Bankruptcy Fall 2006Vida

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Introduction to Bankruptcy pp. 107-117 a. 521 Debtors Duties. The debtor shall file a list of creditors, a schedule of assets and liabilities, and a current income and current expenditures, as well as a statement of his financial affairs. i) An attorney or preparer must sign the petition indicating that they gave the debtor notice of the requirements and deadlines of the filing. ii) The debtor must provide evidence of all payment received 60 days before the date of the filing of the petition, the amount of monthly net income, reasonably anticipated increase in income or expenditures over the year following the date of filing. iii) For secured debts, the debtor must file within 30 days after filing a statement of his intention to surrender the property, whether the property is exempt, or an intention to redeem the property or reaffirm the debts. Within 30 days after the first date set for the meeting of creditors or within additional time that the court allows for cause, the debtor must perform that intention. iv) The debtor must cooperate with the trustee in administrating the estate and surrender all property of the estate and any recorded information such as document and papers. v) The debtor must appear at the hearing for discharge. vi) The debtor may not retain personal property that is encumbered by a PMSI unless the debtor within 45 days after the first meeting of the creditors enters into an agreement under 524(c) or redeems the property under 722. If the debtor does not act within 45 days, the stay is terminated with respect to personal property of the estate and the creditor may take whatever action is permitted by applicable law. Unless the trustee files a motion before the expiration of the 45 day period that the property is of consequential value or benefit to the estate and orders the debtor to deliver any collateral to the trustee. vii) The debtor must file a certificate from the approved nonprofit budget and credit counseling agency that provided the debtors required class and a copy of the debt repayment plan developed. viii) The debtor must notify the court of any interest it has in an education individual retirement account under a qualified tuition program. ix) The creditor may file a request with the court to obtain copies of the petition and schedules and statement of financial affairs. x) No later than 7 days before the date first set for the first meeting of creditors, the debtor shall provide a copy of the income tax return required under applicable law for the most recent tax year ending immediately before the commencement of the case and a copy of the return must be given to any creditor that requests it. If the debtor fails, then the court shall dismiss the case unless the debtor demonstrates it was beyond her control. xi) Creditor may receive a copy of the Ch. 13 payment plan for a reasonable cost 5 days after the request. xii) The court, US trustee or any party in interest in 7, 11, or 13 may request that the debtor file a copy of each Federal income tax return or a transcript of the tax returnfiled ending in the three year period ending on the date of the commencement of the case Three years before the filing of the caseall tax returns for the last three years. xiii) In Ch. 13, at the request of the court, trustee, or any party in interest 1) if the plan is not yet confirmed, along with the return must be filed a statement of income and expenditures of the debtor during the tax year, monthly income that shows how income, expenditures, and monthly income are calculated either 90 days after the end of the tax year or 1 year after the date of the commencement of the case whichever is late, and 2) if the plan is confirmed, annually after the plan is confirmed and until the case is closed and not later than 45 days before the anniversary of confirmation of the plan. xiv) Debtor must provide the identity of any person responsible with the debtor for the support of any dependent. xv) All information must be filed in a Ch. 7 or 13 within 45 days after the date of the filing of the petition, or the case shall be automatically dismissed on the 46th day after the filing of the petition. The court may allow the debtor an additional period of not to exceed 45 days to file the information required if the court finds justification for an extension of the due date for filing. The court may also decline to dismiss the case if it finds that the debtor attempted in good faith to file all the information and that the best interests of the creditors would be served by administration. xvi) If the debtor fails to file a tax return that becomes due after the commencement of the case or properly obtain an extension of the due date for filing such return, the taxing authority may request that the court enter an order converting or dismissing the case. b. 526 Restrictions on debt relief agencies: A debt relief agency SHALL NOT 1)fail to perform any service that it told a debtor it would provide; 2) counsel a debtor to, or make any false or misleading statement 3) misrepresent the services, benefits, and risks to bankruptcy advise a person to incur more debt to file (been ruled unconstitutional by 2 federal courts in the US) Any waiver of right by a debtor under 526 cant be enforced against the debtor but can be enforced against the debt relief agency. Any K with a debtor

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that does not comply with 526, 527, and 528 is VOID. A debt relief agency is liable to a debtor for any $ received, actual damages and reasonable attorneys fees and costs if the agency is found after a notice and a hearing, to have: 1) intentionally or negligently failed to comply with 526, 527, or 528, 2) caused a case to be dismissed or converted because of failure to file the required paperwork under 521: or 3) disregard the requirements of the BR code. If its believed that a debt relief agency has violated 526, the State may stop them, bring an action on behalf of the state residents to recover actual damages, and if successful in the action, get awarded attorney fees. (District courts have concurrent jurisdiction over these actions.) If a debt relief agency intentionally violates this section, the court may stop the violation or impose a civil penalty. No provision of 526, 527, or 528 shall annul, alter, affect, or exempt any person from complying with the law of a State, except to the extent its inconsistent, or if it limits the State or court from enforcing the qualifications for practicing law. Debt Relief AgenciesAttorneys. 527 Disclosures: Debt relief agency (attorney) shall provide written notice, and no later than 3 business days after consultation, a notice that informs the debtor of all the requirements for bankruptcy including specific language about truthfulness and honesty on all forms and honesty in full disclosure. The attorney shall also inform the debtor how to complete all applicable forms and shall maintain a copy of all notices required by this statute. 528 Requirements for Debt Relief Agencies: Debt relief agency (attorney) shall execute contract with Debtor that explains clearly and conspicuously services, fees, give them a copy of the contract, disclose advertised services, and include specific warning language of warnings and disclosures. Development of the Current Statute. i) Act of 1898 providing debt relief through discharge. Provided orderliness to the collection process and encouraging debtors to make some payments, even at the cost of permitting debtors a discharge. ii) Prohibited involuntary petitions against farmers. iii) 1903 Amendments reconciled the concerns of both debtors and creditors. iv) The Chandler Act 1938 most important innovation were the adoption of new procedures for the reorganization of businesses and payment of debt over time by financially troubled wage earners. v) Equity Receivership allowed business to reorganize reduce and extend its debt and to continue operations rather than liquidate. vi) The first form of BR had defects, including expense and frequent fraud. vii) The Great Depression was the impetus for new BR enactments Sections 77 and 77B in 1933 and 1934 for railroads and businesses. viii) 77 and 77B were replaced by Chandler Act by Chapter X, XI, XII contained complex procedures to prevent abuse and most importantly Ch. X required the appointment of an independent trustee to reorganize the debtor company and the active involvement of the Securities and Exchange Commission to protect the rights of public debt holders and shareholders. ix) Chapter XIII provided a way to reorganize a familys finances in much the same way a business could reorganize its obligations debtors could reduce debt as an alternative to Ch. VII asset liquidation. x) Eventually, the act became outdated and in 1970 Congress created the National Committee on Bankruptcy to draft a new law and authorized the Supreme Court to promulgate BR rules analogous to the Federal Rules of Civil Procedure. xi) The Rules were established in 1973 and contained many of the reforms that would later be included in the Bankruptcy Reform Act of 1978. xii) The 1978 Code was adopted effective as to cases filed on or after Oct. 1, 1979 and was the first BR law not adopted after an economic debacle. xiii) Principal reforms to expand greatly the BR jurisdiction of the district courts. The new BR judges continued to be Article I judges, appointed for limited terms, unlike their Article III counterparts on the federal bench who are lifetime appointees. xiv) Supreme Court held unconstitutional the broad jurisdiction to the BR judges on the grounds that those judges were not appointed under and protected by the provisions of Article III of the Constitution. xv) Congress eventually went with a bifurcated jurisdiction approach, allocating jurisdiction between Article I BR judges and the District judges. xvi) Between 1986 and 1994, Chapter 12 was created to assist hard-pressed family farmers and a pilot program of U.S. Trustees under the supervision of the Office of the U.S. Trustee in the Department of Justice, who were to help administer and monitor BR cases. xvii) A 1994 Statute tied various dollar amounts in the statute to the changes in the Consumer Price Index. E.g. dollar amounts of allowed exempt property to eligibility for Ch. 13 and the amount of debt allowed to cause the debtor to file an involuntary BR petition. Adjustments are made at three year intervals. xviii) In 1997 issued a large and comprehensive set of proposals for changes in both consumer and business BRs. In 2005, Congress passed a bill, which was signed into law effective Oct. 17, 2005. (1) Most far-reaching changes since the adoption of the Code in 1978 with respect to personal BR. (2) Policy was that the law needed to be rebalanced in favor of the creditor interest because it was too often abused by debtors.

(3) Discretion of judges is decreased as well as that of lawyers in the application of the law and increase monitoring of their work. (4) The amendments are inartfully drafted by drafters not well-acquainted with their subject. f. Bankruptcy Court Organization i) Refereespecialized master who served on a regular basis appointed by district judges. ii) 1978 Act greatly expanded the jurisdiction of the federal courts sitting as BR courts. Most authority was vested in BR judges appointed for 14 years (not life). iii) Supreme Court decided that the BR judges either needed less power or lifetime Article III appointments. iv) 1984 Amendments broad federal jurisdiction in the BR system but shifted more of that jurisdiction to the district judges and gave the district judges complete control over the work of the BR judges. v) Courts of appeal were given the responsibility of appointing BR judges, is largely overseen by the district courts. vi) BR judges have jurisdiction over core proceedings in BR; their decisions become final unless they are appealed to the district court. vii) Noncore proceedings are only heard by BR judges as a master who submits proposed findings to the district court, unless the parties involved consent to a binding decision by the BR. Judge. viii) BR court decisions are appealed to a District Court who uses a clearly erroneous standard. ix) May appeal further to the court of appeals, asw with any other district court decision. x) First appeal from a BR code can be to a panel of BR judges and from there to the court of appeals. 158(c). xi) Bankruptcy Appellate Panels. Sidesteps the district court that otherwise would hear the case. Not allowed in FIFTH Circuit. xii) The Supreme Court promulgates the Rules of BR Procedure and are subject to any controlling provision of the Code. (1) Prescribe the procedures for administration of the BR estate, the filing of claims by creditors, the forms and schedules to be filed by each petitioning debtor, the giving of notice to creditors of particular developments in the case, and the like. (2) Part VII of the rules governs adversary proceedings defined by Rule 7001. (a) Actions to void a lien or to recover a preference and actions that have been removed to BR court from state court. (b) Full-blown federal lawsuits within the larger BR case, so they typically carry two captions: the In re BR caption first and the more familiar A v. B. (c) Federal Rules of Civil Procedure and Federal Rules of Evidence apply. (d) Disputes other than adversary proceedings are denominated contested matters and are subject to the less elaborate procedures described in Rule 9014. g. Structure of the Bankruptcy Code i) Title 11 of the U.S. Code is divided into chapters All but one of the chapters is odd numbered. (1) Ch. 1, 3, 5 are general provisions applicable in ALL proceedings unless explicitly made inapplicable by a specific context. (2) Ch. 7, 9, 11, 12, 13, and 15 each govern a type of BR. Except for Ch. 15, a debtor is in only one of these chapters at any given time. (3) Ch. 1 has definitions, rules of construction, general powers of BR court, and the qualifications of debtors eligible for each of the types of proceedings. (4) Ch. 3 governs case administrationappointment and compensation of the trustee, accountants, and attorneysoperation of the BR estate. (5) Ch. 5 includes regulation of the claims and distribution process, discharges, and the TIBs avoiding powers. (6) Ch. 7liquidation for both consumers and businesses. (7) Ch. 9 bankruptcy of municipality or other governmental unit. (8) Ch. 11reorganizing businesses. (9) Ch.13reorganizing for consumers and small businessesexcludes corporations. For debtors who want to keep non-exempt property, pay debts over time, and are ineligible for Ch. 7. (10) Ch. 12reorganization by family farmers (11) Ch. 15US court assists a foreign court that has the primary BR jurisdiction over a foreign debtor. ii) Jurisdictional and procedural provisions governing BR are in Title 28 U.S. h. Consumer versus Business Bankruptcy i) Consumer BRs are generally a matter of routine procedures while a large business BR often involves extensive litigation, negotiation, and tailor-made plans. i. Class Notes i) We are increasingly dependent on credit cardsmassive solicitation, procedures that require credit cards, really easily provided. ii) People naturally get into troubleno education as to how to use them. iii) Many college students come out in trouble. iv) Commentary on Bankruptcy Laws

(1) Some thought it was too easy and abused. (2) Authors are scholars who study the psychology of debt and how to handle it. Most people file for one of four reasons. (a) Divorce (b) Loss of a Job. Average family uses two pay checksmake less money than the single spouse working in the 1950s. (c) Medical Catastrophes (d) Otheroveruse of credit cards, etc. v) Bankruptcy does not have a standard pleadingit is form driven. Made up of several documents with several forms set up in a specific way. (1) Petition Page. (Person filing bankruptcyany entity.) (2) Schedule Alist any and all real property the debtor has. (a) Want to be able to go through the papers and determine the debtors financial situation. (3) Schedule Blist any and all personal property. (4) Schedule Cexemptionswhat the person can keep out of reach of the creditors. (5) Schedule Dpriority creditorssecured creditors. (6) Schedule Funsecured creditors. (7) Schedule G-Jleases, co-debtors, income, expenses. (8) Statement of financial Affairswhat type of transactions the debtor has had two years prior to the bankruptcy. (9) Must all be signed under penalty of perjury. vi) Ethical issues are prevalent throughout the classduty toward the poor and the creditors. The debtor may be a fiduciary. vii) Bankruptcy rewrites Contracts. . viii) Really important to read the Code Sections, especially the bolded ones. ix) New Codean atty cannot encourage a client to incur debt in contemplation of bankruptcy. Deprives the atty of giving valid, sound advice to client.commercial 1st amendment right. In two federal district courts, it has been ruled unconstitutional. x) If you give advice to individual worth less than $150,000you are considered Debt Relief Agent. Discourages the more reputable firms from participating in bankruptcy law. Restricts access to bankruptcy. Numbers have dropped drastically. xi) Bankruptcy is only protectionmaking it more difficult to get to. II. Elements Common to Consumer Bankruptcies (Background, Outline, Getting Started, The Estate) pp. 119-136 a. 541 Property of Estate i) (a) Commencement of the case creates the estate and includes all legal or equitable interests of the debtor, wherever located and by whomever held, as of petition, all community property interests of the debtor, all joint interests of the debtor, any interest in property recovered by the TIB, 1. Windfall provision: Interests of the debtor acquired within 180 days of petition, by bequest, divise, or inheritance, as a result of property settlement agreement with debtors spouse, or an interlocutory or final divorce decree, or as beneficiary of life insurance policy or death benefit. 2. Proceeds, product, offspring, rents or profits from property of estate (except earnings). 3. Any interest in property that the estate acquires after the commencement of the case. (b) (b) Property of the estate does not include (i) Any power debtor exercises solely for benefit of another (Executor of trust or ward etc). (ii) Any interest of debtor as lessee under a lease of non-residential real property that terminated before or during the case. (iii) Any license or teaching accreditation, or right to stay in accredited school. (iv) Funds placed in an education individual retirement account designated to child, stepchild, grandchild, stepgrandchild of debtor as long as not an extension of credit and not in excess contributions, not to exceed $5k per child for the last two years. (v) Texas tomorrow fund, contributed to at least a year before filing. (vi) Employer withheld, or employee paid, employee benefit plans for deferred compensation, tax-deferred annuity, health insurance plan. (not disposable income under Chapter 13). (vii)Personal property, that is subject to a non-possessory, non-purchase money, security interest. (viii) Money Order Provision???????? (ix) (c) (1) Even if a clause of a property or trust contract says the property cannot become part of BR estate, it does not matter, if it is of the kind that is listed as property of BR estate. (2) Spend thrift trusts are enforceable under BR law. (x) (d) Trustees interest in property of the estate, is only to the extent of what the debtors interest is. ????????? (xi) (e) Legally adopted child and foster child is a member of debtors household. ii) (f) A tax exempt corporation may be transferred to a non-exempt corporation just as if they had not filed b. Background

i) Key playersdebtors, professionals, and the consumer creditors. ii) Most bankrupts are a broad cross-section of the middle class. iii) Great majority are overwhelmingly in debtcar loans, credit loans, and utility bills. iv) Main Reasons: income loss, medical problems, divorce. Rise of a different kind of credit. Use bankruptcy to hang on to their homes. c. Outline i) Two types of ProceedingsLIQUIDATION AND PAYOUT PLANS. ii) Ch. 7Liquidation in which the debtor gives up all non-exempt assets. (1) Serves the two purposes of bankruptcy by allowing an equal distribution of the debtors assets among the creditors and discharges the debt so that the debtor gets a fresh start. iii) Alternative to Liquidation is the Pay-out Plan. (1) Ch. 13 (Consumers) and Ch. 11 (Businesses) (a) Keeps all assets in exchange for promising to pay off debts over a period of time from future income. (b) Can also mean much higher returns for creditors. d. Getting Started i) In order to start bankruptcy a debtor files a petition. ii) The filing fee for Ch. 7 is $220. However, BR Code provides in forma pauperis. Anyone whose income is less than 150% of the official poverty line can request a fee waiver from the court. 1930(f)(1) iii) The debtors attorney has a clerk who takes the filing to the BR clerks office, where a clerk will take the filing fee, stamp date the minute, hour, and day of petition. At that instant a bankruptcy estate is created. e. The Estate i) Property of the Estate (1) At the moment a bankruptcy petition is filed whether voluntary or involuntary an estate is formed by operation of law. (2) Bankruptcy is a financial demise creating an estate consisting of all the interests in property previously owned by the prebankrupt debtor. (3) At the instant of filing the bankruptcy petition, all the property owned by the debtor becomes property of the estate. This concept is intentionally expansive. (4) The most important exception is for services performed by an individual debtor AFTER the commencement of the case. 541(a)(6) (a) This provision means that wages, commissions, and the like earned after the petition is filed are not property of the estate and do not have to be surrendered to their creditors. (b) Debtors receive the first benefit to the fresh start immediately begun on filing. (c) There are a number of expectancies that must be allocated between the debtors past and future. (d) The determination of the point at which an expectancy becomes property: If it accrues pre-petition, it is property of the estate (i) Segal v. Rochelle (1965) a tax refund from a business 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. (ii) Koskoszka v. Belford (1974) an accrued tax refund was property of the estate because the taxes were on prior personal earnings. (iii) The present language of 541 expressly overrules Lines. Lines v. Frederick (1970) vacation pay accrued but not due and owing on the date of bankruptcy was not property of the estate, but rather part of the fresh start. (iv) Congress intends that the courts include in property of the estate all interests of value to the estate, regardless of competing policy considerations. ii) Sharp v. Dery (1) Facts: Debtor filed Ch. 7 BR on Dec. 21, 1998. From that time until Feb. 1999 Valasis Communications, Inc. employed the debtor. On Feb. 22, 1999 the debtor received an employee bonus of $11, 331.63. A worker must have been in good standing and employed when the company issued the bonus checks. The trustee sought a determination from the bankruptcy court that the post-petition bonus was the property of the estate. (2) Procedure: The BR Court found that the post petition bonus was to go to the Trustee. The funds were held in escrow pending the outcome of this appeal. Reversed, money should remain with the debtor. (3) Issue: Whether if a debtor has an enforceable right to receive property when he files his petition, the property right goes to the estate. YES. (4) Rule: The bankruptcy estates property includes all legal or equitable interests of the debtor in property as of the commencement of the case subject to limited exceptions 541(a)(1).

