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Bankruptcy Outline Spring 2012

Bankruptcy Outline Spring 2012

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1
Bankruptcy - Spring 2012Prof. Taggart
 
Chapter 1: Introduction to Debt Collection and Bankruptcy A.
 
Difference between State Law Remedies & Bankruptcy1.
 
State Law (Individual Action)
a.
 
 A person seeks a judgment to enforce payment of an outstanding debt.
 b.
 
This results in a race to the courthouse to get the judgment recorded against the defaultingparty. This is the opposite of bankruptcy because it entails an individual pursuit of limited assets
 
2.
 
Bankruptcy Law (Collective Action)
 
a.
 
 Automatic Stay
When someone files for bankruptcy, an automatic stay prevents the recording of any further judgments against the debtor.
b.
 
Unsecured v. Secured Creditors
bankruptcy system has a method for dealing differently with theclaims of secured and unsecured creditors.
B.
 
 
Collection Outside of Bankruptcy1. Non-Judicial Collectiona.
 
Secured vs. Unsecured Creditors
i.
 
Secured Creditors
a creditor that in exchange for lending $$ to debtor has received a (i.e.collateral) to secure repayment. The personal obligation of the debtor to pay the debt isreinforced by a right
in rem 
acquired by the creditor in certain property of the debtor.1.
 
Debt can become secured by a contractual agreement, statutory lien, or judgmentlien. [Contractual agreements secured by a Purchase Money Security Interest (PMSI)loan
 –
where creditor takes security interest in the items purchased (e.g. car,furniture, electronics)]2.
 
Most commonly, the debt is satisfied by the sale of property to satisfy the debt or bythe creditor taking the property and keep it in full settlement of the debt.3.
 
Secured creditors can sometimes be secured and unsecured. How? If you are asecured creditor and the security interest you have is less than the total amount thedebtor owes you, you have both a secured and unsecured claim. A secured creditoris a secured creditor only to the amount of the debt or to the amount of the collateral,whichever is lower.4.
 
If the creditor holds a lien on property in which the estate has an interest or if thecreditor has a right of setoff against the debtor.a.
 
Lien should be RECORDED in the recorder of deeds office.b.
 
Title search at Records office should reveal the lien.c.
 
Lien gives the creditor priority over unsecured creditor w/r/t the amount owedto the creditor up to the amount of the lien.5.
 
Secured creditors can ―foreclose‖ if debtor defaults by bringing a judicial action to
foreclose on the collaterala.
 
Sometimes call
ed ―replevin‖ or ―claim and delivery‖ 
 b.
 
Creditor seeks judgment for amount allegedly due, an order to compel debtorto turn over the collateral to sheriff, and an order to have the collateral sold & turned over.c.
 
Sometimes the debtor will hide the collateral once they are sued by creditor[especially true for a car/something moveable] so creditor needs remedy priorto judgment so that he can secure the collateral6.
 
UCC § 9-609(a)(1): Secured party may repossess w/out judicial process so long asthey proceed without breach of the peace (2 factors):a.
 
Whether creditor entered debtor‘s premises (if so, likelihood of breach goes
up substantially);b.
 
Whether debtor, or someone acting on behalf of debtor, either consented orobjectedi.
 
Consented to entry and repossession = no breach
 
2
ii.
 
Contemporaneous consent required (i.e. not just purported
 ―consent‖ in original loan documents) –
bc policy concern is toavoid immediate violence1.
 
Deciet or trickery in procuring consent likely negatesconsent2.
 
Objected to entry and repossession = breachc.
 
Creditor could be liable for conversion if debtor‘s personal effects are taken
 d.
 
Situations where breach of peace will likely be found = repossession took 
place in restricted area (e.g. debtor‘s home, closed garage, behind locked
fence, etc).e.
 
Situations where breach will NOT likely be found = repossession is from anopen area (e.g. street, driveway, open garage, parking lot) and no objectionis raisedf.
 
Liability for breach of peace in repossessing: 
Tort liability, Criminal penalties,Statutory liability under UCC § 9-625, a possible loss of deficiency judgment.7.
 
Secured Prioritiesa.
 
General Priority Rule: First person to get a Security interest has priority overanyone else.
First to file rule.
 i.
 
Exceptions: PMSI gets priority.1.
 
If 3 perfected liens of $500 on a $900 collateral...a.
 
Lien 1
 –
Recorded 1.1.11b.
 
Lien 2
 –
Recorded 2.1.11c.
 
Lien 3
 –
Recorded 3.1.112.
 
Foreclosure Outcome:a.
 
Lien 1
 –
Collects full $500b.
 
Lien 2
 –
Collects $400, $100 general unsecured claim.c.
 
Lien 3 -- $500 general unsecured claim.
b.
 
Outside Bankruptcy Priority Order: 
i.
 
Perfected property interests: judicial liens, mortgage, securityinterests.ii.
 
