Bryan Kirsh

Bankruptcy Reilly, Fall ‘16

Part I: Collection Remedies

A) Introduction:
1. Secured v. Unsecured Debt:
a. Secured Creditor = holds a lien (or security interest) on certain property belonging to the D that
will serve as collateral to secure the debt.
b. Lien = (e.g., security interest) = any charge against or interest in property to secure a Cs right to
payment, so that if the debt is not paid, the C may have recourse to the property to satisfy the
debt (See 101(32)

B) Judgment Collection:
1. Judicial Liens – Execution Lien:
a. Unsecured Cs (or Secured Cs opting this route) sue to collect from a D refusing to pay
b. Step 1: Establish in Court that the Debt is Owed
i. Becomes a Judgment Creditor = victorious plaintiff
c. Step 2: Post Judgment Collection Process
i. Court issues a writ of attachment.
ii. Writ is then taken to the sheriff for execution—looks for non-exempt personal property to
seize, sell, and pay proceeds to the Judgment C.
1. If real property = always notice of seizure and foreclosure sale.
iii. The entire process is often called a “levy.”
1. The sheriff “levies upon” the property.
d. Once the sheriff has levied upon a piece of the D’s property, the judgment creditor becomes a
“judicial lien creditor” as to that property.
2. Debt Collection by the Federal Government:
a. Federal Regulation of Consumer Debt Collection

3. Family Debts
a. Alimony/child support are among the most difficult debts to collect

4. Voluntary Liens:
a. Think Mortgages/Security Interests
b. The D voluntarily grants a C an interest in his property in exchange for something of value.
i. Can be an interest in the property received from the C.
1. Ex. Store sells D a TV, D agrees to pay over 12 months.
a. If D fails to pay, the Store repossesses the TV.
ii. [PMSI] loan/credit given to D for the express purpose of enabling the D to acquire
particular property and the property itself is used as collateral.
1. . Bank lends D $10,000 to buy a car.
a. If D defaults on the loan payment, Bank takes the car.
c. Note: C must “perfect” the lien.
i. Give public notice of his interest in the property.
ii. Serves two purposes:
1. Future Cs cannot levy upon the property.
2. D cannot use the same property as collateral in an agreement w/ a future C.
d. Secured creditors can use “self-help” to repossess collateral
i. Cannot “breach the peace.”
1. No violence or threats of violence.
2. Repo must stop once borrower objects: “Stop taking my car.”
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 3. No trespass
4. Can’t enter a home without permission, even if door is unlocked.
a. Can’t open a garage door- carports ok.
5. If Violated? -> Art. 9, losing property interest and damages (including statutory –
punitive / repo in breach of peace as a tort) UCC Art. 9 § 625

5. Statutory Liens (Mechanics Liens, Tax Liens) and Trust Funds:

a. 1] Landlords Lien is granted to a lessor premises – i.e., tenant not paying rent.
b. 2] Repairer’s (or Artisan/Mechanics) Lien grants a lien to the repairer of personal property to
secure the price or value of the repairs
i. Allows, for example, a garage mechanic to keep D’s car until the repair bill is paid or to sell
the car if necessary to satisfy the charges
c. Trust fund statutes:
i. Make the D a trustee of certain property for the Cs, who, as beneficiaries of the trust,
effectively get a priority in that property.

C) Struggle among Creditors: Priorities

1. General Rule: Effective Date of a lien for priority purposes is usually its perfection date
a. First in Time = First in Right = First C to perfect their claim is first in line for Repayment
2. How Cs can Perfect:
a. Judgment Creditors
i. Execution
1. Once the sheriff has levied upon a specific piece of the Ds property, a lien
attaches (and is perfected simultaneously) by operation of law, rendering the
judgment C a judicial lien C (“lien creditor for short).
2. A judicial lien is just as a valid and as helpful as a voluntarily created security
interest

b. Mortgages/Secured Lenders:
i. Filing notice in a predetermined place or otherwise giving others notice of the interest
ii. File mortgage in recorder of deeds office

c. Personal Property Security Interest

i. UCC 1
ii. Secretary of State’s Office/County
iii. Take possession
iv. DMV

d. Statutory Lien Holders:

i. Whatever the statute says is required to perfect
ii. Mechanics Lien usually takes priority over an existing security interest in the goods b/c
the repair has maintained or enhanced the value of the property.

D) Priorities b/t Types of Creditors

1. Unsecured Creditor versus Unsecured Creditor
a. The first to levy upon the property will win as to that property.
i. The date of levy is not always the controlling date.
1. In many states, priority depends upon the date on which the Judgment C initiated
the execution process by delivering the writ to the sheriff.
2. If the Sheriff then goes out and levies upon several properties, the execution
“relates back” to the date it was delivered to the Sheriff.
a. Once it is “out of the C’s hands.”

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 2. Unsecured Judgment Creditor versus Secured Creditor
a. Ordinarily, the Secured C perfects when it records its consensual lien according to the statutory
prescription.
i. If the Judgment C’s lien is earlier, it wins.
1. If it is later, it loses.
b. Credit Bureau of Broken Bow v. Moninger
i. Sherriff must not always remove the goods in order to complete an effective levy.
1. Some jurisdictions disagree, requiring that the sheriff either take possession or
appoint an independent custodian.
ii. If the levied upon goods are left in the hands of the D for an unreasonably long period of
time w/ the consent of the C, the lien will be lost.
1. The C permitting the D to continue to use the goods in the same way as before
the levy is often construed as evidence of fraud.

3. Judgment Creditors and Secured Creditors versus Buyers

a. If a 3rd party buys D’s car on Monday, and the C executes on his judgment and levies on the car on
Tuesday, the 3rd party wins.
i. If the 3rd party buys the car after the levy, she usually loses.

4. Unsecured Judgment Creditor and Secured Party versus the Trustee in Bankruptcy (TIB)
a. Judgment liens are routinely avoided in bankruptcy, nullifying all the diligence and expense of the
execution process.

E) Pre-Judgment Remedies
5. 2 categories:
a. Traditional protection under state law by means of special requirements that a C must satisfy
before being able to get a remedy prior to obtaining a judgment.
i. Typically 2 requirements:
1. A showing of need.
2. A bond
a. To pay D damages if the pre-judgment remedy turns out to have been
wrongfully employed.
b. Procedural requirements in the pre-judgment process that the Supreme Court has found to be
necessary to ensure the D due process of law.
i. Property may not be seized w/out an order issued by a judicial officer upon a factual
showing of need.
ii. Once seized, D must be given a hearing and a chance to get the property back very
quickly.
6. Garnishment
a. The process by which a creditor can levy on property of the debtor in the hands of another person
(third party)
b. Cs can direct 3rd parties who owe the D money to turn over the D’s property or to divert payments
that otherwise would have gone to the D.
i. Write of garnishment
1. Used to “attach” debts owed to the D for the benefit of the D’s judgment C.
a. Can be used to direct an employer to pay wages to the employee’s C
rather than to the employee.
b. Similarly, can garnish a bank account or obtain an order to turn over the
contents of a safety deposit box.
c. Restrictions on Wage Garnishment
i. Consumer Credit Protection Act
1. Restricts the access of all Cs to the wages of any D.
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 2. Acts as a floor, which some states can then exceed w/ their own restrictions.
ii. Commonwealth Edison v. Denson
1. Support orders take precedence over a C’s judgment.
2. Employers cannot garnish an employee’s wages in excess of the state maximum if
the garnishment is split between a support order and a C’s judgment.

Part II: Consumer Bankruptcy

Structure of the Bankruptcy Code

 Chapter 1: Definition
 Chapter 3: Governs case administration
o Appointment/compensation of the Trustee in Bankruptcy (TIB), attorneys, and accountants
o Regulates the operation of the bankruptcy estate
 Chapter 5: Regulation of the claims and distribution process, discharges, and the TIB’s avoiding powers
 Chapter 7: Liquidation for Consumers and Businesses
 Chapter 11: Business Reorganization
 Chapter 13: Consumer and Business Reorganization
 Ch11 is more popular for businesses.

A) Elements Common to Consumer Bankruptcies

 II) Outline:
o Two Types of Proceedings:
 Liquidation
 Chapter 7
o D gives up all non-exempt assets,
o TIB sells these assets,
o Proceeds are distributed pro rate to Cs
 Primary benefit to the D is that he receives a discharge of preexisting debts
 Achieves two classic objectives of bankruptcy:
o Fair distribution of D’s assets for the benefit of all Cs
o A “fresh start” for the D.
 Payout Plans
 Two Types:
o Ch13 (Consumers)
o Ch11 (Businesses and some Consumer’s w/ very large debts)
 D keeps all assets in exchange for agreeing to pay off debts over a period of time w/ future
income.

B) Getting Started:
 To begin a bankruptcy case, the debtor files a petition. §301
o This is the basic request for bankruptcy relief.
o The petition is accompanied by schedules in which the D lists important financial information.
o The petition will need to be signed under penalty of perjury
 Debtor’s attorney then takes the filing to the bankruptcy clerk’s office.
o A clerk takes the filing fee and date-stamps the minute, hour, and day of petition.
 At the time the clerk stamps the petition, a bankruptcy estate is created and an automatic stay
on all collection actions against the D, the D’s property, and the property of the estate
immediately comes into effect.

1) The Estate
1. 541(a) Property of the Estate – When a petition is filed, an estate is created consisting of all of the D’s
interests, both legal & equitable, in all property, both tangible & intangible.
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 a. (a)(1) ALL ownership (legal+equitable) interests of the D in property at the beginning of the case.
i. Legal Entitlements – permits or licenses that are nontransferable may be excluded as
property of the estate (driver’s license (yes) v. liquor license (no))
1. Possible tickets.
ii. Examples:
1. Tort claims – property right in claim for damages
2. Kittens
3. Cars
4. Pretty much anything.
5. Secured Interests that have not been Foreclosed On.
iii. The inclusive language of 541 is broad enough to include unliquidated claims for
damages.
iv. State Law determines if an when a property right arises
b. (a)(2) All interest of the D and the D’s spouse in community property
c. (a)(5) Clawback Provision – any property the D acquires or becomes entitled to by bequest,
devise, inheritance, divorce settlement, beneficiary life insurance w/n 180 days after the petition,
if it would have qualified as property of the estate.
d. (a)(6) Future Interests – Includes in the estate all proceeds, product, offspring’s, rents or profits of
or derived from estate property.
i. Except— Earnings from services performed by an individual D after the commencement
of the case.
1. Test: Whether post-petition income is property of the estate depends on whether
the income accrues from pre-petition or post-petition services.

2. 541(c) Transfer Restrictions

a. (c)(1) generally overrides restrictions on the transfer of property under K or nonbankruptcy law,
so that such property (funds in a retirement plan, beneficial rights in a K) passes to the estate
under 541(a)(1) despite the restriction.
b. (c)(2) though provides an exception where the restriction on transfer relates to the D’s beneficial
interest in a trust and the restriction is enforceable under nonbankruptcy law.
i. A retirement plan w/ valid restrictions on transfer under nonbankruptcy law, i.e., ERISA, is
covered by 541(c)(2).
ii. Spendthrift Trusts – is a trust that has a provision restricting the beneficiary’s ability to
transfer that interest to a 3d party
1. i.e., beneficiary of a $450k trust created by his mother, distributed upon death.

3. 541(d) Property Rights can be Splintered

4. 542 T can demand turnover under.
5. 541(b)(1)–(9) Property of the Debtor
a. (b)(5) Educational IRA’s Excluded
b. (b)(6) Education Savings Account – Educational Accounts of the D’s children or grandchildren from
the estate
c. (b)(7) – employee contributions to tax-qualified retirement accounts

2) The Trustee
1. Trustee controls the property for the benefit of the creditors.
2. Manages the bankruptcy estate and its property.
3. 704 – General Duties Include:
a. Gathering the debtor’s property
b. Protecting and maintaining that property
c. Sell the property for the highest price
d. Distribute the proceeds among Cs according to statutory priorities.

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3) The Automatic Stay – 362

1. General Stuff:
a. Filing a petition creates not only an estate but also an automatic stay.
b. Trigger at the moment of filing.
c. Operates as an injunction from collection efforts
d. Prohibits Cs from attempting to continue to collect or initiate an action a/g the D or the D’s
property until the stay is lifted.
e. Primarily designed to maintain the status quo.

