The Law of Debtors and Creditors Professor Dawson – Spring 2012 Max Schatzow
Table of Contents
Individual Debt Collections ............................................................................................................................................. 3
Collection without Courts.............................................................................................................................................................. 3 Non-judicial Collection Methods ...............................................................................................................................................................3 Restrictions on Non-judicial Collection ...................................................................................................................................................4 State Law Debt Collection ............................................................................................................................................................. 9 Collection Remedies.......................................................................................................................................................................................9 Fraudulent Conveyances and Shielding Debtor Assets .................................................................................................................... 14 State Collective Remedies ......................................................................................................................................................................... 16 Introduction to Bankruptcy ....................................................................................................................................................... 16 Elements Common to Consumer Bankruptcies .................................................................................................................... 16 The Estate ....................................................................................................................................................................................................... 17 The Trustee ..................................................................................................................................................................................................... 18 The Automatic Stay ..................................................................................................................................................................................... 20 Liquidation Bankruptcy ............................................................................................................................................................. 22 Eligibility ........................................................................................................................................................................................................ 22
Consumer Bankruptcy ................................................................................................................................................... 16
Claims and Distributions............................................................................................................................................... 29 Discharge ........................................................................................................................................................................... 31 The Debtor’s Post-Bankruptcy Position: Reaffirmation ....................................................................................... 34
Chapter 13 Bankruptcy .............................................................................................................................................................. 35
Elements of an Acceptable Plan................................................................................................................................... 35
Present value of Secured Claim for n payment periods ................................................................................................................... 37 Threshold Eligibility for Chapter 13 ...................................................................................................................................................... 40 The Consumer Bankruptcy System ........................................................................................................................................................ 40
Business Bankruptcy ...................................................................................................................................................... 41
Chapter 7 Liquidation ................................................................................................................................................................. 41
Business Liquidations..................................................................................................................................................... 41 Involuntary Bankruptcy ................................................................................................................................................ 41
Chapter 11 Reorganization ........................................................................................................................................................ 42
The Traditional Chapter 11 .......................................................................................................................................... 42 The Automatic Stay and Adequate Protection ......................................................................................................... 43
Operating in Chapter 11 ............................................................................................................................................................................. 45 Reshaping the Estate ................................................................................................................................................................................... 49 Preferences: The General Rules............................................................................................................................................................... 50 Negotiating and Confirming the Plan .................................................................................................................................................... 61
Domestic Jurisdiction ..................................................................................................................................................... 75 Transnational Bankruptcies ......................................................................................................................................... 78
Choice of Forum ........................................................................................................................................................................... 78
The Functions of Bankruptcy Law ............................................................................................................................. 81
Individual Debt Collections Collection without Courts Non-judicial Collection Methods Fair Credit Reporting Act (15 USC 1681) § 611. Procedure in case of disputed accuracy [15 U.S.C. § 1681i] (a) Reinvestigations of Disputed Information (1) Reinvestigation Required (A) In general. Subject to subsection (f), if the completeness or accuracy of any item of information contained in a consumer's file at a consumer reporting agency is disputed by the consumer and the consumer notifies the agency directly, or indirectly through a reseller, of such dispute, the agency shall, free of charge, conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate and record the current status of the disputed information, or delete the item from the file in accordance with paragraph (5), before the end of the 30-day period beginning on the date on which the agency receives the notice of the dispute from the consumer or reseller. … (5) Treatment of Inaccurate or Unverifiable Information (A) In general. If, after any reinvestigation under paragraph (1) of any information disputed by a consumer, an item of the information is found to be inaccurate or incomplete or cannot be verified, the consumer reporting agency shall– (i) Promptly delete that item of information from the file of the consumer, or modify that item of information, as appropriate, based on the results of the reinvestigation; and (ii) Promptly notify the furnisher of that information that the information has been modified or deleted from the file of the consumer. (B) Requirements Relating to Reinsertion of Previously Deleted Material (i) Certification of accuracy of information. If any information is deleted from a consumer's file pursuant to subparagraph (A), the information may not be reinserted in the file by the consumer reporting agency unless the person who furnishes the information certifies that the information is complete and accurate … (b) Statement of dispute. If the reinvestigation does not resolve the dispute, the consumer may file a brief statement setting forth the nature of the dispute. The consumer-reporting agency may limit such statements to not more than one hundred words if it provides the consumer with assistance in writing a clear summary of the dispute § 615. Requirements on users of consumer reports [15 U.S.C. § 1681m] (a) Duties of users taking adverse actions on the basis of information contained in consumer reports. If any person takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report, the person shall (1) provide oral, written, or electronic notice of the adverse action to the consumer; (2) provide to the consumer orally, in writing, or electronically (A) the name, address, and telephone number of the consumer reporting agency (including a toll-free telephone number established by the agency if the agency compiles and maintains files on consumers on a nationwide basis) that furnished the report to the person; andJuly 30, 2004 56 (B) a statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken; and (3) provide to the consumer an oral, written, or electronic notice of the consumer's right (A) to obtain, under section 612 [§ 1681j], a free copy of a consumer report on the consumer from the consumer reporting agency referred to in paragraph (2), which notice shall include an indication of the 60-day period under that section for obtaining such a copy; and (B) to dispute, under section 611 [§ 1681i], with a consumer reporting agency the accuracy or completeness of any information in a consumer report furnished by the agency.
§ 1681n. Civil liability for willful noncompliance (a) In general Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of-(1)(A) any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000; or (B) in the case of liability of a natural person for obtaining a consumer report under false pretenses or knowingly without a permissible purpose, actual damages sustained by the consumer as a result of the failure or $1,000, whichever is greater; (2) such amount of punitive damages as the court may allow; and (3) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney's fees as determined by the court. (b) Civil liability for knowing noncompliance Any person who obtains a consumer report from a consumer reporting agency under false pretenses or knowingly without a permissible purpose shall be liable to the consumer reporting agency for actual damages sustained by the consumer reporting agency or $1,000, whichever is greater. (c) Attorney's fees Upon a finding by the court that an unsuccessful pleading, motion, or other paper filed in connection with an action under this section was filed in bad faith or for purposes of harassment, the court shall award to the prevailing party attorney's fees reasonable in relation to the work expended in responding to the pleading, motion, or other paper. § 1681o. Civil liability for negligent noncompliance (a) In general Any person who is negligent in failing to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of-(1) any actual damages sustained by the consumer as a result of the failure; and (2) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney's fees as determined by the court. (b) Attorney's fees On a finding by the court that an unsuccessful pleading, motion, or other paper filed in connection with an action under this section was filed in bad faith or for purposes of harassment, the court shall award to the prevailing party attorney's fees reasonable in relation to the work expended in responding to the pleading, motion, or other paper.
§ 1681s. Administrative enforcement (a) Enforcement by Federal Trade Commission (1) In general The Federal Trade Commission shall be authorized to enforce compliance with the requirements imposed by this subchapter under the Federal Trade Commission Act (15 U.S.C. 41 et seq.), with respect to consumer reporting agencies and all other persons subject thereto, except to the extent that enforcement of the requirements imposed under this subchapter is specifically committed to some other Government agency under any of subparagraphs (A) through (G) of subsection (b)(1), and subject to subtitle B of the Consumer Financial Protection Act of 2010, subsection (b)1. For the purpose of the exercise by the Federal Trade Commission of its functions and powers under the Federal Trade Commission Act, a violation of any requirement or prohibition imposed under this subchapter shall constitute an unfair or deceptive act or practice in commerce, in violation of section 5(a) of the Federal Trade Commission Act (15 U.S.C. 45(a)), and shall be subject to enforcement by the Federal Trade Commission under section 5(b) of that Act with respect to any consumer reporting agency or person that is subject to enforcement by the Federal Trade Commission pursuant to this subsection, irrespective of whether that person is engaged in commerce or meets any other jurisdictional tests under the Federal Trade Commission Act. Restrictions on Non-judicial Collection 1. Usury Laws
performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts by receiving payments from such consumers and distributing such amounts to creditors.Marquette Nat’l Bank of Minneapolis v. family. (8) The term ―State‖ means any State. (3) The term ―consumer‖ means any natural person obligated or allegedly obligated to pay any debt. and (F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity (i) is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement. or possession of the United States. (5) The term ―debt‖ means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money. (D) any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt. (ii) concerns a debt which was originated by such person. Notwithstanding the exclusion provided by clause (F) of the last sentence of this paragraph. such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests. territory. insurance. Holding: Under federal banking laws. uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. or services which are the subject of the transaction are primarily for personal. or household purposes. but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another. whether or not such obligation has been reduced to judgment. collecting debts for such creditor. (iii) concerns a debt which was not in default at the time it was obtained by such person. in the name of the creditor. debts owed or due or asserted to be owed or due another. The term does not include-(A) any officer or employee of a creditor while. Federal Statutory Controls on Non-judicial Collection a. a federally chartered bank could charge whatever interest rate was legal in the bank’s home state. (6) The term ―debt collector‖ means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts. or his place of employment. the state law of the customer’s location was not relevant. the term includes any creditor who. the Commonwealth of Puerto Rico. (C) any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties. (4) The term “creditor” means any person who offers or extends credit creating a debt or to whom a debt is owed. 2. (7) The term ―location information‖ means a consumer's place of abode and his telephone number at such place. property.
. (2) The term ―communication‖ means the conveying of information regarding a debt directly or indirectly to any person through any medium. First Omaha Service Corp (1978) First Omaha solicited credit customers in Minnesota at an interest rate that was lawful in Nebraska but that exceeded the Minnesota Cap. if the person acting as a debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts. (B) any person while acting as a debt collector for another person. (E) any nonprofit organization which. FAIR DEBT COLLECTION PRACTICES ACT §803 or 1692a. the District of Columbia. For the purpose of section 1692f(6) of this title. directly or indirectly. in the process of collecting his own debts. both of whom are related by common ownership or affiliated by corporate control. at the request of consumers. Definitions As used in this subchapter-(1) The term ―Bureau‖ means the Bureau of Consumer Financial Protection. or any political subdivision of any of the foregoing. or who regularly collects or attempts to collect. Instead. or (iv) concerns a debt obtained by such person as a secured party in a commercial credit transaction involving the creditor.
reputation. the following conduct is a violation of this section: (1) The use or threat of use of violence or other criminal means to harm the physical person. or as reasonably necessary to effectuate a postjudgment judicial remedy. and(6) after the debt collector knows the consumer is represented by an attorney with regard to the subject debt and has knowledge of. Communication in connection with debt collection (a) Communication with the consumer generally Without the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction. and. unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer. a debt collector shall assume that the convenient time for communicating with a consumer is after 8 o'clock am and before 9 o'clock pm. or the express permission of a court of competent jurisdiction. except to a consumer reporting agency or to persons meeting the requirements of section 1681a(f) or 1681b(3) of this title. (5) Causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy.
§805 or 1692c. or (3) at the consumer's place of employment if the debt collector knows or has reason to know that the consumer's employer prohibits the consumer from receiving such communication. (2) not state that such consumer owes any debt. the placement of telephone calls without meaningful disclosure of the caller's identity. the creditor. without the prior consent of the consumer given directly to the debt collector. Without limiting the general application of the foregoing. (3) not communicate with any such person more than once unless requested to do so by such person or unless the debt collector reasonably believes that the earlier response of such person is erroneous or incomplete and that such person now has correct or complete location information. such attorney's name and address. abuse. or abuse any person in connection with the collection of a debt. local time at the consumer's location. a debt collector may not communicate with a consumer in connection with the collection of any debt-(1) at any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer. unless the attorney fails to respond within a reasonable period of time to communication from the debt collector. only if expressly requested. (5) not use any language or symbol on any envelope or in the contents of any communication effected by the mails or telegram that indicates that the debt collector is in the debt collection business or that the communication relates to the collection of a debt. in connection with the collection of any debt. such attorney's name and address. a consumer reporting agency if otherwise permitted by law. or harass any person at the called number. identify his employer. (b) Communication with third parties Except as provided in section 1692b of this title. or can readily ascertain. his attorney. (6) Except as provided in section 1692b of this title. (2) The use of obscene or profane language or language the natural consequence of which is to abuse the hearer or reader. state that he is confirming or correcting location information concerning the consumer. the attorney of the creditor. or can readily ascertain.
. not communicate with any person other than that attorney. or property of any person. In the absence of knowledge of circumstances to the contrary. or the attorney of the debt collector…
§806 or 1692d. (4) The advertisement for sale of any debt to coerce payment of the debt. a debt collector may not communicate. (4) not communicate by post card. with any person other than the consumer. oppress. (2) if the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of. Harassment or abuse A debt collector may not engage in any conduct the natural consequence of which is to harass. (3) The publication of a list of consumers who allegedly refuse to pay debts. Acquisition of location information Any debt collector communicating with any person other than the consumer for the purpose of acquiring location information about the consumer shall-(1) identify himself.§804 or 1692b.
(8) Communicating or threatening to communicate to any person credit information which is known or which should be known to be false. or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt. (B) there is no present intention to take possession of the property. (7) Communicating with a consumer regarding a debt by post card. Such charges include.
. (4) The representation or implication that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure. (8) Using any language or symbol. Without limiting the general application of the foregoing. or (B) become subject to any practice prohibited by this subchapter. (3) The false representation or implication that any individual is an attorney or that any communication is from an attorney. uniform. referral. Unfair practices A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. (5) The threat to take any action that cannot legally be taken or that is not intended to be taken. including the use of any badge. (6) The false representation or implication that a sale. fee. the following conduct is a violation of this section: (1) The collection of any amount (including any interest. garnishment. on any envelope when communicating with a consumer by use of the mails or by telegram. but are not limited to. or affiliated with the United States or any State. or legal status of any debt. authorization. or facsimile thereof. (2) The acceptance by a debt collector from any person of a check or other payment instrument postdated by more than five days unless such person is notified in writing of the debt collector's intent to deposit such check or instrument not more than ten nor less than three business days prior to such deposit. Without limiting the general application of the foregoing. amount. (6) Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if-(A) there is no present right to possession of the property claimed as collateral through an enforceable security interest. deceptive. (3) The solicitation by a debt collector of any postdated check or other postdated payment instrument for the purpose of threatening or instituting criminal prosecution. official.§807 or 1692e. or (C) the property is exempt by law from such dispossession or disablement. or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law. including the failure to communicate that a disputed debt is disputed. charge. or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action. (9) The use or distribution of any written communication which simulates or is falsely represented to be a document authorized. or approval. except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business. False or misleading representations A debt collector may not use any false. or approved by any court. other than the debt collector's address. (4) Depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument. attachment. or misleading representation or means in connection with the collection of any debt. issued. or agency of the United States or any State. (2) The false representation of-(A) the character. or which creates a false impression as to its source. (5) Causing charges to be made to any person for communications by concealment of the true purpose of the communication. bonded by. or other transfer of any interest in a debt shall cause the consumer to-(A) lose any claim or defense to payment of the debt. the following conduct is a violation of this section: (1) The false representation or implication that the debt collector is vouched for. (10) The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer… §808 or 1692f. (7) The false representation or implication that the consumer committed any crime or other conduct in order to disgrace the consumer. collect telephone calls and telegram fees.
Heintz v. Jenkins (1995) Facts: Plaintiff borrowed money from the bank to buy a car. She defaulted. Bank’s firm then sued plaintiff in state court to recover the balance. In an effort to settle, George Heintz, wrote to Jenkins’s lawyer. Jenkins then brought this action under the FDCPA. Plaintiff argues that the letter violated the prohibition against trying to collect an amount not ―authorized by the agreement creating the debt,‖ §1692(f)(1), and against making a ―false representation of the amount of any debt,‖ §1692e(2)(A). Issue: Whether the term ―debt collector‖ in the Fair Debt Collection Practices Act applies to a lawyer who ―regularly,‖ through litigation, tries to collect consumer debts. Analysis: The act defines debt collector as ―those who regularly collect or attempt to collect, consumer debts owed…‖ 1692a(6). Attorneys are not exempted from the reaches of the FDCPA.
Young v. Citicorp Retail Services (2nd Cir. 1998) (unpublished) Holding: court held that collection letters on a lawyer’s stationery and bearing her name, although sent form her office at Citicorp, were not ―from‖ the lawyer but were, instead, from Citicorp using the name of another. As a result, Citicorp was subject to the FDCPA and, along with the lawyer, in violation of the FDCPA because of its intent to mislead the debtor into believing the matter had been referred to an attorney for collection.
PROBLEM SET #1 1.1. List of potential debts and assets for both consumer and business clients? Asset. Anything of value that you own, car, stock, house, a claim against someone, insurance policy, some are contingent assets, i.e., the right to receive alimony. Debt. Debt is any money, property, or legal right that you owe to someone either currently or in the future. 1.2. Security Bank sees others being paid, but not it. Debtor’s expenses exceed income. Their options: (1) Threaten to report her to a credit-reporting agency; (2) Threaten to forgive the debt and report it as income to the IRS; (3) Refinance and make the payments more manageable.; (4) Ask Debtor for a security interest in her property; a security interest provides: (a) Leverage—if the item is important to the borrower, then you won’t have to repossess, they will borrow from friends and family, (b) Collateral control—if they need further credit, and the other creditors ask for collateral, they won’t have anything to offer as collateral, (c) Loss reduction. Somewhere down the line the bank make actually want to file suit. 1.4. FDCPA §§803-808. §803 defines who a debt collector is. If you are collecting your own debts you aren’t a debt collector and don’t need to follow the rules. §807 makes certain practices illegal, including misrepresentation that you plan to apply for a warrant for an arrest, because private citizens can’t do this. Marquette v. First Omaha allows banks to charge any interest rate that is legal in their chartered location. 1.6. Attorney sent out demand letter on client’s behalf stating that he would take immediate action, including a lawsuit, if the outstanding amount isn’t paid. ∆ seeks to settle if client will drop all claims b/c you violated the FDCPA. The act defines debt collector as ―those who regularly collect or attempt to collect, consumer debts owed…‖ 1692a(6). Attorneys are not exempted from the reaches of the FDCPA. See Heintz. Must look at the statute to see if 1) the attorney is a debt collector (Does he regularly collect consumer debts owed?), and 2) did he actually violate any provision of the FDCPA? Attorney has good arguments that he is not a debt collector and didn’t violate any provision. Must inform your client of the letter and then get her informed consent to take action.
State Law Debt Collection Collection Remedies a. Execution i. Judgment creditor remains a general unsecured creditor until ―execution‖ is obtained on the judgment. ii. Claim has become indisputable by the debtor— it has become ―liquidated.‖ iii. Execution writ or writ fi. fa or writ of attachment: The writ orders the sheriff or marshal to look for nonexempt property of the judgment debtor, to seize it, to sell it, and to pay the proceeds to the judgment creditor, until the judgment is fully paid. iv. The writ is issued routinely by the court clerk upon request of the judgment creditor and is delivered to the sheriff for ―execution.‖ v. The entire process of seizure is often called a levy and what the sheriff does is ―to levy upon‖ the property. vi. Once the sheriff has levied upon a specific piece of the debtor’s property, the judgment creditor becomes a ―judicial lien creditor‖ as to that property. Sheriff then advertises and sells it to the highest bidder. Proceeds of the sale to the levying judgment creditor until paid in full. Any remaining proceeds are paid back to the judgment debtor, unless some subsequent judgment creditor levied symbolically upon the property while it was stored at the courthouse. An entry is made in the judgment record noting the partial or complete satisfaction of the judgment. vii. If the proceeds are insufficient to pay the judgment in full, then the sheriff will be commanded to look for more of the debtor’s property to seize, and the process will start over. b. Turnover Orders i. Judgment debtor may be ordered to turn over property he possesses. The judgment debtor can also be ordered to turn over property, no matter who possesses it, if the property is subject to his control. The debtor risks imprisonment for contempt if he does not comply. Once property is traced to the debtor, the debtor bears the burden of establishing that certain property is no longer in his possession. c. Sequestration i. May be used in defined circumstances to seize and hold specific property of the debtor, often property in which the creditor has a security interest. State specific* d. Judgment Liens by Recordation i. Judgment lien against real property is obtained by recording a judgment in the county land records where deeds of sale and mortgages are filed. Often the fastest and cheapest post-judgment collection step a creditor can take. ii. Recordation is effective as to other debtor’s property even if the creditor spends no time locating or identifying the property. For a nominal fee, the creditor ties up the debtor’s assets, often preventing any resale b/c no purchaser would buy property w/ the title clouded by an earlier judgment lien. e. Dormancy and Limitations i. Dormancy the judgment still exists but is no longer enforceable w/out being ―revived.‖ Typically 1 year of no enforcement effort. ii. Limitations – statute based limitations. Typically 10 years. f. Debt collection by the Fed’l Gov’t i. Federal Debt Collection Procedures Act. ii. Only applies to judgments in favor of the federal government. g. Family Debts i. Imprisonment for family support payments is possible h. Voluntary Liens i. When a creditor files or ensures public notice, its lien is said to be perfected and the making of the filing is called perfection. ii. PMSI – purchase money security interest: liens necessary for the purchase of the collateral iii. Non-PMSI loan: Borrow money and give a lien on property they already own to secure their promises to repay. I.e., home equity LOC or pledge of stock iv. Personal property: Article 9 ―self-help repossession‖ or can offer to keep the property in satisfaction of the debt w/out any sale ―retain in satisfaction.‖ v. Deficiency Judgment: When collateral is sold for less than the amount still owed on the debt. Must sue the debtor for that amount and scramble for some property to seize just like an unsecured creditor.
vi. Debtor can argue under UUC §9-611 that notice was not given and creditor should forfeit their right to the deficiency. In non-consumer transactions, there is a presumption against the creditor, but showing that the deficiency would have been just as great can rebut it even if all the procedures had been followed. §9626. i. Statutory Liens and Trust Funds i. Landlord’s lien and mechanic’s lien – allow the mechanic to keep a car until the repair bill is paid or to sell the car if necessary to satisfy the charges. Recognized in UCC §9-333. ii. Charging lien: attorney with respect to the proceeds of a successful litigation. iii. Debtor a trustee of certain property for the favored creditors, who, as ―beneficiaries‖ of the statutory trust, effectively get a priority in that property. j. Property Exempt from the Collection Process i. States vary widely in the protection they give to debtors, and that protection never extends to protecting a debtor from a secured creditor. Only comes in to play if the debtor owns a piece of property outright or has equity in excess of the liens on the property. k. Collection in other Jurisdictions i. Full faith and credit clause of the Constitution requires each state to recognize and enforce judgments of sister states. Common law method: file a new suit, serving a summons, resulting in a new local judgment in the enforcing state. Judgments rendered in state or federal courts can be enforced in other countries. However, enforcement is difficult b/c many foreign courts require reciprocity, and the US is not a party to any treaty on the enforcement of judgments. Gerdes v. Kennamer (Tex. App. Corpus Christi 2004) Facts: Appellants Gerdes appeal terms of a turnover order and findings of Gerdes’ noncompliance w/ two earlier turnover orders. Gerdes owed Kennamer. Evidence showed that Gerdeses each owned 50% share in a Mexican entity. Gerdes objected that he couldn’t force his wife to turnover the property. No evidence was offered to show that her property wasn’t subject to his control. Turnover statute does not provide that the court can force the judgment debtor to sign documents; it doesn’t limit it strictly to turning over docs and property. It allows aid from a court through injunction or ―other means‖ to reach the debtor’s property. Must be able to show that the property could not be attached readily or levied by ordinary judicial process. They were in third parties hands out of state. Issue: Can the Texas court order a turnover of stock in a Mexico corporation held by US citizens? Holding: Yes. 2. The Struggle among Creditors: Priorities a. General Rule: ―First in time, first in right,‖ or ―the fastest dog gets fed first.‖ b. The first creditor to levy on a particular piece of property will have the right to be paid in full from the sale proceeds of that property before any other creditor gets even a single dollar from the sale. i. Ex.: Debtor owes 3 creditors $10k each with one property worth $15k. First creditor with priority gets $10k, the second gets $5k, and the third creditor gets nothing. c. Perfection: When a creditor reaches its interest in the debtor’s property will prevail over subsequent interests. For judgment creditors, it means execution. For mortgages and other secured lenders, it means filing in a predetermined place or otherwise giving others notice of the interest. For statutory lien holders it means whatever the statute says is the rule. General Rule: First to perfect wins! d. Unsecured Creditor v. Unsecured Creditor i. Must first get a judgment and then ―levy on‖ that judgment in order to get an interest in a piece of property belonging to the judgment debtor. The levy perfects the judgment lien on that property. First to levy will win as to the property levied upon. ii. Ex.: If A levies on the debtor’s car on Monday, and B levies on Tuesday, A takes all the proceeds from the sale of the car up to the outstanding amount of its debt. B takes any proceeds left up to its outstanding debt. If anything remains, it goes to the debtor. iii. In many states priority depends on the date on which the judgment creditor initiated the execution process by delivering the writ to the sheriff. Some courts say that the judicial creditor gets an ―inchoate lien‖ as of the priority date (for example, when the sheriff gets the writ), which becomes ―choate‖ on the date of actual levy or seizure of the property and ―relates back‖ to the earlier date. e. Unsecured Judgment Creditor v. Secured Creditor i. First to perfect wins. What constitutes perfection for the secured creditor against the unsecured creditor with a judgment?
ii. Secured creditor or the mortgagee perfects when it records its consensual lien according to the statutory prescription. If the judgment creditor’s lien is later, it loses; if the judgment creditor’s lien is earlier, it wins. iii. Ex.: On Monday A takes a consensual lien and records it and B executes and levies on Tuesday, A is first and takes all the proceeds from sale up to the outstanding amount of its debt. iv. Ex.: If A takes the consensual lien on Monday, but fails to record until Thursday, and B executes and levies on Tueday, B wins. Many exceptions for grace periods and relation-back rules however. Credit Bureau of Broken Bow v. Moninger (1979) Facts: BUREAU got a default judgment against Moninger on October 20, 1977 for $1,518. On May 16, 1978, Moninger renewed his prior note to the BANK in the amount of $2,144. Renewed note was to be secured by a security agreement on feeder pigs and a 1975 Ford truck, but no security agreement was entered at that time. On June 27, 1978, at the request of the BUREAU, a writ of execution was issues on its judgment in the amount of $1338, the balance remaining due on the judgment. Sheriff who got the writ examined the title records on July 7, 1978, to determine if a lien existed on the truck. Deputy proceeded to Moninger’s work to levy. The sheriff served him w/ a copy and touched the truck and said, ―I levy on the truck.‖ On July 10, 1978, the BANK and Moninger executed an agreement on the vehicle, which was then filed. Vehicle seized on July 13 and sold on August 14, 1978 for $2050. Court ruled that the sheriff had knowledge of the lien against the vehicle as of July 7 1978, that such notice made any execution subject to the lein, that the vehicle was not ponderous and physical possession could have been taken, that the notice of the possible lien resulted in a valid lien in the bank as of July 7, that the proceeds should go to the bank, and the sheriff in making the levy used due care and acted properly as a stakeholder. A written order showed the sheriff was a stakeholder, the valid levy was not made until July 12, BANK’s lien was perfected on July 10, sheriff’s knowledge imputed to BUREAU, and BANK’s lien was prior to the BUREAU’s lien, and proceeds go to the BANK. Issue: Who wins the race? Bureau levy was valid even w/out possession by Sheriff. Holding: Bureau argues the July 7 levy was legitimate. Rely on 9-317: ―An unperfected security interest is subordinate to the rights of a person who becomes a lien creditor without knowledge of the security interest and before it is perfected.‖ Bureau was a lien creditor on July 7. Caveat: If the levied upon goods are left in the hands of the debtor for an unreasonably long period of time w/ the consent of the creditor, the lien will be lost. Often viewed as fraud. Also: Some states require possession or appointment of an independent custodian. Judgment Creditors and Secured Creditors v. Buyers. i. Ex.: If A buys the debtor’s car on Monday, recording her ownership on the certificate of title, and B executes on his judgment and levies on the car on Tuesday, A wins and retains ownership of the car. But if A buys after B’s levy, she generally loses. ii. Ex.: If A buys the debtor’s car on Monday, and the secured creditor does not try to record a security interest on the car until Tuesday, the secured creditor is out of luck. If the secured creditor makes a notation on Monday, however, and A buys on Tuesday, it is A the buyer who is usually out of luck. g. Unsecured Judgment Creditor and Secured Party v. the Trustee in Bankruptcy i. TIB is the most dangerous foe of the judgment creditor who has levied or the secured party w/ a consensual security interest or even a statutory lien-holder. Judgment liens are often ―avoided‖ in bankruptcy, nullifying all the diligence and expense of the execution process. 3. Pre Judgment Remedies a. 1) Showing of need – putative debtor is decamping w/ its assets; and b. 2) a Bond, often twice the amount of value of the property, to provide a fund for the defendant’s damages if the pre-judgment remedy turns out to have been wrongfully employed. c. Supreme Court cases: Defendant’s property may not be seized without an order issued by a judicial officer (not a clerk) upon a factual showing of need. Once it has been seized, the defendant must be given a hearing and a chance to get his property back very quickly. d. Grupo Mexicano de Desarrollo, SA v. Alliance Bond Fund (1999): British have a worldwide Mareva injunction that works much the way that was rejected in Alliance Bond Fund. Inappropriateness of injunctive relief in lieu of the traditional collection remedies as well as the ultimate remedy of bankruptcy may also influence state courts. e. More cost-effective means of collecting from consumers than trying to get pre-judgment attachments. f.
Most states require levy to perfect a judgment. 5 creditors w/ judgments against SBC.
. Most likely C will get $100k. c. Then. IT is an ancillary lawsuit against the third party garnishee. or 2. How do we collect? What will we need to show in court and how can we get the evidence to make the showing? FRCP 69 and state laws allow discovery concerning the debtor’s assets. Garnishment a. our client will need to levy on the property to get his $50k. Our client consented to the meeting and a workout plan. Thus the garnishment of a bank account will ―catch‖ not only the amount on deposit on the service date but also funds deposited thereafter prior to the answer. See Gerdes. How will it be divided? How could you have better protected your client while still going along w/ the workout plan? Harry probably waived the perfection of his judgment. A creditor may garnish a debtor’s wages by obtaining a writ directing the employer to pay the wages to the employee’s creditor rather than to the employee. b. on December 1st. etc. and 2) a command to the garnishee to withhold payment or return of the debtor’s property pending further order of the court. Handler has a LOC for $350k in his name upon a presentation of an engineer’s certificate that a design job has been satisfactorily completed.1. d. execution. the document. Some states allow for the relates-back doctrine. The creditor’s net may even extend to the time of the garnishment trial. Should have gotten a security interest on workout day. 25th the Sheriff announced he was seizing all the shoes in the store. Evidence showing that the LOC is in Forman’s name.3. but SBC’s lawyer convinced Harry to come to a meeting the next day and not seize the shoes. Store closed on January 5th. Rollins sued by 3 suppliers for $100k each 1)A – Judgment = November 1st 2)B – Judgment = November 10th Writ of Execution = November 15th 3)C – Judgment = November 20th Writ of Execution = November 22nd = Sheriff executed = November 25th (all appliances) We Represent B: Appliances will bring $150k at the sheriff’s sale. 5. Who gets the proceeds from the sale? Can we Change that? Depends on the rules of the state.Problem Set #2 2. b/c it was the first to perfect its interest. Used to attach debts owed to the debtor for the benefit of the debtor’s judgment creditor.2. It is assignable. and only if. Can also garnish a bank account or obtain an order to turn over the contents of a safety deposit box. or a written K guaranteeing their loan by the principal. If garnishee answers falsely or disobeys the command to withhold payment it may be liable to the judgment creditor. and 2) is not exempt from attachment. Omar (client) has judgment for breach of K against Forman Handler. so our client could have a priority over C if. 2 parts: 1) questions designed to determine whether the party served w/ the writ ―garnishee‖ owes any money to the debtor or has any property belonging to the debtor. Also will need a certificate showing satisfactory completion. Seek a turnover order from the Court – Will need to show that 1) not readily be attached or levied on by normal legal process. It was properly perfected on December 5th. but only Harry executed. or seizure. Sale of all the shoes will bring $200k. Bank will get the full value of its outstanding loan. Most states the garnishing creditor gets a temporal ―net‖ the time b/t service of the garnishment writ and the garnishee’s answer—during which the creditor can hope to ―catch‖ obligations arising in favor of the debtor. 2. Nov. Harry will get what is left so long as he levies on the property again. we levy on the appliances before sale. It also goes for a bank that honors the debtor’s checks after service of the writ. SBC granted a security interest in the entire inventory to Bank for $200k operating capital.