(5) Rule: Congress intended property of the estate to encompass all interests of the debtor, including a debtors contract right to future, contingent property. (6) Rule: Courts must look to state law when deciding whether a debtor had a legal or equitable interest in the property when he filed for bankruptcy. (7) RULE: A trustee has no greater rights than the debtor has on the date of the filing of petition (8) Factors Indicating Whether there Was an Enforceable Interest in Property: (a) For the debtor to receive the bonus, the employer had to employ him at the time it declared the bonus, (b) To be eligible for the bonus, the debtor had to satisfactorily perform his job (c) Payment of the bonus was solely at employers discretion. (9) Rule: When post-petition income is dependent upon the continued services of the debtor subsequent to the petition, the amounts do not constitute property of the estate. (10) Rule: The property will constitute property of the estate if it is sufficiently rooted in pre-petition activities. iii) Expectancies in property of the estate under section 541 can be divided into THREE main categories. (1) Legal interests that are not enforceable at the date of bankruptcy but may be enforceable at a future time. (a) The question is whether they are sufficiently matured and certain to be included in the estate. (b) Some of their value may be allocated to the past and the future where some of the value of the contract payments might arise from personal services performed by the debtor after bankruptcy. (2) Certain entitlements such as permits or licenses that are nontransferable, which may or may not be property. (a) A drivers license represents a very valuable legal right that is of no value to anyone but the debtor. (b) Congress has allowed a few restrictions on alienation to be effective to keep property out of the estate, like a liquor license. (3) Restrictions on transferability imposed by contract or by law. The debtor may have no legal right to transfer the property or may be able to transfer only under sharply restricted circumstances. (a) Thus it is not available for sale for the benefit of the creditors. (b) Such restrictions are generally not favored in bankruptcy. (c) The Spendthrift Trust Exception: 541(c)(2) Debtors are often able to keep retirement accounts out of the bankruptcy estates. (i) If a retirement account is ERISA qualified, then federal law protects it from creditors and the Supreme Court has ruled that it will not be part of the estate. (ii) If the account is not ERISA qualified, the debtor can start again with state law. If under state law, the plan has a valid spendthrift trust provision preventing alienation thus protecting it from creditors, it will not become part of the estate. Spendthrift trust is anything that restricts what you can do for a certain time. (d) In re Orkin (i) Facts: The debtor filed bankruptcy and was the sole proprietor of a real estate business. He transferred $271,000 to a retirement plan over which he had sole control and was the employer and sole employee. He filed Ch. 7 on Feb. 24, 1994. The Trustee argued that the plans assets were a part of the bankruptcy estate but the debtor argued that it was protected spendthrift trust exception. (ii) Procedure: Bankruptcy Court found that the plan was not ERISA qualified plan. (iii) Issues: Whether retirement plans are excluded from the bankruptcy estate. IN SOME CASES. Whether the term ERISA qualified means (1) plans which are subject to ERISA, (2) plans which are subject to IRC, or (3) plans which contain enforceable anti-alienation clauses; or (4) plans that have combinations of any of these. (iv) Rule: ERISA requires the presence of a clause restricting transferability of retirement benefits. (v) Rule: to comply with ERISA and qualify for tax benefits, a pension plan must, among other things, include a restriction prohibiting assignment and alienation of pension benefits. (vi) Rule: Where the debtor has the power to amend or terminate the trust, the debtor has such absolute authority over the trust that it must be included in the property of the estate. He was both the settlor and the beneficiary, which is not allowed. (vii) Rationale: A plan is ERISA qualified only when it complies with the requirements of both ERISA and IRC. iv) Rule: Section 541(b)(7) was added to exclude from the estate employee contributions to any ERISA qualified retirement plans, deferred compensation plans, tax-deferred annuities, and health insurance plans. v) 2005 Amendments protect the educational accounts of debtors children and grandchildren with limits on the amounts and timing. Such accounts are not the property of the estate, even though the debtor may be the named owner or manage the account or have the right of withdrawal.

vi) The Supreme Court held that IRAs Individual Retirement Accounts were a part of the codes retirement account exemptions
vii) Property can be excluded from the estate and the debtor keeps it. Or the property is part of the estate but deemed exempt from creditor attachment and the debtor keeps it. viii) In re Burgess (1) Facts: Debtor operated a legal brothel in Nevada and filed a voluntary Ch. 11 bankruptcy. The Sheriff and the County Commission subsequently took away his brothel license because of its concern with his associating with a motorcycle gang. The bankruptcy court held that the brothel license was not property but rather a personal privilege. (2) Procedure: District Court reversed and found that it was property. (3) Issue: Whether a license is property to be included in the estate. (4) Rule: State created rights expressly denominated by the state as privileges have often been treated as Property for purposes of the bankruptcy laws. While state law creates the legal interest and defines their incidents, the ultimate question whether an interest thus created and defined falls within a category stated by a Federal statute, requires an interpretation of that statute which is a Federal question. (5) Rationale: The great weight of cases have found that such licenses are property. The Trustee i) The new bankruptcy estate and its property are managed by a trustee. ii) Trustee in Bankruptcy is typically an attorney who specializes in BR work. iii) Duties are to gather all the debtors property, protect and maintain it, sell the property for the highest possible price, and distribute the proceeds among creditors according to the statutory priorities. 704 iv) He must also scrutinize claims and oppose those that may be invalid or overblown, to challenge any improper exemption claims by the debtor, and to investigate the debtors affairs to the extent necessary. v) While the TIB may be elected by the creditors, this is rare because creditors are not going to take extraordinary lengths for the paltry payout. 702 vi) A government official from the Office of the U.S. Trustee generally selects the TIB from a panel of potential appointees that the U.S. Trustee has chosen as qualified to serve as TIBs. 701(a), 586(a)(1) vii) Special obligation to unsecured general creditors and is especially charged with scrutinizing the debtors reports to discover any wrongdoing that might result in a failure to get a discharge or to locate any concealed property. viii) They must insure that no one creditor is getting more than its share, so the TIB challenges security interests, preferences, and priority claims for the benefit of unsecured creditors. ix) Ch. 7 bankruptcies are by and large no asset so that creditors are encouraged not to file a claim. x) Trustees are compensated with a percentage of their recoveries on behalf of the creditors, the economic realities of consumer bankruptcy cases pushed Congress to compensate them another way. xi) The US Trustee (UST) is a government official appointed by the Attorney General for a five year term to serve various administrative and monitoring functions in the bankruptcy courts of a particular region 581. (1) Serves as a local branch of the Dept. of Justice. (2) 21 USTs cover the entire country. (3) In addition to appointing Ch. 7 trustees and performing general monitoring functions, these responsibilities include appointing and supervising trustees for Ch. 13 cases, appointing members of Creditors Committees in Ch. 11, monitoring abuse of consumer bankruptcy, certifying credit counseling agencies, and approving debtor education programs. They also play a major role in supervising the compensation granted to TIBs and attorneys. (4) 2005 Amendments increased the power of the UST and executive branch in bankruptcy. Class Notes i) Sections 100, 300, and 500 are general provisions that apply to all chapters of bankruptcy. ii) 700 applies to only Ch. 7, 1100 to Ch.11 etc. However, unless there is a specific code then there will be a default to a general provision. iii) After notice and a hearing simply means notice, Negative notice languageIm going to do this and this is the way it will be: If you dont reply, then this is granted. iv) Consumer Price Index Adjustment 104 next one 2007 v) Bankruptcies are both courts of equity and court of law105(a) gives broad powers. However all actions must have some basis in law. vi) 541 Property of the Estate (1) (a) The commencement of a case creates an estate. Such estate is comprised of all the following property wherever located and by whomever held: (2) Any legal or equitable right becomes property of the estate. As of the commencement of the case.

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(3) Property is not defined in the Bankruptcy Code. You must look at the state law. (4) This section creates property and property rights. Federal law determines property rights, and state law determines what is property. The state may consider it a privilege as opposed to a property right. vii) 541 (a)(5) (1) Spouses file individually, whatever they own jointly comes into the estate. Windfall provisions. viii) 541(a)(6) (1) Will not include earningsproceeds and offspring are included in the estate. ix) 541(a)(7) x) 541 (b) Executory powers if I am an executor or trustee are not part of the bankruptcy estate. xi) Non-residential lease is terminated under state law; filing bankruptcy will not bring that lease into the estate. 541(a)(B)(2). xii) 541(b)(5) Allows people to keep educational benefit funds created for children out of the reach of the creditors even if they have control over the fund. there are time and amount limitations. xiii) (6) Texas tomorrow Fund xiv) 541(c)(1) Ipso Facto clauses are not part of the bankruptcy estates. Looked down upon and may not come into the bankruptcy estate. xv) (7) Retirement plans are taken out of the Bankruptcy Estate. Shumate v. Patterson. (A) refers to money being withheld by the employer and (B) talks about money the employee gives the employer. xvi) 541(c)(2) Honors spendthrift trustshonors the settlors of trusts. Honoring the wishes of the dead. As long as the beneficiary has no access to the money, then it will not come into the estate. xvii) 541(d) Trustee can only jump into the shoes of the debtor and has only the interest that the debtor has. h. PROBLEM SET 5 i) 5.1 Which of the following are the property of the estate? (a) parakeet was pregnant and babies were born after the birthed parakeet, TotoY the offspring are also part of the estate, (b) car still subject to a purchase money security interestY, the possessory interest and the fact that we can use it (c) concert ticketsY, (d) snapshotsY, (e) household furniture, dishes, pans, chairs, a couchY, (f) 25 shares of stockY, dividends would be so also (g) oil well interestY, (h) bubble gum baseball cards Y, (i) mitt he lent to his brotherY, (j) 541(d) the property he is holding in trust for another is not his property, (k) pre-petition salaryY, (l) retirement accounttrick question because you have to know what type of retirement account is it. ERISAno Ira yes????. Even if the value is inconsequential, if it was owned pre-petition it is property of the estate, and the TIB must declare we dont need it. (1) 5th Cir. All you need is ERISA qualified. Anti-alienation clausespendthrift trust type. Cant touch it until you are 59. ii) 5.2. Debtor bought ticket on Jan. 15, filed for bankruptcy on Jan. 20, won the lottery for $50,000 on Feb. 1. He gets to keep it because he did not have a right to it when he filed bankruptcy. It is post-petition income. You do have a legal right to the winnings if your number is drawnit will be property of the estate and the proceeds or winnings from it would be too. If you had the ticket before BR and your number is drawn, it will be property of the estate. iii) 5.3. Debtor farmer contracted to sell her wheat crop for market price as of May 1. Filed bankruptcy on April 1, no value at this moment. As of May 1, it is worth 10 but raised to 15 on April 1 and 20 on May 1. The farmer harvests and gets $200,000. The money becomes property of the estate for the benefit of the creditors. Once the farmer files BR, the rights to the crops become property of the estate. iv) 5.4. Corpus of the trust when ailing mother dies, but income until she does. Should he file bankruptcy? The estate gets the income he is receiving. (a)(5)If she dies during the 180 days, he has to pay it to the estate. However, he can ask the trust not to pay him. If she dies within 180 days of filing, he will lose everything. v) 5.5. Debtor files on March 1 and on April 1 he won the $1000 Teaching Excellence Award. If employer gives it, it may not be under the property of the estate but if it is an award it is his. You would need to know when the voting took placepre-petition, then it goes to the estate. vi) 5.6. Liquor license is not expressly nontransferable , but they are sold, hard to get one. Can the trustee make a claim for the license? Yes. It is a property interest. It has considerable value. Why are licenses here? Its a money-making machine, but it also has a regulatory component. We dont want the mafia to have a liquor license or teenagers; thus, they are non-transferable. License is the property of the estate in general case law. III. ELEMENTS COMMON TO CONSUMER BANKRUPTCIES (The Automatic Stay) pp. 137-145 a. The Automatic Stay i) Filing a bankruptcy petition triggers an automatic stay. ii) Prohibits any creditors attempt to continue to collect from the debtor or the debtors property. iii) Prevents any property from leaving the newly formed bankruptcy estate.

iv) The court will oversee the gathering and distribution of the assets, but until that time or until the stay is lifted, creditors are generally precluded from taking any individual action against the D or the Ds bankruptcy estate. v) 362(a) details the prohibitions of the stay vi) 362(b) provides exceptions that permit certain types of actions against the debtor to continue. vii) The first intrusion of the federal BR laws into the state actions that a creditor would ordinarily be entitled to do. viii) The power of the automatic stay is broad. ix) Andrews University v. Merchant (1992) (1) Facts: Merchant had a loan from a Michigan bank for educational expenses that was payable by the University in the event that Merchant defaulted. She did. The University paid the bank and became the sole student loan creditor. Merchant filed Ch. 7 BR. Soon after, she asked the university for her transcripts which it refused to issue in light of her non-payment of the debt. The educational loan and credit extensions are exempted from discharge under 523(a)(8). Thus, the university thought it had the right to hold the transcript. (2) Procedure: On appeal to the 6th Circuit probably from the BR court and a district court. (3) Issues: Whether educational loans are dischargeable, whether extensions of credit for educational purposes are dischargeable, and whether a school may withhold transcripts of a student who has defaulted on educational loans and filed BR. YES, YES, and NO. Does the automatic stay apply to non-dischargeable debts? Yes The Court held that the loan were nondischargeable and Merchant would still owe them in full following her BR. (4) Rule: While many of the exceptions to discharge found in 11 U.S.C. 523 are exceptions from the automatic stay found in 362, educational loans are not. The automatic stay applies to creditors of educational loans and remains in effect until (1) the case is closed, (2) the case is dismissed, or (3) a discharge is granted or denied. (5) Rationale: The university was in violation of the stay as withholding the transcript was an attempt to collect a debt. x) After the discharge of the debtor, the post-discharge injunction arises, but would not protect Merchant as her debt is not dischargeable. xi) By finding no willful violation, the court is simply making the statement that there were no real damages, no harm done. xii) Nissan Motor Acceptance Corp. v. Baker (1999) (1) Facts: Creditor, Nissan, violated the terms of the automatic stay and the BR court awarded actual and punitive damages as well as reasonable attys fees and expenses. The court allowed the creditor to satisfy actual and punitive damages by giving the debtors a new 1996 Nissan free and clear of any liens. Nissan repossessed the debtors vehicle on Jan. 4, 1994 without knowledge of the debtors bankruptcy. However, the debtors atty. contacted Nissan about the bankruptcy after the repossession and Nissan had notice as of 1/4/94. Nissan however did not turn over the vehicle upon notice of bankruptcy but retained possession and filed a motion for relief from the stay or in the alternative adequate protection on 2/23/94. While this motion was pending, Nissan sold the vehicle on 3/16/94. The court, not knowing of the sale, granted the relief on 6/1/94. In Nov., the debtors filed seeking damages for violation of the automatic stay. (2) Procedure: The BR Court awarded damages and the District Court Affirmed. (3) Issue: Whether a creditor who repossesses an item in which a bankrupt has an ownership interest must return the item once it has notice of the automatic stay, even if the item was repossessed pre-bankruptcy. YES (4) Rule: The automatic stay prohibits any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. (5) Rule: A creditors continued retention of estate property after notice of bankruptcy filing constitutes an exercise of control over property of the estate in violation of the automatic stay. (6) Rule: Section 542(a) establishes an affirmative obligation on the creditor to return estate property unless it is of inconsequential value to the estate, and nothing in 542(a) requires the debtor to provide the creditor with adequate protection as a condition precedent to turnover. shall deliver to the trustee, and account for, [estate] property or the value of such property. (7) Rationale: A creditor is not granted the authority to engage in self-help to retain estate property as adequate protection. (8) Vida: Majority rule is if a car is repossessed pre-petition the car must be returned; the minority view is only give the car back is adequate protection b. Another Pothole on the Way to the Automatic Stay i) Before the enactment of the 2005 Bankruptcy Amendments the automatic stay was automatic. (1) The clerk stamp dated the petition and the stay was automatically in place. (2) Notice went out in the next few days according to the list of creditors and addresses supplied by the debtors lawyer. (3) The addresses were generally where the creditor did business or received payments. (4) Creditors may have to give back property seized or a payment extracted. (5) As part of the 2005 Amendments, Congress authorized creditors to file a notice of address with the court where all notices for Ch. 7 and Ch. 13 cases must be sent. 342(e)

(a) Any notice sent elsewhere will not be effective until the notice has been brought to the attention of the creditor. If the
creditor designates a person or organizational subdivision to receive bankruptcy notices and has a reasonable procedure to deliver notices to such person or subdivision, a notice is not effective until it reaches that person or subdivision. 342(g)(1) (6) If the notice is not effective, then no creditor can be charged with any monetary penalty until the notice is delivered to the right party. Preliminary Procedures i) Along with his voluntary bankruptcy petition, the debtor is required to file various detailed forms called schedules, all of which are set forth in Official Forms as part of the Bankruptcy Rules. ii) Include detailed lists of assets, income, and expenses. iii) Must also provide a complete list of creditors, their addresses, and identify what property they claim as exempt. iv) Before they can file, debtors must produce a certification that they have attended a debt counseling session. 109(h), 521(b). v) Schedules must be complete and accurate. (1) Rule: Failure to list a debt may make the debt non-dischargeable. 523(a)(3) (2) Rule: Any false statement in the petition or schedules may result in a complete denial of discharge as to all of the debtors debts and may open the debtor to a perjury prosecution. 727(a)(4) (3) Rule: There must be a certification filed along with the petition stating that the debtor has been given information about the other chapters of the Code and about credit counseling, and the debtor has been warned that false information in the files can lead to penalties and jail time. 521(b) (4) Rule: Debtors must file copies of their pay stubs for the two months before they filed, a statement of their monthly income and an explanation of how that was calculated, and a statement disclosing any anticipated increase in income over the next 12 months. 521(a)(1)(iv)-(vi) (5) Rule: Debtors must file a tax return for the prior year and a copy must be furnished to any creditor that requests one. 521(e) (2) If filed after the commencement of the bankruptcy, a copy must also be filed with the BR court. 521(f) (6) Rule: If a debtor fails to file all of this paperwork, his case will be dismissed even if he is otherwise eligible for bankruptcy. 521(i) vi) Random audits by the Atty. General and the Judicial Conference of the United States are to be performed on the minimum sampling interval of 250 cases. vii) Rule: The attorney by signing the petition represents that he or she has performed a reasonable investigation and has no knowledge that the information in the schedule is incorrect. 707(b)(4)(C), (D) viii) Rule: Consumer bankruptcy lawyers have been termed debt relief agencies and are specifically prohibited from making any statement in any document filed in a case that is untrue, 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) 101(3) Assisted person. An assisted person is a person whose debts consist primarily of consumer debts and their non exempt property is less than 150,000. 101(12A) a debt relief agency is anyone who provides assistance to an assisted person. ix) Rule: Attorneys who fail to abide by these rules can lose their fees, pay actual damages, or be forced to pay the fees of opposing counsel. 526(c)(2), 707(b)(4)(A) x) First Meeting of Creditors: Section 341 meeting is held at a date set by the court within 40 days after the petition is filed. 341. (1) The meeting is ordinarily at the courthouse, but may be held elsewhere. Rule 2003(a) (2) The presiding officer is someone from the US Trustees office. Rule 2003(b) (3) The meeting is to permit an examination of the debtor by the trustee and any interested creditors. In re Chestnut (2005) i) Facts: Creditor foreclosed on debtors 2.52 acre parcel of land in Eastland County, Texas. The property was named in the deed as belonging to the debtors wife but was purchased during their marriage. However, the deed recited that it was the wifes separate property. The creditor communicated to the wife that if she did not make her payments current, it would foreclose and did so when she failed to make the required payments. The foreclosure sale was set for Feb. 4, 2003; however, the husband filed for Ch. 13 bankruptcy on Jan. 31, 2003. The creditor was notified of the filing in which the husband claimed that he owned the property as well as his wife. The creditor disagreed and went ahead with the foreclosure. The debtor brought this action claiming a willful violation of the automatic stay. ii) Procedure: The BR Court found a violation of the stay without determining the status of the property as community or separate property. The District Court reversed holding that the property was separate property and there was no violation of the stay. Reversed District Court and Affirmed BR Court and Remanded to BR Court. iii) Issue: Whether arguable property can be repossessed in violation of the stay before a hearing before the BR court to determine the propertys status. NO.

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iv) Rule: 362(h) gives debtors the right to sue creditor for violation of the stay, specifying that an individual injured by any willful
violation of a stay provided by this section shall recover actual damages, including attys fees, and punitive damages in appropriate case. v) Rule: Section 362(d) states: On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a), such as by terminating, annulling, modifying, or conditioning such stay(1) for cause, including lack of adequate protection of an interest in property of such party in interest; (2) with respect to any stay of an act against property under subsection (a) if(A) the debtor does not have an equity in such property. vi) Rationale: The fact that if an interested party must file a motion and unless a hearing is conducted within thirty days after the party moves for relief, the stay is automatically lifted suggests a preference for adjudication rather than seizure. 362 (11 U.S.C. 362) Automatic Stay. (a) . . . a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities of i) (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title: ii) (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; iii) (3) 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. iv) (4) any act to create, perfect, or enforce any lien against the property of the estate v) (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title. vi) (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title: vii) (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and viii) (8) the commencement or continuation of a proceeding before the United States Tax Court concerning a corporate debtors tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title. (b) The filing of a petition under section 301,302,or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970 does not operate as a stay i) (1) under subsection (a), of the commencement or continuation of a criminal action or proceeding against the debtor; ii) (2) under subsection (a), (1) (A) of the commencement or continuation of a civil action or proceeding (a) (i) for the establishment of paternity (b) (ii)for the establishment or modification of an order for domestic support obligations (c) (iii) concerning child custody or visitation (d) (iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate. (e) (v) regarding domestic violence (2) (B) of the collection of domestic support obligation from property that is not property of the estate. (3) (C) with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute; (4) (D) of the withholding, suspension, or restriction of a drivers license, a professional or occupational license, or a recreational license, under State law as specified in section 466(a)(16) of the Social Security Act. (5) (E) of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in section 466(a) (7) of the SS Act; (6) (F) of the interception of a tax refund, as specified in section 464 and 466(a)(3) of the SS Act or under an analogous state law; or (7) (G) of the enforcement of a medical obligation, as specified under title IV of the SS Act. iii) (3) any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustees rights and powers are subject to such performance when accomplished in a specified period.

e.

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g.

h.

i.

1.

iv) (4) any commencement or continuation of any action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, including the enforcement of a judgment other than a money judgment v) (6)setoff by a commodity broker, forward contract merchant, stockbroker, financial institutions, financial participant, or securities clearing agency of any mutual debt and claim under or in connection with commodity contracts, or securities contracts for a margin payment or settlement payment arising out of commodity contracts, etc. . . . vi) (7) setoff for a margin payment in connection with a repurchase agreement. vii) (8) the commencement of any action by the Secretary of Housing and Urban Development to foreclose a mortgage or deed of trust in any case in which the mortgage or deed held by the Secretary is insured or was formerly insured under the National Housing Act and covers property . . . consisting of five or more living units. viii) (9) under subsection (a), of (1) (A) an audit by a governmental unit to determine tax liability (2) (B) the issuance to the debtor by a governmental unit of a notice of tax deficiency (3) (C) a demand for tax returns; or (4) (D) the making of an assessment for any tax and issuance of a notice and demand for payment of such an assessment. (c)(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate; i) (2) the stay of any other act under subsection (a) continues until the earliest of (1) (A) the time the case is closed (2) (B) the time the case is dismissed; or (3) (C) if the case is a case under Ch.7 concerning an individual or a case under Ch. 9,11, 12, or 13, the time a discharge is granted or denied. ii) (3) if a single or joint case is filed by or against a debtor who is an individual under Ch. 7, 11, or 13 and a single or joint case was pending within the preceding 1 year period but was dismissed, other than a case refilled under a chapter other than Ch. 7 after dismissal under section 707(b) (1) (A) the stay with respect to any action taken shall terminate with respect to the debtor on the 30th day after the filing of the later case. (2) (B) on the motion of a party in interest for continuation of the automatic stay and upon notice and a hearing, the court may extend the sty in particular cases as to any or all creditors (subject to limitation and conditions the court may then impose) after notice and a hearing completed before the expiration of the 30th day only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed and (3) (C) a case is presumptively filed not in good faith (but such presumption may be rebutted by clear and convincing evidence to the contrary.) (d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay. . ., such as by terminating, annulling, modifying, or conditioning such stay i) (1) for cause, including the lack of adequate protection of an interest in property of such party in interest; ii) (2) with respect to a sty of an act against property under (a) if (1) (A) the debtor does not have an equity in such property and (2) (B) such property is not necessary to an effective reorganization; iii) (3) in a stay of an act against single asset real estate under (a) by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief or 30 days after the court determines that the debtor is whichever is later (1) (A) filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or (2) (B) the debtor has commenced monthly payments that (a) (i) may be made from rents or other income generated before, on, or after the date of the commencement of the case by or form the property to each creditor whose claim is secured by such real estate other than a claim secured by a judgment lien and (b) (ii) are in an amount equal to interest at the then applicable non-default contract rate of interest on the value of the creditors interest in the real estate; or. . . . 521 (a) Debtors duties. Make a checklist of 521a. a) A debtor must (1) File a list of creditors, schedule of assets and liabilities, schedule of current income and expenditures, statement of financial affairs. (2) Certify receipt of notice by attorney for debtor or by debtor.

