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Under Wisconsin law, non-compete, non-disclosure and non-solicitation agreements between employers and employees are enforceable, but only if the agreements are narrowly tailored to protect the employer from unfair competition. A recent decision by the Wisconsin Supreme Court reiterates how important it is to make sure such agreements are meticulously drafted.

 

In Manitowoc Co., Inc. v. Lanning, the Supreme Court declared that a two-year non-solicitation agreement, barring a former employee (John Lanning) from soliciting other employees to leave Manitowoc Co. to join a competitor, customer or supplier, was overly broad, and therefore unenforceable. As a result, Manitowoc Co. was left with no recourse for Lanning’s admitted violations of the agreement.

 

In 2008, Lanning signed a non-solicitation agreement with Manitowoc Co., prohibiting Lanning from soliciting Manitowoc Co. employees to leave the company, or accept employment with any competitor, supplier or customer of Manitowoc Co. In 2010, Lanning left Manitowoc Co. to work for a competitor. Over the next two years, Lanning communicated with at least nine Manitowoc Co. employees about possible employment with the competitor. Lanning’s solicitation efforts were significant, including taking one employee to lunch, giving another a tour of the competitor’s plant in China, and interviewing a third employee for a job with the competitor.

 

In 2011, Manitowoc Co. sued Lanning in Wisconsin state court to pursue Lanning’s breach of his non-solicitation agreement with Manitowoc Co. After a trial to the court, Manitowoc Co. prevailed, and in 2014 the Court awarded Manitowoc Co. $97,844.78 in damages, $37,246.82 in costs, and $1 million in attorneys’ fees (meaning Manitowoc Co. had spent at least $1 million in attorneys’ fees prosecuting the case through trial).

 

On appeal, the Court of Appeals reversed the judgment of the trial court, and, in a 5-2 decision issued early this year, the Supreme Court affirmed the Court of Appeals. As a result, the judgment in favor of Manitowoc Co. was vacated, and Manitowoc Co. walked away empty-handed.

 

The Supreme Court first explained that non-solicitation agreements like the employee non-solicitation covenant here fall under Wis. Stat. § 103.465, the statute governing non-compete agreements between employers and employees (no court had previously held that an employee non-solicitation agreement like this fell under Wisconsin’s statute, although many attorneys, this author included, believed that was the case). Because the agreement falls under the statute, for it to be enforceable under Wisconsin law, the agreement must be necessary to safeguard a protectable interest of the employer, reasonable in time and territorial scope, not harsh or oppressive, and not contrary to public policy. The Supreme Court held that the agreement did not meet these standards.

 

Manitowoc Co. argued that it had a protectable interest in preventing an employee like Lanning, who allegedly had full awareness of the talent and skill-set of the company’s employee base, from poaching the best employees and raiding the company. Yet, the Court noted, Manitowoc Co. employs 13,000 people all over the world, and the agreement prohibited Lanning from soliciting any of those employees. The Court found that there was no evidence or reason to believe that Lanning was personally familiar with or had special inside knowledge concerning all of those employees, especially considering that Lanning worked in only one of two divisions of the company, and had little interaction with the other division. It was thus not necessary, the Court held, for Manitowoc Co. to protect itself against Lanning’s solicitation of any and all of Manitowoc Co.’s 13,000 employees, and therefore the agreement is overbroad and unenforceable. As a result, Lanning is free to violate the agreement with impunity, and Manitowoc Co. cannot stop him.

 

It was a “double-whammy” for Manitowoc Co., to both suffer through Lanning’s solicitation of its employees, and then spend seven years and more than a million dollars suing Lanning, winning at trial, and having its victory reversed on appeal. The painful lesson here is that non-compete, non-disclosure and non-solicitation agreements must be drafted with extreme caution by skilled counsel. If there is any misstep, such agreements become worthless in the exact circumstances where they are most needed – that is, when a former employee flagrantly disregards his or her non-compete agreements, severely damaging the employer.

 

The good news is that the Supreme Court in 2015 held that an employer need not provide an employee with additional compensation in exchange for signing a restrictive covenant, even if the covenant is signed many years after the start of employment. This means that employers are free to revise their non-compete agreements at any time. In hindsight, Manitowoc Co. no-doubt wishes that, rather than spending $1 million and seven years fighting a losing battle after Lanning had left, it had spent a small fraction of that money making sure the agreement was sound while Lanning was still with the company. That is the common-sense upshot for this case, and all Wisconsin companies should take heed.

 

If you have any questions about non-compete, non-disclosure or non-solicitation agreements, or would like a review of the agreements you have in place, please contact Kohner, Mann & Kailas, S.C. Attorney Ryan M. Billings at (414) 962-5110 or rbillings@kmksc.com.

Kohner, Mann & Kailas, S.C. (KMK) regularly sets forth in its printed materials to its clients the advisability and value of any credit provider ensuring that it utilizes a state-of-the-art credit application or credit contract executed by the credit customer prior to granting open-account credit.

