Professional Documents
Culture Documents
Czar
Spring 2007
I.
(a)
3.
4.
5.
6.
A. General Info
1. Classic straight bankruptcy where BT is appointed to gather all the debtors
ppty, to sell it, and to distribute the proceeds to creditors.
2. Governed by 276.
3. At the end of the process, the creditors have their proportional share of
whatever the debtor had, and the debtor receives a discharge of the remaining
outstanding debts.
4. As the BT prepares to sell each piece of ppty in which the debtor has an
interest, it must first determine if some other person or company has any
interest in the ppty. (i.e. co-owners or secured creditors)
5. BT must also consider any valid exemption claimed by the debtor in a
particular item of ppty.
6. General creditors are paid after secured parties and other entities with ppty
interests have been paid.
a. Divided into 3 groups:
i.
priority creditors first in line
ii.
general unsecured creditors
iii.
subordinated creditors paid last b/c theyve been
equitably subordinated to everyone else.
B. Eligibility
1. Just about any entity is eligible to file a Ch 7 liquidation case.
a. Exception businesses whose insolvencies are governed by another
set of nonbankruptcy laws (i.e, banks, railroads)
2. Substantial Abuse - 707(b) gives the bankruptcy court discretion to dismiss
a bankruptcy case for substantial abuse.
a. Presumption that when debtor files bankruptcy it is not a substantial
abuse.
b. In re Shaw Court used the Green test to determine whether the
debtor had the ability to pay the debt, including consideration of the
relation of the debtors future income to his future necessary expenses.
See Green factors (TOC test).
i.
Where court finds that debtors are actually living beyond
their means rather than falling victim to some unforeseen
circumstances, their filing will be deemed a substantial
abuse.
c. 707(b): has been amended to give a presumption of abuse of Ch. 7
when it can be deemed to have enough disposable income to pay under
a Ch. 13 plan. For this determination 707(b) lays out called the
threshold eligibility test.
i.
The first component of that calculus is whether the debtors
income is below the medium of other debtors in that area.
(a) if it is below, then debtor can file Ch. 7 (no abuse)
ii.
If income is higher, take debtors income and subtract from
it some expenses (will actually be a standard number that
your get from the govt) then compare to a specific number
laid out in statute to tells us whether debtor will qualify to
file Ch 7.
iii.
To do the financial calculation, it is necessary to know:
(a)
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4.
5.
6.
7.
8.
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ii.
Second, to timely filed proof of claim under 501
iii.
Third, to tardily filed claims
iv.
dont need to worry about 4, 5, and 6
c. If there is money left after paying the priority and secured claims, it is
distributed in accordance with the hierarchy on a pro rata basis.
i.
Ex. - after paying all of 507 claims, the estate has $100
(a) timely filed claims equal $1,000
take the $100/$1,000 = $0.10 per dollar of
claim
get $5 for a $50 claim
ii.
recall each class of the hierarchy must be paid in full before
you move to another class.
3. Priority Claims 507 (unsecured)
a. must satisfy all domestic support obligations (DSOs) first
i.
101(14)(a) debt which accrues before, on or after the
date of filing, including interest.
(a) amt owed to spouse or former spouse, child or
childs parent or guardian.
(b) in the nature of alimony, maintenance, or support
of spouse or former spouse, child or childs parent
(c) established before the bankruptcy case
(d) not assigned to a nongovernmental entity
(e) notice does not include division of ppty
ii.
admn expenses the trustee runs up in order to support DSOs
b. second, admn expenses, i.e. those necessary for the benefit of the
bankruptcy estate.
c. Third, dont worry about
d. Fourth, certain claims that arise out of a debtor owning a business
which has employees
i.
(a)(4) makes claim to the extent of $10k for each individual
who has earned w/in 180 days of the filing, wages, salaries,
commissions, etcfrom debtors business.
ii.
(a)(5) is the same thing but w/regards to any type of
employment benefit plan.
e. Fifth, allowed unsecured claims for farmer or fisherman who have
stored their products w/a facility if the storage place files bankruptcy
f. Sixth, to the extent of $2,225 for each individual, arising from a
security deposit put down for purchase, lease or rental of ppty, or the
purchase of services, for personal, family or household use that were
not delivered.
g. Eight, just about all taxes
h. Ninth, dont worry about
i. Tenth, claims for death or personal injury resulting from the operation
of a motor vehicle or vessel while intoxicated (only monetary damage,
not ppty)
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G. Discharge
1. Enforced by an injunction issued by a federal court which is permanent any
violation would constitute a contempt of court.
