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LENDER MUST RETURN DEBTOR’S VEHICLE
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Theodore entered into an installment
contract with a corporate creditor for the
purchase of a new automobile. A few years
later, he defaulted on his installment
payments, and the creditor repossessed the
vehicle. Not long after that, Theodore filed
for bankruptcy in federal bankruptcy court.
Needing his car to commute to work, he
requested that the creditor return the vehicle to his bankruptcy estate. When the creditor
refused to return the vehicle, absent what it
deemed “adequate protection” of its
interests, Theodore moved for sanctions
under a Bankruptcy
Code provision,
claiming that the
creditor had willfully
violated the automatic
“stay” provision in the
Bankruptcy Code. In
Theodore’s case, the creditor could not be
said to have acted to obtain possession of the
vehicle after the bankruptcy filing, because
it already possessed the car at that point.
Thus, one issue was whether it could be said
to have “exercised control” over the vehicle
by simply keeping it and refusing to return it
to the debtor, as opposed to selling or doing
something else with it.
A federal appellate court answered this
question in the affirmative. It held that, upon
the request of a debtor that has filed for
bankruptcy, a creditor must first return an
asset in which the debtor has an interest to
his or her bankruptcy estate and then, if
necessary, seek adequate protection of its
interests in the bankruptcy court. To hold
that “exercising control” over an asset refers
only to selling or otherwise destroying the
asset would not be logical, given the central
goal of reorganization
bankruptcy. That goal is is to
gather together all of the
debtor’s property in the
bankruptcy estate, so that the
debtor may rehabilitate his or
her credit and pay off his or
her debts. This applies to all property, even
property (such as Theodore’s car) that is
lawfully seized before the filing of a
bankruptcy petition.
The court essentially ruled that the creditor’s
position had put things in the wrong order.
Instead of being permitted to hang on to the
vehicle until it felt satisfied that its interests
would be protected, the creditor had to first
return the asset to the bankruptcy estate.
Then, if the debtor failed to show that he
could adequately protect the creditor’s
interests, the bankruptcy court was
empowered to condition the right of the
estate to keep possession of the asset on the provision of certain specified adequate
protections to the creditor.
Some other considerations also weighed in
favor of placing the onus on the creditor,
rather than on Theodore, to seek relief from
the court if it believed that its interests were
not adequately protected. First, the whole
purpose of reorganization bankruptcy, be it
corporate or personal, and of the stay in
particular, is to allow the debtor to regain his
financial foothold and repay his or her
creditors. Properly implemented, a stay
allows a debtor free use of his or her assets
while the court works with both the debtor
and the creditors to establish a rehabilitation
and repayment plan. In theory at least, these
assets generate money that could contribute
to paying down the debtor’s obligations. In
Theodore’s case, if his car remained in the
hands of the creditor, it could hamper him
from going to work (or, in other cases, from
finding work), which is crucial for getting
the funds necessary to pay off his debts.
Second, allowing a creditor to maintain gives the creditor an unfair bargaining
advantage over other secured creditors.
Finally, requiring the debtor, rather than the
creditor, to bear the costs of seeking court
relief hurts not only the debtor but all of the
debtor’s other creditors by draining the
value of the bankruptcy estate. The court
reasoned that it makes more sense for all
creditors to move before the court in a
consolidated proceeding to have their assets
adequately protected than for a debtor to file
multiple motions piecemeal in an attempt to
recover assets that may be scattered among
many creditors.
possession of an asset until it decides on its
own that adequate protection is in place, or
until the debtor moves for the asset’s return, |
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MEDICAID BENEFITS AND SPECIAL NEEDS TRUSTS
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A permanently disabled Medicaid recipient
residing in a nursing home challenged an
informal rule issued by the federal
Department of Health and Human Services
which requires that, for purposes of
determining the benefits due to a
Medicaid-eligible individual, states must
consider income placed in a Special Needs Trust for that individual’s benefit. (Medicaid
provides joint federal and state funding of
medical care for individuals who cannot
afford to pay their own medical costs.) The
challenged rule effectively prevents
Medicaid recipients from using Special
Needs Trusts to shelter their monthly Social
Security Disability Insurance (SSDI) income
from certain Medicaid determinations. In the
case before the court, the plaintiff’s legal
guardian had created a Special Needs Trust
on the plaintiff’s behalf and had been
depositing into it the plaintiff’s monthly
SSDI benefits, minus some income
deductions that were not at issue.
