News & Events

On April 20, 2005, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”). The Act is one of the most comprehensive pieces of bankruptcy legislation to be enacted in decades. With the exception of some provisions, the effective date for the new law is October 17, 2005. The intent behind the legislation is to prevent individuals and other entities from abusing the remedies provided by the Bankruptcy Code. As a result, a number of the new provisions in the Act are designed to produce increased payments to creditors and/or to increase a creditor’s rights in the bankruptcy proceeding. This article briefly highlights some of the major changes that will take effect this fall.

Overview of Major Changes to Consumer Bankruptcy Cases. Subject to certain exceptions, any individual seeking relief under any chapter of the Bankruptcy Code must complete an individual or group counseling session from an approved nonprofit budget and credit counseling agency within 180 days of filing for bankruptcy protection.

One of the most significant changes made by the Act involves the ability of individuals to file a Chapter 7 bankruptcy. The Act greatly limits the availability of Chapter 7 bankruptcy relief through implementation of the “means test.” Generally speaking, after October 17, 2005, if a debtor’s monthly income exceeds the median income level of his/her state, as reported by the Bureau of the Census, the debtor will be subject to the “means test.” The “means test” is a convoluted formula to determine if a presumption of abuse exists. If a presumption of abuse does exist in a Chapter 7 bankruptcy, the debtor will have to defend against a motion to dismiss the Chapter 7 case by demonstrating that “special circumstances” exist that justify the need for Chapter 7 relief. The intent behind the “means test” is to limit the availability of Chapter 7 relief for individuals. Accordingly, if an individual is prohibited from filing a Chapter 7 bankruptcy, his/her only choices are to either forego bankruptcy relief or seek bankruptcy relief under Chapter 13, which requires at least a minimal repayment of debts. As a result, creditors should, at least in theory, receive a higher repayment on their claims against a debtor under the Act then they did under the soon to be old law.

The automatic stay provisions of the Bankruptcy Code once provided a broad protection for debtors by generally prohibiting any continuation of collection efforts by creditors. The automatic stay provisions of the Act, however, create numerous new limitations on the applicability of the automatic stay. A creditor’s ability to continue collection efforts against a debtor that has filed a bankruptcy case will substantially change under the Act. Several of the new provisions modify the applicability of the automatic stay in relation to interests in real property and leases, which is discussed in more detail below.

Another important amendment to the Bankruptcy Code involving Chapter 7 bankruptcy cases and secured debt is the requirement that the debtor must either redeem the property or reaffirm the debt applicable to collateral. In the past, debtors were able to avoid the formal process of redemption or reaffirmation by simply maintaining current payments to the creditor for the secured debt. Redemption requires a debtor to “buyout” a creditor’s interest in collateral by paying the value of the collateral. Reaffirmation means the debtor agrees to pay the debt according to the original terms of the contract. Pursuant to the Act, the application of the automatic stay may be terminated with respect to certain property if the debtor fails to either redeem the property or reaffirm the debt within a specified time period.

Overview of Major Changes Affecting Real Property in Bankruptcy. The Act contains numerous amendments that affect interests in real property. For example, any act to enforce a lien against or security interest in real property after an order granting relief from the automatic stay as to such real property was entered in any prior bankruptcy case is excepted from the automatic stay for two years after the entry of the order granting the relief from the automatic stay, subject to certain exceptions. Thus, if a creditor is granted relief from the automatic stay in one bankruptcy proceeding, and the debtor, thereafter, files a subsequent bankruptcy case, the automatic stay may not prohibit that secured creditor from enforcing its rights in the collateral under state law.

Another change regarding real property involves a landlord’s ability to proceed with its eviction process after a tenant has filed bankruptcy. The Act provides an exception to the automatic stay wherein a landlord may be able to continue its eviction, unlawful detainer action, or similar proceeding if the landlord received a judgment for possession of such property prior to the date the debtor files for bankruptcy protection. This new provision, however, is limited by certain exceptions.

Other significant changes created by the Act provide additional protection for creditors, including, but not limited to, lessors and secured creditors with an interest in real property. These new provisions provide additional exceptions to the applicability of the automatic stay based upon the number of prior bankruptcy cases filed by the debtor. In certain circumstances, the automatic stay terminates after thirty (30) days. In other instances, the automatic stay never even goes into effect after the debtor files bankruptcy, which means the creditor is not prohibited from proceeding with its action and may not need to obtain an order from the Bankruptcy Court to do so. Further, a creditor with a secured interest in real property may request relief from the automatic stay based upon, among other things, the fact that the debtor has filed multiple bankruptcies affecting such real property. All of these provisions, however, are subject to certain limitations and may be overcome by the debtor by filing the appropriate paperwork with the Bankruptcy Court.

