Charging Extra Fees to Credit Card Users in California Soon to Be Legal

I wrote a three part article here which explained California law as it applied to a retailer’s ability to surcharge for the use of credit cards. The second part discussed the loopholes embedded into the law and discussed why the law is actually bad for consumers and retailers alike. In the final part, it discussed the legality of the law in light of a similar law being struck down by Federal Courts in New York.

While California’s law remains unchallenged, the 11th Circuit Court of Appeals recently struck down the Florida version of the same law after the District Court upheld it! You can read the case here.

 

The 11th Circuit did not give any weight to the actual negative effects of this law, at least it did not write about it. The 11th Circuit simply applied current standards with respect to restrictions on speech and ruled on those grounds alone.

These two cases should form a strong basis for any challenge to the constitutionality of California’s ban on surcharges for credit card usage.

There Is No Limit to the Number of Times a Chapter 11 Debtor Can Receive a Discharge within a Certain Time Frame!

I have spoken with quite a few practitioners and surprisingly, all of them have said the same thing: an individual Debtor in Chapter 11 Bankruptcy can only receive a discharge once every 8 years.

Then a good friend of mine and told me about his magic bullet: he would vacate the prior discharge to make his clients eligible for the Chapter 11 discharge. It is quite brilliant actually but it turns out not to be necessary.

First, let’s discuss the code section which seems to have caused all the confusion:

Under § 1141(d)(3),

(3) The confirmation of a plan does not discharge a debtor if—
(A) the plan provides for the liquidation of all or substantially all of the property of the estate;
(B) the debtor does not engage in business after consummation of the plan; and
(C) the debtor would be denied a discharge under section 727 (a) of this title if the case were a case under chapter 7 of this title.

Furthermore, § 727 (a)(8) provides, in pertinent part, there will be no discharge if:

(8) the debtor has been granted a discharge under this section, under section 1141 of this title … in a case commenced within 8 years before the date of the filing of the petition;

When read together, § 1141(d)(3)(c) coupled with § 727 (a)(8) state that if the Debtor has received a discharge in a case that began within the last 8 years, then there will be no discharge. This seems pretty straight forward.

The problem with this reading is that it ignored the “and” at the end of subsection (B) which turns this rule into a conjunctive test. For § 1141(d)(3) to be applicable to a case, all three tests (A), (B) and (C) must be satisfied. The purpose behind § 1141(d)(3) is not to prevent multiple bankruptcy discharges but to prevent an individual from obtaining multiple Chapter 7 discharges within an 8 year span through constantly filing liquidating Chapter 11 plans.

After I told my friend the analysis, he opened his copy of the code and could not believe his eyes. Unfortunately, there does not seem to be a lot of case law on the subject, but my friend was able to find this gem: In re Berg, 423 BR 671 (10th Cir. BAP 2010). You can find the case here.

I am trying to keep my friend anonymous but he immediately had good luck with this reading of the code as he convinced Judge Neiter and that furthermore, § 1141(d)(3) does not automatically trigger but requires an adversary proceeding!

Author’s comments. I have heard some people say that a second Chapter 11 bankruptcy is an impermissible end-run around § 1127 which governs modification of a plan. There has also been some talk that multiple Chapter 11 bankruptcies are somehow “bad faith” filings. I do not see how either of this could be true when Congress contemplated multiple filings and addressed that specific issue by limiting discharge when the filings are liquidating plans. It is noteworthy that companies may receiving multiple Chapter 11 discharges within a short period of time, even if the plans are liquidating plans, because this is a three part test that also requires the Debtor to not engage in business after consummation of the plan.

Bankruptcy Works!

My wife wanted to go shopping at the Burbank Mall yesterday. I told her to have fun but that did not work.

After we worked up an appetite, we headed to the food court. While she ordered food, I headed over to Hot Dogs on a Stick. There was a moderate line, good. I was given a free hush puppy to try and when I inquired about their ice drinks, I was given a nice size sample. Delicious.

For those of you that are not familiar with Hot Dog on a Stick, here is an excerpt from the website:

An American Icon since 1946, Hot Dog on a Stick™ is an amazing company that began as the entrepreneurial dream of Dave Barham. What began as a small beachfront store in Santa Monica has grown to over 100 locations in 11 states, as well as worldwide locations in Dubai, Guam, Korea, and Brazil! And that beachfront store in Santa Monica is STILL serving our famous food and lemonade to beachgoers today!

