Jed FriedmanBankruptcy Outline-GerberFall- ‘06

1. Policy Concernsa. (1) “Fresh start”: to give D relief

i. Fresh start: In exchange for giving up non-exempt property, individual debtor receives a bankruptcy discharge- relieves debtor of personal liability for his or her pre-bankruptcy debts

1. Chapter 7 discharge is a privilege not a right (Carlton)2. Substantial abuse (Carlton)

a. it would be affording clearly non-needy individuals relief traditionally reserved for honest but needy debtors.

b. it would clearly be affording them a "head start", as opposed to a traditional "fresh start"

3. No fresh start at ex-wife’s expense (5205c4 disallows exemption, Not for AS, priority in distribution)

b. (2) to fairly and equitably distribute pie: the value of the D’s non-exempt assets to C of the D.

2. Backgrounda. Trends

i. 2mm filings, up 30% from prior yr (spike b/c fear of BAPCA on Ch. 7)1. 1.7mm Ch 7 (110K in 2nd Cir)2. 412K were Ch 13 (including 15,817 in the 2d Cir.)3. 6,800 were Chapter 11 cases (including 1,098 filed in the 2d Cir.)4. 380 were Chapter 12 cases including 2 filed in the 2d Cir.)

ii. Less Catastrophe, More Credit Debt (In re Carlton (1997, NDNY))1. For Ch. 7, less catastrophic events (significant job loss, business failure,

matrimonial, disability, or uninsured health problem)2. More debt service on their outstanding consumer obligations (often unsecured credit

cards with generous allowances)3. In some bankruptcy courts- 25- 30% of all adversary proceedings involve actions in

Ch 7 cases by credit card issuers to have their debt declared to be nondischargeable because of the debtor's fraud in the use of the credit card

iii. Increase use of exemptions1. Few seem to own (or report) any significant non-exempt tangible personal property,

but many report substantial exempt retirement funds (IRA, 401-K or Keough)

iv. Less stigma of bankruptcy1. Increased attorney advertising and the lessening of the "stigma" of bankruptcy may

be encouraging debtors to file rather than to explore and/or attempt other alternatives

v. Ch. 13- Dilatory Tactic10.27.06

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1. Over utilized- too many people take on Ch 13 plans that fail2. Debtors file just to delay (to postpone foreclosure of home mortgage)3. In re Carlton (1997, NDNY)- Fewer and fewer Chapter 13 debtors appear to have

filed to pay back their creditors as much as possible, and more and more appear to have filed because it is the only way that they can pay the arrearages on their home mortgages, cram down personal property liens, such as on their vehicles, stretch out student loan repayments, or obtain a superdischarge

b. History- always balance bet creditor and debtori. Debt slavery- Ancient Greece, bankruptcy did not exist - If a father owed (since only locally

born adult males could be citizens, it was fathers who were legal owners of property) and he could not pay, his entire family of wife, children and servants were forced into "debt slavery", until the creditor recouped losses via their physical lab

ii. English law- Involuntary law, creditor-friendly, debtor could be imprisonediii. Shylock & Pound of fleshiv. 1604- debtor could be pilloried and have ear cut offv. Statute of Anne- seizure of property/imprisonment- debtors were entitled to retain a few

articles of clothingvi. Staute of George (in effect at time of US revolution)- discharge from prison for honest debtors

vii. Article 1.8- gives congress power to establish unfirom laws throughout USi. Const 1.8 Congress has power to establish uniform laws on bankruptcies throughout US.

Bankruptcy Code in Title 11 of USC.

b. Statutesi. Scalia on textualism:

1. Scalia concurrence in Shumate v. Paterson: When the phrase "applicable nonbankruptcy law" is considered in isolation, the phenomenon that three Courts of Appeals could have thought it a synonym for "state law" is mystifying [and not including fed law]. When the phrase is considered together with the rest of the Bankruptcy Code (in which Congress chose to refer to state law as, logically enough, "state law"), the phenomenon calls into question whether our legal culture has so far departed from attention to text, or is so lacking in agreed-upon methodology for creating and interpreting text, that it any longer makes sense to talk of "a government of laws, not of men."

ii. Bankruptcy Act of 1898, amended over time until Code put in place in 1979.

iii. 1978 Bankruptcy Reform Act- Title I had code, Title II had amendments to judicial code which reformed bankruptcy cts and established the US trustee system

1. Numbered 1,3, 5, 7, 9, 11, 13- space for even additions2. General

a. Ch 1- definition, SOLb. Ch. 3- case administration- how cases are commenced, meeting of creditors,

automatic stay, use of property, treatment of unperformed contracts c. CH. 5- provisions governing property of estate, avoidance of preferential

and fraudulent transfers3. Substantive

a. Ch. 9 restructing of debts by municipalities

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b. Ch 12 (added in 1986)- permits family farmers to restructure their debts and retain ownership of farms

c. Ch 15- based on model law on bankruptcy adopted by UN Commission on Int’l Trade Law- provide guidance for access to US courts by representatives of foreign debtors, recognition of foreign proceedings and foreign relief, and cooperation and direct communication among domestic and foreign courts

iv. 2005 – Bankruptcy Abuse Prevention and Consumer Protection Act of 20051. Homestead limitations, Means test for Ch 7, for individual- to file, to be told

by clerk, at discharge of options/counseling

v. Title 18 of US code provides that certain acts committed in connection with bankruptcy case are crimes

c. Bankruptcy Courtsi. Technically units of fed dist courts, and jurix is referred to them by district cts,

judges appointed by 14-yr term by judges of Ct of Appealsii. Court approval required for:

1. Retaining attorneys-3272. To borrow money or incur indebtedness-3643. To sell property outside ordinary course of biz-3634. To use cash collateral if credtor whose claim is secured will not

consent to use-363-, so long as adequate protection-363

iii. Resolves disputes for1. Turnover of estate property2. Determine validity of lien3. Grant relief from automatic stay4. Determine amt and allowability of claim5. Subordinate a claim6. Convert to another chapter7. Replace mgmt w/trustee8. Determine whether reorg plan should be come effective

iv. Equity Powers (105)1. Allows a bankruptcy court to "issue any order, process, or judgment

that is necessary or appropriate to carry out the provisions of" the Code.

2. Broad Reading to Execute the Code a. Sportsfame of Ohio v. Wilson Sporting Goods (Bankr Ct, N.D. Ohio

(1984)- Injunction requiring Wilson to fill postpetition orders OK under 105a (“necessary or appropriate” to carry out Title 11)

i. P. has no adequate remedy at law- loss of profits. And injunction would promote success of reorg. given a showing of sig injury to

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debtor’s biz, court could presume that it would render the reorg difficult or impossible.

ii. Irreparable injury- loss of profits, possible failure of reorg.iii. Balancing of equities- D has made no showing that it would suffer

any harm by being required to accept cash for selling goods to P and turning a profit

b. Grady v. Robins Co. (4TH Cir 1988)- Robins made Dalkon Shield, an interuterine contraceptive device. Hysterectomy. Two mo. after Robins filed its petition for reorganization, Mrs. Grady filed a civil action against Robins in DC. Grady said didn’t accrue under state law till harm manifested, so not prepetition. Prepetition claim stayed by AS. But also 105. We also find persuasive the fact that the DC probably had authority to achieve the same result by staying Mrs. Grady's suit under105(a) in the use of its equitable powers to assure the orderly conduct of reorganization proceedings- and to avoid burst of claims that would undermine R and undermine claims of other plaintiffs.

3. vs. Narrow Reading to Balance priorities in codea. Kmart (2004, 7TH Cir, Easterbrook)

i. Section 105(a) not a free pass- This does not create discretion to set aside the Code's rules about priority and distribution; the power conferred by § 105(a) is one to implement rather than override. . . . Every circuit that has considered the question has held that this statute does not allow a bankruptcy judge to authorize full payment of any unsecured debt, unless all unsecured creditors in the class are paid in full. . . . We agree with this view of § 105.” - judge doesn’t have free-floating discretion to redistribute rights in accordance with his personal views of justice and fairness

b. Sec 105 to extend automatic stay? (Manville)i. Collier: Section 105 is not without limits. It does not permit the

court to ignore, supersede, suspend or even misconstrue the statute itself or the rules.

ii. Sec 105 does not have a life of its own and this extension may only be accomplished within the proper boundaries of Section 362- if designed to protect the debtor's interests (“necessary or appropriate to carry out the provisions of this title.”)

2. Debtor Judgmenta. Background

i. For contract remedies (e.g. replevin)ii. You can talk to them

1. Reserving the right to sue on the entire amount due if they miss one payment.2. Making sure that they are not making a contract modification on the debt payment

dateiii. You can sue

1. Can serve a motion for summary judgment- CPLR: when an action is based on an instrument solely for the payment of money (a note) then the P may proceed by a motion for SJ instead of serving a complaint; in other words this is an expedited procedure.

iv. R moves from debtor> judgment debtor once a judgment is issued10.27.06

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v. If a judgment R refuses to satisfy the judgment, then you have to take steps to enforce the judgment:

1. Have to locate assets of judgment debtor2. Has to freeze those assets to keep them from going somewhere else3. Has to get those assets as quickly as possible to satisfy claim

b. Locating assetsi. First, we have to find it- we can hire a private eye, we can do a judgment debtor SDT

(required debtor to appear and produce books), or an information subpoena (is just interrogatory, can be served not just on R but on others who have property of debtor- like a bank)

ii. CPLR 5201- property against which a money judgment can be enforced- any property that can be assigned or transferred.

c. Freezing Assets- Restraining Noticei. Brian is liquidating his assets (selling them, giving them to friends, hiding them)

ii. CPLR 5222- you can disable debtor from transferring property of debtor by serving restraining notice on judgment debtor

1. Once you’ve been served, you can’t make assignment sale or transfer of any property in which you have interest until judgment satisfied…

iii. Recently, 5222 was held unconstitutional in NY state court because it didn’t give enough notice that there was some property subject to exemption. Only individuals get to claim exemptions, not corporations.

1. So…you have to give notice to an individual when serving that some of their property might not be subject to the debt…

2. Only individual debtors get to claim exemptions- so Entity debtors do not get that same notice of exemption

d. Consensual Liensi. Lien: to tie – binds property to the satisfaction to that debt.

ii. Can bring replevin action to get security.iii. Mortgage (Lien on real property)

1. Governed by state law, not UCC2. Purchase Money Mortgage (PMM, “enabling loans”)- borrows money to be able to

buy the property, trumps judgment C (5203a2)- for real estatea. Rationale: R got the property subject to that mortgage (subject to the bank’s

interest in that property)b. If mortgage not PMM, judgment C trumps mortgage– 5203a

3. Perfect a mortgage by recording it (291), priority for subsequent purchasers (that’s why you do a title search). But under law of some states, even if not recorded, if purchaser is in open and notorious possession, gives notice.

4. But even if unrecorded, superior to judgment liens granted after a mortgage is granted

iv. Security interest (Lien on personal property)1. Security interest = interest in personal property or fixtures which secures a

payment/performance of obligation. UCC 1-201(37)a. Governed by Art 9 of the UCC (not state mortgage law)

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b. Gives lender the right to repossess no matter who has title- don’t need permission of ct, unless disturb peace (except in bankruptcy, AS for 30)

c. UCC 9-102(73)- security agreements create security interestsd. UCC 9-102(a)(12) "Collateral" means property subject to a security interest. e. A pledge: Brian borrows $ from Lauren and gives her trombone as a

security interestf. Chattel mortgage: I buy a car, grant security interest to lender, the lender

has my promise to pay back (looks like a real property mortgage since I have title and possession) but in case of default lender can send people over and repossess

g. Conditional sale: Williams v. Walker Furniture: dragnet clause—only when she made final payment on all the furniture title would pass to her on everything else

2. Security interest – only limited exemptions allowed (522c2, 522f1b)a. Exempt property liable if debt secured by consensual lien (mortgage or

security interest) or tax lien (522c2) but AS appliesi. Valid lien will survive in rem and may be enforced against

property securing debt, but no action is permitted against debtor personally for a deficiency (524a)

b. 522f1B- Debtor may avoid a non-possessory, non purchase-money security interest to extent that it impairs an exemption to which the debtor would have been entitled in any:

i. Household goods (including jewels, clothes, musical instruments)- primarily for debtor or dependent’s personal or family use

ii. Professional books, tools of tradeiii. Health aids (e.g. wheelchair)

c. These are part. items that are bare minimum that bankruptcy is trying to protect. Also HFC isn’t really going to take over a $300 couch, it doesn’t care—it would just use that interest to coerce debtor to pay.

3. Purchase money security interests (PMSI) =“Interest in property that is acquired with proceeds of extension of credit that security interest secures.”

a. You can Perfect PMSI Within 20 days for priority (the UCC Grace Pd) - if a secured party files before or within 20 days after R receives delivery of the collateral, the security interest takes priority over the rights of a buyer or lien creditor who purchased or levied on the collateral between the time the security interest attached and the time the financing statement was filed. UCC 9-317(e). Codified in 362b3 for AS and 546b for strong-arm

b. Exception allowed for preferences (547c3)- you can perfect up to 30 days after R received property (even if it’s during bankruptcy)- doesn’t relate back to date of transfer, but it’s not avoidable even w/i 90 days

4. Perfecting a security interest (for priority)a. Gives the secured C a priority interest over other Cs that claim an interest in

that property, and maybe even purchasers of that property; and also priority over the rights of the bankruptcy trustee.

b. Needs to be perfected or subordinate to the rights of any other"lien creditor." UCC 9-317(a)(2). Can also be avoided by bankrupt trustee. The law hates secret liens

i. Lien creditor 10.27.06

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1. C that acquires a lien on property by levy. 9-102(a)(52)2. TIB = functional equivalent of a lien creditor. UCC § 9-

102(a)(52), BC 544ii. If judgment creditor on personal prop doesn’t get a lien, then

person w/unperfected security interest willstill win?c. Perfecting = Attachment + Something Else

i. Security interest “attaches” to the collateral when1. (1) there is an “authenticated” security agreement that

describes the collateral, or the collateral is in the possession of the secured party pursuant to the agreement

2. (2) value has been given3. (3) the debtor has rights in the collateral - i.e. the R

owns whatever he is giving C rights to- important b/c it is not uncommon for borrowers to give security interests in stuff they don’t own! (e.g. an interest in current inventory; but that might not really be owned inventory).). UCC § 9-203.

a. Lien floats and attaches to the inventory when you acquire rights in the inventory

ii. Something else1. Filing a UCC financing statement that describes the

collateral in the appropriate government office (Sec of State or county clerk) UCC 9-310(a)

2. Creditor taking possession of the collateral (UCC § 9-313).

iii. But can not attach post-petition.(552)1. e.g. if creditor granted lien in all inventory “now owned

and hereafter acquired”, then new inventory acquired after CH. 11 filed not part of that security

e. Nonconsensual liens i. Statutory liens

1. Arise automatically- but need to be recorded (filing a mechanic’s lien); if these liens are not recorded, that doesn’t mean it is not enforceable b/w the R and C but it may not be good against others who extend credit,

2. Mechanics Lien: Person who repairs on property has lien to secure charges. 3. Bailee’s lien: A garage operator has a bailee’s lien to secure what you owe a garage.

ii. Judgment liens (“priority lien”)- Docket Judgment for Lien on Real Property1. 5203a- When party gets a judgment and is docketed in a county (at county clerk) in

which the judgment debtor owns real property, the judgment C gets a lien on that real property

2. Judgment liens don’t arise until it’s docketed (then priority) 5203a a. Law hates secret Liens - wants other subsequent purchasers to know

whether or not the assets I own are encumbered by other creditorsb. Once docketed, “No transfer of an interest of the judgment debtor in real

property … is effective against the judgment creditor” – 5203ai. Except- PMM

ii. Exemptions allowed1. 522(f)(1)(A): a R may avoid a judicial lien on exempt

property to the extent that it impairs the exemption.

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2. But not if child support- 522(f)(1)(A): even though exempt prop is generally not subject to satisfaction of a judicial lien; it is subject to a judicial lien for for alimony, spousal or child support, unless has been assigned to another entity

c. Then deliver execution & levy- judgment creditor has power to deliver writ of execution to give sheriff authority to to levy the property from Brian

3. Personal property: Docketing judgment does not give lien on personal property, but you can use judgment to get execution under 5232

f. Levying for Personal Propertyi. 5230- Execution as Priority

1. Issued by ct, Writ of execution directs the sheriff (or marshal) to go out and levy on and sell the R’s property (including personal property) to satisfy the judgment.

2. Delivery of the writ to the sheriff is 1st step in determining judgment creditor’s priority to the R’s personal property.

a. Takes priority over the rights of a transferee for value (see CPLR 5202(a)) or over the rights of a competing judgment creditor who subsequently delivers an exeuction to the sheriff (see CPLR 5234(b)).

b. Except transferee who acquires for fair consideration before levied upon or transferee who acquires non-movable property after it was levied on w/o knowledge of levee- (5202a)

i. Rationale: Rule of substitution: the judgment creditor can still go after the $; wouldn’t they rather have the $ then the car. (Counter: a lot easier to hide/spend money than a car).

ii. Knowledge should be there because sheriff required to put some kind of notice after levy

3. Vs. 550- reaching transferee on avoidancea. 550a- Repo Bank → Immediate Transferee → Mediate Transferee →

Mediate transferee. We could go all the way down the line if there are subsequent transfers.

b. 550b: But one who pays value and doesn’t know that the sale was conducted in violation of the stay is not liable for the return of the car or the value of the car; one who buys at a judicial sale is charged with some level of inquiry.

ii. 5232- Levy on personal property or RE1. When the sheriff goes out and tags the property, that is the levy on the property. He

could then sell it for as much as needed to satisfy judgment2. Levy by seizure: CPLR §5232 (b): if property is moveable, the sheriff levies on it

by taking it away.3. If property is not moveable, the sheriff levies on it by serving a writ of execution

on the party who has custody of the property a. Also the sheriff should also do something to give notice to the world that

the property has been levied on. b. If the property is a debt that has been levied, then the sheriff issues a notice

of garnishment to the person who owes debt to the judgment creditor.4. These statutes are “grab statutes”: the race to the debtor’s assets are

won by the swiftest. CPLR §5234(b also read 5232, 5233

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g. Right of Setoffi. At common law, mutual debtors and creditors (that is, persons who owe obligations to one

another) have the right to set off against one what the other owes

3. Alternatives for Financially Beleaguered Debtorsa. Get additional loan

b. Out of Court “Work-out Agreements”i. How each creditor will be paid (lump sum v installments), what happens if another default

ii. Creditors will agree to “stand still” and not pursue payment1. Most banks have special dept known as a workout group- you don’t deal with loan

officer, but with new banker who is more interested in recovering what the company owes the bank than he or she is in maintaining a long-term banking relationship

iii. Compositions- creditors agreed to be paid less than full amount of claimsiv. Extensions- creditors will be paid in full over a longer pd of timev. Pros:

1. For debtor: no stigma, cost of bankruptcy, no costs of lawyers and committees of creditors, don’t have to disclose biz strategy

2. For creditor: debtor a chance to become profitable again, no race to assets, expense of litigation

vi. Cons: 1. if you can get all creditors to agree to stand still OK, but often collection efforts by

one recalcitrant creditor2. Doesn’t alleviate nuts and bolts problems (need cash, need suppliers to send new

stuff)

c. Independent Non-Judicial Liquidationi. Sell all assets/inventory and distribute the proceeds pro rata among the

creditors (they all will get 10 cents on the dollar)ii. Cons: Breach of fid duty suit

1. Fid duty to maximize pie for creditors when going into bankruptcy or equitable insolvency

a. Usu fid duty just for stockholders, but when insolvent, broad duty to creditors- as assets belong to creditors

b. Equitable insolvency- if a company can’t meet its day-to-day expenses, then expanded fid duty kick in even if technically solvent. Those cts that don’t reach expanded fiduciary duty still do trust theory

2. Ps have burden for c/aa. But D’s have burden of proving the value they could possibly obtain, since

they’re the only ones who would know the info. b. Failure to give notice to Ps (persons primarily interested in assets) requires

imposition upon Ds of burden to show that their action in selling the inventory at public action resulted in obtaining full value.

c. BJR: Because proceeds of sale so much less, might overcome BJR. Conduct would have to be gross to over come BJR.

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3. E.g. - NY Credit Men’s Adjustment Bureau v. Weiss (1953, NY)- Action by TIB under Sec 60 of NY General Corp Law- neglect or failure to perform their fiduciary obligations. You can compel dir to pay if they have acquired themselves, lost or wasted or otherwise violated their duties. Two d’s- officers, directors and holders of 100% stock of corp. Sold assets at auction when co. in trouble for $23K (assets estimated worth at $74K and owed $52K). Creditors not happy, put co into involuntary bankruptcy. New trial to asses P damages- allows Ds oppty to account for handling of sale and show full value realized.

d. General Assignment for Benefit of Creditors- “ABC”i. General

1. Helps debtor avoid Weiss problem.2. Creditors don’t trust debtors to assign, so they’re get angry instead of acting out of

self-enlightened interest3. Fallen out of favor, but now harder for debtor to Ch. 7- back to ABC? You don’t

have to deal w/court, lawyers, expenses, publicity

ii. Process:1. NY D&C Law: Insolvent debtor conveys property to disinterested assignee who

holds the property in trust for benefit of debtor’s creditors. If property is subject to a security interest, the assignee takes it subject to the security interest.

2. Supervised by state ct judge.3. If Cs do not like Rs choice of assignee, they may ask court to name substitute4. Assignee notifies creditors that assignment has been made and directs them to

present claims against property, and manages liquidation.5. Creditor who presents a claim in ABC will receive its pro rata share of proceeds

realized on disposition of property. 6. Creditor can challenge the validity of the assignment if the creditor thinks the

debtor is concealing assets.

iii. Discharge1. Creditors who file a claim in the case release their claims against the R (all states)

a. So… once property is assigned pursuant to valid ABC, it is no longer subject to creditor levy

b. But only prevents creditors from pursuing property that was assigned

2. And if no claim, creditor can still take action against debtor personally- but not the property the debtor previously transferred to assignee

a. i.e. Creditor who does not present a claim in the ABC gets no slice of the ABC pie, but can pursue the debtor and any (nonexempt) assets that were not assigned in connection with the ABC.

iv. Coerceive discharges:1. Coerceive discharges: In NY, general rule is that only debts owed to creditors who

file claims are discharged in ABC but if creditors holding at least 2/3 owed by the debtor consent to discharge that debtor may receive a discharge of liability to all creditors

2. Problems w/Non-compliant Creditor Debt dischargea. But it’s unconstitutional—so it’s not enforceable. (Just no one has

challenged it)

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b. Const 1.10 (no state shall pass any law impairing obligation of contract- forces creditors to give up claims in exchange for getting a slice of the pie;

c. Const 7.2 (supremacy clause)- nat’l bankruptcy law doesn’t allow state to adopt conflicting legislation- State law coercive discharges are unconstitutional

4. Liquidation under Ch. 7a. General

i. Overview1. Ch. 7 - give me all your assets, and take back exempt ones, we’ll liquidate them and

distribute proceeds.2. Trends- No catastrophe, more consumer debt (In re Carlton (1997, NDNY)3. Corporate filers- no exemptions, no discharge 4. Debtors have no personal liability- as in Weiss5. Creditors can’t opt out 6. Time- takes couple of months, but can take longer if assets7. 2005 requirements- for individual- to file, to be told by clerk, at discharge, means

testing or dismissal

ii. Policy1. Chapter 7 discharge is a privilege not a right (Carlton)2. Good faith (Carlton)

a. Honesty not only implies honesty in pre-petition financial dealings, but honesty with respect to the Bankruptcy Code and the Bankruptcy System.

b. If a debtor refuses to consider Chapter 13 or Chapter 11, that may be legally permissible, but it does not mean that that debtor has been honest with the Bankruptcy Code and the Bankruptcy System

3. Bapca:a. Promote Ch. 13, discourage a Ch 7 filing altogether, by showing this debtor

that there are ways of dealing with debts instead of bankruptcy. Debtor will also receive harsh lecture of consequences of false filings.

b. Processi. Qualification

1. Who Can File- 109ba. Debtor is the "person or municipality concerning which a case...is

commenced." (101-13), “Person”= individual, partnership, or corporation (101-41).

b. Doesn’t have to be insolvent under Ch. 7 or 11i. Because want some biz capable of being saved- but 99% are

insolventii. Substantial abuse Check

c. Resides or has a domicile, a place of business, or property in the United States (109)

d. Not a domestic/foreign insurance company, bank, savings bank or railroad (109b. A person does not include a governmental unit.

e. 109g disallows if w/i 180 days from last casei. but only if prior case dismissed b/c he misbehaved, or if it was

voluntarily dismissed b/c a creditor got relief from the stay. ii. Outside of 180 days, could do dismissal/relief for cause

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2. Credit counseling requirement – for individuals (109h1)a. For Ch. 11 and 13 too

3. Clerka. For consumer debtor, Clerk of bankruptcy ct cannot accept

petition without first providing to the debtor ai. description of Ch. 7, 11, 12 and 13(342b)

ii. description of avail. credit counseling services(342b)iii. info about criminal sanctions that might be imposed on debtors

who commit fraud in connection w/bankruptcy (342b)iv. Consumer debtor= “whose debts are primarily consumer debts”v. Def consumer debtor- 101(8)- The term "consumer debt" means

debt incurred by an individual primarily for a personal, family, or household purpose.

4. Filing fee a. Has to be paid. $299 for a Chapter 7 case, $274 for a Chapter 13 case, and

$1039 for a Chapter 11 caseb. Court has discretion- if income of debtor is below the poverty line, to

allow a no fee filing

5. R’s Dutiesa. Surrender non-exempt assets to trusteeb. Examined by his creditorsc. To provide certain required info about his or her financial

affairs i. If finds add’l property after petition, R required to file statement

w/i 10 days after finds add’l property (Bankr Rule 1007h); if he does not comply he may be denied his right to a discharge.

d. R has to file a schedule or matrix of creditors…this is transmitted to a notification center that sends out a notice

e. Has to file a statement of intention under Section 521i. Must do so w/i 30 days of filing or 30 days after first date set for

341- if does so and follows through (enters into re-affirm agreement w/45 days after 341)- if not, AS automatically expires. If yes, reinstates AS under 362h1B.

ii. States property R claims is exempt- not for corprorate Rs (522)iii. States whether R is going to re-affirm any debts (524c)

1. Reaffirm debt waives right to discharge2. You can reaffirm to C but not to estate3. C must take reaffirmation under 362h1B if R offers to

reaffirm on original contract terms.iv. Individual R may Redeem property (722)- tangible personal

property intended primarily for personal, family or household use, if such property is exempted or has been abandoned, from a lien securing a dischargeable consumer debt by paying amount of secured lien in full

1. Often abandoned by estate (since encumbered by lien and of no value to estate)

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2. R gets money to redeem from postpetition income, selling exemption, from dad – must pay lump sum

3. If C doesn’t want R to redeem, C can fight over valuea. Value is replacement value as filing-506a2b. Result of heavy lobbying by consumer credit

industry.4. R has right to redeem and doesn’t need the bank’s

approval to pay the bank early.

ii. Files petition (301-303)1. “Order for relief” is the day when the bankruptcy was filed.2. Under 301, the filing of the bankruptcy order is the order for relief.3. Except involuntarily

a. Gap between it is filed and the date the ct approves filingb. Later date is considered the “order for relief.”

iii. Automatic stay (362)1. Notice of stay- Debtor may actually call the creditors

2. Virginia Centera. Notification: R files matrix of creditors, transmitted to notification center in

Virginia, notice sent out saying petition has been filed for this debtor- so it puts creditor on notice, Automatic stay has gone into effect- if you try to collect, you may be penalized (342e-g)

b. Creditors can file address where petitions should be sent- if a creditor files notice of address, and designates person- then notice isn’t effective until person receives it appropriate address- one can’t be accused of acting knowingly in violation of stay until it’s received. protects creditor from being held in contempt of the auto stay.

c. 342g- no monetary penalty on creditor if attempts to collect on individual’s claim if creditor hasn’t received notice under 342- but still can’t collect

d.

iv. Bankruptcy Estate created (542)1. Turnover of Property of the Estate- One who is in possession of prop of the estate

must turn it over to the trustee (§542(a))2. All property of debtor no matter where it is and who holds it (541a), but not

postpetition services for Ch 7 (541a6)3. Even exempt property goes into the estate and doesn’t become exempt until it is

claimed so by the debtor…gives the court the chance to peruse it and see if it really is exempt

4. Avoidancea. 549: trustee may avoid transfer of property that takes place post-petition.b. 550- reaching transferee on avoidance

i. 550a- Repo Bank → Immediate Transferee → Mediate Transferee → Mediate transferee. We could go all the way down the line if there are subsequent transfers.

ii. 550b: But one who pays value and doesn’t know that the sale was conducted in violation of the stay is not liable for the return of the

10.27.060.13

car or the value of the car; one who buys at a judicial sale is charged with some level of inquiry.

v. US trustee appoints interim trustee (701)1. US Trustee- AG appoints US trustee to serve in each district for 5 yrs2. As soon as Ch 7 commenced, US trustee appoints interim trustee

a. From list of impartial private trustees that office maintainsb. Must pass special list of criteria established by AG pursuant to 586(d),

disinterested defined in 101(14)i. not a creditor/insider

ii. not an investment banker for any outstanding security of the debtoriii. not w/I 2 yrs, officer of debtor or investment bankiv. adverse interests to creditor because of direct or indirect

relationship v. must remain disinterested, and avoid appearance of impropriety

vi. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior- In re Combined Metals Reduction Co (quoting Meinhard)

vii. Even the appearance of impropriety prevented a former trustee from trading in the stock of a reorganized company. In In re Grodel Manufacturing, Inc (Bankr. D. Conn. 1983),

3. Trustee Historya. Under 1978 Act, judges stripped of responsibilities> US Trustee – effort to

separate judicial and administration functions, get judge out of board room and limited to courtroom

b. Previous trustees and judges worked too closely togetheri. Judges appointed Trustees

ii. Judges presided at meetings of creditors- and although they weren’t supposed to use info from those meetings...

iii. Lead to judges investing personally in success of reorgiv. Lead to unusually close relationship bet bankruptcy judges and

bankruptcy bar esp R laywersv. Judges lost some of their impartiality

4. Duties of Trusteea. Represents interests of unsecured creditors and estate- trustee’s job to

recover as much as it can for Cs and his fee will be based on the value of the distribution it will be able to make to Cs.

b. Marshaling (gathering), liquidating R’s assets, create a fund of cash that is used to satisfy the unsecured C’s claims (for benefit of C)

c. Can operate a debtor’s biz for a limited time in order to liquidate estate in orderly manner- to expand pie, so long as ct’s approval (721), can use in ordinary course in Ch 11- 1107a

d. Can incur admin expenses in operation of biz, new contractsi. Can Use sell, lease estate property outside of ordinary course(363)

1. Rationale: AS in Ch 11 case needs to allow rehabilitation of biz (e.g. sell inventory in which creditor has interest).

