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Debtor/creditor payment process is best viewed as a constant balancing ± a weighing and leveraging system. The debtor weighs which bills to pay, not pay, or sue. The creditor weighs which bills to collect on, whether he should threaten to sue, whether to stop furnishing credit or stop supplying it in the future, or whether to file a bad credit report. 2. Secured creditors have much more leverage in the collateral ± it provides a mode of leverage, control over the security interest, and a way to prevent total loss on the credit transaction. ii. Indirect Leveraging in the legal system 1. Creditor can always sue, but the process is expensive and fraught with possibility of mistake. 2. Government occasionally shifts leverage of parties in debt collection: a. Cal. Statute that authorizes a temporary restraining order to be issued to close down any company that twice in ten years either violates the duties to pay its employees or fails to satisfy an employee¶s judgment for nonpayment of wages. Cal. Labor Code §243. iii. The credit information process ± system set up among creditors to track risk of debtors. 1. Services are usually privately owned reporting companies. They charge creditors an annual or per-use fee. The report keeps track of number of credit accounts debtor has, delinquency in repayment, and more. 2. Fair Credit Reporting Act (FCRA) has two themes: a. Giving the debtor access to the credit report information, AND b. Prescribing procedures to ensure the accuracy of the information in the file. b. Restrictions on Nonjudicial Collection i. Usury laws 1. If a creditor charged more than a pre-determined rate of interest, the loan would be deemed usurious, and the interest, and under some statutes the principal itself, would be deemed uncollectible. 2. Generally interest rates are now unregulable. ii. Fair Debt Collection Practices Act (highlights) (p. 15) 1. §803 ± Definitions 2. §804 ± Acquisition of Location Information 3. §805 ± Communication in Connection with Debt Collection 4. §807 ± False or Misleading Representations 5. §808 ± Unfair Practices Post-Judgment Remedies a. Enforcement/Collection of Judgments i. Execution 1. Judgment creates no actual interest and no priority of creditor in debtor¶s property or income; merely makes them a judgment creditor a. Judgment creditor remains an unsecured creditor until ³execution´ 2. Judgment debt is now indisputable between debtor and creditor a. Creditor takes judgment and gets a writ
i. Writ of attachment, writ of execution, writ fi. Fa. Writ is delivered to sheriff who then levies the property by taking physical possession of it, or some other form of ritual action. After levy, the judgment creditor becomes a judicial lien creditor to that property. i. Sheriff will advertise the property for public sale, auction it, remove administrative costs, and distribute proceeds to judicial lien creditors in order of priority. ii. Anything left over will be reimbursed to the debtor.
ii. Turnover orders 1. Turnover statute permits examination of the debtor under oath so that assets can be determined. 2. Once assets are found, debtor can be ordered to produce the property, again under pain of contempt. iii. Other writs 1. Various other writs exist in jurisdictions a. i.e. writ of sequestration that allows seizure of specific property that will then be held. iv. Judgment liens by recordation 1. Process that allows a creditor to obtain a lien on a debtor¶s property quickly and simply, without going through full execution process. a. In most jurisdictions, process is limited to encumbering the debtor¶s real estate. b. Recordation is effective as to the debtor¶s property c. For a nominal fee, creditor effectively ties up the debtor¶s property, often preventing resale or transfer because no purchaser would buy property with a title clouded by an earlier judgment lien. i. Works as pressure to cause debtor to ³voluntarily´ settle debt. v. Dormancy and limitations 1. A judgment that has not been the subject of enforcement efforts for a long period of time faces disability, either through dormancy or expiration 2. Dormancy (usually 1 yr) requires the claim to be revived/renewed in order to act on it. 3. Expiration (usually 10 yrs) of the statute of limitations is terminal for a claim vi. Debt collection by the Federal Government 1. Federal Debt Collection Procedures Act 104 Stat. 993, 28 USC 3001-3308 a. Procedures generally similar to those described in this section for collection of debts under state law. b. BUT, does not apply to enforcement of all judgments in federal courts, only those asserted by the federal government. vii. Family debts 1. Alimony and Child Support are among the most difficult debts to collect. 2. Specialized rules regarding collection of these debts. a. Imprisonment has been retained for failure to make family support payments. b. Child Support Recovery Act of 1992 give ex-spouses more extensive tools to collect support. viii. Voluntary liens
Many creditors make themselves secured creditors by obtaining voluntary liens from their debtors. Written into the agreement, the creditor has a legally enforceable remedy for nonpayment. 2. Generally taken on the property for which the creditor is approving credit, the lienholder may force the sale of the collateral in order to satisfy the outstanding debt of the agreement. 3. Consensual liens restrict the debtor¶s ability to dispose of the collateral, thereby ensuring to some extent its availability to the creditor ix. Statutory liens and trust funds 1. Artisan¶s lien ± a possessory lien on personal property of the debtor. 2. Charging lien ± a lien with respect to the proceeds of a successful litigation. 3. Trust fund statutes ± make the debtor a trustee of certain property for the favored creditors, who, as beneficiaries of the statutory trust, effectively get a priority in that property. x. Collections in other jurisdictions ± state law judgments can be enforced in other jurisdictions because of common law doctrine and the full faith and credit clause of the Constitution, which requires states to recognize the judgments of other states, subject to certain caveats. Priorities among Competing Creditors i. First in time, first in right 1. The first creditor to levy on a particular piece of property will have the right to be paid in full from the sale proceeds of the property before any other creditor gets anything from the sale. 2. Judgment liens by recordation mark a creditor¶s position with respect to particular property. ii. Unsecured creditor v. unsecured creditor 1. A levy perfects the judgment for an unsecured creditor, so it¶s a race to levy first 2. In most states the race is to delivery of the execution process to the sheriff. iii. Unsecured judgment creditor v. secured creditor 1. The first to perfect wins, but it depends on what qualifies as perfection in a particular jurisdiction iv. Judgment creditors and secured creditors v. buyers 1. If buyer purchases property before the creditor records their security interest in the property, the buyer wins. v. Unsecured judgment creditor and secured party v. the TIB 1. TIB is the ultimate foe of the unsecured judgment creditors because of the powers of avoidance. Garnishment i. Garnishment writ is used to attach property owed to the debtor by another creditor before it gets to the debtor in question. 1. Two parts to a writ of garnishment: a. Set of questions designed to determine whether the garnishee (party served with writ) owes any money to the debtor or has any property belonging to the debtor. b. A command to the garnishee to withhold payment or return of the debtor¶s property until further instruction from the court. ii. Restrictions on Wage Garnishment 1. Consumer Credit Protections Act restricted access of all creditors to the wages of any debtor.
