BasicBankruptcy Williams

Basic Bankruptcy - WilliamsFall 2003

of 68Basic Bankruptcy

I. Creditors’ Rights and Remedies A. State Law Debt Collection

1. First in time, first in righti. As to creditor priority, this is the general rule.ii. Race to the courthouse.iii. First to obtain a lien would be first in line for debtor’s property.iv. For admiralty, last in time, first in right is the rule.v. Priorities are disturbances in the equal distribution to creditors.vi. Policy Reasons

a. Reward creditors who actively pursue claims.b. Insistence on certainty.c. Insures title.d. Reduces the cost of credit.

2. Secured v. Unsecured Creditorsi. A secured creditor is someone who gives credit in exchange for a

promise to pay along with collateral.a. Liens granted by owner of property to secure the

obligation.b. There is always collateral (tangible or intangible) that goes

along with ii. An unsecured creditor holds no collateral.

a. Unsecured creditors are paid out of cash flow.3. Consensual

i. State law allows renewals, renegotiations, modifications but they cannot be forced.

4. No DischargeB. State Law Creditors

1. Unsecured Creditorsi. Consensual – creditor determines whether to work with debtor.ii. Nonconsensual – creditor who does not get to determine whether

to work with a debtor. Example is a car accident victim.2. Consensual Secured Creditor3. Judgment Creditor

i. Form of nonconsensual unsecured creditors.ii. Judgment allows a lien over creditor’s property.

4. Statutory Lien Creditori. Certain types of businesses can receive statutory liens. Classic

example is a mechanic’s lien or contractor’s lien.C. Remedies Under State Law

1. Sue on debt or obligation owedi. Get judgmentii. Formal Post-Judgment Collection Efforts

a. Judgment lienb. Execution


of 681). Directs sheriff to find and seize all debtor’s

propertyc. Garnishment

1). Wages and Bank Accounts2). Garnishment order can include personal property

located in a bank safe-deposit box.3). Pre-judgment garnishment of bank accounts

freezes the accounts awaiting final judgment.d. Attachment

1). In many jurisdictions, attachment is necessary for personal property.

iii. Repossession of personal propertya. Secured creditors under Article 9 can repossess personal

property, as long as peace is not breached.b. Court is not involved.

iv. Replevin of personal propertya. Similar to repossession.b. Court is involved.c. Must show lien is involved.

v. Turnover of intangible propertya. Involves intangible propertyb. Funds, commercial paper

vi. Foreclosure of real property2. Every state has exemptions which are beyond the reach of creditors.

D. State Law Collective Actions1. Extensions and compositions

i. Negotiation with creditor for extensions2. Assignment for benefit of creditors

i. Debtor assigns assets to representative who distributesii. Trigger for involuntary bankruptcy

3. Receivershipi. Receivers are appointed to take control of debtor’s assets.ii. Trigger for involuntary bankruptcy

II. Overview of BankruptcyA. Constitutional in Origin

1. Article I, Section 8, Clause 42. “Uniform laws on bankruptcy...”

B. Title 11, USC, Bankruptcy Code1. Title 28 is also important.

i. 28 U.S.C. § 1334 is grant of original and exclusive jurisdiction to district courts.

ii. 28 U.S.C § 151 allows district courts to create bankruptcy courts within district.

2. Title 26 – IRC - is also important.C. Bankruptcy cases reported in West Bankruptcy Reporter and on-lineD. Bankruptcy in History


of 681. 1800 Act2. 1841 Act

i. First hint of discharge of debts in bankruptcy.3. 1867 Act

i. Discharge weakens.4. 1898 (the “Act”) with 1938 Chandler Act Amendments

i. Chandler Act was precipitated by business failures of great depression.

ii. Chandler Act provided for reorganization of businesses.5. 1978 (the “Code”)

i. Forgiving, discharge, and pro-debtor provisions.ii. Broad provisions for discharge.iii. Broad mechanisms for dispute resolution.

E. Why Bankruptcy as Opposed to State Law1. ABC

i. Generally, did not involve court.ii. Assignment for the benefit of creditors.iii. State law has exemptions that do not allow certain assets to be

taken.iv. Debtor transfers all assets not exempt to an assignee who sells the

property and pays of the creditors.2. Receivership

i. Similar to ABCii. Receiver is appointed by state court. Takes control over all of

assets not exempt. Receiver takes legal title.3. Discharge cannot be done under state law, except as agreed by creditor

or by full payment.4. Bankruptcy provides the ability to discharge.5. Federal bankruptcy was needed to prevent favoritism for local creditors.6. Very nature of state action (quick action) leads to sub-optimal level of

return.i. Common pool of oil example.

F. Why File a Bankruptcy Petition1. Becomes an adversarial relationship between debtor and creditor.2. Bankruptcies create exposure to the world - bankruptcy documents are

public documents.3. Individual

i. Excessive liabilitiesa. People who just love credit.b. Living outside their means.

ii. Unforeseen circumstances or eventa. Loss of job, sickness, medical expenses, divorce, etc.b. Spending patterns based on projected income that are not

realistic.iii. Pending dramatic creditor action

a. About to lose car to repossession.


of 68b. Garnishment of wages.

4. Businessi. Distortion of right side of balance sheet.

a. Debt and equity out of balance to assets.b. Might use bankruptcy to trim debt.

ii. Mismanagement of assetsa. Left-side of balance sheet.b. Mergers and acquisitions can create problems with

management of assets.iii. Time

a. Time to get things back on track.b. Allows businesses to keep creditors at bay.

G. Purposes of Bankruptcy1. Efficient collection of debts2. Distribution of debtor’s property in accordance with uniform and

national priorities (not equal treatment)3. Capturing going concern value4. Establish of debtor’s right to discharge or reorganize (reallocation or

rehabilitation)H. Structure of the 1978 Bankruptcy Code

1. Chapters Governing Overall Bankruptcyi. Chapter 1: Definitions, rule of construction, and general provisions

a. Definitions (§ 101)b. Rules of construction (§ 102)

1). Singular includes the plural (but not the other way around)

c. § 105 has been read to allow equitable measuresii. Chapter 3: Case administrationiii. Chapter 5: Creditors, the debtor, and the estate

2. Substantive Chaptersi. Chapter 7: Liquidationii. Chapter 9: Adjustment of debts of a municipalityiii. Chapter 13: Adjustment of debts of an individual with regular

incomeiv. Chapter 11: Reorganizationsv. Chapter 12: Adjustments of debts of a family farmer with regular

incomeI. Key Players

1. Debtor and DIPi. §§ 101, 109 – Debtorii. §§ 1107-1108 – DIP

a. Debtor in possession is in charge of the assets of the estate.b. Pre-petition management gets first crack at managing the

operations of the debtor.2. Creditor

i. Holder of unsecured claim


of 68a. Priority

ii. Holder of secured claima. Oversecured

1). Wholly secured creditorb. Undersecured

3. Official Committeesi. Creditors get committees to oversee bankruptcyii. Committees can be appointed by trustee or ordered by court and

appointed by trustee.iii. Usually, committee is presentiv. A required committee is the official committee of unsecured

creditors.v. That committee can hire own lawyers, accountants, etc. and they

are paid through the bankrupt estate.vi. Can also be many other committees.

a. Equity security committee – shareholder committeeb. Committee of employees – employee committeec. Bondholder committee – bondholdersd. Committee members are entitled to reimbursement for

reasonable and necessary expenses.e. Attorneys/Accountants assisting committees are paid from

the bankrupt estate.4. United States Trustee

i. Article II representative in the Bankruptcy Court – part of the Department of Justice from the Executive Branch

ii. Have broad range of duties.iii. Primary function is

a. To ensure reasonable compensation to professions,b. To ensure disinterestedness and no conflicts of interest,c. To ensure periodic reporting requirements under the Code.

iv. Also, handles § 341 examination of debtora. Anything is fair game in this debtor exam except attorney-

client privilege and privilege against self-incrimination.v. Generally speaking, the U.S. Trustee is irrelevant – they do not

take an active approach.5. Chapter 7 Trustee

i. Trustee appointed in every Chapter 7 case by U.S. Trusteeii. Comes from panel of Chapter 7 trustees within each District.iii. Have important duties under Code.

6. Chapter 11 Trusteei. Generally, is not appointed because DIP retains control.ii. In some instances, court will displace DIP with Chapter 11 Trusteeiii. Presumption is for DIP to remain in control.iv. Chapter 11 Trustee becomes the holder of attorney-client privilege.

Trustee can waive attorney-client privilege.7. Bankruptcy Court


of 68i. Non-Article III Adjunct Court to Federal District Courtii. 28 U.S.C. § 1334 gives jurisdiction for bankruptcy to District

Courtiii. Appointed by judicial council of each circuit.

J. Jurisdiction and Venue1. Jurisdiction

i. Where does jurisdiction reside?a. District courts shall have original and exclusive jurisdiction

of all cases under Title 11.ii. Statutory Roadmap

a. 28 U.S.C. § 1334 – grant of jurisdiction for bankruptcy to District Courts

1). Bankruptcy court has in rem jurisdictionb. 28 U.S.C. § 157 – Congressional grant that allows District

Court to refer petition to Bankruptcy Court.iii. Title 11 Case

a. CASE – The whole ball of wax1). The overarching “proceeding”2). Civil Proceeding

i). Adversary proceedingsa). Civil actionb). Governed by Part 7 of Bankruptcy

Rulesc). § 7001d). Incorporates Federal Rules of Civil

Procedureii). Contested matters

a). Anything that is not an adversary proceeding

b). Governed by Part 9 of Bankruptcy Rules

c). § 9014d). Initiated by motion

iv. Jurisdiction for Bankruptcy Courtsa. Cases under Title 11

1). Original and exclusiveb. Proceedings arising under Title 11c. Proceedings arising in a case under Title 11d. Proceedings related to a case under Title 11

v. Wood v. Wooda. Supreme Court had struck down Bankruptcy Court

adjudication over state law claims.b. Problem in this case is whether District Court can address

proceedings “related to” a case under Title 11.vi. Jurisdictional Structure

a. Bankruptcy jurisdiction rests with the District Court


of 68b. District Court may assign cases through reference to the

Bankruptcy Courtc. Bankruptcy Court may hear all matters (unless specifically

limited by statute) but can render final judgment in core matters only.

d. If it is a non-core proceeding, Bankruptcy Court judge can issue proposed findings of fact, but District Court issues final judgment and is not bound by Bankruptcy Court findings.

e. If it is a core proceeding, District Court review is “clearly erroneous” standard

f. If it is a non-core proceeding, District Court review is “de novo” standard

g. Bankruptcy Court CANNOT hear wrongful death h. District Court can always take any part of a Title 11 case.

2. Venuei. Venue of the Case

a. Proper venue for the entire bankruptcy case (where the petition under §§ 301, 302, or 303 is filed) lies in the place where the debtor’s domicile, residence, principal place of business or principal assets have been located for the greatest period of time in the six months preceding the filing of the petition.

b. Governed by 28 U.S.C. § 1408ii. Venue of Proceedings

a. Governed by 28 U.S.C. § 1409b. Proper venue for a proceeding in a bankruptcy case lies in

the district court in which the bankruptcy case is pending.c. Two Exceptions

1). If Bankruptcy trustee or DIP attempts to collect a money judgment of less than $1,000, recover property worth less than $1,000 or collect a consumer debt of less than $5,000, venue lies in the district where the defendant resides.

i). 28 U.S.C. 1409 (b)2). If a claim arises from the debtor’s business after

commencement of the bankruptcy case, venue lies in the district in which a state or federal court would have had jurisdiction in the absence of bankruptcy.

i). 28 U.S.C. 1409 (d)d. If a claim arises from the operation of the debtor’s business

after the filing and the plaintiff is the non-debtor, rather than the trustee or DIP, then venue lies in the district court for the district in which either a state or federal court would


of 68have had jurisdiction under applicable non-bankruptcy law, or in the district in which the bankruptcy case is pending.

e. 28 U.S.C. § 1409 (c) provides an alternative venue for proceedings brought by the trustee or DIP to claim property of the estate under § 541, or to avoid certain transfers under § 544(b). Such a proceeding can be brought in the district in which the suit could have been filed, either in state or federal court, in the absence of bankruptcy.

iii. Change of Venuea. 28 U.S.C. 1412 allows a district court to transfer a case or

proceeding in bankruptcy to another district court in the interest of justice or for the convenience of the parties.

b. Factors for evaluation1). The economic harm to the debtor and creditors

that would result from the change of venue;2). The location of estate assets;3). The economic administration of the estate;4). The necessity for ancillary administration if

liquidation should result;5). The effect of the transfer on the parties’ and

witnesses’ willingness and ability to participate in the case or proceeding; and

6). Any interrelationship with another bankruptcy case involving the debtor’s affiliate, general partner, or partnership.

K. Bankruptcy Types1. Chapter 7

i. Trustee is always appointedii. Identification, collection, liquidation and distribution of property

of the debtor.iii. Debtor seeks dischargeiv. Claims are paid in accordance with priority scheme of the code.

2. Chapter 13i. Debtor with regular source of income

a. There are debt limitationsii. Standing trustee appointed

a. Appointed by court orderb. Role is as a disbursement agentc. Paid as percentage

iii. Craft a 3-5 year repayment plan.iv. Payments made to trustee who then distributes in accordance with

the planv. “Best interests of the creditors” requirement

a. Means simply that treatment creditor will receive in Chapter 13 is at least equal to what they would receive under Chapter 7.


of 68b. Proponent of the plan would prepare the Chapter 7 analysis.c. Creditors committees would also prepare an analysis to

keep things fair.vi. “Super-discharge”

3. Chapter 11i. DIP – debtor remains in controlii. Best interests of creditors requirementiii. Class of creditorsiv. Plan is operative documentv. Absolute priority rule

a. Requires that debt is paid prior to equity.b. Classes of debt must be paid in priority before next class of

debt is paid.vi. Consent or cram down

a. Plans have voting provisionsb. Debtor can cram down the plan over a dissenting class of

creditors.vii. Liquidation/rehabilitation

a. Reorganizations can include orderly liquidation under Chapter 11.

viii. Confirmationa. Court confirms plan

4. Chapter 12i. Family farmers with steady income sourcesii. Debt limitsiii. Patterned after Chapter 13

5. Chapter 9i. Cities, special assessment districts, etc.ii. State cannot file for relief under Bankruptcy Code.

III. Bankruptcy: Commencement, Eligibility, Conversion, and DismissalA. Commencement of a Case

1. Voluntary i. § 301ii. Filing = Commencement = Order for Reliefiii. All occur at same time.iv. Order for Relief is automatically entered.v. Binding upon creditors even without notice.