2. 3b3b1 says they can use it outside of ordinary course of biz only after notice and a hearing

3. 363(e)- the court should prohibit or condition use sale or lease as is necessary to provide “adequate protection of” such interest- trustee

10.27.060.14

should do it, but if not, ct will order4. 363c2- Special rule for cash because it has tendency to disappear.

a. Evanescent (Emily Dickenson poem, like a hummingbird)b. “May not use sell or lease cash collateral” unless..

i. everyone that has interest in cash consents orii. court consents after notice and hearing

ii. Can sue or be sued on behalf of estate (even former officers)-959iii. Can borrow money (364), can retain attorneys, can abandone

burdensome propertiese. Avoiding powers- fraudulent transfers (548), preferences (547)f. Assume or reject executory contracts or leases (365)g. Also AS remains on secured property if “of consequential value or

benefit to estate” (362h2)i. Personal property that is “of consequential value or benefit to the estate” can get AS

ii. If the court: 1. (1) determines that the property is “of consequential value” to the estate

a. (Ct would have to make a finding that the car is worth more than the amount of the C’s claim and the R’s exemption)

2. (2) orders the debtor to deliver the property (the car) to the trustee3. (3) orders appropriate adequate protection of the secured creditor’s

interest in the property - 362(h)(1)(A)(2)iii. Turned over to the trustee pursuant to § 542(a)

h. At the end of the day, must make distributions to claimants in order established by code and to close estate expeditiously

i. For corporate debtor in Ch 7, power passes from mgmt to trustee

5. But also musta. Account for all property received. § 704(2).b. Examine proofs of claim and object to improper ones. 704(4).c. File reports regarding operation of the business to the court and appropriate

government authorities. § 704(7).d. Investigate and report on financial affairs of the debtor. § 704(4).

6. E.g. Kmart (2004, 7TH Cir, Easterbrook) - Kmart sought permission in 1st day of bankruptcy to pay immediately, and in full, the prepetition claims of all "critical vendors,” said some suppliers may be unwilling to do business with them.

a. Considers 363b1i. Pro: Satisfaction of a pre-petition debt in order to keep "critical"

supplies flowing is a use of property other than in the ordinary course of administering an estate in bankruptcy. -prudent to read, and use, 363(b)(1) to do the least damage possible to priorities established by contract and by other parts of the Bankruptcy Code.

ii. Con: But Capital Factors insists that 363(b)(1) should be limited to the commencement of capital projects, such as building a new plant, rather than payment of old debts -- as paying vendors would be "in the ordinary course" but for the intervening bankruptcy petition. To read 363(b)(1) broadly, Capital Factors observes, would be to allow a judge to rearrange priorities among creditors (which is what a critical-vendors order effectively does), even though the SC has cautioned against such a step. But If the language of statute is too open-ended, that is a problem for the legislature.

iii. Rejects Because….Some supposedly critical vendors will continue to do biz with R because they must. E.g.- long term

10.27.060.15

contracts, and AS prevents these vendors from walking away as long as the R pays for new deliveries. .

1. Doubtless many suppliers fear the prospect of throwing good money after bad. It therefore may be vital to assure them that a debtor will pay for new deliveries on a current basis

b. Crit Vendors test: OK ifi. (1) Vendor will cease doing biz unless pre-petition claims paid;

1. Can’t admit will cease doing biz- because of Sportsfame, so bankruptcy judges will make the debtor develop a better record (show that suppliers won’t ship) w/o smoking gun

ii. (2) Other non-preferred vendors will somehow benefit from this1. 363b1 OK only if the record shows the prospect of benefit

to the other creditors. 2. Prof: show estate will be benefited; and that is done by

showing that if they don’t ship, it will destroy the reorganization.

3.

vi. 341 Meeting of Creditors1. US trustee convenes/presides at 341 meeting - within reasonable time

after order for relief2. Who’s a creditor?

a. 101-10- Entity that has a claim against debtor that arose at time or before order of relief

b. Claimi. "Right to payment, whether or not such right is reduced to

judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured" or (101-5)

1. Matured: Bankruptcy accelerates the maturation of claims- otherwise it wouldn’t be due. Used for involuntary. Unmatured includes accounts receivable not paid yet.

2. Non-bankruptcy/state law will often determine whether the holder has a right to payment and that is the initial question as to whether there is a claim – then you get to the list in 101 – 5.

ii. “Right to equitable remedy for breach of performance if such breach gives rise to payment…whether such right is reduced to judgment

c. "Secured" Creditors - claims are collateralized by an interest in the debtor's property (if personal property, Art. 9 of UCC, if real property, it’s a mortgage governed by state law). Claim is deemed secured only to the extent of the value of the creditor’s collateral (506a)

i. Bifurcation of claims principle- To the extent that the value is less than the secured claim, the creditor holds two claims.

ii. Property acquired after case is not a claim in Ch 11 (552a), e.g. if creditor granted lien in all inventory “now owned and hereafter acquired”, unless it’s offspring of collateral 552b

10.27.060.16

d. Proof of claim must be filed w/I 90 days after 1st date set for Sec 341 meeting (in Ch 7, 12 or 13)

i. Different from 11 (1111a) because in Ch 11 you don’t need to file proofs for claims listed in R’s schedules

ii. Trustee can disallow claims- must object to improper clams under 704(a5)- then not allowed to receive distribution of estate property

iii. Failure to file timely proof is grounds for disallowance-502b9iv. But tardily filed proof can be allowed under 726a1B up till date

trustee begins distribution

e. For admin expense, Must be timely filed request for payment- not proof of claim (503a)

3. TIB Elected (or interim trustee carries over) (702)a. By general unsecured creditors (if at least 20% of $ amt of claims vote)b. In cases where there are few assets, there will be little creditor interest- then

interim trustee who was appointed by US trustee serves

4. Creditors Committee Elected (705)a. Elected by holders of unsecured claims, advisory role, 3-11 unsecured

creditorsb. Play largely advisory role

i. Consult with the trustee about administration of estateii. Submitting to the court any questions

5. Examination of debtor under oath a. By creditors or US trustee- Meeting is attempt to evaluate bankruptcy

petition’s accuracyb. Debtor answers questions about assets- how much worth? Anyone suing

you? Any fraudulent bahevior?c. On behalf of creditors, bankruptcy trustee may challenge exemptionsd. Discussion about debtor’s debt reaffirmation

c. Distribution Prioritiesi. Determine Status of Claims (501-510)- Claims satisfied out of assets that are

both nonexempt and not encumbered by liens

ii. First, Secured Creditors (725)1. Paid from collateral securing their claims or security itself2. Claim is deemed secured only to the extent of the value of the creditor’s collateral

(506a)- excess persona liability owed to bank unsecureda. "Secured" Creditors - claims are collateralized by an interest in the

debtor's property (if personal property, Art. 9 of UCC, if real property, it’s a mortgage governed by state law)

b. Bifurcation of claims principle- To the extent that the value is less than the secured claim, the creditor holds two claims.

3. If secured party’s collateral exceeds his claim (oversecured), any post-petition interests that are allowed generally accrue until the time of distribution in a Ch. 7 case

4. Lien pass through concept

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a. Lien passes through the bankruptcy process intact–even though the debt is discharged- but automatic stay halts lien enforcement, and value of the property on which they have a lien declines while the case is pending

b. The setting apart of the homestead under Bankruptcy Act did not relieve the property from the operation of liens created by contract before the bankruptcy

c. Long v. Bullard (SC, 1886)- bankruptcy does not affect the mortgage or security interest of a secured creditor. Long went bankrupt, debts discharged, Bullard owned mortgage on house and pursued action in state court. Debt could be discharged only if debts could be proved in bankruptcy, and debts secured by mortgage can only be proved for balance remaining due after deducting value of security.

iii. Second, priority claims (order spelled out in 726)1. 507(a) ladder as long as proof is filed under 501 (726a1)2. Domestic support (a1)3. Inadequate Protection (507b)

a. Secured administrative expense. This is not secured claim- it is a secured administrative expense.

b. Because otherwise collateral values turn out to be less than expected, and there is nothing left to cover these claims, and other administrative expenses might cut into it.

c. Rationale: You guys can propose any kind of adequate protection you want, but they’re going to get paid ahead of you if it doesn’t work. So don’t propose some bs. protection, because your fee isn’t t safe.

4. Administrative expenses (507A2)a. By definition, arise post petition, Rationale: Administrative expenses are

paid off top so that people do biz with debtor b. Actual and necessary costs incurred in preserving the estate (503b)

i. E.g. includes operating costs of biz for Ch. 11- services like attorneys fees, rent, reasonable costs incurred by environmental agency to clean up waste, Even a tort case which did not arise out of what we think of for admin expense, SC held it is.

ii. E.g. Expenses of involuntary petition, Ch.11 creditors committeeiii. Must have privity- since must be transaction w/trustee. Claim

must arise with the trustee/debtor in possession or estate and the trans must have benefited the estate in the operation of its post-petition biz.

c. Must be timely filed request for payment- doesn’t file proof of claim (503a)i. So No AS relief is required to file that b/c it arises out of a

transaction that was entered into w/ the DIP or trustee. 362(a)(1) stays action that could have been collected pre-petition, but 362(a)(3) stays any act to obtain property – so this is post-petition.

ii. But judge can allow or disallow under 503(b)(1)(A) (“the actual, necessary costs and expenses of preserving the estate”)

iii. Judge has to determine, if I allow administrative expenses will it disrupt the bankruptcy reorganization? If you’re the judge and someone comes in and says pay my admin expense, slip/fall person has same priority as Martha Stewart contract claim, but if there’s insurance that would cover claim then it would be very good reason for giving relief from stay.

d. Ch 7 take priority over Ch 11 admin10.27.06

0.18

i. When case is converted from Ch. 11 to Ch. 7, administrative expenses of superseding liquidation have priority over administration expenses of aborted Ch. 11 case

e. You will still not be paid until the divvying up of pie unless get AS relief i. Or 331- interim compensation- if you are professional employed

for reorg, you can apply every 120 days, after hearing, get paid.

5. Involuntary gap claimsa. Involuntary gap claims get priority after regular admin expenses- To

encourage biz to keep working with debtor, claims which arise out of transactions with the debtor during the involuntary gap period are entitled to second priority treatment. 502f via 507a3.

b. E,g, attorneys fees, claims arising from transactions entered into by trustee or DIP (Gant sells tshirts to Kmart when it is operating in Ch 11), Torts from operating biz (959)

6. Ordinary course of biz or financial affairs (a3)a. after commencement of case but before appt of trustee and order of relief

7. Prepetition priority claims (a4)a. Unsecured prepetition claims like tax claims, wage claims, and other claims

that the drafters thought deserved special consideration

iv. Third, general vanilla “allowed unsecured claims” 1. Who file proofs of claim pursuant to 501 (726a2)2. No post-petition claims.- 501a says creditors may file proofs of claims. And

101(10) says creditor is one who holds a claim before order for relief.

d. Debts Discharge i. Can be raised at any point in process

ii. Only individuals (flesh and blood debtors) are entitled to a Chapter 7 discharge—not corporate (727a1)

iii. Debts that arose before the order for relief (date of filing)727(b)1. 524a1- discharge automatically voids any judgment against debtor for personal

liability on a debt that is included in discharge2. 524a2- discharge is injunction against continuation of action to collect debt as a

personal liability of debtor

iv. Waiver of Discharge: §727(a)(10): 1. Claims are discharged even if R waived his right before bankrtupcy. 2. Waiver is enforceable only if R waived his right to discharge after commencement of

case, after the order for relief, in writing, and the court approves the waiver.

v. Not admin expenses (727b)1. Estate owes admin expenses, not debtor. 2. Don’t need to be discharged in order for the debtor to get a fresh start.

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vi. Not postpetition obligation (727b)1. Date from date of filing not confirmation (different than Ch 11) 2. If the debtor gets into trouble again she will have to file another bankruptcy petition

to discharge these claims, and if she files within 6 years of the filing of the first petition, she will not be able to discharge them. § 727(a)(8).

vii. Not 523 non-dischargeable debts1. Certain tax claims, child support, alimony, student loans

a. but still can’t go after exempt assets- exempt asstes are exempt even if dischargeable from non-exempt assets

b. Presumptively Non-Dischargeable Debts: Taxes; Debts Not Scheduled; Domestic Support Obligations (new amendments no longer differentiate b/w alimony and property settlements); Fines/Penalties payable to Gov’t; Student Loans (7 year limit eliminated now, unless hardship applies); DWI debts; Debts from prior bankr in which discharge was denied or waived; Sarbanes-Oxley Debts

c. Debts that become non-dischargeable only if someone objects to them and someone complains that are non-dischargeable and the court concludes that they are (there are elements of these obligations that require inquiries): Debts obtained through fraud; D incurs debt on credit, with no intent to pay the credit back.

viii. Not liens1. Exempt property liable if debt secured by lien (mortgage or security interest) or tax

lien (522c2)2. Valid lien will survive in rem and may be enforced against property securing debt,

(but no action is permitted against debtor personally for a deficiency -524a)3. AS applies

ix. Ch. 7 discharge hearing (524, 727)1. Does not extinguish debts- operates as a permanent injunction barring creditors

from taking steps to enforce their claims against the debtor2. Binding- Discharge occurs whether or not creditors agree to it (vs ABC which

requires majority of creditor approval)

x. Grounds for denying a discharge- 727(a)1. Debtor transferred or destroyed his property within a yr before petition with intent to

hinder, delay or defraud a creditor or officer of estate2. Failed to keep records or destroyed them concerning biz transactions and financial

status3. Made false account about a materials issue, submitted a false claim4. Failed to adequately explain any loss of assets5. Refused to obey a valid judicial order or to testify6. Committed any of the above acts in connection with a separate bankruptcy case7. Discharge in a prior bankruptcy case commenced w/I 8 yrs before the date petiiotn

was filed8. Consumer debtor must complete a course in financial mgmt in order to be eligible

for discharge (2005 amendments-727a11)

Allowed to Get A Slice

10.27.060.20

Admin. Expense ☺ Yes. §§ 726; 507(a) No. They don’t need to be in order for the debtor to get a fresh start.

Prepetition Claim ☺ Yes. §§ 726, 502, 501, 101(10)

Yes. § 727(b). Discharge of these claims is the essence of the fresh start.

Postpetition Obligation

No. §§ 502, 501, ☹

101(10)No. § 727(b). If the debtor gets into trouble again she will have to file another bankruptcy petition to discharge these claims, and if she files within 6 years of the filing of the first petition, she will not be able to discharge them. § 727(a)(8).

5. Credit Counseling Requirement (2005)a. Before petition date (109h1)

i. Within 180 days before the petition date, received an individual or group briefing (can be done over phone or Net) that: 109(h)(1)

1. outlined credit counseling opportunitiesa. informed about alternatives to Ch. 7 and bankruptcy in generalb. consequences of bankruptcy -- such as the potentially devastating effect it

can have on their credit ratingc. warned of sanctions for not behaving honestly during the process

2. assisted in budget analysis 3. And you file Certificate of Credit Counseling

ii. Exceptions: 1. Safe harbor for Exigent circumstances: Ct may grant 30 day temporary exemption

from requirement (109(h)(3)(A))a. Can be extended for 15 days for cause 109(h)(3)(B)b. Provided debtor asks for counseling before it was filed but wasn’t able to

get it within five days2. Incapacity, disability, or active military duty, may seek permanent exemption

(109h4)

b. Clerk requirement at filing (342b)

10.27.060.21

i. For consumer debtor, Clerk of bankruptcy ct cannot accept petition without first providing to the debtor a

1. description of Ch. 7, 11, 12 and 13(342b)2. description of avail. credit counseling services(342b)3. info about criminal sanctions that might be imposed on debtors who commit fraud

in connection w/bankruptcy (342b)4. Consumer debtor= “whose debts are primarily consumer debts”5. Def consumer debtor- 101(8)- The term "consumer debt" means debt incurred by an

individual primarily for a personal, family, or household purpose.

c. Discharge requirement (727a11)i. Consumer debtor must complete a course in financial mgmt in order to be eligible for

discharge (2005 amendments-727a11, and in Ch 11 individual through 1141d3)

d. Dismissal vs. Striking Voidi. If dismissed, presumptive bad faith for automatic stay if re-file

1. 362 (c)(3)(C)- Presumptive Bad faith if a previous case under any of chapters 7, 11, and 13 in which the individual was a debtor was dismissed within such 1-year period

a. Stay will automatically expire after 30 days with respect to secured property(362c3A)

b. But debtor can (i) files a motion, (ii) obtains a hearing and ruling by the Court within such thirty-day period and (iii) proves by clear and convincing evidence that the second case was filed in good faith.

ii. Dismissal Rationale: 1. Analogy: Several sections of Code provide that a bankruptcy case should be

dismissed if a debtor does not file required documents (other than credit counseling).a. 707(a)(3) provides that in a Chapter 7 case, "the court may dismiss a case

under this chapter . . . for cause, including . . . failure . . . to file . . . the information required by [Section 521(a)(1)]."

b. Dismissal is the result in nearly all of the cases filed by petitioners who are ineligible under other subsections of Section 109

2. 109 not jurisdictional: until the court determines that a petitioner is ineligible, a case is commenced by the filing of a petition and cannot be a nullity.

3. Procedural pitfalls: Problems w/post-petition stay (and violation of postpetition stay) for petition deemed invalid. Can creditor complete a repossession or foreclosure because of the absence of a stay in void case? Filing fees should be returned to ineligible petitioners? parties who violate the stay during the pendency of the dismissed case will be subject to liability and thus discouraged from taking action in violation of the stay in a case that they think is likely to be annuled.

4. BAPCA to avoid serial filers: Bapca was to address the situation of serial filings made to invoke the protections of the automatic stay in the face of collection actions by creditors with a security interest in real property

a. if declared void, an ineligible petitioner could file a series of bankruptcy petitions and trigger the protections of the automatic stay over and over again, thus avoiding the consequences of serial filings that now result from 362(c)(3).

5. No serious harm. Yes, stay will automatically expire after 30 days (362c3A), but debtor can (i) files a motion, (ii) obtains a hearing and ruling by the Court within 30 days (iii) proves by clear and convincing evidence that the second case was filed in good faith.

10.27.060.22

6. In re Charles Edward Seaman (EDNY, 2006)- Ch. 7 w/o certificate of credit counseling with his petition Dismiss the case or declare void ab initio (wasn’t good at any time)? Dismissal is the Appropriate Outcome.

7. E.g. In re Guillermo Alfonso Sosa (W.D. Texas, 2005)- Didn’t file a Certificate of Credit Counseling, filed Ch 13 on December 6, 2005, "as an emergency measure to stop foreclosure on their homestead." Lien holder had refused to accept payment at the last moment and that was what necessitated the emergency filing of bankruptcy. Didn’t qualify for safe harbor because Sosa’s did not request the counseling before they filed. Judge Monroe denounces this requirement as well as the rest of the amendments;

iii. Striking void- to keep 362 benefits1. In re Rios (Bankr. S.D.N.Y. 2005): Debtor filed a bankruptcy petition but did not

obtain pre-petition credit counseling or seek a temporary or permanent exemption. Debtors may not be eligible for the full panoply of protections provided by 362 if they choose, after rectifying their error in failing to seek credit counseling, to file for bankruptcy protection in the future. Striking the petition, by contrast, would give effect to Congress's objective of "enlarg[ing] debtors' options in the face of financial difficulty, not limit[ing] them." The court concluded that striking the debtor's petition was the appropriate result.

6. Ch. 7 Abuse > 707b Dismissala. Conversion in Ch 7

i. 706- By ch. 7 debtor, provided case hadn’t already been transferred from Ch 11 to 7 earlier, but not to Ch 13 unless debtor consents

b. Pre-amendment- Substantial Abuse/3 approaches (Carlton)i. If would be a substantial abuse because…

1. Grossly unfair advantage over their creditors2. To this Court's conscience, it would be shocking3. Non-needy individuals get relief intended for honest but needy debtors. 4. "head start", as opposed to a traditional "fresh start"

ii. Per Se Rule (8th, 9th Cir) – R’s ability to pay his debts, standing alone, justifies 707(b) dismissal

1. Ability to pay? (Carlton)a. Viability of Ch 11/13: All/part of priority and unsecured debt in a Chapter

13 case under a 1-5 yr plan, or over a reasonable period of time in a Ch 11 case, while properly providing for secured debt

b. Extravagant expenses?c. Income representative of the R's true financial condition?

2. Criticism: Circuit Judge Ralph Winter (Carlton) - a frugal family with income over the designated level but with unusually large medical expenses necessary to a child's life.” But means test is per se test.

iii. Totality of the Circumstances Test (4th Cir) Circs mitigate against the debtor's "Ability to Pay" or constitute aggravating factors to show a debtor's bad faith or dishonesty?

1. Non-exclusive list of factors (Carlton)

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a. sudden illness, calamity, disability, or unemployment; unforeseen or catastrophic events;

b. debtor incurred cash advances and made consumer purchases far in excess of his ability to pay;

c. good faith and candor in filing his schedules and other documents; d. eve of bankruptcy purchases e. debtor enjoys a stable source of future income; f. state remedies with the potential to ease the debtor's financial predicament; g. relief obtainable through private negotiation, and to what degree; h. debtor's expenses can be reduced significantly without depriving him of

adequate food, clothing, shelter, and other necessities; i. debtor has significant retirement funds which could be voluntarily devoted

in whole or in part to the payment of creditors; j. no other choice available to the debtor for working out his financial

problems other than Chapter 7, and whether the debtor has explored or attempted other alternatives.

2. Honest w/System (Carlton)a. Honesty not only implies honesty in pre-petition financial dealings, but

honesty with respect to the Bankruptcy Code and the Bankruptcy System. In this regard, the Bankruptcy System provides an individual consumer debtor with a menu of alternatives (Chapter 7, Chapter 13 and Chapter 11) for obtaining any necessary financial relief. If a debtor refuses to consider Chapter 13 or Chapter 11, that may be legally permissible, but it does not mean that that debtor has been honest with the Bankruptcy Code and the Bankruptcy System

b. E.g. Carlton- “Kornfields are not being honest with the Bankruptcy System, because there are other bankruptcy and non-bankruptcy alternatives which would offer them adequate financial relief, but would require some lifestyle sacrifices which the Kornfields are capable of, but unwilling to make”

iv. Hybrid Approach (6th Cir)- first analyzes the ability of the debtor to repay his creditors out of future earnings and then analyzes any mitigating factors which may then rebut the resulting presumption of substantial abuse

1. E.g. In re Carlton (1997, NDNY) – Hybrid- Kornfield Ch. 7. US Trustee moved that case be dismissed for 707(b) substantial abuse. High monthly income exceeded necessary household expenses, $400K exempt pension. Ability to pay and no mitigating factors, not honest w/system

a. Chapter 11 plan viable over 5 yrsi. Ineligible for Ch 13. But Ch. 11- Has post-petition personal service

income as would be necessary to fund a plan that would be in good faith and fundamentally fair to the Kornfields' creditors. Kornfields, who report no non-exempt assets whatsoever, could simply: (a) allow any active creditors to garnish Dr. Kornfield's wages, which in New York might not exceed 10% of his annual gross income,

b. Budget out of controli. food budget is at least $350.00 more than the Court often sees for

similar families, $4,470.00 per month ($53,640.00 annualized) tuition expense, "perhaps the son, like other children of parents of modest or even not so modest means, could find some way to fund

10.27.060.24

a college education, other than at the expense of his father's creditors.

c. No recent catastrophic event.i. Kornfields have some financial problems because of declining

income and an unwillingness to reduce expenses accordingly d. Exempt assets

i. Kornfield has in excess of $390,000 in retirement funds all or part of which might be able to be utilized, now or in the future, to pay creditors or supplement family income;

c. Substantial Abuse> “Abuse” (707(b) 2005 amendment)i. Rationale

1. Individual debtors should be denied access to Chapter 7, and be channeled into Chapter 13 or 11, if they have the means

2. Gives the court much less discretion and tells court what expenses are reasonable

ii. Creditors can Bring Motion1. Previously only the bankr ct on its own motion, or the U.S. trustee could seek

dismissal 2. Concern that creditors would use the threat of dismissal motions to induce debtors to

reaffirm dischargeable debts3. Now limitation only when income less than median income of state

iii. Trustee- New review duties1. 704b1- trustee has to review all files of debtor- then has to report w/ a statement if

debtor’s case seems to be an abuse

iv. Rule 11- Damages against R’s attorney- 707(b)(4)1. If a trustee moves for dismissal/conversion and the ct finds that the R’s attorney

violated Rule 9011 (Bankruptcy Rule 9011=FRCP 11), the court would be required to award damages against the R's attorney

2. Could include both reimbursement of trustee's expenses and an award of a civil penalty to the trustee.

v. “Mini-Means test”: For Obvious Ch.7-Worthy Cases1. R’s current monthly income * 12

a. Current Monthly income §101-10Ai. “Average monthly income from all sources during the six mo’s

prior to the filing of the bankruptcy petition- even if unemployed during 2 months

ii. Includes most benefits, but not SS payments. iii. Includes amt paid by others (like father) on regular basis – 101(10)

(A)(B)iv. Includes both spouses incomes, unless the spouses are living

“separate and apart,” for a reason other than to manipulate the means test. See § 707(b)(7)(A), (B)

2. Eligible for Ch. 7. automatically only if less than the median income in state - Otherwise, maxi-means test used.

a. State Median Income- 707(b)(6) and (7)

10.27.060.25

i. For R household of 2, 3, or 4 individuals, family of the same number or fewer individuals last reported by the Bureau of Census. (household = anyone living w/you for past yr)

ii. For R household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals last reported by the Bureau of Census plus $525 per month for each individual in excess of 4.”

b. In NYi. 2-Person Household- $47,123

ii. 3-Person Household- $56,617iii. 4-Person Household- $67,855

vi. The Maxi Means Test (less than $100/month in disposable income)1. (Debtor’s monthly income- debtor’s allowable monthly expenses * 60)

a. If $6,000 or less (less than $100 a month in disposable income), Ch 7 OK b. $6,000-$10,000- more or less than 25% of the debtor’s outstanding

unsecured debt?i. If more than 25% (i.e., the debtor is capable paying at least 25% of

its unsecured debt over the life of a 60-month plan), debtor may only file a Chapter 13 petition and the debtor must propose a 60-month repayment plan.

ii. Less than 25%, can file whateverc. If $10,000 or more (more than $166/month in disposable income)

i. Only Ch 13 allowed and must propose a 60-month repayment plan that devotes disposable income to unsecured debts.

2. Allowable expensesa. IRS Guidelines for tax evader’s ability to pay delinquent tax b. National Standards

i. Food, housekeeping supplies, clothingii. 60K/year for 3 person household ($4167 to $5833/month)

1. Food 6222. Housekeeping supplies 1083. Apparel & Services 2044. Personal Care 615. Miscel 1616. Total $1156

iii. Food and clothing may be increased by 5% when “reasonable and necessary.” -707(b)(2)(A)(ii).

c. Local Standardsi. housing, utilities, and transportation

ii. Allowance = amt actually spent on these items or the local standard (varies by location), whichever is less

iii. Housing- Even if 3 person family pays $2500 for rent/utilities in Kings county, allowance would only be $1916 (local std)—manhattan std is $4173

iv. Transportation- must be required to produce income or ensure health/welfare

1. Operating Costs & Public Transportation Costs- for NY= $384 (vs. $298 for northeast), ownership costs $475

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d. Other Necessary Expensesi. Taxes, health care, accounting and legal fees, involuntary wage

deductions, court-ordered payments, and other expenses necessary to produce the debtor’s income

ii. E.g. teachers’ union dues, taxes, legal and accounting fees, and equipment and supplies.

e. Charitable Contributionsi. 1998- Religious Liberty and Charitable Donation Protection Act

amended § 707(b)ii. Qualified religious or charitable entity

d. Shift in Presumptioni. Presumption of abuse if disposable income doesn’t meet mini-means or

maxi-means- 707b2Ai1. Shift from Former § 707(b)- express “presumption in favor of granting the relief

requested by a debtor.”

ii. Rebutting presumption (707b2B)1. Presumption of abuse may only be rebutted by special circumstances- - if the

additional expenses cause debtor's income/expenses changes 2. E.g. serious medical condition, call to active duty in army3. Cf. Not for paying back state taxes that threatened nurse license, esp. when license

could continue under another plana. IN Re Eddie Lee Johns and Debra Johns (2006)- Presumption of abuse-

Here, 60-month disposable income of $ 29K far exceeds $ 10K. Debtors say - Mrs. Johns is a registered nurse and prior to bankruptcy she was in danger of losing her nursing license due to past due state taxes. A judgment creditor also began garnishing her wages immediately prior to the bankruptcy filing. No dice- exceptions like serious medical condition or armed forces- something like that. Also ct notes that Mrs. Johns was allowed to renew her license following the bankruptcy filing.

e. Bad Faith & Totality of Circs (If Passes Means Test)i. 707(b)(3)- for abuse, court shall consider

1. Bad faith; or2. Totality of the circumstances

ii. Bad faith1. Spending significant cash assets on unnecessary luxury items with an

intent to file bankruptcy- “James spent at expense of creditors (James)2. “Honest w/System” terms of Carlton??