2. Lack of notice for the automatic stay is no defense for violating the automatic stay.
3. 362(a) governs what the stay covers
a. (a)(1) – bars continuation of a judicial proceeding (an act to “recover a claim against the debtor
that arose prepetition”)
i. *technically acts for a tort would be stayed here – but assuming courts take a purpose-
based approach it will be okay.
b. (a)(2) forbids enforcement of a pre-petition judgment against the debtor or property of the estate
(i.e., execution levy)
c. (a)(3) – any act to obtain possession of property of the estate.
d. (a)(4) – prohibits any act to create, perfect, or enforce a lien a/g the property.
e. (a)(6) – any act to collect, assess, or recover a claim.
i. In re Parker – if the refusal of a transcript is used as a means to persuade or coerce a D
into paying a prepetition tuition debt, it is a violation of the stay. (but dischargeable)

4. 362(b) provides exceptions that allow certain actions

a. (b)(1) – exempts from the stay the commencement of continuation of a criminal action a/g the D
b. (b)(2) – Domestic Support Obligation: Collection of Alimony or Support with/form Post-Petition
Property
c. (b)(3) – Notice Mechanics Lien Exception under 546(b)(1)(A) – re Judicial Lien Hypo C.
d. (b)(4) – Governmental Units [see 101(27) – includes municipality’s] to enforce Police Powers
other than money judgments (i.e., environmental law)
e. (b)(11) – Presentment of a Check
i. not a violation of the stay to depositing and collecting Sydney’s check post-petition from a
claim that arose pre-petition.

5. 362(d) – C’s seek relief from the stay.

a. C continued retention of estate property after notice of a bankruptcy filing constitutes an exercise
of control over property of the estate in violation of an automatic stay. 363(a)(3).

6. 362(k) – Damages and Fees recoverable by the D (however not if you’re a Corporation)
a. can be put in contempt for violation or compensatory damages under 105(a) if a Corp.
b. Filing a Garnishment.
c. (k)(1) – Emotional Distress damages are recoverable, but to receive them the D must clearly
establish significant psychological or emotional injury and must show a causal connection b/t the
harm and the violation of the stay.

7. 108 – effect of automatic stay on limitations periods

a. If I have to take an action, i.e., filing complaint in order to preserve the complaint notwithstanding
operation of state law statute of limitations while automatic stay is pending

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 Part III: Liquidation Bankruptcy:

A) Introduction:
1. Ch7 is a straight liquidation bankruptcy.
2. TIB is appointed to gather all of the D’s property, sell it, and then distribute the proceeds to Cs.
a. Afterwards, the D is discharged from the remaining outstanding debt.

B) Eligibility – Bars to Chapter 7

1) Presumption of Abuse:
1. Only consumers are subject to screening for abuse, not businesses
a. Congress exempted from the screening for abuse anyone whose debts were mostly business-
related. 707(b)(1)
2. If a debtor flunks the means test (he has the “means” to pay his creditors)
a. The court must dismiss his chapter 7 case as an a abuse of chapter 7.
b. No chapter 7 discharge.
c. The debtor must use chapter 13 or get no bankruptcy relief at all
3. Compulsory means test budget is for all above median chapter 13 filers, regardless of whether they
passed or flunked the means test for Ch7. 1325b4Aii
4. 707(a) For Cause: (a)(1)-(3) Unrx Delay by the D that is Prejudicial to the Cs
a. 707(b) only applicable to an individual whose debts are primarily consumer debts
5. 707(b)(3) Abuse – Allows dismissal on “bad faith” or “totality of the circumstances.”

2) Median Income Screen (Means Bypass Test) – 707(b)(7)

1. (b)(7)(A) Bars any party, including the judge or a U.S. Trustee, from asserting the means test presumption
against a below-median debtor
2. First: Calculate D’s current monthly income as defined in 101(10A)
a. Current Monthly Income: Calculate the D’s average monthly income for the 6 months prior to
bankruptcy filing, added up and divide by 6 to get a monthly average.
i. Income from all other sources is included:
1. Wages, interest, irrespective of tax.
2. Stock dividends,
3. Unemployment compensations,
4. Income tax refunds,
5. [Small] business revenues/accounts receivable.
6. Amounts paid by others toward household expenses.
ii. Excluded: Social Security Benefits
iii. Both refer to household and family size.
iv. Consider even if she takes vacation and doesn’t work.
b. Test: If the Ds current monthly income (multiplied by 12) is less than the median annual income
for a household of the Ds size in the Ds state of residence, the presumption of abuse does not
apply.
i. Otherwise, If D’s income is higher than the state median, more calculations await.

3) Calculate Debtor’s Net Income – 707(b)(2)(A)(ii)

1. Creates a presumption of abuse based on a formula of income minus expenses
2. Current monthly income MINUS statutory expenses = Net Monthly Income
a. For housing, utilities, and transportation use IRS National and Local Standards.
i. Permitted Discretion – increase the allowance for food and clothing by up to 5% if the D
can demonstrate that such expenditures are reasonable and necessary. 707(b)(2)(A)(ii)

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 ii. In re Scott (2011): Means Test seems to allow the applicable IRS expenses w/o regard to
whether the debtor actually incurs them. i.e., Debtor spends $250/month on food, when
National Standards provides for a fixed deduction of over $315/month

b. Also use additional expenses authorized in 707(b)(2)(a)(i)-(iv)

i. (ii)(I) Health insurance, disability insurance, health savings accounts
ii. (ii)(II) Expenses of caring for the elderly
iii. (ii)(IV) Private schools, up to $1,650 per child per year.
iv. (iv) Any expenses to pay arrearages on “priority debts.
1. Mainly alimony, child support, and taxes
2. Priority debts listed in 507(a)
v. (iii) Secured Debt – always worthy – payments scheduled as due over the year
1. the sum of (I) the total of all amounts scheduled and contractually due to secured
creditors in each month of the 60 months following the date of the petition
2. No – Credit Cards
c. Example:
i. Current Monthly Income = $4433
ii. Authorized Expenses = $4000
iii. Current Monthly Income Surplus = $433/month

4) Compare Debtor’s Net Income – 707(b)(2)(A)(i)

1. Multiply (Debtor’s Monthly Net Income)*(60 Months) = Determine Debtor’s 5 Year Payback
a. ($433)*(60) = $25,950 => Presumption Applies.

b. Pass = if equal to/lower than $7,700$1540/yr (Monthly NI < $128)

c. Fail = if greater than/equal to $12,850 $2570/yr (Monthly NI > $214)
d. Uncertain = if in between these two poles and 5 year payback equal to/greater than 25% of
unsecured, nonprioritiy debt, a “presumption” of abuse is created.

i. i.e., D owes $30k unsecured debt. Monthly NI = $130 (year payback of $7800),
presumption arises b/c $7800/$30k = 27%

2. “rebut the presumption” = 707(b)(2)(B)(i) – ONLY WAY to rebut is to show “special circumstances, such
as a serious medial condition or a call or order to active duty in the Armed Forces … that justify additional
expenses or adjustments of current monthly income.”
a. The “rebuttal” thus works only if the debtor can prove documental changes in income or expenses
that allow the debtor to pass the means test. See 707(b)(2)(B)(iv).
b. Examples:
i. extra housing expenses for special needs children,
ii. high commuting costs,
iii. student loan payments, and
iv. repaying a 401(k) loan

5) Debtors Exempting Property from the Estate: (§522)

1. General Notes:
a. 522(l) – Ds claims exempt property, if no one objects, then the debtors claims stands
b. Only Humans may claim exemptions, Corporations not allowed.
c. 522(a)(2) = Value of Exempt Property for 522 is the FMV as of the date of the petition.

2. [522b] Debtor can choose either

a. the State Exemptions (unless state law opts out—then required to use state law)
i. 730 Day Domicile Rule [522(b)(3)(A)]

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 1. State Exemption applies in State Domicile for 2 years prior to filing. If not in a
single state, go back to the 180 days preceded the 730
2. *If not eligible for any state exemption, they can take use the federal exemptions
via Hanging Paragraph)

b. the Federal Exemptions (listed under 522(d)) or

i. (d)(1) Homestead – may claim up to $23,675 (doubled with a couple filing a joint
statement) provided they use the property as a residence.
1. Can increase w/ (d)(5) only up $1250
ii. (d)(2) Car up to $3775
iii. (d)(3) Household Furnishing Stuff up to $12,625 (max of $600 per item)
iv. (d)(4) Jewelry
v. (d)(5) Wildcard – $1250, plus up to $11,500 of the unused homestead exemption.
vi. (d)(6) Tools of Trade if it is used by the D to earn his livelihood up to $2375
vii. 522(b)(3)(C) *Retirement Funds

3. Security Interests in Personal Property:

a. Waiver of Exemption via Security Interest:
i. Unless 522(f) applies, any of the Ds exemption are subordinate to a valid consensual
security interest in the property. By granting the security interest (e.g., a mortgage), the D
is taken to have waived the exemption as against the secured creditor (e.g., mortgagee).
522(c)(2).
ii. If there is any equity in the property left—the D may be use any of the exemptions to
consume any value there would be for the estate, leading the T to abandon it.

b. 522(f) – Avoiding Judicial Liens, and Non-Possessory, Non-PMSI Liens

i. (f)(1)(A) Judicial Liens for anything exception domestic support obligations.
ii. (f)(1)(B) Non-Possessory, Non-PMSI Liens (i.e., a C lends money and takes a security
interest in the household goods the D already own)
1. (i) Household Furnishings Stuff [(d)(3)]
2. (ii) Tools of the Trade [(d)(6)]
3. (iii) Professionally Prescribed Health Aids [(d)(9)]
4. * D may apply the the general exemption in 522(a)(5) to property that is
otherwise nonexempt, or to augment a existing exemption.
iii. To the Extent it Impairs an Exemption:
1. The Total of:
a. The Cs Amount of the Lien $6500
b. + Other Liens $0
c. + The Exemption Amount $3775
2. To the extent that it exceeds the Ds interest in the Property.
a. Ds Interest in the Property $7000 (Truck)
3. =$3225
iv. Rest becomes a General Unsecured Claim.

4. Proceeds and Tracing:

a. Courts are willing to countenance prepetition conversion of nonexempt assets into exempt
property provided that the conversion does not constitute bad faith—by selling the property at
FMV and reinvesting the proceeds in exempt property, it is permissible.
b. *Go beyond this opens up the door to Denials of Discharge
c. *522(o) -> reduces the amount of the Ds homestead exemption to the extent that, w/ intent to
hinder, delay or defraud Cs, the D acquired or increased an exempt homestead interest in the 10
years before the petition. Applicable to state opt-outs with generous homestead exemptions.

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 5. Partially Exempt Property
a. When D has property worth more than the exempted value, considered partially exempt and will
be sold – proceeds distributed in this order:
i. Cost of Sale
ii. D’s Exemption
iii. Judgment Cs (b/c they avoided under 522(f)

[Pre-Petition Claims] T has all the property of the estate, time for the C to file a Claim

6) Claims and Distributions:

1. Claims Process:
a. Once the property belongs to the Ds estate, the T begins to assemble the property and prepare to
sell it
b. The claims process will be distributed pro rata
c. C must submit a “proof of claim” form.
i. In C7 and C13 cases, a claim must be filed w/in 90 days after the first meeting of Cs.
ii. In C11 cases, the court fixes a “bar” date before which claims must be filed.
d. Must file a claim in order to receive any payment, even if the C was listed on the D’s schedules.
i. In C11 cases, a C listed on D’s schedule need not file a proof of claim
e. A claim is allowed unless a party in interest (D, TIB) objects.

2. Secured Claims:
a. Holders of allowed secured claims get paid first from the proceeds of their collateral prior to
distribution.
i. Subject to Individual Debtor Exemptions.
ii. Any remaining debt owed beyond C’s secured interest is treated as an unsecured C

3. Priority/General Claims:
a. Then, distribute the remaining funds (unencumbered, nonexempt property) among the general,
unsecured creditors.
b. General Principal – holders of allowed unsecured claims should be treated equally (share pro rata)
unless the code provides for priority creditors.
i. In which case, the holder of a priority unsecured claim is paid FIRST, before other
unsecured creditor. See 726(a)-(b).
4. Attorneys’ fees
5. Exemptions
6. Post-petition Claims – Made under §503.

