Delivering the Goods: What Happens When a Consumer Puts Up a Deposit for Goods and the Retailer Goes Belly Up?

Last September, Gediman’s Appliances of Bath Maine close abruptly. Customers who had put deposits down on appliances were left with neither their money or what they ordered. Sadly, this is not an uncommon occurrence when a retailer, big or small, closes. What then is a customer to do? Unfortunately, not much.

Leaving bankruptcy aside for a moment, the customer can sue the retailer and obtain a judgment but likely this is an empty gesture. Retailers that close their doors usually do so for a lack of assets, more specifically cash. It is therefore unlikely that the customer will recover anything by way of a lawsuit. Customers who paid their deposits by credit card fare better as their deposits may have some protection under the Fair Credit Billing Act. This Act allows customers to dispute the credit card charges on the basis of non-delivery of goods and have the charges reversed, assuming, of course, the consumer knows about their rights and timely disputes the charges. Finally, there is a small chance that a retailer may be able to pay customers back after holding a liquidation sale but I would not hold my breath; liquidation sales are trying to generate quick cash and so assets are sold for much less than they are worth.

If the retailer files for bankruptcy, the customers’ situations are only improved slightly. Under the Bankruptcy Code, Section 507(a)(7) allows an individual customer, who put a deposit down with a retailer to purchase goods, to receive a priority of payment over certain other creditors for up to $1,800. Practically speaking (and to avoid a long discussion of bankruptcy law) what this statute means is that customers with deposits move up the food chain. When a business is liquidated in bankruptcy, its assets are liquidated and the proceeds used to pay creditors. Secured creditors (meaning the creditor has a lien on the debtor’s property) come first, usually banks and finance companies then comes the priority creditors and finally general unsecured creditors. From experience, by the time the secured creditors are paid there is not much left over for anyone else. I am not saying that a customer will not recover anything but it likely will not be the full amount of the deposit.

Returning to Gediman’s Appliances, the attorney for the business has said that it has no intention of filing bankruptcy for the business. Instead an auction is being held to sell all of the business’ assets in the hopes of generating money to pay creditors, including customers with deposits. So until then customers have to hold tight and hope for the best. I guess the best lesson to learn here is that if you are considering putting down a deposit on goods your best bet is to use your credit card, even if you incur some interest charges. This is probably the best means to protect your purchase otherwise you may have to wait a long time to receive a pittance or nothing at all.

Here is a link to the Bangor Daily News article: http://bangordailynews.com/2015/01/23/business/customers-remain-in-limbo-as-owners-of-appliance-store-that-closed-without-filling-orders-consider-bankruptcy/

Excerpt from Title 11 Section 507(a):

“Seventh, allowed unsecured claims of individuals, to the extent of $1,800 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.”

High Flying Attorney Gets His Wings Clipped by the IRS

T.C. Memo. 2015-1 Tulane Meredith Peterson v. Commissioner of Internal Revenue (Issued January 5, 2015)

The Story

Arcadia, California resident Tulane Peterson loved to fly. While licensed as an attorney since 1997, his first true and abiding love was flying; by the time of this court opinion he had been an amateur flyer for forty years. Specializing in personal injury law, in 2005 Peterson decided to upgrade his practice and so he purchased a new chariot: a 2005 Cessna Turbo Skylane. At $332,000, it was reasonably priced and available for only $10,000 down and $1,400 a month thereafter. It was also around this time that Peterson decided to up his game by becoming “instrument rated” as a pilot, which means that he becomes certified to fly solely by relying on his instruments rather than by sight and thus enabling him to handle more diverse weather conditions.