2. Debtor does not always receive discharge.
a. Governed by 2 provisions:
i.
727 lose right to discharge if you are in a 727 category.
ii.
523 contains a laundry list of debts that are not
dischargeable.
3. 727(a): the court shall grant debtor a discharge UNLESS:
a. debtor is not an individual (i.e. corporation, business assoc.)
i.
Note: if you liquidate corp., in the end there is no corp.
b. debtor w/intent to hinder, delay, or defraud
c. debtor concealed, destroyed, of failed to keep properly recorded info
on debtors financial condition or business transactions.
d. debtor knowingly and fraudulently makes false statements, false
claims, bribes or withholds relevant info from BT, etc.
e. debtor fails to adequately explain any loss/deficiency of assets
f. debtor doesnt obey court order or invokes privilege of selfincrimination
i.
bankruptcy not a right, its a privilege
g. debtor has previously filed within prescribed time period:
i.
Only one Ch 7 case every 8 yrs
ii.
Only one Ch 13 case every 6 years
4. 523 Non-Dischargeable Debts:
a. (a)(1): any tax debts
i.
they are also priority claims
b. (a)(2): credit or money obtained through fraud, false representations
about debtors financial condition, or debt incurred (beyond $500) on
luxury goods or services within 90 days, cash advances (beyond $750)
within 70 days.
c. (a)(3): debt that debtor fails to list in his filing when it should have
been listed. (fails to give notice)
d. (a)(4): fraud while a fiduciary, embezzlement or larceny.
e. (a)(5): domestic support obligation
f. (a)(6): willful and malicious injury by the debtor to another entity or
to the ppty of another entity.
g. (a)(7): fines or penalties paid to a governmental unit
i.
could arguably include student parking tickets to a state
university.
h. (a)(8): any federally guaranteed education loan, unless it would
impose undue hardship
i. (a)(9): debt from death or personal injury caused by drunk driving,
boating, or flying, or any use of intoxicating substance.
i.
not ppty damage; some try to get it in under (a)(6)
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Redemption
1. Recall that the debtor has an equity of redemption right until the gavel drops
at the foreclosure sale.
2. 722 provides a slightly more favorable remedy in bankruptcy that allows the
debtor to redeem his ppty by paying the full loan or full value of the collateral
in cash, whichever is less, to the secured creditor. (essentially buying back
from the secured creditor)
3. Permitted only in Ch. 7.
4. Only refers to redeeming the collateral subject to a lien that secures a
dischargable consumer debt.
5. Ppty must be tangible personal ppty intended primarily for personal, family, or
household use and it must have been exempted or abandoned.
J.
Retention of Collateral
1. Not specified by the Code and only permitted by some courts in Ch. 7.
2. Allows the debtor to elect to retain collateral while continuing to pay
installments to the secured party as required by the security agreement.
3. The secured transaction rides through the bankruptcy w/o being formally
administered and dealt with as part of the estate.
4. A majority of courts dont like this and will say it is invalid.
A. Overview
1. Designed for individuals w/regular income (i.e. not too much debt).
a. no corporations may file Ch. 13, but sole proprietorships may.
b. a debtor with unpredictable or unstable income cannot be permitted to
undertake Ch 13 bankruptcy.
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2. Under Ch 13, debtors are allowed to keep their ppty as long as they present to
the court a plan that provides creditors specific payments over a period of
time.
a. Note the difference from Ch 7, where all of debtors non-exempt assets
immediately become property of the estate.
b. Ch. 13 focuses more on future income.
3. More flexible and cheaper than Ch. 11.
a. Court has more control.
b. Creditors have different role. If a creditor objects to debtors plan,
their only recourse is to know the Ch 13 law, so they can properly
object to debtors plan.
4. One standing Trustee or a group of standing trustees that oversee a large
number of Ch. 13 cases.
a. Has many of the obligation of a Ch. 11 trustee:
(i)
must object to questionable claims
(ii)
receive and distribute the debtors plan payments to
creditors pursuant to the chapter 13 plan.
5. Must be commenced voluntarily; creditors have not right to petition for an
involuntary Ch. 13 bankruptcy.