Hot Dog on a Stick™ has stayed true to its roots by still serving our original lemonade and hot dogs on a stick, and has grown to include cheese on a stick, French fries, funnel cake sticks, and even Nathan’s Famous beef hot dogs! Today’s menu still offers our original delicious products, that are still made fresh, to serve our hungry, loyal customers.

Hot Dog on a Stick™ serves the finest products, with the friendliest customer service around. Our employees are known for their cheery smiles, bright uniforms, and of course, the striped hat!!

And this is what it looks like:

HDOS

 

What does this have to do with anything? Hotdog on a Stick is HDOS Enterprises. It filed a voluntary Chapter 11 Bankruptcy Petition on February 3, 2014 with the Friedman Law Group serving as its general counsel and under the watchful eye of Judge Bason [bankruptcy case no. 2:14-bk-12028].

On August 11, 2014, just 189 days later, an order was entered Authorizing the Sale of Substantially all of the Debtor’s Assets Free and Clear of All Liens, Claims, Encumbrances and Interests to HDOS Acquisitions, LLC; (2) Authorizing Assumption and Assignment of Unexpired Commercial Leases and Various Executory Contracts; (3) Determining the Amounts Necessary to Cure Such Unexpired Commercial Leases and Various Executory Contracts; and (4) Granting Related Relief.

The case was closed on January 8, 2015.

It took less than a year from start to finish. So what was accomplished? I spoke to Summer at the cash register. She has been with the company for over three years. She says she believes the bankruptcy improved the work environment. She mentioned when the bankruptcy was announced, there was a rush from customers who wanted to eat the food, thinking it may be their last chance. More importantly, she mentioned that the company was considering expanding into the east coast. She may be picked as one of the people who is flown over to train new employees and was generally very excited (she even did a quick twirl and yelled “New York, here I come!”).

HDOS expanded too quickly into expensive leases at large malls that were opening all across the mid-west. When the Great Recession hit, it faced declining revenues but was stuck with significantly above market leases. Its landlords wouldn’t negotiate because HDOS was a solvent company. Recognizing that it could not sustain itself, it filed bankruptcy. Now it’s a thriving company. Bankruptcy works. 

[Note: Outside of bankruptcy, breach of these leases would have resulted in very large breach of contract judgments which would have choked the company. The bankruptcy not only demonstrated to landlords that HDOS was serious and caused many landlords to “voluntarily” renegotiate leases, it also provides a cap to the amount of damage that a landlord is entitled to and further caps that exposure because unsecured creditors don’t necessarily have to be paid in full.]

An entertaining footnote about metaphors!

This is footnote 2 from Official Committee v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 662 n.2 (S.D.N.Y. 1992):

The Supreme Court has warned that “[c]atch words and labels . . . are subject to the dangers that lurk in metaphors and symbols, and must be watched with circumspection lest they put us off guard.”United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 253, 109 S.Ct. 1026, 1036, 103 L.Ed.2d 290 (1989) (citing Henneford v. Silas Mason Co., 300 U.S. 577, 586, 57 S.Ct. 524, 528, 81 L.Ed. 814 (1937)). Nevertheless, courts seem to enjoy framing bankruptcy issues in colorful, but misleading, metaphor. For example, the term “stalking horse” has appeared in a variety of odd contexts. See, e.g.,In re El Paso Pharm., Inc., 130 B.R. 492, 496 (Bankr.W.D.Tex. 1991) (“[t]he jury issue thus turns out to be a stalking horse”); In re Louis Fleet, 122 B.R. 910, 917 (Bankr.E.D.Pa.1990) (rejecting a “last ditch effort” of a debtor to use “his wife as a stalking horse”).

Bankruptcy cases teem with other mixed and maltreated metaphors. See, e.g., United States v. Nelson,969 F.2d 626 (8th Cir.1992) (“trustee here was attempting to `gouge substantive congressional-given rights from the eyes of debtors’”); Reynolds v. Comm’r of Internal Revenue, 861 F.2d 469, 472-73 (6th Cir.1988) (“Emerson’s dictum that `a foolish consistency is the hobgoblin of little minds’ cuts no ice in this context.”).