2. Jointi. § 302ii. Joint filing between spouse.iii. Filing = Commencement = Order for Reliefiv. All occur at same time.

3. Involuntaryi. § 303ii. Creditors file an involuntary petition in Bankruptcyiii. Official Form #5


of 68iv. Filing = Commencement v. Order for Relief is Not Done at the Same Timevi. Creditors select Chapter under which Bankruptcy is Filed

B. Debtor Eligibility1. Four Step Process

i. First determine the status of the potential debtora. Personb. Corporationc. Trustd. Partnershipe. Bankf. Railroadg. Etc.

ii. Second determine the residence requirementsiii. Third determine if categorical exclusions applyiv. Fourth determine what chapters for relief may apply

2. Problems p. 50i. 1a – Last Federal Savings and Loan, which sustained substantial

losses due to improvident loan policies = No Chapter would be available

ii. 1b – Imprudential Insurance Company, which insured only property in the counties hardest hit by Hurricane Andrew = No Chapter would be available

iii. 1c – Transylvania Railroad, which serviced mines that produced highly-polluting coal and that have gradually reduced their output = Only Chapter 11. Chapter 7 is not available to railroads. Railroads must attempt to reorganize. Stockbrokers and commodity brokers are excluded from Ch. 11 – determination of drafters was to reduce monitoring costs

iv. 1d – Joe Farmer and his wife, Hill, whose family farm has been unable to compete with larger, mechanized operations = Joint petition. One filing fee. Administratively consolidated without a motion. Substantive consolidation is an equitable doctrine that allows court to ignore corporate separateness – a disregard of separateness of entities. Downside to filing joint return is that the ceiling amounts do not increase when joint return is filed.

v. 1e – Mike Farmer and his brother Bob, who have been farming together on land they inherited from their parents = No joint petition. 7, 11, 12, 13 available.

vi. 1f – Starcrossed Partnership, which developed real estate in an overdeveloped market = 7, 11 available.

3. Problems p. 51i. 2a – Arnold Able incurred substantial hospital bills following an

accident last year. Able has been unable to work since the accident and consequently cannot pay almost $70,000 in medical bills not


of 68covered by insurance = 7, 11. Not 13 because he does not have regular income.

ii. 2b – Beta Construction Corporation has suffered considerable losses as a result of the sharp decline in new construction projects. Beta recently defaulted on a large bank loan and is unable to pay its suppliers. Beta’s debts total over $1 million = 7, 11. Not 13 because debts exceed limits.

iii. 2c – Clara Crumm is a big spender with a small but regular income. Crumm has charged purchases up to the limit of all thirteen of her credit cards. Those debts total approximately $95,000. Clara also has monthly rent, car payments, and other expenses, which absorb most of her income, leaving her unable to make even the minimum payments on her credit cards = 7, 13. Has regular income. 11 might not be practical.

4. Problems p. 51i. 3 – Cannot file for bankruptcy as a sole proprietorship, but must file

as individuals. When SBA claim is bifurcated, would not be eligible for 13.

5. Eligibility Summaryi. Chapter 7 – All persons except railroadsii. Chapter 13 – An individual with regular incomeiii. Chapter 11 – All persons available under 7 + Railroads –

Commodity Brokers & StockbrokersC. Under voluntary petitions, insolvency is not required.D. The Meaning of Contingent and Liquidated Under the Code

1. Contingenti. No court dispute.ii. A claim subject to a condition in the future.iii. Non-contingent means the claim is no longer subject to a condition

in the future.iv. Credit transactions are example of non-contingent claims.v. Promissory notes are considered non-contingent claims.vi. Lease payments are non-contingent claims.vii. Judgments rendered are non-contingent claims.

2. Liquidatedi. Unliquidated if liability has to be fixed.ii. Unliquidated claims are those in which liability has been fixed.

3. Examplesi. Guarantees

a. Contingent claim but is liquidated.b. Don’t count for § 109

ii. Tort Claima. Can be both contingent (because it has not been reduced to

judgment) and unliquidated.b. Don’t count until judgment for § 109

iii. Contract Claim


of 68a. Non-contingent and liquidatedb. Count for § 109

E. Involuntary Case1. Right type of debtor2. Right type of chapter3. Right number of creditors4. Right reasons for relief

F. Involuntary Case - Section 303 Analysis1. 99.3% of petitions are voluntary2. § 303(a)

i. How involuntary case is commenced.ii. 7 or 11 Only. No involuntary 13’s or 12’s.iii. Must be a person eligible for relief under that particular chapteriv. Only against person, except farmer, family farmer, and non-profits.

3. § 303 (b)i. Requisite number of petitioning creditors.

a. <12 creditors, then 1 creditor can commence case.b. >=12 creditors, then 3 creditors holding in excess of stated

dollar amounts must commence case.4. § 303 (c)

i. Creditors can join in petition5. § 303 (d)

i. Only debtor may answer6. § 303 (e)

i. Court may require bond7. § 303 (f)

i. Debtor may continue business through the “Gap Period” – period after filing but before order for relief is granted.

8. § 303 (g)i. Interim trustee may be appointed to preserve the estate or prevent

loss9. § 303 (h)

i. Grounds for reliefa. Generally not paying debts as such debts become due

unless subject to a bona fide disputeb. Within 120 days of the filing, custodian appointed or took

possession of debtor’s property.10. § 303 (i)

i. Sanctions for wrongful filings11. § 303 (j)

i. Under some conditions, court can dismiss.12. § 303 (k)

i. Foreign banks (limited to Chapter 7 where the bank is under a foreign proceeding similar to our Bankruptcy proceedings)

13. Involuntary Joint Petition


of 68i. According to only court that has addressed it, cannot use § 303 to

commence an involuntary case as a joint proceeding against a husband and wife.

ii. However, the Code does not specifically indicate whether this is true or not. Because this is ambiguous, could look to legislative history.

G. Why File Chapter 11 as opposed to 131. 11 Does not limit the length of time for payment.

i. However, present value of payments must be at least what creditor would have received under Chapter 7.

2. 11 Allows debtor to maintain control over the estate.3. 11 Allows you to get around dollar amounts required by Chapter 13.4. 11 Discharge is more broad than under Chapter 7.

H. Downside to Chapter 111. Cost2. Monthly reporting.3. Dealing with a creditors committee

I. Typically, if debtor is individual person, Chapter 11 is not good choice unless high income, high assets.

J. Debtor’s Duties1. § 521

i. File list of creditorsa. Called a creditor matrix

ii. Schedule of assets and liabilitiesiii. Schedule of current income and expendituresiv. Statement of the debtor’s financial affairsv. Cooperate with court officersvi. Appear at examinations and hearingsvii. Turn over books and recordsviii. Comply with all court orders

K. Dismissal: Statutory Grounds1. Premature end of case2. Chapter 7 dismissal

i. 707(a)ii. 305(a)

3. Chapter 13 dismissali. 1307(b) – Debtor as of rightii. 1307(c) – Creditor for cause

4. Chapter 11 dismissali. 1112(b) – Causeii. List is not exclusive.

L. Dismissal: Implied Grounds1. Duty of good faith filing

i. Cases (Phoenix Picadilly and Manville) indicate that good faith is required in filing.

ii. Prevent abuse of process


of 68iii. Protect integrity of judicial processiv. Efficiency

2. Code Supporti. 1112(b)(1), (b)(2), and (b)(5), 1129(a)(3)ii. To confirm a plan, it must be proposed in good faith – 1129(a)(3)iii. Code suggests that if there is a requirement for confirmation of

good faith, there is a corresponding requirement for filing in good faith.

iv. Efficiency really becomes the driving purpose.M. Duty of Good Faith: Factors

1. Parties have been successful in dismissal for bad faith when these factors are present

i. Single assetii. Undeveloped landiii. Encumbered landiv. No equityv. Little or no employeesvi. Little cash flowvii. No source of incomeviii. Few creditors with small claimsix. Secured creditor action forces the filing

a. Bankruptcy filing provides stay under § 362x. Timingxi. Parallel litigationxii. New debtor syndrome

a. Just before bankruptcy, an asset is spun off and taken into bankruptcy without parent entity being subject to bankruptcy.

N. Practice Pointer1. Ways in which creditor can use bad faith allegations

i. Dismissalii. Conversioniii. Relief from stayiv. Objection to planv. Test out arguments

2. Can talk to judge about how bad debtor isO. Conversion

1. Chapter 7 Conversioni. § 706

a. Chapter 7 debtor may convert to Chapter 11 or 13 if the case had not been previously converted from 11 or 13 to 7.

b. Voluntaryc. Court may convert from 7 to 11 at any timed. No forced conversion to Chapter 13

1). Cannot make someone become a Chapter 13 debtor.


of 68ii. § 305

a. Cannot convert unless in best interest of debtor and creditor2. Chapter 11 Conversion

i. § 1112a. Debtor may convert from 11 to 7 unless certain limits are

met. 1112(a)b. Court may convert a case from 11 to 7 for cause at any

time. 1112(b)c. Court can’t convert without consent from 11 to 7 if the

debtor is a farmer or non-profitP. Practice Pointer

1. Debtor may answer involuntary chapter 7 petition by simply converting case to a case under Chapter 11 and proceed as DIP.

IV. Bankruptcy: Estate and StayA. Filing of Petition and Commencement of Case

1. Triggers two eventsi. Commencement of the case creates an estateii. Filing of petition operates as a stay, protecting the estate, the

debtor, and the debtor’s propertyB. Purpose of Property of Estate

1. The “Stash”2. Value to be distributed to holders of claims and interests

C. Methodology1. Identify all the debtor’s legal or equitable interests in property wherever

located by whomever held as of the petition datei. If the answer to the question of whether the property has value to

creditors is yes, it IS property.a. Tax Attribute – expenses exceeding income creates a loss

that would have value to creditorsii. Federal question but consult state lawiii. Board of Trade and Butner

a. Butner Case1). Principle in case kicked off whole philosophy of

bankruptcy law.2). Question was what rights secured creditors had in

bankruptcy.3). First would look to state law.4). Then would look to bankruptcy law. Bankruptcy

law accords substantial deference to state law. Except where bankruptcy code specifically modifies state rights, state rights are paramount.

5). Bankruptcy law defers to applicable non-bankruptcy (federal and state) law to resolve entitlements unless bankruptcy policy or bankruptcy law specifies otherwise.


of 68iv. Note that § 541 reaches interest and not property - § 541(a)(1) and

(d)2. Apply rules under § 541(a)3. Apply Chapter-specific rules

i. Chapter 13 INCLUDES post-petition earnings of debtor in property of the estate.

4. Apply property exclusions under § 541(b)5. Apply anti-forfeiture, recapture, and exclusion provisions under § 541(c)

D. § 541 – Property of the Estate1. (a)(1) – general standard2. (a)(2) – includes community property3. (a)(3) and (a)(4) – any property recovered by trustee for benefit of the

estate4. (a)(5) – property from CERTAIN transfers within 180 days after the

filing5. (a)(6) – proceeds, products, rents, and profits from property of estate,

except earnings from services performed by individual debtor after commencement

i. Must be tied to ACTUAL earnings from debtor’s INDIVIDUAL activity

6. (a)(7) – any interest in property that estate acquiresE. Interplay Between § 541 and § 362

1. § 362(a)(2)2. § 362(a)(3)3. § 362(a)(4)4. § 362(b)(2)5. Lesson

i. The broader the definition of estate, the greater the protection under the stay.

F. Property of the Estate1. Problems p. 95

i. 1A – Right to use the name of a company. a. Property of the estate.

ii. 1B – Copyrights owned in full by debtor publisher. a. Property of the estate.

iii. 1C – Copyrights debtor shares with others. a. Property of estate to the extent owned by debtor.

iv. 1D – Residential lease of rent-controlled apartment in New York, occupied by the debtor.

a. Property of the estate.v. 1E – Commercial lease for warehouse space under which a

bankrupt shipping company is lessee. a. Property of the estate. 541(b)(2) does not exclude because

the lease must terminate prior to the commencement of the case in order to be excluded.

vi. 2 – Yes


of 68G. Jess Case

1. A/R created prior to filing/Paid to Debtor prior to filing. Property of the estate.

2. A/R created prior to filing/Paid to Debtor after filing. Property of the estate under 541(a)(6).

3. A/R created after the filing/Paid to Debtor after filing. For Corporation, property of the estate under 541(a)(6) and (a)(7).

4. Paid pre-petition/A/R post-petition. Only earned after filing, thus for an individual performing services after petition it would not be property of the estate. The flip side to this is that if debtor pre-pays for services, 541(a)(3) and 541(a)(4) would allow pre-payment to be recovered into the estate.

H. Problems p. 1091. 2 – Refunds attributable to excessive withholding in bankruptcy year

would be in estate. Only portion attributable to pre-petition withholding. Prorated based on calendar basis. Real rule is there must be pro-ration based on some reasonable method.

2. 3- Proceeds are from pre-petition work and are included in estate.I. Exemptions

1. Role of Exemptions: Fresh Start2. Federal Model

i. § 522(b)a. Only individual can use exemptionsb. Debtor elects to use federal list in § 522(d) or state list

ii. State “opt-out” provision - § 522(b)(1)a. State can tell debtors that state list must be used.

iii. Georgia Exemptionsa. Georgia has opted out.

iv. This can lead to non-uniform treatment of creditors between states.3. Judicial liens under 522(f) can be avoided.4. Consensual liens cannot be avoided.5. Problems p. 112-113

i. Problem 2a. See problems file.

6. Limitations on Exemptionsi. Available only to individual debtorsii. Presumptively part of the estateiii. Exempt property still subject to certain liens and claims under §

522(c)a. Tax claimsb. Alimony/Child Support

J. Automatic Stay Provisions1. Methodology

i. When does the stay become effective?ii. What is the scope of the stay?iii. What are the limits of the stay?


of 68iv. When does the stay end?v. How can a party in interest obtain relief from the stay?

