Bankruptcy Notes

- The Nature of Debt and the Meaning of Life - Non-judicial Collection methods
Debt: Obligation to pay money a court of competent jurisdiction will enforce Classification of Debt: (1) Legal Status: - Contractual (voluntary) - Implied at law (torts) - Statutory Obligation (tax) (2) Purpose: - Consumer (personal, family, household) - Business (trying to make profit) Constitution: Art.1 §8 c.4  The right for Congress to establish uniform laws of bankruptcies throughout the U.S. © United States v. Kras Holding: No constitutional or fundamental right to discharge bankruptcy. “Bankruptcy legislation is in area of legislation…” What lawsuit does/doesn’t do  Does: money judgment (liability + judgment amount)  Doesn’t: make debtor pay (not self-executory) Peaceful Repo is lawful (as long as doesn’t break peace)  possible liability for conversion  want to document (video and witnesses) Religious Notions (Moral Obligation): Owe to God, “The wicked borrow and do not repay.” “Let no debt stand outstanding except to love others.” Why people repay debts (MEPRS): (1) Moral Duty (obligation: right thing to do) (2) Fear of Public Enforcement (3) Peer Group Pressure/Disapproval (4) Reward when Promise kept (5) Social Expectation Leverage: Can get leverage against debtor if know what button to push. “similar to possessing nukes” Notions of Punishment: (1) Retribution (sanctions) – notion of proportionality (2) Utilitarian (appropriate when overall consequences are better) Look at Hostess Articles  Chapter 22? (When a corporate files for Chapter 11 for 2
nd

time)

- Priorities Among Creditors - Other Collection Issues
What is debt? Good debt/bad debt? Mortgage Classification of debt by legal status? (1) voluntary (2) implied in law (3) statutory by purpose? (1) consumer (2) business All debts incur danger of default. Constitution  Art.1 §8 c.4 < Questions > (1) Why have Americans taken on so much debt? (greed? Excess? Credit?) Default judgment: ∆ doesn’t respond Consent judgment: both parties agree (not-uncommon) Judgment (expedites legal process) by confession (illegal in many states): if someone defaults, someone can gain judgment on that person automatically (debtor is in default by default)  see Overmeyer v. Frick Co. – JbC ok in business setting, not in consumer Leverage – who has it? Question 1.2 (pg 29) - What is strategy going to be? - What order will Talis put priority on? - How could we improve legal position? - We want to know full picture  more information needed

can avoid bankruptcy.Collection Remedies Why people repay debts? (5) 3 kinds of judgments? (1) consent judgment: both parties agree to stipulations/may reduce (2) default judgment: didn’t respond according to rules of civil procedure caveat) has to prove damages (3) judgment by confession: must be included in original document Most states prohibit (class D misdemeanor) – consumer or business? Fair Credit Reporting Act (FCRA) . avoid costs .Can’t call if you know debtor is represented by attorney .Problem with complexity of claims (unions. sale. disposition) (4) Realizing (execute) assets (levying. change in issuance of dividend. liquidating…)  Beneficial to client ** Don’t get fixed on one asset!! Multiple assets!!  Should always have backup plan!! Workout: Non-bankruptcy negotiated settlement that consensually modifies contractual rights of creditors.Asked to enter own view regarding disputable information . valid.Not feasible .Can’t call debtor at work if you know that employer prohibits .Gives debtor opportunity to fix monster inaccurate information .General economic situation .Caller must stop communicating if debtor requests cessation . in order to resolve the financial difficulties of debtors  Readjustment in creditor’s expectations! (possible in both consumer/business) Examples) may give an extra day. environmental.Can’t impersonate someone else Judgment Creditor’s Objectives (ILKE) (IMPORTANT!! – conceptual framework for all cases) (1) Identify property available to satisfy judgment . tax…) Aging judgments (law rewards the diligent) (1) Dormancy: Lack of effort to collect  still valid but unenforceable (mostly procedural and so could probably revive) – Some creditors may attempt to collect once a year to keep it alive (2) Limitations: Judgment no longer (good.can influence business .found out security interest doesn’t exist Problems? .Entitled to copy of credit report Fair Debt Collection Practices Act Are attorneys bound by FDCPA?  Yes.unencumbered assets (assets with no security interest) . change in interest rate.Can’t harass consumer debtor to gain info on them . .Can’t call at unusual hours . products liability. allow debtor some security interest status Why workout? ..Collection Agency can’t use threatening language . if engaged in collection practices. enforceable)  ways around – file new claim based on old judgment before limitations and get new judgment and extend another 10 years. .non-exempt assets (2) Locate assets (physical) (3) Keep assets in place (prevent transfer.