Bates stated that in November 1975 he had been released from a hospital after 7-week stay. garnishing his wages for the full amount. On June 1984. App. Issue: Whether a contractual right to use an Internet domain can be garnished? Holding: Such a contractual right is the product of a contract for services and hence is not subject to garnishment.‖ Enjoined the debtor from use of the domain name and awarded Umbro $23k for fees and expenses. may still garnish money due under a contract. Inc. which was 3. court entered judgment against Denson for $600 plus costs. Issue: Was it proper for the court to reverse the garnishment on Bates? YES! Holding: More liberal in allowing the belated garnishee to answer after default than in granting the privilege to an ordinary suitor defaulter. Feb. so far as any prospect of being benefitted is concerned. Sup. Umbro asked NSI to place them on hold and to deposit control of them into the registry of the court so the names could be advertised and sold. Webb’s attorney notified Bates. Webb caused several writs of garnishment to be served on houses sold by Erickson. Three years passed.appeals from two separate judgments of circuit court of the county. or the amount by which the weekly disposable earnings exceed 30 times the Federal minimum hourly wage. Umbro named Network solutions as the garnishee and sought to garnish 38 internet domain names that the judgment debtor registered w/ NSI. Inc. Granted review and vacated and affirm the judgment of the trial court. the court entered judgment for Newsome against Morgan for $748. However. Restrictions act as a floor. If the support order is 25%. 1. Summons was issued for a wage deduction order in the amount of the judgment and Com Ed served interrogatories on Caterpillar. Involved the judgment debtor’s registration of the internet domain name ―umbro. Aug. 1979 Bates filed a motion to vacate and to stay the execution of judgment. Process designated Bates as a garnishee-defendant in an action based on the Webb/Erickson judgment. Erickson (1982) Facts: Webb obtained default judgment against Erickson’s in amount of $5000 plus interest and $1500 in attorney’s fees based on 2 promissory notes and a check for insufficient funds executed by Erickson.com. Bates stated that he did not understand the service on him. and in March 1979. Analysis: NSI assigns domain names for a fee. The second action was brought by plaintiff-appellee. NSI objected that the sites were standardized. Commonwealth Edison v. 15 USC §1673. yet an interested third person so far as the danger of being injured is concerned.
e. which is subject to the restrictions of 1673. Caterpillar responded and forwarded a check to Com Ed for $140. Ct. Issue: Are support orders and creditor garnishment to be calculated separately? Holding: No combine the two. Excusable neglect by Bates. 1986) Facts: Employer-Caterpillar. Denson’s current employer. Morgan’s current employer. They then match the domain name to the corresponding IP address. Because the contracts contain mutual obligations and liabilities one party cannot assign it without consent of the other party. Consumer Credit Protection Act 15 USC §1671 et seq. Webb appealed and the court reversed. It declined to deduct the full amount because it already deducted $60 per week for a support order. creating a minimal protection.Webb v. Reasons for Bates’ failure to understand and answer relate to excusable neglect. but not the services. No copy of the judgment was mailed to Bates. Com Ed to collect monies due by Denson. Webb obtained a default on Bates for the whole judgment on Erickson. Summons was issued and Newsome served interrogatories on Caterpillar. no garnishment is allowed that would exceed the lesser of 15% of gross earnings. and the support garnishment has priority in accordance w/ state law. Umbro International. First action brought by plaintiff-appellee. The garnishment restrictions of the Consumer Credit Protection Act preempts state laws insofar as state laws would permit recovery in excess of 25% of an individual’s disposable earnings. One of these parties was Bates. Restricts the access of all creditors to the wages of any debtor. Cat contends that under Illinois law. v. f. Webb served a writ of garnishment on Bates’ employer. Erickson earned commissions as a real estate agent. The trial court granted it. since he is a disinterested party in the proceedings. (judgment debtor).35 at the time. the CCPA does not permit the withholding of any additional amounts pursuant to an ordinary garnishment. Denson (Ill. which some states then exceed with their own restrictions. Newsome PT to collect monies due and owing by Dwight Morgan. Creative Garnishment Network Solutions. executory service contracts or domain name registration agreements. (Va. 2000) Facts: Umbro got default and permanent injunction against Canada corp. Bates never answered the writ b/c he believed the whole thing was in escrow. August 1979.
. On October 1984. Restrictions on Wage Garnishment i. 27 1976. NSI compares apps w/ a database of existing domain names to prevent the registration of identical domain names.
3. What do I advise? What are possible consequences for wrongfully firing? Are there any risks besides an employee suit? §304 of the Consumer Credit Protection Act. Employer wants to fire an employee when it received a notice of a garnishment of wages. Feb. Pierce being possessed of goods and chattels of the value of 300 pounds. and marked them w/ his own mark: and after C had judgment against Pierce. Doyle says Chuck was keeping it for Baker. Made in secret. Fa. He stated he leased it on October 1 for 1 year. Twyne said they were gifts. bank may setoff any outstanding loans to Wayne first. Section 5(a): Permits creditor to avoid any transfer made (1) in exchange for an unfairly low consideration (2) at a time when the debtor was insolvent. ACLI Government Securities v. Presumption had an enormous impact on development of non-possessory security interests.‖ Faces a fine and imprisonment up to 1 year! 15 USC 1673 :sets out the maximum allowable garnishment: the lesser of 25% of disposable earning for the week OR amt by which disposable earning for that week exceed 30 times the Federal minimum wage. or defraud‖ creditors or purchasers c. Donor continued in possession and used them. and pending the writ. 3. Preliminary analysis: ABS will have to turn over all the money in the account. ABS should not honor any checks of Wayne and freeze his account until further court order or be liable for any dissipation in assets. Fraudulent Conveyances and Shielding Debtor Assets 1. and some of them he sold. Origins of Fraudulent Conveyance Law TWYNE’S CASE (Star Chamber. Gifts were not for fair consideration. and had a fi. On Feb 5th. in satisfaction of his debt.5k and delivered a writ on Amos Bank. and not October 1. unless its for child support. Chuck answered on November 4. ―Intent to delay. Sheriff served both writs on Feb. How will it be solved? Who is entitled to the property depending on Doyle’s credibility? Trial on the fact of whether the lease is valid. the account was overdrawn by $10.2. ii.
.Problem Set #3 3. On Feb 7th 2nd Finance Co. obtained a judgment on Wayne for $3. 1st: FFC had $3k judgment on Wayne and delivered a writ of garnishment to the sheriff for service on Amos Bank. There was a trust between the parties. C brought an action of debt against Pierce. If Doyle is credible JCI has a right to the property. 3. in secret made a general deed of gift of all his goods and chattels real and personal whatsoever to Twyne. Development of the Uniform Fraudulent Transfer Act a. Also. Wayne deposited $5k. $2k will then go to 2nd Finance Co. where Wayne had his checking account. saying he had equipment belonging to Baker (judgment debtor). FFC likely has priority so they get paid $3k first. and he shore the sheep. d.5 M was entered against Dan in favor of plaintiff ACLI. Derived from Twyne’s Case b. ―Badges of fraud‖ : facts that raised a presumption (rebuttable or otherwise) that raised the presumption of fraud was a sale or gift without transfer of possession.‖ Issue: Was the conveyance fraudulent? 2.1. which occurred the day before a judgment of over $1. Directed to he Sheriff who executed of the said goods. It was made pending the writ. 9th. Constructive fraud or presumptive fraud – Permits creditor to set aside a transfer even though the debtor was entirely innocent of any fraudulent intent. Brother conveyed house and acres to sister for $1 and unspecified ―other good consideration. October 15 JCI delivered writ of garnishment on Chuck. On this date. 15 USC §1674 – ―No employer may discharge any employee by reason of the fact that his earnings have been subjected to garnishment for any one indebtedness. Rhoades (SDNY 1987) Facts: Defendant Dan Rhoades conveyed property to his sister defendant Norma Rhoads. Doyle says she was present for the lease signing on October 20. hinder. 1601) Facts: Pierce was indebted to Twyne and C. Issue: Were the gifts fraudulent transfers? Holding: Yes. notwithstanding that Pierce continued in possession of the said goods. Uniform Fraudulent Transfer Act (UFTA) i.
R. 2. Therefore. Also. BT received a first priority security interest in all the assets of Bay Plastics. His homestead is exempt under state law from creditors. The transfer was to an insider. Code §544(b).§4(b) lists the badges of fraud. The acquirers take the equity for relatively little infusion of their own cash. Current equity holders are paid off in cash. §8 is a defense the transferee can rely on. Last year they totaled $13. Analysis: Should the court collapse the transaction into one integrated transaction? Is it a straight sale without an LBO? If there is evidence that the parties knew or should have known that the transaction would deplete the assets of the company. 5. even though it would bring $75k.5 M in cash plus $1. §4a1: No actual intent to defraud §4a2: Must be for REV and debtor – Here we have an arms-length transaction b/t debtor and transferee.1. He conveys the homestead to his son. debtor is insolvent. Can Stoke’s current creditors reach the homestead conveyed to the son? See UFTA §1. the debtor became insolvent as a result. 1990. Milhous put no money into the purchase. Thus at closing. §4(a)(1) to Future Creditors – Actual Fraud . Formally. Corp. so she could keep it in the family. Debtor is insolvent and owes $50k to Family Finance. Inc. etc. Can CC Company claim a fraudulent conveyance? See UFTA §4. Debtor uses her Credit Card to purchase $25k in furniture. She sells it for $5k. His homestead is not counted as an asset under the definitions. $3. Issue: Is this leveraged buyout a fraudulent transfer? Holding: Transaction may be avoided as a constructive fraudulent transfer under the Cal. Piano is valued at $40k. BPI Acquisition Corp. BPI then paid the selling shareholders for their stock. and 4) which is attacked by a pre-transaction creditor. 2) without receiving a reasonably equivalent value in exchange. the transfer wasn’t for REV. Problem Set #4 4. 4. (Bankr. and 5. the parties to the transaction were BPI and the selling shareholders. the transfer occurred shortly before a substantial debt was incurred. the Court should look beyond the formal structure and collapse the transaction. They filed Chapter 7 and their trustee asked the church to return the money. 3. Its subsidiary Nicole Plactics formed its own subsidiary. Assets of the corporation being acquired are used to secure the purchase price paid for those assets.‖ In re Bay Plastics. BT received it all and nothing is left for the unsecureds. not just the stock. They filed for bankruptcy on January 25. The shareholders knew about the financing. the old equity holders may finance the operation by taking back a security interest in the company’s assets to secure the new buyer’s promise to pay the selling price. The financer takes a security interest in virtually all of the company’s assets. Elements of a cause of action under this statute are as follows: the debtor 1) made a transfer or incurred an obligation.450 while they were insolvent. goodwill cannot be retained in Bankruptcy. she asks $20k in ad.5 M of the funds paid into escrow by BT went directly to the selling shareholders. What do we advise the church? §548(a)(2): transfers to charitable contribution to a qualified religious or charitable entity shall not be a transfer where the amount of the contribution does not exceed 15% of AGI of the debtor for the year in which the transfer
. and the debtor is entitled to recover against the selling shareholders.5 M of the loan to be disbursed to BPI.(―BPI‖). the brother and sister’s transfer was fraudulent. she is offered and accepts $15k. 5. 4. So debtor is insolvent and under §5 he did not receive REV so it is a fraudulent transfer. The day after the sale. Can FF claim a fraudulent conveyance? See UFTA §§4. He loses the exemption. All of the debt except for $500k owed to BT was a result of the LBO. Young’s tithe to the church and follow the biblical injunction to give 10%. 8. an arrangement referred to as ―seller financing.Holding: Yes under the State version of the UFTA. Under UFTA §5 for a constructive fraudulent transfer rendering the debtor insolvent. §4(a)(2) – No REV and debtor intended to incur debts beyond her ability to pay as they became due 4. and then caused Bay Plastics to direct that $3. Debtor also knows her sister would be willing to sell it back when she gets solvent. Bay Plastics borrowed approximately $3. to take ownership of the BP stock. 3) which rendered the debtor insolvent (or debtor already insolvent). His other assets are $55k.8 M in deferred payments. Shareholders sold their stock to Milhous for $3. it was a concealed transfer. Milhous didn’t acquire the stock directly. his debts all unsecured total $75k.6.3.95 M from defendant BT Comm.2. Alternatively. Leveraged Buyouts (LBO’s) a. Stoke owns a homestead free and clear worth $200k. 1995) Facts: Shareholders formed debtor Bay Plastic in 1979. Debtor is insolvent and sells her coin collection to her cousin. CD Cal. UFTA on which the debtor relies pursuant to B.
the Trustee in Bankruptcy sells these assets. f. Debtor then receives a discharge of preexisting debts.of the contribution is made. Composition is an agreement b/t the debtor and all or virtually all of the creditors that the creditors will accept a stated partial payment in full satisfaction of their debts. Structure of the Bankruptcy Code a. Receiver appointed by the court becomes the person in legal control of the property of a debtor. ABC’s do not discharge a debtor from unpaid portions of outstanding debt. 3. which the debtor gives up all non-exempt assets. with the power to manage the debtor’s financial affairs. Chapter 4 provisions include regulation of the claims and distribution process. g. Chapter 12 is a specialized version of Chapter 13 governing reorganization bankruptcies filed by family farmers. as well as provisions regulating the operation of a bankrupt estate. d. Two classic objectives of bankruptcy o Fair distribution of the debtor’s assets for the benefit of all creditors o Fresh start for the debtor Payout plan o Chapter 13 for consumers o Chapter 11 for businesses and some consumers with very large debts o Debtor proposes to keep all assets in exchange for promising to pay off debts over a period of time out of future income
.9. Chapters 7. Chapter 7 governs the classic ―straight‖ bankruptcy liquidation for consumers and businesses. and 5 are general provisions applicable in all proceedings in bankruptcy unless explicitly made inapplicable in a specific context b. Extension is a general agreement to give the debtor more time to pay the outstanding debts in full. and the TIB’s avoiding powers. j. b. rules of construction. and the proceeds are. e. Composition and Extension a. and the qualifications of debtors eligible for each of the types of proceedings available. Elements Common to Consumer Bankruptcies Chapter 7 is the liquidation chapter. Consumer Bankruptcy Introduction to Bankruptcy 1. Chapters 1.12. including appointment and compensation of the TIB and of professional persons such as atty’s and accountants. and 15 each govern a different type of bankruptcy c. distributed pro rate to creditors. Chapter 13 which excludes corporations is used by consumers and small businesses to make payments over time. k. i. Assignee liquidates it all and distributes a pro rata share to claimants. Chapter 15 is a special ―ancillary‖ proceeding in which the US court assists a foreign court that has the primary bankruptcy jurisdiction over a foreign creditor. 4. as assignee and tells the creditors to go argue with him. b. Receiverships a. Chapter 1 is devoted to structural subjects such as definitions. Chapter 11 is the chapter most often used by reorganizing businesses. Chapter 3 governs case administration. Debtor assigns all non-exempt property to a local lawyer. State Collective Remedies 2.11. 3. discharges. ABC is sometimes the vehicle for a composition to obtain the benefits of that proceeding to aid in the composition.13. Assignment for the Benefit of Creditors (ABC’s) a. Chapter 9 has special provisions for the bankruptcy of a muni or other gov’t unit h. or transfer is consistent w/ the practices of the debtor in making charitable contributions. general powers of the court.
commissions. As of December 21. Segal v. taxicab medallion o Restrictions on transferability by contract or by law. Michigan law embraces that an employee who ends his employment before the closing date of a bonus period. through Feb. Kokoszka v. Holding: Did the debtor have an enforceable right to receive the bonus check when he filed on December 21. signed by the debtor under penalty of perjury. It includes ―all legal or equitable interests of the Debtor in property as of the commencement of the case.‖ Wages. 2000) Facts: Debtor filed on Dec. At that time. 21. Sharp v. he was employed.‖ Analysis: §541(a) creates the estate. §541 expressly overrules Lines v. Frederick (1970): Held that vacation pay accrued but not due and owing on the date of bankruptcy was not property of the estate. forfeits eligibility for the bonus dividend. To receive the bonus he had to be employed and in good standing when they were issued. 1999. Important exceptions: §541(a)(6): ―services performed by an individual debtor after the commencement of the case. o Except: §541(c)(2): spendthrift trust exception allows debtors to keep retirement accounts out of their bankruptcy estates. Debtor received an employee bonus of $11k. 31.
Debtor files a petition Request for bankruptcy relief Key certifications including a requirement that all the information in the filing is true. thereby failing to establish a contractually mandated condition for receipt of the bonus. §526 and §707(b) require the attorney to verify the accuracy of the debtor’s record under the penalty of forfeiture of fees or subject them to sanctions. The bonus was for FY Jan. regardless of competing policy considerations. Frederick: it may be that Congress meant to include in ―property of the estate‖ all interests of value to the estate. Belford (1974): An accrued tax refund was property of the estate because the taxes were on prior personal earnings. 1998.‖ a deliberately expansive concept. but rather was part of the ―fresh start.‖ o Special status for wages as opposed to other kinds of property on policy grounds. and the property of the estate is immediately put into effect.
The Estate At moment of filing all the interests in property previously owned by the pre-bankrupt debtor becomes ―property of the estate. Court must look to state law to decide when the debtor had a legal right or equitable interest in the property when he filed for bankruptcy. with only a few specific exceptions set forth in §541.e. and the like earned after the petition is filed will not become property of the estate and do not have to be surrendered to their creditors. Dery) o Is it property? I. §1930(f)(1): Waiver of the Chapter 7 $299 filing fee when income is less than 150% of the official poverty line After the filing is submitted to the Bankruptcy clerk. and does not constitute property of the estate. drivers license v. On Feb 22. Trustee is holding the funds in escrow pending the outcome on appeal. Issue: Was the post-petition bonus property of the state? Bankruptcy court said yes. §541(c)(1) makes most restrictions unenforceable. even though the entitlement to receive the refund did not technically accrue until after the bankruptcy was filed. 1998? Whether a bonus plan under which Debtor had no contractual right to payment as of Dec. 3 types of controversies over the estate o Mature or not to be included in the estate (Sharp v. Lines v. 21 gave debtor an enforceable right to the bonus check he would eventually receive in Feb. Spendthrift trust gets two shots at exemption: 1) ERISA and 2) state law
. the estate is created and an automatic stay on all collection actions against the debtor. The timing was also under their discretion. 22. Rochelle (1965): Court held that a tax refund from a business’s prior taxable years was property of the estate. the debtor had no legally enforceable interest in the check he later received on Feb. 1 to Dec. The employer had the right to terminate the bonus plan at any time. Dery (ED MICH. 1998?The bonus check was ―dependent upon the continued services o the debtor subsequent to the petition.‖ subject to limited exceptions. the debtor’s property.
Trustee disagrees. Gov’t official from the Office for the US Trustee generally selects the TIB from a panel of potential appointees that the US Trustee has chosen as qualified to serve. 1994. federal law determines whether it is property for purposes of the federal bankruptcy laws. IF the property is part of the estate. challenge any improper exemption claims by the debtor. Plan was valued at $295k. Issue: Is the debtor’s retirement plan excused as property of the estate? Holding: No. 1999) Facts: Since 1983 debtor ran a legal brothel. and to investigate the debtor’s affairs to extent necessary. 1998. Analysis: §541 creates the estate w/ all property of the debtor. He transferred $270k into the plan. even though IRAs are not specifically mentioned in the list of exempt plans. and distribute the proceeds among creditors according to the statutory priorities. Mass 1994) Facts: Debtor was sole proprietor of R/E biz. Similar licenses issued by state agencies are property for bankruptcy purposes. 2. D. Trustee argues that Orkin is not an employee under ERISA. It also requires compliance w/ the IRC. He claims its not property of the estate under §541(c)(2) as a spendthrift trust. and driver’s licenses as not property. §326. Issue: Under §362 was the debtor entitled to a reversal of the revocation of his license and damages? Was the license property or personal privilege? Holding: Brothel license is more like a liquor license than a license to practice law. It is property of the estate b/c he has control over it and it is not ERISA qualified. While state law creates the right. representing the proceeds of an IRA. and health insurance plans from property of the estate. sole employee. etc. protect and maintain it. §701(a). In re Burgess (Bankr. Nev. Most courts hold that liquor licenses are property under bankruptcy laws. general creditors and must look out for their best interests by challenging security interests. tax laws. Bankruptcy court denied the request to undo the revocation of the license and debtor appealed. Also he argues that the plan’s anti-alienation clause is unenforceable under IRC §401(a)(13). the county revoked the debtor’s brothel license for associating with the Hell’s Angels. Debtor was employer. On June 2. the debtor has the sole discretion to terminate the trust w/ 60 day’s notice so it must be included in property of the estate. The Trustee New estate and its property are managed by a Trustee in Bankruptcy Duty is to gather all of the debtor’ property. debtor filed under Chapter 11. Congress expanded protection further to include educational accounts for debtor’s children or grandchildren. §330(b)
. 1992. On June 22. airport slips. 330 Great majority of consumer Chapter 7 cases are ―no-asset‖ cases where the debtor has no non-exempt assets. employee compensation plans. TIB wants to maximize the pool for general unsecureds. On July 30. Jackoway (2005): Congress intended to include IRA’s in its alphabet soup list of retirement account exemptions. He also collects fees calculated in part as a percentage of the funds distributed and that distribution is primarily to unsecureds. Rousey v. Attorney license to practice is not property. Some courts consider licenses to sell lottery tickets. 1. 1997. sell the property for the highest possible price. he established the Orkin Retirement Plan. the debtor keeps it. 2) State Law issues: Debtor can exclude a pension plan from the estate if he can show a restriction on transfer enforceable under applicable state law.In re Orkin (Bankr. Recently. He then filed under Chapter 7 on February 24. §56(a)(1) TIB has a common law duty to unsecured. See §704 TIB must also examine all claims and oppose those that may be invalid. Congress has specifically excluded tax-deferred annuities. Analysis: Is the debtor’s plan ―ERISA qualified?‖ ERISA mandates that a plan not be assignable or alienable. but deemed exempt from creditor attachment. preferences. and priority claims. 1) Trustee is correct in that an employer can not be an employee as well for ERISA benefits. If property is excluded from the estate the debtor keeps it. and sole participant. Here. Licenses to operate a track or casino are property of the estate. D. Trustee also receives $60 of the $299 filing fees.
On April 1. certifying credit counseling agencies.. 541(a)(6) because he had the right to the salary on the commencement of the case. Otherwise. e. where the court found that the bonus was primarily a post petition proceed. The majority would go to the estate. Thus. CN: assume he files a petition today. Salary for services performed before the petition. §541(c)(1)(A) ―it doesn’t matter where the property is located. Also monitors the compensation granted to TIB’s and attorneys in bankruptcy cases. except for the earnings from services performed by an individual debtor. —§541(d) yes. ERISA benefits are excluded from the debtor’s bankruptcy estate.6) Liquor licenses in the state are nontransferable. An example of when one person has equitable interest and another has legal interest.§541(d) does not apply: the bankrupt has legal and equitable interest in the car. unless the new owner is disqualified. File bankruptcy now and start your estate and pray your mom makes it 180 days under (a)(5). but on March 1.‖ Dividend: yes. the price was $10/bushel. On April 1 it was worth $15/bushel. On April 1 he won the $1k Teaching Excellence Award. but a tax refund. tomorrow he received his salary which represents the past two weeks’ salary.1) Donald filed Chapter 7.yes Catcher’s mitt in his brother’s possession. So long as it is ERISA qualified or state-law qualified. yes.g. ―Property of the state does not include. Snapshots—yes if ―property‖ of the estate. But what is this property worth to the estate if the lien is worth more than the property? This property remains subject to the lien. Retirement account. Salary after petition was filed is ―Services‖ therefore do not come under §541(a)(6). Can the trustee make any claim for the license? Why would she want the license?
. not an equitable interest. What is property of the estate under §541(a)? See §541(d) All legal or equitable interests of the debtor in property as of the commencement of the case. when she harvested it was $20/bushel. thus the beneficiaries will not be affected. Yes. 541(a)(6) or (7). §541(b)(4) Baseball cards. It seems like he gets to keep the $. -. When she receives the $200k who gets it? §541(a)(6) – it seems to be profit of the estate. and on May 1. 5. ―Applicable nonbankruptcy law ― under §541(c)(2) includes both state spendthrift law and federal law including ERISA. appointing members of Creditors Committees in Chapter 11. §541(d).3) On March 1 FA contracted to sell her winter wheat crop of 10k bushels for the prevailing price on May 1. is a trust relationship. Contribution to his retirement account? No. although ABC in the state always has issued a new license to someone who buys a store from a prior licensee. So it is not worth any thing to the estate even though it is property of the estate. He will get the corpus of the trust when his mom passes which is expected to 6 months to 1 year from now. 5. and approving debtor ed. 5.4) Client owes $100k and his only income is $1k/month from a $250k trust that is non-assignable. There is an exception for services performed after the commencement of the case.
UST appoints Chapter 7 trustees. Who gets it? Sharp v. 5. acquired by inheritance §541(a)(5)(A) Oil well—gaseous hydrocarbons. or the TIB may decide they are of no value and abandon them. But the automatic stay prevents the dealership from repossessing. At filing the wheat was worthless. she filed for bankruptcy. bonus.. OTHER Considerations: Two little parakeets are included.2) Lottery ticket purchased prior to bankruptcy and won with the ticket after filing for bankruptcy §541(a)(6) and (7) show that the proceeds or interests belong to the estate. but 541(d) protects the equitable interest. but on devise you do. which he cannot touch until after he retires.5) March 1 teacher files bankruptcy. to the extent that the trust capacity and the ownership of legal title. but all services performed after April 1 would be paid for out of this to FA. Exemptions follow the creation of the estate. Orkin says that ERISA plans are not property of the estate.
Problem Set #5 5. No. So the estate gets whatever rights the debtor has. §541(a)(6) ―offspring. monitoring abuse in consumer bankruptcy. You don’t have legal title now. Parakeet is a legal interest under §541(a)(1). They may be subject to exemptions. a license is hard to come by. §581(a)(3)(A). Programs. Stock. it is property of the estate. Dery: Court must look to state law to decide when the debtor had a legal right or equitable interest in the property when he filed for bankruptcy. Trustee for which debtor is trustee. but they are property of the estate Concert tickets – yes. Car --.. 5. appointing and supervising trustees for Chapter 13 cases. the car dealer only has a SI in it.
BC gave Appellant option of satisfying actual/puni’s by deliviering a new truck. granted the motion on June 1. and must id what property they claim as exempt. * The court was willing to lift the stay and Nissan could have had the car. assess. they were not excepted from the automatic stay provision. BC entered actual and punitives for Appellees Debtors in amount of $23k and reasonable atty fees and expenses totaling $5k. 1992) Facts: Foreign student received loan to attend college. the vehicle was their only transportation. it had to pay nearly $30k in damages. Nissan. However. the stay will terminate when the court enters an order consistent with the opinion. While state law creates the right. so that Merchant would continue to owe full repayment to the college following bankruptcy. and they had to purchase and finance a used car in May to replace their vehicle.
In re Burgess: §541 creates the estate w/ all property of the debtor. §523(a)(8) protects the solvency of the education system.‖ Appellee testified that their daughter-in-law drove them when necessary. §109(H) and 521(b) require a debt counseling session Failure to list a debt may make the debt nondischargeable. violated automatic stay of 362. or recover a prepetition debt?‖ §362(a)(6). Schedules are a part of the filing. Court affirms. and became the sole creditor of the student. income.
The Automatic Stay §362(a) details the prohibitions of the stay §362(b) provides exceptions that permit certain types of actions against the debtor to continue Andrews University v. Because the educational debts are not dischargeable. Court held that the actions of Nissan. 1994. Must also provide a complete list of creditors and their addresses. or 3) a discharge is granted or denied. debtor had to drive 90 miles to work. Merchant (6th Cir. or in the alternative. Bank had full recourse against college in event of default. Analysis: §362(a)(3) prohibits ―any act to obtain possession of property of the estate or of property from the estate or to exercise control over the property of the estate. On Nov. 1999) Facts: Bankr. On Feb. adequate protection. The automatic stay applies to creditors of education loans and remains in effect until 1) the case is closed. The license has value for the estate b/c they are difficult to acquire and can increase the pot for creditors. Debtor’s counsel contacted Nissan following the repo to inform them of the debtor’s bankruptcy. the college paid the bank. federal law determines whether it is property for purposes of the federal bankruptcy laws. §523(a)(3)
. free and clear of any liens. 2) the case is dismissed. Debtor filed Chapter 7 on Dec. which is exactly what the creditor did. Is it an ―act to collect. Nissan Motor Acceptance Corp. estate property or the value of such property. BC did not know of the sale. so sanctions are not merited. The automatic stay is to be read broadly and is self executing. 541(c)(1) says that restrictions on transfer do not prevent property from becoming property of the estate. Stay. §542(a) provides that a creditor ―shall deliver to the trustee. Debtor must list debts. Most courts hold that liquor licenses are property under bankruptcy laws. §362(c)(2)(C). Nowhere in §363 grants a creditor the authority to self-help to retain property as adequate protection. 1994. without knowledge repo’d the truck. couldn’t secure reliable transportation.‖ Case law holds that continued retention of property of the estate after notice of the bankruptcy filing is an ―exercise of control‖ over property of the estate in violation of the automatic stay. On Jan. 23. appellant. Issue: Are commercial loans for education excepted from discharge under §523(a)(8)? Are extensions of credit for education dischargeable under same provision? Did the college’s refusal to give the student transcripts violate the automatic stay? Holding: The loans are nondischargeable. Student filed Chapter 7 one year after graduation. Lesson learned. Similar licenses issued by state agencies are property for bankruptcy purposes. 30. debtor filed this to seek damages for violating the auto. and account for. etc. and expenses. She wanted her transcripts for an employer. 1994. but the college refused. Issue: Is the repossession and retention of debtor’s property a violation of the automatic stay? Were there actions willful to merit sanctions? Were actual Damages merited by sufficient evidence? Holding: Yes and Yes and Yes. Analysis: The college claimed that the education loan and credit extension were excepted from discharge under §523(a)(8) and had a right to refuse. BUT when it acted on its own without approval. v. Baker (ND Tex. They listed their 1991 truck and stated their intent to reaffirm the debt. After default. Nissan filed for relief from stay. 4. but it was not willful. assets. Nissan sold the truck on March 16. 1994. tax laws. 1993. The college violated the automatic stay. 1994.
False statements in the petition or schedules may result in denial of discharge to all the debts. (B)(23): Stay not applicable for eviction where tenant has endangered the property or illegally used controlled substances. the TIB appointed by the UST is in charge the remainder of the case.‖ so even if they had already disconnected. tomorrow and every 2 weeks thereafter. and hasn’t sought credit counseling. Tax returns filed after commencement also must be filed with the court. etc. the automatic stay may not protect property of the debtor that is not property of the estate. monthly net income. It also requires a tax return for the prior year. 526(a)(2). will he get his full paycheck. in consumer cases. (i) Seems to give the debtor 45 days to file all the paperwork. (b)(2). 101(12A). undiminished by garnishment. and an explanation of how that was calculated. Past due alimony and child support. even if otherwise eligible. Failure to produce these will result in dismissal. or any other paperwork. (i). The utility ―may not refuse. Must also file a certificate of credit counseling. (12A) Defines debt relief agency. (b)(22). 6. (D). Even if someone already has a security interest in something. CONSUMER BANKRUPTCY ATTORNEYS: renamed ―debt relief agencies‖ and they are prohibited from making any statement in any document filed in a case that is ―untrue or misleading. (i) – Debtor must list creditors and assets and liabilities. all the collection activity must stop. He wants to know what to expect in the next few weeks. and may open the debtor to a perjury prosecution as well. (D). 1104(b).
. However. should we inquire further besides asking her if that is correct? §521(a). o Some creditors may move quickly to seek relief from the automatic stay. §521 requires a certification that the debtor knows of the other chapters of the cod and credit counseling. Bad check proceeding. there is no self-help. and a statement disclosing any anticipated increase in income over the next 12 months. but didn’t bring paycheck stubs. 109(h) requires debt-counseling w/in the 180-day period ending on the date of filing. Typically. (b)(23). or that upon exercise of reasonable care. See §362(b)(2)(A)(ii)(exception to the stay) There is not a stay on property that is not property of the estate. Section 341 Meeting: Where debtor first sees the courthouse. §526 details what a debt relief agency cannot do. See §362(b)(1)(criminal proceedings not stayed unless of course it is civil in nature) (B)(22): Stay not in effect where lessor has already gotten a judgment for possession of such property. See §362(a). 1102(a)(1)). o Automatic stay gives debtor breathing room and puts almost all creditors into one forum. they cannot enforce it under 362(a)(5). §727(a)(4). Utilities bills see §366(a)(utility cannot shut off power). 366(b). and warning about false information leading to penalties and jail time. (b). Presided by officer from the UST. Attorney now must sign the debtor’s petition. Failure to follow these rules can lose their fees. It also requires pay stubs for the 2 months before filing. o Permits an exam of the debtor by the trustee and any interested creditors. 707(b)(4)(C). though they may demand adequate assurance. §526(c)(2). But it can discontinue service if either the trustee or debtor fails to deposit adequate assurance. He will file later today. 707(b)(4)(A). What do you need from your client and how can you get it? See 11 USC §521(a). It is automatic. o In large cases. but has certain exceptions. pay actual damages. §366 The automatic stay doesn’t require any action by the court. (b). so exempt property and wages may still be subject to garnishment if they are for child support. As soon as the petition is filed. §707(b)(4)(C). She listed her car for $250. then they would have to turn it back on. should have been known by such agency to be untrue or misleading. Under 362(d) you have to seek relief from the automatic stay. 109(h). 526. tax returns. She filled out her schedules.1) Debtor is in a serious bind. o §341 requires a meeting within 40 days after petition is filed. statement of monthly income. A utility may not discontinue service solely on the basis that petitioner has failed to pay a pre-petition debt. creditor may chose to elect a TIB §702. or they may elect a Creditor’s Committee (§705(a).2) Foreclosure sale for your client to take place tomorrow at noon. Attorney represents that he has ―performed reasonable investigation‖ and has no knowledge that the information in the schedules is incorrect. so debtor here is safe. They must exercise reasonable care with misstatements in filings. a copy to be furnished to any creditor upon request.
Problem Set #6 6. or be forced to pay fees of opposing counsel.‖ §101(12A).
and warranted by existing law or good faith modification of law. General creditors: i. 6. cheating the creditors. and then the amount of the claim of a secured party and pay that amount to the secured party.
