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NJ Janitorial Firm Bradford and Byrd Tries to Clean House with a Chapter 11

By: Justin A. Saporito, Law Clerk

Bradford & Byrd Associates, Inc. filed for voluntary Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of New Jersey on May 23rd, 2014.  The case has been assigned to the Honorable Christine M. Gravelle under case number 3:14:bk-20478.

b&bmopper400Debtor claims assets of less than $50,000 with liabilities ranging between $500,000 and $1 million.  Among debtor’s 21 creditors are the Internal Revenue Service, New Jersey Department of Labor, New York State Workers Compensation Board, Mercedes Benz, and several other companies and private individuals.  Debtor is represented by Bunce Atkinson of Atkinson & DeBartolo, PC from Red Bank, New Jersey.

Debtor is a janitorial firm that was founded in 1989 and headquartered in Freehold, New Jersey.  Debtor provides janitorial services clients in New York, New Jersey, Pennsylvania, Georgia, and North and South Carolina.  Some of debtor’s more notable clients include UPS, the Social Security Administration Headquarters, and Public Service Electric and Gas Company.  In debtor’s more than 20 years in business, it has achieved some noticeable accomplishments including servicing the Statue of Liberty in 1996 and being contracted to clean vintage chandeliers at West Point Military Academy in 2001.

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West Virginia’s 2014 Economic Outlook

Weirton Steel, Weirton, WV

Weirton Steel, Weirton, WV

In the beginning of 2014, I was asked by the WV Attorney General’s office to participate in a town hall meeting to discuss issues impacting the WV economy.  As a business and bankruptcy lawyer,  I wanted to do my diligence.  I asked my clients and colleagues what they believed were significant factors.  Here was a punch list of the issues identified by them and those at the town hall meeting:

  • retention and attraction of young talent
  • scarcity of livable downtown spaces in major WV cities, Weirton, Wheeling, Huntington, Charleston, Martinsburg, Morgantown
  • healthcare reform proving costly for new businesses
  • business and Occupancy taxes
  • rampant drug addiction
  • revitalization of old industry to attract new industry.
  • deterioration of main streets
  • oil and gas industry presence.

Prior to the town hall meeting, I also asked Justin Saporito, my law clerk to take to google to research this topic.

****

Justin found a 2014 Outlook Report (Report) for WV’s economy, produced by West Virginia University’s College of Business and Economics (one of my alma maters).

The economy of West Virginia has grown steadily over the past year with Gross Domestic Product (GDP) growing by 3.3% over the past year, ranking it tenth (10th) among U.S. states in real GDP growth.  This growth was the result of several factors such as the addition of 3,000 new jobs over the past year, a state unemployment rate that has remained 1% below the national average for the past five years, and increased exports.  Exports accounted for 16% of state economic output in 2012 compared with only 5% in 2000.  The housing and automotive sectors of the economy, important indicators of economic health, have also seen increases.  Home sales in WV are on par with home sales during the 2004-2005 housing boom and auto sales are at pre-recession levels.

According to the report, the key drivers of the economy in 2012 were coal mining, natural gas, healthcare, tourism, electrical power manufacturing, and chemical manufacturing.  The Report predicted that annual job growth would increase in the healthcare services, wholesale and retail trade, construction, and professional and business service sectors every year through 2017.

A shining light for WV’s economy has been the city of Morgantown.  Morgantown boasts an unemployment rate that is 3% below the national average with job growth above the national average with an estimated annual job growth rate of 2% in the coming years.

It is not all good news for WV however as it is ranked 47th among the 50 states in per capita income.  Another major concern is the declining and aging population.  WV’s median age is 5 years above the national average.  Another concern is the state budget, ¼ of which comes from coal tax revenue and lottery revenue.  With coal production predicted to fall through 2017, the state will have to find additional sources of revenue in the coming years. Despite these looming issues, WV is expected to have revenue growth of 3.5% for 2014.