Lawsuit (3): (1) Liabilities. (Very powerful!) (2) Turnover orders (citation to deliver assets): combination of collection tool and discovery device/ way of identifying assets (a) file from pleading: require debtor to come to court with documents (information) (3) Consensual lien: debtor voluntarily gives lien (4) Levy. judgment liens (a) recordation: takes abstract/memorandum of judgment and record it in county clerk’s office Why engage in recordation  give notice to world of debt (establishes priority) Important because has effect on property acquired in future until debt is settled.. liquidate. writ of execution (utilizing sheriff system) Writ of execution: writ that authorizes sheriff to find. but… Downside: could make judgment debtor file for bankruptcy that effectively wipes out judgment debtor’s debt  think twice before! Law: can’t get fired for having one wage garnishment (2) Asset garnishment: same general concept but asking for assets * Family support garnishment usually trumps other types of garnishment Limits to garnishment: ordinarily 25% of paycheck (disposable income) rd . Tag  effectively puts property in sheriff’s control. seizure and sale of property (to obtain) (assumption: unencumbered & non-exempt) Seizure of real-estate and unmoveable/hard to move items.Collection Remedies Lender Liability: Popular back in the 1980s. Collection Remedies (Comprehensive multi-collection efforts is best!) (1) Liens. (3) Legal foundation for judgment creditor for any future collection activities. seize. (2) Damages. Borrower sues lender claiming that lender put borrower in bad situation. When is lien created? (1) Writ of execution is issued (2) Upon delivery of writ to sheriff (more common) * What helps one creditor hurts other creditors (1) individual remedies (2) collective remedies (5) Garnishment: court order requiring 3 party to turnover something of value to judgment creditor  upside is that you can collect quickly? Types: (1) Wage garnishment: powerful weapon. sell as the law requires based upon priorities Levy: procedure.

. identify property (specific) nd Priority  (1) personal property (debtor can choose/claim exempt).Writ of body attachment  works on any random stop (can get picked up during speeding violation)  not because failing to pay but failing to appear in court .) Levy. (2) real estate (2 priority because we don’t want to boot out of home) (a) non-homestead property (b) residence is always last Appraisement statutes (what property will be sold for how much?): Property disposed is done properly. 53) Judgment liens: On judgment creditor to report satisfactory payment (burden)  file satisfaction Writ of body attachment (writ of attachment: court order) . IN  2/3 of appraisal value  JD. also sheriff can go look multiple times  Problem Set 2 (pg. JC each appoint one appraiser each and third is selected by both appraisers Sheriff can look for specific property.Judgment debtor doesn’t’ pay . heavily controlled) Sheriff  look. etc. new employment.Judgment debtor is ordered to pay x/month .Collection Remedies If judgment debtor is at edge (tilting) of bankruptcy… Prof: monitor the judgment debtor. put burden of reporting changes to judgment debtor (file tax. writ of execution (exempted items vary by States.Petition for show of cause  no show  contempt .

veteran’s benefits…) Public Policy Reasons: Debtor should not be left to absolute destitution. Di-Chem (a) have to allege with specificity of entitlement (b) requires judicial officer to order (c) order has to provide (timely hearing post seizure) Read: Grupo Mexicano de Desarrollo Limits placed on federal equity jurisdiction Contracts case  workout failed  injunction BUT…A US CT can’t enter injunction judgment on foreign jurisdiction ** Get the judgment!!! (No judgment  No collection) Exemptions (for individuals only. bible…) . or any other final process and thus not available to satisfy judgment  To be liberally construed in favor of debtor (differs by State constitutions. corporations can’t claim): property not subject to levy. case law $ amounts and categories) Application: In all proceedings except in “consensual settings” such as mortgage Exempt by: (1) category (2) dollar amount Sources of exemptions: (1) State constitution (2) Implemented by state statute (3) 11 USC § 522 Bankruptcy code (federal) (4) Other sprinkles (social security. State statutes.Exemptions Writ of body attachment Levy of execution (priority) Appraisal of property Pre-judgment (provisional) Remedies (pg. federal statutes. 52): Looking to preserve status-quo Back in the days  creditor friendly Get “clerk” of court to sign-off collection Basis: (1) Statutory: establish (a) out of State defendant (b) defendant is risk of flight (c) decamping (hiding and going out back door) (d) liquidate risk (2) Constitutional: due process issue Read: North Georgia Finishing v.. sale. (liberally construed in favor of debtor) (1) Safety net (social fabric) (2) Debtor & dependants shouldn’t have to become ward or charges of States (3) Concept of fresh start (something to start with…) (4) Some personal items have little intrinsic value but significant value to family (family pet.