6. Postbankruptcy ppty is included in the Ch 13 estate b/c the debtors
performance under the plan is dependent on it.
7. It is the general policy of bankruptcy law to favor rehabilitation under Ch. 13
over liquidation under Ch. 7, on the theory that creditors are likely to do better
in a Ch. 13 case.
8. When a debtor fails to make payments pursuant to Ch 13 plan, it can be
converted into a Ch 7 case.
B. Threshold Eligibility for Ch 13
1. 109(e) limits access to Ch 13 to:
a. natural person
b. with limited debts
i.
non-contingent limited debts below certain levels
c. and regular income
2. Regular Income determined on a case by case basis.
a. 101(30) individual whose income is sufficiently stable and regular
to enable such individual to make payments under a Ch 13 plan, other
than a stockbroker or commodity broker.
b. In re Murphy Congress intended to expand and broadly define
individual regular income to include funding from diverse and
nontraditional sources, such as a weekly allowance from a CL
husband.
c. Does not necessarily mean monthly pmts.
i.
most courts will accept evidence of past performance
d. Govt pmts (i.e., social sec, welfare, etc) do count as regular income.
e. Sales commission may not be considered regular income.
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iii.
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(e)
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iii.
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3. The business continues to operate in the ordinary course, under the control
of the DIP.
a. DIP controls the estate and has all of the powers and duties of a
Trustee.
b. has avoidance powers
4. Debtor negotiates a plan of reorganization with its major creditors.
a. the Ch 11 petition is an invitation to a negotiation\
5. A creditors committee is appointed to scrutinize the debtors activities on
behalf of all the creditors and to negotiate with debtor.
6. To conclude the bankruptcy, the debtor will propose a plan of reorganization,
in which it will offer to pay each class of creditors a certain percentage of
their claims over a stated period of time, with pmt being in cash, ppty, or
securities.
7. If the plan is approved by the specified majorities of creditors in each class, it
will be confirmed by the court granted that every creditor who did not accept
the plan will get at least what they would have recd in Ch 7.
8. Upon confirmation of the plan, the debtor is discharged from all its prepetition debts except as provided in the plan.
a. Note: different from Ch 13 where debtor is not discharged until the
plan has been completed.
C. Automatic Stay and Adequate Protection
1. Chapter 11 plans take longer to put them together, often 6 months to 2 years.
Why? The creditors must approve the plan.
2. During this time, the stay is in place and the creditors are watching their
collateral decline in value. So, under chapter 11, adequate protection is more
of a problem.
3. Exceptions to the stay:
a. Filing of a criminal case and/or continuation of a criminal case filed
against you does not violate the automatic stay.
b. 362(b)(2) a case is not stayed if it is a civil proceeding for the
establishment of paternity, custody, DSO, divorce, or any other pure
domestic relations type cases.
4. Lifting the stay 362(d):
a. for cause lack of adequate protection
i.
collateral is greatly decreasing in value
ii. the debtor may have to pay the decline in value, so that
creditor is adequately protected. The expert testifies to the
decline in value.
iii.
Court must lift stay if the decline in value is occurring
iv.
Also, secured creditor can require the debtor to maintain
insurance, etc on collateral and if they dont, the stay is
lifted drop dead order.
v.
Market rate of interest on value of collateral isnt included
in adequate protection.
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vi.
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3.
4.
5.
6.
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E. Preferences
1. Seeks to deter debtor behavior of paying off certain creditors prior to filing
bankruptcy.
a. By receiving a pmt right before bankruptcy, the creditor will receive
more. He is a preferred creditor.
b. Ex. - debtor has three creditors and one is his brother, debtor only has
$1k total. Each creditor is owed $1k. You give the $1k to your brother
on the eve of bktcy, instead of $333 to each creditor. By doing this,
your brother has become a preferred creditor.
c. Does not necessarily mean he is being paid in full. Even partial pmts
will give them more than they would receive in bankruptcy % wise.
2. All unsecured creditors, with the exception of priority creditors, should be
treated equally.
3. Purpose of the Preference Statute is to deter debtors from preferring
creditors prior to bankruptcy that would subvert the distribution process
of bankruptcy.
4. No scienter requirement therefore, the Trustee does not have to show intent.
5. 547(b) trustee may avoid the transfer of any interest of the debtor in ppty.
a. transfer of interest means money, property, etcany property being
transferred including assignments and transfers of security interest.
b. gives the trustee the power to have the court declare a security interest
null and void.