As can be imagined, the expenses of purchasing and maintaining the aircraft and obtaining the certification added up. For tax years 2006 and 2007, Mr. Peterson claimed 100% of his costs as being for business, totaling $115,620 and $123,012, respectively. Peterson maintained a list of trips he took in the plane as well as the business purpose of the trip. The court, helpfully, provided a list of Peterson’s various “business” flights; here is a sampling:

• 17 trips to Big Bear, a resort only 90 miles from his home. The ostensible purposes for these flights were: purchasing aviation fuel; business development; informal law office marketing (as opposed to formal law office marketing); reconnoitering an office location; entertaining for business; practicing high-altitude landings; AND attending FAA pilot safety meetings. Wow! That is a lot of business in only 17 trips!
• Flights to and from his parents’ home in Bismarck, North Dakota. The taxpayer said the purpose of the trip was to provide his parents with estate planning advice, for which he never charged them, and to resolve a “mold complaint.” Such a good boy.
• Flights with his son to take aerial photographs related to several personal injury cases he was working on; the court notes that no evidence was submitted by the taxpayer as to how these photos were necessary for litigating those cases (or even what the photos were of, for that matter).
• A Flight to Santa Monica, California, to “return a defective portable bike purchased for use with aircraft.” Ok, you got me there.
• Flights to various airports to discuss complaints regarding the price of aviation fuel at meetings of the Five County Pilots Association. A problem to be sure.

The IRS was understandably skeptical of Peterson’s claim that 100% of airplane expenses were for business and so it conducted an audit on his taxes for both years. In 2006, the IRS denied all of Peterson’s aircraft related expenses as being personal and not business. 2007, ended up a bit better, and a new IRS agent allowed Peterson to claim 27% of his expenses as being business related; subsequently, the IRS conceded that 18% of Peterson’s airplane expenses were deductible for 2006. Unhappy with the results, Peterson appealed to the United States Tax Court but the tax court was no more sympathetic to Mr. Peterson’s arguments. If the IRS had not conceded that some of the airplane expenses were business, the court appeared ready to deny his expenses in full. The court rightly pointed out that most of the trips were to locations within 100 miles of his home office, close enough to justify the use of a car over an airplane.

Here the court make it clear that it was the taxpayer’s love of flying that motivated him to incur those expenses rather than a business reason. While the taxpayer here was likely a bit greedy, the mere fact that you derive some enjoyment from a business expense does not make it non-deductible but it does mean that taxpayer will need to do more to show that the expense was ultimately motivated by a business purpose. This case was about an aviator who flew too close to the sun and got burnt (forgive the pun).

Business Expenses

While this case had some interesting facts, it actually has a good discussion of what constitutes a business expense and how a taxpayer goes about substantiating such expenses. If you want the crib notes, here is a quick summary:

A taxpayer can deduct the ordinary and necessary expenses incurred or paid in furtherance of running a business, where the expenses can be properly substantiated by the taxpayer, on whom the burden rests.

Ordinary expenses are those expenses that are normal, usual, or customary in the business in which the taxpayer operates while necessary expenses are those expenses that are appropriate or helpful in a taxpayer’s business.

Proper substantiation requires some proof that an expense was incurred or paid in furtherance of a taxpayer’s business, usually through documentary evidence such as invoices, statements, and receipts; if the taxpayer cannot substantiate the exact amount of the expense then other evidence can be submitted to prove that expense, unless the Internal Revenue Code provides for a specific means to substantiate an expense.

Postscript

I did a Google search on Tulane Peterson and it appears that Peterson now works with a law firm rather than in solo practice; no word on what happened to the Cessna.

IRS Will Not Seize Refunds to Pay Back Old Debts to Social Security

For the 2014 tax filing season, the Social Security Administration (SSA) has agreed not to seize an individual’s tax refunds to pay back old debts. Since 2008, the SSA has been able to have the Treasury Department seize federal payments to someone who owes a debt to the SSA, usually in the form of tax refunds. Unlike the IRS, which administratively can only collect on a debt for ten years, the SSA has no such limitation and can attempt to recoup benefit overpayments from children who are well into their adult years.

Certainly there is resistance to this program. Several members of the Legislature have raised the alarm that taxpayers should not be blindsided by unknown debts or hounded to pay decades old debts. Last year, the SSA stayed its collection efforts when an uproar was raised that individuals were being forced to repay debts for benefits paid to parents or guardians on the child’s behalf. Vern Buchanan, R-FL, has introduced a bill to limit collection efforts to 10 years like the IRS but as of yet nothing has come of it.

