MF Global Trustee turns over confidential emails- or how your attorney client privilege can be lost

In a February 14, 2012 article, "Federal Investigators Gain Access to Thousands of Internal MF Global Documents" the New York Times reports that the trustee for bankrupt MF Global has agreed to partially waive the corporation's attorney client privilege so as to turn over "thousands of internal e-mails and documents to federal investigators, ending a dispute over the privacy of decisions made in the days before the firm collapsed"

This reminds us that many years ago, the United States Supreme Court ruled that a corporation's bankruptcy trustee controls the attorney client privilege and can waive it. This same rationale has been extended to corporations, Limited Liability Companies, and even partnerships. Under limited circumstances, it has been applied to individuals. As a bankruptcy trustee, I used this power more than once to pry open important information, sometimes yielding a treasure trove of information.

Normally, what a person, or the management of a business tells their attorney in private is privileged and protected against disclosure. However, by putting itself into bankruptcy, a business entity enters a "fishbowl", and where a trustee is appointed (routine in Chapter 7 bankruptcies but far less common in Chapter 11) the Trustee becomes the new management, and gains control of the attorney client privilege. Confidential discussions between corporate officers or business partners and their attorney can potentially no longer be private if a trustee so chooses.

That is why we regularly recommend that the individual shareholders, partners or members of a business in trouble retain personal counsel. When we act as counsel for the business, we caution our clients about the potential for otherwise privileged discussions to lose that status.

Steering a business out of financial trouble is rarely simple. Litigation in bankruptcy court is always possible. Disputes with creditors are likely. Experience is essential. For more information about these and related subjects, please visit our websites at http://www.southjerseybankruptcylaw.com or http://www.nv-njlaw.com

Big Banks sending 1099's on debts discharged in bankruptcy even though no taxable income exists

One of the big advantages of a bankruptcy discharge is that it has no tax consequences under federal law. Outside of bankruptcy, whenever a creditor agrees to cancel part of a debt, that becomes income for federal tax purposes. This means the debtor gets a 1099-C and has to pay tax on the amount canceled unless another exemption applies.

When a debt gets canceled as a result of a bankruptcy discharge, there is no federal taxable income. Nor is there any state or local income tax. Under a specific provision of federal law found in Bankruptcy Code section 346(j), states and local governments who have income taxes must give debtors in bankruptcy who receive a discharge the same treatment as under federal law. Under the Supremacy Clause of the U.S. Constitution, states and local governments are bound by federal law. So a bankruptcy discharge cannot result in any taxable income, at state, federal or local level.

But recently, several reports have come in that large banks are sending 1099-C's to people who received a bankruptcy discharge. The form even identifies "bankruptcy" as the basis for discharge. We wonder why this is. I would think that if the IRS examines the form, it should see that the bankruptcy discharge makes the 1099-C inapplicable. But it remains to see if the IRS processing machinery will be so discerning. More likely, if there is not some attachment to the tax return showing the bankruptcy discharge, the result will be generation of needless, distressing and wasteful dunning notices.

UPDATE: Since the original posting, we have learned this is a requirement by the IRS. http://www.irs.gov/pub/irs-pdf/i1099ac.pdf. The IRS instructs that the form needs to be filed even if the person whose debt was canceled need not report the income. It does not apply to debts secured by personal property such as cars or motor vehicles not used in business. It also does not apply where the debt was not actually incurred by the debtor, such as in cases of identity theft. However it does apply in cases of foreclosure.

While we are not tax attorneys, the advantage of having a tax free discharge of income are obvious and can be substantial. For more information about this and related topics, please visit our website, http://www.nv-njlaw.com

IRS CIRCULAR 230 DISCLOSURE:  Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

Debt collectors trying to collect debts after the statute of limitations has expired.

We have received several reports of debt collectors trying to collect debts after the statute of limitations had expired. In a recently reported development, the FTC has imposed record fines on a debt collector for various practices, including trying to collect debts without telling the debtor they could no longer be sued due to the expiration of their state's statute of limitations, and failing to tell them that even a small payment could revive the debt by "resetting the clock". See link to the article in the New York Times:
FTC fines a collector of debt 2.5 million.

Statutes of limitation set time limits by which suit must be brought on a claim. They can arise under either federal or state law, depending on the basis for suit, or "cause of action". What statute of limitations may apply in a particular situation can be complex. It is something for which legal advice is needed. If you are the party with a claim to sue on, you need to file suit before the time expires. If you are the person facing suit, you need to know whether the time has expired.

I will focus here on the common situation, where a collector is trying to collect a money debt arising under a credit card or other "installment loan". In New Jersey, suit on such a claim needs to be filed within 6 years of the date the "cause of action accrued". And with a credit card or installment loan, the time begins running when each payment is due. Therefore, if the last payment you made was due 5 years ago, then the creditor has another year to file suit on the unpaid balance. Laws in other states will vary. Caution: this is only an example. A shorter or longer time limitation might apply to other kinds of claims. Generally the time to bring suits seeking money for personal injuries is much shorter. Always seek legal advice promptly.

Note that the statute of limitations applies only if the creditor has not already sued and gotten a judgment. Even if a suit is filed on the debt, it is up to the defendant being sued to raise the statute of limitations as a defense and/or seek dismissal of the suit. If that is not done, the defense could be waived. Of course, if a creditor files suit or tries to collect on a debt that is not enforceable in court, that could give you a right to sue under other law. But it is up to you to act to assert and protect your rights.

Anyone facing debt collection needs to be aware of statutes of limitation. If it has been a long time since your last missed payment was due, you should be very cautious and should seek legal advice.

If you enter into a payment arrangement or a "settlement agreement" to pay even a small part of the balance due, you may end up starting the clock running all over again on a debt that otherwise might not be collectible in court.

Although collectors and collection attorneys do try to collect old debts, under some circumstances this could give rise to a liability claim against them.

If a collector contacts you or you are being sued and you think you might have a basis to challenge the debt, make a written demand for proof, including signed documents and a payment history. Even better, see a qualified attorney for further advice and help.

For more about this subject and other aspects of obtaining debt relief please visit our website at http://www.nv-njlaw.com.