By Jeffrey C Toole 

May 24, 2023

Section 363 of the Bankruptcy Code permits debtors-in-possession and trustees to sell or lease property of the bankruptcy estate to someone else, subject to fulfilling certain requirements, including to obtain bankruptcy court authorization.  It also includes a provision – section 363(m) – that can protect good faith purchasers and lessees if the effectiveness of the bankruptcy court order authorizing a sale or lease is not “stayed” pending an appeal and if an appellate court later reverses or modifies that order.  On April 19, 2023, the U.S. Supreme Court resolved a split among the federal courts of appeal by deciding that section 363(m) is not “jurisdictional” and thus does not invariably prevent an appeal – even if the authorization order is not stayed during the appeal.

Why the Decision Matters

The Court’s decision has important implications for bankruptcy sales.  The Court explained that “[t]he ‘jurisdictional’ label is significant because it carries with it unique and sometimes severe consequences.  An un­met jurisdictional precondition deprives courts of power to hear the case, thus requiring immediate dismissal.”  In other words, if section 363(m) were “jurisdictional,” a purchaser or lessee could raise it at any time to dismiss an appeal from the bankruptcy court order authorizing the sale or lease if that order has not been stayed pending the outcome of that appeal.  Because section 363(m) is not jurisdictional, however, a purchaser or lessee cannot necessarily wait and see whether it “wins” the appeal before invoking section 363(m).  Section 363(m)’s requirements can be waived, forfeited, or barred if not raised properly or timely.

Background and Rationale for the Decision

Section 363(m) provides that:

[t]he reversal or modification on appeal of an authori­zation under [sections 363(b) or 363(c)] of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

The issue concerning section 363(m) arose during the bankruptcy case of Sears, Roebuck and Co.  In Sears’s case, the bankruptcy court entered an order approving a sale of its assets. In connection with that sale, the purchaser (Transform Holdco LLC) acquired the right to later “designate” leases that Sears then would have to assume and assign to Transform.  One of the leases eligible for assignment to Transform was Sears’s lease with MOAC Mall Holding LLC, which leases space to tenants at the Minnesota Mall of America.  Transform designated the Mall of America lease for assignment to its wholly owned subsidiary.  MOAC objected.  The bankruptcy court overruled the objection and approved the assignment to Transform.

MOAC was fearful Transform might argue that section 363(m)’s restrictions limited or barred MOAC’s appeal from the order approving the lease assignment.  Therefore, MOAC asked the bankruptcy court for a stay of the order’s effectiveness (to take advantage of the “safe harbor” in section 363(m) for appeals from orders that are “stayed pending appeal”).  The bankruptcy court denied MOAC’s request.  Because no stay was granted, the order assigning the lease became effective and Sears assigned that lease to Transform.

MOAC appealed to the district court, which initially sided with MOAC and vacated the order authorizing the lease assignment “to the extent it approved” Sears’s assignment of the Mall of America lease to Transform.  Transform asked for rehearing and then did an “about-face” to argue for the first time that section 363(m) was jurisdictional and deprived the district court of the adjudicatory power to grant MOAC’s requested relief – despite Transform’s earlier representations to the bankruptcy court that it would not invoke section 363(m) against MOAC’s appeal.  The district court “was ‘appalled’ by Transform’s gambit of waiting to invoke [section] 363(m) until after losing the merits of the appeal . . .” and explained that “if ever there were an appropriate situation for the application of judicial estoppel, this would be it.”  As the Supreme Court noted in its opinion, however, “. . . not even such egre­gious conduct by a litigant could permit the application of judicial estoppel as against a jurisdictional rule.”

And so it was in the district court appeal.  The district court determined that Second Circuit precedent bound it to treat section 363(m) as jurisdictional, and that section 363(m) therefore was not subject to waiver or judicial estoppel.  It dismissed MOAC’s appeal, leaving the order assigning the lease in place.

On further appeal, the Second Circuit agreed with the district court that section 363(m) is jurisdictional.  By do doing, the Second Circuit reinforced a split among the federal circuit courts on this issue.  The Supreme Court agreed to hear the case to resolve that split.

In a unanimous opinion, the Supreme Court disagreed with the Second Circuit.

The Court explained that Congressional statutes are laden with instructions to litigants that are preconditions to relief or to suit.  But jurisdictional preconditions pertain to the court’s power to adjudicate cases, rather than to the rights or obligations of the parties.  According to the Court, a provision will be treated as jurisdictional only if Congress “clearly states” as much.  Section 363(m) does not meet this “clear statement” test.

The Court saw nothing in section 363(m) that purported to govern a federal court’s adjudicatory power.  First, the text of section 363(m) does not say it does.  It does not address a federal court’s authority or refer to such courts’ jurisdiction. Instead, the text assumes that a court can exercise jurisdictional power over authorizations of bankruptcy sale or lease transactions, and plainly contemplates that appellate courts might “reverse or modify” such authorizations, subject to limitations that sometimes can protect good faith purchasers or lessees under certain prescribed circumstances.  Section 363(m) therefore reads like a “statutory limitation” that is “tied in some instances to the need for a party to take ‘certain procedural steps at certain specified times.’”

Second, statutory context also indicates that section 363(m) is not a constraint on federal courts’ jurisdictional power.  Congress set forth federal courts’ jurisdiction over bankruptcy matters in title 28, while section 363(m) is in title 11.  The Court found no “clear tie” between section 363(m) and those title 28 provisions.

The arguments Transform mounted did not convince the Court otherwise.  The Justices opined that the Second Circuit judgment “rested on the mistaken belief that [section] 363(m) is jurisdictional.”  The Supreme Court therefore vacated that judgment and remanded the case for further proceedings below.

The Takeaway for Purchasers and Lessees

The takeaway for purchasers or lessees is clear:   If an appellant fails to obtain a stay pending appeal, that failure does not mean that the appeal must be dismissed under section 363(m).  If an appellate court reverses or modifies an authorization order, however, section 363(m) nonetheless can prevent the purchase or lease transaction from being upended – at least where the purchaser or lessee acts in good faith and invokes section 363(m)’s protections properly and timely.

The decision is MOAC Mall Holdings LLC v. Transform Holdco LLC, Sup. Ct. No. 21-1270.

We aggressively pursue the best possible results for our clients, while providing valuable and cost-effective services. You can feel comfortable knowing that your bottom line is our top priority. Please contact us with any questions or to speak with one of our expert bankruptcy attorneys.