 

Do not think for a moment that type of document is not productive. We can tell you in utter candor that KMK regularly, and as a matter of course, collects hundreds of thousands of dollars over and above the principal amount placed for collection when our clients make use of a state-of-the-art credit application. Often KMK extracts a net recovery of more than the full principal placed for collection. In other words, in such a situation, the client pays absolutely nothing for the successful collection, as there is no collection expense to the client. In fact KMK remits to the client an amount in excess of the full principal placed for collection net of KMK fees. A client cannot make money easier than that.

 

A recent KMK billing cycle produced the following net recoveries in excess of the full principal placed for collection: $3,342.26 more than the full net principal placed for collection; $1,122.81 more than the full net principal placed for collection; $370.34 more than the full net principal placed for collection; $359.23 more than the full net principal placed for collection; $352.13 more than the full net principal placed for collection; and $87.27 more than the full net principal placed for collection.

 

The contractual provisions of the credit applications involved provided for the excess or surplus recoveries as reported above: interest and attorneys’ fees of $8,503.26; interest, service charges, returned check charges and attorneys’ fees of $4,258.77; interest and attorneys’ fees of $2,066.55; interest and attorneys’ fees of $499.00; interest and attorneys’ fees of $810.25; service charges and attorneys’ fees of $695.52; returned check charges and attorneys’ fees of $194.54; and interest and attorneys’ fees of $203.58.

 

The clients represented in this one billing cycle paid absolutely nothing for the full collection recoveries made, and in fact “pocketed” the amounts listed as “surplus” recoveries over and above the full principal placed for collection.

 

The cost of this type of credit application or contract is nominal, and it will often be returned back to you in the first recovery made upon the credit application or contract. It is “found money” that no credit grantor can intelligently dismiss or ignore.

 

The language of the credit applications drafted by KMK provides the legal contractual language to bind the purchasing customer to the payment of interest, collection costs and all other damages as the result of defaulted payment. KMK can historically document clients that have delinquent accounts receivable that nevertheless maintain a strong and positive recovery rate. Call Attorney Steve Kailas at 414-962-5110 to discuss and confirm this phenomenon.

Kohner, Mann & Kailas, S.C. litigation attorneys Robert L. Gegios, Ryan M. Billings, and Melinda A. Bialzik wrote the cover story for the June 2018 issue of Wisconsin Lawyer, published by the Wisconsin State Bar Association. The article, entitled “Sweeping Changes to Rules of Civil Procedure,” details the dramatic impact the revisions to the procedural rules have on civil litigation in the Wisconsin State Courts.

Unless a statute or contract provides otherwise, a party to a lawsuit is responsible for its own litigation expenses, including attorneys’ fees. This is known as the “American rule.” It contrasts with the “English rule,” under which the losing party pays the prevailing party’s costs and attorneys’ fees. As its name suggests, the American rule is ubiquitous in the United States.

 

There are exceptions to the American rule. One such exception—known as the “third party litigation exception”—occurs where “wrongful acts” by one party cause another party to incur legal expenses to protect its interests against a third-party. Fraud, breach of fiduciary duty, and other tortious conduct may qualify as wrongful acts for this purpose. For example, where a seller of real property is sued by the buyer because of misrepresentations made by the seller’s realtor, the seller may recover from the realtor the litigation expenses paid to resolve the buyer’s claim. It is not solely tortious acts or omissions, however, that may lead to such an award.

 

In the recently decided case of Talmer Bank and Trust v. Jacobson, the Wisconsin Court of Appeals rejected the notion that only tortious conduct may qualify as a wrongful act under the third-party litigation exception. In Talmer, the bank filed a commercial foreclosure action against the defaulting borrowers, also naming the tenants as interested parties. The tenants had previously entered into a land contract with the borrowers to purchase the mortgaged property. Under the terms of the land contract, the tenants were to make payments to the borrowers who, in turn, would continue making mortgage payments to the bank. While the tenants made the required payments under the land contract, the borrowers breached the contract by failing to pay the bank. The foreclosure action ensued.

 

As the lawsuit progressed, the tenants negotiated a settlement with the bank and then pursued a claim against the borrowers under the third-party litigation exception seeking to recover the attorneys’ fees they had paid for being drawn into the foreclosure action. The tenants argued that the attorneys’ fee award was justified by the borrowers’ wrongful act of breaching the land contract by failing to pay the mortgage. The borrowers admitted that they were in breach of the land contract, but they argued that only certain tortious conduct could amount to a wrongful act under the third-party litigation exception to the American rule. The trial court agreed with the borrowers and dismissed the tenants’ claim for attorneys’ fees.

 

The Wisconsin Court of Appeals disagreed and reversed. The appellate court noted that it was undisputed that the tenants were drawn into the foreclosure lawsuit solely because the borrowers had breached the land contract. Indeed, when they made the land contract the borrowers should have foreseen that a subsequent mortgage default by them would necessarily force the tenants into litigation with the bank. Given these circumstances, the Court of Appeals found that the borrowers’ breach of contract easily sufficed as a wrongful act justifying a fee award under the third-party litigation exception, and ordered the trial court to enter such an award on remand.

