Chapter 30 Bankruptcy Law. 2 Bankruptcy and Reorganization Article I, Section 8 of the U.S....

Chapter 30Bankruptcy Law

Chapter 30Bankruptcy Law

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Bankruptcy and ReorganizationBankruptcy and Reorganization

Article I, Section 8 of the U.S. Constitution. Federal jurisdiction.

Bankruptcy Reform Act of 1978, amended by Reform Act of 1994.

Federal court under U.S. district court, can appeal to district courts.

Federally appointed judges.

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§1: Types of Bankruptcy Relief [1]§1: Types of Bankruptcy Relief [1]

Bankruptcy code has 8 chapters.

1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate.

Chapter 7 - liquidation proceedings.

Chapter 9 - adjustment of debts of a municipality.

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Types of Bankruptcy Relief [2]Types of Bankruptcy Relief [2]

Chapter 11 – reorganizations.

Chapter 12 - adjustment of debts of family farmers with regular incomes.

Chapter 13 - adjustment of debts of individuals with regular incomes.

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§2: Liquidation Proceedings§2: Liquidation ProceedingsChapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee.Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged.Available for any person, individual, corporation, partnership.Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors.

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Filing the Chapter 7 PetitionFiling the Chapter 7 Petition

Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court.

Voluntary vs. Involuntary bankruptcy.

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Voluntary Petition [1]Voluntary Petition [1]

Petitioner must understand there are other chapters available.

Debtor does not have to be insolvent.

List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses.

Swear to these and sign. Federal crime to misrepresent.

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Voluntary Petition [2]Voluntary Petition [2]

Court issues order of relief.

Clerk of court gives trustee and Creditors mailed notice of the order within 20 days.

Court will deny if “substantial abuse” of Chapter 7.

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Involuntary Bankruptcy [1]Involuntary Bankruptcy [1]

Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution).

If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition.

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Involuntary Bankruptcy [2]Involuntary Bankruptcy [2]

If there are less than 12 creditors, one or more having a claim of $10,000 may file.

Court will order relief if Debtor is generally not paying debts as they come due.

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Involuntary Bankruptcy [3] Involuntary Bankruptcy [3]

Court will order relief if:A general receiver, assignee, or custodian took

possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing.

Penalties for frivolous petitions against debtors, including Punitive damages.

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Automatic StayAutomatic Stay

Either voluntary or involuntary.

Creditors cannot commence or continue most legal actions.

Damages for violation of stay.

Creditors can get “adequate protection.”Periodic or one time cash payments or

indubitable equivalent.

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Property of the Estate [1]Property of the Estate [1]

Debtor’s Estate includes:All Debtor’s legal and equitable interests in

property presently held, including community property;

Property transferred in a “voidable” transaction; and

Property which Debtor becomes entitled within 180 days after filing.

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Property of the Estate [2]Property of the Estate [2]

Estate includes (cont’d):Proceeds and profits from the property of the

estate.After-acquired property such as inheritances,

property settlements, and life insurance death proceeds.

Case 30.2: In Re Andrews (1996).

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Creditor’s Meeting and Claims [1]Creditor’s Meeting and Claims [1]

Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets.

Within 90 days, Creditors must file “proof of claim” with court clerk.

Leases cannot be for more than one year.

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Creditor’s Meeting and Claims [2]Creditor’s Meeting and Claims [2]

Allowed unless disputed.

If claim is disputed or unliquidated, court will decide value.

It is a crime to file false claim.

Employment contracts and real estate.

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ExemptionsExemptions

See list in text pages 549-550.

States may pass law requiring Debtor use state exemptions.

In some states, Debtor may choose state or federal exemptions.

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Bankruptcy TrusteeBankruptcy Trustee

Court-appointed until first meeting of creditors.

Creditors elect permanent trustee

Administers estate.

Collects proceeds, liquidates assets and pay Creditors in order of priority.

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Trustee’s PowersTrustee’s Powers

Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of:Debtor against the creditors.Lien creditors against the creditors.Bona fide purchaser against the creditors.Trustee still loses to the pmsi creditor who

perfects within his “magic” 10-day period.

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Voidable RightsVoidable Rights

Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

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Preferential Transfers [1]Preferential Transfers [1]

A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another.

For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

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Preferential Transfers [2]Preferential Transfers [2]

Trustee can use preferential payment to pay a real preexisting debt, not for current consideration.

Creditor gets more than he would in a Chapter 7.

Consumer can transfer up to $600 without constituting a preference.

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Liens on Debtor’s PropertyLiens on Debtor’s Property

Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent.

Can avoid liens which were unperfected on date of bankruptcy.

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Fraudulent TransfersFraudulent Transfers

Trustee may avoid fraudulent transfers made within one year of filing of petition.

