The benefits of filing a Chapter 13 bankruptcy

In  precarious times, when local economies are faltering, many people attempt to retain their homes despite mounting debts.

The Bankruptcy Code, under Chapter 13, provides an individual wage-earner with a mechanism of proposing a “plan” or reorganization, in which the “debtor” may retain the asset and make payments to creditors. The most common reason for a debtor to file a petition under Chapter 13 is to protect his primary residence from foreclosure sale.

As opposed to a bankruptcy petition under Chapter 7, where the debtor turns over to the trustee all non-exempt assets for distribution to creditors in proportion, the Chapter 13 debtor will make regular payments to the trustee pursuant to a plan (which may range in term from three to five years). For instance, if the debtor has a house worth $100,000, and wants to keep it, the debtor will propose a plan to pay creditors during the term of the plan that same value in order to retain the property. A basic tenet of Chapter 13 is that the proposed plan will pay creditors more than if the debtor had filed a Chapter 13 petition for liquidation.

One of the most important considerations in filing a Chapter 13 and, ultimately, confirming the plan is whether the debtor has the ability to make the requisite payments. Since the debtor must pay not only the scheduled plan payments to the trustee for the arrearages on the mortgage and other listed creditors, but also current mortgage payments, special consideration must be made of the debtor’s income and expenses to test affordability.

The greatest benefit of filing a Chapter 13 petition is the “automatic stay” under the Bankruptcy Code. This stay stops all actions on the part of creditors to collect their debts. In the typical case, the stay stops the upcoming mortgage foreclosure auction sale on the courthouse steps. It cannot be understated that the timing of the filing of the petition is significant; e.g., the filing of the petition after the foreclosure auction sale is generally fatal to attempting to retain the real property in the debtor’s bankruptcy estate. Another benefit of Chapter 13 is to file a plan that proposes to pay creditors less in percentage than that owed. Certain calculations to determine the appropriate reduced percentage are necessary.

by Richard A. Klass, Esq.

R. A. Klass
Your Court Street Lawyer

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A Day Late and a Dollar Short

A comprehensive medical practice was opening up in an office building and needed extensive renovations in the space. The medical practice hired a construction company to handle the build-out of the office at a cost of over $250,000. The construction contract specified that the contractor would achieve “ substantial completion ” of the project within 3 months after work began in April 2012. Unfortunately, the project took a lot longer than anticipated (about 9 months). Finally, on January 16, 2013, the project was confirmed by the contractor as complete, and the work was approved by the county. There was even a confirming email from the contractor to the medical provider stating “ We Passed!!! ” An invoice marked “ Final Billing ” was rendered, and a Certificate of Compliance was issued by the Building Inspector on January 31, 2013.

Since the project took much longer to complete than anticipated and agreed-upon in the construction contract, the medical provider withheld final payment, claiming it suffered heavy losses including loss of business, substantial rent payments to the landlord for the unusable space and additional overhead expenses.

Mechanic’s Lien Filed

Instead of directly addressing the client’s concerns, on October 8, 2013, the contractor simply filed a “ Notice of Mechanic’s Lien ” with the County Clerk. New York’s Lien Law Section 10 provides a powerful collection tool to a home improvement or commercial contractor—the right to place a lien upon someone’s house or building:

§10(1) Notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within eight months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished; provided, however, that where the improvement is related to real property improved or to be improved with a single family dwelling, the notice of lien may be filed at any time during the progress of the work and the furnishing of the materials, or, within four months after the completion of the contract, or the final performance of the work, or the final furnishing of the materials, dating from the last item of work performed or materials furnished.

The “ Eight Month ” Rule

One of the fundamentals of the Lien Law is that its procedures are to be strictly followed by the lienor. Unlike other areas of law, in which harmless errors can be glossed over, the Lien Law requires punctilious compliance; otherwise, the lien will be invalid. This is mainly because the right to place a lien on someone’s house is such a harsh remedy.

After being directed by the landlord to remove the mechanic’s lien, the medical provider retained Richard A. Klass, Your Court Street Lawyer. The first step was to analyze the lien notice itself—and determine whether a proceeding could be brought to discharge the mechanic’s lien under Lien Law §19(6) for being “ facially invalid. ” This means that, from looking at the face of the notice of lien itself, it may be determined that the lienor does not have a valid lien.

In the lien notice, the contractor had stated that the last item of work was performed on “ February 13, 2013. ” However the court ruled that all work was completed by January 31, 2013. Thus, the October 8, 2013, lien notice was filed more than 8 months afterward (late filing). This late filing would make the mechanic’s lien invalid under the Lien Law. In Ren. Reh. Systems Co., Inc. v. Faulkner, 85 AD3d 752 [2 Dept. 2011], the court held that the failure of a mechanic’s lien to be timely filed pursuant to the Lien Law was fatal to the mechanic’s lien.