2. Triggering Eventi. Filing of petition in bankruptcy

a. Voluntaryb. Involuntary

3. Scopei. Protects the following

a. Debtorb. Debtor’s Propertyc. Property of the Estate

ii. From What?a. Any act worth taking from creditor’s perspective.b. Informal and formal collection efforts are stayed.

4. Purposei. Preserve the estateii. Marshal property of the estateiii. Sell assetsiv. Distribute proceeds from asset salesv. Propose and confirm plan of reorganizationvi. Gives breathing room to debtor.

5. Acts in Violation of the Stayi. Stay is self-enforcingii. Knowledge irrelevantiii. Void/Voidable

a. States are split as to whether the act is void or voidable.b. In 11th Circuit, the act is void – no judicial action is

necessary.iv. Sanctions for willful violations - § 362(h)

a. Costs and attorney feesb. In some instances, punitive damages

v. Problems p. 126-127a. 1A. Prior to bankruptcy, debtor obtained a $15,000 loan

from bank, at which debtor maintains a checking account. There is now $2,500 in debtor’s checking account. Upon debtor’s default, bank applies the $2,500 to the amount debtor owes bank on the loan.

1). This is post-petition setoff. Mutuality of debt – each side is both debtor and creditor. Under 362(a)(7), bank cannot seize the funds.

b. 1B. A representative of charge card comp1). This violates §362(a)(6).

c. 1C. Secured creditor repossesses debtor’s car after the trustee determines that the car is of no value to the estate and abandons it.

1). Three types abandonment.


of 68i). Disclaimerii). Compellediii).Deemed

2). Property is inconsequential value to the estate or unduly burdensome to administer.

3). Property becomes property of the debtor.4). Under §362(a)(5), this violates the automatic stay.

d. 1D. Electric shuts off debtor’s power because debtor failed to pay for service used in the three months after the petition was filed.

1). Was commenced post-petition and thus § 362(a)(1) would not apply.

e. 1E. State bar continues a proceeding begun before debtor’s bankruptcy petition was filed to revoke debtor’s license to practice law.

1). This is within scope of automatic stay under § 362(a)(1).

f. 1F. An account creditor sends a very polite letter stating the amount of the debt and that prompt payment would be appreciated.

1). This is within the scope of § 362(a)(1) and maybe (a)(6).

2). Courts generally focus on (a)(1).g. 1G. An accident victim attempts to collect from debtor’s

insurance company on a judgment against debtor arising from an automobile accident that took place two years prior to the bankruptcy.

1). This is not within the scope because the stay is designed to protect debtor, not the insurer.

h. 1H. Lender attempts to collect payment from debtor’s parents who signed a loan agreement for debtor as guarantors.

1). Generally speaking, an action against parents is not a violation of the automatic stay provisions.

2). However, § 1301 allows stay to be effective for guarantors of consumer debt and cannot be in the business of assuring debts.

i. 2. Repossession of car by creditor with no knowledge of bankruptcy petition.

1). Yes, has violated the automatic stay.2). Continued violation violates automatic stay.3). Can recover damages and attorney’s fees under §

362(h).i). Would file “motion to impose sanctions for willful violation of automatic stay provisions”

ii). Individuals are eligible.


of 68iii).Corporations are not eligible under § 362(h)iv). Corporations are eligible under § 105 to impose sanctions for violations of court orders and statutory directives.

6. Exceptions to the Automatic Stayi. First – Limited by scope of stay itself § 362(a)ii. Second – Explicit exclusions

a. § 362(b)b. Narrowly drawn and strictly construedc. Examples

1). Criminal prosecution - § 362(b)(1)2). Hot check prosecution - § 362(b)(1)

i). If DA is using prosecution to enforce collection, courts will indicate that this is getting around the law and is a violation of the stay.

ii). All circuits except 9th follow this.3). Collection of alimony, support, etc., BUT NOT

from property of the estate - § 362(b)(2)i). Must not be collected from property of the estate in order to qualify for exception to stay.

ii). If coming from post-petition earnings, it does not violate automatic stay provisions.

4). Governmental action - § 362(b)(4) i). Missouri and Kovacs casesii). Excepted from the stay is the commencement or continuation of an action or

iii).If it is government as collector, that action IS stayed.

iv). If it is government using police or regulatory powers, action is NOT stayed.

a). Condemnation has been held to violate provision of automatic stay. 3 Courts have held this.

V. Claims and PrioritiesA. Role of Claim

1. Only holders of claims may receive a distribution in the bankruptcy case.

i. Exception is that equity interest holders partake after claims have been paid.

2. Claims are subject to the stay.3. Claims are discharged.4. Claims vote on the plan in Chapter 11.

i. If you do not have a claim, you can buy one.5. Why would you want to buy a claim?


of 68i. If assets are undervalued, a claim allows you the inside track to

purchase property.B. Bankruptcy Quirks

1. Focus on claim and not creditori. Oversecuredii. Undersecured

2. No distinction between consensual and non-consensual creditors.i. Statutory lien creditors and tort victims are non-consensual creditors.

C. Allowance of Claims1. Key to participation in the distribution process.2. Bankruptcy concept and not tantamount to enforceable against the

debtor.3. Filing of proof of claim makes out the prima facie case for allowance.4. The proof of claim is deemed allowed unless there is a timely objection.

D. Elements of Proof of Claim1. Sets out the nature and grounds of claim and the circumstances

surrounding it.2. Identifies the amount and extent of claim.3. Identifies the status of claim.

E. Proof of Claim Filing Requirements1. Must file proof of claim in Ch. 7 case by the bar date (unless it is a no

asset case).2. Need not file proof of claim in Ch. 11 case unless claim is not scheduled

or is listed as disputed, contingent, or liquidated.i. Debtor must file schedule of creditors and liabilities. ii. This would be where the claim is scheduled.

3. Must file proof of claim in a Ch. 13 case by the bar date.4. Where holder has no notice, claim is not discharged by bankruptcy.

F. Proof of Claim Bar Date1. Private Creditor

i. 90 days from first scheduled § 341 meeting in Ch. 7 and 13a. Trigger date is scheduled NOT when actually held.

ii. Court-set deadline in Ch. 11a. If converted to Ch. 7, creditor must file within new bar

date.2. Government Creditor

i. 180 days from order for relief (§ 502(b)(9))ii. Idea here was that government needs a longer term.

3. Informal proof of claimi. Doctrine that allows any type of filing that substantially indicates

that a claim is due.a. A motion for relief of stay could qualify as an informal

proof of claim.b. Can look across many different documents to determine.c. Key is that trustee is under notice of claim.

4. Excusable Neglect


of 68i. Doctrine is that if you show excusable neglect, court has discretion

to allow proof of claim.ii. Turns to a degree on the reputation of the representative.

G. Claims Allowance Process1. Proof of claim filed2. Party in interest files objection3. “After notice and hearing”4. “As of the date of the filing of the petition”5. Consolidate claims objections6. Live testimony7. Contested matter

i. Governed by Rule 9014ii. Not an adversary proceeding.

H. Grounds for Disallowance of a Claim1. § 502

i. (b)(1) – Unenforceable against debtora. If you can’t collect outside BK, can’t collect inside.

1). Statute of limitations passed.2). Statute of frauds.

ii. (b)(2) – Unmatured interesta. Post-petition interestb. Can’t be part of allowed claim.c. Unfair to other creditors to allow interest to be part of

claim.d. § 506(b) – secured claims are allowed to claim post-

petition interestiii. (b)(5) – Support and alimonyiv. (b)(6) – Lessor claims cap

a. Cap = Greater of 1)one year’s rent or 2)lessor of a)15% of remaining term or b)3 years’ rent PLUS Unpaid rent due under the lease at the time of the bankruptcy or lessor re-occupancy.

v. (b)(9) – Miss bar dateI. Just What is a Claim?

1. § 101(5) – right to payment, reduced to judgment or not, liquidated, unliquidated, fixed or contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, unsecured PLUS right to equitable remedy if breach of right gives rise to a right to payment.

i. Very broad definition.J. When Does Claim Arise?

1. Three Testsi. State Law Test

a. Holder must have a right to commence action under state law.

b. 3rd Circuit test.c. All required elements of cause of action must be met.


of 681). Example is products liability where injury has not

been manifested – (ie. Asbestosis).d. Because of the effect, 3rd Circuit is not desired for mass tort

litigation.ii. Pre-petition Relationship Test

a. Some pre-petition privity, contact, impact or hidden harm affecting the holder.

iii. Conduct Testa. Claim arises at the time of the debtor’s wrongful conduct.b. Broadest definition.c. Sometimes, a representative of future claimants is

appointed and trust established.2. Notice is a concern with tests.

i. Constructive notice is allowed.ii. Should get court approval for method of constructive notice.

K. Compliance With the Law1. No “free pass” on the law given in bankruptcy.

i. Not allowed to disregard non-bankruptcy law during bankruptcy.2. 28 U.S.C. § 959(b)

L. Problems p. 1551. 1 – Debtor Corp. borrowed $120K from Bank on 8/1. Debtor’s note

obligated it to pay $1K interest per month for one year at which time principal becomes due and payable in full. Debtor made two payments and then declared bankruptcy.

i. What is allowed amount of Bank’s claim? $120K. Un-matured interest is not allowed under §502(b)(2). Effect is that under § 726, interest will be paid prior to debtor getting any surplus.

ii. Would the amount of Bank’s claim change if no payments had been made? Yes. Interest had matured on first two payments + first 10 days of third month and could be claimed. Should be $122.33K

2. 2 – Debtor Corp. borrowed $120K from Bank on 8/1 at 10% interest. Note promises to pay $10K per month principal and $1K per month interest for one year. Debtor made two payments and then filed bankruptcy.

i. What is the amount of Bank’s allowable claim? $100K of unpaid principal.

ii. If bank is not paid by the trustee until April of next year, can bank claim an additional $6K of interest? No. The only creditors that get post-petition interest are over-secured creditors.

3. 7 – Debtor owes an obligation to Creditor that is not dischargeable in bankruptcy.

i. Does creditor have any reason to file a proof of claim? If creditor does not file a proof of claim, they cannot participate in distribution of the estate. Why would not decide to file claim?

a. Fear of large counter-claim.b. Does not consent to jurisdiction of bankruptcy court.


of 68c. If you are representing the state, you are waiving sovereign

immunity.d. Debtor could still file proof of claim on behalf of creditor

and this would not put creditor into position of 3 above.M. Payment of Claims in Chapter 7

1. Sections 704(1) and 7262. Estate assets pay off allowed claims.

i. Effect of exemptionsa. Dollar for dollar reduction in assets available for

distribution.3. Secured creditor receives collateral or value of collateral

i. § 7254. Unsecured creditors

i. § 726ii. Priorityiii. General unsecurediv. Distributional scheme

N. Payment of Claims in Chapter 131. Best interests of creditors test2. In re Greer

O. Payment of Claims in Chapter 111. Best interests of creditors test

P. Estimation of Claims1. § 502(c)

i. Necessary because of the broad definition of § 101 for claim.ii. Empowers bankruptcy court to estimate claims

2. Purposei. Voting

a. More value = more voting powerii. Feasibility

a. Must make judgment if plan can be accomplished.iii. Allowability

3. Bankruptcy Court makes determination4. Reconsideration permitted under § 502(j)5. Important in products liability cases to get debtor back in commission.6. Estimation Methods

i. Face Valuea. Whatever is put in POC.

ii. Zero Valueiii. Market Theoryiv. Forced Settlement

a. Probability of success of claim multiplied by face value.v. Discounted Value

a. Probability of success of claim multiplied by face value.vi. Summary Trial

a. Costs too much money.


of 68Q. Priorities (§507) and Distribution (§726)

1. Priority claims under §§507(a) and 503(b) in the order of priority.2. Timely filed allowed unsecured claims3. Tardily filed allowed unsecured claims4. Fines, Penalties, and Punitive Damages5. Payment of interest on above claims6. Surplus to debtor

R. Best Interest of Creditors Test1. § 726 is foundation to understanding of other Chapter under the

Bankruptcy Code2. Best Interests of Creditors Test

S. Priorities Revisited § 507(a)1. 1. Administrative expenses (§ 503(b))

i. 7’s beat 11’s if case is convertedii. Super-priorities of Ch. 7 over Ch. 11 administrative claims.iii. Administrative expenses are ALWAYS post-petition because you

need an estate to administer.2. 2. Gap Creditors (§ 502(f))

i. Only happens in involuntary cases.ii. Only occurs in time period between filing of case

3. 3. Eligible Wage Claimsi. Cap of $4650 for each claimantii. Earned within 90 days of petition filingiii. Wages, salaries, commissions, and vacation pay.

4. 4. Contributions to employee benefits plansi. Within 180 days of filingii. To the extent of

a. # of employees X $4650 lessb. The aggregate amount paid to employees in level 3 and by

the estate to other benefit plans.5. 5. Grain farmers and fishermen up to $46506. 6. Consumer lay-a-ways up to $2100.7. 7. Family law payments in the nature of alimony and support.

i. Property settlements are not priority claim – it is general unsecured8. 8. Certain tax liabilities (federal, state, and local)

i. (A)a. Three year ruleb. 240-day rulec. Still assessable rule

ii. (B) Property tax assessed before case but payable within 1 year of filing.

iii. (C) Trust fund taxesiv. (D) Certain employment taxesv. (E) Excise taxes within 3 yearsvi. (F) Custom Dutiesvii. (G) Certain Penalties


of 68viii. A-G are all at the same level

9. 9. Certain FDIC claimsT. To the extent there is a priority claim, it takes dollars away from general

unsecured creditors.U. If, at any level of priority, there are insufficient assets to pay a level in full, the

subsequent priority levels are not paid. V. If there are insufficient assets to pay in full, creditors in priority level share pro

rata.W. Priority Problems p. 238-239

1. 1 – Joe Debtor, who practiced law as a professional corporation, had one office employee who earned $30,000 per year. When Debtor, P.C. filed Chapter 11, it owed $5,000 in wages to the employee for work performed in the two months immediately preceding the filing. How much, if any, of the wage claim is entitled to a priority?

i. Under § 507(a)(3), $4,650 for wages is the maximum priority unsecured claim. The excess, $350, would be a general unsecured claim.

2. 2 – Assume that the employee from #1 above continued to work for Debtor, P.C. for two months after bankruptcy was filed, but that the employee quit in disgust because no wages were paid. What priority, if any, will the employee’s claim for post-petition wages enjoy?

i. Because they qualify as administrative expenses under § 503(b), the wages would get top priority under § 507(a)(1).