Liquidation Bankruptcy 2. e. What do we advise? See §§362(a). Introduction a. Trustee must consider exemptions claimed by the debtor too. On Wednesday. f. then each creditor gets 10% of its claims iii. or bad acts.000 left and the unsecured creditors are collectively owed $100. sell it. Paid pro rata share of the remaining funds in proportion to the amounts owed. In 1984 Congress gave bankruptcy judges the power to dismiss Chapter 7 cases if the filing involved ―substantial abuse. but must first determine if anyone else has an interest in it. and then distributes the remainder to the creditors d. take his fee. Can no longer collect or recover on a claim preceding the commencement of the case. Anything remaining would go into the general unsecured pool. Unfortunately. Ex. The trustee and secured creditor would be paid. Unsecured Creditors 1.§507(a) ii. TIB prepares to sell each piece of property the debtor has an interest in. Only if there is money left then it goes to the general unsecureds. 521(a)(2) The automatic stay of §362 is automatic. filing constitutes a certification that the attorney has performed a reasonable investigation and it is well grounded in fact. with a modest amount of sacrifice. On Thursday. pleading. 362(h) and 521(a)(2): Grants debtor 30 days to decide whether to reaffirm/redeem/ride-through. $10. i. a. If a debtor takes an exemption on a car.000. Now you must file for Chapter 13 if you can’t cut it under 7. this attorney cannot probably rush a filing for this client without serious risks. Trustee deducts from the sale proceeds the trustee’s own fee and costs of sale. (D): Attorney’s signature that he has no knowledge after an inquiry that the information in the schedules filed w/ such a petition is incorrect. The TIB pays that party first. On Tuesday she filed for bankruptcy. Bank deposited her check.‖ o Either criminal behavior. c. but the debtor gets the $ value of the exemption. to repay their creditors The 2005 amendments added additional screens on the debtors seeking relief more aggressively than the courts and trustees had done.
. like a co-owner or a secured party. but the Bank called you before they return the car. the trustee may still sell it and give the exemption to the debtor. General. Attorney should at least consult the blue book.707(b)(4)(C): Attorney’s signature on a petition. Priority Creditors . Trustee may seize a Camry. the check cleared. o Debtors were pushed out of filing Chapter 7 because they had the ability. Subordinated Creditors Eligibility Chapter 7 is the baseline for all bankruptcy – the liquidation. Liquidation is governed by §726 b. (h).3) On Monday Sydney’s car was seized and she was desperate to get it back so she wrote a check. and pay off the secured lender.
They listed personal property worth $56k. with an increase in 2002 to $157k. It involves 1) sudden illness. 3) whether the debtor incurred cash advances and made consumer purchase in excess of his ability to repay. They have 15 CC accounts. and 5) whether the petition was filed in good faith. Mrs.‖ §707(b)(2)(A)(i): Creates a presumption of abuse based upon a formula o Court shall presume abuse exists according to a formula of income minus expenses §707(b)(2)(B): ―Special Circumstances. it will be a no asset case and unsecured receive nothing Their family budge is excessive and unreasonable. MDNC 2003) Facts: Married couple – Shaws – filed for Chapter 7 on May 27. If it is equal to or lower than the median. 4) whether the proposed family budget is excessive or unreasonable. If income is low enough. Their AGI for 2001 was $138k. A. Debtor can repay a meaningful portion of their unsecured debt over 36 month period based on their income and future expenses. §707(b)(1): Instructs the court to dismiss a case or convert it to a repayment plan in Chapter 12 or Chapter 11 if the Chapter 7 filing constitutes an ―abuse. Income a. 2) the debtor’s schedules and statement of current income and expenses reasonably reflect their true financial condition. They listed combined total income of $7. cars. Their son is a deadbeat and they should move to a smaller home.‖ such as serious medical conditions or service in the armed forces. then the debtor has passed the median-income screen and no presumption bars Chapter 7 d.‖
3. This case shows substantial abuse. unemployment. Reduce their phones. and college expenses and it frees up $2k in monthly payments in a Chapter 13 plan. They have two children over 20. Their listed monthly expenses are only $7517. §707(b)(2)(A)
. absent special circumstances. may justify adjustments to the calculations to determine which debtors are presumed to have abused the bankruptcy system. Shaw lost her job.8k. The Fourth Circuit follows a ―totality of the circumstances‖ test to decide substantial abuse. If debtor remains in Chapter 7. Analysis: §101(8) defines their debts as primarily consumer debts. If income is greater than the state median income. Their current Monthly Income is $7889. Means Test = Current monthly income is a threshold test for Chapter 7 eligibility b. Mr. the debtor is barred from Chapter 7. Test is based on ―bad faith‖ and ―totality of the circumstances. The Presumption of Abuse §707(b)(1) Congress exempted anyone whose debts are mostly business-related from any screening for abuse. and judges were instructed to dismiss their filings. but receives $2. o Income – expenses If the difference (surplus of income over expenses) would pay at least X amount of debt. They have 3 cars and pay their daughters tuition. They ought to reduce their expenses significantly. disability. The Formula: Income and Expenses Judges were apparently failing at determining who could and could not repay some debt So Congress created the ―means test‖ o If a debtor could not pass the means test they were presumed to abuse the bankruptcy process. more calculations await. Delay the order for 10 days to allow them to convert to Chapter 13 if they choose. Threshold test: Debtor’s income exceeds the median income for similar families in the state where the debtor filed.‖ o Some courts still consider foolish spending ―bad faith. A discharge of their debt would be at the expense of the creditors 2. They have $469k in secured debt and $131k in unsecured credit card debt. §707(b)(3): Even if passing the ―means test‖ court can find you an abuser. Shaw just received a raise.In re Shaw (Bankr.7k monthly income as severance. Their house was valued at $415k but they testified it was less than $400k. then the debtor is exempt from the means test c. 2003. Issue: Is dismissal appropriate for substantial abuse under §707(b) Holding: Yes.
Secured Debt a. Therefore if a debtor owes $5000 in past due child support. General Expenses: Any expenses to pay arrearages on ―priority debts‖ which are listed in §507(a) (i. State’s median (middle) income is used. c. The language indicates it is post-tax income. They also deducted $332 for their second car. After failing the median-income screen. tax refunds. Current monthly income is defined by §101(10A) i. FIA CARD SERVICES Facts: Kimbros deducted an ownership expense of $358 for their first car. A) total size of the surplus of income over expenses over 60 months (5 years). expenses for caring for the elderly. Debtor’s average monthly income for the 6 months preceding the bankruptcy filing ii. the debtor passes. If surplus is greater than $183 the debtor fails no matter what
. Special provision for lenders with a security interest – Loans such as car loans can be deducted in full. and maintenance then follow the Local standards. iv. alimony.e. Income from all sources is included. but had no payment of debt secured by the second car. utilities. wages. Expenses a. Abuse is presumed 1) if the debt is greater than $26. insurance. Taxpayer is limited to the lesser of actual expenses or the local standard. c. d.950 or ii) 25% of the debt. Holding: Debtor is entitled to that expense deduction. IRS guidelines are the National Standards for expenses. Taxes are deducted in the expense section vi. If surplus is less than $110 per month. and private schools (up to $1. no matter how large. a debtor may deduct an ―ownership expense‖ for a vehicle that is subject to neither secured debt nor a lease. B. and taxes). 2005 Amendments allow the court to increase allowance for food and clothing up to 5% if the debtor can show that they are reasonable and necessary §707(b)(2)(A)(ii) d. but the form requires Gross Income v. the IRS allows a local Standard. disability insurance. along with any payment arrearages. e. Some courts allow a debtor to use §707(b)(2)(A)(iii) to deduct payments on cars or a home that the debtor is giving up in bankruptcy on the basis that the means test is a backwards-looking test to measure the debtor’s ability to fund a Chapter 13 plan on the date of petition. and health savings accounts. revenues and accounts receivable for small business filers iii.. b. IRS standards permit Other Necessary Expenses f. and b) how much general unsecured non-priority debt that the debtor owes. §707(b)(2)(A)(ii)(I). the amount of the arrearage divided In re Kimbro (US BAP 6th Cir 2008) OVERRULED BY RANSOM v. unemployment. A bright line rule allowing the deduction would better fit the purposes of the means test. It was calculated by subtracting their car payment of $1122 from the Local Standard of $471.300 and the surplus is at least i) 10.300 or less. If it is between $110 and $183 per month he passes if the surplus is less than 25% of his unsecured debt divided by 60. dividends. §707(b)(2)(A)(iii). Final calculation requires i. and the surplus is at least $6. interest.650 per child per year. b. child support. Other expenses subtracted from monthly income: deductions for health insurance. D. e. C. §707(b)(6) and (7) refer to median family incomes and median household incomes. and not the mean (average) income. Income also includes amounts paid by others toward household expenses. Income After Expenses a. and transporation. Social Security benefits are excluded from the bankruptcy means test income calculation vii. b. Gas.575 c. which pulls it up because of really large earners. f. Affirmed Analysis: The National and Local Standards contain an operating expense and an ownership expense. debtor must show what expenses the debtor may deduct. Issue: Whether in the means test of §707(b)(2)(A)(ii)(I). by 60 (or $83) is deductible from monthly income. For housing. i.e.) g. i. OR 2) if the debt is $26.
If it is between $110 and $183 per month he passes if the surplus is less than 25% of his unsecured debt divided by 60. only the income of the filer is used to determine who can raise the objections. because the debtor failed the means test or general abuse. after allowable expenses. both incomes are included for all purposes. 101(12A). If only one files. 526(a)(4). Debtor lives in Montgomery County. Skateboarder has $30k in general unsecured debt after breaking leg. Also to determine whether an action of collection is punitive or just collection. o ¼ x $30. the non-filing spouse’s income is included for determining if the debtor is above or below the median income for means test analysis. Is she eligible for Chapter 7? See §§101(10A). If one files and the objection is based on the means test. regardless whether it is taxable.600/month income+ $5. because $7.700/6 x 12 = $51. but he ex never paid. how aggressive can you be for her? 101(10A): Current monthly income: avg. 7. F.200 is greater than 25% of $28.000). They have 2 children. Five years ago she got child support of $1000/month.400.00 = $7. Client who lives in DETROIT. 707(b)(6): b(6) permits only a judge or trustee to bring an action on the general standard of abuse for a below median income debtor 707(b)(7): 707(b)(7) bars any party from asserting the means test presumption against a below-median debtor Current monthly income = 4 months at $6100 + 2 months at $650 = 25700 + $3000 (expenses paid) = $25. §707(b)(2)(A)(i) (2). 7. §707(b)(6) and (7) contains the ―bad faith‖ and ―totality of the circumstances‖ test b. Ex. 707b(6) permits only a judge or trustee to bring an action on the general standard of abuse for a below median income debtor d. (b)(7). e. Any advice to make him eligible for Chapter 7? See §707(b)(2)(B)(iv). is $150/month. If a debtor owed $28.
. Have been paying $600/month on their bills.2. = She is an Above Median Debtor.3. They have more than $100k in debt. He is reluctant to commit to a Chapter 13 plan. 707(b)(7) bars any party from asserting the means test presumption against a below-median debtor c.1. but skip line 45. Must proceed w/ the means test w/ expenses. monthly income from all sources. Role of debtor’s lawyers a. C. $6. during the 6-month period ending on—the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income…B) includes any amount paid by any entity other than the debtor. If the debtor fails the test. and drives an old clunker that is paid for. or any creditor. b. 707(b)(2)(A)(iii). Property Exempt from Seizure – Policy of allowing the debtor to have a meaningful fresh start. the presumption of abuse arises.800 monthly income.200/month = $11. on a regular basis for the household expenses of the debtor or their dependents. UST. His income over the past 6 months. Also §526a4 and 707b4A and Rule 9011 require that legal contentions be warranted by existing law or by non-frivolous extension. E. 707(b)(1).000 and the monthly surplus was $120 ($7200 over 60 months). 526(a)(4) Disallow debt relief attorney to advise client to take on more debt.000 ($7. and the claim is general abuse. Procedure a. Attorney must certify that he made some investigation of the accuracy in §707b4. Problem Set #7 7. only the debtor’s income and not the spouse is used to work through the budgets and the means test.i. but pays for clothes and $3000 each month for tuition at the local Catholic school. Rents a modest apt. His surplus is currently $150. received $650k/month for 6 moths. Pa. An above median income debtor is subject to a charge of 707(b) abuse by the judge. What advice do you give to her? She can barely scrape together your standard $800 fee. 707(b)(6). but 4 months ago she found a good job paying $4100/month and $2000/month in overtime. Client is screwed. or has too great of income. If a couple files jointly. See Form 22A.500 / 60 = 125 > Surplus = $150 o He fails this test too! 101(12A).
pics. 168 in the text – Allows for Federal Exemption alternative §41 the homestead is exempt and the proceeds from sale are not subject to seizure for 6 months after date of sale Up to 10 acres of land and improvements for urban home Up to 200 acres for a rural home §42 exempts personal property Up to $60.000 for individual Exempt from seizure and not counted in the aggregate are: current wages. The code uses the word ―motor vehicle. d.
.500. tools and equipment of the trade or profession. but are included in the aggregate Exempt also are home furnishings and family heirlooms. §522(d)(1) provides $20. general creditors cannot seize it to satisfy their judgments.
3. farming or ranching vehicles.200 in home equity exemption or $40. 2 3 or 4 wheeled motor vehicle for each family member with license. Classification of Property Does the debtors claimed exemption fit within the statutory classification? In re Johnson (Bankr. athletic and sporting equipment. Both Texas and Wyoming allow for domestic support obligations and liens to be exempted from the law. All property listed not listed as exempt will be sold by the trustee so proceeds can be distributed to creditors c. Homestead exempt up to $10. jewelry not to exceed 25% of the aggregate.000 $1000 in wearing apparel not to include jewelry of any type other than wedding ring Personal property o Bible. KRS statute exempts one motor vehicle up to $2. school books o Lot in cemetery or burial ground o Furniture up to $2. unpaid commissions for personal services not to exceed 25% of aggregate limit. Savings plans and retirement plans are exempt so long as they comply with the IRC Also insurance and annuity benefits are exempt Wyoming Exemption Statutes – Opted out of Federal Exemption Garnishment is allowed in the lesser of i) 25% of judgment debtor’s disposable earnings for that week. health aids.000 Retirement plan is exempt so long as not assignable §522(d)(5) allows renters to claim half the value of the unclaimed homestead exemption in any property at all. and various animals and forage on hand for their consumption. wearing apparel. or ii) amount by which debtor’s aggregate disposable earnings for that week exceeds 30 times the federal minimum hourly wage.400 for a couple.000 in aggregate FMV for a family Up to $30.000 o Motor vehicle up to $2. 1981) Facts: Debtor owned a bus. A Bus is a motor vehicle.400 o Tools of the trade up to $2. 35 states have opted out Texas Exemption Statutes p. But consensual agreements like mortgages or car loans are not constrained b.a. WD Ky.‖ Trustee argues it is meant to mean automobile. Uniform federal exemptions but states could opt out of those exemptions under §522(b)(2). Issue: Is a bus a car for purposes of KRS exemption? Holding: Yes. alimony. Where property is exempt under state law. so that child support may be enforced by the seizure of exempt property. 2 firearms.
194 in their bank accounts. Debtor’s expert said he’d offer no more than $7. The debtor’s objected on the grounds that all the monies came from either husband’s wages or from a $1. Issue: What is the proper standard for valuation of property claimed as exempt? Holding: FMV must incorporate an appropriate market with a reasonable time frame. Bank argues for a FMV standard of valuation. Walsh doesn’t use liquidation value per se. The ring is valued at $36k. The lottery doesn’t refer to the winnings as proceeds of an annuity and the winner isn’t a beneficiary or payee of an annuity. It speaks of using an applicable market available to the trustee.000 check for child support paid to the wife and deposited in her account.14? Holding: No! It is nonexempt asset and must be liquidated to pay creditors. Trustee moved for turnover less the $300 exemption by Ariz law for fund in a joint debtors’ bank account. It is essentially an objection to the claimed exemption taken under §522(d). 2004) Facts: Debtors filed for Chapter 7 and had $2. Issue: Are these funds exempt? Holding: Arizona wage exemption ceases to apply upon the debtor’s receipt of those wages. However. because the reality is that if it is not retained by the debtor it will only realize for the estate what the trustee can get for it. Issue: What is the proper measure of VALUE? Holding: Fair market value must be interpreted in the liquidation context in a Chapter 7 cases. §222. D. Partially Exempt Property
. Arizona law does not extend to monies disbursed to the debtor’s bank account. WD Tex. If the winner is named as beneficiary to fund a state’s obligation. Stat. Analysis: Connecticut purchased an annuity for $1M to pay her $3M prize for the benefit of debtor. under §541.‖ Bank uses ―estate value‖ which is the jewelry company attaining price of $42k and a FMV of $36k. the winnings may be exempt though. Trustee wants them valued at FMV rather than liquidation value which the previous appraisal came. DDC 1980) Facts: Trustee filed an application for appraisal and the debtor opposed it. Issue: Are the proceeds from the lottery winnings exempt from creditors claims under Florida law? Do they fall within the definition of annuity under Fla. Arizona law was modeled after the FCCPA and the garnishment exemptions under that law do not extend to earnings disbursed to a debtor’s bank account. Includes only what is payable or what has been paid or deposited into a debtor’s account.800 for it.
5. child support payments are held in trust and are not property of the estate. SD Fla. The state comptroller would then issue the following checks for 19 years. Analysis: §522(d) determines values as fair market value ―as of the date of the petition. if we used any other measure other than liquidation value it would force debtor to sell property regardless of whether they took the exemption or not. 1989) Facts: Bank objects to the claimed exemption of the debtor for a 6. 4.
6. Ariz. Ring was purchased for their 25th anniversary for $30.
In re Walsh (Bankr. Analysis: Arizona law exempts 75% of a debtor’s disposable earnings.000.18 carat ring worn regularly.In re Pizzi (Bankr. Valuation of Exempt Property In re Mitchell (Bankr. Analysis: Federal and state exemption use the FMV standard. and the debtor argues for a distress or liquidation value. Also. Debtor claimed exemption under §522. Filed bankruptcy but has 12 more annual payments. They are defined as compensation for his personal services. which is liquidation price. The state is listed as the owner and beneficiary of the contract. The court adopts the fair market values with an exposure of the item to the appropriate market for an appropriate time. State law determines the exemption. under Arizona law payments for child support extend to the deposit so long as they are traceable to the exempt source.‖ For policy reasons. 1993) Facts: Debtor won the lottery. It was deemed ―clothing reasonably necessary for the family. Proceeds and Tracing Application of an exemption to property that would not meet the classification requirements except that it constitutes proceeds from exempt property In re Palidora (Bankr.
2 3 or 4 wheeled motor vehicle for each family member with license. Judicial liens imposed by a court after judgment has been rendered and defendant has not paid c. But. apparel. Avoiding Judicial Liens and Non-PMSI Liens a. In re Reed (5th Cir.625 for personal injury Wyoming exemptions (opted out of federal exemptions): o Very minimal and will likely only be able to save roughly $7000 D. o §522(d)(5) allows for $10. Debtor then has no exemption and TIB has nothing for distribution. tools and equipment of the trade or profession. Homestead Exemptions i. ii. 2 firearms. car would be sold. then to the debtor up to the full amount of the exemption. Car worth $1. appliances. and Exemption Planning --.000. instruments.000. the proceeds are allocated first to the cost of the sale. Nonpossessory.000 and the debtor keeps his exemption. Problem Set #8 8. Debtor owns a car worth $800 would be able to protect the car from any creditor attachment.In most cases property worth more than the dollar limit exemption can be levied on and sold. Two weeks prior to bankruptcy the debtor sold nonexempt personal property for half there worth and put $34k into the liens of his home. jewelry not to exceed 25% of the aggregate. o $1. farming or ranching vehicles.Exemptions and exclusions can shield debtor’s assets a. b. $1000 would go to the debtor and $1800 would go to the creditor as non-exempt.1. Florida has unlimited dollar exemption b. State recognized exemption of $1000 for a car for each individual. collateral musts be exempt property. expenses paid. Texas in bankruptcy: Either state or §522 exemptions.175 in books or tools of the trade o Disability benefits o Right to receive payments not to exceed $21. alimony. wearing apparel.450 in jewelry o $2. §522(f) permits avoidance of certain kinds of liens on certain categories of exempt property. 7. Absent bankruptcy. 8. the property must also be specified in 522(f)(4).800 after expenses. then to the judgment creditors. secured party takes $2. Exemption Planning i. In re Reed (Bankr. Following a judicial sale of exempt property. If there is anything left the TIB can have it. car worth $3. To void a consensual security interest on household gods. health aids. and the car auctioned for $2. ND Tex. crops. nonpurchase money consensual security interest d. animals. If the creditor was owed $3000. the secured party takes the car. o Up to $3.000 and secured creditor’s claim is $2. what can they protect from creditors? What if they filed Chapter 7? What if they lived in Wyoming? Texas exemptions: o Up to $60. o Ex. books. Trusts.525 in total and no more than $550 for each item of household furnishings.825 of any unused homestead exemption. 2. 1983)
. To void the liens. unpaid commissions for personal services not to exceed 25% of aggregate limit.000 in aggregate FMV for a family o Up to $30. but are included in the aggregate o Exempt also are home furnishings and family heirlooms. A debtor who owned one worth $2800 with no lien would have the car seized and sold. Debtors live in Texas and they owe $5k in IRS back taxes. athletic and sporting equipment. Security Interests in Exempt Property a. 1981) 1.450 in one motor vehicle o Up to $11.000 for individual o Exempt from seizure and not counted in the aggregate are: current wages. Homesteads. goods. The Texas constitution prohibits granting the relief sought by the trustee challenging the homestead exemption in the residence. and various animals and forage on hand for their consumption.
while other courts are all right with this practice. In Chapter 7 and 13 a claim must be filed within 90 days of the first meeting of creditors. In Chapter 11 the court fixes a bar date. Debtor valued his gun collection and antiques for $23k and purchased gold coins and Triple BS Corporation that he bought one month before filing 3. §522(b) and (d) allow retention of exempt property under the Code. He sold the company for $5k after buying it for $15k. Better exemption i. Tveten was denied while farmers in South Dakota were granted. if not forbidden by state law or under the provisions of state and federal law other than the minimum allowances in the code §522(b)(2) 7. Third claim was for $27. §522(p) requires ownership for 1215 days c. delay. Debtor objected to bank’s proofs of claims. Bank filed 3 claims. §727(a)(5) denies discharge for ―failure to explain satisfactorily the loss of assets. 11 states allow a debtor to create a trust with himself as the trustee and beneficiary. Proof of claim Form (Official Form No. Asset Protection Trust i. Some courts find problems with debtors transferring their property pre-bankruptcy for unlimited amounts. iii. A debtor who converts nonexempt assets to his homestead immediately before bankruptcy with the intent to hinder. Also. ED Pa 1985) 1. delay. or defraud his creditors must be denied a discharge in bankruptcy because of §727 2. §727(a)(5) the bankruptcy judge found that debtor effected transfers to convert property to exempt property with the intent to hinder. 10) – requires creditor claim based on a writing to have a copy of the writing attached ii. §522(b)(3) places a 2 year limitation on claiming friendly state exemptions so old state law applies if you move. Apparently $300k is owing on the first claim. Dr. In Chapter 11 a creditor who is scheduled need not file a proof of claim to receive payment. Bank later advanced $170k though unsecured loans and none were charged against the first mortgage. d. Trustee usually brings an objection to a claim. Unlimited Exemptions and Asset Trusts i. Then the bank granted another mortgage for $350k with the property as collateral and used $125k to satisfy the original mortgage and $177. Must Show ACTUAL INTENT 9. The second proof was for a note and recorded mortgage securing $24.5k to discharge the unsecured indebtedness. Disputed Claims i. h. or defraud creditors. 5. Likelihood of a homeowner owning a business was 35% higher in states w/ unlimited homestead exemptions. but Bankruptcy Code denies exemption if there was intent to defraud creditors. §522(o) now reduces the dollar value of the exemption for homesteads that is attributable to nonexempt property disposed of with the intent to defraud creditors. even if they are listed on the schedules. Who cares about Exemptions? i. A claim is allowed unless a party in interest makes an objection §502(a). The Claims Process i. §727(a)(2) 8. He also failed to explain nearly $20k in missing cash. In re Lanza (Bankr. Problem Set #9
Claims and Distributions g. and with the proceeds reduced the mortgage on his residence 4. f.5k plus interest. Objections are fairly rare ii.‖ 6. e. Exemptions may be determined under state law.6k of
. Claim 1 was executed for $200k but only $125k was advanced at settlement. In Chapter 7 or 13 the creditor must file a claim to receive a dividend.1.
‖ or value remaining after the secured creditor has been paid in full! k. 2.: TIB repaints furniture before sale and bought paint at Sears on credit. Under §506(b) some secured creditors may receive post-bankruptcy interest. b. $1. Ex. The Claim 1. If claim is less than or equal to the value of the collateral it is fully secured.2: If the $5000 owed and only clears $3000 after expenses.
.unsecured indebtedness. but it is an oddball. then they are part of the secured or unsecured claim. Creditor could file proof of claim for $1000 + $30 interest + $200 in collection costs = $1230 claim under §502 b/c all amounts are pre-petition claims. generally at its K rate. §506(b). Purpose is equality among the unsecured creditors. The Claim 1. Prior to filing of bankruptcy petition are treated same as pre-petition interest. TIB sells the vehicle and clears $6000 after expenses. Accelerated Claims 1. Usually creditors ask for them and the trustee objects. Domestic support obligations that have not come due at the time of filing are not accelerated under §502(a)(5) j. Also provision for attorney’s fees and costs of 20% of debt. then creditor has a secured claim for $3000 and an allowed unsecured claim for $2000. not to enforce high post-petition interest claims iii. If the claim is greater than the value of the collateral it is partially secured. Exemptions 1. Secured creditors who are oversecured are entitled to att’y fees until the total claim exceeds the remaining value of the collateral. Ex. then the secured creditor can receive post-bankruptcy interest.10/$ distribution. secured or unsecured. Interest 1.: $5000 owed on vehicle worth $6500. All pre-bankruptcy claims whether mature or not must be accelerated 2. Travelers Casualty & Ins. Ex. so the debtor may claim only an exemption in the ―equity. 2. §502 explains all pre-petition claims. and it gets this as proceeds from sale. is entitled to pre-petition fees by contract or state law.000 debt and 3 months late on payment w/ interest rate of 12% annually. iv. Pac. §506(a) allows a secured creditor an allowed secured claim up to the value of its collateral. then creditor would take in another $200. i. a. a court may break up the portion of interest that was mature and unmature at filing. The husband died during the bankruptcy. The burden is on the objecting party and not the claimant to invalidate the bank’s claim. Valid. until the value of the collateral is exhausted. Sears has a claim. iii. Post-petition Claims i. 3. ii. but it is a post-petition claim and therefore under §503 ―expenses of administration‖ and not §502. Unmatured interest – unsecured creditors get no post-petition interest! In a lump sum situation. Attorney’s Fees 1. 2. secured and unsecured 2. Ex. The remaining part continues as an unsecured claim against the estate. Both secured and unsecured C’s are entitled to interest accrued prior to bankruptcy. 2. §506(c). Gas & Electric (2007): upheld post petition att’y fees for an unsecured claim. Wife claims to have no knowledge. Creditor then has an allowed secured claim under §506(a) for $5000. The remaining $1k goes to the general unsecured creditors. ii. Oversecured: Value of collateral exceeds the pre-bankruptcy debt (including prebankruptcy interest). Interest 1. §502 claim filing and TIB can raise any contract defense 2. If a creditor. Secured Claims i. unavoidable consensual security interests trump exemption claims. Co v. Assuming a . Unsecured Claims i.
What is the bank’s allowed secured claim in bankruptcy? See §502(b). also jump in. and miscellaneous personal property that sold for $25k. §507 determines order and amount of payout to unsecured creditors. 10.000 when it was sold. she owed the bank $8. Bank is entitled to pre-petition interest of $500 Bank is entitled to post-petition interest of $400 Secured creditors who are over-secured are entitled to att’y fees until the total claim exceeds the remaining value of the collateral. Miller claimed $3. 506(a). and b) another $100 in interest accrued since filing.000 in cash available / $23.100 10. which the TIB sold for $400k. After secured creditors are satisfied by the sale of their collateral. As to individual debts: Trustee or creditors can object under §523 1.652 on the Dollar E. Bank is entitled to their secured claim up to the value of the collateral = $5. What is the amount of Miller’s allowed unsecured claim in bankruptcy? See §502(a). Problem Set #10 10. As to all debts: Trustee or creditors can object under §727
. At time of filing.000 – 8. but was subject to a $365k mortgage.1. b.800 k k k k k k Discharge c.4 Ten other creditors of Corinne are owed a total of $20k. Their remaining $3.3.000 – 500 – 400 = $1. (b). §506(b).000 in unsecured claims = $. (b). If appointed TIB in the bankruptcy and collected $5k for the car and $15k for the stock how should you distribute the money. 10.000 and 1.1.200. the unsecured creditors divide up remaining assets. (b). worth $15.2. including advertising: §507(a)(2): $2. but none of them are claiming any interest. The bank claims the $8000. plus a) past-due interest prior to bankruptcy for $500. to the extent their collateral did not satisfy their claims.000 on the car and bank had a valid security interest in the car. Miller has no security interest in any of Corinne’s property.Sears would ordinarily be paid in full on its §503 claims b/c these are administrative claims that win a first priority payment §507(a)(1)-(2). including a creditor of a general partner in a partnership that is a debtor objects. What if the car from above only brought $5. 506(a).000.000 would become a general unsecured claim. Exceptions to Discharge i.000. Therefore there is $60. how would the bank stand? See §502(b). Non-exempt assets were a condo. Rifle Shot renders one debt nondischargeable ii. Corinne has 2 non-exempt assets: her car worth $10.000 to spread among the creditors. and c) attorney’s fees of $1000 trying to collect. Problem Set #11 11. $15. So bank may claim the $1. Who gets what under §507 and §726(a)(4). (b)? TIB as trustee and as trustee’s counsel: §507(a)(1)(C): Trustee paid first $4.000 plus a) $200 in past due interest accrued prior to bankruptcy. Priority among Unsecured Creditors a. So now there is $23k owed to 10 people.000 shares of Macrosoft stock.000 in attorney’s fees too…10.000 Insurance premiums for insurance on the non-exempt personal property prior to TIB sale: §507(a)(2): $750 Costs of sale of Harold’s non-exempt real estate and personal property. $5k goes to the bank and they have a remaining $3k in general unsecured claims. §502(b): Unsecured only entitled to pre-petition interest He is only entitled to $3. Undersecured creditors. §502(a): any claim is allowed unless a party in interest. b) interest since the bankruptcy for $400.
Fraud by a fiduciary 4. Debtors continued to refinance their home as the price increased on the market. The officer took all this information over the phone. Again in October 2006 the Hills got more credit as ―stated income‖ loans that required no verification of income. They aggregated to $150k. Baker and Mr. Denial for debtors who have lied or filed false docs in connection w/ bankruptcy or failed to complete personal finance course v. §523(c). ix. She fails under §523(a)(2)(B). He produced no evidence of the heart attack. Their debt totaled $683k. ND Tex. ND Cal.com. In re Lee: explanation of “explain satisfactorily” 1.‖ This requires the statement respecting the debtor’s financial condition be in writing.