 

Talmer serves as a cautionary tale for contracting parties and is summarized with the maxim, “think before you breach.” Not only is a party in breach of a contract liable for nonperformance, but he or she may also be liable for expenses paid by the aggrieved party to resolve third-party claims that flow from the breach, including litigation costs and attorneys’ fees.

 

If you have questions about claims for attorneys’ fees, contact Attorney Zach Whitney at (414) 962-5110 or zwhitney@kmksc.com.

In 2006, after passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Kohner, Mann & Kailas, S.C. (KMK) questioned whether reclamation claims in bankruptcy had become obsolete even though BAPCPA had doubled the period that a reclamation claim could cover in bankruptcy, from 20 to 45 days. Despite the expansion of the reclamation time period, BAPCPA also added a provision that declared reclamation claims were expressly subject to (inferior to) secured claims.  KMK posited that this priority for secured claims would negate most reclamation claims in bankruptcy, and KMK’s experience in the last 12 years has confirmed this fear—cases have consistently ruled that secured claims triumph over reclamation claims.  A recent decision from the Indianapolis, Indiana bankruptcy court illustrates this unfortunate outcome.

 

To refresh your recollection, under the Uniform Commercial Code, a seller that discovers the buyer has received goods on credit while insolvent may seek to reclaim the goods by making a written demand for their return within 10 days after receipt by the debtor.  Under pre-BAPCPA law, the filing of a bankruptcy petition gave the creditor until 20 days after the goods were received to make the written demand.

 

Under BAPCPA, if the demand is made within 20 days after the bankruptcy filing date, a creditor can make a written demand for the return of goods received by the debtor as early as 45 days prior to the filing of the case.  If the demand is made, the trustee’s right to use the property is subject to the reclaiming creditor’s rights in the goods.

 

However, even prior to BAPCPA, the reclaiming creditor was always subject to the rights of a good faith purchaser (e.g., a customer that purchased the goods from the debtor before the demand was made), and many case decisions also concluded that a lender with a perfected security interest was a good faith purchaser with rights superior to a reclaiming creditor.  Since a secured creditor’s interest usually attached immediately upon receipt of the goods by the debtor, the reclaiming creditor often lost its reclamation rights to a secured creditor, but some uncertainty in the law gave the reclaiming creditor leverage to argue for some recovery in light of its reclamation rights.  However, under BAPCPA, the secured creditor’s priority interest was made explicit and KMK predicted that the reclaiming creditor’s leverage would evaporate.  A good example is the H. H. Gregg case before the Indianapolis bankruptcy court.

 

In that case, the appliance store, H. H. Gregg, filed  bankruptcy. Whirlpool made a reclamation demand 4 days later, and then filed a lawsuit against the debtor and the secured lenders in the case trying to vindicate its reclamation demand.  Whirlpool’s leading argument was that the secured lenders were not good faith purchasers under the Uniform Commercial Code because they continued to lend to the debtor on the eve of bankruptcy, knowing that the debtors were receiving product (and more collateral for the secured lender’s loans) for which the debtors would not be able to pay.

 

While the bankruptcy court was mildly sympathetic to Whirlpool’s plight, the court concluded in its December 4, 2017 opinion that the express language of the Bankruptcy Code that made reclamation claims subordinate to secured claims carried the day.  Accordingly, Whirlpool’s lawsuit was dismissed.

 

Whirlpool has appealed the decision to the Seventh Circuit Court of Appeals in Chicago, the federal appeals court that also covers cases filed in Wisconsin and Illinois.  The Seventh Circuit’s ruling may determine once and for all whether reclamation claims have any viability in a bankruptcy case at all, or perhaps it might breathe new life into such claims. KMK will keep you informed.

 

However, all is not lost. There was no mention in the Whirlpool case about Whirlpool’s Bankruptcy Code Section 503(b)(9) claim, which provides for an administrative priority claim for the value of goods received by the debtor in the 20 days prior to the bankruptcy petition date (this administrative claim was also added to the Bankruptcy Code by BAPCPA).  Unlike a reclamation claim, a creditor can preserve its 503(b)(9) claim without a written demand within days or weeks of the petition date, and this claim has administrative priority whether or not the goods have been sold or disposed of by the debtor at the time the case was filed, and whether or not there is a secured creditor with a lien in the goods.  In the last 12 years since BAPCPA has been enacted, at least where funds exist for the payment of administrative claims, KMK has an excellent track record of securing payment of these claims.  Therefore, while KMK still recommends issuing a reclamation demand in the appropriate case, we believe a creditor is even better advised to protect its rights under the 20-day administrative claim of Section 503(b)(9).

 

If you have questions about reclamation claims, contact Attorney Samuel Wisotzkey at 414-962-5110 or  swisotzkey@kmksc.com.

Milwaukee, Wis. –  A significant payout is underway in Wisconsin from partial settlements that were reached with four defendant groups in class action lawsuits against natural gas companies that allegedly conspired to manipulate natural gas prices.

 

More than $12 million is being distributed to Wisconsin companies, as well as government and public entities, that were qualified industrial and commercial users of natural gas between 2000 and 2002.

 

In the litigation commenced by Kohner, Mann & Kailas, S.C. (KMK), seven prominent Wisconsin organizations contend that retail prices for natural gas more than doubled in the early 2000s as a result of a scheme by large natural gas companies. The litigation seeks damages for the high prices paid for natural gas.

