The Law of Debtors and Creditors

Professor Dawson – Spring 2012

Table of Contents

Individual Debt Collections........................................................................................................................................... 3Collection without Courts............................................................................................................................................................ 3

Non-judicial Collection Methods................................................................................................................................................................. 3Restrictions on Non-judicial Collection.....................................................................................................................................................4

State Law Debt Collection............................................................................................................................................................ 8Collection Remedies......................................................................................................................................................................................... 8Fraudulent Conveyances and Shielding Debtor Assets......................................................................................................................13State Collective Remedies............................................................................................................................................................................14

Consumer Bankruptcy................................................................................................................................................. 15Introduction to Bankruptcy...................................................................................................................................................... 15Elements Common to Consumer Bankruptcies................................................................................................................... 15

The Estate.......................................................................................................................................................................................................... 16The Trustee........................................................................................................................................................................................................ 17The Automatic Stay........................................................................................................................................................................................ 18

Liquidation Bankruptcy............................................................................................................................................................ 19Eligibility........................................................................................................................................................................................................... 20

Claims and Distributions............................................................................................................................................. 26

Discharge......................................................................................................................................................................... 27

The Debtor’s Post-Bankruptcy Position: Reaffirmation......................................................................................30Chapter 13 Bankruptcy............................................................................................................................................................. 30

Elements of an Acceptable Plan................................................................................................................................. 30Present value of Secured Claim for n payment periods.....................................................................................................................33Threshold Eligibility for Chapter 13.........................................................................................................................................................36The Consumer Bankruptcy System...........................................................................................................................................................36

Business Bankruptcy.................................................................................................................................................... 37Chapter 7 Liquidation................................................................................................................................................................ 37

Business Liquidations................................................................................................................................................... 37

Involuntary Bankruptcy.............................................................................................................................................. 37Chapter 11 Reorganization....................................................................................................................................................... 38

The Traditional Chapter 11........................................................................................................................................ 38

The Automatic Stay and Adequate Protection........................................................................................................ 39Operating in Chapter 11................................................................................................................................................................................ 41Reshaping the Estate...................................................................................................................................................................................... 45Preferences: The General Rules................................................................................................................................................................. 46Negotiating and Confirming the Plan.......................................................................................................................................................57

Domestic Jurisdiction................................................................................................................................................... 70

Transnational Bankruptcies........................................................................................................................................ 73Choice of Forum.......................................................................................................................................................................... 74

The Functions of Bankruptcy Law............................................................................................................................ 77

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Individual Debt Collections

Collection without Courts

Non-judicial Collection Methods

§ 615. Requirements on users of consumer reports [15 U.S.C. § 1681m]

(a) Duties of users taking adverse actions on the basis of information contained in consumer reports. If any person takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report, the person shall (1) provide oral, written, or electronic notice of the adverse action to the consumer;(2) provide to the consumer orally, in writing, or electronically (A) the name, address, and telephone number of the consumer reporting agency (including a toll-free telephone number established by the agency if the agency compiles and maintains files on consumers on a nationwide basis) that furnished the report to the person; andJuly 30, 2004 56(B) a statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken; and(3) provide to the consumer an oral, written, or electronic notice of the consumer's right (A) to obtain, under section 612 [§ 1681j], a free copy of a consumer report on the consumer from the consumer reporting agency referred to in paragraph (2), which notice shall include an indication of the 60-day period under that section for obtaining such a copy; and (B) to dispute, under section 611 [§ 1681i], with a consumer reporting agency the accuracy or completeness of any information in a consumer report furnished by the agency.

Fair Credit Reporting Act (15 USC 1681)§ 611. Procedure in case of disputed accuracy [15 U.S.C. § 1681i](a) Reinvestigations of Disputed Information(1) Reinvestigation Required(A) In general. Subject to subsection (f), if the completeness or accuracy of any item of information contained in a consumer's file at a consumer reporting agency is disputed by the consumer and the consumer notifies the agency directly, or indirectly through a reseller, of such dispute, the agency shall, free of charge, conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate and record the current status of the disputed information, or delete the item from the file in accordance with paragraph (5), before the end of the 30-day period beginning on the date on which the agency receives the notice of the dispute from the consumer or reseller.

…(5) Treatment of Inaccurate or Unverifiable Information (A) In general. If, after any reinvestigation under paragraph (1) of any information disputed by a consumer, an item of the information is found to be inaccurate or incomplete or cannot be verified, the consumer reporting agency shall–(i) Promptly delete that item of information from the file of the consumer, or modify that item of information, as appropriate, based on the results of the reinvestigation; and(ii) Promptly notify the furnisher of that information that the information has been modified or deleted from the file of the consumer. (B) Requirements Relating to Reinsertion of Previously Deleted Material (i) Certification of accuracy of information. If any information is deleted from a consumer's file pursuant to subparagraph (A), the information may not be reinserted in the file by the consumer reporting agency unless the person who furnishes the information certifies that the information is complete and accurate

…(b) Statement of dispute. If the reinvestigation does not resolve the dispute, the consumer may file a brief statement setting forth the nature of the dispute. The consumer-reporting agency may limit such statements to not more than one hundred words if it provides the consumer with assistance in writing a clear summary of the dispute

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§ 1681n. Civil liability for willful noncompliance(a) In generalAny person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of--(1)(A) any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000; or(B) in the case of liability of a natural person for obtaining a consumer report under false pretenses or knowingly without a permissible purpose, actual damages sustained by the consumer as a result of the failure or $1,000, whichever is greater;(2) such amount of punitive damages as the court may allow; and(3) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney's fees as determined by the court.(b) Civil liability for knowing noncomplianceAny person who obtains a consumer report from a consumer reporting agency under false pretenses or knowingly without a permissible purpose shall be liable to the consumer reporting agency for actual damages sustained by the consumer reporting agency or $1,000, whichever is greater.(c) Attorney's feesUpon a finding by the court that an unsuccessful pleading, motion, or other paper filed in connection with an action under this section was filed in bad faith or for purposes of harassment, the court shall award to the prevailing party attorney's fees reasonable in relation to the work expended in responding to the pleading, motion, or other paper.

§ 1681o. Civil liability for negligent noncompliance(a) In generalAny person who is negligent in failing to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of--(1) any actual damages sustained by the consumer as a result of the failure; and(2) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney's fees as determined by the court.(b) Attorney's feesOn a finding by the court that an unsuccessful pleading, motion, or other paper filed in connection with an action under this section was filed in bad faith or for purposes of harassment, the court shall award to the prevailing party attorney's fees reasonable in relation to the work expended in responding to the pleading, motion, or other paper.

§ 1681s. Administrative enforcement(a) Enforcement by Federal Trade Commission(1) In generalThe Federal Trade Commission shall be authorized to enforce compliance with the requirements imposed by this subchapter under the Federal Trade Commission Act (15 U.S.C. 41 et seq.), with respect to consumer reporting agencies and all other persons subject thereto, except to the extent that enforcement of the requirements imposed under this subchapter is specifically committed to some other Government agency under any of subparagraphs (A) through (G) of subsection (b)(1), and subject to subtitle B of the Consumer Financial Protection Act of 2010, subsection (b)1. For the purpose of the exercise by the Federal Trade Commission of its functions and powers under the Federal Trade Commission Act, a violation of any requirement or prohibition imposed under this subchapter shall constitute an unfair or deceptive act or practice in commerce, in violation of section 5(a) of the Federal Trade Commission Act (15 U.S.C. 45(a)), and shall be subject to enforcement by the Federal Trade Commission under section 5(b) of that Act with respect to any consumer reporting agency or person that is subject to enforcement by the Federal Trade Commission pursuant to this subsection, irrespective of whether that person is engaged in commerce or meets any other jurisdictional tests under the Federal Trade Commission Act.

Restrictions on Non-judicial Collection

1. Usury Laws

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Marquette Nat’l Bank of Minneapolis v. First Omaha Service Corp (1978)First Omaha solicited credit customers in Minnesota at an interest rate that was lawful in Nebraska but that exceeded the Minnesota Cap. Holding: Under federal banking laws, the state law of the customer’s location was not relevant. Instead, a federally chartered bank could charge whatever interest rate was legal in the bank’s home state.

2. Federal Statutory Controls on Non-judicial Collectiona. FAIR DEBT COLLECTION PRACTICES ACT

§803 or 1692a. DefinitionsAs used in this subchapter--(1) The term “Bureau” means the Bureau of Consumer Financial Protection.(2) The term “communication” means the conveying of information regarding a debt directly or indirectly to any person through any medium.(3) The term “consumer” means any natural person obligated or allegedly obligated to pay any debt.(4) The term “creditor” means any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.(5) The term “debt” means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.(6) The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. Notwithstanding the exclusion provided by clause (F) of the last sentence of this paragraph, the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. For the purpose of section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests. The term does not include--(A) any officer or employee of a creditor while, in the name of the creditor, collecting debts for such creditor;(B) any person while acting as a debt collector for another person, both of whom are related by common ownership or affiliated by corporate control, if the person acting as a debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts;(C) any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties;(D) any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt;(E) any nonprofit organization which, at the request of consumers, performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts by receiving payments from such consumers and distributing such amounts to creditors; and(F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity (i) is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement; (ii) concerns a debt which was originated by such person; (iii) concerns a debt which was not in default at the time it was obtained by such person; or (iv) concerns a debt obtained by such person as a secured party in a commercial credit transaction involving the creditor.(7) The term “location information” means a consumer's place of abode and his telephone number at such place, or his place of employment.(8) The term “State” means any State, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any political subdivision of any of the foregoing.

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§804 or 1692b. Acquisition of location informationAny debt collector communicating with any person other than the consumer for the purpose of acquiring location information about the consumer shall--(1) identify himself, state that he is confirming or correcting location information concerning the consumer, and, only if expressly requested, identify his employer;(2) not state that such consumer owes any debt;(3) not communicate with any such person more than once unless requested to do so by such person or unless the debt collector reasonably believes that the earlier response of such person is erroneous or incomplete and that such person now has correct or complete location information;(4) not communicate by post card;(5) not use any language or symbol on any envelope or in the contents of any communication effected by the mails or telegram that indicates that the debt collector is in the debt collection business or that the communication relates to the collection of a debt; and(6) after the debt collector knows the consumer is represented by an attorney with regard to the subject debt and has knowledge of, or can readily ascertain, such attorney's name and address, not communicate with any person other than that attorney, unless the attorney fails to respond within a reasonable period of time to communication from the debt collector.

§805 or 1692c. Communication in connection with debt collection(a) Communication with the consumer generallyWithout the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction, a debt collector may not communicate with a consumer in connection with the collection of any debt--(1) at any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer. In the absence of knowledge of circumstances to the contrary, a debt collector shall assume that the convenient time for communicating with a consumer is after 8 o'clock am and before 9 o'clock pm, local time at the consumer's location;(2) if the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney's name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer; or(3) at the consumer's place of employment if the debt collector knows or has reason to know that the consumer's employer prohibits the consumer from receiving such communication.(b) Communication with third partiesExcept as provided in section 1692b of this title, without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a postjudgment judicial remedy, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector…

§806 or 1692d. Harassment or abuseA debt collector may not engage in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:(1) The use or threat of use of violence or other criminal means to harm the physical person, reputation, or property of any person.(2) The use of obscene or profane language or language the natural consequence of which is to abuse the hearer or reader.(3) The publication of a list of consumers who allegedly refuse to pay debts, except to a consumer reporting agency or to persons meeting the requirements of section 1681a(f) or 1681b(3) of this title.(4) The advertisement for sale of any debt to coerce payment of the debt.(5) Causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number.(6) Except as provided in section 1692b of this title, the placement of telephone calls without meaningful disclosure of the caller's identity.

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§807 or 1692e. False or misleading representationsA debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:(1) The false representation or implication that the debt collector is vouched for, bonded by, or affiliated with the United States or any State, including the use of any badge, uniform, or facsimile thereof.(2) The false representation of--(A) the character, amount, or legal status of any debt; or(B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.(3) The false representation or implication that any individual is an attorney or that any communication is from an attorney.(4) The representation or implication that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment, or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action.(5) The threat to take any action that cannot legally be taken or that is not intended to be taken.(6) The false representation or implication that a sale, referral, or other transfer of any interest in a debt shall cause the consumer to--(A) lose any claim or defense to payment of the debt; or(B) become subject to any practice prohibited by this subchapter.(7) The false representation or implication that the consumer committed any crime or other conduct in order to disgrace the consumer.(8) Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.(9) The use or distribution of any written communication which simulates or is falsely represented to be a document authorized, issued, or approved by any court, official, or agency of the United States or any State, or which creates a false impression as to its source, authorization, or approval.(10) The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer…

§808 or 1692f. Unfair practicesA debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:(1) The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.(2) The acceptance by a debt collector from any person of a check or other payment instrument postdated by more than five days unless such person is notified in writing of the debt collector's intent to deposit such check or instrument not more than ten nor less than three business days prior to such deposit.(3) The solicitation by a debt collector of any postdated check or other postdated payment instrument for the purpose of threatening or instituting criminal prosecution.(4) Depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument.(5) Causing charges to be made to any person for communications by concealment of the true purpose of the communication. Such charges include, but are not limited to, collect telephone calls and telegram fees.(6) Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if--(A) there is no present right to possession of the property claimed as collateral through an enforceable security interest;(B) there is no present intention to take possession of the property; or(C) the property is exempt by law from such dispossession or disablement.(7) Communicating with a consumer regarding a debt by post card.(8) Using any language or symbol, other than the debt collector's address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business.

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Heintz v. Jenkins (1995)Facts: Plaintiff borrowed money from the bank to buy a car. She defaulted. Bank’s firm then sued plaintiff in state court to recover the balance. In an effort to settle, George Heintz, wrote to Jenkins’s lawyer. Jenkins then brought this action under the FDCPA. Plaintiff argues that the letter violated the prohibition against trying to collect an amount not “authorized by the agreement creating the debt,” §1692(f)(1), and against making a “false representation of the amount of any debt,” §1692e(2)(A). Issue: Whether the term “debt collector” in the Fair Debt Collection Practices Act applies to a lawyer who “regularly,” through litigation, tries to collect consumer debts.Analysis: The act defines debt collector as “those who regularly collect or attempt to collect, consumer debts owed…” 1692a(6). Attorneys are not exempted from the reaches of the FDCPA.

Young v. Citicorp Retail Services (2nd Cir. 1998) (unpublished)Holding: court held that collection letters on a lawyer’s stationery and bearing her name, although sent form her office at Citicorp, were not “from” the lawyer but were, instead, from Citicorp using the name of another. As a result, Citicorp was subject to the FDCPA and, along with the lawyer, in violation of the FDCPA because of its intent to mislead the debtor into believing the matter had been referred to an attorney for collection.

PROBLEM SET #1

1.1. List of potential debts and assets for both consumer and business clients?Asset. Anything of value that you own, car, stock, house, a claim against someone, insurance policy, some are contingent assets, i.e., the right to receive alimony. Debt. Debt is any money, property, or legal right that you owe to someone either currently or in the future.1.2. Security Bank sees others being paid, but not it. Debtor’s expenses exceed income. Their options:

(1) Threaten to report her to a credit-reporting agency; (2) Threaten to forgive the debt and report it as income to the IRS;(3) Refinance and make the payments more manageable.; (4) Ask Debtor for a security interest in her property; a security interest provides:

(a) Leverage—if the item is important to the borrower, then you won’t have to repossess, they will borrow from friends and family,

(b) Collateral control—if they need further credit, and the other creditors ask for collateral, they won’t have anything to offer as collateral,

(c) Loss reduction.  Somewhere down the line the bank make actually want to file suit.1.4. FDCPA §§803-808. §803 defines who a debt collector is. If you are collecting your own debts you aren’t a debt collector and don’t need to follow the rules. §807 makes certain practices illegal, including misrepresentation that you plan to apply for a warrant for an arrest, because private citizens can’t do this. Marquette v. First Omaha allows banks to charge any interest rate that is legal in their chartered location.1.6. Attorney sent out demand letter on client’s behalf stating that he would take immediate action, including a lawsuit, if the outstanding amount isn’t paid. ∆ seeks to settle if client will drop all claims b/c you violated the FDCPA.

The act defines debt collector as “those who regularly collect or attempt to collect, consumer debts owed…” 1692a(6). Attorneys are not exempted from the reaches of the FDCPA. See Heintz.

Must look at the statute to see if 1) the attorney is a debt collector (Does he regularly collect consumer debts owed?), and 2) did he actually violate any provision of the FDCPA?

Attorney has good arguments that he is not a debt collector and didn’t violate any provision. Must inform your client of the letter and then get her informed consent to take action.

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State Law Debt Collection

Collection Remedies

a. Executioni. Judgment creditor remains a general unsecured creditor until “execution” is obtained on the judgment.ii. Claim has become indisputable by the debtor— it has become “liquidated.”iii. Execution writ or writ fi. fa or writ of attachment: The writ orders the sheriff or marshal to look for non-

exempt property of the judgment debtor, to seize it, to sell it, and to pay the proceeds to the judgment creditor, until the judgment is fully paid.

iv. The writ is issued routinely by the court clerk upon request of the judgment creditor and is delivered to the sheriff for “execution.”

v. The entire process of seizure is often called a levy and what the sheriff does is “to levy upon” the property.

vi. Once the sheriff has levied upon a specific piece of the debtor’s property, the judgment creditor becomes a “judicial lien creditor” as to that property. Sheriff then advertises and sells it to the highest bidder. Proceeds of the sale to the levying judgment creditor until paid in full. Any remaining proceeds are paid back to the judgment debtor, unless some subsequent judgment creditor levied symbolically upon the property while it was stored at the courthouse. An entry is made in the judgment record noting the partial or complete satisfaction of the judgment.

vii. If the proceeds are insufficient to pay the judgment in full, then the sheriff will be commanded to look for more of the debtor’s property to seize, and the process will start over.

b. Turnover Ordersi. Judgment debtor may be ordered to turn over property he possesses. The judgment debtor can also be

ordered to turn over property, no matter who possesses it, if the property is subject to his control. The debtor risks imprisonment for contempt if he does not comply. Once property is traced to the debtor, the debtor bears the burden of establishing that certain property is no longer in his possession.

c. Sequestrationi. May be used in defined circumstances to seize and hold specific property of the debtor, often property in

which the creditor has a security interest. State specific*d. Judgment Liens by Recordation

i. Judgment lien against real property is obtained by recording a judgment in the county land records where deeds of sale and mortgages are filed. Often the fastest and cheapest post-judgment collection step a creditor can take.

ii. Recordation is effective as to other debtor’s property even if the creditor spends no time locating or identifying the property. For a nominal fee, the creditor ties up the debtor’s assets, often preventing any resale b/c no purchaser would buy property w/ the title clouded by an earlier judgment lien.

e. Dormancy and Limitationsi. Dormancy the judgment still exists but is no longer enforceable w/out being “revived.” Typically 1 year

of no enforcement effort.ii. Limitations – statute based limitations. Typically 10 years.

f. Debt collection by the Fed’l Gov’ti. Federal Debt Collection Procedures Act. ii. Only applies to judgments in favor of the federal government.

g. Family Debtsi. Imprisonment for family support payments is possible

h. Voluntary Liensi. When a creditor files or ensures public notice, its lien is said to be perfected and the making of the filing

is called perfection.ii. PMSI – purchase money security interest: liens necessary for the purchase of the collateraliii. Non-PMSI loan: Borrow money and give a lien on property they already own to secure their promises to

repay. I.e., home equity LOC or pledge of stockiv. Personal property: Article 9 “self-help repossession” or can offer to keep the property in satisfaction of

the debt w/out any sale “retain in satisfaction.” v. Deficiency Judgment: When collateral is sold for less than the amount still owed on the debt. Must sue

the debtor for that amount and scramble for some property to seize just like an unsecured creditor.

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vi. Debtor can argue under UUC §9-611 that notice was not given and creditor should forfeit their right to the deficiency. In non-consumer transactions, there is a presumption against the creditor, but showing that the deficiency would have been just as great can rebut it even if all the procedures had been followed. §9-626.

i. Statutory Liens and Trust Fundsi. Landlord’s lien and mechanic’s lien – allow the mechanic to keep a car until the repair bill is paid or to

sell the car if necessary to satisfy the charges. Recognized in UCC §9-333. ii. Charging lien: attorney with respect to the proceeds of a successful litigation.iii. Debtor a trustee of certain property for the favored creditors, who, as “beneficiaries” of the statutory trust,

effectively get a priority in that property.j. Property Exempt from the Collection Process

i. States vary widely in the protection they give to debtors, and that protection never extends to protecting a debtor from a secured creditor. Only comes in to play if the debtor owns a piece of property outright or has equity in excess of the liens on the property.

k. Collection in other Jurisdictionsi. Full faith and credit clause of the Constitution requires each state to recognize and enforce judgments of

sister states. Common law method: file a new suit, serving a summons, resulting in a new local judgment in the enforcing state. Judgments rendered in state or federal courts can be enforced in other countries. However, enforcement is difficult b/c many foreign courts require reciprocity, and the US is not a party to any treaty on the enforcement of judgments.

Gerdes v. Kennamer (Tex. App. Corpus Christi 2004)Facts: Appellants Gerdes appeal terms of a turnover order and findings of Gerdes’ noncompliance w/ two earlier turnover orders. Gerdes owed Kennamer. Evidence showed that Gerdeses each owned 50% share in a Mexican entity. Gerdes objected that he couldn’t force his wife to turnover the property. No evidence was offered to show that her property wasn’t subject to his control. Turnover statute does not provide that the court can force the judgment debtor to sign documents; it doesn’t limit it strictly to turning over docs and property. It allows aid from a court through injunction or “other means” to reach the debtor’s property. Must be able to show that the property could not be attached readily or levied by ordinary judicial process. They were in third parties hands out of state. Issue: Can the Texas court order a turnover of stock in a Mexico corporation held by US citizens?Holding: Yes.

2. The Struggle among Creditors: Prioritiesa. General Rule: “First in time, first in right,” or “the fastest dog gets fed first.”b. The first creditor to levy on a particular piece of property will have the right to be paid in full from the

sale proceeds of that property before any other creditor gets even a single dollar from the sale.i. Ex.: Debtor owes 3 creditors $10k each with one property worth $15k. First creditor with priority

gets $10k, the second gets $5k, and the third creditor gets nothing. c. Perfection: When a creditor reaches its interest in the debtor’s property will prevail over subsequent

interests. For judgment creditors, it means execution. For mortgages and other secured lenders, it means filing in a predetermined place or otherwise giving others notice of the interest. For statutory lien holders it means whatever the statute says is the rule. General Rule: First to perfect wins!

d. Unsecured Creditor v. Unsecured Creditori. Must first get a judgment and then “levy on” that judgment in order to get an interest in a piece of

property belonging to the judgment debtor. The levy perfects the judgment lien on that property. First to levy will win as to the property levied upon.

ii. Ex.: If A levies on the debtor’s car on Monday, and B levies on Tuesday, A takes all the proceeds from the sale of the car up to the outstanding amount of its debt. B takes any proceeds left up to its outstanding debt. If anything remains, it goes to the debtor.

iii. In many states priority depends on the date on which the judgment creditor initiated the execution process by delivering the writ to the sheriff. Some courts say that the judicial creditor gets an “inchoate lien” as of the priority date (for example, when the sheriff gets the writ), which becomes “choate” on the date of actual levy or seizure of the property and “relates back” to the earlier date.

e. Unsecured Judgment Creditor v. Secured Creditori. First to perfect wins. What constitutes perfection for the secured creditor against the unsecured

creditor with a judgment?

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ii. Secured creditor or the mortgagee perfects when it records its consensual lien according to the statutory prescription. If the judgment creditor’s lien is later, it loses; if the judgment creditor’s lien is earlier, it wins.

iii. Ex.: On Monday A takes a consensual lien and records it and B executes and levies on Tuesday, A is first and takes all the proceeds from sale up to the outstanding amount of its debt.

iv. Ex.: If A takes the consensual lien on Monday, but fails to record until Thursday, and B executes and levies on Tueday, B wins. Many exceptions for grace periods and relation-back rules however.

f. Judgment Creditors and Secured Creditors v. Buyers.i. Ex.: If A buys the debtor’s car on Monday, recording her ownership on the certificate of title, and

B executes on his judgment and levies on the car on Tuesday, A wins and retains ownership of the car. But if A buys after B’s levy, she generally loses.

ii. Ex.: If A buys the debtor’s car on Monday, and the secured creditor does not try to record a security interest on the car until Tuesday, the secured creditor is out of luck. If the secured creditor makes a notation on Monday, however, and A buys on Tuesday, it is A the buyer who is usually out of luck.

g. Unsecured Judgment Creditor and Secured Party v. the Trustee in Bankruptcyi. TIB is the most dangerous foe of the judgment creditor who has levied or the secured party w/ a

consensual security interest or even a statutory lien-holder. Judgment liens are often “avoided” in bankruptcy, nullifying all the diligence and expense of the execution process.

3. Pre Judgment Remediesa. 1) Showing of need – putative debtor is decamping w/ its assets; andb. 2) a Bond, often twice the amount of value of the property, to provide a fund for the defendant’s damages

if the pre-judgment remedy turns out to have been wrongfully employed.c. Supreme Court cases: Defendant’s property may not be seized without an order issued by a judicial

officer (not a clerk) upon a factual showing of need. Once it has been seized, the defendant must be given a hearing and a chance to get his property back very quickly.

d. Grupo Mexicano de Desarrollo, SA v. Alliance Bond Fund (1999): British have a worldwide Mareva injunction that works much the way that was rejected in Alliance Bond Fund. Inappropriateness of injunctive relief in lieu of the traditional collection remedies as well as the ultimate remedy of bankruptcy may also influence state courts.

e. More cost-effective means of collecting from consumers than trying to get pre-judgment attachments.

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Credit Bureau of Broken Bow v. Moninger (1979)Facts: BUREAU got a default judgment against Moninger on October 20, 1977 for $1,518. On May 16, 1978, Moninger renewed his prior note to the BANK in the amount of $2,144. Renewed note was to be secured by a security agreement on feeder pigs and a 1975 Ford truck, but no security agreement was entered at that time. On June 27, 1978, at the request of the BUREAU, a writ of execution was issues on its judgment in the amount of $1338, the balance remaining due on the judgment. Sheriff who got the writ examined the title records on July 7, 1978, to determine if a lien existed on the truck. Deputy proceeded to Moninger’s work to levy. The sheriff served him w/ a copy and touched the truck and said, “I levy on the truck.” On July 10, 1978, the BANK and Moninger executed an agreement on the vehicle, which was then filed. Vehicle seized on July 13 and sold on August 14, 1978 for $2050. Court ruled that the sheriff had knowledge of the lien against the vehicle as of July 7 1978, that such notice made any execution subject to the lein, that the vehicle was not ponderous and physical possession could have been taken, that the notice of the possible lien resulted in a valid lien in the bank as of July 7, that the proceeds should go to the bank, and the sheriff in making the levy used due care and acted properly as a stakeholder. A written order showed the sheriff was a stakeholder, the valid levy was not made until July 12, BANK’s lien was perfected on July 10, sheriff’s knowledge imputed to BUREAU, and BANK’s lien was prior to the BUREAU’s lien, and proceeds go to the BANK.Issue: Who wins the race? Bureau levy was valid even w/out possession by Sheriff.Holding: Bureau argues the July 7 levy was legitimate. Rely on 9-317: “An unperfected security interest is subordinate to the rights of a person who becomes a lien creditor without knowledge of the security interest and before it is perfected.” Bureau was a lien creditor on July 7. Caveat: If the levied upon goods are left in the hands of the debtor for an unreasonably long period of time w/ the consent of the creditor, the lien will be lost. Often viewed as fraud. Also: Some states require possession or appointment of an independent custodian.

Problem Set #22.1. Rollins sued by 3 suppliers for $100k each1)A – Judgment = November 1st 2)B – Judgment = November 10th Writ of Execution = November 15th 3)C – Judgment = November 20th Writ of Execution = November 22nd = Sheriff executed = November 25th (all appliances)We Represent B: Appliances will bring $150k at the sheriff’s sale. Who gets the proceeds from the sale? Can we Change that?

Depends on the rules of the state. Most states require levy to perfect a judgment. Most likely C will get $100k, our client will need to levy on the property to get his $50k. Some states allow for the relates-back doctrine, so our client could have a priority over C if, and only if, we levy on the appliances before sale.

2.2. 5 creditors w/ judgments against SBC, but only Harry executed. Nov. 25th the Sheriff announced he was seizing all the shoes in the store, but SBC’s lawyer convinced Harry to come to a meeting the next day and not seize the shoes. Our client consented to the meeting and a workout plan. Then, on December 1st, SBC granted a security interest in the entire inventory to Bank for $200k operating capital. It was properly perfected on December 5th. Store closed on January 5th. Sale of all the shoes will bring $200k. How will it be divided? How could you have better protected your client while still going along w/ the workout plan?

Harry probably waived the perfection of his judgment. Bank will get the full value of its outstanding loan, b/c it was the first to perfect its interest. Harry will get what is left so long as he levies on the property again.

Should have gotten a security interest on workout day, or a written K guaranteeing their loan by the principal, or

2.3. Omar (client) has judgment for breach of K against Forman Handler. Handler has a LOC for $350k in his name upon a presentation of an engineer’s certificate that a design job has been satisfactorily completed. It is assignable. How do we collect? What will we need to show in court and how can we get the evidence to make the showing?

FRCP 69 and state laws allow discovery concerning the debtor’s assets. Seek a turnover order from the Court – Will need to show that 1) not readily be attached or levied on by normal

legal process, and 2) is not exempt from attachment, execution, or seizure. See Gerdes. Evidence showing that the LOC is in Forman’s name, the document, etc. Also will need a certificate showing

satisfactory completion.

5. Garnishmenta. Used to attach debts owed to the debtor for the benefit of the debtor’s judgment creditor. A creditor may

garnish a debtor’s wages by obtaining a writ directing the employer to pay the wages to the employee’s creditor rather than to the employee. Can also garnish a bank account or obtain an order to turn over the contents of a safety deposit box.

b. 2 parts: 1) questions designed to determine whether the party served w/ the writ “garnishee” owes any money to the debtor or has any property belonging to the debtor, and 2) a command to the garnishee to withhold payment or return of the debtor’s property pending further order of the court. If garnishee answers falsely or disobeys the command to withhold payment it may be liable to the judgment creditor. It also goes for a bank that honors the debtor’s checks after service of the writ.

c. IT is an ancillary lawsuit against the third party garnishee. d. Most states the garnishing creditor gets a temporal “net” the time b/t service of the garnishment writ and

the garnishee’s answer—during which the creditor can hope to “catch” obligations arising in favor of the debtor. Thus the garnishment of a bank account will “catch” not only the amount on deposit on the service date but also funds deposited thereafter prior to the answer. The creditor’s net may even extend to the time of the garnishment trial.

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Webb v. Erickson (1982)Facts: Webb obtained default judgment against Erickson’s in amount of $5000 plus interest and $1500 in attorney’s fees based on 2 promissory notes and a check for insufficient funds executed by Erickson. Erickson earned commissions as a real estate agent. Webb caused several writs of garnishment to be served on houses sold by Erickson. One of these parties was Bates. Process designated Bates as a garnishee-defendant in an action based on the Webb/Erickson judgment. Bates stated that in November 1975 he had been released from a hospital after 7-week stay. Bates stated that he did not understand the service on him. Bates never answered the writ b/c he believed the whole thing was in escrow. Feb. 27 1976, Webb obtained a default on Bates for the whole judgment on Erickson. No copy of the judgment was mailed to Bates. Three years passed, and in March 1979, Webb’s attorney notified Bates. August 1979, Webb served a writ of garnishment on Bates’ employer, garnishing his wages for the full amount. Aug. 1979 Bates filed a motion to vacate and to stay the execution of judgment. The trial court granted it. Webb appealed and the court reversed. Granted review and vacated and affirm the judgment of the trial court.Issue: Was it proper for the court to reverse the garnishment on Bates? YES!Holding: More liberal in allowing the belated garnishee to answer after default than in granting the privilege to an ordinary suitor defaulter, since he is a disinterested party in the proceedings, so far as any prospect of being benefitted is concerned, yet an interested third person so far as the danger of being injured is concerned. Excusable neglect by Bates. Reasons for Bates’ failure to understand and answer relate to excusable neglect.

e. Restrictions on Wage Garnishmenti. Consumer Credit Protection Act 15 USC §1671 et seq.

1. Restricts the access of all creditors to the wages of any debtor. Restrictions act as a floor, creating a minimal protection, which some states then exceed with their own restrictions.