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(3) File copies of pay stubs and the like. (4) File a statement of monthly net income itemized. (5) File a statement disclosing anticipated increase in income or expenses over 12 months after petition is filed. (6) File a schedule of assets and liabilities (secured and unsecured) (7) Cooperate with trustee and or auditor as necessary (8) Surrender property of estate to trustee and all documents necessary to effectuate (9) Appear at the hearing (10) Must not retain personal property due a creditor unless reaffirmed or redeemed within 45 days. (11) Must, unless there is a TIB, continue to administer employee benefit plans. b) 527a2B: You cannot pull out values out of thin air. i) All assets and all liabilities are required to be completely and accurately disclosed in the documents filed to commence the case and the replacement value of each asset as defined in section 506 must be stated in those documents where requested after reasonable inquiry to establish such value j. 342 Notice. k. Problem Set 6 i) Client needs help with his staggering debt burden. He makes $34,000 per year as a meat cutter, but he hurt his arm last year and was out of work nearly eight months. His current wages are reduced by $100 per week because a finance company garnishes them. He owes $68,000 in unsecured debt, including past due alimony and child support. He owes $4500 on his car loan and another $750 to an auto repair garage. Creditors are threatening action. He tries to pay a little to each creditor from each check and to keep from getting his car repossessed he wrote a hot check for which he is being summoned to the district court on a bad check charge. Joes assets consist of his car, clothing, kitchen utensils, and a few pieces of small furniture. He will get paid tomorrow morning for a two week period that ended yesterday. He will file Ch. 7 later today. He wants to know what he can expect and if he will get his full paycheck, undiminished by the garnishment, tomorrow and every two weeks thereafter. Automatic stay cannot revive anything in which the debtor does not have an equitable or legal right in. If Joe falls the petition before he gets his check, he gets to keep it. With regard to garnishment-simply has a standing order to siphon the moneythe automatic stay stops the siphoning. The stay will not protect him from collection of child support. If the electricity is cut off before petition, then it is pay as normal, but if he filed, he has 20 days to provide adequate protectionan agreed upon depositcash, letter of credit. Debtors collection agencystay, past due alimonyno stay, auto repair garagestay, doctors billstay. ii) 521 What paperwork must the debtor have to begin the bankruptcy proceeding? The debtor does not have check stubs, tax returns, or proof of purchase. The stay can begin and the court will give her time to get the paperwork together. You have 15 days, if you cant get it, then you have to file for an extension. 109(h) They must go through credit counseling during 180 days BEFORE filing petition. No automatic stay ever begins because it was not filed. You can do credit counseling in person, by telephone, or by internet. Internet is higher. Both parties prefer it. 707(b)(4)(C) it is waived if you only speak one language and there is no available classthey dont have to take it. You only have to ask one. He thinks 521(i) is scaryyou did not comply with something 46th daythe court doesnt have the power. Can you retroactively fix everything? As to the value of the car, 527(2)(B)You must make a reasonable inquiry to establish such valueyou cant pull values out of the air. She can do better than the $250 to investigate and try and find the value. iii) Creditor presently has possession of a car he repossessed for non-payment of its cost and the cancelled insurance that is required per the security agreement. The creditor received a notice yesterday that the debtor had filed for bankruptcy after he had repod the car and the debtors lawyer demanded return of the car. The creditor would like to send the debtor a nice letter asking for payment and reinstatement of the insurance for return of the car but is hesitant. What is your advice? While he does not have to return the car since he repossessed it before filing of the bankruptcy, he does have to refrain from asking the debtor for any kind of payment or harassing him in any way about the debt because of the automatic stay of which he has notice. Make him come to the office because you are just as liable for free advice as paid advice. Does the repossession cut off the right the debtor has in the car? The repossession of the car does not change title in the car. Until such time until the D holds a reasonable commercial sale, the ownership is still with the debtor. So he does have to return the car. There is a stay, so he cannot send the letter. Until such time as the creditor holds a legally commercial sale, ownership of the vehicle lies with the debtor. Since debtor filed before sale, creditor must return the vehicle. iv) Debtor with a chiropractic practice has fallen behind in her bills. She came to see you a month ago and last week you filed her Ch. 13 bankruptcy. A crew however took all of her equipment while she was not present in her office. She is unable to meet todays patients and will have a bruised reputation when news gets out of what has happened. The bank officer knew about the bankruptcy, but he wants the debtor to sell some of the equipment and give them some cash. The officer however did not receive the notice because it was sent to the main office and not its designated place for receiving notices. What do you do, and how much do you charge the debtor? Under 342, a creditor can file a designated place to which notices are to be sent from the BR court; however, it has to create a reasonable procedure by which the court can make sure all notices are routed to such place.

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The comment figure it out may not be deemed reasonable. However, if the creditor has followed the procedures, then notice is not deemed received until it gets to the right place. I would send it to the designated place. However, I think this is still a violation of the stay as he obviously somehow knows about the stay and must go through the court to get the adequate assurance he is seeking. I would wait to charge Christy as this may be malpractice on my part as I should have known where to send the notice. Does the lawyer send notices when a BR is filed? No, the trustee or BR court (Bankcap) sends them in Ch. 13. In Ch. 7 the petition is filed along with a mailing matrix for all creditorssent electronicallythe BR court sends out the notices on these cases. In Ch. 11, the notice goes out by the court. The only time the lawyer will send notices is when it is an emergency, if the petition is already filed, then he has to send it to the creditors. A BR Notice is a one sheet notice with lots of information. Rule: If you get communication from the creditor of a designated place w/in 90 days of the bankruptcy, then the notice must be sent there. The creditor must designate a place or person and you have to have a reasonable procedure for finding the address. Actual knowledge has been interpreted by courts as good notice. BR courts are courts of equityhard to allow someone to pull such a stunt. Not mandatory for a creditor to file an address with the courtif it doesnt go to the designated place,, it is not good notice. l. Class Notes i) Some written because of computer malfunction. ii) The automatic stay is an injunction. Usually have to file a court order bring a case get a tro. iii) This one is automatic. iv) Self-executingTemporary v) Automatic Stay extends from the Petition Date until discharge. After that discharge, the discharge injunction is in place. vi) The petition date is the date that relief is granted. vii) 362 (1) (8) Tax issues that are post petition may continue, but pre-petition must stop. (a) Debtor doesnt get to choose the forum (2) Some of the stay provisions in favor of the property of the estate, property of the debtor, or the debtor. viii) Intent is you intend the actionthinks the first case is wrong. Courts of Appeals are not experts. ix) Nissan minority ruleif the car was repossessed before the bankruptcy, then the dealership did not have to give it back. The case found that they had to return itmajority rule. This is just a hypothe Nissan situation always has to give the car back. x) (b)(1) Criminal proceedings xi) (b)(2) Civil action or proceeding for Family Court procedures. Establish or modify; it does not say collection. It can keep going without any interference (1) Enforce collection or divide property, you must get relief from the stay. IV. Liquidation Bankruptcy p. 149 (Introduction, Eligibility) pp. 149-167 a. Introduction i) Ch. 7 is the liquidation bankruptcy in which a TIB (Trustee in Bankruptcy) is appointed to gather all of the debtors property, sell it, and distribute the proceeds to the creditors. ii) In the end, creditors will have their proportional share of whatever the debtor had, and the debtor receives a discharge of the remaining debt. iii) The distribution process in liquidation is governed by section 726. iv) The Process (1) Before selling the debtors property, the TIB must determine if someone else has an interest in it. E.g. co-owner, secured creditor. (2) If another party has an interest, the TIB must pay that party that part of the proceeds to which it is entitled, and only the remainder will be distributed to other creditors. (3) The TIB will also have to deduct from the proceeds his own fee and costs of the sale. (4) The Trustee must also consider valid exemptions claimed by the debtor in a particular item of property. (5) Exemptions determine what property in the estate is exempt from sale and reserved for the debtors fresh start. E.g. If an exempt car was seized and sold, the TIB would deduct his costs, pay the secured creditor, and have to give the value to the debtor. None of the money could go to creditors. (6) Once secured creditors have been paid, the TIB distributes the remainder to general creditors. Divided into three principal groups: priority creditors, general unsecured creditors, and subordinated creditors. THESE CREDITORS ARE NOT SECURED. Some of them may have been partially secured and are attempting to collect what remains on their claim after the sale from their collateral. (7) General creditors are paid PRO RATA from the fund, in proportions to the amount owed to each. E.g. $10,000 left, $100,000 owed, then each one will get 10% of its claim. b. Eligibility

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A Change in Philosophy i) Bankruptcy is an extraordinary remedy for a recurring problem in a free market where debtors find themselves unable to pay their debts. It is a better alternative to outlaw methods of dealing with bankrupts. ii) The idea of eligibility has been re-visited many times and initially just applied to traders recognizing the need to encourage entrepreneurial endeavors, then it was expanded to families. Finally, the Great Depression added the repayment scheme so that debtors could liquidate or pay creditors over time. iii) The 1978 Bankruptcy Code kept access to Ch. 7 broad open to both individuals and businesses. iv) The 1978 Code substantially revised Ch. 13 in order to encourage individuals to pay more of their debts. They added incentives: to get current on a home mortgage that was in default, keep more property, discharge of debts that could not be discharged under Ch. 7. v) This changes resulted in an upsurge of Ch. 13 filings. vi) Congress achieved a two-level bankruptcy system that provided liquidation for people in the most financial trouble and Ch. 13 for the majority of debtors. vii) However, the filings for Ch. 13 did not continue to increase, and most debtors could not make their repaymentsonly 1/3 of the filers did. (About 30% file Ch. 13.) Most converted to Ch. 7 or just gave up. viii) By 2004, bankruptcy filings were at an all time high. ix) Due to the lobbying of the credit industry (according to the authors) and the rise in filings, Congress acted to restrict filings. Wanted to curtail wildly spending debtors or debtors who could pay their debts if they really tried. (1) In 1984, Congress gave bankruptcy judges the power to dismiss Ch. 7 cases if the filing involved substantial abuse (2) Many were dismissed for bad acts done prior to bankruptcy, having the ability to pay with small sacrifice. Others were told to convert their cases to Ch. 13 in light of substantial incomes. x) In re Shaw (2003) (1) Facts: The Shaws filed for bankruptcy in May of 2003. They had a home valued at a little over $400, 000 and made a combined salary of $125,000 or more. Though Mrs. Shaw had lost her job, she was to keep receiving severance pay through April 2004 and planned to find a job with her skills as a cosmetologist. The Debtors listed net monthly expenses of $7517.59; their monthly income was approximately $300 over that. However, the debtors understated their automobile payments for three vehicles. They also had two cell phones and two home lines. The college expenses for their daughter had been reduced because they took out a loan. The Shaws had incredible debt, over $100,000 was due to fifteen credit card accounts. The Shaws wanted to file Ch. 7 so that they could have a fresh start to retain their home and vehicles. The Court scheduled a hearing to see if the case should be dismissed for substantial abuse under BR 707(b). (2) Procedure: Being heard in the Bankruptcy Court. Dismissed the case for Substantial Abuse. (3) Issue: What is meant by substantial abuse under the BR code? (4) Test for Substantial Abuse: The Court must consider the following factors: whether the debtor has the ability to repay the debt, whether the debtor filed his bankruptcy petition because of sudden illness, calamity, disability, or unemployment, whether the debtors schedules and statement of current income and expenses reasonably and accurately reflect his true financial condition, whether the debtor incurred cash advances and made consumer purchases in excess of his ability to repay, whether the debtors proposed family budget is excessive or unreasonable, and whether the petition was filed in good faith. The court should look at the totality of the circumstances in making a substantial abuse determination. (5) Rationale: The Court found that the Shaws expenses were excessive and suggested that they get rid of the larger house, reduce the phone lines for which they were paying, and make their adult son and daughter take care of themselves or contribute to the home. They were not in bankruptcy because of calamity but because of lifestyle choices. Further, the debtors were living beyond their means. The desire to get their debt discharged so that they can live beyond their means weighs against a finding of good faith filing. xi) Historical Deterrents to Filing BR were stigma and the risk of losing property. (1) These two deterrents became inadequate as the filings of bankruptcies steadily rose. (2) In 2005, Congress took steps to make bankruptcy less accessible. The 2005 Amendments put new mechanisms in place to screen the debtors seeking relief more aggressively than the courts and trustees had done. d. The Presumption of Abuse i) The 2005 Amendments scrutinize the debtors to see which ones should be denied access to Ch. 7 liquidation because they are abusing the system. ii) Focused mostly on the Consumer. Someone with mostly business debts is not screened for abuse 707(b)(1). iii) The 2005 Amendments have changed the roles of the judges. Instead of leaving discretion with the court, the screen is semiautomated, employing a fixed formula to determine which debtors should be deemed ineligible. iv) 707(b)(1) instructs courts to dismiss a case or convert it to a repayment plan in Ch. 13 or Ch.11 if the Ch. 7 filing constitutes an abuse.

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v) 707(b)(2)(A) creates a presumption of abuse based upon a formula. The court shall presume abuse exists. Formula
consists of income minus expenses. The courts can no longer weigh and measure abuse according to individualized circumstances of each person. vi) The courts must apply the formula to all Ch. 7 filers. vii) 707(b)(2)(B) Special Circumstances Serious medical conditions, service in the armed forces may justify adjustments to calculations to determine which debtors are presumed to have abused the BR system. (1) These exceptions require extensive documentation and the adjustments must be cranked back into the mechanical formula to determine whether the debtor can overcome the presumption . (2) Suffering or distress is not enoughthe special circumstances must have an effect on income or expenses that can be quantified or documented. The Formula: Income and Expenses i) Means Test is used to determine which debtors can make any meaningful repayment of their debts and define meaningful. ii) The determination of whether a debtor can repay debt is determined as a matter of law. iii) Debtors who cannot pass the means test are presumed to have abused the system and judges must dismiss their case. iv) Courts must define income, expenses and subtract the second from the first. v) If the difference (surplus of income over expenses) would pay at least X amount of debt, the debtor is barred from Ch. 7, absent special circumstances. vi) Income (1) Begins with the debtors current monthly income and a threshold test for Ch. 7 eligibility. Debtors with low enough income are exempt from the means test. (2) Threshold Test: Whether the debtors income exceeds the median income for similar families in the state where the debtor filed. (a) Equal to or lower than the median, then the debtor can file Ch. 7. (b) Higher than the state median, there must be more calculation. (c) The test uses the median or middle income as opposed to the average income; thus, this figure is skewed upward by high incomes in the state. (3) Current Monthly Income is defined in 101(10A) (a) The court must calculate the average monthly income for the six months preceding the filing. (b) Income from all sources is included. (c) Income also includes amounts paid by others toward household expenses. (d) This screen depends on comparison with the state median income compiled by the Census Bureau, but the BR Code and Census definitions of income are different in the following ways: (i) Is income pre-tax or post-tax? BR Code defines current monthly income as income received which is posttax. The Census Bureau is pre-tax. (ii) The Census Bureau excludes many sources such as: capital gains, sale of property proceeds, income in kind like food stamps, tax refunds, gifts and inheritances, insurance payments, other lump sum receipts. All of these are included by the BR Code. (iii) The BR Code excludes Social Security benefits, but the Census Bureau includes them. Payments to victims of war crimes are crimes against humanity or payments for victims of international terrorism are also excluded by the BR Code. (e) Other Paycheck Deductionssavings bonds, retirement contributions that create assets make the computation very complex. Listed as assets. (f) The various definitions of income make it impossible to make the comparison to the state median and apples-toapples comparison. (g) Congress has required courts to use the Bureaus data despite the fact that the Bureau does not collect new data annually and only offers estimates. (h) When the data is not current, Congress instructs the court to adjust the most recent data for inflation. Inflation adjustments come from the Consumer Price Index, which is based on expenses not income. It is also national, violating further a state comparison validity. (i) The authors suggest that the means test does not eliminate eligible debtors at a higher rate but that its calculation and litigation is a deterrent. (j) The calculation also puts a substantial cost on debtors and their attorneys. (4) Expenses

e.

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(a) If a debtor fails the median income screen, the next step is to determine what expenses the debtor may deduct. (b) In an attempt to encourage debtors to spend less and pay more to creditors as well as make the standard uniform, the Congress turned to the IRS for standards. (c) The IRS negotiated with tax payers who had not paid their taxes around a family budget, which divided money between the taxpayer and the IRS. (d) The IRS developed guidelines for the expense allowances for the tax delinquent. (e) It is a sliding scale which allows a single mother who makes less to spend less money on groceries than a woman in the same predicament who makes more money. (f) The National Standards used by the IRS cover clothing, food, personal grooming, laundry and miscellaneous. (g) Governed by family size and income level, regardless of what is actually spent. (h) The BR Code allows debtors to deduct these amounts without further proof. 707(b)(2)(A)(ii) (i) The IRS uses the guidelines as just that, not a hard fast rule. The website explains that documentation can cause individual taxpayers to be allowed to deduct their actual expenses where the guidelines are inadequate to provide basic living expenses. (j) The BR allows some discretion which the authors term as tightly controlled. (k) The court may increase the allowance for food and clothing up to 5% if the debtor can demonstrate that such expenditures are reasonable and necessary. 707(b)(2)(A)(ii). Expenses above that 5% and all other categories are not adjustable. There is no discretion to consider how families actually spend their money. (l) The BR Code adds additional expenses that can be deducted from income. Health insurance, disability insurance, health savings accounts, expenses of caring for the elderly, private schools, up to $1500 per child per year. 707(b)(2) (A)(ii)(I)-(IV). (m) IRS Allowable ListOther Necessary Expenses: The BR Code allows deductions for childcare, legal fees, life insurance, union dues, taxes, etc. E.g. The debtor may get to keep his Internet expense if it is necessary to produce income. (n) 707(b)(2)(A)(iv) General Expenses. The debtor is allowed to pay arrearages on priority debts. Priority Debts are listed in 507(a). Some are alimony, child support, taxes. E.g. If a debtor is behind in child support, its arrearage can be divided into monthly installments and deducted from income. (5) Secured Debts (a) Secured debts, such as car loans, no matter how large can be deducted in full along with any payment arrearages. 707(b) (2)(A)(iii) (b) The gasoline, insurance, and maintenance of the car follow the Local Standards of the IRS tables. 707(b)(2)(A)(ii)(I). (c) Homes are also protected. Therefore, the debtor can deduct its mortgage payment, no matter how large. 707(b)(2)(A) (iii). (d) The handling of costs of utilities and maintenance for the home is unclear. The IRS combines all housing costs in a single amount. The statute appears to give the debtor both the actual amount of the home mortgage and the full Local Standard deduction. (e) However, there is no extra allowance for car leases or home rentals. Can only deduct the amounts allowed not the full amount as if the home or car were being purchased. (6) Income after Expenses (a) If there is still a surplus after the deduction of expenses, a debtor may still be eligible for Ch. 7. (b) Depends on the following two factors: (i) The total size of the surplus of income over expenses over 5 years or 60 months, (ii) How much general unsecured nonpriority debt, such as credit cards and medical bills, the debtor owes. (iii) Abuse is Presumed 1. If the general unsecured debt is greater than $24,000 and a. the surplus is at least i. $10,000 or ii. 25% of the debt; OR 2. If the debt is $24,000 or less, and the surplus is at least $6000 (iv) If the surplus is less than $100 per month, the debtor can file Ch.7 (v) If it is between $100 and $166.66, he passes if the surplus is less than 25% of his unsecured debt divided by 60. (Take the surplus, multiply by 60, then see if that equals 25% of the unsecured debt.) (vi) If the surplus is greater than $166.66, he flunks no matter how much he owes. (c) These requirements increase the work on both courts and attorneys.

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f.