3. 3 – Customer ordered a custom-made sofa for his den from Furniture Manufacturer, Inc. The price of the sofa was $2,200 and Customer paid 50% down. Before the sofa was delivered, Furniture Manufacturer, Inc. filed Chapter 7. Customer received neither refund nor sofa. What priority, if any, will Customer’s claim enjoy in Furniture Manufacturer, Inc.’s bankruptcy?

i. Under § 507(a)(6), consumer deposits up to $2,100 are given sixth priority status. Thus, the $1,100 paid by Customer would receive sixth priority status as an unsecured claim.

4. 4 – Debtor owed federal income taxes for the tax years 1995, 1996, 1997, and 1998. The taxes for each year were due on April 15th of the next year. Debtor receives no extensions and the IRS filed no notice of a tax lien. What priority, if any, will the tax claims enjoy if Debtor files bankruptcy on April 10, 2000. Does it matter if Debtor filed no returns at all or filed returns but included no checks.

i. 1996, 1997, and 1998 taxes would be priority claims under § 507(a)(8)(A)(i). Only taxes due within three years of filing would be entitled to priority. 1995 taxes would have been due on April 15, 1996 and are thus nearly four years at time of filing.

ii. No, it does not matter if returns were not filed or included no checks. The tax was still owed and there would be a claim.

iii. Priority tax claims, if not paid, are not dischargeable.X. What happens to a post-petition tort liability?


of 681. Reading Co. v. Brown2. Tort claimant whose cause of action arises post-petition is entitled to

level one priority claim. Essentially, the language is construed broadly and qualifies as an administrative expense.

3. Problems arise as to when cause of action actual accrues. IUD example. IUD implanted on 3/1, BK on 4/1, and injury on 5/1. When did cause of action arise? One of the big issues is that this determines two things: 1)priority claim status and 2)non-dischargeability of claims arising after BK.

Y. Hypo1. BK filed on 3/1 for couple. Medical expenses cause BK petition in

Chapter 7. Also have potential tort liability from accident on 2/1. 4/1 another car accident and another potential tort liability.

i. 2/1 tort liability is pre-petition unsecured claim and is dischargeable.ii. 4/1 tort liability is post-petition obligation but not a claim against

the estate. It is non-dischargeable. Could move to dismiss the case but judge would indicate that it is not in best interests of creditor and deny. Could obtain automatic discharge by missing §341 meeting. However, this looks shady.

VI. Equitable Subordination, Claims Classification, and Secured ClaimsA. Subordination § 510

1. § 510(a) – contractual subordinationi. Subordination of claims through contracts.

2. § 510(b) – statutory subordinationi. Statute prescribes how claims rank.

3. § 510(c) – equitable subordinationi. Do not look at contract or statute. Looks to equitable principles.

B. § 510 Standard1. Three Requirements

i. Must show inequitable conductii. Misconduct must result in harm

a. Subordinate only to extent of harmb. It is designed for compensation for harm, not punitive

damages.iii. Consistent with Bankruptcy Code

a. What the courts say is that debt can be subordinated to other debt, but debt cannot be subordinated to equity. Debt always takes before equity.

C. Classification of Claims1. Key in Chapter 11 and 132. Distributions made to classes of claims3. Votes are cast within classes4. Key provisions

i. §§1122, 1123(a), and 1322(b)(1)D. Chapter 11

1. Chapter 11 Plan must designate classes of claims


of 682. § 1122 provides the rules for classification3. Only like claims may be classified in same class

E. Chapter 131. § 1322(b)(1) provies Chapter 13 Plan MAY designate classes2. If so, must comply with § 1122.

F. Overriding Principle1. Is the proposed classification fair? To whom?

i. Reasonable basisii. Reasonably necessaryiii. Good faithiv. Treatment

G. Classification and Cram Down1. Read §§1129(a)(8) and (a)(10)2. Enter §1129(b) cram down3. Threshold to cram down is (a)(10)

i. One impaired (claims will not be paid in full) non-insider class must vote in favor of the plan

4. GerrymanderingH. Secured Claims

1. § 506(a) - bifurcation policy in bankruptcy2. Secured creditor entitled to its collateral or value thereof3. § 524(a)(2) creditor’s in rem right survives the discharge4. Valuation of the thing5. Valuation hearings

i. Anyone can request6. Problems p. 277

I. Collateral Focus1. What can Trustee do with Collateral

i. Surrender under § 725ii. Use under § 363(b) and (c)

a. If used outside of ordinary course of business, must get court permission.

iii. Sell or lease under § 363(f)a. Includes ability to sell property free and clear of lien.

iv. Abandon under § 5542. Agree to stay relief under 362(d)

i. When secured party gets relief from stay, they are entitled to take action.

3. What Can Secured Party do with the Collaterali. Request Surrenderii. Move for abandonment under § 554(b)iii. Request adequate protection under § 361iv. Move to dismiss for bad faith filingv. Move to convert under 1112(b)vi. Move to appoint Chapter 11 Trustee under 1104vii. Propose its own plan of reorganization


of 68a. Any party in interest has ability to proposeb. Debtor gets first crack – no other proposals for 120 days

and 60 days more to get approval. This time can be extended for good cause. Must try to get both periods extended.

viii. Obtain relief from the stayJ. Relief from Stay § 362

1. Automatic stay prevents secured party from repossessing or foreclosing on property.

2. There are methods for getting relief from the stay.i. (d)(1) – for cause, including lack of adequate protection

a. Argument is that property is being impaired.b. Governed by § 361c. Example is small amount of equity in property and property

depreciates.d. “Cause” has various meanings

ii. (d)(2) – debtor has no equity in the property AND the property is not necessary for an effective reorganization

a. No equity = nothing for unsecured creditorsb. No reason to keep property if it is not needed for

reorganizationc. Example

1). Collateral Value = $1002). Secured Party 1 Lien = $753). Secured Party 2 Lien = $304). Aggregate Lien is $105. Thus, there is no equity

in the property.5). SP2 could argue cause that depreciation is

deflating his secured claim and also impacting his interest draw. SP2 would be eligible for interest because he is oversecured ($100 property value vs. $30 lien).

iii. (d)(3) – debtor fails to file feasible plan within 90 days of the filing or has failed to begin monthly payments to creditors holding interest in the property

3. § 362 Provides Quick Action on Relief from Stayi. (e) – short procedural fuse

a. 30 days after request for reliefK. Adequate Protection § 361

1. Right of secured creditors2. Generally, unsecured creditors do not have this right3. Periodic cash payments

i. Cash could come from various sources, including other unencumbered property, additional capital investment, post-petition income, etc.

4. Additional or substitute lien


of 685. Indubitable equivalent

i. Insurance would be an example.6. Key is that you must ask for it7. Alyucan and the Equity Cushion

i. Value of collateral = $1.4Mii. Debt = $1.2Miii. Equity Cushion = $200Kiv. Equity Cushion is being reduced by post-petition interest.v. Question is whether an equity cushion constitutes adequate

protection?vi. Court says that it is not adequate protection.vii. Court indicates that an equity cushion is an educated guess as to

the collateral value.viii. If guess is wrong, there are consequences.ix. If there is an erroneous overvaluation of collateral, debtor can give

up the collateral and extinguish the claim.x. Debtors generally want undervaluation.xi. Creditors generally want overvaluation.xii. Three Things We Get from Alyucan

a. Secured party is entitled to collateral or value of the collateral.

b. Interest in property is not measured by amount of debt but by the value of the lien.

c. Interest in property that is being protected is being protected from any impairment in value attributed to the stay.

8. Timbers and Lost Opportunity Costsi. Undersecured creditor

a. Has both secured claim and unsecured claim.ii. Entitled to adequate protection of secured claim from impairment

in value attributed to stay.iii. Creditor argued that unsecured claim is not being adequately being

protected.iv. Creditor is arguing that he should be able to get interest from

unsecured claim.v. Under § 506(b), there is no post-petition interest for undersecured

creditors.vi. Example

a. Secured Claim = $150b. Unsecured Claim = $25c. Rising by $1 every month

vii. Lessons from Timbersa. There are real losses/costs on part of secured party in

bankruptcy and therefore, cases must be managed and moved along.


of 68b. It is the unsecured creditor, particularly the undersecured

creditor, that funds the reorganization.L. Rights of Secured Creditors Who Repossess Before Bankruptcy

1. Whiting Pools Casei. Prepetition seizure of assets by creditor (in this case, creditor is the

IRS)ii. Turnover action by debtor under § 542

a. § 362 indicates that property of estate held by creditor violates stay and § 542 indicates that property must be given back to estate

iii. Role of stay and adequate protectiona. IRS claims that stay should be lifted because there was no

equity and that it is not needed for an effective reorganization

iv. Undoing creditor debt collection effortsv. Supreme Court holds that debtor maintains an interest in the

property until it is sold. vi. Debtor has right of redemption

a. Can, up to point of sale, pay off debt and take property.vii. Court indicates that right of redemption is an adequate interest in

property of the state to command protection.viii. Court does indicate that there must be a form of adequate

protection for the secured creditor.ix. Also, Court holds that property must be necessary for an effective

reorganization.x. What would have happened if IRS seized cash?

a. IRS would be able to keep cash.xi. Supreme Court also indicates that it is a proper use of bankruptcy

to undo creditor debt collection efforts.M. At what point is it too late for debtor to file bankruptcy in order to force the return

of repossessed and foreclosed collateral?1. Real Property

i. Noticeii. Foreclosure Sale

a. Generally, in Georgia, debtor’s interest is extinguished on completion of foreclosure sale.

b. Other states allow interest until issuance of deed.iii. Issuance of Deediv. Recordation of Deed

2. Personal Propertyi. Notice of Defaultii. Repossession w/o Breach of Peaceiii. Commercially Reasonable Disposition

a. This is the point of no return, even if not yet memorialized.iv. Bill of Sale

a. Performs evidentiary and ministerial function.


of 68N. Satisfaction of Secured Claims in Chapters 7 & 13

1. Secured Claims: General Rulei. Liens ride through bankruptcyii. Secured creditor entitled to collateral or value of collateral

a. Can pay over timeb. Does not require immediate payment

iii. Examplea. Debt of $100b. Collateral Value $75c. Secured Claim = $75d. Unsecured Claim = $25

iv. Generally, value is determined as of the petition date.a. Reasons for using petition date

1). Easy2). Secured party is entitled to preservation of value

of collateral.2. Statement of Intentions

i. Within 30 days file of entry of order for relief a Statement of Intentions

ii. Three options under § 521a. Surrender the property to the secured creditorb. Keep the property and

1). Redemptioni). § 722ii). Lump sum payment to cash out secured claim equal to value of secured claim.

a). No installment option under § 722b). Cash from any source, including

post-petition financing and earningsiii).Requirements

a). Individual debtorb). Tangible personal propertyc). Personal family or household used). Consumer debte). Exempted or abandoned by

bankruptcy trusteeiv). Key argument at this point is value of collateral

v). Applied primarily to consumer debtorvi). Redemption is a tool that helps support fresh start.

vii). Abandoned property is no longer property of the estate but it is property of the debtor and is subject to automatic stay.

viii). Discharge ends stay protecting property of debtor.


of 682). Reaffirmation

i). § 524ii). New agreement between debtor and secured creditor

a). Generally, must pay all of existing obligation (not simply secured claim).

b). Can pay over time with reaffirmation.

c). Essentially, this is a consensual exception to discharge in bankruptcy.

d). Debtor would become liable for the agreement post bankruptcy – there is no discharge

c. Fourth Option in Some Circuits1). Retain and Pay

i). Can debtor keep collateral and make continued payments

a). Split in authorityb). Keep property, make installment

payments on secured claim and creditor must waive deficiency.

c). Boodrow caseiii. Formal Reaffirmation Requirements

a. § 524(c)b. Agreement

1). Must be bilateralc. Made before discharge is grantedd. Filed with courte. 60 days to consider rescindingf. Written notification of intent to rescindg. Agreement can not be an undue hardship on the debtor

1). Court hearing2). Attorney declaration

3. Dewsnup Casei. Collateral Value = $39,000ii. Debt = $120,000iii. Secured Claim = $39,000iv. Unsecured Claim = $81,000v. Because there was no equity in property, the trustee MUST

abandon it.vi. Issue is whether debtors can strip down the lien to the collateral

value and then have unsecured claim discharged.


of 68vii. Court ultimately indicates that § 506(d) does not allow debtors to

strip down the lien to the value of the collateral when value is less than the lien.

viii. Primary Rationalea. Debtor’s argument would freeze a creditor’s interest in

judicially-determine value, depriving creditor of any appreciation in value.

b. If lien stripping was allowed, it would freeze the creditor’s interest and allow the debtor to pocket the appreciation in value.

ix. Court indicates that, historically, liens pass through bankruptcy unaffected and decline to change the historical treatment of the lien.

4. Chapter 13 and Secured Claimsi. Three Methods to Deal with Secured Claims

a. Consensual treatment under Chapter 13 plan1). Not reaffirmation, only negotiation2). § 1325(a)(5)(A)

b. Surrender the collateral1). § 1325(a)(5)(C)

c. Plan provides that secured creditor retains lien in the collateral and the secured party receives the present value of its secured claim

1). Value of collateral2). Discount rate3). Essentially, this is lien stripping4). This is the “cram down” option

ii. Rash and the Valuations of Propertya. Valuations under § 506(a) in a Chapter 13 Cram-Down b. Three Methods for Valuation

1). Foreclosure valuei). Low end

2). Replacement valuei). High end

3). Middle-ground valuec. Generally, looking at fair market value

iii. Johnson Casea. “Chapter 20” Caseb. Court held that the mortgage lien can be included in

Chapter 13 bankruptcy reorganization plan after the personal obligation secured by the mortgaged property has been discharged in a Chapter 7 proceeding.

iv. Nobleman Casea. Bifurcation and strip down of a residential mortgage.b. Court says this is not allowed because of prohibition of

strip down of residential real estate mortgages § 1322(b)(2)VII. Avoiding Powers


of 68A. Fraudulent Transfers

1. Avoidance powers were designed to bring back property that should have been included in the estate.

2. With preferences, there is no misconduct.3. Basically, these are ways to increase the value of the debtor’s estate.4. § 548 – Types of Fraudulent Transfers5. Actual Fraud

i. Elementsa. Trustee or DIP (Chapter 11 cases)

1). Has standing to attack transfer of property.b. Transfer

1). § 101(54)c. Property of the debtor

1). Debtor must have interest in property that is sought to be recovered.

d. One year reach back1). Sufficiently far to permit trustee to recover

property.2). First petition filing when there is conversion.

e. Actual intent to hinder, delay, or defraud.1). Requires a state of mind analysis.2). Only occasionally is there direct evidence of this.3). Generally, this is proved by circumstantial

evidence.6. Constructive Fraud

i. Elementsa. Trusteeb. Transferc. Property of the debtord. One year reach backe. Lack of REV

1). Less than reasonably equivalent valuef. Financial Distress

1). Debtor must meet one of three testsi). Insolvent OR rendered insolvent

a). Insolvent is comparison between Property and Debt of debtor.