Commonwealth Edison v. Denson (Ill. App. 1986)Facts: Employer-Caterpillar- appeals from two separate judgments of circuit court of the county. First action brought by plaintiff-appellee, Com Ed to collect monies due by Denson. On June 1984, court entered judgment against Denson for $600 plus costs. Summons was issued for a wage deduction order in the amount of the judgment and Com Ed served interrogatories on Caterpillar, Denson’s current employer. Caterpillar responded and forwarded a check to Com Ed for $140. It declined to deduct the full amount because it already deducted $60 per week for a support order. The second action was brought by plaintiff-appellee, Newsome PT to collect monies due and owing by Dwight Morgan. On October 1984, the court entered judgment for Newsome against Morgan for $748. Summons was issued and Newsome served interrogatories on Caterpillar, Morgan’s current employer. Cat contends that under Illinois law, no garnishment is allowed that would exceed the lesser of 15% of gross earnings, or the amount by which the weekly disposable earnings exceed 30 times the Federal minimum hourly wage, which was 3.35 at the time. The garnishment restrictions of the Consumer Credit Protection Act preempts state laws insofar as state laws would permit recovery in excess of 25% of an individual’s disposable earnings. 15 USC §1673.Issue: Are support orders and creditor garnishment to be calculated separately? Holding: No combine the two. If the support order is 25%, and the support garnishment has priority in accordance w/ state law, the CCPA does not permit the withholding of any additional amounts pursuant to an ordinary garnishment, which is subject to the restrictions of 1673.

f. Creative Garnishment

Network Solutions, Inc. v. Umbro International, Inc. (Va. Sup. Ct. 2000)Facts: Umbro got default and permanent injunction against Canada corp. (judgment debtor). Involved the judgment debtor’s registration of the internet domain name “umbro.com.” Enjoined the debtor from use of the domain name and awarded Umbro $23k for fees and expenses. Umbro named Network solutions as the garnishee and sought to garnish 38 internet domain names that the judgment debtor registered w/ NSI. Umbro asked NSI to place them on hold and to deposit control of them into the registry of the court so the names could be advertised and sold. NSI objected that the sites were standardized, executory service contracts or domain name registration agreements. Issue: Whether a contractual right to use an Internet domain can be garnished?Holding: Such a contractual right is the product of a contract for services and hence is not subject to garnishment. Analysis: NSI assigns domain names for a fee. NSI compares apps w/ a database of existing domain names to prevent the registration of identical domain names. They then match the domain name to the corresponding IP address. Because the contracts contain mutual obligations and liabilities one party cannot assign it without consent of the other party. However, may still garnish money due under a contract, but not the services.

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Problem Set #33.1. Feb. 1st: FFC had $3k judgment on Wayne and delivered a writ of garnishment to the sheriff for service on Amos Bank, where Wayne had his checking account. On this date, the account was overdrawn by $10. On Feb 5th, Wayne deposited $5k. On Feb 7th 2nd Finance Co. obtained a judgment on Wayne for $3.5k and delivered a writ on Amos Bank. Sheriff served both writs on Feb. 9th.

Preliminary analysis: ABS will have to turn over all the money in the account. FFC likely has priority so they get paid $3k first. $2k will then go to 2nd Finance Co. ABS should not honor any checks of Wayne and freeze his account until further court order or be liable for any dissipation in assets. Also, bank may setoff any outstanding loans to Wayne first.

3.2. October 15 JCI delivered writ of garnishment on Chuck. Chuck answered on November 4, saying he had equipment belonging to Baker (judgment debtor). He stated he leased it on October 1 for 1 year. Doyle says Chuck was keeping it for Baker. Doyle says she was present for the lease signing on October 20, and not October 1. How will it be solved? Who is entitled to the property depending on Doyle’s credibility?

Trial on the fact of whether the lease is valid. If Doyle is credible JCI has a right to the property.3.3. Employer wants to fire an employee when it received a notice of a garnishment of wages.

What do I advise? What are possible consequences for wrongfully firing? Are there any risks besides an employee suit?

§304 of the Consumer Credit Protection Act, 15 USC §1674 – “No employer may discharge any employee by reason of the fact that his earnings have been subjected to garnishment for any one indebtedness.”

Faces a fine and imprisonment up to 1 year! 15 USC 1673 :sets out the maximum allowable garnishment:  the lesser of 25% of disposable earning for the

week OR amt by which disposable earning for that week exceed 30 times the Federal minimum wage, unless its for child support.

Fraudulent Conveyances and Shielding Debtor Assets1. Origins of Fraudulent Conveyance Law

TWYNE’S CASE (Star Chamber, 1601)Facts: Pierce was indebted to Twyne and C. C brought an action of debt against Pierce, and pending the writ, Pierce being possessed of goods and chattels of the value of 300 pounds, in secret made a general deed of gift of all his goods and chattels real and personal whatsoever to Twyne, in satisfaction of his debt; notwithstanding that Pierce continued in possession of the said goods, and some of them he sold; and he shore the sheep, and marked them w/ his own mark: and after C had judgment against Pierce, and had a fi. Fa. Directed to he Sheriff who executed of the said goods. Twyne said they were gifts.Issue: Were the gifts fraudulent transfers?Holding: Yes. Gifts were not for fair consideration. Donor continued in possession and used them. Made in secret. It was made pending the writ. There was a trust between the parties.

2. Development of the Uniform Fraudulent Transfer Acta. Derived from Twyne’s Caseb. “Intent to delay, hinder, or defraud” creditors or purchasersc. “Badges of fraud” : facts that raised a presumption (rebuttable or otherwise) that raised the presumption

of fraud was a sale or gift without transfer of possession. Presumption had an enormous impact on development of non-possessory security interests.

d. Uniform Fraudulent Transfer Act (UFTA)i. Constructive fraud or presumptive fraud – Permits creditor to set aside a transfer even though the

debtor was entirely innocent of any fraudulent intent.ii. Section 5(a): Permits creditor to avoid any transfer made (1) in exchange for an unfairly low

consideration (2) at a time when the debtor was insolvent. ACLI Government Securities v. Rhoades (SDNY 1987)Facts: Defendant Dan Rhoades conveyed property to his sister defendant Norma Rhoads, which occurred the day before a judgment of over $1.5 M was entered against Dan in favor of plaintiff ACLI. Brother conveyed house and acres to sister for $1 and unspecified “other good consideration.”Issue: Was the conveyance fraudulent? Holding: Yes under the State version of the UFTA, the brother and sister’s transfer was fraudulent.

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3. Leveraged Buyouts (LBO’s)a. Assets of the corporation being acquired are used to secure the purchase price paid for those assets.

Current equity holders are paid off in cash. The financer takes a security interest in virtually all of the company’s assets, not just the stock. The acquirers take the equity for relatively little infusion of their own cash. Alternatively, the old equity holders may finance the operation by taking back a security interest in the company’s assets to secure the new buyer’s promise to pay the selling price, an arrangement referred to as “seller financing.”

In re Bay Plastics, Inc. (Bankr. CD Cal. 1995)Facts: Shareholders formed debtor Bay Plastic in 1979. They filed for bankruptcy on January 25, 1990. Shareholders sold their stock to Milhous for $3.5 M in cash plus $1.8 M in deferred payments. Milhous didn’t acquire the stock directly. Its subsidiary Nicole Plactics formed its own subsidiary, BPI Acquisition Corp.(“BPI”), to take ownership of the BP stock. Formally, the parties to the transaction were BPI and the selling shareholders. Milhous put no money into the purchase. Bay Plastics borrowed approximately $3.95 M from defendant BT Comm. Corp. and then caused Bay Plastics to direct that $3.5 M of the loan to be disbursed to BPI. BPI then paid the selling shareholders for their stock. Thus at closing, $3.5 M of the funds paid into escrow by BT went directly to the selling shareholders. BT received a first priority security interest in all the assets of Bay Plastics. BT received it all and nothing is left for the unsecureds. All of the debt except for $500k owed to BT was a result of the LBO. The shareholders knew about the financing. Issue: Is this leveraged buyout a fraudulent transfer?Holding: Transaction may be avoided as a constructive fraudulent transfer under the Cal. UFTA on which the debtor relies pursuant to B.R. Code §544(b), and the debtor is entitled to recover against the selling shareholders.Under UFTA §5 for a constructive fraudulent transfer rendering the debtor insolvent. Elements of a cause of action under this statute are as follows: the debtor 1) made a transfer or incurred an obligation, 2) without receiving a reasonably equivalent value in exchange, 3) which rendered the debtor insolvent (or debtor already insolvent), and 4) which is attacked by a pre-transaction creditor.Analysis: Should the court collapse the transaction into one integrated transaction? Is it a straight sale without an LBO? If there is evidence that the parties knew or should have known that the transaction would deplete the assets of the company, the Court should look beyond the formal structure and collapse the transaction. Also, goodwill cannot be retained in Bankruptcy. Therefore, debtor is insolvent.

Problem Set #44.1. Debtor is insolvent and owes $50k to Family Finance. Piano is valued at $40k, she asks $20k in ad, she is offered and accepts $15k. Can FF claim a fraudulent conveyance? See UFTA §§4, 5, 8.

§4a1: No actual intent to defraud §4a2: Must be for REV and debtor – Here we have an arms-length transaction b/t debtor and transferee. §8 is a

defense the transferee can rely on.4.2. Debtor is insolvent and sells her coin collection to her cousin. She sells it for $5k, even though it would bring $75k, so she could keep it in the family. Debtor also knows her sister would be willing to sell it back when she gets solvent. The day after the sale, Debtor uses her Credit Card to purchase $25k in furniture. Can CC Company claim a fraudulent conveyance? See UFTA §4, 5.

§4(a)(1) to Future Creditors – Actual Fraud - §4(b) lists the badges of fraud. The transfer was to an insider, it was a concealed transfer, the transfer wasn’t for REV, the debtor became insolvent as a result, the transfer occurred shortly before a substantial debt was incurred, etc.

§4(a)(2) – No REV and debtor intended to incur debts beyond her ability to pay as they became due4.3. Stoke owns a homestead free and clear worth $200k. His other assets are $55k; his debts all unsecured total $75k. His homestead is exempt under state law from creditors. He conveys the homestead to his son. Can Stoke’s current creditors reach the homestead conveyed to the son? See UFTA §1, 2, and 5.

His homestead is not counted as an asset under the definitions. So debtor is insolvent and under §5 he did not receive REV so it is a fraudulent transfer. He loses the exemption.

4.6. Young’s tithe to the church and follow the biblical injunction to give 10%. Last year they totaled $13,450 while they were insolvent. They filed Chapter 7 and their trustee asked the church to return the money. What do we advise the church?

§548(a)(2): transfers to charitable contribution to a qualified religious or charitable entity shall not be a transfer where the amount of the contribution does not exceed 15% of AGI of the debtor for the year in which the transfer of the contribution is made, or transfer is consistent w/ the practices of the debtor in making charitable contributions.

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State Collective Remedies

2. Assignment for the Benefit of Creditors (ABC’s)a. Debtor assigns all non-exempt property to a local lawyer, as assignee and tells the creditors to go argue

with him. Assignee liquidates it all and distributes a pro rata share to claimants. b. ABC’s do not discharge a debtor from unpaid portions of outstanding debt.

3. Composition and Extensiona. Composition is an agreement b/t the debtor and all or virtually all of the creditors that the creditors will

accept a stated partial payment in full satisfaction of their debts. ABC is sometimes the vehicle for a composition to obtain the benefits of that proceeding to aid in the composition.

b. Extension is a general agreement to give the debtor more time to pay the outstanding debts in full. 4. Receiverships

a. Receiver appointed by the court becomes the person in legal control of the property of a debtor, with the power to manage the debtor’s financial affairs.

Consumer Bankruptcy

Introduction to Bankruptcy

1. Structure of the Bankruptcy Codea. Chapters 1, 3, and 5 are general provisions applicable in all proceedings in bankruptcy unless explicitly

made inapplicable in a specific contextb. Chapters 7,9,11,12,13, and 15 each govern a different type of bankruptcyc. Chapter 1 is devoted to structural subjects such as definitions, rules of construction, general powers of the

court, and the qualifications of debtors eligible for each of the types of proceedings available.d. Chapter 3 governs case administration, including appointment and compensation of the TIB and of

professional persons such as atty’s and accountants, as well as provisions regulating the operation of a bankrupt estate.

e. Chapter 4 provisions include regulation of the claims and distribution process, discharges, and the TIB’s avoiding powers.

f. Chapter 7 governs the classic “straight” bankruptcy liquidation for consumers and businesses.g. Chapter 9 has special provisions for the bankruptcy of a muni or other gov’t unith. Chapter 11 is the chapter most often used by reorganizing businesses. i. Chapter 13 which excludes corporations is used by consumers and small businesses to make payments

over time. j. Chapter 12 is a specialized version of Chapter 13 governing reorganization bankruptcies filed by family

farmers.k. Chapter 15 is a special “ancillary” proceeding in which the US court assists a foreign court that has the

primary bankruptcy jurisdiction over a foreign creditor.

Elements Common to Consumer Bankruptcies

Chapter 7 is the liquidation chapter, which the debtor gives up all non-exempt assets, the Trustee in Bankruptcy sells these assets, and the proceeds are, distributed pro rate to creditors.

Debtor then receives a discharge of preexisting debts. Two classic objectives of bankruptcy

o Fair distribution of the debtor’s assets for the benefit of all creditorso Fresh start for the debtor

Payout plano Chapter 13 for consumerso Chapter 11 for businesses and some consumers with very large debtso Debtor proposes to keep all assets in exchange for promising to pay off debts over a period of time out of

future income

Debtor files a petition Request for bankruptcy relief

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Key certifications including a requirement that all the information in the filing is true, signed by the debtor under penalty of perjury.

§1930(f)(1): Waiver of the Chapter 7 $299 filing fee when income is less than 150% of the official poverty line After the filing is submitted to the Bankruptcy clerk, the estate is created and an automatic stay on all collection

actions against the debtor, the debtor’s property, and the property of the estate is immediately put into effect. §526 and §707(b) require the attorney to verify the accuracy of the debtor’s record under the penalty of forfeiture

of fees or subject them to sanctions.

The Estate At moment of filing all the interests in property previously owned by the pre-bankrupt debtor becomes “property

of the estate,” a deliberately expansive concept, with only a few specific exceptions set forth in §541. Important exceptions: §541(a)(6): “services performed by an individual debtor after the commencement of the

case.” Wages, commissions, and the like earned after the petition is filed will not become property of the estate and do

not have to be surrendered to their creditors. Segal v. Rochelle (1965): Court held that a tax refund from a business’s prior taxable years was property of the

estate, even though the entitlement to receive the refund did not technically accrue until after the bankruptcy was filed.

Lines v. Frederick (1970): Held that vacation pay accrued but not due and owing on the date of bankruptcy was not property of the estate, but rather was part of the “fresh start.”

o Special status for wages as opposed to other kinds of property on policy grounds. Kokoszka v. Belford (1974): An accrued tax refund was property of the estate because the taxes were on prior

personal earnings. §541 expressly overrules Lines v. Frederick: it may be that Congress meant to include in “property of the estate”

all interests of value to the estate, regardless of competing policy considerations.

Sharp v. Dery (ED MICH. 2000)Facts: Debtor filed on Dec. 21, 1998. At that time, through Feb. 1999, he was employed. On Feb 22. Debtor received an employee bonus of $11k. The bonus was for FY Jan. 1 to Dec. 31. To receive the bonus he had to be employed and in good standing when they were issued. The employer had the right to terminate the bonus plan at any time. The timing was also under their discretion. Issue: Was the post-petition bonus property of the state? Bankruptcy court said yes. Trustee is holding the funds in escrow pending the outcome on appeal.Holding: Did the debtor have an enforceable right to receive the bonus check when he filed on December 21, 1998? Whether a bonus plan under which Debtor had no contractual right to payment as of Dec. 21 gave debtor an enforceable right to the bonus check he would eventually receive in Feb. 1998?The bonus check was “dependent upon the continued services o the debtor subsequent to the petition, and does not constitute property of the estate.”Analysis: §541(a) creates the estate. It includes “all legal or equitable interests of the Debtor in property as of the commencement of the case,” subject to limited exceptions. Court must look to state law to decide when the debtor had a legal right or equitable interest in the property when he filed for bankruptcy. Michigan law embraces that an employee who ends his employment before the closing date of a bonus period, thereby failing to establish a contractually mandated condition for receipt of the bonus, forfeits eligibility for the bonus dividend. As of December 21, the debtor had no legally enforceable interest in the check he later received on Feb. 22.

3 types of controversies over the estateo Mature or not to be included in the estate (Sharp v. Dery)o Is it property? I.e. drivers license v. taxicab medalliono Restrictions on transferability by contract or by law. §541(c)(1) makes most restrictions unenforceable.o Except: §541(c)(2): spendthrift trust exception allows debtors to keep retirement accounts out of their

bankruptcy estates. Spendthrift trust gets two shots at exemption: 1) ERISA and 2) state law

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In re Orkin (Bankr. D. Mass 1994)Facts: Debtor was sole proprietor of R/E biz. On June 22, 1992, he established the Orkin Retirement Plan. He transferred $270k into the plan, representing the proceeds of an IRA. Debtor was employer, sole employee, and sole participant. He then filed under Chapter 7 on February 24, 1994. Plan was valued at $295k. He claims its not property of the estate under §541(c)(2) as a spendthrift trust. Trustee disagrees.Issue: Is the debtor’s retirement plan excused as property of the estate?Holding: No. It is property of the estate b/c he has control over it and it is not ERISA qualified.Analysis: Is the debtor’s plan “ERISA qualified?” ERISA mandates that a plan not be assignable or alienable. It also requires compliance w/ the IRC. Trustee argues that Orkin is not an employee under ERISA. Also he argues that the plan’s anti-alienation clause is unenforceable under IRC §401(a)(13).

1) Trustee is correct in that an employer can not be an employee as well for ERISA benefits.2) State Law issues: Debtor can exclude a pension plan from the estate if he can show a restriction on transfer

enforceable under applicable state law. Here, the debtor has the sole discretion to terminate the trust w/ 60 day’s notice so it must be included in property of the estate.

Congress has specifically excluded tax-deferred annuities, employee compensation plans, and health insurance plans from property of the estate.

Recently, Congress expanded protection further to include educational accounts for debtor’s children or grandchildren.

Rousey v. Jackoway (2005): Congress intended to include IRA’s in its alphabet soup list of retirement account exemptions, even though IRAs are not specifically mentioned in the list of exempt plans.

1. If property is excluded from the estate the debtor keeps it. 2. IF the property is part of the estate, but deemed exempt from creditor attachment, the debtor keeps it.

In re Burgess (Bankr. D. Nev. 1999)Facts: Since 1983 debtor ran a legal brothel. On July 30, 1997, debtor filed under Chapter 11. On June 2, 1998, the county revoked the debtor’s brothel license for associating with the Hell’s Angels. Bankruptcy court denied the request to undo the revocation of the license and debtor appealed. Issue: Under §362 was the debtor entitled to a reversal of the revocation of his license and damages? Was the license property or personal privilege?Holding: Brothel license is more like a liquor license than a license to practice law.Analysis: §541 creates the estate w/ all property of the debtor. While state law creates the right, federal law determines whether it is property for purposes of the federal bankruptcy laws, tax laws, etc. Similar licenses issued by state agencies are property for bankruptcy purposes. Most courts hold that liquor licenses are property under bankruptcy laws. Licenses to operate a track or casino are property of the estate. Some courts consider licenses to sell lottery tickets, airport slips, and driver’s licenses as not property. Attorney license to practice is not property.

The Trustee New estate and its property are managed by a Trustee in Bankruptcy Duty is to gather all of the debtor’ property, protect and maintain it, sell the property for the highest possible

price, and distribute the proceeds among creditors according to the statutory priorities. See §704 TIB must also examine all claims and oppose those that may be invalid, challenge any improper exemption claims

by the debtor, and to investigate the debtor’s affairs to extent necessary. Gov’t official from the Office for the US Trustee generally selects the TIB from a panel of potential appointees

that the US Trustee has chosen as qualified to serve. §701(a); §56(a)(1) TIB has a common law duty to unsecured, general creditors and must look out for their best interests by

challenging security interests, preferences, and priority claims. TIB wants to maximize the pool for general unsecureds. He also collects fees calculated in part as a percentage of

the funds distributed and that distribution is primarily to unsecureds. §326; 330 Great majority of consumer Chapter 7 cases are “no-asset” cases where the debtor has no non-exempt assets. Trustee also receives $60 of the $299 filing fees. §330(b) UST appoints Chapter 7 trustees, appointing and supervising trustees for Chapter 13 cases, appointing members

of Creditors Committees in Chapter 11, monitoring abuse in consumer bankruptcy, certifying credit counseling agencies, and approving debtor ed. Programs. Also monitors the compensation granted to TIB’s and attorneys in bankruptcy cases. §581(a)(3)(A).

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Problem Set #55.1) Donald filed Chapter 7. What is property of the estate under §541(a)? See §541(d)

All legal or equitable interests of the debtor in property as of the commencement of the case. Parakeet is a legal interest under §541(a)(1). Exemptions follow the creation of the estate. Car --- §541(d) does not apply: the bankrupt has legal and equitable interest in the car; the car dealer only has a SI

in it, not an equitable interest. But the automatic stay prevents the dealership from repossessing. An example of when one person has equitable interest and another has legal interest, is a trust relationship.  But what is this property worth to the estate if the lien is worth more than the property?  This property remains subject to the lien. So it is not worth any thing to the estate even though it is property of the estate.

Snapshots—yes if “property” of the estate.  They may be subject to exemptions, or the TIB may decide they are of no value and abandon them, but they are property of the estate

Concert tickets – yes. Stock, yes, acquired by inheritance §541(a)(5)(A) Oil well—gaseous hydrocarbons, “Property of the state does not include... §541(b)(4) Baseball cards, -- yes Catcher’s mitt in his brother’s possession.  Yes, §541(c)(1)(A) “it doesn’t matter where the property is located. Trustee for which debtor is trustee, —§541(d) yes, to the extent that the trust capacity and the ownership of legal

title, it is property of the estate, but 541(d) protects the equitable interest, thus the beneficiaries will not be affected. So the estate gets whatever rights the debtor has.

Salary for services performed before the petition.  CN: assume he files a petition today, tomorrow he received his salary which represents the past two weeks’ salary.  541(a)(6) because he had the right to the salary on the commencement of the case.  There is an exception for services performed after the commencement of the case, e.g., bonus, where the court found that the bonus was primarily a post petition proceed, but a tax refund.

Retirement account, which he cannot touch until after he retires.  No.  “Applicable nonbankruptcy law “ under §541(c)(2) includes both state spendthrift law and federal law including ERISA. Thus, ERISA benefits are excluded from the debtor’s bankruptcy estate.  So long as it is ERISA qualified or state-law qualified.

OTHER Considerations: Two little parakeets are included.  §541(a)(6) “offspring.”  Dividend:  yes, 541(a)(6) or (7); Salary after petition was filed is “Services” therefore do not come under §541(a)(6).  Contribution to his retirement account?  No. Orkin says that ERISA plans are not property of the estate.

5.2) Lottery ticket purchased prior to bankruptcy and won with the ticket after filing for bankruptcy §541(a)(6) and (7) show that the proceeds or interests belong to the estate.

5.3) On March 1 FA contracted to sell her winter wheat crop of 10k bushels for the prevailing price on May 1. On April 1, she filed for bankruptcy. At filing the wheat was worthless, but on March 1, the price was $10/bushel. On April 1 it was worth $15/bushel, and on May 1, when she harvested it was $20/bushel. When she receives the $200k who gets it?

§541(a)(6) – it seems to be profit of the estate, except for the earnings from services performed by an individual debtor. The majority would go to the estate, but all services performed after April 1 would be paid for out of this to FA. 

5.4) Client owes $100k and his only income is $1k/month from a $250k trust that is non-assignable. He will get the corpus of the trust when his mom passes which is expected to 6 months to 1 year from now.

File bankruptcy now and start your estate and pray your mom makes it 180 days under (a)(5). You don’t have legal title now, but on devise you do. §541(d).

5.5) March 1 teacher files bankruptcy. On April 1 he won the $1k Teaching Excellence Award. Who gets it? Sharp v. Dery: Court must look to state law to decide when the debtor had a legal right or equitable interest in the

property when he filed for bankruptcy. It seems like he gets to keep the $.5.6) Liquor licenses in the state are nontransferable, although ABC in the state always has issued a new license to someone who buys a store from a prior licensee, unless the new owner is disqualified. Otherwise, a license is hard to come by. Can the trustee make any claim for the license? Why would she want the license?

In re Burgess: §541 creates the estate w/ all property of the debtor. While state law creates the right, federal law determines whether it is property for purposes of the federal bankruptcy laws, tax laws, etc. Similar licenses issued by state agencies are property for bankruptcy purposes. Most courts hold that liquor licenses are property under bankruptcy laws. 541(c)(1) says that restrictions on transfer do not prevent property from becoming property of the estate. 

The license has value for the estate b/c they are difficult to acquire and can increase the pot for creditors.

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The Automatic Stay §362(a) details the prohibitions of the stay §362(b) provides exceptions that permit certain types of actions against the debtor to continue

Andrews University v. Merchant (6th Cir. 1992)Facts: Foreign student received loan to attend college. Bank had full recourse against college in event of default. After default, the college paid the bank, and became the sole creditor of the student. Student filed Chapter 7 one year after graduation. She wanted her transcripts for an employer, but the college refused.Issue: Are commercial loans for education excepted from discharge under §523(a)(8)? Are extensions of credit for education dischargeable under same provision? Did the college’s refusal to give the student transcripts violate the automatic stay?Holding: The loans are nondischargeable, so that Merchant would continue to owe full repayment to the college following bankruptcy. The college violated the automatic stay, but it was not willful, so sanctions are not merited.Analysis: The college claimed that the education loan and credit extension were excepted from discharge under §523(a)(8) and had a right to refuse. The automatic stay is to be read broadly and is self executing. Is it an “act to collect, assess, or recover a prepetition debt?” §362(a)(6). The automatic stay applies to creditors of education loans and remains in effect until 1) the case is closed, 2) the case is dismissed, or 3) a discharge is granted or denied. §362(c)(2)(C). Because the educational debts are not dischargeable, the stay will terminate when the court enters an order consistent with the opinion. §523(a)(8) protects the solvency of the education system. However, they were not excepted from the automatic stay provision.

Nissan Motor Acceptance Corp. v. Baker (ND Tex. 1999)Facts: Bankr. Court held that the actions of Nissan, appellant, violated automatic stay of 362. BC entered actual and punitives for Appellees Debtors in amount of $23k and reasonable atty fees and expenses totaling $5k. BC gave Appellant option of satisfying actual/puni’s by deliviering a new truck, free and clear of any liens. Court affirms. Debtor filed Chapter 7 on Dec. 30, 1993. They listed their 1991 truck and stated their intent to reaffirm the debt. On Jan. 4, 1994, Nissan, without knowledge repo’d the truck. Debtor’s counsel contacted Nissan following the repo to inform them of the debtor’s bankruptcy. On Feb. 23, 1994, Nissan filed for relief from stay, or in the alternative, adequate protection. Nissan sold the truck on March 16, 1994. BC did not know of the sale, granted the motion on June 1, 1994. On Nov. 1994, debtor filed this to seek damages for violating the auto. Stay.Issue: Is the repossession and retention of debtor’s property a violation of the automatic stay? Were there actions willful to merit sanctions? Were actual Damages merited by sufficient evidence?Holding: Yes and Yes and Yes.Analysis: §362(a)(3) prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over the property of the estate.” Case law holds that continued retention of property of the estate after notice of the bankruptcy filing is an “exercise of control” over property of the estate in violation of the automatic stay. Nowhere in §363 grants a creditor the authority to self-help to retain property as adequate protection, which is exactly what the creditor did. §542(a) provides that a creditor “shall deliver to the trustee, and account for, estate property or the value of such property.” Appellee testified that their daughter-in-law drove them when necessary, the vehicle was their only transportation, debtor had to drive 90 miles to work, couldn’t secure reliable transportation, and they had to purchase and finance a used car in May to replace their vehicle. * The court was willing to lift the stay and Nissan could have had the car. BUT when it acted on its own without approval, it had to pay nearly $30k in damages. Lesson learned.

Schedules are a part of the filing. Debtor must list debts, assets, income, and expenses. Must also provide a complete list of creditors and their addresses, and must id what property they claim as exempt.

§109(H) and 521(b) require a debt counseling session Failure to list a debt may make the debt nondischargeable. §523(a)(3) False statements in the petition or schedules may result in denial of discharge to all the debts. §727(a)(4), and may

open the debtor to a perjury prosecution as well. §521 requires a certification that the debtor knows of the other chapters of the cod and credit counseling, and

warning about false information leading to penalties and jail time. It also requires pay stubs for the 2 months before filing, statement of monthly income, and an explanation of how that was calculated, and a statement disclosing any anticipated increase in income over the next 12 months. It also requires a tax return for the prior year, a copy to be furnished to any creditor upon request. Tax returns filed after commencement also must be filed with the court. Failure to produce these will result in dismissal, even if otherwise eligible.

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Attorney now must sign the debtor’s petition. Attorney represents that he has “performed reasonable investigation” and has no knowledge that the information in the schedules is incorrect. §707(b)(4)(C), (D).

CONSUMER BANKRUPTCY ATTORNEYS: renamed “debt relief agencies” and they are prohibited from making any statement in any document filed in a case that is “untrue or misleading, or that upon exercise of reasonable care, should have been known by such agency to be untrue or misleading.” §101(12A); 526(a)(2). Failure to follow these rules can lose their fees, pay actual damages, or be forced to pay fees of opposing counsel. §526(c)(2); 707(b)(4)(A).

Section 341 Meeting: Where debtor first sees the courthouse. o §341 requires a meeting within 40 days after petition is filed. Presided by officer from the UST. o Permits an exam of the debtor by the trustee and any interested creditors.o In large cases, creditor may chose to elect a TIB §702; 1104(b), or they may elect a Creditor’s Committee

(§705(a); 1102(a)(1)). Typically, in consumer cases, the TIB appointed by the UST is in charge the remainder of the case.

o Automatic stay gives debtor breathing room and puts almost all creditors into one forum. o Some creditors may move quickly to seek relief from the automatic stay.

Problem Set #66.1) Debtor is in a serious bind. He will file later today. He wants to know what to expect in the next few weeks, will he get his full paycheck, undiminished by garnishment, tomorrow and every 2 weeks thereafter. See §362(a), (b)(2), (b)(22), (b)(23), §366

The automatic stay doesn’t require any action by the court. It is automatic.  Under 362(d) you have to seek relief from the automatic stay; there is no self-help.  However, the automatic stay may not protect property of the debtor that is not property of the estate.

As soon as the petition is filed, all the collection activity must stop.  Even if someone already has a security interest in something, they cannot enforce it under 362(a)(5).

Past due alimony and child support . See §362(b)(2)(A)(ii)(exception to the stay) There is not a stay on property that is not property of the estate, so exempt property and wages may still be subject

to garnishment if they are for child support. Utilities bills see §366(a)(utility cannot shut off power). A utility may not discontinue service solely on the basis

that petitioner has failed to pay a pre-petition debt.  But it can discontinue service if either the trustee or debtor fails to deposit adequate assurance. 366(b).  The utility “may not refuse,” so even if they had already disconnected, then they would have to turn it back on, though they may demand adequate assurance. 

Bad check proceeding.  See §362(b)(1)(criminal proceedings not stayed unless of course it is civil in nature) (B)(22): Stay not in effect where lessor has already gotten a judgment for possession of such property, so debtor

here is safe. (B)(23): Stay not applicable for eviction where tenant has endangered the property or illegally used controlled

substances.6.2) Foreclosure sale for your client to take place tomorrow at noon. She filled out her schedules, but didn’t bring paycheck stubs, tax returns, or any other paperwork, and hasn’t sought credit counseling. What do you need from your client and how can you get it? See 11 USC §521(a), (b), (i); 101(12A); 109(h); 526; 707(b)(4)(C), (D). She listed her car for $250, should we inquire further besides asking her if that is correct?

§521(a), (b), (i) – Debtor must list creditors and assets and liabilities, monthly net income, etc. Must also file a certificate of credit counseling. (i) Seems to give the debtor 45 days to file all the paperwork.

(12A) Defines debt relief agency. 109(h) requires debt-counseling w/in the 180-day period ending on the date of filing, but has certain exceptions. §526 details what a debt relief agency cannot do. They must exercise reasonable care with misstatements in

filings. 707(b)(4)(C): Attorney’s signature on a petition, pleading, filing constitutes a certification that the attorney has

performed a reasonable investigation and it is well grounded in fact, and warranted by existing law or good faith modification of law. (D): Attorney’s signature that he has no knowledge after an inquiry that the information in the schedules filed w/ such a petition is incorrect. Attorney should at least consult the blue book.

Unfortunately, this attorney cannot probably rush a filing for this client without serious risks.6.3) On Monday Sydney’s car was seized and she was desperate to get it back so she wrote a check. On Tuesday she filed for bankruptcy. On Wednesday, Bank deposited her check. On Thursday, the check cleared, but the Bank called you before they return the car. What do we advise? See §§362(a), (h); 521(a)(2)

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The automatic stay of §362 is automatic. Can no longer collect or recover on a claim preceding the commencement of the case. 362(h) and 521(a)(2): Grants debtor 30 days to decide whether to reaffirm/redeem/ride-through.