. Personal property .001(c) – The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.$60.000  structured settlement (annuity benefits) . 196 – Problem set 8 Make $250. 168 – Texas Exemption Statutes (liberal = generous)  foundation was based on people fleeing to west Homestead – unlimited dollar amount Category: (1) Urban (10 acres).000 (1) current wages  no wage garnishment (2) professionally prescribed health aids – diamond encrusted wheel chair? (3) alimony §42.003 Designation of exempt property Burden is on debtor to tell sheriff what he could take Pg.Exemptions Pg. (2) Rural (200 acres) §41.  debtors can move! After claiming bankruptcy.

818 F. tools of trade Code §522 – exempt for bankruptcy purposes If State opted out (30 something States)  must use State law Supreme Court case – Uniformity of exemptions “laws passed on uniformity must be uniform throughout the state” but not by State  geographical in nature but not personal U. if money is traceable. etc.Fraudulent Transfers Read Matter of Agnew. Ex) Prof incurs debt and dies  collectors can’t collect from real-estate Ways around: (1) Joint debt.S.) (1) Equity in property ex) only when equity exists in property (2) Exempt categories ex) funky categories – guns. (4) Consensual lien .If property is sold.Tenancy by the entirety is applicable to multi-real-estate property Fraudulent Conveyance (Transfer) Subject to execution as if still being held by transferor (debtor). statutes. Carolina?) BUT.. other party gets real-estate in entirety without judgment. as long as uniform within State Tenancy by the entireties (only between spouses) – C/L doctrine that has become codified Concept: husband and wife is one unit  if one party dies first. exempt . Twyne’s Case (6) (see handout) Statute of Elizabeth (Fraudulent Conveyance) – relied on “badges of fraud” = circumstantial evidence (1) signs and marks of fraud – badge test (smells of fraud) (2) donor continued in possession – used them as his own (retained ownership) (3) made in secret (4) made pending writ (5) trust (agreement) between parties (6) transfer said to be gift Issues: (1) moral. Trustee Program (48 States) Bankruptcy Administrators (Alabama.2d 1284 (7 Cir. N. livestock. (2) Divorce can sever entirety. when (1) innocent 3 party and (2) sales price similar to market value… Fraudulent? Focus on “timing” (view from “reasonable creditor’s perspective”) th . (3) One spouse can convey to other.K. church pew. how can you have uniform if two systems?  O. 1987) Exemptions: look at from State standpoint (Constitution. (2) creditor expectations Twyne distinguishes: (1) good/bad faith. (2) agreements Classic Fraudulent Conveyance  Actual Fraudulent Intent  easy rd but.

intent)  So so bad…dishonest intent is so so bad Badges of Fraud: simple inferences  if x. then y (not legal presumption) just look at facts and make factual determination (b) Constructive fraud: don’t have to show fraud  fraud is established as a matter of law. Resolution Very important to have stability in real-estate market (if follows State law.File suit…why? (1) move property back to debtor. (2) paid too little  less protection ex) (!) Bad faith transferee  no protection Badges of Fraud (Modern day): (1) Transfer is not in the ordinary course of debtor’s business (2) Asset change due to transaction: transaction caused insolvency? (3) Threat or existence of litigation (4) Receive or benefit less than reasonably equivalent value (5) Secrecy or deviation of transaction (6) Retention of transferor/debtor of ownership (7) Transfer to family members/insiders (8) Retention of assets with highly questionable value ..Fraudulent Transfers Gives unsecured creditors leverage Grupo Mexicano: Secured/Judgment creditors can get protection by getting security/judgment Creditor obtains judgment  tries to execute  no property  doesn’t pass badges of fraud (smell test)  files suit against transferee (because is actual owner of property) (1) Looking for assets (a) not exempt and (b) not encumbered (prior valid security interest) (2) Fraudulent conveyance: any creditor at any time can bring action within statute of limitations (a) Actual fraud (dishonest – deliberate motive . Have to prove: (i) Debtor didn’t receive reasonably equivalent value (ii) Debtor was involved/engaged in business with/leaving him with insufficient capital (iii) Debtor is about to incur debts with actual/imputed intention not to pay back  Normally brings both suits!!! (Actual fraud and constructive fraud) (3) Debtor is insolvent  At time of transaction was debtor insolvent? Or did transaction cause insolvency? Reasonably equivalent value SCT: support to transferee cases (1) BFB v. (2) move money in lieu back to debtor Ex) (1) Good faith transferee (2) Reasonably good equivalent value  transferee keeps property (not going to punish because innocent) ex) (1) Good faith transferee. foreclosure sale is presumptively valid) (2) Transaction recognized in industry ex) auto sales auction Remedy .