. indefinite. Burden then shifts to the ∆ to explain the loss. §727(a)(5) grants a discharge unless the ―debtor fails to explain satisfactorily. before determination of discharge. But the oral representations to her that he had the funds to repay her hiding from his divorce proceeding. It is not satisfactory if it is not offered in good faith or is vague. Hill listed his income as $98k/yr and Mrs. viii. He is contented. May mean reasonable. Baker alleges that Sharpe said he was hiding assets from his second wife. Lying on credit application 2. Ms. any loss of assets or deficiency of assets to met the debtor’s liabilities. Hill listed hers as $47k/yr. D.‖ a. vii. He did show evidence that he had enough money for a vacation and denied depositing the money in an offshore account. 3. Judgments from drunk driving or boating iv. 2. Sharpe were incolved in a biz of Ultimatematch. Debts for luxury goods worth more than $500 obtained w/in 90 days of filing 3. Conn. Alimony and child support 5. 2. the creditor must object to discharge in bankruptcy court or the debt will be discharged automatically. Global Denial Grounds now number 12 1. He gambled $130k in a poker game and couldn’t provide any details because he was drunk and had a second heart attack. Baker made two loans to Mr. Plaintiff Bank a foreclosed out former junior deed of trust holder wanted to except $250k claim from this Chapter 7 discharge under §523(a)(2)(B). Sharpe and other undocumented loans. Sharpe listed her as an unsecured creditor for a personal loan. Sharpe was a big spender who dined finely and dressed nicely. Under §523 with a rifle-shot denial. Combined the debtors only had income of $65k. 3. He is satisfied. In re Robert W. 2004) – Global denial Case 1. In re Hill (Bankr. 2008) 1. and uncorroborated. 3. Court held that the debtor was denied discharge under §727(a)(2)(A) & (5) vi. 5. or actual fraud?‖ a. 2006) 1. Test relates to the credibility of the explanation. McNamara (Bankr. Held: Court cannot provide relief to Baker b/c all the representations concerned his financial condition and all required a writing to accord relief. 4. Debtor had $150k in a briefcase and he was ordered to deposit it into escrow 2. Is the debt nondischargeable under §523(a)(2)(A) because of ―false pretenses. 4. Global denial of discharge iii. Specific nondischargeable debts now number 19 1. or it may mean that the court is content in believing the explanation. The last clause reads ―other than a statement respecting the debtor’s or an insider’s financial condition. Plaintiff has the burden of showing evidence of disappearance of assets or unusual transactions. In their loan app Mr. he believes what the bankrupt says w/ reference to the disappearance or shortage. these were also all concerning the financial condition of the debtor. He also told her that he had the ability to repay the loans. b. false representation. Corporations do not receive discharge in Chapter 7 2. However.1. In Re Sharpe (Bankr.
earnings ability. their incomes increased substantially over time. 2. a.‖ Court granted her a partial discharge. Higher Ed. She failed to complete her PHD. c. Bankruptcy court found that all of her student loan debts were not dischargeable under §523(a)(8) because they didn’t impose an ―undue hardship upon her. Debtor obtained BA and MA in art and philosophy. and professional degree may also be considered. 3) debtor knew at the time that it was false. US v. She only paid $368 to date. false oaths. Tax debts are nondischargeable AND the IRS can satisfy them by seizing property that is otherwise exempt under state law. and 3) debtor has made good faith effort to repay. §507(a)(8)(A)-(G): tax priority in payment. Also. Equivalent to the §523(a)(2) of the new Code. a. false claims. Tax Priorities and Discharge i. xi. Penalties on nondischargeable taxes are also nondischargeable. Assistance Agency. income. iv. expenses. that their reliance was reasonable. 2001 she filed Chapter 7. d. It is an objective standard and must follow its normal business practicese. Pre-petition interest on §507(a)(8) priority tax claims share the priority of the claims themselves and enjoy their nondischargeable status too! iii. 1) Debtor cannot maintain on current income a minimal standard of living for themselves and dependent. age. education. v.4. Loans guaranteed by Penn. SDNY 1979) – False pretenses discharge exception 1. ii. Post-petition interest does not accrue on unsecured tax claims against the TIB and the property of the estate. health. Farm case in Kansas: Farmer lied about selling hogs to feed them. 4) made with intent to deceive the creditor. Creditor must prove each by a preponderance of the evidence 5. fee fixing. They fail to meet prong 5 and 6. are made crimes in 18 USC §151155. but post-petition interest does accrue against the debtor as to any unpaid. 2) representation was material. iii. Convicted of perjury for trying to save his hogs. In re Milbank (Bankr. §523(a)(7) even though such penalties don’t get priority in payment under §507(a)(8). She claimed PHEAA could be discharged of her $89k obligation. Hill’s business was verified by CPA letterhead without the correct signature. 2) Circumstances show the affairs will persist. 5) creditor relied on the representation. ii. 2. On May 20. dependents. §502(b). 2004) – Must show undue hardship for at least a portion of student loans to be discharged! 1. They dismissed $55k. e. Under the old Act. In re Patricia Miller (6th Cir. undischarged tax debts that survive bankruptcy. x. No Discharge. 6) reliance was reasonable. Did he obtain the money under false pretenses? 3. §523(a)(2)(B): creditor must establish that 1) debtor made a written representation of their financial condition. The red flag here is that Ms. 1998)
. and Worse – Bankruptcy Crimes i. Father and daughter seek a nondischargeable determination w/ respect to debtor who is the ex-son-in-law of plaintiff and ex-husband of plaintiff b/c he borrowed money from both and then had an affair. Other factors including amount of debt. The bank fails to show the 6th prong. etc. Court relied on §105(a) under the equitable doctrine to carry out a necessary or appropriate measure to effectuate the title. wealth. Cluck (5th Cir. Concealment of assets. but any unpaid portion of those taxes is exempted from discharge by §523(a)(1)(A). and 7) the damage suffered by the creditor proximately resulted form the representation. the court held that he had obtained their money under false pretenses and would not discharge the loans. 3. Not enough to follow own standards if they don’t follow industry standards or if a ―red flag‖ is raised. Brunner Case in 2nd circuit requires three part test to show undue hardship: b.
§524 of the Code i. reaffirm the contract wit hthe secured party on that collateral. He was hit for an award of $2. Disclosures about the interst and fees associate w/ reaffirmed debt 5. Cluck appeals conviction and sentence for committing bankruptcy fraud in violation of 18 USC §152(1) and (3). §524(c)(6) allows attorneys to sign off on reaffirmations. If the debtor can’t manage on paper the court must refuse. Option for the debtor to rescind the agreement for a period of 60 days 4. g. Reaffirmation of Secured Debt i. Problem Set #12
The Debtor’s Post-Bankruptcy Position: Reaffirmation f. The discharge injunction forbids any attempt to collect a dischargeable debt! iii. §36(c)(2)(C). Problem is debtors have no cash! They must borrow to redeem 2. ED Pa. Debtor to pay the creditor the lessor of the full loan or the full value of the collateral in cash b. Debts are discharged but Liens are NOT! §506(d) ii. He hid lots of assets by selling them for less than their REV with a right to reacquire w/in 30-90 days of the sale. Only available if the collateral is exempt property or has been abandoned by the trustee c.9M for fraudulent conduct. Either pays the loan off or loses the collateral to repossession. §524(m)(2) allows Credit unions to get reAFFS even without counsel and the debtor unable to pay. §521(a)(6) has a savings clause for the debtor if the creditor demands more than the original terms (contra. ∆ was an attorney who practiced asset protection. Secured debt remains attached to its collateral. Redemption §722 a. §362(h) removes the collateral form the estate and lifts the stay unless the debtor complies with the command in §521(a)(2) to state an intention to do one of 3 things and then do them: surrender the property. but he believed it was incorrect and appealed. He was charged with false statements and fraudulent concealment in violation of 18 USC §151(1) and (3). §524(m) 6.1. or redeem pursuant to §722. Debtor must work through a mini-budget to show the debtor has adequate income (after necessary expenses) to pay the reaffirmed debt. Collection by seizure of collateral is not forbidden iv. He then filed for Chapter 7. §521(a)(6) is limited to personal property In re Pendlebury (Bankr. Retention or Ride-through a. 7. §524(c): REAFFIRMATION 1. Options for Debtors . §524(k) a. but without any deficiency threat iii. Willing creditor to allow the debtor to keep the collateral in return for a promise to repay that will survive bankruptcy b. §362 automatic stay dissolves. He failed to list on his schedules these assets and a note owed to him for $50k. b. 1988)
. Debtor is not in default at filing and continues to make its contracted payments while the creditor simply does not do anything to reclaim the collateral. Good faith effort to comply by the creditors under §524(l)(3) 8. He was convicted and ordered to pay restitution and serve time. Pendlebury). ii. 1. At the moment of Chapter 7 discharge. v. Must be reached before the discharge 2. and the §524 disjunction comes into play. Agreement must be filed with the court 3. Reaffirmation §524(c) a. Waive their discharge subject to losing the collateral and owing a deficiency claim 3.§521(a)(2) requires Chapter 7 debtor to issue a statement w/in 30 days of filing their intended course of action with respect to collateral.
Debtor’s mother pledged her interest in an annuity to secure payment of debtor’s obligation. Typical case Example i. Before discharge the debtor took out another note for $13k payable in 108 monthly installments. Supervision to last from date of filing until the plan payments are completed. Trustee is obligated to ensure payments are commenced w/in 30 days afte plan is file and that payments are properly distributed to creditors. ii. 10 years after the second note was signed the debtor brought an action against the bank for violating the discharge injunction and the automatic stay when it coerced him to execute the 2nd note. Bank sent a demand to the mother for payment. Incentives for creditors to reaffirm are greater. Overview of Chapter 13 a. objects to the debtor’s discharge. rather than accumulated assets to pay creditors b. or a permit crucial to the debtor’s livelihood or well being for bankruptcy. In re Foster (5th Cir. It was a different obligation for different consideration. WD Pa. The attorney for the debtor may determine that the fees are not fair and reasonsable and will impose an undue hardship on the debtor or a dependent and cannot in good faith execute the declaration or affidavit required by §524(c)(3). by agreeing to pay off a loan that Mom had co-signed. ensure the requisite amount of income is relinquished. d. Debtor received a discharge and paid off the second note. Issue: Can the debtor object to a reaffirmation agreement? Holding: No! Analysis: Debtor can achieve Redemption by 1) agreeing that the debtor may redeem by installments and the parties comply with the reaffirmation provisions of §524(c) (reaffirmation) or 2) by the debtor’s filing of a petition under Chapter 13 h.(4) e. §1302(1). Typically 3-5 years c. §525 forbids discrimination for refusing a job. Trustee has abandonded the mobile homes as a burdensome asset of the estate. The second note was not a reaffirmation however. i. §1302(b)(2)(B) f. The ∆ in no way undertook to collect a soon-to-be discharged debt from debtor or even advised him that he had to execute the second note. Trustee expected to recommend approval or denial of confirmation. Mom once again pledged her interest. Debtor filed for Chapter 7. Makes them responsible for payment of $250 in attorney fees. 1982)
. In re Paglia (Bankr. Debtor remains in possession of the property. Debtors may want to reaffirm for gratitude or debtor’s desire to protect a co-debtor. Wage Earners’ Plan – Use of future earnings. Reaffirmation of Unsecured Debt i. license. Bankruptcy shows on a credit report for 10 years
Problem Set # 13
Chapter 13 Bankruptcy Elements of an Acceptable Plan 1. Nondiscrimination i. Also has the duty to assist the debtor in the performance of the debtor’s duties. 2003) Facts: Debtor took out a note for his business for $13k for bank. Trustee must object to improper creditor claims. §1302(b)(5) g. The ∆ merely accepted debtor’s offer to execute the second note. Issue: Holding: Analysis: A creditor that passively permits a debtor to become liable once again for a discharged debt has not violated §524(a)(2).Facts: Mobile homeowners want an order striking a provision in a proposed reaffirmation agreement with Leader Federal. In fact the debtor took his initiative to ensure the ∆ would not take legal action on his mother. *Chapter 13 contains a special stay to protect codebtors while Chapter 7 does not.
a. ED Va. §363. and the debtor will 1) procure adequate insurance on the property at time of recovering possession. He has stable employment and is capable of meeting the payments. Fosters filed Chapter 13. and 2) make monthly payments under the K w/ GMAC until confirmation.1. He has reasonable likelihood of having the plan confirmed. Payments to Secured Creditors a. Debtor listed the car value as $2.68 over 36 months. GMAC is adequately protected because they retain their lien on the collateral and receive the amount of their allowed secured claim and they will be adequately protected if the plan is effectively consummated. Ex. and 3) the property has value or benefit to the estate. or control over property. 2. Protects against loss of collateral and decline in value b. §1306(a). with the debtor remaining in possession of the estate. Modifying the Secured Creditor’s Contract – Lien Stripping i. GMAC repossessed the car prior to bankruptcy after default. Debtor may seek turnover under §542(a) because he may use it in the ordinary course of business. except as provided in the confirmed plan or the order confirming the plan.70/$. Confirmation vests all property of the estate in the debtor. Plan said they would pay $350/mos for 36 months to pay 100 percent of priority claims of the IRS. GMAC hasn’t shown the debtor’s chances of rehabilitation are remote.§1325(a)
. dismissed or converted.30. Secured creditor must be paid its allowed secured claim in full 2. No such thing as involuntary Chapter 13. Adequate protection for the secured party §362(d) 1. e. §1325(a)(5)(B)(i). It is necessary so relief cannot be granted under §362(d)(2). Analysis: §362(g) places the burden on the debtor to show the property is necessary for effective reorg. §362(c). §542 enables the debtor in Chapter 13 to demand ―turnover‖ of property to the trustee In re Radden (Bankr. Adequate protection is necessary for the turnover. Loan for $10k w/ collateral valued at $5k. Protection of the secured party’s interest in the collateral while case is ongoing i. 2. custody. Must also be paid interest on that claim ii. 2 days before the sale. The plan proposed to pay GMAC in full up to the value of the car plus interest at 5% per annum in monthly payments of $89. Adequate payment to the secured party – formula driven c. Debtor has all the rights of the trustee under Chapter 7 or DIP under Chapter 11.700 and balance due of $4. The other portion is treated as an unsecured claim to receive . and 49% of unsecured claims. and treat the unsecured portion like any other unsecured debt 1. He needs the car to get to and from work. Filing a petition commences chapter 13. then GMAC will be adequately protected and §361 and 362 will be satisfied. and property and earnings acquired after commencement but before the case is closed. 3. Also. CRAMDOWN = Promise to pay the secured value of the collateral in full. or a Chapter 13 discharge is granted or denied. §1322 and 1325 define what may or must be in a Chapter 13 plan 2. Creditor seeks relief on lack of adequate protection §361(d)(1). Must pay $5k (secured claim) and a pro rata share of the other $5k.400. Creditors can move to lift the automatic stay under §362(d) for adequate protection d. ‖§541. EXCEPTIONS TO CRAMDOWN . §1325(a)(5): 2 requirements for payments to secured creditors 1. the debtor filed for Chapter 13. 1983) Facts: Debtor bought a car and the note was assigned to GMAC. The rest is discharged if they complete their plan. §301. GMAC notified the debtor of their right to redeem the property and of a proposed sale if they did not redeem. §542 elements: 1) entity has possession. Issue: Does GMAC have adequate protection? Can the debtor motion for a turnover? Holding: Yes and Yes. If the debtor fails the debts will not be discharged and the secured creditor will be able to enforce its security interest w/ regard to all the unpaid debt. The automatic stay remains in effect until the cases is closed. The petition starts the ―automatic stay‖ of §362. An estate is created of ―all legal or equitable interests of the debtor in property as of commencement. §1327(b). and that the property has no equity and is not necessary for the debtor’s effective reorganization §362(d)(2). 2) the debtor may use the property pursuant to §363. §1306(b). full value of secured creditors. dismissed.
§1325(a)(5)(C). i. 2) debtor surrenders the property. If the secured creditor objects. 2) what the debtor would have to pay for comparable property (replacementvalue standard). Footnote 6: Whether replacement value is the equivalent of retail value. The present value of the allowed secured claim under §1325(a)(5)(B)(ii). Issue: When a debtor.5 years). wholesale value.‖ Analysis:§1325(a)(5) requires 1) acceptance of the plan by the creditor. or 3) the midpoint between these two measurements? Holding: §506(a) directs application of the replacement-value standard. §506 requires that the claim is secured up to the value of the collateral and the rest is unsecured. v. Debtor filed a Chapter 13. Monthly payments use i/12 n is the number of payment periods. ―The price a willing buyer in the debtor’s trade. or some other value will depend on the type of the debtor and the nature of the property! Creditor should not receive portions of the retail price. Purchase Money Security interest in a motor vehicle extends to 910 days prior to bankruptcy (2.e. and ii. the TOTAL PRESENT VALUE of the allowed secured claim. Computing the Amount the Secured Creditor Must be Paid a. §1325(a)(5)(A) . if any. ii. but the debtor must pay over the life of the plan. warranties. court must determine the amount for the debtor to pay under the Ch. After determining security interest in the collateral is secured. or the debtor invokes the cram down provision of §1325(a)(5)(B). 13 plan. * §506(a)(2) codified this rule essentially
3. Cram down allows the debtor to retain the property subject to the lien. seeks to retain and use the creditor’s collateral in a Chapter 13 Plan. Balance owed at filing was $41.
Associates Commercial Corp.i. To be confirmed the plan had to meet §1325(a)(5). a debtor who wants to keep the collateral must promise to pay the debt in full. The present value of a secured claim PV(A) formula has four variables.g. Nor should the creditor gain from modifications to the property.171. I.
. is the value of the collateral to be determined by 1) what the secured creitor could obtain through a foreclosure sale of the property (foreclosure value standard). RASH (1997) Facts: Respondent purchased a tractor for $73.700. each of which can be solved for:
PV(A) is the value of the annuity at time=0 A is the value of the individual payments in each compounding period i equals the interest rate that would be compounded for each period of time. addition of accessories to a vehicle to which a creditor’s lien would not extend under state law. reconditioning. or situation would pay a willing seler to obtain property of like age and condition. The amount of the allowed secured claim under §506(a). Purchase Money Security interest granted w/in the year before bankruptcy is exempt. over a secured creditor’s objection. E. Present value of Secured Claim for n payment periods In this case the cash flow values remain the same throughout the n periods. business. that reflect the value of items the debtor does not receive when he retains the vehicle.
Disposable Income i.
. d. Court held that Chapter 13 allows the debtor to ―cure defaults‖ by ―deaccelerating‖ their mortgage and reinstating the original schedule. §1325(b)(4)(A)(ii). §1325(b) iii.e. Analysis: §1322(b)(2) allows the court to modify the rights of any creditor whose claim is secured by any interest other than real property that is the debtor’s principal residence. The debtor proposed their plan w/ 9. Debtor must devote all ―disposable income‖ to plan payments during the life of the plan. §1322(a)(2) b. Lender refused to accept the full payment of their arrears by check. c.5% interest per year that was the ―prime-plus‖ rate. Payments on the Home Mortgage a. Original contract called for 21% per year interest. Best interest test 1. Requires that each creditor. (a)(5)(B) ii. General unsecured are given the pro rata treatment c. secured or unsecured. Adequate protection is not an issue when the value of the home exceeds the mortgage i. Cramdown of Chapter 13 1. Favored for time 2. Lien Stripping i. Payments to Unsecured Creditors a. Some courts allow second mortgages to be stripped down that are entirely unsecured. No discharge until completion (but for §1328(b)) ii. Secured claim limited to $4000 and the balance was unsecured.‖ Problem Set #14 3. Redemption under §722 1. All priority claimants in §507 are entitled to payment in full. §1322(b)(5): Cannot cram down on a home mortgage. i. b. State law provided that the creditor could accelerate payments and demand full payment in event of default. Before the lender could obtain final judgment the debtors filed for Chapter 13. must receive at least as much as that creditor would receive if the debtor had filed Chapter 7. b.‖ §1325(a)(3). §1322(c) now provides for de-acceleration any time prior to the foreclosure sale d. Issue: What is the correct interest rate to apply? Holding: Look to the national prime rate and allow the bankruptcy court to adjust accordingly. i. In re Taddeo (2nd Cir. presumptive contract rate. Home worth $200k and first mortgage was $210k. Wholly unsecured so it is not a mortgage ―in real property that is the debtor’s principal residence. §1325(a)(4). and cost of funds approaches. then the plan probably should not be confirmed. §1325 i. b.Till v. If a ―eye-popping‖ interest rate is necessary. Discharges liability 4. SCS Credit Corporation (2004) Facts: Debtor owed $4894. Saving the home from foreclosure AND proposing a plan to comply w/ the strict limitations imposed by Chapter 13 to protect the rights of mortgage lenders are the twin aims.89 on a truck worth only $4000 at time of Chapter 13 filing. 1982) a. Plan must be proposed in ―good faith and not by any means forbidden by law. Median income test: Married debtor must include spousal income to determine whether income is above the state median. 1. Requires immediate payment 2. Must catch up on past due arrearage while making current payments on the mortgage as they come due. We reject the coerced loan.
Race to the court before IRS files a lien.‖§1325(b)(2)(A). Neb 1998) i. In re Farrar-Johnson i. Paying the taxes over time. Plan called for payments from debtor of $75/mos for 36 months. ii. §506(a) repayment in full for all taxes subject to a lien or entitled to priority under §507(a)(8) and explicit requirement to pay them ahead of all other claims. §1325(b)(1)(B) requires payment of disposable income. Income > State Median Income => 2 factors 1. ii. Debtor’s expenses are either ―reasonably necessary‖ or they are not. In the matter of Wyant (Bankr. Below-Median Debtors 1. Proposed 5 year plan §1325(b)(4) 2. Creditors with claims that would receive priority under §507(a) are entitled to payment in full in Chapter 13. a. Trustee then argued the debtor’s failure to pay more into their plan failed the good faith test. Good Faith 1. §1322(a)(2) priority debt only ‖full payment. Creditor objected under §1325(b) for more disposable income and bad faith. Disposable income is a floor not a ceiling. Judge reduces the expenses to $100 per month v. Income < State Median income => ―reasonably necessary‖ test for disposable income iii. §1325(b)(2)-(3). then they are required to pay in Chapter 13 the surplus calculated by application of the §707(b)(2) means test. iv.‖ e. w/ automatic stay holding off the IRS b. Taxes. and Other Priority Claims in Chapter 13 i. The discretion of the judge was removed w/ BAPCPA. She listed monthly income as $600 and expenses of $500.ii. In re Lanning (2010)– ―forward looking approach‖ – ―when a bankruptcy court calculates a Chapter 13 debtor's projected disposable income. §1325(a)(3) a. D. ii. the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation. iv. Above-Median Debtors 1. §1328. Court determined that the above-median income debtors were entitled to take a housing allowance under the IRS standards even though they lived free in military housing. Disposable income is income received by the debtor that is not ―reasonably necessary for the support of debtor or his dependents. Must include the husband’s wife in the schedule. In re Carter (Bankr. Income and necessary expenses are essential to disposable income calculations a. Family Support. 2 advantages in Chapter 13 a. Veterinary and livestock feed are unreasonable and unnecessary for the maintenance or support of the debtor or his dependents. ED Pa 1996) i. in deferred cash payments‖ does not include interest d. Must also calculate a surplus of income under the presumptive-abuse test of §707(b)(2)(A)-(B). In Re Kagenveama (2008)– ―mechanical approach‖ to calculating the surplus of income – OVERRULED b. §1322(a)(2). If debtor is barred from Chapter 7 because of the means test. Denial of post-petition interest on unsecured claims locks the tax claim at its value as of date of bankruptcy. Tax Claims 1. Filing a lien is an action to collect c. Debtors may claim IRS standard
. and a discharge of most of remaining taxes and most other dischargeable debt. iii. Married woman filed alone. Required to propose a 5 year plan. b.
b. under penalty of perjury for the current tax year Problem Set #15
Threshold Eligibility for Chapter 13 C. or to the extent it is unliquidated it wouldn’t count towards §109(e) debt limit and the debtors could file Chapter 13. Murphy’s Chapter 13 plan payments until completion. Live in Boyfriend made affidavit that he would pay Ms. No creditor objected. Montana court disagrees. Plan proposed o pay $1 over a period of 16 months. Debtor filed for turnover of a car and the creditor objected on grounds that the debtor is not eligible for Chapter 13 b/c she does not have ―regular income‖ required by §§109(e) and 101(30). Objections to expenses are to be made under §1325(b). trustee. 1999 Allstate filed a civil complaint against debtor alleging RICO violations. 1984) i. On the same date. iv. D. Chapter 7 requires attorney’s fees up front. §1329(a) allows debtor. Lawyers a. 20. Liquidated = ―subject to ready determination and precision in computation of the amount due. d. §1129(a)(15) requires application of a Chapter 13 disposable income test in a Chapter 11 for a natural person. 1998) i.469. v. If Allstate’s claim is contingent. In re San Miguel (Bankr. including a conspiracy to defraud Allstate. Sept. ii. the debtors filed a joint Chapter 13 case. Noncontingent = ―If all events giving rise to liability occurred prior to the filing of the bankruptcy petition‖ v. Identifying Types of Claims a. liquidated debts for Chapter 13 b. or creditor to move to modify or dismiss the plan. §109(e) places a statutory maximum on amount owing in noncontingent. §109(e) Chapter 13 for natural persons w/ limited debts and regular income a. Debt Relief Agencies c. This claim is both noncontingent and liquidated.505 for a total unsecured debt totaling $357. In re Huelbig (DRI 2003) i. Good faith = Not showing an Abuse of the ―spirit of Chapter 13‖
. Allstate claims $330. iii. On Feb. court fines. D. Problem Set #16 The Consumer Bankruptcy System E. If you have large debts (business as sole proprietorship) you must chose Chapter 7 or 11. The court raises issues of good faith due to the short nature and minimal payment afforded to unsecured creditors. Allstate offered receipts showing the criminal actions already plead ―nolo‖ to. In re Murphy (Bankr. MD Tenn.‖ c. §526-528 set out substantial responsibilities and liabilities on consumer bankruptcy attorneys. failing to predict the interpretation of ambiguous terms e. and other actual Other Necessary Expenses. Colo. Allstate motioned to dismiss debtor’s case on ground that their unsecured debt exceeds the limits proscribed in §109(e). Annual financial updates if judge or any party in interest requests so §521(f)(4).expenses. 2. In Chapter 7 the creditors will receive money upon liquidation. damages suits by the US or the client d. Modification and Dismissal of Chapter 13 Plans 1. Question of good faith. Statutory limit on length is 60 months §1322(d)(1) – must find money because you won’t be extended time 3. Professional sanctions. Court found that this was sufficiently regular income. Failing to confirm the accuracy of the debtor’s valuation of assets. Reason was to spread attorneys fees in Chapter 7. 2001 debtor plead nolo contendere to the charges.
but none of them withdrew their joinder in the petition. §526(a)(4): Forbids lawyers to suggest to ―assisted persons‖ ( consumer debts and value of nonexempt property is less than $175. No exemptions for corporate debtors §727(a). §303(i) grants attorneys’ fees and costs (sometimes punitive damages) against an unsuccessful involuntary petitioner. Three creditors petitioned for involuntary Chapter 7 on Faberge. §1112(a) f. WAC purchased notes from Wurlitzer long before filing of the petition. numerous acts of bankruptcy. Problem Set #17
Business Bankruptcy Chapter 7 Liquidation A. §507 priorities remain the same Business Liquidations e. Is WAC a separate petitioning creditor? iii. Wurlitzer was then joined by Wurlitzer Acceptance Corp. b. §1112(b) Involuntary Bankruptcy g. and the debtor had fewer than 12 creditors. SD Fla. c. Alleged insolvency. Wurlitzer Company owed $1M+ filed an involuntary petition against Gibraltor in March 1960.ii. Otherwise file for Chapter 7 iii. In re Gibraltor Amusements (1961) i. m. No discharge for a Chapter 7 debtor that is not an individual.
. In re Faberge Restaurant of Florida (Bankr. Creditors can convert to Chapter 7 on proper showing. Debtor then paid off 3 of the 4 creditors. 13 to 19% of all debtors listed as ―consumers‖ had operated small businesses d. Credible threat for negotiations for a workout – threat against the debtor and other favored creditors j. Natural persons filed 75% of the Chapter 7 cases that are designated as business cases. Repayment of creditors is an aim of Chapter 13. Corporations merely expire under state corporate law. 3 more creditors then joined the petition. k.750) that they borrow money to pay lawyer’s fees. They have honored the separate corporate form. §303 for both Chapter 7 and 11 h. No need to pierce the corporate veil b/c there is an absence of fraud and honoring of the corporate form. §303(b)(1) requires 3 creditors to join in most involuntary peititons l. Usually filed by unsecured creditors. Debtor usually has an absolute right to convert a case to Chapter 7. and 25% of Chapter 11 cases that were designated as business cases. while secured creditors fear attack by the TIB on their security interests i. 1997) i. Introduction a. ii. Debtor filed a motion to dismiss b/c it disputed the debt of 2 of the creditors. as one of the 3 required petitioning creditors.
In re Silverman (Bankr. Debtor has not been paying debts as they become due 2.ii.‖§363(c). l. §1102 Creditor’s Committee is appointed in larger cases to scrutinize the debtor’s activities on behalf of all the creditors and negotiate. 24.000 required by §303(b)(1) b. Punitives are appropriate if there is bad faith under §303(i)(2)(B). §303(b)(1) doesn’t allow claims for involuntary bankruptcy if they are subject of a bona fide dispute. §303(i) authorizes fees. GSPC is undisputed creditor and has the requisite debt of $10. Business continues to operate in the ―ordinary course. DIP has most of the legal rights and duties of the TIB §1107 c. Issue preclusion principles show their was bad faith w/r/t this claim. §365 Power to assume or breach outstanding executory contracts h. §364 DIP can get financing and other credit during bankruptcy w/ court approval f. Single creditor filed involuntary Chapter 7 petition on Oct. Creditor ordered a UCC search. Logic Behind Chapter 11 i. iii.‖ All 31 of debtor’s creditors revealed that he was never late on payment. §1126(c) Plan approval by specified majorities of creditors in each class m. greater UST supervision. Creditors may file involuntary Chapter 11 §303(a)
. Now face increased reporting requirements. and damages if an involuntary petition is dismissed w/out consent of the debtor and all of the petitioning creditors. under the control of the Debtor in Possession (DIP). Creditors may force a ―quasi-involuntary‖ bankruptcy filing if they are secured by pressuring the debtor to file bankruptcy or actually initiating repossession or foreclosure. DIP can attack its own conveyance as a fraudulent conveyance on behalf of all of its creditors d. it is limited in the use of secured assets. §303 governs involuntary petitions. Post-petition payments after the filing of bankruptcy will not deprive the court of jurisdiction or require dismissal of the petition n. §547 Avoiding powers to recover preferences (w/in 90 days) g. Creditor’s Perspective 1. §548 and §544(b) Power to void fraudulent conveyance i. Nor did he order a credit report of the debtor. §303(h)(1) standard is that the ―debtor is generally not paying his debts as they become due. §1129(a)(7) requires that every creditor who has not accepted the plan will get at least as much as the creditor would have gotten in liquidation n. §1141(d) Debtor is discharged from all pre-petition debts except as provided in the plan B. but never informed the court of the results. Secured creditors may also lift the stay w/ court approval unless the DIP can provide ―adequate protection‖ of their interests. shorter deadlines. §362 automatic stay is imposed. A. >12 creditors then §303(b)(1) requires that there are 3 creditors who are not the subject of a bona fide dispute or holders of contingent claims a. §361 and 362(d) e. 1. Problem Set #18
Chapter 11 Reorganization The Traditional Chapter 11 §101(51D)(A) ―small business case‖ applies to most businesses w/ debts less than $2M at time of filing. He sued in state court prior to the petition on a $200k promissory note. §363(c) and (e) allow DIP to operate in the ordinary course w/out court approval of each routine transaction. Mechanics of Chapter 11 a. His order for summary judgment was denied. DNJ 1998) i. §544(a) and §547 Power to set aside unperfected or late-perfected security interests in the debtor’s property j. § 542 and §543 Power to require turnover of property of the debtor being held by another entity k. 1997 against the debtor. costs. o. ii. b.
vi. Generally 1. Stay is nationwide (or even worldwide) and strictly enforced v. §362(e) Court must act on request to lift the stay w/in 30 days or it will automatically be lifted as to the requesting creditor’s collateral 4. §362(d) has 3 alternative tests to lift the stay 1. §362(b)(4) and (5) exempt ―government units to pursue actions to protect the public health and safety‖ even when the target is in bankruptcy. Automatic stay is an incentive to hold off foreclosure or repossession 2. §362(g) Burden on the DIP to show existence of ―adequate protection‖ of the collateral iv. Farm Credit of Central Florida v.2. Lack of ―adequate protection‖ §362 to §361 where ―adequate protection‖ is defined ii. Scope of the Stay 1. Polk (MD Fla. The civil action does not serve to stop any continuing misconduct by the debtor. 1993) 1. It is neither continuing nor health-related. Possibility of adopting a plan to bind all creditors. Liquidating plan is permitted in Chapter 11 §1123(b)(4). even with a minority rejecting it 3. Whether their 2-party deal binds the post-petition estate and all other creditors? 2. b. TIB or DIP can force return of the property to the debtor ex post 3. I. Turnover and avoiding powers. Westbrook then filed for Chapter 11 and asked court to stay the case and to permit the bankruptcy court to adjudicate the matter. Also. Prior cases show that a prepetition waiver of the §362 stay is valid and enforceable in single asset bankruptcy cases where bad faith existed and the court found there was no prospect for successful reorganization. No exception to the automatic stay. 3. Creditor v. Debtor’s Perspective 1. Seitles ordered to pay $44k in restitution. In the criminal case. ED Va. 4. Bankruptcy court found that the prepetition agreement that entitled creditor to an immediate lifting of the automatic stay is not sufficient to lift the stay unless showing of other criteria is found. 2. Gov’t argues there is no reason to stay non-debtor co-defendant Seitles’s matter. Debtor and creditor saw bankruptcy on the horizon as they negotiated an agreement to extend date of foreclosure sale in exchange for Polk not to contest a motion for relief from stay by creditor in the event they filed for bankruptcy. Is the government action ―protection of the public health and safety‖ or the ―protection of pecuniary interests?‖ Does it concern a wider group other than the parties at issue? Key is whether it is continuing misconduct by the debtor. US v. 3. Plaintiffs seek relief from the automatic stay pursuant to §361(d)(1) and (2)
. Co-debtor moved for stay under §105: ―Guided by a) irreparable harm and either 1) likelihood of success on the merits or 2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. §105 stay is necessary and appropriate to rehab the debtor. 6. 1980) 1. In re Rogers Development Corp. augment the assets available and provide powerful leverage over certain creditors The Automatic Stay and Adequate Protection iii. Creditor over validity of lien or preference ii.e. Seitles (SDNY 1989) 1. Six months or more the exclusive right to propose a plan 4.‖ Irreparable harm element is: ―interference with the rehab process‖ and the non-debtor codefendant is so ―inextricably interwove‖ w/ the affairs of the debtor‖ that it would ―substantially hinder the debtor’s reorg efforts‖ Seitles is the president of the debtor and the DIP. 5. Lifting the Stay i. Automatic stay and breathing room 2. (Bankr. Bad faith 3. Government sued Seitles under the False Claims Act seeking damages and civil penalties.