1). Property2). $1003). Property worth $1004). Debt5). Current liabilities $1006). Long-term liabilities $2007). When debt exceeds

property, debtor is insolvent.


of 688). If property was sold for

$25, the debtor has reduced the property available for distribution to creditors in the bankruptcy.

b). Snapshotii). Unreasonably small capital

a). Focus here is on things like liquidity and working capital.

b). Was business left with sufficient capital to continue.

c). Horizontal (other companies in similar situation) and vertical examination (performance of this company).

d). Middle ground looking out.iii).Inability to pay debts as they become due

a). Liquidity analysisb). Looks farther out than other tests.

ii. Lack of REV and Financial Distress elements basically combine to require reasonably equivalent value when the debtor is in financial distress.

a. Rationale is that creditors are harmed in this situation.iii. Reasonably Equivalent Value

a. 0 – 50% = Not reasonably equivalentb. 50 – 70% = Possibly reasonably equivalentc. 70% - 100% = Probably reasonably equivalent

7. Trustee can recover from purchaser either: 1)property subject to lien in amount of purchaser’s cost or 2)a money judgment for difference between purchase price and value to property

8. BFP v. Resolution Trust Corp. i. Reasonably equivalent value of foreclosed property is the amount

received at foreclosure sale, as long as state’s foreclosure laws are complied with.

9. State Fraud and § 544(b)i. Elements

a. Trustee1). Only trustee or DIP has standing

b. Actual creditor with an allowed unsecured claim1). Must find actual creditor with an allowed

unsecured claim that could have attacked transfer under state law.

c. State law allows creditor to avoid1). Trustee steps into the shoes of the creditor.

d. Remedy1). Moore v. Bay


of 68i). Trustee is not limited to amount of recovery that creditor could have had; they can recover full amount of property.

ii. Statute of limitations is governed by state law – there is no reach back provision in § 544(b).

iii. Very powerful tool10. Problems p. 395

i. 1. Maybe. Might be constructive fraudulent transfer if Nellie was insolvent. The value Nellie received was not reasonably equivalent value.

ii. 2. No. Steve received the reasonably equivalent value.iii. 3. Maybe. Looks like corporation was in financial distress. As

long as the bonus payment was reasonable, it will be OK.11. § 548 Defenses

i. Good Faith Value to the Debtorii. § 550iii. Example

a. Parent and three subsidiaries.b. Parent wants $300 loan from bank.c. Parent only owns stock of subsidiaries.d. Bank could loan to subsidiary, parent, or combination.e. Parent wants to keep $150 and push $150 to subsidiaries.f. Parent wants to get all $300 and push $150 to subsidiaries.g. Bank would require subsidiaries to guarantee the loan.h. After transaction, the business was left with unreasonably

small capital or was unable to pay bills.i. Because of the guarantees, P, S1, S2, and S3 would all be

liable for loan.j. There would be fraudulent transfer concerns in this

situation.k. Rules of Thumb as to Fraudulent Transfers

1). Guarantees of a subsidiary as to parent’s debt are considered upstream guarantees

i). Where there is no direct benefit are strongly considered to be fraudulent transfers.

ii). Where there is direct benefit the transactions are suspect as to fraudulent transfers.

iii).Would also look at indirect benefits.2). Cross-Stream Guarantees are analyzed in the

same manner as upstream guarantees.3). Generally, downstream guarantees where parent

guarantees debt of subsidiary is strongly presumed to be reasonably equivalent value.

B. Preferences1. Elements

i. Trustee


of 68ii. Transfer iii. Of property of the debtor iv. To or for benefit of creditor v. For a or on account of antecedent debt vi. Made while the debtor was insolvent vii. Made with 90 days (or up to 1 year if insider)

a. There is a presumption of insolvency within 90 days of filing

viii. Preferential effecta. Transferee receives more than they would have received

under a Chapter 7.2. Purpose

i. Prevent opt-out on part of creditorsii. Prevent secret liens iii. Protect distributional scheme in bankruptcy

3. Under state law and other applicable non-bankruptcy law, preferences are OK, except that you cannot prefer a creditor over a tax lien.

4. Preference Defensesi. Section 547(c) ii. Plead and Proof iii. Burden of proof on transfereeiv. First Defense

a. Contemporaneous exchanges for new value 1). Intended to be contemporaneous exchange for

new valuei). New value – money or money’s worth in goods or services, or release of property

2). In fact substantially contemporaneous b. Examples

1). 10 days -- §§547(e)(2)(A) and 547(b)(2) 2). 30 days

i). With intent ii). Without intent

3). 60 days i). With intent

v. Second Defensea. Ordinary course of business (Tolona Pizza)

1). Three Tests Must Be Meti). Debt incurred in the ordinary course of business of the debtor and the transferee

a). This a bilateral determination - have to look at the business; would you expect a debt of this type?

b). Generally, from creditor’s perspective.


of 68ii). Transfer was made in the ordinary course of the debtor and transferee

a). Usually payment but could be return of goods looking at past practice of the debtor and transferee.

iii).Transfer made in accordance with ordinary business terms

a). Internal analysis – would this type of expense ordinarily arise in the business?

b. Used chiefly by trade creditorsc. Wolas

1). Banks may use in appropriate circumstancesvi. Third Defense

a. Enabling loans (protects PMSI)b. Elements

1). Transfer of security interest in property 2). Security interest secures new value 3). Given at the time or after signing of security

agreement that describes the property 4). Given by or on behalf of the SP 5). Given to enable debtor to acquire property 6). In fact used to acquire such property 7). Perfected within 20 days after debtor possesses

c. If these elements are met, even if the perfection is on account of antecedent debt, transferee is protected.

d. Set up to allow for ongoing business.vii. Fourth Defense

a. Subsequent new value defense (trade defense) b. Not unusual to work hand in hand with ordinary course of

business defense.c. To the extent new value is offered, the transferee should be

protected.d. Elements

1). Transfer to or for benefit of creditor 2). After transfer creditor gave new value to debtor 3). Not secured 4). Not otherwise unavoidable

viii. Fifth Defensea. Floating lien defense

1). Situation is where there is a lien in inventory and/or receivables.

2). Not unusual for inventory, receivables, and debt to vary during 90 day period prior to bankruptcy.

b. Bank defense


of 68c. Protects AAP (after-acquired property) clause in inventory

or receivables 1). Improvement in position from Petition date to 90

days before bankruptcy.2). To extent collateral value increases during the 90

days before bankruptcy.d. Methodology

1). Collateral value is looked at for two datesi). Petition dateii). 90 days prior to petition

2). Examplei). Petition CV = $100ii). 90 Days Prior = $100iii).Debt = $100iv). There has been no improvement in position – defense applies.

3). Another Examplei). Petition CV = $75ii). 90 Days Prior = $100iii).Debt = $100iv). Bank’s collateral value has dropped. There has not been an improvement in position. Therefore, the defense applies. Bank would have secured claim of $75 and unsecured claim of $25.

4). Another Examplei). Petition CV = $75ii). 90 Days Prior = $50iii).Debt = $100iv). Bank’s collateral value has increased. There has been an improvement in position. Secured claim has gone from $50 90 days prior to $75 at petition. Can recover $25 back into the bankruptcy estate. At petition, bank would have secured claim of $50.

5). Another Examplei). What if collateral values fluctuate during 90 days prior to petition?

ii). It is irrelevant. ONLY petition date and 90 days prior are looked at.

6). When value of collateral simply increases due to market forces, there is no preference to be avoided.

ix. Sixth Defensea. Protects certain statutory liens from preference attack

1). Tax lien


of 68x. Seventh Defense

a. Family law obligation payments in the nature of support or in the nature of property settlements.

xi. Eight Defensea. Consumer exception

1). Individual debtor 2). Debts primarily consumer3). Aggregate transfers of less than $600 – if

transferee receives less than $600, this defense is available. Majority rule is that it is $600 for EACH creditor.

5. Recovery §550i. Return of property or money judgment (with court order)ii. (a)(1) – remedy against initial transferee

a. Initial transferee’s liability is absoluteiii. (a)(2) – remedy against immediate or mediate transfereeiv. Defenses §550(b) and (e)

a. Initial transferee – absolute liability 1). Section 548(c) – Value and good faith lien for

fraudulent transfers b. Other transferees – good faith, value, and without

knowledge of the voidability of the transfer c. Improvements – All transferees but only to extent of cost of

improvements or increased value, whichever is less6. Section 551

i. Preservation of transfer for benefit of estate7. Strong-Arm Powers

i. Powers exist as of the petition dateii. §544(a)(1) and (a)(2) – status of hypothetical judicial lien creditor

under applicable nonbankruptcy lawa. In all 50 states and DC, a judicial lien creditor takes

precedent over unperfected liens or security interestsb. Thus, trustee can avoid any unperfected liens or security

interests iii. §544(a)(3) – status of hypothetical BFP of real property

a. Generally, a BFP takes in priority to unrecorded grantees.b. Thus, trustee can avoid any unrecorded deed or unrecorded

mortgage.c. Grantee just has to record prior to petition. If this is done,

trustee cannot avoid the transfer because it has been recorded.

8. Exemption Avoidance Powersi. §522(f) intended to protect fresh start policy ii. (f)(1)(A) – avoid judicial liens on exempt property unless secures

family obligation (alimony, child support, property settlement, etc.)


of 68iii. (f)(1)(B) – avoid nonpossessory, nonpurchase money security

interests on designated categories of property9. Setoffs

i. No bankruptcy right to setoff a. No setoff right is createdb. Preserves applicable non-bankruptcy law setoff

ii. Setoff violates the automatic stay iii. What is setoff?

a. Fund is property of the debtor 1). Bank account is classic example

b. Fund is deposited without restrictionc. Debt is due

1). Essentially, this means that there must be a default on debt.

d. Mutuality of debtsiv. Setoff v. recoupment

a. Recoupment is not a stay violation1). Compulsory counterclaim under Rule 13

b. Recoupment requires a direct relationship between debts that are sought to be setoff. Mutual debts must arise from same transaction or occurrence.

c. Setoff right preserved in bankruptcyv. Limitations on Setoff

a. Four limits1). Can’t setoff against a disallowed claim2). Obtaining a setoff right through transfer while

debtor was insolvent 3). Obtaining a setoff right through incurrence of debt

at time of insolvency 4). Improvement in position -- §553(b) and

prepetition setoffi). Methodology

a). Calculate insufficiency at time of setoff

b). Calculate insufficiency at 90th day c). Calculate insufficiency at Petition

Date d). If insufficiency at Setoff is greater

than at time of Petition Date, then calculate insufficiency at each successive date from Petition Date to 90th day

e). Recovery rule10. Freeze

i. Role of automatic stay


of 68ii. Secured claim definitioniii. Adequate protection iv. Use of cash collateral v. Turnover action §542vi. What result?

a. Supreme Court indicates that freeze is not a setoff because debtor still has rights in the fund. Creditor has the right to preserve its setoff right through the refusal to allow funds to be used.

vii. Procedural context11. Postpetition Transfers

i. Every avoidance power prior to this involved pre-petition transfer.ii. Pre – v. Post – Petition transfers iii. §549 designed to protect stay purposes and distributional scheme

in bankruptcya. Designed to allow recapture of post-petition transfersb. Classic example is transfer by debtor of property outside

the normal course of business following the filing of the petition.

VIII. Mid-Course ReviewA. Voluntary Petition = Order for Relief = Commencement of CaseB. Involuntary Petition = No Order for Relief = Commencement of CaseC. At commencement of case, Property of Estate is formed.

1. There are some exclusionsD. After commencement of case, Automatic Stay kicks in. § 362E. After commencement of case, Exemptions come in. F. After commencement of case, Abandonment occurs. G. After commencement of case, Avoidance Powers kick in to increase the value of

the bankruptcy estate. §§544(a), 544(b), 547, 5481. Transfers of property2. Obligations of estate

H. Business of Bankruptcy1. Claims2. Priority3. Distribution

i. Best Interests of Creditors Testa. Creditors in Chapter 11 must receive at least what they

would receive under Chapter 7.I. Business of Business is what is covered next.

IX. Executory Contracts and Unexpired LeasesA. Section 365

1. Too long 2. Authorizes the trustee or DIP to reject, assume, or assign executory

contracts and unexpired leases.3. Non-Executory Contracts are NOT Covered by § 365.

i. Classic non-executory contract is the promissory note.


of 68ii. Classic executory contract is a supply contract.

4. Executory contracts and unexpired leases are similar because there is both a potential asset and a potential liability.

i. In lease situation, leased property is an asset, but there is also a liability to pay rent.

5. Why special treatment? i. Both a potential asset and liability.

B. Executory Contract: Definition1. No well-defined bankruptcy definition 2. Countryman Test – An executory contract is one under which the

obligations of the debtor and the other party are both so far unperformed that the failure of either to perform would constitute a material breach excusing the performance of the other.

i. This is clearly the most cited definition of executory contract in bankruptcy cases.

ii. Future performance on BOTH sides of contract. Failure to perform would be a material breach that excuses performance.

3. Functional Test – Is the estate benefited from characterization as an executory contract? In re Booth.

i. This is how some courts define executory contract.ii. Result-oriented

4. Legislative History – Some performance on both sides in addition to the payment of money.

i. Some courts use this as the definition of executory contract.5. Executory contracts have the feeling of leases in that they have elements

of both asset and liability.C. Unexpired Leases

1. Not much problem in identification 2. Real property leases 3. Personal property leases 4. Real property law and UCC 2A as sources

i. If evidence indicates that there is a sale and not a lease, bankruptcy will not treat it as a lease – it would be treated as an unperfected security interest in a lease and trustee could avoid unperfected security interests.