(9) Hurried set of contemporaneous transfers (10) Transfer results in transferor’s insolvency © Bay Plastics Inc. LBO  reasonable expectation of creditors changed Courts will see whether (1) actual fraud? (2) constructive fraud? .

distinguish ABC (property law) from composition/extension (mainly contractual) . liquidates. less expensive. NY has comprehensive ABC) . less embarrassing Different types of ABC (1) Statutory (ex. nimble. and distributes to creditors (pro-rata unsecured)  Difference from bankruptcy is that ABC doesn’t get “discharge” of debt  only federal system can get you discharge  Non-rehabilitative  Not reorganization  Just “State” collective remedy  Positive law doesn’t change often (predictability)  Based on contract law  State’s duty to help out? ABC… (1) (2) maximize value for creditors (3) facilitate acquisition of assets out of bankruptcy context (4) quick.bond required .If too many issues at hand o ABC (Assignment for the Benefit of Creditors)  Out of court assignment where debtor assigns (transfers) all of nonexempt property to assignee.Did transaction leave company with little operating cash? .Composition: creditor accepts lesser sum to satisfy debt .Did LBO render company insolvent? .allows debtor to choose assignee (panel of trustees in bankruptcy) Assignment Agreement (1) has to be right? (2) has to be recorded (3) full/complete description of property (play by the rules) (4) assignment must be under oath Assignee .usually person that is used to dealing with this type of situation .oath (fiduciary duty) Assignee’s duties (1) give notice of appointment to creditors (2) file complete inventory (3) get appraisals of property (4) collect assets (5) solicits claims of creditors . who holds.What did company gain (get in return?) State Collective Remedies (alternative to bankruptcy) – insolvency .State Collective Remedies Fraudulent Conveyance Law is mainly for unsecured .Shift focus to “what’s good for all creditors” .Extension: original amount is in place but agreed to push back ..cost/time efficient .more/less court involvement .files full/complete schedule assets & liabilities (full disclosure) .

can result in de facto discharge Overall open/transparent process Creditor’s options: (1) don’t participate in assignment process (2) threaten/actually file involuntary bankruptcy (3) possibility of State court receivership appointment .(6) some states require reports (IN – 6 month status report) ABC is not like Chapter 11 (not rehabilitative) .possible for assignee to keep business open for limited time and has to let creditors know of intent Although not discharge per se.

financial statements. etc. inventory.State Collective Remedies How to define insolvency: (1) Bankruptcy code (liability exceeds assets) (2) Unable to pay bills Workout: consensual arrangement to readjust creditor expectations Methods: (1) extension: same amount but extending payment date (2) composition: changing essential term of agreement ABC: assigning all non-exempt property to assignee Two types of assignments: (1) Statutory: all of debtor’s assets (2) C/L ABC: convey less than all of assets (relay 80% to assignee. advantageous to confer company to 3 party purchaser  can keep company open for limited time (since assignee is fulfilling fiduciary duty) Bankruptcy process is well known by creditors.) Assignee will require creditors to file claims  screen out valid claims ABC has less publicity. Representing Creditor (1) Attack procedural (statutory) defect  what is creditor trying to achieve? (2) Take no action (3) Threat of filing involuntary bankruptcy  Jackup to another level  may delay process (debtor has to file response) (4) State court receivership  appointment Bankruptcy code §547  preferences  California once said they could dictate preferences but preferences is bankruptcy domain See Receivership handout rd . customer list. keep 20% to continue operations) ABC pros: (1) Cheaper (2) Quicker (3) Easy to follow (4) Debtor gets to choose assignee Drawback: have to convince creditors (full disclosure – tax returns.. ABC might need sales-pitch. less stigma. What assignee (trustee) must do: (1) Give notice to world (2) Post bond (3) File complete inventory (full disclosure) (4) Get appraisal (full disclosure) (5) Collect debts owed to debtor (6) Solicit/receive claims (7) Reporting requirements (8) Take control of assets  creditor can claim contrary ex) 3 days may be o.k. documentation. etc. while 27 may not  look at State court law & good faith.