-Justin Saporito

-Salene Kraemer

Freedom Industries, Inc. Files for Chapter 11 Bankruptcy Following Historic WV Chemical Spill

By: Justin A. SaporitoMAZURKRAEMER Law Clerk

The following case is of particular interest to Salene since she is  originally from Weirton, West Virginia and attended West Virginia University.

freedom_industries

Freedom Industries, Inc. filed a voluntary petition for Chapter 11 bankruptcy on January 17, 2014 in the United States Bankruptcy Court for the Southern District of West Virginia.  The case has been assigned to the Honorable Ronald G. Pearson.  Both assets and liabilities are estimated to be between $1 and $10 million.  Approximately 700 creditors are listed in the petition including multiple WV state agencies, service companies, and private individuals.  Multiple motions were filed along with the petition including motions to allow payments to essential trade vendors and to pay $2.4 million in unpaid taxes to the IRS.  A summary of debtor’s filings can be found here.

Debtor is a specialty chemicals manufacturer founded in 1986 and located in Charleston, WV.  It manufactures chemicals for the mining, steel, and cement industries and is wholly-owned by Chemstream Holdings, Inc.  The Charleston chemical plant is located along the Elk River and has recently been widely publicized as the cause of a chemical spill that contaminated the Elk River on January 9th, 2014 which led to state and federal states of emergency being declared.  The spill left 300,000 residents without running water for several days.  The chemical that leaked into the river is used in coal processing.  The local water supply is currently said to be safe for residents in the nine affected counties except for residents in certain towns.  Additionally, pregnant women in the affected areas are advised to drink only bottled water at this time.

Debtor is represented by Mark E. Freedlander of McGuire Woods LLP and Stephen L. Thompson from Barth & Thompson.  Debtor also filed a motion to Employ Pietragallo, Gordon, Alfano, Bosick, and Raspanti, LLP as Special Litigation Counsel.  

DragonFire, Inc. Running Out of Breath as it Files Chapter 11

By: Justin A. Saporito, MAZURKRAEMER Law Clerk

DragonFire, Inc. filed a voluntary petition for Chapter 11 bankruptcy in October 25th, 2013.  The petition was filed in the United States Bankruptcy Court for the Western District of Pennsylvania and has been assigned case number 2:13-bk-24517.  Debtor’s Disclosure Statement, Balance Sheet, Declaration of Schedules, and other documents were due by November 8th, 2013.  For a complete list of the documents due please refer to the document summary.1366998187

Debtor is the corporate entity for DragonFire Japanese Steakhouse and Sushi Bar located at 1500 Washington Rd. in the Gallery Mall in Mt. Lebanon, Pennsylvania.  As the name suggests, DragonFire specializes in hibachi and sushi.  For those unfamiliar with hibachi, it is a rectangular Japanese style barbecue grill.  Customers often sit at a counter that spans three sides of the grill.  The chef stands at the fourth side and prepares the meal (which typically consists of fried rice, vegetables, and various meats) with much fanfare.   DragonFire also boasts a robata grill, a traditional Japanese slow grilling method. For more information about DragonFire, you can visit their website here.

Debtor has declared between $50k and $100k in assets with between $500k and $1 million in liabilities with approximately 20 creditors listed in the petition.  Debtor is represented by Donald R. Calaiaro of Calaiaro  & Corbett, P.C.

Chapter 11 Debtors Beware: Do Not Fail to Pay Quarterly Fees Owed to the U.S. Trustee

By:  Justin Saporito, Law Clerk and Salene Mazur Kraemer, Owner

U.S. DOJ seal

What fees are associated with filing a Chapter 11 case? Aside from payment of attorneys’ fees (which can be steep), there are filing fees and ongoing quarterly administrative fees.

For a chapter 11 case, quarterly fees must be paid to the U.S. Trustee each quarter, or fraction thereof, until that case is closed, dismissed, or converted.  These fees are in addition to the filing fee that must be paid by the debtor.  The amount owed by the debtor is based upon the amount of disbursements made during the quarter starting at a minimum of $325 with a maximum of $30,000.  (Complete breakdown of quarterly fees w/ instructions.)   Again we repeat, there is a minimum payment of at least $325 a quarter.   If significant assets are sold, a debtor may be looking at a quarterly fee up to $13,000 or even $30,000 to be made payable to the U.S. Trustee’s office.  The fee schedule is uniform for all Federal Judicial Districts that are a part of the U.S. Trustee Program which includes all Federal Judicial Districts except for Alabama and North Carolina.