D. Forfeiture Clause1. Generally not enforceable in a bankruptcy case if tied to bankruptcy

filing, insolvency, or anything else that indicates financial distress.2. Provisions in bankruptcy code that render these clauses unenforceable

i. § 363(l) ii. § 365(e) iii. § 541(c)

3. If exercised before filing, then forfeiture clause MAY be enforceable. First, must determine

i. Check to see if debtor still has interesta. Right of redemption is an interest.


of 68ii. Potential avoidance power action

a. Typically, application of fraudulent transfer provisions would be seen here.

4. Forfeiture clauses in specified kinds of contracts may be effective to prevent assumption of a contract by the trustee and may actually permit termination by the non-debtor party after filing of petition

i. §§365(c), (e)(2) ii. Examples – Contracts to make a loan, financial accommodations,

issue security.iii. These are a special type of executory contract that cannot be

assumed.iv. Also impacts assignment because in order to assign, the trustee

would have to assume the executory contract of unexpired lease.5. Forfeiture clauses may also be enforceable in bankruptcy if the contract

is for personal services.i. This is really a prohibition against the assumption and assignment of

personal services contracts.ii. Only the case where non-bankruptcy law, independent of the

clause, would excuse a party from accepting or rendering performance.

iii. Key is that non-bankruptcy law prohibits assignment.E. Contract Must Be Property of the Estate

1. If fully terminated before bankruptcy, no contract or lease may be assumed, etc. There is nothing there!

2. However, would have to look to determine if there are “cure” rights under applicable non-bankruptcy law or if there are ways to bring the contract or lease back into the estate.

3. Non-curable notice of termination given before the case, then neither the stay or §365 will prevent termination when the notice period has run. The stay does not prevent running of time!

i. §105 – Bankruptcy courts have allowed an equitable remedy.ii. §108

4. Examplesi. February 1st – Notice of termination and no cure rights. March 1st –

Bankruptcy petition is filed. There is no lease. Would look to see if there is state right to cure. Would also look to see if there is a way to avoid as fraudulent transfer.

ii. February 1st – Notice that termination will occur in 45 days with no cure. March 1st – Bankruptcy petition is filed. Would still terminate on March 15th.

F. Section 365 Time Limits1. Time by which debtor or trustee must make decision as to assuming or

rejecting executory contract or unexpired lease.2. Why does time matter?

i. Concern is that other party is not receiving benefit of the contract or lease.


of 68ii. Other creditors would be concerned because during the time

period, there are administrative expenses that have a priority in payment.

iii. Other creditors would also be concerned because the amount available to general unsecured creditors is going down as administrative expenses increase.

iv. Debtor would be concerned because there may be value to the contract or lease that is being lost as time goes on.

a. Typically, first, management looks at the contracts and leases first and puts the items in three categories

1). Keep2). Reject3). Would like to keep because things will turn

around.b. Experts would look at contracts and leases and prepare an

analysis to determine what is a net asset and what is a net liability to the debtor.

v. If there are incorrect determinations whether to assume something, it will be a priority administrative expense and results in less money for general unsecured creditors. Additionally, these administrative expenses are not capped.

3. Chapter 7 – within 60 days after the order for relief i. Liquidation case so the presumption is that not much time is needed

to develop a rehabilitation plan. ii. Drafters believed that 60 days would be appropriate time period to

determine whether to assume, assume and assign, or reject the lease.iii. After 60 days, if nothing has been done, the contracts or leases are

deemed rejected.a. Thus, there is a presumption against administrative

expenses.b. Becomes a pre-petition claim.c. Subject to capping if it is a lease. Not subject to cap if it is

an executory contract.4. ANY nonresidential real property lease situation – within 60 days after

the order for relief i. Applies to ANY non-residential real property lease situation under

ANY Chapter.ii. Deemed rejected if no action is taken before 60 days.iii. Landlords use the extension of time for two reasons

a. Force assumption.b. To extract $ for extending the time. Essentially, this is a

cost of forbearance. c. Generally, courts will rubber-stamp if there is agreement.

5. §§365(d)(1), (4)6. Chapters 9, 11, 12, 13 – any time before confirmation (unless

nonresidential real property lease)


of 68i. Drafters of the Code believed that developing business plan takes

more time.ii. Thus, the debtor is allowed to have all the way up to the

confirmation.7. Party in interest may move to set an earlier date to accept or reject. 8. Executory Contracts and Unexpired Residential Leases Ride through in

Chapter 11 and 13i. If confirmed plan is silent as to an executory contract or unexpired

leases, the majority rule is that they are presumed not rejected nor assumed – they simply go through the bankruptcy as if there was no bankruptcy.

9. Time can be extended by the bankruptcy court.G. Limbo Period

1. Period between filing of petition and the time of assumption or rejectioni. Debtor not in default – other party must continue to perform ii. Debtor in default – other party need not perform unless contract

cured and assumed a. Failure to perform would then constitute a breach and gives

rise to cause of action for breach of contract and is property of the estate.

iii. Nonresidential real property – must perform in timely manner. a. §365(d)(3) indicates that during this period, the debtor must

fully perform all obligations under the lease. Must stay current in accordance with terms of lease.

b. Courts are split as to whether debtor would get money back if paid for full month and then rejected prior to the end of the month.

2. Post-petition use – Estate must pay if used after petition. i. Split of authority in courts between contract price, FMV, or use

value (majority rule) to the estate. a. Rationale is that administrative expenses are the “actual,

necessary costs...of preserving the estate”ii. Special rule for nonresidential real estate.

a. Must perform under the contract price, even if the debtor is not using.

H. Trustee’s Powers Under §3651. Rejection

i. Rejection constitutes a breach of executory contract or unexpired lease.

ii. §§365(g), 502(g) treat the breach as a pre-petition claim a. However, if assumed and then breached, then

administrative expense under §365(g)(2).iii. Rejection excuses trustee from future performance

a. Overrides remedy of specific performance under applicable non-bankruptcy law.

iv. Procedures


of 68a. Subject to court approval.b. Apply business judgment rule. c. Focus is on whether the rejection benefits the estate?d. Not a balancing calculus.

1). There is no cost-benefit analysis.2). If rejection benefits the estate but hurts third-party

business, it does not matter.v. Limits to Damages Claims

a. Allowability of lessor of real estate claim limited under §502(b)(6)

1). Claim is capped as to allowability. 2). If there is a guarantor in the mix, landlord could

obtain 3). Example

i). Debtor is tenant.ii). Debtor is subsidiary of parent.iii).There is also another subsidiary.iv). Landlord leases space to debtor for 10 years.v). Assume no duty to mitigate.vi). Landlord gets guarantees from Parent and Other Subsidiary.

vii). Only Debtor goes into BK.viii). Debtor rejects lease.

a). Damages under lease are capped.b). Enforceability is NOT capped.

ix). Landlord would bring suit against guarantors under state law.

x). Would have to evaluate whether guarantee is a fraudulent obligation ONLY if parent or other subsidiary files for BK also.

a). General rule of thumb is that parent’s guarantee is not fraudulent.

b). General rule of thumb is that other subsidiaries guarantee is fraudulent.

4). Bankruptcy law generally prevails when there is conflict with non-bankruptcy (state or federal) law.

b. Allowability of employee under a terminated employment contract limited under §502(b)(7).

1). Ways for employees to get more than the cap.i). Key is to take value and get it out of the estate by setting up a letter of credit, annuity, trust, etc.

ii). However, would be scrutinized as a potential fraudulent transfer.

2. Assumption


of 68i. Assumption binds the estate and the non-debtor party

a. Most contracts and leases may be assumed except the personal services and other financial accommodation varieties under §365(c)

ii. Effect is to make the contract an administrative expense of the estate as if estate had originally entered into the contract

a. Post-assumption breach gives rise to an administrative expense under §365(g)(2)

iii. Proceduresa. Requires court approval

1). If Contract is Not in Default (or financial condition default) – court must approve the contract. §§365(a), (b)(2)

i). Must showa). In best interest of estateb). Consistent with business judgment

rule2). If Contract is in Default – court must approve

contract and trustee must cure all defaults (except the financial condition types) or provide adequate assurance of a prompt cure (including adequate compensation for nonpecuniary losses like fees), §§365(b)(1)(A), (b)(2), (b)(1)(B), and provide adequate assurance of future performance under §365(b)(1)(C).

i). Must showa). In best interests of estateb). Consistent with business judgment

ruleb. Business judgment rulec. Focus is on benefit to the estate

3. Assignment i. Trustee has power to assign, notwithstanding a prohibition on

assignability in the contract or under applicable nonbankruptcy law. §365(f)(1).

a. Personal services contracts are an exception.ii. Court can avoid anti-assignment provisions under §365(f)(3).

a. Types of failed attempts – 1). Rent increase upon assignment2). Cross-default 3). Use restriction – most courts say you can override

use restrictions in leases. Exception is shopping malls, where lessor can keep a certain “mix”

4). Etc.iii. Trustee must first assume before it may assign under §365(f)(2)(A)

a. Must follow steps required for assumption.


of 68iv. Recall assumption limits regarding specific contracts found in

§365(c)v. After assignment, the estate is no longer liable under §365(k).

Overrides applicable non-bankruptcy law.a. There is no claim against the estate.b. If there is a breach post-assignment, estate is not liable.

vi. Procedurea. Recall that all assumption procedures must be met as well.

1). Court approval,2). Cure or plan to cure,3). Adequate assurance of future performance.

b. However, adequate assurance of future performance must come from the assignee, whether or not there has been a default under the contract under §365(f)(2)(B).

4. “Ride-through”I. Debtor as Landlord

1. Several provisions protect non-debtor party – i. Under §365(h), rejection by debtor landlord cannot result in eviction

of tenant from lease of real property.ii. If debtor landlord rejects, tenant may stay and setoff against future

rent any damages caused by rejection. 2. Purchaser of timeshare interest given the same protections.

J. Debtor as Licensor of Intellectual Property1. Section 365(n) protects non-debtor licensee of intellectual property2. IP is defined in §§101(52) and (53) to include copyrights, patents and

applications therefore, trade secrets and mask works, but not tradenames, trademarks, or related rights.

3. Limited Protectioni. If trustee rejects licensing agreement, then:

a. Treat license as terminated and assert a damage claim or b. May retain the rights under the license and continue to

make royalty payments, waiving any right of setoff or any administrative expense resulting from the performance under the license

ii. During limbo period, debtor must perform if requested by licenseeK. Methodology Summary

1. What are the consequences of rejection, assumption, or assignment?2. What are the procedures for rejection, assumption, or assignment?3. What are the limitations on rejection, assumption, or assignment?4. What are the time limits on rejection, assumption, or assignment?5. What are the definitions of an executory contract and unexpired lease?

L. ConclusionX. Chapter 11

A. Timeline1. Filing of Petition = 02. Within 20-40 Days


of 68i. § 341 Meetingii. Appointment of Official Committee of Unsecured Creditors

3. 0 - 120 Daysi. Disclosure Statement of Plan must be filed along with proposed plan

of reorganization.a. Disclosure Statement must explain how creditors and

equity security holders will be treated under the plan.b. § 1129 serves as c. Disclosure statement must allow creditor to make informed

decision as to whether to vote for or against plan.d. Involves court hearing.

ii. Time Period of Exclusivitya. This is the period when Debtor has sole ability to file plan

of reorganization.4. 120 - 180 Days

i. Once plan is proposed and disclosure statement filed, Debtor can solicit votes in favor of the plan.

ii. Can amend plan but if there are substantial changes, Debtor might have to file a new disclosure statement.

iii. Confirmation of plan requires court hearing.a. § 1129(a) and (b)b. Votes are reported.

5. Post-Confirmationi. Actions occurring after confirmation.

6. Time periods can be extendedi. Not unusual for time periods to be extended to 18 – 24 months.

7. Time period between petition and filing of disclosure statement is the window of vulnerability.

i. Time period in the bankruptcy process where there is such focus on proceedings that business side might be neglected.

B. Purpose of Chapter 11 Reorganizations1. Capture going concern value of enterprise.

i. Historically, this is to provide the maximum return for the creditors.2. Prevent debtor from going into liquidation.

i. Greater return to creditorsii. Greater return to equityiii. Prevent the loss of jobsiv. Prevent loss of tax basev. Misuse of economic resources

C. Debtor Control of Chapter 111. Debtor remains in possession of the estate under § 1108 and defined

under § 1101(1).i. Possessor of the bankruptcy estate.

2. Debtor has powers of a Chapter 11 trustee under § 1107.3. Debtor is only party in interest that may propose a plan of reorganization

for the first 120 days following the order for relief.


of 684. Debtor then has 60 days to convince the court that plan is in best interest

of creditors by obtaining approval of plan by creditors or “cram down”D. Powers of Chapter 11 Debtor

1. Debtor may reject executory contracts and unexpired leases, including collective bargaining agreements.

2. Debtor may use secured party’s collaterali. Must provide adequate protection

3. Debtor may borrow moneyi. Post-petition credit is entitled to administrative expense priority.

4. Debtor is protected by the automatic stayi. § 105 injunction to protect non-debtor insiders who have guaranteed

Debtor’s debts.a. Majority rule is that Debtor has to bring injunction.b. Courts agree that injunction must further reorganizational

efforts of debtor.5. Debtor may modify the debt and equity portion of its capital structure

i. Bifurcation of secured claims.ii. Strip-down of liens.iii. Equity portion can be affected by canceling stock and issuing new

stock.6. Debtor may bind dissenting members of class.

i. Among members of class, >1/2 of number of holders AND 2/3 of value must vote in favor.

7. Debtor may cram down a plan over the objection of most classes.i. Must comply with § 1129(b)

8. Debtor may enjoy certain tax benefits through reorganization.E. Classification of Claims

1. During 120 day time frame, debtor is attempting to classify claims.2. Key in Chapter 11 and 13 because

i. Distributions made to classes of claims.ii. Votes are cast within classes.

3. Chapter 11 Plan must designate classes of claims.4. § 1122 provides the rules for classification.

i. Dissimilar claims cannot be put in the same class.a. Many courts read this as “Only like claims must be

classified in the same class.”b. No majority.