7) Secured Claims
1. Does the C have a Claim? See 101(5) a right to payment or right to an equitable remedy

2. To What Extent is it an Allowed Claim under §502?

a. A claim filed under §501 is deemed allowed unless and until a party objects (502(a)). Any
objections made under 502(b), the claim allowed will be reduced to the extent that it is:
i. (b)(1) is unenforceable under any Ax or applicable law
1. *522(f) invalidates the extent of the secured claim here
ii. (b)(2) Post-Petition Interest and Fees
1. Unsecured Claim not entitled b/c the interest is unmatured interest on the filing
date.
2. Secured Claim – see 506(b) “to the extent permitted”
b. *a claim is as of the date of filing the petition – effects post-petition interest.

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Allowed Claim under §502
 = Principal Amount on the Loan, etc. $8500
 + Pre-Petition Interest, Penalties, and Attorney’s Fees $1000
=$9500
Allowed Secured Claim under §506
 If Oversecured Claim $10k -- $9500 = $500
o Entitled to Allowed Claim, and
o Equity Cushion = Value of Collateral – Allowed Claim
 *Creditor entitled to Post-Petition interest to the extent of its equity cushion. 506(b).

 If Undersecured Claim $9500 - $5000 = $4500

o Entitled to Value of Collateral.
o Will have negative equity
 (debtor owes more than collateral value) – leads to a bifurcated claim, and where the difference
b/t the Allowed Claim and Value of Collateral becomes a General Unsecured Claim.

3. To What Extent is it an Allowed Secured Claim? 506

a. The holder of an allowed secured claim is entitled to the value of the collateral subject to the lien.
b. 506(a) => determines how much the secured and undersecured claims are
c. 506(b) => deals with equity cushion
i. Secured Cs are entitled to interest, legal costs, and fees, to the extent of any surplus value
in the collateral.
d. 506(c) => administrative expense for T re costs incurred to sell collateral for secured C’
e. Bank is entitled under §506(b) to post-petition interest to the extent of its equity cushion.

4. Distribution to Unsecured Creditors

a. Pro rata distribution = property/claims
b. * Stock worth $15k, Car worth $5k
i. Bank = $5k Secured; $3.5k Unsecured (attorney’s fees post-petition)
ii. Miller Plumbing = $3k
iii. Other Creditors = $20k
iv. Total Secured = $5k Unsecured = $26.7k

5. (Available Assets for Unsecured Cs ) ÷ (Total Unsecured Claims) = Assets/Claims

a. $15k ÷ $26.7k = .56
b. So:
i. Bank gets $5k Secured
ii. Bank gets $3,500 (.56) = $1,960
iii. Miller Plumbing gets $3,200 (.56) = $1792.
iv. Other Creditors get $20,000 (.56) = $11,200

8) Priority/Unsecured Claims
1. Distribution Process of Property of the Estate is governed under 726.
2. 507(a)(1)-(10) Priority Creditors
a. (a)(1) Domestic Support Obligations
i. debts in nature of alimony, maintenance, or support directly to spouse/gov’t
ii. *Probably not Marital Property Settlement
iii. (C) T’s fees and expenses = related to the admins of assets used to pay domestic support
obligations
iv. (A) Allowed claims for DSOs owed directly to the spouse, ex-spouse, child
v. (B) -> DSO’s owed directly to the gov’t

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 b. (a)(2) Admin Expenses (via 503(b))
i. Rx in advancing the estate’s interest, preserving or enhancing its assets, or furthering the
D’s efforts at rehabilitation
ii. These get First Priority in C11
c. (a)(3)
i. In an involuntary case, the D is entitled to continue operating its business or conducting
its financial affairs in the period b/t the petition and the order for relief or appointment of
aT
d. (a)(4) Priority Salary and Wage
i. Wages up to $12850 per individual earned w/n 180 days of the petition
e. (a)(8) Taxes
i. Income Taxes for three to 4 years prior to the petition
ii. Property taxes payable in the 1 year before bankruptcy

3. *General Unsecured claims share pro rata in any fund remaining after all priority claims have been paid.
All unsecured claims that do not qualify for any priority fit into this category, as well as any deficiency due
on undersecured claims and any amount over the limit on priority claims.

C) Discharge:

1) Introduction: Discharge and Liens that Survive Post Discharge

1. In Ch7, automatic stay ends when discharge is granted or denied. If granted, the automatic stay is
replaced with a discharge injunction forbidding attempts to collect debt as a personal liability of the
discharged debtor.
2. A secured debt remains attached to its collateral and can be enforced against the collateral after
bankruptcy, even though D cannot be sued for the deficiency. 524(a).
a. Can be used as a defense against unsecured C’s.
3. Debts are discharged, but liens are not. 506(d)
a. i.e., Ch7 does not discharge a lien against real or personal property
b. Collection by seizure of collateral is not only permissible but often anticipated
4. § 727(a)(1) – debtor cannot get a discharge unless it is an individual.

2) Exceptions to Discharge (last hope for a C to try and get payment of debt)
1. 523 “Rifle shot” denial of discharge as to a single claim. All other claims are discharged.
a. Categories of specific nondischargeable debts (19 in all)
b. For certain types of rifle-shot exemptions, the C must object to discharge in bankruptcy court or
the debt will be discharged automatically. 523(c)
c. *(a)(2) – for debt for money, property, services, or credit extension if obtained by
i. (A) False Pretenses (doesn’t need to be in writing)
ii. (B) False/Misrepresentation in Financial Statements (must be in writing)
iii. (C) for purposes of (A) – Debts for $675+ Luxury Goods w/n 90 days before relief for a
Single C – presumed to be nondischargeable.

d. (a)(4)
e. (a)(6) willful and malicious injury by D to another entity or to the property of another entity.
i. tort plaintiff’s claim against Chickie dischargeable, medical malpractice
ii. constitutes commercial injury—covers selling a security interest.
iii. If bad enough can lead to 727(a)(2)

f. (a)(7)
g. (a)(8) – Nondischargeability of Student Loans unless excepting such discharge would impose an
undue hardship on the D and the Ds dependents.
h. (a)(9) – no discharge if driving drunk and causing injury (limited to ch7?)
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 2. Discharge for C13 is 1328
a. Included under C13 under 1328** no = x
i. *1328(a)(4) => narrower version of this (a)(6) – will and malicious
ii. *1328(a)(2) = (a)(8)
iii. 13 = (a)(2)

3. §727 – 12 “Global” denial of any discharge at all. No claims are discharged.

a. (a)(2) Transfer Property w/ Intent to Defraud C’s w/n a year before the petition. (gifting)
b. (a)(3) Falsifying Financial Records – … unless such failure to act was justified under all of the
circumstances of the case.
i. Failing to be able to find a Bona Fide Transferee
c. (a)(5) Transfer Assets w/ Bad Explanation/Reasoning (gambling)

3) D’s Post-Bankruptcy Position: (These are C7 rights)

1. §521(a)(2)-(3) requires a Ch7 D to issue a statement w/n 30 days of filing bankruptcy as to the D’s
intended course of action w/ regard to the collateral encumbered by a security interest
a. Non-exempt property is none of the Ds business in C7, the T gets to sell it and distribute its value
to the estate, with the S C’s lien attaching to its proceeds

2. [1] Section 524(c) Reaffirmation Ax w/ the C –

a. Pay the debt in installments and keep the property via a Consensual Arrangement, C needs
incentive to enter the Ax if immediate liquidation would fully settle its claim.
b. Requirements: Satisfy Terms of 524(c)-(d)
i. Protect D from coerced or uninformed assumption of liability for discharged debt.
ii. D must act voluntarily and fully informed.
iii. Impartial Review by (i.e., Attorney)
c. Consequences – Ds sign a legally binding Ax to waive discharge of given debt, subjecting
themselves to losing the collateral and being sued for the deficiency
i. If can’t satisfy this => off to C13

3. (2) Redemption 722 – Debtor’s Call Option: Right to buy out a secured creditor for the amount of the
allowed secured claim/
a. Requirements:
i. D must be an individual
ii. Debt must be Dischargeable
iii. Must be tangible personal property intended primarily for personal, family, or household
use—cannot be for real property [521[a6A-B]
iv. Must have been either exempted or abandoned.
v. D must pay the claim in full.
1. If the value of collateral >/= the debt => fully allowed secured claim
2. If the value of collateral < the debt => redemption price limited to the value of the
collateral.
vi. Estate must not have any interest in the property, and if it does, the D must first pay out
the estate’s interest so it will abandon the property.
1. An exemption may limit the Secured Claim / Estate’s Interest.
2. Won’t have interest when lien captures the entire value of the property or lien
plus exception equal the value of the property (722).
b. Examples:
i. *$14k Car, w/ $13k Lien
1. Does the D have Equity in the Car? $1k
2. To what extent is the D’s equity exempt? $3,750 (522(d))
3. Does the Estate have an Interest in the Car? No
4. *Can redeem for $13k.
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 ii. $10k Car, w/ $20k Lien.
1. C’s Allowed Claim? $20k
2. C’s Allowed Secured Claim? $10k
3. C’s Allowed Unsecured Claim? $10k
4. May Debtor redeem the car?
a. No equity in car, estate has no interest, right type of property
5. If so, what is the redemption price?
a. 10k – to drive a car that is worth $20k, benefits of § 722
4. (3) Ride Through
a. Situation where the D is not in default at filing and continues to make its contracted payments
under the original Ax while the C simply does not do anything to reclaim the collateral
b. Effectively the D and C pretend the bankruptcy is not happening.

5. (4) Surrender it to the Estate/Creditor

6. *Reaffirmation of Unsecured Debt
a. There are a few obvious reasons to reaffirm an unsecured debt, such as gratitude
b. Also, protecting to a co-debtor who has signed onto pay if the debtor fails to do so
c. Incentive:
i. Offer of future credit
ii. Threat of an objection to discharge
iii. Protection of co-debtors (co-signors).
d. Need to Look out for Violation of Automatic Stay under 362(a)(6).
7. Nondiscrimination – §525
a. §525 forbids discrimination (i.e., employment discrimination) based on a person’s prior filing of
bankruptcy.
b. Section 525 forbids discrimination for being a bankrupt
c. Generally interpreted narrowly

Part IV: C13 Bankruptcy

A) Overview of Ch13
1. Role of the Trustee:
a. In sum, the T scrutinizes everyone connected with the case
i. Objecting to improper C claims
ii. Asserts any objections to the D’s discharge.
iii. Duty to assist the D in performance of D’s duties. 1302(b)(1) + 1302(b)(4)
b. The T’s main duties, however, are in connection with confirmation of the plan and distribution of
payments
c. Generally expected to recommend approval or denial of the D’s plan. 1302(b)(2)(B)
d. Ensure that the D gives up the required amount of income.
i. Obligated to ensure that payments are commenced w/n 30 days after the plan is filed and
that payments are properly distributed to C’s. 1302(b)(5) and 1326.
ii. Ordinarily, the plan provides that the D will make lump-sum monthly payments to the T
and then the T will distribute the funds to the C’s
2. Typical process of a C13 bankruptcy:
a. D files the petition.
b. At the moment of filing a Ch13 petition:
i. An estate is created. Includes:
1. All legal or equitable interests of the D as of the commencement of the case.
2. Property and earnings acquired after commencement of the case but before the
case is closed, dismissed, or converted.

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 c. the automatic stay provisions of 362 restrict the actions of Cs against property of the estate or the
D.
i. automatic stay remain in effect as a going concern until the case is closed, dismissed, or
discharge is granted or denied. 362
d. D files a plan providing for the repayment of all or a portion of the claims against the D out of the
D’s future income.
e. The confirmation of a plan vests all of the property of the estate in the D.
f. The process of having the plan confirmed by the court:
i. Cs’ meeting is held.
1. Ds appear and are examined.
2. TIB and Ds’ attorney also appear.
ii. Confirmation hearing is held
1. Bankruptcy Court may either approve, deny, or modify the plan.