Quarterly fee bills are mailed to the debtor by the U.S. Trustee at the end of each quarter with instructions on how to determine the amount of fees owed.  These fees are due on the last day of the calendar month following the calendar quarter.  The minimum fee is due even if no disbursements were made that quarter and failure to pay a quarterly fee is cause for conversion or dismissal of the chapter 11 case.  Failure to receive an invoice does not excuse the obligation to timely pay U.S. Trustee’s fees.  Debtor’s counsel should contact the Office of the U.S. Trustee If a quarterly bill is not received, unless counsel for the debtor has executed an authorization allowing the U.S. Trustee to discuss the issue of quarterly fees with the debtor.

For payments made by check, the payment is converted to an electronic funds transfer (EFT).  This means that the account information will be copied from the check to electronically debit the debtor’s account for the amount of the check.  The debit usually occurs within 24 hours after which the original check is destroyed.  A copy of the check will be made by the U.S. Trustee’s Office however.  If the EFT cannot be process due to technical reasons, the debtor authorizes the U.S. Trustee’s Office to process the copy in place of the original check.  If the EFT cannot be completed due to insufficient funds, two more attempts to make the transfer may be made.

TIPS FOR THE CHAPTER 11 DEBTOR:  Payment of these U.S. Trustees fees is important.  The U.S. Trustee is an agent of the Department of Justice.  He or she is a lawyer who plays a critical and influential role in every Chapter 11 Case (more on this later).  Do not overlook paying these fees or responding to any requests made by a U.S. Trustee.   If a Debtor ignores such requests or fails to pay U.S. Trustee fees, the Debtor can almost be certain that a Motion to Dismiss the Case or Convert the Chapter 11 Case to  Chapter 7 Case (liquidation) will be forthcoming.

Riverview Country Club Files for Chapter 11 Bankruptcy in West Virginia

By:  Justin Saporito, MAZURKRAEMER Law Clerk

Riverview Country Club - Flag              On September 10, 2013, the Riverview Country Club, Inc. filed a Chapter 11 Voluntary Petition in the United States Bankruptcy Court for the Southern District of West Virginia, Case No 2:13-bk-20467 in front of the Honorable Judge Ron Pearson.   Riverview Country Club is a semi-private 18 hole regulation golf course that was built in 1970 and opened in 1972.  Riverview Country Club is located on Route 17 Riverview Course Road in Madison, West Virginia 25130.  The 6,069 yard par 70 course was designed by Bob Plant and is open year round to the public.

The Debtor claims assets valued between 0$ to $50,000 with liabilities of $500,001 to $1 million listing BB&T, Dollar Bank Leasing Corp, Motive Power, Inc. Premier Bank, and USX Transportation as creditors.  The Debtor is represented by Mitchell Lee Klein of Klein Law Office located at 3566 Teays Valley Road Hurricane, WV 25526.  Mr. Klein filed a Corporate Statement Ownership Statement and Corporate Resolution.

Bankruptcy Docket Beat: Ashland, KY’s River Cities Glass & Construction Files for Chapter 11 in WV

On May 2, 2013, River Cities Glass & Construction, LLC, a glass and glazing contractors company, located at 4750 Winchester Avenue, Ashland, KY 41101 filed a voluntary Chapter 11 bankruptcy protection in the Southern District of West Virginia (Huntington), assigned case No. 3:13-bk-30226 (RGP).  The case was assigned to the Honorable Judge Ronald G. Pearson.  See docket here.  William Cox signed the Debtor’s Schedules as President of the Debtor.

The Debtor is represented by Mitchell Lee Klein of the Klein Law Office, 3566 Teays Valley Road, Hurricane, WV 25526.  Klein’s disclosed a retainer of $5,000 and an hourly rate of $200/hour.

Chihuly            The Debtor elected to be considered a “small business debtor” pursuant to Bankruptcy Code Section 1116.   Its Chapter 11 Plan is due in 6 months, or by October 29, 2013.  Its Disclosure Statement is also due on October 29, 2013.   The Debtor listed liabilities of $159,936.01 and assets under $50,000 with less than 50 creditors.  Simultaneously with its voluntary petition, the Debtor filed an initial operating report and an application to employ an attorney.  Because this is a “small debtor case”, in addition to filing a petition, schedules and a statement of financial affairs, the Debtor is required to also submit a balance sheet, statement of operation, and a cash flow statement, as well as a federal tax return.