F. Voting in Chapter 111. Only impaired creditors vote.

i. Unimpaired is a “yes” vote.ii. Impaired creditors who get nothing are deemed as a “no” vote.

2. A class of creditors accepts when over ½ in number and at least 2/3 of THOSE VOTING vote in favor of the claims.

G. Applicability of Other Chapters1. Title 28, USC generally applies to Chapter 11 reorganizations.2. Chapters 1, 3, and 5 generally apply to Chapter 11 cases.


of 68H. Eligibility for Relief

1. Any person who is eligible for relief under Chapter 7 plus railroads minus stock and commodity brokers.

2. Individuals, partnerships, limited liability entities, and corporations.i. Look at definitions under state law.

I. Commencement of the Chapter 11 Case1. Voluntary

i. Petition date is the date for the order for relief.2. Involuntary

i. Answer through voluntary relief.3. Joint Voluntary

J. Conversion from Chapter 11 to Chapter 7 by Debtor1. Debtor has power to convert a Chapter 11 to a Chapter 7 case to case

under Chapter 7 at any time, excepti. Where Chapter 11 trustee has been appointed.ii. Case was commenced as an involuntary Chapter 11.iii. Case was converted to a Chapter 11 case by someone other than

the debtor.K. Conversion from 11 to 7 By Other Party in Interest

1. § 1112(b) provides non-exhaustive list of grounds for conversion or dismissal

i. SEE § 1112(b)L. Claims

1. Any right to payment, etc., as defined in § 101(5)2. Claim deemed allowed in Chapter 11 case where it is listed in the

schedules at the correct amount, status, and priority.i. § 1111(a)ii. Must file proof of claim if claim is omitted from schedules or listed

as disputed, contingent, or un-liquidated.3. Secured party need not file claim to receive the benefit of collateral.

i. Valuation hearings under § 506(a)ii. Failure to file claim should not effect lieniii. Watch the unsecured portion of any debt

M. U.S. Trustee1. Differs from “trustee”

i. Trustee means bankruptcy trustee who is appointed by U.S. Trustee and who has different responsibilities.

ii. Bankruptcy trustee is appointed in Chapter 7 case automatically.iii. Bankruptcy trustee may be appointed in Chapter 11 case if

necessary because of an inability of DIP to run business in manner that does not harm creditors.

iv. Trustee is paid as an administrative expense by the debtor.2. Department of Justice official3. U.S. Trustee is a party in interest and can bring suits.4. U.S. Trustee is paid by the government from fees collected, in part, from

the bankruptcy estate.


of 685. Specific Statutory Duties

i. Convenes and presides over first meeting of creditors.a. § 341 meeting

ii. MAY call a meeting of equity security holders.a. Purely discretionary.

iii. Supervises the case.iv. U.S. Trustee is appointed so that bankruptcy judge did not have to

play both judge and administrator.v. U.S. Trustee is involved in review of fees paid to attorneys.vi. Appoints the creditors committee

a. MUST appoint creditors committeeb. Generally, unsecured creditors committee is made up of the

holders of the 7 largest unsecured claims who are willing to sit on the committee.

c. MAY appoint other official committees (bond, equity, etc.) – this is discretionary.

d. Rules of Thumb1). Banks want cash.2). Bondholders hold subordinated debt and want the

company to go forward. They use their position to force other classes to give them something.

3). Trade wants generally to keep their customer in business.

4). Management wants to see the company reorganized but only if they are a part of the reorganization.

5). Essentially, it is the Secured Creditor who is funding the bankruptcy because they are giving up their ability to take their property.

6). Dynamics change for these committees because the original bondholders, secured creditors, etc. change through the selling of the claims.

N. Committees1. Unsecured creditors committee is intended to play a key role in chapter

11. 2. US Trustee generally appoints the committee from the 7 largest

unsecured creditors.i. UST may use discretion to balance the committee.ii. Can often look at composition of official committee of unsecured

creditors to determine what is going to happen with the company. If bonds are highly represented, the chances are that the company will be sold (in whole or in part), not liquidated or rehabilitated. If majority is made up of trade creditors, there is a high probability of rehabilitation.

3. Pre-petition informal committee may stay in place if selected fairly and representative of the class of creditors.


of 68i. Essentially, bankruptcy is a class action with interpleader overtones.

4. Court may order additional committees.5. Committees may retain professionals with court approval.

i. Fees are administrative expenses if the committee is official.O. Committee Counterbalance

1. Committees act as a counterbalance against the DIP.i. Protects the interest of the creditors.

2. Party in interest.3. Appear and be heard on any issue. 4. Retention of professionals.5. With court permission, may bring avoidance powers actions.6. Section § 1109(b) and § 1103 powers

i. Plan negotiationP. Keeping the Ship Afloat – Primary Goals

1. Operating the business i. §§ 363, 364, 365, 554, 1108 Provisions help to operate the business.ii. DIP operates the business without court approval under § 1108.

a. No Chapter 11 trustee unless court ordered for cause.iii. Operation v. Liquidation

a. DIP must determine what is in best interest of creditors.iv. Court may order termination of operations under § 1112.v. Turnaround or recapitalize

a. Operating business is a turnaround.b. Recapitalization is change in capital structure of company.

2. Achieving Stability i. Key period from operational perspective – from filing to plan

confirmation.ii. Stem operational losses.iii. Operations take place under the umbrella of the Bankruptcy Code.

a. Means that Code provisions regulate operations.3. Protecting the estate

i. The Stayii. Section 365 iii. Abandonment under § 554 iv. Surrender v. Collateral swaps

Q. Business Failures1. Identify causes

i. External a. Economic changes b. Competitive changes c. Government constraints d. Social change e. Technological change

ii. Management and Internal Causesa. Primary cause of business failures.


of 68b. Reasons

1). Poor management 2). Unbalanced top management team 3). Dysfunctional BOD

iii. Fraud 2. Distinguish between causes and symptoms of financial distress.

i. Tools necessary to grow the business are ill suited to management of businesses in financial distress.

ii. For instance, cash flow problems are a symptom of an underlying financial problem.

R. Focus in Turnarounds1. Solving operating problems2. Analyze operational issues 3. Design strategy 4. Implement strategy 5. Develop business plan 6. Need key information in timely fashion7. Techniques

i. Just in Timeii. Activity Based Costingiii. Four Wall Analysis

S. Restructuring1. Occurs on the financial side.2. Developing a financial structure as a basis for the turnaround.3. Financial management

i. Debt restructuringii. Working capital improvementsiii. Cost reduction analysisiv. Low cost producer

T. Firm Valuation1. Enterprise Value (EV) = Long term debt (so-called funding debt) +

Market value of the equity i. Methods to value EV

a. Comparablesb. Income

1). DCF – Discounted Cash Flow2). EBITDA Multiple – Earnings Before Interest,

Taxes, Depreciation and Amortization.c. Replacement cost

2. Reorganization Value (RV) of the Assets = Current Liabilities + Enterprise Value OR Assets = Liabilities + Equity

i. Generally, assets are carried at cost. Reorganization value marks up or down the assets to market price.

U. Goodwill1. Going Concern Goodwill

i. That amount of EV in excess of total identifiable asset value.


of 682. Even though it is intangible, it is property of the estate.3. Methods of valuation

i. Comparables ii. DCF iii. Excess earnings

V. Appointment of Trustee or Examiner1. Section 1104 permits appointment of trustee for cause or if in best

interests of creditors 2. UST appoints the trustee after consultation with the creditors and other

parties in interest 3. Court may replace trustee with DIP under § 1105 4. Consequences of Appointment

i. Appointment of trustee terminates period of exclusivity.a. Court can use equitable powers to enjoin creditors from

submitting plans.ii. Examiner may be appointed in certain circumstances to investigate

the debtor or current management and to report findings a. Appointment may be mandatory in some circumstancesb. Appointment may not displace DIP

W. Operating the Business1. Window of vulnerability

i. Petition date to confirmation date 2. Post-petition transactions

i. Ordinary course transactionsa. § 363 governs.b. No court approval necessary. c. Horizontal (industry-wide) and vertical (historical) test is

used to determine if transactions are in ordinary course of business.

1). Very fact intensive inquiry.d. Sell, etc., collateral assuming adequate protection.

ii. Outside ordinary coursea. Court approval necessary.b. Unauthorized post-petition transfer under § 549.

X. Special Case for Cash Collateral1. § 363(a) 2. Unencumbered Cash – Treat like any other property.3. Cash collateral (cash or cash equivalent like deposit accounts, accounts

receivable, etc in which debtor and third party claim an interest) – Can not use unless all those with interest in CC consent or court order.

i. Adequate protectiona. § 361b. Protection of secured creditor’s collateral.

ii. Check setoff right and lien in proceeds situations.4. If use of cash collateral does not meet requirements, creditor can seek to

appoint Chapter 11 Trustee, move the court to impose sanctions, move


of 68to dismiss the bankruptcy case, move the court to convert the case from Chapter 11 to Chapter 7, etc.

Y. Funding Options1. Sale of assets

i. Common in bankruptcy to sell assets in ordinary and outside of ordinary course of business.

ii. When Debtor wants to sell all or substantially all of assets, they use § 363. Doing this prior to the confirmation of plan circumvents the safeguards of the Chapter 11 process.

a. In re Lionel and In re Braniff Airlines held that debtor can sell assets as long as there is a business necessity to selling now and that the sale was in the best interests of the estate.

1). Must be for a fair price because there must be adequate protection of assets.

2). § 363(k) protects creditors with a lien by allowing them to “credit bid” against entity attempting to purchase assets.

iii. Still must continue with Chapter 11 process. Simply becomes a liquidating plan under Chapter 11.

iv. Bankruptcy Court has the power to convert a private sale into a public auction and do so regularly.

2. Avoidance Actionsi. Can use money from avoidance actions to fund the reorganizations.

3. Equity for Debt Swapsi. Go to unsecured creditors and will get them to agree or force them to

take shares in reorganized debtor.ii. Common way to fund Chapter 11 reorganizations.

4. Equity Infusionsi. Third parties who invest in business.

5. Future Operationsi. Income from future operations.

6. Accumulated Cashi. If in a cash-rich business, do not have to pay pre-petition debts so

can build cash position.7. Post-Petition Financing

i. Section 364 a. DIP authorized to obtain post-petition financing.b. (a) – administrative expense priority to obligations incurred

in ordinary course of business.1). Example is credit from a trade creditor.

c. (b) – same to those obligations authorized by court.d. (c)(1) – super-super priority upon court order.

1). Administrative expense must be paid in full before any other administrative expense is paid.

e. (c)(2) – court grants lien on unencumbered property.f. (c)(3) – court grants junior lien on property.


of 681). Court can grant junior lien on already encumbered

property.2). Party with existing lien can object to this.

g. (d) – court grants priming lien on property.1). Priming lien is one that would take priority over

already existing lien holder.h. Most post-petition lenders will only lend to debtor with

consent of secured party.1). Secured party now is between a rock and a hard

place because if they do not consent, the business will be dead; if they do consent, they risk giving up their security.

ii. Cross-collateralizationa. Pre-petition lender who comes in and offers post-petition

financing in exchange for interests in post-petition assets that secures a pre-petition claim.

XI. Bankruptcy Plan – Material Presented by Professor Klee (UCLA)A. Types of Plans

1. Composition Plan is based on percentage that creditors will receive.2. Extension Plan3. Combination of Above4. Convert Debt to Equity

B. Chapter 11 Plan can also restructure the business of the debtor.1. This impacts the asset side of the balance sheet.2. Debtor may eliminate underperforming assets.

C. Fundamental business decision is whether to restructure the business or to liquidate.

D. Plan is a result of negotiation between Debtor and Creditors.1. Conducted in advance of disclosure statement.

E. When is the Right Time to Develop the Plan1. A lot of negotiations occur prior to filing of petition.2. Negotiation after filing is very pressure-filled.3. Management wants as much time as possible – they have eternal

optimism.4. From creditor’s point of view, creditor would want to develop a plan as

soon as possible becausei. Depreciationii. Business is losing money – that is why they are in bankruptcy.iii. Administrative expenses are paid prior to unsecured creditors.

5. Bottom line is that you must know whether business is a going concern prior to developing a plan.

F. Exclusivity Periods1. 120 days after order for relief.2. 180 days after order for relief.3. Remember that in an involuntary case, the order for relief is not at the

same time as the petition.


of 684. Must show cause to extend exclusivity.

i. Causea. Size and complexity of the case.b. Litigation sometimes can be a factor for cause but normally

can be addressed in plan.c. Where creditor has refused to negotiate.

ii. Not Causea. When debtor is using extension to put pressure on the

creditors to settle.b. Where debtor has refused to negotiate.

5. There is a real disparity between courts in protecting exclusivity.6. Sometimes, court has reduced periods of exclusivity.

i. Usually done when there is evidence of gross misconduct on the part of the debtor.

7. Appointment of Trustee automatically ends period of exclusivity.8. Impasse in the governance of partnership or corporation may be grounds

for the court to end period of exclusivity.9. Debtor or creditor can appeal extension or ending of exclusivity.10. Why is exclusivity important?

i. Loss of exclusivity can be seen as a big blow to management and might serve to harm the business in terms of employees, suppliers, and creditors.

ii. Competing plan can form a basis for liquidation or take-over.iii. Debtor loses a lot of leverage in negotiations when period of

exclusivity ends.G. Contents of a Plan

1. Mandatory Provisionsi. § 1123(a)ii. Must specify classes of claims in interest.iii. Must specify whether the class is impaired or not impaired.

a. § 1124iv. Must specify the treatment that each class is going to

receive under the plan.v. Same treatment to each holder within a class unless they

agree to a less favorable treatment.2. Permissive Provisions

i. § 1123(b)ii. Plan may impair or leave unimpaired any class of claims,

secured or unsecured, or of interests.iii. Plan may assume, reject, or assign executory contracts and

unexpired leases of the DEBTOR not previously rejected under § 365.

a. Post-petition contracts give rise to administrative expenses.

b. No power to assume, assign, or reject post-petition executory contracts or unexpired leases.


of 68iv. Plan may provide for settlement or adjustment of any claim

or interest belonging to the debtor or to the estate or for the retention and enforcement of any such claim or interest.

a. Very powerful provision to incorporate settlements into plan.

v. Plan may propose liquidation.vi. Plan may modify the rights of holders of secured claims,

other than a claim secured only by a security interest in real property that is the debtor’s principal residence.

vii. Plan may include any other appropriate provisions not inconsistent with Bankruptcy Code.

a. Has been used to limit liability.3. § 1123(d)4. Possible to structure a plan so that if a class votes in favor of plan,

they receive X; if they vote no, they receive Y.i. Most courts allow if this is done by class, but cannot discriminate

between members of the class.ii. Some courts hold that this is coercive and do no allow it.