By Jeffrey C Toole 

March 7, 2023

On February 22, 2023, the U.S. Supreme Court held that an individual who is found liable for fraud cannot discharge that debt in bankruptcy, regardless of the individual’s culpability.  According to the Court:  “. . . sometimes a debtor is liable for fraud that she did not personally commit—for example, deceit practiced by a partner or an agent. We must decide whether the bar [that prevents a debtor from discharging that debt in bankruptcy] extends to this situation too.  It does.”

The Facts

Kate Bartenwerfer and her then-boyfriend, David Bartenwerfer, jointly purchased a house.  Acting as business partners, they agreed to remodel the house, intending to sell it for a profit. David took charge of the project.  Kate was largely uninvolved.  Upon completing the remodel, they sold the house to Kieran Buckley. In connection with the sale, Kate and David represented to Buckley that they had disclosed all material facts related to the property.

After the purchase closed, however, Buckley discovered several defects that the Bartenwerfers had not disclosed.  Buckley sued them in California state court and won.  The jury awarded judgment against the Bartenwerfers jointly for more than $200,000.

Unable to pay that judgment, the Bartenwerfers filed for Chapter 7 bankruptcy protection.  Buckley then sued them in the bankruptcy case, alleging that the debt on the state court judgment was not dischargeable under an exception in section 523(a)(2)(A) of the Bankruptcy Code.  That section bars discharge by “an individual debtor” of “any debt . . . for money . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud.”

The bankruptcy court found that David had committed fraud and imputed his fraudulent intent to Kate because the two had formed a legal partnership to execute the renovation and sale project.

The Bankruptcy Appellate Panel agreed as to David’s fraudulent intent but disagreed regarding Kate’s.  It ruled that section 523(a)(2)(A) prevented Kate from discharging the debt only if she knew or had reason to know of David’s fraud.  On further appeal, the Court of Appeals for the Ninth Circuit reversed in part.

In a unanimous decision, the Supreme Court affirmed the Ninth Circuit and ruled against Kate.

The Decision

The Court began with the text of the statute.  Noting that section 523(a)(2)(A) “obviously applies to a debtor who was a fraudster,” and that “sometimes a debtor is liable for fraud that she did not personally commit–for example, deceit practiced by a partner or agent,” the question to be decided was whether the bar against discharge applied in this situation.  It does, wrote the Court:  “Written in the passive voice, §523(a)(2)(A) turns on how the money is obtained, not who committed the fraud to obtain it.”

The state court judgment against Kate satisfied section 523(a)(2)(A).  Kate was “an individual debtor”; the state court judgment was a “debt”; and that debt arose from sale proceeds obtained by David’s fraudulent misrepresentation.  The state court judgment thus was a debt “for money . . . obtained by . . . false pretenses, a false representation, or actual fraud.”

Kate argued that the phrase “money obtained by fraud” in the statute means “money obtained by an individual debtor’s fraud” (not someone else’s fraud).  The Justices were unmoved:  “The passive voice in §523(a)(2)(A) does not hide the relevant actor in plain sight, as [Kate] suggests—it removes the actor altogether.”  According to the Court, Congress framed section 523(a)(2)(A) to focus broadly on an event that occurs without respect to a specific actor, and therefore without regard to any actor’s intent or culpability.  The debt must result from someone’s fraud, it concluded, but Congress was “agnostic” about who committed it.

The Court acknowledged that context sometimes can limit a passive-voice sentence to a likely set of actors, but it observed that the legal context relevant to section 523(a)(2)(A) – i.e., the common law of fraud – “has long maintained that fraud liability is not limited to the wrongdoer.”  Other persons also may be liable for the fraudster’s act.  The Court cited examples:  courts traditionally have held principals liable for the frauds of their agents and individuals can be held liable for frauds committed by their partners within the scope of the partnership.  Understanding section 523(a)(2)(A) to reflect the passive voice’s usual “agnosticism” “is thus consistent with the age-old rule that individual debtors can be liable for fraudulent schemes they did not devise.”

The Court found additional support for its conclusion in one of its earlier decisions — Strang v. Bradner, 114 U.S. 555 (1885) – and how Congress reacted to it.  When Strang was decided, the exception to discharge under the relevant 19^th century statute applied to debts “created by the fraud or embezzlement of the bankrupt.”   That language suggested that only debts arising from the bankrupt debtor’s own fraud were barred from discharge.  In Strang, however, the Supreme Court held otherwise.  It ruled that the fraud of one partner should be imputed to the other partners who shared in the fruits of that fraud, such that none of them could discharge the debt in bankruptcy.  When Congress next amended the bankruptcy statutes, in 1898, it deleted the phrase “of the bankrupt” from this exception.  Given the Court’s assumption that Congress is aware of the Court’s relevant precedents when it enacts statutes, the implication of that change is that Congress embraced the holding in Strang.  The Court therefore embraced Strang in its decision too.

Finally, Kate argued that precluding faultless debtors from discharging debts for others’ fraudulent acts would undermine modern bankruptcy law’s policy that debtors should receive a “fresh start.”   The Justices disagreed.  Bankruptcy law balances debtors’ and creditors’ interests, the Court explained, and “in Congress’s judgment, [sometimes] the creditor’s interest in recovering a particular debt outweighs the debtor’s interest in a fresh start.”  Section 523(a)(2)(A) is one such example.  If a fresh start were all that mattered, the Court concluded, section 523 would not exist, but it does.  The Court declined Kate’s invitation to rewrite the statute.

The Court also made several observations.  It reminded Kate that section 523(a)(2)(A) did not create Kate’s liability for fraud; California law did.  Section 523(a)(2)(A) merely “took the debt as it found it.”  Therefore, Kate’s argument was better directed to the California state law that made her, an “honest partner,” liable in the first place.  Also, the Court pointed out that the law of fraud does not (as Kate suggested) make “hapless bystanders” invariably liable.  “Ordinarily, a faultless individual is responsible for another’s debt only when the two have a special relationship, and even then, defenses to liability are available.”

The Concurring Opinion

In a concurring opinion, Justice Sotomayor (with whom Justice Jackson joined) emphasized the importance of that “special relationship” between the wrongdoer and the “innocent” debtor to the outcome.  In this case, Kate did not dispute that she and David were business partners.  Justice Sotomayor explained her “understanding” that, therefore, the Court’s decision concerns fraud only by “agents” and “partners within the scope of the partnership.”  The decision does not, in her view, address “a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.”

Perhaps Justices Sotomayor and Jackson seek to place a limiting “gloss” on the Court’s holding.  Whether a majority of the Justices share that “understanding” of their ruling, and whether lower courts will adopt that interpretation in future cases, remains to be seen.

The decision is Bartenwerfer v. Buckley, No. 21-908, 598 U.S. ___ (2023).