The SSA for its part, argues that most of these debts are for benefits paid to individuals aged 18 to 22 who received survivor benefits; from 1965 to 1985, beneficiaries were able to receive benefits until 22 if in college. The SSA said that far from being innocent victims, the beneficiaries agreed to report to the SSA if they no longer attended school, were jailed, got a job, or were married which would have ended the benefit payments. The individuals did not and continued to receive benefits to which they were not entitled.

Whatever the merit of the SSA’s collection efforts, it is estimated that 400,000 individuals owe $714 million dollars to the SSA, with 55% of the individuals owning less than $1,000. As of the date of the AP story, that number has dwindled to 300,000 due to individuals agreeing to payment arrangements or the death of the individual.

Here is a link to the Yahoo Finance article that was the source of this post: http://finance.yahoo.com/news/social-security-wont-seize-tax-194427299.html;_ylt=A0LEVzipDbVUuFQAHzNXNyoA

Former Reality TV Star Teresa Giudice Begins Serving Time for Bankruptcy Fraud

Teresa Giudice of “The Real Housewives of New Jersey” was previously convicted of bankruptcy fraud and since that time she has been free but not anymore. Today she surrendered to the authorities to begin her 15 month sentence in a low-security prison in Connecticut. Her husband will serve his sentence once Teresa is released so that there will be someone there to raise their four children. Sad news for the children though, once Giuseppe Giudice, an Italian citizen, finishes his sentence he will be deported back to Italy. It is not clear from the article or other sources if Teresa plans to move the family to Italy when his sentence is finished.

The bankruptcy fraud conviction stems from their 2009 bankruptcy filing. Both Teresa and her husband admitted, as part of a plea deal, that they both made fraudulent statements to obtain loans by inflating their income. Additionally, both Giudices admit to attempting to conceal assets and sources of income from creditors, including Teresa’s income from appearing on the “Housewives” show.

Here is a link to the Bangor Daily News article that is the source of this post: http://bangordailynews.com/2015/01/05/news/nation/real-housewives-of-new-jersey-star-begins-prison-sentence/?ref=polbeat

Reaching the Outer Limits of Uninsured Motorist Coverage – Maine Supreme Court Holds that Umbrella Insurance Policies Are Not “Motor Vehicle Insurance Policies”

Dickau v. Vermont Mutual Insurance Co., 2014 ME 158, decided by the Maine Law Court on December 31, 2014

The Maine Supreme Court recently held that an umbrella policy, a policy that provides coverage over several other policies, is not a motor vehicle insurance policy (MVIP) for purposes of determining coverage under Maine’s Uninsured Motorist laws. Uninsured motorist coverage (UM coverage) only applies to the primary policy of the insured and not to any additional coverage under an umbrella policy. While most people involved in an auto accident will not be affected, individuals who suffer serious injuries caused by an uninsured or underinsured driver may only be able to recover up to their policy limits on their primary auto policy rather than from both the primary policy and an umbrella policy. 

The facts of the case are this: James Dickau was seriously injured, resulting in damages over $250,000, when his motorcycle was struck by a car driven by Irida Macomber. Macomber had liability coverage of $100,000 while Dickau had an automobile policy, with UM coverage, of $250,000 as well additional liability coverage, up to $1,000,000, through an umbrella policy with Vermont Mutual. Under Maine law, an injured motorist, who is insured under a liability policy on her motor vehicle, may recover damages from her insurer to the same extent that she would have recovered from the liable party, if the liable party had the same coverage as the insured. A mouthful I know. In operation, it works like this. If the liable party’s insurance covers all of the insured’s damages then no additional recovery by the insured from her own insurance company. If, however, the liable party is uninsured (which includes a hit and run accident) or underinsured (meaning that the liable party has less coverage than the injured party), then the insured can recover from her insurance company up to her insurance policy limits less any amounts recovered from the liable party or the liable party’s insurer.

