A Hidden Asset Raises Thorny Legal Issues

Who owns a legal claim that is filed after a bankruptcy, but stems from actions that took place before the bankruptcy case was closed? This is the question our federal courts are trying to answer thanks to a Wisconsin woman who recently went through the Chapter 7 bankruptcy process.

Megan Kitchner was sued in small claims court on March 9, 2017. A few weeks later, on March 28, she filed for Chapter 7 bankruptcy. The small claims collection action became part of her bankruptcy case, as all pending and potential legal matters do when someone files for bankruptcy.

Kitchner received her bankruptcy discharge on June 29, 2017, and her bankruptcy case was closed on July 3, 2017. Less than six months later, Kitchner was back in court. She filed a lawsuit alleging that the Kohn Law Firm had violated the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA) by disclosing her credit score and credit report when it filed its small claims collection against against her in March 2017. She claimed she was eligible for compensation stemming from the alleged violations.

The firm asked the court to dismiss the claims Kitchner had filed against it because it argued that those claims should have been included in the bankruptcy case, and were therefore under the control of the bankruptcy trustee, not Ms. Kitchner.

This is where things get tricky. Kitchner should have told the bankruptcy court about her potential claims against Kohn, even though she hadn’t filed her lawsuit yet. However, even though she didn’t disclose her potential claims and hadn’t filed them yet, they still technically belong to the bankruptcy estate and are under the control of the bankruptcy trustee. The trustee gets to decide whether to pursue the case, settle it, or abandon it and put it back under the bankruptcy filer’s control.

In this case, the court agreed with Kohn that the bankruptcy trustee, not Kitchner, was the true owner of the claims Kitchner had against the firm. However, it was reluctant to dismiss the case. Instead, it instructed Kitchner to either convince the bankruptcy trustee to formally give the case back to her, or to pull the trustee into the case to act as the plaintiff.

Our clients often find it frustrating that we ask so many questions about their lives as we are preparing to file their cases, but this case shows why it is necessary for us to do so. The bankruptcy court needs to know about ALL assets and liabilities, not just the ones you can think of off the top of your head. It can be frustrating and time-consuming to go through your entire life searching for hidden assets and liabilities, but it is important.

This case is also a good reminder of how critical it is to be vigilant about protecting your personal information. You don’t lose your right to keep your personal financial information private just because you file for bankruptcy. But as this case illustrates, you can lose your right to seek compensation for a FCRA or FDCPA violation.

 

The Rebirth Of American Apparel

“Companies are mutating all the time, shutting down departments that aren’t financially viable and discontinuing products that don’t sell. But when a brand is bought out of bankruptcy… it becomes eminently clear what portions of its business still have value, because that’s all that’s allowed to live on.” This quote, which is from an article on the relaunch the clothing company American Apparel, is a very succinct summary of a typical Chapter 11 business bankruptcy.

We would know, because at Hanson & Payne, LLC, we help Milwaukee area businesses retool and relaunch just as frequently as we help them shut down, and it always becomes clear as we work with our clients what portions of their business still hold value.

For many businesses, the real value lies in the business’s brand and reputation. This is what American Apparel discovered after going bankrupt twice. By studying consumer buying habits, they learned that regular people bought their clothes because they were a “cool” brand, not because all of their products were manufactured in America. Wholesalers, however, were buying because American Apparel’s products had that coveted “Made in the USA” label that sports teams and local fire departments want when they order shirts with their logo on the front.

We help business owners figure out what portions of their business hold the most value, and how to move forward with that information. Oftentimes this occurs in the middle of a Chapter 11 bankruptcy proceeding.

When most people hear the word bankruptcy, they conjure up images of a Chapter 7 bankruptcy, where a business’s (or individual’s) assets are liquidated to pay off creditors, and the business is shut down. During a Chapter 11 bankruptcy, however, the business stays open and operates pretty much as normal. Bits and pieces may be shut down or sold off though, and it is through the process of going through all of a business’s assets and figuring out what they are valued at by others as stand-alone entities that many businesses find their way forward.

During its bankruptcy, American Apparel realized it needed to revamp its manufacturing to offer different price points. And that it needed to cut ties with a former leader to generated more lawsuits than business. It closed all its stores, including the ones in Milwaukee and Madison, but it plans to open a new one in L.A. by the end of the year. It is charting a new and radically different path forward. One that only opened up after the company went into bankruptcy for a second time, and was more thoughtful about its future.

It is our goal to help Wisconsin businesses tell a similar story of redemption and rebirth. Our country’s bankruptcy laws exist in order to give people and businesses a second (or third) chance. Business owners should not hesitate to take full advantage of them. Especially in this day and age where monumental changes in consumer preference and the market seem to happen over night, bankruptcy allows one to be nimble and to focus on creating value for the future.