Creates a base floor for protection Federal maximum allowable garnishment a. Whichever is the lesser of (1) 25% of the debtor¶s disposable weekly income, OR (2) the amount by which the disposable income exceeds 30 times the federal minimum wage 4. California maximum garnishment is the same as federal, except that other exemptions may apply. a. Furthermore, debts incurred for provision of common necessaries of life. Reason: we don¶t want to prevent people from obtaining credit to obtain the things they need to live, i.e. groceries, so we allow creditors furnishing those things the ability to still collect, thus ensuring that they will continue to provide the necessary credit. 5. Also, anti-discrimination statutes for garnishments a. 15 USC 1674 ± employee can¶t be discharged by reason of a garnishment for any one indebtedness b. Cal. Labor Code §2029 ± employee can be discharged by reason of a garnishment for a judgment. i. Might be able to fire for multiple garnishments? iii. Creative garnishment ± garnishing use of internet domain names or other weird but valuable things. Pre-Judgment Remedies a. Delicate balance between protecting rights of creditor in cases where property might be destroyed or removed and rights of debtors to due process. b. State statutes typically require (1) a showing of need on part of creditors, and (2) A bond, usually twice the value of the property seized, to provide for damages in case creditor was unlawful or wrong. c. Supreme Court¶s requires that the property can¶t be seized without an order issued by a judicial officer (not clerk) upon a factual showing of need. Once seized, the debtor must be given a prompt hearing. Fraudulent Conveyances and Shielding Debtor¶s assets a. Origins of fraudulent conveyance law i. Twyne¶s Case ± Pierce owes two creditors, the second of whom sues him. He secretly pays Twyne with goods to satisfy his debt but maintains possession of them in order to make money with them. BUT, he then transfers them to second creditor in satisfaction of second debt. b. Uniform Fraudulent Transfers Act i. USE UFTA when bankruptcy is not at issue. If debtor is in bankruptcy, use §548 ii. Insolvent debtor¶s repayment of debt to an insider can be set aside without the need to file an involuntary bankruptcy. iii. Big section is 5(a) which permits a creditor to avoid any transfer made in exchange for an unfairly low consideration at a time when the debtor was insolvent. It includes transfers made when the debtor was innocent of fraud, since ostensibly, the difference between the transfer price and the full value of the property transferred injures the creditor in the amount that they cannot recover from sale at full value. iv. §2 Insolvency 1. A debtor is insolvent if the sum of the debtor¶s debts is greater than all of the debtor¶s assets at a fair valuation 2. A debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.
[partnership insolvency] Assets under this section do not include property that has been transferred with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making it voidable under this Act. v. §4 Transfers Fraudulent as to Present and Future Creditors 1. §4(a) a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer or incurred the obligation: a. (1) with actual intent to hinder, delay or defraud any creditor of the debtor; or b. (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: i. was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or ii. intended to incur, or believed or reasonably should have believed that he would incur debts beyond his ability to pay as they came due. 2. In determining actual intent under (a)(1), consideration may be given, among other factors to whether: (These are Badges of Fraud!) a. The transfer was to an insider b. The debtor retained possession or control of the property transferred after the transfer c. The transfer or obligation was disclosed or concealed d. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit e. The transfer was of substantially all the debtor¶s assets f. The debtor absconded g. The debtor removed or concealed assets h. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred i. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred j. The transfer occurred shortly before or shortly after a substantial debt was incurred; and k. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. vi. §5 Transfers Fraudulent as to Present Creditors 1. A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of that transfer 2. A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.
vii. §6 When transfer is made or obligation is incurred 1. A transfer is made: a. With respect to an asset that is real property when the transfer is so far perfected that a good faith purchaser of the asset from the debtor against whom applicable law permits the transfer to be perfected cannot acquire an interest in the asset that is superior to the interest of the transferee; AND b. With respect to non real property, when the transfer is so far perfected that a creditor on a simple contract cannot acquire a judicial lien otherwise that under this Act that is superior to the interest of the transferee 2. If applicable law permits the transfer to be perfected as provided in paragraph (1) and the transfer is not so perfected before the commencement of an action for relief, the transfer is deemed made immediately before the commencement of the action. viii. §7 Remedies of creditors ± creditors can avoid the transfer or have a remedy against the transferee, subject to the defenses below. ix. §8 Defenses of a transferee 1. (a) a transfer or obligation is not voidable under §4(a)(1) against a person who took in good faith and for a reasonably equivalent value, or against any subsequent transferee. 2. (b) to extent transfer is voidable the creditor may recover the judgment for the value of the asset transferred against: a. (1) the first transferee of thee asset or the person for whose benefit the transfer was made; OR b. (2) any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee. (Some value, doesn¶t have to be ³reasonably equivalent´ value). Bankruptcy in general 1. 2. Is the filing of the petition voluntary or involuntary? a. If voluntary, what are the debtor¶s goals is filing the bankruptcy? b. If involuntary, the debtor can only be forced into C11 or C7. What type of bankruptcy best suits the debtor? a. Liquidation (C7) i. Upon filing the petition, the estate is created. The Trustee in Bankruptcy (TIB) collects non-exempt assets and sells them in order to distribute proceeds pro rata to the creditors. ii. Benefit to debtor is that debtor is able to achieve a quicker discharge of pre-existing debts. iii. Creditors may be able to receive faster payment, but risk receiving nothing if debtor has no non-exempt assets. iv. Achieves two classic goals of bankruptcy: 1. Distribution of debtor¶s assets for the benefit of all creditors, AND 2. A ³fresh start´ for the debtor. b. Payout plan (C13 for consumers) or Reorganization (C11 for businesses or few consumers) i. Here, estate is retained by the debtor who proposes a plan with which to pay creditors over a period of time with future income. ii. Allows debtor to keep possession of assets and allows creditors a potential higher payout. Often, debtors have ³no asset´ cases in C7, and these chapters allow for at least some return to creditors. Definitions important to bankruptcies. §101
§101(5) ± the term ³claim´ means ± i. (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; OR ii. (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. b. §101(54) ± The term ³transfer´ means ± i. (A) the creation of a lien; ii. (B) the retention of title as a security interest iii. (C) the foreclosure of a debtor¶s equity of redemption; or iv. (D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property or (ii) an interest in property. Bankruptcy Procedure A. First, a petition for bankruptcy is filed. a. It is the basic request for bankruptcy relief, along with key certifications, including a requirement that all the information contained is true, signed by petitioner under penalty of perjury. b. Petition is accompanied by schedules in which the debtor must list important financial information. Filing fee is $299, but if debtor is below 150% of the poverty line, they can qualify for fee waiver. B. At the instant the petition is filed, the bankruptcy estate is created. a. This creates an automatic stay against creditors on all collection actions against the debtor, the debtor¶s property, and the property of the estate. b. Freezes all assets of the estate for analysis by the Trustee in Bankruptcy, usually an attorney. C. The estate a. Property of the estate i. At the moment a bankruptcy petition is filed, an ³estate´ is created by operation of law. All the debtor¶s property then becomes ³property of the estate,´ governed by §541. It generally includes all interests of value to the estate, legal or equitable, with some exceptions. ii. Most important exception to property of the estate is for ³services performed by an individual debtor after the commencement of the case.´ §541(a)(6). But what about expectancies at varying levels of realization that must be allocated to either futures or the estate? 1. Sharp v. Dery ± debtor received employee bonus which was based on performance from 1/1 to 12/31. Court found that bonus was conditional on employment at time of bonus, satisfactory job performance, and employer discretion. Therefore, debtor did not have ³right´ to the bonus at time of filing petition. Not property of the estate. iii. Disputes about inclusion of expectancies divide into three categories: 1. Legal interests that are not enforceable at date of filing but may be enforceable at future time (a) In re Orkin ± retirement plan was cancellable by debtor for some value, and therefore was part of the estate. Basically shows that if there is any way for the debtor to obtain the benefit of the retirement plan early, it becomes property of the estate. 2. Entitlements, such as permits and licenses that are nontransferable, which may or may not be property (a) In re Burgess ± brothel license was property of the estate. 3. Problems with restrictions on transferability imposed by contract or law (a) Restrictions are not generally favored in bankruptcy and §541(c)(1) makes most of them unenforceable. iv. Two part inquiry as to property of the estate: 1. If property is excluded from the estate, the debtor keeps it.