In Dickau’s case, he had two policies, his auto policy of $250,000 and his umbrella policy that covered up to $1,000,000. Under the UM statute, Dickau could collect $150,000 from his primary insurer because Macomber’s insurance covered $100,000 of his damages. The second policy was a bit trickier. Under the umbrella policy, UM coverage was explicitly excluded in the contract but the policy included liability coverage for any damages Dickau caused to another party while operating his motor vehicle (it also included liability for his watercraft, his home, and for any damages he caused more generally). Thus under the statute, if Macomber had his primary coverage and umbrella policy, then, assuming the umbrella policy was included in UM coverage, Dickau could recover from his insurer his damages up to $1,000,000. If not, then Dickau would be capped at $250,000, the total coverage under his primary policy. So the question became, “What is Dickau’s coverage for his injuries under Maine’s UM statute? Is it $250,000 or $1,000,000?”

Vermont Mutual refused Dickau coverage under his policy and so he instituted suit. In court, Dickau’s first argument was that his umbrella policy implicitly covered UM coverage even though the policy explicitly excluded UM coverage. The lower court and the Maine Supreme Court did not agree. Both courts agreed that insurance policy’s language was pretty clear on this point and so no insurance coverage through that route.

Dickau’s second argument was that even if the policy explicitly excluded UM coverage that Maine’s UM statute required Vermont Mutual to cover him. At least from the language of the statute, it appeared that he had a good argument here – the Court was split 4 to 3 on the issue. Majority rules, however, and the Court felt that both the particular characteristics of a MVIP and the implied intent of the statute placed umbrella policies outside the reach of UM coverage.

In the UM statute, the term MVIP is used to describe policies that fall under the umbrella of statute but the term itself is not defined. The Court felt that the term MVIP was a term of art from the insurance industry describing a particular type of insurance policy which covers specific drivers and a specific motor vehicle (or motor vehicles) whereas an umbrella policy applies in a more general way. For example, premiums on primary motor vehicle policies are calculated using certain factors, such as a driver’s age and accident history and a motor vehicle’s age, condition and safety features. While not stated in the opinion, an umbrella policy likely includes some of the same factors as those in a primary policy but in a more general fashion. For the Court, it was the rather general nature of an umbrella policy that put it in another category of insurance than the more specific primary motor vehicle policy. The difference in the nature of a primary policy and an umbrella policy put the umbrella policies outside of the term MVIP.

The Court also felt that the history of the UM statute was one of limiting coverage rather than expanding it. The purpose of the statute is to cover the insured for personal injuries where the liable party is uninsured or underinsured, a purpose that can be fully achieved by applying UM coverage to a motorist’s primary auto policy, which is required by statute.

“We conclude that the Legislature did not intend for [the UM statute] to provide the universe of coverage argued by Dickau; to determine otherwise would be to rewrite [the statute] to accommodate a remedy significantly greater than the Legislature intended.”

In summary, for purposes of determining UM coverage, umbrella policies are not considered MVIPs and therefore excluded from the calculation. This exclusion will likely affect only a small percentage of injured motorists making claims but those affected will also likely be the most seriously injured. Practically speaking, motorists should examine their primary policies to determine if their UM coverage should be increased. It remains to be seen if the legislature will act in response to this ruling. In the past, the legislature has acted in response to a Maine Supreme Court ruling, which it called “clarifying its intent”, but in that case, the legislature took the opportunity to restrict, rather than expanded, the ability of persons to find coverage under the statute, Butterfield v. Norfolk and Dedham Mutual Fire Insurance Company, 2004 ME 124, so I think that it is unlikely the legislature will expand coverage.

Excerpt From the UM Statute

Title 29-A §2902. Uninsured vehicle coverage; insolvency of insurer

1.    A policy insuring against liability arising out of the ownership, maintenance or use of any motor vehicle may not be delivered or issued for delivery in this State with respect to any such vehicle registered or principally garaged in this State, unless coverage is provided in the policy or supplemental to the policy for the protection of persons insured under the policy who are legally entitled to recover damages from owners or operators of uninsured, underinsured or hit-and-run motor vehicles, for bodily injury, sickness or disease, including death, sustained by an insured person resulting from the ownership, maintenance or use of such uninsured, underinsured or hit-and-run motor vehicle.