.) 11 U. not referee! . etc.no discharges for corporations (2) Interested in rehabilitation/reorganization of businesses (3) Maximizing value of recovery for creditors (avoid fire sales) (4) Preservation of estate (enhancing value) – make sure asset doesn’t dissipate but goes to creditor (5) Efficient administration ..S. and the Rules Receivership: If owner can/thinks he can turnaround company  File chapter 11 and regain possession State remedies might not be adequate  Must try to enhance both (1) creditor’s remedy and (2) debtor’s protection Goals & Purposes of Bankruptcy (5) (1) Fresh start for individuals exceptions – discharge can be denied  bankruptcy could become sole creditor remedy .Correct term is “debtors.S.Introduction to Bankruptcy.C.11 U..certain debts as public policy aren’t dischargeable (bad boy…) .Bankruptcy Code o Read §101. Relieve the honest debtor from the oppressive indebtedness and start afresh.Must be aware of other rights BUT.  Uniformity within State (exemptions.Minimize non-bankruptcy rights . the Code.(honest but unfortunate debtor) Bankruptcy General .” not “bankrupts” . property.“Debtor in possession” is Chapter 11 case . §704 Duties of trustee . (1) and (3) are contradicting (tension) Bankruptcy underpinnings in Constitution Supremacy Clause – Federal law trumps State law Bankruptcy: allocation of assets and losses Uniformity of bankruptcy code doesn’t mean uniformity over all States  Accept State law.Bankruptcy judge.C. §522 – Exemptions Bankruptcy code lets States use §522 or opt out.1 judge (limited jurisdiction) .Bankruptcy judges  Art. §102 (rules of construction) .

Debtor’s duties and benefits)  Applies to all bankruptcy filings  Chapters 1. Energy  equitable (3) K-Mart  equitable (4) Morama  good faith/bad faith? Can use §105 when power is not directly in code Purpose of Bankruptcy (1) Creditor’s remedy (2) Debtor’s right . administrative powers)  Applies to all bankruptcies Chapter 5 – Creditors. Bankruptcy is focused on motion practice (not adversary) Rule 7001 states all situations that require adversary proceedings to litigate (filed separately from bankruptcy) Eligibility §109  not jurisdictional.. debtors. see what it tells you ex) Debtor may be illegal alien since not prohibited . §105 Power of court  Bankruptcy superpowers Cases restraining §105 Chronological: (1) (2) U.Fresh start (SCT calls fundamental concept) Hierarchy of Bankruptcy Law (1) Bankruptcy Code (2) Bankruptcy Rules (3) Local Rules  Exists to implement federal code & rules Code (9 Chapters) Chapter 1 – Definitions & Eligibility (General Provisions)  Applies in all bankruptcy filings Chapter 3 – Administration (commencement.Debtor Eligibility and Forms of Bankruptcy Relief 11 U.S. Debtor (13)  When looking at code. administration.S. person filing must establish eligibility §109(a) – Person (41). officers.3. and the estate (Creditors and claims (important if you are creditor). 5 apply across the board Chapter 7 – Liquidation (most cases)  Consumer & straight liquidation Chapter 9 – Limited to municipality (not used as much as 7 or 11)  Must be permitted by State Constitution Chapter 11 – Reorganization (typically corporations but SCT held individual can also file)  can act as own trustee vs Chapter 7 Chapter 12 – Family farmer and family fisherman Chapter 13 – Similar to Chapter 11 but for little guys  Rehabilitate individual = wage earners) Chapter 15 – Cross-border bankruptcy (ancillary) Ex) bankruptcy filed in foreign country but may have assets or suit pending in U.C.S.

 When checking code for “debtor eligibility”  §109 and then §101 for definition §109(b) – broad (almost anyone can file) §109(c) – municipality  §101 §109(e) – individual with regular income  §101 dollar amount  §104 (can get thrown out of 13 and sent to 11) §109(f) – family farmer  §101 §109(g) – bad faith filing §109(h) – some judges can require prior mandatory credit counseling .

S. deny renewal of license…etc.” . normally doesn’t impact all Cr. if creditor insists according to statute) Creditors can simply say no to (1) reaffirmation (2) redemption § 523 – 1:1 (debtor:creditor) issue.Exemptions.) § 727 – Adversary – debtor behaved in bad conduct. asset protection and ethics issues Trustee – Gary D. concealing…) Bust out schemes Prof. §523  debtor still owes to singled out Cr. fraudulently. 527. likes “smell test”  Any trial judge will inevitably come to a decision that a case smells. But other debts gone !!! 14 days to appeal to bankruptcy !!! §525 – Debtor will enjoy some protection from discriminatory treatment if debtor filed bankruptcy ex) §525(a) – Gov. etc…) Majority are no asset cases (exempt) 90% of cases Debtors might claim – disputed (most creditors will not go through trouble)  burden shifts to creditors to prove otherwise Discharge is the goal! (trumps State law) Proof of claim – pre-printed form (fairly simple)  attorney doesn’t have to file necessarily Informal proof of claim  weak but should ask client if anything was done to put trustee on notice Reaffirmation – long. exemption planning. Boyn Claim – right to payment (broad definition on purpose)  filed through “proof of claim” (voucher. they shouldn’t get a discharge on anything (basically fraud claim) §727  boom!. 528 – Debt relief agency (consumer protection)  Any person that provides bankruptcy advice for payment or any other consideration  Passed by Congress because Congress was skeptical that bankruptcy attorneys were doing good for clients Criminal Aspect of Bankruptcy 18 U. cumbersome process (basically real contract) . “doesn’t pass the smell test.. §551 §152 laundry list (knowingly.attorney has to sign off (good idea…) affidavit Creditor priority – (1) Domestic support obligation Redemption – allow debtors “fresh start” along with (1) reaffirmation (2) exemption  pay redemption amount (only possible in lump sum.C. (protects single Cr. unit may not revoke. §525(b) – no private employer may terminate employment of or discriminate against §§526.