The end result of applying the challenged
agency rule is that income placed in a
Special Needs Trust is not considered in
making the first determination of eligibility
for Medicaid, but is considered in making
the second determination of the extent of
benefits to which an eligible individual is
entitled. Relying on the agency rule,
appropriate officials may count the income
that an institutionalized individual places in
a Special Needs Trust when determining
how much of the individual’s income he or she must contribute to the cost of his or her
care.
In his class action lawsuit, the Medicaid
recipient, on his behalf and that of similarly
situated persons, unsuccessfully argued that
the rule conflicts with the express language
of a part of the Medicaid laws. A federal
appeals court rejected the plaintiff’s reading
of the pertinent statute, instead concluding
that Congress did not speak to the precise
question presented by his claim. Under
accepted principles of administrative law,
this meant that the federal agency was free
to “fill the gap” left by Congress. When it
did so, that was an appropriate exercise of
the agency’s authority, to which the court
deferred. |
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LITIGATION OVER NONCOMPETE AGREEMENTS
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Agreements between employers and their
employees prohibiting or restricting
competition by a departing employee are
nothing new, but their use is growing—and
not just for the highest levels of
management. This trend makes it all the
more important to understand the limits that
courts have placed on such agreements, with
a view toward balancing employers’
interests with policies favoring competition
and unfettered opportunities for individuals
to pursue their livelihoods. While courts
have sometimes struck down noncompete
agreements in their entirety, occasionally
they effectively have rewritten parts of an
agreement, a practice known as “blue
penciling,” so as to fix offending parts while
retaining acceptable provisions.
In employment contracts, restrictive
covenants, as they are sometimes called, are
from the outset suspect as restraints of trade
that are disfavored at law, and they must
withstand close scrutiny as to their
reasonableness. For the same reason, they
generally are not to be construed to extend
beyond their proper import, or farther than
the contract language absolutely requires. In
cases of ambiguous language, to borrow a
term from baseball, the “tie” goes to the
former employee.
The requirements for enforcing a
noncompete agreement may vary some from
state to state, but a typical set of conditions requires that the agreement (1) be necessary
for the protection of the employer that is, the
employer must have a protectable interest
justifying the restriction imposed on the
activity of the former employee; (2) provide
a reasonable time limit; (3) provide a
reasonable territorial limit; (4) not be harsh
or oppressive as to the former employee;
and (5) not be contrary to public policy. In
keeping with the law’s predisposition
against such agreements, generally the
employer has the burden of proving the
reasonableness of a noncompete clause.
In a recent case involving a company that
distributed novelty items to convenience
stores and similar businesses, a noncompete
clause that prohibited a route salesperson
from interfering with or attempting to entice
away customers—who were customers of
the employer during a one-year period
before the employee’s termination, and
whom the employee had serviced, dealt
with, or obtained special knowledge about
during his employment—was found by a
court to be reasonably necessary and
enforceable to protect the employer’s
business. The employer had a legitimate interest in prohibiting solicitation of its
recent past customers and in winning back
their business, and, as to such customers, the
former employee would be in a far better
position than an ordinary competitor, with a
distinct advantage were it not for the
noncompete restriction.
The case of the novelty items business
resulted in a split decision for the employer.
A separate clause in the agreement, referred
to as the “business” clause, prohibited a
former employee, for 24 months following
his or her termination, from engaging “in
any business which is substantially similar
to” the employer’s business. The court
concluded that this provision went too far. It
did not protect a legitimate business interest
and was thus unenforceable. The
engagement of a former employee in a
similar, but noncompetitive, enterprise
posed little, if any, additional danger to the
employer.