Liquidation Bankruptcy

2. Introductiona. Liquidation is governed by §726b. TIB prepares to sell each piece of property the debtor has an interest in, but must first determine if anyone

else has an interest in it, like a co-owner or a secured party.c. The TIB pays that party first, and then distributes the remainder to the creditorsd. Trustee deducts from the sale proceeds the trustee’s own fee and costs of sale, and then the amount of the

claim of a secured party and pay that amount to the secured party.i. Ex. Trustee may seize a Camry, sell it, take his fee, and pay off the secured lender. Anything

remaining would go into the general unsecured pool.e. Trustee must consider exemptions claimed by the debtor too. If a debtor takes an exemption on a car, the

trustee may still sell it and give the exemption to the debtor. The trustee and secured creditor would be paid, but the debtor gets the $ value of the exemption. Only if there is money left then it goes to the general unsecureds.

f. General creditors:i. Priority Creditors - §507(a)

ii. General, Unsecured Creditors1. Paid pro rata share of the remaining funds in proportion to the amounts owed.

a. $10,000 left and the unsecured creditors are collectively owed $100,000, then each creditor gets 10% of its claims

iii. Subordinated Creditors

Eligibility Chapter 7 is the baseline for all bankruptcy – the liquidation. In 1984 Congress gave bankruptcy judges the power to dismiss Chapter 7 cases if the filing involved

“substantial abuse.” o Either criminal behavior, cheating the creditors, or bad acts.o Debtors were pushed out of filing Chapter 7 because they had the ability, with a modest amount of

sacrifice, to repay their creditors The 2005 amendments added additional screens on the debtors seeking relief more aggressively than the

courts and trustees had done. Now you must file for Chapter 13 if you can’t cut it under 7.

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2. The Presumption of Abuse

§707(b)(1) Congress exempted anyone whose debts are mostly business-related from any screening for abuse. §707(b)(1): Instructs the court to dismiss a case or convert it to a repayment plan in Chapter 12 or Chapter 11 if

the Chapter 7 filing constitutes an “abuse.” §707(b)(2)(A)(i): Creates a presumption of abuse based upon a formula

o Court shall presume abuse exists according to a formula of income minus expenses §707(b)(2)(B): “Special Circumstances,” such as serious medical conditions or service in the armed forces, may

justify adjustments to the calculations to determine which debtors are presumed to have abused the bankruptcy system.

§707(b)(3): Even if passing the “means test” court can find you an abuser. Test is based on “bad faith” and “totality of the circumstances.”

o Some courts still consider foolish spending “bad faith.”

3. The Formula: Income and Expenses Judges were apparently failing at determining who could and could not repay some debt So Congress created the “means test”

o If a debtor could not pass the means test they were presumed to abuse the bankruptcy process, and judges were instructed to dismiss their filings.

o Income – expenses If the difference (surplus of income over expenses) would pay at least X amount of debt, the

debtor is barred from Chapter 7, absent special circumstances.

A. Incomea. Means Test = Current monthly income is a threshold test for Chapter 7 eligibilityb. If income is low enough, then the debtor is exempt from the means testc. Threshold test: Debtor’s income exceeds the median income for similar families in the state where the

debtor filed. If it is equal to or lower than the median, then the debtor has passed the median-income screen and no presumption bars Chapter 7

d. If income is greater than the state median income, more calculations await. §707(b)(2)(A)e. State’s median (middle) income is used, and not the mean (average) income, which pulls it up because of

really large earners.

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In re Shaw (Bankr. MDNC 2003)Facts: Married couple – Shaws – filed for Chapter 7 on May 27, 2003. They have two children over 20. Their house was valued at $415k but they testified it was less than $400k. They listed personal property worth $56k. Their AGI for 2001 was $138k, with an increase in 2002 to $157k. They listed combined total income of $7.8k. Mrs. Shaw lost her job, but receives $2.7k monthly income as severance. Mr. Shaw just received a raise. Their current Monthly Income is $7889. Their listed monthly expenses are only $7517. They have 3 cars and pay their daughters tuition. They have $469k in secured debt and $131k in unsecured credit card debt. They have 15 CC accounts. Issue: Is dismissal appropriate for substantial abuse under §707(b)Holding: Yes. This case shows substantial abuse. Delay the order for 10 days to allow them to convert to Chapter 13 if they choose. Analysis: §101(8) defines their debts as primarily consumer debts. The Fourth Circuit follows a “totality of the circumstances” test to decide substantial abuse. It involves 1) sudden illness, disability, unemployment, 2) the debtor’s schedules and statement of current income and expenses reasonably reflect their true financial condition, 3) whether the debtor incurred cash advances and made consumer purchase in excess of his ability to repay; 4) whether the proposed family budget is excessive or unreasonable; and 5) whether the petition was filed in good faith.

Debtor can repay a meaningful portion of their unsecured debt over 36 month period based on their income and future expenses.

If debtor remains in Chapter 7, it will be a no asset case and unsecured receive nothing Their family budge is excessive and unreasonable. They ought to reduce their expenses significantly. Their son is a deadbeat and they should move to a smaller home. Reduce their phones, cars, and college expenses

and it frees up $2k in monthly payments in a Chapter 13 plan. A discharge of their debt would be at the expense of the creditors

f. Current monthly income is defined by §101(10A)i. Debtor’s average monthly income for the 6 months preceding the bankruptcy filing

ii. Income from all sources is included; wages, interest, dividends, unemployment, tax refunds, revenues and accounts receivable for small business filers

iii. Income also includes amounts paid by others toward household expenses.iv. The language indicates it is post-tax income, but the form requires Gross Incomev. Taxes are deducted in the expense section

vi. Social Security benefits are excluded from the bankruptcy means test income calculationvii. §707(b)(6) and (7) refer to median family incomes and median household incomes.

B. Expensesa. After failing the median-income screen, debtor must show what expenses the debtor may deduct.b. IRS guidelines are the National Standards for expenses.c. 2005 Amendments allow the court to increase allowance for food and clothing up to 5% if the debtor can

show that they are reasonable and necessary §707(b)(2)(A)(ii)d. For housing, utilities, and transporation, the IRS allows a local Standard.

i. Taxpayer is limited to the lesser of actual expenses or the local standard.e. IRS standards permit Other Necessary Expensesf. Other expenses subtracted from monthly income: deductions for health insurance, disability insurance,

and health savings accounts, expenses for caring for the elderly, and private schools (up to $1,650 per child per year.)

g. General Expenses: Any expenses to pay arrearages on “priority debts” which are listed in §507(a) (i.e., alimony, child support, and taxes).

i. Therefore if a debtor owes $5000 in past due child support, the amount of the arrearage divided

by 60 (or $83) is deductible from monthly income.

C. Secured Debta. Special provision for lenders with a security interest – Loans such as car loans can be deducted in full, no

matter how large, along with any payment arrearages. §707(b)(2)(A)(iii).b. Gas, insurance, and maintenance then follow the Local standards. §707(b)(2)(A)(ii)(I).c. Some courts allow a debtor to use §707(b)(2)(A)(iii) to deduct payments on cars or a home that the debtor

is giving up in bankruptcy on the basis that the means test is a backwards-looking test to measure the debtor’s ability to fund a Chapter 13 plan on the date of petition.

D. Income After Expensesa. Final calculation requires

i. A) total size of the surplus of income over expenses over 60 months (5 years); and b) how much general unsecured non-priority debt that the debtor owes.

b. Abuse is presumed 1) if the debt is greater than $26,300 and the surplus is at least i) 10,950 or ii) 25% of the debt; OR 2) if the debt is $26,300 or less, and the surplus is at least $6,575

c. If surplus is less than $110 per month, the debtor passes. d. If it is between $110 and $183 per month he passes if the surplus is less than 25% of his unsecured debt

divided by 60.e. If surplus is greater than $183 the debtor fails no matter what

i. Ex. If a debtor owed $28,000 and the monthly surplus was $120 ($7200 over 60 months), the presumption of abuse arises, because $7,200 is greater than 25% of $28,000 ($7,000). §707(b)(2)(A)(i) (2).

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In re Kimbro (US BAP 6th Cir 2008) OVERRULED BY RANSOM v. FIA CARD SERVICESFacts: Kimbros deducted an ownership expense of $358 for their first car. It was calculated by subtracting their car payment of $1122 from the Local Standard of $471. They also deducted $332 for their second car, but had no payment of debt secured by the second car. Issue: Whether in the means test of §707(b)(2)(A)(ii)(I), a debtor may deduct an “ownership expense” for a vehicle that is subject to neither secured debt nor a lease.Holding: Debtor is entitled to that expense deduction. AffirmedAnalysis: The National and Local Standards contain an operating expense and an ownership expense. A bright line rule allowing the deduction would better fit the purposes of the means test.

E. Procedurea. §707(b)(6) and (7) contains the “bad faith” and “totality of the circumstances” testb. 707(b)(7) bars any party from asserting the means test presumption against a below-median debtorc. 707b(6) permits only a judge or trustee to bring an action on the general standard of abuse for a below

median income debtord. An above median income debtor is subject to a charge of 707(b) abuse by the judge, UST, or any creditor,

because the debtor failed the means test or general abuse.e. If a couple files jointly, both incomes are included for all purposes. If only one files, and the claim is

general abuse, only the income of the filer is used to determine who can raise the objections. If one files and the objection is based on the means test, the non-filing spouse’s income is included for determining if the debtor is above or below the median income for means test analysis. If the debtor fails the test, or has too great of income, only the debtor’s income and not the spouse is used to work through the budgets and the means test.

F. Role of debtor’s lawyersa. Attorney must certify that he made some investigation of the accuracy in §707b4. b. Also §526a4 and 707b4A and Rule 9011 require that legal contentions be warranted by existing law or by

non-frivolous extension.

Problem Set #77.1. Client who lives in DETROIT, received $650k/month for 6 moths, but 4 months ago she found a good job paying $4100/month and $2000/month in overtime. Five years ago she got child support of $1000/month, but he ex never paid, but pays for clothes and $3000 each month for tuition at the local Catholic school. Is she eligible for Chapter 7? See §§101(10A), 707(b)(6), (b)(7). What advice do you give to her? She can barely scrape together your standard $800 fee; how aggressive can you be for her?

101(10A): Current monthly income: avg. monthly income from all sources, regardless whether it is taxable, during the 6-month period ending on—the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income…B) includes any amount paid by any entity other than the debtor, on a regular basis for the household expenses of the debtor or their dependents.

707(b)(6): b(6) permits only a judge or trustee to bring an action on the general standard of abuse for a below median income debtor

707(b)(7): 707(b)(7) bars any party from asserting the means test presumption against a below-median debtor Current monthly income = 4 months at $6100 + 2 months at $650 = 25700 + $3000 (expenses paid) = $25,700/6 x 12 = $51,400. = She is an Above Median Debtor. Must proceed w/ the means test w/ expenses.

7.2. Debtor lives in Montgomery County, Pa. $6,600/month income+ $5,200/month = $11,800 monthly income. They have 2 children. They have more than $100k in debt. Have been paying $600/month on their bills. See Form 22A, but skip line 45. 7.3. Skateboarder has $30k in general unsecured debt after breaking leg. Rents a modest apt. and drives an old clunker that is paid for. His income over the past 6 months, after allowable expenses, is $150/month. He is reluctant to commit to a Chapter 13 plan. Any advice to make him eligible for Chapter 7? See §707(b)(2)(B)(iv); 707(b)(2)(A)(iii); 707(b)(1); 101(12A); 526(a)(4).

His surplus is currently $150. If it is between $110 and $183 per month he passes if the surplus is less than 25% of his unsecured debt divided by 60.

o ¼ x $30,00 = $7,500 / 60 = 125 > Surplus = $150 o He fails this test too!

101(12A); 526(a)(4) Disallow debt relief attorney to advise client to take on more debt. Client is screwed.

C. Property Exempt from Seizure – Policy of allowing the debtor to have a meaningful fresh start. Also to determine whether an action of collection is punitive or just collection.

a. Where property is exempt under state law, general creditors cannot seize it to satisfy their judgments. But consensual agreements like mortgages or car loans are not constrained

b. All property listed not listed as exempt will be sold by the trustee so proceeds can be distributed to creditors

c. Uniform federal exemptions but states could opt out of those exemptions under §522(b)(2).d. 35 states have opted out

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Texas Exemption Statutes p. 168 in the text – Allows for Federal Exemption alternative§41 the homestead is exempt and the proceeds from sale are not subject to seizure for 6 months after date of sale

Up to 10 acres of land and improvements for urban home Up to 200 acres for a rural home

§42 exempts personal property Up to $60,000 in aggregate FMV for a family Up to $30,000 for individual Exempt from seizure and not counted in the aggregate are: current wages, health aids, alimony, unpaid

commissions for personal services not to exceed 25% of aggregate limit, but are included in the aggregate Exempt also are home furnishings and family heirlooms, farming or ranching vehicles, tools and equipment of the

trade or profession, wearing apparel, jewelry not to exceed 25% of the aggregate, 2 firearms, athletic and sporting equipment, 2 3 or 4 wheeled motor vehicle for each family member with license, and various animals and forage on hand for their consumption.

Savings plans and retirement plans are exempt so long as they comply with the IRC Also insurance and annuity benefits are exempt

Wyoming Exemption Statutes – Opted out of Federal Exemption Garnishment is allowed in the lesser of i) 25% of judgment debtor’s disposable earnings for that week, or ii)

amount by which debtor’s aggregate disposable earnings for that week exceeds 30 times the federal minimum hourly wage.

Homestead exempt up to $10,000 $1000 in wearing apparel not to include jewelry of any type other than wedding ring Personal property

o Bible, pics, school bookso Lot in cemetery or burial groundo Furniture up to $2,000o Motor vehicle up to $2,400o Tools of the trade up to $2,000

Retirement plan is exempt so long as not assignable

§522(d)(5) allows renters to claim half the value of the unclaimed homestead exemption in any property at all. §522(d)(1) provides $20,200 in home equity exemption or $40,400 for a couple. Both Texas and Wyoming allow for domestic support obligations and liens to be exempted from the law, so that

child support may be enforced by the seizure of exempt property.

3. Classification of Property Does the debtors claimed exemption fit within the statutory classification?

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In re Johnson (Bankr. WD Ky. 1981)Facts: Debtor owned a bus. KRS statute exempts one motor vehicle up to $2,500. The code uses the word “motor vehicle.” Trustee argues it is meant to mean automobile. Issue: Is a bus a car for purposes of KRS exemption? Holding: Yes. A Bus is a motor vehicle.

4. Valuation of Exempt Property

5. Proceeds and Tracing Application of an exemption to property that would not meet the classification requirements except that it

constitutes proceeds from exempt property

6. Partially Exempt Property

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In re Pizzi (Bankr. SD Fla. 1993)Facts: Debtor won the lottery. Filed bankruptcy but has 12 more annual payments. Issue: Are the proceeds from the lottery winnings exempt from creditors claims under Florida law? Do they fall within the definition of annuity under Fla. Stat. §222.14?Holding: No! It is nonexempt asset and must be liquidated to pay creditors.Analysis: Connecticut purchased an annuity for $1M to pay her $3M prize for the benefit of debtor. The state comptroller would then issue the following checks for 19 years. The state is listed as the owner and beneficiary of the contract. The lottery doesn’t refer to the winnings as proceeds of an annuity and the winner isn’t a beneficiary or payee of an annuity. If the winner is named as beneficiary to fund a state’s obligation, the winnings may be exempt though.

In re Walsh (Bankr. DDC 1980)Facts: Trustee filed an application for appraisal and the debtor opposed it. Debtor claimed exemption under §522. Trustee wants them valued at FMV rather than liquidation value which the previous appraisal came. It is essentially an objection to the claimed exemption taken under §522(d). Issue: What is the proper measure of VALUE?Holding: Fair market value must be interpreted in the liquidation context in a Chapter 7 cases.Analysis: §522(d) determines values as fair market value “as of the date of the petition.” For policy reasons, if we used any other measure other than liquidation value it would force debtor to sell property regardless of whether they took the exemption or not.

In re Mitchell (Bankr. WD Tex. 1989)Facts: Bank objects to the claimed exemption of the debtor for a 6.18 carat ring worn regularly. Bank argues for a FMV standard of valuation, and the debtor argues for a distress or liquidation value, because the reality is that if it is not retained by the debtor it will only realize for the estate what the trustee can get for it, which is liquidation price. Ring was purchased for their 25th anniversary for $30,000. It was deemed “clothing reasonably necessary for the family.” Bank uses “estate value” which is the jewelry company attaining price of $42k and a FMV of $36k. Debtor’s expert said he’d offer no more than $7,800 for it. Issue: What is the proper standard for valuation of property claimed as exempt?Holding: FMV must incorporate an appropriate market with a reasonable time frame. Analysis: Federal and state exemption use the FMV standard. Walsh doesn’t use liquidation value per se. It speaks of using an applicable market available to the trustee. The court adopts the fair market values with an exposure of the item to the appropriate market for an appropriate time. The ring is valued at $36k.

In re Palidora (Bankr. D. Ariz. 2004)Facts: Debtors filed for Chapter 7 and had $2,194 in their bank accounts. Trustee moved for turnover less the $300 exemption by Ariz law for fund in a joint debtors’ bank account. The debtor’s objected on the grounds that all the monies came from either husband’s wages or from a $1,000 check for child support paid to the wife and deposited in her account.Issue: Are these funds exempt?Holding: Arizona wage exemption ceases to apply upon the debtor’s receipt of those wages. However, under §541, child support payments are held in trust and are not property of the estate. Also, under Arizona law payments for child support extend to the deposit so long as they are traceable to the exempt source.Analysis: Arizona law exempts 75% of a debtor’s disposable earnings. They are defined as compensation for his personal services. Includes only what is payable or what has been paid or deposited into a debtor’s account. State law determines the exemption. Arizona law does not extend to monies disbursed to the debtor’s bank account. Arizona law was modeled after the FCCPA and the garnishment exemptions under that law do not extend to earnings disbursed to a debtor’s bank account.

In most cases property worth more than the dollar limit exemption can be levied on and sold. Following a judicial sale of exempt property, the proceeds are allocated first to the cost of the sale, then to

the debtor up to the full amount of the exemption, then to the judgment creditors.o Ex. State recognized exemption of $1000 for a car for each individual. Debtor owns a car worth

$800 would be able to protect the car from any creditor attachment. A debtor who owned one worth $2800 with no lien would have the car seized and sold. If the creditor was owed $3000, and the car auctioned for $2,800 after expenses, $1000 would go to the debtor and $1800 would go to the creditor as non-exempt.

7. Security Interests in Exempt Propertya. Car worth $1,000 and secured creditor’s claim is $2,000, the secured party takes the car. Debtor then has

no exemption and TIB has nothing for distribution. But, car worth $3,000, car would be sold, expenses paid, secured party takes $2,000 and the debtor keeps his exemption. If there is anything left the TIB can have it.

8. Avoiding Judicial Liens and Non-PMSI Liensa. §522(f) permits avoidance of certain kinds of liens on certain categories of exempt property. b. Judicial liens imposed by a court after judgment has been rendered and defendant has not paidc. Nonpossessory, nonpurchase money consensual security interestd. To void the liens, collateral musts be exempt property. To void a consensual security interest on

household gods, the property must also be specified in 522(f)(4).

Problem Set #88.1. Debtors live in Texas and they owe $5k in IRS back taxes. Absent bankruptcy, what can they protect from creditors? What if they filed Chapter 7? What if they lived in Wyoming?

Texas exemptions: o Up to $60,000 in aggregate FMV for a familyo Up to $30,000 for individualo Exempt from seizure and not counted in the aggregate are: current wages, health aids, alimony, unpaid

commissions for personal services not to exceed 25% of aggregate limit, but are included in the aggregateo Exempt also are home furnishings and family heirlooms, farming or ranching vehicles, tools and

equipment of the trade or profession, wearing apparel, jewelry not to exceed 25% of the aggregate, 2 firearms, athletic and sporting equipment, 2 3 or 4 wheeled motor vehicle for each family member with license, and various animals and forage on hand for their consumption.

Texas in bankruptcy: Either state or §522 exemptions. o §522(d)(5) allows for $10,825 of any unused homestead exemption. o Up to $3,450 in one motor vehicleo Up to $11,525 in total and no more than $550 for each item of household furnishings, goods, apparel,

appliances, books, animals, crops, instruments. o $1,450 in jewelryo $2,175 in books or tools of the tradeo Disability benefitso Right to receive payments not to exceed $21,625 for personal injury

Wyoming exemptions (opted out of federal exemptions):o Very minimal and will likely only be able to save roughly $7000

D. Homesteads, Trusts, and Exemption Planning --- Exemptions and exclusions can shield debtor’s assetsa. Homestead Exemptions

i. Florida has unlimited dollar exemptionb. Exemption Planning

i. In re Reed (Bankr. ND Tex. 1981)1. Two weeks prior to bankruptcy the debtor sold nonexempt personal property for half

there worth and put $34k into the liens of his home. 2. The Texas constitution prohibits granting the relief sought by the trustee challenging the

homestead exemption in the residence.ii. In re Reed (5th Cir. 1983)

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1. A debtor who converts nonexempt assets to his homestead immediately before bankruptcy with the intent to hinder, delay, or defraud his creditors must be denied a discharge in bankruptcy because of §727

2. Debtor valued his gun collection and antiques for $23k and purchased gold coins and Triple BS Corporation that he bought one month before filing

3. He sold the company for $5k after buying it for $15k, and with the proceeds reduced the mortgage on his residence

4. §727(a)(5) the bankruptcy judge found that debtor effected transfers to convert property to exempt property with the intent to hinder, delay, or defraud creditors. He also failed to explain nearly $20k in missing cash.

5. §727(a)(5) denies discharge for “failure to explain satisfactorily the loss of assets.”6. §522(b) and (d) allow retention of exempt property under the Code, if not forbidden by

state law or under the provisions of state and federal law other than the minimum allowances in the code §522(b)(2)

7. Exemptions may be determined under state law, but Bankruptcy Code denies exemption if there was intent to defraud creditors. §727(a)(2)

8. Must Show ACTUAL INTENT9. §522(o) now reduces the dollar value of the exemption for homesteads that is attributable

to nonexempt property disposed of with the intent to defraud creditors. Also, §522(p) requires ownership for 1215 days

c. Better exemptioni. §522(b)(3) places a 2 year limitation on claiming friendly state exemptions so old state law

applies if you move.d. Unlimited Exemptions and Asset Trusts

i. Some courts find problems with debtors transferring their property pre-bankruptcy for unlimited amounts, while other courts are all right with this practice. Dr. Tveten was denied while farmers in South Dakota were granted.

e. Asset Protection Trusti. 11 states allow a debtor to create a trust with himself as the trustee and beneficiary.

f. Who cares about Exemptions?i. Likelihood of a homeowner owning a business was 35% higher in states w/ unlimited homestead

exemptions. Problem Set #9

Claims and Distributionsg. The Claims Process

i. Proof of claim Form (Official Form No. 10) – requires creditor claim based on a writing to have a copy of the writing attached

ii. In Chapter 7 and 13 a claim must be filed within 90 days of the first meeting of creditors. In Chapter 11 the court fixes a bar date. In Chapter 7 or 13 the creditor must file a claim to receive a dividend, even if they are listed on the schedules. In Chapter 11 a creditor who is scheduled need not file a proof of claim to receive payment.

iii. A claim is allowed unless a party in interest makes an objection §502(a).h. Disputed Claims

i. Trustee usually brings an objection to a claim. Objections are fairly rareii. In re Lanza (Bankr. ED Pa 1985)

1. Debtor objected to bank’s proofs of claims. Bank filed 3 claims. Claim 1 was executed for $200k but only $125k was advanced at settlement. Bank later advanced $170k though unsecured loans and none were charged against the first mortgage. Then the bank granted another mortgage for $350k with the property as collateral and used $125k to satisfy the original mortgage and $177.5k to discharge the unsecured indebtedness. Apparently $300k is owing on the first claim. The second proof was for a note and recorded mortgage securing $24.5k plus interest. Third claim was for $27.6k of

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unsecured indebtedness. The husband died during the bankruptcy. Wife claims to have no knowledge.

2. The burden is on the objecting party and not the claimant to invalidate the bank’s claim. i. Unsecured Claims

i. The Claim 1. §502 explains all pre-petition claims, secured and unsecured2. Ex. $1,000 debt and 3 months late on payment w/ interest rate of 12% annually. Also

provision for attorney’s fees and costs of 20% of debt. Creditor could file proof of claim for $1000 + $30 interest + $200 in collection costs = $1230 claim under §502 b/c all amounts are pre-petition claims.

ii. Interest1. Unmatured interest – unsecured creditors get no post-petition interest! In a lump sum

situation, a court may break up the portion of interest that was mature and unmature at filing.

2. Purpose is equality among the unsecured creditors, not to enforce high post-petition interest claims

iii. Accelerated Claims1. All pre-bankruptcy claims whether mature or not must be accelerated2. Domestic support obligations that have not come due at the time of filing are not

accelerated under §502(a)(5)j. Secured Claims

i. The Claim1. §502 claim filing and TIB can raise any contract defense2. §506(a) allows a secured creditor an allowed secured claim up to the value of its

collateral. If claim is less than or equal to the value of the collateral it is fully secured. If the claim is greater than the value of the collateral it is partially secured. The remaining part continues as an unsecured claim against the estate.

a. Ex.: $5000 owed on vehicle worth $6500. TIB sells the vehicle and clears $6000 after expenses. §506(c). Creditor then has an allowed secured claim under §506(a) for $5000, and it gets this as proceeds from sale. The remaining $1k goes to the general unsecured creditors.

b. Ex.2: If the $5000 owed and only clears $3000 after expenses, then creditor has a secured claim for $3000 and an allowed unsecured claim for $2000. Assuming a .10/$ distribution, then creditor would take in another $200.

ii. Interest1. Both secured and unsecured C’s are entitled to interest accrued prior to bankruptcy.

Under §506(b) some secured creditors may receive post-bankruptcy interest. 2. Oversecured: Value of collateral exceeds the pre-bankruptcy debt (including pre-

bankruptcy interest), then the secured creditor can receive post-bankruptcy interest, generally at its K rate, until the value of the collateral is exhausted.

iii. Attorney’s Fees1. Prior to filing of bankruptcy petition are treated same as pre-petition interest. If a

creditor, secured or unsecured, is entitled to pre-petition fees by contract or state law, then they are part of the secured or unsecured claim.

2. Secured creditors who are oversecured are entitled to att’y fees until the total claim exceeds the remaining value of the collateral. §506(b).

3. Travelers Casualty & Ins. Co v. Pac. Gas & Electric (2007): upheld post petition att’y fees for an unsecured claim, but it is an oddball. Usually creditors ask for them and the trustee objects.

iv. Exemptions1. Valid, unavoidable consensual security interests trump exemption claims, so the debtor

may claim only an exemption in the “equity,” or value remaining after the secured creditor has been paid in full!

k. Post-petition Claimsi. Ex.: TIB repaints furniture before sale and bought paint at Sears on credit. Sears has a claim, but

it is a post-petition claim and therefore under §503 “expenses of administration” and not §502.

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Sears would ordinarily be paid in full on its §503 claims b/c these are administrative claims that win a first priority payment §507(a)(1)-(2).

Problem Set #1010.1. Miller claimed $3,000 plus a) $200 in past due interest accrued prior to bankruptcy, and b) another $100 in interest accrued since filing. Miller has no security interest in any of Corinne’s property. What is the amount of Miller’s allowed unsecured claim in bankruptcy? See §502(a), (b).

§502(a): any claim is allowed unless a party in interest, including a creditor of a general partner in a partnership that is a debtor objects.

§502(b): Unsecured only entitled to pre-petition interest He is only entitled to $3,200.

10.2. Corinne has 2 non-exempt assets: her car worth $10,000 and 1,000 shares of Macrosoft stock, worth $15,000. At time of filing, she owed the bank $8,000 on the car and bank had a valid security interest in the car. The bank claims the $8000, plus a) past-due interest prior to bankruptcy for $500; b) interest since the bankruptcy for $400, and c) attorney’s fees of $1000 trying to collect. What is the bank’s allowed secured claim in bankruptcy? See §502(b); 506(a), (b).

Bank is entitled to pre-petition interest of $500 Bank is entitled to post-petition interest of $400 Secured creditors who are over-secured are entitled to att’y fees until the total claim exceeds the remaining value

of the collateral. §506(b). So bank may claim the $1,000 in attorney’s fees too…10,000 – 8,000 – 500 – 400 = $1,100

10.3. What if the car from above only brought $5,000 when it was sold, how would the bank stand? See §502(b); 506(a), (b).

Bank is entitled to their secured claim up to the value of the collateral = $5,000. Their remaining $3,000 would become a general unsecured claim.

10.4 Ten other creditors of Corinne are owed a total of $20k, but none of them are claiming any interest. If appointed TIB in the bankruptcy and collected $5k for the car and $15k for the stock how should you distribute the money.

$5k goes to the bank and they have a remaining $3k in general unsecured claims. So now there is $23k owed to 10 people. $15,000 in cash available / $23,000 in unsecured claims = $.652 on the Dollar

E. Priority among Unsecured Creditorsa. After secured creditors are satisfied by the sale of their collateral, the unsecured creditors divide up

remaining assets. Undersecured creditors, to the extent their collateral did not satisfy their claims, also jump in.

b. §507 determines order and amount of payout to unsecured creditors.

Problem Set #1111.1. Non-exempt assets were a condo, which the TIB sold for $400k, but was subject to a $365k mortgage, and miscellaneous personal property that sold for $25k. Therefore there is $60,000 to spread among the creditors. Who gets what under §507 and §726(a)(4), (b)?

TIB as trustee and as trustee’s counsel: §507(a)(1)(C): Trustee paid first $4,000 Insurance premiums for insurance on the non-exempt personal property prior to TIB sale: §507(a)(2): $750 Costs of sale of Harold’s non-exempt real estate and personal property, including advertising: §507(a)(2): $2,800 k k k k k k

Dischargec. Exceptions to Discharge

i. As to individual debts: Trustee or creditors can object under §5231. Rifle Shot renders one debt nondischargeable

ii. As to all debts: Trustee or creditors can object under §7271. Global denial of discharge

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iii. Specific nondischargeable debts now number 191. Lying on credit application2. Debts for luxury goods worth more than $500 obtained w/in 90 days of filing3. Fraud by a fiduciary4. Alimony and child support5. Judgments from drunk driving or boating

iv. Global Denial Grounds now number 121. Corporations do not receive discharge in Chapter 72. Denial for debtors who have lied or filed false docs in connection w/ bankruptcy or failed

to complete personal finance coursev. In re Robert W. McNamara (Bankr. D. Conn. 2004) – Global denial Case

1. Debtor had $150k in a briefcase and he was ordered to deposit it into escrow2. He gambled $130k in a poker game and couldn’t provide any details because he was

drunk and had a second heart attack. He produced no evidence of the heart attack.3. He did show evidence that he had enough money for a vacation and denied depositing the

money in an offshore account.4. §727(a)(5) grants a discharge unless the “debtor fails to explain satisfactorily, before

determination of discharge, any loss of assets or deficiency of assets to met the debtor’s liabilities.”

a. Plaintiff has the burden of showing evidence of disappearance of assets or unusual transactions. Burden then shifts to the ∆ to explain the loss. Test relates to the credibility of the explanation. It is not satisfactory if it is not offered in good faith or is vague, indefinite, and uncorroborated.

5. Court held that the debtor was denied discharge under §727(a)(2)(A) & (5)vi. In re Lee: explanation of “explain satisfactorily”

1. May mean reasonable, or it may mean that the court is content in believing the explanation, he believes what the bankrupt says w/ reference to the disappearance or shortage. He is satisfied. He is contented.

vii. Under §523 with a rifle-shot denial, the creditor must object to discharge in bankruptcy court or the debt will be discharged automatically. §523(c).

viii. In Re Sharpe (Bankr. ND Tex. 2006)1. Ms. Baker and Mr. Sharpe were incolved in a biz of Ultimatematch.com. Baker made

two loans to Mr. Sharpe and other undocumented loans. They aggregated to $150k. Sharpe listed her as an unsecured creditor for a personal loan.

2. Sharpe was a big spender who dined finely and dressed nicely. Baker alleges that Sharpe said he was hiding assets from his second wife. He also told her that he had the ability to repay the loans.

3. Is the debt nondischargeable under §523(a)(2)(A) because of “false pretenses, false representation, or actual fraud?”

a. The last clause reads “other than a statement respecting the debtor’s or an insider’s financial condition.” This requires the statement respecting the debtor’s financial condition be in writing. She fails under §523(a)(2)(B).

b. But the oral representations to her that he had the funds to repay her hiding from his divorce proceeding. However, these were also all concerning the financial condition of the debtor.

4. Held: Court cannot provide relief to Baker b/c all the representations concerned his financial condition and all required a writing to accord relief.

ix. In re Hill (Bankr. ND Cal. 2008)1. Plaintiff Bank a foreclosed out former junior deed of trust holder wanted to except $250k

claim from this Chapter 7 discharge under §523(a)(2)(B).2. Debtors continued to refinance their home as the price increased on the market. Their

debt totaled $683k. Combined the debtors only had income of $65k. 3. In their loan app Mr. Hill listed his income as $98k/yr and Mrs. Hill listed hers as

$47k/yr. The officer took all this information over the phone. Again in October 2006 the Hills got more credit as “stated income” loans that required no verification of income.