Trustee may proceed under state law for fraud with a 3 year statute of limitations.

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Distribution of Property [1]Distribution of Property [1]If Secured property:Consumer debtors.

• Have 30 days from filing petition or before first meeting of creditors.

• Debtor must tell what she intends to do with collateral-- keep or surrender.

• Trustee must enforce within 45 days.

If surrenders: creditor can keep or sell.• If creditor keeps = full satisfaction of debt.• If creditor sells = can use extra for costs, or can

become unsecured creditor for deficiency.

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Distribution of Property [2]Distribution of Property [2]

Unsecured propertyPaid according to bankruptcy law.All of one class must be paid before moving to

next.Creditor within last class receive

proportionately if not enough.See Priority List in text.All creditors paid, trustee gives extra back to

debtor.

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DischargeDischarge

Exemptions.

Objections to Discharge.

Effect of Discharge.

Revocation of Discharge.

Reaffirmation of a Debt.

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Exceptions to Discharge(List on p.604)

Exceptions to Discharge(List on p.604)

Claims for back taxes.

Claims for amounts borrowed by Debtor to pay federal taxes.

Claims against property/money obtained by Debtor under false pretenses.

Claims by Creditors who did not know about bankruptcy.

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Reaffirmation of DebtReaffirmation of Debt

Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy.

Agreement is filed with court.

Debtor can rescind agreement at any time.

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§ 3: Reorganizations§ 3: Reorganizations

Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest.

Same debtors as are eligible under Chapter 7.

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Reorganizations [2]Reorganizations [2]

“Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate.

“Workouts”.

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Reorganizations [3]Reorganizations [3]

Debtor in Possession (DIP).Trustee may be appointed.DIP has same powers as trustee in Chapter 7.

• Strong-arm clause.

Collective Bargaining Agreements.

Creditors Committees.

The Reorganization Plan.

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§4: Additional Forms of Bankruptcy Relief

§4: Additional Forms of Bankruptcy Relief

Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750.

Not for partnerships, corporations.

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Additional Forms of Bankruptcy Relief [2]

Additional Forms of Bankruptcy Relief [2]

Chapter 12: Family Farmer Plans“Family Farmer”: 50% of gross income comes

from farming and whose debts are 80% farm related.

Procedure for filing.Content of plan.Court confirmation.

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Case 30.1: In Re Lamana(Voluntary Bankruptcy)


FACTS: Lamanna lived with his parents and had no plans

to move out. His monthly expenses were $580. His monthly income was $1,350.96, leaving a difference of $770.96.

During a four-week period, he charged $9,994.45 on credit cards. Three months latter, when his total unsecured debt was $15,911.96, he filed a Chapter 7 petition in a federal bankruptcy court.

The court dismissed Lamanna’s case because he was capable of paying all of his debts under a Chapter 13 repayment plan and dismissed the case.

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HELD: AFFIRMEDLamanna argued that he was being

penalized for living with his parents.Granting Lamanna’s petition would

constitute substantial abuse. Under a “totality of the circumstances” test, Lamanna “has sufficient disposable income to repay his debts under a Chapter 13 repayment plan in three to five years.”



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Case 30.2: In Re Andrews(Property of the Estate)


FACTS:Tarmac Acquisition, Inc., bought AMAX Corp. The

AMAX owners, including John Andrews, signed agreements not to compete with Tarmac.

Andrews was to receive $1 million, payable in quarterly installments over a five-year period.

Three years later, Andrews filed a bankruptcy petition. He asked the court not to include, in the property of his estate, any future installments. The court refused. Andrews appealed.

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HELD:The Fourth Circuit affirmed. “Pre-petition assets, like the NCA

[noncompetition agreement] payments, are those assets rooted in the debtor’s pre-petition activities, including any proceeds that may flow from those assets in the future.”

The payments “are plainly rooted in, and grow out of, Andrews’s pre-petition activities.”



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Case 30.3: In Re Jercich(Discharge)


FACTS:In 1981, Petralia began to work for Jercich,

Inc., a mortgage company wholly owned and operated by George Jercich.

Petralia’s primary duty was to obtain investors to fund the home loans. Jercich agreed to pay Petralia a salary plus monthly commissions for loans that were funded through his efforts.

When Jercich failed to pay the commissions, Petralia quit and sued Jercich. Jercich filed bankruptcy. The bankruptcy court held the debt was dischargeable. Petralia appealed.

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HELD: REVERSED. FOR PETRALIA.Jercich’s debt to Petralia was not

dischargeable. “An intentional breach of contract generally

will not give rise to a nondischargeable debt.” The court held, however, that “where an

intentional breach of contract is accompanied by tortious conduct which results in willful and malicious injury, the resulting debt is excepted from discharge.”



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