1999) 1. All creditors add pre-petition interest to their claims. but no post-petition interest. §502. iv. Debtor’s expert stated FMV of $801k. (3rd Cir. Secured creditor who has excess collateral is also entitled to add interest to its allowed secured claim under §506(b) during the pendency of the bankruptcy up until the value of the collateral. plus interest on that amount. but no post-petition interest. Member of Creditor’s Committee stated the property was essential to the successful reorganization of the debtor. No need to show insolvency in US Bankruptcy Law. In May 1978 the debtors defaulted on the acquisition loan. Payments While the Chapter 11 is Pending i. Forces debtor to propose a workable plan promptly or start paying interest on the value of the collateral. Unsecured creditors only hope of escaping is a Motion to Convert to Chapter 7 or Motion to dismiss. 5. Creditor can’t do either! c. In July 1979 they went into default on the construction loan. Forcing them to be paid ongoing will be a significant cash drain 2. Catch all allows for an ―adequate cushion‖ b. Unsecured creditors will get at least the amount they would have gotten in a liquidation. Plaintiff’s expert valued the property that the current FMV was $704k. ―Commercially reasonable‖ standard required given the circumstances of the case. §362(d)(2) requires no equity and not necessary for effective reorganization a. 3. §361 and 362 = adequate protection = 1) periodic payments. c. Plaintiffs argue ―lack of adequate protection‖ and the debtors have no equity and it is not necessary for effective reorganization. while mortgage lenders get the interest rate set at the preexisting contract rate. pre-confirmation interest (up to value of collateral) and they will then earn interest postconfirmation on the allowed amount that has accrued up to the time of confirmation. §502 iii. vi. Failure to do so immediately leads to lifting or modifying the stay. Questionable whether they accrued post-filing and pre-confirmation interest payments are to be added to the allowed secured claim or due as the case progresses. In June 1998 SGL’s parent made a best estimate of $240M in potential
. Value is crucial to determining the cushion. plus postconfirmation interest on that amount. Motion to dismiss requires a showing of bad faith. In 1997 US DOJ investigated alleged price fixing by manufactures led to a class action suit against SGL. 3) ―catch all‖ (―realization by such entity of the indubitable equivalent of such entity’s interest in such property‖) a. Neither liquidation value or full going concern value is proper per se.2. 4. 3. 506(b) v. §101(51B). according to K or applicable non-bankruptcy law. ii. Secured creditors are entitled to the present value of their allowed secured claims. Over-secured creditors receive the full amount of their claims. 362(d)(3). Conversion to Chapter 7 requires unfeasibility in the first months of a case. plus payment for the deficiency part of their claim (at the pro rata rate). Heritage loaned them $520k acquisition and development loan and $360k LOC. Plaintiffs argue they owe $548k in total. i. Take the median of $750k and they are adequately protected by equity cushion which could be well over $130k with the rising real estate market. In re SGL Carbon Corp. 2) additional or replacement lien. Good Faith i. a. Single Asset Real Estate (SARE) cases. Under-secured creditors get the value of their collateral at the time of filing. Adequate protection payments should not be confused with interim interest payments ii. including post-petition. d. Under-secured and unsecure creditors are denied that opportunity. SAREs have the ability to use rents to make adequate protection payments. §1129(a)(7) 1. Rogers owned 75% of a real estate development project. Without their only asset they cannot reorganize! Must show that there is no reasonable likelihood of reorganization to creditor dissent or feasibility. while unsecured creditors are entitled to the present value of what they would have received in Chapter 7 liquidation.
Investors with equity or subordinated debt are high-risk. The District Court found that it was in good faith because 1) the litigation posed a threat to successful operations. On Dec. Cash Collateral in §363 cannot be used by the DIP w/out the permission of the court. 3. §1104(a)(3): If there is reason to dismiss the case. Data shows that smaller. Wholesale food distributor with hard assets of refrigeration equipment. the CEO almost always rolls. §1104. and sought an immediate hearing to get a
. then the court may replace the DIP w/ a trustee if such a move is in ―the best interests of creditors and the estate. (3d Cir. ii. dishonesty. 1989) i. 2. g. Number 2 was shut down pending $18M in repairs. 2. Employees have the same interests. i. Who’s Running the Show? a.‖ As they managed the debtor or made financial reports. b. but not satisfied w/ the 30-day time frame by §362(e). DIP has a fiduciary duty to the creditors* iv. 16. Value is in its customer relationships. SGL filed for Chapter 11. §1104(c): appointment of an examiner to investigate the affairs of the debtor. c. trucks. the owner-managers virtually never lose control. Number 3 faced shutdown b/c it was overdue for relining. Sun Bank moved on 24 hours notice. e. 1998 at the direction of its parent. In re Earth Lite (Bankr. In re Sharon Steel corp. c. closely held companies that survive the Chapter 11 filing. Bankruptcy court granted b/c of prepetition transfers that were voidable preferences or fraudulent conveyances and none were questioned by the DIP. Dismissed ―for cause‖ under §1112(b) Problem Set #19 Operating in Chapter 11 1. Whereas.‖ f. However. Debtor had 2 blast furnaces and only Furnace 3 was operational. and knowledge of the retail food industry. On its disclosures it listed only the litigation as a reason for filing. Only the plaintiffs would receive less than full cash payment in it’s filing. Chapter 11 cases are subject to dismissal if not filed in good faith. iii. and also protected the parent from future suits. §1104(e) UST shall move for the appointment of a trustee if there are ―reasonable grounds to suspect‖ that those in control participated in ―actual fraud. Sun Bank sought relief from the automatic stay of §362. The company is otherwise healthy with large cash reserves. ii. even suspected existence of fraudulent conveyances and concealment of assets is not usually justification for removing the DIP. 4.liability in both suits. Unsecured creditors make much more if the business succeeds by keeping a future customer. high-reward and need success to profit. They have a net wroth of $124M. or criminal conduct. 1981) i. in large filings. Success of the business is the aim of all. office equipment worth $500k. Disputes between the DIP and a group of creditors may seek conversion to Chapter 7 or appointment of a trustee to run the business in Chapter 11. They want liquidation and immediate payment. supply lines. The community also may want to see success. so long as the cash is used ―in the ordinary course of business‖ under §363(c)(1). Debtor shared common management with the receiver of the transfers. Cash collateral is cash derived form the sale of inventory or the collection of accounts subject to an Article 9 proceeds claim by a lender secured by inventory or accounts. computers. MD Fla. Few constraints on the DIP’s use of cash that is not subject to a lien. What happens to the Cash? a. The bank has a security interest in its hard assets and has $400k in outstanding debt. Must pose a serious threat to the companies’ long-term viability. Chapter 11 liquidation can yield the best prices with the management conducting the sale d. and 2) the litigation could cause financial ruin. Legal fees were insane for defending the appointment of the trustee to protect the equity owners. Ex. i. Their assets were exceeded by liabilities by nearly $300M and filed Chapter 11. b. Committee dissatisfied w/ progress so petitioned for appointment of a trustee under §1104. Debtors and creditors hope for the success of the business.
iv. §506(a) creditor w/ a setoff right is treated as a secured for the amount of its setoff right. Creditor w/ a setoff right is subject to the automatic stay and must have permission of the court. Debtor is in default and the equity cushion is not enough to waive monthly payments. and 4) where the creditor purchased a claim for setoff.e. 1980. At commencement. Majority view of §533: Gov’t agencies are as a matter of law a single entity. 2) if it would jeopardize a debtor’s ability to reorganize. iii. The code protects the rights of secured parties with the ―adequate protection‖ provision of §361. and the account subject to setoff is cash collateral and governed by the rules in §363(c).prelim injunction to prevent Earth Lite from using any of its collateral. IRS audited and determined that Hawaii airlines made overpayments totaling $215k. ii. The net equity of the insiders is also very large. Citizens Bank of Md. It also called for creation of a ―lock box‖ system to handle the collection of accounts receivable. BAP 1996) i. Here the personal guaranties of the insiders which were worth $300k on indebtedness of less than $150k is enough. and a cemetery lot.‖ Bankruptcy recognizes a party’s non-bankruptcy right to setoff mutual prepetition debts. Bank’s right to Setoff i. 3) deny setoff in a liquidation context b/c it results in either a preference or priority over other unsecured creditors. Creditor could not set off w/out violating the stay. ii. 1. Must show more than an equity cushion to use cash collateral. f. standing in the same capacity and same kind or equality. collateral assignment of a mortgage receivable. Sturmpf (1995) i. Nonbankruptcy right to setoff comes from Title 31. and 2) this right should be preserved in bankruptcy under §533. Called for periodic payments to be applied to interest and principal. Government agencies allowed setoff for ―past-due legally enforceable debts‖ w/ unpaid federal tax refunds of the debtor where the agency has a formal agreement with the IRS and notifies the IRS of any deficiency. After bankruptcy filing. US filed a motion to lift the stay and for a setoff to use the $215k to offset the claims of other agencies. Triangular setoff by subsidiary is not allowed so gov’t should follow this rule. iii. iv. Maryland v. unless they act in a distinctly private capacity. 2. but creditor could protect itself w/ an ―administrative freeze‖ by holding the money in a checking account pending its application to the bankruptcy court for the lift-stay motion. Mutuality requires that the debts are ―in the same right and between the same parties. subject to some qualifications and limitations. Debtor filed a motion to use cash collateral and other collateral under §363 for its survival. d. Stumpf (1995). Hawaii Airlines and HAL filed Chapter 11. and needed court approval to have the stay lifted before it acted. They filed for Chapter 11 on June 27. v.‖ iv. Creditor must establish 1) it has a right to setoff under nonbankruptcy law.500 a month.
. Debtor originally got loan for $350k secured by the inventory and accounts receivable of debtor. V. §363 provides that ―cash collateral‖ means cash or other cash equivalents in which the estate and an entity other than the estate has an interest. After filing. Courts may deny setoff where: 1) creditor acted inequitably. Minority view of §533 – narrow construction in the reorganization context. §533 allows any creditor to offset a debt it owes to the debtor against a debt owed to the creditor by the debtor. §533(a) states that filing a petition does not (except in certain circumstances) ―affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case… against a claim of such creditor against the debtor that arose before the commencement of the case. iii. Debtor agreed to pay bank $12. a mortgage lien on a condo. but it should be able to cure this default in reasonable time. Allows creditors to obtain full payment of a claim up to the amount of its debt to the debtor. §362(a)(7) e. which far exceeded the amount of debt outstanding ($288k). The guarantees granted a second mortgage on the home of the president. i. ii. the inventory and the monies received from the collection of accounts receivable. In re Hal (9th Cir. the bank agreed to lend $75k for additional collateral and for personal guarantees of insiders. Earth Lite had $500k in inventory and about $90k in account receivables. but does not itself create such a right.
HPL agreed to clean it up. Judge and appeals court concluded there existed a reasonable likelihood of survival b. In re Hubbard Power & Light (EDNY 1996) – Non-assignable generation K i. Affirm the decision to allow setoff.
. Mass. Problem Set #20 1. Inadequate cash flow and the need for increase in operating capital for survival b.7M. §522(a): pre-petition security interests do not attach to property acquired by the DIP after bankruptcy i. In re Garland Corp. Inventory acquired after filing will be property of the estate. vi. Debtor seeks $750k in postpetition financing from Enron under §364(c) and (d) and provides Enron a super-priority lien. Enron is to receive a super priority administrative claim under §364(c). NY DEC. ii.1. Requires showing that the debtor was unable to obtain unsecured credit under §364(c). a.‖ Denied a. Must find someone who is willing to make new infusions of cash in order to survive c. Store has $1M in inventory on date of filing and the creditor w/ a perfected security interest in inventory can lay first claim to this inventory. Only Enron made an offer to lend the funds. No objection and judge authorized debtor to borrow an additional $700k and enter a LOC w/ the bank and Prudential for up to $1. Taking of property w/out just compensation in violation of the 5th Amendment. §364(c)(2) challenge to borrowing operating funds secured by unencumbered assets. Islip Township paid to clean up HPL’s property and was reimbursed by the County. Landlord. post-petition inventory back to the sale of the old. no longer subject to the secured creditor’s after-acquired property clause. 2. Evidence does not show a ―reasonable likelihood that the debtor could be successfully rehabilitated. However. No Express statutory requirements that holders of unsecured claims be provided ―adequate protection. and often does. Borrowing of operating funds secured by unencumbered assets requires ―adequate protection‖ of the interest of unsecured creditors w/in §361. b/c other lenders didn’t want to pay for the clean up. 362. Arguments for appeal: 1. The only argument here is that other unsecured creditors will receive stock in satisfaction of their claim and not cash. a priming lien on all the debtor’s assets. They couldn’t find it. Also extends to creditors improving their setoff position w/in 90 days of filing. ii. Judge approved the $500k and an increase in the LOC to $1. They were later found to be priority costs of administration under §507(b) and secured by a first lien on all assets of the debtor including receivables and inventory. The debtor can still offer as security for post-petition financing both property that was not encumbered before filing plus an interest in any new property it acquires post-filing. Denied. Debtor sought authorization to borrow operating funds from Bank and Prudential. It is subject to resolution of HPL’s disputes with LI Lighting Co and its landlord and entry of final non-appealable order for the consent of the DEC to resume HPL’s production of power. §533(a) extends to claims obtained or debts incurred w/in 90 days of filing of the petition. (Bankr.‖ It only is to be provided under §361. and the County of Suffolk all oppose. CC appeals. Ex. but b/c it stopped operations it had no money to do so. d. If they can trace the purchase of the new. Post-petition Financing a. claim a security interest in post-petition property by way of a proceeds under UCC §9-315. 1980) – Unsecured creditors worried about increased borrowing i.4M in postpetition borrowings. iii. the secured creditor could claim a continuing security interest. pre-petition inventory in which it held an interest. the secured creditor can. CC opposed request of the debtor to borrow $500k more. D. Rejected the constitutional claim e. or 364. an assignment of and a first priority security interest in all revenues received from the sale of power. Denied. i.
Mootness: Difficulty of a appellate court to reverse a bankruptcy court’s decision on post-petition financing because a stay of the bankruptcy court order will sink the company. Purpose is to safeguard the secured creditor from loss of value in its interest. debtor filed motion to use cash collateral and financing order to incur secured debt. There is currently no property in the estate which is not already subject to a lien.ii. (11th Cir. Shapiro is unsecured creditor objecting to the bankruptcy court’s allowance of the Chapter 11 debtor to ―cross-collateralize‖ their pre-petition debt w/ unencumbered property from the bankruptcy estate. County orally objected b/c they don’t want to be subordinated to Enron for lack of ―adequate protection‖ for their lien. Mootness under §364(e). d. $300-400k is earmarked for cleanup.5M and there is no equity in any of HPL’s property. v. Oak Re and the bondholders have a valid perfected first lien on all of HPL’s personal and real property. Hanover agreed to lend debtors $3M for a security interest in all the debtor’s property both prior to filing and acquired after. §364(e) is only applicable if the challenged lien or priority was authorized under §364. 2. No party involved was willing to clean up the party and get an administrative lien for the cost of clean up. Court refuses a stay and overruled the objection. the County could either sell the real property 1) subject to the cost to clean in satisfaction of the DEC. §364 applies only to
. the lender would wait until all appeals are final and it is too late for the debtor. vi. c. iv. The improvement with the borrowed funds improve the value of the County’s collateral from $0 to at least $300k = Adequately Protected. b. This screwed over the unsecured creditors by at least $21M. or 2) at a reduced amount based on the cost of clean up and removal of abandoned property by the debtor and secured creditor. Section 364 encourages credit granting to debtors by eliminating the risk that any lien securing the loan will be modified on appeal. iii. xii. They can’t find financing elsewhere. By law. Cross-collateralization: Securing a pre-bankruptcy loan with new or additional collateral granted post-bankruptcy as part of a new post-bankruptcy loan. Party seeking a financing order appeal must apply for stay and usually post a substantial bond. so they can’t secure financing under §363(c)(2). §363 allows debtor to obtain credit. During first day orders. Must determine if its moot after determining if crosscollateralization is authorized under §364. Absent a stay. Oak Re has a valid blanket lien for its bondholders worth $4. Should a creditor’s pre-petition position (often unsecured) get promoted in exchange for postpetition financing? 3. It is also beyond the scope of the equitable powers of the court because it contradicts the priority scheme in the code. at least the County could foreclose in the future and realize its true value. Oak Re agreed to subordinate its claim to Enron and now supports the arrangement. viii. 1992) – 11th Circuit denies cross-collateralization but the 9th and 2nd approve of it in limited circumstances a. Circuit concludes that it is not moot and cross-collateralization is not allowed under the Code. xi. x. a. Debtor filed on Nov. the County has a lien on real property for $1M. §506(a) grants security to the extent of the value of the property. After hearing. 4. §364(d) debtor must present evidence of existing lien holder is adequately protected. It protected the $3M post-petition credit and secured their $34M prepetition debt. Oak Re would likely abandon the equipment in liquidation. §364 is not authorized as a method of postpetition financing in the code. The value of Debtor’s raw land is $275k. the County’s lien primes the lien of Oak Re. Their assets are 2 acres of real property and a pre-fab building w/ equipment and a cogeneration agreement w/ LILCO not assignable. In the event of foreclosure by the County and an abandonment. ix. which the lien is fixed. 14 and continued as DIP under §§1107 and 1108. The County is adequately protected with the clean up efforts. xiii. vii. If the business fails. §506 governs definition and treatment of secured claims. The current value of the County’s lien is $0. They have no other assets or funding for the site or for operation or expenses. Subsequent to this lien. Debtor owed Hanover about $34M secured by collateral less than $10M. Otherwise. Saybrook Mfg. the lender will be protected in its security or priority even if the appellate court overturns the financing arrangement. Shapiro v.
an execution creditor. 5) postpetition financing arrangement. First Day Orders a. In re Bowling (SD Ohio 2004) a. Otherwise. DIP will avoid transactions and challenge any secured creditor’s demand for better treatment than the unsecureds until they establish the security interest is not vulnerable to any avoiding powers. Reclamation does not work against a secured lender who claims the newly delivered property as inventory. 6. 2) requirements for operating reports. §503(b)(9). or for real estate. pay employees wages due. the seller may have a right to get the goods back if it makes a timely written demand. equity. but no spouse is listed on the deed as grantee. a BFP. and community. 3. 5. and 6) employment of counsel for the debtor and a creditor committee. On July 12. b. in practice creditors may allow continued operation by old equity in a small owner-operator business. They filed Chapter 7 on Jan. §544 equalizes the TIB with all other creditors by giving them the rights and powers on filing of a judicial lien creditor. However. is debtor’s testimony alone enough to show that the notary was not present at execution?
. §506(c) Blanket security interest trumps the supplier. 3) authorization to buy or sell outside of the ordinary course. Suppliers are hesitant to provide credit in bankruptcy and they are entitled to administrative priority if they do. (7th Cir 2004): Critical vendor doctrine to be read narrowly and must be demonstrated. W/in 20 days of filing. b. b. d. 2. c. Granting priority over all other unsecured claims is not equitable. and employees. 203 N. 2003. the court may permit equity to retain ownership if its convinced that the bargain is fair and creditors benefit. Bank of America Nat’l Trust v. DIP now has the rights of the old debtor and the collective rights of the creditors to preserve the business’s assets. 4. Debtor owns real estate and the deed conveying it to him reflects he was married. Ordinary supply calls for order and delivery without a contract. Trustee filed an avoidance of the mortgage b/c it was defectively executed under Ohio law and avoidable under §§544 and/or 547. Bowling’s dower interest in the real estate part of the estate? Do amendments to Ohio law eliminate the requirement that a notary must be present at the time of signing? If a notary signature is required. Avoiding powers give TIB/DIP power to undo pre-bankruptcy transactions between the debtor and certain creditors. Absolute Priority Rule: General rule is that equity cannot retain value unless all the creditors have been paid in full. creditor must wait for pro rata distribution. It also gives the TIB/DIP negotiating leverage with the defendant-creditor that may face the loss of its security interest or an order requiring it to pay back amounts it received form the debtor shortly before bankruptcy. Problem Set #21 Reshaping the Estate 1. Owner Financing – Absolute Priority Rule a. 507(a)(1). c. §§503(b). Financing Goods and Services a.future extensions of credit and not liens to secure prepetition loans. 2001 Bowling executed a promissory note to MERS for $116k and a mortgage conveying the real estate as security for the note. LaSalle (1999): Held that real estate partnership cannot simply buy the equity in the business as part of its confirmation w/out giving others a similar opportunity to bid. Critical Vendor Rule: In re Kmart Corp. Ohio law governs the validity of the mortgage. §544(a)(3): Gives the TIB even greater powers than against personal property for real property and grants them status of a Bona Fide Purchaser of real property. 1) additional injunctive relief. b. Is Mrs. 7. Exception is that when equity provides ―new value‖ that can’t be obtained elsewhere to finance the reorg. DIP is now trying to save the business on behalf of all the creditors. The Strong Arm Clause – §544(a) a. 4) use of cash collateral and cash management. seller gets an automatic administrative priority. §507 fixes priority orders of claims and expenses of the estate. Reclamation: §546(c) if the debtor receives the goods while insolvent and w/in 45 days of filing. Debtor’s wife did not sign the note or the mortgage.
* Strong-arm clause tests the strength of the lock that the secured creditor or lien holder placed on the property. 18. 2) transfer had not been made. Defendant holds a judicial lien for $43k from a post-judgment attachment in County Court on Jan. §547(b)(5): Preference if showing that the judicial lien enables creditor to receive more than such creditor would receive if 1) case under Chapter 7. §547(f). MERS also not entitled to a lien in the real estate under §550. the TIB must recognize the lien in bankruptcy and treat the gov’t as it does any other perfected secured party. Other Property a. §547 Determines preferences 3. Debtor is presumed insolvent in the 90-day period. After the tax lien is filed. b. Until lien is filed. Would the ∆ ―receive more‖ w/ the judicial lien than he would w/out the lien in a Chapter 7? 1. Federal tax lien arises when an assessment is made. c. 2007. Federal Bankruptcy law looks to state UCC law to evaluate security interests on personal property. 19. UCC §9-338: Secured parties and buyers are protected against misinformation of certain types in a filed financing statement. iii. ii. 2007 the debtor filed Chapter 13 and listed the property’s FMV at $300k. Provisions apply to all state and federal taxes owed. Was the debtor insolvent at the time of the attachment? 1. including the TIB. Defendant offered another value at $443k as of April 5. If they locked it up so that it could prevail over a BFP. It was the subject lien for or on account of an antecedent debt iv. 6th Circuit determined that when the Trustee has avoided a mortgage under the strong-arm powers. Problem Set #22 Preferences: The General Rules 1. Allow the TIB to review activities of the debtor as it neared bankruptcy to determine if creditors received preferential treatment before filing. vi. it is like an unfiled security interest: good against the debtor. On April 5. It was for the benefit of a creditor. 26 USC §6323. then the lock will hold in bankruptcy. It occurred during the 90 day preference period 1. and debtor filed on April 5. whether the tax claim is secured or not.
. and attaches to all the taxpayer’s property and rights to property. DNH 2008) a. i. Debtor owns 50% of the property and his mother owns the other half. * 1. Creditor bears the burden in overcoming the presumption. Debtor’s word can control if MERS offers no evidence rebutting. iii.i. Trustee has the burden of proving the avoidability §547(b) and (g). §507 priorities and §523 discharge command the TIB’s position w/r/t federal tax liens. Federal Tax Liens a. It was a transfer of the debtor’s interest in property ii. which gives the TIB priority over the unfiled tax lien. the mortgagee’s interest is preserved and becomes part of the estate w/out need for the trustee to resort to the recovery process under §550(a). v. 5. b. but not against most other interested parties. 6. 2. Insolvency under §547(b)(3): Debt > assets at FMV excluding property that may be exempt under §522. while the unsecured creditors represented by the TIB are bound by a defective and misleading filing even if they actually relied on it. §544(a)(1)-(2) TIB has only ―lien creditor‖ status over disputes with personal property b. In re Pysz (Bankr. and 3) such creditor received payment of such debt to the extent provided by this title. ∆ got and recorded the attachment on Jan 18 and 19. Trustee is entitled to avoid the mortgage pursuant to strong-arm powers under §544(a)(3) with clear and convincing evidence that the mortgage was not signed and notarized. Some circuits charge the TIB or DIP with notice of the defective mortgage and cannot claim BFP status to set aside a defective mortgage. It was recorded on Jan. Π move for SJ to avoid the ∆’s judicial lien as a preference under §547(b). Before filing. strong-arm provisions permit the TIB to exercise the rights of a judgment lien creditor or BFP of real estate on the date of filing.
Now 30 days under Code a. Minority of courts use a unitary-transaction theory. 2. ii. §550(c) and 547(i) insulate the non-insider creditor from the effects of an insider benefit for transfers made more than 90 days before filing. at the time of recording the mortgage. 2003.‖ Applicable law is state law of Michigan where perfection occurs upon recording. c. f. the transfer occurred when it was perfected on Dec. Debtor made $1. New mortgage was perfected ―when a BFP of the property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee. and 73 days after the refinancing had taken place. there is held to be no transfer of property of the debtor even if the funds pass through the debtor’s hands in getting to the selected creditor. Can Chase’s new mortgage lien be avoided under §547? b. a transfer occurs for or on account of the debt that could be challenged as preferential by the trustee. Chase could have protected itself by perfecting w/in 10 days of the Debtor’s granting it on October 6. the associate mortgage will not be considered antecedent. §547(b)(4)(B) increases preference period to 1 year for insiders! i. 17. the transfer occurs at the time of perfection. Even if they were. A BFP could have bought the property from the debtor up until Chase recorded. The majority rule is that late-perfecting refinancers are not entitled to using the rule. e. On the facts. In re Denochick (WD Pa. g. i. Judge ruled the appellants were creditors and failed to establish the ―ordinary course of business‖ exception. A borrower who later becomes a debtor incurs an antecedent debt and. but it waited 72 days. It still doesn’t help Denochick’s sister who guaranteed the loan. h. which was 72 days after loan proceeds were disbursed – well outside the 10-day grace period. Appellants agreed to guarantee a debt consolidation loan from NBOC to Sandra’s sister. and 3) the transaction according to the agreement does not result in a diminution of the debtor’s estate. Must be that 1) the agreement is b/t a new creditor and the debtor for the payment of a specific antecedent debt. and the debt will be antecedent.
. Therefore. 1. then the new mortgage wouldn’t have been on account of an antecedent debt.713 in loan payments to NBOC in the year prior to filing. but the payments had the indirect effect of reducing their exposure on the guarantee given to NBOC. 2003) transferees and others who benefit under the “to of for the benefit of a creditor” §547(b)(2) i. Trustee discovered it had been recorded w/in 90 days of filing. but this one adopts a 2 part analysis. to the detriment of her other creditors. Earmarking Doctrine – Transfer of an ―interest of the Debtor in Property‖ i. Any unsecured creditor where distribution is less than 100% fails to meet this analysis. If so. 2008) – Avoidance and Grace Period. 2003 and made on account of an antecedent debt. 2003. Appellants received none of this money. The appellants never testified. Shapiro (6th Cir. the earmarking doctrine does not shield it from preference. ii. Creditor includes the guarantor of a debt. Chase Manhattan Mtg. 2) the agreement is performed according to its terms. Susan Denochick. Debtor’s payments to NBOC benefited them. So long as mortgage is recorded w/in 10 days. d. Trustee sought to avoid it as a preference and recover from appellants the money that Denochick paid to NBOC. Corp v. only the bank that received the payments. Chase is not a new creditor! They fail. 4.‖ Antecedent = incurred before the transfer in question. §547(e) grace period for lenders in perfecting a security interest. 2003. and the trustee could avoid the $1.713 and recover that from appellants. If perfection occurs more than 10 days after the transfer takes effect. debtor incurred obligation when Chase disbursed on October 6.2. Judicially crafted limitation on §547(b): Exception to the general rule that the use of borrowed funds to discharge the debt constitutes a transfer of property of the debtor: where the borrowed funds have been specifically earmarked by the lender for payment to a designated creditor. New mortgage was recorded on Dec 17. The policy behind the law is to equalize all creditors and prevent ―secret liens‖ on the debtor’s collateral which are not perfected until just before debtor’s filing. Debtor filed for Chapter 7 a short time after the bank refinanced the mortgage. §547(b)(2) trustee must show that transfer was made ―for or on account of an antecedent debt owed by the debtor before such transfer was made.
leaving only $300 to be avoided. Debtor may have two kinds of voidable preference actions--§547(b) and UFTA §5(b) in states that have adopted it. But if the senior is sued by the TIB claiming that the payment benefited a second secured creditor w/ a junior position in the same collateral. which payment was itself unavoidable. UFTA §5(b) v. when the debtor filed a preference of $1000 would exist. 5. Trustee admits that the payment was not a preference to the senior creditor. §547(c)(4) 2. Those transactions that can be avoided under §547(b) can be saved under §547(c). Identify a payment (or other transfer) that is preferential under §547(b) 3.the senior creditor. UFTA §5(b) Fraudulent conveyance if it is a transfer or payment of an antecedent debt by an insolvent debtor to an insider who had reasonable cause to know of the insolvency. and then made a $700 delivery of new supplies on credit.000 preference should be reduced by the $700 new value. i. Seller delivers goods and the buyer hands over cash ii. Ex. Ex. §547(c)(3) Purchase money creditors are protected in bankruptcy the same as under the UCC.‖ Code draws no distinction. Test new value for qualification under (c)(4) by determining whether under (C)(4)(A) and (B) it was accompanied by a payment (or other transfer or was secured). Creditor received a $1. Ex. UCC law provides only 20 days. See if the avoidable amount of the preference can be reduced by the amount of a lateradvanced new value that qualifies under (c)(4). When debtor filed the new value would not qualify since it was accompanied by the full payment of $700 at
. Creditor received a $1. UFTA requires the insider to have had ―reasonable casue to believe that the debtor was insolvent. and then delivered $700 of new supplies that were paid for in cash on delivery. §547(b): UFTA distinguishes b/t creditors at the time of transfer with a right to set aside the transfer and those who became creditors after the transfer and have no right to set aside. iv. there is a problem. Voidable Preferences at State Law a. or 2) made according to ordinary business terms iii. Insolvent debtor’s repayment of debt to insider can be set aside by other creditors w/out an involuntary bankruptcy. So long as the question took place w/in 90 day voidable preference period. §547(c)(2) Transfer in payment of a debt incurred by debtor in ordinary course of the debtor and transferee and transfer was 1) made in ordinary course. Ordinary Course Payments 1. The transfer is recoverable from the ―initial transferee‖. Under (c)(4). while Bankruptcy Code reaches back only 1 year to review transfers to insiders c. Also extends to insider payments to organizations that are immune from involuntary bankruptcy filings. 4. §547(c)(1)(A&B) Seller or lender should be able to deal w/ a buyer or borrower w/out worrying about whether the order in which the transaction took place could create a voidable preference. Contemporaneous Exchange 1.000 preferential payment. 2. a. 9 Exceptions to the rules of §547(b).000 preferential payment. d. UFTA has 4 year SOL for REV case and a 1 year SOL for actual intent cases. PMSI creditors who file w/in 30 days are given full protection against a voidable preference. a. Problem Set #23 1.ii. the bank would seem to have received a voidable preference. but the junior creditor indirectly benefited b/c its security interest was ―promoted‖ by the transfer. ―New Value‖ Exception 1. including charities. Purchase Money 1. even under the amendments. the $1. b/c that creditor was fully secured. The Exceptions a. b. Fully secured creditor is paid w/in 90 days (and other requirements of §547(b) are satisfied) there would be no voidable preference as to the bank.
500 in unsecured credit will permit the creditor to keep $1500 of the two preferences. 1. it disqualifies the $700 in new value under (C)(4)(B).‖ and if presented in ordinary course (UCC says 30 days) it will in fact be substantially contemporaneous. Debtor tendered a cashier’s check drawn on Bank. The payments made by cashier’s check enabled Barry to receive more than it would have in Chapter 7. and id each payment (or transfer) that qualifies as preferential under §547. They were made while debtor was insolvent and the payments were made w/in 90 days preceding filing.