3. In re Kevin James (2006, Iowa)- Terminal manager for Jebro chemical products (road construction). $71K mortgage debt, aggregate unsecured debt listed by James was $ 24K (credit cards). He got a $12K bonus, but James did not use any part of it to pay existing debts. New dog kennel for $600, new gun for $235, bowling ball for $200, hunting boots for $180. Also he purchased Christmas gifts for the nine adults

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and six children in his family. He also paid his attorney's charges for bankruptcy representation ($1K).

iii. Totality of Circs1. Pre-BAPCA std’s for totality of circs (substantial abuse) considered

under 707b3 totality of circs, even if passes means test (Pak)2. Test = Ability to pay combined w/aggravating and mitigating factors

a. BUT Pak opinion is going to be very controversial b/c there are many people that believe that once you get past the mini means test - your filing can no longer be challenged.

b. Ability to pay? (Carlton)i. Viability of Ch 11/13: All/part of priority and unsecured debt in a

Chapter 13 case under a 1-5 yr plan, or over a reasonable period of time in a Ch 11 case, while properly providing for secured debt

ii. Extravagant expenses?iii. Income representative of the R's true financial condition?

c. Non-exclusive list of factors (Carlton)i. sudden illness, calamity, disability, or unemployment; unforeseen

or catastrophic events;ii. debtor incurred cash advances and made consumer purchases far

in excess of his ability to pay; iii. good faith and candor in filing his schedules and other documents; iv. eve of bankruptcy purchases v. debtor enjoys a stable source of future income;

vi. state remedies with the potential to ease the debtor's financial predicament;

vii. relief obtainable through private negotiation, and to what degree; viii. debtor's expenses can be reduced significantly without depriving

him of adequate food, clothing, shelter, and other necessities; ix. debtor has significant retirement funds which could be

voluntarily devoted in whole or in part to the payment of creditors; x. no other choice available to the debtor for working out his

financial problems other than Chapter 7, and whether the debtor has explored or attempted other alternatives.

d. E.g. In re John Pak (2006, N.D. Ca.)- Unemployed for most of 6 mo.- so "current monthly income" OK, not subject to the "means test." But Debtor is now employed, earning slightly over $ 100,000 a year. Ability to pay debts through Ch. 13 plan . Debtor's "projected disposable income" should take into account any post-filing change in circumstances. Would be able pay only 19% of debt w/disposable income, but while 19% is a relatively small percentage payment, $ 34K is a relatively large amount. Also some of the Debtor's claimed expenses are excessive.

7. Ch. 11- Business Reorganizationsa. Generally

i. Overview

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1. Judicially supervised workouta. Allows debtor to borrow new funds and even subordinate existing debtb. A lot of what goes on in Ch. 11 case- although statutorily authoirzed is not

mandated (e.g. negotiation).

2. Cs will approve or receive at least as much as Ch 7a. 1129a7, reorg plan won’t be confirmed unless all debtor’s creditors accept

the plan or will receive not less than they would under a Ch 7.b. In order to determine the hypothetical distribution in a liquidation, the court

will have to consider the various subordination provisions

3. Auto stay is esp. importanta. Stopping the mad chase is key to allow debtor to breath and reorganizeb. Enables debtor to continue to do biz free of harassment by creditors, while

it trims fat, shuts down unprofitable operations and rejects or renegotiates burdensome contracts

4. Long Timea. Avg over 2 yrsb. But majority of cases doen’t result in reorg plans-after lingering a while

convert to CH 7 or dismissedc. While cases linger, administrative expenses accumulate, asset values

erode, and creditors’ recoveries are diminished

ii. Policy1. Asset moving to highest value

a. for the benefit of the entire creditor bodyb. Underlies allowance for individual filing Ch 11- Allowing such a debtor to

proceed under Chapter 11 serves the congressional purpose of deriving as much value as possible from the debtor's estate. (Toibb)

2. Society benefits when co’s worka. “Whole is more than scrap parts”- jobs, economy

3. But not safe harbor- breathing pd or conversiona. Viability of a debtor is an issue at various stages of Ch 11 b. Whether the debtor should be permitted to incur post-petition indebtedness,

whether it should be permitted to assume executory contracts, and whether it should be allowed to spend cash collateral and consume other property of the estate in the operation of the business, conversion or dismissal

c. Notion underlying dismissal/conversion to Ch. 7 provisions is that “Bankruptcy must not become a safe harbor inside which debtors are forever hidden from debts they have incurred and creditors who deserve payment… ‘Bankruptcy only provides a breathing period for a debtor to attempt to reorganize” (In re Jackson)

d. Toibb- has to have hope, purpose in refilling- chance of success

b. Qualificationi. Who can file- 109d

1. Doesn’t have to be insolvent

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a. Because want some biz capable of being saved- but 99% of petitioners are insolvent

2. Doesn’t have to be a biz (Toibb)a. Plain language, and Congress knew how to restrict recourse to the avenues

of bankruptcy relief- it did not place Ch 11 reorg beyond the reach of a nonbiz individual debtor

3. Resides or has a domicile, a place of business, or property in the United States4. Must be able to be a Ch 7 debtor - i.e. Not a domestic/foreign insurance company,

bank, savings bank- But can be a railroad. 5. Not a stockbroker or commodity broker (investor’s accounts would be dissipated)6. 109g can make it abusive if w/i 180 days from last case

a. but only if prior case dismissed b/c he misbehaved, or if it was voluntarily dismissed b/c a creditor got relief from the stay.

b. Outside of 180 days, could do dismissal/relief for cause

ii. Individual under Ch. 111. Credit counseling- requirement under 109h12. Creditor approval required- Operates as check- So creditors are not prejudiced

against one method or the other. Or not getting less. 1129a73. Ch. 11 v. Ch. 13 and Ch. 7

a. Vs. Ch. 7- you’d to it if undervalue of assetsi. Toibb’s 24% stock interest in the company might grow one day

b. Vs. Ch. 13- needs regular income, debt ceiling in Chapter 13

4. Toibb v. Radloff (1991)- Was trying to hold onto the stock and pay creditors 25K (at least what creditors would get in Ch.7, borrowed $ from parents)- and to sweeten deal, he says that if the stock pays dividends, he will share those dividends with the creditors.

a. Argument: stautue’s legislative history and structure make clear that Ch. 11 was intended for biz debtors alone?

i. But we look first to statutory language and then to legis history if statutory language unclear. Here clear. Anyway Congress knew how to restrict recourse to the avenues of bankruptcy relief- it did not place Ch 11 reorg beyond the reach of a nonbiz individual debtor

b. Argument- Congress' purpose for Ch. 11 preserve jobs and protect investors?i. But no single purpose in enacting Ch 11. Ch 11 also embodies the general Code policy of

maximizing the value of the bankruptcy estate- a consumer debtor's estate can be worth more if reorganized under Chapter 11 than if liquidated under Chapter 7. Allowing such a debtor to proceed under Chapter 11 serves the congressional purpose of deriving as much value as possible from the debtor's estate.

c. Argument- Ch. 11 would allow debtor to shield both disposable income and nonexempt personal property. i. But under 1129a7, reorg plan won’t be confirmed unless all debtor’s creditors accept the plan or

will receive not less than they would under a Ch 7.d. Argument- flood bankruptcy cts w/Ch 11 filings?

i. No, Ch. 11 have more expense and complexity, and cts have great discretion to dismiss Ch 11 case with untenable plan of reorg

e. Argument- Debtors will be forced into Ch 11 under 303a involuntary reorg by creditors?i. a result contrary to Congress wish for no involuntary reorg. They were afraid debtors would

sabotage reorg plan. But then court courld covert Ch 11 to Ch 7.

c. Processi. Stay (Sec 362)

ii. Bankruptcy estate (541)1. Subs- includes stock in subs but not assets of subs2. For individual R, includes postpetition earnings (1115a2) and postpetition-

acquired property (1115a1)a. 1115a2 takes away need for Herbermann holding, which found postpetition

included under 541a7.

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b. In re Harvey Herbermann, M.D. (Bankr. W.D. Texas 1990)- 4yrs prior to Ch 11, earned about $600,000 a year. 541a6? No- Services exception just applies to offspring. 541(a)(6) -“proceeds are property of the estate...unless they are earnings from services performed by an individual debtor after commencement of the case.” So only refers to services generated through contract. But comes under 541a7.

3. includes property subject to mortgage—even if property is in possession of secured creditor, so debtor may be able to get it back to use in continued operation of biz

4. If finds add’l property after petition, R required to file statement w/i 10 days after finds add’l property (Bankr Rule 1007h); if he does not comply he may be denied his right to a discharge.

iii. Ct sets deadline date for filing of proofs of claims or interest1. Vs Ch 7 – 90 days after 1st date set for 341 meeting2. Any claim or interest listed in schedules filed by debtor is deemed filed

automatically unless claim is scheduled as contingent or disputed (not in Ch 7)3. Failure to file timely proof is grounds for disallowance-502b94. Who’s a creditor?

a. 101-10- Entity that has a claim against debtor that arose at time or before order of relief

b. Claimi. "Right to payment, whether or not such right is reduced to

judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured" or (101-5)

1. Matured: Bankruptcy accelerates the maturation of claims- otherwise it wouldn’t be due. Used for involuntary. Unmatured includes accounts receivable not paid yet.

2. Non-bankruptcy/state law will often determine whether the holder has a right to payment and that is the initial question as to whether there is a claim – then you get to the list in 101 – 5.

ii. “Right to equitable remedy for breach of performance if such breach gives rise to payment…whether such right is reduced to judgment

c. "Secured" Creditors - claims are collateralized by an interest in the debtor's property (if personal property, Art. 9 of UCC, if real property, it’s a mortgage governed by state law). Claim is deemed secured only to the extent of the value of the creditor’s collateral (506a)

i. Bifurcation of claims principle- To the extent that the value is less than the secured claim, the creditor holds two claims.

ii. Property acquired after case is not a claim in Ch 11 (552a), e.g. if creditor granted lien in all inventory “now owned and hereafter acquired”, unless it’s offspring of collateral 552b

d. For admin expense, Must be timely filed request for payment- not proof of claim (503a)

5. Trustee can disallow claims- must object to improper clams under 1106a1 (DIP-1107a) then not allowed to participate in reorg plan and get proceeds

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iv. Organizational meeting1. Not required by code- occurs more often in big cases, held in hotels2. Representative of debtor (DIP), lawyers who don’t represent anyone but will show

up at meetings looking for clients, make pitches in hotel rooms3. Managers will speak and say they can pay 100 cents on the dollar plus interest; then

the reps of the debtor will ask if creditors have questions4. US trustee will also be in attendance & will form creditors committee

v. Section 341 meeting 1. debtors will be present

vi. Committee of Unsecured creditors appointed by US trustee1. Supposed to be 7 largest unsecured creditors willing to serve (1102)

a. Hedge funds buy out small claims- by acquiring debt. b. Membership not limited to “individuals”- other groups holding large

unsecured claims may be appointed (unions)

2. Active role: a. Consult with the DIP or trustee re: administration of the caseb. Investigate debtorc. Participate in the formulation of a plan- often negotiate termsd. Often gives the business advice (interested in compensation packages) b/c

this will largely determine what payout they will ultimately gete. Retain professionals (accountants, appraisers, auditors, lawyers) -- fees are

paid by the estate as expenses of administrationf. Reorg plan won’t be confirmed unless all Cs accept the plan or will receive

not less than they would under a Ch 7- 1129a7

vii. Usu DIP, not trustee1. Debtor becomes debtor in possession (1115b)

a. Remains in possession of estateb. Has same rights and fid duties as trustees- has the same avoiding powers,

look at evaluating claims for objections, Can use biz in ordinary course in Ch 11 (1107) and non-ordinary course (363)

c. Has to file list of Cs, Has to state what his assets ared. But not required to investigate its own financial affairs

2. Rationale:a. Know something about bizb. Won’t delay filing for fear of being turned out of officec. Creditors would rather deal with devil they know than new trustee

3. Exception for Appt of Trusteea. Trustee like Ch. 7, except presumption that trustee will continue to operate

biz and negotiates reorg planb. If trustee, debtor loses exclusive right to file plan even in 120 day pd

c. Reasonsi. By motion of interested party or US trustee

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ii. For fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management,"

iii. Or if “in the interests of creditors” (1104a),iv. Where management's time divided bet debtor and other business

In re Concord Coal Corp., v. Inept mgmt- had a history of failing in an industry in which others

were succeeding nicely, In re La Sherene, vi. Where management failed to supervise bookkeeping operations

with the result that sales proceeds were misused In re Anchorage Boat Sales, Inc.

vii. Where management had allegedly caused the debtor to engage in fraudulent transfers on the eve of filing, In re Russel

d. Bankruptcy judge determines whether there are grounds for appointing a trustee, US trustee would convene meeting of creditors to make appt

viii. Biz Reorg Plan developed1. Exclusive Period: Debtor has exclusive right to file reorg plan w/i 120

days, but extensions often granted. a. After exclusive pd expires, any party in interest may file a plan.

2. Biz sold or shut downa. Major sales/purchase of assets, and plan to provide for treatment of claims b. Somehow we must preserve the core (jelly center not pie) of the debtor so

that the entity emerges from bankruptcy as an operating entity.

3. Treatment of existing claimsa. Plan must specify treatment for claims (1123a1) , specify claims/interests

not impaired (1123a2) and those impaired (1123a3)b. Plan may impair any class of claims (1123b) or provide for rejection of any

executory contract or unexpired lease (1123b), or modify rights of holders of secured claims

c. E.g. Might provide for stretching out the maturity of claims or for a reduction in interest charges, might provide for exchange of debt for stock

d. Exception for home mortgagesi. 1123(b)(5) – Ch 11 plan may not modify the rights of a holder of a

claim secured only by an interest in the R’s principal residence. But to the extent that they can scale down and stretch out other forms of indebtedness, debtors improve their ability to service mortgage debt.

4. Disclosurea. Plan and disclosure statement filed with courtb. Before votes can be solicited, creditors must receive a court-approved

disclosure statement that provides adequate info about the plan

5. Votea. Must be accepted by majority of creditors and interest holders (called

consensual plan)b. But even if not accepted by required majorities, can be confirmed by ct if

satisfies certain eco std’s 1129b

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6. Court confirmationa. Then court must confirm- holds hearing/listens to objectionsb. 1129- Court shall confirm only if

i. a2- Proponent complies with code provisions. Only people who play nicely in sandbox- will deny discharge if debtors don’t do their obligation.

ii. a3- “good faith” iii. a4- payment for services or expenses related to plan (attorneys

fees, for example) must be approved by ct as reasonableiv. a7- creditors accepted plan or will receive at least as much in

reorganization as it would in liquidation1. In order to determine the hypothetical distribution in a

liquidation, the court will have to consider the various subordination provisions

v. a9- holders of admin expense claims must be paid in full on effective date of plan (unless a part. holder agrees to less favorable treatment)

ix. Discharge1. Can be raised at any point- on motion, to prevent discharge

2. Confirmation discharges debtor on all claims that arose prior to confirmation (unless otherwise provided for plan) (1141d1A)

a. 524a2- discharge is injunction against continuation of action to collect debt as a personal liability of debtor

b. If debt is not dealt w/ in the plan, it is dischargedc. Even if no proof of claim filed, or holder of claim has not accepted plan, it

is discharged - 1141(d)(1)(A) i. So…if claims known to claim holders but not to the debtor and

debtor doesn’t deal w/ the claims in his plan and the holder doesn’t file proof of claim until the case is over…that is discharged!

ii. Except- If neither debtor nor creditor knows about the existence of the claim and not dealt with in the plan…these are not discharged!!!!

d. Except if debtor bad faith- If debtor knows of crediotr’s claim but fails to schedule it and creditor does not receive notice of bankruptcy proceedings (Broomall Industries)

i. If R knows there is a class of claims out there but doesn’t schedule those claims and confirms a plan that doesn’t deal w/ those claims and post petition those claims arise, those claims are not discharged

3. Debts that arose before confirmation, not date of filing (different than Ch 7)

4. Waiver of Discharge: §727(a)(10): a. Claims are discharged even if R waived his right before bankrtupcy.

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b. Waiver is enforceable only if R waived his right to discharge after commencement of case, after the order for relief, in writing, and the court approves the waiver.

5. Not for corps which liquidate in Ch 11 (1141d3)a. If plan provides for liquidation of all property of estate, debtor does not

engage in biz after consummation of plan

6. Not if R would be denied a discharge under 727a in Ch. 7 (1141d3)a. Debtor transferred or destroyed his property within a yr before petition with

intent to hinder, delay or defraud a creditor or officer of estateb. Failed to keep records or destroyed them concerning biz transactions and

financial statusc. Made false account about a materials issue, submitted a false claimd. Failed to adequately explain any loss of assetse. Refused to obey a valid judicial order or to testifyf. Committed any of the above acts in connection with a separate bankruptcy

caseg. Discharge in a prior bankruptcy case commenced w/I 8 yrs before the date

petiiotn was filedh. Consumer debtor must complete a course in financial mgmt in order to be

eligible for discharge (2005 amendments-727a11)

7. Not for 523 Nondischargeable Exceptions (1142d2)a. Certain tax claims, child support, alimony, student loansb. Presumptively Non-Dischargeable Debts: Taxes; Debts Not Scheduled; Domestic Support

Obligations (new amendments no longer differentiate b/w alimony and property settlements); Fines/Penalties payable to Gov’t; Student Loans (7 year limit eliminated now, unless hardship applies); DWI debts; Debts from prior bankr in which discharge was denied or waived; Sarbanes-Oxley Debts

c. Debts that become non-dischargeable only if someone objects to them and someone complains that are non-dischargeable and the court concludes that they are (there are elements of these obligations that require inquiries): Debts obtained through fraud; D incurs debt on credit, with no intent to pay the credit back.

8. Not for officers and directorsa. of a debtor from liabilities incurred personally while associated with debtor

(In re Inforex)

9. Not liensa. Exempt property liable if debt secured by lien (mortgage or security

interest) or tax lien (522c2)b. Valid lien will survive in rem and may be enforced against property

securing debt (but no action is permitted against debtor personally for a deficiency-524a), and AS applies

8. Conversion/Dismissal (Ch 11)a. Conversion/Dismissal in Ch 11

i. 1112a -R can do it1. as long as debtor is DIP (and not been replaced by a trustee)

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2. and not involuntary case3. and case wasn’t converted to a case in this chapter other than on debtor’s request

ii. Upon motion of any party in interest if movant establishes cause 1112b1. Ct can’t dismiss on own motion2. 2005 amendment-1112(b)(1) provides that the court must convert or dismiss the

case (previous version said “may”) if the movant establishes cause3. Unless ct has already determined that case should stay in Ch. 11 w/a trustee (1104a3)

iii. Should convert/dismiss- whichever in best interests of creditors and estate

iv. Does not define ''cause,” but 2005 amendments give mandatories 1. 2005 Amendments

a. Rationale: Notion underlying these provisions is that “Bankruptcy must not become a safe harbor inside which debtors are forever hidden from debts they have incurred and creditors who deserve payment.-- ‘Bankruptcy only provides a breathing period for a debtor to attempt to reorganize”

b. Substantial or Continuing Loss and the Absence of Likelihood of Rehabilitation; § 1112(b)(4)(A)

c. Gross Mismanagement of the Estate; § 1112(b)(4)(B)d. Failure to Maintain Certain Insurance; § 1112(b)(4)(C)e. Unauthorized Use of Cash Collateral; § 1112(b)(4)(D)f. Failure to Follow a Court Order; § 1112(b)(4)(E)g. Failure to Satisfy any Filing or Reporting Requirement; § 1112(b)(4)(F)h. Failure to Attend Meeting of Creditors or 2004 Exam; § 1112(b)(4)(G)i. Failure to Pay Taxes; § 1112(b)(4)(I)j. E.g. Rs operating in Ch 11 at a loss, that cannot generate enough cash flow

to meet even post-petition operating expenses, that can’t arrest declining asset values. that cannot obtain necessary financing

k. E.g. Eastern Airlines - Filed Ch. 11, mgmt tried to reorganize over 1.5 yrs. Initially creditor allowed debtor to use planes, and use huge reserve of cash to keep plane afloat. Plan went from promising 100 cents/dollar to 50 cents/dollar. Bankruptcy judge converted from Ch. 11 to Ch. 7. Not ideal scenario.

2. Cause also= bad faith (Victory, HBA East)a. "Good faith" must therefore be viewed as an implicit prerequisite to the

filing or continuation of a proceeding under Chapter 11 of the Code. – But in victory ended up granting relief from automatic stay, did not dismiss(Victory)

b. Date of Filing, No money to funds successful reorgi. In re HBA East, Inc (Bankr. E.D.N.Y. 1988)- filed on the eve of a

trial from joint venturer to get AS to avoid appearing in that lawsuit, and were able to shift the forum to this Court, a forum they believed might be more favorable to their plight. Reorganization presupposes the existence of monies to pay the expenses of operating a business- here no assets. As a general rule where, as here, the timing of the filing of a Chapter 11 petition is such that there can be no doubt that the primary, if not sole,

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purpose of the filing was a litigation tactic, the petition may be dismissed as not being filed in good faith.

ii. Reorganization presupposes the existence of monies to pay the expenses of operating a business and assets to generate the funds for implementation of a reorganization plan. Here, $5,366.01....The Debtors' only assets of any possible significance are the boxing promotional contracts. Not only are these assets highly speculative, but control are vigorously disputed by Movants.....The existence of disputes or contingencies relating to a debtor's only possible significant assets constitutes a basis for dismissal of a Chapter 11 petition as not being filed in good faith....There is virtually no money to run the business, no cognizable assets to fund a plan of reorganization and no realistic probability of a successful reorganization.

iii.

c. Totality of circs-i. Test = Ability to pay combined w/aggravating and mitigating

factors1. BUT Pak opinion is going to be very controversial b/c

there are many people that believe that once you get past the mini means test - your filing can no longer be challenged.

ii. E.g. In re John Pak (2006, N.D. Ca.)- Unemployed for most of 6 mo.- so "current monthly income" OK, not subject to the "means test." But Debtor is now employed, earning slightly over $ 100,000 a year. Ability to pay debts through Ch. 13 plan . Debtor's "projected disposable income" should take into account any post-filing change in circumstances. Would be able pay only 19% of debt w/disposable income, but while 19% is a relatively small percentage payment, $ 34K is a relatively large amount. Also some of the Debtor's claimed expenses are excessive.

3. Some discretion for cta. If “unusual circumstances” that conversion/dismissal is not in best

interests of creditors and estate, ct doesn’t have to, but must specifically identify circs

9. Ch 13a. General

i. One of key goals of 2005 amendements is to channel debtors from CH. 7>Ch 13 and Ch 11 where they will have to use future income for claims

ii. Congress felt that 13 should be utilized in only relatively small cases w/ reasonable debt loads- so debt limitations

iii. Over utilized- too many people take on Ch 13 plans that fail1. In re Carlton (1997, NDNY)- Fewer and fewer Chapter 13 debtors appear to have

filed to pay back their creditors as much as possible, and more and more appear to have filed because it is the only way that they can pay the arrearages on their home mortgages, cram down personal property liens, such as on their vehicles, stretch out student loan repayments, or obtain a superdischarge

2. Also to postpone foreclosure of their home mortgage

b. Qualificationsi. For “individual with regular income” (109e)- flesh and blood

1. (except stockbroker or commodity broker)ii. Debts not exceeding limits in 109e

1. unsecured debt less than $308K

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2. secured debts less than $923K iii. 109h1- Consumer debtor must be able to show credit counseling

c. Estate (542)- Propery of estate also includes property acquired after petition filed but before closure of case (1306)

d. Stayi. Halts actions against co-debtors as well as debtors (such as father who guaranteed loan)- in

contrast to Ch 11 (1301a)ii. “From any individual that is liable on such debt with the debtor, or that secured such debt,

unless (1) such individual became liable on or secured such debt in the ordinary course of such individual's business”.

e. Standing Ch 13 trustee i. Debtor remains in possession but “standing Ch. 13” trustee supervises

ii. Standing trustee- who serves in all Chapter 13 cases in a district1. investigating the financial affairs of the debtor2. examining claims3. preparing reports4. advising on the formulation of a plan5. making sure that the debtor makes payments on a timely basis6. receiving plan payments7. disbursing payments to creditors

iii. Sometimes district doesn’t have standing Ch 13, so ct appoints a trustee

f. 341 Meeting- held 20-40 days from petition

g. Ch 13 plan (1321)i. Often developed before petition is filed with no participation by creditors

ii. Normally 3-yr plan, but ct can approve up to 5 yrsiii. May modify rights of holders of secured claims (1322b)

1. Except Mortgage debt - 1322(b)(2)- Ch. 13 plan may not scale down, stretch out, or otherwise modify home mortgage debt.

a. BUT 1322b3 and b5, allow mortgagors, including home mortgagors, to cure defaults in mortgage payments, undo any acceleration or due on default clauses, and reinstate the original payment terms and schedule.

b. In 1994, Congress also liberalized the Ch 13 by carving out an exception for certain kinds of mortgages (Congress failed to carve out a similar exception in Ch 11)

iv. Debtor devotes portion of future income to payment of claim1. 19% of debt OK- In re John Pak (2006, N.D. Ca.)- Unemployed for most of 6 mo.-

so "current monthly income" OK, not subject to the "means test." But Debtor is now employed, earning slightly over $ 100,000 a year. Would be able pay only 19% of debt w/disposable income, but while 19% is a relatively small percentage payment, $ 34K is a relatively large amount. Also some of the Debtor's claimed expenses are excessive.

v. Need not be approved by majority of creditors to be confirmed by ct

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1. Creditors do not even get to vote – but can object, and ct won’t confirm plan unless either (1325b1):

a. All projected disposable income over 3 yrs will be applied to make payments to unsecured creditors under the plan

b. Value of property to be distributed on claim is not less than amt of claim

h. Broad discharge (1328)i. Can be relieved of more debt than in Ch. 11 and 7, provided that it performs per plan

ii. Trustee can opposing discharge of the debtor in appropriate cases

10. Involuntary Bankruptcy (303)a. General

i. To protect unsecured Cs from loss if co completely fails, Stop race to assets. (Secured C’s seek dismissal)

ii. Avoid R hiding/wasting assets, making preference transfers, unwanted workout or ABCiii. To accelarate the maturation of loans- E.g. lump sum loan. 101-5 says it’s a claim. C could

receive a claim well in advance of maturation- inside of bankruptcy. iv. D gets screwed if is owed money—will go to estatev. Less than 1% of cases.

b. Qualifications (303b)i. Burden

1. R can make pf showing that creditors not qualified in answer, then burden shifts to creditors

2. Permits the ct to award costs if an involuntary petition is dismissed other than on consent of the parties-303(i)

ii. § 303(b)(2)- If <12 creditors,1 or more1. if hold $12,300 in aggregate2. Employees not counted in 12 (303b2)

a. Any creditor who is an "employee or insider" is not to be included in counting 12 because employer or insider has strong incentive not liquidate—they’ll lose their job. But they can join petition.

3. Recipients of preferential/voidable 544 transfers not counted in 12a. 303(b)(2), we exclude from the census, in addition to insiders and

employees, “any transferee of a transfer that is voidable under sections 544...547...548...549...” which includes recipients of preferential transfers.

iii. § 303(b)(1) - If debtor has >12 creditors, 3 or more1. If such claims aggregate at least $12,300 in unsecured debt

a. If one of 3 has no unsecured debt (but has some claim), and two others combined had more than $12.3, then the 3 will still suffice

b. Can be unmatured claim- under 101-5, but not generally paying debts analysis. Unmatured includes accounts receivable not paid yet.

c. Can waive securityi. All Media: a party bringing an involuntary petition could waive its

security by failing to mention the security in its petition. – Not followed. Key Mechanical right.

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ii. Key Mechanical v BDC (2003, 2nd Cir)- You must actually waive security before the petition was dismissed. Could waive as much of their collateral as they needed to reach jurisdictional amt

iii. Prof: Wherever you have fully secured creditors who is willing to waive security, you’re looking at law school exam- secured creditors don’t join in involuntary peititons

d. Satisfaction of claim post-petition doesn’t deprive ct of jurixi. Claim of Atlas Office Supply is in the amount of $439 for office

supplies sold to Artlite. Artlite paid Atlas its debt after the petition was filed – but doesn’t affect Atlas' status as a petitioning creditor. (All Media)

ii. All Media rationale: No late payment after petition filed. Plain language “not being paid as they become due”. Second, if it takes the drastic measure of the filing of an involuntary petition to motivate the debtor to pay its debts, relief is appropriate so that a plan can be formulated to insure that the debtor does not fall back into the pattern. Third, would deprive other creditors, who remain unpaid, of the protective provisions afforded creditors under the Code. Evidence relating to post-petition payment of debts would seem to have more relevance on the issue of whether a trustee should be appointed or whether the alleged debtor's improved performance in the payment of its debts is sufficient to allow it to remain as a DIP

2. Good faith joiners allowed to reach 3a. 3 must include good faith counting to file

i. Basin Electric (8th Cir. 1985) -C, knowing well that the R has 12 or more creditors, files an involuntary petition anyway, assuming that, should the R challenge the filing, two more petitioning creditors can be recruited to join in the petition and cure the defect- “3 creditor requirement is not a meaningless formality that a creditor may ignore until after filing the involuntary petition, single creditor may not file an involuntary petition knowing the debtor has twelve or more creditors." Basin Electric Power Cooperative v. Midwest Processing Co.,

b. Afterwards, Rule 1003b and 303c allows joiners for problemsi. Should not be dismissed for lack of a third creditor if there is

joining creditor who meets the statutory requirements. ii. 303c of the Code-“with the same effect” as if such joining creditor

were a petitioning creditor under original filingiii. E.g. If R repaying one of the petitioning Cs results in the three-

creditor requirement not being met

iv. Not subject of bona fide dispute as to liability or amount (303b1)1. No partially disputed claims allowed- “as to amount”

a. If claim is only partly disputed, it still disqualifies holder from filing petition

2. No offset claims allowed, but Counterclaim OKa. Claim is not subject to a bf dispute simply because the debtor has an

unrelated counterclaim , but where a claim for offset arises out of the same

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transaction and is directly related to the creditor's underlying claim, and, if valid, could serve as a complete defense to that claim, a bona fide dispute exists (BDC)

3. Bad Faith oka. If C files, knowing claim subject to a bona fide dispute is also making a bad

faith filing, but claim can continue In re Norriss Brothers Lumber Co.