If the property is part of the estate, but exempt from creditor attachment, the debtor keeps it.
The trustee i. TIB has a special obligation to unsecured, general creditors and therefore is especially charged with scrutinizing the debtor¶s reports to discover any wrongdoing that might result in a failure to get a discharge or to locate any concealed property. ii. Usually appointed by the US Trustee¶s office from potential pool of trustees in locality. c. Problems that show application (p. 130) i. 5.1 ± Which assets are property of the estate? 1. All property of the estate: parakeet, car subject to security interest, photographs, U2 tickets, household items, shares of stock, oil interest, baseball cards, agreement with brother as to catcher¶s mitt (he has power to retrieve mitt), his paycheck for the month prior received hours after filing (property of estate because he has equitable power to force payment) 2. Not property of estate: bank account for his niece on which he is trustee (no benefit to him possible), and retirement accoutm, which he has no ability to draw on until he retires. ii. 5.2 ± the lottery ticket is arguably property of the estate, and the proceeds from it become property of the estate as well, even though it was not worth anything until after filing of petition iii. 5.4 ± Client¶s trust payments prior to filing are property of estate if still available, but payments after are not. Corpus of trust may become property of estate if mother dies w/in 180 days of filing. Client can either file bankruptcy and hope mother lasts 180 days or wait to file and hope creditors will be patient. D. The automatic stay a. §362(a) details the prohibitions of the stay, §362(b) provides the exceptions that permit certain types of actions against the debtor to continue. i. Andrews University v. Merchant ± school can¶t withhold transcripts during stay, but educational loan debts are non-dischargeable. ii. Nissan Motor Acceptance Corp. v. Baker ± Nissan¶s attempt to repossess the car in violation of the stay caused them to have to pay $30k in damages, but had they petitioned for relief from stay, the court probably would have granted it. b. Preliminary procedures i. Along with voluntary bankruptcy petition, debtor must file schedules which include detailed lists of debts, assets, income, and expenses. (see pg. 137 of book) 1. Must also provide a complete list of creditors and contact information and what property they claim as exempt. 2. They must provide proof that they attended a debt counseling session. §109(h), §521(b) 3. Debtor must file with court pay stubs from two months before filing, statement of monthly income and an explanation of how it was calculated, anticipated increases in income in next 12 months, and past tax returns. §521 ii. Failure to list a debt may make it nondischargeable. §523(a)(3) iii. False statements in the petition may make result in denial of petition. §727(a)(4) c. Problems (pg. 138) i. 6.1 Joe will not get his most recent paycheck due tomorrow because it was earned prior to the stay. Garnishment on future checks should fall within the stay. The landlord cannot evict him yet because LL hasn¶t filed UD. 1. Wage garnishment and dunning letters fall within stay. So does the property attempted to be repossessed. So does check issue unless it is a criminal prosecution. Alimony/family support can still be garnished. 2. §366 deals with utility service ± provider cannot interrupt services for debts owed prior to filing, but if after 20 days from notice of date of order for
relief, debtor hasn¶t made adequate assurance of payment, service can be changed. ii. 6.2 Client would need to file a list of creditors and all other documents mentioned above. 1. Value of car should be inquired about because of §707(b)(4)(C), (D) ± requires an attorney to perform reasonable investigation as to ³circumstances that gave rise to the petition,´ and ³determined that it is well grounded in fact.´ = this is a LOW standard. (D) requires that atty sign petition stating that they have no knowledge that info is incorrect. Chapter 7 Liquidation E. Introduction a. TIB is appointed to gather all the debtor¶s property, sell it, and distribute the proceeds to creditors. i. TIB duties - §704 b. Distribution process is governed by §726. TIB must take into account interests owned by other parties with ownership stakes in the property of the estate. They must also take into account exemptions on property that prevent certain things from becoming property of the estate. F. Eligibility a. In re Shaw ± debtors had a substantial amount of disposable income with which to pay off creditors. Court finds that debtors should proceed under payment plan because to grant liquidation would be an abuse of the bankruptcy system. i. Fourth Cir. Test for ³substantial abuse´ is a totality of circumstances test, which includes debtor¶s ability to repay the debt, consideration of future income to future necessary expenses, as well as reasonableness of the debtor¶s schedules and proposed budget. b. Presumption of abuse. §707(b) ± ³means testing´ i. Means test is set up to determine whether you have too much monthly income to qualify for a C7 liquidation. ii. First, Court compares debtor¶s average income for the 6 months prior to filing with the median income for the state in which the debtor resides. 1. If income is less than median, ³presumption does not arise´ and debtor proceeds in C7. The debtor¶s expenses are evaluated under the ³reasonably necessary´ standard, that often depends on what the judge finds that term to mean. (a) BUT, court can still find abuse notwithstanding means test. 2. If the income exceeds the median, the debtor must go through means testing. iii. Process tallies up all your income and subtracts your ³reasonable and necessary´ expenses. These include: 1. National standards for food, clothing, and other items 2. National standards for health care 3. Local standards for housing and utilities (non-mortgage) 4. Local standards for housing and utilities (mortgage/rent) 5. Local standards for utilities ± adjustments 6. Local standards for transportation 7. Expenses of involuntary deductions, taxes, insurance, childcare, healthcare, telecommunications, educational expenses for disabled dependants. 8. Additional allowable deductions: charitable contributions, private school, etc. iv. Next, process subtracts your calculated monthly payments towards secured creditors for the five year period following filing (this would be the C13 plan payments) v. Finally, process compares you leftover ³disposable income´ with numbers fixed in §707(b)(2)(A)(i) c. Plain English means testing:
i. Abuse is presumed if the general unsecured nonpriorty debt is greater than $26,300 AND the surplus income is at least $1175 or 25% of the debt OR if the debt is $26300 or less and the surplus is at least $6575 d. Problems with means testing include that it may not accurately reflect a debtor¶s current financial situation or that it might incentivize assuming more secured debt to raise a debtor¶s obligated payments to secured creditors so that they have less disposable income with which to fail the means test. i. 7.1 ± qualification for means testing depended on whether mother could claim child as a dependent living in her house. If she has a larger family, she would qualify for a greater exemption, thereby allowing her to file C7. ii. Prob. 7.3 (pg. 166) ± skateboarder drives an old clunker but would benefit from assuming a new security-based car loan in order to qualify for C7 to liquidate his medical expenses. 1. Attorney can¶t advise fraud in bankruptcy, but can freely discuss a debtor¶s choices and the repercussions those choices might have. G. Exemptions a. When property is defined as ³exempt´ under state law, general creditors cannot seize it to satisfy their judgments. BUT, consensual agreements like mortgages on homes or security interests in property are not so constrained. b. All property listed as ³non-exempt´ or not listed explicitly as ³exempt´ will be sold by the trustee so that the proceeds can be distributed. Often the unsecured creditors¶ last chance to get paid. c. The State/Federal system i. All states have exemption laws, although the amount of protection varies drastically. Once a debtor files for bankruptcy, federal law preempts state collection efforts with the automatic stay, but then the question of what property is exempt arises. ii. The modernization of bankruptcy laws in 1978 created a federal exemptions scheme, but also gave states the choice of opting out of them. States that opted out require their debtors to use their exemption laws during bankruptcy. States that did not, allow the debtor to choose between state and federal provisions. 1. Texas ± provides an unlimited homestead exemption and $30k in other property, but no provision for cash. Federal homestead exemption is only $21625 with only around $19k for other property, BUT includes a wildcard $1150 that could apply to cash. 2. Wyoming ± opposite side of spectrum: provide almost no exemption. Homestead is paltry $20k for married homeowners 3. California ± has unique ³in lieu´ provision ± if you rent in CA, use ³in lieu´ exemptions, if you own, use the standard section. d. Classification of property i. Because exemptions statutes are often written to exempt only listed types of property, disputes often arise as to whether particular property is within the definition of the exemption. 1. In re Johnson ± issue as to whether a moped is a motor vehicle. Court granted broader inclusion. 2. In re Hall ± tractor lawnmower was NOT household furniture. 3. In re Pizzi ± lottery winnings, though perhaps annuity, were property of the estate. Debtor should not be able to take loans against her future winnings only to file C7 and avoid repayment of the loans w/o using winnings. ii. Really seems to depend on what type of bankruptcy judge you get. e. Valuation of exempt property i. In addition to determining whether property claimed as exempt fits within the allowed categories, it is often necessary to determine whether the property fits within the permitted valuations as well. ii. Federal exemptions define ³value´ as ³FMV as of the date of the filing of the petition or, with respect to property that becomes property of the estate after such date, as of the date property became the estate¶s.´
One court determined FMV to mean liquidation value. Another found it to mean the FMV in the particular market for a reasonable amount of time. 3. In re Grablowsky ± debtor claimed partnerships exempt at $1. Trustee did not contest, but sold them for FMV, from which $1 was paid back to debtor. f. Proceeds and Tracing i. Property is not static ± wages may be deposited into checking accounts, property may be sold, contract obligations may be satisfied. Whenever the form of property changes, it raises issues about proceeds ± that is, issues that focus on the application of an exemption to property that would not meet the classification requirement except that it constitutes proceeds from exempt property. 1. In re Palidora ± contents of bank account were wages and child support, which were exempt. 2. In re Dasher ± debtor cashed out retirement account and bought truck, which trustee then seized and sold. g. Partially exempt property i. If property is exempt, but not to the full value of the property, it is often sold, with the first proceeds going to pay for the sale, then the allocable amount of the exemption to the debtor, then the remainder to the judgment creditors. h. Security interest in exempt property i. When potentially exempt property is encumbered by a security interest valid in bankruptcy, the secured party moves ahead of both the debtor and the TIB. ii. i.e. if a car was secured by creditor for claim greater than the value of the car, the secured party could take the car. The debtor would have no exemption and the TIB would have nothing for distribution. 1. But if the car were worth more than the security interest, the car would be sold, the security interest would go to the lender, and the rest would go towards distribution. i. Avoiding Judicial liens and non-PMSI liens i. §522(f) permits the avoidance of certain kinds of liens on certain categories of exempt property listed therein. 1. Two types of liens are avoidable: judicial liens and nonpossessory nonpurchase money consensual security interests 2. To void the liens, the collateral must be exempt property. To void a consensual security interest on household goods, the property must also be of a kind specified in §522(f)(4) 3. Causes these creditors to be treated like any other general unsecured creditor, entitled only to pro rata treatment of their claim. ii. In general a debtor may avoid all judicial liens on exempt property regardless of the nature of the debt secured by the line or the type of property. §522(f)(4) 1. BUT, domestic support payments are not avoidable. iii. §522(f)(1)(B), which voids certain voluntary security interests was adopted in response to a growing concernt about the use of security interest by companies to prey on the poor. ³Hostage value´ of security interests ensured payment. H. Homesteads, Trusts, and Exemption Planning a. In re Reed ± b. 2005 amendments c. Moving to better exemption i. §522(b)(3) ± applicable exemptions will be wherever the debtor resided for 730 days. 1. It takes two years to take advantage of the local exemptions. If the debtor moved during that time, go back the 180 days that precede the filing and see where the debtor was for the majority of that time. Then apply those exemptions. d. Unlimited exemptions and asset trusts I. Claims and Distributions a. The claims process
i. Ordinarily a creditor will receive a proof of claim form with the notice of the bankruptcy. 1. Must be filed within 90 days of the first meeting of creditors. 2. To receive any distribution, each C7 or C13 creditor must submit a proof of claim. ii. A claim is allowed unless a party in interest makes an objection. §502(a). If a party objects, the dispute is resolved as a ³contested matter´ under rule 9014 Disputed claims i. In some instances a TIB might object to paying certain creditors. Most often the trustee argues that there was no valid debt under state law or that the amount of the debt was lower than claimed. Unsecured Claims i. The claim 1. §501 lays out the procedure for filing a claim. §502 explains the mechanics of calculating a claim. 2. Unsecured creditors have an allowed unsecured claim equal to the amount of the debt and interest accrued up to time of filing as per the agreement. (a) Unsecured creditors do not get post-petition interest, even if an unsecured creditor attempts to argue that the interest was owing before bankruptcy but ³unmatured.´ ii. Accelerated claims 1. Though most debts are obvious, undisputed obligation, some, like looming tort suits may be accelerated, in order to estimate the obligation. 2. Often, this falls to the bankruptcy judge. Secured Claims i. The claim 1. §506 provides that a secured creditor¶s claim is allowable up to the value of its collateral. (a) If the claim is less than equal to the value of the collateral, the entire claim is secured. (b) If the claim is greater than the value of the collateral then the creditor is undersecured. The remaining amount of their claim is severed to become an allowed unsecured claim and they are put in the general unsecured creditors for payment as to that amount. 