 

Robert L. Gegios, KMK’s lead attorney in the litigation, noted these initial settlements involve only four of the 11 groups of defendants. The plaintiffs are pursuing the remaining defendants aggressively for further recovery, including if necessary, trial in federal court in Madison, Wisconsin.

 

According to the claims administrator, numerous public entities are receiving substantial settlements. They include the State of Wisconsin Department of Administration – $1,181,082; Milwaukee Public Schools – $348,083; and the Madison Metropolitan School District – $91,040.  Even more Wisconsin businesses that qualified as natural gas users are receiving payments as well, sharing in the more than $12 million.

 

The natural gas company defendants argued that the Wisconsin plaintiffs’ state law claims would interfere with the authority of the Federal Energy Regulatory Commission (FERC), which oversees interstate natural gas markets. Federal authority, the defendants argued, renders state law invalid. But the Federal Court of Appeals sided with the plaintiffs, and in 2015 the U.S. Supreme Court agreed, allowing the lawsuits to proceed.

 

About KMK                        

Kohner, Mann & Kailas, S.C., (KMK) is a leading business transactions, commercial finance and litigation law firm that provides clients with cost-effective legal support for their business operations. Formed in 1937, KMK blends demonstrable business know-how with the legal issues that arise from doing business in the United States and elsewhere. KMK offers an experienced and sophisticated team able to adapt its services to the particular business issues of its clients. Based in Milwaukee, Wisconsin, KMK has a reputation for achieving results in local, national, and transnational business disputes and transactions. For more information, visit www.kmksc.com

Recent amendments to Wisconsin’s foreclosure statutes went into effect on December 1, 2017. The amendments significantly changed the process of recording deeds after confirmation of sheriff’s sales throughout Wisconsin.

 

The amendments repealed Wis. Stats. §§ 846.167 and 846.17.  These statutes were colloquially known as the “Milwaukee County Rule”, because Wis. Stat. § 846.167 only applied in counties having a population of 750,000 or more and Milwaukee County was the only county that met this criterion.  This statute provided that once the court confirms the sheriff’s sale and upon compliance by the purchaser with the terms of sale and payment of the balance of the sale price, the clerk of court shall transmit the sheriff’s deed to the register of deeds for the county.

 

This statute evolved out of the need for ensuring that sheriff’s sale deeds issued in Milwaukee County foreclosure cases were submitted to the register of deeds for recording.  Frequently third party winning bidders at Milwaukee County sheriff’s sales failed to record the sheriff’s deed. This caused many headaches for the taxing and code enforcement authorities because the foreclosed mortgagor remained the owner of record.

 

For all other counties, Wis. Stat. § 846.17 provided that once the court confirms the sheriff’s sale and upon compliance by the purchaser with the terms of sale and payment of the balance of the sale price, the clerk of court shall transmit the deed directly to the purchaser (which was also the procedure in Milwaukee County before the enactment of Wis. § 846.167 in 2015).  When the sheriff’s deed was delivered to our firm as counsel for the lender/mortgagee purchaser, our office was able to immediately e-record the sheriff’s deed.  However, with the new amendments, there may be delays in recording the sheriff’s deed that are outside the control of counsel.

 

The amendments now require that all counties follow the Milwaukee County Rule, that is, upon confirmation of the sale and compliance by the purchaser with the terms of the sale and payment of any balance of the sale price, and unless otherwise ordered by the court, the clerk of court shall transmit the deed to the register of deeds. See Wis. Stat. § 846.16(3m)(a) (2017).  Experience with the Milwaukee County Rule has shown that lender/mortgagee sheriff’s sale purchasers have encountered delays in having the sheriff’s deed recorded in part because the statute does not impose a deadline for the clerk of court to transmit the deed to the register of deeds and does not impose a deadline for the register of deeds to record the sheriff’s deed.

 

Perhaps courts will become receptive to utilizing the “unless otherwise ordered by the court” clause in the statute to direct the clerk of court to deliver the sheriff’s deed directly to legal counsel for the lender/mortgagee sheriff’s sale purchaser — thereby allowing legal counsel to expedite the recording of the sheriff’s deed.  Developing an expedited protocol for lender/mortgagees may have to come about by request in the motion to confirm the sale on a case by case basis or by local court rule of the individual circuit courts because the current statutory scheme does not explicitly provide for a carve-out or exception for lender/mortgagee purchasers.

 

Additionally, the amendments revised the notice of sheriff’s sale requirements. In addition to the time and place of the sale (as required in the prior version of the statute), the notice of sheriff’s sale must also contain the street address of the real estate to be sold and the sum of the judgment.

 

If you have any questions on the topic of this bulletin or other foreclosure matters, feel free to contact Attorney Matthew Gerdisch (mgerdisch@kmksc.com) or Attorney Devon Daughety (ddaughety@kmksc.com) of our office, or call (414) 962-5110.