XII. Chapter 11 Plan ConfirmationA. Overview

1. Chapter 11 crafted to accommodate both consensual and nonconsensual plans

2. Designed to force negotiation and ultimate agreement among parties in interest through system of checks and balances

B. Consensual Plans1. Section 1129(a) provides for consensual plans 2. Binds dissenting members of a consenting class

i. Class accepts if over ½ in number and 2/3 in amount of claims (that actually vote) vote in favor.

ii. Do not need unanimous vote in favor of plan.3. Juniors may receive value under the plan even if seniors not fully paid if

seniors receive at least what entitled to in a liquidation.C. Non-Consensual Plans

1. If one impaired class rejects the plan, confirmation must meet cram down requirements under section 1129(b)

2. No reorganizational value may be given to juniors under the plan unless senior non-accepting class has been fully compensated

D. Core Concept in Confirmation1. A plan cannot be confirmed unless each class of claims or interests:

i. Has accepted the plan by requisite vote; ii. Is not impaired by the plan; or iii. The plan “does not discriminate unfairly” and complies with the

“fair and equitable rule.”E. Best Interest of Creditors Test

1. Financial protection for dissenting members of an accepting class.


of 682. All IMPAIRED creditors may invoke best interests requirement even if

class voted to accept the plan.i. Not in play when all class members vote for the plan.

a. Waiver by class.ii. Not in play with unimpaired classes.

a. Deemed to have accepted plan.F. Cram Down – Section 1129(b)

1. Confirmation over the objection of an impaired class or classes where plan

i. Does not discriminate unfairly andii. Plan is fair and equitable.

G. Fair and Equitable: Absolute Priority Rule1. Seniors entitled to full payment before juniors may participate

i. Payment may be in cash, property, or equity.ii. Most common payment form is new securities in the reorganized

debtor.2. Analysis requires an assessment of enterprise value usually through

discount cash flow method.3. What typically happens is that seniors give up value to juniors to forge a

plan and juniors make reasonable demands for fear of Absolute Priority Rule.

H. Fair and Equitable Trends1. Seniors are entitled to full but not over compensation.

i. Can’t block a plan just because the juniors get something.2. Subtle distinction between secured and unsecured.

i. Secured -- Must preserve present value of collateral ii. Unsecured – Must provide present value of claim or no one junior

participatesI. New Value Exception to Absolute Priority Rule

1. Elements i. Contribution to reorganized debtor by old equity ii. Money or money’s worth

a. No sweat equity iii. Necessary iv. Substantial equivalent in value to the interest retained by old equity

2. If elements are met, old equity (juniors) can keep their stock even though seniors have not been paid in full.

J. Other Requirements: Boilerplate1. Plan must comply with Title 11. 2. Proponent must comply with Title 11. 3. Plan must be proposed in good faith.4. Requirements met for disclosure and payment re plan and identify of

insiders. 5. Regulatory approval if necessary. 6. Pay all fees.

K. Priority Claims


of 681. Administrative expenses under § 503(b) and gap (§ 507(a)(2) – post-

petition but pre-order for relief) claims paid in full in cash as of effective date – no class vote.

2. Priority tax claims (§ 507(a)(8)) can be paid over 6 years from date of assessment.

i. Pre-petition interest – yes, because it is part of the claim.ii. Post-petition interest – no, because it is not part of the claim.iii. Post-confirmation interest – yes, because interest arises after

confirmation of plan.3. Other priorities – paid in full in cash unless class accepts (1/2 in number

and 2/3 in value) extension with present value of claim.L. Voting on Plan

1. All classes must accept or have been deemed to accepted the plan.2. Absent unanimous acceptance, then one non-insider impaired class must

accept the plan.M. Feasibility

1. Gauge the business plan and the distribution plan. 2. Proponent must show a reasonable likelihood of success.

N. Feasibility Focus 1. Focus on future cash flow and net earnings to meet its restructured

interest and dividend needs as well as amortize the principal.2. Proposed new capital structure, including the relationship of debt to

equity in the reorganized debtor is sound.XIII. Discharge

A. Importance1. To an individual debtor the single most important feature of modern

bankruptcy law is the discharge. See 11 U.S.C. 727. 2. Along with exemptions and the carve out of future income from property

of the estate under section 541(a)(6), the discharge fuels the fresh start of the debtor, a policy of singular importance in individual bankruptcies.

3. Individual debtors can also obtain a discharge under chapters 11 and 13 of the Code. See 1141(d) and 1328(a) and (b).

B. Introduction1. The discharge is granted virtually automatically unless an objecting

party can establish that the debtor has engaged in certain prohibited conduct, usually some type of gross misconduct, fraud or bankruptcy crime. See 11 U.S.C. 727(a).

2. The objecting party has the burden of establishing a ground for the denial of a discharge.

C. Prior Denial of Discharge1. If a debtor has been denied a discharge in a bankruptcy case, so that all

his debts remain outstanding, the debtor may not include the same obligations in a subsequent case to obtain a discharge.

2. The denial of the discharge is res judicata as to the obligations existing at that time, which are forever non-dischargeable.

D. Effect of Discharge


of 681. A discharge in a bankruptcy case voids any judgment to the extent that it

is a determination of the personal liability of the debtor with respect to a pre-petition debt. See 11 U.S.C. 524(a).

2. The discharge also operates as an injunction against the commencement or continuation of an action, the employment of process, or any act, including telephone calls, letters, and personal contacts, to collect, recover, or offset any discharged debt.

3. In effect, the discharge is a total prohibition on debt collection efforts. 4. Furthermore, under 524 of the Code, any attempt to reaffirm a particular

debt is void unless the particular provisions of the Code delineating the requirements of reaffirmation are specifically followed. See generally 11 U.S.C. 524(c).

i. Always have the opportunity to voluntarily pay debts that were discharged.

E. Non-discrimination Provision: Government1. To ensure the effectiveness of the discharge, Code 525 prohibits a

governmental unit from denying, suspending, or refusing to renew a license or permit or deny employment solely because the person involved was discharged under the Code, was insolvent before the bankruptcy case, or has not paid a dischargeable debt.

F. Non-discrimination Provision: Private Employer1. Additionally, under 525(b), no private employer may terminate the

employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under the Code, or an individual associated with a debtor under the Code, solely because the debtor is or has been a debtor under the Code, was insolvent before the commencement of case under the Code, or has not paid a debt that is dischargeable under the Code.

G. Scope of Discharge1. Chapter 7: all debts that arose before the order for relief

i. Under 727(a), the bankruptcy court must grant the individual debtor a discharge of pre-petition debts unless any of ten conditions are met.

ii. Only an individual is eligible for a discharge under chapter 7 pursuant to 727(a); a partnership or corporation may not receive a discharge under chapter 7.

iii. Additionally, 727(a) applies only in liquidation cases under chapter 7.

2. Chapter 11: all debts that arose before confirmation of the plani. Under 1141(d) of the Bankruptcy Code, the confirmation of the plan

of reorganization discharges the debtor from any debt that arose before the confirmation of the plan.

ii. Unlike 727(a), a partnership or corporation (as well as an individual) may receive a 1141(d) discharge.

iii. The 1141(d) discharge is broader than the 727(a) discharge in that the latter discharges any debts that arose before the order for relief


of 68(petition was filed in a voluntary case), while the former discharges any debts that arose before the confirmation of the plan.

iv. Limits to Chapter 11 Dischargea. Nevertheless, there are limits to the 1141(d) discharge –

cannot use Chapter 11 to get a discharge when you are mimicking Chapter 7.

1). First, debts excepted from discharge under 523 are not discharged under 1141(d) when the debtor is an individual.

2). Second, if the plan provides for liquidation of all or substantially all of the property of the estate, the debtor does not continue in business, and the debtor would be denied a discharge under 727(a), then confirmation of the plan does not discharge the debtor. If you were going to be denied a discharge under Chapter 7, you will not get a discharge under Chapter 11.

b. These limitations are necessary so that an individual debtor may not employ a chapter 11 liquidation plan to evade the objections to discharge embodied in 523(a) and 727(a).

3. Chapter 13: all debts provided for in the plan or disallowed under section 502

i. Unlike chapter 11, the chapter 13 discharge is granted not at confirmation but after the debtor has completed performance under the chapter 13 plan.

ii. Under 1328(a) almost all debts of the debtor are discharged, even those that are non-dischargeable under 523(a), except debts like support and alimony, certain long term debts that the plan purports to pay out after the plan, student loans, DUI debts, and a few others.

iii. Consequently, the chapter 13 discharge is broadest in scope, discharging all debts provided for in the plan or disallowed under 502, except those few debts already mentioned.

iv. Hardship Dischargea. A chapter 13 debtor who fails to complete payments under

the chapter 13 plan for reasons beyond the debtor's control may nevertheless be granted a "hardship" discharge.

b. This hardship discharge is granted so long as the creditors have received as much under the plan as they would have under a chapter 7 liquidation.

c. In effect, the hardship discharge is nothing but a chapter 7 discharge under a different guise.

d. Thus, all the debts that are non-dischargeable under 523(a), which could have been discharged pursuant to completion of the chapter 13 plan, will remain in full force and effect like in a chapter 7 case.

H. Discharge Hearing


of 681. Section 524(e) of the Code requires an individual debtor to appear

before the court to receive the discharge. 2. The discharge hearing gives the court an opportunity to explain the

nature of the discharge and to warn the debtor against reaffirming discharged obligations.

3. The discharge hearing is a formal affair that is intended to impress upon the individual debtor the significance of the bankruptcy case.

4. At the discharge hearing, the court will also hear the debtor's attempt to reaffirm any debts.

I. Reaffirmations1. A reaffirmation agreement is an agreement between the debtor and one

of the creditors wherein the debtor agrees to pay an otherwise dischargeable debt.

2. As a general rule, reaffirmation agreements are void unless certain procedures are met.

3. Reaffirmation Proceduresi. However, the Code recognizes certain reaffirmation agreements if

certain Code requirements are met.ii. First, the reaffirmation agreement must be entered into before the

granting of the discharge. iii. Second, the debtor must have 60 days after approval of the

agreement to rescind it. iv. Third, if the individual debtor is seeking to reaffirm a consumer

debt that is not secured by the debtor's real property, the court must find that the agreement will not impose an undue hardship on the debtor.

4. Court Reluctancei. It is difficult to persuade a court to approve reaffirmation

agreements. ii. Courts are particularly careful not to allow the debtor, through

good intentions, to throttle the fresh start provided by the Code with otherwise dischargeable debt.

iii. This is true because courts recognize that reaffirmations hinder and may even obliterate the debtor's discharge and fresh start.

J. Redemption1. Reaffirmations should be contrasted with redemptions. 2. A redemption occurs pursuant to 722 of the Code, and gives the debtor a

right to buy back collateral from the secured creditor.3. The strike price is set by the court through a court-imposed valuation. 4. The right applies only to consumer goods securing a consumer debt.5. Moreover, the property in question must either be exempt or abandoned

by the trustee.6. Finally, courts hold that the debtor must pay the entire strike price at the

time the right is exercised – no installment deals on this one.


of 687. Of course, if not the type of property in that right category, a debtor

could always buy it from the trustee through cash that is not property of the estate.

K. Objections to Discharge1. Not all debtors are entitled to a discharge under 727(a) of the Code. The

right to discharge is a right reserved for the honest but unfortunate debtor.

2. Over-extending oneself, unforeseen contingencies, the inability to pay debt, or lack of business acumen are not reasons to deny a debtor's discharge. But fraud, criminal activity, and misconduct are.

3. If a creditor or the trustee is successful in attacking the debtor's discharge under 727(a), then all claims survive the bankruptcy case and may be enforced and ultimately satisfied.

L. Grounds for Denial1. Grounds for denial of a discharge include:

i. The debtor is not an individual. ii. A transfer or concealment of property within one year of

bankruptcy by the debtor with the intent to hinder, delay, or defraud its creditors. Purge the taint?

a. Some circuits have taken the view that you cannot purge the taint by bringing property back into the estate that had previously been moved outside prior to filing.

b. Some circuits allow debtor to purge the taint – no harm, no foul.

iii. The debtor's failure to keep adequate financial records. iv. Debtor misconduct during the bankruptcy case, including perjury,

false statements, false oaths, or failure to obey a court order. v. A debtor's inability to satisfactorily explain any losses or

deficiencies of assets. vi. A chapter 7 discharge within six years of the commencement of

the pending case. Measure from filing date to filing date. M. Revocation of Discharge

1. Section 727(d) requires the court to revoke a discharge already granted in certain circumstances.

2. If the debtor obtains a discharge through fraud, if he acquired and concealed property of the estate, or if he refused to obey a court order to testify, the discharge must be revoked.

3. Additionally, 727(e) permits the trustee, a creditor, or the United States trustee to request revocation of a discharge within one year after the discharge is granted for fraud.

N. Waiver of Discharge1. A debtor may waive its right to discharge under 727(a)(10) of the Code.2. The waiver of discharge must be executed in writing by the debtor after

the order for relief under chapter 7 has been entered. 3. The waiver is ineffective until approved by the court.

O. Exemption Planning: How Far Can We Go?


of 681. In re Tveten

i. Actual fraud or using exemptions provided by law??? ii. What do you think?

P. Exceptions of Debt from Discharge under § 523(a)1. For Policy

i. Certain taxesii. Debts not timely filediii. Family obligationsiv. Government stuffv. Educational loans

2. For Bad Conducti. Fraudulent incurred obligationsii. Fiduciary, fraud, larceny, embezzlementiii. Willful and malicious injuryiv. Drunk driving judgments

3. Creditor has burden of proof.4. Standard is preponderance of the evidence.5. Doctrine of collateral estoppel allows State court judgments or

convictions to serve as conclusive evidence that the court can use to make determinations under applicable § 523 exceptions.

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