2. If the claim is less than the value of the collateral, then the fully-secured creditor has a larger claim for post-petition interest, up to the actual value of the collateral. 3. Rash ± under §506(a), the value of property retained because the debtor has exercised the §1325(a)(5)(B) cramdown option is the cost the debtor would incur to obtain a like asset for the same ³proposed use´ 4. §506, via §1325 hanging language, does NOT apply when a vehicle is for ³personal´ use and acquired within the 910 days preceding the date of filing. ii. Interest 1. Secured creditors may be eligible to receive post-petition interest on their claims if the value of the collateral exceeds the amount of their pre-petition claim. iii. Attorney¶s fees 1. Both secured and unsecured creditors are allowed attorney¶s fees prepetition if allowed under their agreement 2. But, only secured creditors are allowed to claim post-petition attorney¶s fees, and only if the agreement allows for it and the value of the collateral exceeds the pre-petition claim. iv. Exemptions
Unavoidable consensual security interests trump exemption claims, so a debtor may claim only an exemption in the ³equity´ value remaining after the claim has been paid in full. v. Post-petition claims 1. A claim to an expense incurred through administration of the estate, postpetition is entitled to priority treatment over others. e. Distributions i. Priority among unsecured creditors 1. After the secured creditors have been satisfied by the sale of their collateral, the unsecured or undersecured creditors begin the process of dividing the remaining assets. 2. §507 determines the order and amount of the payout to unsecured creditors. (a) Domestic obligations (b) Administrative expenses as defined in §503(b) (c) Unsecured claims allowed under §502(f) (d) Allowed unsecured claims for wages/salaries due to employees, contracted workers, etc. (e) Contributions to an employee benefit plan (f) Grain producers/fishermen¶s claims (g) Security deposits for real or personal property (h) Government claims for taxes i. Special catch here on tax priority ± includes taxes for which a return is last due after three years before the date of the filing of the petition. This pulls in the tax year that may have ended before the filing of the petition but whose return was not due until within the three years prior to the filing of the petition. (i) Claims based on commitment to federal depository institutions (j) Claims for death or personal injury from drunk driving. 3. §726 Distribution of property of the estate. (adds additional priorities which follow priorities of §507) Discharge (§727) a. At the moment of discharge, §362 automatic stay injunction dissolves and the §524 discharge injunction begins, which prohibits any attempt to collect a dischargeable debt. i. §524(f) - ³Nothing contained in subsection (c) or (d) prevents a debtor from voluntarily repaying the debt. b. Exceptions to discharge i. The debtor is not entitled to a discharge as a matter of right, but the discharge will be granted unless it is challenged by the trustee or a creditor. ii. Trustee or creditor may object to a discharge to a particular debt under §523 or all debts under §727 1. §523 ± rifle-shot ± single debt becomes nondischargeable (a) 19 categories of nondischargeable debts ± includes debts obtained by lying on a credit application, fraud by fiduciary, alimony, drunk driving judgments, most student debt. (b) This does not prevent the automatic stay from applying to the creditors with nondischargeable debts, but does except them from the discharge injunction. See §362 (c) A single debt is not dischargeable under §523(a)(2) for money, property, services, or an extension, renewal or refinancing of credit to the extent obtained by: i. False pretenses, false reps, or fraud, other than a statement respecting the debtor¶s financial condition, ii. Use of a statement in writing (i) that is materially false, (ii) respecting the debtor¶s financial condition, (iii) on
which the creditor to whom the debtor is liable reasonably relied, and (iv) that the debtor made with intent to deceive iii. FOR false pretenses option: consumer debts owed to a single creditor and aggregating more than $600 for luxury goods w/in 90 days or $875 cash advances w/in 70 days of petition are PRESUMED to be nondischargeable. iv. (This is a bursting bubble presumption- once challenged by debtor, objector has to prove it) 2. §727 ± global denial of discharge ± leaves debtor with no option to avoid debt other than repayment (a) 12 ways to lose your C7 discharge: corporations can¶t get discharges, debtors who have lied or falsified documents, failure to complete certain requirements. 3. Objections may open up tough questions for challengers. If they have a strong argument for a §523 debt, then the creditor would get much higher payment because the debt would survive the bankruptcy. (a) BUT, if they challenge under §727 they prevent the discharge of all debts, which might put them in a worse position than they were in, since all the creditors would now pursue their full claims. iii. Examples from problems: 1. Does client face problems for not keeping his records? Potentially under §727(a)(3) which denies discharge if the debtor doesn¶t keep sufficient records, destroys his records, etc. (a) BUT, if the act or failure to act was justified under all the circumstances, it might not be a problem. He did move a lot. 2. Challenger has potential objections under both discharge sections. BUT, she can¶t file them seriatim, and her global objection is a stronger argument. If she files the weaker one only, she doesn¶t have to tell other creditors about it but she might not win. If she files the global objection, she might win but she would open up all other creditors. If she files both, the court might not dismiss either, causing the same situation as if she filed only the stronger. 3. The consumer debt §523(a)(2) exception may be brought by credit card alleging use of the card was knowing fraud, even if the goods purchased were not luxury items. c. Tax priorities and discharge i. The kinds of taxes specified in §507(a)(8) for priority are exempted from discharge; they must be paid. 1. Post-petition interest accrues on non-paid portions of tax debts 2. Penalties are nondischargeable even though they do not get priority. The penalty is dischargeable only if the tax itself is. 3. AND, IRS can satisfy debts by seizing otherwise exempt property. ii. Pre-petition interest on priority claims also enjoy nondischargeable status. 1. Post-petition interest does not accrue on the unsecured tax claims against the TIB or the property of the estate d. No discharge ± bankruptcy crimes i. Acts that trigger denial of discharge may also be bankruptcy crimes. ii. Krikava ± lie about selling hogs to buy feed for other starving ones got man 5 mos. iii. Cluck ± lying and hiding transfers from his TIB landed him in jail. ³circumstances altogether inconclusive, if separately considered, by their number and joint operation,.. may be sufficient proof.´ K. Post-Bankruptcy a. Reaffirmation of secured debt i. Debts are discharged, but liens are not. §506(d). Secured debt remains attached to its collateral and can be enforced against the collateral after bankruptcy, even though the debtor can¶t be sued for the deficiency. ii. Creditor can still seize collateral.