& 13 §109 – Who may be a debtor? .Duty of a committee: Consult debtor. mandatory credit counseling exempt since corporation §1101 (1) Debtor in Possession (DIP) SCT: sensible to view as same entity as before filing of bankruptcy but empowered by virtue of the bankruptcy code to deal with its contracts and property in ways it would not have been able to prior to filing of bankruptcy (2) Plan Consummation §1102: Creditor’s committee . investigate debtor.Trustee has in all Chapter 11s responsibility to for creditor’s (unsecured usually) committee that will represent rights . dishonesty. gross mismanagement §1107 DIP has broad powers (Can run company as usual) but cannot be compensated as other officers would under the bankruptcy code §1114 Payment of insurance benefits to retired employees §1115 Property of Estate (Chapter 11 is chapter 13 on steroids) §1121 Who may file a plan: Only DIP until 120 days §1123 Contents of Plan (a) shall (b) may §1124 Impairment of claims or interests §1125 Solicitation on the plan §1126 Acceptance of plan  Impaired parties get to vote §1127 Modification § 1128 Confirmation hearing §1129 Confirmation of plan * Chapter 11 filing is an invitation to negotiation! .Chapter 11 Reorganization – Overview Chapter 13 success rates aren’t that high  many are transferred to Chapter 7 Chapter 13 is good for debtors (save a lot of assets)  repayment plan to creditors (no requirement % on recovery) Chapter 11 Usually another set (group) of attorneys from CH 7.No eligibility $ amount.. participate in formation of plan… §1104: Appointment of trustee or examiner  (a)(1) Fraud.9.

(3) Hair-cut: Client will take a 50% haircut means that if they were owed 10mn. (4) Employees and unions §§1113 and 1114. (5) Fresh start: Although not a running start. pay bills. Rate at which cash is expended in a Chapter 11. (5) Bankruptcy practitioners are more sophisticated and are better at what they do.. Chapter 11 (what's needed? Cash.. Friends. deal is droppeddead. . Who can be a debtor? See §109.?) (3) Need a plan to sell because. (6) Good faith/Bad faith: Did the debtor file the bankruptcy/plan in good faith? Are the debtors complying with the bankruptcy code? If not in good faith.. (b) Necessary to fund the plan. (4) Drop-dead: If entered into drop-dead provision and debtor doesn't comply.. (ex) will pay 20¢ on the dollar) make the plan feasible..said not new entity. New entity? SCOTUS. Unions hate the notion of Chapter 11 due to the §§1113 and 1114.. Same entity empowered by bankruptcy code to take care of assets. Can't pay the administrators. unsecured creditors... taxing authority.Chapter 11 Reorganization Venue (What is the proper venue?) Debtor in possession. (ex) gerrymandering a category. (a) Plan to continue operating (b) Persuade constituencies that you know what the problem was and have formalized a plan (new contract). (2) Friends are important because. and a Plan!) (1) Cash is important in Chapter 11 because. (a) Need the support of friends during the pendency of the case (want to continue operating business and therefore need clients) (b) Need friends to vote for your plan (Secured creditors.(Chapter 11 is reorganization) pay employees. there could be a situation where they might not have liked the previous CEO and the bankruptcy filing brought in new management.... Although unions will never admit that they like bankruptcy filing.. they will only get 5mn.. -> Crater (2) Administrative Insolvency: Administrative costs will eat up the case. Debtor stops paying bills to accumulate cash. (a) Need cash to keep business going... Terminology! (1) Burn-rate: Administrative expenses will be incurred by Chapter 11 debtors. Market is not as super negative when a company files since they are used to the venue. etc. debtor gets a new start..) need impaired voting for your plan. want to tell the judge.. Two General approaches to Chapter 11 (1) Realistic Approach Bankruptcy is all about the allocation of losses amongst disappointed parties (2) Positive Approach Participatory process leading to confirmation of a consensual plan Good thing about Chapter 11 and why it has become more acceptable (5) (1) Companies are more used to Chapter 11 process (2) Lenders are more willing to work with distressed debtors because they know what the downside is and the only plausible option is to work with Chapter 11 debtors (3) Market encourages filing of Chapter 11 bankruptcy... pay more to a certain category.