One last important change in the Act involves the assumption or rejection of an unexpired non-residential real property lease. The new law provides that a debtor has one hundred and twenty (120) days from the date of the filing of the bankruptcy case to assume or reject a non-residential real property lease. Thereafter, the debtor may request a ninety (90) day extension, which provides a maximum of two hundred and ten (210) days from the date of the filing of the bankruptcy case within which the debtor must either assume or reject the lease. The Act further provides that any request by the debtor for an extension beyond the maximum of two hundred and ten (210) days cannot be granted unless the landlord/lessor has provided its written consent. This is a significant change because under the current law it is customary for the debtor to request and be granted numerous and lengthy extensions to assume or reject a lease. This new provision in the Act will require the debtor and the lessor/landlord participate in negotiations much earlier in the bankruptcy proceeding.

Conclusion. This article provides only a brief overview of some of the significant changes that will take effect on October 17, 2005. The changes created by the Act are much too numerous to be addressed one by one in this article, and thus, this article is not an exhaustive explanation of the impending modifications that will be implemented by the Act. If you or your business become involved in a bankruptcy matter as a result of your client, tenant or customer filing a bankruptcy case, it is advisable that you seek advice as to how the new law may affect you or your business. The attorneys at Maguire & Schneider, L.L.P., are happy to discuss any questions or concerns you may have regarding the new bankruptcy law.

When a married supervisor conducts longstanding, concurrent affairs with three female subordinates at work and grants them professional favors over more deserving candidates, does it constitute unlawful sexual harassment?
In Miller v. Department of Corrections, the California Supreme Court has held that it does, despite a longstanding reluctance by courts to recognize claims of so-called "sexual favoritism."

The case was brought by two former employees at the Valley State Prison for Women (VSPW). The Plaintiffs alleged that they were subjected to discrimination and harassment as a result of the chief deputy prison warden's multiple workplace affairs.

The crux of the complaint is its allegation that the deputy warden openly carried on three affairs with female employees at the prison, all subordinate to him, and granted those women undeserved privileges and promotions because of his relationship with them. At the same time, the suit alleges, female employees who complained about these relationships were punished, and retaliated against, for their objections.

One might contend that they have been denied access to job benefits not because of their sex, but because the boss happened to choose a different woman to have an affair with. The EEOC's Policy Guidance states the agency's position on when sexual favoritism constitutes illegal harassment or discrimination. It recognizes the possibility that widespread favoritism can create a hostile environment for both male and female employees.
The Court said, “when such sexual favoritism in a workplace is sufficiently widespread it may create an actionable hostile work environment in which the demeaning message is conveyed to female employees that they are viewed by management as 'sexual playthings' or that the way required for women to get ahead in the workplace is by engaging in sexual conduct with their supervisors or management.”

Isolated incidences of sexual favoritism, while clearly inappropriate, are not considered unlawful by the EEOC. The safe thing, then, for employers to do is prohibit such favoritism, just as they often have policies banning nepotism.
When sexual favoritism is as pervasive and unfettered as it is alleged to have been at VSPW, no woman can get a fair evaluation based on her abilities and work-related talents. That is the essence of sex discrimination, and the Miller court was right to put a stop to it.

If you have not heard the state of Ohio has adopted a commercial activity tax (CAT) which became effective July 1, 2005. The CAT tax is an annual privilege tax to do business in Ohio and is measured by gross receipts on business activity. The tax applies to all types of businesses regardless of legal form. Individuals also may be subject to the tax. This is how the CAT tax works: most everyone, except wage earners, with gross receipts beyond $150,000 must register with the state and pay a fee of $20.00 ($15.00 if you register electronically) on or before November 15, 2005. For gross receipts up to $1 million, you pay $150.00 annually. For gross receipts above $1 million, you will pay an additional .0026. Here are a few examples:

� Sam owns a welding shop and has $475,000 in gross receipts. His business expenses total $410,000 leaving him with net income of $65,000. Sam pays income tax on $65,000 plus an extra $150.00 for the CAT tax.

� Wendy is a partner in a small medical practice. The practice generates $2 million in gross receipts. The practice will pay $2,750 in CAT tax.

� Karl has investment properties that generate $5 million in gross rents. In addition to paying income tax on the net income (gross receipts less allowable deductions) his CAT tax will be $10,550.

As the examples show, each person is paying more tax to the state of Ohio than before.

The CAT tax will be phased in over the next five years and payment is due in February of each year. Some taxpayers will be required to make quarterly payments.

Here is one more tidbit: If state of Ohio revenue projections from the CAT tax are lower than projected, the Ohio Tax Commissioner (and not your elected representatives) is permitted to increase the Cat tax.

For more information on the CAT tax and how it may apply to your situation, please consult your tax advisor.

The Fair and Accurate Credit Transaction Act�s (FACTA) disposal provisions went into effect on June 1st. The purpose of the rules is to prevent workplace identity theft by requiring employers to properly dispose of records that contain �consumer information.� FACTA amends the Fair Credit Reporting Act (FCRA) and requires �any person that maintains or otherwise possesses consumer information, or any compilation of consumer information, derived from consumer reports for a business purpose to properly dispose of any such information or compilation.�

Under the rule, �consumer information� means any record about an individual that is a consumer report or is derived from a consumer report as defined by the FCRA. The FCRA�s definition of a consumer report includes any written, oral, or other communication of any information by a consumer reporting agency regarding a consumer�s credit standing, credit capacity, character, reputation, personal characteristics, or mode of living which is used as a factor to establish the consumer�s eligibility for employment. Practically, the disposal rules come into play whenever a third-party is used to perform a credit check, run a credit report, conduct a background investigation, or perform a driving record check. Further, if information from any of these reports is made part of another document, such as a summary of the reports, these additional documents are also covered by FACTA. The rules are limited by the requirement that information must come from a third-party; information gathered by internal research or checking is not covered under FACTA.