We aggressively pursue the best possible results for our clients, while providing valuable and cost-effective services. You can feel comfortable knowing that your bottom line is our top priority. Please contact us with any questions or to speak with one of our expert bankruptcy attorneys.

By: James M. Berent

January 27, 2023

On September 1, 2022, Allegheny County Common Pleas Judge, Alan Hertzberg, ordered that the common level ratio for the tax year 2022 be set at 63.53% – a significant decrease from the 81.1% that was previously published and being applied at the 2022 appeal hearings. The common level ratio, often referred to as the “CLR,” is an assessment-to-market-value ratio that is used to convert the current market value into a property’s taxable assessment. In response to the reduction of the 2022 common level ratio, Allegheny County Council has approved a bill that will give taxpayers a second chance to appeal their 2022 assessments. The filing deadline for 2022 assessment appeals, as well as 2023 assessment appeals, will be March 31, 2023. Allegheny County property owners may now be entitled to significant tax relief for both 2022 and 2023 tax years.

Bernstein-Burkley, P.C., represents residential and commercial clients in various real estate matters. Real estate property acquisitions, sales and leasing, residential and commercial property assessment appeals, commercial real estate distressed debt matters, and landlord-tenant issues are just a few of the areas we specialize in.

About us: 

Bernstein-Burkley, P.C., has more than 50 years of experience in analyzing the value of assets and representing the clients’ interests in bankruptcy and liquidation valuations. In addition to our asset valuation experience providing a foundation for our tax assessment appeal work, it is also part of the foundation for our bankruptcy and restructuring practice. We routinely handle distressed debt matters including forbearance, restructuring and recovery actions, and navigate our business clients through the sheriff’s sale process and other foreclosure proceedings. Whether it is a landlord-tenant dispute or a commercial loan default, Bernstein-Burkley, P.C., knows and understands clients’ rights and has the expertise to zealously enforce these rights.

Contact our team at Bernstein-Burkley today at 412-456-8100 to see how we can assist you in Real Estate Law.

By Jeffrey C Toole 

December 29, 2022

Section 548(a) of the Bankruptcy Code empowers a trustee or a chapter 11 debtor-in-possession to set aside  “transfers” occurring within two years before bankruptcy that are deemed to be “fraudulent.”  In general, transfers are “fraudulent conveyances” under section 548(a) if the debtor makes the transfer with the actual intent to hinder, delay or defraud its creditors or if the debtor makes the transfer while insolvent and without receiving a reasonably equivalent value in exchange.  Historically, section 548(a) has been applied to set aside a wide variety of pre-bankruptcy transactions, ranging from something-for-nothing conveyances among family members to landlords’ lawful terminations of debtor-tenants’ below-market leases.  But section 548(a)’s reach has limits.  A recent non-precedential opinion by the Court of Appeals for the Third Circuit illustrates one of those limits.  The Third Circuit ruled that a third party’s pre-bankruptcy termination of a debtor’s real estate purchase option was not a “transfer” capable of being set aside as a fraudulent conveyance.

The facts of the case are somewhat convoluted, but boil down to this:  The owner of a building and real estate in New Jersey leased the premises to a restaurant tenant.  The owner-debtor filed bankruptcy.  Under the debtor’s court-approved chapter 11 plan, its property was sold to a secured creditor.  In connection with that plan, the tenant signed a new lease and the (former) owner was granted the option to repurchase the property from the secured creditor.  The plan specified the timing for the repurchase option to be exercised.  Several years later, the secured creditor issued notices required by the confirmed plan to the former owner and to the tenant in order to terminate the lease and to trigger the period within which the former owner could exercise the repurchase option, failing which the option would lapse.  Despite repeated notices, the former owner and tenant were “radio silent” and did not exercise the repurchase option.  The secured creditor filed a discharge of the option and sold the property.

After the property sold, the former owner and tenant each filed chapter 11 petitions and listed both the lease and option to repurchase the property as assets in their bankruptcies.  Litigation ensued regarding whether the secured creditor’s terminations of the lease and repurchase option were valid and whether the debtors could avoid the terminations under section 548(a) as “fraudulent conveyances.”  The bankruptcy court ruled in favor of the secured creditor, upholding the validity of the terminations.  The court also found the terminations of the lease and repurchase option were not “transfers” under section 548(a)(1)(B) of the Bankruptcy Code and therefore could not be recovered as fraudulent conveyances. The debtors appealed that decision to the district court.  It affirmed.  They appealed to the Circuit and lost again.

Applying New Jersey law, the Third Circuit concluded that, pre-bankruptcy, the secured creditor had validly terminated the lease for abandonment and had validly terminated the repurchase option.  Under New Jersey law, termination of lease also terminated the tenancy.

Next, the Circuit assessed the bankruptcy court’s decision that termination of the repurchase option was not a “transfer” that can be set aside as a “fraudulent conveyance” under section 548(a).  Notably, the Circuit began by “leaving aside the issue of fraud,” thus side-stepping whether under other circumstances any actual or constructive fraud can taint the termination of a lease or repurchase option.  Instead, it focused solely on whether a “transfer” occurred.  Section 101(54) of the Bankruptcy Code defines a “transfer” to include “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with . . . property; or . . . an interest in property.”

First, the Circuit determined what “interest in property” was at issue.  Interests in property typically are defined by reference to non-bankruptcy state or federal law.  The Circuit adopted the district court’s conclusion that, under New Jersey law, the option to repurchase the property was a “future contingent interest” that the Bankruptcy Code protects.  Second, the Circuit opined that no “transfer” of that interest had occurred when the secured creditor terminated the repurchase option.  The Circuit agreed with the district court that the debtors’ failure to convert their “contingent interest” into actual ownership (by failing to exercise the repurchase option) did not amount to “dispos[ing] of or part[ing] with” their protected interest in the property.  According to the Circuit, the debtors did not “transfer” their option rights to the secured creditor, “but rather ‘failed to pursue a business opportunity’ by allowing their interest in potential ownership to lapse.”  In so ruling, the Circuit was mindful of the U.S. Supreme Court’s observations regarding “avoidance powers” such as section 548(a) in Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) – namely, that the Bankruptcy Code imposes “stringent” limits on allowing debtors to use section 548(a) “to unwind pre-bankruptcy transfers” and “everything the Code does to keep avoidances cabined – so they do not threaten the rule that the estate can take only what the debtor possessed before filing.”  Because the debtors made no prepetition attempts to exercise their option rights, any interest they had in the property no longer existed when they filed for bankruptcy.  The Circuit therefore agreed with the lower courts that termination of the option did not constitute a “transfer” under section 548(a).