Lot have to do with findings.(7) Loading up: Context of consumer case (Chapter 7 and 13). (12) First-day motions/first-day orders: Things that need to be done on the first day. (10) Deepening insolvency: Lender starts to manage and the financial situation gets worse. Everyone knows whats going to happen before filing. However. (11) Pre-pack Chapter 11: Debtor has worked out a deal before filing for bankruptcy.. (8) Abusive serial filing: Nothing wrong with serial filing.. Excessive spending on the eve of filing bankruptcy." . No good faith intent with complying with the Bankruptcy code. Filing a Chapter 11 Bankruptcy is "an invitation to negotiation. (13) Creditor fatigue/Borrower fatigue/Lender fatigue: May or may not work to debtors advantage. (9) Turnaround management: Higher guys that will come in and turnaround the company. (deepening loss of money) shareholders might file an action against lender. Filing is completed on fast-track (expedited). when it becomes abusive and somebody tries to use the system or gain an automatic stay.

Use.. debtor has to file motion beforehand (good faith argument why deal will be beneficial) .. Insurance. The problem is that their is a restriction on what the debtor can do with cash collateral. negotiable instruments..(1) Does it subject creditors to new risk? (ex. Can't use cash collateral unless. -> In order to continue to operate. negotiation behind the scene..14 days to appeal exception (as long as within 21 days and excusable excuse) BUT. focus on 14 days! Hard to get exception. .people have opportunity to object Cash collateral: §363(a) cash collateral means cash.) Chapter 11 bankruptcy All about three things. section applies to all chapters of bankruptcy!) Court must authorize debtor unless in the ordinary course of business. Have to check what business the debtor is in. consultation of parties with interest. (1) Money: to operate while pending (2) Friends: to continue to do business with (3) Plans Competing goals of Chapter 11 bankruptcy (1) Enhance value of business: organization sense (2) Establish orderly distribution scheme: distribution to the creditors in a single form (3) Attempt to internalize cost of bankruptcy and default (4) Establish privately monitored system: Trustee will try to establish a creditors' committee. ultimately creditors get to vote (5) Protecting third parties Preserve (Maximize) value (amongst many different parties). you will need cash. Different tests to determine the business.. Test ex.. (2) Court order allows you to use (usually conditions attached also) §361 Adequate protection (1) Cash payment or periodic cash payments When no cash (2) Provide additional or replacement lien When no unencumbered assets (3) indubitable equivalent (ex.. Readjust expectations §363 Sales.give notice to everybody . used car salesman selling cars is what creditors want) If unusual deal.. debtor must apply for special permission. documents of title. §364 Obtaining Credit (1) Debtor in Possession (DIP) Financing (2) Bridge Financing . equity cushion) For adequate protection debtor will probably have to provide budget. But usually there are conditions attached.Chapter 11 Reorganization How many days to file a bankruptcy appeal? 14 days Rule 8002(c)(2) .. (1) Non-debtor entity (whoever has security interest) consents. If not in the ordinary course. Cosigners.. and Lease of property (If in the 300s.. securities.

(2) earnest money deposit.. Lot of lenders that will lend bridge loans between filing and execution.can buy.. Pre-Bankruptcy Exemption Planning (Read Smiley? case) Purpose: Maximize exemptions (1) (2) move assets into exemption friendly states (Florida.. Cosigners. What can you use for adequate protection? (1) Cash payment or periodic cash payments (cash is king!) When no cash (2) Provide additional or replacement lien When no unencumbered assets (3) indubitable equivalent (ex. . * Thing that you can't do: Can't give administrative expense (ex.management.Sales (stalking horse not required. Is debtor in good faith? Cash Collateral §363(a): Cash that someone has a security interest in.The trustee may void (reach back.. etc. Problem: if sale is specific (buys only certain assets) Contracts: buyer can assume certain contracts but don't need to assume all... Recent phenomena §363 . Texas.Court will ask debtor why he is doing particular act.) Smiley (1) Nothing inherently wrong with pre-bankruptcy exemption planning (Congress said its ok) (2) Can't deceive (must be in good faith).Chapter 11 Reorganization Debtor in Possession (DIP): Has to know business to know whether ordinary course of business.. Are the creditors in greater risk? ex) Car Dealer tries to sell entire lot. can't defraud (3) Don't have to prove all bad faith but just hindrance --> Although you can engage in planning. final disposition of the breakup fee money Bottom line: Seeing a lot more of §363 sales of good assets and then motion to chapter 7 than reorganization within chapter 11.(kinda fishy) If someone enters into non-ordinary course of business . There will be exit costs. expense critical to ongoing of business because if business fails there is risk of losing all administrative expenses) as adequate protection. (Shows you the extent of what you can do) Ω §548(e)(1) and (2) ..Necessity for business. you can't go outside of the rules (motivation of intent was to hinder and delay. equity cushion) For adequate protection debtor will probably have to provide budget.. (3) union concessions Financing for §363 Interim financing. What are the restrictions in which DIP can use CC? (1) Creditor consent (2) Court order Have to provide "Adequate Protection" ex) Rolling stock "truck and trailers" . Insurance. (needs exit financing). can't mislead.. Purchase agreement: contingency withholdings.) Buyers are buying assets of company rather than reorganization efforts. Kansas.. claw back) any transfer of an interest of the debtor in property that was made within 10 years of filing of bankruptcy. Stalking Horse: Buyer who signs a purchase agreement (subject to (1) court approval and (2) competitive bidding) agreeing to buy certain assets Other protections for SH: (1) breakup fees.