4. Court will do abbreviated SJ hearing- Std= Legal or Factual Dispute (Key Mechanical)

i. Burden- Petitioning C must make pf that no bona fide dispute exists. Then burden shifts. Ct shouldn’t resolve dispute, just determine if it exists.

b. Most circuits: GIMF that bears upon R's liability, No code def for disputei. 7th Cir definition adopted in Key.- objective basis for either a

factual or a legal dispute as to the validity of [the] debt." c. Matter of law rationale: Existence of no bona fide is prereq for SMJ, not

element of case- so can be dealt w/as matter of law. Otherwise, creditors could, on the basis of relatively untested claims, haul a solvent debtor with whom they have legitimate disputes into bankruptcy court

d. Matter of fact rationale: Ruling can even be about factual issue based on evidence in record, and no hearing or de novo necessary.

e. E.g. BB business case- Chase mistakenly gave them $7mm dollars in the account. They fled country. Chase filed involuntary insolvency petition, so as to be able to avoid preference transfers. BB said bf dispute. Judge Friendly says “In order to qualify as a disputed claim, you need to pass SJ std.” Here, no good defenses asserted in substantial form.”

f. E.g. Key Mechanical v BDC (2003, 2nd Cir)- Key- construction co, heating at Chambers Hotel, dispute w/BDC owner of hotel. Key claimed that it had substantially performed and was owed $232K. BDC claimed that Key's work was defective and incomplete and insisted that Key complete performance. BDC ultimately hired another contractor, Dyn-aire, to complete the work. Sue BDC for involuntary Ch. 7 along w/other construction co.

i. Key-record contained several letters from BDC to Key, beginning in January 2001, notifying Key that it was in default and demanding performance. The letters also warned Key that if it failed to complete the work, BDC would hire another contractor and back-charge Key for any shortfall-potential direct and indirect damages" caused by Key's breach

ii. DWF- contract required that DWF first fully pursue a lien action against the hotel before it could seek to recover directly from BDC:

iii. Mesta- tiling subcontactor, Mesta apparently couldn’t come after BDC if they had already paid the general contractor. Contracts w/ subcontracts usually say once owner pays gen they are no longer liable to sub. Mesta says they don’t believe they paid the gen. Clearly disputed!

v. Not contingent as to liability (303b1)1. Contingent = if debtor will be called upon to pay only upon the occurrence of an

extrinsic event which will trigger the liabilitya. if such triggering event or occurrence was one reasonably contemplated

by the debtor and creditor at the time the original relationship of the parties was created.

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b. Although can’t bring involuntary, if by the day of distribution contingency has been paid, then contingency payor will have an allowable claim, 502e.

2. E.g. liability of a guarantor of a promissory note executed by a third party, both the creditor and guarantor knew there would be liability only if the principle maker defaulted.

a. Under TX law, triggering event is primary obligor’s default. But that is not the law in NY. In NY it is when the guarantor pays.

3. E.g. Tort claim for negligence, tort claim is contingent as to liability until a final judgment is entered fixing the rights of the parties.

a. Prof disagrees: No transaction, tort never contemplated by recipient. So disputed claim.

4. Cf. Doesn’t mean unliquidated, disputed or unmatured (Matured by definition not due yet)

5. Cf.- sale dispute, subsequent events might lead to a dispute (e.g. defective merchandise)- but this not contingent

vi. Not Ch. 131. D can be put into Ch 7 and Ch 11 involuntarily, but not Ch 13; b/c of the involuntary

servitude problem.

c. Generally not paying debts as such debts become due (303h1)i. Not generally paying debts (All Media)

1. Generally a. "generally" not defined in order to avoid mechanical test and to give the

bankruptcy ct leeway b. Doesn’t mean usu. or a majority of the timec. Not a very clear or bright line rule.

2. Amt of debt not being paid and # of claims not being paida. Regularly missing a significant number of payments to creditors or

regularly missing payments which are significant in amount in relation to the size of the debtor's operation.

b. Not unmatured claims- Unmatured includes accounts receivable not paid yet.

3. E.g. All Media- Bankr. Ct. S.D. Texas 1980)- Creditors bring involuntary case against All Media (parent co) and its sub Artlite Broadcasting. generally paying their debts as they came due? 35 of 47 "new" accounts payable in the amount of $52K which were not paid as they became due. 9 "old" accounts payable in the amount of $18K which were not paid as they became due- no good.

ii. Equity insolvency test- ignore1. Classic grounds under 303h for bringing an involuntary petition. Old grounds- this

was eliminated. Chose to focus on generally paying debts. 2. Focuses upon the payment of debts rather than acts of insolvency. 3. Act of bankruptcy + "balance sheet insolvency”

a. Balance sheet insolvency- if R's liabilities exceed assetsb. "Acts of Bankruptcy"

i. concealed property with intent to defraud creditors or make a fraudulent transfer

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ii. made a preferential transfer;iii. while insolvent, permitted certain kinds of liens to attach;iv. made an ABCv. while insolvent, had a receiver take over its property;

vi. admitted in writing its inability to pay its debts and its willingness to be adjudged a bankrupt.

iii. Workouts don’t matter once petition filed1. Claim of Atlas Office Supply is in the amount of $439 for office supplies sold to

Artlite. Artlite paid Atlas its debt after the petition was filed – but doesn’t affect Atlas' status as a petitioning creditor. (All Media)

2. All Media rationale: No late payment after petition filed. Plain language “not being paid as they become due”. Second, if it takes the drastic measure of the filing of an involuntary petition to motivate the debtor to pay its debts, relief is appropriate so that a plan can be formulated to insure that the debtor does not fall back into the pattern. Third, would deprive other creditors, who remain unpaid, of the protective provisions afforded creditors under the Code. Evidence relating to post-petition payment of debts would seem to have more relevance on the issue of whether a trustee should be appointed or whether the alleged debtor's improved performance in the payment of its debts is sufficient to allow it to remain as a DIP

d. Exceptionsi. Takeover- Within 120 days before the date of the filing of the petition, a custodian, other

than a trustee, took over for the purpose of enforcing a lien against such property

ii. Farmers, nonprofits exempt from involuntary filings (303a)1. Farmers- because it’s cyclical, don’t want farmers to get hit in lean yrs2. Nonprofits- Congress likes them

iii. Discretion of Ct1. Discretion of § 305(b) to abstain from hearing a case when "the interests of creditors

and the debtor would be better served by dismissal,"

iv. Overzealous Creditors1. Under 305b, some cts dismiss involuntary cases commenced by a few obstructionist

creditors who refused to join in an out-of-court workout, especially where a majority of nonpetitoning creditors oppose bankruptcy.

e. Processi. C files petition (303b)

1. "Involuntary gap”a. Pd bet filing of the petition and the entry of the order for relief.b. Order for relief is not entered until the debtor either fails to object to the

petition or is adjudged to be a fit debtor c. R remains in possession, continues to operate biz-303fd. Involuntary gap claims get priority after regular admin expenses- To

encourage biz to keep working with debtor, claims which arise out of transactions with the debtor during the involuntary gap period are entitled to second priority treatment. 502f via 507a3.

2. If there is danger of loss to estate in Ch7, interim trustee might be appointed 303(g)

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ii. R decides whether to contest w/i 20 days (303d)1. Bankr Rule 1011(b)- R has 20 days in which to file defenses and objections t

2. If R does not contest the petition, on 21st day the court enters the order for relief.

3. If R files an answer under 303(d), assert grounds for dismissinga. Only debtor can challenge involuntary petition

i. But Stockholder may intervene and deny the allegations of an involuntary petition filed against the corporation when the officers decline to do so.

b. D can make pf showing that creditors not qualified, then burden shifts to Cc. D can say Behavior does not warrant petition

iii. Ct holds a hearing 1. To determine the merits of the petition under § 303(h) or the merits of the petitioners

under 303(b). 2. Motions to dismiss for SJ can be used, full dress trial not necessary

iv. Decision1. If debtor fails to "timely controverted." allegations contained in the petition, the court

enters an order for relief. (303h)2. Once order for relief gets going, case unfolds in the same way that a voluntary case

unfolds w/all of the creditors claims (not just petitioning Creditors)3. Involuntary gap claims get priority after regular admin expenses- To encourage

biz to keep working with debtor, claims which arise out of transactions with the debtor during the involuntary gap period are entitled to second priority treatment. 502f via 507a3.

11. Automatic Stay Basicsa. Rationale

i. Bankruptcy cases take time- To avoid piecemeal dismantling of debtorii. To give debtor a breathing spell- permits R to attempt a repayment or reorganization plan

iii. Generally- Considerations:1. Considerable overlap in prohibitions2. Difference bet debtor and estate3. Prevents prepetition claims from pursuing postpetition assets

b. Duration of stayi. Continues in effect until case closed, dismissed, or a discharge is granted or denied. 362(c)(2)

ii. AS against property of the estate continues in effect until the property ceases being property of the estate- 362(c)(1)

1. E.g. property was bought out of the estate.

c. 362(a) – once petition filed, injunction against:i. Debtor

1. Commencement or continuation of any action against the debtor that was or could have been commenced prior to the filing (a1)

2. To recover a claim against the debtor that arose before the commencement of the case (a1)

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3. All efforts to collect from the debtor a debt that arose prior to the commencement of the case §362(a)(6).

4. All efforts to enforce a lien on property of the debtor to the extent the lien secures a prepetition claim. § 362(a)(5)

ii. Estate/Both1. Enforcing a judgment obtained prior to the commencement of the case against

either the debtor or against property of the estate § 362(a)(2). 2. Any act to obtain property of the estate. § 362(a)(3). 3. All efforts to obtain or enforce a lien on property of the estate. § 362(a)(4).

d. But no stay for secured claims of individual (two-footed) (362h)i. If individual has personal property (like a car) securing claim, the stay is “terminated”

automatically unless 30 days… 1. R files timely statement of intention with respect to personal property under 521a2,

e.g. surrender, claiming exemption, redeem property under 722, reaffirm debt under 524c

a. Statement of intention must be filed w/i 30 days of filing peititon or within 30 days after first date set for 341 meeting of creditors.

b. Reaffirm-524- reaffirming debt would waive right to discharge personal liability. Often abandoned by estate (since encumbered by lien and of no value to estate). You can reaffirm to C but not to estate

c. Redeem-R gets money to redeem from postpetition income, selling exemption

2. AND must follow through on intentions. a. Reaffirm- Must actually enter into reaffirmation agreement/redeem no later

than 45 days after the 341 meeting i. Bank can’t force take the car by refusing to agree to the

affirmation- 362(h)(1)(B) provides that the stay is not terminated if the debtor stated her intention to reaffirm the debt on the original contract terms and the creditor refused to agree to the reaffirmation.

b. Redeem- Often abandoned by estate (since encumbered by lien and of no value to estate)

i. R gets money to redeem from postpetition income, selling exemption, from dad

ii. If C doesn’t want R to redeem, C can fight over value1. Value is replacement value as filing-506a22. Result of heavy lobbying by consumer credit industry.3. Must pay lump sum

iii. R has right to redeem and doesn’t need the bank’s approval to pay the bank early.

3. Reinstates stay against crediors-362h1B

e. Also AS remains if “of consequential value or benefit to estate” (362h2)i. Personal property that is “of consequential value or benefit to the estate” can get ASii. If the court:

1. (1) determines that the property is “of consequential value” to the estate

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a. (Ct would have to make a finding that the car is worth more than the amount of the C’s claim and the R’s exemption)

2. (2) orders the debtor to deliver the property (the car) to the trustee3. (3) orders appropriate adequate protection of the secured creditor’s interest in the

property - 362(h)(1)(A)(2)iii. Turned over to the trustee pursuant to § 542(a)

f. 363 – Use, sale or lease of propertyi. Rationale: AS in Ch 11 case needs to allow rehabilitation of biz (e.g. sell inventory in which

creditor has interest). ii. 3b3b1 says they can use it outside of ordinary course of biz only after notice and a hearing

iii. 363(e)- the court should prohibit or condition use sale or lease as is necessary to provide “adequate protection of” such interest

iv. 363c2- Special rule for cash because it has tendency to disappear. 1. Evanescent (Emily Dickenson poem, like a hummingbird)2. “May not use sell or lease cash collateral” unless..

a. everyone that has interest in cash consents orb. court consents after notice and hearing

g. Notificationi. Notice of stay- Debtor may actually call the creditors

ii. Virginia Center1. Notification: Debtor files matrix of creditors, transmitted to notification center in

Virginia, notice sent out saying petition has been filed for this debtor- so it puts creditor on notice, Automatic stay has gone into effect- if you try to collect, you may be penalized (342e-g)

2. Creditors can file address where petitions should be sent- if a creditor files notice of address, and designates person- then notice isn’t effective until person receives it appropriate address- one can’t be accused of acting knowingly in violation of stay until it’s received. protects creditor from being held in contempt of the auto stay.

3. 342g- no monetary penalty on creditor if attempts to collect on individual’s claim if creditor hasn’t received notice under 342- but still can’t collect

h. Help for C’si. Presumptive Bad faith for re-filers

1. if a previous case under any of chapters 7, 11, and 13 in which the individual was a R was dismissed within such 1-year period (362c3C)

a. Stay will automatically expire after 30 days (362c3A)b. But debtor can (i) files a motion, (ii) obtains a hearing and ruling by the

Court within such thirty-day period and (iii) proves by clear and convincing evidence that the second case was filed in good faith.

ii. SOL extended1. 108(c) provides that if SOL had not expired before the date of the bankruptcy

petition, the limitations period does not expire until the later of: (a) the end of the period fixed by non-bankruptcy law; or (b) 30 days after the termination or expiration of the automatic stay.

12. Broad Scope of Staya. Stay has broad scope

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i. Collier’s- " should apply to almost any type of formal or informal action against the debtor or property of the estate."

b. Includes attempts to discover Ri. Per se Rule-Floyd Weed

1. Floyd Weed v. Fleet Tiremart and Mansfield Co. (Iowa)- P Floyd Weed commenced a products liability suit. Then D Mansfield Tire & Rubber Co. filed a Ch 11, lawsuit stayed? Action against Mansfield should be stayed, but action against D2- no problem. D may have products liability insurance- so suit would not affect the assets in the bankrupt's estate, but terms of the statute are quite clear. Also any discovery concerning the existence of a policy of products liability insurance may be conducted by leave of the Bankruptcy Court.

ii. Interfere w/Re-org-Penn-Dixie1. Penn-Dixie Std: Ct said depended on whether the proceeding ""is not connected

with, or will not interfere with, the pending bankruptcy case, so as to not violate the purpose and policy of the automatic stay.'' This Court will not allow Ps to chip away piecemeal at the R's automatic stay protection.

a. Penn-Dixie Industries, Inc. (Bankr. S.D.N.Y. 1980): Moved for relief from the stay to let discovery go forward in antitrust class action against a steel company which later filed Ch 11. Ps requested that the Rs respond to interrogatories asking for names of customers who purchased steel during the period when the alleged violations occurred. Here no good.

b. Would necessitate energy- a deviation from Debtor's duties and responsibilities in this reorg (not to mention the costs of compliance). That consideration cannot be shrugged off as de minimis. Interference by creditors in the administration of the estate, no matter how small, through the continuance of a preliminary skirmish in a suit outside the Bankruptcy Court is prohibited.

2. Even as Non-Partya. In re Johns-Manville, Inc (S.D.N.Y. 1984): Examination of a debtor even as

a non-party witness should be permitted only if it would not interfere with pending bankruptcy proceedings- going against earlier ruling that stay did not bar discovery of a debtor as a non-party witness. Action against insurance.

c. Includes appellate actionsi. Association of St. Croix Condominium Owners v. St. Croix Hotel, (3d Cir. 1982): 362 should

be read to stay all appeals in proceedings that were originally brought against the debtor, regardless of whether the debtor is the appellant or appellee.

d. Includes attempts to Perfect security interests i. Under 362a4- any act to perfect a lien

ii. Perfecting interest1. Gives the secured creditor a priority interest over other Cs that claim an interest in

that property; and also priority over the rights of the bankruptcy trustee. a. An unperfected mortgage or security interest may be avoided by the

bankruptcy trustee.

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2. Security interest = interest in personal property or fixtures which secures a payment or performance of an obligation. UCC 1-201(37)

a. UCC 9-102(73)- security agreements create security interestsb. UCC 9-102(a)(12) "Collateral" means property subject to a security interest.

3. Unperfected security interest is subordinate to the rights of "lien creditor." UCC 9-317(a)(2).

a. TIB = functional equivalent of a lien creditor. UCC § 9-102(a)(52), BC 544b. Lien creditor = C that acquires a lien on property by levy. 9-102(a)(52)c. The law hates secret liens

4. Perfecting = Attachment + Something Elsea. Security interest “attaches” to the collateral when

i. (1) there is an “authenticated” security agreement that describes the collateral, or the collateral is in the possession of the secured party pursuant to the agreement

ii. (2) value has been giveniii. (3) the debtor has rights in the collateral - i.e. the R owns

whatever he is giving C rights to- important b/c it is not uncommon for borrowers to give security interests in stuff they don’t own! (e.g. an interest in current inventory; but that might not really be owned inventory).). UCC § 9-203.

1. Lien floats and attaches to the inventory when you acquire rights in the inventory

b. Something elsei. Filing a UCC financing statement that describes the collateral in

the appropriate government office (Sec of State or county clerk) UCC 9-310(a)

ii. Creditor taking possession of the collateral (UCC § 9-313).

iii. Exception: Allowing perfection under stay for PMSI1. For purchase money security interests, if a secured party files before or within 20

days after R receives delivery of the collateral, the security interest takes priority over the rights of a buyer or lien creditor who purchased or levied on the collateral between the time the security interest attached and the time the financing statement was filed. 362(b)(3); UCC 9-317(e). 

e. Includes “any act” under 362a6 - like C’s refusal to do bizi. Wilson could have just said nothing about reason

ii. Sportsfame of Ohio v. Wilson Sporting Goods (Bankr Ct N.D. Ohio, 1984)- P runs sports retailer- D (Wilson) refused to resume shipments unless P brought its account current (it owed $18K), even though P offered to pay cash. Ct found C desired to coerce debtor’s repayment of its prepetition indebtedness and that this act, was in violation of a6. Injunction requiring Wilson to fill post-petition orders OK under 105a (“necessary or appropriate” to carry out Title 11). Controversial ruling

1. P. has no adequate remedy at law- loss of profits. And injunction would promote success of reorg. given a showing of sig injury to debtor’s biz, court could presume that it would render the reorg difficult or impossible.

2. Irreparable injury- loss of profits, possible failure of reorg.

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3. Balancing of equities- D has made no showing that it would suffer any harm by being required to accept cash for selling goods to P and turning a profit

iii. Cf. Kmart (2004, 7TH Cir, Easterbrook) - Kmart sought permission in 1st day of bankruptcy to pay immediately, and in full, the prepetition claims of all "critical vendors,” said some suppliers may be unwilling to do business with them.

1. Considers 363b1a. Pro: Satisfaction of a pre-petition debt in order to keep "critical" supplies

flowing is a use of property other than in the ordinary course of administering an estate in bankruptcy. -prudent to read, and use, 363(b)(1) to do the least damage possible to priorities established by contract and by other parts of the Bankruptcy Code.

b. Con: But Capital Factors insists that 363(b)(1) should be limited to the commencement of capital projects, such as building a new plant, rather than payment of old debts -- as paying vendors would be "in the ordinary course" but for the intervening bankruptcy petition. To read 363(b)(1) broadly, Capital Factors observes, would be to allow a judge to rearrange priorities among creditors (which is what a critical-vendors order effectively does), even though the SC has cautioned against such a step. But If the language of statute is too open-ended, that is a problem for the legislature.

c. Rejects Because….Some supposedly critical vendors will continue to do biz with R because they must. E.g.- long term contracts, and AS prevents these vendors from walking away as long as the R pays for new deliveries. .

i. Doubtless many suppliers fear the prospect of throwing good money after bad. It therefore may be vital to assure them that a debtor will pay for new deliveries on a current basis

2. Crit Vendors test: OK ifa. (1) Vendor will cease doing biz unless pre-petition claims paid;

i. Can’t admit will cease doing biz- because of Sportsfame, so bankruptcy judges will make the debtor develop a better record (show that suppliers won’t ship) w/o smoking gun

b. (2) Other non-preferred vendors will somehow benefit from thisi. 363b1 OK only if the record shows the prospect of benefit to the

other creditors. ii. Prof: show estate will be benefited; and that is done by showing

that if they don’t ship, it will destroy the reorganization.

f. Includes Property in possession of 3rd party (Property of estate)i. 541a- Estate includes all legal or equitable interests of debtor in property as of the

commencement of the case, including “wherever located and by whomever held”1. 541a3- Includes property recoverable by means of the avoidance of a lien, a

preferential transfer, a fraudulent conveyance, or an improper setoff

ii. Includes secured Property seized by a C prior to filing1. Rationale: Reorganization effort would have small chance of success if property

essential to running the business were excluded from the estate.2. United States v. Whiting Pools, Inc. (SC, 1983)- Whiting was in the swimming biz,

owed $92,000 in back taxes, IRS obtained a tax lien on, and then seized, Whiting's equipment, vehicles, inventory, and office supplies. Ch 11 by Whiting. Bankruptcy ct found that the IRS was bound by the automatic stay and ordered it to turn the

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seized property over to the debtor . Upheld by SC, but under § 363(e), remains entitled to adequate protection .

3. 550- reaching transferee on avoidancea. 550a- Repo Bank → Immediate Transferee → Mediate Transferee →

Mediate transferee. We could go all the way down the line if there are subsequent transfers.

b. 550b: But one who pays value and doesn’t know that the sale was conducted in violation of the stay is not liable for the return of the car or the value of the car; one who buys at a judicial sale is charged with some level of inquiry.

iii. But doesn’t effect shares of a corp in Ch111. In re Calamity Jane's Inc., (Bankr. D.N.J. 1982)- automatic stay did not prohibit

transfer of shares in a debtor corporation because the stock was not property of the debtor- property of the individual stockholders

a. However, where a creditor appears to be using it’s power over stock in the debtor to control the debtor, in order to enhance its recovery as a creditor, rather than as a shareholder, courts have found that the creditor’s action violates 362(a)(3).

g. Includes setoffi. Code treats setoff as though secured interest

1. Setoff - right of setoff (also called "offset") allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding "the absurdity of making A pay B when B owes A."

a. E.g. when bank zeroes down client’s account, and applies it to partial satisfaction of debt owed

2. 553a - whatever right of setoff otherwise exists is preserved in bankruptcy (with certain exceptions)

3. 506a- an allowed claim of a C that is subject to setoff under 553 is a secured claim to the extent of the amount subject to setoff, and is an unsecured calim to the extent that the value of such crditor’s interest is less than the amt of such allowed claim

a. In the end when the pie is served, the bank should get two slices - right of setoff which will cancel the amount they are supposed to pay back to the debtor and the other slice they will get will be their general unsecured creditor claim in line w/ the others

ii. Not required to turn over setoff to estate- 542(b)1. Requires R’s debtors to pay to trustee any "debt that is property of the estate and that

is matured, payable on demand, or payable on order ... except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor."

iii. But setoff temporarily barred during stay1. 362a7 includes setoffs in AS - "the setoff of any debt owing to the debtor that arose

before the commencement of the [bankruptcy case] against any claim against the debtor."

a. Postponing the right of setoff is not the same as extinguishing it

iv. Administrative Freeze OK

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1. Creditor, in order to protect its setoff rights, can temporarily withhold payment of a debt that it owes D - -not a setoff within the meaning of 362(a)(7).

a. Although can’t do actual setoff during the AS, and relief from AS should be requested immediately

b. Distinguish Freeze from Setoff (Scalia says 3 prong test)i. Creditor has intent to effectuate right of setoff

ii. Creditor has taken action to accomplish setoff (zeroing down the account and moving money somewhere else)

iii. Setoff is recorded; making an entry on its books (records that 60K of 100K debt is paid). The bank would not do this for a freeze.

2. E.g. Citizens Bank of Md v. Strumpf (SC, 1995, Scalia)- R had checking account with Bank and loan, R was in default on loan, R filed Ch 13, bank withheld remaining balance in acct through an "administrative hold.” Petitioner refused to pay its debt, not permanently and absolutely, but only while it sought relief from stay under 362(d).

a. 362a7 Doesn’t Apply- It would be an odd construction of 362a7 that required a creditor with a right of setoff to do immediately that which 542(b) specifically excuses it from doing as a general matter: pay a claim to which a defense of setoff applies. What if debtor starts writing checks on acct? Then security interest is eroding- setoff right would be useless

b. 362a3/a6 Doesn’t Apply- Requires bank to take dominion over property- maybe if money belonged to the depositor and held by the bank. But-- bank deposit just entails a promise to pay, from the bank to the depositor, and petitioner's temporary refusal to pay was neither a taking of possession of respondent's property nor an exercising of control over it, but merely a refusal to perform its promise.

13. Can Include Actions Against Non-Debtors (Insurers, Ch 13, Indispensable Pty)a. AS bars actions against insurers

i. “Insurance falls within the scope of the debtor’s property.” (Mansville)ii. Concerns about equitable distribution, participation

1. Johns-Manville Corp. v. Asbestos Litigation Group (S.D.N.Y. 1984): Ct concluded that direct actions by asbestos victims against Manville's insurers should be stayed because: (1) the outcome of the suits could affect litigation pending between Manville and its insurers; (2) Manville would therefore be required to participate vigorously in the direct actions; (3) resolution of all asbestos claims against Manville in one forum was preferable- otherwise future claimants would have nothing – asbestos trust would be depleted.

b. AS bars actions against Ch 13 Co-debtorsi. In contrast to Ch 11, specifically allows for the stay of an action against a co-debtor

ii. 1301(a): AS for action against co-debtor, C can’t pursue from any individual that is liable on such debt with the debtor, or that secured such debt, unless (1) such individual became liable on or secured such debt in the ordinary course of such individual's business.

c. AS bars against Co-D if indispensable party under FRCP 19 or 105 injunctioni. Fact specific, depends on liability. Brought by Co-D’s to get an AS against their own P’s.

ii. FRCP 19 Std- indispensable party (Manville)1. (1) can relief be afforded the P without the presence of the other party?

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2. (2) can the case be decided on its merits w/o prejudicing the rights of the other party (the R)?

3. Joint tortfeasors not indispensable

iii. 105 Std Prelim Injunction1. Requirements

a. irreparable injury to the bankruptcy estate if the injunction does not issue

b. Strong likelihood of success on the merits; and c. No harm or minimal harm to the other party or parties (Ps)

i. E.g. Avail of parallel discovery for P. Johns-Manville Corp. v. Asbestos Litigation Group-Prejudice to the Herrmans, if any, is sharply diminished by the parallel Bankruptcy Rule 2004 which allows discovery w/i bankruptcy process.

ii. Cf. The asbestos victims will certainly suffer by the total frustration of their opportunity for a day in court. (GAF-Mansville)

2. Narrow Scope of 105a. Sec 105 does not have a life of its own and this extension may only be

accomplished within the proper boundaries of Sec 362- if designed to protect the debtor's interests (“necessary or appropriate to carry out the provisions of this title.”)

b. Collier: Section 105 is not without limits. It does not permit the court to ignore, supersede, suspend or even misconstrue the statute itself or the rules.

iv. E.g. Indispensable parties1. Some courts stay against all co-d’s until further order of the ct- but in those cases

facts showed indispensability of Manville. If Manville supplied the major portion of asbestos products in a particular location it could be held to be unfair to proceed in Manville's absence.

v. E.g. Guarantors1. Notes guaranteed by non-debtor, where assets would otherwise go to estate =

irreparable harma. E.g. In re Otero Mills, Inc- creditor was stayed from continuing an action

against a non-debtor party. R had executed notes guaranteed by its non-debtor president. Irreparable harm if foreclosure on pres’s property- property which the president planned to sell with the intention that the proceeds be contributed to the debtor for the payment of corporate debts. The court agreed and extended the stay to encompass the debtor's president.

b. Cf. In re Old Orchard Investment Co- court took great pains to distinguish between actions against partners and actions against guarantors or sureties of the debtor. Actions against 3rd party guarantors do not deplete a debtor's asset pool and have no effect on the ability of a debtor to reorganize.

vi. E.g. Key Employees1. Prevented from carrying out their reorg=irreparable harm

a. “if these co-defendants were key employees of the debtor, and it showed that they are prevented from carrying out their reorganization duties of plan formulation because of participation in the litigation, then there’s a case” (in GAF Mansville)

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2. Res judicata, claims for contributiona. E.g. Wickes v. Groebner (Bankr. C.D. Cal. -1982), the court temporarily

enjoined various class actions against present and former officers of the debtor because believed that a judgment might have some res judicata effect adverse to the company, that the R could be exposed to claims for contribution and indemnification, and that the depositions of the officers might be used against the debtor. - Wickes may be constrained to participate in the Class Actions in order to attempt to minimize the risks it otherwise runs.