Policing the New Standards. i) Procedure. ii) The form calculating the means test is to be filed 521. The TIB must look at every filing to see if the presumption of abuse is triggered and file a statement reporting its finding which will be sent to every creditor. 704(b)(1) iii) For a debtor that is above the median, the Trustee office must file a motion to dismiss or convert the case if presumptive abuse is present or file a statement explaining why it has not done so. iv) Abuse can be alleged against an above-median debtor by the judge, the US Trustees office, or any creditor. 707 (b)(1). Standing. (1) A creditor may not raise the abuse question against a below or at median debtor under general abuse or the means test. (2) Only a judge or US Trustee can raise a claim of general abuse 707(b)(6). However, even a judge or Trustee cannot raise this if a debtors income is below or equal to the state median. (3) Spouses incomeif they file jointly, we combine; however, if only one files, the spouses income is still counted in the calculation for determining whether the debtor is at or below the median income. 707(b)(7). However, if the debtor fails that is if the debtor and the debtors spouse have income above the median-- only his or her income is used for working through the budgets and means test. ?????? v) Many Roles for Debtors Lawyers (1) 707 (b)(2) means test adds a new layer of required information about income and expenses and it requires documentation from six months preceding the filing. (2) The 2005 Amendments require the debtors attorney to certify that the lawyer has made some investigation of the accuracy of the data. 707 (b)(4)(C), (D). (3) 526(a)(4) and 707(b)(4)(A) impose new duties on the atty. regarding the advice the atty. gives the debtor in helping the debtor decide whether to file Ch.7. (4) 707(b)(4)(A) authorizes the court to award costs and reasonable atty.s fees to a trustee who prevailed on a motion to dismiss Ch. 7, if the atty. violates Rule 9011, which requires that any petition be made only after reasonable inquiry that the allegations have a factual basis. (5) 707(b)(5) gives the debtor the power to recover if the court finds that the creditor or trustee violated Rule 9011 or brought its motion solely to coerce the debtor to waive other rights guaranteed by the BR code. g. In re Sosa (2005) i) Facts: Couple came to a hearing to show cause why their case should not be dismissed because of their failure to acquire credit counseling before the filing of their BR petition. At the time of the hearing, the H had received the counseling but his wife had not. The debtors had delayed because they were trying to work a payment out with the mortgage company who demanded payment at the last minute. ii) Issue: Whether debtors must have credit counseling to be eligible and what qualifies as exigent circumstances. iii) Decision: The statute ties the hands of the court and the case had to be dismissed. Judge finds the rule inane and clearly not designed to protect consumers. iv) Rule: An individual is ineligible for relief under the BR unless he has during the 180-day period preceding the date of filing the petition received from an approved nonprofit budget and credit counseling agency an individual or group briefing, including one conducted by telephone or on the Internet, that outlines the opportunities for credit counseling and assisted him in performing a related budget analysis. v) Rule: If a debtor does not request the required credit counseling service before the petition is filed, that person is ineligible to be a debtor. vi) Rationale: The statute is clear and unambiguous that if debtors violate the provision of the statute they are ineligible to be Debtors, and the case must be dismissed. h. Class Notes i) Three kinds of unsecured creditorsgeneral, priority, ??? ii) Ch. 7 intends to give equal treatment to creditors that are in the same or similar classes. iii) 1 in every 75 households has filed for BR. iv) Shaw: The judge had discretion to determine whether there was abusesale your house and get a smaller one. Too much discretion??? What if $130,000 credit card debt was from not paying or for what the charges were for? The lawyer did not do a good job explaining the debt. (1) The judge has great discretion. (2) They are well-educated; most likely in the top 10% of income earners. Very diametric to the debtors. The judges will be way more considerate about giving someone else the same standard as I. (3) Congress decided to take discretion away from judges and forced them to use a formula.

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v) Under BAPCA substantial abuse is now just abuse. Under the old law there was a presumption in favor of debtor in granting relief. Now, the formula leads to a presumption of abuse. vi) Congress has shifted its policy position, believing that too many people were abusing the system. vii) IRS Standards (1) Its national (2) It gives you fair living standardsbut designed for people not paying their taxesthese are criminals. Is the government a collection agency for lenders? Lenders are the ones who are lending. (3) US Trustee is supposed to review every BR filinga million cases means there is a huge need for man power. (4) 1 out of every 250 cases has to be audited. $100 million per year is the cost. viii) 707 (1) (a) only deals with someone trying to work the system, not paying fees. (2) (b) contains the formula to determine whether a debtor can file for BR. (a) What is the size of the household? (b) What is the median income for that household in that state? (i) If Debtors income is < median incomeDebtor can proceed with Ch. 7. (ii) If Debtors income is > median incomeThen there must be a MEANS TEST. (c) Means Test (i) IRS expenses 1. National Standards : clothing, food, personal grooming, laundry, miscellaneous 2. Local Standards : housing expenses, transportationgo county by county 3. Miscellaneous: cell phones, Internet, etc. (ii) Actual expenses : E.g. $3000 mortgage, but local standards may be $1800. What do you do? The statute says you get to deduct them both apparently. The court said no, you only get the higher of the two. (d) Determine the Income (i) Anything the debtor receives six months prior to the BRthere is a look back component. (ii) 101(10A) The current monthly income (CMI)(A) means (You look to the month before the BR is filed.) (iii) Filing a BR is a privilege not a right so you must play by the rules. (iv) Any entitydoesnt have to be a personmust be paying you on a regular basis. (v) Excludes Social Security, victims of war crimes, and payments for terrorism. (e) Result (i) <100you pass the means testyou can file Ch. 7 (ii) > 166.67you flunk and there is no way to save youno Ch. 7 (iii) > 100 and > 166.67then there is another test (f) Test (i) 135.00 x 60 = 8160 (ii) Then find how much unsecured debt the person has. $100, 000 and 25% is 25,000. This is greater than that, then you pass. (iii) Debt is 10,000now that is $2500 is 25% now your surplus is greater and you cannot file Ch. 7. (g) 707(b)(2)(A)(i) (i) IF you fail the means test, there is a presumption you are abusing the system. (ii) The presumption used to be granting relief. (iii) Income- Expenses = 166.67 Ch 13 1. 99.99---Ch. 7 2. 100-166.67Able to pay 25% of unsecured debtCh. 13 a. Unable to pay 25% --Ch. 7 3. The less debt you have, the more likely you are to have to go Ch. 13. The more debt you incur, the more likely you can go Ch. 7 (h) What does income mean? 101(10A) (i) From the petition date, you must look six months ahead of it. Six months preceding the month in which you file. (ii) Any and all income received. Without regard to whether it is taxable. Includes any amount paid by any entity on a regular basisbut excludes S.S. benefit, war crimes, and victims of international terrorism. (He is unclear with the requirement for regularity.) (i) Expense (i) Amounts determined in ii, iii, and iv.

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(ii) These all represent expenses (iii) 707(b)(2)(A)(ii)-(iv) 1. (ii) (I) IRS National Standards, IRS Local Standards, and IRS Miscellaneous Standards. a. National Standards, Local Standards, and actual expenses specified as Other Necessary Expenses. b. Reasonably necessary health insurance, disability insurance, and health savings account expenses. c. Food, clothing, personal products, misc. etc the table is based on the peoples incomethe more money you have the more you can get. d. Local Standardstransportationownership and operation, housingownership and operation. You go to the county where the person resides and determine the amount. e. (II) Actual expenses for taking care of extended familythis is a valid expense. f. (III) Trustees fees. g. (IV) School expenseseach child gets $1500must be less than 18 years and documentation must tell why it is necessary. h. (V) Housing and utilities that exceed the standardbut you must tell why they are more. i. You can add 5% above the amount IRS tables give for food and clothing. 2. (iii) (I) Secured debts shall be calculated as the sum of what is due divided by 60 and (II) arrearages divided by 60. This is encouraging people who are not frugal. If you owe money on a mortgage30 year. BR lets you catch up if you file five months behinddivide it by 60. 3. Figure out CMI subtract every expense allowed in 707(b)(2)(A) (ii)(I)-(IV); (iii) ; (iv). The fourth one is priorityunsecured debthigher priorityIRS taxes on trust funds. 4. IRS gives a dollar amount for mortgage, but if it is higher you deduct your actual mortgage. But if its smaller, you get to deduct the IRS amount. i. 707(b) i) Can challenge a person being in Ch. 7 so long as the persons debts are primarily consumer debts for abusing the systemthe Court, US Trustee, Trustee, or any party in interest may challenge. ii) However, this is not applied to Businesses. iii) Consumer debtany debt that you incur for household or dependants usehouse, car, doctor bills. However, taxes are not consumer debts. Courts rely on the dollar amount????? iv) Who are the parties in interest? The creditors, but also the spouse. May not be a creditor but is a party in interest because he or she co-owns the house. j. 707(b)(2)(A)(i) Presumption of Abuse CMI Expenses = $ If the $ is < 100 you pass to Ch. 7 means test. This section only applies to above median debtors. If $ is between 100 and 166.67, there must be another test. You multiply $ by 60 with gives you the pool. If pool is > than 25% of the total unsecured claim, you flunk. If the pool is < 25% of the total unsecured claim, you pass and may file Ch. 7. If the $ is > 166.67, you flunk. k. 11. U.S.C. 109 Who may be a debtor . i) (a). . . only a person that resides or has a domicile, a place of business, or property in the U.S., or a municipality , may be a debtor under this title. ii) (b) A person may be a debtor under Ch. 7 . . . only if such person is not(1) a railroad; (2) a domestic insurance company, bank, cooperative bank, savings and loan association. .. . or (3) (A)a foreign insurance company.. (B) a foreign bank. . . iii) (c) An entity may be a debtor under Ch. 7 of this title if and only if such entity(1) is a municipality; (2) is specifically authorized, in its capacity as a municipality or by name, to be a debtor. . . ; (3) is insolvent; (4) desires to effect a plan to adjust such debts; and (5)(A) has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter; (B) has negotiated in good faith with creditors. . .; (C) is unable to negotiate with the creditors because negotiation is impracticable; or (D) reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of this title. iv) (d) Only a railroad, a person that may be a debtor under Ch. 7 (except a stockbroker or commodity broker), and an uninsured State member bank, or a corporation organized under the Federal Reserve Act or actinc as a clearing organization may be a debtor under Ch. 11. v) (e) Only an individual with regular income that owes, on the date of filing the petition, noncontingent, liquidated, unsecured debts of less than $307,675 and noncontingent, liquidated , secured debts of less than $922,975, or an individual with regular income and [his or her] spouse that owe on the date of the filing of the petition non-contingent, liquidated unsecured debts that aggregate less than $307,675 and non-contingent, liquidated secured debts of less than $922,975 may be a debtor under Ch. 13 of this title. vi) (f) only a family farmer or fisherman with regular annual income may be a debtor under Ch. 12.

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l.

vii) (g) . . . no individual or family farmer may be a debtor who has been a debtor in a case pending under this title at any time in the preceding 180 days if (1) the case was dismissed for willful failure of the debtor to abide by orders of the court, or to appear before the court, or (2) the debtor requested and obtained the voluntary dismissal of the case viii) (h)(1) an individual may not be a debtor unless such individual has, during the 180-day period preceding the filing of the petition received from an approved non-profit budget and credit counseling agency (111(a)) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities available credit counseling and assisted such individual in performing a related budget analysis. (1) (2)(A) [This] shall not apply to a debtor who resides in a district for which the US trustee determines that the approved nonprofit counseling agencies are not reasonably able to provide adequate services to the additional individuals who would otherwise seek counseling form such agencies because of these requirements (a) (B) The US Trustee who makes this determination shall review them not later than a year after the date of the determination and every year thereafter. A US trustee can disapprove an agency at any time. (2) (3)(A) [This requirement] shall not apply with respect to a debtor who submits to the court a certification that (a) (i) describes exigent circumstances that merit a waiver of the requirements. . . (b) (ii) states that the debtor requested counseling services form an approved agency, but was unable to obtain the services during the 5-day period beginning on the date on which the debtor made the request; and (c) (iii) is satisfactory to the court. (3) (B) An exemption shall cease to apply to a debtor on the date on which the debtor meets the requirements, but in no case may an exemption apply to that debtor after the date that is 30 days after the debtor files a petition, except that the court, for cause, may order an additional 15 days. (4) (4) [This requirement] shall not apply with respect to a debtor the court determines, after notice and a hearing, is unable to complete [it] because of incapacity, disability, or active military duty in a military combat zone. Incapacity means that the debtor is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities; and disability means that the debtor is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing. 11 U.S.C. 707 Dismissal of a case or conversion to a case under chapter 11 or 13. i) (a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause including (1) (1) unreasonable delay by the debtor that is prejudicial to the creditors; (2) (2) nonpayment of any fees or charges required under Ch. 123 and title 28; and (3) (3) failure of the debtor in a voluntary case to file, within 15 days or such additional time as the curt may allow after the filing of the petition commencing the case, the information required by section 521, but only on a motion by the US Trustee. ii) (b)(1) After notice and a hearing, the court, on its own motion or on a motion by the US trustee, or any party in interest, may dismiss a case filed by an individual debtor whose debts are primarily consumer debts, or, with the debtors consent, convert such a case to a case under Ch. 11 or 13, if it finds that granting of relief would be an abuse of the provisions of this chapter. In making a determination whether to dismiss a case under this section, the court may not take into consideration whether a debtor has made or continues to make charitable contributions under section 548(d)(3) to any qualified religious charitable entity or organization (as that term is defined in section 548(d)(4). (1) (2)(A)(i) In considering whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtors current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of (a) (I) 25% of the debtors nonpriority unsecured claims in the case, or $6000, whichever is greater OR (b) (II) $10,000. (2) (ii)(I) The debtors monthly expenses shall be the debtors applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtors actual monthly expenses for the categories specified as Other Necessary Expenses issued by the IRS for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor, the dependents of the debtor, and the spouse fo the debtor in a joint case, if the spouse is not otherwise dependent. Such expenses shall include reasonable necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse of the debtor, or the dependents of the debtor. the monthly expenses of the debtor shall not include payments for debts. In addition, the debtors monthly expenses shall include the debtors reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence as identified under section 309 of the Family if it is demonstrated that it is reasonable and necessary, the debtors monthly expenses may include an additional allowance for food and clothing of up to 5 percent of the food and clothing of up to 5 % of the food and clothing categories as specified by the National Standards issued by the IRS. (i) (II) Care of the elderly and dependent expenses may be included. (ii) (III) May include expenses for the administration of a Ch. 13 plan up to 10% of the projected plan payments.

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(IV) Expenses may include $1500 per child per year under 18 for education at a private elementary or secondary school with proper documentation. (iv) (V) Expenses may include an allowance for housing and utilities in excess of the allowance specified in Local Standards based on actual expenses for home energy costs if the debtor provides documentation. (3) (iii) The debtors average monthly payments on account of secured debts shall be calculated as the sum of (I) the total of all amounts due in each month of the 60 months following the date of the petition; and (II) any additional payments necessary for the debtor in filing a plan under Ch. 13 to maintain possession of the primary residence, motor vehicle, or other property necessary for the support of the debtor and his dependents that serves as collateral for secured debts; (4) (iv) Expenses for payment of all priority claimsincluding alimony and child supportshall be calculated as the total amount of debts entitled to priority, divided by 60. iii) (B)(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent that they justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. (1) (ii) In order to establish special circumstances, the D shall be required to itemize each additional expense or adjustment of income and to provide--.. m. Problem Set 7 i) Client comes to see about filing bankruptcy. She lived on $650 a month from unemployment for six months because her job went out of business. She found another job three months ago where she makes approximately $6000 including overtime pay. She is still struggling with her credit card and other debt though she is catching up on her mortgage payments. She and her ex-husband share custody of a son and is due $1000 in child support per month that her husband hasnt paid for years though he buys clothes for the boy and has paid the $3000 each semester for tuition at the local Catholic school. Can you tell if Marissa is eligible for Chapter 7? What advice do you giver her at this point? Marissas eligibility will depend on her monthly income minus her expenses calculated by the means test. It looks as though her income may be too high to allow her to file Ch.7, but we would need more information. At this point I would advise that she begin to pull together the paper work required if she does want to file, that she begin to gather documentation of her income from the last six months and that she attend credit counseling if she has not done so. Well, the fee would concern me, but we shouldnt be so aggressive right now anyway, she seems to be doing okay with her housing and can continue to plug away until we get the requisite information to determine whether she should file Ch. 7, 13, or not at all. You must figure out her CMI for six months prior to her filing. 650, 650, 650, 6000, 6000, 6000. $3325 is the average. CMIaverage monthly income (multiplied by 12) $39, 900. Income in MI is $41,877 for one earner, two earner $49,052. Look to the median income for the household size in the state. Average would be higher than the median. That is why they pick the median. Right now she applies, but if she waits. Stop doing the overtime then she will be sure to qualifyit is ethical to tell her this. Advising in the time of filing. Congress did not define householdUS Trustee says it means number of dependents. We should have included the amount that the husband was payingthe son lives with her and if the H was not paying for the clothes she would have to be. . ii) A H and W come to file who make approximately $9800 but are $100,000 in debt because of their childs serious heart condition. They list their expenses which total to $9515. Can you tell if they are eligible for Ch. 7.? It appears that they will be eligible for Ch. 7 since almost all of their expenses can be deducted from their income so that they are not above any median income of their state. It would make a huge difference if they rented their home and leased their car because there is no break for renting and they would be limited to the IRS amounts for those expenses with very little leeway for the courts to expand these allowances according to the actual expense. Household size was 5. He checked the IRS web site. $1546 +216= $1762. A 5% increase was $67 for food and clothing. Home mortgage is $1446 for someone living in Montgomery County Pennsylvania. I get the $1600 I actually pay. IRSif your car is six years or older or has a certain mileage, you get a $200. Operating costactual was $530-$386you are stuck with the 386. But ownership, you get the actual expense. Taking the higher of the twomortgage and car ownershipiii. There is also a need for charity is automatically allowed. Health insurance is allowed and all other health expenses. First, we would determine if they are above the median incomethese debtors probably are. Then we would deduct expenses from the income using the IRS schedules. If there is no surplus, they can file Chapter 7; it the surplus is $99 or less, they can file Ch. 7 if the surplus is 100-166.67 then we must determine if that is more than 25% of their unsecured debt by multiplying the surplus by 60. If it is, they cannot file Chapter 7. ITEM VALUE STATUTE Houshold furniture and appliances 8,000 Clothing 2,000 Loiss law books 2,400 Harvs MGA 800 Cash Value on Loiss Insurance 2,000 11108.531 exempt

(iii)

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Loiss wedding ring Loiss computer 100 Shares Disney Co Joint checking account Harvs computer set up Joint checking account Boat Harvs motorized wheelchair Fluffy Soccer ball

1,000 1,200 5,000 200 7,500 200 6,000 18,000 200 2

Exempt a6 A4 tool of trade only Not exempt Not exempt As tool of trade Not exempt Not exempt Health aid, no limit On dollar amount Exempt Exempt

iii) Debtor is a competitive skateboarder who has run up $30,000 in general unsecured debt after he broke his leg last year. His
income over the past six months has put him above the median income of a one-earner family and after allowable expenses, he has $150 a month available. What advice could make him eligible for Ch7? He fails because his surplus is more than 25% of his unsecured debt divided by 60. But it is only$25 more. It would be against Section 526 for me to encourage him to incur more debt to reach this limit. He may use the extra $25 for a charitable contribution, but personally I would be a little afraid to tell him that since Congress is out to get people like me. He may under 707(b)(2)(A)(iii) include in his expenses what he would have to pay on Ch 13 plan to maintain his residence, motor vehicle, or other property necessary for the support of the debtorthus any equipment he has for skateboarding might work here and eat up the extra $25. 25% Rule, can you pay at least 25% of your total unsecured debt. Yes= ch 13; noCh.7. If CMI-Expenses = 99.99 File Ch. 7 CMI-Expenses = 166.67 File Ch. 13 CMIExpenses=100-166.66, you must do the 25% rule. 30,000/ .25 = $7500 150 x 60=$9,000. Thus, he can pay. He says you can tell him not to pay and wait. You can get a better vehicle. He says that 526 is unconstitutional which states that an attorney cannot advise them to incur debt. Two courts have found this unconstitutional. iv) Former CEO lost a fraud trial and owes a judgment of $1billion. He wants to file Ch. 7. He has $1 million in assets and is glad to give that up. He has trusts that will make his annual income $2 million. Is he eligible for Ch. 7? It is hard to say since we dont know his monthly expenses; however, it is hard to imagine that he would be eligible although the $1 billion judgment is a secured debt and not an unsecured debt????? If this counts as a business expense maybe he will not have to meet the strict consumer demands???? This is a business debt, so he will get to file. 707(b)(2). 707(a) may dismiss for cause includingmeaning that this is not exclusive list which includes unreasonable delay, nonpayment of fees, and failure to file paperwork within 15 days, so we could show abuse. v) The calculation of the means test is cumbersome and I would like to skip it or just give estimates since it is irrelevant to the consumers case who is easily below the median income level? No, because an attorneys signature is a certification that a reasonable investigation supports the veracity of the reports; further I could be brought to court by the US trustee or a creditor for violating 9011 which asserts that I believe and have investigated that this client is eligible for Ch. 7. V. LIQUIDATION BANKRUPTY (Property Exempt from Seizure) pp. 169-194 A. TEX. PROP. CODE ANN. 41.001-42.005 i) 41.001 and 41.002 Real Property (1) Unlimited homestead exemption as to amount. However, it is limited as to where it is and how large it is. (a) UrbanSingle persons get 10 acres and a family gets 10 acres. These must be contiguous. If you cant satisfy the urban definition, then you have a rural homestead. (b) RuralSingle person gets 100 acres and a family gets 200 acres. This land may be non-contiguous. (c) Liens that can be held against the homestead: purchase money (mortgage), taxes, materials used in improvements, owelty of partition (wife gets house, but if she ever sells it, you get half of the proceeds. H. has a lien against the house.), refinance of a lien (they paid your taxes), home equity loan (they can foreclose), reverse mortgage (sell the house to a lending institution that lets me live there while I am alive, and they send me living expenseslife estate.) (d) Proceeds are exempt for 6 months. Must be fully reinvested into a new home for the exemption to be saved. If six months pass by, and I have not purchased a home, creditors can get to it. (2) 41.002 (a) Gives the definition of urbanlocated within the limits of the municipality or its extraterritorial jurisdiction or a platted subdivision; and (b) Served by police protection, paid or volunteer fire protection, and at least three of the following services provided by the municipality or under contract to a municipality: Electric, Natural Gas, Sewer, Storm Sewer, and Water. (3) 41.003

