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Herten, Burstein, Sheridan, Cevasco,
Bottinelli, Litt, Toskos & Harz, LLC
REPORT FROM COUNSEL
Summer 2005 ISSUE
REVISIONS TO BANKRUPTCY LAW CREATE DRASTIC
CHANGES
By Daniel Y. Gielchinsky, Esq.
On Wednesday, April 20, 2005, President Bush
signed into law a long-expected series of legislation that
drastically altered this country's bankruptcy laws. In order to
fully explain the affect of this new legislation, some background is
helpful.
There are three popular forms of bankruptcy relief
available. A Chapter 11, which is used by corporate entities, can be
thought of as a reorganization of debt. In short, the debt-ridden
company can restructure its debt obligations to creditors and equity
obligations to its shareholders through the use of a Chapter 11. A
company can continue to run and manage its own day-to-day affairs in
most cases, and the potential exists for a company in Chapter 11 to
emerge from the bankruptcy with a significantly improved financial
picture. In some situations, a company's management will continue to
run the day-to-day affairs of the company, and the company is then
referred to as a debtor-in-possession. Ironically, this leads to
circumstances where the same inept management that put the company
into its precarious financial situation remains in place during the
company's continued management. In other circumstances, a
representative from the United States Trustee's Office will be
appointed by the Court to oversee the management and day-to-day
operations of the company.
A Chapter 13 is a personal form of a Chapter 11.
In a Chapter 13, the individual(s) who declared bankruptcy will be
devising a plan to pay back their creditors over time. This form of
bankruptcy is most often used when the debtors are in arrears on
their mortgage for their residence. The advantage of using Chapter
13 in this circumstance is that this form of bankruptcy relief
allows the mortgage arrearages to be "crammed down", or paid back to
the bank over a period of time. The advantage of this form of
bankruptcy is that it allows a distressed homeowner to remain in
possession of the residence, and affords the debtor with an
opportunity to pay back mortgage arrearages over what typically
becomes a five year period. However, the debtor will necessarily be
devising a plan to also pay back other creditors, such as banks,
credit cards and other forms of debt.
A Chapter 7 bankruptcy can be used by corporate
entities or individuals. A Chapter 7 bankruptcy is often referred to
as a liquidation, since if the debtor obtains a discharge of its
debts, there will be no repayments of the debts in the future. This
form of bankruptcy is also most often thought of as a consumer
bankruptcy, since it is most often used to discharge credit lines
and credit card loans. The recent legislation is targeted directly
at these consumer bankruptcies.
The bill that President Bush signed into law was
not the first attempt by Congress and the Senate to limit the scope
of Chapter 7 relief. The powerful banking lobby has been advocating
the change in bankruptcy laws for a number of years. However, a
similar bill with other measures attached to it was turned down by
the Senate approximately one year ago. The recently passed
legislation was strongly opposed by consumer rights groups who
argued that it would prevent debt-ridden people from giving the
"fresh start" that is envisioned by the bankruptcy laws.
The new law, which takes effect in six months,
will have the result of converting what would have been Chapter 7
filings into Chapter 13 repayment plans. People at income levels
that are higher than their respective state's median income level
will have to pay some or all of their credit bills, medical bills
and other obligations through a court-ordered bankruptcy plan. The
new legislation encompasses a complicated formula that will be
utilized to determine the type of bankruptcy relief an individual
will be able to avail himself or herself. In summary, those people
with discretionary incomes of $100 a month or more will be forced to
use that income to repay their debts over a five-year period. It is
estimated that between 30,000 and 210,000 people, representing
approximately 4%-20% of those who discharge their debts through
bankruptcy each year, will be disqualified from doing so under the
new law.
Ironically, the legislation comes at a time when
it seems to be least needed. New personal bankruptcy filings went
from 1,613,097 in the year ending June 30, 2003 to 1,599,986 in the
year ending last June 30, which runs counter to the upward trend of
recent years. Needless to say, the downward trend will continue,
although it is expected that there will be a spike in personal
bankruptcy filings during the next six months, until the legislation
becomes law.
Aside from the drastic effect the new law will
have on those who need bankruptcy relief, one area of the
legislation that was not well publicized was its impact on
bankruptcy practitioners. The new provisions, which have raised
major concerns among the bankruptcy bar, will require debtors'
attorneys to vouch under oath for the accuracy of their clients'
financial statements in a manner that greatly expands what was
required under the old law. In the future, lawyers themselves could
be held financially liable for their clients' misrepresentations.
The net effect of these provisions will be to reduce the amount of
bankruptcy practitioners, thus making it more difficult for
individuals in need of bankruptcy protection to find a willing
attorney to represent them. In so doing, the banking lobby has
created another hurdle for individuals whose credit card bills,
penalties and interest have gone over their head.
Clearly, the wide availability of a complete
discharge of debt through the use of a bankruptcy will be greatly
limited by the new legislation. Those who find themselves in a
constrained financial situation are well advised to take advantage
of the current bankruptcy laws before the new legislation goes into
effect. We at Herten Burstein are able to provide a full range of
bankruptcy services, including both debtor and creditor
representation, bankruptcy litigation, relief from stay
applications, and defenses of preferential transfer and/or
fraudulent transfer claims.
