Nova Law Group’s services to bankruptcy debtors, creditors, and third parties, often require us to negotiate with bankruptcy trustees on behalf of our clients. This article will discuss strategies for negotiating with bankruptcy trustees regarding non-exempt property of the bankruptcy estate and how Nova Law Group attorneys achieve maximum results for clients when handling these negotiations.

The purpose of a negotiation with a bankruptcy trustee can vary significantly depending on a particular client’s interests. Additionally, the chapter of bankruptcy in which the debtor filed has a significant impact on how negotiations with a bankruptcy trustee should be approached. Negotiations with a chapter 7 bankruptcy trustee operate very differently than negotiations with a chapter 13 bankruptcy trustee, as the former is a “possessory trustee” (has a duty to seize and liquidate non-exempt property for the benefit of creditors), while the latter is a “non-possessory trustee” (has no duty to seize property or liquidate non-exempt property for the estate). In chapter 11 cases, the bankruptcy trustee is often the debtor itself, and accordingly, develops its own strategy for liquidating or retaining non-exempt property and negotiating with creditors and third parties to meet its objectives. However, even in cases where the client must negotiate with a non-possessory trustee, the valuation of non-exempt property can be a material issue for many clients, as in chapter 11 and chapter 13 cases, the amount of payments made to creditors must often exceed the projected amount that creditors could have expected to be paid in a comparative liquidation case with the same property (also called “the best interests of creditors test”). In these cases, the valuation determination made as to such property can be critical, even if no trustee is tasked with liquidating the non-exempt property. And finally, experienced bankruptcy counsel should always be sure to determine which, if any, exemptions apply to the client prior to the bankruptcy case being filed. For example, debtor/clients who have recently moved states or jurisdictions may only be able to use certain exemptions specified by the bankruptcy code and state law, and corporate debtor/clients don’t get any exemptions at all, meaning that all estate property will be considered non-exempt upon filing. These substantial variations from client to client make it essential for skilled bankruptcy counsel to determine in advance of filing which exemptions apply to the client, and correspondingly, the strategy for handling any non-exempt property that is likely to exist upon filing. Some of the most common examples are discussed below.

When representing a bankruptcy debtor, an attorney may need to negotiate with the trustee regarding non-exempt property that the debtor wishes to retain and not have liquidated for the benefit of the estate’s creditors. Alternatively, a bankruptcy debtor may want the trustee to abandon certain property, perhaps because it has minimal financial value to the estate, but significant personal or sentimental value to the debtor. Even in bankruptcy cases where a “non-possessory trustee” is appointed, negotiation may occur with regard to valuation of the property for other purposes, such as the “best interests of creditors test.” A skilled bankruptcy attorney must be aware of a client’s interests in property prior to the bankruptcy case being filed, so that the attorney is aware of which property will likely be exempted, and which property, if any, will likely be non-exempt. To the extent property will likely be non-exempt, an attorney should have a discussion with his or her client prior to filing the bankruptcy case regarding whether or not the liquidation of such property would be an issue for the client, and if so, what steps and strategies to take to negotiate the purchase of such property by the client, or the abandonment of such property by the trustee on behalf of the estate.  A discussion of exempt property and non-exempt property between attorney and client pre-filing is critical to effective representation of any client with non-exempt assets (also called an “asset case”), as otherwise, a client may have property that is liquidated for the benefit of the estate and that the client was not aware might be forfeited. Alternately, in bankruptcy cases where a non-possessory trustee is appointed, a client may have to pay significantly more money to creditors over time than the client originally expected, if the value of the client’s non-exempt property is greater than expected. An effective discussion with a debtor/client pre-filing will allow the attorney to assist the client in determining which property might be non-exempt, if any, and whether any remaining non-exempt property is property that the client would rather turnover to the bankruptcy trustee for potential liquidation, or negotiate with the bankruptcy trustee to acquire.

If the debtor/client elects to turnover the non-exempt property to the trustee, then the property will likely be liquidated by the trustee on behalf of the bankruptcy estate if it has value that can be realized after selling costs, holding costs, and administrative costs are accounted for by the trustee. If the debtor/client elects to turnover non-exempt property for which the trustee likely cannot obtain value for the bankruptcy estate after costs and expenses are included, then the trustee may elect to “abandon” such property, which effectively means that legal ownership returns to the parties that owned the property prior to the bankruptcy case being filed (often the debtor).

If the debtor/client does not wish to turnover certain non-exempt property to the bankruptcy trustee, then the attorney must obtain the bankruptcy trustee’s consent and agreement to allowing the debtor/client to retain the non-exempt property. Otherwise, this non-exempt property must be turned over to the bankruptcy estate upon request. To ensure that the client has the maximum chance to retain any non-exempt property that is important to client interests, the bankruptcy attorney and client should develop a strategic plan for a negotiation with the bankruptcy trustee regarding the purchase of such non-exempt property from the bankruptcy estate. This strategic plan often includes an active negotiation with the bankruptcy trustee regarding alternative compensation to the bankruptcy estate of “equivalent value” to the property that the debtor wishes to retain. The strategic plan should be developed prior to the filing of the bankruptcy case and developed based on the client’s indicated interest in retaining or forfeiting each item of non-exempt property, relative to the likely cost of doing so.