The decision is Speedwell Ventures LLC v. Berley Assocs. Ltd. (In re Pazzo Pazzo Inc.), No. 21-2344, 2022 U.S. App. LEXIS 34619, 2022 WL 17690158 (3d Cir. Dec. 15, 2022).

We aggressively pursue the best possible results for our clients, while providing valuable and cost-effective services. You can feel comfortable knowing that your bottom line is our top priority. Please contact us with any questions or to speak with one of our expert bankruptcy attorneys.

By Lara S. Martin 

October 12, 2022

Generally, in individual bankruptcy cases (Ch. 7, 11, 12 and 13), a debtor will be granted a discharge of its debts. A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts, meaning, the debtor is no longer legally required to pay any debts that are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. However, Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors, meaning that the Debtor must still repay those debts after bankruptcy.

One exception for discharge is for a discharge of debts for fraud or defalcation while acting in fiduciary capacity, embezzlement or larceny (11 U.S.C. Section 523(a)(4)). Recently, the Eleventh Circuit resolved a split among the lower courts defining a technical trust where a “defalcation” by the trustee would result in nondischargeability under Section 523(a)(4). In holding that a claim against an individual arising from violation of a trust under the Perishable Agricultural Commodities Act (“PACA”) is not dischargeable under Section 523(a)(4) the Court held that an exception to discharge does not apply simply because the parties or a statute label the relationship as a trust.

Thus, in a case of first impression the Eleventh Circuit held that the exception to discharge in 523(a)(4) does not apply to debts incurred by a produce buyer who is acting as a trustee under PACA in In re Nathan Aaron Forrest, Marsha Weidman Forrest (Spring Valley Produce, Inc., Produce Exchange Co., Inc., Fresh Direct, Inc., S. Roza & Company, Inc., v. Nathan Aaron Forrest, Marsha Weidman Forrest)  USCA11 Case 21-12133. In this case, the debtors, the Forrests (as owners and officers of Central Market of FL, Inc. “Central Marked”) owed a pre-petition debt for produce to Spring Valley Produce, Inc. (“SVP”) which the Court determined was dischargeable. During the transactions at issue, SVP and Central Market were licensed under PACA and SVP preserved its rights as a PACA trust beneficiary by including the required statutory statement on its invoices to Central Market. Upon receiving and accepting SVP’s produce shipments, Central Market became a PACA trustee of a trust res consisting of the produce.

The Debtors argued that the nondischarge exception in 523(a)(4) did not apply because a PACA trustee is not acting in a fiduciary capacity as that term is understood in the section’s context and moreover, PACA does not require segregation of trust assets nor prohibit use of trust assets for non-trust purpose and thus 523(a)(4) does not apply to PACA-related debts.  In holding the exception to dischargeability does not apply, the Court addressed the core issue as being what type of trust-like duties are sufficient to create a technical trust under the Fiduciary Capacity Exception and thus adopted a three-part test for determining whether a debtor is acting in fiduciary capacity under 523(a)(4) in relation to a creditor sufficient to create the necessary relationship for non-dischargeability: first, the relationship must have 1) a trustee who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries. Second, the relationship must define sufficient trust like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust, with the strongest indicia of a technical trust being the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt.

Thus, at least in the Eleventh Circuit, a claim against an individual arising from violation of a trust under PACA is not dischargeable under Section 523(a)(4). However, the Court emphasized that their holding is limited to the narrow meaning of “fiduciary capacity” in the context of § 523(a)(4)’s exception to discharge and does not address whether a fiduciary relationship creates a trust in other contexts.

By Jeffrey C. Toole

July 5, 2022

The U.S. Supreme Court has agreed to decide an important issue affecting asset sales and lease assignments in bankruptcy cases – namely, whether a disgruntled party’s failure to obtain an order staying the effectiveness of a sale approval order or an order “integral” to a bankruptcy sale creates a jurisdictional bar against appealing such orders. More specifically, according to the petitioner, the question presented to the Supreme Court is: “Whether Bankruptcy Code Section 363(m) limits the appellate courts’ jurisdiction over any sale order or order deemed ‘integral’ to a sale order, such that it is not subject to waiver, and even when a remedy could be fashioned that does not affect the validity of the sale.”

This question has divided the federal courts of appeals. The Second and Fifth Circuits have ruled that failure to stay a sale approval order is jurisdictional and, according to the Second Circuit, precludes an appeal of any order that is “integral” to the sale approval order, regardless of whether the relief sought on appeal would affect the sale’s validity. The Third, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits have rejected the notion that section 363(m) limits appellate courts’ jurisdiction to review unstayed sale approval orders. Instead, those Circuits have concluded that section 363(m) merely limits the remedies available in such an appeal.

The answer to this question has significant practical implications for sales and lease assignments in bankruptcy cases. For example, if a party’s failure to obtain a stay of a sale approval order is jurisdictional, then an appeal of the sale order may be dismissed without the appellate court ever considering whether any remedies exist on appeal that would not affect the sale’s validity. Likewise, if section 363(m) is jurisdictional, a party cannot waive, forfeit, or be estopped from asserting it to challenge an appeal. In other words, if section 363(m) is jurisdictional, then a party can challenge an appeal from an unstayed sale approval order at any time in the appellate process.

The genesis of this issue is section 363(m), which provides that “[t]he reversal or modification on appeal of [a bankruptcy sale approval order] does not affect the validity of a sale . . . to an entity that purchased . . . such property in good faith, whether or not such entity knew of the pendency of the appeal, unless [the bankruptcy sale approval order] and such sale . . . were stayed pending appeal.”  The Supreme Court will evaluate section 363(m) in a case from the Second Circuit in which Sears was the chapter 11 debtor and tenant under a lease. In Sears’ case, the bankruptcy court entered an order approving a sale of its assets. In connection with that sale, the purchaser acquired the right to later “designate” leases that Sears would assume and assign to it, subject to notice, opportunity for a hearing, and entry of another bankruptcy court order approving the lease assignment. More than two months after the sale closed, the purchaser and Sears designated Sears’ lease at the Mall of America for assignment, and sought an order authorizing Sears to assume and assign that lease to the asset purchaser. The landlord objected. The bankruptcy court nonetheless entered an order approving the lease assignment. The landlord appealed that assignment order to the district court. It also asked the bankruptcy court for a stay of the order pending appeal, as contemplated in section 363(m). The bankruptcy court denied the stay request, because it agreed with the purchaser that section 363(m) did not apply to a lease assignment (only to a sale), because the purchaser had represented that it was not relying on section 363(m), and because the purchaser “would be judicially estopped” from arguing otherwise on appeal.