The rules require proper disposal of consumer information contained within the reports covered by FACTA. The rules further require employers to take �reasonable measures� to protect against unauthorized access to information contained within reports covered by FACTA once the reports are disposed. The logical question is what are reasonable measures? The rule suggests shredding, burning, or pulverizing documents. Computer and electronic files must be erased. These rules only apply to the disposal of consumer information�they do not apply to the maintenance and/or storage of the information.

In recent years, many businesses have started to include mandatory arbitration provisions in contracts with suppliers, customers, and consumers. While mandatory arbitration provisions may be advantageous in certain transactions, their benefits must be analyzed on a case by case basis.

Arbitration is a private dispute resolution process in which a neutral third party renders a decision resolving the dispute after both parties have had an opportunity to be heard. Mandatory arbitration provisions, which are usually included within the terms of a written agreement, require the parties to resolve any dispute related to that transaction through this process, as opposed to presenting the matter to the courts. Overall, this process has been viewed as less costly and more efficient than traditional litigation. However, there are many situations where this presupposition has proven false.

For example, mandatory arbitration provisions in consumer contracts or in contracts between an employer and an individual employee are coming under strict scrutiny by the courts, and in some cases, have been found to be unenforceable. In addition, even if an arbitration clause itself is not challenged, the arbitration decision may later be challenged in court. Obviously, these types of legal disputes will add to the cost of arbitration. Furthermore, when a private dispute resolution mechanism like arbitration is used, the parties typically pay the cost for the arbitrator痴 services, which may be substantial depending on the nature of the dispute. Therefore, prior to inserting mandatory arbitration provision in a contract, you should consider the nature of the contract (consumer or commercial), the amount involved, and the complexity of the potential issues to determine whether mandatory arbitration is the best way to resolve potential disputes.

For 2005, a taxpayer can make a Roth IRA contribution equal to the lesser of (1) $4,000 (up to $4,500 if he is age 50 or older), or 100% of the compensation that痴 includible in his gross income for that year. The maximum Roth IRA contribution is reduced by amounts contributed to non-Roth IRAs and is phased out if modified AGI exceeds $150,000 for joint filers. The deadline for establishing and making a contribution to a Roth IRA is the unextended tax return due date for the tax year to which the contributions relate.

If you have questions regarding tax-free rollovers, conversion of traditional IRA to a Roth or recharacterization of a contribution, please consult your tax advisor.

On Aug. 8, 2005, the President signed the Energy Tax Act which could provide homeowners with a $500 credit for non-business energy property (a one time credit) and the 30% of cost credit for residential energy efficient property (up to $2000). Not surprising, given their subject matter, both are fairly complex. While the many energy related technicalities related to these credits will hopefully be easily resolved with the help of manufacturers’ certification/labeling, the average person should be aware of this tax saving opportunity.

A homeowner may take advantage of these credits by installing energy efficient insulation, skylights, exterior doors, and pigmented coated metal roofs. For example, you may be eligible for a $50 credit for each advanced main air circulating fan or $300 for qualified energy-efficient property heat pumps, water heaters and central air conditioners.

For additional details please consult your tax advisor.

Your credit card bill just arrived in the mail and you notice a $500 charge for a lawnmower from a home improvement store in Illinois. Wait a minute...you don't have a lawn and you certainly don't live in Illinois! It's identity theft. Quick! What do you do next?

Step 1 - 10 minutes

Call the creditor to notify them of the fraud right away. The creditor should reverse the fraudulent charges and lock your account. You should have photocopies of your credit cards and credit contact numbers stored in a safe place just for this kind of emergency. Be sure to record the times, dates and names of the people you contact in a log for future reference.

Step 2 - 10 minutes

Your next step is to contact the credit reporting agencies to report the crime and request that a 90-day fraud alert is placed on your credit report. You only need to contact one of the three bureaus (TransUnion, Equifax or Experian) to have fraud alerts placed on all three of your credit reports.

This 90-day alert will notify creditors that you may be a victim of fraud and advise them to verify your identity before opening any new accounts. This alert also entitles you to a free credit report from each bureau for your review. Fraud resolution experts with the credit reporting agencies can also help you check your credit data for other signs of identity theft and can help you restore your account security. Don't forget to record the results of your contacts in your identity theft log.

Step 3 - 10 minutes

Your last ten minutes should be spent on the Federal Trade Commission's Web site filling out an ID theft affidavit. Once you complete this worksheet, you can use it to report fraud to creditors and can keep it in your records for future reference. If your identity theft goes beyond credit card fraud, you should also contact your local law enforcement agency to file a police report. Add copies of your affidavit and police report to your identity theft log and store these documents in a safe place. How quickly you spot and report identity theft can make all the difference!