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4. §523(a)(2)(B): creditor must establish that 1) debtor made a written representation of their financial condition, 2) representation was material, 3) debtor knew at the time that it was false, 4) made with intent to deceive the creditor, 5) creditor relied on the representation, 6) reliance was reasonable, and 7) the damage suffered by the creditor proximately resulted form the representation.

a. Creditor must prove each by a preponderance of the evidence5. The bank fails to show the 6th prong; that their reliance was reasonable. It is an objective

standard and must follow its normal business practicese. Not enough to follow own standards if they don’t follow industry standards or if a “red flag” is raised. The red flag here is that Ms. Hill’s business was verified by CPA letterhead without the correct signature. Also, their incomes increased substantially over time. They fail to meet prong 5 and 6.

x. In re Patricia Miller (6th Cir. 2004) – Must show undue hardship for at least a portion of student loans to be discharged!

1. Debtor obtained BA and MA in art and philosophy. She failed to complete her PHD. Loans guaranteed by Penn. Higher Ed. Assistance Agency. On May 20, 2001 she filed Chapter 7. She claimed PHEAA could be discharged of her $89k obligation. She only paid $368 to date.

2. Bankruptcy court found that all of her student loan debts were not dischargeable under §523(a)(8) because they didn’t impose an “undue hardship upon her.” Court granted her a partial discharge. They dismissed $55k.

3. Court relied on §105(a) under the equitable doctrine to carry out a necessary or appropriate measure to effectuate the title.

a. Brunner Case in 2nd circuit requires three part test to show undue hardship:b. 1) Debtor cannot maintain on current income a minimal standard of living for

themselves and dependent, 2) Circumstances show the affairs will persist, and 3) debtor has made good faith effort to repay.

c. Other factors including amount of debt, expenses, income, earnings ability, health, education, dependents, age, wealth, and professional degree may also be considered.

xi. In re Milbank (Bankr. SDNY 1979) – False pretenses discharge exception1. Father and daughter seek a nondischargeable determination w/ respect to debtor who is

the ex-son-in-law of plaintiff and ex-husband of plaintiff b/c he borrowed money from both and then had an affair.

2. Did he obtain the money under false pretenses? 3. Under the old Act, the court held that he had obtained their money under false pretenses

and would not discharge the loans. Equivalent to the §523(a)(2) of the new Code.d. Tax Priorities and Discharge

i. §507(a)(8)(A)-(G): tax priority in payment, but any unpaid portion of those taxes is exempted from discharge by §523(a)(1)(A).

ii. Pre-petition interest on §507(a)(8) priority tax claims share the priority of the claims themselves and enjoy their nondischargeable status too!

iii. Post-petition interest does not accrue on unsecured tax claims against the TIB and the property of the estate, §502(b), but post-petition interest does accrue against the debtor as to any unpaid, undischarged tax debts that survive bankruptcy.

iv. Penalties on nondischargeable taxes are also nondischargeable, §523(a)(7) even though such penalties don’t get priority in payment under §507(a)(8).

v. Tax debts are nondischargeable AND the IRS can satisfy them by seizing property that is otherwise exempt under state law.

e. No Discharge, and Worse – Bankruptcy Crimesi. Concealment of assets, false oaths, false claims, fee fixing, etc. are made crimes in 18 USC §151-

155. ii. Farm case in Kansas: Farmer lied about selling hogs to feed them. Convicted of perjury for

trying to save his hogs.iii. US v. Cluck (5th Cir. 1998)

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1. Cluck appeals conviction and sentence for committing bankruptcy fraud in violation of 18 USC §152(1) and (3). ∆ was an attorney who practiced asset protection. He was hit for an award of $2.9M for fraudulent conduct, but he believed it was incorrect and appealed. He hid lots of assets by selling them for less than their REV with a right to reacquire w/in 30-90 days of the sale. He then filed for Chapter 7. He failed to list on his schedules these assets and a note owed to him for $50k. He was charged with false statements and fraudulent concealment in violation of 18 USC §151(1) and (3). He was convicted and ordered to pay restitution and serve time.

Problem Set #12

The Debtor’s Post-Bankruptcy Position: Reaffirmationf. §524 of the Code

i. At the moment of Chapter 7 discharge, §362 automatic stay dissolves, §36(c)(2)(C), and the §524 disjunction comes into play.

ii. The discharge injunction forbids any attempt to collect a dischargeable debt!iii. §524(c): REAFFIRMATION

1. Must be reached before the discharge2. Agreement must be filed with the court3. Option for the debtor to rescind the agreement for a period of 60 days4. Disclosures about the interst and fees associate w/ reaffirmed debt5. Debtor must work through a mini-budget to show the debtor has adequate income (after

necessary expenses) to pay the reaffirmed debt. §524(k)a. If the debtor can’t manage on paper the court must refuse. §524(m)

6. §524(c)(6) allows attorneys to sign off on reaffirmations.7. Good faith effort to comply by the creditors under §524(l)(3)8. §524(m)(2) allows Credit unions to get reAFFS even without counsel and the debtor

unable to pay.g. Reaffirmation of Secured Debt

i. Debts are discharged but Liens are NOT! §506(d)ii. Secured debt remains attached to its collateral, but without any deficiency threat

iii. Collection by seizure of collateral is not forbiddeniv. Options for Debtors - §521(a)(2) requires Chapter 7 debtor to issue a statement w/in 30 days of

filing their intended course of action with respect to collateral.1. Redemption §722

a. Debtor to pay the creditor the lessor of the full loan or the full value of the collateral in cash

b. Only available if the collateral is exempt property or has been abandoned by the trustee

c. Problem is debtors have no cash! They must borrow to redeem2. Reaffirmation §524(c)

a. Willing creditor to allow the debtor to keep the collateral in return for a promise to repay that will survive bankruptcy

b. Waive their discharge subject to losing the collateral and owing a deficiency claim

3. Retention or Ride-througha. Debtor is not in default at filing and continues to make its contracted payments

while the creditor simply does not do anything to reclaim the collateral. b. Either pays the loan off or loses the collateral to repossession.

v. §362(h) removes the collateral form the estate and lifts the stay unless the debtor complies with the command in §521(a)(2) to state an intention to do one of 3 things and then do them: surrender the property, reaffirm the contract wit hthe secured party on that collateral, or redeem pursuant to §722. §521(a)(6) has a savings clause for the debtor if the creditor demands more than the original terms (contra. Pendlebury). §521(a)(6) is limited to personal property

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h. Reaffirmation of Unsecured Debti. Incentives for creditors to reaffirm are greater. Debtors may want to reaffirm for gratitude or

debtor’s desire to protect a co-debtor, by agreeing to pay off a loan that Mom had co-signed.

i. Nondiscriminationi. §525 forbids discrimination for refusing a job, license, or a permit crucial to the debtor’s

livelihood or well being for bankruptcy.ii. Bankruptcy shows on a credit report for 10 years

Problem Set # 13

Chapter 13 Bankruptcy

Elements of an Acceptable Plan1. Overview of Chapter 13

a. Wage Earners’ Plan – Use of future earnings, rather than accumulated assets to pay creditorsb. Supervision to last from date of filing until the plan payments are completed. Typically 3-5 yearsc. Debtor remains in possession of the property. d. Trustee must object to improper creditor claims, ensure the requisite amount of income is

relinquished, objects to the debtor’s discharge. Also has the duty to assist the debtor in the performance of the debtor’s duties. §1302(1),(4)

e. Trustee expected to recommend approval or denial of confirmation. §1302(b)(2)(B)f. Trustee is obligated to ensure payments are commenced w/in 30 days afte plan is file and that

payments are properly distributed to creditors. §1302(b)(5)

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In re Pendlebury (Bankr. ED Pa. 1988)Facts: Mobile homeowners want an order striking a provision in a proposed reaffirmation agreement with Leader Federal. Makes them responsible for payment of $250 in attorney fees. Trustee has abandonded the mobile homes as a burdensome asset of the estate. The attorney for the debtor may determine that the fees are not fair and reasonsable and will impose an undue hardship on the debtor or a dependent and cannot in good faith execute the declaration or affidavit required by §524(c)(3). Issue: Can the debtor object to a reaffirmation agreement?Holding: No!Analysis: Debtor can achieve Redemption by 1) agreeing that the debtor may redeem by installments and the parties comply with the reaffirmation provisions of §524(c) (reaffirmation) or 2) by the debtor’s filing of a petition under Chapter 13

In re Paglia (Bankr. WD Pa. 2003)Facts: Debtor took out a note for his business for $13k for bank. Debtor’s mother pledged her interest in an annuity to secure payment of debtor’s obligation. Debtor filed for Chapter 7. Bank sent a demand to the mother for payment. Before discharge the debtor took out another note for $13k payable in 108 monthly installments. Mom once again pledged her interest. Debtor received a discharge and paid off the second note. 10 years after the second note was signed the debtor brought an action against the bank for violating the discharge injunction and the automatic stay when it coerced him to execute the 2nd note.Issue:Holding:Analysis: A creditor that passively permits a debtor to become liable once again for a discharged debt has not violated §524(a)(2). The ∆ in no way undertook to collect a soon-to-be discharged debt from debtor or even advised him that he had to execute the second note. In fact the debtor took his initiative to ensure the ∆ would not take legal action on his mother. The ∆ merely accepted debtor’s offer to execute the second note. The second note was not a reaffirmation however. It was a different obligation for different consideration. *Chapter 13 contains a special stay to protect co-debtors while Chapter 7 does not.

g. Typical case Examplei. In re Foster (5th Cir. 1982)

1. Fosters filed Chapter 13. Plan said they would pay $350/mos for 36 months to pay 100 percent of priority claims of the IRS, full value of secured creditors, and 49% of unsecured claims.

2. Filing a petition commences chapter 13. §301. No such thing as involuntary Chapter 13. An estate is created of “all legal or equitable interests of the debtor in property as of commencement, ”§541, and property and earnings acquired after commencement but before the case is closed, dismissed or converted, §1306(a), with the debtor remaining in possession of the estate, except as provided in the confirmed plan or the order confirming the plan, §1306(b). Confirmation vests all property of the estate in the debtor. §1327(b). The petition starts the “automatic stay” of §362. The automatic stay remains in effect until the cases is closed, dismissed, or a Chapter 13 discharge is granted or denied. §362(c).

3. §1322 and 1325 define what may or must be in a Chapter 13 plan2. Payments to Secured Creditors

a. Protection of the secured party’s interest in the collateral while case is ongoingi. Adequate protection for the secured party §362(d)

1. Protects against loss of collateral and decline in valueb. Adequate payment to the secured party – formula drivenc. Creditors can move to lift the automatic stay under §362(d) for adequate protectiond. §542 enables the debtor in Chapter 13 to demand “turnover” of property to the trustee

e. Modifying the Secured Creditor’s Contract – Lien Strippingi. §1325(a)(5): 2 requirements for payments to secured creditors

1. Secured creditor must be paid its allowed secured claim in full2. Must also be paid interest on that claim

ii. CRAMDOWN = Promise to pay the secured value of the collateral in full, and treat the unsecured portion like any other unsecured debt

1. Ex. Loan for $10k w/ collateral valued at $5k. Must pay $5k (secured claim) and a pro rata share of the other $5k. The rest is discharged if they complete their plan.

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In re Radden (Bankr. ED Va. 1983)Facts: Debtor bought a car and the note was assigned to GMAC. GMAC repossessed the car prior to bankruptcy after default. GMAC notified the debtor of their right to redeem the property and of a proposed sale if they did not redeem. 2 days before the sale, the debtor filed for Chapter 13. Debtor listed the car value as $2,700 and balance due of $4,400.30. The plan proposed to pay GMAC in full up to the value of the car plus interest at 5% per annum in monthly payments of $89.68 over 36 months. The other portion is treated as an unsecured claim to receive .70/$. Creditor seeks relief on lack of adequate protection §361(d)(1), and that the property has no equity and is not necessary for the debtor’s effective reorganization §362(d)(2). Issue: Does GMAC have adequate protection? Can the debtor motion for a turnover?Holding: Yes and Yes.Analysis: §362(g) places the burden on the debtor to show the property is necessary for effective reorg. He needs the car to get to and from work. It is necessary so relief cannot be granted under §362(d)(2). Also, GMAC is adequately protected because they retain their lien on the collateral and receive the amount of their allowed secured claim and they will be adequately protected if the plan is effectively consummated. GMAC hasn’t shown the debtor’s chances of rehabilitation are remote. He has stable employment and is capable of meeting the payments. He has reasonable likelihood of having the plan confirmed. Debtor has all the rights of the trustee under Chapter 7 or DIP under Chapter 11. Debtor may seek turnover under §542(a) because he may use it in the ordinary course of business. §363. §542 elements: 1) entity has possession, custody, or control over property, 2) the debtor may use the property pursuant to §363, and 3) the property has value or benefit to the estate. Adequate protection is necessary for the turnover, and the debtor will 1) procure adequate insurance on the property at time of recovering possession, and 2) make monthly payments under the K w/ GMAC until confirmation, then GMAC will be adequately protected and §361 and 362 will be satisfied.

2. If the debtor fails the debts will not be discharged and the secured creditor will be able to enforce its security interest w/ regard to all the unpaid debt. §1325(a)(5)(B)(i).

a. EXCEPTIONS TO CRAMDOWN - §1325(a) i. Purchase Money Security interest granted w/in the year before

bankruptcy is exempt. If the secured creditor objects, a debtor who wants to keep the collateral must promise to pay the debt in full.

ii. Purchase Money Security interest in a motor vehicle extends to 910 days prior to bankruptcy (2.5 years).

3. Computing the Amount the Secured Creditor Must be Paida. After determining security interest in the collateral is secured, court must determine the amount for

the debtor to pay under the Ch. 13 plan.i. The amount of the allowed secured claim under §506(a); and

ii. The present value of the allowed secured claim under §1325(a)(5)(B)(ii).

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Associates Commercial Corp. v. RASH (1997)Facts: Respondent purchased a tractor for $73,700. Debtor filed a Chapter 13. Balance owed at filing was $41,171. §506 requires that the claim is secured up to the value of the collateral and the rest is unsecured. To be confirmed the plan had to meet §1325(a)(5). Issue: When a debtor, over a secured creditor’s objection, seeks to retain and use the creditor’s collateral in a Chapter 13 Plan, is the value of the collateral to be determined by 1) what the secured creitor could obtain through a foreclosure sale of the property (foreclosure value standard); 2) what the debtor would have to pay for comparable property (replacement-value standard); or 3) the midpoint between these two measurements?Holding: §506(a) directs application of the replacement-value standard. “The price a willing buyer in the debtor’s trade, business, or situation would pay a willing seler to obtain property of like age and condition.”Analysis:§1325(a)(5) requires 1) acceptance of the plan by the creditor, §1325(a)(5)(A) , 2) debtor surrenders the property, §1325(a)(5)(C), or the debtor invokes the cram down provision of §1325(a)(5)(B). Cram down allows the debtor to retain the property subject to the lien, but the debtor must pay over the life of the plan, the TOTAL PRESENT VALUE of the allowed secured claim.Footnote 6: Whether replacement value is the equivalent of retail value, wholesale value, or some other value will depend on the type of the debtor and the nature of the property! Creditor should not receive portions of the retail price, if any, that reflect the value of items the debtor does not receive when he retains the vehicle. I.e. warranties, reconditioning. Nor should the creditor gain from modifications to the property. E.g. addition of accessories to a vehicle to which a creditor’s lien would not extend under state law.* §506(a)(2) codified this rule essentially

Present value of Secured Claim for n payment periodsIn this case the cash flow values remain the same throughout the n periods. The present value of a secured claim PV(A)

formula has four variables, each of which can be solved for:

PV(A) is the value of the annuity at time=0

A is the value of the individual payments in each compounding period

i equals the interest rate that would be compounded for each period of time. Monthly payments use i/12

n is the number of payment periods.

b. Lien Strippingi. Cramdown of Chapter 13

1. Favored for time2. No discharge until completion (but for §1328(b))

ii. Redemption under §7221. Requires immediate payment2. Discharges liability

4. Payments on the Home Mortgagea. §1322(b)(5): Cannot cram down on a home mortgage. Must catch up on past due arrearage while making current payments on the mortgage as they come due.b. Adequate protection is not an issue when the value of the home exceeds the mortgage

i. Saving the home from foreclosure AND proposing a plan to comply w/ the strict limitations imposed by Chapter 13 to protect the rights of mortgage lenders are the twin aims.

1. In re Taddeo (2nd Cir. 1982)a. State law provided that the creditor could accelerate payments and demand full

payment in event of default. Lender refused to accept the full payment of their arrears by check. Before the lender could obtain final judgment the debtors filed for Chapter 13.

b. Court held that Chapter 13 allows the debtor to “cure defaults” by “de-accelerating” their mortgage and reinstating the original schedule.

c. §1322(c) now provides for de-acceleration any time prior to the foreclosure saled. Some courts allow second mortgages to be stripped down that are entirely

unsecured. i. i.e. Home worth $200k and first mortgage was $210k. Wholly unsecured

so it is not a mortgage “in real property that is the debtor’s principal residence.”

Problem Set #143. Payments to Unsecured Creditors

a. All priority claimants in §507 are entitled to payment in full. §1322(a)(2)b. General unsecured are given the pro rata treatmentc. §1325

i. Best interest test1. Requires that each creditor, secured or unsecured, must receive at least as much as that

creditor would receive if the debtor had filed Chapter 7. §1325(a)(4); (a)(5)(B)ii. Debtor must devote all “disposable income” to plan payments during the life of the plan.

§1325(b)iii. Plan must be proposed in “good faith and not by any means forbidden by law.” §1325(a)(3).

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Till v. SCS Credit Corporation (2004)Facts: Debtor owed $4894.89 on a truck worth only $4000 at time of Chapter 13 filing. Secured claim limited to $4000 and the balance was unsecured. Original contract called for 21% per year interest. The debtor proposed their plan w/ 9.5% interest per year that was the “prime-plus” rate. Issue: What is the correct interest rate to apply?Holding: Look to the national prime rate and allow the bankruptcy court to adjust accordingly. If a “eye-popping” interest rate is necessary, then the plan probably should not be confirmed.Analysis: §1322(b)(2) allows the court to modify the rights of any creditor whose claim is secured by any interest other than real property that is the debtor’s principal residence. We reject the coerced loan, presumptive contract rate, and cost of funds approaches.

d. Disposable Incomei. Median income test: Married debtor must include spousal income to determine whether income is

above the state median. §1325(b)(4)(A)(ii).ii. Income < State Median income => “reasonably necessary” test for disposable income

iii. Income > State Median Income => 2 factors1. Proposed 5 year plan §1325(b)(4)2. If debtor is barred from Chapter 7 because of the means test, then they are required to pay

in Chapter 13 the surplus calculated by application of the §707(b)(2) means test. §1325(b)(2)-(3).

iv. Below-Median Debtors1. Income and necessary expenses are essential to disposable income calculations

a. In re Carter (Bankr. ED Pa 1996)i. Married woman filed alone. She listed monthly income as $600 and

expenses of $500. Plan called for payments from debtor of $75/mos for 36 months. Creditor objected under §1325(b) for more disposable income and bad faith.

ii. Disposable income is income received by the debtor that is not “reasonably necessary for the support of debtor or his dependents.”§1325(b)(2)(A). Must include the husband’s wife in the schedule.

b. In the matter of Wyant (Bankr. D. Neb 1998)i. §1325(b)(1)(B) requires payment of disposable income. Veterinary and

livestock feed are unreasonable and unnecessary for the maintenance or support of the debtor or his dependents. Judge reduces the expenses to $100 per month

v. Above-Median Debtors1. Required to propose a 5 year plan. Must also calculate a surplus of income under the

presumptive-abuse test of §707(b)(2)(A)-(B).a. In Re Kagenveama (2008)– “mechanical approach” to calculating the surplus of

income – OVERRULEDb. In re Lanning (2010)– “forward looking approach” – “when a bankruptcy court

calculates a Chapter 13 debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.”

e. Family Support, Taxes, and Other Priority Claims in Chapter 13i. Creditors with claims that would receive priority under §507(a) are entitled to payment in full in

Chapter 13. §1322(a)(2). ii. Disposable income is a floor not a ceiling.

iii. Tax Claims1. 2 advantages in Chapter 13

a. Paying the taxes over time, w/ automatic stay holding off the IRSb. Denial of post-petition interest on unsecured claims locks the tax claim at its

value as of date of bankruptcy. Race to the court before IRS files a lien. Filing a lien is an action to collect

c. §1322(a)(2) priority debt only ”full payment, in deferred cash payments” does not include interest

d. §506(a) repayment in full for all taxes subject to a lien or entitled to priority under §507(a)(8) and explicit requirement to pay them ahead of all other claims, and a discharge of most of remaining taxes and most other dischargeable debt. §1328.

iv. Good Faith1. §1325(a)(3)

a. In re Farrar-Johnsoni. Court determined that the above-median income debtors were entitled to take a

housing allowance under the IRS standards even though they lived free in

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military housing. Trustee then argued the debtor’s failure to pay more into their plan failed the good faith test.

ii. The discretion of the judge was removed w/ BAPCPA. Debtor’s expenses are either “reasonably necessary” or they are not. Debtors may claim IRS standard expenses, and other actual Other Necessary Expenses. Objections to expenses are to be made under §1325(b).

v. Modification and Dismissal of Chapter 13 Plans1. §1329(a) allows debtor, trustee, or creditor to move to modify or dismiss the plan. 2. Statutory limit on length is 60 months §1322(d)(1) – must find money because you won’t

be extended time3. Annual financial updates if judge or any party in interest requests so §521(f)(4), under

penalty of perjury for the current tax yearProblem Set #15

Threshold Eligibility for Chapter 13

C. §109(e) Chapter 13 for natural persons w/ limited debts and regular incomea. In re Murphy (Bankr. MD Tenn. 1998)

i. Live in Boyfriend made affidavit that he would pay Ms. Murphy’s Chapter 13 plan payments until completion. Debtor filed for turnover of a car and the creditor objected on grounds that the debtor is not eligible for Chapter 13 b/c she does not have “regular income” required by §§109(e) and 101(30). Court found that this was sufficiently regular income. Montana court disagrees.

D. Identifying Types of Claimsa. §109(e) places a statutory maximum on amount owing in noncontingent, liquidated debts for Chapter 13b. In re Huelbig (DRI 2003)

i. Allstate motioned to dismiss debtor’s case on ground that their unsecured debt exceeds the limits proscribed in §109(e).

ii. Sept. 1999 Allstate filed a civil complaint against debtor alleging RICO violations, including a conspiracy to defraud Allstate. On Feb. 20, 2001 debtor plead nolo contendere to the charges. On the same date, the debtors filed a joint Chapter 13 case. Allstate claims $330,505 for a total unsecured debt totaling $357,469.

iii. If Allstate’s claim is contingent, or to the extent it is unliquidated it wouldn’t count towards §109(e) debt limit and the debtors could file Chapter 13. This claim is both noncontingent and liquidated. Allstate offered receipts showing the criminal actions already plead “nolo” to.

iv. Noncontingent = “If all events giving rise to liability occurred prior to the filing of the bankruptcy petition”

v. Liquidated = “subject to ready determination and precision in computation of the amount due.”c. If you have large debts (business as sole proprietorship) you must chose Chapter 7 or 11.d. §1129(a)(15) requires application of a Chapter 13 disposable income test in a Chapter 11 for a natural

person.

Problem Set #16

The Consumer Bankruptcy System

E. Lawyersa. §526-528 set out substantial responsibilities and liabilities on consumer bankruptcy attorneys. b. Debt Relief Agenciesc. Professional sanctions, court fines, damages suits by the US or the clientd. Failing to confirm the accuracy of the debtor’s valuation of assets, failing to predict the interpretation of

ambiguous termse. In re San Miguel (Bankr. D. Colo. 1984)

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i. Question of good faith. Plan proposed o pay $1 over a period of 16 months. Reason was to spread attorneys fees in Chapter 7. No creditor objected. The court raises issues of good faith due to the short nature and minimal payment afforded to unsecured creditors. Chapter 7 requires attorney’s fees up front. In Chapter 7 the creditors will receive money upon liquidation. Good faith = Not showing an Abuse of the “spirit of Chapter 13”

ii. Repayment of creditors is an aim of Chapter 13. Otherwise file for Chapter 7iii. §526(a)(4): Forbids lawyers to suggest to “assisted persons” ( consumer debts and value of

nonexempt property is less than $175,750) that they borrow money to pay lawyer’s fees.

Problem Set #17

Business Bankruptcy

Chapter 7 Liquidation

A. Introductiona. No discharge for a Chapter 7 debtor that is not an individual. Corporations merely expire under state

corporate law. No exemptions for corporate debtors §727(a).b. Natural persons filed 75% of the Chapter 7 cases that are designated as business cases, and 25% of

Chapter 11 cases that were designated as business cases. c. 13 to 19% of all debtors listed as “consumers” had operated small businessesd. §507 priorities remain the same

Business Liquidationse. Debtor usually has an absolute right to convert a case to Chapter 7. §1112(a)f. Creditors can convert to Chapter 7 on proper showing. §1112(b)

Involuntary Bankruptcyg. §303 for both Chapter 7 and 11h. Usually filed by unsecured creditors, while secured creditors fear attack by the TIB on their security

interestsi. Credible threat for negotiations for a workout – threat against the debtor and other favored creditorsj. §303(i) grants attorneys’ fees and costs (sometimes punitive damages) against an unsuccessful

involuntary petitioner.k. §303(b)(1) requires 3 creditors to join in most involuntary peititonsl. In re Gibraltor Amusements (1961)

i. Wurlitzer Company owed $1M+ filed an involuntary petition against Gibraltor in March 1960. Alleged insolvency, numerous acts of bankruptcy, and the debtor had fewer than 12 creditors. Wurlitzer was then joined by Wurlitzer Acceptance Corp. as one of the 3 required petitioning creditors.

ii. Is WAC a separate petitioning creditor?

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iii. They have honored the separate corporate form. WAC purchased notes from Wurlitzer long before filing of the petition. No need to pierce the corporate veil b/c there is an absence of fraud and honoring of the corporate form.

m. In re Faberge Restaurant of Florida (Bankr. SD Fla. 1997)i. Three creditors petitioned for involuntary Chapter 7 on Faberge. Debtor filed a motion to dismiss

b/c it disputed the debt of 2 of the creditors. 3 more creditors then joined the petition. Debtor then paid off 3 of the 4 creditors, but none of them withdrew their joinder in the petition.

ii. §303 governs involuntary petitions.1. Debtor has not been paying debts as they become due2. >12 creditors then §303(b)(1) requires that there are 3 creditors who are not the subject of

a bona fide dispute or holders of contingent claims a. GSPC is undisputed creditor and has the requisite debt of $10,000 required by

§303(b)(1)b. Post-petition payments after the filing of bankruptcy will not deprive the court of

jurisdiction or require dismissal of the petitionn. In re Silverman (Bankr. DNJ 1998)

i. Single creditor filed involuntary Chapter 7 petition on Oct. 24, 1997 against the debtor. He sued in state court prior to the petition on a $200k promissory note. His order for summary judgment was denied. Creditor ordered a UCC search, but never informed the court of the results. Nor did he order a credit report of the debtor. §303(h)(1) standard is that the “debtor is generally not paying his debts as they become due.” All 31 of debtor’s creditors revealed that he was never late on payment.

ii. §303(b)(1) doesn’t allow claims for involuntary bankruptcy if they are subject of a bona fide dispute.

iii. §303(i) authorizes fees, costs, and damages if an involuntary petition is dismissed w/out consent of the debtor and all of the petitioning creditors. Punitives are appropriate if there is bad faith under §303(i)(2)(B). Issue preclusion principles show their was bad faith w/r/t this claim.

o. Creditors may force a “quasi-involuntary” bankruptcy filing if they are secured by pressuring the debtor to file bankruptcy or actually initiating repossession or foreclosure.

Problem Set #18

Chapter 11 Reorganization

The Traditional Chapter 11§101(51D)(A) “small business case” applies to most businesses w/ debts less than $2M at time of filing. Now face increased reporting requirements, greater UST supervision, shorter deadlines.

A. Mechanics of Chapter 11a. §362 automatic stay is imposed. Business continues to operate in the “ordinary course,”§363(c), under

the control of the Debtor in Possession (DIP).b. DIP has most of the legal rights and duties of the TIB §1107c. DIP can attack its own conveyance as a fraudulent conveyance on behalf of all of its creditorsd. §363(c) and (e) allow DIP to operate in the ordinary course w/out court approval of each routine

transaction, it is limited in the use of secured assets. Secured creditors may also lift the stay w/ court approval unless the DIP can provide “adequate protection” of their interests. §361 and 362(d)

e. §364 DIP can get financing and other credit during bankruptcy w/ court approvalf. §547 Avoiding powers to recover preferences (w/in 90 days)g. §365 Power to assume or breach outstanding executory contracts h. §548 and §544(b) Power to void fraudulent conveyancei. §544(a) and §547 Power to set aside unperfected or late-perfected security interests in the debtor’s

propertyj. § 542 and §543 Power to require turnover of property of the debtor being held by another entityk. §1102 Creditor’s Committee is appointed in larger cases to scrutinize the debtor’s activities on behalf of

all the creditors and negotiate.

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l. §1126(c) Plan approval by specified majorities of creditors in each classm. §1129(a)(7) requires that every creditor who has not accepted the plan will get at least as much as the

creditor would have gotten in liquidationn. §1141(d) Debtor is discharged from all pre-petition debts except as provided in the plan

B. Logic Behind Chapter 11i. Creditor’s Perspective

1. Creditors may file involuntary Chapter 11 §303(a)2. Liquidating plan is permitted in Chapter 11 §1123(b)(4).3. Creditor v. Creditor over validity of lien or preference

ii. Debtor’s Perspective1. Automatic stay and breathing room2. Possibility of adopting a plan to bind all creditors, even with a minority rejecting it3. Six months or more the exclusive right to propose a plan4. Turnover and avoiding powers, augment the assets available and provide powerful

leverage over certain creditors

The Automatic Stay and Adequate Protectioniii. Generally

1. Automatic stay is an incentive to hold off foreclosure or repossession2. Also, TIB or DIP can force return of the property to the debtor ex post3. §362(e) Court must act on request to lift the stay w/in 30 days or it will automatically be

lifted as to the requesting creditor’s collateral4. §362(g) Burden on the DIP to show existence of “adequate protection” of the collateral

iv. Scope of the Stay1. Stay is nationwide (or even worldwide) and strictly enforced

v. Farm Credit of Central Florida v. Polk (MD Fla. 1993)1. Debtor and creditor saw bankruptcy on the horizon as they negotiated an agreement to

extend date of foreclosure sale in exchange for Polk not to contest a motion for relief from stay by creditor in the event they filed for bankruptcy. Whether their 2-party deal binds the post-petition estate and all other creditors?

2. Bankruptcy court found that the prepetition agreement that entitled creditor to an immediate lifting of the automatic stay is not sufficient to lift the stay unless showing of other criteria is found. I.e. Bad faith

3. Prior cases show that a prepetition waiver of the §362 stay is valid and enforceable in single asset bankruptcy cases where bad faith existed and the court found there was no prospect for successful reorganization.

vi. US v. Seitles (SDNY 1989)1. Government sued Seitles under the False Claims Act seeking damages and civil penalties.

Westbrook then filed for Chapter 11 and asked court to stay the case and to permit the bankruptcy court to adjudicate the matter.

2. In the criminal case, Seitles ordered to pay $44k in restitution. Gov’t argues there is no reason to stay non-debtor co-defendant Seitles’s matter.

3. §362(b)(4) and (5) exempt “government units to pursue actions to protect the public health and safety” even when the target is in bankruptcy.

4. Is the government action “protection of the public health and safety” or the “protection of pecuniary interests?” Does it concern a wider group other than the parties at issue? Key is whether it is continuing misconduct by the debtor.

5. The civil action does not serve to stop any continuing misconduct by the debtor. It is neither continuing nor health-related. No exception to the automatic stay.

6. Co-debtor moved for stay under §105: “Guided by a) irreparable harm and either 1) likelihood of success on the merits or 2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.” Irreparable harm element is: “interference with the rehab process” and the non-debtor codefendant is so “inextricably interwove” w/ the affairs of the debtor” that it would “substantially hinder the debtor’s

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reorg efforts” Seitles is the president of the debtor and the DIP. §105 stay is necessary and appropriate to rehab the debtor.

b. Lifting the Stayi. §362(d) has 3 alternative tests to lift the stay

1. Lack of “adequate protection” §362 to §361 where “adequate protection” is definedii. In re Rogers Development Corp. (Bankr. ED Va. 1980)

1. Plaintiffs seek relief from the automatic stay pursuant to §361(d)(1) and (2)2. Rogers owned 75% of a real estate development project. Heritage loaned them $520k

acquisition and development loan and $360k LOC. In May 1978 the debtors defaulted on the acquisition loan. In July 1979 they went into default on the construction loan. Plaintiffs argue they owe $548k in total. Plaintiff’s expert valued the property that the current FMV was $704k. Debtor’s expert stated FMV of $801k. Member of Creditor’s Committee stated the property was essential to the successful reorganization of the debtor.