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(a) If the owner rents out the homestead; it does not change its character as long as you do not acquire another homestead. (4) What do you have to do to have a homestead in TX? (a) Have an intent to live upon the land and take some steps to improve the land. (b) However, you can only have one at a time. (c) A H and W can only have one homestead. Spatmove outstill have the same homestead. (5) Personal Property 42.002 (a) Single people can keep $30,000 (b) Families can keep $60,000 (c) Some property protected: current wages, health care materials, alimony support, commissions. (d) Class of property you get to keep: (i) Home furnishings and family heirlooms (ii) Consumption (iii) Farming and Ranching vehicles and implements (iv) Tools used in a trade or profession. (v) Wearing apparel (vi) Jewelry not to exceed 25% of the aggregate limitations prescribed by 42.001 (vii)Two Firearms (viii) Athletic and Sporting equipment, including bicycles (ix) Two wheeled, three wheeled, four wheeled motor vehicles for each member with a drivers license or without but depends on another family member (x) Animalscheck the list. (xi) Household pets (6) 42.003 (a) If exceeds the aggregate amount allowed and the debtor is where the property is located, then the sheriff can ask the debtor which property can take. The debtor gets to determine what property is exempt. (b) You get to designate what portion you want to keep because you have over the limited amount. (7) 42.005 Child support liensnot limited by any amount. Theres no such thing as an exemption from a child support lien. (8) 42.0021 Retirement (a) IRA (b) Pension Plans (c) 403(b) plansannuities (d) IRC says its okay; TX exempts it. (e) Life insurance is exempt so long as I did not get it in fraud of creditors. 42.004 (9) TProp.C 41.001(a) Interests in Land Exempt from Seizures. Homestead ...[is] exempt from seizure to satisfy claims of creditors except for encumbrances properly fixed on homestead (b) Encumbrances may be properly fixed on homestead property for: (1) purchase money; (2) taxes on the property; (3) work and material used in constructing improvements on the property if contracted for in writing as provide by 53.254; (4) an owelty of partition against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or award of a family homestead, or from the tax debt of the owner; (5) the refinance of a lien against a homestead, including a federal tax lien resulting from the tax debt of both spouses, if the homestead is a family homestead, or from the tax debt of the owner; (6) an extension of credit that meets the requirements of 50(a)(6), Article XVI , TX constitution; (7) a reverse mortgage that meets the requirements of 50(k)(p), Article XVI, Texas Constitution. (a) (c) Homestead claimants proceeds of a sale of a homestead are not subject for SIX MONTHS after the date of the sale. (10) TProp.C 41.002 Definition of Homestead. (a) Urban Home can be 10 acres or less (b) Rural Home can be 100 acres for a single person and 200 acres for a family (c) Definition of Homestead. (a) If used for the purposes of an urban home or as both an urgban home and a place to exercise a calling or business, the homestead of a family or a single, adult person, not otherwise entitled to a homestead, shall consist of not more than 10 acres of land which may be in one or more contiguous lots, together with any improvements thereon. (b) If used for the purposes of a rural home, the homestead shall consist of: (1) for a family, not more than 200 acres, which may be in one or more parcels, with the improvements thereon; (2) for a single, adult person, not otherwise entitled to a homestead, not more than 100 acres, which may be in one or more parcels, with the improvements thereon. (c) A homestead is considered to be urban if, at the time the designation is made, the property is: (1) located within the limits of a municipality or its extraterritorial jurisdiction or platted subdivision; and (2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality

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b.

c.

or under contract to a municipality: (A) electric; (B) natural gas; (C) sewer; (D) storm sewer; and (E) Water. (d) the definition of a homestead as provided in this section applies to all homesteads in this state whenever created. (11) While the homestead exemption is unlimited, the personal property exemption has limitations. (12) TProp. C 42.001 Personal Property Exemption. (a) Personal property, as described in section 42.002, is exempt from garnishment, attachment, execution, or other seizure if (1) the property is provided for a family and has an aggregate FMV of not more than $60,000, exclusive of liens, security interests, or other charges encumbering the property; or (2) owned by a single adult , who is not a member of a family, and has an aggregate FMV of not more than $30,000 exclusive of see above. (a) (b) The following personal property is exempt and not part of the aggregate limitations in subsection a: (i) Current wages for personal services except for enforcement of court-ordered child support payments. (ii) Professionally prescribed health aids of the debtor or a dependent of the debtor (iii) Alimony, support, or separate maintenance received by debtor for support of a debtor or dependent child of the debtor. (c) This section does not prevent seizure by a secured creditor with a contractual landlords lien or other security in the property to be seized. (d) Unpaid commissions for personal services not to exceed 25% of the aggregate limitations by subsection (a) are exempt from seizure and are included in the aggregate. (13) TProp.C 42.002 Personal Property. (Exempt) (This counts against the limitations in 42.001) (a) The following property is exempt under section 42.001(a) 1. Home furnishings including family heirlooms 2. Provisions for consumption 3. Farming or ranching vehicles and implements 4. Tools, equipment, books, and apparatus including boats, motor vehicles used in a trade or profession 5. Wearing apparel 6. Jewelry not to exceed 25% of the aggregate limitations 7. Two firearms 8. Athletic and sporting equipment, including bicycles 9. A two-wheeled, three wheeled, or four wheeled motor vehicle for each member of a family or a single adult who holds a drivers license or does not and relies on another person to operate it. 10. Animals and forage on hand for their consumption (2 horses, saddle blanket, and bridle for each, 12 head of cattle, 60 head of other types of livestock, 120 fowl) 11. Household pets. (b) Personal property, unless precluded from being encumbered by other law, may be encumbered by a security interest under the Business and Commerce Code (U.C.C.) or the Transportation Code, or by a lien fixed by other law, and the security interest or lien may not be avoided on the ground that the property is exempt under this chapter. (14) TProp.C 42.0021 Additional Exemption for Certain Savings Plans (a) Stock Bonus Payments (b) Pension (c) Profit-sharing (d) Retirement Plan for Self-Employed (e) Annuity (f) Retirement Annuity or Account (g) Health Savings Account All exempt unless the plan does not qualify under IRC 1986 (15) 42.004 allows creditors to challenge conversion of nonexempt property to exempt property for two years before the debtor files BR. TEX. INS CODE ANN. 1108.001- 1108.102 (It is unclear to me how this fits; the code is really murky????) 002. An annuity contract is an insurance policy if it is issued by a life insurance company or by employer. 051. Annuity and insurance benefits include cash value and proceeds that go to beneficiary or insured of an insurance policy. It doesnt matter if the insured has the right to change the beneficiary and the estate itself is a contingent beneficiary. 53. Does not apply to premium payment made in fraud in the creditor did it just to protect assets, debt secured by insurance policy, child support lien. 101. Insurance policies is alienable. 102. If annuity prohibits assigning, such an assignment is void. Property Exempt from Seizure: Introduction. i) The law in every state makes at least some property exempt from execution and other legal process so that no debtor can be reduced to absolute destitution. ii) Policy includes a desire to avoid results that threaten the social fabric of the community and expresses a self-interest.

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iii) A creditor is not to leave the debtor with so little property that the debtor and his or her family will become a charge on the community. iv) Exemption laws are directed toward making certain that every debtor retains enough basic property to have a chance to get out of a hole and make a fresh start. v) Some personal items have little resale value but are crucial to the debtor, such as clothes. vi) The law distinguishes between seizing property to satisfy a debt and seizing property soley to inflict pain to the debtor. vii) Rule: When property is defined as exempt under state law, general creditors cannot seize it to satisfy their judgments. However, consensual agreements, such as pawn shop possession, are not so protected. viii) Rule: As part of granting a security interest, the debtor waives the exemption as to these creditors; thus, the creditors are entitled to seize the property for non payment of their outstanding loans even when the property is exempt. ix) Rule: All property not listed as exempt is denominated non-exempt and will be sold by the trustee so that the proceeds can be distributed to the creditors. x) A State/Federal System (1) Every state has exemption laws, although the amount of protection varies widely. (2) Federal law preempts state collection efforts with the automatic stay, but the question of which property is exempt is stategoverned. (3) Rule: The federal Bankruptcy Code establishes federal exemptions, but states can opt-out of those exemptions, denying their own citizens the benefits of the federal protection when they have filed bankruptcy. 522(b)(2). (4) This was a compromise for states who wanted to be more or less generous than the federal exemptions. (5) Federal exemptions cover a wide variety of property, including payments from crime reparations laws and un-matured life insurance. 522(d) (6) The 2005 Amendments require that retirement funds regardless of whether the debtor lived in a state that opted out of the federal exemption are exempt. 522(b)(3)(C); (d)(12) (7) Most retirement accounts are not property of the estate anyway as they are equipped with spendthrift trust provisions. 541(c) (8) Federal exemptions are limited to specific dollar amounts, such as $2950 exemption in a car, which amounts are adjusted every three years for inflation. 108(d), (e) (9) Every set of exemption statutes has some provisions that are tied to specific kinds of propertyhousehold goods, homesteads, rights to receive disability payments. (10) TX statute limits a homestead in terms of acreage; beyond that a debtor is entitled to exempt the property regardless of its dollar value. (11) Federal exemptions are somewhere between limits and none at all and sets a dollar value on the homestead for each debtor. (12) TX exemptions add no special protection for renters to match its protection to homeowners. (13) Federal statutes allow anyone who does not claim a homestead exemption under 522(d)(1) to claim half the value of the unclaimed homestead exemption in any property at all under 522(d)(5). 975 is the wild card, plus 9250 homestead. You cannot exceed 9250. The debtors aggregate interest in any property, not to exceed in value $975 plus up to $9250 of any unused amount of the exemption provided under paragraph (1) of this subsection. (14) Rule: When a home mortgagesecond or third mortgageis as large as the total value of the property, then the debtor has no equity to protect. Its equity that counts, not the value of the home. (15) Most states exempt various domestic support obligations and liens from the exemption laws, so that child support may be enforced by the seizure of otherwise exempt property. xi) Classification of Property (1) Although the exemptions the debtor may claim are creatures of state law, the federal bankruptcy courts will be called on to determine their meaning. (2) In re Johnson (1981) (a) Facts: BR petitioner claimed that the bus he used to haul parishioners was an automobile and thus exempt. The trustee argued that it was not an automobile covered by exemptions because of its use. (b) Procedure: BR Court found that a motor vehicle was a motor vehicle and that the bus was exempt as such. (3) In re Pizzi (1993) (a) Facts: The debtor won a prize in the lottery worth $3,202,624.20. She had to file Ch. 7 bankruptcy in the middle of her yearly payoffs of the prize money. She was to receive 12 more annual payments in the amount of $128,105.17 from the state of Connecticut who had purchased an annuity contract from Met Life for the benefit of Ms. Pizzi to manage and make the payments. (b) Issue: Whether the proceeds from the lottery winnings are exempt from the claims of creditors under FL law.

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(c) Rationale: Income stream flowing directly to the Debtor is not an annuity at all. The monies are prize winnings
stemming from a lottery ticket. It would be inequitable for a debtor to obtain loans for lottery winnings and then discharge these obligations without turning over winnings to her estate. However, since she is named as a beneficiary of an annuity contract purchased to fund a states obligations, the winnings may be exempt. (d) Rationale: The payments are not annuity and she is never referred to as a beneficiary of an annuity. xii) Valuation of Exempt Property (1) In addition to determining whether property is exempt, it is also necessary to determine whether the property fits within the permitted valuations. (2) In re Walsh (a) Facts: The trustee filed an application for appraisal of the value to be given to the property claimed as exempt. Here the trustee wanted the appraisal to be at fair market value as opposed to liquidation value. (b) Procedure: Usually done without a hearing, but here came before the BR court. Court found in this case that liquidation value was the appropriate value given. (c) Issue: Whether fair market value is the amount that can be gained on liquidation (liquidation value) or the amount that a willing buyer would pay a willing seller (traditional). (d) Rule: If the assets claimed as exempt exceed the monetary limits set forth in 522(d), then to that extent, they are nonexempt assets. (e) Rule: Value for the purposes of the exemption section is defined as fair market value as of the date of the filing of the petition. 522(a)(1) (f) Rationale: In construing the meaning of value, the Court must look to the usual and accepted meaning of fair market valuethe price at which a willing seller and a willing buyer will trade. This assumes an agreement between an owner willing , not obliged to sell for cash. A court must then consider all considerations that fairly might be brought forward and given substantial weight in bargaining. (3) In re Mitchell (1989) (a) Facts: A creditor raised objections to the value of an exemption raised by the debtor. The creditor argued that the court should apply a fair market value to the property and the debtor argued for distress or liquidation value. The creditor gave the ring a FMV of $36,000 and the debtor gave it a liquidation value of $7800. If the diamond ring were valued at its FMV, the debtor would have to choose between the jewelry and household furnishings. (b) Procedure: Clarified that Walsh did not stand for the application of liquidation value per se. Instead, it encouraged a focus on the applicable market. (c) Issue: Whether traditional fair market value or liquidation value should be applied in valuing exempt property. (d) Rule: The appropriate valuation standard is thus fair value market incorporating an exposure of the item to the appropriate market for a reasonable period of time. (e) Rationale: The use and intent determine the classification of the property. (f) Rationale: Texans cannot simply keep $30,000 of any property they choose. They must pick items from an approved list. Once they have done so, they must stay within the given budget, which balances out the competing concerns of assuring a debtor a fresh start and assuring creditors a fair recovery. xiii) Proceeds and Tracing (1) Exemptions are typically by category of propertywages, tools of the trade, motor vehicles, household furniture, alimony. (2) Property is not static in nature and may change forms. (3) Issue: Whenever the form of property changes, how do exemptions apply to property that would not meet the classification requirements except that it constitutes proceeds from exempt property? (4) In re Palidora (2004) (a) Facts: Debtors objected to a trustees attempts to draw money from a joint banking account because it claimed that the amount was exempt as proceeds from wages and a payment for child support. (b) Procedure: (c) Issue: Whether wages, salary or compensation for personal services means only what is payable, or includes what has been paid, either by cash, check or direct deposit to a debtors bank account. (d) Rule: The meaning of a state exemption is controlled by the applicable state law, and a BR court is bound by the states construction of a state statute.

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(e) Rule: Paid child support is different from paid wages. Where the state law provides that child support payments are held
by the custodial parent in a fiduciary capacity, such funds do not become property of the estate. (f) Section 541(d) defines property held in trust not to constitute property of the estate. Money paid by a former spouse to a custodial parent for child support pursuant to a court order are trust funds held by the custodial parent for the benefit of the child and not property of the estate. (g) Rationale: Here, according to Arizona law, the wage exemption only applied to wages when given to the debtor, not once they were in the hands of a debtor. The exemption was to protect from garnishment. (h) Rationale: In addition, Arizona exempted monies received by or payable to a person entitled to receive child support or spousal maintenance under a court order. The statute expressly covers not only money payable to the debtor but also money received by a debtor. They are thus traceable to the exempt source. (5) The Dasher Debacle: If moneys are not traceable, then you could lose property that would otherwise be exempt. Foolish person took out retirement funds (exempt) and purchased a truck (non-exempt). Lost the truck and thus his retirement. xiv) Partially Exempt Property (1) If there is a dollar limit on an exempt category, property of greater value does not cease to be exempt. The property is partially exempt. (2) The exemption attaches up to its dollar limit to the cash for the sale. (3) The proceeds are allocated first to the debtor for the exempt amount. The remainder goes to the judgment creditors. xv) Security Interests in Exempt Property (1) When potentially exempt property is encumbered by a security interest valid in BR, the secured party moves ahead of both the debtor and the TIB. (2) Only when the value of the property exceeds the sum of the allowed secured claim and the debtors exemption would the TIB be able to reach any value in the property. xvi) Avoiding Judicial Liens and Non-PMSI Liens (1) In addition to personal exemptions, Congress has protected post-bankruptcy debtors. (2) Two kinds of liens are made avoidable: judicial liens and non-possessory, non purchase money consensual security interests. (3) The collateral must be exempt property (4) It must be a kind of household good defined in 522(f)(4) household goods. (5) They are treated like general creditors as opposed to secured creditors. (6) Rule: A debtor may avoid all judicial liens on exempt property, regardless of the nature of the debt secured by the lien. However, a debt for domestic support is exempt. (7) Rationale: Section 522(f)(1)(B) voids voluntary security interests was adopted to void agreements entered into by the poor putting liens on property not merely selected to return value but to punish the debtor or imprison them such that they would make any sacrifice to keep their clothing for instance. (a) FTC followed suit: 16 CFR 444.1 (1985) It is unfair practice to take a nonpossessory nonpurchase money security interest in certain listed goods. (b) Only applies to security interests created after its effective date to avoid constitutional challenges for the taking of property or voiding contractual provisions. (c) Similar challenges made 522 post dated also. d. Problem Set 8 e. 8.1. H. and W. live in TX in an apt. They are unable to pay their debts and would like to know which of their assets is vulnerable to creditor attachment. Their biggest creditor is the IRS to whom they owe $5000 in back taxes. H is a computer programmer and is injured from a train accident and is likely to settle with the RR for $50,000. What can H and W protect from the creditors? H and W cannot protect anything from the IRS as they are a priority debtor. They can, however, protect from all other creditors 60,000 in personal property, which could include their household furnishings, clothing, law books, the moped and the MGA (one for each family member with a license), the wedding ring, Lois computer, if it is for work, Harvs computer if it is used in his trade, Fluffy their cat, the soccer ball. They will also get to keep the right to dividends from the shares of Disney. They will not be able to protect the cash value on the insurance, the money from the joint checking accounts, the boat??? because it is not a wheeled vehicle. Though the settlement is a projection, if it comes through and is all attributable to personal injury, it will not be vulnerable to attachment. However if it is pecuniary loss or pain and suffering it will be vulnerable. What could they protect if they lived in DE? They will get the law books, their clothes, they can only keep trade tools with a very low value which will likely make the computers vulnerable even if they are used in the professions of the debtors. Not much at all. 85% of their wages will be protected. The cash value of the insurance is exempt. Now, the computer is a part of home furnishingshousehold good and is exempt. The Disney stock is not exempt. Under the Federal exemptions may have allowed them to exempt some of the things they could not under the state exemptions.

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ITEM Houshold furniture and appliances Clothing Loiss law books Harvs MGA Cash Value on Loiss Insurance Loiss wedding ring Loiss computer 100 Shares Disney Co Joint checking account Harvs computer set up Joint checking account Boat Harvs motorized wheelchair Fluffy the cat Soccer ball Loiss moped Total

VALUE 8,000 2,000 2,400 800 2,000 1,000 1,200 5,000 200 7,500 200 6,000 18,000 200 2 800 23602

TEXAS STATUTE Exempt counts Exempt counts Tool of trade counts Exempt counts 11108.531 exempt, doesnt count Exempt a6 counts A4 tool of trade only counts Computers may be HH furnture Not exempt Not exempt As tool of trade counts Not exempt Not exempt Health aid, no limit On dollar amount Exempt counts Exempt counts Exempt counts

f. 8.2. Debtor who is a computer programmer has a collection of old books and manuscripts including a Bible worth $500,000 and the
remainder of the library is $600,000. All other assets are worth $50. What can she keep in TX as her creditors close in? It appears she can only keep that which she can claim as personal property under the $30,000 cap; however, I thought there was a statute in TX allowing her to keep such collectibles???? What can she keep in DE? In DE, she can keep the Bible if it is considered a family Bible which it may not be since it is clearly an antique and not for personal use. She can keep the library if it is deemed a family library. 85% of her wages from computer programming. The trustee would give her $29,950 after selling the books in TX. Even though the Bible is an antique, it is still subject to the limit. She can keep the $50. 8.3. Debtor lives in a state where the state permits an individual debtor to exempt $25,000 in the homestead. The house was purchased in 1990; debtor paid $5000 down and has paid a $45,000 mortgage to $40,000. The FMV of the house is $75,000 when they are exposed to the market in normal conditions; however, such a house sold for $29,428 at a foreclosure sale to creditor who was the only one at the sale for the exact amount the debtor owed. The debtor owes a judgment creditor $25,000. What should the court consider in ordering a judicial sale? The court needs to determine what his equity is in the house and whether such a sale would bring enough money to satisfy creditors to whom it is due. A judgment creditor is not a secured creditor and under the federal laws his debt can be avoided. The proceeds of the sale will be to give the debtor his exemption, pay the expenses of the sale, and the remainder will go to creditors. FMV 75,000-45,000 = 35,000 equity. Exemption is 25,000 There is $10,000 non-exempt. The proceeds would be disbursed at 4,500 for commission, 40,000 to mortgage company and 25,000 exemption leaving the judgment creditor 5,500. Not worth it. Fire sale price leaves nothing. Here a foreclosure would not be prudent. Here, the judgment creditor is just using the house as leverage. A creditor can force the sale of the house, but it really just wants the money. Should the decision to force the sale differ if the creditor is the victim of the debtors drunk driving or a corporation that has swindled the debtor? Yes, he will not be able to avoid the judgment, if it is the tort victim; however, he will be able to avoid it if the creditor is a criminal. Would it be different if it was the mortgagee instead of a judgment creditor? It will be different if it is a mortgage, because that is a secured debt; however, the creditor will still only be able to reach the non-exempt portion of the sale proceeds. 522(f ) applies only to personal property and not to real estate, and therefore, he cannot avoid the judicial lien or a non-purchase money lien on personal property, not on real property. 8.4. Debtor purchased a truck that he used as collateral for a $6500 loan. Since debtor could not obtain work, he began a business of his own hauling trash which still failed resulting in his filing bankruptcy. The creditor for the loan filed to have the stay lifted so that it could repossess the truck. If the Federal exemptions apply, should the stay be lifted? Lifting the stay has nothing to do with the exemptions; however, if the stay is lifted, the debtor will receive the amount of exemption from the proceeds of the sale of the car. Also, it would be totally exempt if it were the vehicle used in the trash hauling business. He can avoid the lien????522(f)(1)(b) because it is nonpossessory, nonpurchase money security interest in any . . . tool of the trade. The character of the property as of the petition date. TX law does prohibit avoidance of a consensual lien. Would it matter if Debtor was doing both light hauling and working in his profession of construction? No, just because he does it part time does not mean that it is not his profession. If debtor was just driving the pickup to and from construction sites? It is now less likely to be a tool of his trade. To collect unemployment checks? Yes, then it will definitely be strictly for personal use. Is there a way for the creditor to determine its use and does it matter? I

g.

h.