. and 4) creditor took advantage of debtor’s financial condition.000 each followed by an extension of $1.850
b. Since it is unavoidable. b. AND 2. d. work backward from each grant of new value to determine whether it is subsequent to a given preference w/ the same creditor having advanced unsecured credit to the debtor. or new credit. 2) amount or form of tender differed. Check returned for NSF on Feb. Work forward chronologically from the 90th day to Bankruptcy Day. 12 200. Ordinary Course of Business Exception 1. 2 preferences of $1. Debts were incurred 2 weeks before the delivery of the cashier’s checks and were antecedent. Any advance of unsecured credit after the preference will trigger (c)(4). vi. Bill Younger returned an NSF check prior to filing to the mom too. vii. and if Barry received payment of its debts as allowed under the code. Intended by the debtor and creditor to be a contemporaneous exchange for new value given to the debtor. 3) unusual collection or payment activity. §547(c)(2) a. §547(c)(65) §547(c)(6) – permits statutory liens that violate the voidable preference provisions to survive if they are otherwise unavoidable under §545 §547(c)(7) – alimony and support are not recoverable as voidable preferences §547(c)(8) – individual debtor w/ primarily consumer debts aggregate <$600 §547(c)(9) – debts not primarily consumer debts. Debtor purchased cattle from Barry by check for $17k dated Jan. or B) made according to ordinary business terms. Trustee met all other prongs for preference of the two cashier’s checks. New value: money or money’s worth in goods. ―Floating Lien‖ – inventory and account financing 1. iii. c. The second payment was not avoidable as a preference b/c it was made at the moment the debt was created and therefore was not paid on an antecedent debt under §547(b). 5. 29. Made in the ordinary course: 1) length of time engaged in transaction at issue. Ex.v. WD Ark. but the dollars of each advance can be counted only once.
delivery. UCC determines that title to the cattle passed upon delivery of the cattle on the day of the respective sales. Creditor must prove that the transfer was: 1) in payment of a debt incurred by debtor in ordinary course of the debtor and transferee and transfer was A) made in ordinary course of debtor and transferee. aggregate <$5. and not the full $2000. Debtor’s mom paid $15k to Barry toward a debt owing Barry. a. services. if the payments had not been made. viii. They were purchased w/ money of the debtor. Creditor can avoid if it has an exemption under §547(c). In re Stewart (Bankr. but does not include an obligation substituted for an existing obligation. 2000. After they are located. 2002) i. ix. or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law…. A bounced check is no longer contemporaneous. Contemporaneous Exchange for New Value Exception 1. Transfer by check is considered to be ―intended to be contemporaneous. Was in fact a substantially contemporaneous exchange? a. Its contemporaneous only if the check was presented and paid w/in a reasonable time. ii.
Trustee filed to set aside Valley’s security interest. Valley defends under: 1. Before April 3.
. ii. 2000 until August 11. United released this lien.: Creditor received a $1k preferential payment. 2001) i. Valley claims it lent money to the debtors upon refinancing specifically for the purpose of paying off United. Test new value for qualification under (c)(4) by determining whether under (c)(4)(A) and (B) it was accompanied by a payment (or other transfer or was secured). just as they do under the UCC scheme. Va. 2000 the debtors filed for Chapter 7. 2000. On October 18. 1) Purchase of vehicle by David and Linda Shreves (debtor) financed by United Bank. Ex.: Creditor received a $1k preferential payment. From May 1.2000 to United. leaving only $300 to be avoided.whether the payment is a transfer of the debtor’s interest in property to pay the debt owed to the first creditor. but the transfer that occurred when the new creditor perfected its lien more than 10 (30) days after the parties’ loan agreement. UCC only grants 20 day. 1. New Value Exception i. the $1k preference should be reduced by $700 new value. ii. 2. debtors refinanced through Valley. Earmarking Doctrine a. On May 1. 2000 debtors got loan to buy car and gave United a security interest. Grants PMSI lender 30 days to file for full protection against a voidable preference. which payment was itself unavoidable. 2) Subsequent refinancing b/t debtors and Valley Bank. Second payment was not avoidable as a preference b/c it was made at the moment the debt was created and therefore was not paid on an antecedent debt under §547(b). When the debtor filed the new value would not qualify since it was accompanied by the full $700 payment. Doctrine is applicable to refinancing to determine whether debtor’s payment of an existing creditor w/ funds borrowed from a new creditor constitutes a preference. when the debtor filed a preference of $1k would exist. 2001. iv. §547(c)(3): Purchase-money creditors will receive special protection in bankruptcy. Ex. Perfection occurred more than 4 months after the security agreement. In re Shreves (Bankr. d. Intended to be contemporaneous and was in fact substantially contemporaneous exchange. Valley could have protected itself by getting United to transfer its security interest to Valley at time of payment. then made a $700 delivery of new supplies on credit that were paid for in cash on delivery. ND W. c. See if the avoidable amount of the preference can be reduce by the amount of later-advanced new value that qualifies under (c)(4) (―to the extent that‖). and 3) perfection of Valley’s interest during the preference period. Valley wrote a check on April 5. before United perfected its interest. e. They only bounced 1 other check in the year prior to filing. and that consequently. However. ―Substantially contemporaneous exchange‖ exception §547(c)(1)(A)&(B) a. NOT in fact SCE c. DMV recorded Valley’s lien on August 11. 2000. since the payment is unavoidable. b. Under (c)(4). Valley steps into United’s secured position. the transfer at issue is not the transfer of funds to the initial creditor. On April 3. United recorded on April 21. iii. The Purchase Money Exception i. 1. §547(c)(3) for enabling loans (PMSI) has 30-day grace period now. then made a $700 delivery of new supplies on credit. Not ordinary course and not ordinary in the industry. but was 10 days at the time. 2000 no lien showed on the title. There would be no transfer ―of an interest of the debtor in property‖ b/c the transfer would’ve been United’s interest in the property. 2000. it disqualifies the $700 of new valued under (c)(4)(B). §547(c)(4): Identiyf a payment (or other transfer) that is preferential under §547(b). b.b.
In re Nivens (Bankr. late fees. Stat by working forward chronologically from the 90th day preceding Bankruptyc.‖ Debt is liability on a claim. 27.
iii. of Agriculture. and the trustee competing for the payments in possession of the trustee. If.
. Burlingame was always under-secured during preference period. i(1) < i(2). and new accounts receivable were generated. B argued that its position had not improved b/c its debt had increased during the preference period. Both held security in virtually all assets. D had 2 secured creditors. followed by an extension of $1500 in unsecured credit. but the dollars of each advance can be conted only once. although made to an unsecured creditor. First State Bank. 2. the excess should be preferences that are avoidable.
Problem Set #24 1. will not be recoverable as voidable preferences even if made during the preference period. and had chemicals that qualified as inventory. INC (2007) i. the aggregate value of all property that constitutes or is affected by such transfer is less than $5. 1. filed for Chapter 7. value of B’s security interest in D’s AR and Inventory then in existence was greater than the value of its security interest in the AR and inventory at the beginning of the preference period. then preference = i(2) – i(1). B argues §547(c)(5): ―improvement in position‖ defense. College v. §547(c)(5) refers to ―debt. §547(c)(7): Alimony and support payments. 2003. Inventory and account receivables: Can make argument for floating lien that if the creditor is under-secured on 90th day. Trustee showed that value of D’s AR and inventory increased by $156k during the period. Comm. §547(c)(9): if. b. B had an ―after-acquired property clause‖ in their security agreement. 1982) i. 90th day. iv. Filing day. D was subject to unpaid wages during preference period and unpaid vendor claims for goods provided. 2004. Value of undersecured c’s collateral in relationship to its debt on the petition date is compared w/ the value of its collateral in relation to its debt at the beginning of the preference period. and only if. the aggregate value of all property that constitutes or is affected by such transfer is less than $600 iv. c. 27. On Dec. including accounts receivable and inventory. dad and son. The Other Exceptions i. B’s debt increased by at least $165k. and automatically acquired liens in the new AR generated during the preference period. After a preference is located. i(2) = Debt – Value of Collateral vii. in a case filed by a debtor whose debts are not primarily consumer debts. even more than the value of its collateral had increased. However. work backward from each grant of new value to determine whether it is subsequent to a given preference w/ the same creditor having advanced unsecured credit to the debtor. 2 farmers. 3. 1. Sovereign Immunity: No longer granted as a result of Central Va. i(1) (insufficiency) = Debt – Value of Collateral vi. Deal w/ statutory liens under §545. Identify each payment (or transfer) that qualifies as preferential under §547(b). iii. v.: 2 preferences of $1k each. ND Tex. On petition date. ii. Debtor filed Chap 11 on Feb. On petition date. Katz (2006). They were to receive deficiency payments of $36k and disaster payments of $1k from the Dept. In re QMECT. due to the accrual of interest and late fees. Senior secured was Comerica and junior secured was Burlingame. Some of the accounts receivable B held generated cash. ii. §547(c)(8): case filed by an individual debtor whose debts are primarily consumer debts. §547(c)(6): permits statutory liens that violated the voidable preference provisions to survive if they are otherwise unavoidable under §545. iii. not the full $2k. Claim is defined broadly and includes pre-petition interest.000. Any advance of unsecured credit after the preference will work to trigger §547(c)(4). He generated accounts receivable from his business.f. and attorneys’ fees. Ex. They then were spent in the continued biz ops. SBA. More on the Exceptions: The ―Floating Lien‖ a. but over-secured on bankruptcy day. v. will permit the creditor to keep $1500 of the two preferences. Transfers during the preference period are only avoidable to the extent that its undersecured position on the earlier date is greater than its under-secured position on the later date.
Right to the checks derived from rights in the crop. the increases attributable to their work should be used for the benefit of all the creditors and not the secured creditor alone.433M. Problem Set #26 b. f. Insufficiency on date was $1. Amount in accounts was $349k. 1993. (Bankr. K may not be assumed if it was terminated prior to bankruptcy under nonbankruptcy law. which were outstanding in 1990.09M. iii. On Aug. 1990 and converted to 7 on May 12. Inc. 8. g. Pre-bankruptcy contracts are good bargains. GMAC withdrew its LOC financing. including crops.
. 1990. Insufficiency was $1. but the TIB argued the bank benefited from an improvement in position from the increase in the crop’s value during the 90 days preceding bankruptcy. Insufficiency was greater on date of setoff. The Economic Decision i. iv. v. §541(a) brings all property of the debtor to the estate ii. In Oct. they are compensated out of the assets of estate. Farmers labor belongs to the farmers and not the estate following bankruptcy e. Debtor owned and operated a GMC dealership in Pa. Some good bargains may be worth more to someone else than they are to D. No improvement in position and therefore no voidable preference d. 88 days before filing Union Trust met with debtor and decided to set-off. 1993 and extended until Aug. there is no avoidable preference. So to should after bankruptcy. GM notified debtor that it was in breach of the agreement. iii. W/ permission of the court under §362 is not required to surrender any improvement in setoff position obtained during the 90 day period. If the enhanced value of the crop goes exclusively to the creditor. ii. Improvement in Position Calculation: Jan 25. Executory Contracts a. 12. then §365 deals with the rules of Rejection. Setoff Preferences a. priority checks goes to the one who has priority in the crop. 90 days prior to filing the debtor’s accounts had a balance of $211k. 1994 debtor filed Chapter 11. without an accompanying increase in volume of inventory. Later that day $130k was deposited into debtor’s account. and Assignment. 11. c. 1993. Union Trust made loans pre-petition to debtor. Debtor filed Chapter 11 on April 23. 1992.4M on that date. March 6.43M and Union setoff $339k. Applies only if the creditor offsets before bankruptcy. On Jan 23. b. In re Wild Bills.083M. D. The loans were always undersecured. Increase in crop value that is attributable to transfers of d’s cash during preference period belongs to all the creditors on pro rata basis. ii. GM gave notice it would terminate on July 13. then a preferential transfer on behalf of that creditor has occurred (value of cash transferred to the secured creditor). debtor filed an appeal with the state board on the merits of termination. 1992. 1997) i. while others may have turned out to be losers. §533(b): empowers the trustee to recover from an offsetting creditor the amount by which the credito’s setoff position improved during the 90 days before bankruptcy. Once K is in the estate. They operated the dealership pursuant to a GMC agreement in effect on Nov 1. the farmers executed a transfer to enhance the value of the crop. The Statute i. so Union Trust did not improve its position. estate money used to pay farmers for their labor. Nineteen days later the state board entered an order allowing GM to terminate their agreement.ii. §365 deals with the DIP’s options. 2. On Sept. Crops are inventory under §547(a)(1). 1990 – 90th day – Debts owed was $1. In re Krystal Cadillac-Oldsmobile-GMC Truck (3d Cir. Conn. Problem Set #25 1. Assumption. There is only an increase in value of the inventory due to market fluctuations. Under §547(c)(5) a preference will not result to the holder of a perfected security interest in inventory. If the farmers used cash to buy fertilizer and pesticide. Bank had a valid security interest in the crop. 1990: Date of Setoff – Debts owed was $1. 1998) i. Debtor owed $1. 1991. IF farmers work during Chapter 7. unless and to the extent that the holder improves his position during the 90 day period before filing. so that part of its interest in the crop and support checks was voidable under §547(b) and §547(c)(5).
§365(f)(1) permits assignment of an unexpired lease despite a clause in the lease prohibiting. viii. §365 also imposes certain constraints on trustee’s right to assume or reject a pre-bankruptcy K. §365(c)(1) ii. Included in PA law is that no such termination or failure to renew is effective until final determination by the Board. free and clear of liens and encumbrances. 1996. at least in Chapter 7 context. Thereafter. vi. §365(a) authorizes DIP to assume or reject. or restricting the assignment. Lease had provision that if tenant assigns the lease. restricting. conditioning. or conditioning assignment while (f)(3) deals w/ terminating or modifying the terms of a lease b/c it has been assumed or assigned. e. i. iii. d. so in bankruptcy it forbids the assumption and performance of the contract. The cap and releasing obligations apply to the allowed amount of the claim. the agreement. DIP may assign an unexpired lease of the debtor only if it assumes the lease in accordance w/ §365(a). by statute. Conditioning right to assign on payment of ―profit‖ realized are routinely invalidated under (f)(1). Trustee may not assume a K if its assignment is forbidden under applicable nonbankruptcy law. 8. i. conditioning. v. (f)(2)(B). like all other property b. v. Ex. vii. Trustee must cure or arrange to cure most defaults as a condition of assumption. 18. while landlord remains subject to the duty under state law to mitigate damages by re-leasing the premises. including the GM franchise. PA court violated the stay of §362(a) and their order was not binding on the bankruptcy court. Trustee motioned to sell the assets. debtor moved under §365 to assume and assign the lease to Rite Aid for $100k and Mass Mutual objected. §365(b) iii. §365(c)(1) forbids assumption of a K that could not have been assigned by the debtor under nonbankruptcy law. Extra-statutory Constraints on the Trustee’s Right to Assume or Reject a. Debtor and affiliates filed on Oct. iv. Tenant shall pay LL 60% of such profits. §365(g) w/ §502(g) allows rejection damages for any contract to be calculated as a pre-bankruptcy unsecured claim. If the franchise agreement was still in force on date debtor filed. The contract said that GM may terminate upon written notice 60-days following dealer’s receipt of the notice. f. Debtor argues the lease provision is void and unenforceable under §365(f)(1) b/c they limit its ability to realize the full economic value of the leases for the benefit of all unsecureds. The clause limits debtor’s ability to realize the intrinsic value of the lease. §365(f)(1) invalidates provisions restricting. d. iv. Problem Set #27 2. §541(c)(1) invalidates anti-assignment and bankruptcy clauses that would otherwise prevent those rights from passing to the estate c. Court allowed the motion. and then paid in tiny bankruptcy dollars. or prohibiting debtor’s right to assign the subject lease. Trustee or its assignee (in the case of assumption and assignment under §365(f)) must provide ―adequate assurance of future performance. and provides adequate assurance of future performance by the assignee. (Bankr.‖ §365(b)(1)(C). the agreement was in force on the date of filing on Sept. and to assume and assign the franchise for benefit of all creditors. On Feb. See §365(f)(2). SDNY 1996) i. §365(a): allows trustee to assume or reject a K and its attendant bundles of rights and obligations. §541(a) debtor’s pre-bankruptcy k rights come into the estate. iii. Trustee may cure any defects. Profit sharing provisions of the lease are unenforceable! e. Debtor had agreement w/ Mass Mutual to lease certain retail space in the Newberry Commons. regardless of when the rejection occurs. In re Jamesway Corp. then during the first 20 years. Contract must be EXECUTORY or else it can’t be assumed/assigned
. Therefore. any executory K or unexpired lease of the debtor. whether or not there has been a default under the lease. §502(b)(6) caps landlords damage claims following rejection. (f)(1) deals with prohibiting. the tenant shall pay LL 50% of the ―profits‖ received by the tenant from the assignee or sublessee. §502(b) and (g): Debtor’s obligations to other party to the K become claims against the estate. PA law requires a minimum of 60-days advance notice of the termination. ii. is an asset of the estate.ii. 9. iv. subject to court approval. GM objected that it was not an asset of the estate. 1995 under Chapter 11.: personal services contract. Actor cannot assign rights to movie role under state law.
opposes. x. Debtor and 2 shareholders entered agreements with LLC to secure financing and equipment that led to the debtor granting option to LLC. Alternative to the Countryman Test – Functional Approach – Benefits that assumption or rejection would produce for the estate. Corporation granted the holder of warrant right to buy all or part of 93 shares of the business for $1/share up to 25 years. 2) for a consideration less than the REV. e. LTD (7th Cir. d. Also right of first refusal for LLC to participate in new restaurant venture. Shareholder agreement required 2 LLC members on 4 person board. For only $93. c. (n) solves the IP and real estate issues Problem Set #28 1. 1. If market for onions is up. 1. Neither party performed and no defaults. To make payment and acquire the shares. §550 provides the remedies for avoidance actions under all the avoiding powers. to obtain the benefit of the counterparty’s performance. §544(b) preserves state law rights but gives them to the TIB or DIP acting as TIB to set aside fraudulent conveyances on behalf of all the creditors in an action. dleay. Debtor filed Chapter 11 and owns and operates a restaurant. including §544(b) and 548. f. claiming the rejection gives it the right to revoke the license and grant it to another. §548 creates a federal fraudulent conveyance law to ensure a baseline for all creditors regardless of the state law. LLC must exercise the option. b. Transfers among Related Entitites i. Contract is executory if each side must render performance. iv. Fraudulent Conveyance and Other State Avoidance Laws in Bankruptcy a. $93 is so de minimis that the chance to sell the shares outweighs any benefit in performing. Inc (Bankr. Countryman Test for executoriness: ―A contract under which the obligation of both the bankrupt and the counterparty to the K are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other. and a 2/3 share holder vote to take action. §365 requires executoriness. the optionee. the K is non-executory. To sell the shares and receive payment. In re Image Worldwide. By exercising the warrant. LLC could own 60% of the shares by exercising its warrant. vii. vi. K for sale of Real Estate: seller files and claims its rejection of the sale K leaves it free to sell the land to the highest bidder. on account of an existing legal duty or to fulfill a condition. Some transactions are deemed fraudulent b/c they are made w/ an intent to hinder.1. Warrant: It is executory – each party must perform under it in order to obtain the benefits under the contingent bilateral K of sale. 2. ii. A v. Debtor cannot cherry pick and reject unfavorable provisions contained in an integrated agreement for loan and lease. v. claiming the rejection frees the debtor form the covenant. A breach is material if it permits either party to sue for breach b/c of the counterparties failure to perform > Executory 2. TIB steps into the creditor’s shoes. Where such a K performance remains due on only one side.5. while LLC. §548(a)(1). Covenants against competition: debtor franchisee or employee files and rejects the k. and hence neither assumable nor rejectable. 1998)
.: Pre-bankruptcy K where debtor agreed to sell 100 bushels for $1/bushel. ix. making state fraudulent conveyance law an important part of TIB’s tools for reshaping estate. TIB’s rights are derivative so there must be an actual unsecured creditor (creditor w/ an unsecured claim under §502) who could have brought the avoidance action under state law. §365(h)-(j). LLC can veto all action. debtor must keep it open. or defraud creditors. License K: debtor-inventor files and rejects the IP license it granted to a licensee. trustee rejects. sell for higher price and pay K damages in tiny bankruptcy dollars. viii. UFTA §§ 4. Ex. Debtor seeks to reject a stock option agreement and shareholders agreement. some are fraudulent solely because they are transfers 1) when the debtor is insolvent. iii. However. In re Riodizio. Rejection benefits the estate w/out any significant downside. SDNY 1997) i. §365 permits assumption/rejection.
. but under §544(b) trustee can avoid any transaction that would be voidable by any actual unsecured creditor under state law. 1994. Trustee moved under §548(a)(1) to avoid the revocation as a fraudulent transfer b/c the debtor’s right to make or revoke its Subchapter S election was ―property. b. They were intercorporate guarantees. Image Marketing LTD. Is the debtor’s principal the initial transferee of corporate funds used to satisfy personal obligation? Split in circuits. Cross Stream: Corporation guarantees debt of an affiliate g. In re Bakersfield Westar (9th Cir. The guarantees made IW insolvent. Debtor purchased check to the casino for $65k w/ the name of debtor on it. that they made WW insolvent. 14. k. The Extraordinary Powers of the TIB a. Both parties stipulated it was fraudulent under §548. FCL then filed an involuntary Chapter 7 on IW. Dick was sole shareholder and officer of IM. Trustee moved under §544(b) to challenge the transfers in violation of UFTA. c. Parkway demanded IW guarantee IM’s $300k in debt. Must be ―fairly concrete. In 1992. ii. i. In 1994 he moved for C Corporation. but only marketing received funds from the loan. the guarantor had received no consideration for the guarantee. Trustee in the Bakersfield case filed under §544(b) and 548 and Cal Code §3439 to avoid the revocation as a fraudulent transfer. Trustee has absolute right to recover from initial transferee. The same person owned both. as guarantor. d. but question whether Casino was an initial transferee under §550(a) or a subsequent transferee lacking good faith knowledge of the voidability of the transfer under 550(b). j. Worldwide guaranteed loans paid to an affiliate. §548 has a 1 year SOL. Debtor then filed. iii. IW paid down nearly $100k in principal and interest on the loan. Did the guarantor receive indirect benefits from the guarantee if there has been an indirect benefit. Parkway got a lift of the stay and collected IW’s account in total of $444k. Downstream: Parent guarantees debt of subsidiary iii.‖ i. Also badges of fraud for the election and revocation. Initial transferee has the ―burden of inquiry and the risk the conveyance is a fraud‖ f. but it bankrupted itself in the process. He gave this check and a personal check for $10k to the casino. Upstream: Subsidiary guarantees debt of parent ii. Parkway let Dick use money from the liquidation to pay down IM’s debts. IW was able to stay afloat for 17 months after guaranteeing the loan. Corporation owned w/ Saunders and his wife. Parkway lent $200k to Dick to pay down its debt owed to FCL. Cross stream are most abused and scrutinized b/c the guarantor has not received REV for the guarantee. b. b/c IW never received REV for its guarantees to Parkway. IM leased space from FCL. d. IW may have received an indirect benefit. Dick liquidated IM in 1994. and that WW did not receive REV in exchange.a.‖ and the revocation was a ―transfer‖ under §548. w/out knowledge of the transfer’s voidability. Dick then created IW and leased the same space from FCL. Principal’s control over the business does not compel a finding that he had dominion and control over the funds transferred to the casino. IW paid off IM’s debts. g. Trustee of debtor brings fruaudlent conveyance action to recover proceeds of cashier’s check purchased by debtor and paid to casino to settle gambling debts incurred by the debtor’s principal. Casino was the initial transferee under §550(a) 4. Debtor was Cal. Therefore. BAP 1998) i. b/c from the standpoint of the unsecured creditor. §550(b) e. Saunders filed Chapter 7 on Feb. rather than the Saunders. receive REV for its guarantee when the direct benefits were received by IM? f. Saunders filed for S Corporation treatment to begin in 1992. IM got LOC from Parkway secured by a first lien on all its assets. 3. NO REV for the guarantees. and were their most important supplier. Trustee may not recover from subsequent transferee if the subsequent transferee accepted the transfer for value. 1997) a. Did IW. §548 is now a 2 year reach back period. Trustee argued that election of S corporation allowed debtor to incur obligations of the estate and its creditors. in good faith. h. c. h. In re Video Depot (9th Cir. Trustee in the Saunders’ case filed a voluntary Chapter 7 petition on behalf of Bakersfield (debtor) on March 4. FCL allowed IM and FW to operate their business on their premise. WW trustee filed suit to avoid the guarantees as a fraudulent transfer. Principal was a courier and not a transferee. e.
Totaling $825k in outstanding debt. Corporation and not just third parties suffered damage from the fraud. iii. §510(c) b. they owed $184k to consignors for proceeds from sales. ND Ga. Ability to not pay taxes has a value to the debtor-corporation here.5M in taxable losses and the debtor’s estate will sustain $400k in capital gains taxes from the sale of its assets as a result of the revocation of that status. Proceeds from auction were $624k w/ assets of $32k. 1980) i.
. v. no findings that their transactions with the debtor caused harm to the debtor or the unsecured creditors with the November loan. 1) The subordinated creditor must have engaged in some type of inequitable conduct. were not harmed. and 4) A Claim should be subordinated only to the extent necessary to offset the harm which the debtor or its creditors have suffered as a result of the inequitable conduct. The November loan was lent by IBC after the IBC denied lending it directly to SI. Loans may be treated as capital contributions and the rights subordinated. They were also officers and directors and largest shareholders of SI. and as a class. Elements: 1) The subordinated creditor must have engaged in some type of inequitable conduct. loans. In re SI Restructuring (2008) i. This transferred risk of loss and insolvency to the general creditors. Debtor’s prepetition right to make or revoke its Subchapter S status is ―property‖ or an ―interest of the debtor in property‖! vi. Court agrees.‖ b. Trustee in this case has the power to avoid the debtor’s revocation of its subchapter S status b/c it was a ―transfer. Equitable Subordination a. TIB sues on behalf of the debtor corporation and courts routinely deny recovery to the TIB for fraud by corporate officers. Corporation’s claims were barred by in pari delicto. etc. Problem Set #30 1. They appealed. (1994): Held that ―reasonably equivalent value‖ should be conclusively deemed to have been given at any judicial foreclosure sale that was non-collusive and properly conducted under state law. On auction day they had $363k debt to investors. SI filed in August 2004 for Chapter 11. 5. v.5M in Nov. Bros filed secured claims for the April and Nov. The loan proceeds paid off current unsecured creditors. neither did the TIB as successor. iv. Aiding and Abetting a. v. They lent $1M in April 2003 and $2. Debtor raised $300k+ by promising persons and entities who advanced money that on the first day of the 2-day auction the amount advanced would be returned w/ 10% interest and a bonus of 10% for a finder’s fee. 3) equitable subordination must not be inconsistent w/ the provisions of the Bankrutpcy Act. Wooley bro’s made loans to Schlotzsky’s Inc. Power to subordinate the claim of one creditor to claims of other creditors ―where subordination is necessary to prevent the consummation of conduct which is inequitable. The Board reviewed both loans. laborers.iv. In 2004 the brothers were removed as officers and resigned as directors. Trustee argues that the return on investments was equity and it was not entitled to be paid in priority to general creditors and should be returned for distribution. ii. and 3) equitable subordination must not be inconsistent w/ the provisions of the Bankrutpcy Act. Further. Also trustee argues it should be subordinated to claims of unsecured Creditors. and $268k to trade creditors. iii. In re Carolee’s Combine (Bankr. $35k to First National Bank. Resolution Trust Corp. Wooley’s made the April loan after financing fell through and secured it w/ company assets. c. Officers of the corporation and its professionals were involved in fraudulent conduct and professionals failed to report to the Board.‖ iv. BFP v. Bankruptyc Court subordinated their claims to unsecured. 2) such conduct must have resulted in injury to other creditors of the bankrupt or conferred an unfair advantage on the subordinated creditor. b/c the corporation had no claim. ii. Also. left a liability of $195k. at the end of auction. It passed through $2. 2) such conduct must have resulted in injury to other creditors of the bankrupt or conferred an unfair advantage on the subordinated creditor. No finding that the bros breached any obligation to the company or its creditors or that they engaged in inequitable conduct of any kind with the April loan.
which gives extraordinary protections to secured creditors w/ regard to aircraft held as collateral and these powers are ―not limited or otherwise affected by any other provisions of this title or by any power of the court.vi. Must be satisfied even if all creditors approve. then its effective in bankruptcy. iii. Debtor then failed to meet the stipulation agreement. Creidtor entitled to repossess planes under special provisions of §1110. Confirmation a. Lender Liability: debtor claims the lender took wrongful act against the debtor and should pay damages. but payments serving that function are routinely awarded. Issue stock to some creditors ii. They owe $2. Debtor’s sole asset was a HOJO motel owned 50/50 b/t he and his wife. §510(a): One party may agree that it will take satisfaction of its debt only after another creditor is satisfied on its debt.7M note. 2. Range of avoiding powers. Inc (Bankr. §1129(a)(7): Best Interests ii. I. Debtor and LaSalle entered a stipulation authorizing use of cash collateral and providing adequate protection to lender. but is often used as a negotiating chip with insiders and with creditors who have possibly overstepped their role. ii. e. Court then lifted the automatic stay for LaSalle to foreclose w/ no sale to occur w/out further order. 2. Popular where the debtor and an earlier creditor want a new creditor to come aboard with new cash. Debtors took a 2nd mortgage w/out consent of LaSalle. Reorganization Structures i. 2004) 1. debtor filed Chapter 11. Contractual Subordination i. §1129(a)(11): Feasibility – likelihood that the plan will succeed and prosper long enough to make the scheduled payments. Problem Set #31
Facts: Issue: Holding: Analysis:
Negotiating and Confirming the Plan §1129: Requirements for confirmation in a Chapter 11 §1126. §1122(a): classification of creditors 1. §108 and 1017 of IRC generally excludes income arising from discharge in bankruptcy from gross income. d. Equitable Subordination and State Law i. It scored a 373/500 w/ 370 being passing.e. Equitable Subordination is rarely litigated.
.‖ No prohibition in the statute preventing the court from using its equitable power to recharacterize a creditor’s interest as something other than a secured party. f. ―Going Concern‖ sale b. or it may reduce its basis in its assets. Deepening Insolvency ii. give the DIP a chance to reexamine the pre-bankruptcy relationships b/t debtor and each creditor. In 2001 their franchise agreement as a Qaulity Inn was terminated.: Texas disallows alimony. and federal law gives them priority. iii. On the date of a SJ hearing for receiver in foreclosure. lessor. Working Through the Tax Implications a. If it is effective under state law. Debtor then can either reduce its tax ―attributes‖ such as NOLs and tax credits. 1129(a)(8): Statutory majority of each class of creditors must vote in favor of a plan for it to be confirmed. Best Interests of the Creditors and Feasibility i.4M on a $2. Recharacterization and the Intersection of State and Federal Law i. but the debtor again failed to comply. including state law actions under §544 or as property of the estate. but an amount equal to the exclusion must be offset against other tax advantages. In re Malkus. or conditional vendor. MD Fla. Court ordered debtor to fulfill the stipulation.
In re US Truck Co (6th Cir. ii. or the need for further financial reorganization. Teamsters argue that plan fails to have one class of impaired claims to accept the plan b/c US Truck gerrymandered the classes to neutralize the Teamster’s dissenting vote. US Truck filed on June 11. §1129(a)(11). 2001) i. §1129(b): Incorporates all the requirements of subsection (a). ii. of the debtor or any successor to the debtor under the plan. The valuation was proper without any rebuttal. US Truck is using its classification powers to segregate dissenting (impaired) creditors from assenting (impaired) creditors (by putting the dissenters into a class or classes by themselves) and. Court denied proposed shareholder loan for paying the commitment fee for the loan b/c it was not a post-petition ordinary-course business debt.8M. vi. Committee objected and proposed to finance the bankruptcy w/ an ―as is‖ immediate cash sale of the property for $4. Platinum determined its catalogue had a liquidation value of $15M. Plan is confirmed. c. v. Palladin argues that each of the creditors must receive as much as they would in Chapter 7. and
. Debtor filed for Chapter 11 and proposed funding via a loan for $9M from Kennedy Funding w/ stipulation that it requires an appraisal of $15M on their property. ED Mich. SK-Palladin Parnters. Platinum Entertainment. 2/3 majority in amount of debt b. b/c the loan was not a proper admin expense b/c it did not directly/substantially benefit the estate. Confirmation of the plan is not likely to be followed by the liquidation. Simple majority in number of creditors. it was unsecured creditors. iii. thus. 3.‖ Only the Teamsters Joint Area Rider Committee object. No reasonable assurance that Kennedy loan will ever close or that the property will be valued high enough for financing. Cram Down – permits confirmation over objections of one or more impaired classes of creditors iv. which requires all impaired classes of claims or interests to accept the plan. Requires all eleven requirements of subsection (a) to be met. With these funds debtor would pay its secured creditors and admin claims in full. Plan is not feasible even though they were profitable in the 3 summer months iv. Palladin. the holder of a security interest in all the assets. Best Interests Test i. §1129(a): First way to confirm a plan. Platinum filed for Chapter 11. Feasibility: Debtor’s plan is not feasible. (ND Ill. a Class 3 unsecured claim holder. In June SK wound down after defaulting and transferred its assets to First Source Financials. except subsection (a)(8). It also denied its request under §364(b). In July. Bankruptcy court denied extensions for discovery and Palladin failed to retain an expert to value the catalogue. Debtor’s plan is not Feasible under §1129(a)(11) b/c it does not off a ―reasonable prospect of success and is not workable. and second imposes 2 additional requirements. Inc. including (a)(8). unless such liquidation or reorg is proposed in the plan. the best interest test requires that creditor would have received at least as much in a Chapter 7 liquidation. 1986) i. In re Made in Detroit (Bankr. Class XI was the only clearly impaired class to accept. §1129(a)(7): applies to each individual creditor. 2003) 1. objected that the joint plan did not served the best interest of creditors §1129(a). §1129(a)(11) 4. 2. §1126(c) requires approval by: i. 1) Employees represented by the Teamsters have a unique continued interest in the ongoing biz of the debtor 2) the mechanics of the Union’s claim differ substantially from those of Class XI claims. d. excluding the labor union claimant. Problem Set #32 1. and ii. Unless a creditor has voted in favor of the plan. 1. A plan that is submitted on a conditional basis is not considered feasible. it is assured that at least one class of impaired creditors will vote for the plan and make it eligible for cram down consideration. LP (π) v. The rejection was found to be ―absolutely necessary to save the debtor from collapse. 1982 for Chapter 11 and sought to reject the CBA. §364(a). Classification and Voting a. and thus confirmation of such plan must be denied.3. Palladin’s valuation was inadmissible hearsay. Teamsters Committee’s claim that US Truck is liable to its employees for rejecting a CBA b/t local union and US Truck.‖ a.