Initially, the district court reversed the lease assignment order (but did not undo the earlier asset sale order). In response, the purchaser moved for a rehearing and argued, for the first time on appeal, that section 363(m) applied to the lease assignment and deprived the district court of appellate jurisdiction because the assignment order had not been stayed. The district court vacated its order and dismissed the landlord’s appeal. The district court opined that section 363(m) did apply, stating that the lease assignment was a sale because the purchaser was required to pay “cure costs” for the lease.  The court also concluded, based upon its interpretation of Second Circuit precedent, that section 363(m) was jurisdictional, could not be waived, and that the purchaser could not be estopped from asserting it, despite what the purchaser had told the bankruptcy court and what the bankruptcy court had ruled when it denied the landlord’s motion for a stay pending appeal.

The landlord next appealed to the Second Circuit, but it lost again. Based upon its earlier decisions, the Circuit concluded that section 363(m) deprived the district court of appellate jurisdiction. First, it decided that section 363(m) applies not just to sale orders, but also to other orders that are “integral” to a sale that is authorized under section 363. It opined that the lease assignment order was “integral” to this sale. Next, the Circuit ruled that, in view of its precedents, section 363(m) was jurisdictional and therefore not subject to waiver or judicial estoppel.

The Circuit’s conclusion that section 363(m) is jurisdictional was fatal to the landlord’s appeal. If the Circuit had ruled that section 363(m) is not jurisdictional, then the purchaser presumably would have lost because it either waived the right to argue otherwise on appeal, or because (as the bankruptcy court concluded when it denied the landlord’s motion for a stay pending appeal) the purchaser would be “judicially estopped” from changing its position on appeal and arguing that the district court lacked appellate jurisdiction.

The landlord convinced the Second Circuit to stay the issuance of its mandate to the lower courts, and petitioned the Supreme Court to hear the case.  The Supreme Court granted certiorari on June 27.  Assuming the parties complete their briefs expeditiously, the case may be argued later this year and decided next Spring.

We will continue to follow this case and report once the Supreme Court renders its decision.

We aggressively pursue the best possible results for our clients, while providing valuable and cost-effective services. You can feel comfortable knowing that your bottom line is our top priority. Please contact us with any questions or to speak with one of our expert bankruptcy attorneys.

By Lara S. Martin

June 24, 2022

Revlon, Inc. is the first consumer facing retail business to file for bankruptcy protection in 2022.  As supply chain disruptions and delays abound and inflation spikes, it feels almost imminent more retail businesses will shortly file suit.  Rising interest rates typically lead to an escalation in bankruptcy filings. Add in, worker shortages and inflation, the option for access to bankruptcy will be critical for struggling businesses.  Fortunately, access will be even more broad with the Bankruptcy Threshold Adjustment and Technical Corrections Act recently signed into law by President Biden which permanently sets the debt limit for small businesses that file under the recently enacted Subchapter V at $7.5 million.

The risk of bankruptcy for retail businesses is high, especially for those companies facing rising inventory levels, supply chain disruptions, inflation, and labor shortages.  Retailers have too much stuff after shipments arrive late and consumers abruptly change what they are shopping for[1].  Revlon, Inc. also faced a specific pandemic related issue as sales of its iconic product, lipstick, dropped dramatically due to masking during the pandemic.  Compounded with its loss of sales, Revlon cites its inability to keep a regular supply of raw materials contributing to its debt.  According to the brand’s filing, the company is currently unable to timely fill almost one-third of customer demand for its products, due to an inability to source a “sufficient and regular supply of raw materials.” Shipping components from China to the United States takes Revlon eight weeks to 12 weeks and costs four times 2019 prices, the company reported.[2]

In previous years, relief from fiscal stimulus to businesses and stimulus dollars to consumers provided the retail industry with nearly a two-year reprieve in filings – in fact, including Revlon’s filing, there have been only four other retail bankruptcies so far this year, the lowest tracked number in 12 years.[3]  However, with the current high level of inflation, and increase in consumer debt, families are forced to shift their budgets to cover the higher costs of basic necessities which means less discretionary spending (and decreased revenue for certain retailers).  According to Reuters.com[4], the latest retail sales data shows consumers are pulling back the most in advance retail and food service spending; furniture and home furnishings retailers, electronics and appliances stores, and health-and personal-care chains all are seeing month over month declines.  Moreover, Reuters reports, according to an NPD Group survey issued in late May, more than 8 in 10 U.S. consumers said they planned to make further changes to pull back on their spending in the next three to six months.  In the meantime, consumer debt levels are hovering near all-time high, in part due to the rise in borrowing, auto loans, student debt and mortgages[5].

Revlon’s filing could very well be the first of consumer-facing businesses in the consumer discretionary sector to file for bankruptcy this year. Businesses will have less government relief (and no more stimulus money), fewer accommodations and deferments from lenders, combined with supply chain issues, commodity price increases, labor shortages and higher labor costs, and higher raw material will likely culminate in an increased need for many businesses to reevaluate and restructure their organizations.  Sectors such as retail and consumer goods adversely affected by higher raw material and labor costs will be particularly vulnerable.

For questions about this article, or if you have questions about consumer-facing businesses and bankruptcy, pleas contact us.

[1] “The Retail Industry is Facing a Potential Wave of Bankruptcies – Here’s Why”, Lauren Thomas, 6/23/2022, https://www.cnbc.com/2022/06/23/why-retail-industry-is-facing-bankruptcy-wave.html?__source=google%7Ceditorspicks%7C&par=google

[2] “Revlon Files for Chapter 11 Bankruptcy Protection,” TotalRetail, Joe Kennan, 5,16,2022 https://www.mytotalretail.com/article/revlon-files-for-chapter-11-bankruptcy-protection/

[3] “The Retail Industry is Facing a Potential Wave of Bankruptcies – Here’s Why”, Lauren Thomas, 6/23/2022, https://www.cnbc.com/2022/06/23/why-retail-industry-is-facing-bankruptcy-wave.html?__source=google%7Ceditorspicks%7C&par=google

[4] Revlon Files for Bankruptcy, Blames Supply Chain Snags,” Paramasviam, Ponnezhath and Knauth, 5/16/2022, https://www.reuters.com/business/retail-consumer/revlon-files-bankruptcy-protection-2022-06-16/

[5] Id.

By Erica L. Kravchenko and Jeffrey C. Toole

June 21, 2022

On June 21, 2022, President Biden signed the bipartisan-supported “Bankruptcy Threshold Adjustment and Technical Corrections Act” into law. The Act makes several changes to the federal Bankruptcy Code that will broaden the availability of chapter 13 and chapter 11 relief for wage earners and various small business debtors, respectively.