New Bankruptcy Code Section 1116  imposes duties on a small business debtor beyond not required of other Chapter 11 debtors, beginning with the filing of the petition.  Under § 1116(1), the debtor must attach to its petition (or in an involuntary case, file within seven days after the date of the order for relief) either (a) its most recent balance sheet, statement of operations, cash flow statement and federal income tax return or (b) a statement made under oath that such documents have not been prepared and that such tax return has not been filed.

We found this listing on the salespider website for the Debtor; we are not certain when it was ever initially listed.  The listing stated that the company has about 7 employees and estimated yearly revenue of $1,200,000 and that the Debtor’s SIC Code is 5231.  This industry consists of establishments engaged in selling primarily paint, glass, and wallpaper, or any combination of these lines, to the general public.  While these establishments may sell primarily to construction contractors, they are known as retail in the trade.  Establishments that do not sell to the general public or are known in the trade as wholesale are classified in the wholesale trade industries.   See SIC Code article here.

Bankruptcy Docket Beat: Levittown’s Renee’s Pizza & Grill Files for Chapter 11Bankruptcy

pizza                  On April 12, 2013, Debtor Renees LLC, of 8739 Newportville Road, Levittown, PA 19054, filed a Chapter 11 bankruptcy petition in the Bankruptcy Court for the Eastern District of Pennsylvania (Philadelphia), Case No. 13-13236.  Debtor’s counsel is Michael P. Gigliotti of Kashkashian & Associates , 10 Canal Street, Suite 204, Bristol, PA 19007.  The case was assigned to Chief Judge Eric L. Frank.

Renee’s LLC did business as Renee’s Pizza and Grill offering a takeout service and grill.  Assets and liabilities both were in the range of  $0-$50,000.  This Chapter 11 is an asset case and it is anticipated that there will be some distribution to creditors.

Does Motive Matter in a Preference Lawsuit?

This is the second in a series of blog posts I am writing here about preference lawsuits (I have a 50 page research treatise that I wrote, from which I am pulling to create these posts!).  I will try to make the subject matter as interesting as possible.    

Does the motive of a debtor a creditor matter in a preference law suit?

MOTIVE

MOTIVE

Scenario One: I know our business is not going to make it another 30 days.  I have one $10,000 receivable that we can expect to receive.  We owe our trade creditors about $100,000 and we owe my Aunt Molly $50,000 that she lent to us on an unsecured basis.  We have been making monthly payments in the amount of $500 to her for the past three years.   I want to take the $10,000 once we get it and pay her all of it because she is my favorite Aunt, I feel bad we are going to stiff her, and she use to buy me pink marshmallow peeps for every Easter.

       Scenario Two: My critical supplier knows that we  have been in distress.  He knows that we lost our biggest customer and we are barely making ends meet.  He just recently shortened my payment terms from net 30 to net 7, he has told me he doesn’t care if I cannot pay my electric bill or payroll and that he wants me to pay his aged account receivable now!  He sends me threatening letters, emails, and nasty voicemail messages.  I don’t even answer my phone anymore. 

As set forth in my prior blog post, there are the five basic elements of a preference; basically, a transfer must be made (1) to or for the benefit of a creditor, (2) on account of an antecedent debt, (3) while the debtor is insolvent, (4) within ninety days before bankruptcy (for non-insiders) or 1 year (for insiders); and (5) the transfer must enable the creditor to receive a greater amount had the transfer not occurred and had the creditor received payment in a hypothetical Chapter 7 liquidation.

What is absent from that list is mental state of mind, motive, or intent.   Under the predecessor statute to Bankruptcy Code § 547 (§60 of the Bankruptcy Act of 1898), a plaintiff had to establish that the creditor had “reasonable cause to believe” that a debtor was insolvent before a preferential transfer could be avoided.  But, importantly, a creditor’s state of mind is no longer an element to the preference cause of action.  See Barash v. Public Finance Corp., 658 F.2d 504, 510 (7th Cir. (Ill.) 1981).  In the Barash case, the Seventh Circuit Court of Appeals held that voluntary payments by a debtor to creditor on an installment contract were preferential transfers, and the fact that the creditor had no way of knowing that the debtor was having financial difficulties was irrelevant.   The Barash Court quoted the legislative notes regarding Bankruptcy Code § 547:  “A creditor’s state of mind has nothing whatsoever to do with the policy of equality of distribution ….”.  H.R.Rep.No.95-595, supra, at 178, 5 U.S. Code Cong. & Admin. News at 6139.