3. Collateral Estoppel against R, reorg inteference, effect on R’s property, no harm

a. E.g. Johns-Manville Corp. v. Asbestos Litigation Group (Manville III)- Class action against the directors of Manville stayed because ""its true object [was] the debtor itself.'' - frustrate Manville's efforts to achieve financial rehabilitation.

i. Deposition could be used against co.- collaterally estoppel and privilege waiver issues

ii. Don’t want to distract debtor with discovery. And unless Manville participated in suit, wouldn’t have oppty to interview witnesses.

iii. Serious consequences for the debtors' estate- Manville's By-Laws require it to indemnify its officers and directors so long as the conduct at issue was intended to benefit the company.

b. P Hermans alleged that Manville's public disclosures misstated its potential litigation costs in violation of the federal securities laws. In all but formal detail, the Herrman litigation is against the debtor within the meaning of Section 362-- alleged that Manville, not the individual defendants, benefitted from alleged misstatements causing the company's stock to sell at inflated prices. Under 105, P’s shown no prejducie. E.g. Avail of parallel discovery for P. Prejudice to the Herrmans, if any, is sharply diminished by the parallel Bankruptcy Rule 2004 which allows discovery w/i bankruptcy process.

vii. E.g. General Partners1. Harm to Estate v….

a. 723 requires a partnership trustee in a Ch 7 liquidation case to seek recovery of any deficiency of partnership assets vis-a-vis partnership liabilities by pursuing the assets of general partners

b. E.g. Elemar Associates v. Goldsmith (Bankr. S.D.N.Y. 1977). - C holding a judgment against a debtor-partnership sought to enforce it against a general partner of the debtor, Ct said no. Adverse impact on the partnership's other creditors and frustrate the debtor's efforts in Chapter XI, could hold up debtor’s use of those assets to deal w/other creditors. The source of funds upon which a debtor could draw to give life to its plan must be preserved. - Policy considerations of allowing the partner to continue to pay into the partnership

2. Harm to Psa. Cf- In re Aboussie Bros. Construction (E.D. Mo. 1981- Refusal to enjoin a

creditor of the debtor-partnership from pursuing a state court action against the individual partners. Doesn’t matter if impair the individual partners'

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ability to contribute fresh funds to the reorganization effort. DC reasoned, ""Adverse effect upon the Debtor, alone, however, is not sufficient justification for the exercise of jurisdiction over the property of the partners.''

viii. Cf. GAF Corp Johns-Manville (Bankr Ct SDNY 1983)1. Mansville world's largest supplier of asbestos. 15,550 plaintiffs. Co-Ds who are not

bankrupt ask Ct to use equitable powers under 105 to broaden the automatic stay to include them- indispensable nature of Manville in asbestos litigation

2. Co-D’s hypothesize a suspension of the enormous litigation nationwide which would facilitate the creation of: a superfund or pool to which they, the insurance industry and Manville would contribute.

3. Co-D’s claimed injuries: multiplicity of actions resulting in an increased risk of inconsistent verdicts and a great increase in litigation costs to the co-defendants, issues of comparative negligence, apportionment among joint tortfeasors, and primary and secondary liability with respect to sellers of asbestos products and suppliers of raw asbestos itself, ability to obtain discovery and production of documents from Manville has been severely impaired by Manville's filing.

4. Test under 105a. No harm to Manville is key- That Manville is basically indifferent to the

Co-d’s requested relief is suggestive of lack of irreparable harm to estate. Failure to extend the stay herein would not adversely or detrimentally influence or pressure Manville through the co-defendants- not so interwoven, doesn’t interfere w/attempts to reorganize.

b. Harm to other parties. The asbestos victims will certainly suffer by the total frustration of their opportunity for a day in court. Some of them are dying and testimony must be perpetuated.

ix. Cf. Floyd Weed v. Fleet Tiremart and Mansfield Co. (Iowa)1. Plaintiff Floyd Weed commenced a products liability suit. Then D Mansfield Tire &

Rubber Co. filed a Ch 11, lawsuit stayed? Action against Mansfield should be stayed, but action against D2- no problem. D may have products liability insurance- so suit would not affect the assets in the bankrupt's estate, but terms of the statute are quite clear. Also any discovery concerning the existence of a policy of products liability insurance may be conducted by leave of the Bankruptcy Court.

14. Exceptions to staya. Criminal prosecutions, even if enforcing bad check collection (362b1)

b. Commercial Rentals i. AS does not apply to a lessor's efforts to retake nonresidential real property after the

expiration of the stated term of a lease, even if lease expires after commencement of petition 362b10

1. Leased residential real property ceases to be property of the estate when the stated term of the lease expires.

2. Cf. not if just defaulted on a few months rentii. But residential landlords did get 362b22: if Lessor gets a judgment of possession pre-

petition, then it can continue to evict the R

c. 2005 Amendments for support- 362b2i. for the establishment of paternity

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ii. for the establishment or modification of a support obligationiii. concerning child custody or visitationiv. for the dissolution of a marriagev. regarding domestic violence

vi. 522c1 –exemptions- says that even property that is exempt is subject to domestic support claims, no AS

vii. 523a5 – tells us that claims based on domestic support obligations are non dischargeable…viii. 507a1 – claims based on domestic support obligations enjoy a first priority

d. Actions Brought in Bankruptcy Courti. Action to liquidate a claim does not violate AS if commenced in the

bankruptcy court where the debtor's bankruptcy case is pending -- In re Atreus Enterprises, Ltd.

1. 28 USC 157c1 – For Ch. 11, bankruptcy judge may hear a proceeding that is not a core proceeding but that is related to a case

2. Rationale: Stay is temporary umbrella for the purpose of concentrating on the financial, rehabilitative and distributive procedures applicable in the bankruptcy court where the debtor's case is pending. The automatic stay was never intended to bar the bankruptcy court from exercising its statutory mandate to determine and allow claims and interests

e. Actions to Perfect PMSI Within the UCC Grace Pd i. For purchase money security interests, if a secured party files before or within 20 days after R

receives delivery of the collateral, the security interest takes priority over the rights of a buyer or lien creditor who purchased or levied on the collateral between the time the security interest attached and the time the financing statement was filed. 362(b)(3); UCC 9-317(e). 

f. Post-petition acts/Admin expensesi. 18 USC 959b- DIP or trustee is required to manage property in accordance with state laws

(but courts have construed this to mean in accordance with fed law too)

ii. 959a- Trustees, receivers, DIP or managers of any property, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property (No AS)

1. Rationale: Fidelity Mortgage Investors: court says that the purpose of this section is to enable a DIP to continue his biz subsequent to the filing of a Ch. 11 petition.

2. Limitations:a. Savings clause in 959a, to allow for “equity power” of ct “necessary to the

ends of justice”b. Allows getting a judgment, but not enforcing a judgment.

3. Except if no privity (3P injured post-petition)a. Pettibone Corp. v. Ramirez - R had been sued for injuries sustained by the

operator of a forklift that had been designed and manufactured prepetition. The claimant was hired by his employer and had sustained his injury postpetition. Ct said that the Robbins case was different b/c there was some basis for finding pre-bankruptcy harm to the P; here since P was not in privity not the same situation. Because the injury could not be tied to some type of prebankruptcy privity, contact, impact, or hidden harm, the claimant did not hold a claim for bankruptcy purpose. Claim was a post-petition claim not subject to the automatic stay.

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b. You can also argue it’s an admin expense, although it must be from transaction w/trustee (so privity required). Claim must arise with the estate and the trans must have benefited the estate in the operation of its post-petition biz.

i. if claimant can show that there was a duty to warn then we could concoct an argument that there was an admin expense; b/c of the good faith in the product

c. Some courts wink at problem and treat it as preptition anyway.

4. also except if preptition lien for after-acquired propertya. 552a- property acquired after commencement of case is not subject to any

lien resulting from a security agreement entered into by debtor before commencement of case

i. e.g. if creditor granted lien in all inventory “now owned and hereafter acquired”, then new inventory acquired after Ch. 11 filed not part of that security

b. Offspring of collateral exception (552b)- if security interest created by a pre-petition security agreement includes collateral that debtor acquired prior to bankruptcy and also includes the proceeds, profits, product or offspring of such collateral, then security interest is deemed valid and operative as to any such proceeds that estate obtains postpetitoin

i. e.g. if Creditor sold $500K worth of inventory post-petitioin, and bank had a security interest in prepetition inventory and its proceeds, would have an interest in purchase

iii. To enforce:1. Could Use Admin expense to get priority distribution

a. By definition, arise post petitionb. Actual and necessary costs incurred in preserving the estate (503b)

i. Usu. includes operating costs of biz for Ch. 11- services like attorneys fees, rent, reasonable costs incurred by environmental agency to clean up waste, Even a tort case which did not arise out of what we think of for admin expense, SC held it is.

ii. Expenses of involuntary petition, Ch.11 creditors committeec. Rationale: Administrative expenses are paid off top so that people do biz

with debtor d. Must be timely filed request for payment- doesn’t file proof of claim

(503a)e. No AS relief is required to file that b/c it arises out of a transaction that

was entered into w/ the DIP or trustee. 362(a)(1) stays action that could have been collected pre-petition, but 362(a)(3) stays any act to obtain property – so this is post-petition.

i. But judge can allow or disallow under 503(b)(1)(A) (“the actual, necessary costs and expenses of preserving the estate”)

f. You will still not be paid until the divvying up of pie unless you get reliefi. Or 331- interim compensation- if you are professional employed

for reorg, you can apply every 120 days, after hearing, get paid.

2. Could then ask for relief from a stay

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a. e.g. Kmart in Ch.11. -If shopper in Kmart trips, sues, you don’t need relief from ct to bring action, gets judgment but can’t enforce under 362a3, so to get judgment can ask ct for relief Judge has to determine, if I allow administrative expenses will it disrupt the bankruptcy reorganization?

b. If you’re the judge and someone comes in and says pay my admin expense, slip/fall person has same priority as Martha Stewart contract claim, but if there’s insurance that would cover claim then it would be very good reason for giving relief from stay.

g. Govt Regulatory Exception (362b4)i. Rationale:

1. Even companies in financial trouble should not be able to skirt complying w/ regulations. Can’t dodge health code, SEC.

2. We are punishing creditors for not keeping tighter reign on R, Don’t do biz w/polluters!

ii. Used to be b4 and b5

iii. No AS if commencement or continuation of an action or proceeding by:1. Either

a. a governmental unit (includes private AG’s) ori. Alpern v. Lieb (7th Cir. 1993), Rule 11 sanctions was exempt from

the stay, since meted out by a governmental unit, the court, though typically sought by a private individual or organization

b. org exercising authority under the Convention on Chemical Weapons

2. To enforce such govt unit's or organization's police and regulatory powera. Govt suing to prevent or stop violation of fraud, environmental

protection, consumer protection, safety (NRLB v Evans-)b. Police and regulatory powers broadly construed to include state actors.

(Penn Terra)i. Restoring power to the States, Congress intentionally used such a

broad term as ""police and regulatory powers,'' – so it should be construed broadly

ii. The police power of the several States embodies the main bulwark of protection by which they carry out their responsibilities to the People; its abrogation is therefore a serious matter.

iii. Where important state law or general equitable principles protect some public interest, they should not be overridden by federal legislation unless they are inconsistent with explicit congressional intent such that the supremacy clause mandates their supersession.

3. including the enforcement of a judgment other than a money judgmenta. Raiotnale: No money judgment, b/c would give the govt. agency

preferential treatment. The govt. agency has to wait in line like everyone else for their slice of pie.

b. But can require money to be spent- otherwise 362b4 exception would be meaningless- almost everything costs something (Penn Terra)

c. NRLB v. Evans (5th Cir, 1981)- Enforce Bd’s decision ordering co to reinstate with back pay two employees whom it discriminatorily discharged. NRLB govt unit- this action was undertaken to enforce the

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federal law regulating the relationship between employer and employee- exercise of police or regulatory powers which places it within the § 362(b)(4) exemption to the automatic stay. Reinstating costs money, but allowed anyway. Even so, back pay disallowed- considered money judgment.

d. Penn Terra Limited v. Department of Environmental Resources (3d Cir. 1984)- Decree from state agency required the debtor, a coal strip mining company, to undertake costly land reclamation measures. Consent decree executed by the debtor prior to its Chapter 7? Federally created bankruptcy policy-equitable distribution vs. environmental policies of Pennsylvania require those to rectify damage to the environment which they have caused

iv. Entry of Money judgment OK1. Rationale (Penn Terra): Money Judgment narrowly construed so as to leave to the

States as much of their police power as a fair reading of the statute allows. Legislative history explicitly notes: mere entry of a money judgment by a governmental unit is not affected

a. Money judgment is an order entered by the court or by the clerk, after a verdict has been rendered for P, which adjudges that the defendant shall pay a sum of money to the plaintiff. Essentially, it need consist of only two elements: (1) an identification of the parties for and against whom judgment is being entered, and (2) a definite and certain designation of the amount which plaintiff is owed by defendant. It need not, and generally does not, contain provisions for its enforcement.

2. E.g. NLRB v. Continental Hagen Corp. (9th Cir. 1991).- permits the entry of a money judgment, but not the collection of that money judgment. The holder of the resulting claim will file a proof of claim and, unless the claim is of a type that is entitled to priority under § 507, the claim be treated on a par with other unsecured claims.

v. But not enforcement of Money Judgment 1. Most consternation relates to environmental cases.

a. In 1980, Congress passed the Comprehensive Environmental Response Compensation and Liability Act (CERCLA): under CERCLA if there is a release of haz substance into the environment, and if gov’t spends $ on this, the govt has a claim against the party responsible for this. The gov’t can recoup response costs from the responsible party.

b. But if company is financially plagues, makes more sense to go to court and get injunction for company to clean up the mess.

2. Classic Money judgment enforcement (Penn Terra)a. Having obtained a judgment for a sum certain, a plaintiff attempts to seize

property of the defendant in order to satisfy that judgment. It is this seizure of a defendant-debtor's property, to satisfy the judgment obtained by a plaintiff-creditor, which is proscribed by subsection 362(b)(5).

3. Harm Sought to be Remedied Std (Penn Terra)a. Would remedy compensate for past wrongful acts resulting in injuries

already suffered (maybe a penalty), or project against potential future harm? Penn Terra- It was not intended to provide compensation for past

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injuries. Injunction was meant to prevent future harm to, and to restore the environment.

i. Cf. If a coal mining company conducted operations in violation of applicable surface reclamation laws, then the assessment and collection of a civil penalty to serve as a punishment and deterrence against future violations no good (e.g. in Penn Terra)

b. Penn Terra Limited v. Department of Environmental Resources (3d Cir. 1984)- Decree from state agency required the debtor, a coal strip mining company, to undertake costly land reclamation measures. Consent decree executed by the debtor prior to its Chapter 7? Federally created bankruptcy policy-equitable distribution vs. environmental policies of Pennsylvania require those to rectify damage to the environment which they have caused

4. Also look to Sum Certain (Penn Terra)a. Proceeding initiated by DER could not have resulted even in the mere entry

of a money judgment. Could never have resulted in the adjudication of liability for a sum certain, an essential element of a money judgment. DER brought its action in equity to compel the performance of certain remedial acts by Penn Terra. It did not seek the payment of compensation to the Commonwealth's coffers.

5. Two other Std’s (In re Commerce Oil Co. -6th Cir. 1988)a. Public policy

i. Proceedings that adjudicate private rights and those that effectuate public policy. Those proceedings that effectuate a public policy are excepted from the stay.”

b. Pecuniary interesti. Whether relates primarily to the protection of the govt's pecuniary

interest in the debtor’s property and not to matters of public safety.c. E.g. NLRB action based on an unfair labor practice complaint satisfies

pecuniary purpose and public policy, because it is not an action to protect the government’s own financial stake, and it is an action to effectuate a public policy–compliance with federal labor laws.

i. Cf. Attempt by the FCC to cancel a debtor’s telecommunications services licenses because the debtor failed to pay a prepetition debt owed to govt failed both tests.

15. Claimsa. General

i. "Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured" or (101-5)

1. Matured: Bankruptcy accelerates the maturation of claims- otherwise it wouldn’t be due. Used for involuntary. Unmatured includes accounts receivable not paid yet.

2. Non-bankruptcy law will often determine whether the holder has a right to payment and that is the initial question as to whether there is a claim – then you get to the list in 101 – 5.

b. Broad definition of Claims i. Congress intended that the definition of claim in the Code be as broad as possible, noting that

"the bill contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy

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ii. AS breathing spell could hardly be done with hundreds or thousands of creditors persevering in different courts all over the country for a first share of a debtor's assets.

c. Fed Determination of claim status trumps statei. What the court said in Grady is that we begin by looking at state law, but we don't necessarily

end there.ii. US SC: "[b]ankruptcy legislation is superimposed upon rights and obligations created by the

laws of the States." -"In determining what claims are allowable and how a debtor's assets are to be distributed, a bankruptcy court does not apply the law of the State where it sits."

d. Contingent claims = pre-petition claimsi. If a tort claimant suffers injury or exposure prior to commencement to the case → pre-petition

claim (doesn’t matter what state law says).ii. 101-5A provides for a "right to payment" whether or not "such right" is "contingent." --

Mrs. Grady's claim, as well as whatever rights the other Future Tort Claimants have, is undoubtedly "contingent”- that event being the manifestation of injury from use of the Dalkon Shield. Federal law- right to payment under 101-5A arose when the acts giving rise to the liability were performed and thus the claim was pre-petition under 362(a)(1).

iii. GRADY V. A.H. ROBINS CO., INC. (4TH Cir 1988)- Robins made Dalkon Shield, an interuterine contraceptive device. Hysterectomy. Two mo. after Robins filed its petition for reorganization, Mrs. Grady filed a civil action against Robins in DC. Grady said didn’t accrue under state law till harm manifested, so not prepetition. Prepetition claim stayed by AS? Yes.

e. Postpetition Claims (if no privity, 3P injured post-petition)i. Pettibone Corp. v. Ramirez - R had been sued for injuries sustained by the operator of a

forklift that had been designed and manufactured prepetition. The claimant was hired by his employer and had sustained his injury postpetition. Ct said that the Robbins case was different b/c there was some basis for finding pre-bankruptcy harm to the P; here since P was not in privity not the same situation. Because the injury could not be tied to some type of prebankruptcy privity, contact, impact, or hidden harm, the claimant did not hold a claim for bankruptcy purpose. Claim was a post-petition claim not subject to the automatic stay.

ii. You can also argue it’s an admin expense, although it must be from transaction w/trustee (so privity required). Claim must arise with the estate and the trans must have benefited the estate in the operation of its post-petition biz.

1. if claimant can show that there was a duty to warn then we could concoct an argument that there was an admin expense; b/c of the good faith in the product

iii. Some courts wink at problem and treat it as preptition anyway.

f. Except if preptition lien for after-acquired propertyi. 552a- property acquired after commencement of case is not subject to any lien resulting from

a security agreement entered into by debtor before commencement of case1. e.g. if creditor granted lien in all inventory “now owned and hereafter acquired”,

then new inventory acquired after CH. 11 filed not part of that securityii. Offspring of collateral exception (552b)- if security interest created by a pre-petition

security agreement includes collateral that debtor acquired prior to bankruptcy and also includes the proceeds, profits, product or offspring of such collateral, then security interest is deemed valid and operative as to any such proceeds that estate obtains postpetitoin

1. e.g. if Creditor sold $500K worth of inventory post-petitioin, and bank had a security interest in prepetition inventory and its proceeds, would have an interest in purchase

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g. Channeling injunction/trust (524g)i. Only to cases in Ch 11 involving asbestos-related liabilities of R

1. When an inderteminable number of2. substantial future demands for payment necessitate use of trust in order to deal

equitable w/claims and future demands ii. Actions enjoined against R, officers/directors, insurance, successors to R, any other entity

directly or indirectly liableiii. Claims will be brought against trustiv. Trust must be funded with stock of the debtor.

16. Relief from Automatic Stay

a. Outside of 362: Can also requesting conversion or dismissal of case-1112b, proposing Ch. 11 plan of reorg after period of exclusivity has expired, 1121c

b. 362d - Relief from stay:- for cause, or for collaterali. On request of a party in interest and after notice and a hearing, Ct shall grant relief from the

stay:1. (1) for cause, including lack of adequate protection of an “interest in property”…or 2. (2) so can pursue collateral- with respect to a stay of an act against property, if (A)

the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization.

c. Bad faith as “cause” (362d1) – In re Victory Construction i. R’s lack of "good faith" in filing a case under Ch 11 is "cause" under d1 (independent of the

existence or lack of adequate protection) (Victory)1. Based on totality of circs surrounding filing of case- bankruptcy court's on-the-spot

evaluation of the debtor's financial condition, motives, and the local financial realities.

2. E.g. filing was an attempt to delay foreclosure despite the lack of any rational basis to believe that a composition or extension was possible, and (ii) that the proceeding was a sham, or device to deprive the secured creditor of rightful recourse to its collateral. When the economic realities of the debtor were so bleak that no fair compromise or extension was possible, the courts easily determined that the debtor's purpose was delay and harassment of creditors

ii. In re Victory Construction - Victory acquired properties subject to liens, filed Ch. 11, Ps stayed from lien enforcement. At no time, did debtor make any payments to lienholders-plaintiffs. Vacate automatic stay? 361d1- Cause- Victory didn’t file Ch 11 in good faith. Relief.

1. Debtor knew that litigation would be instituted to prevent foreclosure of property in event negotiations to get favorable terms from lienholders failed. Victory filed Ch. 11, Ps stayed from lien enforcement. At no time, did debtor make any payments to lienholders-plaintiffs. Vacate automatic stay?

2. New debtor syndrome here- Debtor is attempting to use Ch. 11 to create and organize a new biz, not to reorganize an existing enterprise. Debtor embarked on a speculative real estate promotion- keystone of which was ability to retain existing low interest liens in place.

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3. Debtors were shrewd- knew that losses would build up for creditors if they didn’t play ball, and knew they could delay foreclosure by use of bankruptcy law.

4. This isn’t what Ch 11 is about- neither a going biz nor going concern value to preserve in this case- debtor has purchased its way into ct. Justice, equity and public policy prohibit this.

5. Debtor has not acted with that candor, frankness, sincerity and willingness to do equity which are the indicia of "good faith".

6. Ps get relief from stays against collateral.7. Subsequent developments- Amended plan developed approved by all parties.8. Ordinarily an appellate court should base its decision on the facts as they existed at the time the trial court made its

decision. However, the on-going nature of bankruptcy proceedings, on occasion, creates situations where the reviewing court may take notice of fundamental events occurring after the entry of the judgment from which appeal was taken....

9. In the time which had elapsed, the debtor's principals had contributed sufficient funds to pay off several claims and bring all secured claims current. In addition, the debtor had managed to propose a second amended reorganization plan that provided that Victory would pay interest to the remaining secured creditors at the market rate, rather than the contract rates, which were lower. The appellate panel further noted that Judge Ordin, himself, in the course of one of several hearings on the debtor's proposed reorganization plan, had suggested the possibility that Victory had, by its conduct, “purged” itself of bad faith (which was originally found). Now we have a cash current position where Hadley is in the position he bargained for plus four percent and a guarantor.

b. SARE Cases (362d3)i. Background

1. Ch 11 - large share of “bad faith” cases. 2. R is a corporation or partnership whose sole asset is some kind of income (or more

typically loss) producing real property, property is subject to a mortgage. Downturn in the real estate market produces a decline in rental income, making it impossible for the debtor to service the mortgage debt. Downturn in the market also means depressed real estate values, and as a result the amount of the debt often exceeds the value of the property.

ii. “New debtor syndrome”1. Elements

a. In an attempt to isolate the sick property from well performing assets, R will convey the distressed property to a new entity, which in turn files the Ch 11, and AS

b. Tie up their collateral for the length of the case, during which creditors typically are neither receiving payments nor accruing interest.

c. Collateral values of the secured creditor are eroding

2. SARE case factors:a. debtor has few or no unsecured creditors; b. previous bankruptcy petition by the debtor or a related entity; c. pre-petition conduct of the debtor has been improper; d. petition effectively allows the debtor to evade court orders; e. few debts to non-moving creditors; f. petition was filed on the eve of foreclosure; g. foreclosed property is the sole or major asset of the debtor; h. debtor has no ongoing business or employees; i. no possibility of reorganization; j. debtor's income is not sufficient to operate; k. no pressure from non-moving creditors; l. resolution of a two party dispute which can be resolved in a non-bankruptcy

forum – both for SARE and non-sare cases is important factor (Chapter 11 was never intended to be used as a fist in a two party bout. The Chapter is entitled reorganization and not litigation)

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m. corporate debtor was formed and received title to its major assets immediately before the petition;

n. debtor filed solely to create the automatic stay.

3. In SARE unsecured creditors never move for conversion or dismissal of case. Only way they get paid is if secured creditors still get paid out.

4. E.g. Victory- Considered under d1- but now could be d3-a. R is attempting to use Ch. 11 for new biz, not to reorganize an existing

enterprise. This isn’t what Ch 11 is about R embarked on a speculative real estate promotion- keystone of which was ability to retain existing low interest liens in place. Debtors were shrewd- knew that losses would build up for creditors if they didn’t play ball, and knew they could delay foreclosure by use of bankruptcy law. R has purchased its way into ct. Justice, equity and public policy prohibit this.

iii. 362-d(3) in SARE case, if a C whose claim is secured by a mortgage on the real estate requests relief from the stay, the court must grant relief unless, within the later of 90 days after the commencement of the case or 30 days after the court determines that 362(d)(3) applies, plan that has a reasonable possibility of being confirmed within a reasonable time (like Timbers) or begins making interest payments to the secured creditor at the applicable nondefault contract rate of interest

1. So in next round of SARE cases, lenders will be able to demand close to what was demanded in Timbers, and court will have to do it.

2. Limitations- real property fewer than 4 units. That generated substantially all of income

c. In Rem relief for stays that run w/land (362d4)i. If real estate R files as part of scheme to delay, hinder and defraud C

ii. Order granting relief from the stay continues to apply to the subject property in all bankruptcy cases filed within 2 yrs of recording.

iii. Limitations1. Properly must be recorded under applicable state law2. Exception for subsequent filings necessitated by changed circumstances or other

good cause.

d. Relief for collateral (362d2)i. "Necessary to an effective reorganization." = property is essential for an effective

reorganization that is in prospect (United Savings)ii. 362(g) – pty requesting relief has burden on the R's lack of equity in the property, all other

issues is on party opposing reliefiii. E.g. In re Anchorage Boat Sales (1980)- Debtor and Midlantic Bank financing in exchange

for a security interest in the debtor's inventory. Ch. 11- debtor held property valued at $1.2mm all of it subject to Midlantic's lien for $1.3mm. Business forecasts (prepared by Midlantic) indicated that the debtor would suffer a net loss of $106,000 in the next 12 months. It is undoubtedly true that property is not necessary to an effective reorganization if there is no possibility of an effective reorganization. AS should be lifted to allow the plaintiff to foreclose on its security interests.

iv. Cf. SARE. Where a R does have substantial equity in the real property, petition should not be dismissed, at least not before the debtor has had time to propose a reorg plan, even though some other indicia of bad faith may be present. In re Can-Alta Properties, Ltd.,

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2. The Secured Creditors Rightsa. 3 sections of the code that try to strike balance bet trustees need to use collateral for

reorg and need of secured creditor for property (AS bars both.)- 363, 362

d. 362d - Relief from stay:- for cause, or for collaterali. On request of a party in interest and after notice and a hearing, Ct shall grant relief from the

stay:1. (1) for cause, including lack of adequate protection of an “interest in property”…

or 2. (2) so can pursue collateral- with respect to a stay of an act against property, if (A)

the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization.

b. 363 – Use, sale or lease of propertyi. Rationale: AS in Ch 11 case needs to allow rehabilitation of biz (e.g. sell inventory in which

creditor has interest). ii. 3b3b1 says they can use it outside of ordinary course of biz only after notice and a hearing

iii. 363(e)- the court should prohibit or condition use sale or lease as is necessary to provide “adequate protection of” such interest

iv. 363c2- Special rule for cash because it has tendency to disappear. 1. Evanescent (Emily Dickenson poem, like a hummingbird)2. “May not use sell or lease cash collateral” unless..

a. everyone that has interest in cash consents orb. court consents after notice and hearing

c. Protected interest in propertyi. Burden of Proof- C has burden of lack of R equity in property. R bears the burden of proving

that an equity cushion exists and that it provides adequate protection.

ii. Value of lien, not amt of the debt (Alcuyan)1. Interest not adequately protected if security is depreciating during

term of stay. (Timbers)2. Rationale: Secured interest in property is the right of a secured C to have the

security applied in payment of the debt upon completion of the reorg (Timbers)3. E.g. So if apt declining in value, C allowed to cash payments or additional security

in the amount of the decline4. Cf. In Re Alyucan Interstate Corp – Alyucan, a construction and real estate

development firm, filed a Ch 11. The bank says we want relief from the stay so that we can continue foreclosure action; it says its grounds for relief are that its collateral is not adequately protected. Adequate protection is not defined in the Code. Here, “interest in property'' is the lien of Bankers Life on the realty of debtor. The collateral and therefore the lien are not declining or subject to sudden depreciation in value. Bankers Life is suffering no pain cognizable under Section 362 as a result of the stay, and relief from the stay is therefore, at this juncture, unnecessary. Moreover, this property is essential to the reorganization of the debtor. Equity cushion analysis BS.