B) Payment to Secured Creditors:

1. From the C’s perspective it is the prospect of payment obtained by selling the D’s assets versus payment
from the D’s future income
2. One of the most common reasons for choosing Ch13 is the D’s desire to keep property subject to a
security interest.
3. Ch13 plan is often built around satisfying the legal requirements for retaining a specific piece of property
and structuring a new payment schedule.
4. Secured Cs in a C13 enjoys substantially better protection than Unsecured Cs.
a. Will often just want to seize the property and sell it.
i. Whether or not they can will depend on whether the D can comply w/ the provisions of
C13 that are designed to protect secured Cs.
5. Ds keep all assets, regardless of whether the assets exceed exemption levels and D agrees to pay all
disposable future income for a minimum of three years
6. No discharge will be granted until the D makes the very last payment on the plan.
7. In Ch13 the D retains control of the property of the estate, although statutory provisions are confused
have a number of gaps. 1303 and 1306

1) Modification of a Claimant’s Rights and the Cure of Default

8. 1322(b)(2) – Power to Modify Rights of Secured Creditors minus those w/ a security interest in real
property that on the D’s principal residence (101(13A).
a. Ways to Modify a Claim:
i. Stretch out the term (e.g., 3 year loan to a 5 year payout);
ii. Lower interest rate (e.g., contract rate 14%, plan pays interest at 6%); or
iii. Reduce the principal by cramdown or lien stripping – 1325(a)(5).
9. 1322(b)(3) – allows the plan to provide for the cure or waiver of any default; this cure or waiver applies to
all debts
10. *defaults require payment to be made on the arrears.

2) Modifying the Secured Creditor’s Contract

1. Rule for required payments to secured Cs is contained §1325(a)(5) (Cramdown Section)
2. (a)(5)(A) – Consensual Treatment. C accepts the plan.
a. acceptance can be found if fails to object)
3. (a)(5)(C) – Surrender the Collateral to Secured Claimant. Disposes secured claim + obligation to pay. If
collateral < debt => deficiency is an unsecured claim.
4. (a)(5)(B) – Lien Stripping: Pay the Secured Claim via a Plan providing for a stream of payments equaling
the total allowed secured claim that is up to present value. (but not home mortgages, per § 1322(b)(2)).
a. To calculate minimum payment to holder of allowed secured claim:
i. The amount of the allowed secured claim (Principal) § 502, § 506

15
 1. = replacement value – price a retail merchant would pay considering the age and
condition (1325 v. 506)
ii. The term of the plan
iii. The effective interest (or discount) rate
1. PV of the allowed secured claim under §1325(a)(5)(B)(ii).
b. Example:
i. Leisure Land’s allowed claim? $39,980
ii. Interest, penalties and attorneys’ fees (pre-petition) + $12,300
iii. Allowed claim = $52,280
iv. Value of the collateral (allowed secured claim) = $41,000
v. Leisure Land’s allowed secured claim?
vi. So, What will Leisure Land get in George’s chapter 13 plan?
1. Term of Plan = 60 months
2. Discount Rate is 4.25%
3. Allowed secured claim = $41,000 / 60mo.
a. Minimum Monthly Payment = $764.36, 1325(b)(5)
4. Allowed unsecured claim = $11,280
c. *need to figure out the lowest monthly payment that will pay off the allowed secured claim with
interest over the term of the plan.
d. *also treats the unsecured portion of the debt like any other unsecured claim under the plan.
e. *wont work if Value of Collateral > Allowed Claim
f. *Secured C retains the lien until the grant of discharge under 1328, and if the D defaults before
then, case is converted/dismissed w/o completion of the plan. 1325(a)(5)(B).
5. Exempt from Stripdown Modification under Hanging Paragraph of 1325
a. (1) Any PMSI granted within the year before bankruptcy is exempt.
b. (2) The holder of a PMSI in a car granted w/n 910 days prior to the bankruptcy petition. 1325(*).

3) Long Term Debt Modification (Particularly for Real Property)

1. Not permitted to modify (cramdown) the rights of a security interest mortgage. 1322(b)(2).
a. i.e., cannot bifurcate it.
b. *Second Mortgage Lender will be treated as a general unsecured creditor under 506(a) if there is
no interest in the property to attach to.
i. First Mortgage = 400k, Second (Junior) Mortgage = $120k, House Value = $300k.
2. However, permitted to “cure and maintain” a default of a mortgage as it is not treated as a modification
of the mortgagee’s rights. 1322(b)(5).
a. 1322(b)(5) – allowed to catch up on the past arrearage while making current payments on the
mortgage as the come due.
b. 1322(c)(1) makes it clear that cure is possible until such time as the property has been sold at a
properly conducted foreclosure sale.
c. In utilizing 1322(b)(5), because payments on the claim will extend beyond the period of the plan,
1328(a)(1) excludes the debt from C13 discharge—aka payment of the mortgage is not affected
by discharge at the completion of the plan.

3. 1325(b) – Cure and Maintain Long Term Debt Treatment

a. *Must be a Primary Residence b4 you do anything.
b. (1) [Cure] Provide for the curing of any default w/n a rx time;
i. Rx Time = means the length of the C13 plan according to the courts. Creditor may say
otherwise (Shorter) but court’s disagree
c. (2) [Maintain Payments that are due] Maintain Payments on any…claim on which the last
payment is due after the date on which the final payment under the plan is due
i. This is the $250 min. payment – you must continue to maintain the payment that are due
under non-bankruptcy law (typically made outside the plan)
4. Example:
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 a. Donnie bought a house 7 years ago on a 30 year note and mortgage.
b. The house’s value is $55,000.
c. The principal balance on the note is $62,000.
d. Monthly payments are $250.
e. $500 in late penalties and costs. (missed for 6 months now)
f. ~~~~
g. (1) Cure Default in a Rx time =
i. 6 months x $250 = $1500 plus $500 penalty = $2000
ii. 2000 at 4.5% over 60 months = $37 (36 months = $59)
iii. *add this to the normal monthly payments.
h. (2) Maintain Payments that are Due
i. keep on making $250/mo. payments

5. Secured C may want to bring 362(d) actions as well to repossess and sell the collateral that the D wants
to retain (see below)

3) Payments to Unsecured and Priority Creditors

1. Secured Claims = must make payments satisfying the statutes for present value of the claim
2. Priority Unsecured Creditors 1322(a)(2)
a. Entitled to deferred cash payments over the term of the plan the sum of which equals the
allowed priority claim w/o interest.
b. if the debtor cannot afford to pay all his priority obligations in full, then he cannot confirm a
chapter 13 plan
c. (via § 507)
i. Attys Fees,
ii. Administration Claims,
iii. Domestic Support Obligations,
iv. Taxes [507a8B]
3. 1325(a)(3) – plan must be proposed in “good faith and not by any means forbidden by law.”

4. Disposable Income Test [1325(b)]

a. Ds must devote all of their “disposable income” to funding the pot for unsecured creditor
payments over the life of the C13 plan.

b. Step 1: Determine Ds Current Monthly Income [101(10A)]

i. Income over Past 6 Months prior to the Petition from all sources w/o regard to tax for
average and divided by 6. (must include spousal income too – 1325b4A)
ii. Divide by Six to Get Current Monthly Income = $30k/6 = $5k

c. Step 2: Compare to Annual Median Income for D’s Household Size

i. (Heads on Bead Approach)
ii. Multiply Current Monthly Income by 12 ($5k)*(12) = $60k

d. IF Below-Median D’s Disposable Income [1325(b)(2)(A)-(B)]

i. If below, deduct from Current Monthly Income expenses:
1. Child Support Payments, Disability Payments to the extent rxly necessary.
2. Charitable Organizations – can’t exceed an amount in excess of 15% of gross
income of the D for the year in which contributions are made.
3. Amounts reasonably necessary to be expended for the maintenance or support
of the D, dependent of the D, and a Ds business if applicable.
a. Court decides whether the expense amount is “rxly necessary.”
b. i.e., orthodontist, animal doctor, piano lessons, etc.
ii. Must propose a 3 year plan, can opt to do 5 w/ court. 1322(d)(2)
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 e. IF Above-Median D’s Disposable Income [1325(b)(3) ($5k) – ($3.5) = $1.5k
i. If above, deduct from Current Monthly Income expenses
1. Charitable contributions under
2. 707(b)(2) Statutory Expenses
a. Strict Requirement—court does not interfere
ii. Must propose a 5 year plan. 1322(d)(1)

f. The Surplus Leftover is the Amount they Must Pay Per Month to Unsecured Cs
g. Multiply by 60 to get Commitment to Plan = $90,000

5. Best Interests Test [1325(a)(4)] See if this is greater than $90,000

a. Hypo C7 liquidation analysis – Requires that each Unsecured C receive at least as much as that
creditor would have received if the debtor had gone into CH7.
i. If this Number is </= the Proposed Plan # (see Disposable Income) – then pass
ii. This Number = Available Assets for Unsecured Cs

4) Modification and Dismissal of Chapter 13 plans

1. When after confirmation the payment plan is messed up, the D, the T, or a C may move to have the plan
modified or dismissed. 1329(a)

5) Threshold Eligibility for Ch13 [109(e)]

2. (1) Individual
3. (2) With Regular Income
a. 101(30) addresses regular and stable income
4. (3) with debts under the debt caps – only counts debts that are Noncontingent and liquidated.
i. noncontingent, liquidated, unsecured debts of less than $394,725 and
ii. non-contingent, liquidated, secured debts of less than 1 million
b. Contingent = The claim depends on some event that hasn’t yet occurred and may never occur.
For example, if you cosigned a secured loan, you won’t be liable unless the principal debtor
defaults. Your liability as cosigner is contingent upon the default.
i. “if all events giving rise to liability occurred prior to the filing of the bankruptcy petition,”
the debt is noncontingent
c. Unliquidated. This means that a debt may exist, but the exact amount hasn’t been determined.
i. “ready determination and precision in computation of the amount due” then it’s
liquidated”

PART V: BUSINESS BANKRUPTCY

A) Business C7 Liquidation
1. Businesses have the same choice between liquidation or reorganization as consumers, but the
considerations are very different for both Cs and Ds.
2. Most large businesses end up in ch7 after a failed reorganization attempt in ch11
a. Most concepts for consumer C7 apply for businesses (automatic stay, appointment of trustee,
priority of claims, etc.)
3. Differences
a. No discharge for a Ch7 D that is not an individual (e.g., a corporation). 727(a)
i. Instead of being loosed from its debt, it is instead dissolved
b. No exemptions for corporate Ds (all property is available for repaying the Cs/customers)
c. Normally, the D in these sorts of issues have no interest in the proceedings.
i. Because it has so little to gain from a C7, a corporate D almost never seeks liquidation
except in final, exhausted resignation.
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 4. Many C11 reorgs end up in C7
a. All C11 negotiations are held in the shadow of C7—can end up there in different ways:
i. D usually has an absolute right to convert the case to a C7 (§1112(a))
ii. C’s can do so on a proper showing (§1112(b))
iii. D ordered there if the Cs do not approve the reorganization (1112(b)(4)(A))
iv. 1126(c)
5. The parties perform a “liquidation analysis,” which shows the likely financial result for that party in a C7
liquidation
a. Working backward from that analysis, the party will determine how strong a position it can take in
the nonbankruptcy workout or in the C11 case.
6. Two Practical Points of Business Liquidation in Ch7
a. Bankruptcy liquidation is likely to provide much more satisfactory results for the Cs collectively
than state collection law when the D is in general default.
b. It is most often the chapter in which an involuntary bankruptcy petition is filed.
i. This sort of Ch7 is often the one most involuntarily filed
7. Initiation
a. How does a bankruptcy case get started?
i. Often only sought as a last resort.
1. There is a consensus that far too often companies do not file until it is too late to
save them and most of their value has been dissipated.
ii. Initiation by Cs often fails to fill the gap.
1. If involuntary bankruptcy is too easy to commence, Cs have too much leverage
and a single aggressive C may destroy a viable business.
2. Yet, if the law imposes stringent requirements for proof of serious financial
distress as a precondition for an involuntary bankruptcy, Cs will find it difficult to
initiate a case before Ds are completely moribund.
b. The ideal solution?
i. The D should open a bankruptcy proceeding while there is still substantial value in the
company that can be distributed in liquidation or used to rescue the company in
reorganization.