 

 

About KMK

Kohner, Mann & Kailas, S.C. (KMK) is a leading mortgage default servicing, business transactions, commercial finance and litigation law firm that provides clients with cost-effective legal support for their business operations. Formed in 1937, KMK blends demonstrable business know-how with the legal issues that arise from doing business in the United States and elsewhere. KMK offers an experienced and sophisticated legal team able to adapt its services to the particular business issues and needs of its clients. Based in Milwaukee, Wis., KMK has a reputation for achieving results in local, national and transnational business disputes and transactions.  For more information, please visit: https://kmksc.com.

 

This memorandum is provided by Kohner, Mann and Kailas, S.C. for educational and informational purposes only and is not intended and should not be construed as legal advice.  January 8, 2018.

The Amendments Will Have a Significant Impact on Creditors, Including Secured Creditors

 

Overview

 

In this bulletin, we provide a brief summary of the many amendments to the Federal Rules of Bankruptcy Procedure (“FRBP”) that took effect on December 1, 2017.  These amended rules will have a significant impact on the rights of creditors and should be examined carefully.

 

Rule 2002 – Amendment Shortens Notice of Time to Object to Confirmation of a Chapter 13 Plan

 

FRBP 2002 formerly required that creditors be provided with at least twenty-eight (28) days notice of the deadline to file an objection to confirmation of a Chapter 13 plan.  The amendment reduces the amount of notice by seven (7) days to twenty-one (21) days.  This amendment ties in with the amendment to FRBP 3015 discussed below.  The advance notice of the hearing on confirmation of a plan remains unchanged at not less than twenty-eight (28) days prior to the confirmation hearing.

 

Rule 3002 – Amendment Shortens Deadline to File a Proof of Claim and Addresses Secured Creditors’ Claims            

 

Secured Claims

The amendment makes clear that secured creditors must file a proof of claim in order to receive distributions from the bankruptcy case.  The amendment also eliminates ambiguity regarding the effect on a secured creditor’s lien for failing to file a proof of claim, i.e. whether or not the lien is void due to a failure to file a secured proof of claim.  Amended Rule 3002(a) clears up this ambiguity by reassuring creditors that a failure to file a secured proof of claim does not void the creditor’s lien.

 

Time to File a Proof of Claim Shortened to Seventy (70) Days from Bankruptcy Petition Date

Under the former version of Rule 3002, a proof of claim in a Chapter 7, 12, or 13 case had to be filed no later than ninety (90) days after the first Section 341 Creditors’ Meeting.  The Section 341 Creditors’ Meeting is usually held approximately thirty (30) days after the petition date, but timing varies on a case-by-case basis.  Accordingly, under the former rules, creditors had approximately one hundred twenty (120) days after the petition date to file their proof of claim.

 

Amended Rule 3002(c) contains an important change.  Proofs of claim for voluntary Chapter 7, 12, and 13 cases now must be filed within seventy (70) days of the bankruptcy petition date in order to be timely filed (except in an involuntary Chapter 7 case, the proof of claim filing deadline is now ninety (90) days from the order for relief).  This amendment reduces the amount of time a creditor has to file a proof of claim by nearly half, from approximately one hundred twenty (120) days to only seventy (70) days.

 

In instances of conversion to a Chapter 12 or 13 case, the 70-day deadline begins to run from the date of the order of conversion.

 

Extensions of Time to File a Claim

Amended Rule 3002(c)(6) now allows creditors to ask the Court for extensions to the proof of claim bar date in limited circumstances.  Rule 1007(a) requires that a debtor file a list of creditors’ names and addresses so that the Court can send bankruptcy case notices to creditors.  A creditor may obtain an extension of up to sixty (60) days from the date of the order granting the extension to file a proof of claim, if the creditor demonstrates to the Court that (i) the notice was insufficient to give the creditor a reasonable time to file its proof of claim because the debtor did not timely file the Rule 1007(a) list of creditors or (ii) the notice was insufficient to give the creditor a reasonable time to file its proof of claim and the notice was sent to the creditor at a foreign address.

 

Claims Secured by a Security Interest in a Principal Residence.

Amended Rule 3002(c)(7) provides that a proof of claim for a claim secured by a security interest in a debtor’s principal residence, must be filed with all attachments required under Rule 3001(c)(2)(C) (e.g., the mortgage proof of claim attachment and escrow information) within seventy (70) days after the order for relief is entered.  All other attachments required under Rules 3001(c)(1) and 3001(d) (e.g., the note and mortgage documents) must be filed as supplements to the lien holder’s claim within one hundred twenty (120) days of the order for relief.  (In a voluntary bankruptcy case, the date of the order for relief is the bankruptcy petition date.)

 

Rule 3007 – Procedure for Serving an Objection to Creditor’s Claim

 

Amended Rule 3007 requires that an objection to a claim must be served on the claimant via first-class mail to the party most recently designated on the claimant’s original or amended proof of claim as the person to receive notices at the address so indicated.  This amendment provides creditors with the opportunity to control (via the address in the creditor’s proof of claim or claim amendment) where claim objection notices must be sent to the creditor.