3. Plaintiffs argue “lack of adequate protection” and the debtors have no equity and it is not necessary for effective reorganization.

4. §361 and 362 = adequate protection = 1) periodic payments; 2) additional or replacement lien; 3) “catch all” (“realization by such entity of the indubitable equivalent of such entity’s interest in such property”)

a. Catch all allows for an “adequate cushion”b. Value is crucial to determining the cushion. Neither liquidation value or full

going concern value is proper per se. c. “Commercially reasonable” standard required given the circumstances of the

case. Take the median of $750k and they are adequately protected by equity cushion which could be well over $130k with the rising real estate market.

5. §362(d)(2) requires no equity and not necessary for effective reorganizationa. Without their only asset they cannot reorganize! Must show that there is no

reasonable likelihood of reorganization to creditor dissent or feasibility. Creditor can’t do either!

c. Payments While the Chapter 11 is Pendingi. Adequate protection payments should not be confused with interim interest payments

ii. All creditors add pre-petition interest to their claims, according to K or applicable non-bankruptcy law. §502

iii. Secured creditor who has excess collateral is also entitled to add interest to its allowed secured claim under §506(b) during the pendency of the bankruptcy up until the value of the collateral.

iv. Under-secured and unsecure creditors are denied that opportunity. §502, 506(b)v. Secured creditors are entitled to the present value of their allowed secured claims, while

unsecured creditors are entitled to the present value of what they would have received in Chapter 7 liquidation. §1129(a)(7)

1. Over-secured creditors receive the full amount of their claims, including post-petition, pre-confirmation interest (up to value of collateral) and they will then earn interest post-confirmation on the allowed amount that has accrued up to the time of confirmation.

a. Questionable whether they accrued post-filing and pre-confirmation interest payments are to be added to the allowed secured claim or due as the case progresses.

i. Forcing them to be paid ongoing will be a significant cash drain2. Under-secured creditors get the value of their collateral at the time of filing, plus post-

confirmation interest on that amount, plus payment for the deficiency part of their claim (at the pro rata rate), but no post-petition interest.

3. Unsecured creditors will get at least the amount they would have gotten in a liquidation, plus interest on that amount, but no post-petition interest.

vi. Single Asset Real Estate (SARE) cases. §101(51B), 362(d)(3). Forces debtor to propose a workable plan promptly or start paying interest on the value of the collateral. Failure to do so immediately leads to lifting or modifying the stay. SAREs have the ability to use rents to make adequate protection payments, while mortgage lenders get the interest rate set at the preexisting contract rate.

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d. Good Faithi. Unsecured creditors only hope of escaping is a Motion to Convert to Chapter 7 or Motion to

dismiss. Conversion to Chapter 7 requires unfeasibility in the first months of a case. Motion to dismiss requires a showing of bad faith. No need to show insolvency in US Bankruptcy Law.

ii. In re SGL Carbon Corp. (3rd Cir. 1999)1. In 1997 US DOJ investigated alleged price fixing by manufactures led to a class action

suit against SGL. In June 1998 SGL’s parent made a best estimate of $240M in potential liability in both suits. On Dec. 16, 1998 at the direction of its parent, SGL filed for Chapter 11. On its disclosures it listed only the litigation as a reason for filing. Only the plaintiffs would receive less than full cash payment in it’s filing, and also protected the parent from future suits.

2. Chapter 11 cases are subject to dismissal if not filed in good faith. The District Court found that it was in good faith because 1) the litigation posed a threat to successful operations, and 2) the litigation could cause financial ruin.

3. The company is otherwise healthy with large cash reserves. Must pose a serious threat to the companies’ long-term viability. They have a net wroth of $124M.

4. Dismissed “for cause” under §1112(b)Problem Set #19

Operating in Chapter 11

1. Who’s Running the Show?a. Success of the business is the aim of all. Debtors and creditors hope for the success of the business.

i. Ex. Wholesale food distributor with hard assets of refrigeration equipment, trucks, computers, office equipment worth $500k. Value is in its customer relationships, supply lines, and knowledge of the retail food industry. The bank has a security interest in its hard assets and has $400k in outstanding debt. They want liquidation and immediate payment. Unsecured creditors make much more if the business succeeds by keeping a future customer. Employees have the same interests. Investors with equity or subordinated debt are high-risk, high-reward and need success to profit. The community also may want to see success.

ii. Disputes between the DIP and a group of creditors may seek conversion to Chapter 7 or appointment of a trustee to run the business in Chapter 11. §1104.

b. In re Sharon Steel corp. (3d Cir. 1989) i. Debtor had 2 blast furnaces and only Furnace 3 was operational. Number 2 was shut down

pending $18M in repairs. Number 3 faced shutdown b/c it was overdue for relining. Their assets were exceeded by liabilities by nearly $300M and filed Chapter 11.

ii. Committee dissatisfied w/ progress so petitioned for appointment of a trustee under §1104. Bankruptcy court granted b/c of prepetition transfers that were voidable preferences or fraudulent conveyances and none were questioned by the DIP. Debtor shared common management with the receiver of the transfers. Legal fees were insane for defending the appointment of the trustee to protect the equity owners.

iii. DIP has a fiduciary duty to the creditors* iv. However, even suspected existence of fraudulent conveyances and concealment of assets is not

usually justification for removing the DIP. c. Chapter 11 liquidation can yield the best prices with the management conducting the saled. §1104(e) UST shall move for the appointment of a trustee if there are “reasonable grounds to suspect”

that those in control participated in “actual fraud, dishonesty, or criminal conduct.” As they managed the debtor or made financial reports.

e. §1104(a)(3): If there is reason to dismiss the case, then the court may replace the DIP w/ a trustee if such a move is in “the best interests of creditors and the estate.”

f. §1104(c): appointment of an examiner to investigate the affairs of the debtor. g. Data shows that smaller, closely held companies that survive the Chapter 11 filing, the owner-managers

virtually never lose control. Whereas, in large filings, the CEO almost always rolls.2. What happens to the Cash?

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a. Few constraints on the DIP’s use of cash that is not subject to a lien, so long as the cash is used “in the ordinary course of business” under §363(c)(1).

b. Cash Collateral in §363 cannot be used by the DIP w/out the permission of the court.i. Cash collateral is cash derived form the sale of inventory or the collection of accounts subject to

an Article 9 proceeds claim by a lender secured by inventory or accounts.c. In re Earth Lite (Bankr. MD Fla. 1981)

i. Sun Bank sought relief from the automatic stay of §362, but not satisfied w/ the 30-day time frame by §362(e), Sun Bank moved on 24 hours notice, and sought an immediate hearing to get a prelim injunction to prevent Earth Lite from using any of its collateral, i.e. the inventory and the monies received from the collection of accounts receivable. Debtor filed a motion to use cash collateral and other collateral under §363 for its survival.

ii. Debtor originally got loan for $350k secured by the inventory and accounts receivable of debtor. They filed for Chapter 11 on June 27, 1980. After filing, the bank agreed to lend $75k for additional collateral and for personal guarantees of insiders. Called for periodic payments to be applied to interest and principal. It also called for creation of a “lock box” system to handle the collection of accounts receivable. At commencement, Earth Lite had $500k in inventory and about $90k in account receivables, which far exceeded the amount of debt outstanding ($288k). The guarantees granted a second mortgage on the home of the president, collateral assignment of a mortgage receivable, a mortgage lien on a condo, and a cemetery lot. The net equity of the insiders is also very large.

iii. §363 provides that “cash collateral” means cash or other cash equivalents in which the estate and an entity other than the estate has an interest. The code protects the rights of secured parties with the “adequate protection” provision of §361. Must show more than an equity cushion to use cash collateral. Here the personal guaranties of the insiders which were worth $300k on indebtedness of less than $150k is enough.

iv. Debtor agreed to pay bank $12,500 a month. Debtor is in default and the equity cushion is not enough to waive monthly payments, but it should be able to cure this default in reasonable time.

d. Bank’s right to Setoffi. §533 allows any creditor to offset a debt it owes to the debtor against a debt owed to the creditor

by the debtor, subject to some qualifications and limitations. ii. Allows creditors to obtain full payment of a claim up to the amount of its debt to the debtor.

iii. §506(a) creditor w/ a setoff right is treated as a secured for the amount of its setoff right, and the account subject to setoff is cash collateral and governed by the rules in §363(c).

iv. Creditor w/ a setoff right is subject to the automatic stay and must have permission of the court. §362(a)(7)

e. Citizens Bank of Md. V. Sturmpf (1995)i. Creditor could not set off w/out violating the stay, and needed court approval to have the stay

lifted before it acted, but creditor could protect itself w/ an “administrative freeze” by holding the money in a checking account pending its application to the bankruptcy court for the lift-stay motion.

f. In re Hal (9th Cir. BAP 1996)i. Hawaii Airlines and HAL filed Chapter 11. After bankruptcy filing, IRS audited and determined

that Hawaii airlines made overpayments totaling $215k. US filed a motion to lift the stay and for a setoff to use the $215k to offset the claims of other agencies.

ii. §533(a) states that filing a petition does not (except in certain circumstances) “affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case… against a claim of such creditor against the debtor that arose before the commencement of the case.” Bankruptcy recognizes a party’s non-bankruptcy right to setoff mutual prepetition debts, but does not itself create such a right. Maryland v. Stumpf (1995). Creditor must establish 1) it has a right to setoff under nonbankruptcy law; and 2) this right should be preserved in bankruptcy under §533.

iii. Mutuality requires that the debts are “in the same right and between the same parties, standing in the same capacity and same kind or equality.”

iv. Nonbankruptcy right to setoff comes from Title 31. Government agencies allowed setoff for “past-due legally enforceable debts” w/ unpaid federal tax refunds of the debtor where the agency has a formal agreement with the IRS and notifies the IRS of any deficiency.

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1. Minority view of §533 – narrow construction in the reorganization context. Triangular setoff by subsidiary is not allowed so gov’t should follow this rule.

2. Majority view of §533: Gov’t agencies are as a matter of law a single entity, unless they act in a distinctly private capacity.

v. Courts may deny setoff where: 1) creditor acted inequitably; 2) if it would jeopardize a debtor’s ability to reorganize; 3) deny setoff in a liquidation context b/c it results in either a preference or priority over other unsecured creditors; and 4) where the creditor purchased a claim for setoff.

1. §533(a) extends to claims obtained or debts incurred w/in 90 days of filing of the petition. Also extends to creditors improving their setoff position w/in 90 days of filing.

vi. The only argument here is that other unsecured creditors will receive stock in satisfaction of their claim and not cash. Affirm the decision to allow setoff.

Problem Set #20

1. Post-petition Financinga. Inadequate cash flow and the need for increase in operating capital for survivalb. Must find someone who is willing to make new infusions of cash in order to survivec. §522(a): pre-petition security interests do not attach to property acquired by the DIP after bankruptcy

i. Ex. Store has $1M in inventory on date of filing and the creditor w/ a perfected security interest in inventory can lay first claim to this inventory. Inventory acquired after filing will be property of the estate, no longer subject to the secured creditor’s after-acquired property clause. However, the secured creditor can, and often does, claim a security interest in post-petition property by way of a proceeds under UCC §9-315. If they can trace the purchase of the new, post-petition inventory back to the sale of the old, pre-petition inventory in which it held an interest, the secured creditor could claim a continuing security interest. The debtor can still offer as security for post-petition financing both property that was not encumbered before filing plus an interest in any new property it acquires post-filing.

d. In re Garland Corp. (Bankr. D. Mass. 1980) – Unsecured creditors worried about increased borrowing

i. Debtor sought authorization to borrow operating funds from Bank and Prudential. No objection and judge authorized debtor to borrow an additional $700k and enter a LOC w/ the bank and Prudential for up to $1.4M in postpetition borrowings. They were later found to be priority costs of administration under §507(b) and secured by a first lien on all assets of the debtor including receivables and inventory. CC opposed request of the debtor to borrow $500k more. Judge approved the $500k and an increase in the LOC to $1.7M. CC appeals.

ii. Arguments for appeal:1. Evidence does not show a “reasonable likelihood that the debtor could be successfully

rehabilitated.” Denieda. Judge and appeals court concluded there existed a reasonable likelihood of

survivalb. Borrowing of operating funds secured by unencumbered assets requires

“adequate protection” of the interest of unsecured creditors w/in §361. Denied.i. §364(c)(2) challenge to borrowing operating funds secured by

unencumbered assets. ii. Requires showing that the debtor was unable to obtain unsecured credit

under §364(c). They couldn’t find it.iii. No Express statutory requirements that holders of unsecured claims be

provided “adequate protection.” It only is to be provided under §361, 362, or 364.

2. Taking of property w/out just compensation in violation of the 5th Amendment. Denied.a. Rejected the constitutional claim

e. In re Hubbard Power & Light (EDNY 1996) – Non-assignable generation Ki. Debtor seeks $750k in postpetition financing from Enron under §364(c) and (d) and provides

Enron a super-priority lien. NY DEC, Landlord, and the County of Suffolk all oppose. Islip Township paid to clean up HPL’s property and was reimbursed by the County. HPL agreed to clean it up, but b/c it stopped operations it had no money to do so. Only Enron made an offer to

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lend the funds, b/c other lenders didn’t want to pay for the clean up. Enron is to receive a super priority administrative claim under §364(c), a priming lien on all the debtor’s assets, an assignment of and a first priority security interest in all revenues received from the sale of power. It is subject to resolution of HPL’s disputes with LI Lighting Co and its landlord and entry of final non-appealable order for the consent of the DEC to resume HPL’s production of power.

ii. $300-400k is earmarked for cleanup. Oak Re and the bondholders have a valid perfected first lien on all of HPL’s personal and real property. After hearing, Oak Re agreed to subordinate its claim to Enron and now supports the arrangement.

iii. County orally objected b/c they don’t want to be subordinated to Enron for lack of “adequate protection” for their lien.

iv. Debtor filed on Nov. 14 and continued as DIP under §§1107 and 1108.v. Their assets are 2 acres of real property and a pre-fab building w/ equipment and a cogeneration

agreement w/ LILCO not assignable. vi. Oak Re has a valid blanket lien for its bondholders worth $4.5M and there is no equity in any of

HPL’s property. Subsequent to this lien, the County has a lien on real property for $1M. By law, the County’s lien primes the lien of Oak Re.

vii. The value of Debtor’s raw land is $275k. They have no other assets or funding for the site or for operation or expenses. Oak Re would likely abandon the equipment in liquidation.

viii. In the event of foreclosure by the County and an abandonment, the County could either sell the real property 1) subject to the cost to clean in satisfaction of the DEC, or 2) at a reduced amount based on the cost of clean up and removal of abandoned property by the debtor and secured creditor.

ix. The improvement with the borrowed funds improve the value of the County’s collateral from $0 to at least $300k = Adequately Protected. If the business fails, at least the County could foreclose in the future and realize its true value.

x. §363 allows debtor to obtain credit. They can’t find financing elsewhere. No party involved was willing to clean up the party and get an administrative lien for the cost of clean up.

xi. §364(d) debtor must present evidence of existing lien holder is adequately protected. Purpose is to safeguard the secured creditor from loss of value in its interest.

xii. §506 governs definition and treatment of secured claims. xiii. §506(a) grants security to the extent of the value of the property, which the lien is fixed. The

current value of the County’s lien is $0. The County is adequately protected with the clean up efforts. There is currently no property in the estate which is not already subject to a lien, so they can’t secure financing under §363(c)(2).

2. Cross-collateralization: Securing a pre-bankruptcy loan with new or additional collateral granted post-bankruptcy as part of a new post-bankruptcy loan. Should a creditor’s pre-petition position (often unsecured) get promoted in exchange for postpetition financing?

3. Mootness: Difficulty of a appellate court to reverse a bankruptcy court’s decision on post-petition financing because a stay of the bankruptcy court order will sink the company.

a. Party seeking a financing order appeal must apply for stay and usually post a substantial bond. Absent a stay, the lender will be protected in its security or priority even if the appellate court overturns the financing arrangement. Otherwise, the lender would wait until all appeals are final and it is too late for the debtor.

4. Shapiro v. Saybrook Mfg. (11th Cir. 1992) – 11th Circuit denies cross-collateralization but the 9th and 2nd approve of it in limited circumstances

a. Shapiro is unsecured creditor objecting to the bankruptcy court’s allowance of the Chapter 11 debtor to “cross-collateralize” their pre-petition debt w/ unencumbered property from the bankruptcy estate. Court refuses a stay and overruled the objection. Circuit concludes that it is not moot and cross-collateralization is not allowed under the Code.

b. During first day orders, debtor filed motion to use cash collateral and financing order to incur secured debt. Debtor owed Hanover about $34M secured by collateral less than $10M. Hanover agreed to lend debtors $3M for a security interest in all the debtor’s property both prior to filing and acquired after. It protected the $3M post-petition credit and secured their $34M prepetition debt. This screwed over the unsecured creditors by at least $21M.

c. Mootness under §364(e). Section 364 encourages credit granting to debtors by eliminating the risk that any lien securing the loan will be modified on appeal. §364(e) is only applicable if the challenged lien or

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priority was authorized under §364. Must determine if its moot after determining if cross-collateralization is authorized under §364.

d. §364 is not authorized as a method of postpetition financing in the code. It is also beyond the scope of the equitable powers of the court because it contradicts the priority scheme in the code. §364 applies only to future extensions of credit and not liens to secure prepetition loans. §507 fixes priority orders of claims and expenses of the estate. Granting priority over all other unsecured claims is not equitable.

5. Owner Financing – Absolute Priority Rulea. Absolute Priority Rule: General rule is that equity cannot retain value unless all the creditors have been

paid in full. Exception is that when equity provides “new value” that can’t be obtained elsewhere to finance the reorg, the court may permit equity to retain ownership if its convinced that the bargain is fair and creditors benefit.

b. Bank of America Nat’l Trust v. 203 N. LaSalle (1999): Held that real estate partnership cannot simply buy the equity in the business as part of its confirmation w/out giving others a similar opportunity to bid.

c. However, in practice creditors may allow continued operation by old equity in a small owner-operator business.

6. Financing Goods and Servicesa. Ordinary supply calls for order and delivery without a contract. Suppliers are hesitant to provide credit in

bankruptcy and they are entitled to administrative priority if they do. §§503(b), 507(a)(1).b. Critical Vendor Rule: In re Kmart Corp. (7th Cir 2004): Critical vendor doctrine to be read narrowly and

must be demonstrated. Otherwise, creditor must wait for pro rata distribution.c. Reclamation: §546(c) if the debtor receives the goods while insolvent and w/in 45 days of filing, the

seller may have a right to get the goods back if it makes a timely written demand. W/in 20 days of filing, seller gets an automatic administrative priority. §503(b)(9).

d. Reclamation does not work against a secured lender who claims the newly delivered property as inventory. §506(c) Blanket security interest trumps the supplier.

7. First Day Ordersa. 1) additional injunctive relief, 2) requirements for operating reports, 3) authorization to buy or sell outside

of the ordinary course, pay employees wages due, 4) use of cash collateral and cash management, 5) postpetition financing arrangement, and 6) employment of counsel for the debtor and a creditor committee.

Problem Set #21

Reshaping the Estate1. Avoiding powers give TIB/DIP power to undo pre-bankruptcy transactions between the debtor and certain

creditors. It also gives the TIB/DIP negotiating leverage with the defendant-creditor that may face the loss of its security interest or an order requiring it to pay back amounts it received form the debtor shortly before bankruptcy.

2. DIP is now trying to save the business on behalf of all the creditors, and employees, equity, and community. DIP now has the rights of the old debtor and the collective rights of the creditors to preserve the business’s assets. DIP will avoid transactions and challenge any secured creditor’s demand for better treatment than the unsecureds until they establish the security interest is not vulnerable to any avoiding powers.

3. The Strong Arm Clause – §544(a)a. §544 equalizes the TIB with all other creditors by giving them the rights and powers on filing of a judicial

lien creditor, an execution creditor, or for real estate, a BFP. b. §544(a)(3): Gives the TIB even greater powers than against personal property for real property and grants

them status of a Bona Fide Purchaser of real property. 4. In re Bowling (SD Ohio 2004)

a. Debtor owns real estate and the deed conveying it to him reflects he was married, but no spouse is listed on the deed as grantee. On July 12, 2001 Bowling executed a promissory note to MERS for $116k and a mortgage conveying the real estate as security for the note. Debtor’s wife did not sign the note or the mortgage. They filed Chapter 7 on Jan. 2003. Trustee filed an avoidance of the mortgage b/c it was defectively executed under Ohio law and avoidable under §§544 and/or 547.

b. Ohio law governs the validity of the mortgage. Is Mrs. Bowling’s dower interest in the real estate part of the estate? Do amendments to Ohio law eliminate the requirement that a notary must be present at the

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time of signing? If a notary signature is required, is debtor’s testimony alone enough to show that the notary was not present at execution?

i. Trustee is entitled to avoid the mortgage pursuant to strong-arm powers under §544(a)(3) with clear and convincing evidence that the mortgage was not signed and notarized. Debtor’s word can control if MERS offers no evidence rebutting.

ii. MERS also not entitled to a lien in the real estate under §550. 6th Circuit determined that when the Trustee has avoided a mortgage under the strong-arm powers, the mortgagee’s interest is preserved and becomes part of the estate w/out need for the trustee to resort to the recovery process under §550(a).

iii. * Strong-arm clause tests the strength of the lock that the secured creditor or lien holder placed on the property. If they locked it up so that it could prevail over a BFP, then the lock will hold in bankruptcy. *

1. Some circuits charge the TIB or DIP with notice of the defective mortgage and cannot claim BFP status to set aside a defective mortgage.

5. Other Propertya. §544(a)(1)-(2) TIB has only “lien creditor” status over disputes with personal propertyb. UCC §9-338: Secured parties and buyers are protected against misinformation of certain types in a filed

financing statement, while the unsecured creditors represented by the TIB are bound by a defective and misleading filing even if they actually relied on it.

c. Federal Bankruptcy law looks to state UCC law to evaluate security interests on personal property.6. Federal Tax Liens

a. §507 priorities and §523 discharge command the TIB’s position w/r/t federal tax liens. Provisions apply to all state and federal taxes owed, whether the tax claim is secured or not.

b. Federal tax lien arises when an assessment is made, and attaches to all the taxpayer’s property and rights to property. Until lien is filed, it is like an unfiled security interest: good against the debtor, but not against most other interested parties, including the TIB. Before filing, strong-arm provisions permit the TIB to exercise the rights of a judgment lien creditor or BFP of real estate on the date of filing, which gives the TIB priority over the unfiled tax lien. 26 USC §6323. After the tax lien is filed, the TIB must recognize the lien in bankruptcy and treat the gov’t as it does any other perfected secured party.

Problem Set #22

Preferences: The General Rules1. Allow the TIB to review activities of the debtor as it neared bankruptcy to determine if creditors received

preferential treatment before filing. 2. §547 Determines preferences3. In re Pysz (Bankr. DNH 2008)

a. Defendant holds a judicial lien for $43k from a post-judgment attachment in County Court on Jan. 18, 2007. It was recorded on Jan. 19. Debtor owns 50% of the property and his mother owns the other half. On April 5, 2007 the debtor filed Chapter 13 and listed the property’s FMV at $300k. Defendant offered another value at $443k as of April 5.

b. Π move for SJ to avoid the ∆’s judicial lien as a preference under §547(b). Trustee has the burden of proving the avoidability §547(b) and (g).

i. It was a transfer of the debtor’s interest in propertyii. It was for the benefit of a creditor.

iii. It was the subject lien for or on account of an antecedent debtiv. It occurred during the 90 day preference period

1. ∆ got and recorded the attachment on Jan 18 and 19, and debtor filed on April 5.v. Was the debtor insolvent at the time of the attachment?

1. Insolvency under §547(b)(3): Debt > assets at FMV excluding property that may be exempt under §522. Debtor is presumed insolvent in the 90-day period. §547(f). Creditor bears the burden in overcoming the presumption.

vi. Would the ∆ “receive more” w/ the judicial lien than he would w/out the lien in a Chapter 7?1. §547(b)(5): Preference if showing that the judicial lien enables creditor to receive more

than such creditor would receive if 1) case under Chapter 7, 2) transfer had not been

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made; and 3) such creditor received payment of such debt to the extent provided by this title.

2. Any unsecured creditor where distribution is less than 100% fails to meet this analysis. 4. Chase Manhattan Mtg. Corp v. Shapiro (6th Cir. 2008) – Avoidance and Grace Period. Now 30 days under

Codea. Debtor filed for Chapter 7 a short time after the bank refinanced the mortgage. Trustee discovered it had

been recorded w/in 90 days of filing, and 73 days after the refinancing had taken place. Can Chase’s new mortgage lien be avoided under §547?

b. The policy behind the law is to equalize all creditors and prevent “secret liens” on the debtor’s collateral which are not perfected until just before debtor’s filing.

c. §547(b)(2) trustee must show that transfer was made “for or on account of an antecedent debt owed by the debtor before such transfer was made.” Antecedent = incurred before the transfer in question.

d. A borrower who later becomes a debtor incurs an antecedent debt and, at the time of recording the mortgage, a transfer occurs for or on account of the debt that could be challenged as preferential by the trustee.

e. §547(e) grace period for lenders in perfecting a security interest. So long as mortgage is recorded w/in 10 days, the associate mortgage will not be considered antecedent. If perfection occurs more than 10 days after the transfer takes effect, the transfer occurs at the time of perfection, and the debt will be antecedent.

i. On the facts, debtor incurred obligation when Chase disbursed on October 6, 2003. New mortgage was perfected “when a BFP of the property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee.” Applicable law is state law of Michigan where perfection occurs upon recording. A BFP could have bought the property from the debtor up until Chase recorded. New mortgage was recorded on Dec 17, 2003, which was 72 days after loan proceeds were disbursed – well outside the 10-day grace period. Therefore, the transfer occurred when it was perfected on Dec. 17, 2003 and made on account of an antecedent debt.

ii. Chase could have protected itself by perfecting w/in 10 days of the Debtor’s granting it on October 6, 2003. If so, then the new mortgage wouldn’t have been on account of an antecedent debt, but it waited 72 days.

f. Earmarking Doctrine – Transfer of an “interest of the Debtor in Property”i. Judicially crafted limitation on §547(b): Exception to the general rule that the use of borrowed

funds to discharge the debt constitutes a transfer of property of the debtor: where the borrowed funds have been specifically earmarked by the lender for payment to a designated creditor, there is held to be no transfer of property of the debtor even if the funds pass through the debtor’s hands in getting to the selected creditor.

ii. Must be that 1) the agreement is b/t a new creditor and the debtor for the payment of a specific antecedent debt; 2) the agreement is performed according to its terms; and 3) the transaction according to the agreement does not result in a diminution of the debtor’s estate.

1. Chase is not a new creditor! They fail. Even if they were, the earmarking doctrine does not shield it from preference. The majority rule is that late-perfecting refinancers are not entitled to using the rule.

2. Minority of courts use a unitary-transaction theory, but this one adopts a 2 part analysis. g. In re Denochick (WD Pa. 2003) transferees and others who benefit under the “to of for the benefit

of a creditor” §547(b)(2)i. Appellants agreed to guarantee a debt consolidation loan from NBOC to Sandra’s sister, Susan

Denochick. Debtor made $1,713 in loan payments to NBOC in the year prior to filing. Appellants received none of this money, but the payments had the indirect effect of reducing their exposure on the guarantee given to NBOC. Trustee sought to avoid it as a preference and recover from appellants the money that Denochick paid to NBOC. Judge ruled the appellants were creditors and failed to establish the “ordinary course of business” exception. The appellants never testified, and the trustee could avoid the $1,713 and recover that from appellants. Creditor includes the guarantor of a debt. Debtor’s payments to NBOC benefited them, to the detriment of her other creditors.

h. §547(b)(4)(B) increases preference period to 1 year for insiders!

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i. §550(c) and 547(i) insulate the non-insider creditor from the effects of an insider benefit for transfers made more than 90 days before filing. It still doesn’t help Denochick’s sister who guaranteed the loan, only the bank that received the payments.

ii. Fully secured creditor is paid w/in 90 days (and other requirements of §547(b) are satisfied) there would be no voidable preference as to the bank. But if the senior is sued by the TIB claiming that the payment benefited a second secured creditor w/ a junior position in the same collateral, there is a problem. Trustee admits that the payment was not a preference to the senior creditor, b/c that creditor was fully secured, but the junior creditor indirectly benefited b/c its security interest was “promoted” by the transfer. The transfer is recoverable from the “initial transferee”- the senior creditor. So long as the question took place w/in 90 day voidable preference period, the bank would seem to have received a voidable preference, even under the amendments.

5. Voidable Preferences at State Lawa. UFTA §5(b) Fraudulent conveyance if it is a transfer or payment of an antecedent debt by an insolvent

debtor to an insider who had reasonable cause to know of the insolvency. Insolvent debtor’s repayment of debt to insider can be set aside by other creditors w/out an involuntary bankruptcy. Also extends to insider payments to organizations that are immune from involuntary bankruptcy filings, including charities.

b. UFTA has 4 year SOL for REV case and a 1 year SOL for actual intent cases, while Bankruptcy Code reaches back only 1 year to review transfers to insiders

c. UFTA §5(b) v. §547(b): UFTA distinguishes b/t creditors at the time of transfer with a right to set aside the transfer and those who became creditors after the transfer and have no right to set aside. UFTA requires the insider to have had “reasonable casue to believe that the debtor was insolvent.” Code draws no distinction.

d. Debtor may have two kinds of voidable preference actions--§547(b) and UFTA §5(b) in states that have adopted it.

Problem Set #23

1. The Exceptionsa. 9 Exceptions to the rules of §547(b). Those transactions that can be avoided under §547(b) can be saved

under §547(c). i. Contemporaneous Exchange

1. §547(c)(1)(A&B) Seller or lender should be able to deal w/ a buyer or borrower w/out worrying about whether the order in which the transaction took place could create a voidable preference.

2. Ex. Seller delivers goods and the buyer hands over cashii. Ordinary Course Payments

1. §547(c)(2) Transfer in payment of a debt incurred by debtor in ordinary course of the debtor and transferee and transfer was 1) made in ordinary course; or 2) made according to ordinary business terms

iii. Purchase Money1. §547(c)(3) Purchase money creditors are protected in bankruptcy the same as under the

UCC. PMSI creditors who file w/in 30 days are given full protection against a voidable preference. UCC law provides only 20 days.

iv. “New Value” Exception1. §547(c)(4)2. Identify a payment (or other transfer) that is preferential under §547(b)3. See if the avoidable amount of the preference can be reduced by the amount of a later-

advanced new value that qualifies under (c)(4).a. Ex. Creditor received a $1,000 preferential payment, and then made a $700

delivery of new supplies on credit, when the debtor filed a preference of $1000 would exist. Under (c)(4), the $1,000 preference should be reduced by the $700 new value, leaving only $300 to be avoided.

4. Test new value for qualification under (c)(4) by determining whether under (C)(4)(A) and (B) it was accompanied by a payment (or other transfer or was secured), which payment was itself unavoidable.

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a. Ex. Creditor received a $1,000 preferential payment, and then delivered $700 of new supplies that were paid for in cash on delivery. When debtor filed the new value would not qualify since it was accompanied by the full payment of $700 at delivery. The second payment was not avoidable as a preference b/c it was made at the moment the debt was created and therefore was not paid on an antecedent debt under §547(b). Since it is unavoidable, it disqualifies the $700 in new value under (C)(4)(B).

5. Work forward chronologically from the 90th day to Bankruptcy Day, and id each payment (or transfer) that qualifies as preferential under §547. After they are located, work backward from each grant of new value to determine whether it is subsequent to a given preference w/ the same creditor having advanced unsecured credit to the debtor. Any advance of unsecured credit after the preference will trigger (c)(4), but the dollars of each advance can be counted only once.

a. Ex. 2 preferences of $1,000 each followed by an extension of $1,500 in unsecured credit will permit the creditor to keep $1500 of the two preferences, and not the full $2000.

v. “Floating Lien” – inventory and account financing1. §547(c)(65)

vi. §547(c)(6) – permits statutory liens that violate the voidable preference provisions to survive if they are otherwise unavoidable under §545

vii. §547(c)(7) – alimony and support are not recoverable as voidable preferencesviii. §547(c)(8) – individual debtor w/ primarily consumer debts aggregate <$600

ix. §547(c)(9) – debts not primarily consumer debts, aggregate <$5,850

b. In re Stewart (Bankr. WD Ark. 2002)i. Debtor purchased cattle from Barry by check for $17k dated Jan. 29, 2000. Check returned for

NSF on Feb, 12 200, Debtor tendered a cashier’s check drawn on Bank. They were purchased w/ money of the debtor. They were made while debtor was insolvent and the payments were made w/in 90 days preceding filing. The payments made by cashier’s check enabled Barry to receive more than it would have in Chapter 7, if the payments had not been made, and if Barry received payment of its debts as allowed under the code. Debtor’s mom paid $15k to Barry toward a debt owing Barry. Bill Younger returned an NSF check prior to filing to the mom too.

