A chapter 11 reorganization is the most complex of all bankruptcy cases and generally the most expensive; on average bankruptcy firms will usually charge a retainer between $20,000 – $100,000 to file a chapter 11, depending on the complexity. A chapter 11 should be considered only after careful analysis and exploration of all other alternatives; it is basically a chapter of last resort. Many bankruptcy practitioners may go their whole career without tackling a chapter 11 bankruptcy because of the complexities and responsibilities associated with filing. It is the only bankruptcy where creditors have to vote to confirm the proposed plan and because of this unique characteristic, many chapter 11’s are doomed before they are even started.

In the non-profit sector, there has not been a single legal services organization in New York, or possibly even the United States, that has ever brought a chapter 11 on behalf of their client, until now. This changed when Brooklyn Legal Services Corporation A (Brooklyn A) brought one on behalf of a distressed homeowner.

The homeowner, who will be referred to as Client A, at the time a recent medical school graduate, was approached by a friend with the idea of opening their own medical practice; the friend overseeing office management and Client A providing medical services. In order to get the practice started, Client A was tasked with obtaining financing for a building and medical equipment. After registering the business, she obtained a $450,000 mortgage to purchase a building and procured a $450,000 business loan from Bank of America (BOA). BOA requested that she “personally guarantee” the loan; meaning if the loan was not paid, the bank’s recourse would not be limited to the business, BOA would be able to pursue Client A personally; including personal and real property.

After a short start-up the business failed. The building purchased was foreclosed upon and the medical equipment purchased was seized by the mortgagee. For a couple of years Client A did not hear from BOA regarding the business loan and she assumed the bank may have called it a loss and would not pursue her. She came to realize this was not the case after she was served with a summons and complaint indicating she owed over $550,000 which included the interest that accrued since her default. Client A did not know what to do. She owned a home and had a young child. Her concern was that BOA would force sale of her home.

Ndukwe AgwuAfter Client A was referred to Brooklyn A, Ndukwe Agwu, Esq., Senior Staff Attorney of the Consumer and Economic Advocacy (CEA) Program conducted a detailed assessment of the facts and believed something could be achieved with a chapter 11 filing. With careful consideration he prepared and filed a petition. Handled primarily by Mr. Agwu, with the assistance of David Bryan, Esq., CEA Program Director, they first considered filing a chapter 7 for Client A but concluded that she earned above the means test threshold established for chapter 7 filings. She also would lose her home because the chapter 7 trustee would sell it to pay back her creditors and get their trustee percentage due to her equity in the home. Similarly, she could not file a chapter 13 because she was well above the unsecured limit of $383,175. Her only option was a chapter 11. While this may seem to be a unique case involving a high income individual, Brooklyn homeowners have benefited from a rising home real estate market. Kings County homes, recently considered of modest value, have escalated in value to the point where they also exceed the unsecured limit of $383,000.

After navigating the very complex procedures and deadlines, Mr. Agwu was able to successfully demonstrate to BOA and the United States Trustee that it could conceive a plan that paid the creditors more than they would receive if the case was converted to a chapter 7. BOA, after extensive negotiation, agreed to accept 42% of the total amount owed. BOA agreed to accept a chapter 11 five year payout plan, which would create a new contract and extinguish all the obligations and monies owed to BOA under the previous contract. Basically, BOA was not contractually owed $550,000 from the default of the original loan but instead was owed approximately $216,000 going forward. This agreement was accepted and proffered to the Court for the Judges approval. In March, 2016, Judge Elizabeth Stong of the New York Eastern District Bankruptcy Court confirmed Client A’s plan.

Our review of the records available on PACER indicate that Brooklyn A is the only non-profit legal services organization in New York State to ever file a chapter 11 bankruptcy, and the only organization in the country to file and have the plan confirmed.*

Congratulations to Ndukwe Agwu and the entire Consumer and Economic Advocacy Program for their steadfast commitment and pioneering efforts in representing our clients.

*Public Access to Court Electronic Records (PACER), is an electronic public access service that allows users to obtain case and docket information online from federal appellate, district, and bankruptcy courts, and the PACER Case Locator. PACER is provided by the Federal Judiciary in keeping with its commitment to providing public access to court information via a centralized service. PACER has not documented any previous cases of this sort in the United States.