 

Under the Amended Rule, claim objections must be filed and served no later than thirty (30) days before any scheduled hearing on the objection or any deadline for the claimant to request a hearing on the objection.  Courts are no longer required to hold a hearing on claim objections.  Local rules dictate the procedure for scheduling a hearing on an objection to a claim.  In Wisconsin, the Eastern District Bankruptcy Court requires that the claimant file a timely response to an objection to claim before scheduling a hearing. Currently, there is not a local rule regarding claim objection hearings in the Bankruptcy Court for the Western District of Wisconsin.  Under the Amended Rule, in the absence of an objection, the Court may sustain the objection or the Court may hold a hearing to examine the legal basis of the objection to claim and to determine if the presumption of the claims validity has been sufficiently rebutted.

 

Rule 3012 – Amendment Changes Procedures for Determining the Amount of Secured Claims and is Extended to Priority Claims

 

Under the former version of Rule 3012, a party seeking to establish the amount of a secured claim can do so only by way of a motion.  Amended Rule 3012 allows for the determination of the amount of a secured claim in one of three ways: via motion, in an objection to the creditor’s claim, or in a Chapter 12 or Chapter 13 plan.  If the determination of the secured claim amount is to be made via a Chapter 12 or 13 plan, the plan must be served on the holder of the claim (and other parties the Court may designate) in the manner required under Rule 7004.  (See discussion below on amendments to Rule 3015 on the effect of confirmation of plan.)

 

If a claim is held by a governmental unit, then the request to determine the amount may only be made by a motion or in a claim objection.  Further, the request must be made either after the governmental unit has filed a proof of claim or after the expiration of the bar date, whichever is first.

 

Priority Claims

A request to determine the amount of a claim entitled to priority may be made only by a motion after the claim is filed or in a claim objection.

 

Rule 3015 – Chapter 12 and 13 Plans:  Many Important Changes to Procedures

 

Official Form Plan

Amended Rule 3015(c) requires the use of the Official Form Chapter 13 Plan unless the Bankruptcy Court has adopted a local Chapter 13 Plan Form in accordance with Rule 3015.1.   (The national form Chapter 13 Plan is designated in the amendments as Official Form 113.)  A local Chapter 13 Plan Form has been proposed for adoption in both the Eastern and Western Districts of Wisconsin.

 

Under the Amended Rule, any specialized provisions added by debtor’s counsel or any provision that deviates from the standard provisions listed on the applicable Official Form Plan will only be effective if the provision is included in the section designated for special provisions.

 

Delivery of Plan to Creditors

Former Rule 3015(d) states that either the plan, or a summary of the plan, must be included with each notice of the confirmation of plan hearing.  Consequently, under that former rule, in some instances it is possible for creditors to receive notice of a hearing on confirmation of a plan without receiving the entire plan.

 

Amended Rule 3015(d) helps ensure that interested parties receive a copy of the plan while simultaneously putting a greater responsibility on debtors.  If a copy of the plan is not included with the notice of the hearing on confirmation, it will be the debtor’s responsibility to serve the plan on the trustee and all interested creditors once the plan has been filed with the Court.

 

Objection to Plan

Once a plan has been filed, former Rule 3015(f) allowed interested parties to object to confirmation of a plan at any time prior to confirmation of the plan.  The Court is granted the authority to determine whether or not an objection has been timely filed, but the open-ended nature of the objection period can be a benefit to creditors.  Amended Rule 3015(f) now requires interested parties to object to a reorganization plan in a more defined manner.  An objection to a plan now has to be filed and served at least seven (7) days prior to the plan confirmation hearing, unless the Court orders otherwise.

 

Modification of Plan

Former Rule 3015(g), titled “Modification of Plan After Confirmation,” has been moved to a new subsection, Amended Rule 3015(h).  Similar to the former version of Rule 3015(d), debtors may now serve all interested parties with either the proposed modification or a summary of the proposed modification of the plan.

 

Confirmation of the Chapter 12 and Chapter 13 Plans – Plan Terms May Control Secured Claim Amount

Amended Rule 3015(g) contains an entirely new subsection, entitled, “Effect of Confirmation.” Section 1 of Amended Rule 3015(g) states that a confirmed plan controls the amount of a secured claim under Amended Rule 3012 and is binding on the holder of the secured claim.  Filing a proof of claim with a contradictory secured claim amount is insufficient to challenge the amount of the secured claim as determined in a Chapter 12 or Chapter 13 plan.  Likewise, the amount of the secured claim as determined by the plan overrides the amount of the secured claim set out in the debtor’s schedules.  Even if there is a pending objection to a creditor’s secured claim, if the plan lists a contradictory secured claim amount, the creditor must object to the plan if the creditor wishes to defend the amount of its secured claim.

 

Plan Terms Can Terminate the Automatic Stay

Under the Amended Rule, a Chapter 12 or Chapter 13 plan may provide for the termination of the automatic stay and co-debtor stay, thus eliminating the need for a motion for relief from the automatic stay for the affected creditor.  Amended Rule 3015(g)(2) provides that any request within the plan to terminate the automatic stay imposed by 11 U.S.C. §362(a), 11 U.S.C. §1201(a), or 11 U.S.C. § 1301(a) will be granted upon plan confirmation.