1. Debts were incurred 2 weeks before the delivery of the cashier’s checks and were antecedent. Trustee met all other prongs for preference of the two cashier’s checks. Creditor can avoid if it has an exemption under §547(c).

ii. Contemporaneous Exchange for New Value Exception1. Intended by the debtor and creditor to be a contemporaneous exchange for new value

given to the debtor, AND2. Was in fact a substantially contemporaneous exchange?

a. New value: money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law…, but does not include an obligation substituted for an existing obligation.

b. UCC determines that title to the cattle passed upon delivery of the cattle on the day of the respective sales.

c. Transfer by check is considered to be “intended to be contemporaneous,” and if presented in ordinary course (UCC says 30 days) it will in fact be substantially contemporaneous. Its contemporaneous only if the check was presented and paid w/in a reasonable time.

d. A bounced check is no longer contemporaneous. iii. Ordinary Course of Business Exception

1. Creditor must prove that the transfer was: 1) in payment of a debt incurred by debtor in ordinary course of the debtor and transferee and transfer was A) made in ordinary course of debtor and transferee; or B) made according to ordinary business terms. §547(c)(2)

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a. Made in the ordinary course: 1) length of time engaged in transaction at issue, 2) amount or form of tender differed, 3) unusual collection or payment activity, and 4) creditor took advantage of debtor’s financial condition.

b. They only bounced 1 other check in the year prior to filing. Not ordinary course and not ordinary in the industry.

c. In re Shreves (Bankr. ND W. Va. 2001)i. 1) Purchase of vehicle by David and Linda Shreves (debtor) financed by United Bank, 2)

Subsequent refinancing b/t debtors and Valley Bank, and 3) perfection of Valley’s interest during the preference period.

ii. Before April 3, 2000 debtors got loan to buy car and gave United a security interest. On April 3, 2000, before United perfected its interest, debtors refinanced through Valley. Valley wrote a check on April 5,2000 to United. United recorded on April 21, 2001. On May 1, 2000, United released this lien. DMV recorded Valley’s lien on August 11, 2000. From May 1, 2000 until August 11, 2000 no lien showed on the title. On October 18, 2000 the debtors filed for Chapter 7. Trustee filed to set aside Valley’s security interest.

iii. Valley defends under:1. “Substantially contemporaneous exchange” exception §547(c)(1)(A)&(B)

a. Intended to be contemporaneous and was in fact substantially contemporaneous exchange.

b. Perfection occurred more than 4 months after the security agreement. NOT in fact SCE

c. §547(c)(3) for enabling loans (PMSI) has 30-day grace period now, but was 10 days at the time.

2. Earmarking Doctrinea. Valley claims it lent money to the debtors upon refinancing specifically for the

purpose of paying off United, and that consequently, Valley steps into United’s secured position.

b. Doctrine is applicable to refinancing to determine whether debtor’s payment of an existing creditor w/ funds borrowed from a new creditor constitutes a preference- whether the payment is a transfer of the debtor’s interest in property to pay the debt owed to the first creditor. However, the transfer at issue is not the transfer of funds to the initial creditor, but the transfer that occurred when the new creditor perfected its lien more than 10 (30) days after the parties’ loan agreement.

iv. Valley could have protected itself by getting United to transfer its security interest to Valley at time of payment. There would be no transfer “of an interest of the debtor in property” b/c the transfer would’ve been United’s interest in the property.

d. The Purchase Money Exceptioni. §547(c)(3): Purchase-money creditors will receive special protection in bankruptcy, just as they

do under the UCC scheme. Grants PMSI lender 30 days to file for full protection against a voidable preference. UCC only grants 20 day.

e. New Value Exceptioni. §547(c)(4): Identiyf a payment (or other transfer) that is preferential under §547(b). See if the

avoidable amount of the preference can be reduce by the amount of later-advanced new value that qualifies under (c)(4) (“to the extent that”).

1. Ex.: Creditor received a $1k preferential payment, then made a $700 delivery of new supplies on credit, when the debtor filed a preference of $1k would exist. Under (c)(4), the $1k preference should be reduced by $700 new value, leaving only $300 to be avoided.

ii. Test new value for qualification under (c)(4) by determining whether under (c)(4)(A) and (B) it was accompanied by a payment (or other transfer or was secured), which payment was itself unavoidable.

1. Ex.: Creditor received a $1k preferential payment, then made a $700 delivery of new supplies on credit that were paid for in cash on delivery. When the debtor filed the new value would not qualify since it was accompanied by the full $700 payment. Second payment was not avoidable as a preference b/c it was made at the moment the debt was

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created and therefore was not paid on an antecedent debt under §547(b), since the payment is unavoidable, it disqualifies the $700 of new valued under (c)(4)(B).

iii. Stat by working forward chronologically from the 90th day preceding Bankruptyc. Identify each payment (or transfer) that qualifies as preferential under §547(b). After a preference is located, work backward from each grant of new value to determine whether it is subsequent to a given preference w/ the same creditor having advanced unsecured credit to the debtor. Any advance of unsecured credit after the preference will work to trigger §547(c)(4), but the dollars of each advance can be conted only once.

1. Ex.: 2 preferences of $1k each, followed by an extension of $1500 in unsecured credit, will permit the creditor to keep $1500 of the two preferences, not the full $2k.

f. The Other Exceptionsi. §547(c)(6): permits statutory liens that violated the voidable preference provisions to survive if

they are otherwise unavoidable under §545. Deal w/ statutory liens under §545.ii. §547(c)(7): Alimony and support payments, although made to an unsecured creditor, will not be

recoverable as voidable preferences even if made during the preference period.iii. §547(c)(8): case filed by an individual debtor whose debts are primarily consumer debts, the

aggregate value of all property that constitutes or is affected by such transfer is less than $600iv. §547(c)(9): if, in a case filed by a debtor whose debts are not primarily consumer debts, the

aggregate value of all property that constitutes or is affected by such transfer is less than $5,000.v. Sovereign Immunity: No longer granted as a result of Central Va. Comm. College v. Katz (2006).

Problem Set #24

1. More on the Exceptions: The “Floating Lien”a. Inventory and account receivables: Can make argument for floating lien that if the creditor is under-secured

on 90th day, but over-secured on bankruptcy day, the excess should be preferences that are avoidable. b. In re QMECT, INC (2007)

i. Debtor filed Chap 11 on Feb. 27, 2004. He generated accounts receivable from his business, and had chemicals that qualified as inventory. On Dec. 27, 2003, D had 2 secured creditors. Senior secured was Comerica and junior secured was Burlingame. Both held security in virtually all assets, including accounts receivable and inventory. Burlingame was always under-secured during preference period. Some of the accounts receivable B held generated cash. They then were spent in the continued biz ops, and new accounts receivable were generated.

ii. B had an “after-acquired property clause” in their security agreement, and automatically acquired liens in the new AR generated during the preference period.

iii. On petition date, value of B’s security interest in D’s AR and Inventory then in existence was greater than the value of its security interest in the AR and inventory at the beginning of the preference period. On petition date, D was subject to unpaid wages during preference period and unpaid vendor claims for goods provided.

iv. B argues §547(c)(5): “improvement in position” defense. 1. Value of undersecured c’s collateral in relationship to its debt on the petition date is

compared w/ the value of its collateral in relation to its debt at the beginning of the preference period. Transfers during the preference period are only avoidable to the extent that its under-secured position on the earlier date is greater than its under-secured position on the later date.

2. Trustee showed that value of D’s AR and inventory increased by $156k during the period. However, B’s debt increased by at least $165k. B argued that its position had not improved b/c its debt had increased during the preference period, due to the accrual of interest and late fees, even more than the value of its collateral had increased.

3. §547(c)(5) refers to “debt.” Debt is liability on a claim. Claim is defined broadly and includes pre-petition interest, late fees, and attorneys’ fees.

v. 90th day, i(1) (insufficiency) = Debt – Value of Collateralvi. Filing day, i(2) = Debt – Value of Collateral

vii. If, and only if, i(1) < i(2), then preference = i(2) – i(1).c. In re Nivens (Bankr. ND Tex. 1982)

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i. 2 farmers, dad and son, filed for Chapter 7. They were to receive deficiency payments of $36k and disaster payments of $1k from the Dept. of Agriculture. First State Bank, SBA, and the trustee competing for the payments in possession of the trustee.

ii. Right to the checks derived from rights in the crop, priority checks goes to the one who has priority in the crop. Bank had a valid security interest in the crop, but the TIB argued the bank benefited from an improvement in position from the increase in the crop’s value during the 90 days preceding bankruptcy, so that part of its interest in the crop and support checks was voidable under §547(b) and §547(c)(5).

iii. Crops are inventory under §547(a)(1). Under §547(c)(5) a preference will not result to the holder of a perfected security interest in inventory, including crops, unless and to the extent that the holder improves his position during the 90 day period before filing.

iv. There is only an increase in value of the inventory due to market fluctuations, without an accompanying increase in volume of inventory, there is no avoidable preference.

v. No improvement in position and therefore no voidable preferenced. Farmers labor belongs to the farmers and not the estate following bankruptcye. IF farmers work during Chapter 7, they are compensated out of the assets of estate.f. If the farmers used cash to buy fertilizer and pesticide, the farmers executed a transfer to enhance the value of

the crop. If the enhanced value of the crop goes exclusively to the creditor, then a preferential transfer on behalf of that creditor has occurred (value of cash transferred to the secured creditor).

g. Increase in crop value that is attributable to transfers of d’s cash during preference period belongs to all the creditors on pro rata basis. So to should after bankruptcy, estate money used to pay farmers for their labor, the increases attributable to their work should be used for the benefit of all the creditors and not the secured creditor alone.

2. Setoff Preferencesa. §533(b): empowers the trustee to recover from an offsetting creditor the amount by which the credito’s setoff

position improved during the 90 days before bankruptcy. Applies only if the creditor offsets before bankruptcy. W/ permission of the court under §362 is not required to surrender any improvement in setoff position obtained during the 90 day period.

b. In re Wild Bills, Inc. (Bankr. D. Conn. 1997)i. Debtor filed Chapter 11 on April 23, 1990 and converted to 7 on May 12, 1992. Union Trust made

loans pre-petition to debtor, which were outstanding in 1990. 90 days prior to filing the debtor’s accounts had a balance of $211k. Later that day $130k was deposited into debtor’s account. Debtor owed $1.4M on that date. 88 days before filing Union Trust met with debtor and decided to set-off. The loans were always undersecured.

ii. Improvement in Position Calculation: Jan 25, 1990: Date of Setoff – Debts owed was $1.43M and Union setoff $339k. Insufficiency on date was $1.09M. On Jan 23, 1990 – 90th day – Debts owed was $1.433M. Amount in accounts was $349k. Insufficiency was $1.083M. Insufficiency was greater on date of setoff, so Union Trust did not improve its position.

Problem Set #25

1. Executory Contractsa. The Economic Decision

i. Pre-bankruptcy contracts are good bargains, while others may have turned out to be losers. Some good bargains may be worth more to someone else than they are to D.

ii. §365 deals with the DIP’s options.Problem Set #26

b. The Statutei. §541(a) brings all property of the debtor to the estate

ii. Once K is in the estate, then §365 deals with the rules of Rejection, Assumption, and Assignment.iii. K may not be assumed if it was terminated prior to bankruptcy under nonbankruptcy law.

c. In re Krystal Cadillac-Oldsmobile-GMC Truck (3d Cir. 1998)i. Debtor owned and operated a GMC dealership in Pa. They operated the dealership pursuant to a

GMC agreement in effect on Nov 1, 1990. In Oct. 1991, GMAC withdrew its LOC financing. March 6, 1992, GM notified debtor that it was in breach of the agreement. GM gave notice it would

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terminate on July 13, 1993 and extended until Aug. 12, 1993. On Aug. 11, 1993, debtor filed an appeal with the state board on the merits of termination. On Sept. 8, 1994 debtor filed Chapter 11. Nineteen days later the state board entered an order allowing GM to terminate their agreement.

ii. Trustee motioned to sell the assets, including the GM franchise, free and clear of liens and encumbrances. GM objected that it was not an asset of the estate.

iii. If the franchise agreement was still in force on date debtor filed, the agreement, by statute, is an asset of the estate.

iv. The contract said that GM may terminate upon written notice 60-days following dealer’s receipt of the notice. PA law requires a minimum of 60-days advance notice of the termination. Included in PA law is that no such termination or failure to renew is effective until final determination by the Board.

v. Therefore, the agreement was in force on the date of filing on Sept. 8. PA court violated the stay of §362(a) and their order was not binding on the bankruptcy court. Trustee may cure any defects, and to assume and assign the franchise for benefit of all creditors.

d. In re Jamesway Corp. (Bankr. SDNY 1996)i. Debtor and affiliates filed on Oct. 18, 1995 under Chapter 11. Debtor had agreement w/ Mass Mutual

to lease certain retail space in the Newberry Commons. Lease had provision that if tenant assigns the lease, then during the first 20 years, the tenant shall pay LL 50% of the “profits” received by the tenant from the assignee or sublessee. Thereafter, Tenant shall pay LL 60% of such profits.

ii. On Feb. 9, 1996, debtor moved under §365 to assume and assign the lease to Rite Aid for $100k and Mass Mutual objected. Court allowed the motion.

iii. §365(a) authorizes DIP to assume or reject, subject to court approval, any executory K or unexpired lease of the debtor. DIP may assign an unexpired lease of the debtor only if it assumes the lease in accordance w/ §365(a), and provides adequate assurance of future performance by the assignee, whether or not there has been a default under the lease. See §365(f)(2).

iv. Debtor argues the lease provision is void and unenforceable under §365(f)(1) b/c they limit its ability to realize the full economic value of the leases for the benefit of all unsecureds.

v. §365(f)(1) permits assignment of an unexpired lease despite a clause in the lease prohibiting, conditioning, or restricting the assignment.

vi. (f)(1) deals with prohibiting, restricting, or conditioning assignment while (f)(3) deals w/ terminating or modifying the terms of a lease b/c it has been assumed or assigned.

vii. §365(f)(1) invalidates provisions restricting, conditioning, or prohibiting debtor’s right to assign the subject lease. Conditioning right to assign on payment of “profit” realized are routinely invalidated under (f)(1). The clause limits debtor’s ability to realize the intrinsic value of the lease.

viii. Profit sharing provisions of the lease are unenforceable! e. §365(g) w/ §502(g) allows rejection damages for any contract to be calculated as a pre-bankruptcy unsecured

claim, regardless of when the rejection occurs. §502(b)(6) caps landlords damage claims following rejection, while landlord remains subject to the duty under state law to mitigate damages by re-leasing the premises. The cap and releasing obligations apply to the allowed amount of the claim, and then paid in tiny bankruptcy dollars.

f. §365(c)(1) forbids assumption of a K that could not have been assigned by the debtor under nonbankruptcy law.

i. Ex.: personal services contract. Actor cannot assign rights to movie role under state law, so in bankruptcy it forbids the assumption and performance of the contract, at least in Chapter 7 context.

Problem Set #27

2. Extra-statutory Constraints on the Trustee’s Right to Assume or Rejecta. §541(a) debtor’s pre-bankruptcy k rights come into the estate, like all other propertyb. §541(c)(1) invalidates anti-assignment and bankruptcy clauses that would otherwise prevent those rights from

passing to the estatec. §502(b) and (g): Debtor’s obligations to other party to the K become claims against the estate. d. §365(a): allows trustee to assume or reject a K and its attendant bundles of rights and obligations.e. §365 also imposes certain constraints on trustee’s right to assume or reject a pre-bankruptcy K.

i. Trustee may not assume a K if its assignment is forbidden under applicable nonbankruptcy law. §365(c)(1)

ii. Trustee must cure or arrange to cure most defaults as a condition of assumption. §365(b)

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iii. Trustee or its assignee (in the case of assumption and assignment under §365(f)) must provide “adequate assurance of future performance.” §365(b)(1)(C), (f)(2)(B).

iv. Contract must be EXECUTORY or else it can’t be assumed/assigned1. Ex.: Pre-bankruptcy K where debtor agreed to sell 100 bushels for $1/bushel. Neither party

performed and no defaults. §365 permits assumption/rejection. If market for onions is up, trustee rejects, sell for higher price and pay K damages in tiny bankruptcy dollars.

v. Countryman Test for executoriness: “A contract under which the obligation of both the bankrupt and the counterparty to the K are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.

f. In re Riodizio, Inc (Bankr. SDNY 1997)i. Debtor seeks to reject a stock option agreement and shareholders agreement, while LLC, the

optionee, opposes. Debtor filed Chapter 11 and owns and operates a restaurant. Debtor and 2 shareholders entered agreements with LLC to secure financing and equipment that led to the debtor granting option to LLC.

ii. Debtor cannot cherry pick and reject unfavorable provisions contained in an integrated agreement for loan and lease.

iii. Corporation granted the holder of warrant right to buy all or part of 93 shares of the business for $1/share up to 25 years. For only $93, LLC could own 60% of the shares by exercising its warrant.

iv. Shareholder agreement required 2 LLC members on 4 person board, and a 2/3 share holder vote to take action. By exercising the warrant, LLC can veto all action. Also right of first refusal for LLC to participate in new restaurant venture.

1. Where such a K performance remains due on only one side, the K is non-executory, and hence neither assumable nor rejectable. A breach is material if it permits either party to sue for breach b/c of the counterparties failure to perform > Executory

2. Av. Alternative to the Countryman Test – Functional Approach – Benefits that assumption or rejection

would produce for the estate. However, §365 requires executoriness.vi. Contract is executory if each side must render performance, on account of an existing legal duty or to

fulfill a condition, to obtain the benefit of the counterparty’s performance. vii. Warrant: It is executory – each party must perform under it in order to obtain the benefits under the

contingent bilateral K of sale. To sell the shares and receive payment, debtor must keep it open. To make payment and acquire the shares, LLC must exercise the option. Rejection benefits the estate w/out any significant downside. $93 is so de minimis that the chance to sell the shares outweighs any benefit in performing.

viii. Covenants against competition: debtor franchisee or employee files and rejects the k, claiming the rejection frees the debtor form the covenant.

ix. License K: debtor-inventor files and rejects the IP license it granted to a licensee, claiming the rejection gives it the right to revoke the license and grant it to another.

x. K for sale of Real Estate: seller files and claims its rejection of the sale K leaves it free to sell the land to the highest bidder.

1. §365(h)-(j), (n) solves the IP and real estate issuesProblem Set #28

1. Fraudulent Conveyance and Other State Avoidance Laws in Bankruptcya. §544(b) preserves state law rights but gives them to the TIB or DIP acting as TIB to set aside fraudulent

conveyances on behalf of all the creditors in an action, making state fraudulent conveyance law an important part of TIB’s tools for reshaping estate.

b. TIB’s rights are derivative so there must be an actual unsecured creditor (creditor w/ an unsecured claim under §502) who could have brought the avoidance action under state law. TIB steps into the creditor’s shoes.

c. §548 creates a federal fraudulent conveyance law to ensure a baseline for all creditors regardless of the state law.

d. §550 provides the remedies for avoidance actions under all the avoiding powers, including §544(b) and 548.e. Transfers among Related Entitites

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i. Some transactions are deemed fraudulent b/c they are made w/ an intent to hinder, dleay, or defraud creditors, some are fraudulent solely because they are transfers 1) when the debtor is insolvent, 2) for a consideration less than the REV. UFTA §§ 4,5; §548(a)(1).

2. In re Image Worldwide, LTD (7th Cir. 1998)a. Worldwide guaranteed loans paid to an affiliate, Image Marketing LTD. The same person owned both, but

only marketing received funds from the loan. WW trustee filed suit to avoid the guarantees as a fraudulent transfer, that they made WW insolvent, and that WW did not receive REV in exchange.

b. Dick was sole shareholder and officer of IM. IM leased space from FCL. In 1992, IM got LOC from Parkway secured by a first lien on all its assets. Dick then created IW and leased the same space from FCL. Dick liquidated IM in 1994. Parkway let Dick use money from the liquidation to pay down IM’s debts. Parkway demanded IW guarantee IM’s $300k in debt. Parkway lent $200k to Dick to pay down its debt owed to FCL.

c. IW paid down nearly $100k in principal and interest on the loan. The guarantees made IW insolvent. FCL then filed an involuntary Chapter 7 on IW. Parkway got a lift of the stay and collected IW’s account in total of $444k. Trustee moved under §544(b) to challenge the transfers in violation of UFTA, b/c IW never received REV for its guarantees to Parkway.

d. §548 has a 1 year SOL, but under §544(b) trustee can avoid any transaction that would be voidable by any actual unsecured creditor under state law.

e. Did IW, as guarantor, receive REV for its guarantee when the direct benefits were received by IM? f. They were intercorporate guarantees.

i. Upstream: Subsidiary guarantees debt of parentii. Downstream: Parent guarantees debt of subsidiary

iii. Cross Stream: Corporation guarantees debt of an affiliate g. Cross stream are most abused and scrutinized b/c the guarantor has not received REV for the guarantee, b/c

from the standpoint of the unsecured creditor, the guarantor had received no consideration for the guarantee. h. Did the guarantor receive indirect benefits from the guarantee if there has been an indirect benefit. Must be

“fairly concrete.” i. IW may have received an indirect benefit. FCL allowed IM and FW to operate their business on their

premise, and were their most important supplier. IW was able to stay afloat for 17 months after guaranteeing the loan.

j. IW paid off IM’s debts, but it bankrupted itself in the process. Therefore, NO REV for the guarantees.k. §548 is now a 2 year reach back period.

3. In re Video Depot (9th Cir. 1997)a. Trustee of debtor brings fruaudlent conveyance action to recover proceeds of cashier’s check purchased by

debtor and paid to casino to settle gambling debts incurred by the debtor’s principal. b. Debtor purchased check to the casino for $65k w/ the name of debtor on it. He gave this check and a personal

check for $10k to the casino. Debtor then filed. Both parties stipulated it was fraudulent under §548, but question whether Casino was an initial transferee under §550(a) or a subsequent transferee lacking good faith knowledge of the voidability of the transfer under 550(b).

c. Trustee has absolute right to recover from initial transferee.d. Trustee may not recover from subsequent transferee if the subsequent transferee accepted the transfer for

value, in good faith, w/out knowledge of the transfer’s voidability. §550(b)e. Initial transferee has the “burden of inquiry and the risk the conveyance is a fraud”f. Is the debtor’s principal the initial transferee of corporate funds used to satisfy personal obligation? Split in

circuits. g. Principal’s control over the business does not compel a finding that he had dominion and control over the

funds transferred to the casino. Principal was a courier and not a transferee.h. Casino was the initial transferee under §550(a)

4. The Extraordinary Powers of the TIBa. In re Bakersfield Westar (9th Cir. BAP 1998)

i. Debtor was Cal. Corporation owned w/ Saunders and his wife. Saunders filed for S Corporation treatment to begin in 1992. In 1994 he moved for C Corporation. Saunders filed Chapter 7 on Feb. 14, 1994. Trustee in the Saunders’ case filed a voluntary Chapter 7 petition on behalf of Bakersfield (debtor) on March 4. Trustee in the Bakersfield case filed under §544(b) and 548 and Cal Code §3439 to avoid the revocation as a fraudulent transfer.

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ii. Trustee moved under §548(a)(1) to avoid the revocation as a fraudulent transfer b/c the debtor’s right to make or revoke its Subchapter S election was “property,” and the revocation was a “transfer” under §548. Trustee argued that election of S corporation allowed debtor to incur obligations of the estate and its creditors, rather than the Saunders.

iii. Also badges of fraud for the election and revocation.iv. Ability to not pay taxes has a value to the debtor-corporation here. It passed through $2.5M in

taxable losses and the debtor’s estate will sustain $400k in capital gains taxes from the sale of its assets as a result of the revocation of that status.

v. Debtor’s prepetition right to make or revoke its Subchapter S status is “property” or an “interest of the debtor in property”!

vi. Trustee in this case has the power to avoid the debtor’s revocation of its subchapter S status b/c it was a “transfer.”

b. BFP v. Resolution Trust Corp. (1994): Held that “reasonably equivalent value” should be conclusively deemed to have been given at any judicial foreclosure sale that was non-collusive and properly conducted under state law.

5. Aiding and Abettinga. TIB sues on behalf of the debtor corporation and courts routinely deny recovery to the TIB for fraud by

corporate officers. Officers of the corporation and its professionals were involved in fraudulent conduct and professionals failed to report to the Board. Corporation and not just third parties suffered damage from the fraud. Corporation’s claims were barred by in pari delicto, b/c the corporation had no claim, neither did the TIB as successor.

Problem Set #30

1. Equitable Subordinationa. §510(c)b. In re Carolee’s Combine (Bankr. ND Ga. 1980)

i. Debtor raised $300k+ by promising persons and entities who advanced money that on the first day of the 2-day auction the amount advanced would be returned w/ 10% interest and a bonus of 10% for a finder’s fee. This transferred risk of loss and insolvency to the general creditors. On auction day they had $363k debt to investors, $35k to First National Bank, and $268k to trade creditors, laborers, etc. Also, at the end of auction, they owed $184k to consignors for proceeds from sales. Totaling $825k in outstanding debt. Proceeds from auction were $624k w/ assets of $32k, left a liability of $195k.

ii. Trustee argues that the return on investments was equity and it was not entitled to be paid in priority to general creditors and should be returned for distribution. Also trustee argues it should be subordinated to claims of unsecured Creditors. Court agrees.

iii. Power to subordinate the claim of one creditor to claims of other creditors “where subordination is necessary to prevent the consummation of conduct which is inequitable.”

iv. Loans may be treated as capital contributions and the rights subordinated. v. Elements: 1) The subordinated creditor must have engaged in some type of inequitable conduct, 2)

such conduct must have resulted in injury to other creditors of the bankrupt or conferred an unfair advantage on the subordinated creditor; and 3) equitable subordination must not be inconsistent w/ the provisions of the Bankrutpcy Act.

c. In re SI Restructuring (2008)i. Wooley bro’s made loans to Schlotzsky’s Inc. They were also officers and directors and largest

shareholders of SI. They lent $1M in April 2003 and $2.5M in Nov. Wooley’s made the April loan after financing fell through and secured it w/ company assets. The November loan was lent by IBC after the IBC denied lending it directly to SI. The Board reviewed both loans. In 2004 the brothers were removed as officers and resigned as directors. SI filed in August 2004 for Chapter 11.

ii. Bros filed secured claims for the April and Nov. loans. Bankruptyc Court subordinated their claims to unsecured. They appealed.

iii. 1) The subordinated creditor must have engaged in some type of inequitable conduct, 2) such conduct must have resulted in injury to other creditors of the bankrupt or conferred an unfair advantage on the subordinated creditor, 3) equitable subordination must not be inconsistent w/ the provisions of the Bankrutpcy Act, and 4) A Claim should be subordinated only to the extent necessary to offset the harm which the debtor or its creditors have suffered as a result of the inequitable conduct.

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iv. The loan proceeds paid off current unsecured creditors, and as a class, were not harmed. v. No finding that the bros breached any obligation to the company or its creditors or that they engaged

in inequitable conduct of any kind with the April loan. Further, no findings that their transactions with the debtor caused harm to the debtor or the unsecured creditors with the November loan.

vi. Equitable Subordination is rarely litigated, but is often used as a negotiating chip with insiders and with creditors who have possibly overstepped their role.

d. Contractual Subordinationi. §510(a): One party may agree that it will take satisfaction of its debt only after another creditor is

satisfied on its debt. Popular where the debtor and an earlier creditor want a new creditor to come aboard with new cash. If it is effective under state law, then its effective in bankruptcy.

e. Equitable Subordination and State Lawi. Deepening Insolvency

ii. Lender Liability: debtor claims the lender took wrongful act against the debtor and should pay damages.

iii. Range of avoiding powers, including state law actions under §544 or as property of the estate; give the DIP a chance to reexamine the pre-bankruptcy relationships b/t debtor and each creditor.

f. Recharacterization and the Intersection of State and Federal Lawi. Creidtor entitled to repossess planes under special provisions of §1110, which gives extraordinary

protections to secured creditors w/ regard to aircraft held as collateral and these powers are “not limited or otherwise affected by any other provisions of this title or by any power of the court.” No prohibition in the statute preventing the court from using its equitable power to recharacterize a creditor’s interest as something other than a secured party, lessor, or conditional vendor.

ii. I.e.: Texas disallows alimony, but payments serving that function are routinely awarded, and federal law gives them priority.

Problem Set #31

Negotiating and Confirming the Plan§1129: Requirements for confirmation in a Chapter 11§1126, 1129(a)(8): Statutory majority of each class of creditors must vote in favor of a plan for it to be confirmed.§1122(a): classification of creditors1. Working Through the Tax Implications

a. §108 and 1017 of IRC generally excludes income arising from discharge in bankruptcy from gross income, but an amount equal to the exclusion must be offset against other tax advantages. Debtor then can either reduce its tax “attributes” such as NOLs and tax credits, or it may reduce its basis in its assets.

2. Confirmationa. Reorganization Structures

i. Issue stock to some creditorsii. “Going Concern” sale

b. Best Interests of the Creditors and Feasibilityi. §1129(a)(7): Best Interests

ii. §1129(a)(11): Feasibility – likelihood that the plan will succeed and prosper long enough to make the scheduled payments. Must be satisfied even if all creditors approve.

iii. In re Malkus, Inc (Bankr. MD Fla. 2004)1. Debtor’s sole asset was a HOJO motel owned 50/50 b/t he and his wife. In 2001 their

franchise agreement as a Qaulity Inn was terminated. It scored a 373/500 w/ 370 being passing. They owe $2.4M on a $2.7M note. Debtors took a 2nd mortgage w/out consent of LaSalle. On the date of a SJ hearing for receiver in foreclosure, debtor filed Chapter 11.

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Facts:Issue:Holding:Analysis:

2. Debtor and LaSalle entered a stipulation authorizing use of cash collateral and providing adequate protection to lender. Debtor then failed to meet the stipulation agreement. Court ordered debtor to fulfill the stipulation, but the debtor again failed to comply. Court then lifted the automatic stay for LaSalle to foreclose w/ no sale to occur w/out further order.

3. Debtor’s plan is not Feasible under §1129(a)(11) b/c it does not off a “reasonable prospect of success and is not workable.”

a. Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorg is proposed in the plan. §1129(a)(11)

4. Plan is not feasible even though they were profitable in the 3 summer monthsiv. In re Made in Detroit (Bankr. ED Mich. 2003)

1. Debtor filed for Chapter 11 and proposed funding via a loan for $9M from Kennedy Funding w/ stipulation that it requires an appraisal of $15M on their property. With these funds debtor would pay its secured creditors and admin claims in full. Committee objected and proposed to finance the bankruptcy w/ an “as is” immediate cash sale of the property for $4.8M.

2. Feasibility: Debtor’s plan is not feasible. §1129(a)(11). A plan that is submitted on a conditional basis is not considered feasible, and thus confirmation of such plan must be denied. No reasonable assurance that Kennedy loan will ever close or that the property will be valued high enough for financing.

3. Court denied proposed shareholder loan for paying the commitment fee for the loan b/c it was not a post-petition ordinary-course business debt. §364(a). It also denied its request under §364(b), b/c the loan was not a proper admin expense b/c it did not directly/substantially benefit the estate.

c. Best Interests Testi. §1129(a)(7): applies to each individual creditor. Unless a creditor has voted in favor of the plan, the

best interest test requires that creditor would have received at least as much in a Chapter 7 liquidation. d. SK-Palladin Parnters, LP (π) v. Platinum Entertainment, Inc. (ND Ill. 2001)

i. In June SK wound down after defaulting and transferred its assets to First Source Financials, the holder of a security interest in all the assets. In July, Platinum filed for Chapter 11. Platinum determined its catalogue had a liquidation value of $15M. Palladin, a Class 3 unsecured claim holder, objected that the joint plan did not served the best interest of creditors §1129(a).

ii. Palladin argues that each of the creditors must receive as much as they would in Chapter 7. Bankruptcy court denied extensions for discovery and Palladin failed to retain an expert to value the catalogue. Palladin’s valuation was inadmissible hearsay. The valuation was proper without any rebuttal. Plan is confirmed.

Problem Set #321. Classification and Voting

a. §1126(c) requires approval by:i. Simple majority in number of creditors, and

ii. 2/3 majority in amount of debtb. In re US Truck Co (6th Cir. 1986)

i. Teamsters Committee’s claim that US Truck is liable to its employees for rejecting a CBA b/t local union and US Truck. US Truck filed on June 11, 1982 for Chapter 11 and sought to reject the CBA. The rejection was found to be “absolutely necessary to save the debtor from collapse.” Only the Teamsters Joint Area Rider Committee object.

ii. §1129(a): First way to confirm a plan. Requires all eleven requirements of subsection (a) to be met, including (a)(8), which requires all impaired classes of claims or interests to accept the plan.

iii. §1129(b): Incorporates all the requirements of subsection (a), except subsection (a)(8), and second imposes 2 additional requirements.