Daniel Gielchinsky is an associate in our
litigation department with extensive bankruptcy experience.
NEWS FROM HERTENBURSTEIN.COM
- "Diversity and experience" -- those words
were chosen by New Jersey Monthly Magazine in its recent edition
on Super Lawyers to describe our Firm. Four of our equity
members were honored at having been chosen as Super Lawyers by
New Jersey Monthly Magazine. Thomas J. Herten, Terry Paul
Bottinelli, Arnold D. Litt and Steven B. Harz had an article
written about their accomplishments in the special edition on
the top attorneys in New Jersey. Needless to say, our Firm is
very proud of the recognition they have received.
- We are still growing! Welcome to lawyers Lori
L. Bibko, Carolyn B. Hand and Justine A. Zeppone who will be
working in our products liability litigation department. The
Firm also hired Nicole Stinson who joins our paralegal staff.
Assisting our lawyers, are Chris Karounos (Rutgers University
School of Law), Michael Saily (New York Law School), Robert E.
Spiotti (Wake Forest University School of Law) and Robert Tucker
(Ohio State University School of Law) all of whom have been
hired as summer law clerks. These additions to our fine staff
allow us to continue providing top notch service to our clients.
- As we grow, we are eagerly anticipating the
Firm's move into our new offices. Construction is progressing at
a rapid rate. Presently our expected occupancy date is targeted
for early July. The additional 7,000 square feet and redesign
will allow for a more efficient operation of our office
facilities.
- Speaking about expansion, Arnold and Elaine
Litt announced the arrival of two new grandchildren. Daughter
Jody and son-in-law Dan are the proud parents of twin girls,
Carly and Alexa, whose birth instantly doubled the number of
Litt grandchildren (all girls). With three daughters and four
granddaughters, Arnold's minority shareholder status within the
family remains secure.
- Congratulations to Andy Cevasco's daughter,
Alison who graduated from the University of Scranton and will be
working for the Jesuit Voluntary Corp. in California. Steven
Harz's son, Jonathan is also a member of the class of '05 and is
a graduate of Vanderbilt University. He will be pursuing a
career in government.
- Our Director of Operations, Dave Polizzotto
recently attended the American Legal Administrators National
Conference. The event took place in San Francisco. Dave, who was
chosen as a proctor, returned with several suggestions as to how
to continue to improve the administration of our Firm.
- After a five day trial, Thomas J. Herten
recently obtained a successful verdict involving a dispute
between members of a limited liability company. The matter was
tried in New Jersey Superior Court -- Chancery Division and
involved the testimony of forensic accounting experts. The
Court's decision established the parameters upon which the
business would be valued and resulted in a highly favorable
buy-out figure to the Firm's client. Tom was assisted in the
trial by associate Daniel Gielchinsky, who somehow still found
time to write an article in this edition of the newsletter on
the new revisions to the bankruptcy law.
- The Open Public Records Act ("OPRA") is a
fairly recent law which requires that governmental bodies make
available their public records. Unfortunately OPRA provides very
little guidance as to what is a public record. If the wrong
decision is made and a document is not released as a public
record, then the governmental entity would be subject to fines
and payment of legal costs incurred to obtain the public record.
These were the issues facing associate Craig Bossong of our Firm
who had to counsel one of our municipal clients regarding an
OPRA request for copies of fire and burglar alarm permits. Craig
successfully argued before the Government Records Council who
agreed with his opinion that these documents are not public
records citing safety concerns and the reasonable expectation of
privacy.
- The New Jersey Business and Industry
Association ("NJBIA") annually recognizes the best and most
exciting real estate development projects in the State of New
Jersey. The Firm would like to congratulate its client
Mercedes-Benz USA, LLC on having its regional distribution
center, recently constructed in Washington Township, Mercer
County, recognized by the NJBIA for this prestigious award. Tom
Herten, Manny Toskos, Susan Marra and Nilufer DeScherer formed
the Firm's team who provided legal assistance to MBUSA, LLC on
this complex project.
- This spring about 200 public officials,
including members of governing bodies, planning boards and
zoning boards, took part in the annual Bergen County Bar
Association Land Use Symposium. The event was located at Bergen
Community College and consisted of several workshops where
public officials were able to attend lectures presented by
volunteer attorneys and other professionals. The program was
organized by Manny Toskos, a Co-Chair of the Bar Association
Land Use Committee who moderated a panel consisting of Judge
Harris, Judge Contillo and Judge Donohue of the New Jersey
Superior Court. Jason Shafron, Nilufer DeScherer and Craig
Bossong were among the attorneys who presented lectures. This
event is the Bar Association's largest community legal education
program of the year.
- From our products liability group, attorney
Stephen Sugrue, who is also a trained nurse, provided a three
part training course in cardiopulmonary resuscitation. The
course was given in-house and available to all our employees.