Collier on Bankruptcy, the most authoritative secondary authority on bankruptcy law, acknowledges this change as well.  “Intent or motive is not a material factor in the consideration of an alleged preference under §547.  Generally speaking, it is the effect of a transaction, rather than the debtor’s or creditor’s intent, that is controlling.” See 4 COLLIER ON BANKRUPTCY, ¶547.01 at 547.12.

Some courts, however, have attached a significance to the intent, motive or state of mind of either the debtor or a creditor, even though intent is not a “material” or a basic element of a preference,.  In the Eleventh Circuit, for example, see In re Craig Oil Co., 785 F.2d 1563 (11th Cir. (Ga.) 1986)).   The Craig Oil Court held that a pre-Petition payment was a preference, attaching significance to fact that debtor’s motive for making a payment to a creditor was to forestall an involuntary petition and to prevent personal liability on guaranteed debt, but observing that state of mind of the debtor alone, would not establish unusual or extraordinary actions by the debtor, but merely would go to explain unusual payment actions by debtor.  Also, in the  First Software Corp. v. Micro Educ. Corp. of Amer., 103 B.R. 359 (D. Mass. 1988), the United States District Court for Massachusetts held that payments made by a debtor under an agreement with a creditor were not preferences.   The debtor agreed to make larger weekly payments to a creditor until the balance on the account was reduced to zero.  The Court held that the transfers were within the ordinary course of business (and not preferences), where there was no evidence that indicated that the creditor knew that the debtor was on the verge of bankruptcy when the payments at issue were agreed upon and made.

I have had cases in which my creditor clients were guilty of making dunning phone calls to the debtor prior to company’s slide into bankruptcy.  I have also had cases in which my client was a critical supplier and it wanted to keep servicing the debtor during the time of distress.  Often, at moments like that, new deals are struck in order to keep the debtor afloat and the supplier still dealing with the debtor.   Perhaps, the supplier is owed a substantial amount of money from the debtor and the supplier is willing to do anything to keep the debtor as a going concern; otherwise, the supplier faces the threat of its own bankruptcy.

Although the intent, mens rea, state of mind, motive of either the debtor or the creditor is no longer a prima facie element to a preference action, when I conduct diligence surrounding an alleged preferential transfer I always ask the necessary questions to get a better understanding of what was really going on in the business relationship as the debtor became unable to pay its debts as they came due.   Asking these questions is important in order to paint an accurate picture of the course of dealing between the parties and how such dealing may have changed prior to the filing of the case.

I often advise the credit risk groups of all of my clients always to have a pulse on the financial condition of their clients, especially if a client generates revenue from only a handful of customers.  I even advise my clients to put “google alerts” on each such client so that they can catch wind of any distressed circumstances.

Without a doubt, a business should be strategic when dealing with a distressed client, especially if there is a significant amount owed, and especially if you are striking a new deal with the debtor with changed terms.   Even if you are paid in the year or 90 days prior to your customer’s bankruptcy filing, you always run the risk that the payment will be clawed back post-Petition.  You should be prepared for what defenses you will mount in the event that happens.

MAZURKRAEMER represents debtors and creditors in bankruptcy courts all over the country. The information, comments and links posted on this blog do not constitute legal advice. No attorney-client relationship has been or will be formed by any communication(s) to, from or with the blog and/or the blogger. For legal advice, contact an attorney at MAZURKRAEMER or an attorney actively practicing in your jurisdiction.

What the Heck Is a Preference Action: Paying Off Favorite Creditors as a Business Tanks

       Preferential Treatment.  My two older siblings Nathan and Nicole and I often teased my folks about being the favorite kid, each of us jockeying for the favorite position (not really).  I will be writing a series of posts on paying a favorite creditor and the consequences of a debtor doing so as his or her business slides into bankruptcy.  This is the first post.  (I have a 50 page research treatise that I wrote, from which I am pulling to create these posts!).  I will try to make the subject matter as interesting as possible.