1. Cram Down – permits confirmation over objections of one or more impaired classes of creditors

iv. Teamsters argue that plan fails to have one class of impaired claims to accept the plan b/c US Truck gerrymandered the classes to neutralize the Teamster’s dissenting vote. Class XI was the only clearly impaired class to accept, it was unsecured creditors, excluding the labor union claimant.

v. US Truck is using its classification powers to segregate dissenting (impaired) creditors from assenting (impaired) creditors (by putting the dissenters into a class or classes by themselves) and, thus, it is

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assured that at least one class of impaired creditors will vote for the plan and make it eligible for cram down consideration.

vi. 1) Employees represented by the Teamsters have a unique continued interest in the ongoing biz of the debtor 2) the mechanics of the Union’s claim differ substantially from those of Class XI claims, and 3) the Teamsters claim is likely to become part of the agenda of future CBA sessions b/t the union and the reorganized company.

vii. The Teamsters still are protected by (a) and (b), specifically (b) that the plan does not discriminate unfairly and that it be fair and equitable w/r/t the Teamsters claim. Plan does not violate those though.

viii. Classification eliminates the incentive to hold out.c. Classification: Permits separating small creditors into a separate classs for convenience and prohibits

combining differently situated creditors into a single class. Offers no guidance on when, or if, legally similar creditors might be allocated to separate classes. §1122(a), (b).

d. National Bankruptcy Review Commission: Upon objection, proponent should demonstrate the classification is supported by a “rational business justification.” (1997)

e. In re Bernhard Steiner Pianos (Bankr. ND Tex. 2002)i. Kahn borrowed funds from debtor. Piano sales were down. Funds were not turned over to lenders

providing the floor plan financing. The collateral for the lenders was exceeded b the debt owed to them. Debtor then filed Chapter 11 in March 2002. Objecting creditors got relief from the stay and repossessed their remaining collateral.

ii. Debtor got permission to enter 3rd party arrangement for pianos and funding the cost of operations for 90-day period. In return, the debtor and the 3rd party split profits. Plan proposed to repay 100% of claims. To succeed, debtor must continue to find good consignment pianos. The need to pay the consignment class will improve acquiring new consignment pianos.

iii. All impaired classes, except for Class 6, the floor plan lenders approved. The consignment creditors, Class 4, will be repaid over 10-month period. Class 6 will be paid out with excess cash flow. Objection is that they should be in the same classes.

iv. 5th Circuit does not permit substantially similar claims to be separately classified “in order to gerrymander an affirmative vote on a reorg plan,” but is permitted for “good business reasons.”

f. Classification and the Single Asset Casei. SARE involes a debtor that is corporation or partnership to operate a single property. Debtor borrows

lots of money to finance the purchase, market crashes, and debtor takes the operation into bankruptcy to prevent foreclosure, and strip down the mortgage to the current value of the property, which it plans to pay over time. Lender objects. DIP needs a class of accepting creditors. If the debtor can form a trade-class with suppliers, trade creditors, employees, they will often vote “yes” b/c they want to continue business w/ SARE debtor. §1129(a)(10).

ii. Can be viewed as “bad faith.” g. Impairment

i. Debtor is excused from gaining acceptance of the plan from a class that is “deemed” to have accepted the plan. §1126(f). If a class is unimpaired, they have met the “best interests test” of §1129(a)(7).

h. In re PPI Enterprises (3d Cir. 2003):i. SS owns office tower and leased 10k sq. ft. to PPIE. Lease ran for 10 years at $620k/mos. PPIE’s

parent guaranteed the obligations. Bank issued a standby LOC to SS, on behalf of PPIE, for $650k. The parent went into UK Chapter 11 equivalent, and PPIE faced credit cancellations and defaults exceeding $17M. PPIE defaulted on the loan, SS gave notice to terminate, and rent due totaled $5.86M.

ii. PPIE filed for Chapter 11 to: 1) liquidate PPIE, 2) invoke provisions to reject a restriction on selling its Del Monte stock, and 3) limiting SS’s lease termination damages under §502(b)(6). SS then submitted a proof of claim reducing damages to $4.75M.

iii. SS moved to dismiss for “bad faith,” alleging it was a sham to create value for its parent and creditors at his expense, and the bankruptcy served no legitimate purpose. He alleged that the company had no ongoing business and no assets other than stock certificates in 2% of Del Monte. Court denied the motion w/out prejudice. SS subsequently purchased the stock over a bid by Del Monte for $11M and sold them for at least $30M.

iv. Class 2, which SS was a member, returned 2/7 ballots. One yes and one no vote (SS). v. Does the doctrine of impairment preclude SS from having voting rights against PPIE’s Chapter 11

plan?

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1. Bankruptcy court held that the plan did not impair SS’s legal, equitable, and contractual rights b/c his reovery was set by §502(b)(6). However, SS claims this statute alters his claim and entitles him to vote against the confirmation.

2. PPIE’s plan intends to pay SS his “legal entitlement” and provide him with “full and complete satisfaction” of his claim on the date of effectiveness. He is only entitled to his rights under the Code, including the statutory cap of §502(b)(6).

3. Claim is not impaired under §1124(1).2. Claims Trading

a. In re Figter Ltd. (9th Cir. 1997):i. Debtor owns Skyline Terrace apartment complex, and district court affirmed the bankruptcy court’s

decision to allow the Teachers Pension, which holds a $15.6 note secured by first deed of trust on the apartment complex, to buy 21 unsecured claims in good faith and that it could vote each one separately.

ii. Teachers is the only secured creditor and only member of Class 2 plan proposed by Figter. Plan offers full payment of the secured claim, w/ disputed rate of interest. Under the plan, Teacher’s is not impaired. Plan proposed 80% payment to Class 3 – unsecured claims. Court determined the complex value at $19.3M and $17.96 was fully secured.

iii. Teachers bought 21/34 unsecured claims in Class 3 at full value for $14.6k. As a result the plan is unconfirmable, b/c it is unable to meet §1129(a)(10) requirement (no impaired, consenting class of claims). It will preclude a “cram down” of Teacher’s secured claim under §1129(b).

iv. Good faith: Court may designate any entity whose acceptance or rejection of a plan was not in good faith, or was not solicited or procured in good faith. §1126(e) I.e. Disqualify from voting. Purpose was to apply to those “whose selfish purpose was to obstruct a fair and feasible reorganization in the hope that someone would pay them more than the ratable equivalent of their proportionate part of the bankrupt assets.” See Young v. Higbee (1945). Protecting own proper interests is OK.

v. “As long as a creditor acts to preserve what he reasonably perceives as his fair share of the debtor’s estate, bad faith will not be attributed to his purchase of claims to control a class vote.” In re Gilber (Bankr. WD Mo. 1989).

vi. Courts are keener to non-preexisting creditors purchasing a claim to block an action against it. Also competing businesses to destroy debtor are bad faith.

vii. Teachers was a lender and it feared it could be left with a complex lien situation, with part owners and part renters of its collateral.

viii. Voting: §1126(c0 speaks in terms of the number of claims, not the number of creditors, that actually vote. Creditor is entitled to one vote for each of his unsecured Class X claims.

b. In re Northwest Airlines Corp. (Bankr. SDNY 2007): Disclosure filed under B.R. 2019i. Debtors moved to require committee to supplement their statement under BR 2019 b/c they fail to

disclose, “the amounts of claims or interests owned by members of the committee, the times acquired, the amounts paid, and any sales or disposition.” Motion granted.

ii. 1 Creditor appeared on behalf of an ad hoc committee of equity security holders who stated there were 20M shares of common stock and claims in the amount of $264M. They need to state each members interest individually!

Problem Set #33

1. Solicitation and Disclosurea. Creditor claims the debtor failed to disclose important financial and biz information that was necessary for an

informed vote on the plan. Also, creditor may assert that the proposed plan has a fatal flaw that will prevent confirmation and that the disclosure statement is defective for failing to “disclose” that the plan cannot be confirmed.

b. Required Disclosure: What must be included in a disclosure statement:c. In re Malek (Bankr. ED Mich. 1983):

i. §1125(a)(1) and (b) The court rejects and denies approval of the Debtor’s disclosure statement b/c it fails to provide adequate information.

ii. At a minimum, Disclosure Statement must include:1. Description of Business2. History of the Debtor Prior to Filing3. Financial Information

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4. Description of the Plan5. How the Plan is to be Executed6. Liquidation Analysis7. Management to Be Retained and the Compensation of the Personnel Retained8. Projection of Operations9. Litigation10. Transactions With Insiders11. Tax Consequences

d. The “Safe Harbor” Rulei. Companies in Chapter 11 can make disclosures and solicit votes exempt from SEC regulations.

ii. §1125(e): No person connected w/ the solicitation of plan acceptances and rejections is liable for a violation of the securities laws, so long as that person acts in good faith and in compliance w/ Title 11.

e. Prepackaged Bankruptciesi. Debtor and several key creditors have worked out a refinancing structure for the debtor, often

involving substantial forgiveness of debt, infusion of new capital, and a promise of future credit. Then the debtor files to get the tools of Bankruptcy.

ii. §1126(b): Deems pre-petition votes to be effective in the bankruptcy proceedings so long as the pre-petition solicitations complied w/ all applicable disclosure laws and regulations. If there are no applicable SEC or similar laws, then the solicitations will be effective if they comply w/ §1125(a) solicitation requirements in the Code.

iii. Creditors opposing a prepack need to push a debtor into bankruptcy before solicitation begins or the creditor may discover that the prepack is complete before the creditor has a chance to speak. 341 Meeting is waived in prepacks whenever the debtor has solicited pre-petition. §341(e).

Problem Set #341. Cramdown (by a Corporate Debtor)

a. Even if a plan satisfied the best interests test of §1129(a)(7) as to every non-accepting creditor and meets the feasibility test, it nonetheless must be accepted by the statutory majority of creditors in each impaired class under §1129(a)(8). If any class rejects, then the plan cannot be confirmed as a consensual plan under §1129(a).

b. However it can be crammed down under §1129(b): It must attract at least one consenting class of impaired creditors. Without that consenting class, a plan cannot be confirmed period. §1129(a)(10).

2. Absolute Priority and the Participation of Old Equitya. §1129(b)(1): Cramdown of the rejecting class only if the plan does not discriminate unfairly between classes

and is “fair and equitable.” b. §1129 (b)(2)(A) (secured creditors), (B) (unsecured creditors), and (C) (equity holders).

i. Secured creditors: liens must be preserved by the plan, and the creditors must be paid the “present value” of their allowed secured claim. Full value of the collateral, plus a market interest rate.

ii. Unsecured creditors and senior stock holders: Vote against the plan are protected by the “absolute priority rule.” If a class votes against the plan, it must be paid in full or the plan must provide that any parties “junior” to them will get nothing.

iii. Preferred stockholders: must receive the full value of their preferred position or they cannot be crammed down unless the common stockholders get nothing.

3. Bank of America Nat’l Trust v. 203 North LaSalle Street Partnership (1999):a. Can debtor’s pre-bankruptcy equity holder, over the objection of a senior class of impaired creditors,

contribute new capital and receive ownership interests in the reorganized entity, when that opportunity is given exclusively to the old equity holders under a plan adopted w/out consideration of alternatives. NO! Old equity holders are disqualified from participating in such a “new value” transaction under §1129(b)(2)(B)(ii), which in such circumstances bars a junior interest holder’s receipt of any property on account of his prior interest.

b. §1111(b) provides that nonrecourse secured creditors who are undersecured must be treated in Chapter 11 as if they had recourse.

c. A few of the former partners would contribute new capital over 5 years in exchange for the Partnership’s entire ownership of the reorganized debtor, while eliminating the interests of noncontributing partners.

d. §1129(b)(2)(B)(ii): Prohibits a plan providing junior interest holders with exclusive opportunities free from competition and w/out benefit of market valuation.

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4. Absolute Priority only comes in to play if the creditors are crammed down – if the majority does not vote approval of the plan!

5. Cramdown Against the Secured Creditora. Undersecured Creditor: Full value for the secured portion and places its unsecured portion in with the

unsecured claims (called lien-stripping).b. §1111(b) election: Primary use is in SARE cases. Benefits two distinct legal circumstances.

i. Usual undersecured creditor that has both an allowed secured claim and an allowed unsecured claim under §506(a). §1111(b)(1)(B) allows the undersecured creditor to waive any deficiency or unsecured claim that would result form the creditor’s undersecurity and thus waive any participation in the plan as an unsecured creditor. In exchange, debtor is forced to pay the secured creditor over time the full number of dollars that the creditor is owed, even though the creditor is undersecured and even though unsecured creditors may be only getting a fractional payment. Debtor not required paying the PV of the entire claim, only the PV of that portion of the claim equal to the value of the collateral.

1. II) That each holder of a claim of such class receive on account of such claim deferred cash payments 1) totaling at least the allowed amount of such claim, AND 2) of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property.

ii. Nonrecourse undersecured creditor1. §1111(b)(1)(A): gives nonrecourse creditor full recourse claim in bankruptcy. It can then

assert the usual secured-unsecured claims or make a §1111(b) election.Problem Set #35

1. Small Business Reorganizationsa. Who is a Small Biz Debtor?

i. §101(51D): Mandatory – every person engaged in commercial or business activities1. “Aggregate noncontingent liquidated secured and unsecured debts as of the date of the

petition…. in an amount not more than $2,000,000.”2. Debts to insiders or affiliates are excluded from the total

ii. (51D)(A): Only cases in which no creditors’ committee has been appointed or in which the committee is “not sufficiently active and representative to provide effective oversight of the creditor” will be tagged for treatment as a small business.

b. New Rules for the Little Guysi. §1116 requires management to append a balance sheet, statement of operations, cash flow statement,

and fed income tax returns or file a statement, under penalty of perjury, that no such docs have been prepared.

ii. §308: During bankruptcy small biz debtors required to file periodic financial and other reports containing info w/r/t to the debtor’s profitability and projected cash receipts and disbursements.

iii. Management must attend meetings w/ UST, “including initial debtor interviews, scheduling conferences, and meetings of creditors convened under §341 unless the court, after notice and hearing, waives that requirement upon a finding of extraordinary and compelling circumstances. §1116(2).

iv. Initial debtor interview “as soon as practicable” with the UST 28 USC §586(a)(7)v. UST is an investigator to ascertain state of the debtor’s books and records and very filing of tax

returns. 28 USC §586(a)(7)(B).vi. Exclusive right to propose a plan of reorg for 180 days and the plan, whenever proposed, must be

approved w/in 300 days of the bankruptcy filing or be dismissed. §1121(e). Cannot be extended unless it is “more likely than not” that the court will confirm a plan w/in a reasonable period of time, a new deadline is imposed at granting, and extension order is signed before the deadline has expired.

vii. W/in 2 years of filing debtor must prove to the court that its bankruptcy resulted from circumstances beyond the debtor’s control that were not foreseeable at the time the case was filed and that is more likely than not the court will confirm a plan of reorganization. If they can’t make the showing, no automatic stay is available to protect the debtor. §362(n)(1)(D)

c. Who Will Own the Reorganized Small Business?i. “Sweat equity”: the promise of future labor as a contribution to purchase the equity of ownership.

However, it is not “new value” for cram down purposes. See Ahlers (1988).

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ii. Creditors can still vote for confirmation despite their impairment if they believe they will do better in the reorg than they would trying to liquidate or sell the biz.

iii. Unsecured creditors will only get a trivial amount in liquidation, so the option to permit the Chapter 11 are fairly attractive

iv. Small Biz debtor who cannot convince most of the suppliers to go along with a feasible plan does not have much of a chance of survival. If one creditor holds out, and they cannot be included in a larger class, then Cramdown may be impossible. The holdout creditor will have increased leverage.

d. In re MJ Metal Products (D. Wyo. 2003)i. NLRB filed a claim for $48k based on a judgment in its favor. The basis for the judgment was back

wages due to Martin, Newcombe, and Johnson. Debtor propped a plan to cancel all common stock and new stock in the reorganized debtor will be sold to the highest bidder by sealed bids. The right to participate was limited to “former shareholders.”

ii. 10 of the voting Class 8 creditors accepted the plan, but the NLRB rejected. Newcombe submitted a ballot, but did not state the amount of his claim on the ballot. Only 52% of the voting Class 8 creditors accepted the plan in total dollar amount, without counting Newcombe’s ballot.

iii. Not confirmable under §1129(a)(8) b/c Class 8 is impaired class, it is not receiving payment in full, and “2/3 in amount” of the voting creditors did not accept. §1126(c).

iv. Therefore, that class of secured claims must be paid in full or comply w/ the “absolute priority rule.” Court has an independent duty to ensure the plan complies w/ §1129!

v. Per North LaSalle, the debtor must not make exclusive opportunities without benefit of market valuation.

vi. Debtor can expose the sale of shares to the market, attempt to obtain more accepting votes in Class 8, or pay the unsecured creditors in full.

Problem Set #36

1. The Reorganization of Public Companiesa. Control

i. Usually lies w/ management and they are not the principal owners, so control in bankruptcy is separated from equity interests.

ii. Some creditors may exercise control through obtaining security interests in most of the debtor’s assets or through making DIP loans at the start of the case and making those loans conditional upon strict covenants in their favor in a first day order

iii. Managmenet, divorced from equity, has its own interests that creditors may be better able to satisfy.iv. Role of the valuation of the company’s worth to determine who will be in control of the wealth that

emerges from a Chapter 11 under a confirmed plan. Think Priorities and the champagne glasses.v. “Zone of Insolvency”: Directors acquire a duty to creditors under state corporate law instead of or in

addition to their duty to shareholders.vi. Banks often lend to large public companies w/out collateral, but come bankruptcy lenders demand

security w/ new money for security interests. This leads to increased influence over the management/DIP (Secured Party in Possession SPIP)

b. In re Channel Master Holdings (Bankr. D. Del. 2004):i. Comerica, as agent for the pre-petition and post-petition lenders (lenders), objected to the fees of the

Official Unsecured Creidtors’ Committee’s professionals. Debtor filed Bankruptcy and sought to sell nearly all their assets to Andrews Corp for $18.1M, which was less than the balance due to the lenders. After applying the proceeds to lenders’ claims, they were still due over $25M. Case was then converted to Chapter 7. Lenders object to fees sought by Committee’s professionals in excess of the $75k cap carved out in the budget attached to the DIP financing order and also for the fees as excessive for the Committee’s work b/c the unsecured were “out of the money” and should have restricted their services.

ii. Cap on fees for Committee’s professionals in the order does not limit allowance or payment of fees to those professionals. The Estate is insolvent and reallocation of fees may be warranted. Debtor’s professionals should not disgorge any fees b/c the miscellaneous category covers them.

iii. Court reviews all fee requests to ensure the services rendered were necessary and appropriate and the fees requested are reasonable.

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iv. A reasonable professional representing the Committee would have performed many of the services performed by the professionals in this case, but not to the extent that the professionals did so in this case.

1. Key Employee Retention Plan: Reasonable for the Committee to review and oppose the KERP. Unlikely that any reduction in the KERP would have found money for the unsecured creditors. $5k was reasonable to spend reviewing the KERP.

2. Sale: Committee had a duty to insist upon bid procedures that were fair and locate additional bidders. They were a part of their fiduciary duty. Allowed!

3. Analysis of Lenders’ Liens: Duty of the Committee’s pros to analyze, and if appropriate, contest the liens of the lenders. Not excessive. Allow!

c. How Long Will the Debtor Have to Reorganize?i. §1121(b) gives debtor t 120 days to exclusively propose its own plan and §1121(c)(1) gives 180 days

to exclusively solicit votes to confirm the plan. Both measured from date of filing and overlap each other.

ii. §1121(d)(2) imposes a cap on judicial discretion of 18 months to propose a plan and 20 months to solicit votes. These two overlap.

d. Liquidating Plans and Asset Salesi. §1123(b)(4) allows for liquidating plans. Allows conveyance of some or all of the estate’s assets to a

liquidating trust managed by a trustee appointed through the plan.ii. Alternatively, sale of assets can be through §363(b)(1): sale out of the ordinary course before any

plan has been approved. Principal reason would be to allow the seller to sell “clean title, free and clear of all liens” under §363(f).

e. Management Changei. §503(c) imposes very strict limits on KERPs and other compensation programs for executives.

ii. §548(a)(1)(B)(ii)(IV) provides for recovery of pre-bankruptcy transfers made to insidersf. In re Dana Corp I (Bankr. SDNY 2006):

i. Is this a “Pay to Stay” compensation plan (aka KERP) subject to limitations of §503(c) or is it an incentivizing “Produce Value for Pay” plan to be scrutinized through the business judgment lens of §363?

ii. Debtors propose to pay base salary, annual incentive plan (AIP) bonuses, and “Target Completion Bonuses” to each of their executives. Under the terms of the Compensation Motion and Modified Plan, executives to be paid base salaries of $500-600k and CEO Burns to be paid $1.55M (unchanged from his prepetition amount).

iii. AIP bonuses sought for the Executives range from $336k to $528k. CEO’s AIP is $2M, unchanged from prepetition amount. Completion Bonuses: 1) Fixed component w/out regard to performance or creditor recovery on effective date of reorg if executive is still employed ranging from $400-$600k and $3.1M for CEO, and 2) uncapped, variable component based on Total Enterprise Value of debtors 6 months after effective date. CEO could make anywhere b/t $4-6M. Severance/”Non-Compete” Package: CEO – 18 mos. Non-compete agreement for $166.6k/mos. For the 18 months. Senior Executive Retirement Program: Debtors assume the agreement of CEO at earlier of his termination or Debtor’s emergence from bankruptcy for $6M.

iv. §503(c) standards to meet before court may authorize payments to an insider to induce the person to remain w/ the debtor’s business, or payments made on account of severance. Business judgment rule doesn’t apply if the payments fit within §503(c). The Completion Bonus is payable regardless of outcome and cannot be considered an incentive bonus > It is a retention bonus.

v. Severance payments to an insider may not be approved by this Court unless the Debtors have established that the payment is part of a program generally applicable to all full-time employees and the amount is not more than 10x the amount of mean severance given to non-management employees in that calendar year. §503(c)(2).

g. In re Dana Corp II (Bankr. SDNY 2006):i. Merely because a plan has some retentive effect does not mean that the plan, overall, is retentive

rather than incentivizing in nature. The new plan is consistent w/ §503(c), is within the fair and reasonable business judgment of the Debtors and thus w/in the zone of acceptability.

ii. Pension Benefits: Dana will assume 100% of Sr. Exec. Pension plans and 60% of CEO’s pension plan, w/ remaining 40% to be a general unsecured claim to take place on emergence from bankruptcy or involuntary termination w/out cause, and for the CEO, voluntary termination for good reason.

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iii. Non-Disclosure Agreement and Pre-Emergence or Post-Emergence Claim: prohibits sr. execs. From accepting positions w/ competitor, disclosing confidential information to 3rd parties, soliciting any employees of Dana or disparaging Dana for 12 months. CEO and Senior Executives eligible for a long-term incentive bonus if the company reaches a certain EBITDAR, and amount would increase if additional, higher EBITDAR reached. Hence, no guaranteed payments to the CEO or executives other than base salary.

iv. The pension plans are already vested, so any retentive impact is merely incidental to the terms of the pension plans and are ordinary and customary in such plans.

v. Debtor exercised fair and reasonable business judgment in determining to assume these employment agreements.

vi. AIP – Annual Incentive Plan – Horizontal test: is the transaction common in the industry. Vertical test: Whether the transaction subjects a creditor to economic risk of a nature different from those he accepted when he decided to extend credit.

vii. However, as a whole package, must look at the cost or expenses reasonableness and in the best interests of the estate, present record is not sufficiently transparent enough. Court will approve the LTIP if there is a yearly ceiling on the CEO and exectuvies total compensation earned during the reorg period.

viii. By forcing the CEO to produce and increase the value of the estate, Debtors escape §503(c)(1) as to the Executive Compensation Motion. Also, they escape §503(c)(2) b/c none of the proposed payments violate it b/c it specifically limits “severance” payments to those permissible under (c)(2) and any other payment is non-severance.

h. Treatment of Equityi. Equity holders in public companies receive little or nothing in a plan of reorganization.

ii. When reorg plan proposes to turn its ownership over to creidtors on the basis that the shareholders are “under water” they can argue that the company is more valuable then it is being represented.

i. In re Loral Space & Comm. (SDNY 2004)i. Stockholders Committee represents 8.4% of common shares and appeals the denial of their motion to

appoint an examiner under §1104(c)(1) and (2).ii. Argued 1) the Debtors were undervaluing many of their most valuable assets, and 2) the Debtors and

Creditors’ Committee were improperly colluding to depress the valuations of Loral. Appeals court ordered the Bankruptcy Court to appoint an examiner w/in 10 days.

iii. §1104(c)(2) has a threshold for debtors fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceeding $5M. Purpose of statute was to protect equity holders. §1104(c)(2) mandates the appointment of an examiner where a party in interests moves for one and the debtor has $5M of qualifying debt. The court may limit the discretion and scope of the examiner’s investigation and the compensation and expenses available.

Problem Set #37

5. Negotiating with Special Claimantsa. Introduction

i. Environmental Claimants, Mass Tort Claimants, and Regulatory Claimantsb. Big Liabilities

i. Commercial lenders and trade creditors v. Cleanup costs and product liability obligationsii. Timing problems: Often span the pre and post filing period. Post filing claims are fully

enforceable against the estate and the post-bankruptcy debtor, unlike the pre-filing claims that maybe entitled to only a pro rata distribution.

iii. §101(5)(A): Defines claim as any right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, un-matured, disputed, undisputed, legal, equitable, secured, or unsecured.

iv. §502(c) permits the estimation of claims. c. Environmental Claims

i. Business not supposed to spill toxic waste and clean up any waste it spills.ii. Spill that occurs pre-petition clearly creates a pre-petition obligation; a spill after filing creates a

post-petiiton claim. iii. What about a clean up that continues post-petition?

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iv. Principally responsible parties: owners and operators of companies on hook federally for clean up.

Signature Combs INC v. US (WD Tenn. 2003)Facts: MDL claims Plaintiffs’ claims were discharged in their Chapter 11 bankruptcy reorg. Court denies MDL’s motion for judgment on the pleadings. Comprehensive Environmental Response, Compensation, and Liability ACT (CERCLA), plaintiffs want to recover response costs incurred at a superfund site charged by the EPA and Arkansas. (contribution). Issue: Are the claims by plaintiff barred by MDL’s chapter 11 petition and discharge?Holding: Court adopts the fair contemplation standard. Does not violate 5th amendment and Bankruptcy notice requirements. MDL failed to show that the claims of the EPA were discharged!Right to Payment Approach: 1. D falls w/in one of the 4 categories of responsible parties. 2. Hazardous substances are disposed at a facility. 3. There is a relase or threatened release of hazardous substances from the facility into the environment, and 4. The release causes the incurrence of response costs including removal activities and enforcement activities related thereto. Debtor’s CERCLA liability will be discharged only if all 4 exist prior to bankruptcy. Underlying Act Approach: Pre bankruptcy claim subject to the code’s discharge provisions exist so long as the underlying polluting act occurred prior to the debtor’s bankruptcy. Evades those who don’t know yet about the behavior. Debtor-Creditor Relationship Approach: Any CERCLA liability is discharged if the creditor and debtor began a relationship before the debtor filed for bankruptcy, so long as the underlying act occurred before the bankruptcy petition was filed. EPA ought to know, so they have a relationship.Fair Contemplation Approach: A contingent CERCLA claim arises pre-petition only if it is “based upon pre-petition conduct that can fairly be contemplated by the parties at the time of the debtors’ bankruptcy.” Reasonable diligence that it had a claim against the debtor for a hazardous release. Claim accrues earlier than the right to payment standard b/c the potential claimant need not incure response costs for a contingent claim to arise under this standard.

Remediation costs incurred post-petition are administrative claims, but those that are pre-petition are still questioned for priority and administrative claims.

d. Mass Tortsi. Timing problem. Asbestos. Must set aside money for future claimants at the detriment of current

plaintiffs. ii. Future claimants and injuries yet to be discovered.

Kane v. Johns-Manville Corp. (2nd Cir 1988) (No standing)Facts: Manville filed a Chapter 11 reorg. Kane and a group of 765 individuals he represented are persons with asbestos injuries who had filed PI suits against Manville prior to the Chapter 11 petition. The suits were stayed and he and others were designated as Class 4 creditors. Kane objects because: 1) it discharges the rights of future victims who do not have “claims” within §101(4), 2) it was adopted w/out constitutionally adequate notice, 3) voting procedures violated the code and due process, and 4) the plan fails to conform w/ the requirements of §1129(a) and (b). Issue:Holding: Kane lacks sanding to challenge the plan on the grounds that it violates the rights of future claimants and other third parties, and reject on the merits his remaining claims that the plan violates his rights regarding voting and fails to meet the requirements of §1129. Affirmed the order of the confirmation of the plan.Analysis: A court appointed legal representative negotiated on behalf of future claimants. Manville was directed to give notice to inform person with present health claims of the pendency of the reorg and their opportunity to participate. Kane can only challenge a deprivation of his own rights. He cannot make claims on third party grievances. §524(g): 1994 amendments added “personal injury, recovery for damages allegedly caused by the presence of, or exposure to, asbestos or asbestos-containing products.”

In re Fairchild Aircraft Corp. (Bankr. WD Tex. 1995) (Manville with Standing after plane crash)Facts: FAC stopped producing the 300 in 1982. Continued selling them as late as 1985. It was made no later than 1982 and sold no later than 1985-five years before FAC’s later chapter 11 bankruptcy. FAC filed on Feb. 11, 1990. Trustee was appointed who tried to find a buyer for the company as a going concern. August 14, 1990 Trustee entered agreement to pay $5M and to assume liability for secured debt in range of $36M. An agreement was reached to exclude the purchasers from future liability for defects. On Sept. 17, 1990, the court confirmed the plan. Assets sold free and clear of all liens except the ones assumed. The trustee made no provision to contact the defendants or plane purchasers. Issue: Did the sale provision actually indemnify the purchaser of future liability? NO!Holding: The order of sale did not insulate FAI and this court lacked the jurisdiction to enjoin these claimants because they did not hold “bankruptcy claims.” The purchaser could have given notice and appointed a representative, but they

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failed to do so.

e. Regulatory Claimantsi. Regulator says it is owed money, it may demand payment as a condition of permission to

continue operationii. Debtor claims the regulator is attempting to collect on a debt or otherwise violate bankruptcy

laws.iii. Is the FCC like any other creditor or whether its status as a regulatory agency permits it to use its

administrative power to trump the debtor’s efforts in bankruptcy?FCC v. Nextwave Personal Communications, Inc. (2003)Facts: Communications Act grants FCC awarding licenses through auction. Nextwave won bids for licenses. They got 63 C-Block licenses on bids totaling $4.74B and 27 F-Block licenses for $123M. They made a down payment and signed promissory notes for the balance, and executed security agreements that the FCC perfected under the UCC. The agreements gave first liens on each license. Conditioned on full and timely payment of all monies due pursuant to the installment plan. Failure to comply results in automatic cancellation. Nextwave couldn’t pay and filed for Chapter 11. Argued that under §544 the C-blocks were fraudulent conveyances. Second Circuit said NOPE these agreements held that the license terminated. DC Circuit held that FCC’s cancellation violated §525. Issue: Whether §525 of the code prohibits the FCC from revoking licenses held by a debtor in a bankruptcy upon the debtor’s failure to make timely payments owed to the FCC for purchase of the licenses?Analysis: §525 ”a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.”

38.1. Women wants help with potential $1.1M EPA bill. Prepetition claim. File bankruptcy. Pay tiny bankruptcy dollars? Director could be personally liable regardless Difference between a pre-petition claim v. post-petition claim Protect self and company by disposing of all chemicals. Under the conduct test it would fly. State law might be problematic.

38.2. Bill would create a lien to cover the fees, interest, and penalties imposed for the disposal of hazardous waste. Lien enjoys same priority as state revenue liens –which gives these liens priority over all other liens on the property, even preexisting ones. Bill would cover all clean-up costs. Implications? Advice?

38.3. $40M to purchase a factory and shift its outputs to more varied industrial supply output. 550 workers retained. 50% payouts to creditors. 46 of the 10,000 boilers have blown up. Rosenkrans wants protection from the previous Boilers produced. He will take liability for future productions. See Fairchild Aircraft.

Faces potential liability, but no one has standing now. When someone is injured there is slight chance of liability. If you give notice to all purchasers and appoint a representative of the class of potential victims, you may be able to squeeze by.

Trust could run out Funding the trust is difficult Due process issues

o Channelling the litigantso Future legal representative

38.4. Counsel for Nat’l Assoc. of Home Heating Repair Persons. They installed 100k of thermostats with defected chips. Replacing them would cost at least $50M. Some say Y5 and some say Y9 for peak defective years. What claims for NAHHRP members? Courts ruling? Members treated in a plan of reorganization? Homeowners have a claim? “Class

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Claim” how would you react? Support or oppose? What arguments for opposing the class claim and how will the class counsel respond?

38.5 Contractor failed to pay several trades people and agency took over the claims and sued HH on their behalf. Agency sent HH notice six months ago that the fees for license of $20k are past due. What do you advise?

6. Post-confirmation: Life after Chapter 11a. Types of Post-Confirm problems/issues

i. Claims by the post-confirmation debtor against other entities – res judicataii. Claims against the debtor – Have all the claims been discharged?