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iii. So interest/oppty costs of using property not entitled to adequate protection

1. Since interest does not include right to immediate foreclosure (take immediate possession of the defaulted security, and apply it in payment of the debt) (Timbers)

2. A mushrooming debt (via accrual of interest) is immaterial, if the amount of the lien is not thereby increased (Alcuyan)

3. During pettiion, claim frozen and interest does not accrue (unless oversecured)4. Eg. United Savings Assn v. Timbers of Inwood Forest (SC, 1988, Scalia)- $4.1mm

loan collateralized by apt building in Houston- security interest included an assignment of rents from the project. Bank sues for relief from AS because doesn’t get monthly payments for the use value of the loan collateral. C doesn’t have right to take R collateral on day of default. So interest on collateral not a right.

iv. Lien can not include after-acquired property1. 552a- property acquired after commencement of case is not subject to any lien

resulting from a security agreement entered into by debtor before commencement of case

a. e.g. if creditor granted lien in all inventory “now owned and hereafter acquired”, then new inventory acquired after CH. 11 filed not part of that security

2. Offspring of collateral exception (552b)- if security interest created by a pre-petition security agreement includes collateral that debtor acquired prior to bankruptcy and also includes the proceeds, profits, product or offspring of such collateral, then security interest is deemed valid and operative as to any such proceeds that estate obtains postpetitoin

a. E.g. PMSIb. e.g. if Creditor sold $500K worth of inventory post-petitioin, and bank had

a security interest in prepetition inventory and its proceeds, would have an interest in purchase

d. Interest/admin expenses for oversecured claimsi. Oversecured =comparison of that C's claim with the value of the property less the amount of

any senior secured claims against the property.1. E.g. 1mm collateral, Chase has 2nd priority mortgage for $300K, Citibank has 1st

mortgage for $850K. Chase asks for adequate protections? Judge says OK to make periodic payments of interests to Citibank.

2. Citi oversecured. So 1st in line stands to accrue interest because it is oversecured. 2nd will gets nothing (Only 150 secured for Chase 150 unsecured for chase). If you pay interest, interest doesn’t accrue on 850, and junior lienholders doesn’t lose his stuff

ii. 506b- fees and interests for oversecured claims1. "[t]o the extent that an allowed secured claim is secured by property the value of

which...is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim and any reasonable fees, costs or charges provided for under the agreement or state statute under which such claim arose."

2. But not for undersecured claims

iii. Rationale: C bargained for interest in part. collateral and we recognize that bargaining.

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e. Valuation of secured claims(Am Kitchen Foods)i. Colliers: the most impt thing about bankruptcy is that secured c’s remedies may be

suspended---but the value of their secured position as it existed at the commencement of the case must be protected throughout the case.

ii. 506(a) – the measure of a secured claim is the value of the collateral1. Bifurcation of claims principle- rest is unsecured2. So if the collateral value is eroding then the secured claim will diminish and the

secured claim holder will be prejudiced.

iii. Replacement value (for individual R)1. 506a2- in Ch. 7 or 13 case involving an individual debtor, the value of personal

property shall be determined based on the replacement value of such property as of the date of filing the petition without deduction as to costs of sale or marketing

a. Replacement value= price a retail merchant would charge for property of that kind

b. So if debtor seeks under Sec. 722 to redeem collateral such as a car by paying secured creditor, amt of claim will be based on retail price that the R would have to pay to buy the same car- not what R would pay if he or she sold or purchased the car at auction

iv. Liquidation value (foreclosure value)1. When there is no practicable alternative except to submit to the influence of bargain

basement buyers sanguine in the knowledge the salvage recoveries will reward their wait- forced sales ok

v. Going concern (fair mkt)1. But informed projection as to net amounts recoverable upon conversion of collateral

into cash in a commercially reasonable manner2. Going concern better here- Where the collateral consists of inventory and accounts,

and the R continues to operate, and where reasonable prospects persist that it can continue to generate and collect accounts receivable and sell and replace inventories in the ordinary course. Value of the collateral is equitable with the net recovery realizable from ordinary course of biz.

vi. Date of valuation1. Original petition, as time of relief request, when collateral recovered2. Collateral can be assigned different values throughout their proceedings (most

commercially reasonable disposition at every phase of case)3. Whipsaw effect- inconsistent positions are possible

a. Secured creditors can whipsaw the R by insisting upon a going-concern valuation at the commencement of the proceedings, but a forced-sale valuation later on, in order to demonstrate more extensive collateral depletion. Then can say C’s collateral is getting worthless quickly.

b. R’s purpose is usu served by maximizing value of security when relief from stay is sought. More equity a debtor has in property securing a debt, easier it is for debtor to fashion adequate protection. But later in case want less valuation to avoid having to treat claims as secured.

f. Adequate protection (361)i. But “even secured creditors have rights,”

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ii. 361(1)- cash payments for the expected decrease in value (derived from In re Bermec)1. seem appropriate where fixed, regularly depreciating assets (such as land,

buildings, machinery, and equipment)2. but not practical where rapidly depreciating or perishable current assets (such as

inventory or accounts receivable) are at risk. 3. In re Bermac (2nd Cir, 1971)- Bermac leased trucks - 65 maintenance terminals-

15,000 shareholders. Insolvent. Cs ask for immediate payment of secured indebtedness, since collateral is depreciating rapidly. But not a hopeless case, and Trustees will be able to pay the “economic depreciation'' on the secured creditors' equipment. Bermec trustee proposed to make monthly payments to secured creditors of 12 percent per annum of the original cost of trucks and 10 percent per annum of the original cost of trailers- trustee projects a monthly cash flow of $675,000 which he estimates will be sufficient. OK.

iii. 361(2)- additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity's interest in such property; or

1. This says to C: To the extent that the value of your collateral declines as a result of R’s operation of biz, you will have a secured administrative expense claim, secured by a replacement lien on all of the D’s other assets.

2. In Re American Kitchen Foods (B.C., Maine 1976)- Purchasing and processing potatoes- expansion into the midwest resulted in a disastrous capital drain, but Maine plants profitable. Cs implemented default procedures interdicting the defendants' cash flow from accounts receivable, inventory and proceeds. There was no cash to defray the cost of essential services like labor, electricity and fuel, without which business operations could not continue. Replacement lien OK, assets in Maine unencumbered.

iv. 361(3) granting such other relief, but not admin expenses1. SO drafters rejected administrative expense treatment because such protection is too

uncertain to be meaningful2. In event reorg fails and liquidation ensues, you have nothing. E.g. When case is

converted from Ch. 11 to Ch. 7, administrative expenses of superseding liquidation have priority over administration expenses of aborted Ch. 11 case

v. Equity cushion?1. “Equity cushion'': the difference between outstanding debt and the

value of the property against which the creditor desires to act. a. Cushion=comparison of that creditor's claim with the value of the property

less the amount of any senior secured claims against the property.i. E.g. collateral, a home, was valued at $125,000, while the debt and

costs of foreclosure and resale were fixed at $105,875, leaving a cushion of $19,125 or 15 percent.

ii. E.g. In re Llewellyn, 27 B.R. 481 (Bankr. M.D. Pa. 1983) (cushion of 59 percent in machinery and inventory collateral held adequate protection for lender).

b. As interest accrues, or depreciation advances, and the margin declines, the cushion weakens and the stay may be lifted. Some Cts say AS should be terminated when the cushion will be absorbed through interest, commissions, and other costs of resale.

c. Courtsi. Some Cts consider, Part. in real estate where there is enough of

a cushion to absorb the shock of decrease in value. Courts are must

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more willing to do this b/c the property doesn’t tend to disappear and also b/c property values tend to be more stable.

ii. Other courts disapprove (Alcuyan)

2. Arguments against cushion (Alyucan)a. It’s about preserving existing value, not shooting it out of water

i. By focusing on ratio of debt to collateral, obscures purpose of adequate protection. If Bankers Life had been undersecured at the petition, the absence of cushion would have dictated relief from the stay, even though the stay did not impair its lien (and in fact realty usually appreciates)

b. Ignores recoverability of value from other sourcesc. It’s about balancing existing equity w/re-org needs, not cushion

i. 362d – relief from stay granted if “the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization”

1. Lack of equity does not warrant relief from the stay- unless shows that property in unnecessary to effective reorg

2. Also it’s not “equity cushion” that’s at issue under 362d- it’s absence of equity- cushion analysis is inconsistent with 362d2 which speaks in terms of equity

ii. If the secured creditor is adequately protected from injury resulting from the stay, the collateral is essential to the reorganization, and a reorganization in the interest of unsecured creditors is a realistic possibility, the absence of equity shouldn’t matter.

d. Liquidation value over going covern value

g. Adequate Protection Examplesi. Debtor, who owns and operates an apartment building, files a Chapter 11 petition on January

1. On January 15, the bank that holds a mortgage on the building moves for relief from the automatic stay on the grounds that its interest in the property is not adequately protected. On that date the property is worth $200,000 and the Bank’s claim is $200,000. One expert testifies that the value of the property is stable; another expert testifies that the value of the property is declining. The court decides that it will not grant relief from the stay, provided that the debtor provides adequate protection in the form of monthly payments of $1,000 to protect the bank from any decline in the value of the collateral.

ii. Hypo 1: 10 mo later, when it appears that the R is incapable of being resuscitated, the court converts the case to Ch 7. At that point the property is worth $250,000.

1. Answer: What is allowed secured claim? On Ch 7 filing, $250K is more than $200K. Oversecured claim, so C gets interest. If total interest will be $2K, and already got 10K from monthly payments, then will just get another $192 from sale. $202 total payment. ($10,000 in adequate protection payments that the bank received should be applied to its secured claim.)

iii. Hypo 2: 10 mo later, when it appears that the debtor is incapable of being resuscitated, the court converts the case to Ch 7. At that point the property is worth $190,000.

1. Answer: Undersecured claim. So no interest. Gets $200K. Gets 10K from monthly payments, and 190K from sale.

iv. Hypo 3: Assume that the value of the property does, in fact, remain stable during the 10-month life of the chapter 11 case, so that when the court converts the case to chapter 7 the

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property is worth $200,000. 1. Answer: Not oversecured. No interest. Gets $190 on sale

v. Hypo 4: Assume that the value of the property declines twice as fast as anticipated, so that when the court converts the case to chapter 7, the value of the property is $180,000.

1. Answer: No interest, but has secured claim for $180 and gets to keep $10k. Then $10K “inadequate protection claim” under Code section 507(b). Such a claim is entitled to priority over administrative expense claims and unsecured claims.

3. “Property of the Estatea. All legal and equitable interests of R in property, real or personal, tangible or

intangible, at time petition is filed – 541a1i. Property defined by Nonbankruptcy law, primarily state law

1. Bank deposits, stock bonds, product liability insurance, executory contract, personal injury claims, rights of action, income tax refunds, net operating loss carryovers, copyrights. If you take world upside down and shake it, it’s personal- but also includes interest, goodwill

2. Includes contracts- but for employment contract, trustee should abandon because worth nothing to estate

3. Includes exempt- property that R may claim as exempt under 522 (Some property is not exempt until it is claimed as exempt)

4. Includes community property - if property under R’s sole or joint control or is liable for a claim against the debtor (541a2)

5. Included avoided property- whether trustee has avoided a preferential or fraudulent transfer of debtor’s interest in property (541a3-4)

6. Includes bequest, inheritance, life ins, property settlement with debtor’s spouse or divorce decree w/i 180 days of filing which “the debtor becomes entitled to” (541a5)

a. Can’t renounce expectancy interest until receive it, so comes into estate.b. Alimony payments- although most of it can prob be exempted out by CPLR

5205(d)(3).c. R required to file statement w/i 10 days after finds add’l property (1007h);

if he does not comply he may be denied his right to a discharge. 7. Includes non-erisa pensions (e.g. IRA Accounts) - if not subject to the kinds of

restrictions on alienation that ERISA-qualified plans are (it can be transferred) so doesn’t come under 541c2 .

a. But SC hold can fall under 522d10E exemption Rousey v. Jacoway(2005)b. And also falls under exemption laws of many states - CPLR § 5205(c), “the

corpus of any trust qualifying as an individual retirement account” is exempt from the satisfaction of a money judgment.

c. Cf- Keogh account- may contain anti alienation provisisons and therefore they may not come into the estate

8. Can’t contract around it, condition it on nonbankruptcy- 541c1b- for a1, a2, a59. But not:

a. Not property sold by R under PMSI- Commencement of case is things in which debtor has an interest. Interest is not goods sold (which are owned by buyer) but the actual security interest goes into estate

b. Late wages- legal interest, but actual payment goes under a6

ii. Includes Offspring of Estate Property (541a6)

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1. Rent, profits, product, proceeds, [lawsuit recoveries] or offspring generated by property of the estate- except services performed after commencement of case. (541a6)

2. Product= fruit of the tree. 3. Rule of substitution: Even if proceeds are greater than original value of property, it

still all goes back to estate.4. E.g. video games replaced with accounts receivable (or IOUs). 5. E.g. recovery from insurance co for car accident pospetition6. E.g. tax refund. Siegel v. Rochelle, SC. Debtor had claim against govt, govt paid

that claim. 7. E.g. copyright royalties, but copyright itself under 541a18. E.g. late wages

iii. After acquired property (541a7)1. Property acquired by estate after commencement of case 2. Post-petition contract made by trustee of DIP would constitute property, but

proceeds of contract go into 541a6

b. Includes property of Estate in 3rd Partyi. All property of debtor no matter where it is and who holds it (541a)

ii. Determination of R’s right in property extinguished under state law (Art. 9) 1. So when prepetition sale, no recovery

a. 9-617 - when collateral is disposed of by secured party, disposition transfers to a purchaser all of R rights therein.

2. For RE foreclosure, rights extinguished on auction, not deed transfera. Rodgers v. County of Monroe (2d Cir. 2003)- Tax dept sold his house, but

he still had deed. Rodgers filed a bankruptcy petition prior to the delivery of the deed, said delivery of deed violated AS. But sale itself formally extinguished rights in the property. So not property of estate. AS inapplicable.

iii. Sec 542(a)- turnover. Requires an entity (other than a custodian) holding any property of the R that the trustee can use under 363 to turn that property over to the trustee.

1. Even secured C who has repossessed collateral before filing of Ch 11 petition but who has not yet sold the collateral to a bf purchaser

2. When custodian, no recoverya. 101(1) defines “custodian”: assignees, receivers (remember ABCs)b. 543 describes turnover of property by custodians; it imposes some special

rules – soon as assignee in ABC learns there is a bankruptcy case they must turn over property of the estate and must file an accounting. The assignee is a fiduciary to the Cs, so not only must it turn prop over, but must account for it. So actually the Code imposes more onerous burdens on the custodian than just plain vanilla parties.

3. E.g. United States v. Whiting Pools, Inc. (SC, 1983)- Whiting was in the swimming pool sales, owed $92,000 in back taxes, IRS obtained a tax lien on, and then seized, Whiting's equipment, vehicles, inventory, and office supplies. Ch 11 by Whiting. Bankruptcy ct found that the IRS was bound by AS and ordered it to turn the seized property over to R. Upheld by SC.

a. But keeps protection- when property seized prior to the filing of a petition is drawn into the Chapter 11 reorgestate, the IRS's tax lien is not dissolved; nor is its status as a secured creditor destroyed. The IRS, under § 363(e),

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remains entitled to adequate protection for its interests, to other rights enjoyed by secured creditors, and to the specific privileges accorded tax collectors- just can’t withholding the seized property from the debtor's efforts to reorganize.

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iv. Rationale: 1. Reorganization effort would have small chance of success if property

essential to running the business were excluded from the estate..

v. 550- reaching transferee on avoidance1. 550a- Repo Bank → Immediate Transferee → Mediate Transferee →

Mediate transferee. We could go all the way down the line if there are subsequent transfers.

2. 550b: But one who pays value and doesn’t know that the sale was conducted in violation of the stay is not liable for the return of the car or the value of the car; one who buys at a judicial sale is charged with some level of inquiry.

c. Exceptionsi. Services Income for Ch. 7 (541a6)

1. After commencement of case- “except earnings from services performed by indiv R after the commencement of case”

2. Services performed by individual postpetition but before case is closed are R’s in Ch 7, but included in Ch 11 (1115a2, 2005 amendment) or 13 (1306a2) because fund plan

a. 1115a2 takes away need for Herbermann holding, which found postpetition included under 541a7.

b. In re Harvey Herbermann, M.D. (Bankr. W.D. Texas 1990)- 4yrs prior to Ch 11, earned about $600,000 a year. 541a6? No- Services exception just applies to offspring. 541(a)(6) -“proceeds are property of the estate...unless they are earnings from services performed by an individual debtor after commencement of the case.” So only refers to services generated through contract. But comes under 541a7.

ii. Trusts1. Definition

a. Spendthrift trust is a trust that is created for the benefit of a person (often because he or she is unable to control spending) that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary.

2. Can’t reach corpusa. NY CPLR 5205(c): any property held in trust for R, where trust is

created by a non-R, is exempt from the satisfaction of a money judgment.

i. Unless added w/i 90 days before claim or fraudulent conveyance (5205c5)

b. Also can’t reach under 541a1

3. Income (spigot) included from a testamentary spendthrift trust that is paid or owing to debtor-beneficiary w/i 180 days after filing

4. Unless restriction on transfer of debtor’s beneficial interest (income) in a trust is enforceable if that restriction “is enforceable under applicable nonbankruptcy law” (541c2)

a. So you can’t assign away your interest if it’s not allowed by trust,

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1.72

and that restriction is enforceable under nonbankruptcy law. Can’t reach outside of bankruptcy- then can’t reach inside of bankruptcy.

b. Traditionally spendthrift trust governed by state lawsi. E.g. NY EPTL 7-1.5: under NY law an express trust is

automatically a spendthrift trust unless otherwise stated. The right of a beneficiary of an express trust to receive income may not be transferred by assignment or otherwise unless such power is created by the document creating the trust.

c. SC: also covers ERISA-qualified pension plansi. E.g. Patterson v. Shumate (SC, Blackmun 1992)-

Shumate was employed for over 30 yrs by Coleman Furniture. Coleman Pension Plan satisfied all applicable requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Ch 7, Shumate's interest in the plan was valued at $250K. Article 16.1 of the Plan contained the anti-alienation provision required for qualification ERISA ("Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated"). Benefits=beneficial interest. Non transferable. Gets to keep money. Otherwise C could reach R’s protected plan right in involuntary bankruptcy, even though could not otherwise reach

5. Also 5205d1 exemption in NYa. 90% of income from trust is exempt (sometimes more) b. But No exemptions from judgment of spousal support

i. 5205c4- trust exemption doesn’t impair spouse’s ability to get judgment (“qualified domestic relations order) on all IRAs or big-ticket exemptions

ii. No fresh start at ex-wife’s expense

d. PATTERSON V. SHUMATE (SC, Blackmun 1992)- Shumate, Jr., was employed for over 30 years by Coleman Furniture, where he ultimately attained the position of president, Coleman Furniture Corporation Pension Plan (Plan). The Plan satisfied all applicable requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and qualified for favorable tax treatment under the Internal Revenue Code. Shumate's interest in the plan was valued at $250,000. Bankruptcy for Shumate under Ch.7, Patterson was trustee. Is a pension a trust? Article 16.1 of the Plan contained the anti-alienation provision required for qualification under § 206(d)(1) of ERISA, 29 U.S.C. § 1056(d)(1) ("Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated").

i. Question: Anti-alienation provision contained in an ERISA-qualified pension plan constitutes a restriction on transfer enforceable under "applicable nonbankruptcy law," and whether a debtor may exclude his interest in such a plan from the property of the bankruptcy estate?

ii. Section 541(c)(2) provides the following exclusion from the otherwise broad definition of "property of the estate" contained in § 541(a)(1) of the Code:

1. "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title"

iii. DC rejected Shumate's contention that his interest in the Plan should be excluded from his bankruptcy estate. The court held that § 541(c)(2)'s reference to "nonbankruptcy law" embraced only state law, not federal law such as ERISA. Applying Virginia law, the court held that Shumate's interest in the Plan did not qualify for protection as a spendthrift trust.

iv. But natural reading of 541c2 entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law. Nothing in § 541 suggests that the phrase "applicable nonbankruptcy law" refers, as petitioner contends, exclusively to state law. \

1. Also code reveals, significantly, that Congress, when it desired to do so, knew how to restrict the scope of applicable law to "state law" and did so with some frequency.

2. Congress' decision to use the broader phrase "applicable nonbankruptcy law" in § 541(c)(2) strongly suggests that it did not intend to restrict the provision in the manner that petitioner contends....

3. Scalia concurrence: When the phrase "applicable nonbankruptcy law" is considered in isolation, the phenomenon that three Courts of Appeals could have thought it a synonym for "state law" is mystifying. When the phrase is considered together with the rest of the Bankruptcy Code (in which Congress chose to refer to state law as, logically enough, "state law"), the phenomenon calls into question whether our legal culture has so far departed from attention to text, or is so lacking in agreed-upon methodology for creating and interpreting text, that it any longer makes sense to talk of "a government of laws, not of men."

v. We next determine whether the anti-alienation provision contained in the ERISA-qualified plan at issue here satisfies the literal terms of § 541(c)(2).

1. Section 206(d)(1) of ERISA, which states that "each pension plan shall provide that benefits provided under the plan may not be assigned or alienated," 29 U.S.C. § 1056(d)(1), clearly imposes a "restriction on the transfer" of a debtor's "beneficial interest" in the trust.

2. these transfer restrictions are "enforceable," as required by § 541(c)(2)

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vi. Counterarguments1. Renders § 522(d)(10)(E) of the Bankruptcy Code superfluous? Under § 522(d)(10)(E), a debtor who elects the federal

exemptions set forth in § 522(d) may exempt from the bankruptcy estate his right to receive "a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract . . ., to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." If a debtor's interest in a pension plan could be excluded in full from the bankruptcy estate, the argument goes, then there would have been no reason for Congress to create a limited exemption for such interests elsewhere in the statute. But this covers pensions broader than ERISA.

2. Frustrates 541a1- estate comprised of "all legal and equitable interests of the debtor in property as of the commencement of the case"?

a. language of the statute is so clear, we believe that our construction of § 541(c)(2) is preferable to the one petitioner urges upon us.

vii. Policy Support1. First, our decision today ensures that the treatment of pension benefits will not vary based on the beneficiary's bankruptcy

status. Declining to recognize any exceptions to that provision within the bankruptcy context minimizes the possibility that creditors will engage in strategic manipulation of the bankruptcy laws in order to gain access to otherwise inaccessible funds.

a. See Seiden, Chapter 7 Cases: Do ERISA and the Bankruptcy Code Conflict as to Whether a Debtor's Interest in or Rights Under a Qualified Plan Can be Used to Pay Claims?, 61 Am. Bankr. L.J. 301, 317 (1987) (noting inconsistency if "a creditor could not reach a debtor-participant's plan right or interest in a garnishment or other collection action outside of a bankruptcy case but indirectly could reach the plan right or interest by filing a petition . . . to place the debtor in bankruptcy involuntarily").

2. Our holding also gives full and appropriate effect to ERISA's goal of protecting pension benefits. See 29 U.S.C. §§ 1001(b) and (c). This Court has described that goal as one of ensuring that "if a worker has been promised a defined pension benefit upon retirement--and if he has fulfilled whatever conditions are required to obtain a vested benefit--he actually will receive it."

a. "Section 206(d) [of ERISA] reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for the wrongs done them. If exceptions to this policy are to be made, it is for Congress to undertake that task."

3. Our holding furthers another important policy underlying ERISA: uniform national treatment of pension benefits. a. Construing "applicable nonbankruptcy law" to include federal law ensures that the security of a debtor's pension

benefits will be governed by ERISA, not left to the vagaries of state spendthrift trust law.

i.

viii. Random 2005 Amendments Exclusions1. Coverdell Education Savings Accounts (541b5)

a. account designed to help students and parents save for education expenses

b. $2000/yr max2. 520 accounts (541b6)

a. funds used to purchase tuition credits or certificates under qualified state tuition programs

b. But funds deposited within a year prior to bankruptcy are not excluded from the estate

c. Also, with respect to funds deposited in the accounts between 365 days and 720 days before the petition is filed, the exclusion is limited to $5,000.

d. designated beneficiary of the account must be a “child, stepchild, grandchild or stepgrandchild” of the debtor. According to § 541(e), which was amended in 2005, the following are regarded as “a child of [an] individual by blood:” “a legally adopted child,” “a child who is a member of the [debtor’s] household if placed with such individual by an authorized placement agency” and a “foster child...”

3. Pawnbroker transactions (541b8)a. tangible personal property that the debtor has “pledged or sold...as

collateral for a loan or advance of money given by a person licensed under law to make such loans or advances” if the pledgee is in possession of such property and the debtor has no obligation to repay the money borrowed or redeem the property.

4. Special Pensions (b)(7)a. funds that have been “withheld by an employer from the wages of

employees” as contributions to certain types of employee benefit plans, deferred compensation plans and tax deferred annuity plans.

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e. Abandonment i. 554a- "After notice and a hearing, the trustee may abandon any

property of the estate that is burdensome to the estate or that is of inconsequential value to the estate."

1. Often property encumbered by liens- so only of value to R, who may redeem

ii. But can’t abandon in contravention of state laws or regulations that are reasonably designed to protect the public's health or safety from imminent and identifiable harm

1. 554 codified judicial rule of abandonment, included judicially- developed doctrine intended to protect legitimate state or federal interests

2. Does not encompass a speculative or indeterminate future violation3. Ottenheimer v. Whitaker (CA4 1952), the Ct of Appeals concluded that a

bankruptcy trustee, in liquidating the estate of a barge company, could not abandon several barges when the abandonment would have obstructed a navigable passage in violation of federal law. (cited in Midlantic)

4. In re Lewis Jones, Inc., 1 BCD 277 (Bankr Ct. ED Pa. 1974), the Bankruptcy Court invoked its equitable power to "safeguard the public interest" by requiring the debtor public utilities to seal underground steam lines before abandoning them. (cited in Midlantic)

5. Midlantic Nat’l Bank v. N.J. DEP (SC, 1986, Powell)- Quanta Resources Co. processed waste oil. Bank gave Quanta $600K loan secured by inventory, accounts receivable, and certain equipment. NJDEP then found Quanta violated a specific prohibition in its operating permit by accepting more than 400,000 gallons of oil contaminated with PCB. Ordered cleanup. Ch. 11, then Ch. 7. Abandonment, because cleanup too expensive. Upon abandonment, the trustee removed the 24-hour guard service and shut down the fire-suppression system. Trustee was not required to take even relatively minor steps to reduce imminent danger, such as security fencing, drainage and diking repairs, sealing deteriorating tanks, and removing explosive agents. NY spent $2.5mm to decontaminate the facility, asks for repayment as admin expense.

2. Exemptionsa. Generally

i. 522c1- Exempt property not liable during or after case for debt before commencement of case (even non-dischargeable ones)

ii. Consider support- obligations may be satisfiable out of that exempt property if D files for bankruptcy, but otherwise it would be immune.

iii. Consensual Lien Exception in Rem1. Exempt property liable if debt secured by consensual lien (mortgage or

security interest) or tax lien (522c2) but AS applies2. Valid lien will survive in rem and may be enforced against property

securing debt, but no action is permitted against debtor personally for a deficiency (524a)

3. Except for some minimal security interests (see fed exemptions below)

iv. Discharge1. 524a1- discharge automatically voids any judgment against debtor for

personal liability on a debt that is included in discharge2. 524a2- discharge is injunction against continuation of action to collect

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debt as a personal liability of debtor3. Once debt is discharged, can not be pursued- ever.4. Certain debts nondischargeable

a. 523(a)(8)- debts founded on government-insured education loans are generally nondischargeable

b. but still can’t go after exempt assets- exempt asstes are exempt even if dischargeable from non-exempt assets

5. Discharge only once every 8 yrs (727a8)

b. Claiming exemptioni. Exempt property included under 541a, then subject to being claimed as exempt (and

only by individual debtor) under 5221. Certain exemptions against judgment creditors anyway (5205, 5206)

ii. Rationale: Debtor may decide not to claim property as exempt, or a R may fail to meet timing requirements

iii. Timing1. Bank Rule 1007: R must file a schedule of exempt property w/in 15 days

of the order for relief, unless the time period is extended by the court2. Cs have 30 days from the date of the end of 341 meeting to file objections

to the claimed exemptions.iv. Once R claims, accepted unless challenge

1. Taylor v. Freeland & Krnoz- SC held that property claimed in the schedules as exempt becomes exempt if no objection is made–even if there’s no basis for the claim of exempt status.R claimed a $100,000 employment discrimination claim as exempt. The trustee failed to object to the exemption because he thought the claim was worthless.

v. But can’t claim bogus exemptions (bad faith)1. in hope no one will notice and 30 day SOL will run out- Under 727, this

kind of behavior may result in a denial of the debtor’s discharge.2. E.g. Johnson- denial of discharge.

vi. You are allowed to sell exemption

c. Fed Exception – only in play on bankruptcy filingi. Certain tax (523a1 exception to 522c1)

ii. Support (523a5 exception to 522c1, no AS either)

d. Fed exemptionsi. Non-bankruptcy exemption

1. covered under choice of law terms of 522b2. E.g. SS benefits, civil service retirement benefits, and veterans’ benefits are

made exempt by operation of various provisions of federal nonbankruptcy law.

ii. Security Interest in Rem1. Exempt property liable if debt secured by consensual lien (mortgage or

security interest) or tax lien (522c2) but AS applies2. Valid lien will survive in rem and may be enforced against property

securing debt, but no action is permitted against debtor personally for a deficiency (524a)

iii. Security interest – very few exemptions allowed

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1. 522f1B- Debtor may avoid a non-possessory, non purchase-money security interest to extent that it impairs an exemption to which the debtor would have been entitled in any:

a. Household goods (including jewels, clothes, musical instruments)- primarily for debtor or dependent’s personal or family use

b. Professional books, tools of tradec. Health aids (e.g. wheelchair)

2. These are part. items that are bare minimum that bankruptcy is trying to protect. Also HFC isn’t really going to take over a $300 couch, it doesn’t care—it would just use that interest to coerce debtor to pay.

iv. Judgment Lien – exemptions allowed1. 522(f)(1)(A): a R may avoid a judicial lien on exempt property to the extent

that it impairs the exemption.2. But not if child support- 522(f)(1)(A): even though exempt prop is

generally not subject to satisfaction of a judicial lien; it is subject to a judicial lien for for alimony, spousal or child support, unless has been assigned to another entity

e. NY State Exemptionsi. 5205, 5206 applied even if not for bankruptcy

ii. CPLR 5205: Personal Property exempt from application to satisfaction of money judgment

1. (D&C 283 limits to $5K)2. 5205a- stove, bible, church pew, pets, apparel, fridge, furniture, radio,

crockery, tableware, one tv, wedding ring, necessary working tools, watch up to $35, not burial plot (in 5206)

3. 5205d- 90% of earnings of judgment R for personal services rendered within 60 days before income execution delivered to sheriff, Support payments/matrimonial settlement (for R)- bankruptcy is treated same as execution.