6. Elements:
a. transfer must be to or for the benefit of a creditor.
b. for or on acct of an antecedent debt owed by the debtor before the
transfer was made.
i.
must be on acct of a pre-existing debt.
c. made while the debtor was insolvent.
i.
547(f): rebuttable presumption that 90 days prior to filing
bankruptcy, the debtor is insolvent.
ii.
If within the 90 days, debtor will have to prove solvency...if
over 90 days, trustee will have to prove insolvency.
d. made within 90 days of bankruptcy filing.
i.
this is the normal reach back period.
ii.
However, the reach back period extends b/w 90 days and 1
year.
(a) Can always avoid w/in 90 days
(b) Can avoid up to 1 yr if the creditor involved with
the transfer was an insider of the debtor.
e. Creditor received more than he would have received in Ch 7.
i.
(5) will always be met unless the transfer took place in 1
of 2 situations:
(a) debtor is solvent (can pay all creditors in full)
(b) pmts are made to an oversecured creditor.
7. Exceptions to Preference 547(c):
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a. Even if all of the elements of 547(b) are met, the transfer can still not
be made avoidable.
b. Contemporaneous Exchange - the deal was meant to be substantially
contemporaneously made. It must be intended by debtor and creditor
for a new value.
i.
Contemporaneous usually means w/in a couple of hours.
ii.
Ex. grocery store w/cash (not check)
c. Ordinary Course Exception - debt incurred in the ordinary course of
business of debtor and transferee; payment must have been made in
ordinary course of business, and must have been paid according to
ordinary business terms. (ordinary for that particular debtor)
i.
Courts have held that start up loans can be avoided b/c they
are not ordinary. (only made once)
d. Subsequent New Value Exception Debtor is sliding toward bktcy;
debtor pays money back and gets new items and then files bktcy.
Congress wants to encourage people to deal with debtors who are
about to file bankruptcy. This exception gives creditors incentive to
deal with these debtors, b/c they will get credit for the new value
extended to them.
i.
Ex. 1- Debtor is sliding towards bankruptcy. On Day 0
debtor pays creditor $1000 on preference antecedent debt.
On day 5 creditor extends credit to debtor for $5000. If
debtor then files bankruptcy, the debtor can off-set the pmt
by the new value that was extended. So in this case, debtor
can offset the $1000 preference pmt by the $5000.
ii.
See p 510. list in 24.4.
o First thing to determine is whether the pmt is a
preference at all.
is it w/in the preference period?
o Only get to offset extensions of credit that occur
after the preference period.
o First preferential pmt is made on 2/10 for $2k.
Subsequent to that, new extensions of credit are
extended amting to $17k. This offsets the $2k
preferential pmt. Creditor will not have to pay the
$2k back.
o Next preferential pmt is on 3/10 for $1k. Notice you
cannot use the $17k to offset it b/c you can only use
subsequent new credit to offset. New credit was
issued on 3/17 for $6k. This can be used to offset the
$1k pmt.
o 2 more preference pmts on 3/20 and 4/1 amting to
$19k. No new credit issued subsequent to that, so
creditor will be subject to $19k in preference
exposure.
e. Earmarking Doctrine limited and all of the elements must be met.
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i.
F. Fraudulent Conveyances
1. As a debtor slides toward bankruptcy it is simple predictable to our nature that
debtors will try to hide their assets.
2. Not only are actual fraudulent transfers before the debtor files bankruptcy are
avoidable but also constructive fraudulent transfers.
3. Reach back period is 2 years.
4. Actual Fraudulent Conveyance - 548(a)(1)
a. Transfer of interest in ppty that occurred w/in 2 yrs of filing, and the
transfer was made w/actual intent to hinder, delay, or defraud
creditors.
b. Badges of Fraud if these are present court will impute fraud into
debtors transfer:
i.
transfer occurred right before bankruptcy when the debtor
was aware that he was insolvent and intended to file for
bankruptcy.
ii.
any transfer made to a close relative or insider.
iii.
Not an exhaustive list. May always claim that a transfer is
a badge of fraud.
5. Constructive Fraudulent Conveyance - 548(a)(2)
a. makes avoidable transfers by the debtor that are made:
i.
within 2 years of filing for bankruptcy,
ii.
at a time when the debtor was insolvent, and
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iii.
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