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i.

think he may have to take the debtors word for it, and yes, the use of it does matter. What result if the debtors state has opted out of federal exemptions? He can only take state exemptions. Makes tools of the trade exempt up to $1000? He is likely unable to keep the car and will only get 1000 to replace it. Makes motor vehicles exempt up to $2000? He gets $2000 in value. Says that all consensual liens are enforceable? The credit union will have a right to the truck, but they will still be subject to the stay unless the court lifts it. Class Notes . i) Two different concepts exist: (1) Excluded from Estate (2) Exempted from Estate. (a) E.g. 401K is excluded because it is ERISA qualified. It never came into the estate. (b) House, car, furniture, cattlethese are all a part of the estate; however, the state exempts it and says the creditors cant touch itit leaves the estate. (3) The idea behind exemptions is that we want people to keep their cultural identityshould keep their family heirloom (4) We also want them to have enough resources to not become wards of the estate. (5) Exemptions are paternalistic approach to protect the debtors dependents. (6) Tied to either a $ amount or classes of property. (7) Give the debtor just enough to be able to survive. ii) When they passed the code, they wanted to have universal exemptions determined by Federal law. (1) CompromiseFederal Exemptions in 522 (d) Bankruptcy Exemptions (2) State law Exemptions also. (3) Congress gave states the option to opt out. If you opt out, citizens cannot use the federal ones, they will be limited to the state exemptions + other federal exemptions. (a) Other federal exemptionswork for US Postal Service, IRS, Supremacy Clause these supersede state law. These are found anywhere in the US Code. (b) TX says we wont opt outtherefore, our citizens can choose between federal or state. Most of these states who did not opt out have very generous exemptions. (c) TX and FL have unlimited homesteadthe coast, weather, amenities, infrastructure; thus, there is more abuse in these states. iii) 1108.0531 Insurance with an annuity is exempt and cannot be reached except by those to whom you pledge it and those whom you defrauded to get it. iv) 42.004 Allows a creditor to challenge conversion of non-exempt assets to exempt assets for a term of two years after the transaction. However, if they dont challenge, the opportunity is gone. Even if they do challenge it, the burden is very hard to carry. v) We are expected to know TX exemptions; either MC or short essay. He considers it a fundamental concept. (1) Texas Exemptions is set up by a dollar amount and a list of items. Pick and choose from these items up to this dollar amount. (2) Federal Exemptions you get X item for up to X amount of money. Controls what you can have and what amount the value of it is. E.g. You only get one car worth $2500 (a) These get adjusted every three years a new set is due Apr. 2007. (3) Though the TX exemption is generous for homestead, but must debtors who file dont own a home. Those who do own a home, most have zero equity. (a) In 2001 mortgages were standard; now they are exotic. (b) Homes are being foreclosed on. Highest number in Dallas and Tarrant county since the mid 80s. (4) In re Johnson: (a) A bus is a vehicle. (5) In re Pizzi (a) You must be the buyer and beneficiary of the annuity for it to be exempt under TX law. (6) In re Walsh (a) Whos going to sell this property? Trusteeno markethe is going to take it to auction. Close to wholesale or less. (b) As a debtor, you want this. (7) In re Mitchell (a) He can assign it to someone who can sell it, so it may not go to auction. In which case it will be valued at FMV. (b) Creditors and trustees want thisexpose to marketit will bring in fair market value. (8) Wages are exempt until they reach your account. (9) Partially exemptdoes not mean the debtor gets deprived of his or her exemption. (10) Judicial Lien Exemption. Only applies to personal property. vi) 522 (1) Dependent includes spouse does not matter whether the husband takes her as a tax exemption or not.

30

(2) Day of the filing of the bankruptcy???? (3) Any individual may exempt from P2 or P3. (a) P2what it is in 522(d) (b) P3property that is exempt under state law. (4) You must satisfy venue provision to file bankruptcythe court looks back 180 days; if youve lived there 91 days or more, venue is proper. But for exemptions, they look back 730 days; the debtor must have lived there more than 730 days, if not, they go back 180 days91 days or more during that time is the state of exemption. 522(b)(3)(A) (5) Part CRetirement Funds (a) Designed to protect retirement accounts in terms of defaults. 522(c) Safety Valves to make sure that protection stays on. If you are in the plan and are also the trustee of the plan, then you will have a problem. (b) Just because you get a discharge in BR does not mean that domestic support problems and exempt items are fair game. E.g. $500,000 house that is homestead522(c) allows a domestic support obligation against you can sell the house from under you. In BR it is available to the claimant. (6) Itemization of Exemptions 522 (d) [per person filing BR) (m) two people file, like H and W, each gets a set of these exemptions. (a) $18,450 homesteadreal property (b) $2950 for a car (c) $9, 850 Household Goods (no individual item can be over $475) (d) 1,225 Jewelry (e) $1850 tools of the trade (f) Term policyLife Insurance (g) $9850Policy with cash value (h) Health aidsunlimited (i) The debtors right to receivesocial security benefit, veterans benefit, disability or unemployment benefit, alimony support (j) Payment under a stock bonus or similar plan (IRA) only to the extent reasonably necessary for the support of the debtor and dependent. (k) Crime Victims Reparition (l) $18, 450 for personal bodily injury (no pain and suffering) (m) A payment in compensation of loss of future earnings of the debtor so long as reasonably necessary for the support. (n) Retirement Funds to the extent that they are exempt from taxation. (7) 522(f) You can avoid a lien on an exempt property to the extent it is impairing the exemption: Judicial lien; non-purchase non-possessory purchase money lien. (a) The property must fit into one of the household goods, tools of the trade, professionally prescribed health aids. (8) 522(f)(4) clothing, furniture, appliance one radio, television, and vcr. Etc. (9) 522(n) Assets in individual retirement accounts (IRA) shall not exceed $1 million. If you have rolled it over into an IRA, and it has generated income, then the rollover doesnt count toward the limitation. Congress wanted to protect rollovers. (10) 522(o) real or personal property that the debtor or a dependent of the debtor claims as a homestead. (11) If within ten years, you put a lump sum in to defraud, then it can be subtracted as nonexempt. Ten year reverse rule. They can look ten years before the filing of the BR petition for any property you disposed of with the intent to defraud or avoid the creditor. VI. Liquidation Bankruptcy (Homesteads, Trusts, and Exemption Planning) pp. 196-218 a. 522 Exemptions. (a) Dependent includes spouse, whether or not actually dependent; (2) value means fair market value as of the date of the filing of the petition or as of the date that property enters the estate. (b)(1)In spite of 541, a debtor may exempt property listed from paragraph 2 or in the alternative 3. In either joint or individual cases filed by a husband and wife, and whose estates are ordered to be jointly administered, one debtor may not elect to exempt property listed in paragraph 2 and the other debtor elect to exempt property listed in paragraph 3. If the parties cannot agree on the alternative to be elected, they shall be deemed to elect paragraph 2, where such election is permitted under law of the jurisdiction. (2)Property listed in this paragraph is property under (d) unless the State law specifically does not so authorize. (3) Property in this section, subject to (o) and (p), any property that is exempt under Federal law, other than (d), or state or local law that is applicable on the date of the filing of the petition at the place in which the debtors domicile has been located for the past 730 days immediately preceding the petition filing OR if the debtors domicile has not been located at a single State for such 730 day period , the place in which the debtors domicile was located for 180 days immediately preceding the 730 day period or for a longer portion of such 180 day period than in any other place. (B) Any interest in property that is as a tenant by the entirety or joint tenant to the extent that such interest is exempt from process under non-bankruptcy

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c.

law; and (C) retirement funds to the extent that those funds are in a fund or account exempt. If the effect of the domiciliary requirement is to render the debtor ineligible for any exemption, the debtor may elect to exempt property in (d). i) (4) The following applies to (3)(C) and (d)(12) (1) (A)If the retirement fund has received favorable treatment from the IRC at the time of the filing, it is exempt; (2) (B) If the retirement funds have not received a favorable determination, those funds are only exempt if the debtor can show (i) no prior determination to the contrary has been made by a court or the IRS; and (ii)(I) the fund is in substantial compliance with applicable IRC requirements or (II) the fund fails to be in substantial compliance with the IRC and the debtor is not materially responsible for that failure. (3) (C) A transfer of retirement funds from an account that is exempt from taxation shall not cease to qualify for exemption by reason of direct transfer. (4) (D)(i) Any rollover under the IRC or that is described in (ii) shall not cease to qualify for exemption . (ii) A distribution described in this clause is an amount that (I) has been distributed from a fund that is exempt from taxation under the IRC and (II ) to the extent allowed by law, is deposited in such a fund not later than 60 days after the distribution. (c) Unless the case is dismissed, exempt property is not liable during or after the case for any debt that arose before the commencement of the case EXCEPT i) Property that is exempted from discharge under 523 (a) ii) A debt secured by a lien that is (A)(i) not avoided under (f) or (g) or under 544,545, etc.; and (ii) not void under 506(d); or (B) a tax lien, notice of which is properly filed.; iii) (3) a debt owed by an institution-affiliated party of an insured depositary institution to a Federal depositary institutions regulatory agency acting in its capacity as conservator, receiver, or liquidating agent for such institution; or iv) (4) a debt in connection with fraud in the obtaining or providing of a scholarship or other financial assistance for purposes of financing education. (d) The following property may be exempted under subsection (b): i) (1)The debtors aggregate interest, not to exceed $18,450 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor ii) (2) $2950, maximum in value in one motor vehicle. iii) (3) maximum $475 interest in value in any particular item or $9850 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor. iv) (4) maximum $1225 in value in jewelry held primarily for the personal, family, or household use of the debtor or dependent of the debtor. v) (5) interest in any property for a maximum of $975 plus up to $9250 of any unused amount of the exemption provided under paragraph (1) of this subsection. (if you dont have a homestead, this will help) vi) (6) maximum of $1850 in value in any implements, professional books, or tools, of the trade the debtor or a dependent of the debtor. vii) (7) unmatured life insurance K owned by the debtor, other than credit life insurance K. viii) (8) maximum of $9850 less any amount of property of the estate transferred in the manner specified in 542(d) in an accrued dividend or interest or the loan value of any unmatured life insurance K owned by the D or an individual of whom the D is a dependent. ix) (9) Professionally prescribed health aids for the D or a dependent of a debtor. x) (10) The debtors right to receive(A) social security benefits, unemployment, or local public assistance; (B) a veterans benefit; (C) a disability, illness, or unemployment benefit; (D) alimony, support, or separate maintenance to the extent reasonably necessary for the support of the debtor and any dependent; (E) a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or K on account of illness, disability, death, age, or length of service to the extent reasonably necessary for the d or his dependent, unless (i) the plan was done by or under the auspices of an insider that employed the debtor at the time the rights arose; (ii) such payment is on account of age of length of service; and (iii) such plan or K does not qualify under the IRC. xi) (11) The debtors right to receive, or property that is traceable to(A) an award under a crime victims reparation law; (B) a payment on account of wrongful death of a person to whom the d was dependent as reasonably necessary for the Ds support or any dependent, and (C) a payment under a life insurance K that insured the life of an individual of whom the debtor was a dependent on the date of that individuals death, to the extent reasonably necessary for the support of the D and any dependent of the D. (D) maximum $18,450 on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss or an individual on whom the D is dependent, (E) a payment in compensation of loss of future earnings of the D or an individual on whom the D is dependent, to the extent reasonably necessary for the support of the D or a dependent.

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xii) (12) Retirement funds to the extent that those funds are in a fund that is exempt from taxation under the IRC.

d. (e) A waiver of an exemption executed in favor of an unsecured creditor is unenforceable with respect to such a claim against e.
property that the debtor may exempt under (b). A waiver by the D of a power under (f) or (h) to avoid a transfer, (g) or (i) to exempt property, or (i) to recover property or to preserve a transfer, is unenforceable. NO WAIVER. (f)(1) The debtor may AVOID THE FIXING OF A LIEN on an interest of the debtor in property to the extant that the lien impairs an exemption to which the D would have been entitled under (b)IF the lien is (A) Judicial lien, other than one that secures a debt of a kind specified in 523(a)(5) OR (B) a non-possessory, non purchase money security interest in any(i) household furnishings, goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household, use of the debtor or a dependent of the debtor; (ii) implements, professional books or tools, of the trade of the debtor or the trade of a dependent of the D; or (iii) professionally prescribed health aids for the D or a dependent of the D. (2)(A) A lien shall be deemed to impair an exemption to the extent that the sum of(i) the lien; (ii) all other liens on the property, and (iii) the amount of the exemption that the debtor could claim if there were no liens on the property exceeds the value that the debtors interest in the property would have in the absence of any liens. (B) If a property has more than 1 lien, a lien that has been avoided shall not be considered in the calculation for other liens. (C) This paragraph shall not apply to judgments arising out of mortgage foreclosure. (3) In a case in which State law that is applicable to the debtor(A) permits a person to voluntarily waive a right to claim exemptions under (d) or prohibits a debtor from claiming exemptions under (d) and (B) either permits the debtor to claim exemptions under State law without limitation in amount, except to the extent that the debtor has permitted the fixing of a consensual lien on any property or prohibits avoidance of a consensual lien on property otherwise eligible to be claimed as exempt property; the debtor may not avoid the fixing of a lien on an interest of the debtor or a dependent in property if the lien is a non-possesory, non-purchase money security interest in implements, professional books, or tools of the trade of the debtor or a dependent of the debtor or farm animals or crops of the debtor or a dependent to the extent the value of such implements, professional books, tools of the trade, animals, and crops exceeds $5000. (4)(A) Subject to paragraph (B), for purposes of paragraph (1)(B), the term household goods means(i) clothing; (ii) furniture, (iii) appliances; (iv) 1 radio; (v) 1 television; (vi) 1 VCR; (vii) linens; (viii) china; (ix) crockery; (x) kitchenware; (xi) educational materials and educational equipment primarily for the use of minor dependent children of the D; (xii) medical equipment and supplies; (xiii) furniture exclusively for the use of minor children, or elderly or disabled dependents of the debtor; (xiv) personal effects (including toys and hobbies of minor children and wedding rings) of the D and dependents and (xv) 1 personal computer. (B) The term household goods does not include(i) works of art unless done by the D or a dependent; (ii) electronic entertainment equipment with a FMV of more than $500 in the aggregate (except 1 television, 1 radio, and 1VCR); (iii) items acquired as antiques with fair market Value of more than $500 in the aggregate (except wedding rings); and (v) a computer (except as otherwise provided for in this section), motor vehicle (including a tractor or lawn tractor), boat, or a motorized recreational device, conveyance, vehicle, watercraft, or aircraft. (g) In spite of 550 and 551 of this title, the D may exempt under (b) of this section property that the trustee recovers under section 510 etc of this title, to the extent that the D could have exempted such property under (b) of this section if such property had not been transferred, if(1)(A) such transfer was not a voluntary transfer of such property of the D; and (B) the debtor did not conceal such property or (2) the debtor could have avoided such transfer under subsection (f)(1)(B) of this section. (h) The D may avoid a transfer of property of the D or recover a setoff to the extent that the D could have exempted such property under (g) (1) of this section if the trustee had avoided such transfer, if(1) such transfer is avoidable by the T under 544, 545, 547, etc or recoverable by the trustee under 553; and (2) the T does not attempt to avoid such transfer. (i) (1)If the D avoids a transfer or recovers a setoff under (f) or (h), the D may recover in the manner prescribed by, and subject to the limitations of, section 550 of this title, the same as if the trustee had avoided such transfer, and may exempt any property so recovered under (b). (2) In spite of 551, a transfer avoided or property recovered may be preserved for the benefit of the D to the extent that the D may exempt such property under (g) or (1). (j) In spite of (g) and (i), the D may exempt a particular kind of property under (g) and (i) only to the extent that the D has exempted less property in value of such kind than that to which the D is entitled under (b). (k) Exempt property is not liable for payment of any administrative expense except (1) the partial share of costs and expenses of avoiding a transfer or property that the debtor exempts, or for recovery of the property attributable to the value of the portion of property exempted in relation to the value of the property and (2) any costs and expenses of avoiding a transfer or recovery of property that the debtor has not paid. (l) Debtor shall file a list of property they claim as exempt. If debtor fails to file the list, a dependent of the debtor may file the list, or may claim property as exempt from property of the estate on behalf of debtor. Unless party in interest objects, the property claimed as exempt is exempt.

f. g.

h.

i.

j.

k.

l. m.

n. o.

p.

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q. (m) This section applies separately with respect to each debtor in a joint case. r. (n) For assets in IRAs, other than a simplified employee pension, the aggregated value of the assets exempted, save and except under
this section shall not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require. s. (o) The value of an interest in (1) residential real or personal property; (2) coop residential property (3) burial plots; (4) homestead real or personal property, shall be reduced to the extent that the debtor disposed a portion of it in the 10-year period ending on petition date, with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt as if on the date, the debtor held that property. t. (p)(1) A debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of filing a petition that exceeds the aggregate $125k value in (A) residential real or personal; (B) coop residential property; (C) burial plots; (D) debtors homestead. (2)(A) The limitation shall not apply to family farmers and their residence. (2)(B) Does not include interest transferred from principal residence if the previous and current residences are located in the same State. u. (q)(1) If debtor elects to exempt property under State or local law, a debtor may not exempt any amount of an interest in property exceeding in the aggregate of $125k if the debtor has been convicted of a felony that demonstrates that filing of the case was an abuse of the provisions of BRC; or (B) the debtor owes a debt arising from violation of Federal or State securities laws, (ii) fraud deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sales of securities (iii) any civil remedy, (iv) any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years. (2) This does not apply to the extent it is reasonably necessary for the support of debtor and dependents. End of Statute. v. Rule 4003: Exemptions (a) Claim of Exemptions: A debtor shall list the property claimed as exempt on the schedule assets. If debtor fails to claim exemptions or file the schedule within the time limit, a dependent of debtor may file the list within 30 days thereafter. (b) Objecting to Claim of Exemptions: A party in interest may file an objection to exemption schedule within 30 days of the meeting of creditors or within 30 days of any amendment to list or supplemental schedules is filed, which ever is later. The court may for cause extend the time for filing objections if, before the time to object expires, a party in interest files a request for an extension. Copies shall be delivered or mailed to trustee, person filing the list, and attorney for that person.(c) Burden of Proof: Objecting party has BOP. (d) Avoidance by Debtor of Transfers of Exempt Property: A proceeding by D to avoid a lien or other transfer of property that is exempt shall be in a motion filed as adversary proceeding. End of Statute. w. Most debtors have few assets and only need the low level of assets. x. Exemptions matter to a small minority of affluent debtors most likely to need more sophisticated legal advice. y. Exemptions serve as a check on affluent debtors who might exploit too liberal a system by escaping their legal obligations by manipulating luxury property to keep it from the legitimate claims of their creditors, including fraud victims. z. Some of these affluent debtors take advantage of large exemptions and others count on excluding certain assets from their estates. i) Property may be excluded by operation of law. (E.g. Retirement Funds) ii) Other property may be excluded by use of trusts that show that the debtor has no remaining legal interest in property the debtor nonetheless seems to control and enjoy. iii) Either exemption or exclusion puts the property beyond the reach of the debtor. aa. Homestead Exemptions i) Most important type of exempt property to most debtors is their home. ii) Homestead is typically the real property occupied by the debtor as a residence. iii) Most significant asset owned by most Americans and represent 60% of all the wealth held by individuals. iv) Property that is afforded particular protection because it is the family home. v) Comes from Anglo American and Hispanic legal traditions. Began in TX where many Americans began to flee because it was a state where debtors could escape debt. vi) Homestead exemptions are now available in a large number of jurisdictions. (1) Twenty states protect less than $20,000 equity in a homestead (2) Four states, including Delaware, offer no homestead exemption. (3) Tenancy by the Entirety prohibits creditors from seizing the home of a married couple if they are not the creditors of both the husband and the wife. vii) Typically the homestead is exempt up to a certain dollar amount viii) Seven states offer exemptions based on area or some other testTX law exempts a homestead that covers up to 10 acres in a city and 200 acres in the country. ix) Policy debates exist over how generous the exemptions should be and what class of debtor should be favored by them. bb. Exemption Planning

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Because some states, like TX, protect unlimited value in a homestead, the debtor has the opportunity to do some careful planning before filing for bankruptcy to discharge debtsthey try to convert non-exempt property into exempt property. ii) In re Reed. (1) Facts: Debtors filed Ch. 7 bankruptcy in Dec. 1979 however in the two week period prior to filing they sold nonexempt personal property for approximately 50% of its value and applied the proceeds towards liquidation of liens against their residence homestead. (2) Procedure: The BR trustee argued that he should not be subject to the homestead exemption because he had acted to defraud the creditors (3) Issue: Whether a BR debtor may transform his nonexempt property to exempt property in preparation for filing BR in an attempt to keep money from creditors. (4) Rule: The debtor will be permitted to convert non-exempted property into exempt property before filing bankruptcy petition. The practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under law. (5) Rule: TX law specifically prohibits the retention of an exemption in personal property so acquired with proceeds of nonexempt property where there was intent to defraud, delay or hinder a creditor or other interested persons. iii) In re Reed II (1) Facts: By Feb. of 1979, Reed knew his business was insolvent and signed an agreement to turn over management of the store to a consulting from for the year. In return, Reeds creditors agreed to postpone collection efforts and Reed promised to resume payments in January 1980. The business continued to fail and in Dec. 1979 Reed and his wife signed a foreclosure agreement surrendering the store to the bank. Six days later they filed BR. Reed had collected antiques, gold coins, and guns and made other investments; he also accumulated Krugerrands and Mexican fifty peso pieces, and one month before filing he purchased a one third interest in a corporation. Finally, two months before filing, he opened an account at a bank unknown to his creditors in which he deposited the daily receipts of his Mens Wear store. Reed applied all of the proceeds from the sale on his non exempt property to the mortgages on his family residence thereby reducing his non exempt assets and increasing the value of his homestead exempt under TX law. Most of his sales were for below FMV. (2) Procedure: The BR judge found that Reed had effected transfers designed to convert nonexempt property into exempt property less than two weeks before BR with the intent to hinder, delay, or defraud creditors. Reed had failed to explain the loss of the money that had passed through his hands The district court affirmed. We affirm. (3) Issue: Whether a debtor can convert nonexempt property to exempt property in order to plan for BR. NO. (4) Rule: A debtor who converts nonexempt assets to an exempt homestead immediately before bankruptcy, with an intent to defraud his creditors, must be denied a discharge in BR because of the provisions of Section 727 of the BR Code. 727 (a)(2) (5) Rule: The BR Code allows a debtor to retain property exempt either (1) under the provisions of the BR Code, if not forbidden by state law 522(b) and (d), or (2) under the provisions of state law and federal law other than the minimum allowances in the BR Code 522(b)(2). (6) Rule: Under the Act, the mere conversion of nonexempt property into exempt property on the eve of BR was not itself such fraud as will deprive the bankrupt of his right to exemptions. (7) Rule: The scope of a claim is determined by state law; however, the BR Code sets separate standards for determining whether a debtor shall be denied a discharge. The debtors entitlement to a discharge must, therefore, be determined by federal, not state, law. (8) Rationale: Property that would otherwise have been exempt is deprived of its immunity if there is evidence other than the simple act of conversion showing that the debtor had acquired it with the intention of defrauding his creditors; however, if intent to defraud is not proven, exemption is granted. iv) Courts have tried to negotiate a line that provides protection for the debtor and yet does not permit debtors to take undue advantage. v) Congress rejected a homestead cap, but it did put some restrictions on the value that a debtor could protect in a homestead. (1) 2005 Amendments include a provision to reduce the dollar value of the homestead protection by any amount that is attributable to otherwise non-exempt property that the debtor disposed of. . . with intent to hinder, delay or defraud a creditor. 522(o) (2) The provision has a ten year reach-back period. vi) There is tension between whether planning is fraudulent or sensible. vii) In reaction to Enron executives hiding assets in extravagant homes, Congress added additional limitations. There is an absolute cap on the homestead for people who were convicted of securities law violations, fraud in a fiduciary capacity, and a handful of other related bad acts. 522(q) viii) The discharge can be delayed to see if the debtor is subject to a proceeding that might give rise to a limitation of the homestead exemption. 727(a)(12) ; 1121(d)(5)(C); 1328(h).