First, the Act increases the availability of chapter 13 to wage earners (and their spouses) by increasing the debt ceiling for such cases.  Prior to enactment, eligibility under chapter 13 of the Bankruptcy Code required a wage-earning individual (and spouse who elects to file bankruptcy too) to owe less than $465,275 in noncontingent, liquidated debts and $1,395,875 in noncontingent, liquidated, secured debts.  The Act amends section 109(e) of the Bankruptcy Code to eliminate this distinction between unsecured and secured debt, so that all debt counts toward a single debt limit.  Now, to be eligible for relief under chapter 13, the wage earner (and spouse, if applicable) must have total noncontingent, liquidated debts of less than $2.75 million. The debt limit increase takes effect immediately and is expected to sunset on June 21, 2024 (unless Congress extends it).

Second, the Act expands businesses’ and individuals’ ability to file so-called “subchapter V” reorganization cases under chapter 11 of the Bankruptcy Code, as compared to the past few months.  Effective in early 2020, the Small Business Reorganization Act of 2019 (the “SBRA”) provided that, to qualify for relief under subchapter V of chapter 11, debtors could not owe more than $2,725,625 in noncontingent, liquidated secured and unsecured debts as of the petition date.  In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) increased this debt ceiling to $7.5 million temporarily.  Initially, that debt limit increase was scheduled to automatically sunset on March 27, 2021, but Congress extended that expiration date to March 27, 2022.

Due to scheduling and procedural issues, Congress allowed that increased debt ceiling to lapse on March 27, 2022, returning the debt ceiling to its original SBRA level – i.e., approximately $2.7 million.  Under the Act, the debt ceiling will increase (back) to $7.5 million.  Furthermore, this debt ceiling increase will apply retroactively to all subchapter V cases that were commenced under chapter 11 of the Bankruptcy Code on or after March 27, 2020, and that remained pending as of the date the Act was enacted.  This increase will remain in effect for two years, until June 21, 2024 (unless Congress further extends it). The Act also clarifies that the $7.5 million debt ceiling is subject to future adjustments for inflation, as are various other dollar amounts in the Bankruptcy Code.

In addition, the Act amends the Bankruptcy Code to provide that “standing trustees” appointed in subchapter V cases are expressly authorized to operate a debtor’s business if the debtor ceases to be a “debtor in possession.”  It also makes various technical corrections and refinements to other statutory provisions.

Lastly, the Act resolves what some commentators labeled as a flaw in subchapter V relief that was created by the CARES Act.  Prior to the CARES Act, the SBRA excluded from the definition of a “small business debtor” (and precluded from filing under subchapter V of chapter 11) any corporation subject to the reporting requirements of the Securities Exchange Act of 1934 (the “SEC Act”).  The CARES Act further narrowed this definition, precluding from subchapter V eligibility any debtors that are affiliates of an “issuer” as defined by the SEC Act.  Some courts interpreted this change to preclude a company from seeking relief under subchapter V of chapter 11 if any of its affiliates are publicly traded – even if none of those affiliates was itself in bankruptcy and even if the company seeking relief under subchapter V was not an “issuer” under the SEC Act.  The Act appears to resolve this interpretive issue by amending certain definitions in the Bankruptcy Code.  Now, a small business debtor that is an affiliate of a publicly traded company nonetheless is eligible for relief under subchapter V (if it meets other statutory requirements), provided that it is not an “issuer” under the SEC Act and provided that it is not an affiliate of a publicly traded company that itself is in bankruptcy.

If you have questions about the Act or other aspects of bankruptcy law, please contact us.

By Erica L. Kravchenko –

June 21, 2022

The two basic tenets of bankruptcy are to provide an honest but financially distressed debtor the opportunity to achieve a fresh start and to give creditors an equal chance to recover what is owed to them by the debtor. Achieving both, and promoting fairness between the parties, often involves a delicate balancing act, sometimes resulting in the denial of a debtor’s discharge or denial of discharge of certain debts. Take for example section 523(a)(2)(A) of the Bankruptcy Code, which excludes from discharge debts that arise from false pretenses, false representation, or actual fraud. Denying discharge of debts from a debtor who commits such acts is reconcilable, but what happens when these acts are committed by the partnership of an allegedly innocent debtor. Can fraudulent actions be imputed onto innocent parties?

On May 2, 2022, when presented with this very issue, the Supreme Court granted certiorari in Bartenwerfer[1] to resolve the growing split of authority among the circuit courts. In Bartenwerfer, a husband-and-wife team purchased, renovated, and later sold a home to Kieran Buckley. Shortly after the completion of the sale, Buckley found alleged defects and sued the Bartenwerfers in state court for breach of contract, negligence, nondisclosure of material facts, negligent misrepresentation, and intentional misrepresentation. Judgment was rendered in Buckley’s favor. Subsequently, Bartenwerfers filed for bankruptcy.

Buckley then filed an adversary proceeding seeking a determination of dischargeability of the debt owed to him pursuant to section 523(a)(2)(A). After initially determining that the debt was nondischargeable and that, despite the wife’s contention that she was innocent, the husband’s fraudulent conduct could be imputed upon her, the 9th Circuit BAP remanded on the imputed liability finding . In adopting the Eighth Circuit’s “known or should have known” standard, the BAP instructed the bankruptcy court to determine whether the wife knew or should have known of the husband’s fraud. On remand, the bankruptcy court, utilizing this standard, reversed course finding that the husband’s fraud could not be imputed upon the wife. On appeal, the 9th Circuit reversed again, applying basic partnership principals espoused in Strang v. Bradner,[2], and holding that partners cannot escape the pecuniary responsibility of another partner’s false or fraudulent misrepresentation.

The issue of imputation has created three divergent lines of authority.[3] Under the Eighth Circuit standard mentioned above, fraudulent debts are nondischargeable only if the innocent debtor knew or should have known of the fraud. Under the Fifth and Ninth Circuits, partners are indeed liable for their partners fraudulent acts. [4]  In other words, fraudulent acts are imputed on innocent partners. Lastly, the Sixth Circuit requires some form of benefit to be received prior to finding such debts are nondischargeable.

The legislative history of section 523(a)(2)(A) provides little guidance as to Congress’s intent regarding imputation. However, by codifying Neal v. Clark, [5] wherein the Supreme Court reversed the lower court’s holding imputing fraud on an innocent party, one commentor suggests that Congress may have rejected the application of the vicarious liability theory for section 523(a)(2)(A). Interestingly, the legislative history does not address Strang and its holding, decided less than a decade later.

The concepts of bankruptcy and agency law upon which these two cases were decided were less developed and espoused different policy goals than today. With the expansion of the concepts of agency and partnership law, coupled with the shifting policy goals of bankruptcy, it will be interesting to see if the Supreme Court will stand by the legal principal of stare decisis or if it will find these changes in policy and law require a different ruling.