Favorite Child      I have been prosecuting and defending the recovery of alleged preferential transfers since my first few weeks as a bankruptcy associate at a large firm in Philadelphia and Wilmington, DE.   I have developed a massive library of research regarding this special type of litigation that arises only  in a bankruptcy case.   So let’s start with the basics; what is a preference action?

As business owners and management see the tell-tale signs that they are going to close their doors or reorganize, the issue always comes up—who can I pay now and in what order?  Often, we see significant outstanding tax liability, much of which consists of trust fund taxes (i.e., payroll, sales taxes, etc.) for which the owners of the company are personally liable.  We also see mom and dads or related companies (aka insiders) lend an ailing business sizable chunks of money on an unsecured basis.   We also see business owners who feel terrible stiffing their long-term business buddy suppliers because they know if that last payment is not made, then the suppliers’ business will become troubled too.   In their darkest hour of distress, as the lights are about to go out, the owners scurry to pay “preferred” creditors.

But, the Bankruptcy Code provides a recourse to protect those creditors who are not on the preferred list.   Specifically, pursuant to 11 U.S.C.§ 547 (aka Bankruptcy Code §547(b)), a preference action is a statutory right unique to bankruptcy that allows a debtor-in-possession or trustee to recover transfers made to a creditor within 90 days of a bankruptcy filing or within 1 year if to an insider, where such transfers were made to pay pre-existing debt.   By initiating preference lawsuits inside of a bankruptcy proceeding, a bankruptcy trust or debtor is able to sue the creditors that it once “preferred” (either voluntarily or involuntarily) in order to claw back those monies into a debtor’s estate for fair distribution to all unsecured creditors.

The five basic elements of a preference are as follows:

  • The transfer must be made (1) to or for the benefit of a creditor,
  • (2) on account of an antecedent debt,
  • (3) while the debtor is insolvent,
  • (4) within ninety days before bankruptcy (for non-insiders) or within one year (for insiders); and
  • (5) the transfer must enable the creditor to receive a greater amount had the transfer not occurred and had the creditor received payment in a hypothetical Chapter 7 liquidation.

All of these elements of a preference under Section 547(b) of the Bankruptcy Code must be present.  If the plaintiff trustee/debtor-in-possession cannot prove a transfer’s avoidability by a “preponderance of the evidence” (generally the ability to prove as “more likely than not” that the five preference elements exist) then a defendant creditor will prevail.  Note that, neither the debtor nor the creditor’s intent regarding the transfer is a material factor in the consideration of an alleged preference (more on this later).

I have been on both the prosecuting and defending side of numerous preference cases.  When a debtor initiates preference actions, often a debtor is directed to pull its check register to identify payments and persons that the debtor has paid over the last year.  Sometimes, those names, addresses and payments are placed into an excel spreadsheet that is then merged with a form complaint.  The preference lawsuits are then filed in “batches.”   I have seen hundreds of preference actions filed in a batch.   Truth be told then — often, not a whole lot of diligence is put into determining whether a debtor’s actually preferred a certain creditor defendant (i.e., whether the debtor or trustee can satisfy each of the statutory elements of a preferential transfer  and/or whether a defendant will have any valid defenses to the action that will either limit or eliminate liability).    So the lawsuit is set in motion and now each creditor defendant to hire a bankruptcy lawyer and defend the lawsuit by either asserting that the plaintiff has not satisfied each of the prima facie elements set forth in the statute and/or asserting an affirmative defense.

Preference laws were designed to facilitate a fundamental bankruptcy policy of equality of distribution among creditors of the debtor.  Nonetheless, in practice, preference actions are often viewed by creditors as extremely punitive, inasmuch as their effect is to cause creditors to disgorge funds that they have received for legitimate, undisputed bills.   Fortunately, as referred to above, the bankruptcy statute also provides numerous defenses to a preference claim that can often substantially reduce or eliminate liability that would otherwise arise if the defenses are not timely asserted.   I will discuss defenses in another post!  Stay tuned.

MAZURKRAEMER represents debtors and creditors in bankruptcy courts all over the country. The information, comments and links posted on this blog do not constitute legal advice. No attorney-client relationship has been or will be formed by any communication(s) to, from or with the blog and/or the blogger. For legal advice, contact an attorney at MAZURKRAEMER or an attorney actively practicing in your jurisdiction.