 

New Rule 3015.1 – Set-up Procedure for the Use of a Local Form Plan in Chapter 13 Cases

 

Rule 3015.1 is a new rule created to clarify the Chapter 13 plan requirements mentioned in Amended Rule 3015(c).  If a district decides it will have a local form for Chapter 13 plans, the form must be created in accordance with the specifications listed in Rule 3015.1.  Further, there may only be one local form and that form may only be adopted after notice and an opportunity for comment has been given to the public.

 

Rule 4003 – Amendment Expands and Provides Alternative Ways for Debtors to Avoid a Lien or Transfer Exempt Property

 

The former version of Rule 4003 provides that the only way a debtor can avoid a lien or transfer of exempt property is by a motion filed with the Court.  Amended Rule 4003 expands upon the current rule and provides a Chapter 12 or Chapter 13 debtor with an additional method to seek to avoid a lien on or transfer of exempt property.  A Chapter 12 or Chapter 13 debtor may still file a motion with the Court to avoid the lien. However, a Chapter 12 or Chapter 13 debtor also may provide for the avoidance of the lien or a transfer of the exempt property within the Chapter 12 or Chapter 13 plan by serving a copy of the plan on the affected creditor in the manner required under Rule 7004, in which case the affected creditor will need to timely object to the plan to protect its lien.

 

Rule 5009 – Procedure for Declaring a Lien Satisfied in Chapter 12 and 13 Cases

 

In an interesting development, under Amended Rule 5009, a debtor in a Chapter 12 or 13 case may request via motion that the Court enter an order declaring that a secured claim has been satisfied and that the lien has been released under the terms of a confirmed plan.  The motion may be made at any time during the bankruptcy case, as long as the appropriate conditions have been met.

 

Conclusion

 

The above amendments were effective on December 1, 2017.  Many facets of the Bankruptcy Rules have been altered in fundamental ways.  Deadlines have been shortened and procedures modified such that unwary creditors may find their claims and interests impaired or lost. Creditors can be proactive to protect their claims by consulting with experienced bankruptcy counsel to review the creditor’s practices and integrate the amendments into the creditor’s procedures.

 

If you have any questions on the topic of this bulletin or other bankruptcy matters, feel free to contact Attorney Matthew Gerdisch (mgerdisch@kmksc.com) or Attorney Samuel Wisotzkey (swisotzkey@kmksc.com) of our office at (414) 962-5110

 

 

About KMK:

 

Kohner, Mann & Kailas, S.C. (KMK) is a leading business transactions, commercial finance and litigation law firm that provides clients with cost-effective legal support for their business operations, including representing creditors in bankruptcy, insolvency and work-out matters on a nationwide basis. Formed in 1937, KMK blends demonstrable business know-how with the legal issues that arise from doing business in the United States and elsewhere.  KMK offers an experienced and sophisticated legal team able to adapt its services to the particular business issues and needs of its clients.  Based in Milwaukee, WI, KMK has a reputation for achieving results in local, national and transnational business disputes and transactions.  For more information, please visit kmksc.com.

 

This memorandum is provided by Kohner, Mann and Kailas, S.C. for educational and informational purposes only and is not intended and should not be construed as legal advice. 

A recent bankruptcy case dramatically illustrates how critical it is for a lender to strictly comply with the requirements for creating a legally effective UCC financing statement, and the hard lessons that follow if a lender fails to do so.

 

In Mainsource Bank v. LEAF Capital Funding, LLC (In re Nay), 563 B.R. 535 (Bankr. S.D. Ind. 2017), the Indiana bankruptcy court held that because the borrower’s middle name on financing statements did not exactly match his middle name on his driver’s license (it lacked one letter: t), LEAF’s financing statements were not effective. Consequently, LEAF lost its collateral to another lender, and it was relegated to general unsecured creditor status in the bankruptcy case.

 

Background of the Case

In February 2014, Mainsource Bank (“Mainsource”) filed a financing statement perfecting its security interest in personal property of Mr. and Mrs. Nay (the debtors) that included equipment. Subsequently, Mr. Nay granted LEAF purchase money security interests in two pieces of equipment that Mr. Nay acquired with financing provided by LEAF. LEAF filed two UCC financing statements that identified the debtor’s name as “Ronald Mark Nay.” The debtor’s name as listed on his most recently issued unexpired Indiana driver’s license was “Ronald Markt Nay.” The difference was a missing “t” at the end of Mr. Nay’s middle name. Perhaps the person at LEAF tasked with preparing the financing statements thought that the “t” was a typo, and the person took the liberty of correcting what appeared to be a misspelling.  If that is what occurred, that was a fatal assumption and it cost LEAF dearly.

 

Under the Uniform Commercial Code (the “UCC”), a creditor that properly and timely perfects a purchase money security interest in equipment will acquire a security interest in that equipment that has priority over other pre-existing secured creditors. The problem for LEAF was that the court found that LEAF had not properly perfected its security interests in the subject equipment because the name on LEAF’s financing statements did not match the name listed on Mr. Nay’s driver’s license.