[1]              Bartenwerfer v. Bartenwerfer (In re Bartenwerfer), 860 F. App’x 544 (9th Cir. 2021).

[2]              114 U.S. 555, 561 (1885).

[3]              Sachan v. Huh (In re Huh), 506 B.R. 257 (B.A.P. 9th Cir. 2014).

[4]              Deodati v. M.M. Winkler & Assocs. (In re M.M. Winkler & Assocs.), 239 F.3d 746 (5th Cir. 2001);

Supra fn. 1.

[5]              95 U.S. 704 (1877).

By Erica L. Kravchenko –

UPDATED June 7, 2022

This term, the Supreme Court granted certiorari in Seigel v. Fitzgerald (In re Circuit City Stores, Inc.), 996 F.3d 156 (4th Cir. 2021), to resolve a growing split of authority arising across the country regarding whether the 2017 Amendment to 28 U.S.C. 1930(a)(6), the statute governing bankruptcy fees, violates the uniformity requirement of the Bankruptcy Clause by increasing quarterly fees solely in United States Trustee districts.

To fully understand the legal quagmire, historical context is required. In 1978, Congress implemented the United States Trustee (“UST”) pilot program in 19 districts, wherein USTs performed administrative duties that were once performed by bankruptcy judges.[1] In 1986, after mostly favorably review, Congress made the program permanent and expanded it to all 50 states except for Alabama and North Carolina, where Bankruptcy Administrators were appointed to carry out administrative duties.[2] UST districts were most self-funded by debtor fees, including chapter 11 quarterly fees, while Bankruptcy Administrator districts are overseen by the Judicial Conference and funded by the Judiciary.[3] Although meant to be temporary, this dual program continues today.

This dual system first gave rise to a constitutional challenge in 1994, where the Ninth Circuit determined two things: (1) the dual structure was arbitrarily created without justification and thus, violated the uniformity requirement of the Bankruptcy Clause and (2) a reasonable remedy would be to abolish the dual program.[4]

In response, Congress empowered the Judicial Conference to implement a procedure by which Bankruptcy Administrator districts would assess fees equal to those imposed in the UST districts.[5] Though not perfect, it resolved the discrepancy as districts across the country uniformly calculated and distributed fees pursuant to the same fee structure under 28 U.S.C. § 1930(a)(6).

This uniformity persisted until the enactment of the 2017 Amendment, wherein Congress implemented a new fee structure in large chapter 11 cases to address a shortfall in the UST System fund.[6] Under this new structure, the quarterly fees were assessed by calculating the lesser of 1% of disbursements or $250,000, a substantial increase from the prior maximum fee of $30,000. The 2017 Amendment was to be both temporal (sunsetting in 2022) and conditional (applying if the UST System Fund fell below $200 million at the end of the current fiscal year). Notably absent from the 2017 Amendment was language addressing whether the new fee structure would be uniformly applied to both types of districts and to both new and pending cases.

Shortly after its enactment, the conditional requirement was triggered. Both pending and new cases in UST districts were assessed the increased quarterly fees effective January 1, 2018, while only new cases in Bankruptcy Administrator districts filed on or after October 1, 2018 were assessed the increased fee. Across the country, opposition to these new fees arose.

In Siegel, the liquidating trustee for debtor Circuit City (“CC Trustee”), sought to limit its liability under the 2017 Amendment reasoning that it impermissibly created nonuniform laws and violated the Bankruptcy Clause.[7] The Bankruptcy Clause requires all laws on the subject of bankruptcies to be constitutionally uniform, meaning they must (1) be applied uniformly to a defined class of debtors and (2) be geographically uniform.[8]

The Bankruptcy Court ruled in favor of the CC Trustee on the constitutionality issue. But on direct appeal, the Fourth Circuit reversed, holding that the 2017 Amendment did not contravene the Bankruptcy Clause because the difference in quarterly fees assessed in UST districts and Bankruptcy Administrator districts was not arbitrary, that Congress provided solid justification for the amendment.

Currently, a Circuit split exists. Both the Fourth and Fifth Circuits have upheld the 2017 Amendment on the basis that unlike in St. Angelo, this time Congress provided a reasonable justification and therefore, the amendment passes constitutional muster.[9] By contrast, the Second and Tenth Circuits held that the 2017 Amendment is “unconstitutionally nonuniform on its face” because it required an increase in fees in the UST districts but only permitted such change in Bankruptcy Administrator districts.[10] In other words, it was unconstitutional because “[it] neither applie[d] uniformly to a class of debtors nor addresse[d] a geographically isolated problem.” [11] To remedy the discrepancy, these Courts ordered the refund of the excess fees paid pursuant to the 2017 Amendment.

Interestingly, the Eleventh Circuit also upheld the 2017 Amendment but on different grounds than the Second and Tenth Circuits, determining that the Judicial Conference’s decision to impose the fee increase ten (10) months later did not render the 2017 Amendment unconstitutional.[12]

Currently, there are also pending appeals challenging the 2017 Amendment in the Federal, Sixth, and Ninth Circuits.

While this constitutional challenge is limited in scope,[13] the outcome may have broader implications. First, if the Supreme Court determines that the 2017 Amendment is unconstitutional and adopts the recommendation of the Second and Tenth Circuits in requiring a refund of the excess fees, this could have a significant impact on larger chapter 11 cases pending during the first three (3) quarters of 2018. Second, the ruling may an additional impact on how the uniformity requirements in other statutes are interpreted. With the Court’s ruling scheduled to be issued in the next few weeks, we won’t have long to see how this plays out.

UPDATE June 8, 2022

The wait was not long indeed! Earlier this week, the Supreme Court in a unanimous decision in Siegel v. Fitzgerald, No. 21-441, struck down the 2017 Amendment to 28 U.S.C. 1930(a)(6), ruling that it violated the uniformity requirement of the Bankruptcy Clause. Specifically, the Court held that “the uniformity requirement of the Bankruptcy Clause prohibits Congress from arbitrarily burdening only one set of debtors with a more onerous funding mechanism than that which applies to debtors in other States.” Id.

In reaching its decision, the Court first determined that the 2017 Amendment was indeed subject to the uniformity requirement, noting that the Bankruptcy Clause applied to both legal and administrative laws, rejecting Respondent Fitzgerald’s contrary position. The Court approached the constitutional issue more narrowly, limiting its ruling to the specific circumstances presented in this specific nonuniform fee increase. The Court declined to address the constitutionality of the dual system, and even warned against applying the decision in a way that would limit Congress’s authority to structure relief to deal with geographically isolated issues.