. including unimpaired creditors that voted against.confirmation of the plan §1129(b)(1) and (2) §1129(b)(1) . (junior unsecured claim cannot be paid until every other creditor is paid) Absolute Priority Rule: Junior Unsecured Creditors get paid before equity shareholders! < CRAM DOWN > Impaired class that is unsecured --> votes against the plan Debtor can vote §1129 cram down --> must satisfy judge that he did everything under §1129 As long as not discriminate unfairly (can discriminate some). (1989) Moved all assets to Kansas... *************************************************************************************************************** Pre-bankruptcy exemption planning in Re Smiley.. *************************************************************************************************************** Core Issues of Bankruptcy (1) Jurisdiction: Historically had bankruptcy referees handle bankruptcy cases.. SCT said need bankruptcy CTs (not article III).unimpaired) Not end of world for DIP. At least 1 class of unsecured creditors votes against plan. plan gets submitted to creditor. Forces shareholders to contribute new capital (new value .. Duress provision: you got my trust. Although not article III judges. . There was no problem until Stern v. Cram down provisions are available to enforce plan on everyone. (because interests were not jeopardized . can be 3rd party. 864 F. Marshall. and is fair and equitable. is fair and equitable with respect to each class of the claims... Congress comes up with 28 USC §157 .. Decades ago. CT will have to approve the plan despite being voted down by a class < ABSOLUTE PRIORITY > Equity shareholders can receive nothing under the plan until all the junior unsecured creditors get payed.cash) before they can retain shareholder interest in corporation. a part of the district CT.various things that bankruptcy judges can do regarding "core" proceedings..Chapter 11 Reorganization Someone (usually debtor).. (1) look at code §1129 . 548(e) Debtor made such transfer with actual intent to hinder delay for fraud to which the debtor was or became.plan does not discriminate unfairly.... (kind of safe harbor) (1) lobby constituents to vote for plan (2) cram down which includes the absolute priority rule * but must have at least one consenting class of creditors to have the plan confirmed (even by cram down) What is judge going to do.2d 562. Hypo) If junior unsecured claim doesn't approve of plan and judge effects cram down..

. Chapter 15 Totally different from other chapters.. (newest chapter added in 2005) Need for a good interface between American bankruptcy law and foreign bankruptcy law. Three general parts (1) ancillary to a primary proceeding brought in another country (2) debtor or creditor may file a full blown bankruptcy in the United States if the structure of the bankruptcy is very complex (3) A US court may authorize a trustee or examiner or some other entity created by the court to act on behalf of the US party EXAM) What kind of bankruptcy system do we have? 707(b)(3) 2/3 of 13 filers don't make it .doesn't require a stalking horse to buy (anyone else can also buy) Absolute priority rule: Have to have at lease one impaired class voting for the plan (another reason you should have friends. Whiteside (1986) Options available to attorney (1) Should try to dissuade client (2) Can withdraw from representation when the client threatens to commit perjury (Noisy withdrawal . 1129(b)(2)(B) .Chapter 12 Family Farmer Fisherman and Chapter 15 Transnational Bankruptcies §363 .all classes in front of equity shareholders must be paid in full.) But if everyone votes against plan.absolute priority rule . --> Before equity shareholders can retain their interest. Extended every 2 years and recently made permanent. Hybrid 11 and 13.when more than economics is involved) Chapter 12 §109(f) . must pay the creditors in full © Nix v.Only a family farmer or family fisherman with regular annual income may be a debtor under chapter 12 of this title..

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