 

UCC Alternative A and Alternative B

Several years ago, amendments to the UCC allowed states to choose between two alternatives for identifying an individual debtor’s name for the UCC financing statement. The choices are informally referred to as “Alternative A” and “Alternative B”. Forty-four states (including Wisconsin) have adopted Alternative A.

 

Under Alternative A, a financing statement will not be seriously misleading “only if” the financing statement uses the name on the debtor’s unexpired state-issued driver’s license or identification card. [As an aside, the question of what is the correct debtor name for a financing statement can become complicated if the debtor’s driver’s license or identification card later expires (especially if the debtor does not obtain a new one) or the debtor later modifies his/her name on the driver’s license or ID card.]

 

Six states have adopted Alternative B, also known as the “safe harbor alternative.”[1] Under Alternative B, the creditor can look to either (1) the debtor’s individual name as determined under state law; (2) the debtor’s surname and first personal name; or (3) the name on an unexpired driver’s license or other state identification card. Under Alternative B, using the unexpired driver’s license or state identification name on the UCC financing statement provides a “safe harbor” where using that name for the debtor will mean that the financing statement is not seriously misleading, even if the debtor uses different names on other public records or commonly goes by a different version of his/her name than what is on the license or ID card.

 

Application of Alternative A in LEAF Case

Indiana is an Alternative A state, where a financing statement is “seriously misleading” if it fails to provide the name of the individual which is indicated on an unexpired Indiana driver’s license or identification card. In this case, because Mr. Nay’s name listed on the financing statements did not match the name listed on his unexpired driver’s license (fatally missing the letter t), LEAF’s financing statements were “seriously misleading.”

 

However, the UCC contains a general fallback provision that can sometimes redeem an otherwise “seriously misleading” financing statement.  Under this fallback provision, if a search of the financing statement records (in the applicable UCC filing office, using the UCC filing office’s standard search logic) under the debtor’s “correct name” (the debtor’s name as required under Alternative A or B as applicable to the case at hand), discloses the defective financing statement, then the defective financing statement may still be effective to perfect the security interest.  In order for LEAF to be protected by this fallback provision, LEAF needed to demonstrate that its financing statements (that omitted the “t” in the middle name) would show up in a UCC financing statement search under Mr. Nay’s “correct name”: “Ronald Markt Nay”.

 

Unfortunately for LEAF, the UCC search (using the filing office’s standard search logic) under the debtor’s correct name did not reveal LEAF’s financing statements. As a result, LEAF’s security interests in the equipment were unperfected and the equipment LEAF financed became the collateral of Mainsource because Mainsource’s financing statement stated the debtor’s correct name.

 

The court noted that although the result was harsh, the court was “constrained to interpret the statute in a manner consistent with legislative intent, which is ‘to simplify formal requisites and filing requirements.’”

 

Conclusion

The LEAF case demonstrates the significant loss a lender can suffer from a small error, such as a missing “t”, from an individual debtor’s middle name.  The case also demonstrates that such harsh consequences can be avoided by carefully following the rules set out in the UCC for creating and filing a financing statement.  Following those rules can be easier said than done, however, as the UCC rules can vary from state to state and are not always all that clear.  Lenders can minimize exposure by consulting with experienced commercial law counsel to review a lender’s practices and procedures and develop checklists to facilitate the preparation and filing of UCC documents.

 

If you have any questions on the topic of this bulletin or other UCC matters, feel free to contact Attorney Matthew Gerdisch (mgerdisch@kmksc.com) or Attorney Devon Daughety (ddaughety@kmksc.com) of our office, or call (414) 962-5110

 

This bulletin is provided by Kohner, Mann & Kailas, S.C., for educational and informational purposes only and is not intended and should not be construed to be legal advice.  September 27, 2017.

[1] These states are Alaska, Colorado, Connecticut, Delaware, Nevada, and Wyoming.

KMK is pleased to announce its success in an important constitutional case before the Wisconsin Supreme Court.

 

The case involves a trial court’s delegation of broad authority to a “referee,” a private individual who was appointed by the court to act as a surrogate judge. The trial court empowered the referee to rule on all matters short of trial, and forced the parties to pay the referee a high hourly rate set by the court to act as their substitute judge.

 

KMK challenged the scope and terms of the referee’s appointment, and asked Wisconsin’s highest court to exercise its superintending power over all Wisconsin courts (a power rarely exercised) to protect its client’s constitutional right to its day in court.

 

The Wisconsin Supreme Court agreed with KMK. As the Supreme Court explained:

 

“The Wisconsin Constitution embodies the principle that courts are an essential and integral part of Wisconsin’s government….The Order of Reference impermissibly delegated to the referee judicial power constitutionally vested in Wisconsin’s unified court system. Accordingly, the Order does not survive [the Petitioner’s] constitutional challenge.”

 

The Supreme Court vacated the appointment, and struck all the significant orders issued by the referee.

 

This ground-breaking decision will protect the constitutional rights of all Wisconsin litigants to have their claims adjudicated by a democratically-elected judge in a court of law.

 

KMK attorneys Robert L. Gegios, Ryan M. Billings, and Melinda A. Bialzik represent our client in the litigation and handled the Supreme Court appeal. The opinion can be found at 2017 WI 26.



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