iii. §521(a)(2) requires debtor to file statement with court as to plans for collateral. iv. Debtor has three options, two from statute, one from common law: 1. Redeem the collateral (§722) ± requires the debtor to pay the creditor the full loan or the full value of the collateral in cash, whichever is less. 2. Negotiate a reaffirmation agreement (§524(c)) ± requires the creditor willing to agree to let the debtor keep the collateral in return for a promise to repay that will survive the bankruptcy. (a) Debtor may want this option if they have property that they rely on, i.e. a car, and they are willing to continue the relationship with the creditor. Creditor cannot be forced into reaffirmation. (b) §524(m) provides for a presumption of undue hardship which will cause court to disallow reaffirmation agreement if the debtor¶s monthly income is less that the debtor¶s monthly expenses as shown on debtor¶s signed statement in §524(k)(6)(A). i. Atty. Has to sign reaffirmation agreement. ii. Problem where man wants to sell family home to reaffirm his motorcycle is example of one that I would not sign. 3. ³Ride-through´ ± the debtor, not in default at filing, continues to pay the creditor and the creditor goes about their business because debtor is paid up. (a) Debtor either pays off the loan or loses collateral to repossession later. Reaffirmation of unsecured debt i. Obviously, secured creditors have more power to get reaffirmations than unsecured creditors, but sometimes there are reasons for a debtor to reaffirm unsecured debt: 1. Protection of co-debtors 2. Continued business relationship, continuation of services, etc. Nondiscrimination - §525 prevents discrimination based on past bankruptcies, but more debtors have lost than won. How often can you file a C7? i. 8 years from filing of past C7 ii. 6 years from filing of past C13 iii. Bankruptcy stays on your credit record for 10 years.
Chapter 13 Adjustment of Debts L. Elements of an acceptable plan a. C13 focuses on future earnings and long-term repayment of debts instead of liquidation and fast discharge. i. The debtor keeps all the assets, regardless of whether the assets exceed the exemption levels, but in turn agrees to pay a portion of future income for a minimum of three years. 1. Only the debtor may instigate the filing in C13 2. Commencement of the case creates the estate, which includes all legal and equitable interests of the debtor in property at time of petition (§541) and property and earnings acquired after commencement but before close of case (§1306(a)). 3. Automatic stay kicks in (§362) and prevents creditor action. ii. Debtor works with creditors to approve a plan for repayment. 1. §1322 and §1325 provide what must be included in the plan, and §1322(a)(2) gives debtor power to use plan to modify creditors rights. 2. §1322 is divided into ³Shall´ and ³May´ (a) Requires certain minimum qualities of plan (b) Allows for modification of secured creditor¶s rights, except property that is principal residence. iii. The TIB takes a portion of future income, deducts administration expenses, and then distributes the remainder to the creditors according to the court approved plan.
Focus of TIB is not on protection of the assets of the debtor, but on getting the plan confirmed and making sure that the creditors are paid. 2. TIB is expected to recommend confirmation or denial of the plan. §1302(b)(2)(B) and objecting to improper creditor claims. iv. Garnishments under C13 are made under federal law, so state garnishment statutes do not apply. v. When the debtor has completed the plan, the remaining debts are discharged. Payments to secured creditors i. One of the most common reasons to go C13 is a debtor¶s desire to keep property that subject to a security interest. ii. The general rule about required payments to secured creditors is that they must be paid their allowed secured claim in full and they must be paid interest on that claim. iii. Courts must solve two separate but related issues when a secured creditor wants to repossess and sell the collateral: ³Adequate protection´ and ³adequate payment´ iv. Adequate protection (defined in §361) 1. Because debtor keeps possession in C13, creditor is naturally worried that the value of the collateral will either decline over time or become damaged or worthless due to neglect or accident, or worse, intentional destruction. 2. §361 ± when adequate protection is required, such adequate protection can be provided by: (a) Requiring the trustee to make cash payment or periodic cash payments to such entity, to the extent that the stay under §362 results in a decrease in the value of the property. (b) OR, by providing to a secured creditor an additional or replacement lien to the extent that the stay causes decrease in value of the property. 3. §362(d) allows a party in interest (creditor), after notice and hearing, to ask for relief from the stay for inadequate protection. Court can change or deny plan for this reason. (a) Adequate protection objection can relieve stay when the debtor does not have an equity in the property and such property is not necessary to an effective reorganization. (b) Adequate protection payments are also in §1325(a)(5)(B)(iii) 4. In re Radden ± although the debtor has no equity in the vehicle, court found it necessary for commuting to work and necessary for success of plan. Also found car adequately protected if insured 5. Problems for examples: (a) If the property is depreciating, the court may require periodic payments to lower the amount of the secured claim in line with the amount of depreciation of the secured property. (b) If the secured property is NOT substantially depreciating, and there is an equity cushion, the court will not require payments because the claim is adequately protected by the secured property (c) Say you have two liens on the same property. If one creditor¶s claim is oversecured by the value of the property and they are the first lienholder, their claim will continue to rise up to the present value of the collateral. This will cause the second creditor¶s security interest to shrink, since they are junior lienholder. They may be able to argue inadequate protection, especially if the collateral is depreciating. v. Adequate payment ± secured creditor is guaranteed ³adequate payment´ 1. §1322(b)(2) allows modification of payment to secured creditor unless the security collateral is the principal residence of the debtor. (a) 2-part computation of value of the collateral.