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cc. Unlimited Exemptions and Asset Trusts i) In an asset protection trust, the debtor names himself as both trustee and beneficiary and transfers his property to that trust. The debtor can continue to use the property and no creditor can seize it because it is not technically property of the debtor but of the trust. Self-settled Trust. ii) Some states have made such trusts legal: Alaska, Delaware, Missouri, Nevada, Oklahoma, Rhode Island, South Dakota, and Utah. Many of these states make them available to out-of-state residents; thus, these can be available without leaving ones home state. iii) Offshore Trust: Purport to become unresponsive to the settlors instructions if those instructions are the product of coercion. A debtor who is held in contempt for not producing assets from a foreign trust can honestly claim an inability to do so. iv) Asset protection trusts in BR if they do not include a spendthrift provision and have an automatic appointment of a third party as trustee if the trustee-debtor is sued, the debtor will claim that the property in such a trust is not property of the estate. 541(c). They have complete protection in the eight states. GENERALLY THESE ARE NOT ALLOWED. v) Such trusts can always be set aside under Reed II so that even if the trust works at state law, the debtor will be denied discharge in BR. dd. Moving to Better Exemptions i) Debtors can move from a state with stingy exemptions to one with better exemptions unless the BR court deems the move a planning strategy to file BR. ii) In re Coplan (1) Facts: Coplan was employed by Coplans Super Appliance and TV, Inc. a company that owned a retail appliance store conducting business under the name of Coplans Home and Appliance Entertainment Superstore. AT&T provided a line of credit to the store and was the primary creditor of the business. In 1988 Coplan acquired a one-half ownership interest in the business from his father. In 1989 Coplan executed a personal guaranty in favor of AT&T in replacement of the one held by his father. The business subsequently deteriorated and caused Coplan a $44,264 loss with the business losing double that amount. In Nov. 1989, Coplan resigned because of unhappiness with what he had been doing, a dishonest business partner, emotional stress relating to the company. He had job offers prior to his resignation which he did not accept in his home state of Wisconsin. He relocated to FL for job opportunities with Amana and Disney, but had no job offer from either of these companies before he moved. In 1990, Park State Bank obtained a judgment against the debtors and AT&T filed suit against Mr. Coplan and obtained a judgment. At this point Coplan worked full time for Amana and prior to that had worked in Sears retail store as an appliance sales representative. The Coplans had liquidated nearly all of their non-exempt assets and used the proceeds on which to live. (2) Procedure: The court found that the relevant exemption statutes were found in FL law since the Coplans were bona fide residents of FL. The court denied the FL exemption and limited the debtors to WI exemptions. (3) Issue: Whether, considering all the circumstances, a debtors relocation to a state with more generous exemptions can be deemed for the purpose of shielding assets from creditors and thus violative of BR law. YES. (4) Rule: Section 541 of the BR Code states that the filing of a BR petition creates an estate that consists of all property of the debtor. The exemption of property which is ordinarily subject to administration by the estate is governed by 522 of the BR Code. (5) Rule: The debtors right to exempt their homestead is subject to qualification where the exempt property has been impermissibly converted from nonexempt assets. (6) Explanation: Section 548 provides a one-year statute of limitations for actions to set aside fraudulent transfers; however, there are no time strictures in 522 that would limit moving from state to state. However, the timing of the conversion of assets is a factor to be considered in determining whether there was a specific intent to shield assets from creditors. (7) Rationale: As a general rule, all other things being equal, the more distant the conversion, the less likely the court will be to find that the conversion was part of a specific plan to exclude the property from the reach of the creditors. iii) The 2005 Amendments include a provision to limit the ability of a debtor to move to take better exemptions by creating a choiceof-law for exemptions. (1) 522(b)(3) the applicable exemptions will be wherever the debtor resided for 730 days (two years). If the debtor moves during that time, then the Court will go back to the 180 days PRECEDING THE 730 DAYS and see where the debtor was for the majority of that time. (The six months before two years before filing). This is the state whose exemptions will govern. (2) Some states only protect a homestead in the jurisdiction or property held locally and will not bend to the BR laws. (3) Creates a situation where a debtor would have no exemptions at all. ee. Who Cares about Exemptions? i) Changing BR laws and narrowing exemptions would discourage many entrepreneurs from going into business and some of the discouraged businesses would inevitably involve innovative new ideas that would have generated jobs and economic growth. ff. Problem Set 9

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gg. 9.1. Debtor has a $10 million dollar judgment against him in contract. Owns a condo in Chicago where he has lived for five years.
Two and a half years ago he rented an apartment in TX for 91 days and lived in Wisconsin for 60 days last year. Debtor wants to file a Ch. 7 bankruptcy petition. Can he keep his condo? Under the 730 day rule, he will be subject to the Illinois exemptions and will only get to keep $7500 of value in the condo. Does he face any other obvious problems? ????? The debtor is going to file the case in Illinois which is where he lives. He has lived in Illinois. 180 days is for venue purpose. Has he lived in the state of Illinois consistently for the last 730 days? Unclear so we look at the 180 days prior to the 730 in which he lived in TX for 91. The last 30 days in WI for last year means he cannot take Il because he has not lived there the last 730. Therefore, he gets TX exemption. TX does not recognize extraterritorial homesteads. render ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection d. The drafting is unclear because any could mean none or any single one. He is left with no exemptions because TX does not recognize. hh. 9.2. Debtor injured two people in a car accident and completely destroyed a 1996 Jaguar, which occurred 19 days after his car insurance expired. As a tort expert, you believe he will lose any suit resulting from the accident. Should you inquire what property he owns? Yes, if I want to advise him how a bankruptcy filing will affect his property and its exemptions. I must be careful not to do anything unethical, but I should still advise him of the relevant law. Should you explain the law before asking any questions? I dont see where it matters as I will still have to be an advocate for him while not injuring my ethics as a professional. Maybe this is not a good idea because you dont want him to gear their facts toward your recitation. This could lead you to blindly become unethical. Ask if this is a consultation for planning or for bankruptcy. Dont ever do both. ii. 9.3. Debtor doctor who has never had a malpractice claim and knows of none that are pending comes to ask about an asset protection plan and wants to set up a trust to hold all his investments. What suggestions would you make to him? I would advise him that selfsettled trust where he is both the trustee and the beneficiary are illegal, but if he sets up a real trust where perhaps he has a life estate and someone else is a beneficiary may be protected especially if it has a spendthrift provision. It is unclear what the parameters are; you are taking risks in the 5th Cir. In the 5th Cir.; pigs survive; hogs get slaughtered. Dont try to hide it all. If he keeps the life estate, he is still a beneficiary. What sort of state remedies should he fear and how would your advice help? He would fear any state remedies that would allow the raiding of his assets perhaps for a family court judgment or for his trying to defraud creditors. Are there state remedies that might threaten him no matter what? Yes, family court judgments, voluntary commitments, taxes. Does his late admission that he is presently in arbitration and about to lose and become subject to a judgment change your advice? Yes, now he is trying to defraud a creditor and may be able to keep the exemption but lose the right to discharge in a bankruptcy. If he says, I am trying to hide my money away from creditors, then am I being unethical if I help him? jj. 9.4. Legislator is considering amendments to the BR Code to drop categories from 522d and simply put in a dollar amount and to get rid of letting states opt out and establishing uniform federal exemptions. What do you tell her when she asks for your preliminary assessment? I like categories and dollar amounts much like the TX model because it both allows the debtor to keep essentials and not become a ward of the state, but also puts limits on that can tend to limit abuse. However, I think uniform exemptions would certainly make the code more equitable as the difference between a TX bankrupt and a DE bankrupt is almost unconscionable. kk. Class Notes ll. 522 (1) BR under BAPCA can subtract funny money like in Reed. (2) A debtor may not exempt any amount of equity that was acquired during the 1215 day period that exceeds in the aggregate of $125,000, unless he rolls it over from another homestead in the same state. This is in the code 522. (m) lets them stack it. (3) Farmers are exempt from this paragraph. (4) Whether you choose state or federal exemptions all the other sections except (d) apply to all debtors in BR. (5) (d)(5) 9250+975= Whatever part of the homestead exemption you dont use up to this amount you want . You can only have 18, 450 of equity. Equity is determined on the date of the petition. You can keep the property if you want??? The trustee has no right to it. (a) E.g. Debtor has 100,000 equity in house You will use all of (d)(5). This debtor gets a wild card of $975. (b) E.g. D has no equity in his house You wont use all of it. 9250 +975 = 10,225. You now have 10225 to use (c) E.g D has 15000 in his house. 3450 +975= 4425 (d) You use d(5) for anything you may be short on. (6) Federal exemption is better than TX homestead exemption if you do not have a homestead. (7) What will happen to the house under federal exemption? The trustee can either sell it and give you the amount you are owed, or the debtor can pay the non-exempt amount. In TX, you would just take the state exemption. (8) A person convicted of felonythat conviction will cause concern, and my equity can be capped at 125000 also if I have violated the securities laws. Bad Guy Cap. (9) If H and W cannot agree as to whether to take federal or state exemption, then they shall go for federal. They can only choose if they agree. (10) If you are not entitled to any exemptions, you may take federal exemptions.

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mm. Only 8 states allow self-settled trusts. nn. TX is one of five states that has unlimited exemptions. oo. In re Reed i) If you pump anything into homestead under old law. You are full proof. ii) Under BAPCApumping within 10 years, the creditors can undo the pumping of that chunk of money. iii) Reed IInone of your debts get wiped out even though you got to keep your home. pp. In re Coplan i) Part of a well-planned schemeExemption Planning. ii) The court was of the opinion that they defrauded the people they owed. iii) Coplan is no longer good in FL. iv) 11th Cir. Certified to FL Supreme Courtwe dont care about the intent to defraud; the Homestead is protected. However, under BAPCA, BR courts will shave off those state court protections. v) The Code doesnt say whether you have to bring an adversary proceeding or a contested matterobjection. Adversary proceeding is like a lawsuitall the procedural matters are required. Rule 4003 you must objectionare you going to challenge what has been put in the homestead. No case law, but it appears you have to do so by adversary proceeding. Creditor must sue you in the BR court to disallow that amount as a valid amount of your homestead. VII.Liquidation Bankruptcy (Claims and Distributions) pp. 218-227 a. 502 Allowance of Claims or Interest(a) A claim or interest is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor, objects.(b) Except as otherwise provided in this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim as of the date of the filing of the petition, and shall allow such claim in that amount, except to the extent that(1) the claim is unenforceable against the debtor and property of the debtor, unless it is contingent or unmatured;(2) the claim is for unmatured interest; (For unsecured creditors no post-petition interest b. 504- Sharing of Compensation (does not include attorney fees). A trustee, accountant, examiner, ombudsman, or attorney (disinterested) may not share or agree to share compensation or reimbursement with another person. Exceptions: 1) a member, partner, or regular associate in a professional association, Corp. or partnership may share compensation or reimbursement received with another member or partner. 2) An attorney that files an involuntary petition for a creditor may share compensation and reimbursement with any other attorney contributing to the work. This provision does not apply to sharing or agreeing to share compensation with a bona fide public service attorney referral program and with PR rules that apply to attorney acceptance of referrals. You cant put in with creditors and make a deal to attack the trustee or estate in a certain way. c. 506 Determination of Secured Status (a)(1) An allowed claim of a creditor secured by a lien on property of the estate is a secured claim to the extent of the value of the creditors interest in the estates interest in the property and is an unsecured claim to the extent that the value of the creditors interest is less than the amount of the claim. (2) If debtor is an individual, the value of personal property securing a claim shall be determined by replacement value as of the petition date without deduction for costs of sale or marketing. Replacement value is the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined. (b) If the property is valued at more than the secured claim, the secured creditor shall be allowed interest, reasonable fees, costs, or charges under State statute (up to the amount of the value.) (c) The trustee can recover reasonable and necessary costs and expenses of preserving and disposing of the property to the extent of the benefit of the secured creditor. (d) To the extent that a lien secures a claim that is not an allowed secured claim, the lien is void unless (1) it was an unmatured claim as of petition and excepted from discharge; or (2) the claim is not allowed due to failure to file proof of claim. d. The Claims Process e. Once exempt property has been determined, the trustee begins to assemble non-exempt property for sale. f. Proceeds will be distributed pro rata to the creditors. g. In order to give each the appropriate share, the trustee now examines the creditors. i) A creditor will receive a proof of claim form with the notice of the BR. ii) Completion and filing are governed by Rules 3001-3008. iii) A claim based on a writing must have a copy of the writing attached. iv) Claims must be filed within 90 days in Ch. 7 and 13 cases. v) Ch. 11 cases set a bar date before which claims must be filed. vi) Creditor must file in Ch.s 7 and 13 to get a share even if they appear on the debtors schedule. vii) However, in Ch. 11, the creditor does not have to file if the debtor lists him to get payment. viii) Lots of creditors fail to file in Ch. 7 and 13 though they must do so for payment. Ch. 7 rarely ends in a pay out, but Ch. 13 usually does. ix) A claim is allowed unless a party in interest files an objection. 502 (1) If a party objects, the matter is resolved as a contested matter under Rule 9014.

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(2) However, relief requested can convert the case to an adversary proceeding under Rule 7001. E.g. A demand to void a preference. (3) Most common Issues: (a) Calculation of a Claim (b) Resolution of Disputed Claims (c) Different Treatments of Secured, Unsecured, and Priority Claims. h. Disputed Claims i) Most claims are agreed upon by the parties since the TIB wants to spend money paying creditors instead of in litigation, the creditors are not enthusiastic about pursuing modest amounts, and the debtor who knows the debt will be discharged has little incentive to bicker over it. ii) Sometimes the TIB will dispute the debt owed because either 1) it is not a valid debt under state law or 2) the debt is lower than what is claimed. (1) The threat of such a challenge serves to police creditor claims. iii) Sometimes resolution requires an evidentiary hearing. (1) In re Lanza (a) Facts: Bank had filed three proofs of claim for which it had produced very poorly kept records. The debtor W objected but had presented no proof that the debts were invalid. (b) Procedure: The court upheld the claims for which the debtor presented no opposing records and chose the lowest amount of the bank in recognition of its poor book keeping. (c) Issue: Whether the opposing party in a challenge to a proof of claim has the burden of proof. YES (d) Rule: A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim. (e) Rule: The burden of going forward with the proof is on the objecting party not the claimant and that burden is not satisfied by merely filing an objection. (f) Rationale: With no evidence offered by the debtors to invalidate the loan or the properly recorded mortgage , the claim must be upheld. iv) Usually handled in a short period of time by the BR courts. v) However, the practice of creditors selling debts has complicated the quick resolution of challenges of proofs of claim because the debt buyers rarely attach all the needed proof to their claims and finding a paper trail is difficult. i. Unsecured Claims: The Claim i) Section 501 lays out the procedure for filing the claims and section 502 explains the mechanics of calculating the claim. ii) Rule: All pre-petition claims, secured and unsecured, must begin with a 502 calculation. (1) E.g. Debtor has an unsecured agreement with Sears under which the debt was to be paid in full in 30 days or be subject to 12% interest thereafter. The agreement also states that Sears will be entitled to attorneys fees if it has to file a claim to collect on the debt. On the date of BR the debtor had made a $1000 purchase that was three months behind for $30 interest. Sears would add $200 dollars spent on collection costs and file a claim for $1230. All amounts are considered pre-petition. (2) After the non exempt assets have been sold, if there are proceeds equal to 10% of the total unsecured claims, Sears will be sent a check for $123 and the debtor will discharge $1107. j. Unsecured Claims: Interest i) Though it will take time for the estate to be liquidated and Sears to get paid, Sears will not be entitled to interest that accrues after the date that the petition is filed because it is an unsecured creditor. ii) 502(b)(2) Unsecured creditors are denied the opportunity to collect any interest on its unsecured claim after the filing and while the BR is pending. Interest that is unmatured on that date. Unsecured creditors get no post-petition interest. iii) Unmatured interest can be claimed for a loan that provided for a lump sum of interest rather than interest calculated over time; it would be reanalyzed by a BR court to determine the portion of interest that was mature and the portion that was unmature as of the instant of filing. iv) Rationale: BR wants to emphasize the goal of equality between unsecured creditors since many will have high interest rates while others have low interest rates. k. Unsecured Claims: Accelerated Claims i) Because all of the debtors debts are about to be resolved in one forum, there is a need to accelerate debts whether they have matured or not.

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Guaranty claim calculations are difficult because the debtor may or may not have to be paid and the amount will be determined by how much the primary obligor is paid. In addition, the debt is contingent and will be disallowed if it remains so as of petition filing. l. Secured Claims i) The Claim ii) The creditor figures what it is owed pre-bankruptcy. iii) The TIB can raise contract claims. iv) Section 502(b) governs the permissible nature and extent of an allowed pre-petition claim. v) Section 506 sets forth the special post-petition and collection rights of secured creditors. vi) Rule: Section 506(a) grants a secured creditor an allowed secured claim up to the value of its collateral. (1) If the claim is less than or equal to the value of the collateral, then the entire claim is securedfully secured. (2) If the claim is greater than the value of the collateral, then the claim is partially secured. The remaining portion of the initial claim continues as an unsecured claim against the estate. (3) E.g. Debtor purchases a riding lawnmower from Sears for which Sears is owed $5000 at the filing of BR. The lawnmower is worth $6500. The TIB sells the lawnmower for $6000 after deducting costs of advertising and other sales costs. 506(c) (a) Sears allowed claim is $5000 under 506(a); therefore, it gets $5000 from proceeds of the sale, and the remaining $1000 goes into the pool for general (unsecured) creditors/debts. (4) E.g. On the other hand if the lawnmower is only worth $3500 and the TIB only sells it for $3000 after expenses; Sears has an allowed secured claim for $3000 and an unsecured claim for the remainder of what it is owed $2000. (5) An unsecured creditor gets a bifurcated claimA secured claim equal to the value of the collateral and an unsecured claim for the deficiency. vii) Interest (1) Unlike unsecured creditors, secured creditors are entitled to interest after the filing of the BR petition. (2) Both types of creditors are entitled to interest accrued pre-petition, assuming that their agreements with the debtor so provided. . (3) Some secured creditors may be able to claim post-petition interestIf the secured creditor is over-securedthe value of the collateral exceeds the pre-bankruptcy debt (including pre-bankruptcy interest), then the creditor can receive post-bankruptcy interest at its contract rate, until the value of the collateral is exhausted. (4) E.g. Sears could have collected interest in the first example where the value of the collateral ($6500) exceeded the amount Sears was owed ($5000). In the second example, Sears was not over-secured and could not collect interest. (5) The interest will continue to grow and compound until it reaches the amount that could be realized from the sale of the collateral. Up to another $1000. Beyond this point, no interest would be collected. viii) Attorneys Fees (1) Rule: Attorneys fees are treated like interest pre-petition: If a creditor, secured or unsecured, is entitled to pre-petition attorneys fees by contract or state law, then the fees are part of the creditors secured or unsecured claim. (2) Rule: Secured creditors who are over-secured are entitled to post petition attorneys fees until the total claim exceeds the remaining value of the collateral. 506(b) (3) It is unclear, but it appears that unsecured creditors are not entitled to post-petition attorneys fees. (a) However, Case law is less clear as a lack of a prohibition for post-petition attorneys fees has resulted in courts granting such fees to unsecured creditors. ix) Exemptions (1) VALID, UNAVOIDABLE CONSENSUAL SECURITY INTERESTS TRUMP EXEMPTION CLAIMS. The debtor may claim only an exemption in the equitythe value remaining after the secured creditor has been paid in full. m. Post Petition Claims i) E.g. The TIB decides to improve property of the debtor and buys paint from Sears to do so. This is expenses of administration section 503, under which Sears will be paid in full. n. Problem Set 10 i) 10.1. Debtor lost her job last month and filed Ch. 7. Creditor, Miller Plumbing Co., claimed $3000 plus $200 pre-petition interest and $100 post-petition interest. However, Miller Plumbing has no security interest in any of the Debtors property. What is the amount of the allowed claim in BR? $3200, as an unsecured creditor Miller Plumbing is not entitled to post-petition interest. A creditor can file whatever he wants; it wont necessarily be allowed. This creditor will file $3300, but will only get $3200. ii) 10.2. Debtor has two non-exempt assets: her car, worth $10,000 and 1000 shares of MicroSoft stock worth $15000. She owes the bank $8000 on the car, and the bank has a valid and enforceable security interest on the car. The bank claims pre-petition interest of $500 and post-petition interest of $400, as well as attorneys fees totaling $1000. The bank is entitled to collect all these amounts under relevant law and their agreement. What is the amount of the allowed secured claim? As a secured creditor, the

ii)