4. 5205e- income from armed forces5. 5205g- security deposit for rental of residence6. 5205d1- 90% of income from trust is exempt (sometimes more)

a. In bankruptcy, ERISA qualified retirement account doesn’t even come into estate under 542c2 (but IRA does)

7. But no trust exemptions from judgment of spousal supporta. 5205c4- trust exemption doesn’t impair spouse’s ability to get

judgment (“qualified domestic relations order) on all IRAs or big-ticket exemptions

b. No fresh start at ex-wife’s expense

iii. CPLR 5206: Real Property exempt from application to satisfaction of money judgments

1. Includes burial plot land (only if someone in it)2. $50K cutoff, if sale of property then debtor keeps 60K which is exempt for

1 yr (unless plows it into a new house)3. Becomes $100K (big number) if spouses file together.

iv. D&C 282- bankruptcy

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1. Can screw with system by filing petition just for AS (you can only get discharge once every 8 yrs, but you can still get AS)

a. 109g can make it abusive if w/i 180 days from last casei. but only if prior case dismissed b/c he misbehaved, or if it

was voluntarily dismissed b/c a creditor got relief from the stay.

ii. Outside of 180 days, could do dismissal/relief for cause2. 5205 exemptions, 5206 exemptions, insurance policies under 3212, motor

vehicle not exceeding $2400 above liens, benefits (social security, veterans, disability, stock bonus, pension unless doesn’t qualify under IRS), wrongful death, P&S up to $7500

v. D&C 283- bankruptcy1. 5205 limited to $50002. If doesn’t use 5206, and 5205 maxed out below $5000, then can still take

either (a) any cash he has up to difference bet $5K and claimed 5205 exemptions or (b) $2500- whichever lower

3. Rationale: 5206 spillover exemption because if you’re so poor you can’t claim homestead exemption, you should get something.

f. Which Law i. Fed- R has a choice of exemption schemes under (522b):

1. Exemptions available under other (nonbankruptcy) federal law plus the law of the state in which the debtor is domiciled.

a. Nonbankruptcy – E.g. SS benefits, civil service retirement benefits, and veterans’ benefits are made exempt by operation of various provisions of federal nonbankruptcy law.

2. Federal exemptions prescribed in § 522(d) a. Also includes federal non-bankruptcy aw- integrated into the

federal exemption scheme by § 522(d)(10)b. But 522b1 provides that a state may adopt legislation prohibiting

its citizens from choosing the § 522(d). Most states – including New York – have “opted out” of federal. (NY D&C 284)

ii. What state?1. R must be domiciled in that state for 2 yrs before petition.2. If R did not live in state for 2 yrs, R takes exemptions of the state in which

he or she resided during the 180 days or the majority of the 180 days prior to the commencement of that 2yr period. (522(b)(3)(A)- 2005)

Table : Selected Exemptions

Federal Non-BankrExemptions

FederalBankruptcyExemptions

NY State Non-BankrExemptions

NY StateBankruptcyExemptions

Property exempt under IRC

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Disability Benefits 5 USC §1930;

Civil Service Ret Benefits10 USC § 1935

Military Benefits 15 USC § 1673

ERISA Qualif Pension Plans 29 USC § 10561

Social Sec. Benefits 42 USC 407

The stuff described in § 522(d).

Note that § 522(d)(10) picks up the various federal non-bankr exemptions

CPLR 5205 "stuff", including the miscellaneous stuff in subsection (a) and the important(c) "trust exemption"2

CPLR 5206 Real Prop, including the $50,000 homestead exemption

Ins Law § 3212

D/C 282:

Picks up CPLR § 5205 & 5206; and Ins L. § 3212 most non-bankr fed exemptions;

The $2400 vehicle

Certain pension, wrongful death, P.I. claim benefits

D/C § 283 limits CPLR § 5205(a) exemptions, provides an alternative exemption

...from satis of tax claims:

See Internal Rev Code § 6334(a)

3. Conversion of Non-Exempt to Exempt Assets on the “Eve” of Bankruptcy

a. Law permits Rs to intentionally transform property into exempt assets. (J-I)i. Rationale: fresh start.

b. General rule: Ascertain R’s actual intent, examine actions (property use) in furtherance of purpose of exemption and fed fresh start bankr policy

i. Courts look at how much was converted and reason why converted. 1. For unlimited exemptions, amount of property converted into exempt

forms and the value, amount, and nature of the exempt form taken may be considered in determining whether fraudulent intent exists. (John I)

ii. Can’t temporarily "shelter" the value of the non-exempt asset from the claims of Cs, for later retrieval via sale or liquidation (J-II)

iii. Pigs can get away, but hogs will get caught.

1 1 This exemption, which refers to ERISA regulated pension benefits, does not apply to to alimony, maintenance or child support claims under a "qualified domestic relations order." This means qualified under § 414(p) of the Internal Revenue Code, and that section refers to support orders issued by a state court of

competent jurisdiction.

2 2 These "trust funds," too, are liable for the satisfaction of alimony, maintenance, or child support claims

under a "qualified domestic relations order."

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1. Scope of the exemption is fixed by state law, but the debtor's right to discharge is determined by federal law.

2. E.g. Minn. loves homesteads (limited by acreage rather than by monetary value, reflects “growth and cultivation among its citizens of feelings of personal independence, together with love of country and kindred”). So Minn R may enhance the value of his interest in an exempt homestead by converting virtually any amount of nonexempt assets to homestead equity, without jeopardizing his right to a discharge in bankruptcy.

a. Johnson I –homestead. (8th Cir. 1989)- Johnson invested in a real estate enterprise GVI, GVI had substantial financial difficulty, and GVI's Cs obtained judgments against Johnson. In anticipation of bankruptcy, R converted $400K in property assets into property exempt from his creditors' claims under Minn law (paid off mortgage to own free & clear, put income in individual retirement accounts, life insurance, musical instruments). Then filed Ch. 7. No fraud as to Johnson's homestead exemption but remand for the bankruptcy court's reconsideration of the other issues in light of this opinion.

3. E.g. Johnson II (BC, Minn 1991). R did not acquire any of these assets for the purposes which the legislature sought to advance. Merits denial of discharge under 727(a)(2)(A).

a. Claim of Exemption in Cash Value of Life Insuranceb. Purpose to protect against hardship by keeping life insurance in

that form. Bought within several weeks of filing, consulted attorneys about exemption laws, there were lawsuits and judgments against him, he had no dependents for his life insurance, asked for policy w/cash surrender value that would not exceed exemption value. Soon after his bankruptcy filing, R surrendered the National Life policy, and spent the cash he received back from the insurer. Also he already had life insurance coverage under a "term" policy, presumably in amounts he had previously deemed appropriate, and there is no evidence of record that he or his intended beneficiaries needed any additional protection.

c. Claim of Exemption in Musical Instrumentsd. Purpose: The extension of exemption protection to such family

possessions and keepsakes as a Bible, the home library, and musical instruments seems to be one of those pieces of nineteenth-century legislation which embodied and honored the pieties of the growing Republic. Such enactments manifested a public policy encouraging stable family life, education, and the refinement of tastes and emotions, through the tempering influence of religious faith and the arts, sciences, and letters. -- so actual retention use, and maintenance of such items by the debtor and his family members, however, is essential to the accomplishment of this legislative purpose.

e. Use: Traded his collection of wooden sport and fishing boats to an acquaintance of his, for a harpsichord of European manufacture- neither R nor live-in girl friend, play either of the instruments. Harpsicord remained in the basement of Debtor's house

c. But can be denied discharge under 727a2, for acts done with an intent to hinder, delay or defraud creditors.

i. Size of exemptions doesn’t bear on objection to discharge- a small transfer is subject to sanction as a large one (J-II)

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ii. Cf. Once R claims even though no basis, accepted unless challenge1. Taylor v. Freeland & Krnoz- SC held that property claimed in the schedules

as exempt becomes exempt if no objection is made–even if there’s no basis for the claim of exempt status.R claimed a $100,000 employment discrimination claim as exempt. The trustee failed to object to the exemption because he thought the claim was worthless.

iii. Extrinsic evidence of fraudulent intent is required to establish fraud.

1. Desire to convert assets into exempt forms by itself does not constitute fraud (John I)

2. Extrinsic evidence = a. materially mislead or deceive Cs about the R's positionb. conveyances for less than fair value (John I)c. continued retention, benefit or use of property allegedly

conveyed together with evidence that the conveyance was for inadequate consideration (John I)

d. proximity of the transfer to collection remedies against R in favor of an unsecured C (John II)

e. the making of the transfer after the R obtained a temporary respite from the collection pressure of creditors (John II)

3. For unlimited exemptions, amount of property converted into exempt forms and the value, amount, and nature of the exempt form taken may be considered in determining whether fraudulent intent exists. (John I)

iv. Special case: Homestead- 522(o)1. Ability of a R to exempt interest in homestead property will be reduced to

the extent that “it is attributable to any property that the debtor, with the intent to hinder, delay, or defraud a creditor, disposed of in the 10-year period ending on the date of the filing of the petition...” (2005)

a. Excludes full value of new home- except exemption would have been entitled to under previous state law

2. Still subject to state choice of lawa. R must be domiciled in that state for 2 yrs before petition. If he

was, then subject to 10 yr restriction.b. If R did not live in state for 2 yrs, R takes exemptions of the state

in which he or she resided during the 180 days or the majority of the 180 days prior to the commencement of that 2yr period. (522(b)(3)(A)- 2005)

3. Good faith= Reason for move- circ evidence that did it to avoid C obligations…and

a. As soon as it became apparent that the business was failing, Rs undertook a well considered and carefully orchestrated series of maneuvers for the purpose of shielding their assets from the reach of their creditors.

b. Mr. Coplan was painfully aware that, in the event the business defaulted on its obligation to AT&T, he was personally liable. Mrs. Coplan admitted the debtors knew their house in Wisconsin was subject to forced sale to satisfy the claims of their creditors and that a homestead in Florida was fully exempt. R then moved to

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Florida without any job commitment for the only breadwinner for the family, having rejected job offers in Wisconsin.

4. ….Timing of asset conversion from exempt to non-exempta. As a general rule, all other things being equal, the more distant the

conversion, the less likely the court will be to find that the conversion was part of a specific plan to exclude the property from the reach of creditors.

b. The fact that the debtors waited one year to file their petition suggests that they were carefully attempting to avoid having the conversion set aside as a fraudulent transfer–a transfer with the intent to delay, defraud, hinder creditors. During the year period, they spent down their nonexempt assets.

c. E.g. In re Coplan (Bankr. M.D. Fla. 1993)- Lee was a principal in family-owned appliance store that was in financial difficulty, he had personally guaranteed debt, sold home and bought in Fl. (unlimited homestead). File petition in Fl. Aftr 1 yr. Lee and Rebecca insisted that they had moved to Florida in order to improve their job prospects, and because Lee disliked his job, disliked his partner, had issues with his parents and just couldn’t stand the stress anymore. Exemption should be denied to the extentcthat the debtors achieved a benefit greater than their entitlement under Wisconsin law.- $40K exemption

d. 522(p)(1) Per Se Homestead Limitationi. if a debtor uses the proceeds of a disposition of nonexempt property to increase the

value of his or her interest in an exempt residence in 1215 days [roughly 40 months] prior to filing a bankruptcy petition, then the portion of the value of the residence attributable to the disposition of the nonexempt property may not be exempted to extent that resulting exemption exceeds $125K

1. e.g. pay down a mortgage that encumbers an existing interest2. But even R who installs a new kitchen or new guttering that increases the

value of her homestead ii. Most states are below 125 anyway, so not that much of a difference

4. Preferential Transfersa. General

i. Prefer- pay one creditor ahead of anotherii. When a lien is avoided, the transferee is relegated to the status of an unsecured

creditor.iii. May recover property or value (550a)

b. Rationalei. Equal treatment. Cs of equal rank to be treated equally

1. To accomplish an equitable distribution in order established by code2. Discourage Mad Mad race to the assets, which benefits only the fastest C

ii. Stop precipitous filing. Discourages Cs from disemboweling R just prior to filing. 1. threat of a give-back discourages creditors from engaging in asset grabs

when bankruptcy seems imminent, tipping a debtor into a filing.2. protection enables him to work his way out of a difficult financial situation

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through cooperation with all Cs

c. 547 Requirements for avoiding preferential payment:i. Note: Don’t waste time writing each element. Just apply them.

ii. The trustee may avoid any transfer of an interest of the R in propertyiii. To or for the benefit of a C (b1)

1. includes changing C from unperfected to perfectediv. Made on account of an antecedent debt (b2)

1. after the debt was incurred not contemporaneous exchange v. Made while the debtor was insolvent (b3)

1. Presumption that R was insolvent during the 90 days immediately preceding the filing of the petition ( 547f)

2. Rationale: purpose of avoiding preferential transfers is to avoid giving one of creditors more than another. If there’s enough to go around, we don’t care.

vi. Made within 90 days of the commencement of the case, or within a year, if the transfer was to or for the benefit of an insider. (b4)

1. insider 101(31)- relative or general partner of the debtor, a partnership in which the debtor is a partner, a corporation of which the debtor is an officer, director, or control person.

a. Rationale: insiders may not only know about upcoming peittion, but be able to control, the timing of a bankruptcy filing. Insiders may be able to postpone filing for 90 days; it is less likely that an insider can stave off filing for a year.

2. 547(i) – after 90 days, recoverable only from the insider, not for benefit of insider (within 90 days could recover from insider or for benefit of insider)

a. E.g. gets insider guarantor off hook after 90 days

vii. Giving transferee more than would have received in a Ch 7 case if the transfer had not been made (b5)

1. Improvement in position test: Comparison is made not as of the time the transfer was made, but at the time the assets are marshaled for distribution in bankruptcy- as long as the distribution to creditors is less than 100%, the result is always that the preferred creditor gets more.

a. Because estate is always going downward, so amt to be distributed among equal creditors will be equal percentage (e.g. 20%) of smaller pie

2. But floating lien consideration- consider Ch 7 for Secured C’s – they would have first dibs on collateral anyway, so position wouldn’t be improved. (Lackow- not on test)

3. Exempt property- If transfered property that could have been claimeda. Courts have traditionally refused to void such transfers, if

voluntarily made, on the theory that the other creditors are not damaged by them. But might still need to pass b5

d. Any transfer of an interest of the R in propertyi. "Transfer" = "every mode, direct or indirect, absolute or conditional, voluntary or

involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest." 101(54)

1. Perfection of a security interest (Merritt) 2. Creation of lien- consensual or judicial (docketing judgment- CPLR 5203)

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3. Retention/granting of title as security interest

ii. Earmarking exception1. Def: Use of another’s entity’s property to repay a specified antecedent debt

if no dimunition of R’s estate a. Also applies if funds are loaned to R under agreement that they

will be used to pay a specific creditorb. For security interests- when a security interest is given for funds

used to pay secured debts, but not when a security interest is given for funds used to pay an unsecured debt. (heitkamp)

i. Must result in one C steeping into another’s shoes of equal priority and status (or who’d get greater priority- mechanics lien comes before second mortgage)

ii. To the extent that a security interest is transferred by the debtor in exchange for the fresh funds, an old one must be released.

2. Rationale: Loaned funds never become part of R's property. Instead, a new creditor merely steps into the shoes of an old creditor.

3. E.g. In re Heitkamp (8th Cir, 1998)- Heitkamps build and sell homes in North Dakota. Obtained loan for $40K from the bank in exchange for 2nd mortgage, bank issued cashier's checks payable to specific subcontractors (who had secured mechanics liens for $40K). Ch 7. Mortgaged house was sold, and the bank and several subcontractors asserted rights to the proceeds.

a. Transfer of the mortgage interest to the bank merely replaced the subcontractors' security interest, Bank and the Heitkamps agreed the secured funds would be used to pay specific preexisting debts, the agreement was performed, and the transfer of the mortgage interest did not diminish the amount available for distribution to the Heitkamps' creditors. (Heitkamps owed subcontractors $40K secured by statutory lien on the house for goods and services rendered, afterwards liens waived, owed the bank $ 40K secured by the house for a cash loan used to pay the subcontractors)

b. Transfer of $40K to subcontractors not avoidable, because it was not a transfer of the R’s property. It was a transfer of the bank’s money- new funds never become part of the debtor's property.

c. Transfer of the mortgage- not preferential because it merely resulted in one C stepping into the shoes of another C of equal priority and status.

e. Date of transfer- 547(e) i. Important for 90 days and antecedent debt

ii. Provided R had acquired right in property at time of transfer (547e3)iii. Counting- Bankr. Rule 9006 - "the day of the event from which the designated

period begins to run is not included."1. So, if the transfer is made on Monday January 1, we begin counting on

Tuesday January 2. 2. Under this same rule the last day is included unless it is a holiday or

weekend.

iv. Perfection w/i 30 days1. Transfer is made on the date it became effective bet parties (547e2A)

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2. Rationale: Timing is critical for preferences, and we can’t identify the time of the transfer if we cant detect/see the transfer itself. Problem arises when mortgage is invisible.

3. Even in bankruptcy, you’re allowed to perfect w/i 30 days. Exception to AS- 362(b)(3) – AS lifted (and security can be perfected) if occurs w/i 30 day period.

v. Perfection after 30 days1. Transfer is made on date of perfection-547e2B

vi. Perfection once in bankruptcy for 30 days1. 547e2C- For preference purposes, transfer is deemed to have been made

immediately prior to bankruptcy if perfection has not occurred at the later of a. (i) the commencement of the case; and b. (ii) 30 days after such transfer takes effect between the transferor

and the transferee. 2. No real perfection- Can’t record it. Actions taken in violation of the auto

stay are void. This is just for preference purposes.

f. Perfectingi. Real property- Deemed perfected when under state law (e.g.

recording statutes), it is superior to the interest of a subsequent bona fide purchaser (547e1a)

1. New York Real Property Law 291- must be recoreded to be good against subsequent purchasers in good faith and for a valuable consideration

2. Rationale: Law’s historic abhorrence of “secret liens.” Holders of nonpossessory interests in property are invisible. Cs may rely on these assets in extending credit to the R. Also they may not be real.

3. If you don’t record promptly, then the transfer could be avoidable by the trustee.

ii. Personal property- Deemed perfected when under state law (e.g. UCC Art. 9) it is superior to interest of a subsequent judicial lien creditor (547e1b)

1. Outright sale/transfer (e.g. payment in cash), the moment that the transfer takes effect = the moment that the creditor is perfected (so w/i 30 days)

a. When the cash “changes hands,” a judgment lien creditor can no longer levy on that cash. 5202a1 (cash not levied on, so takes priority over judgment Lien Creditor)

2. Checka. Transfer occurs when banks pay, not when check transferred,

because only when paid can a judgment C not have claim on R’s account. Transfer and perfection simultaneous. But could be substantially contemporenous 547c1, not antecedent.

a. Barnhill v. Johnson (SC 1992)- Check was dated Nov19, and the check was honored by the drawee bank on Nov 20. Ch 11, 90th day was No 20. Receipt of a check does not, however, give the recipient a right against the bank. 3-409(1). Myriad events can intervene between delivery and presentment of the check that would result in the check being dishonored. R in this case retained the ability to stop payment on the check until the very last, another creditor could lien on bank funds.Date that bank pays the check is day transfer takes effect.

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2. Cashier’s/certified checka. Since the funds are removed from the debtor’s account

immediately, these are analogous to cash transfers – thus they are intended to be, and are in fact, substantially contemporaneous.

3. Judgment creditor, must deliver writ to sheriff4. Security interest

a. UCC 9-317a2- once a security interest is perfected it has priority over the interest of a judgment creditor who subsequently levies on the property

b. Attachment (9-203) +Filing UCC statement (9-310a) or possession (9-313)

c. Security interest “attaches” to the collateral wheni. (1) there is an “authenticated” security agreement that

describes the collateral, or the collateral is in the possession of the secured party pursuant to the agreement

ii. (2) value has been giveniii. (3) the R has rights in the collateral - i.e. the R owns

whatever he is giving C rights to- important b/c it is not uncommon for borrowers to give security interests in stuff they don’t own! (e.g. an interest in current inventory; but that might not really be owned inventory).). UCC § 9-203.

1. Lien floats and attaches to the inventory when you acquire rights in the inventory

2. Security attaches on date new property acquired (provided financing statement already made).

3. Also- 547e(3) - transfer is not made until the debtor has acquired rights in the property transferred

4. Rationale: prevents a C from “encouraging” a debtor on the edge of bankruptcy to convert assets in which C has no security interest(e.g., cash) into collateral in which it does have a security interest, (e.g., equipment).

d. But can not attach post-petition.(552)i. e.g. if creditor granted lien in all inventory “now owned

and hereafter acquired”, then new inventory acquired after CH. 11 filed not part of that security. Except if offspring of collateral 552b.

5. PMSI- 547(c)(3) a. For PMSI, Transfer/perfection occurs on date of attachment (when

R received property), but still not avoidable even within 90 days. b. Rationale: we want to encourage lenders to make extensions of

credit that will enable Rs to keep operating and help them stave off bankruptcy.

c. Elements:i. C gave R new value (extended credit) to enable the

debtor to acquire the collateral.ii. New value (extension of credit) was given at or after the

signing of a security agreement describing the property as collateral for the loan. (In other words, the

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transaction was wholesome, above-board, and was clearly intended to create a PMSI), AND. . .

iii. R actually used the new value (extension of credit) to buy that collateral. (To avoid a commingling of funds and tracing problem, the lender might make the loan check payable to the seller.), AND . . .

iv. C perfects its security interest no later than 30 days after the debtor receives possession of the property (can also perfect anytime before- UCC can be pre-filed.) Secured creditor doesn’t have to file a new UCC each time a new purchase occurs.

6. Inventory a. “Floating Lien Exception” for Security Interests in Inventory and

Receivables; § 547(c)(5) b. 547(c)(5) - expressly excepts from the preference section liens on

inventory or receivables, except to the extent that a creditor has improved his position at the expense of the estate during the ninety (90) days to the prejudice of other creditors holding unsecured claims. Even though may not be perfected.

c. Improved his position?i. If the transfer creating the original security interest occurs

within the 90 day preference period, for example within 30 days of filing, the comparison is from time of transfer to time of filing.

ii. to the extent that the value of the collateral--the inventory and receivables--on the date of filing exceeds the value of the collateral on the date 90 days before the filing date.

iii. Where the secured creditor is an insider, the comparison is made between the creditor's position one year from the filing and the date of filing (5Aii)

iv. Does not occur when mkt forces increases value - 547(c)(5) says that in order for the increase in the value of the collateral to be avoidable, the resulting benefit to secured creditor must be at the expense of unsecured creditors.

1. This situation only occurs when the value of the collateral is increasing because the debtor is spending unencumbered assets to acquire new collateral.

v. E.g. Jan 15- Amphy borrows $1mm and grants bank security interest in inventory and receivables. Feb 1 -Amphy owes the bank $1mm. Inventory and receivables worth $500K. May 1 Amphy owes the bank $1mm. Inventory and receivables worth $700,000. The trustee can recover the difference between $500,000 and $700,000 or $200,000...the amount by which the collateral value increased during the 90-day period.

vi. E.g. IN RE LACKOW BROTHERS, INC. (S.D. Fla. 1982)- Debtor was a manufacturer of moderately-priced gold jewelry items. Heller has a lien on the Debtor's inventory and accounts receivable by the terms of an Inventory Loan Security Agreement dated September 24, 1980. Ch. 11 on April 1. Here, Heller was secured to the full extent of the outstanding balance of its loan to the Debtor on both of the pivotal dates within the ninety (90) days before the petition; the Court further finds and concludes that Heller, being at no relevant time undersecured, did not receive any payments from the Debtor during the relevant ninety (90) day period which could have improved Heller's position to the prejudice of the estate. OK within § 547(c)(5);

b. Antecedent debt (547b2) vs. Substantially Contemporaneous Exchange for New Value (547c1)

i. Past 30 day perfection= antecedent debt

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1. Transfer contemporaneous if perfected w/i 30 days (b/c relates back to date of debt)

2. But delayed transfer of liens (mortgages, security interests) after 30 days can result in the transfer being treated as a transfer on account of an antecedent debt.

7. In Re Merritt (Bankr. W.D. Mo. 1980)- R purchase 30 crates for their hog farm operation. Callaway Bank, D, loaned the Rs $10K and took a security agreement. UCC signed June 4, 1979 but not filed with the Callaway County Recorder of Deeds' office until March 6, 1980, description of collateral was "machinery and equipment." Bankruptcy was filed by the debtors on May 5, 1980 (w/i 90 days). Perfect by filing- So transfer was "made" on March 6, 1980. For antecedent debt- R’s official transfer was more than 45 days after loan.

iii. 547(c)(1)-Substantially contemporaneous exchanges for new value.1. If a transfer was

a. (a) intended by the parties (R and C) to be a contemporaneous exchange, and

b. (b) was, in fact, a substantially contemporaneous exchange, c. it should be treated as if it were a contemporaneous exchange, and

not a transfer on account of an antecedent debt. 2. E.g. In Re Merritt. Intent OK But fails on 547c1b. Not actual exchange in

fact because of the substantial time between the transfer (when the security interest was perfected) and the making of the debt (over eight (8) months), this Court finds that the exchange was not in fact substantially contemporaneous.

3. Rationale: designed to cover the situation in which the soon-to-be R pays by check but the seller does not actually receive payment until the check is cleared through the R’s bank. Otherwise transfer is technically on account of an antecedent debt.

4. Payment by Check= Contemporaneous exchangea. If it is intended to be contemporaneous exchange, payment is

considered to be made when the check is delivered for purposes of sections 547c1 and c2 These sections are designed to encourage creditors to continue to deal with troubled debtors on normal business terms by obviating any worry that a subsequent bankruptcy filing might require the creditor to disgorge as a preference an earlier received payment. (Barnhill)

b. E.g. If check had bounced several times, so that check did not clear until a month later. Not, in fact, contemporaneous.

c. E.g. Suppose the check was post-dated by 30 days, but the store nevertheless deposited it immediately and it cleared a day or two after it was deposited? What if creditor waits the 30-days? This first is a transfer that was not intended to be contemporaneous, but, in fact, was. The second is a transfer that was not intended to be contemporaneous and was not, in fact contemporaneous. The exception does not save either of these transfers from avoidance as a preference.

5. Credit Card- not contemporaneous exchange. Belfance v. Standard Oil Co. (Bankr. N.D. Ohio 1982).

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c. Ordinary Course of Biz or Financial Affairs of R and Transferee (547c2) i. Elements

1. If debt had been incurred in the ordinary course of the business of both R and C (547c2A), and

2. Eithera. Payment, too, had been made and received in the ordinary course

of their businesses (547c2B) ORi. Norm established by the R and C in the pd before the

preference period, preferably well before. (Tolona)ii. E.g. Tolona. The debtor usually paid for sausage

deliveries within 28-30 days, and most of the payments that the trustee sought to avoid were made within 28-30 days, too. These were longer terms than less favored customers got, by they were the custom of this seller and its oldest and best customers.

b. Payment "made according to ordinary business terms.” 547c2C.i. Posner: If terms are not so extraordinary that debtor’s

other Cs would be taken by surprise. (Tolona) (Circuits divided-some say industry std.)

ii. E.g. Tolona. Here- no hint either that other creditors of Tolona would have been surprised to learn that Rose had been so forbearing in its dealings with Tolona....It is true that Stiehl testified that Tolona was one of an exceptional group of Rose's customers with whom Rose's dealings fell outside common industry practice. But the undisputed evidence concerning those dealings and the practices of the industry demonstrates that payment within 30 days is within the outer limits of normal industry practices, and the payments at issue in this case were made on average in a significantly shorter time.

3. E.g. In the Matter of Tolona Pizza Porducts Corp (7th Cir, Posner, 1993)- Tolona issued 8checks to Rose, its sausage supplier, within 90 days. Rose's invoices said "net 7 days," but Tolona rarely paid within 7 days; nor did Rose's other customers. Most paid within 21 days, 8 payments at issue were made between 12 and 32 days, but in 3 yrs before the preference period, the average time for which Rose's invoices to Tolona were outstanding was 26 days and the longest time was 46 days. Rose consistently treated Tolona with a degree of leniency that made Tolona one of a "sort of exceptional group of customers of Rose . . . falling outside the common industry practice and standards. Passes both tests.

ii. Rationale:1. Supposed to insulate payments on account of short-term debts such as

shipments of supplies or inventory on “net 30 day” terms. Don’t want to discourage supplier from shipping and forcing R into bankruptcy.

2. Timeline: Soon after the Code was enacted, people realized that some industries deal on longer than 30 or 45-day terms. No solution. Congress took out 45 days, debating over new time.

3. “Or” is 2005 new- This prevents overzealous trustees from extorting settlements out of suppliers who could easily show that the transfer was made in the ordinary course, but who could not afford to hire experts who would testify that the transfer was made according to normal business terms.

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iii. Can also apply to long-term payments (not just accounts receiv)1. Installment payments on account of long term loans OK, if the

“ordinary” requirements are met2. Union Bank v. Wolas (SC,1991, Stevens)- ZZZZ Best Co., Inc. (R)

borrowed $7mm from P, Union Bank, monthly payment required. Ch. 7. During the preceding 90-day period, the Debtor had made two interest payments totalling approximately $100,000 and had paid a loan commitment fee of about $2,500 to the Bank.