When a tax return preparation firm sued a
former employee for breach of a
noncompete agreement, the court used a
standard providing that an agreement of that
kind will be enforced only if the business interests the employer seeks to protect and
the effect the covenants have are reasonable
as to (1) duration; (2) the capacity in which
the former employee is prohibited from
competing against his or her former
employer; and (3) the geographic territory in
which the former employee is restricted
from working. The court held that the
noncompetition clause in the tax preparer’s
employment contract was overbroad for
failing to properly limit the territory to
which it applied, making the entire covenant
unenforceable. The clause purported to limit
the former employee from working for any
employer whose business included the
preparation and electronic filing of income
tax returns, if that employer was located,
conducted business, or solicited business in
the geographic district where the former
employee had previously worked or within
10 miles of the district’s borders, even if the
former employee did not propose to work in
or near that district. Such a clause cannot
stand, because, as the court put it, it
“overprotects” the employer at the expense
of a former employee’s right to earn a
living. |
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TAX BREAKS FOR COLLEGE COSTS
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Persistently
increasing college
costs may have joined death and taxes as
inevitable facts of life. Still, it is usually
possible to soften the blow of escalating
costs of higher education by taking
advantage of an assortment of income tax
breaks provided by the federal government.
The options and their ramifications for your
tax bill are not as simple as they might be,
so it may be prudent to get some
professional advice. Given the large sums of
money at stake, you do not want to leave
any smart moves unmade for lack of
information and timely advice.
American Opportunity Tax Credit
This year, the American Opportunity Tax
Credit effectively replaces the Hope
Scholarship Credit. Taxpayers spending at
least $2,000 for tuition, fees, books, and
materials for higher education can save
$2,000 in taxes with a dollar-for-dollar
credit. Expenses over $2,000 bring an
additional tax credit of 25 cents on the
dollar, and, if expenses reach $4,000, there
is a maximum credit of $2,500. The credit is
available per student, so that a family with
more than one college student can achieve
even larger total benefits. Up to 40% of the
American Opportunity Tax Credit is
refundable, so that some of the tax credit
may be received as a tax refund if the credit
for which the taxpayer qualifies exceeds his
or her income tax liability. This credit
phases out for taxpayers with a modified
adjusted gross income between $80,000 and
$90,000 ($160,000 and $180,000 for
married couples filing jointly).
Lifetime Learning Credit
While the American Opportunity Tax Credit
is limited to the first four years of education
after high school, the Lifetime Learning
Credit, as the name suggests, may be
claimed for any year of higher education,
such as years spent in graduate or
professional schools. Another distinction
between the two credits is that the Lifetime
Learning Credit is available for any course
of study relating to job skills at an accredited
school, whereas the American Opportunity
Tax Credit requires that the student be
enrolled at least on a half-time basis. The
phaseout income ranges are lower than for
the American Opportunity Tax Credit, by
margins of $30,000 for individuals and
$60,000 for married couples filing jointly.
Calculated at 20 cents on the dollar, the
Lifetime Learning Credit maxes out at
$2,000, for $10,000 in tuition and related
expenses. It is not refundable. Unlike the
American Opportunity Tax Credit, which is
determined per student, the Lifetime
Learning Credit is calculated per taxpayer,
so any one taxpayer has the above maximu
no matter how many individuals in a family
are studying at the postsecondary level. A
taxpayer may not use both credits for the
same student in the same year, but different
credits may be used for different students’
expenses in the same year.
Tuition and Fees Deduction
A tax credit, by shaving off the actual tax
bill, does more for a taxpayer’s bottom line
than a deduction, which only reduces the
income on which the tax will be imposed.
Still, there is a third option in the form of a
tax deduction for tuition and related fees,
although it cannot be used in the same year
for the same student as either of the tax credits previously described. This deduction,
which is available even for taxpayers who
do not itemize deductions, can be as large as
$4,000 for modified adjusted gross incomes
up to $65,000 ($130,000 for married couples
filing jointly). The deduction is cut in half
for even one dollar above those incomes,
and disappears altogether when the income
levels top $80,000 ($160,000 for married
couples filing jointly). Another limitation on
this deduction is that it cannot be claimed
for expenses paid with money from a
Section 529 plan or withdrawals from a
Coverdell Education Savings Account. |
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© 2005 - 2009. Beaumont & Beaumont. All Rights Reserved.
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