1. Timing2. Notice

iii. Claims by third party that the plan has discharged the liabilities of the third partyb. Effects of Confirmation: Claims against the debtor

i. Timing1. Is the claim pre or post confirmation?

ii. NoticeIn re USH Corp. (Bankr. SDNY 1998)Facts: Homeowners seek an order determining that the π’s are not bound by reorg. Plan and to pursue prepetition claims against US Home. April 15 USH filed petitions. The court set December 23 1991 as the Bar order for all claims to be filed. On May 24 1993 the plan was confirmed. The homeowners hired someone who told them their houses didn’t meet the insurance standards. On August 1996 the π’s sent a demand letter to USH. USH responded that the confirmation order enjoined litigation on their claims. Π’s brought this motion because they were not given formal notice of bankruptcy. USH argues that the creditors received constructive notice by publication and the claims are barred under §1141(d). Issue: Did the claimant receive sufficient notice of the bankruptcy?Holding: Yes! They were unknown creditors. This case turns on the legal duty owed by the debtor. Since there was no law they violated or standard, they were not put on notice essential.Analysis: Discharge presumes that all creditors bound by the plan have been given notice sufficient to satisfy due process. Adequate notice depends on the facts and circumstances of each case. Due process is met if notice is “reasonably calculated to reach all interested parties, reasonably conveys all of the required information, and permits a reasonable amount of time for response.” When a creditor is unknown to the debtor, publication notice of the claims bar date may satisfy DP. If a creditor is known to the debtor, notice by publication is not constitutionally reasonable, and actual notice of the relevant bar dates must be afforded to the creditor. Here, the debtor sent out national publications as well as local. Were the creditors known? Known = actual knowledge or reasonably ascertainable by the debtor. Unknown = a creditor whose “interests are either conjectural or future or, although they could be discovered upon investigation, do not in due course of business come to knowledge of the debtor.”

c. Claims by Debtorsi. Litigation Trusts

1. Estate contributes causes of action that the debtor had against other parties. Estate may be paid immediately for this property and the money distributed to creditors. Trust may get this money by selling shares to third parties or to some subset of creditors. Trust then litigates or settles and whatever is recovered is distributed to shareholders.

2. In re Ashford Hotels (SDNY 1999): Irish bank lent to a joint venture to develop a hotel that failed. The debtor, guaranteed part of the joint venture’s loan, and two investors had agreed to indemnify the debtor against losses on the guarantee. Dispute generated 2 lawsuits in the US and one in UK. Debtor’s TIB proposed to sell the debtor’s indemnification rights to the bank in exchange for the bank’s funding a defense in NY and attack in UK, and a % of any recovery in UK. Putative indemnitors objected. Ruled they had no standing. Also under Bankr. Rule 9019 it was a proper court approved settlement.

ii. Res Judicata1. Cause of action must survive the court order granting the confirmation of a plan.

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2. Claims by the debtor (as opposed to claims against the debtor) are not discharged under §1141, other legal doctrines may bar them.

In re Howe (5th Cir. 1990)Facts: Howe’s filed for Chapter 11 in 1982. Confirmed on January 28, 1983. Five years later they filed in state court lender liability claims that were removed to federal court and referred to the bankr. Court. The creditors moved to dismiss on res judicata, prescription, or equitable or judicial estoppel. Howes moved to abstain and remand arguing it was a state law issue. Bankruptcy court granted the bank’s motion and the district court affirmed. The Howes’ lender liability claims that are the subject of the appeal were not scheduled as an asset of the estate, nor were they disclosed or treated in the 4 th amended plan of reorg. And disclosure statement. Plan treated Premier as an allowed claim, partially secured and partially unsecured. Howe’s now sue for lender liability b/c they incurred substantial debt without regard to their ability to repay the sum. They sought $14.5 M b/c they claim the bank wanted their land and owed them fiduciary and contractual duties and violated La. Securities law and state law fraud.Issue: Does res judicata bar the case in question?Holding: Yes. It stems from the same nucleus of operative facts that informed their earlier bankruptcy proceedings. Analysis: Circuit test for res judicata are: 1. The parties be identical in both suits 2. A court of competent jurisdiction rendered the prior judgment 3. There was a final judgment on the merits in the previous decision, and 4. The plaintiff raises the same cause of action or claim in both suits. The question is whether the 4th prong is met. Fifth circuit adopted the rule that states, “it bars all claims that were or could have been advanced in support of the cause of action on the occasion of its former adjudication, … not merely those that were adjudicated.” The central transaction in a previous case was a passing of title to the property in exchange for the cancellation of the mortgage debt. See Southmark.

d. Discharge of NondebtorsIn re Metromedia Fiber Network, Inc. (2nd Cir. 2005)Facts: Two big banks challenge a largely implemented confirmed plan in Chapter 11 of Metromedia Fiber Network and its subsidiaries. A District court confirmed the order on appeal. Appellants argue that releases in the plan improperly shield certain non-debtors from suit by creditors. Kluge trust would forgive approximately $150M in unsecured claims against Metromedia, convert $15.7M in senior secured to equity, invest approximately $12.1M in reorg debtor, and purchase up to $25M of unsold stock in the debtor’s offering. In return, the Kluge Trust would receive 10.8% of common stock, and a full and complete release waiver and discharge from any holder of a claim of any nature and liability arising out of or related to Metromedia or a subsidiary based on the effective date. Appellants challenge the release.Issue: Were the third party releases proper? No!Holding: Must show uniqueness for discharge by nondebtors. However, the court affirmed on ground of equitable mootness, because no stay of the plan had been obtained pending appeal.Analysis: “in bankruptcy cases, a court may enjoin a creditor from suing a 3rd party so long as the injunction plays an important part in the debtor’s reorg.” Such a release is proper only in rare cases. §524(g) authorizes releases in asbestos cases when certain conditions are met. Second, release lends itself to abuse. Courts have allowed releases when the estate receives proper consideration, enjoined claims were channeled to a settlement fund, enjoined claims would indirectly impact the reorg by way of indemnity or contribution. Also may be tolerated if affected creditors consent. The bankruptcy court erred because there is insufficient evidence to show the need for the release. Equitable mootness: Often a nondebtors release presents the bankruptcy court and the parties with the prospect of a successful resolution of a large case and the salvage of an important business. It effectively halts appellate review, giving the bankruptcy courts vast discretion in achieving that happy result by approving nondebtor’s releases.

In re Bernhard Steiner Pianos USA, Inc. (Bankr. ND Tex. 2002)Facts: Debtor an insiders were shielded by granting them the exclusive remedy for payment of any claim or debt so long as the plan is not in default shall be the plan. Any applicable SOL from a 3rd party is tolled from the period of time until the date upon which the debtor fails to cure any written notice of default. Textron and Transamerica argue that it acts as a release of their claims against Debtor’s principal, Kahn. However, the plan specifically says that it does not act as a release. Issue: Were there unusual circumstances to grant Kahn and Co. a temporary post-confirmation injunction?Holding: Yes. Kahn is practically the debtor. A claim on Kahn is a claim on the debtor. It also has an adverse effect on the successful reorg of the debtor.Analysis: Fifth Circuit said that post-confirmation permanent injunctions that effectively release nondebtors from liability are prohibited. However, temporary may be proper under certain circumstances. Two reasons: 1. When the nondebtors and debtor enjoy such an identity of interest that the suit against the non-debtor is essentially a suit against the debtor, and 2. When the third party action will have an adverse impact on the debtor’s ability to accomplish reorg. Injunctive relief

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requires a showing that: 1. a substantial likelihood the movant prevails on the merits; 2. Irreparable harm; 3. Injury to the movant outweighs the threatened harm an injunction may cause to opposing party; and 4. Granting the injunction will not disserve the public interest. These factors are met.

e. Chapter 22i. ¼ of publicly traded companies confirmed a Chapter 11 plan end up back in bankruptcy.

ii. Chapter 22 is a repeat Chapter 11 customer/companyProblem Set #39

39.1) Problem with microchip w/ chance of causing problems with home heating systems. 5 or 9 years it he peak problem year. Neither producer nor consumer knows of the problem before filing for bankruptcy.See §1141, 523(a)(3), and 524

a) Can the members sue UC for damages for replacing the chip? Do the members of the association have standing? Probably not. IDK

b) Can the homeowners sue the contractors, even if the contractors cannot sue UC? Is it pre-petition or post-petition claim? If it is pre-petition? Need adequate notice? Adequate notice depends on the facts and circumstances. Adequate notice depends on the facts and

circumstances of each case. Due process is met if notice is “reasonably calculated to reach all interested parties, reasonably conveys all of the required information, and permits a reasonable amount of time for response.”

I think their was no notice here of the underlying claim.

c) Does either question turn on the producers knowledge of the problem? To a certain degree. If the producers know of the problem, then the “creditors” may be known to them, which

would require them to make actual disclosures or at least make publication of the fact.

d) what if their were low-key news stories? Then they would be known creditors. Might need to give actual notice to each chipholder.

39.2) Real estate company files for Chapter 11. The president, Evans will put up substantial assets to back the companies obligations under the plan. Only willing if he is released from all personal guarantees on the pre bankruptcy debt. See §524(e) and 1129See In Re Bernhard Steiner Pianos.: Fifth Circuit said that post-confirmation permanent injunctions that effectively release nondebtors from liability are prohibited. However, temporary injunctions may be proper under certain circumstances. Two reasons: 1. When the nondebtors and debtor enjoy such an identity of interest that the suit against the non-debtor is essentially a suit against the debtor, and 2. When the third party action will have an adverse impact on the debtor’s ability to accomplish reorg. Injunctive relief requires a showing that: 1. a substantial likelihood the movant prevails on the merits; 2. Irreparable harm; 3. Injury to the movant outweighs the threatened harm an injunction may cause to opposing party; and 4. Granting the injunction will not disserve the public interest. 1. Debtor is the company and the nondebtors is the president. One in the same person2. Irreparable harm if not granted. The company may be forced to liquidate3. Opposing party will not be harmed as greatly as the debtor.4. In the public interest to continue development in the residential market.

The plan should grant a temporary injunction that stipulates that RiverMist and the nondebtors are temporarily enjoined from any claim upon the proper and timely payments to Tiffany and Titanic.

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39.3) Mangle is not acting in good faith here. He set up a “litigation trust” in his own name as the individual in charge of the debtor who went through liquidation. He didn’t make full distribution to the creditors because he held back on preferences. He ought to be barred by res judicata here because he could have litigated these claim previously.

Test for Res Judicata: 1. The parties be identical in both suits 2. A court of competent jurisdiction rendered the prior judgment 3. There was a final judgment on the merits in the previous decision, and 4. The plaintiff raises the same cause of action or claim in both suits. Fifth circuit adopted the rule that states, “it bars all claims that were or could have been advanced in support of

the cause of action on the occasion of its former adjudication, … not merely those that were adjudicated.”

Domestic Jurisdiction

Is this dispute within the federal bankruptcy jurisdiction, as opposed to the general jurisdiction of a state court or the non-bankruptcy (federal question and diversity) jurisdiction of a federal court?

If the dispute is within bankruptcy jurisdiction, is the district judge the only one who can hear the matter or may the bankruptcy judge decide it?

Northern Pipeline Construction v. Marathon Pipe Line (1982)o Reorg. Debtor sued Marathon in bankruptcy court, alleging breach of K, misrepresentation, and coercion. o Defendant argued that the court did not have Article III status and couldn’t hear it.o Essentially held that the bankruptcy courts were unable to handle this matter.

1984 Amendments required abstention by federal courts in matters involving state law claims and limited the matters that bankruptcy judges could decide on a “clearly erroneous” basis

28 USC §157 designated certain matters as “core proceedings” that may be heard by bankruptcy judges, subject to the unlimited discretion of the district judges to withdraw any matter from the bankruptcy court at any time.

Granfinanciera v. Nordberg (1989)Issue: Whether a person who has not submitted a claim against a bankruptcy estate has a right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly fraudulent monetary transfer?Holding: The Seventh Amendment entitles such a person to a trial by jury, notwithstanding Congress’ designation of fraudulent conveyance actions as “core proceedings” in 28 USC §157(b)(2)(H)? (1982 ed, Supp IV)Analysis: Remedy sought and determine whether it is legal or equitable in nature. Can Congress then assign or have they already assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as fact finder. 7th Amendment protects right to jury in legal causes of action and involves a matter of “private right.” WE ARE NOT OBLIGED TO DECIDE TODAY WEHTHER BANKRUPTCY COURTS MAY CONDUCT JURY TRIALS IN A FRAUDULENT CONVEYANCE SUIT BROUGHT BY A TRUSTEE AGAINST A PERSON WHO HAS NOT ENTERED A CLAIM AGAISNT THE ESTATE, IETHER IN THE RARE PROCEDURAL POSTURE OF THIS CASE…OR UNDER THE CURRENT STATUTORY SCHEME.

28 USC §157(e) granted jury trials in bankruptcy if:o the matter is otherwise within bankruptcy court’s jurisdictiono district court expressly authorizes it, ANDo the court has the consent of all parties.

§158(d): permits direct appeals from bankruptcy court to the Court of Appeals in limited circumstances. 28 USC §1334(b): Broad “related to” bankruptcy jurisdiction to district courts 28 USC §1334(c)(1) and (2): Limits the actual operation of the broad jurisdiction by provisions for discretionary

or mandatory abstention in favor of state courts. District judges in each district the collective right to refer some or all of the court’s bankruptcy jurisdiction to the

bankruptcy judges. §157(a). Every federal district court has granted all cases to bankruptcy court.

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28 USC §157 defines the “clearly erroneous” basis of review and “masters” recommending findings of fact and conclusions of law to the district judges.

28 USC 157(b) lists matters that are included among core proceedings. 28 USC §157(b)(4): Personal injury and wrongful death claims AGAINST the estate receive special treatment.

They are not subject to core jurisdiction of a bankruptcy judge (157b2B), but on the other hand they are not subject to mandatory abstention under Section 1334(c)(2).

o Related to bankruptcy > tried by the district judge, unless the parties consent to bankruptcy jurisdiction, §157c2, or the district court abstains on a discretionary basis and permits a state court to try the case.28 USC §1334(c)(1).

§157(d): Power of district court judge to take a case at any time.o Also district judge MUST take over any matter involving federal statutes “regulating organizations or

activities affecting interstate commerce.”

Proceedings that arise UNDER Title 11o Clearly erroneous standard

Proceedings that arise IN Title 11case, ando Clearly erroneous standard

Proceedings that are RELATED TO Title 11 cases.o Master recommendations of fact and law

Will the case be decided by a state or federal judge? If by a federal judge, will it be the Article III judge or the Article I bankruptcy judge?

Federal Jurisdiction or not? Is a matter sufficiently related to bankruptcy to justify federal jurisdiction? If there is federal jurisdiction, is the federal court (i) required or (ii) permitted to abstain in favor of a state court?

In re Dow Corning Corp. (6th Cir. 1996)Facts: Dist Court held that it did not have “related to” jurisdiction over those claims under §1334(b) and concluded that they could not be transferred to it pursuant to §157(b)(5). On June 25, 1992, ND Alabama reached a class settlement. 440k elected to join the settlement, while several thousand π opted out. On May 15, 1995 Dow filed its petition in the ED Mich. This stayed all claims against it. However, claims against Dow’s 2 shareholders, Dow Chem. And Corning Corp., and the other nondebtors defendants were not stayed. Dow filed a motion to transfer to the ED Mich. The opt-out cases against it. The district court granted Dow jurisdiction motion under §1334(b) and permitted the transfer pursuant to §157(b)(5). However, the district court denied the other transfer motions by the shareholders because it claimed to lack SMJ for they were not “related to” Dow’s bankruptcy pursuant to §1334(b).Issue: What is the subject matter jurisdiction of federal district courts, sitting as bankruptcy courts, over proceedings “related to” a case filed under Chapter 11 and the ability of federal DC’s to transfer such proceedings to the DC in which the bankruptcy case is pending? Did the DC err in its determination that claims for compensatory and punitive damages asserted in 100000’s of actions against numerous nondebtors manufacturers and suppliers of silicone gel breast implants could have no conceivable effect upon, and therefore were not related to, the bankruptcy estate of the Dow Corning corp? Holding: Reversed and Remanded.Analysis: Does the Court have Subj. Matter Jurisdiction? §1334(b) is read broadly. There must be some nexus b/t the related civil proceeding and the title 11 case. – PACOR. It includes “suits between 3rd parties which have an effect on the bankr. Estate.” Claims for Contribution and Indemnification are contingent and will have a conceivable effect on the bankruptcy proceedings. §362 stay against nonbankrupt co-∆ may be granted in “unusual circumstances.” This is the case here. Also, all three companies share joint insurance. Allowing the stay against Dow and not the other corps will dry up the estate for the creditors of Dow in the meantime.

A §157(b)(5) motion requires an abstention analysis Abstention provision of §1334(c) qualify §1334(b)’s broad grant of jurisdiction

o The DC determines each individual case whether hearing it would promote or impair efficient and fair adjudication of bankruptcy cases.

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§1334 – 2 types of abstentiono Discretionary Abstention 1334(c)(1)o Mandatory abstention 1334(c)(2)

Proceeding must be: Based on a state law claim or cause of action Lack a federal jurisdictional basis absent the bankrutpyc Be commenced in a state forum of appropriate jurisdiction Be capable of timely adjudication Be a non-core proceeding

Non-core proceedings under §157b2B are not subject to §1334c2’s mandatory abstention provision pursuant to §157b4

The DC in this case determined that 157b4 rendered exempt from the mandatory abstention requirement all PI tort claims pending solely against Dow, and decided not to abstain discretionarily w/ regard to those claims at this time.

In re Dow Corning Corp. (6th Cir. 1997) MANDAMUS WRITFacts: Parties contest the DC’s denial of their motion to transfer to ED Mich. Breast implant claims brought in various jurisdictions by claimants who have chosen not to join the global settlement pool. DC upon remand, exercised discretionary and mandatory abstention in declining to transfer the claims against the shareholders and co-∆. Issue:Holding: We issue a writ of mandamus ordering the DC to transfer the claims against the shareholders to the ED of Mich. And to evaluate each claim individually to determine whether mandatory abstention applies.Analysis: §1334(c)(1) and (2): Congress curtailed the Appeals Courts ability to review a DC’s decision to exercise mandatory or discretionary abstention. §1134(c) decision to globally abstain without examination of a single individual claim cannot stand. Failure to transfer the claims against the shareholders will affect the size of the estate and the length of time the bankruptcy proceedings will be pending, as well as Dow Corning’s ability to resolve its liability and proceed w/ reorg.

In re US Lines, Inc. (2nd Cir. 1999)Facts: US Lines and their trust sued in Bankruptcy Court fo the SDNY seeking a declarartory judgment to establish the Trust’s rights under various insurance K’s. BR Court held it was w/in its core jurisdiction and denied motion to compel arbitration. DC for SDNY reversed and held the insurance K disputes were not core proceedings. Under §1292(b) the district court certified its order for interlocutory appeal. The Trust is their successor in interest to the confirmed plan. All of their insurance policies were issue before the debtors petitioned for bankruptcy relief. Issue:Holding:Analysis: Is it core or non-core proceeding? Bankruptcy court has core jurisdiction over claims arising from a contract formed post-petition under §157(b)(2)(A). However, we conclude that the impact these contracts have on other core bankruptcy functions nevertheless render the proceedings core. Newman concurrence: It ought to be core simply because it involves a post-petition breach.Calabresi concurrence: Case-by-case approach but punts for another day.

In re Enron Corp. (Bankr. SDNY 2002) IS VENUE IN NY UNFAIR?Facts: Enron has a shit ton of employees in TX, but also has a bunch in NYIssue: Should the venue of these bankruptcy cases be transferred from NY to TX?

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Holding: NO. NY is king.Analysis: §1408(1) lets debtor select venue for Chapter 11 reorg. Venue is proper in any jurisdiction where the debtor maintains 1) a domicile, 2) residence, 3) principle place of biz, 4) where its principal assets are located for at least 180 days before filing. §1408(2): venue is proper for any affiliate that files a bankruptcy petition w/in a venue where there is already a bankruptcy case pending under §1408(1). Burden on the movant to show by a preponderance that the transfer is warranted. §1412 grants relief if it is established that transfer is in 1) the interest of justice or 2) the convenience of the parties. Convenience is determined by 1) proximity of creitors of each kind, 2) proximity of the debtor, 3) proximity of witnesses for administration of estate, 4) location of assets, 5) economic administration of the estate, and 6) necessity for ancillary administration if liquidation should result.

Transnational Bankruptcies Territorialism: “grab rule”. Local creditors had legitimate expectations that any financial crisis would be resolved

applying local policies and preferences Universalism: Bankruptcy is a collective proceeding that must extend to all of a debtor’s assets and all the

stakeholders.

2 Major Issues in Transnational Bankruptcies Choice of Forum

o Which court should have primary management over the case? Choice of Law

o Which law should be applied to this issue?

Choice of Forum

Parallel proceedings: Where other courts have full bankruptcy cases involving the same companyAncillary proceedings: Solely assist the primary court

1. Home Court: United Statesa. §541(a)(1) grants jurisdiction over the asets of the bankrupt “wherever located.”

In re McLean Industries (Bankr. SDNY 1986) -- US LinesFacts: US Lines as debtor wanted to restrain GAC Marine from ceasing their ship for unpaid debts. They wanted to find GAC in contempt for violating the automatic stay. GAC doesn’t believe it is subject to the US in personam jurisdiction because it is organized under UK law and has no domicile in the US.Issue: IS GAC Marine subject to in personam jurisdiction?Holding: YES! They violated the stay and will be sanctionedAnalysis: Was Due Process sufficient? I) transactional jurisdiction as set forth in Rest. 2nd of Conflicts and 2) General “doing business” jurisdiction. I) GAC Marine has a subsidiary in the US that holds itself out as GAC Marine. And 2) is supposed to be read broadly. See BK v. Rudzewicz

In re McLean Industries II (Bankr. SDNY 1987) -- US LinesFacts: US Lines wants a judgment finding GAC in continuing contempt and make them pay their sanctions. GAC insists it is impossible to comply because they assigned their pre-petiition claim. GAC fails to introduce evidence of the assignment. GAC transferred it to FAL. GAC filed in Hong Kong and Singapore to substitute FAL so they could sell the boats. GAC argues they can’t comply with the order from the first case. Issue: Are they violating the stay? GAC argues that i) court is extending its jurisdiction by holding them in contempt for

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seizing foreign assets, ii) assignment was permitted by 3001 R. Bankruptcy, and iii) the contempt decree is “ineffectual” b/c it will not free the ship since other foreign creditors have joined the arrest proceedings.Holding: GAC is Shit outta luck!Analysis: They could buy back the claim. They could have vacated their orders in HK and Singapore instead they transferred them and enforced them. They violated §362a1 a4 and a6. GAC could have modified the stay and introduced evidence showing cause for mod. In fact, this court has granted them before. They made a mockery of Rule 3001.

2. Home Court: Elsewhere

X v. Schenkius (receiver of Y) Dutch ExampleFacts: X and Y granted divorce on June 6 1988. X petitioned the same court to declare Y bankruptc. Schenkius was appointed receiver. Their joint estate included a plot of land in Spain. Receiver demanded that X be ordered to cooperate w/ the sale of the real estate for the benefit of the bankrupt estate. Court ordered X to cooperate. Judge ruled that the entire estate made the debtor (Y) make any foreign property available to the receiver. Issue:Does X (ex-wife) have to comply?Holding: Yes. B/c X and Y were married in community of property and their divorcce was not yet final (not entered in the civil register) at the time when the bankruptcy was declared.)

3. Cooperating Court: United Statesa. §303(b)(4), 304-306: permit and encourage bankruptcy courts to cooperate w/ home country bankruptcy

courts abroad.b. Chapter 15 of the Bankruptcy Code

i. Model Law of Cross-border insolvency by the UN in 1997 adoptionii. Retains ancillary proceedings as the vehicle of cooperation, but permits parallel proceedings.

iii. Some primacy to local parallel proceedings1. Called concurrent proceedings in §1529

c. Court still has broad discretion to dismiss the local US case in favor of an ancillary approach in deference to the foreign proceeding where it is pending in the home country of the debtor.

d. Main Proceedingsi. §101(23) and §1502(4)

ii. Given lots of deference by USiii. Must truly be the “center of main interest” or COMI or Principle Place of Biz

e. Foreign Representative may file for recognition of a foreign proceeding in the US under §1515 and granted quickly in most cases using various presumptions.

i. Must make full disclosure to US courts of status of the proceedingsf. Non-Main Proceedings

i. Pending in countries where the debtor has an “establishment” are granted limited recognition and cooperation

ii. §1521(c)

In re Bear Stearns High-Grade Structured Credit Strategies Master Fund (Bankr. SDNY 2007)Facts: The two joint provisional liquidators of 2 investment funds filed petitions under §1515 for recognition of their liquidation of funds in the Cayman Islands as foreign main proceedings under §1517 or foreign non-main proceedings in 1502(5) and relief under §1521. Issue: Were these foreign proceedings eligible for recognition? Only if they met definitional requirements of either a foreign main proceeding or non-main proceeding.Holding: No! They are not eligible for relief as main or non-main proceedingsAnalysis: The Foreign proceeding must be in a country where the debtor has its center of main interests (PPB) or have an establishment. Establishment = anywhere the debtor carries out a non-transitory economic activity.

Main Proceedingo Debtor must be proceeding where it has its COMIo §1502(4)

Foreign Non-main proceedingo Debtor must have establishment where the proceeding is happeningo §1502(5)

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Presumptiono §1516o Absence of evidence then we assume the debtor’s registered office is their COMIo If there is evidence to the contrary then the foreign representative must offer proofo Location of HQ, location of managers, debtor’s assets, majority of creditors, jurisdiction whose law

would apply to most disputes can be offered Main Analysis: Petitioners pleadings say the US is their COMI = PPB – FAIL TO MEET MAIN Proceeding Non-main proceeding analysis: Must have an “establishment” in the Caymans. Look to National law. The

debtor has no establishment in the Caymans. They only have a shell corp.

In re Board of Directors of Telecom Argentina (2nd Cir. 2008)Facts: Telecom company re-negotiated its obligations in wake of economic crisis. Argo Fund challenged the restructuring. Telecom announced it intended to restructure under Argentina Involsvency Law. Their law allows the debtor to suspend payments or seek court approval under privately negotiated, majority approved plan and bind all creditors. They had 90% consent in $ and 82% in #. Argentine court approved the plan. They concluded it was not abusive, fraudulent, or discriminatory with legal regs. Under §304 Telecom sought ancillary to a foreign proceeding to declare the approval order and give the APE full force and effect in the US to bind all creditors. Bankruptcy court qualified it as a “foreign proceeding” and granted. Issue: Can the Argentina judgment be granted in the US?Holding: Yes!Analysis: §304 grants petitions for best economical and expeditious administration of the estate with 6 factors. A) Just treatment of creditors: Argo had notice but never objected. Bankruptcy court did not abuse its discretion that this APE ensured due process and just treatment. B) Comity: Most important factor. Comity is “the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other person who are under the protection of its law.” Argo argued it violated public policy b/c it was inconsistent with the Bankruptcy Code for 3 reasons. 1) protection of bondholder’s under §316, 2) best interests of creditors under §1129, and 3) good faith requirement under §1129. §304 acts to override these objections.

2. Cooperating Court: Elsewhere McGrath v. Riddell (House of Lords 2008)Facts: Australian insurance companies insolvent. Four of them petitioned for liquidation. Their assets were reinsurance claims on London policies, situated in England. Provisional liquidators appointed in London. In Australia, court granted orders and appointed liquidators. The Australian judge wrote to the High Court in London, asking the provisional liquidators to be directed, after their expenses, to remit the assets to the Australian liquidators for distribution. Can and should the English court do so? The alternative is a English liquidation and distribution. If the English assets are sent to Australia, the outcome for creditors will differ.Issue: How to cooperate when each country has somewhat different priority rules?Holding: Remit the assets to the Australian liquidator.Analysis: 2 grounds for doing so. Common law and Statutory. UK §426 grants the courts to cooperate with “relevant countries” deemed by the Secretary of their state. Australia is a relevant country and comity and universalism demand that they cooperate. *US is not a relevant country.

4. Choice of Lawa. Choice of law is often a distinct issueb. Choice of law is always related to which country is the home country and therefore to choice of forumc. Choice of law for application of avoidance law is in many ways the most important question in int’l

insolvency, at least from litigants perspectived. Three most important and crucial areas for determining the applicable bankruptcy law

1. Avoiding Powers2. Distribution (priority rules)3. Discharge

In re Maxwell Communication Corp (2nd Cir. 1996) British preference law requires the debtor to have a “desire to prefer the creditor.” Most likely avoidable under

§547 of the US Bankruptcy code but not §239 of the English Insolvency Act.

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Facts: Less than 90 days before bankruptcy Maxwell made transfers to British banks with their headquarters in London, but with branches in NY. One bank was a French bank with its HQ in Paris with offices in London and NY. Debtor filed petition in US and sought an administration order (Chapter 11) in London. The judges from both sides of the pond reached a global protocol. They failed to discuss whether the debtor could set aside pre-petition transfers to certain creditors.Issue: Whether Maxwell as a debtor estate in Chapter 11 may recover under American law millions of dollars transferred to 3 foreign banks shortly before declaring bankruptcy?Holding: The doctrine of international comity precludes application of the American avoidance law to transfers in which England’s interest has primacy.Analysis: Comity is important for the US Judge to consider. The dismissal was warranted, the statute was properly construed not to reach the pre-petition fund transfers to the banks. England has the strongest connection to the debtors and the present litigation. Almost all the creditors were centered in London and the fund transfers occurred there. The English avoidance law has a better argument. The choice of law was appropriate.

Problem Set 4242.1) Canadian corporation with primarily Canadian warehouses had 4 US locations. The company filed liquidation in Calgary. Our client, a Detroit corporation wants to obtain pre-judgment attachemtns against each of the US warehouses to secure payment of the $775,000 owed to it. Does the Canadian stay affect our client’s right to seize the inventory? Probably not unless our client is bound by Canadian jurisdiction, but look to Canadian law. See GAC caseWhat is the next step by the Canadian bankruptcy trustee for Maple Leaf? They will file as a Foreign representative in the US courts. §1515What effect will it have on our client? It is a foreign main proceeding so they will be granted a foreign representative. §1520What is the likely success of grabbing the inventory? Unless you beat the corporation to being declared a foreign representative, an automatic stay will be placed on all their US property. Not a good outcome for our client.§1520

The Functions of Bankruptcy Law

Banks have their own special bankruptcy law which protects those who deposit with them Securities Investors Protection Act protects investors by disallowing bankruptcy of stock brokers who hold the

securities of their customers §752 Railroads aren’t allowed to file Chapter 7 but have their own Chapter 11 The reason banks and brokers are excluded from ordinary bankruptcy rules is because they are “highly regulated

financial institutions that take deposits of money or valuables from the public” Hedge funds – not excluded from bankruptcy

o But their financial instruments are not exempt from the automatic stay and avoiding powerso §362(b)(6)-(7), (17); 559-560

Long Term Capital Management $4B in capital and borrowed up to 20 times that for leverage NY Federal Reserve invited leading banks and firms agreed to invest billions more in its

equity to prevent a run on its assets Alternative Approaches to Bankruptcy

o Automated Bankruptcy Courts would enforce absolute contractual priority in both liquidation and reorganization and the

control over the deployment of the assets of a firm in general default would be determined by a sort of reverse “bidding-in” by existing creditors or equity holders.

Each class of equity or debt would either purchase all the interests above it at face value or forfeit the interests of their class. If no lower class bought the debt above it, the highest class of debt would own the company outright. The new owner would then decide how to deploy the assets through sale or continuing business.

o Contractualist Approach Coase Theory: A legal rule that alters the bargains of economic actors is inefficient.

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Elimination or deregulation of bankruptcy law for a minimum amount of mandatory rules and permits economic actors to construct their own rules to manage general default.

Choice of “bankruptcy menu” at the inception of the firm. Include a default rule for non-parties such as tort victims “Collective Action Problem”

Tragedy of the Commons Bankruptcy is supposed to solve this problem by maximizing the debtor’s assets and

distributing the proceeds to the creditors “creditors’ bargain theory”: idea that at the inception all creditors would agree to

bankruptcy law Authors data shows that a case averages 19 unsecured claimants Need to solve the problem of contracts changing over time Involuntary creditors and quasi-involuntary, and small creditors would never be a party to

the bargainProblem Set #4343.1) a) market efficiencies available in the contract approaches as against the difficulty of negotiating among a number of creditors over timeb) the claim that bankruptcy should serve debtor interests as against the Bankruptcy Code rule that seem to confirm that creditors have the overriding rights in bankruptcy (e.g., absolute priority rule in §1129(b))

43.2) Create a new hypothetical Business bankruptcy system. Should it include state-owned enterprises that are being slowly privatized? Prior law made criminal penalties for Officer and Directors of failed companies and had no provision for discharge of entrepreneurs or consumers. The country is unitized, not federal, and it has no specialized judiciary. What else should be known about the country? Its legal system? Initial thoughts on the system proposed and why?

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