3. Counterargs: a. Ps say- ordinary course intended for commercial paper, trade

creditors (short-term debt payments)- nothing else. Captured previous current expense rule.

i. But Congress redressed short-term debt problem by entirely deleting the time limitation in § 547(c)(2). 547(c)(2) shouldn’t be construed as the statutory analogue of the judicially crafted current expense rule because there are other exceptions in § 547(c) that explicitly cover contemporaneous exchanges for new value.

b. Ps say- you’re violating equal distribuition policyi. But even if we accept the Court of Appeals' conclusion

that the availability of the ordinary business exception to long-term creditors does not directly further the policy of equal treatment, we must recognize that it does further the policy of deterring the race to the courthouse and, as the House Report recognized, may indirectly further the goal of equal distribution as well.

d. Transfers of Payments on Account of Domestic Support Obligations-547c7-i. 547(c)(7)- payments made on account of bona fide alimony, maintenance, and

support obligations are not avoidable as preferences.

e. Subsequent Advance/New Value Exception (Net Result Rule); 547(c)(4)i. Transfer avoidance reduced if creditor gave new value after preference payment if

1. The new value must be advanced after the preference is paid. Hence we call it a subsequent advance.

2. The new value must be advanced on an unsecured basis. a. Otherwise the creditor would be transforming unsecured into

secured indebtedness and improving its position at the expense of unsecured creditors.

ii. The Point: It would be unfair to make creditor disgorge preferences if it did not also get credit for fresh advances it made during the preference period.

iii. E.g. Suppose that Brian owes MasterCard $1,000. Suppose that this is a balance that he’s been carrying for some time, paying only the minimum amount due, and suppose that this is an unsecured claim. 60 days prior to his bankruptcy filing, he pays MC $500, but 30 days prior to the filing, he takes a MC cash advance of $100. So trustee could only recover $400 from Mastercard.

f. Transfers to an Approved Credit Counseling Agency § 547(h) i. New § 547(h)- trustee may not avoid as preferences payments made to an approved

nonprofit credit counseling agency pursuant to an alternative repayment schedule.ii. E.g. If credit counselor negotiated an agreement between Brian and Visa pursuant to

which Visa agreed to reduce Brian’s debt if Brian would resume making payments

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of, say, $100 a month for the next two years. The payments would be made to the credit counseling agency, which would remit them to Visa. Suppose that Brian made payments on January 1and February 1. On March 1, Brian filed a bankruptcy petition.

2. The Strong Arm Power: Transfers That Can Be Avoided by The Trustee in Its Capacity as Hypothetical Ideal Lien Creditor And Bona Fide Purchaser

a. 544 gives trustee power to avoid transfers that are not perfected before bankruptcy - calls time on mad mad rush.

i. Trustee steps into the shoes of the perfect Judgment Lien C or BFP that those characters could have avoided. Trustee is strong-arming that other character.

ii. Rationale: Rather than try to figure out who should get priority among those who should have perfected, we are going to put it all into the estate and let unsecured Cs fight over it. So Code halts race and decides to distribute the assets pro rata amongst all the Cs.

iii. Remember:1. Always look to date of filing- you’re hypothetical perfects on day filing

(if C had perfected long after transfer, but before filing- that C still OK)2. For 20 day PMSI, then PMSI takes priority over intervening lien creditor.

So PMSI would trump hypothetical 544. (546b) 3. For purposes of preference transfer, relates back w/i 30 days. But not for

purposes of 544. Hypothetical judgment lien creditor can still levy on it and take priority.

b. 544(a) gives the bankruptcy trustee the power to avoid the kinds of transfers that could be avoided by the following types of hypothetical creditors:

i. A hypothetical judgment lien creditor who got a judgment, docketed it, and did whatever else it had to do to get a lien on all of the debtor's property--real and personal. § 544(a)(1)

1. E.g. A creditor who extended credit to the debtor on the date of the commencement of the case and who, on that date, obtained a judicial lien on all property of the debtor.

ii. a hypothetical judgment creditor who obtained an execution lien on all of the debtor's personal property. § 544(a)(2)

1. E.g. A creditor who extended credit to the debtor at the time of the commencement of the case and at that same time obtained a writ of execution against the debtor.

iii. a bona fide purchaser of real property of the debtor who perfected its title prior to the commencement of the case. § 544(a)(3)

1. E.g. A bona fide purchaser of real property from the debtor, against whom applicable law permits the transfer to be perfected, who becomes a bona fide purchaser and has perfected such transfer at the time of the commencement of the case.

2. Actual knowledge of non-recording in constructive state notice (where would give unrecorded deed priority) doesn’t matter

3. E.g. In re Sandy Ridge Oil Co. (7th Cir. 1986) Sandy Ridge Oil purchased oil well services from Halliburton, going broke, gave note for $244K mortgage on six oil wells, but Halliburton didn’t record properly (no name of person who prepared instrument on document). Ch.11, strong arm?

a. D responds that avoidance is precluded by the debtor-in-

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possession's actual knowledge of the mortgage; and in any case the mortgage provides constructive notice to a bona fide purchaser. Section 544(a) states that a trustee "shall" be able to avoid an encumbrance that would be voidable by a bona fide purchaser "without regard to any knowledge of the trustee or of any creditor." If didn’t record, then judgment lien creditor could get it.

3. The Trustee’s Power to Avoid Fraudulent Transfers a. 544(b)—Trustee has rights that any actual creditors may have under state

fraudulent conveyance laws, can avoidi. state law SOL period may be longer- in NY there is a 6-year statute of limitations on

fraud actions which runs from the date of discovery. N.Y.C.P.L.R. § 213.

b. 548 – Federal fraudulent conveyance statute i. For transfers and obligations R incurred

1. Avoidance of an obligation means that the estate is no longer saddled with it and the non-debtor party does not hold a claim against the estate.

2. Trustee can get back property, or value thereof (550a); or 3. R can be denied a discharge.

ii. Rationale: to provide a measure of uniformity in bankruptcy cases filed in states which have not adopted the Uniform Fraudulent Conveyance Act or the Uniform Fraudulent Transfer Act.

c. Must occur within two years of the filing of the petition. § 548(a). i. Timing of transfer- 548(d) says that a transfer is deemed made for these purposes

when the transfer is perfected as against a bona fide purchaser.

d. Transfers With Fraudulent Intent (548a1A)i. transfers made "with actual intent to hinder, delay, or defraud" entities to which the

debtor was or became indebted on or after the date of the transfer." (i.e. existing or future creditors)

ii. Eg: Brian transfers, for no or nominal consideration, his boat, his stocks & bonds, his jewelry, or as in the previous example, his house to friends and relatives to keep it out of reach of creditors or the trustee.

iii. Eg: Brian repays a debt to someone with whom he hopes to do business in the future, then waits 92 days and files his bankruptcy petition. Arguable case. Depends on whether his primary purpose was to prefer a creditor. This could be a so-called "fraudulent preference" because it mixes elements of both kinds of transfers.

e. Constructively fraudulent transfers-548(a)(1)(B)i. General: Sort of strict liability standard- same effect as fraudulent transfers, difficult

to prove, belief that the are actually fraudulentii. Transfers for Less than Reasonably Equivalent Value While R was Insolvent. §

548(a)(1)(B)(i),(ii)(I)1. Rationale: debtor should not be removing slices of the pie while it is in

financial trouble, unless it is replacing them. 2. Intent is irrelevant3. Insolvency

a. insolvent refers to balance sheet insolvency as defined in § 101(32)b. no counterpart to the presumption of insolvency that arises in the

preference context. Insolvency must be proven.

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4. Reasonably equivalent valuea. Eg. Brian loans $40,000 to his children to be repaid over 40 years

at 1% interest. Held: Not a fair exchange. In re Newman, 11 BR 628

b. Cf: Brian sells apartment building with FMV of $70,000 to stranger for $65,500. Held: reasonably equivalent value. In re Thompson, 18 BR 67

iii. Transfers for Less than Reasonably Equivalent Value When, or which leave, the Debtor undercapitalized. §548(a)(1)(B)(i),(ii)(II) (Similar to D&C § 274)

iv. Transfers for Less than Reasonably Equivalent Value With Intent to Incur Debts beyond Ability to Pay. §548(a)(1)(B)(i),(ii)(III) (Similar to D&C § 274)

f. Exception: Foreclosure Sales OK1. E.g. BFP v. Resolution Trust , 114 S. Ct. 1757 (1994)2. Foreclosure sale couldn’t be overturned as a fraudulent transfer --provided

that the sale was properly and fairly conducted.3. Rs formed a partnership (BFP) that borrowed from a Bank to acquire a

house in Newport Beach. Two years later, BFP defaulted. The bank sold the house at a foreclosure sale for $433,000. Less than a year after that, BFP filed a Chapter 11 petition and sought to set the sale aside as a fraudulent transfer, insisting that the house was worth closer to $725,000..

4. SC held that so long as all the relevant procedures and laws and been complied with and there was no taint of collusion, the price actually received at a foreclosure sale is conclusively presumed to be "reasonably equivalent value" as used in § 548(a)(2).

5. Justice Scalia reasoned that “reasonably equivalent value” could not only mean “fair market value,” because that would mean that a foreclosure sale would always be fraudulent because it is not conducted under the same circumstances as a non-forced sale. Justice Scalia also held that to hold otherwise would mean that real estate titles could be very easily upset and that would interfere with the ancient and strong interest in protecting title to real estate.

g. Exception: Charitable Transfersi. § 548(a)(2), charitable transfers OK if:

1. does not exceed 15% of R’s gross income for the year in which the transfer was made;

a. Or, if it exceeds that percentage, was consistent with the debtor’s practices of charitable giving;

2. Transferee is a charitable institution as defined in § 170(c) of IRC. § 548(d)(3)(A);

3. The transfer is made by a natural person–i.e.–not a corporate or partnership debtor. § 548(d)(3)(B); and

4. The transfer is of money or a financial instrument as defined by the Code. § 548(d)(3)(C).

h. 2005 Amendmentsi. § 548(a)(2)(B)(i)(IV) - even a solvent company to challenge certain out- of-the-

ordinary course employment contracts with insiders. 1. (1) services to be rendered by the employee were not reasonably equivalent

value for the transfers made or obligations incurred2. (2) the transfers and obligations were outside the ordinary course of

business.

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3. This provision is effective only in those cases commenced on or after the date of enactment of the 2005 Act, which would be April 20, 2005.

4. E.g. Suppose, for example, that Amphy enters into an employment contract with Brian, pursuant to which it agrees to pay him $5,000,000 a year, plus a bonus if he meets certain performance levels. Perhaps it also provides that if his employment is terminated, he will receive $1,000,000 a year for the next ten years.

ii. 548(e) designed to attack so-called “asset protection trusts.” 1. transfers made within 10 years before the date of the filing2. to self-settled spendthrift trusts. § 548(e). 3. transfers must have been made with “actual intent to hinder, delay, or

defraud any entity to which the transfer was or became...indebted” on or after the date that such transfer was made.

4. cases filed on or after the enactment of the 2005 Act 5. E.g. Suppose, for example, that instead of investing in his house and a

harpsichord, Dr. Johnson, places several million dollars in an offshore spendthrift trust managed by a trust company in the Cayman Islands. Several years later he files a bankruptcy petition (or is the subject of an involuntary petition). The transfer may well be avoidable

4. Claimsa. Grounds for disallowing claims

b. The Disputed Claim Problem: Ways disputes can get resolved: i. Settlement;

ii. Bankr court gives C relief from stay to litigate claim outside of bankr court or in Bankr ct (unless PI); or

iii. Claims Estimation (§502(c))1. New amendment- lets court pick method for estimating amt of

contingent or unliquidated claim if fixing or liquidating the claim would unduly delay administration of the case

2. How does ct estimate claim?a. Many approachesb. Bittner approach: “ultimate merits” approach: ct

estimates claim at 0 and if C gets judgment that is more than 0, come back and you’ll get your share. This wont work in every case b/c in some cases the claims will be too large.

ASSIGNMENT 10: Allowance and Priority of Claims Against the Debtor

ڭ Introduction to the Proof and Allowance of Claims ب Proof of Claim : the written statement that a creditor files w/ the bankruptcy

court in order to present a demand for payment. (501(a); Rule 3001)ب In a 7 or 13 case, general rule is that a proof of claim must be filed not later

than 90 days after the date set for the 341 meeting of creditors…

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ب In a 11 case, proofs of claim must be filed before a deadline (bar date) that is set by the court. (3003c3)

ب Failure to timely file a proof of claim is grounds for disallowance of a claim… (502b9)

ب Interestingly, though, in an 11 case only, 1111a makes filing unnecessary for claims that are listed in the debtor’s schedules, if those claims are not listed as disputed, contingent, or unliquidated.

ب Most people file anyways as a precautionary matter and if it gets transferred to 7 from 11.

ب Only holders of “claims” that are “allowed” are entitled to receive distributions of estate property (726a).ض In a 11 case, only holders of “claims” that are “allowed” are entitled to

vote on reorganization plans 1126a and receive distributions of estate property pursuant to a reorganization plan…

ب In order for a claim to be allowed under 502, it must be evidenced by a timely filed proof of claim.ض 502a states that if a proof of claim is filed or is deemed filed under 1111a,

the claim that it represents will be deemed “allowed,” unless a party in interest objects!

ض That is why debtor/trustee must go through and object to improper claims (704(5), 1106a1, 1107a)

ب Claim may be “objected” by trustee/debtor as a matter of private agreement/non bankruptcy law/unenforceable against debtor and property under any agreement or applicable law (502b1) or any other reason listed in 502.

ش Estimation of Contingent and Unliquidated Claims ڭ Remember 101(5)’s broad definition of a “claim.”

ب A right to pmt is said to be unliquidated if the existence of the claim is not in question, but the amount of the claim is. If the amount is easily ascertainable, the claim is liquidated.

ب A right to pmt is said to be contingent, if the debt is one that the debtor will be called upon to pay only upon the occurrence of an extrinsic event and if that occurrence or event was reasonably contemplated by the debtor and creditor.

ب A right to pmt is said to be unmatured, if the time for pmt has not arrived. Debts comes due a year from now.

ب A right to pmt is said to be disputed, if the existence of the liability or amount of liability is challenged.

ڭ With disputed claims, parties can settle their dispute subject to court approval, court might grant relief from the stay to permit liquidation of the claim through nonbankruptcy court, and 502c1 requires the bankruptcy court to estimate the amount of any contingent or unliquidated claim if fixing or liquidating the claim would unduly delay the administration of the case…that estimation process follows:

ڭ Bittner v. Borne Chemical (F.2d – 1982)

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ب Prior to filing 11 petition, B commenced state court action against R for pirating trade secrets…

ب R filed a counterclaim alleging B tortiously interfered w/ a merger by terminating a K and brining this suit.

ب R sought relief from the stay to continue this state court action…ب 502c provides for the estimation of certain claims that would unduly delay the

closing of the case….ض The procedure is to be undertaken initially by the bankruptcy judges, using

whatever method is best suited to the particular contingencies at issue.ض The principal consideration must be an accommodation to the underlying

purposes of the Code…ض In rare cases, a jury trial on all or some of issues may be necessary…ض Where there is sufficient evidence on which to base a reasonable estimate

of the claim, judge should determine the value…ض Court is bound by the legal rules which may govern the ultimate value of

the claim…ض An appellate court may only reverse if bankruptcy court abused its

discretion…ض The validity of the estimation must be determined in light of the policy

underlying reorg proceedings.ض In order to realize the goals of Ch. 11, a reorg must be accomplished

quickly and efficiently…ض If the bankruptcy court estimated the value of R’s claims according to the

ultimate merits of their state court action, such a valuation method is not inconsistent w/ the principles which imbue Chapter 11…

ض By valuing the ultimate merits of the R claims at zero, and temporarily disallowing them until the final resolution of the state action, the bankruptcy court avoided the possibility of a protracted and inequitable reorganization proceeding while ensuring that B will be responsible to pay a dividend on the claims in the event that the state court decides in R’s favor…ڄ So R cannot vote on the Ch. 11 reorganization plan!!! Keeps the Ch.

11 case moving quickly!!ض Court finds that the bankruptcy court’s findings were not clearly erroneous

and must stand…ڭ Notes and Questions

ب Other Methods of Estimating Claims ض Court above used the “ultimate merits” approach…ض The “present value of the probability” test rejected above has been

accepted by other courts…ڄ The claims realistic value consists, under this test, of the amount

stipulated as damages in the event the debtor is found liable, discounted by the chance that the debtor will not be found liable…

ب Effect of Estimation

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ض Above, R’s claims were estimated to be worthless and temporarily disallowed, pending an on-the-merits determination in state court…ڄ Accordingly, R was deprived of the opportunity to vote on B’s

reorganization plan…ڄ However, the court required debtor to waive discharge of the claims as

a condition of confirming plan.ڄ If state court had ruled for R, B would have been responsible for

paying a dividend on the claims…ض But unless the judge would have made B agree to this, the effect of

valuing the claim at zero would be to allow debtor to discharge the claim when he filed his Ch. 11 plan!!!

ض Estimated claims are covered by a debtor’s discharge, subject only to a 502j motion for reconsideration at a later time…

ب Estimation of Personal Injury Claims ض A bankruptcy court may not determine the amount of a personal injury or

wrongful death claim for purposes of distribution…ض However, a bankruptcy court may estimate the claims for purposes of

establishing voting rights or determining the feasibility of a Ch. 11 plan.ش Secured Claims

ڭ Introductionب While it may be delayed by the bankruptcy, a secured lien stays in force

through bankruptcy…ب While the right to foreclose is suspended, secured creditor is entitled to

adequate protection of value of lien (362d), and to the extent that the value of the collateral exceeds the amount of its claim, a secured creditor is entitled to postpetition interest (506b).

ب If a secured creditor objects to the treatment it receives under a plan, the court may not confirm the plan unless satisfies the “cramdown” standards…

ب To know if creditor is being treated appropriately, we need to know the measure of its secured claim…

ڭ Determining the Allowed Amount of a Secured Claimب 506a defines a secured claim as “an allowed claim of a creditor secured by a

lien on property in which the estate has an interest to the extent of the value of such creditor’s interest in the estate’s interest.”ض The value of the collateral is the measure of the secured claim…ض And to the extent that the value of the collateral is less than the amount of

the allowed claim, the creditor holds an unsecured claim!ض Bifurcation of claims!ض 506a separates an undersecured creditor’s claim into two parts:

ڄ he has a secured claim to the extent of the value of his collateral…ڄ and he has an unsecured claim for the balance of his claim…

ب Keep in mind that 101(37) defines lien very broadly!! Lien may arise by operation of contract…

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ب When secured creditors are tying to get relief from the stay to foreclose they had an incentive to understate collateral values so that they could prove that their interests in the collateral were not adequately protected

ب Now, as we approach the plan stage of the case, their positions are reversed and creditors have an incentive to overstate collateral values and the amount of secured claims to receive better treatment under any plan.

ب The first step in determining whether a secured claim is receiving appropriate treatment under a plan requires determining the value of the collateral and fixing the allowed amount of the secured claim (506a)…ض Value is established through testimony of experts…what measure of value

is relevant though?ڄ Code provides little guidance, apart from stating in 506a that value is

to be determined in light of the purpose of the valuation and of the proposed disposition or use of such property…

ب Rash case (we are not reading)ب Notes

ض Courts have held that replacement value is the appropriate standard to apply when valuing property that a debtor proposes retain and use in its ongoing business…

ض SC in Rash said that “whether replacement value is the equivalent of retail value, wholesale value, or some other value will depend on the type of debtor and the nature of the property.”ڄ Will this encourage battle of the experts and litigation?ڄ Replacement value cannot be looked up, it must be litigated…

ض National Bankruptcy Review Commission’s Recommendations ڄ Wholesale valuation standard be used to value personal property..ڄ FMV should be adopted for real property…ڄ But these were ignored by drafters of the 05’ amendments…

ض 2005 Amendments ڄ They adopted a new subsection (2) to 506 that applies only to cases

involving individual debtors in Chapter 7 or 13…ڳ It provides that the allowed amount of a secured claim will be

determined based on the replacement value of such property as of the date of the filing of the petition w/out deduction for costs of sale or marketing.”

ڳ In addition, 506a2 defines the “replacement value” of property acquired for personal, family or household purposes, as the “price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.”

ض Measuring the Creditor’s Interest ڄ Code 506(a) says that a claim is a secured claim to the extent of “the

value of such creditor’s interest in the estate interest in such property.”ڭ Interest on Secured Claims

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ب Read code 502b2, 506b for creditor’s right to charge interest on a claim while case is pending…

ب Lee M. Till case (we are not reading)ب Notes

ض Default Rates of Interest ڄ Although the appropriate “pendency interest” rate is within the

discretion of the bankruptcy court, courts habitually award interest at the contract rate…

ڄ Courts have generally been willing to enforce contract provisions that call for interest to accrue at a default rate that is higher than pre-default rate…ڳ This is absent a showing that the stepped up rate is unenforceable

under nonbankrupty law or that equitable considerations militate against enforcing it…

ڳ A default rate of interest should not be a penalty!!ڇ Rather it should be a means for compensating the creditor for

any loss resulting from the nonpayment of principal at maturity…so interest rate must have relation to projected loss!!!

ڇ Need evidence to justify the rate of default insurance…ڳ And also, these contracts must be viewed in light of the bankruptcy

filing and that always giving a secured creditor an absolute right to the terms of the K may be impossible or seriously detrimental to the policy of the bankruptcy laws…ڇ Must look at relative distribution to all creditors…only so

much money to go around…ڇ An excessive rate incurs a penalty on other creditors

ڳ Courts have also permitted oversecured creditors to seek interest on interest as part of their allowed secured claim, provided that their agreement or applicable nonbankruptcy law provides for it.

ض Postpetition Interest and Nonconsensual Liens ڄ The rule currently in 502b2 – suspending the accrual of interest on

unsecured claims, is not new.ڳ Rules saves the trustee from having to continuously recalculate the

amount due to each creditor…ڳ Rule allows trustee to do his job diligently w/out worrying that

interest will be accruing…ڳ Rule prevents unmerited gain/loss by creditors who have different

interest rates – equality…ڄ The rule (506b) permitting oversecured creditors to recover

postpetition interest out of their equity cushion is not new either…ڳ Oversecured creditor who has bargained for this cushion should

not have it snatched from him for the benefit of other creditors…ڳ To deny this would undermine the faith of lenders and the efficacy

of credit arrangements…

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ڳ Satisfies the expectations of the parties and strikes an equitable balance between creditors/debtors.

ڄ Ron Pair Enterprises (US SC)ڳ Holders of claims secured by nonconsensual liens, such as

statutory liens, tax liens, and judicial liens, are like holders of consensual liens, entitled to accrue postpetition interest to the extent that their claims are oversecured…

ض Amended 506b now reads that “there shall be allowed any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.”ڄ This suggests that state law will govern whether attorney’s fees are

recoverable, whereas fed bankruptcy law will govern the reasonableness of any fees.

ض Timing Issues: When to Value Collateral ڄ What if the value of collateral fluctuates over the course of a case,

meaning creditor is sometimes oversecured and sometimes not?ڄ Some courts hold that collateral should be valued on one date (date of

petition or date or reorganization confirmation, etc)…but others reject the single valuation date (adopt a flexible approach)ڳ A flexible approach recognizes the fact that a creditor’s claim,

which is being reduced over time, may become entitled to accrue postpetition interest, and that under the plain language of 506b there is nothing limiting that right…ڇ Feels that the single valuation date is too favorfull to

creditors…doesn’t balance…ض Expenses of Preserving Collateral; 506(c)

ڄ 506b provides that in determining whether a creditor is oversecured, the expenses in 506c must be taken into account.

ڄ Means that a secured claim is subordinate to administrative expenses that are incurred to preserve or dispose of the collateral that secures the claim, provided that the expenses are reasonable and only to the extent that they actually benefited the secured creditor…

ڄ Underlying premise of 506c is that unsecured creditors should not be required to bear the cost of protecting a secured creditor’s collateral…

ش Priority of Claims ڭ Secured Claims

ب When it comes to serving the slices of the pie, creditors who have enforceable liens on property of the estate get the slice that represents their collateral…ض To the extent that the amount of their claim exceeds the value of the

collateral, they will hold an unsecured claim, that will be dealt w/ according to the principles discussed below…

ڭ Unsecured Claimsب In a ch. 7 case, then the remaining property is distributed to unsecured

creditors under 726, which says order is:

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ض First, in pmt of the kinds of claims described in 507. These are so-called priority claims. There are 10 different kinds of priority claims. Holders of the first kind must be satisfied in full before the holders of the second can receive a slice…

ض Second, in pmt of allowed unsecured claims, proofs of which have been filed either on time or tardily filed by creditors who lacked notice in time to file on time.

ض Third, in pmt of claims tardily filed by creditors who did have notice of the case but nevertheless failed to file on time.

ض Fourth, in pmt of allowed claims for fines, and forfeitures or multiple damage claims to the extent they do not represent compensatory damages for actual loss. In other words, if P in an antitrust action obtains a 100K judgment which is then trebled, P would have a general unsecured claim of 100K and a subordinate unsecured claim of 200K

ض Fifth, in pmt of interest at the legal rate on unsecured claims. Remember, we said that as a general rule, under 502a2, interest does not accrue on unsecured claims after the case is commenced. This is sort of an exception to that rule. It says that in the rare case in which there is enough to go around and there is something left after all the preceding claims have been satisfied, then unsecured creditors will receive post-petition interest before the debtor gets what is left.

ض If there is anything left it goes to the debtor…(or corporation’s shareholders)

ڭ Priority Claimsب 507 establishes a priority ladder that ranks certain kinds of unsecured claims

and dictates order of payment…ب The kinds of claims ranked are called “priority claims,” because they have

priority over other kinds of unsecured claims known as “general unsecured claims.” 507 ranks priority claims in the following order:ض First Priority: Domestic Support Obligations

ڄ 507a1…ڄ There is no limit on the size of this claim.ڄ Subsections a1A and a1B grants priority within these claims…ڄ 507a1C contains a carve-out provision, which provides that

notwithstanding the above, these domestic support claims are subordinate to certain kinds of administrative expenses incurred by a trustee in administering the assets that are used to pay such domestic support obligations.ڳ These are described in 503b1A, 503b2, and 503b6..

ض Second Priority: Administrative Expenses ڄ 507a2…ڄ 503b contains list of admin expenses…ڄ Remember, however, that 507a2 must be read in conjunction w/ 507b,

which gives secured creditors who receive adequate protection under

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362, 3, or 4 a superiority claim to the extent the protection turns out to be inadequate…

ض Third Priority: Involuntary Gap Claims ڄ 507a3 accords second priority treatment to claims arising in the

ordinary course of a debtor’s business after the commencement of an involuntary bankruptcy case but before the appointment of a trustee or the entry of an order for relief. See 502g

ض Fourth Priority: Employee Salary and Wage Claims ڄ 507a4 covers the above w/in 180 days of the commencement of the

case or the cessation of business, up to 10K per employee…ض Fifth Priority: Employee Benefit Plan Claims

ڄ Employer contributions to employee pension and health and life insurance plans…

ڄ Fifth priority treatment to claims for such contributions arising from services rendered w/in 180 days prior to the commencement of case or cessation of business…

ڄ As to each plan, this priority may not exceed the number of employees covered by the plan multiplied by 10K minus the amount paid pursuant to the wage priority and the aggregate amount paid on behalf of the employees to other benefit plans…

ض Sixth Priority: Loaves and Fishes ڄ (a)6A accords a 5th priority claim to grain producers for grain or the

proceeds of grain delivered to operators of grain storage facilities who later file petitions (4,925 dollar cap)

ڄ (a)6B provides a similar priority to fishermen who have claims against operators of fish facilities…

ض Seventh Priority: Consumer Deposits ڄ Consumers up to a max of 2,225 for cash deposits given prior to

bankruptcy to a debtor in connection w/ the sale, lease or rental of property or services for personal or household use…

ض Eighth Priority: Certain Tax Claims ڄ Most kinds of fed, state, and local tax claims that arose prior to

commencement of the case and are not secured b y a tax lien…ض Ninth Priority: Commitments to Maintain the Capital of an Insured

Depository Institutionڄ Added in the wake of the collapse of the Savings and Loan institutions

across the country…ض Tenth Priority: Certain DWI Claims

ڄ Claims resulting from death or injury caused by debtor’s operation of a car while under drugs/alcohol.

ڄ These are nondischargeable…ڄ Aircraft was omitted from the priority…

ض Excellent excellent table summarizing it all on page 10.38…ڭ Administrative Expenses

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ب Section 503(b) describes the kinds of claims that are entitled administrative expense treatment…

ب These are obligations that arose postpetition…ب Techinically, therefore, one does not file a proof of claim to obtain pmt of an

administrative expense, and instead, one timely files a request for pmt of an administrative expense (503a)…ض Timely apparently means before the bar date set by the court…

ب Some obligations that might seem to qualify for admin expense treatment don’tض In Jartran, court held that the answer to whether a claim was admin

expense depended on whether the obligation both (1) arose from a transaction w/ the debtor in possession, and (2) arose out of a transaction that was beneficial to the debtor in possession in the operation of the business…ڄ In that case the obligation did not meet prong (1) for the agmreement

among the parties was entered into before the petition was filed…ڄ This follows the reason for the exception, so DIPs can induce people

to do business w/ the debtor!ب Some obligations that do not seem to qualify for admin expense treatment do

ض SC case of Reading Co. is an example of case that did not directaly confer a benefit on the estate…ڄ Debtor owned building which broke out in fire and destroyed neighbor

building owned by Reading.ڄ Fire caused by DIP’s workers…ڄ Court held that the claims of the fire victims were entitled to

administrative priority…ڄ The DIP ws operating for the benefit of the creditors – worthy

objectives…ڄ “Actual and necessary costs” should include costs ordinarily incident

to operation of a business, and not be limited to costs w/out which rehabilitation would be impossible…

ڄ Tort claims seem to be included…

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