Unperfected security interestsiii.
 
General unsecured creditors.iv.
 
Last tier
 –
Shareholders, equity, debtor.
c.
 
Inside Bankruptcy Priority Order: 
i.
 
Perfected property interests: judicial liens, mortgage, SIsii.
 
 Administrative expenses (attorney/trustee fees) get paid after theperfected secured creditors.1.
 
 Administrative Expense Priority:2.
 
Ex: C works as a P/T guard for D. D owes $100 to C at thetime of filing. C continues to work after the filing, but that$100 is not an administrative expense.iii.
 
General unsecured creditorsiv.
 
Shareholders, equity, debtor.ii.
 
Unsecured Creditors
 –
a creditor that has received no security for his debts (e.g. credit cards)1.
 
How do unsecured creditors collect on debts?a.
 
File complaint; get judgment in court; Seize and convert assets; Attach assets to judgment [i.e. create a lien valid against debtor]b.
 
Record the lien [in courthouse of county where debtor owns property]c.
 
Perfection
 –
makes lien binding on 3rd parties (ahead of their claims)i.
 
2 forms of perfection1.
 
Taking possession of tangible assets2.
 
Filing in a designated public office of a notice of a securedtransaction. Usually a financing statement. This notice is notinformative-
 ―notice filing‖ –
contains only name of debtor and SC
 
3
and indicates collateral. The burden is on the 3rd party todetermine the nature of the transaction. (intangibles).ii.
 
2 effects of perfection:1.
 
W/R/T Real Property: It gives the unsecured an automatic lien onall property the debtor owns in that jurisdiction.2.
 
W/R/T Personal Property: The clerk must issue a writ that must belevied by the sheriff.[The money then waterfalls: Administrative costs (Court/Sheriff)
 Creditor
Any money left over goes back to the debtor.]
b.
 
Tort Law
i.
 
Potential causes of action for outrageous collection practices: invasion of privacy, intentionalinfliction of emotional distress, defamation, assault, battery, interference with contractualrelations, malicious prosecution of criminal or civil proceedings, conversion, fraudii.
 
To recover in tort, debtor must show creditor‘s conduct is ―extreme‖ or ―outrageous‖ 
 iii.
 
Problem with tort law: creditor has legitimate interest and are thus given a lot of leeway(hard to prevail for plaintiff debtor)
c.
 
Fair Debt Collection Practices Act
 –
FDCPA
i.
 
Scope of coverage -
 Applies to ―debt collector‖ attempting to collect a ―debt‖ 
 1.
 
 ―Debt collector‖ = those in debt collection business
 a.
 
In any business, the principle purpose of which is collection of any debtsb.
 
Or one who regularly attempts to collect, directly or indirectly, debtsowed/due to anotherc.
 
Does not apply to creditor who is attempting to collect its own debt2.
 
 ―Debt‖ 
 a.
 
Debtor must be a consumer (natural person)b.
 
Debt must be a consumer debt (i.e. for personal/family/household purposes)c.
 
Does not apply to corporate/partnership/business debtsii.
 
 Violations of FDCPA1.
 
Communication w/
third parties and to acquire ―location information‖ 
 a.
 
Can‘t call consumer‘s place of work if employer proh
ibits communicationb.
 
Can‘ 
t communicate about debt w/
third person without debtor‘s prior consent
 2.
 
Harassment, oppression, or abuse in connection with collection of debt3.
 
Prohibits use of false, deceptive, or misleading representations or meansa.
 
Can‘t contact
at inconvenient time (before 8am, after 9pm
 –
presumption)4.
 
Use of unfair or unconscionable means to collect debt5.
 
Requires debt collector to give consumer detailed information regarding debta.
 
Must send written ―validation notice‖ within 5 days of initial com
municationb.
 
Give debtor 30 days to dispute and obtain verification6.
 
Debtor has ability to terminate any further communication if notifies debt collector inwriting that he refuses to pay or that he wishes to stop communicationiii.
 
 ―Bona Fide Error‖ Defense
 1.
 
Debt collector protected from liability if:a.
 
 Violation was not intentional, andb.
 
Happened because of a ―bona fide error‖ notwithstanding maintenance of 
procedures reasonably adapted to prevent such an erroriv.
 
Remedies under FDCPA1.
 
Civil liability: actual + statutory damages + costs/attorneys fees2.
 
 Administrative enforcement by FTC: injunctive relief or cease & desist
2. Judicial Collection
 –
creditor invokes power of state to collecta.
 
Postjudment remedies: Enforcement of Money Judgments
i.
 
Introduction1.
 
Priority dispute 
 
 –
arises when 2 or more non-
debtors assert a claim against debtor‘s
scarce assets [
―first in time, first in right‖ 
-- 
first to obtain enforceable claim (lien)usually prevails in priority dispute]

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