Those who took the course are now certified by the American
Heart Association. The Firm is grateful to Steve for his
efforts. Now if we only find a dietician to help us prevent the
heart attack.
BUSINESS STARTUP--SHOULD YOU BE A "FRANCHISE
PLAYER"?
Launching a business is a little like walking a
tightrope, with any long-term rewards coming only after overcoming
some risk. Being well-informed and realistic from the outset is
essential. One of the first considerations is the legal form that
the business should take. An option that has the potential for
achieving a good balance between risk and reward is the franchise.
A franchise is a relationship between the owner of
a trademark or trade name (franchisor) and an individual or entity
(franchisee) who contracts to use that legally protected
identification in a business. The details of the relationship are
controlled by a franchise agreement, but most franchises share some
common characteristics. Typically, the franchisee sells goods or
services that are either supplied by the franchisor or at least must
meet standards set by the franchisor. In simple terms, the
franchisor provides the ingredients that come from the proven
experience of an established line of businesses, while the
franchisee provides the elbow grease and all of the other
intangibles that are needed if a fledgling business is to get off
the ground and prosper.
There are two types of franchises. The simpler
version, known as a "product/trade name franchise," is the sale of
the right to use a business name or trademark. In the more complex
form, called a "business format franchise," the fates of the parties
are tied together more closely and for a longer period of time. In
this format, the franchisee trades some of its independence in
exchange for various forms of assistance from the franchisor.
Money Matters
One benefit of a franchise is that the prospects
for a healthy bottom line are enhanced, since the risks of the
investment are reduced by being associated with an established
company and its good name. But that boost is not without cost. A
would-be franchisee should always be aware of the financial
commitment involved, but not be too quickly scared away by the
reality that here, as in most business matters, "you have to spend
money to make money."
It is only prudent to consider carefully a number
of likely expenses. There is the initial franchise fee, sometimes
nonrefundable and usually at least a few thousand dollars. Costs to
rent or build an outlet and to purchase the initial inventory will
be significant. The full range of expenses depends on the type of
business, but some of the other typical expenses include fees for
licenses and insurance, ongoing royalty payments to the franchisor
based on income and for the right to use the franchisor's name, and
payments into the franchisor's advertising fund.
Who's in Charge Here?
It is the nature of a franchise that, in exchange
for getting to hitch its wagon to the franchisor, the franchisee
agrees to give up some of the control over how the business will
operate. There still should be room for putting a personal stamp on
the business, but the franchise business model is not for someone
who would have difficulty giving up the decision-making power that
comes with starting a business. Owners of a "Mom and Pop" do not
need permission for their store's color schemes, but the franchisee
probably will.
As set out in the franchise agreement, the
franchisor will usually have the final say about the specific goods
and services that may be sold, site approval for the business
location, design or appearance standards, as well as authority over
an array of operational matters such as hours of operation, signs,
employee uniforms, and even bookkeeping procedures. On the larger
scale, the franchisor also may limit the franchisee's business to a
specific territory.
Parting Company
A franchisee's breach of the franchise agreement, such as by failure
to make payments or to comply with performance standards, could
result in termination of the franchise and loss of the franchisee's
investment. Even without a breach, a franchisee must foresee that
franchise agreements generally run for a finite period, such as 15
or 20 years. Of course, if both sides so desire, the agreement can
be renewed under the same terms or perhaps even terms more favorable
to the now-proven franchise. But the franchisor could decide not to
renew, and it usually reserves the right to do so for its own
reasons. If there is a renewal, the parties must agree again to all
of the terms and conditions. The franchisor may take that
opportunity to make changes in the deal to its benefit. In that
event, the franchisee would be wise to give a fresh look at whether
owning a franchise still makes business sense.
Anyone seriously considering buying and running a
franchise needs to do the homework first, and the Federal Government
has made that process more organized. The Federal Trade Commission (www.ftc.gov)
requires franchisors to prepare a disclosure document, sometimes
called a Franchise Offering Circular, that puts in one place a
wealth of information about the franchisor, current and former
franchisees, and what the franchisee is agreeing to when the
franchise agreement is signed. Reading and understanding the
disclosure document, not to mention the franchise agreement itself,
is essential. One should always seek independent professional advice
before making a commitment to a franchise arrangement.
NEW TAX DEPOSIT RULES FOR SMALL BUSINESSES
As of January 1, 2005, the IRS increased the
minimum threshold for Federal Unemployment Tax Act (FUTA) deposits.
Under the previous rule, employers were required to make a quarterly
deposit for unemployment taxes if the accumulated tax exceeded $100.
Now the threshold is $500.
The IRS estimates that this change will lighten
the load for more than 4 million small businesses. Assuming an
employer makes timely state unemployment tax payments, the most that
the IRS will collect from employers per employee is $56 per year.
Before the threshold was increased, most employers with two or more
employees had to make at least one federal tax deposit a year. Now
employers with eight employees or fewer will be freed from the
requirement of making as many as four FUTA deposits per year.
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