Involuntary Bankruptcy
1. 303(a) Involuntary bankruptcy may be initiated in C7 or C11 (not C13), and may be commenced only
against a:
a. person [101(41)], except a farmer, family farmer, or
b. corporation [101(9)(A)(iv)] that is not a moneyed, business, or commercial corporation”(means
not for profit or charitable organization) (e.g., campaign)
c. —that may be a debtor [109] under which the cash is commenced
2. To Bring an Involuntary Case:
a. [1] Creditor Requirement:
i. [a] Count Holders – not contingent as to liability or the subject of a bona fide dispute as
to liability or amount
1. Debts in any meaningful dispute as to liability or amount are not holders within
the meaning of 303(b)(1) and cannot count.
ii. [b] As a Group: 12 or More Holders [303(b)(1)]: Need 3 to File Petition w/ Aggregate
Unsecured Claims > $15,775
1. Secured Claim cannot be counted for determining aggregate amount
iii. [c] On Own: 11 or Less Holders [303(b)(2)]: One can file petition holds in aggregate
unsecured claims > $15,775 but need:
1. Excludes Insiders, Holders, and Transferees of Avoidable Transferees.
2. Secured Claim CAN be counted for determining aggregate amount
b. [2] If D denies the petition, two grounds for relief under 303(h)
i. (h)(1) Custodian has been appointed or took positions of Ds property
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 ii. (h)(2) D is generally not paying debts as they become due
1. Excludes bona fide dispute of debts from the determination of general
nonpayment.
2. Income Statement Test: Not Paying Debts as they Become Due
3. Balance Sheet Insolvency: Liabilities > Assets – Negative Net Worth
4. Factors:
a. Number, Value, and Importance of Overdue Debts
b. Ds overall financial situation, including period/circumstances of default
c. Arrangements made w/ Cs to cure default
d. Ds general financial viability.
5. Court will not likely place a D in involuntary liquidation if it appears that the D
may overcome her financial adversity and the overall interests of the D and her Cs
are best served by allowing the D to try to cope w/ the financial difficulties.
3. 303(i) entitled D to rx attorneys’ fees and costs (and sometimes even punitive damages), against an
unsuccessful involuntary petitioner.
a. Court may award compensatory and punitive damages if it finds that a creditor filed the
involuntary bankruptcy petition in bad faith.
b. totality of the circumstances
c. presumption of good faith in favor of the petitioning creditor, and thus the alleged debtor has the
burden of proving bad faith.
4. Quasi-involuntary bankruptcy:
a. Secured C’s may provide the necessary pressure for a D to file bankruptcy by threatening or
actually initiating repossession or foreclosure.
i. * secured creditors in the US rarely have to find 2 colleagues to join a petition to get the
debtor to file. Most can force a “quasi-involuntary” bankruptcy filing by threatening
repossession of key property (e.g., key collateral).
ii. Secured Cs usually do not need C7 bankruptcy help because they have already negotiated
for their own preferred collection rights.
b. Unsecured Cs’ have much less options.

B) Business C11 Reorganization

1) Intro to Business Reorg

1. General:
a. Business Reorganization in C11 is a negotiated solution to a business debt crisis.
i. a means to try to reorganize the business through recapitalizing its debts and changing its
operations—goal being to prevent liquidation in C7
ii. Key premise of a business model reorganization (wholesale reshuffling of the business
operations as opposed to a purely financial reorganization) is that the new company can
in fact be profitable.
b. C11 is available for both individuals and corporations
i. Individuals usually forced into by C7 and C13 ineligibility.
c. Unlike C13, in C13, equity interest holders are entitled to disclosure about Ds business
circumstances and a vote to object or vote for the reorganization.
2. The DIP:
a. The post-petition entity in a C11 case.
i. Legally distinct from the pre-petition debtor.
ii. Ordinarily, continues to operate the business,
b. DIP is in control of the debtor’s assets and affairs.
c. DIP is effectively deemed to be the T, with most of the powers and duties attendant to that role
under §330. 1107(a).

20
 d. DIP can retain credit – obtain financing and other credit during bankruptcy w/ the approval of the
court. 364
e. Ordinarily no TIB is appointed in C11, and it is the D acting as the DIP.
i. In larger cases, an Official Unsecured C Committee is appointed – has the right to
scrutinize the Ds activities (i.e., demand financials) and negotiate w/ the D on behalf of all
Cs. §1102-03.

f. DIP Avoiding Powers:

i. Avoiding Powers – power to recover preferences (payments or transfer property to
favored Cs w/n 90 days of bankruptcy. §547.
ii. The power to assume or breach outstanding executory K. 365
iii. To power to void fraudulent conveyances. 548 and 544(b)
iv. The power to Set-aside unperfected or late perfected security interests in the debtor’s
property. 544(a) + 547
v. Power to require turnover of property held by another entity. 542 + 543.

3. Authorized US T or C to Appoint/Displace DIP & Appoint a Trustee. 1104(a)-(c)

a. 1104(a) – Required appointment of a T on a showing of Cause (e.g., Fraud/Gross
Mismanagement)
b. 1104(b) – Possible appointment of a T on a showing it is in the best interests of the Cs
c. 1104(c) – Alternatively, can appoint an Examiner
d. * It is settled law that the appointment of a T is the exception, rather than the rule, and is relief
granted only as a last resort.
4. Mechanics of the C11 Process
a. Filing a Petition:
i. After business files Ch11 petition, the automatic stay under 362
ii. Debtor at this time is trying to stabilize the failing business.
iii. D is obtaining financing, getting approval for the use of cash collateral, arguing about
“adequate protection” of secured Cs, firing employees, reassuring customers, closing
money-losing facilities, and so forth. Often all at the same time
b. Reorganization Plan and Disclosure Statement:
i. Once some stability is reached, the D begins to negotiate a plan w/ its major Cs.
ii. To conclude the bankruptcy, the D will propose a plan of reorganization, in which it will
offer to pay each “class” of Cs a certain percentage of their claims over a stated period of
time, w/ payment to be made in cash, in property, or in securities issued by the
reorganized D.
iii. Plan must be approved by the specified majorities of Cs in each class. 1126(c)
1. Objectors may urge the court to deny confirmation and convert the case to a
liquidation in C7.
iv. Plan also must conforms to other statutory requirements. §1129.
v. Upon confirmation, the debtor is discharged from all its prepetition debts, except as
provided for in the plan. § 1141(d).
1. The post-petition entity in a chapter 11 case.
2. Legally distinct from the pre-petition debtor.
3. Ordinarily, continues to operate the business,
a. Subject to important statutory limitations

2) Automatic Stay and Adequate Protection

1. General Considerations
a. The mere threat of bankruptcy may be enough to hold off people from foreclosing or
repossession.
b. Cs know that the automatic stay is difficult to lift (especially early on)
c. The court must obtain immediate and complete control over the D and all of its assets.
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 d. The stay must be nationwide (or worldwide) and it must be strictly enforced.
e. Even actions taken in innocent violation of the stay, without notice of the bankruptcy filing, are
void or voidable.
2. Step 1: Determine what is included w/n the Property of the Estate.
3. Step 2: Argue a statutory exception to the stay as provided in 362(b)
4. Step 3: Ask the Court to Lift the Stay by satisfying one of three alternative tests under 362(d).
a. * there is no limit on how often a creditor can bring lift-stay motions as the case goes along
5. 362(d)(1) Lack of “Adequate Protection” of a Security Interest in the Property.
a. Preventing the Collateral from Losing Substantial Value.
b. Must provide E that the value of the collateralized property is declining, or at least threatened
(i.e., property value at time of hearing to time of filing)
c. Methods of providing adequate protection to a Secured Creditor:
i. 361(1) Cash Payments: Periodic payments that result in a decrease in the value of such
entity’s interest in the property.
ii. 361(2) Additional Collateral: Additional or replacement lien that results in a decrease in
the value of such entity’s interest in the property.
iii. 361(3) Indubitable Equivalence: A “catch all,” permitting other means of providing
adequate protection “as will result in the realization by such entity of the indubitable
equivalent” of their interest in such property.
d. *C does not need to pursue lifting the stay, and can instead ask ask for adequate protection
payments to ensure it is covered a/g declining value while remaining subject to the stay.
e. An oversecured creditor w/ an adequate equity cushion should be fine in these kind of situations.
f. If undersecured, may be unlikely to have adequate protection unless T is able to offer additional
protection under 361.
g. Ds prospects of rehabilitation are also relevant, and a strong likelihood of success may counteract
some doubt in valuation.
h. C13 => adequate protection requires C’s interest is protected by insurance from loss or
destruction of collateral.
i. Secured Creditor is concerned about
i. loss of the collateral (e.g., fire, theft, simple Nx), and
ii. decline in value (e.g., depreciation).

j. 362(d)(2)
i. [a] D has no Equity in the Property and
1. If the Property > Debt -> Relief from the Stay cannot be granted, b/ then the C has
equity in the property.
ii. [b] the property is not necessary to an effective reorganization.
1. C7 => the property cannot be necessary for an effective reorganization.
2. C11 => the D must show that the D needs the property for successful
reorganization efforts and that the D has a prospect of successful reorganization.
3. C13 => Question is whether the asset is necessary for the Ds rehabilitation –
whether it is needed to affect a fresh start (recreation property v. ____)
iii. *362(g) – D bear the burden.

k. 362(d)(3) – SARE – Single Asset Real Estate Cases

i. Defined in section 101(51B) – where a D derives substantially all of its gross income from
the rental of a single piece of real property that is essentially used for commercial
purposes (or apartments) larger than 4 units.
1. (1) Ds only significant business is the ownership of a single piece of income
producing real estate, and
2. (2)the D is engaged only in the passive activity of collecting rent and conducting
maintenance of the property.

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 ii. Purpose is to prevent dilatory behavior by putting pressure on the D to create a workable
plan w/n a short period of time, ~90 days, or if this has not been possible, at least to make
payments equal to interest to the mortgage holder.
iii. If the D does neither of these things, the mortgagee may obtain a lift from the stay or at
the minimum modification – allowing the mortgagee to foreclose on the property.

[C] Operating in Ch11

1. Who’s Running the Show
a. Courts are reluctant to remove a manager from his position as DIP
b. However, this is not to say they won’t do it
c. Under section 1104, the court has the power to appoint a trustee
d. Where there is large scale waste and diversion of corporate assets
e. Using chapter 11 to liquidate can be financially sound as a decision given that current
management may be able to get more for the assets than a trustee

2. Continued Routine Exception: DIP is authorized to operate and enter into transactions that are in the
ordinary course of business w/o notice or a hearing. 363(c)(1), §1108
a. Those outside must be authorized by court after notice and hearing. 363(b)(1)
i. Horizontal Dimension Test whether, from an industry-wide perspective, the transaction is
commonly undertaken by companies in that industry.
1. (the industry’s ordinary course)
ii. Vertical Dimension Test: whether the transaction is w/n the rx expectations of interested
parties as to this particular DIP.
1. (DIP’s ordinary course).
b. Why? Insolvency and moral hazard. Protection for creditors/control.
c. limited to the use of its assets subject to a Security Ax. 363(e).
d. *Avoidable Transfers – look out

3. What Happens to the Cash

a. D does not have the free rein to run the business that it had before bankruptcy
b. There is a special danger of cash (because of its liquidity)
i. The special concern of lenders who lend on an ‘asset basis” based on security in inventory
or accounts because the collateral quickly turns into cash and may quickly disappear
c. Using Cash not Subject to a Lien okay as long as it’s in the ordinary course of business.
d. When you think about cash collateral, want to think about the original collateral, the proceeds,
inventory. But also want to think about the right to set off and that right that is present in
bankruptcy

4. Cash Collateral – Using Cash Subject to a Lien: §363(a)

a. D frequently has cash collateral (cash subject to a lien) that cannot be used w/o the court’s
permission. §363(c)(2).
i. Usually derived from the sale of inventory or collection of accounts “cash collateral” i.e.,
running shoe store.
ii. C can argue under 362(d) Lack of Protection.
b. §552 – Provides that a debtor’s previously granted liens that cover after-acquired property (e.g.,
“this loan is secured by all factory equipment of the debtor, now and hereafter acquired”)
encumber only the D, not the subsequent bankruptcy estate.
i. So, if the DIP buys a new machine for its factory, the secured Cs after-acquired property
clause, even if fully valid under Article 9, is nullified and will not attach to the estate’s new
machine
c. HOWEVER: proceeds of original collateral is subject to a pre-petition Cs security interest—tracing
is allowed.