i. Determine the amount of the allowed secured claim or the value of the allowed secured claim, whichever is less. (§506(a)) ii. Second, determine present value of secured claim (accounting for interest, inflation, etc.) (§1325(a)(5)(B)(ii)) (b) Once allowed secured claim is determined, the payment schedules can be determined to permit the creditor to recover the present value of the claim. i. Present value = ((1-1/(1-i)^n)/i)(a) 1. Where a=dollar amount of installment payment 2. i = a current annual interest rate 3. n = the number of annual payments. (c) Don¶t forget that ADEQUATE PROTECTION may be required under §1325(a)(5)(B)(iii) (d) If the claim is oversecured, i.e. the present value is greater than the allowed claim, then post-petition interest can be accrued. i. Till case says to use prime rate plus a few points. 2. §506(a) bifurcates an undersecured claim into a secured claim equal to the value of the collateral and an unsecured claim for the remainder. (a) §1325(a)(5) (³cramdown´), the debtor can promise to pay the allowed secured claim in full while treating the unsecured portion of the debt like any other unsecured debt. (b) BUT, if the debt is secured by a vehicle granted within the 910 days prior to the bankruptcy petition, cramdown does not apply. §1325(a) flush language. i. BUT, if the vehicle was not acquired for ³personal use´ then §506 might apply. (c) NOR does PMSI debt secured within the year before the bankruptcy. vi. Payments on home mortgages 1. Has always been exempted from the cramdown rules. 2. De-acceleration of home mortgages is not considered a ³modification´ for purposes of §1322(b)(2), which prohibits the modification of home mortgages. (a) Acceleration occurs when a term of the loan provides that upon certain conditions the creditor can ³accelerate´ the mortgage and collect on the entire debt. Under C13, the debtor can ³deaccelerate´ by curing the default and reinstating the original payment schedule. (b) In re Taddeo- gives proposition that de-acceleration is ok. BUT, also says that if foreclosure occurs before the debtor cures the default, it is too late. Payments to unsecured creditors i. Unsecured creditors, with exception of priority claimants who are entitled to full payment under §1322(a)(2), unsecured creditors are pooled together for pro rata treatment. ii. Unsecured creditors can best enhance their collective position by arguing that the debtor should be required to make larger payments under the plan. By forcing larger payments to general unsecured classes, they enlarge their overall, pro rata take. iii. Two ways for unsecured creditors to do this: 1. The ³Best Interests´ test ± requires that each creditor, secured or unsecured, receives at least as much as they would have received if the debtor had gone into C7. §1325(a)(4), (a)(5)(B) 2. Provision that requires debtor to devote all ³disposable income´ to plan payments during the life of thee plan. §1325(b)
ALSO, plan must be proposed in ³good faith and not by any means forbidden by law.´ §1325(a)(3) iv. Disposable income 1. Like the C7 means test, screening for disposable income begins with a median income test. If a debtor passes the median income screen or passes the presumption in the means test, they are below median. 2. Below median debtors (a) Debtors who have incomes below the median income but choose to file C13 are governed by the ³reasonably necessary´ test for disposable income. i. Income less necessary expenses ii. ³reasonably necessary´ turns on judge¶s definition. 3. Above median debtors (a) Two adverse consequences: i. C13 plan must run 5 years instead of minimum 3. §1325(b)(4) ii. Not governed by ³reasonably necessary´ test for expenses, but the surplus is calculated by application of the §707(b)(2) means test. §1325(b)(2)-(3) 4. §1325(b)(2)(A)(ii) allows for charitable deductions from the income prior to determining disposable income. Modification and Dismissal of C13 plans i. §1329 ± Plan can be modified at the request of the debtor, trustee, or creditor, but must still comply with all requirements of an acceptable plan. ii. Problem with 2005 amendments is that it required all above-median debtors to take maximum repayment period, which severely limits the types of modifications the plan can make. iii. What happens if the debtor¶s income changes and they attempt to modify the plan? 1. What if they drop below the median? Do you modify using the means test or not? We don¶t know. Neustadter doesn¶t know either.
Business Bankruptcy M. Involuntary Bankruptcy a. Code permits involuntary bankruptcies in C7 or C11, but for businesses only. §303(b) i. Usually unsecured creditors that bring involuntary bankruptcy proceedings. ii. Secured creditors normally have better agreements worked out as to collateral and therefore dislike the idea of a trustee meddling in bankruptcy. b. §303 Involuntary cases i. Commenced by filing the bankruptcy in C7 or C11 by: 1. Three or more entities, each of which has a claim for at least $14,425 of unsecured, undisputed claim, OR 2. If there are fewer than 12 such holders, by one or more of the holders of unsecured, undisputed claims in aggregate of at least $14,425 ii. What qualifies as separate entities? 1. In re Gibraltor Amusements ± issue of whether the finance company is a separate creditor from the parent company. Look to whether the claims by each creditor are separate and distinct. If so, they may be separate creditors. If not, i.e. if there is subrogation or joint obligation, they aren¶t. iii. §303(h)(1) ± if the petition is not timely controverted, the court shall order relief. Otherwise, after a trial, the court shall order relief if: 1. The debtor is generally not paying such debtor¶s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount, OR 2. w/in 120 days before the date of the filing, a custodian other than a trustee was appointed or took possession
iv. §303(i) ± if the court dismisses a petition under this section other than on consent of all petitioners and the debtor, court can grant judgment: 1. Against petitioners and in favor of debtor for costs, atty¶s fees, or 2. Against any petitioner that filed in bad faith for damages or punitive damages. N. Chapter 11 reorganization a. A business debtor almost never wants to liquidate, since there is no advantage for the company¶s success in liquidation. Corporate liquidations have no exemptions and no discharge from debt. Liquidation = death of the company. b. Debtor in possession ± either the management of the company or some management firm that takes possession to operate the company through the C11 reorganization. c. Heart of a C11 is negotiation. C11 gives the debtor some powerful aids in its negotiations i. The automatic stay and the breathing room it brings ii. The possibility of adopting a plan that will legally bind all creditors, even though a minority reject it. iii. Six months or more, the DIP has exclusive right to propose such a plan. iv. The turnover and avoiding powers, which can greatly augment the assets avaialbe and provide powerful leverage over certain creditors. O. Automatic Stay revisited a. §362 provides 25ish exceptions to the automatic stay i. Include things like 1. Continuation of criminal proceedings against debtor b. Scope of the stay i. Same test applies in C11 as in C13: Secured creditors will be entitled to the present value of their allowed secured claims, which unsecured creditors will be entitled to the present value of what they would have received in C7. §1129(a)(7). c. Lifting the stay i. Most creditors readily acknowledge that the stay applies to them, but they ask the court to lift it under §362. ii. Single Asset Real Estate in C11 1. Congress didn¶t want debtors to be able to ³park´ their real estate in C11. 2. §362(d)(3): debtor has to have a plan that will be confirmed within a reasonable amount of time, OR (a) They have to make monthly payments that are at least equal to the interest accruing on the claim. The interest rate is that rate agreed upon in the original contract for the security interest. (nondefault rate)
P. Operating the business in C11 a. Who¶s in control? b. What happens to the cash? c. Post-petition financing Q. Reshaping the estate a. Strong arm clause (§544) i. §544 Trustee as lien creditor and as successor to certain creditors and purchasers ii. Essentially makes the DIP or TIB a bona fide purchaser of all property of the estate, thereby knocking off any unperfected liens outstanding on the property of the estate. b. §365 Executory contracts and unexpired leases i. The trustee may assume or reject any executor contract or unexpired lease of the debtor. ii. If there has been a default in an executor contract or unexpired lease, the trustee may not assume such contract or lease unless at the time of assumption of such contract or lease, the trustee: 1. Cures or provides adequate assurance that trustee will cure.