Piano sales were down.‖ alleging it was a sham to create value for its parent and creditors at his expense. Objection is that they should be in the same classes. and debtor takes the operation into bankruptcy to prevent foreclosure. SS then submitted a proof of claim reducing damages to $4. e. One yes and one no vote (SS). To succeed. Class 6 will be paid out with excess cash flow. In re PPI Enterprises (3d Cir. Class 4. debtor must continue to find good consignment pianos. §1122(a). iii.‖ Impairment i. (b). Debtor borrows lots of money to finance the purchase.‖ Classification and the Single Asset Case i. equitable. SS gave notice to terminate. PPIE defaulted on the loan. Debtor is excused from gaining acceptance of the plan from a class that is ―deemed‖ to have accepted the plan. they will often vote ―yes‖ b/c they want to continue business w/ SARE debtor.
3) the Teamsters claim is likely to become part of the agenda of future CBA sessions b/t the union and the reorganized company. to PPIE. Lender objects. The consignment creditors. Debtor then filed Chapter 11 in March 2002. specifically (b) that the plan does not discriminate unfairly and that it be fair and equitable w/r/t the Teamsters claim. If a class is unimpaired.
h. and contractual rights b/c his reovery was set by §502(b)(6). 2003): i. In return. SS claims this statute alters his claim and entitles him to vote against the confirmation. Classification: Permits separating small creditors into a separate classs for convenience and prohibits combining differently situated creditors into a single class. SS owns office tower and leased 10k sq. which it plans to pay over time. Funds were not turned over to lenders providing the floor plan financing. 5th Circuit does not permit substantially similar claims to be separately classified ―in order to gerrymander an affirmative vote on a reorg plan. ii. §1129(a)(10). and PPIE faced credit cancellations and defaults exceeding $17M. except for Class 6. Debtor got permission to enter 3rd party arrangement for pianos and funding the cost of operations for 90-day period. proponent should demonstrate the classification is supported by a ―rational business justification. Plan proposed to repay 100% of claims. Offers no guidance on when. If the debtor can form a trade-class with suppliers. iv. Lease ran for 10 years at $620k/mos.‖ (1997) In re Bernhard Steiner Pianos (Bankr. and strip down the mortgage to the current value of the property. Objecting creditors got relief from the stay and repossessed their remaining collateral. The collateral for the lenders was exceeded b the debt owed to them. and rent due totaled $5. employees. or if. The Teamsters still are protected by (a) and (b). trade creditors.‖ but is permitted for ―good business reasons. viii. iii. §1126(f). ii. returned 2/7 ballots. Class 2. will be repaid over 10-month period. and the bankruptcy served no legitimate purpose. and 3) limiting SS’s lease termination damages under §502(b)(6). Bankruptcy court held that the plan did not impair SS’s legal. legally similar creditors might be allocated to separate classes.
f. DIP needs a class of accepting creditors. iv. Can be viewed as ―bad faith. they have met the ―best interests test‖ of §1129(a)(7). All impaired classes. ii. ft. National Bankruptcy Review Commission: Upon objection. vii. on behalf of PPIE. 2002) i. the floor plan lenders approved. Classification eliminates the incentive to hold out. SARE involes a debtor that is corporation or partnership to operate a single property. Does the doctrine of impairment preclude SS from having voting rights against PPIE’s Chapter 11 plan? 1. the debtor and the 3rd party split profits. Plan does not violate those though. 2) invoke provisions to reject a restriction on selling its Del Monte stock. He alleged that the company had no ongoing business and no assets other than stock certificates in 2% of Del Monte.c. PPIE filed for Chapter 11 to: 1) liquidate PPIE. SS moved to dismiss for ―bad faith. Kahn borrowed funds from debtor.86M.
. ND Tex. PPIE’s parent guaranteed the obligations. The need to pay the consignment class will improve acquiring new consignment pianos.75M. The parent went into UK Chapter 11 equivalent. v.
g. which SS was a member. However. Bank issued a standby LOC to SS. Court denied the motion w/out prejudice. market crashes. for $650k. SS subsequently purchased the stock over a bid by Del Monte for $11M and sold them for at least $30M.
§1125(a)(1) and (b) The court rejects and denies approval of the Debtor’s disclosure statement b/c it fails to provide adequate information. and any sales or disposition. In re Figter Ltd. which holds a $15. that actually vote. As a result the plan is unconfirmable. Teachers bought 21/34 unsecured claims in Class 3 at full value for $14. including the statutory cap of §502(b)(6). to buy 21 unsecured claims in good faith and that it could vote each one separately. Creditor is entitled to one vote for each of his unsecured Class X claims. Description of Business 2. or was not solicited or procured in good faith. 2019 i. At a minimum. Protecting own proper interests is OK. ED Mich. SDNY 2007): Disclosure filed under B. Also. iii.2. consenting class of claims). 1997): i.3M and $17. not the number of creditors. Disqualify from voting. the amounts paid. ii. Disclosure Statement must include: 1. In re Northwest Airlines Corp. v. vi. They need to state each members interest individually! Problem Set #33 1. (9th Cir. 3. Required Disclosure: What must be included in a disclosure statement: c. Claims Trading a. Debtor owns Skyline Terrace apartment complex. Under the plan.R. History of the Debtor Prior to Filing 3. Courts are keener to non-preexisting creditors purchasing a claim to block an action against it. Purpose was to apply to those ―whose selfish purpose was to obstruct a fair and feasible reorganization in the hope that someone would pay them more than the ratable equivalent of their proportionate part of the bankrupt assets. b. ii. bad faith will not be attributed to his purchase of claims to control a class vote. 1983): i.6k. ―the amounts of claims or interests owned by members of the committee. creditor may assert that the proposed plan has a fatal flaw that will prevent confirmation and that the disclosure statement is defective for failing to ―disclose‖ that the plan cannot be confirmed. Liquidation Analysis
. 1 Creditor appeared on behalf of an ad hoc committee of equity security holders who stated there were 20M shares of common stock and claims in the amount of $264M. 1989). Creditor claims the debtor failed to disclose important financial and biz information that was necessary for an informed vote on the plan. How the Plan is to be Executed 6. Teachers was a lender and it feared it could be left with a complex lien situation. b/c it is unable to meet §1129(a)(10) requirement (no impaired. Good faith: Court may designate any entity whose acceptance or rejection of a plan was not in good faith. Financial Information 4. In re Malek (Bankr. ―As long as a creditor acts to preserve what he reasonably perceives as his fair share of the debtor’s estate. vii.‖ See Young v. §1126(e) I. ii. Also competing businesses to destroy debtor are bad faith. Teacher’s is not impaired. Plan proposed 80% payment to Class 3 – unsecured claims.‖ Motion granted. w/ disputed rate of interest.96 was fully secured. 2.e. b. Court determined the complex value at $19. WD Mo. He is only entitled to his rights under the Code. Debtors moved to require committee to supplement their statement under BR 2019 b/c they fail to disclose. Solicitation and Disclosure a.6 note secured by first deed of trust on the apartment complex. with part owners and part renters of its collateral. Description of the Plan 5. Claim is not impaired under §1124(1). and district court affirmed the bankruptcy court’s decision to allow the Teachers Pension. Teachers is the only secured creditor and only member of Class 2 plan proposed by Figter. Voting: §1126(c0 speaks in terms of the number of claims. It will preclude a ―cram down‖ of Teacher’s secured claim under §1129(b). iv. the times acquired. Plan offers full payment of the secured claim. (Bankr. PPIE’s plan intends to pay SS his ―legal entitlement‖ and provide him with ―full and complete satisfaction‖ of his claim on the date of effectiveness. Higbee (1945). viii.‖ In re Gilber (Bankr.
‖ If a class votes against the plan. it must be paid in full or the plan must provide that any parties ―junior‖ to them will get nothing. ii. e. often involving substantial forgiveness of debt. then the plan cannot be confirmed as a consensual plan under §1129(a). which in such circumstances bars a junior interest holder’s receipt of any property on account of his prior interest. and the creditors must be paid the ―present value‖ of their allowed secured claim. Even if a plan satisfied the best interests test of §1129(a)(7) as to every non-accepting creditor and meets the feasibility test. §341(e). over the objection of a senior class of impaired creditors. Litigation 10. Then the debtor files to get the tools of Bankruptcy. §1129(a)(10). contribute new capital and receive ownership interests in the reorganized entity. and a promise of future credit. §1111(b) provides that nonrecourse secured creditors who are undersecured must be treated in Chapter 11 as if they had recourse. (B) (unsecured creditors). ii. plus a market interest rate. §1129(b)(2)(B)(ii): Prohibits a plan providing junior interest holders with exclusive opportunities free from competition and w/out benefit of market valuation. while eliminating the interests of noncontributing partners. Preferred stockholders: must receive the full value of their preferred position or they cannot be crammed down unless the common stockholders get nothing. 203 North LaSalle Street Partnership (1999): a. §1129(b)(1): Cramdown of the rejecting class only if the plan does not discriminate unfairly between classes and is ―fair and equitable. A few of the former partners would contribute new capital over 5 years in exchange for the Partnership’s entire ownership of the reorganized debtor. Absolute Priority and the Participation of Old Equity a. Without that consenting class. iii. c. NO! Old equity holders are disqualified from participating in such a ―new value‖ transaction under §1129(b)(2)(B)(ii). §1126(b): Deems pre-petition votes to be effective in the bankruptcy proceedings so long as the prepetition solicitations complied w/ all applicable disclosure laws and regulations. 2. Tax Consequences d. 3. it nonetheless must be accepted by the statutory majority of creditors in each impaired class under §1129(a)(8). §1125(e): No person connected w/ the solicitation of plan acceptances and rejections is liable for a violation of the securities laws. Cramdown Against the Secured Creditor
. Unsecured creditors and senior stock holders: Vote against the plan are protected by the ―absolute priority rule. 341 Meeting is waived in prepacks whenever the debtor has solicited pre-petition. infusion of new capital. Projection of Operations 9. If any class rejects. b. If there are no applicable SEC or similar laws. §1129 (b)(2)(A) (secured creditors). Transactions With Insiders 11. then the solicitations will be effective if they comply w/ §1125(a) solicitation requirements in the Code. and (C) (equity holders). i. so long as that person acts in good faith and in compliance w/ Title 11. ii.7. Creditors opposing a prepack need to push a debtor into bankruptcy before solicitation begins or the creditor may discover that the prepack is complete before the creditor has a chance to speak. Can debtor’s pre-bankruptcy equity holder. Bank of America Nat’l Trust v. Problem Set #34 1. when that opportunity is given exclusively to the old equity holders under a plan adopted w/out consideration of alternatives.‖ b. Cramdown (by a Corporate Debtor) a. Full value of the collateral. Management to Be Retained and the Compensation of the Personnel Retained 8. Companies in Chapter 11 can make disclosures and solicit votes exempt from SEC regulations. Debtor and several key creditors have worked out a refinancing structure for the debtor. Absolute Priority only comes in to play if the creditors are crammed down – if the majority does not vote approval of the plan! 5. Prepackaged Bankruptcies i. The ―Safe Harbor‖ Rule i. 4. However it can be crammed down under §1129(b): It must attract at least one consenting class of impaired creditors. Secured creditors: liens must be preserved by the plan. b. a plan cannot be confirmed period. d. iii.
as of the effective date of the plan.
. Debts to insiders or affiliates are excluded from the total ii. It can then assert the usual secured-unsecured claims or make a §1111(b) election. Who is a Small Biz Debtor? i. §1111(b)(1)(A): gives nonrecourse creditor full recourse claim in bankruptcy. and meetings of creditors convened under §341 unless the court.000. Who Will Own the Reorganized Small Business? i. Initial debtor interview ―as soon as practicable‖ with the UST 28 USC §586(a)(7) v. in an amount not more than $2.a. ii. II) That each holder of a claim of such class receive on account of such claim deferred cash payments 1) totaling at least the allowed amount of such claim. must be approved w/in 300 days of the bankruptcy filing or be dismissed.000. iii. i. a new deadline is imposed at granting. Benefits two distinct legal circumstances. §101(51D): Mandatory – every person engaged in commercial or business activities 1. Usual undersecured creditor that has both an allowed secured claim and an allowed unsecured claim under §506(a). Creditors can still vote for confirmation despite their impairment if they believe they will do better in the reorg than they would trying to liquidate or sell the biz. Small Business Reorganizations a. §1111(b)(1)(B) allows the undersecured creditor to waive any deficiency or unsecured claim that would result form the creditor’s undersecurity and thus waive any participation in the plan as an unsecured creditor. ―including initial debtor interviews. even though the creditor is undersecured and even though unsecured creditors may be only getting a fractional payment. scheduling conferences. §362(n)(1)(D) c. ―Aggregate noncontingent liquidated secured and unsecured debts as of the date of the petition…. §1116(2). of at least the value of such holder’s interest in the estate’s interest in such property. ―Sweat equity‖: the promise of future labor as a contribution to purchase the equity of ownership. Management must attend meetings w/ UST. However. no automatic stay is available to protect the debtor. Nonrecourse undersecured creditor 1. cash flow statement. New Rules for the Little Guys i. Debtor not required paying the PV of the entire claim. and extension order is signed before the deadline has expired. Problem Set #35 1. statement of operations. ii. after notice and hearing. under penalty of perjury. §1111(b) election: Primary use is in SARE cases. If they can’t make the showing. vii. AND 2) of a value. 1. §1116 requires management to append a balance sheet.‖ 2. waives that requirement upon a finding of extraordinary and compelling circumstances. W/in 2 years of filing debtor must prove to the court that its bankruptcy resulted from circumstances beyond the debtor’s control that were not foreseeable at the time the case was filed and that is more likely than not the court will confirm a plan of reorganization. b. it is not ―new value‖ for cram down purposes. only the PV of that portion of the claim equal to the value of the collateral. §308: During bankruptcy small biz debtors required to file periodic financial and other reports containing info w/r/t to the debtor’s profitability and projected cash receipts and disbursements. (51D)(A): Only cases in which no creditors’ committee has been appointed or in which the committee is ―not sufficiently active and representative to provide effective oversight of the creditor‖ will be tagged for treatment as a small business. Undersecured Creditor: Full value for the secured portion and places its unsecured portion in with the unsecured claims (called lien-stripping). and fed income tax returns or file a statement. UST is an investigator to ascertain state of the debtor’s books and records and very filing of tax returns. ii. 28 USC §586(a)(7)(B). vi. b. iv. Cannot be extended unless it is ―more likely than not‖ that the court will confirm a plan w/in a reasonable period of time. debtor is forced to pay the secured creditor over time the full number of dollars that the creditor is owed. Exclusive right to propose a plan of reorg for 180 days and the plan. In exchange. that no such docs have been prepared. See Ahlers (1988). §1121(e). whenever proposed.
Usually lies w/ management and they are not the principal owners. 2003) i. without counting Newcombe’s ballot. vi. The Estate is insolvent and reallocation of fees may be warranted. D. The right to participate was limited to ―former shareholders.‖ Court has an independent duty to ensure the plan complies w/ §1129! v. iv. attempt to obtain more accepting votes in Class 8. so control in bankruptcy is separated from equity interests. Wyo. Role of the valuation of the company’s worth to determine who will be in control of the wealth that emerges from a Chapter 11 under a confirmed plan.iii. After applying the proceeds to lenders’ claims. d. and ―2/3 in amount‖ of the voting creditors did not accept. Court reviews all fee requests to ensure the services rendered were necessary and appropriate and the fees requested are reasonable. iv. Some creditors may exercise control through obtaining security interests in most of the debtor’s assets or through making DIP loans at the start of the case and making those loans conditional upon strict covenants in their favor in a first day order iii. or pay the unsecured creditors in full. it is not receiving payment in full. Per North LaSalle. has its own interests that creditors may be better able to satisfy. as agent for the pre-petition and post-petition lenders (lenders). which was less than the balance due to the lenders. Problem Set #36 1. If one creditor holds out. Newcombe submitted a ballot. 10 of the voting Class 8 creditors accepted the plan. Think Priorities and the champagne glasses.1M. §1126(c). Cap on fees for Committee’s professionals in the order does not limit allowance or payment of fees to those professionals. Control i. objected to the fees of the Official Unsecured Creidtors’ Committee’s professionals. The Reorganization of Public Companies a. ―Zone of Insolvency‖: Directors acquire a duty to creditors under state corporate law instead of or in addition to their duty to shareholders. Del. Case was then converted to Chapter 7. divorced from equity. iii. Banks often lend to large public companies w/out collateral. they were still due over $25M. Comerica. ii. v. NLRB filed a claim for $48k based on a judgment in its favor. then Cramdown may be impossible. Debtor propped a plan to cancel all common stock and new stock in the reorganized debtor will be sold to the highest bidder by sealed bids. Lenders object to fees sought by Committee’s professionals in excess of the $75k cap carved out in the budget attached to the DIP financing order and also for the fees as excessive for the Committee’s work b/c the unsecured were ―out of the money‖ and should have restricted their services. Small Biz debtor who cannot convince most of the suppliers to go along with a feasible plan does not have much of a chance of survival. Newcombe. In re MJ Metal Products (D. iii. that class of secured claims must be paid in full or comply w/ the ―absolute priority rule. This leads to increased influence over the management/DIP (Secured Party in Possession SPIP) b. but the NLRB rejected. In re Channel Master Holdings (Bankr.‖ ii. the debtor must not make exclusive opportunities without benefit of market valuation. so the option to permit the Chapter 11 are fairly attractive iv. Not confirmable under §1129(a)(8) b/c Class 8 is impaired class. The basis for the judgment was back wages due to Martin. Managmenet. but did not state the amount of his claim on the ballot. Debtor filed Bankruptcy and sought to sell nearly all their assets to Andrews Corp for $18. ii. but come bankruptcy lenders demand security w/ new money for security interests. iv. Debtor can expose the sale of shares to the market. A reasonable professional representing the Committee would have performed many of the services performed by the professionals in this case. Debtor’s professionals should not disgorge any fees b/c the miscellaneous category covers them. Therefore. and they cannot be included in a larger class. vi. Only 52% of the voting Class 8 creditors accepted the plan in total dollar amount. 2004): i. The holdout creditor will have increased leverage. and Johnson. but not to the extent that the professionals did so in this case.
. Unsecured creditors will only get a trivial amount in liquidation.
They were a part of their fiduciary duty.
e. v. Management Change i. For the 18 months. §503(c) imposes very strict limits on KERPs and other compensation programs for executives. contest the liens of the lenders. Business judgment rule doesn’t apply if the payments fit within §503(c). In re Dana Corp II (Bankr. ii. §1121(b) gives debtor t 120 days to exclusively propose its own plan and §1121(c)(1) gives 180 days to exclusively solicit votes to confirm the plan. overall. Merely because a plan has some retentive effect does not mean that the plan. Alternatively. ii. These two overlap.c. voluntary termination for good reason. Completion Bonuses: 1) Fixed component w/out regard to performance or creditor recovery on effective date of reorg if executive is still employed ranging from $400-$600k and $3. is retentive rather than incentivizing in nature. execs. annual incentive plan (AIP) bonuses. disclosing confidential information to 3rd parties. Not excessive.
g.1M for CEO.
1. and 2) uncapped. From accepting positions w/ competitor. Exec. iii. ii.55M (unchanged from his prepetition amount). Allows conveyance of some or all of the estate’s assets to a liquidating trust managed by a trustee appointed through the plan. sale of assets can be through §363(b)(1): sale out of the ordinary course before any plan has been approved. Analysis of Lenders’ Liens: Duty of the Committee’s pros to analyze. Under the terms of the Compensation Motion and Modified Plan.
d. and if appropriate. free and clear of all liens‖ under §363(f). Pension Benefits: Dana will assume 100% of Sr. Is this a ―Pay to Stay‖ compensation plan (aka KERP) subject to limitations of §503(c) or is it an incentivizing ―Produce Value for Pay‖ plan to be scrutinized through the business judgment lens of §363? ii. AIP bonuses sought for the Executives range from $336k to $528k. iii. CEO could make anywhere b/t $4-6M. The new plan is consistent w/ §503(c). is within the fair and reasonable business judgment of the Debtors and thus w/in the zone of acceptability.6k/mos. Key Employee Retention Plan: Reasonable for the Committee to review and oppose the KERP. Allow! How Long Will the Debtor Have to Reorganize? i. §548(a)(1)(B)(ii)(IV) provides for recovery of pre-bankruptcy transfers made to insiders In re Dana Corp I (Bankr. Severance payments to an insider may not be approved by this Court unless the Debtors have established that the payment is part of a program generally applicable to all full-time employees and the amount is not more than 10x the amount of mean severance given to non-management employees in that calendar year. Pension plans and 60% of CEO’s pension plan. and ―Target Completion Bonuses‖ to each of their executives. 2. and for the CEO. §1121(d)(2) imposes a cap on judicial discretion of 18 months to propose a plan and 20 months to solicit votes. Senior Executive Retirement Program: Debtors assume the agreement of CEO at earlier of his termination or Debtor’s emergence from bankruptcy for $6M. Debtors propose to pay base salary. soliciting any employees of Dana or disparaging Dana for 12 months. Liquidating Plans and Asset Sales i. The Completion Bonus is payable regardless of outcome and cannot be considered an incentive bonus > It is a retention bonus. Both measured from date of filing and overlap each other. SDNY 2006): i. unchanged from prepetition amount. w/ remaining 40% to be a general unsecured claim to take place on emergence from bankruptcy or involuntary termination w/out cause. §503(c)(2). executives to be paid base salaries of $500-600k and CEO Burns to be paid $1. Sale: Committee had a duty to insist upon bid procedures that were fair and locate additional bidders. SDNY 2006): i. iv. CEO’s AIP is $2M. Severance/”NonCompete” Package: CEO – 18 mos. or payments made on account of severance. Allowed! 3. variable component based on Total Enterprise Value of debtors 6 months after effective date. §1123(b)(4) allows for liquidating plans.
f. Principal reason would be to allow the seller to sell ―clean title. Non-compete agreement for $166. $5k was reasonable to spend reviewing the KERP. Unlikely that any reduction in the KERP would have found money for the unsecured creditors. Non-Disclosure Agreement and Pre-Emergence or Post-Emergence Claim: prohibits sr. ii. §503(c) standards to meet before court may authorize payments to an insider to induce the person to remain w/ the debtor’s business. CEO and Senior Executives eligible for a
iii. Appeals court ordered the Bankruptcy Court to appoint an examiner w/in 10 days. Stockholders Committee represents 8. However. Principally responsible parties: owners and operators of companies on hook federally for clean up. US (WD Tenn. whether or not such right is reduced to judgment. no guaranteed payments to the CEO or executives other than base salary. §1104(c)(2) has a threshold for debtors fixed. disputed. iii. Purpose of statute was to protect equity holders. Environmental Claimants. liquidated. higher EBITDAR reached. What about a clean up that continues post-petition? iv. ii. Treatment of Equity i. Signature Combs INC v. When reorg plan proposes to turn its ownership over to creidtors on the basis that the shareholders are ―under water‖ they can argue that the company is more valuable then it is being represented. Cleanup costs and product liability obligations ii. a spill after filing creates a post-petiiton claim. equitable. The court may limit the discretion and scope of the examiner’s investigation and the compensation and expenses available. i.long-term incentive bonus if the company reaches a certain EBITDAR. Debtors escape §503(c)(1) as to the Executive Compensation Motion. Debtor exercised fair and reasonable business judgment in determining to assume these employment agreements. iii. or unsecured. Negotiating with Special Claimants a. unlike the pre-filing claims that maybe entitled to only a pro rata distribution. Commercial lenders and trade creditors v. c. Environmental Claims i. 2003)
. unsecured debts. Mass Tort Claimants. vii. or owing to an insider. Court will approve the LTIP if there is a yearly ceiling on the CEO and exectuvies total compensation earned during the reorg period. fixed. Also. and 2) the Debtors and Creditors’ Committee were improperly colluding to depress the valuations of Loral. §101(5)(A): Defines claim as any right to payment. AIP – Annual Incentive Plan – Horizontal test: is the transaction common in the industry. as a whole package. By forcing the CEO to produce and increase the value of the estate. they escape §503(c)(2) b/c none of the proposed payments violate it b/c it specifically limits ―severance‖ payments to those permissible under (c)(2) and any other payment is non-severance. legal. secured. vi. Introduction i.4% of common shares and appeals the denial of their motion to appoint an examiner under §1104(c)(1) and (2). Hence. ii. v. exceeding $5M. other than debts for goods. iv. matured. undisputed. un-matured. viii. present record is not sufficiently transparent enough. Post filing claims are fully enforceable against the estate and the post-bankruptcy debtor. must look at the cost or expenses reasonableness and in the best interests of the estate. so any retentive impact is merely incidental to the terms of the pension plans and are ordinary and customary in such plans. liquidated. contingent. Vertical test: Whether the transaction subjects a creditor to economic risk of a nature different from those he accepted when he decided to extend credit. Equity holders in public companies receive little or nothing in a plan of reorganization. Spill that occurs pre-petition clearly creates a pre-petition obligation. Problem Set #37
5. §502(c) permits the estimation of claims. The pension plans are already vested. (SDNY 2004) i. §1104(c)(2) mandates the appointment of an examiner where a party in interests moves for one and the debtor has $5M of qualifying debt. Big Liabilities i. unliquidated. and amount would increase if additional. or taxes. In re Loral Space & Comm. ii. Timing problems: Often span the pre and post filing period. iv. h. Argued 1) the Debtors were undervaluing many of their most valuable assets. services. Business not supposed to spill toxic waste and clean up any waste it spills. and Regulatory Claimants b.
D falls w/in one of the 4 categories of responsible parties. On Sept. Underlying Act Approach: Pre bankruptcy claim subject to the code’s discharge provisions exist so long as the underlying polluting act occurred prior to the debtor’s bankruptcy. Hazardous substances are disposed at a facility. Assets sold free and clear of all liens except the ones assumed. Comprehensive Environmental Response. FAC filed on Feb. EPA ought to know. It was made no later than 1982 and sold no later than 1985-five years before FAC’s later chapter 11 bankruptcy. so they have a relationship. Manville was directed to give notice to inform person with present health claims of the pendency of the reorg and their opportunity to participate. 1995) (Manville with Standing after plane crash) Facts: FAC stopped producing the 300 in 1982. plaintiffs want to recover response costs incurred at a superfund site charged by the EPA and Arkansas. There is a relase or threatened release of hazardous substances from the facility into the environment.‖ In re Fairchild Aircraft Corp. Debtor-Creditor Relationship Approach: Any CERCLA liability is discharged if the creditor and debtor began a relationship before the debtor filed for bankruptcy. Compensation. Does not violate 5th amendment and Bankruptcy notice requirements. Remediation costs incurred post-petition are administrative claims. 1990. Claim accrues earlier than the right to payment standard b/c the potential claimant need not incure response costs for a contingent claim to arise under this standard. Issue: Holding: Kane lacks sanding to challenge the plan on the grounds that it violates the rights of future claimants and other third parties. 2. The trustee made no provision to contact the defendants or plane purchasers. Fair Contemplation Approach: A contingent CERCLA claim arises pre-petition only if it is ―based upon pre-petition conduct that can fairly be contemplated by the parties at the time of the debtors’ bankruptcy. Analysis: A court appointed legal representative negotiated on behalf of future claimants. Kane can only challenge a deprivation of his own rights. the court confirmed the plan. but those that are pre-petition are still questioned for priority and administrative claims. Debtor’s CERCLA liability will be discharged only if all 4 exist prior to bankruptcy. Evades those who don’t know yet about the behavior. Timing problem. The release causes the incurrence of response costs including removal activities and enforcement activities related thereto. and Liability ACT (CERCLA). Johns-Manville Corp.Facts: MDL claims Plaintiffs’ claims were discharged in their Chapter 11 bankruptcy reorg. Court denies MDL’s motion for judgment on the pleadings. and 4.‖ Reasonable diligence that it had a claim against the debtor for a hazardous release. Regulatory Claimants
. Must set aside money for future claimants at the detriment of current plaintiffs. The suits were stayed and he and others were designated as Class 4 creditors. §524(g): 1994 amendments added ―personal injury. 3) voting procedures violated the code and due process. and 4) the plan fails to conform w/ the requirements of §1129(a) and (b). An agreement was reached to exclude the purchasers from future liability for defects. (contribution). Asbestos. so long as the underlying act occurred before the bankruptcy petition was filed.
d. Trustee was appointed who tried to find a buyer for the company as a going concern. August 14. Kane objects because: 1) it discharges the rights of future victims who do not have ―claims‖ within §101(4). Future claimants and injuries yet to be discovered. MDL failed to show that the claims of the EPA were discharged! Right to Payment Approach: 1. 1990. or exposure to. Issue: Are the claims by plaintiff barred by MDL’s chapter 11 petition and discharge? Holding: Court adopts the fair contemplation standard. and reject on the merits his remaining claims that the plan violates his rights regarding voting and fails to meet the requirements of §1129. Kane v. He cannot make claims on third party grievances. Issue: Did the sale provision actually indemnify the purchaser of future liability? NO! Holding: The order of sale did not insulate FAI and this court lacked the jurisdiction to enjoin these claimants because they did not hold ―bankruptcy claims. recovery for damages allegedly caused by the presence of. (2nd Cir 1988) (No standing) Facts: Manville filed a Chapter 11 reorg. WD Tex. 1990 Trustee entered agreement to pay $5M and to assume liability for secured debt in range of $36M. but they failed to do so. 11. Continued selling them as late as 1985. Mass Torts i. asbestos or asbestos-containing products. Affirmed the order of the confirmation of the plan. 2) it was adopted w/out constitutionally adequate notice. (Bankr. 3. Kane and a group of 765 individuals he represented are persons with asbestos injuries who had filed PI suits against Manville prior to the Chapter 11 petition.‖ The purchaser could have given notice and appointed a representative. 17. e. ii.
condition such a grant to. terminate the employment of. or other similar grant to. Bill would cover all clean-up costs. Pay tiny bankruptcy dollars? Director could be personally liable regardless Difference between a pre-petition claim v. If you give notice to all purchasers and appoint a representative of the class of potential victims. and executed security agreements that the FCC perfected under the UCC. DC Circuit held that FCC’s cancellation violated §525. suspend. Some say Y5 and some say Y9 for peak defective years. Under the conduct test it would fly. even preexisting ones. and penalties imposed for the disposal of hazardous waste.1. but no one has standing now. File bankruptcy. Issue: Whether §525 of the code prohibits the FCC from revoking licenses held by a debtor in a bankruptcy upon the debtor’s failure to make timely payments owed to the FCC for purchase of the licenses? Analysis: §525 ‖a governmental unit may not deny. Faces potential liability. solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act. Is the FCC like any other creditor or whether its status as a regulatory agency permits it to use its administrative power to trump the debtor’s efforts in bankruptcy? FCC v.74B and 27 F-Block licenses for $123M. discriminate with respect to such a grant against. deny employment to. or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act. Regulator says it is owed money. Prepetition claim. 46 of the 10. post-petition claim Protect self and company by disposing of all chemicals. Conditioned on full and timely payment of all monies due pursuant to the installment plan. franchise. He will take liability for future productions. Lien enjoys same priority as state revenue liens –which gives these liens priority over all other liens on the property. Implications? Advice? 38. has been insolvent before the commencement of the case under this title. They got 63 C-Block licenses on bids totaling $4. The agreements gave first liens on each license.2. Failure to comply results in automatic cancellation. Counsel for Nat’l Assoc. They installed 100k of thermostats with defected chips. or refuse to renew a license. 550 workers retained. They made a down payment and signed promissory notes for the balance.3. Inc. or discriminate with respect to employment against.1M EPA bill.i. of Home Heating Repair Persons. $40M to purchase a factory and shift its outputs to more varied industrial supply output. Nextwave Personal Communications. a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act. When someone is injured there is slight chance of liability. See Fairchild Aircraft. 38. Women wants help with potential $1. you may be able to squeeze by. What claims for NAHHRP members? Courts ruling? Members treated in a plan of reorganization? Homeowners have a claim? ―Class Claim‖ how would you react? Support or oppose? What arguments for opposing the class claim and how will the class counsel respond?
. (2003) Facts: Communications Act grants FCC awarding licenses through auction. Rosenkrans wants protection from the previous Boilers produced. Bill would create a lien to cover the fees.000 boilers have blown up. 50% payouts to creditors. or during the case but before the debtor is granted or denied a discharge. interest. Second Circuit said NOPE these agreements held that the license terminated. Nextwave won bids for licenses.‖ 38. Argued that under §544 the C-blocks were fraudulent conveyances. State law might be problematic.4. iii. Debtor claims the regulator is attempting to collect on a debt or otherwise violate bankruptcy laws. or another person with whom such bankrupt or debtor has been associated. it may demand payment as a condition of permission to continue operation ii. Replacing them would cost at least $50M. revoke. permit. Trust could run out Funding the trust is difficult Due process issues o Channelling the litigants o Future legal representative 38. charter. Nextwave couldn’t pay and filed for Chapter 11.