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 i. Cash Collateral is extended to identifiable proceeds received by the D in exchange for the
original collateral—e.g., funds that are identified as proceeds of inventory subject to a
security interest
1. If recovered post-petition -> they are property of the estate.

d. Setoff – 553(a) preserves the “right of setoff,” meaning that the Bank can deduct the amount
owed to the D from his allowed claim.
i. Although the right to setoff is not technically a security interest and is expressly excluded
from the general rules of UCC Art. 9, a set off is treated as secured claim for the amount
of the setoff right. §506(a)
ii. When the setoff right arises from cash = cash collateral and governed Automatic Stay—
the C may not exercise right to setoff w/o permission from the court. 362(a)(7), but could
protect itself with an automatic freeze. This was to give the bank time to get relief from
the automatic stay.
1. Citizens Banks of Maryland (1995)
iii. Statute says “a mutual debt” – meaning it precludes “triangular” set offs

e. CL rights of Reclamation to claw back recently shipped goods or delivered goods (here’s a
barbeque, you can pay me at the end of the month)
i. Under 546(c) if a D receives the goods while insolvent and within 45 days of filing
bankruptcy, the seller may have a right to get the goods back if timely written demand is
given.
ii. Additionally, if a seller of goods received by the debtor within 20 days before bankruptcy
it gets automatic administrative priority claims for invoices. 503(b)(9)

[D] Reshaping the Estate

1. Generally
a. The avoiding powers of the TIB are available in all types of bankruptcy cases, although used most
often in the Chapter 11 context cause they’re expensive and also in chapter 7 cases
b. It will be important to keep in mind the difference between the pre-bankruptcy debtor and the
debtor in possession
c. The DIP is trying to save the company as a going concern for all the creditors

Strong Arm Clause – 544(a) Three Hypothetical Creditors

1. DIP exercising right of trustee wants to avoid liens so as to free-up collateral to serve a security for some
post-petition financing, to make it possible to sue the property w/o notice and hearing if the property is
inventory subject to protection under 363c2 (cash collateral).
2. In a Ch11 case, the DIP has these strong-arm powers instead of a trustee. § 1107(a)
3. Forecloses Estoppel Type Arguments 544(a)(1) (“without regard to any knowledge of the trustee or of any
creditor”).

4. [1] Judicial Lien Holder [544(a)(1)] – Gives the T the powers and rights of such a judgment lien [101(36)]
creditor at the moment of bankruptcy filing—
a. Under state law, a judicial lienholder, and thus the T/DIP, has priority over an unperfected
secured creditor, and thus makes an unperfected security interest is avoidable. UCC Art 9 9-
317(a)(2)
i. Clawback Exception [9-317(e)] Exception to First in Time Rule under 9-317(a)(2), a PMSI
lender has a grace period treatment of perfecting the lien within 20 days after filing.
ii. This Type of Perfection is Deemed a Violation of the Automatic Stay under 362(a), but
under 362(b)(3)—late filing statement is an express exception
b. the secured party loses its security interest and becomes a general undersecured claimant.

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 c. If the last minute perfecting of an interest (i.e., filing) occurs w/n 90 days of the bankruptcy, the
perfected security interest would have been avoidable as a preference under §547.

5. [2] Unsatisfied Execution Creditor [544(a)(2)]

a. = someone who gets a writ, gets the sheriff to execute the writ, but something happens – sheriff
returns the writ b/c could not find anything to levy on (nothing there)

6. [3] Bona Fide Purchaser of Real Property [544(a)(3)] – gives the T the the rights and powers of a BFP’s of
real property from the D who obtained and perfected that status on the date of petition.
a. Would allow them to trump unrecorded land interests: If under the applicable nonbankruptcy
law a BFP would prevail over an unrecorded interest, that unrecorded interest may be avoided.
i. penalize people who take an interest in property (easement, adverse possession), but
don’t report it, so make a good faith purchaser for value.
b. Expressly Excludes Fixtures/Personal Property only 544(a)(1)-(2) will work w/ Fixtures.
c. 20 Day Grace Period Does Not Apply

Power to Avoid Statutory Liens [§545]

1. Allows the DIP to avoid certain liens created automatically by operation of state law.
2. Statutory Lien that is validly obtained and perfected under nonbankruptcy law is fully effective upon the
bankruptcy of the D and cannot be avoided unless it fits into one of three categories specified by 545:
3. Statutory Liens [101(53)]
a. Includes Common Law Liens of Distress of Rent,
b. Expressly Excludes Consensual Security Interests and Judicial Liens even if they are provided for by
statute.
i. i.e., a voluntary contractual lien (security interest under Art. 9, state law) is not avoidable
under 545 even if it is given to a landlord
4. [545(3)–(4)] Landlords’ liens – permits the DIP to void state-law landlords’ liens. i.e., Dominant Landlord
Lien for Unpaid Rent
a. Section 545(3) (Rent)
b. Section 545(4) (Lien of Distress for Rent)
i. Means if you don’t pay your rent, Landlord has a lien on all your property in the
apartment
c. Lessors should be treated as unsecured Cs and not given any special rights in bankruptcy unless
they have obtained a consensual security interest in the lessee’s property
5. [545(1)] Bankruptcy Priority Liens – Voids statutory liens that are triggered on bankruptcy or near-
bankruptcy conditions
a. Liens created by state law that Congress believes to be phony in the sense that states do not
intend to create real liens for this purpose, but only to circumvent bankruptcy
b. Requires the liens to be valid both in bankruptcy and out
i. Essentially, it means that a bankruptcy court won’t recognize the lien unless the lien
would exist in both bankruptcy and out
ii. The idea being that the states can’t just make liens to effect bankruptcy cases
6. [545(2)] Unperfected Statutory Liens
a. Allows the trustee or DIP to avoid statutory liens if the lien is not perfected or enforceable at the
time of the commencement of the case against a BFP.
b. Not confined to real property.
c. re Mechanics Lien:
i. If not properly recorded, it takes priority superior to all other interests (i.e., judgment
liens) except for those of a BFP of the property from the owner of record. (See 544(a)(3)
ii. if properly recorded, take priority over a BFP.
d. After T’s avoiding powers:
i. Mechanic’s Lien (Trustee-- avoided/preserved for estate under § 551)
ii. Judgment Lien (Gonzales)
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 e. When T avoids the mechanics’ lien under 545(2), it steps into the mechanics’ lien’s place in the
priority line by virtue of 551 (“preserved for the benefit of the estate”)

Preferential Transfers:

Overview:
1. Permits, if all the elements of 547(b) are met, the avoidance of transfers made by the debtor in the 90
days (or, in the case of insiders, one year) before the petition that gives the creditor an advantage to
which it is not entitled in bankruptcy
2. What is the T going to accomplish if it is able to avoid this type of transfer? You avoid the security, free up
the cash collateral

Preferential Transfer Avoiding Power: Analytical Strategy

[A] What is the transfer of an interest of the debtor in property under § 101(54).
a. Transfer of cash to pay an antecedent debt.
i. (D pays C $200 Cash)
b. Transfer of goods, etc. in kind to pay an antecedent debt.
i. (take equipment worth $14k)
c. Grant of a security interest in collateral to secure an unsecured or undersecured antecedent debt.
i. (D grants C a mortgage in Black Acre)
ii. (D grants a loan with a security interest in the equipment)

[B] Is it a preferential transfer under 547(b)?

1. To or for the benefit of a C?
a. Ex: D paid C by check.

2. On account of antecedent debt?

a. Debt [101(12) – liability on a claim] is Antecedent if it is incurred before the transfer of goods or
payment from the D was made.
b. Problematic when the debt and payment are nearly contemporaneous.
c. In a sale of goods, the debt of the buyer normally arises when the goods are delivered.
i. Debt Created 1/1 = When Deliver was Made
ii. Transfer on 4/15 = When Check was Deposited
iii. Thus, the debt was created on 1/1 and is antecedent to the transfer on 4/15
iv. i.e., D orders goods and is invoiced on 2/1. D later pays the invoice on 7/30, which is w/n
90 days of a bankruptcy filing.

3. Made while the D was insolvent? [101(32), Balance Sheet Test: L > A]
a. 547(f) presumes D to be insolvent in the 90days prior to the petition.

4. Made w/n the red zone?

a. Made (A) on or w/n 90 days before the date of the filing…or (B) [one year/insiders]
b. 547(e)(2) When does the Transfer Occur?
i. (A) On Attachment if the transfer I perfected w/n 30 days after Attachment.
ii. (B) On Perfection, if the transfer is perfected after 30 days after Attachment.
iii. (C) Immediately before the filing date if such transfer is not perfected by the filing date.
c. 547(e)(1)(A)-(B) When is a Transfer Perfected?
i. Real property => as soon as a subsequent BFP “cannot” acquire a superior interest in the
property, and
ii. Other Property => as soon as an ordinary judicial leinor “cannot” acquire superior rights
d. *When the Check is Deposited = Transfer
e. Perfection of a Security Interest = Transfer (is it w/n the Red Zone?)
f. Payment of an Outstanding Debt = Transfer
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 g. A late transfer can make the debt Antecedent.

5. That enables the creditor to receive more than it would in a C7 liquidation (“IIP Test”)?
a. Requires a hypo Ch7 liquidation to be calculated
b. An unsecured or partially secured C of an insolvent D ALWAYS improves its position
i. If the transfer is not avoided, C is paid; if it is avoided, C, as a general unsecured C, will
receive a distribution relative to all the other unsecured C’s.
c. A fully secured or oversecured creditor NEVER improves its position?

If so, do any exceptions in 547(c) apply to protect the transfer from avoidance?
1. (c)(1) Substantial Contemporaneous Exchange for New Value
a. T may avoid a transfer to the extent that such transfer was:
i. (1) Both the C and the D intended it to be contemporaneous:
1. Exchange to new value to D and was substantially contemporaneous, if wishy
washy look to intent
ii. (2) Payment of a debt incurred by the D in the ordinary course of business or financial
affairs of the debtor in that: Ordinary business terms
iii. (3) Must be in fact a contemporaneous exchange for new value:
b. Preference: Check treated as payment of an antecedent debt
c. Defense: Check treated as a contemporaneous exchange for new value at the money.
d. New Value under [547a2] is defined to mean money, goods, services, or new credit, and can also
include the release of property previously transferred by the D, provided that the original
transaction is unavoidable
e. Designed For: Immediately delivery of a check in payment of the goods or services.

2. 547(c)(2) Ordinary-Course Payments

a. Transfers avoided to the extent that both the creation of the debt and its payment qualify as
ordinary-course transactions.
b. Requirements:
c. 1) Debt created by a transaction that was in the ordinary course of business or financial affairs of
both the D and the transferee.
i. Regular Payments on Ordinary Debts
ii. (Monthly Expenses—utilities or services, monthly payments on long term debts, regular
trade purchases by a business D on short term credit)
d. 2) the payment of the debt was either in the ordinary course of business or financial affairs of the
D and transferee, or it was made according to ordinary business terms.
i. Debt may be incurred in the ordinary course of business, but the payment is not routine
or regular when it is overdue and followed by some pressure from the C.

3. 547(c)(3) PMSIs
a. PMSI is one granted by the D to secure a loan or credit used to acquire the very collateral subject
to the interest
b. An interest qualifies as a PMSI to the extent that it secured new value given by the C to the D at or
after the execution of a Security Ax describing the collateral, and the new value is both intended
to be used and is in fact used to acquire the collateral.
c. Not an absolute exception—merely created a limited protection to the secured party by providing
a special grace period for perfection: The interest is unavoidable provided that it is perfected
w/n 30 days from the date on which the D received possession of the collateral
i. Must understand it has Limited Scope/Application: Only helpful to a secured party where
the D receives possession some time after the date on which the interest attaches, and the
perfection date is w/n 30 days of the possession date.