The development of a strategic plan should include the following analysis at a minimum:

(1) List of all property that is likely to be non-exempt and its economic value, including the portion of such economic value which is non-exempt.

(2) The likely costs and expenses associated with sale of the property by a trustee, including selling costs, holding costs, and administrative costs, among others.

(3) The likely economic value, net costs and expenses, that would likely be distributed to creditors, if all non-exempt property were sold in a liquidation by the bankruptcy trustee.

(4) Analysis of client priorities regarding desired retention or disposition of such non-exempt property, and separately, discussion with the client about which property client would like to repurchase from the bankruptcy estate.

Generally, attorneys should attempt to perform the above-mentioned steps in numerical order. Otherwise, it will be difficult for a client to determine which property the client would like to retain (and pay for), and which property the client would like to dispose of (and decline to pay for), because the client may not know the price that would be persuasive to the bankruptcy trustee to sell the client such non-exempt property.

In calculating the figure to offer the bankruptcy trustee for each item of non-exempt property, it is critical not only to value the property in terms of its economic value to the bankruptcy estate, but also, the amount of time it will take the trustee and other administrators of the estate to sell such property for the benefit of creditors. Property which is easily sold by the Trustee, such as publicly-traded stocks, bonds, and other liquid financial securities or cash, generally will need to be purchased from the bankruptcy estate at full value (100% of fair market value), for the trustee to allow such property to be retained by the debtor. A non-possessory trustee will also require these assets to be valued at full fair market value generally at the time of filing, or at the time of confirmation of the plan, depending on the chapter of bankruptcy filed. In contrast, property which is difficult for the Trustee to sell, such as privately-held stock or limited partnership interests without any active market, assets valuable to a relatively small group of buyers, or assets which are hard to value, may only need to be purchased from the Trustee at a small fraction of their actual value. Most property falls somewhere in between these two extremes, including automobiles, real estate, artwork, and jewelry. While it is beyond the scope of this article to discuss the offers made to Trustees by Nova Law Group attorneys in every situation and with regard to all property types, as a general matter, the more the client values the property and/or the more easily the property can be liquidated by a liquidating trustee for money to pay creditors, the greater the percentage of fair market value (FMV) the interested party should offer the trustee to acquire it. The opposite is also true. In fact, in some cases, valuable property may be abandoned by a trustee, not because it has no hypothetical economic value, but rather, because no buyer can be found. This occurs frequently with difficult to sell assets of significant value, like patent rights and other intellectual property, which may have value only to a very small subset of buyers. A skilled bankruptcy attorney can provide a client with invaluable advice regarding the above-mentioned concepts and help the client to come up with an offer regarding the client’s non-exempt property that will appeal to a bankruptcy trustee, but also obtain the most favorable deal possible for the client to acquire such property.

The above-mentioned concepts and strategies also apply where an attorney is representing a creditor or third party interested in acquiring non-exempt property, except that the creditor or third party client cannot decide for the debtor where he or she will use the debtor’s exemptions, if any apply at all. When negotiating on behalf of a creditor or third party, it is important to be aware that a debtor’s exemptions should be reviewed to ensure that they are legally applicable and accurate, as otherwise, property that may belong to the bankruptcy estate could erroneously be retained by the debtor. Additionally, there are circumstances in which the development of creditor or third party interest in assets of the bankruptcy estate may incentivize the trustee to search for other potential buyers in an attempt to start a “bidding war.” This is increasingly likely for assets that have public markets or significant quantities of buyers, and should be considered prior to a creditor or third party buyer expending the time and resources to contact the Trustee and make an offer. Additionally, Trustees are exempt from certain laws when disposing of estate property and are not required to provide many of the disclosures that would normally be required of sellers. Skilled bankruptcy counsel should be employed to determine if any of the disclosures are relevant to client, and what action, if any, needs to be taken to ensure client interests in the property to be acquired are protected.

Nova Law Group regularly advises our debtor, creditor, and third party clients regarding these issues, and our extensive experience in working with dozens of bankruptcy trustees has allowed us to advise our clients effectively regarding potential deals. This is one of the best ways that a skilled bankruptcy lawyer can add value for a client, and distinguishes “average” lawyers from “exceptional” lawyers in the field of bankruptcy. If you may need to negotiate with a bankruptcy trustee as part of a prospective bankruptcy case, or a bankruptcy case that has already been filed by you or another party, feel free to contact a Nova Law Group attorney and we will be happy to assist you.