Issue: Did the claimant receive sufficient notice of the bankruptcy? Holding: Yes! They were unknown creditors. Claims against the debtor – Have all the claims been discharged? 1. the debtor sent out national publications as well as local.5 Contractor failed to pay several trades people and agency took over the claims and sued HH on their behalf. Post-confirmation: Life after Chapter 11 a. reasonably conveys all of the required information. In re Ashford Hotels (SDNY 1999): Irish bank lent to a joint venture to develop a hotel that failed. ii. Claims by Debtors i. Debtor’s TIB proposed to sell the debtor’s indemnification rights to the bank in exchange for the bank’s funding a defense in NY and attack in UK. and two investors had agreed to indemnify the debtor against losses on the guarantee. Here. other legal doctrines may bar them. Plan and to pursue prepetition claims against US Home. do not in due course of business come to knowledge of the debtor. Cause of action must survive the court order granting the confirmation of a plan. Types of Post-Confirm problems/issues i. Analysis: Discharge presumes that all creditors bound by the plan have been given notice sufficient to satisfy due process. (Bankr. Res Judicata 1.38. Ruled they had no standing. What do you advise?
6. Timing 1. Timing 2. USH argues that the creditors received constructive notice by publication and the claims are barred under §1141(d). Claims by the post-confirmation debtor against other entities – res judicata ii. The debtor. Is the claim pre or post confirmation? ii. th In re Howe (5 Cir. Agency sent HH notice six months ago that the fees for license of $20k are past due. Dispute generated 2 lawsuits in the US and one in UK. April 15 USH filed petitions. Due process is met if notice is ―reasonably calculated to reach all interested parties. SDNY 1998) Facts: Homeowners seek an order determining that the π’s are not bound by reorg. notice by publication is not constitutionally reasonable. Claims by the debtor (as opposed to claims against the debtor) are not discharged under §1141. Trust then litigates or settles and whatever is recovered is distributed to shareholders. and actual notice of the relevant bar dates must be afforded to the creditor. guaranteed part of the joint venture’s loan. Estate contributes causes of action that the debtor had against other parties. Were the creditors known? Known = actual knowledge or reasonably ascertainable by the debtor. Notice iii. 2. Estate may be paid immediately for this property and the money distributed to creditors. USH responded that the confirmation order enjoined litigation on their claims. On August 1996 the π’s sent a demand letter to USH.‖ c. 2. publication notice of the claims bar date may satisfy DP. Also under Bankr. Effects of Confirmation: Claims against the debtor i. 1990)
.‖ When a creditor is unknown to the debtor. and permits a reasonable amount of time for response. The homeowners hired someone who told them their houses didn’t meet the insurance standards. Putative indemnitors objected. This case turns on the legal duty owed by the debtor. Rule 9019 it was a proper court approved settlement. Litigation Trusts 1. Claims by third party that the plan has discharged the liabilities of the third party b. Adequate notice depends on the facts and circumstances of each case. On May 24 1993 the plan was confirmed. and a % of any recovery in UK. Notice In re USH Corp. Since there was no law they violated or standard. Trust may get this money by selling shares to third parties or to some subset of creditors. although they could be discovered upon investigation. Unknown = a creditor whose ―interests are either conjectural or future or. Π’s brought this motion because they were not given formal notice of bankruptcy. The court set December 23 1991 as the Bar order for all claims to be filed. If a creditor is known to the debtor. they were not put on notice essential.
a court may enjoin a creditor from suing a 3rd party so long as the injunction plays an important part in the debtor’s reorg. Inc. 2002) Facts: Debtor an insiders were shielded by granting them the exclusive remedy for payment of any claim or debt so long as the plan is not in default shall be the plan. Appellants argue that releases in the plan improperly shield certain non-debtors from suit by creditors. A District court confirmed the order on appeal. and purchase up to $25M of unsold stock in the debtor’s offering. Court. A claim on Kahn is a claim on the debtor. the plan specifically says that it does not act as a release. the court affirmed on ground of equitable mootness. Also may be tolerated if affected creditors consent.8% of common stock. the Kluge Trust would receive 10. 3. Confirmed on January 28.‖ Such a release is proper only in rare cases. Analysis: Circuit test for res judicata are: 1. It effectively halts appellate review. Granting the injunction will not disserve the public interest.7M in senior secured to equity. Analysis: ―in bankruptcy cases. convert $15. The plaintiff raises the same cause of action or claim in both suits. However. Equitable mootness: Often a nondebtors release presents the bankruptcy court and the parties with the prospect of a successful resolution of a large case and the salvage of an important business. Injury to the movant outweighs the threatened harm an injunction may cause to opposing party. or equitable or judicial estoppel. (Bankr. The parties be identical in both suits 2. Bankruptcy court granted the bank’s motion and the district court affirmed. They sought $14. a temporary post-confirmation injunction? Holding: Yes. However. Injunctive relief requires a showing that: 1. Plan treated Premier as an allowed claim. ND Tex. and 4. See Southmark. It stems from the same nucleus of operative facts that informed their earlier bankruptcy proceedings. 2005) Facts: Two big banks challenge a largely implemented confirmed plan in Chapter 11 of Metromedia Fiber Network and its subsidiaries. It also has an adverse effect on the successful reorg of the debtor. When the third party action will have an adverse impact on the debtor’s ability to accomplish reorg. Issue: Were the third party releases proper? No! Holding: Must show uniqueness for discharge by nondebtors. Any applicable SOL from a 3rd party is tolled from the period of time until the date upon which the debtor fails to cure any written notice of default. (2nd Cir. nor were they disclosed or treated in the 4th amended plan of reorg. Inc. These factors are met. When the nondebtors and debtor enjoy such an identity of interest that the suit against the non-debtor is essentially a suit against the debtor. The bankruptcy court erred because there is insufficient evidence to show the need for the release. There was a final judgment on the merits in the previous decision. Issue: Were there unusual circumstances to grant Kahn and Co. prescription.5 M b/c they claim the bank wanted their land and owed them fiduciary and contractual duties and violated La. Courts have allowed releases when the estate receives proper consideration. and 4. Howe’s now sue for lender liability b/c they incurred substantial debt without regard to their ability to repay the sum. enjoined claims would indirectly impact the reorg by way of indemnity or contribution.1M in reorg debtor. Discharge of Nondebtors In re Metromedia Fiber Network. Issue: Does res judicata bar the case in question? Holding: Yes.
. a substantial likelihood the movant prevails on the merits. release lends itself to abuse. d. partially secured and partially unsecured. Kluge trust would forgive approximately $150M in unsecured claims against Metromedia. Irreparable harm. However. ―it bars all claims that were or could have been advanced in support of the cause of action on the occasion of its former adjudication.‖ The central transaction in a previous case was a passing of title to the property in exchange for the cancellation of the mortgage debt. invest approximately $12. temporary may be proper under certain circumstances. and a full and complete release waiver and discharge from any holder of a claim of any nature and liability arising out of or related to Metromedia or a subsidiary based on the effective date. Securities law and state law fraud. … not merely those that were adjudicated.Facts: Howe’s filed for Chapter 11 in 1982. giving the bankruptcy courts vast discretion in achieving that happy result by approving nondebtor’s releases. A court of competent jurisdiction rendered the prior judgment 3. Analysis: Fifth Circuit said that post-confirmation permanent injunctions that effectively release nondebtors from liability are prohibited. §524(g) authorizes releases in asbestos cases when certain conditions are met. The question is whether the 4th prong is met. enjoined claims were channeled to a settlement fund. 1983. The creditors moved to dismiss on res judicata. Two reasons: 1. because no stay of the plan had been obtained pending appeal. Kahn is practically the debtor. Appellants challenge the release. Textron and Transamerica argue that it acts as a release of their claims against Debtor’s principal. 2. And disclosure statement. In re Bernhard Steiner Pianos USA. Howes moved to abstain and remand arguing it was a state law issue. Kahn. Fifth circuit adopted the rule that states. and 2. In return. The Howes’ lender liability claims that are the subject of the appeal were not scheduled as an asset of the estate. Five years later they filed in state court lender liability claims that were removed to federal court and referred to the bankr. Second.
When the nondebtors and debtor enjoy such an identity of interest that the suit against the non-debtor is essentially a suit against the debtor. Neither producer nor consumer knows of the problem before filing for bankruptcy. The company may be forced to liquidate 3. 523(a)(3). Irreparable harm if not granted. 39. Irreparable harm.2) Real estate company files for Chapter 11. temporary injunctions may be proper under certain circumstances.3) Mangle is not acting in good faith here. Chapter 22 is a repeat Chapter 11 customer/company Problem Set #39 39. Injunctive relief requires a showing that: 1. and 4. 2. Chapter 22 i. He didn’t make full distribution to the creditors because he held back on preferences. Two reasons: 1. a substantial likelihood the movant prevails on the merits. Test for Res Judicata:
. Adequate notice depends on the facts and circumstances of each case. When the third party action will have an adverse impact on the debtor’s ability to accomplish reorg. Might need to give actual notice to each chipholder. If the producers know of the problem. 5 or 9 years it he peak problem year. and 524 a) Can the members sue UC for damages for replacing the chip? Do the members of the association have standing? Probably not.: Fifth Circuit said that post-confirmation permanent injunctions that effectively release nondebtors from liability are prohibited. See §524(e) and 1129 See In Re Bernhard Steiner Pianos.
39. 3. 1. He set up a ―litigation trust‖ in his own name as the individual in charge of the debtor who went through liquidation.
c) Does either question turn on the producers knowledge of the problem? To a certain degree.‖ I think their was no notice here of the underlying claim. However. Only willing if he is released from all personal guarantees on the pre bankruptcy debt. IDK
b) Can the homeowners sue the contractors. d) what if their were low-key news stories? Then they would be known creditors. The plan should grant a temporary injunction that stipulates that RiverMist and the nondebtors are temporarily enjoined from any claim upon the proper and timely payments to Tiffany and Titanic. In the public interest to continue development in the residential market. ¼ of publicly traded companies confirmed a Chapter 11 plan end up back in bankruptcy. and permits a reasonable amount of time for response. Granting the injunction will not disserve the public interest.1) Problem with microchip w/ chance of causing problems with home heating systems. Injury to the movant outweighs the threatened harm an injunction may cause to opposing party. then the ―creditors‖ may be known to them. One in the same person 2. The president. Due process is met if notice is ―reasonably calculated to reach all interested parties. reasonably conveys all of the required information. 4. which would require them to make actual disclosures or at least make publication of the fact. and 2.e. Opposing party will not be harmed as greatly as the debtor. See §1141. Evans will put up substantial assets to back the companies obligations under the plan. ii. He ought to be barred by res judicata here because he could have litigated these claim previously. Debtor is the company and the nondebtors is the president. even if the contractors cannot sue UC? Is it pre-petition or post-petition claim? If it is pre-petition? Need adequate notice? Adequate notice depends on the facts and circumstances.
1. The plaintiff raises the same cause of action or claim in both suits. alleging breach of K. §158(d): permits direct appeals from bankruptcy court to the Court of Appeals in limited circumstances. Supp IV) Analysis: Remedy sought and determine whether it is legal or equitable in nature.‖ WE ARE NOT OBLIGED TO DECIDE TODAY WEHTHER BANKRUPTCY COURTS MAY CONDUCT JURY TRIALS IN A FRAUDULENT CONVEYANCE SUIT BROUGHT BY A TRUSTEE AGAINST A PERSON WHO HAS NOT ENTERED A CLAIM AGAISNT THE ESTATE. Nordberg (1989) Issue: Whether a person who has not submitted a claim against a bankruptcy estate has a right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly fraudulent monetary transfer? Holding: The Seventh Amendment entitles such a person to a trial by jury. Fifth circuit adopted the rule that states. AND o the court has the consent of all parties. The parties be identical in both suits 2. is the district judge the only one who can hear the matter or may the bankruptcy judge decide it? Northern Pipeline Construction v. and 4. Can Congress then assign or have they already assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as fact finder. 1984 Amendments required abstention by federal courts in matters involving state law claims and limited the matters that bankruptcy judges could decide on a ―clearly erroneous‖ basis 28 USC §157 designated certain matters as ―core proceedings‖ that may be heard by bankruptcy judges. 28 USC §1334(b): Broad ―related to‖ bankruptcy jurisdiction to district courts 28 USC §1334(c)(1) and (2): Limits the actual operation of the broad jurisdiction by provisions for discretionary or mandatory abstention in favor of state courts. as opposed to the general jurisdiction of a state court or the non-bankruptcy (federal question and diversity) jurisdiction of a federal court? If the dispute is within bankruptcy jurisdiction. Every federal district court has granted all cases to bankruptcy court. Marathon Pipe Line (1982) o Reorg. 28 USC 157(b) lists matters that are included among core proceedings. Debtor sued Marathon in bankruptcy court. District judges in each district the collective right to refer some or all of the court’s bankruptcy jurisdiction to the bankruptcy judges. §157(a). and coercion. 28 USC §157(e) granted jury trials in bankruptcy if: o the matter is otherwise within bankruptcy court’s jurisdiction o district court expressly authorizes it. There was a final judgment on the merits in the previous decision.
. … not merely those that were adjudicated.
Granfinanciera v. notwithstanding Congress’ designation of fraudulent conveyance actions as ―core proceedings‖ in 28 USC §157(b)(2)(H)? (1982 ed. o Essentially held that the bankruptcy courts were unable to handle this matter. 28 USC §157 defines the ―clearly erroneous‖ basis of review and ―masters‖ recommending findings of fact and conclusions of law to the district judges. subject to the unlimited discretion of the district judges to withdraw any matter from the bankruptcy court at any time.‖
Domestic Jurisdiction Is this dispute within the federal bankruptcy jurisdiction. misrepresentation. ―it bars all claims that were or could have been advanced in support of the cause of action on the occasion of its former adjudication. o Defendant argued that the court did not have Article III status and couldn’t hear it. 7th Amendment protects right to jury in legal causes of action and involves a matter of ―private right. IETHER IN THE RARE PROCEDURAL POSTURE OF THIS CASE…OR UNDER THE CURRENT STATUTORY SCHEME. A court of competent jurisdiction rendered the prior judgment 3.
It includes ―suits between 3rd parties which have an effect on the bankr. This stayed all claims against it. §157c2.. o Also district judge MUST take over any matter involving federal statutes ―regulating organizations or activities affecting interstate commerce.28 USC §1334(c)(1). The opt-out cases against it. o Related to bankruptcy > tried by the district judge. A §157(b)(5) motion requires an abstention analysis Abstention provision of §1334(c) qualify §1334(b)’s broad grant of jurisdiction o The DC determines each individual case whether hearing it would promote or impair efficient and fair adjudication of bankruptcy cases. 1995 Dow filed its petition in the ED Mich. The district court granted Dow jurisdiction motion under §1334(b) and permitted the transfer pursuant to §157(b)(5). Dow Chem.‖ Proceedings that arise UNDER Title 11 o Clearly erroneous standard Proceedings that arise IN Title 11case. 1992. Analysis: Does the Court have Subj. will it be the Article III judge or the Article I bankruptcy judge?
Federal Jurisdiction or not? Is a matter sufficiently related to bankruptcy to justify federal jurisdiction? If there is federal jurisdiction.‖ This is the case here. They are not subject to core jurisdiction of a bankruptcy judge (157b2B). sitting as bankruptcy courts. Allowing the stay against Dow and not the other corps will dry up the estate for the creditors of Dow in the meantime.
28 USC §157(b)(4): Personal injury and wrongful death claims AGAINST the estate receive special treatment. §1334 – 2 types of abstention o Discretionary Abstention 1334(c)(1) o Mandatory abstention 1334(c)(2)
. There must be some nexus b/t the related civil proceeding and the title 11 case.‖ Claims for Contribution and Indemnification are contingent and will have a conceivable effect on the bankruptcy proceedings. 440k elected to join the settlement. However. Also. while several thousand π opted out. but on the other hand they are not subject to mandatory abstention under Section 1334(c)(2). or the district court abstains on a discretionary basis and permits a state court to try the case. the district court denied the other transfer motions by the shareholders because it claimed to lack SMJ for they were not ―related to‖ Dow’s bankruptcy pursuant to §1334(b). Issue: What is the subject matter jurisdiction of federal district courts. unless the parties consent to bankruptcy jurisdiction. Dow filed a motion to transfer to the ED Mich. – PACOR. all three companies share joint insurance. 1996) Facts: Dist Court held that it did not have ―related to‖ jurisdiction over those claims under §1334(b) and concluded that they could not be transferred to it pursuant to §157(b)(5). and o Clearly erroneous standard Proceedings that are RELATED TO Title 11 cases. On May 15. Matter Jurisdiction? §1334(b) is read broadly. On June 25. is the federal court (i) required or (ii) permitted to abstain in favor of a state court? In re Dow Corning Corp. Estate. the bankruptcy estate of the Dow Corning corp? Holding: Reversed and Remanded. o Master recommendations of fact and law Will the case be decided by a state or federal judge? If by a federal judge. §362 stay against nonbankrupt co-∆ may be granted in ―unusual circumstances. claims against Dow’s 2 shareholders. ND Alabama reached a class settlement. and the other nondebtors defendants were not stayed. (6th Cir. §157(d): Power of district court judge to take a case at any time. over proceedings ―related to‖ a case filed under Chapter 11 and the ability of federal DC’s to transfer such proceedings to the DC in which the bankruptcy case is pending? Did the DC err in its determination that claims for compensatory and punitive damages asserted in 100000’s of actions against numerous nondebtors manufacturers and suppliers of silicone gel breast implants could have no conceivable effect upon. However. and therefore were not related to. And Corning Corp.
Issue: Holding: We issue a writ of mandamus ordering the DC to transfer the claims against the shareholders to the ED of Mich. we conclude that the impact these contracts have on other core bankruptcy functions nevertheless render the proceedings core. SDNY 2002) IS VENUE IN NY UNFAIR? Facts: Enron has a shit ton of employees in TX. DC upon remand. Inc. 4) where its principal assets are located for at least 180
. However. 1999) Facts: US Lines and their trust sued in Bankruptcy Court fo the SDNY seeking a declarartory judgment to establish the Trust’s rights under various insurance K’s. 3) principle place of biz. Analysis: §1334(c)(1) and (2): Congress curtailed the Appeals Courts ability to review a DC’s decision to exercise mandatory or discretionary abstention. (6th Cir. 2) residence. (Bankr. §1134(c) decision to globally abstain without examination of a single individual claim cannot stand. Issue: Holding: Analysis: Is it core or non-core proceeding? Bankruptcy court has core jurisdiction over claims arising from a contract formed post-petition under §157(b)(2)(A). 1997) MANDAMUS WRIT Facts: Parties contest the DC’s denial of their motion to transfer to ED Mich. and decided not to abstain discretionarily w/ regard to those claims at this time. (2nd Cir. exercised discretionary and mandatory abstention in declining to transfer the claims against the shareholders and co-∆. but also has a bunch in NY Issue: Should the venue of these bankruptcy cases be transferred from NY to TX? Holding: NO.
Proceeding must be: Based on a state law claim or cause of action Lack a federal jurisdictional basis absent the bankrutpyc Be commenced in a state forum of appropriate jurisdiction Be capable of timely adjudication Be a non-core proceeding Non-core proceedings under §157b2B are not subject to §1334c2’s mandatory abstention provision pursuant to §157b4 The DC in this case determined that 157b4 rendered exempt from the mandatory abstention requirement all PI tort claims pending solely against Dow. Calabresi concurrence: Case-by-case approach but punts for another day. NY is king. Analysis: §1408(1) lets debtor select venue for Chapter 11 reorg. as well as Dow Corning’s ability to resolve its liability and proceed w/ reorg. Venue is proper in any jurisdiction where the debtor maintains 1) a domicile.
In re Dow Corning Corp.
In re Enron Corp. Breast implant claims brought in various jurisdictions by claimants who have chosen not to join the global settlement pool. Newman concurrence: It ought to be core simply because it involves a post-petition breach. The Trust is their successor in interest to the confirmed plan. Failure to transfer the claims against the shareholders will affect the size of the estate and the length of time the bankruptcy proceedings will be pending. Under §1292(b) the district court certified its order for interlocutory appeal. All of their insurance policies were issue before the debtors petitioned for bankruptcy relief. And to evaluate each claim individually to determine whether mandatory abstention applies. In re US Lines. BR Court held it was w/in its core jurisdiction and denied motion to compel arbitration. DC for SDNY reversed and held the insurance K disputes were not core proceedings.
GAC insists it is impossible to comply because they assigned their pre-petiition claim. Issue: Are they violating the stay? GAC argues that i) court is extending its jurisdiction by holding them in contempt for seizing foreign assets. §1408(2): venue is proper for any affiliate that files a bankruptcy petition w/in a venue where there is already a bankruptcy case pending under §1408(1). GAC transferred it to FAL. 2) proximity of the debtor. Home Court: United States a. ii) assignment was permitted by 3001 R. 4) location of assets. Issue: IS GAC Marine subject to in personam jurisdiction? Holding: YES! They violated the stay and will be sanctioned Analysis: Was Due Process sufficient? I) transactional jurisdiction as set forth in Rest.US Lines Facts: US Lines as debtor wanted to restrain GAC Marine from ceasing their ship for unpaid debts. GAC doesn’t believe it is subject to the US in personam jurisdiction because it is organized under UK law and has no domicile in the US. 3) proximity of witnesses for administration of estate.
Transnational Bankruptcies Territorialism: ―grab rule‖. Convenience is determined by 1) proximity of creitors of each kind. See BK v.‖ In re McLean Industries (Bankr. Bankruptcy. SDNY 1986) -. And 2) is supposed to be read broadly. I) GAC Marine has a subsidiary in the US that holds itself out as GAC Marine. 2 Major Issues in Transnational Bankruptcies Choice of Forum o Which court should have primary management over the case? Choice of Law o Which law should be applied to this issue?
Choice of Forum Parallel proceedings: Where other courts have full bankruptcy cases involving the same company Ancillary proceedings: Solely assist the primary court 1. Holding: GAC is Shit outta luck!
. and iii) the contempt decree is ―ineffectual‖ b/c it will not free the ship since other foreign creditors have joined the arrest proceedings. GAC fails to introduce evidence of the assignment. and 6) necessity for ancillary administration if liquidation should result. Burden on the movant to show by a preponderance that the transfer is warranted. Local creditors had legitimate expectations that any financial crisis would be resolved applying local policies and preferences Universalism: Bankruptcy is a collective proceeding that must extend to all of a debtor’s assets and all the stakeholders. Rudzewicz In re McLean Industries II (Bankr. §541(a)(1) grants jurisdiction over the asets of the bankrupt ―wherever located. SDNY 1987) -. GAC argues they can’t comply with the order from the first case. They wanted to find GAC in contempt for violating the automatic stay. GAC filed in Hong Kong and Singapore to substitute FAL so they could sell the boats.days before filing. 2nd of Conflicts and 2) General ―doing business‖ jurisdiction.US Lines Facts: US Lines wants a judgment finding GAC in continuing contempt and make them pay their sanctions. 5) economic administration of the estate. §1412 grants relief if it is established that transfer is in 1) the interest of justice or 2) the convenience of the parties.
Their joint estate included a plot of land in Spain. Main Proceedings i. Judge ruled that the entire estate made the debtor (Y) make any foreign property available to the receiver. §101(23) and §1502(4) ii. i. 2. Receiver demanded that X be ordered to cooperate w/ the sale of the real estate for the benefit of the bankrupt estate.) 3. §1521(c) In re Bear Stearns High-Grade Structured Credit Strategies Master Fund (Bankr. Must truly be the ―center of main interest‖ or COMI or Principle Place of Biz e. §303(b)(4).Analysis: They could buy back the claim. Some primacy to local parallel proceedings 1. d. Holding: No! They are not eligible for relief as main or non-main proceedings Analysis: The Foreign proceeding must be in a country where the debtor has its center of main interests (PPB) or have an establishment. Retains ancillary proceedings as the vehicle of cooperation. Foreign Representative may file for recognition of a foreign proceeding in the US under §1515 and granted quickly in most cases using various presumptions. B/c X and Y were married in community of property and their divorcce was not yet final (not entered in the civil register) at the time when the bankruptcy was declared. In fact. b. Court still has broad discretion to dismiss the local US case in favor of an ancillary approach in deference to the foreign proceeding where it is pending in the home country of the debtor. Schenkius (receiver of Y) Dutch Example Facts: X and Y granted divorce on June 6 1988. Given lots of deference by US iii. Issue: Were these foreign proceedings eligible for recognition? Only if they met definitional requirements of either a foreign main proceeding or non-main proceeding. They could have vacated their orders in HK and Singapore instead they transferred them and enforced them. Model Law of Cross-border insolvency by the UN in 1997 adoption ii. Establishment = anywhere the debtor carries out a non-transitory economic activity. Issue:Does X (ex-wife) have to comply? Holding: Yes. SDNY 2007) Facts: The two joint provisional liquidators of 2 investment funds filed petitions under §1515 for recognition of their liquidation of funds in the Cayman Islands as foreign main proceedings under §1517 or foreign non-main proceedings in 1502(5) and relief under §1521. Chapter 15 of the Bankruptcy Code i. Home Court: Elsewhere X v. Pending in countries where the debtor has an ―establishment‖ are granted limited recognition and cooperation ii. 304-306: permit and encourage bankruptcy courts to cooperate w/ home country bankruptcy courts abroad. They made a mockery of Rule 3001. Cooperating Court: United States a. Main Proceeding o Debtor must be proceeding where it has its COMI o §1502(4) Foreign Non-main proceeding o Debtor must have establishment where the proceeding is happening o §1502(5) Presumption o §1516 o Absence of evidence then we assume the debtor’s registered office is their COMI
. this court has granted them before. Called concurrent proceedings in §1529 c. but permits parallel proceedings. X petitioned the same court to declare Y bankruptc. Court ordered X to cooperate. They violated §362a1 a4 and a6. iii. Must make full disclosure to US courts of status of the proceedings f. Schenkius was appointed receiver. GAC could have modified the stay and introduced evidence showing cause for mod. Non-Main Proceedings i.
If there is evidence to the contrary then the foreign representative must offer proof Location of HQ. The Australian judge wrote to the High Court in London. Three most important and crucial areas for determining the applicable bankruptcy law 1. Argentine court approved the plan. The debtor has no establishment in the Caymans. or judicial acts of another nation. Avoiding Powers 2. B) Comity: Most important factor. Discharge In re Maxwell Communication Corp (2nd Cir. Under §304 Telecom sought ancillary to a foreign proceeding to declare the approval order and give the APE full force and effect in the US to bind all creditors. Can and should the English court do so? The alternative is a English liquidation and distribution. fraudulent. Distribution (priority rules) 3. situated in England. court granted orders and appointed liquidators. executive. A) Just treatment of creditors: Argo had notice but never objected. Comity is ―the recognition which one nation allows within its territory to the legislative. They only have a shell corp. Cooperating Court: Elsewhere McGrath v. Choice of law is often a distinct issue b. jurisdiction whose law would apply to most disputes can be offered Main Analysis: Petitioners pleadings say the US is their COMI = PPB – FAIL TO MEET MAIN Proceeding Non-main proceeding analysis: Must have an ―establishment‖ in the Caymans. and to the rights of its own citizens. after their expenses. Their assets were reinsurance claims on London policies. They concluded it was not abusive. If the English assets are sent to Australia. Facts: Less than 90 days before bankruptcy Maxwell made transfers to British banks with their headquarters in London. Four of them petitioned for liquidation. debtor’s assets. UK §426 grants the courts to cooperate with ―relevant countries‖ deemed by the Secretary of their state. having due regard both to international duty and convenience. They had 90% consent in $ and 82% in #. Debtor filed petition in US and sought an administration order (Chapter 11) in London. 1) protection of bondholder’s under §316. Choice of law for application of avoidance law is in many ways the most important question in int’l insolvency. asking the provisional liquidators to be directed. Bankruptcy court did not abuse its discretion that this APE ensured due process and just treatment. Australia is a relevant country and comity and universalism demand that they cooperate. Bankruptcy court qualified it as a ―foreign proceeding‖ and granted. the outcome for creditors will differ. 4. Choice of law is always related to which country is the home country and therefore to choice of forum c. Analysis: 2 grounds for doing so. Look to National law. majority of creditors. Issue: How to cooperate when each country has somewhat different priority rules? Holding: Remit the assets to the Australian liquidator. 2. 1996) British preference law requires the debtor to have a ―desire to prefer the creditor.‖ Most likely avoidable under §547 of the US Bankruptcy code but not §239 of the English Insolvency Act. Issue: Can the Argentina judgment be granted in the US? Holding: Yes! Analysis: §304 grants petitions for best economical and expeditious administration of the estate with 6 factors. Their law allows the debtor to suspend payments or seek court approval under privately negotiated. or discriminatory with legal regs. but with branches in NY. at least from litigants perspective d. 2008) Facts: Telecom company re-negotiated its obligations in wake of economic crisis.
In re Board of Directors of Telecom Argentina (2nd Cir. to remit the assets to the Australian liquidators for distribution. Argo Fund challenged the restructuring. 2) best interests of creditors under §1129. Telecom announced it intended to restructure under Argentina Involsvency Law. and 3) good faith requirement under §1129. Provisional liquidators appointed in London. The judges from both sides of the pond
. *US is not a relevant country. location of managers. Choice of Law a. In Australia. §304 acts to override these objections. One bank was a French bank with its HQ in Paris with offices in London and NY. or of other person who are under the protection of its law. Riddell (House of Lords 2008) Facts: Australian insurance companies insolvent. Common law and Statutory. majority approved plan and bind all creditors.‖ Argo argued it violated public policy b/c it was inconsistent with the Bankruptcy Code for 3 reasons.
the highest class of debt would own the company outright. Elimination or deregulation of bankruptcy law for a minimum amount of mandatory rules and permits economic actors to construct their own rules to manage general default. Our client. o Contractualist Approach Coase Theory: A legal rule that alters the bargains of economic actors is inefficient. Each class of equity or debt would either purchase all the interests above it at face value or forfeit the interests of their class. 559-560 Long Term Capital Management $4B in capital and borrowed up to 20 times that for leverage NY Federal Reserve invited leading banks and firms agreed to invest billions more in its equity to prevent a run on its assets Alternative Approaches to Bankruptcy o Automated Bankruptcy Courts would enforce absolute contractual priority in both liquidation and reorganization and the control over the deployment of the assets of a firm in general default would be determined by a sort of reverse ―bidding-in‖ by existing creditors or equity holders. Choice of ―bankruptcy menu‖ at the inception of the firm. (17). Problem Set 42 42. The company filed liquidation in Calgary. Issue: Whether Maxwell as a debtor estate in Chapter 11 may recover under American law millions of dollars transferred to 3 foreign banks shortly before declaring bankruptcy? Holding: The doctrine of international comity precludes application of the American avoidance law to transfers in which England’s interest has primacy. The dismissal was warranted. The English avoidance law has a better argument. Almost all the creditors were centered in London and the fund transfers occurred there.reached a global protocol.000 owed to it. Analysis: Comity is important for the US Judge to consider. a Detroit corporation wants to obtain pre-judgment attachemtns against each of the US warehouses to secure payment of the $775. The new owner would then decide how to deploy the assets through sale or continuing business. If no lower class bought the debt above it. Does the Canadian stay affect our client’s right to seize the inventory? Probably not unless our client is bound by Canadian jurisdiction. §1520 What is the likely success of grabbing the inventory? Unless you beat the corporation to being declared a foreign representative. The choice of law was appropriate.
. England has the strongest connection to the debtors and the present litigation. §1515 What effect will it have on our client? It is a foreign main proceeding so they will be granted a foreign representative. Not a good outcome for our client.1) Canadian corporation with primarily Canadian warehouses had 4 US locations.§1520
The Functions of Bankruptcy Law Banks have their own special bankruptcy law which protects those who deposit with them Securities Investors Protection Act protects investors by disallowing bankruptcy of stock brokers who hold the securities of their customers §752 Railroads aren’t allowed to file Chapter 7 but have their own Chapter 11 The reason banks and brokers are excluded from ordinary bankruptcy rules is because they are ―highly regulated financial institutions that take deposits of money or valuables from the public‖ Hedge funds – not excluded from bankruptcy o But their financial instruments are not exempt from the automatic stay and avoiding powers o §362(b)(6)-(7). an automatic stay will be placed on all their US property. but look to Canadian law. See GAC case What is the next step by the Canadian bankruptcy trustee for Maple Leaf? They will file as a Foreign representative in the US courts. the statute was properly construed not to reach the pre-petition fund transfers to the banks. They failed to discuss whether the debtor could set aside pre-petition transfers to certain creditors.
and small creditors would never be a party to the bargain
Problem Set #43 43.1) a) market efficiencies available in the contract approaches as against the difficulty of negotiating among a number of creditors over time b) the claim that bankruptcy should serve debtor interests as against the Bankruptcy Code rule that seem to confirm that creditors have the overriding rights in bankruptcy (e. not federal. What else should be known about the country? Its legal system? Initial thoughts on the system proposed and why?
. and it has no specialized judiciary. The country is unitized.g.2) Create a new hypothetical Business bankruptcy system.. Should it include state-owned enterprises that are being slowly privatized? Prior law made criminal penalties for Officer and Directors of failed companies and had no provision for discharge of entrepreneurs or consumers.
Include a default rule for non-parties such as tort victims ―Collective Action Problem‖ Tragedy of the Commons Bankruptcy is supposed to solve this problem by maximizing the debtor’s assets and distributing the proceeds to the creditors ―creditors’ bargain theory‖: idea that at the inception all creditors would agree to bankruptcy law Authors data shows that a case averages 19 unsecured claimants Need to solve the problem of contracts changing over time Involuntary creditors and quasi-involuntary. absolute priority rule in §1129(b)) 43.