4. 547(c)(4) Subsequent New Value Exception:

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 a. Allows transfer to or benefit of C to extent that, after such transfer they gave, C gave new value
under 547(a)(2) to or to the benefit of the estate.
b. New value, 547(a)(2): Means money or money’s worth in goods, services or new credit, or release
by a transferee of property previously transferred to such transferee in a valid transaction
i. Elements:
1. (1) Not secured by otherwise unavoidable security interest (AND)
2. (2) On account of which new value of the debtor did not make an otherwise
unavoidable transfer to or for the benefit of such C

5. 547(c)(5) Floating Liens in Inventory and Receivables

a. Applies to Cs with a security interest in the Ds inventory or receivables that was perfected prior to
the 90 day preference period. Assuming the Cs interest in the inventory and receivables does not
improve within the 90 days before bankruptcy, the T will not be able to succeed in a preference
case.
b. In contrast, if the value of the inventory and receivables of a D increase within the 90 days prior to
bankruptcy, an undersecured creditor’s position grows, thereby creating an avoidable preference.
This is particularly true if the C maintains an after acquired security interest in inventory or
receivables, and the debtor then acquires additional inventory and receivables during the
preference period without any corresponding advances of credit. The result is a preference
because under 547(e)(3) of the Code, “a transfer is not made until the D has acquired rights in the
property transferred.”

6. 547(c)(8)-(9) Small-Value Transfers

a. Where the D is an individual whose debt are primarily consumer debts, 547c8 excludes a transfer
from avoidance as a preference if the aggregate value of the property included in that transfer is
less than $600.
b. 547c9 excludes avoidance of a transfer up to a total value of $6225* where the Ds debt are not
primarily consumer debts

Fraudulent Conveyance and Other State Avoidance Laws in Bankruptcy

1) Introduction
1. Used by Unsecured C’s, and T’s – brings suit against the Transferee (3d Party)
a. Secured C’s have liens/interests superior to the rights of a transferee—won’t use it here
b. One of the Unsecured C’s limited tools to interfere with D’s use of the property.
2. Transferee will have an (unsecured) claim a/g the D
3. Overview of a Suit:
a. After attempting execution and receiving a nulla bona return (unsatisfied execution creditor), the
C discovers that the D recently transferred property to a relative for apparently inadequate
consideration.
i. Could be a disposition—sale, gift, a guaranty—or creation of an obligation, real property,
etc.
b. C commences suit a/g the 3d Party Transferee
i. Not necessarily a C – e.g., Preferential Transfers
1. Sections 4 + 5 only apply to Transfers [§1(12)] includes all dispositions of an interest in “Assets” [§1(2)],
which includes “property of the debtor, but does not include:
i. (i) property to the extent it is encumbered by a valid lien;
ii. (ii) property to the extent it is generally exempt under nonbankruptcy law; or
1. *means you can give away exempt property (e.g., homestead)
ii. (iii) an interest in property held in tenancy by the entireties to the extent it is not subject
to process by a C holding a claim a/g only one tenant.”

2) Actual Fraud
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 1. Actual Fraud [§4(a)(1)] Transfer made by D “w/ actual intent to hinder, delay, or defraud any C”
a. Available to Present Creditors, and Future Creditors (after subject transfer occurred)
2. Badges of Fraud [§4(b)(1)-(11)] Patterns creating suspicious behavior of fraudulent intent. Raises a
presumption that the transaction was fraudulent.
a. the transfer or obligation was to an insider
i. [i.e., or someone w/ close family or other connections with the D]
b. the D retained possession or control of the property transferred
c. the transfer or obligation was disclosed or concealed
i. [D sought to conceal the transfer]
d. before the transfer was made or obligation was incurred, the D had been sued or threatened
with suit
i. [transfer occurred just before litigation or in the fact of other impending collection
activity]
e. the transfer was of substantially all the Ds assets
f. the D absconded
g. the D removed or concealed assets
h. the value of the consideration received by the D was rxly equivalent to the value of the asset
transferred or the amount of the obligation incurred
i. the D 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
k. the D transferred the essential assets of the business to a lienor who transferred the assets to
an insider of the debtor.
3. One obvious factual setting that raises the presumption of fraud is a sale or gift w/o transfer of possession
a. Tywne’s Case (1601, England)
i. Pierce deciding to instead of paying the tax, make himself insolvent by conveying all
property to Twyne – E of a gift.
b. Example of Actual Fraud Intent Found: Give wife $2M, get a divorce, left with negative $8.5M net
worth, then file for bankruptcy, but still live together.
4. It’s the Ds state of mind, rather than the transferees, that is relevant – the absence of presence of good
faith on the transferee’s part has an impact on the C’s avoidance rights.

3) Constructive Fraud
1. If burden met, conclusive presumption of fraud is created as a matter of law – inquiry into the Ds state of
mind is irrelevant.
2. [1] [4(a)(2)(B)(i)] D did not receive Rxly Equivalent Value in exchange for the transfer; and
a. 548(a)(1)(A)
b. 3(a), value is given by the transferee if the D receives property in exchange for the transfer or a
prior debt of the D is satisfied, or secured
c. “Rx Equivalence” – doesn’t require FMV, but Equal Value.
i. Economic values exchanged – price so law buyer not behaving in ordinary course
ii. Relationship of the parties,
iii. Economic market environment,
iv. Apparent motive for the transfer.
d. BFP v. Resolution Trust Co (1994 SCOTUS) – reasonably equivalent value exists per se when
offered as the purchase price at a properly conducted, non-collusive judicial foreclosure sale

3. [2] D was in a Specific Financial Condition at the time of the Transfer:

a. Available to Present Creditors, and Future Creditors (after subject transfer occurred)
i. Undercapitalization – Nxly Fraudulent Transfer [4(a)(2)(i)] [548(a)(1)(B)(ii)(II)]
1. D was involved in a business and transfer left D w/ unrxly small capital.
2. i.e., transfer coin collection to sister for $5k (worth $75k), then spend $25k on
Amex Card
29
 ii. Quasi Constructive Fraud – Reckless [4(a)(2)(ii)] [548(a)(I)(B)(ii)(IV)]
1. D was about to incur debts w/ the actual intention or rxly should have known
they would not be paid when due (matured).
iii. *lower std. then actual frau; but a big factual dispute issue.
b. Available to Present Creditors (before subject transfer occurred):
i. [5(a)] Insolvency: At the time the transfer occurred, D was insolvent or became insolvent
as a result. (548(a)(1)(B)(ii)(I))
1. Balance Sheet Test [2(a)] – Insolvent if Ds debts > fair value of its assets
ii. §5(b) provides an additional basis for avoidance on grounds of constructive fraud if the
transfer was made to an insider
4. Notes:
a. Overlap w/ Voidable Preferences that benefit some Cs at the expense of others

Remedies: See 7(b)/8(c)

1. [§7(b)] If a C has obtained a judgment on a claim against the D, the C, if the court so orders, may levy
execution on the asset transferred or its proceeds. (in rem)
a. Recovery of the Property from the Transferee so that it can be subjected to levy and sold in
execution
2. [§7(a)(1)] Remedying the Transfer for a C – A money judgment a/g the transferee for the lesser of either
the value of the property measured at the time of transfer or the amount of the debt due by the D. (in
personam)
a. §(8)(c) – Judgment is an amount equal to the value of the asset at the time it was transferred, if
the judgment under 7(a)(1) is based on the value of the Asset Transferred
3. 548 does not have the remedial alternatives of the UFTA, but it is subject to the general rules (outlined in
E/E 14.5) governing the return of avoided transfers to the estate

Protections for the Transferee (overlap w/ above)

1. Good-Faith Transferee Rights:
a. §8(d)(1) Right to a Lien on the Asset (D can’t go after Transferee for the Asset)
b. §8(d)(3) Right to Set Off – Good-Faith Transferee can set off the amount of value given to the D
(buy mobile home for $80k, worth $160k)
i. In rem rights superior to a good faith purchaser for value.
2. Primary Transferee:
a. Good Faith and Rx Equivalent Value of Property =
i. Fully Protected, regardless of the D’s guilty motives in conveying the property.
ii. Acquire a Lien on or may Retain any Interest Transferred.
b. Good Faith and Less Rx Equivalent Value =
i. Receives partial protection
ii. Transfer is Avoidable, but…
1. Transferee is entitled to offset a/g that recovery the value that had been given to
the D for the property
iii. In Rem – offset is secured by a lien and must be paid to the transferee from the proceeds
of the execution sale
iv. In Personam – transferee’s liability under the judgment is reduced by the offset
3. Immediate Transferee or Mediate Transferee: one who did not take directly from the debtor
a. If acquired the property in good faith and for value is fully protected
b. whether or not in good faith, shelters under the rights of a prior good faith transferee
c. who did not act in good faith and did not derive rights through a good faith transferee has no
protection
d. See §550(a)(1) – May Recover a/g Initial Transferee
e. See §550(a)(2) – Can recover a/g Immediate or Mediate Transferee to the extent allowed under
§550(b)(1)-(2).
f. Compare to UFTA.
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 g. 550(d) -> T only entitled to after Initial Transferee or Immediate/Mediate Transferee, not both.

Fraudulent Transfers under Bankruptcy Code:

1. T (or DIP in C11 Case) may avoid fraudulent transfers in the Prepetition Period via:
2. 544(b) – preserves the state-law rights of the UFTA
a. Under §544, the trustee’s rights are derivative; there must be an actual unsecured C (C w/ an
unsecured claim under §502) eligible to bring the avoidance action
b. Can only avoid to the extent the Unsecured Cs rights, and that Unsecured C remains as such.
3. 548 – Bankruptcy Code Fraudulent Conveyance Provisions

Reach-Back Period and the Effect of Avoidance

 UFTA §9 = 4-year SOL from when the transfer occurred.
 548(a)(2) = 2-year reach-back period from time bankruptcy petition filed.
o allows T to avoid transfers that occurred w/n 2 years preceding bankruptcy
o 546(a) Has a SOL Period requiring an avoidance suit to be brought w/n two years after the date of
petition.
 Thus, the transfer occurred more than 2 years before the petition, the T may be able to avoid it by using
state law under 544(b), even though it cannot be avoided under 548.

Charitable Contributions by an Individual Debtor [548(a)(2)]

1. 544(b)(1) excludes charitable contributions via 544(b)(2)
a. 548(a)(2) specifically provides that a charitable contribution to a qualified religious or charitable
entity or organization is not to be traded as a transfer for less than a rx equivalent value provided
that the contribution does not exceed 15% of the debtor’s gross annual income for the year

[!] Executory Contracts and Unexpired Leases

Introduction:
 Being part of Ch3, 365 applies in all forms of bankruptcy
 Most significant in C11 (usually have contracts there) – arises in other contexts too.
 Generally used in C11 – Ts role is exercised by DIP unless otherwise ordered by the Court.

When a T can Assume or Reject an Executory Contract?

1. 365(a) Subject to the Limitations of (b), (c) and (d), the T, subject to the court’s approval, may assume or
reject any executory K or unexpired lease of the D
a. Rejection Requires Court Approval after notice and hearing
b. Standard for Courts Approval = BJR
2. Definition – Country Man Test: Whether there are material unperformed obligations for both parties at
the time of bankruptcy.
a. Disqualified if either party has substantially performed, term ended, or party rightfully cancelled.
b. If D has performed => outstanding performance due by the other party is simply a right of the Ds
which becomes property of the estate under §541.
c. If Other Party has Performed => Ds remaining obligation gives rise to a pre-petition claim to be
proved in the estate and paid at whatever rate of distribution is due to claims of that class.
2. Procedure and Standards for Assumption or Rejection
a. C7 [365(d)(1)]
i. T must assume/reject the K w/n 60 days of the order for relief,
ii. can be extended by court
iii. If no action taken, K is deemed rejected.
b. C11, C13 [365(d)(2)]
i. Unless K is Nonresidential Real Estate Lease, T may assume/reject anytime prior to
confirmation of plan.

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 ii. Upon application of the other party to the K, court can require T to make an earlier
decision.