Preferences & Fraudulent transfers i. The Code not only gives the TIB or DIP a strong position as a lien creditor or BFP under state law, it also gives them extraordinary powers to dismantle certain transactions that occurred w/in the 90 days prior to the filing. ii. Powers are designed to permit the TIB to review the activities of the debtor as they neared bankruptcy and void preferences and preferential treatment. iii. §547(b) determines what constitutes a preference. (Five requirements) Trustee may avoid any transfer of an interest of the debtor in property: 1. To or for the benefit of a creditor 2. For or on account of an antecedent debt owed by the debtor before such transfer was made 3. Made while the debtor was insolvent 4. Made ± (a) On or w/in 90 days before the date of the filin of the petition; or (b) Between 90 days and a year if such creditor was an insider; AND 5. That enables such creditor to receive more than such creditor would receive if ± (a) The case were a case under C7 (b) The transfer had not been made; AND (c) Such creditor received payment of such debt to the extent provided by the provisions of this title. iv. Certain things do not create preferences under §547(c) 1. ³Contemporaneous exchange´ ± seller or lender should be able to deal with a buyer or borrow without worrying about whether the order in which the transaction took place could create a voidable preference. 2. ³Ordinary course payments´ ± payments which operate during the normal course of the debtor¶s business are not preferences. (a) Debt must be incurred in ordinary course of business, AND either: (b) Transfer was in ordinary course of business, OR (c) Transfer was made according to ordinary business terms 3. ³Purchase money´ ± those transfers that create a security interest in property acquired by the debtor. 4. ³new value´ ± (a) Identify a payment that is preferential under §547(b) (b) See if the avoidable amount of the preference can be reduce by the amount of later-advanced new value that qualifies under (c)(4) (c) Test new value for qualification under ©(4) by determining whether it was accompanied by a payment, which payment itself was unavoidable. 5. Other things in such section. v. Under §547(f), the debtor is presumed to have been insolvent on and ruing the 90 days prior to filing the petition. Fraudulent Transfers in bankruptcy i. TIB may avoid fraudulent transfers in prepetition period either by using state fraudulent transfer law (UFTA) or using §548 1. Differences between two: (a) UFTA has 4 yr. window, §548 has a 2 yr. window. ii. Some notes about avoidability of transfers: 1. Insolvency is a requirement because presumably, a solvent debtor gives their creditors nothing to worry about. (a) BUT, notice that under §457(b)(3) the transfer might not be avoidable even though it MAKES the debtor insolvent 2. If a creditor has a state law judgment and then attempts to execute, the execution is a voidable transfer. The execution might precipitate the bankruptcy filing in order to void that transfer. A Better plan would be to record the state law judgment to establish your position in line.
Transfers to fully secured creditors are not avoidable, but transfers to undersecured creditors are, since it would cause them to get more than they would under C7 4. Say a fire wiped out collateral for a secured claim. If there isn¶t insurance, which would normally be the replacement value that flows to secured creditors, the secured creditor now becomes an unsecured creditor and has to fight for their share. 5. Professor says that ³after-acquired property´ clause is valid in most contexts, but still have to wait to find out ³when´ the transfer occurs. R. Negotiating and Confirming the plan a. Negotiation ± basically a give and take between debtor and creditors to work out a plan that the creditor classes will vote for. b. §1129 Confirmation of the plan i. There are many requirements to the plan. Perhaps the most important of which is that a statutory majority of each class of creditors must vote for the plan in order for it to be confirmed. §1129(a)(8) and §1126 (acceptance of the plan) ii. Other requirements are constraints as to development of the plan. iii. Most of the requirements for confirmation under §1129 relate to acceptance of the plan. Two are flat legal requirements for each individual creditor: (1) ³best interests´ §1129(a)(7) and (2) ³plan must be found feasible´ even if all creditors agree to it. §1129(a)(11) 1. §1129(a)(15) ± the debtor¶s plan must either pay off in full the claims of the secured creditors, or continue paying them the full amount of projected disposable of the debtor over the life of the proposed plan. c. Best Interests of the Creditors §1129(a)(7) i. Like the feasibility test, this objection can be raised by a single creditor. ii. Requires that unless an individual creditor has voted in favor of the plan, the objecting creditor must receive at least as much under the plan as they would have had the debtor proceeded under C7 1. Court must do a liquidation analysis, estimating the amount that could be obtained and then calculating the resulting dividend that would be paid to the objecting creditor. 2. Big issues always involve valuation questions as to what property is worth in liquidation. d. Feasibility §1129(a)(11) i. Goes to the likelihood that the plan will succeed ± that the business will survive at least long enough for the scheduled payments to be made. ii. Test is applied based on a case-by-case basis and reflects the best business judgment of the bankruptcy judge based on testimony from witnesses. 1. Pros: holdout creditors can argue against the blindness/naivete of their fellow creditors, who may not be using the best judgment 2. Cons: if all creditors think the plan will succeed, why stop it from continuing? e. Classification and Voting i. All creditors are sorted into classes for purposes of voting and distribution, with class members being made up of similarly situated creditors. 1. A class shares a similar legal status and pro rata distribution. 2. §1122 Classification of claims or interests (a) A plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to other claims or interest of such class. (b) BUT a plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience. ii. §1126(c) requires a two-part majority vote:
1. Simple majority in number of creditors in the class 2. A 2/3 majority in total amount of debt in the class iii. An unimpaired class is a class that is getting the full value of their allowed claim. Unimpaired classes are presumed to approve the plan because they are unimpaired. iv. At least one impaired class, if there is one, has to approve the plan. §1129(a)(10) v. The debtor has great flexibility in determining how the classes are comprised. This financial gerrymandering is largely acceptable as long as you can justify the way you sorted your classes for a reason other than ³I want to make sure creditor X can¶t prevent my plan from passing´ Cramdown and the Absolute priority rule i. Cramdown 1. Even if a plan satisfies the best interest test of §1129(a)(7) as to every nonaccepting creditor and meets feasibility, it nonetheless must be accepted by a statutory majority of creditors in each impaired class under §1129(a)(8) 2. If any class rejects the plan, it cannot be confirmed as a consensual plan. §1129(a)(9). 3. BUT, if the plan satisfies the further tests set forth in §1129(b), it CAN be confirmed. ii. §1129(b)(1) ± permits cramdown of plan despite rejecting class only if the plan does not discriminate unfairly between classes AND is ³fair and equitable´ iii. §1129(b)(2) ± sets forth minimum requirements for a plan to be found ³fair and equitable´ leaving to the courts the imposition of any additional requirements in particular cases. 1. (b)(2)(A) ± liens of secured creditors must be preserved by the plan, and the creditors must be paid the ³present value´ of their allowed secured claims. (full value of collateral plus market interest rate) 2. (b)(2)(B) ± unsecured creditors who have rejected the plan cannot be crammed down unless all of the equity owners are getting nothing under the plan. 3. (b)(2)(C) ± preferred stockholders must receive the full value of their preferred position or they cannot be crammed down unless the common stockholders get nothing.
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