Food-related metaphors are common. See, e.g., In re Central Ice Cream Co., 114 B.R. 956, 960 (D.N.D.Ill.1989) (referring to the bankruptcy judge’s metaphor of the “egg” of conflict); In re Jeffrey B. Stone, 119 B.R. 222, 234 n. 18 (Bankr.E.D.Wash.1990) (“An appropriate, if informal metaphor, is to compare the exemption to a wedge of Swiss cheese.”); In re Charles Richard Snow, 92 B.R. 154, 158 n. 3 (D.W.D.Va. 1988) (extending the Swiss cheese metaphor to “argue that the wedge of Virginia cheese contains too high a ratio of holes to cheese”); C.I.T. Corp. v. A & A Printing, Inc., 70 B.R. 878, 882 (D.M.D.N.C.1987) (“The familiar metaphor of a pie is instructive.”); In re Tri-Cran, 98 B.R. 609, 620 (Bankr.D.Mass.1989) (learning “through the grapevine” in the cranberry industry).

Zoological metaphors abound. See, e.g., In re Financial News Network, 126 B.R. at 154 n. 5(conferring the title “tethered goat” on a break-up fee recipient); Mellon Bank v. Metro Communications,945 F.2d 635, 646 (3d Cir.1991) (“the target firm may not at all reflect the Elizabethan deadbeat, but may in fact wind up as the sacrificial lamb”); In re Universal Profile, Inc., 5 B.R. 572, Bankr.L.Rep. (CCH) ¶ 67,696 (N.D.Ga. 1980) (“This court is not favorably inclined toward making [the subsidiary] a sacrificial lamb for its parent company.”); In re Willie Charles Jones, 105 B.R. 1007, 1012 (D.N.D.Ala.1989) (remarking that “`Chapter 26′ . . . is an animal as different from `Chapter 20′ as an elephant is from a giraffe”); In re Assembled Interests Corp., 117 B.R. 31, 32 (Bankr.N.H.1990)(acknowledging that “calling an elephant a giraffe does not make the animal any less an elephant,” but also noting that “[t]his is an obvious but irrelevant truth”); In re Robert James Johnson, 80 B.R. 953, 962 (Bankr.D.Minn.1987) (“This test is popularly phrased via the fine, homely folk adage of `The pig gets fattened, but the hog gets slaughtered.’”); Dolese v. United States, 605 F.2d 1146, 1154 (10th Cir.1979) (employing a variant: “There is a principle of too much; phrased colloquially, when a pig becomes a hog it is slaughtered”); In re Donald J. Falconer, 79 B.R. 283, 289 (D.W.D.Mich.1987)(suggesting the allegory of counting and burying cattle to explain the “ontological demise” of cattle which “disappeared in almost `Orwellian fashion’ [and] became, in a word, `uncattle’”).

The reference to Orwell is particularly jarring because that author, a master of the language, warned against the use of stale metaphors as a substitute for clearly expressed thought. IV The Collected Essays, Journalism and Letters of George Orwell 127-40, esp. 130 (Sonia Orwell and Ian Angus, eds. 1968).

A New Wrinkle in Negligent Infliction of Emotional Distress

In Thing v. La Chusa (1989) 48 Cal.3d 644, 667–68 (Thing), the California Supreme Court established three requirements that a plaintiff must satisfy to recover on a claim for negligent infliction of emotional distress to a bystander: (1) the plaintiff must be closely related to the injury victim; (2) the plaintiff must have been present at the scene of the injury-producing event at the time it occurred and then aware that it was causing injury to the victim; and (3) as a result, the plaintiff must have suffered serious emotional distress.

In a recent case, two sisters watched as their mom, after surgery was completed, choked to death due to the surgery. The hospital argued that the sisters did not know that their mom was choking because of the doctor’s malpractice. Since they didn’t know the cause of the choking, they shouldn’t be able to recover for negligent infliction of emotional distress. In California, this is a valid defense because it’s true, the sisters did not, and could not know about the negligence that caused their mom to pass away.

That’s not where the analysis stops. In this case, the evidence showed that the plaintiffs were present when Knox, their mother, had difficulty breathing following thyroid surgery. They observed inadequate efforts to assist her breathing, and called for help from the respiratory therapist, directing him at one point to suction her throat. They also directed hospital staff to call for the surgeon to return to Knox’s bedside to treat her breathing problems. These facts could be properly considered by the jury to demonstrate that the plaintiffs were contemporaneously aware of Knox’s injury and the inadequate treatment provided her by defendants.

The slow response time is key here, that’s the negligence the sisters were aware of which allowed them to sue and win against the hospital. This case was affirmed by the California Court of Appeals. You can read more about it here.