Bilateral Contract Rights:

1. When material performance is due on both sides at the time of the petition, so that the K qualifies as
executory.
a. Ex: Acme contracts to buy a widget from Seller for delivery in three months and agrees to pay
Seller $2000 upon delivery = Executory!
2. 365 gives the T the option of honoring this relationship or repudiating it
a. If the T elects to keep the relationship in existence, the estate assumes the K, thereby adopting it
so that it becomes the estate’s K
i. estate is entitled to receive the other party’s performance and is liable for the obligations
undertaken by the D.
ii. The performance due by the estate qualified as an administrative expense and is thus
entitled to priority under 507(a)(2).
b. The T’s election to reject the K constitutes a breach that is treated by 365(g)(1) as a prepetition
breach by the D.
i. When the estate rejects the K, it rejects it in its entirety. It cannot reject some aspects
of the K while retaining the benefits of others.
1. However—doesn’t mean in entirety—may be appropriate in some K’s to only
terminate performance prospectively.
ii. Upon rejection, other party to the K becomes a C, and its claim for dmgs for breach of K is
a general unsecured prepetition claim under 502(g).
3. Deciding whether to Assume or Reject the K
a. Goal—serve best interests of estate. If advantageous or profitable (especially in C11 rehab),
advances Ds plans for economic recovery—use it.
b. Market Price Changes, now is a Bad K, why not get out?
c. Costs Associates w/ Filing for Bankruptcy.
d. Ch7 (lose control of equity)
e. Ch11 (pay all administrative costs associates w/ plan of reorg)

Nonassumable Contracts: [365(c)]

1. T cannot assume the following, regardless of the terms of the K (re assignability restrictions)
a. (c)(1) Personal Service Contracts
i. When, in the absence of consent by the other party, non-bankruptcy law excuses the
other party from accepting performance or rendering performance to someone other
than the D or the DIP.
b. (c)(2) Loan and Financing Contracts
c. (c)(3) Non-Residential Real Property Leases
i. Such lease is of nonresidential real property and has been terminated under applicable
non-bankruptcy law prior to the order for relief.
1. If Lease/K is not terminated, then have to come to grip w/ facts that Jackie is in
Default in the Lease.
2. Consolidation Prize – if not want K assumed by the DIP. Would like to object to
Assumption

Restrictions on Assuming K’s in Default [365(b)]

1. 365(b)(1) If Executory K is in default, the T cannot assume the K unless and until the T:
a. (A) Cures the Default (or will cure)
i. Default Is terminated by K terms and non-bankruptcy law
ii. Requires negotiation
iii. 108(b) – Time to Cure: longer of the contractual time period or 60 days after the filing of
the petition.
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 b. (B) Compensates for any loss caused by [the default] (or will compensate), and
c. (C) Gives the party adequate assurance of future performance under the K.
i. Provided by showing resources are available for the discharge of the K obligations and
performance is commercially feasible.
2. 365(b)(2) – Types of Defaults that Don’t Need to be Cured:
a. [1] “Ipso Facto” Defaults – doesn’t apply to defaults that is a breach of a provision relating to:
i. The insolvency or financial condition of the D
ii. The commencement of a bankruptcy case
iii. The appointment of a T or custodian
b. [2] [see 365(b)(1)(A)] No Need to Cure Non-Monetary Defaults in Real Estate Leases:
i. If it is impossible to cure the default “by performing nonmonetary acts” after
assumption…
ii. Unless the default is failure to operate per the terms of a non-residential real property
lease, in which case, the tenant has to operate in compliance after assumption and cure
(pay damages) (i.e., the D’s failure to keep a business open during the hours specified in
the K)

Ipso Facto Clauses or Termination Provisions

1. Ipso Facto Clause (or a Bankruptcy Termination Clause) are Ineffective in Bankruptcy
a. Ipso Facto Clause: Provision that allows the non-D to declare default or to terminate the K on the
grounds of the insolvency, financial condition, or bankruptcy of the D
b. 365(e)(1) prevents termination or modification of an executory K after the petition on grounds of
an ipso facto clause in the K or in nonbankruptcy law
i. i.e., terms that say:
1. “Terminates automatically upon Novelty’s making an assignment for the benefit
of creditors or entering receivership or bankruptcy”
2. So if a D wants to assign a K to another person worth $3M a year, they can do so
w/o terminating the lease.
2. Assignment Terms:
a. T may see that the most desirable way for the estate to realize the value of an advantageous K is
to sell it
b. The Assignment of a K includes both the assignment of rights due under the K and the delegation
of duties owed under the K.
c. 365(f)(1) makes limitation on assignment term unenforceable
i. i.e., “2. Can be assigned only with written approval of Bucks”
d. Under 365(f) the T succeeds to the Ds right to assign the K. Upon assignment of the K, the
purchaser of the K (the assignee) acquires all the estate’s rights under the K, and assumes all its
duties of future performance

NEGOTIATIONS

1. In General
a. Goal of a Ch11 case is the rehabilitation of the D. By filing Ch11, the D is able to continue the
operation of its business under the shelter of the automatic stay and thereby able to preserve its
profitable activities and assets while it negotiates w/ Cs and attempts to develop a strategy for the
satisfaction of debts and the revitalization of its failing enterprise.
1. Effects of Confirmation:
a. Discharges DIP of all Pre-Confirmation Debts
i. 1141(d)(1)(A): Discharges D from any debt that arose before the date of confirmation but
only discharges to the extent provided for in the plan
i. 1141(a) Binds all parties including dissenters whether or not they voted for the
acceptance of the plan unless nondischargeable under 523.
2. Filing of Plan/Exclusivity, 1121:
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 a. Exclusivity Period [§1121(b)] The debtor has the exclusive right to file a plan for 120 days after
filing the petition.
i. The court can extend the exclusivity period. § 1121(d)
ii. After the exclusivity period, any party in interest may file a plan. § 1121 (c)
2. Disclosure [Hearing]:
a. Vote solicitation must be preceded by disclosure statement approved by the court, 1125(b)(1),
which will only be approved if it contains adequate information.
i. Adequate information [1125(a)(1)]
1. Would allow a hypothetical investor to make an informed judgment bout the
plan—it is similar to a prospectus in securities law
a. Say Nothing in Disclosure Statement about Avoidance Actions => Will
Treat DIP as Waiving Those Claims
ii. Same Std. as a Proxy Statement = Sufficient and Appropriate Information for Each Party
entitled to vote to make an informed, and rational decision.
b. Safe Harbor Solicitation of Votes [1125(e)] Provided tried to apply with all applicable provided of
code.

Steps to Confirmation
1. Class Structure:
a. Classification of Claims and Interest [1122(a)] … into a particular class allowed only if they are
substantially similar to the other claims or interests of such class.
i. Secured claims are never similar
ii. Unsecured Claims typically in the same category
b. 1122 gives flexibility permitting separate classes provided that the classification has a reasonable
basis and is not for the purpose of voter manipulation.
i. There is no provision in C11 that forbids placing similar claims into separate classes,
provided the purpose of the separate classification is not for the purpose of manipulate
voting or to achieve some end that is contrary to the interests of Cs and not rxly needed
to achieve the legitimate goals of reorganization.
c. [1122b] Courts may approve separate classes of small unsecured claims
i. As is reasonable and necessary for administrative convenience.
2. Whether a Class is Impaired? [1124(f)] A class is impaired
a. (1) unless the plan leaves unaltered the legal, equitable, and contractual right” to which each
claim in the class is entitled. OR
i. Examples of Impairment:
1. Secured Claim not treated exactly as provided in a Loan Ax
2. Lien has been stripped down—the claim has been bifurcated and only the
secured portion will be paid in full.
3. Even if a claim will be paid in full, the payment period will be longer than provided
for in the Loan Ax.
b. (2): Takes steps to make it so the claim or interest is unimpaired by
i. (A) Cures default: Cures defaults that occurred before or after the commencement of the
case under this title, other than ipso facto clauses.
ii. (B) Reinstates maturity: Reinstates the maturity of such claim or interest as such maturity
existed before such default
iii. (C) Plan compensates for any pecuniary loss to C: as a result of such failure to perform a
nonmonetary obligation—other than failure of 365(b)(1)(A)
1. (AND)
iv. (D) Does not otherwise alter rights: legal, equitable, or K rights to which the holder is
entitled.
v. [special treatment for defaults/acceleration– non-impairment if trustee cures,
reinstates and compensates].

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 3. If the class is “impaired,” the class will vote on whether to accept the plan §1126. Cs whose claims are
unimpaired are deemed to have voted in favor of the plan. § 1126(f).
4. [Voting by Class] [1126(c)]
a. For a class of creditors to accept the plan, 1126(c) requires that
i. At least two-third in amount ($$), and
ii. More than one-half in # of Cs in the class must vote to accept the plan.

Confirmation Requirements [1129]

1. [1] 1129(a) – Consensual Plan: Each Impaired Class accepts the plan (by required vote)
a. Consensual Confirmation is only possible if all the elements under 1129(a) are met.
b. (a)(7) Best Interests Test:
i. If the class as a whole votes to accept the plan, any dissenting members of the class have
the protection of the best interests test under 1129(a)(7)(A).
1. Dissenters gets at least as much as would in a Hypo C7 liquidation:
ii. Applicability:
1. Applies to claims and interests
2. Does not apply to class acceptance, it applies to individuals who reject
3. Does not apply if the claim or interest is unimpaired
c. (a)(8)** Every impaired class must vote to accept the plan or that class is not impaired under the
plan, determined w/o including acceptance by an insider.
d. (a)(10) requires that at least one class of impaired claims votes in favor of the plan.
i. This would be a reason to manipulate a voting class.
e. (a)(11) Feasibility:
i. The plan proponent has the burden of showing that the plan has a reasonable chance of
success
ii. Cannot be likely to be followed by liquidation or need future reorganization:
1. Purpose: Pointless to confirm a plan that is doomed for failure and likely to bring
the debtor back into court
2. Do not need absolute certainty: Absolute certainty is not required
3. Burden is on the one who proposed the plan to show this: The burden is on the
one who proposed the plan to show this.

2. If 1129(a)(8) is not satisfied, the plan can only be confirmed by cramdown under 1129(b). However, all the
requirements of 1129(a), apart from (a)(8), must be satisfied for cramdown confirmation.
3. [2] 1129(b) – Cramdown:
a. 1129(b) Allows plan confirmation notwithstanding 1129(a)(8) provided that the plan does not
discriminate unfairly and is fair and equitable to the dissenting class(es).

b. Step 1: Plan does not discriminate unfairly

i. Discrimination in treatment between classes is ok
1. Treating some Creditors Better than Others
ii. Unfair discrimination is not ok

c. Step 2: Plan is “fair and equitable” with respect to each class of claims/interest that is impaired
and did not accept
i. 1129(b)(2)(A) re Secured Claims, plan provides for one of three alternatives:
1. (i) Modify
a. Permit the creditor to retain liens to the extent of the allowed amount of
such claim (stripdown)
b. Permit the creditor to receive deferred cash payments with a PV equal to
the allowed secured claim
i. (e.g., compensated for the time value of waiting—long-term debt
treatment under C13)
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 2. (ii) Sell the collateral and transfer the creditor’s lien to the proceeds
3. (iii) Provide the “indubitable equivalent” of the creditor’s allowed secured claim
by some other means, e.g. …
a. Replacement liens in different collateral;
b. Abandonment of the collateral to the creditor.

ii. 1129(b)(2)(B) re Unsecured Claims, plan provides either

1. (i) each holder of a claim in a class receives the PV of the allowed amount of its
claim, OR if not,
2. (ii) that no claim or interest junior to that class receive any property under the
plan. (Absolute Priority Rule)
a. e.g., if the D declines to pay the unsecured claims in full, equity interest
holders, which are junior to the debt, are wiped out.
b. Hierarchy:
i. Allowed Secured Claims
ii. Priority Unsecured Claims
iii. Unsecured Claims
iv. Equity Interests
iii. New Value Exception to Absolute Priority Rule: Equity holders may retain their interests
even though a senior non-accepting class has not received full payment: if the equity
holders contribute new capital to the D, that is equal to or greater than the value of their
interests, they can retain stock in the D in exchange for this value.

Small Business Rules under C11:

 § 101(51D) The term “small business debtor”
o … has aggregate noncontingent liquidated secured and unsecured debts as of the date of the
filing of the petition…in an amount not more than $2,566,050…
 Small Businesses are 99% of all firms
 Small Business Rules
o § 1121(e)
 (2) The plan and a disclosure statement (if any) shall be filed not later than 300 days after
the date of the order for relief;
 (3) The time periods specified in paragraphs (1) and (2) and the time fixed in 1129(e)
within which the plan shall be confirmed, may be extended only if…..
 Can’t be extended as a matter of course
o § 1129(e)
 45 Days to File after the Plan is Filed! Or resolve under Ch7 or under outside bankruptcy
o Can try and get more D to get over the Debt limit, which is allowed b/c not a business D

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