Extra Work Doesn’t Count

In response to the proceeding brought by the medical provider to discharge the mechanic’s lien, the contractor claimed that it sent a subcontractor to the premises to perform some work in March 2013; thus, its filing of the lien was timely. The medical provider challenged this claim by showing the court that the subcontractor only performed a normal service call for “ no heat. ” It was argued that the court should follow the rule in Nelson v. Schrank, 273 AD72 [2 Dept. 1947], that a mechanic’s lien is not timely filed when measured from the last date that extra work was performed when the extra work was not part of the original contract, anticipated when the original contract was made, or done in continuance of the work under the contract.

In discharging the mechanic’s lien, the court held that there was no proof that the extra work completed was part of the original contract, was anticipated when the original contract was made, or constituted work completed under the original contract. Accordingly, the court granted the petition to discharge the mechanic’s lien.

by Richard A. Klass, Esq.

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copyr. 2015 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-mail to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

Credits: Photo of Richard Klass by Robert Matson, copyr. Richard A. Klass, 2011.
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Image at top: Felicitas, by Anton von Werner, 1872.

R. A. Klass
Your Court Street Lawyer

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Difference of Opinion regarding Mandatory Attorney Fee Dispute Arbitration

The Fee Dispute Resolution Program (22 NYCRR §137) was created to mandate arbitration of fee disputes between attorneys and their former clients in civil matters. It has been subject to differing opinions among different departments leading to divergent opinions on the issue of whether or not an arbitration is necessary when the former client fails to object the validity of the underlying fee.

In 2000, the Second Department determined in Scordio that when there is a fee dispute between an attorney and a former client, the attorney was not required to send notice to the former client informing them of their rights to arbitrate when there was no dispute or objection to the reasonableness of the attorney’s fees. Scordio v. Scordio, 270 A.D.2d 328 (2nd Dept. 2000).

The decision in Scordio would ordinarily lend to the notion that an attorney may pursue collection of his fees without notice to a client of his right to arbitration but the rules regarding arbitration of fee disputes were modified and expanded in 2002, and now lists exceptions to when a notice to a client of his right to arbitrate can be waived. In Wexler & Burkhart, the court held that a reading of the Rules in this way would “effectively eviscerate Part 137 of the Rules, a comprehensive scheme for the informal and expeditious resolution of fee disputes between attorneys and clients through arbitration and mediation.” Wexler & Burkart LLP v. Grant, 12 Misc.3d 1162(A) (Nassau Cty. 2006).

The court in Rotker determined that “the rules of the appellate division establish a clear public policy in favor of the arbitration of attorney-client fee disputes.” Rotker v. Rotker, 195 Misc.2d 768 (Westchester Cty. 2003). Rotker was a matrimonial case where the attorneys for the wife instituted a retainer lien against her for non-payment of her fees. The attorneys asserted that since the client had not disputed the fees, under Scordio, they were entitled to payment without arbitration. The court held that even if it was determined that counsel was not fired for cause, the attorneys were required to provide the client notice of her rights to arbitrate the dispute, with said notice given in writing. If the client then failed to avail herself of her right to arbitrate after 30 days of mailing the notice, the right to arbitration would be waived. Id at 790-791.

The court in Rotker went so far as to hold that the failure of former counsel to send the 30-day notice, regardless of whether or not there is a dispute, would mandate the dismissal of any action for unpaid counsel fees. Rotker at 791.

The basic tenet held in these decisions is the idea that if the Scordio argument is used as a means to avoid Rule 137, then nearly anyone can circumvent the protections that Rule 137 was meant to provide. Wexler & Burkhart LLP at 214;

The position of the Wexler & Burkhart decision and the Rotker decision was most recently supported in Noel F. Caraccio, where the court held that regardless of whether there was an objection or dispute as to the fees when they were billed, the attorney was still required to send the 30-day notice of the right to arbitrate. Noel F. Caraccio PLLC v. Thomas, 29 Misc.3d 1230 (A) (City Ct., Rye 2010); Rotker at 791.

Thus, it is questionable as to whether Scordio remains good law, and as such, it is prudent to notify the former client of his rights to arbitrate the fee in order to prevent a dismissal of an attorney’s action for payment.

Elisa S. Rosenthal, Esq.
Associate
Law Office of Richard A. Klass
Copyr. 2014


Elisa S. Rosenthal, Esq. is an associate of the law firm of Richard A. Klass, Esq.. She practices primarily in the areas of commercial litigation, debt collection/enforcement of judgments, legal malpractice and real estate litigation. She may be reached by phone at (718) COURT-ST [(718) 268-7878)] or www.courtstreetlaw.com.


R. A. Klass
Your Court Street Lawyer

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