But most notably, despite recognizing the potential pandora’s box of legal and administrative concerns such ruling would create, did not provide a potential remedy. Instead remanding it to the lower courts to address. With this ruling, debtors have been provided with an opportunity to creatively seek redress for the excessive fees. To learn more about how this ruling affects you and your right to a potential refund, please contact us.

[1]  Seigel v. Fitzgerald (In re Circuit City Stores, Inc.), 996 F.3d 156 (4th Cir. 2021).

[2]  Id. at 160.

[3]  Id.

[4]  St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525 (9th Cir. 1994), amended by 46 F.3d 969 (9th Cir. 1995).

[5]  28 U.S.C. § 1930(a)(7) (2002) (“In the districts that are not part of a United States Trustee region . . . the Judicial Conference may require the debtor in a case under chapter 11 of title 11 to pay fees equal to those imposed by paragraph (6) of this subsection.”) (emphasis added).

[6]  See 28 U.S.C. 1930(a)(6) (2017). The increase only applies to quarterly fee disbursements that exceed $1 million.

[7] 996 F.3d 156 (4th Cir. 2021). The CC Trustee also argued that the 2017 Amendment’s application to pending cases violated the Due Process Clause as it deprived debtors of fair notice and the uniformity requirement of the Taxing and Spending Clauses of the Constitution. The Bankruptcy Court rejected these two arguments, which was affirmed on appeal.

[8]  U.S. Const. Art. I, Section 8, Cl. 4.

[9]  See fn. 7 supra; Hobbs v. Buffets, L.L.C. (In re Buffets), 979 F.3d 366 (5th Cir. 2020).

[10] Clinton Nurseries of Md., Inc. v. Harrington (In re Clinton Nurseries, Inc.), 998 F.3d 56 (2d Cir. 2021); John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 15 4th 1011 (10th Cir. 2021)

[11]  Id.

[12] United States Tr. Region 21 v. Bast Amron LLP (In re Mosaic Mgmt. Grp.), 22 F.4th 1291 (U.S. 11th Cir. 2022).

[13]  The 2021 Amendment essentially eliminated the constitutional issue by (1) replacing the fee schedule such that it no longer was tied to the level of surplus in the UST System Fund and (2) replacing the “may” language with “shall” language expressly requiring that all cases in both districts pay equal fees.

By Kevin J. Cummings –

As the current economic roller coaster endures peaks and valleys, many businesses are left wondering what to do when clients cease paying invoices. Far too often, businesses take a passive approach to past-due accounts, which allow the debts to grow stale and possibly uncollectable.

There are ways businesses can protect themselves from having to cut their profits to cover unpaid, past-due accounts.

The Who

The first step is to identify the debtor. In the business context, some entities operate under different corporate forms or names. There is a vast difference between having an open invoice with “A-Tech Company” and “Tech Company A”. Taking the time to confirm the debtor’s legal name and entity will help you protect your interest should legal action be necessary.

The same can be true for individual clients. The individual you know as “John Smith” may actually be “Robert John Smith, II”. Properly identifying the debtor may help with present or future collection efforts, especially if the debtor’s contact information is no longer valid.

It may be prudent to review intake policies to obtain the correct legal name of a client, whether it be a business entity, individual, or personal guarantor. Even longstanding accounts should have a period of re-affirmation and review, if not to protect your interest, then to keep business records current.

The Where

As the recent pandemic demonstrated, businesses are either operating remotely or may have changed locations entirely. There are times when invoices are delivered but the intended recipient is no longer at that address.  A simple internet or social media search often provides insight into the current happenings of any given business. The United States Postal Service can also be helpful in determining whether a business has moved or relocated.

Similarly, updating email and phone contacts can be a simple way to get an invoice paid. As employee turnover continues to be high across America, your primary contact may have left the company and his or her emails and voicemails may be sitting dormant in an inbox awaiting review.  Having a direct contact can often streamline payment of delinquent accounts.

Doing a periodic review of where your clients are located can assist in protecting yourself in the future, or even reconnect you with former clients you may wish to engage again.

The When

The adage, “the sooner the better” is axiomatic when determining when to take action on past-due invoices. Often, businesses unknowingly become de facto creditors, providing goods and services, on an unofficial rolling-account basis. Eventually, payments will evolve from being tardy, to not arriving at all.

When an account goes past due, there should be an internal process triggered whereby all channels of communication are open to engage the client. The level of communication efforts will depend on the strength of relationship between the parties. The longer an invoice remains unpaid, the less likely it will be paid voluntarily.

Businesses have a specified time within the Commonwealth of Pennsylvania to seek judicial intervention to attempt to collect unpaid business debts, depending on the nature of the relationship with the client or the nature of the debt.

By being proactive and striking a balance between maintaining the business relationship and protecting the business, owners can put themselves in a position to recover past-due account.

The Why

Each business is built upon hard work and sacrifice. From the iron furnaces of Scranton to the steel mills of Pittsburgh, Pennsylvanians have a long, proud history of creating enterprise opportunity from the ground up.

When clients do not pay for services or goods, whether it be restaurant supply services, trucking services, IT services, or any other merchant services, the greater community suffers. Unpaid commercial debt starves a business of capital for expansion, improvement, and community engagement. It is inequitable for one business to reap the benefits from the hard work of another without compensation. That is why it’s important that businesses explore every avenue when the end-of-the-month balancing of the financial books leaves the scales off-kilter.

The What

Far too often, businesses are left asking themselves, “what happens now?” when a client doesn’t live up to his or her or its obligations.

There is a fine line between an open dialogue and a one-way stream of communication when it comes to client relationships. At some point, the vague promises to pay, or worse, the unreturned calls, texts, emails, and letters can suffocate even the longest standing business relationships.

The resolution to a business dispute over unpaid invoices is to seek competent legal counsel with experience in commercial collections and business disputes.

When looking at the ledger at the end of the month, it is important to remember all the time and effort that went into each line item. Hard work and sacrifice should not be bogged down by others who either willfully fail to live up to their end or the bargain, or who outright ignore their obligations.

When a business doesn’t know what to do when others haven’t delivered on their promises, it is time to seek counsel and review all options to make the business whole.

Bernstein & Burkley, P.C. has spent more than 50 years fighting for  businesses when customers fail to meet their financial obligations. The attorneys and staff are well versed in a multitude of progressive collection techniques focused on recovery, service, and integrity. Whether the nature of the unpaid claim is a piece of farming equipment or a large-scale installation of fiberoptic cable, Bernstein & Burkley, P.C., will utilize its collective experience to deliver results. Contact us for more information or to find out how we can help.