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o.

bank is allowed to collect what it is owed up to the value of the collateral as well as pre and post petition interest and attorneys fees up to the collaterals value. Since the value of the car is $10000, the bank has a claim for $9900. iii) 506 (1) 506(a)(1) Secured to the extent of the value of the collateral, (2) you value the item for the purpose for which it is being used in the context in which it is being used. Should the car be valued as an auction, retail, the blue book value, dealership? How is this determined? Do you look at the creditors collateral from the debtor or creditors perspective? You look at it from the debtors perspective. The dealership price is retail. Selling price and actual sale are different. FMV willing seller and buyer. (2) 506(a)(2) Ch. 7 or 13 we must look at replacement value of the propertyprice a retail merchant would charge for property of that kind in the condition of that property at the time property is valued. Its Replacement Value! (3) 506(b) tells you if non-BR law allows you to charge fees or interests. (4) 506(c) covers that the Trustee can recover expenses from the salehe is not to sell something that wont bring money into the estate; otherwise, he should abandon it and walk away. He should only sell if he is going to be able to pay something off. It is only there when the Trustee has so much equity that he can pay the lien and bring whats left over into the estate. iv) 10.3. If the car in the above problem only brought in $5000 when it was sold, what would the bank recover? The bank would only recover $5000 if that much remained after the TIB deducted the costs of the sale. Therefore, though it would be entitled to post-petition interest and attorneys fees, it could not collect them as a result of the available moneys. The bank should sell or repossess the car. The $3500 will now be unsecured credit. We must take away the post petition interest and the attorneys fees. v) 10.4. Ten other creditors of the debtor are owed $20,000, none of whom are claiming any interest. As TIB you collected $5000 for the car and $15000 for the stock. How should the money be distributed? Since the debtors secured creditor, the bank is owed $9900 for the car, $5000 for the car will go to the bank and $4900 of the 15000 will go to the bank also leaving $11000 for all unsecured creditors. Therefore, each of the 20 creditors, who I presume will be unsecured, $1100 each. The 15,000 divided by 23, 500. The $3500, not $4900, will be unsecured and they must share pro rata. Divided 15,000 by 23,500. Gives the multiplication factor--.64. Multiply that by the dollar amount of each claimants claim. Priority Among Unsecured Creditors i) 503(b)(1)- Allowance of administrative expenses. An entity may timely file a request for payment of an admin. expense or may file a tardy one if the court permits. Exception: a gov. unit doesnt have to file a request for the payment of an administrative expense as a condition of getting an admin. expense. After notice and a hearing, administrative expenses except for those under an involuntary br, include: 1) actual and necessary costs of preserving the estate including a) wages, salaries, and commissions for services rendered after the pet. filing and b) wages and benefits awarded under a N Labor Relations B c) any tax incurred by the estate including property taxes whether u/s or secured, in rem or in personam (does not include income tax, property taxes incurred without penalty within one year of the pet. including the first and last day, fed. withholding taxes, an excise tax, duty tax, and employer tax liability, penalty that relates to an actual pecuniary loss (stealing tags example)), d) any tax attributable to a carryback adjustment, e) any fine, penalty or reduction in credit on the taxes included ii) 507 Priorities: Money is distributed in the following order, and unless and until the higher class is paid, no money shall trickle down, then the rest goes into the pool. Also, if there is not enough money to satisfy the entire class, the members of the class share pro rata. (1) 507a1A: Allowed unsecured claims for domestic support obligations unsecured (101(14(a)) (2) 507a1B: domestic support obligations unsecured assigned to govt unit. (3) 507a1C: admin expenses of Trustee unsecured (4) 507a2: admin expenses of the case (attorney fees, insurance, etc. (503b1A)) unsecured (5) 507a3: After the commencement of the case but before the appointment of the trustee claims arise (relates to involuntary BR) unsecured. Will be treated as if it arose before the petition. (6) 507a4: allowed unsecured claims up to $10,000 for each individual corporation or individual earned within 180 days pre petition or date of cessation of business, (a) wages, (b) sales commissions unsecured. (I am an employer who needs to pay my employees.) (7) 507a5: Contributions to employee benefit plan made 180 days pre petition, up to $10k for each plan unsecured. (Employer) (8) 507a6: allowed unsecured claims from Grain and fisherman up to $4,925 each. (9) 507a7: up to $2,225 for layaways (arising from previous deposit). Purchase, lease, or rental or property or purchases of services which are not delivered or provided. (10) 507a8A: taxes on income or gross receipts for taxable year ending on or before petition date: for which return is due within three years before the petition date; assessed within 240 days before petition date exclusive of any time of settlement offer on the tax was pending, plus 30 days and any time which a stay against collections was in effect in a prior BR case during the 240 days plus 90 days. (a) 3 years rule: Tax return due April 15: Extension Aug 15: second Extension Oct 15; OR

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(b) 240 day rule: cues on assessment. (c) If on the petition date, you look back on a tax, the tax has been due in the past three years, or the tax has been assessed
within 240 days, then the tax is a priority tax. (11) 507a8B: a property tax incurred before petition and payable without penalty within one year of the petition including the first and last day. (a) property taxes incurred happen on Jan 1 of each year, however, the payment is not due until you get billed for it. You have until Jan 31 2007 to pay. Count back one year from the date of petition. If assessed within that one year window, it is a priority. (b) Real property taxes are always going to be secured and will prime everybody. (12) 507a8C: Trustfund taxes always priority (13) 507a8D: Employment tax on wage, salary, commission, subject to three year rule (14) 507a8E: Excise Tax (15) 507a8F: Beauty (customs Duty) tax (16) 507a8G: Penalty relating to pecuniary loss. Penalty is to punish someone not acting lawfully under tax laws, such as filing return late, that is not a pecuniary loss. A pecuniary loss is something like selling fake registration stickers diverting funds from the government. Penalties assessed as such are priority. (17) 507(a)(9) any commitment by the debtor to the FDIC to maintain capital (18) Hanging paragraph after G: The filing of a bankruptcy is an equitable ploy of the times. For the duration of the bankruptcy, any statutes will be tolled. (19) 507a10: Death or personal injury motor vehicle: Drunk driver or drunk boater, you have a judgment against you for this, the debt will have priority iii) Rule: After the secured creditors have been satisfied by the sale of their collateral, the unsecured creditors begin the process of dividing the remaining assets. (1) Under-secured creditors also join in this process. (2) Section 507 determines the order and amount of the payout to unsecured creditors. iv) Class Notes v) Priority creditors are generally unsecured creditors that Congress has elevated above the other unsecured creditors. This is a policy decision. vi) 507(a) Who are the Priority Creditors? (1) 507 (a)(1)(A) allowed unsecured claims for domestic support obligation (101 14a) (2) (B) Unsecured, but it is assigned to governmental unit (3) (C) Administrative Expenses of the Trustee. vii) 507(a)(2) Administrative Expenses of Running the Case viii) (3) Gap Expenses relates to involuntary ix) (4) $10,000 180 dayswages, sales commission (protect x) (5) Employee benefit plan 180 days for $10,000 xi) (6) The grain and fisherman exception xii) (7) $1800 for layaway xiii) (8) Taxes xiv) The money must be distributed in this order. Then what is left over goes to general unsecured creditors. These moneys must be paid in full before the next one is paid. xv) What if there are 10 in one class? They divide it on a pro rata basis. p. Problem Set 11 i) Debtor filed Ch. 7 BR, and his non-exempt assets include a condo which the TIB sold for $400,000 but was subject to a $365,000 mortgage and personal property that sold for $25,000. The following claims were filed in bankruptcy. Who will get what under sections 507 and 726(a)(4), (b)? (1) A nurse who took care of debtors ill father: $11,000 507(a)(4) for up to 10,000 if incurred within 180 days of filing. Bifurcated. 10,000 up to limit; 1000 unsecuredinto the pro rata pool. earned within 180 days prepetitionwages (2) SS and withholding from earlier checks: $534 507(a)(8)(C) Trust tax withholding taxes are trust fund taxes and always priority. (3) City property taxes: $3000 per year for the last three years plus $500 a year in penalties for each year Property taxes only goes back one year30006000 falls into unsecured pro rata pool. The 500 is a punishment and will result in $1500 unsecured debt non-priority. Assuming there is no tax lien security making it a secured debt. (4) Down payment for a tractor mower that debtor sold : $300 Layaway (7) 2225 limit

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(5) State and IRS income taxes: $4000 state and $14000 federal If these are within the last three years old or assessed within 240 days they are priority. 14,000 and 4000 is priority. Pre-petition interest and penalty are included. This is an unsecured tax. (6) Telephone, utility, other regular bills following BR: $5000 This is a post-petition claim that wont be considered by the Trustee. The debtor has to take care of this himself. (7) Attorneys fees: $1250 the entire amount is unsecured 507 (a)(8)(2) An atty is not helping to preserve the estate in a Ch. 7 case. So the whole amount is unsecured. (8) A negotiable note for Harolds ex-wife: $25,000 This could be a domestic obligation in which case it would be priority; however, it could just be a loan. (9) TIB as trustee and trustees counsel: $4000 Priority, because it is for preserving the state. (10) Insurance premiums for insurance on the non-exempt personal property prior to its sale by the TIB: $750 Priority because it is money used to preserve the estate. (11) Costs of sale of Harolds non-exempt real estate and personal property, including advertising: $2800 This will be taken out at the time of the sale. He will start with 57,800 (12) Other unsecured, general claims: $17,000. Not priority. q. Class Notes i) The TIB has a critical role because he puts together. ii) If a creditor does not file a proof of claim within 90 days of the first meeting of the creditors, he may not get paid. Same as 13 iii) Ch. 11, so long as the creditor is listed in the schedule; the creditor does not have to file a proof of claim. Always safer to file in case you are listed as disputed. iv) When a creditor files a proof of claim it is deemed allowed unless someone objectsthen the judge decides v) Two kinds of hearings: (1) Contested Mattersmotion practice (2) Adversary Proceedingstrial. vi) Lanza (1) BR litigation is quick can happen in six months which cant happen in a state court. vii) Categories of Creditors (1) Unsecuredusually the biggest one. Do not have any kind of collateral. (2) Securedcreditors that have collateral. (a) Three Different Kinds of Liens (i) Consensual 1. PMSI 2. Mortgage (ii) Statutory 1. Mechanics Lien 2. Landlord (iii) Judicial 1. Judgment Creditors (3) Secured Creditors because they each have their own collateral; they are in a universe of their own. However, unsecured creditors will be treated the sametreat those in the same class the same way. (4) UNSECURED creditors share on a pro rata basis. viii) Life in BR is bifurcated into two areas: PRE-PETITION AND POST-PETITION (1) Attorneys fees and interest. (2) Is the creditor entitled to keep the clock ticking throughout the BR? The petition date is the measuring stick for when things stop. A completely different rule applies post-petition. (3) Interest stops on unsecured claims as of petition date. (4) Interest does not necessarily stop after petition date. (5) Governed by the terms of the contract. (a) Is the creditor over-secured or under-secured? (i) The amount that the collateral exceeds the amount owedthe interest can tick up to this amount or for other fees such as attys fees allowed by the K. Once this runs out; then the interest (ii) Under-secured creditorSecured debt $800 Unsecured debt $200. Is this creditor entitled to interestsit is not. It is now just an unsecured creditor who is not entitled to interest. ix) Attorneys fees (1) Rule about interest applies to attorneys fees. (2) The one decision Merchant that says unsecured creditors can will not be followed. (3) The majority says that attys fees.

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VIII. a.

b.

c.

(4) Adams v. Zimmerman is the majority view. Liquidation BankruptcyDischarge pp. 229-252 Exceptions to Discharge i) The purpose of a Ch. 7 liquidation BR is almost always to discharge outstanding debt. ii) The debtor is not likely required to attend the discharge hearing, which would be the second and final time the debtor will come to court. iii) The judge will review the BR file, sign the papers declaring the debtor discharged from all listed debts, and close the case. iv) Usually done in mass with the judge making a few remarks to multiple debtors. v) Most courts now dispense with the hearing and instead mail discharge papers to the debtor vi) The debtor is not entitled to discharge as a matter of right. It will only be granted unless it is challenged by the trustee or a creditor. vii) Rule: The trustee or creditors may object to the debtors discharge of particular debts under section 523 or of all debts under section 727. viii) 523 renders only one debt non-dischargeable (rifle shot); 727 renders all of the debt non-dischargeable (global denial). (1) Global denial under 727 leaves a debtor who has turned all property over to the trustee for sale with no recourse except for payments made from the sale of the property. ix) Prevention of the discharge is the creditors last remaining hope of recovering the debt it is owed. x) A list of non-dischargeable debts (by law) continues to grow. (There are now 19). (debts obtained by lying on a credit application, debts for luxury goods worth more than $500 obtained within 90 days of filing BR, fraud by fiduciary, alimony and child support, and judgments arising from drunk-driving accidents.) xi) Grounds for total denial now number (11). (corporations do not receive discharge in Ch. 7, nor do debtors who have filed false statements or documents in connection with the BR or failed to complete a personal finance course.) In re Robert W. McNamara, Debtor i) Facts: D. testified that he had $150,000 in a briefcase as a result of numerous withdrawals from bank accounts during the summer of 1998. Immediately after he was ordered to deposit the money in an escrow account, he claimed that he gambled $130,000 in a winner-take-all stud poker game at a private residence in Brooklyn, NY. He claimed not to remember details about the game because he was under the influence of alcohol and medication. He did not produce any evidence to corroborate that claim. However, he confessed to reserving enough money to pay for a Caribbean vacation which was supported by receipts. His credibility was challenged by an unlikely difficulty recalling the details of significant bank account deposits and withdrawals prior to and concurrent with the alleged gambling loss. The trustee alleged that the debtors gambling loss was an attempt to hide money that he considered to be his and not subject to the claims of his former wife. ii) Procedure: Bankruptcy Court denied the debtors discharge under 727. iii) Issue: Whether a debtor must satisfactorily explain the loss or deficiency of assets to meet his or her obligations in order to receive discharge. YES iv) Rule: 727(a)(5) provides that the debtor shall be granted a discharge unless the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtors liabilities. v) Rule: The complainant or challenger has the burden of introducing evidence of the disappearance of assets or of unusual transactions. (Creditor or Trustee or Interested Party) The burden will shift to the defendant or debtor to satisfactorily explain the loss or deficiency of assets. vi) Test: The credibility of the proffered explanation, not the propriety of the disposition. The standard of proof is the preponderance of the evidence. vii) Rule: An explanation is not satisfactory if it is not offered in good faith or if it is vague, indefinite, or uncorroborated. viii) Rule: 727(a)(2)(A) The court shall grant the debtor a discharge unless the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with the custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed property of the debtor, within one year before the date of filing the petition. ix) Explanation: The pl. must demonstrate that the act in question occurred within one year prior to the commencement of the case; was performed with the actual intent to defraud a creditor or officer of the estate; was the act of the debtor or an agent of the debtor , and involved concealing, destroying, transferring, or removing any property of the debtor or permitting any of these acts to be done. Further Notes i) Discharge cases involve a great deal of judgment and discretion.

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ii) Explain Satisfactorily Test: may mean reasonable, or it may mean that the court, after having heard the excuse, the
explanation, has that mental attitude which finds contentment in saying that the court believes the explanation. iii) For a rifle shot challenge under 523, the creditor must object to discharge or the debt will be discharged automatically. 523(c) In re Dorsey i) Facts: Debtor was a widow with two minor daughters who had not been employed since 1978. During four years, the debtor became involved with a gentleman known only to her as Jimmy Jones who supplemented her income by paying her bills and giving her between $2500 and $6000 per month as spending money. Over the years, she obtained 7 American Express cards, which resulted in a debt of $106,922.39 which she claimed on her schedules filed when she filed for BR. She took extensive travels and charged the expenses on the credit cards. Debtor claimed that she made all charges in good faith thinking that her mysterious boyfriend would cover the expense. American Express objected to discharge of the debt because of the debtors misuse of the cards. ii) Procedure: Bankruptcy court determined that the debt would not be discharged. iii) Issue: Whether a bankruptcy debtor can be denied discharge of a credit card debt based on misuse of the granted credit. iv) Rule: If it is shown that at the time the debtor incurred the charges he or she knew that they would be unable to live up to the obligation and pay the charges, or if it appears that they had no intention to pay the charges when the charges were incurred, there would be an actual fraud thus rendering the debt incurred by using the credit card non-dischargeable. 523(a)(2)(A) v) Rationale: Merely exceeding the credit limit would not by itself be sufficient to form the basis of a claim of non-dischargeability; there must be fraudulent use of the credit card. Creditor has the burden of proof. Further Notes i) The student loan is a debt that has special protection against discharge. ii) In re Gerhardt (1) Facts: Gerhardt obtained over $77,000 in government insured student loans to finance his education at USC in a music degree and was a professional cellist. He defaulted on a loan owed to the United States government. In 1999 he filed for Ch. 7 BR and filed an adversary proceeding seeking discharge of his student loans pursuant to 523(a)(8). Gerhardt worked as a cellist but received minimal pay resulting in financial difficulty. He only paid $755 out of $77,000. (2) Procedure: The BR Court discharged the loans as causing Undue Hardship. The district court reversed on appeal holding that it would not be an undue hardship for him to pay his loans. Affirm the district court. (3) Issue: Whether the undue hardship test to discharge student loans requires that a debtor fail to maintain a minimal standard of living if forced to pay loans. YES. (4) Rule: Brunner Test: To justify the discharge of a debtors student loans, the debtor must show (a) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loans; (b) That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (c) That the debtor has made good faith efforts to repay the loans. (5) Rationale: Court found that though his job did not pay well, he could find other work in other contexts to supplement his income. The Sixth Circuit does a partial discharge and hold you liable for what you can pay. iii) In re Patricia M. Miller, Debtor (1) Facts: Miller received various student loans which were guaranteed by the Pennsylvania Higher Education Assistance Agency. On May 30, 2001, she filed a Ch. 7 BR petition and shortly thereafter filed an adversary proceeding in the BR court against PHEAA seeking discharge of all her outstanding student loan debt which totaled $89,832.16. At the time that she filed, she had only made payments totaling $368. Miller was employed in jobs that did not reflect the education she had received. (2) Procedure: The court found that Millers debts were not dischargeable because there was no undue hardship, but it did grant her a partial discharge deciding she should pay $34,200. PHEAA appealed the judgment to the district court who adopted the opinion of the BR court. REVERSED. (3) Issue: Whether a BR court can rely on 105(a) to grant a partial discharge of student loan indebtedness and whether, before BR court grants discharge, it must first find that the portion being discharged satisfies the undue hardship requirement. YES and NO. (4) Rule: A discharge in Ch. 7 BR does not discharge an individual debtors student loan obligations unless excepting such debt from discharge . . . will impose an undue hardship on the debtor and the debtors dependents. 523(a)(8) (5) Rule: 105(a) provides that a court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.

d.

e.

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(6) Rule: When a debtor does not make a showing of undue hardship with respect to the entirety of a student loan, a BR court may pursuant to its 105a powers contemplate granting various forms of relief, including granting a partial discharge of the debtors student loans. (7) Factors to Be Considered: the amount of the debt and the rate at which interest is accruing, the debtors claimed expenses and current standard of living, with a view toward ascertaining whether the debtor has attempted to minimize the expenses of himself and his dependents. The debtors income, earning ability, health, educational background, dependents, age, accumulated wealth, and professional degree. Whether a debtor has attempted to maximize his earning potential by seeking or obtaining stable employment commensurate with his educational background and abilities. (8) Rationale: In a student loan discharge case where undue hardship does not exist, but where facts and circumstances require intervention in the financial burden on the debtor, an all-or-nothing treatment thwarts the purpose of the BR Act. Court did not use the Brunner test or any other factors but constructed its own framework for partial discharge and impermissibly used its equitable authority. iv) In re Milbank (1) Facts: Pl. father and daughter made business loans to Ch. 7 debtor on the promise that he was committed to working on his marriage to the daughter. However, at the time that he was taking the loans, he was engaged in an ongoing affair with the neighbor for whom he eventually left his wife. The father and daughter claimed fraud and challenged the discharge of their respective debts. (2) Procedure: BR court found that the debt was non-dischargeable as it was obtained through deceit. (3) Issue: Whether a discharge can be denied for a debt that the debtor obtains under false pretenses. YES. (4) Rule: It is not essential that a bankrupts pretenses be expressed in words. A deliberately created falsehood is the same as a spoken falsehood. (5) Rationale: Loans were made in reliance upon the bankrupts representation that he and his wife would make a good faith effort to strengthen their marriage. f. Tax Priorities and Discharge i) Tax obligations have a protected position. ii) 507(a)(8)(A)-(G) taxes are not only given priority in payment, but any unpaid portion is exempted from discharge under 523(a) (1)(A). iii) The debtor must pay income taxes and other taxes notwithstanding any declaration of BR. Any money generated by the estate will pay the taxes first and the debtor will remain personally liable for any remaining balance after discharge. iv) Pre-petition Interest on section 507(a)(8) priority claims shares the priority of the claims themselves and enjoys their nondischargeable status. v) Post-petition Interest does not accrue on unsecured tax claims against the TIB and the property of the estate. 502(b). However, post-petition interest does accrue against the debtor for any amount that survives the BR. vi) Penalties on non-dischargeable taxes are also non-dischargeable. 523(a)(7), even though these penalties DO NOT get priority in payment. A penalty is dischargeable only if the underlying tax is dischargeable. vii) IRS can seize property to satisfy tax debt EVEN IF THE PROPERTY IS OTHERWISE EXEMPT. g. No Discharge, and WorseBankruptcy Crimes. i) The acts that trigger denial of discharge may also put the debtor in jeopardy for criminal sanctions ii) Rule: Concealment of assets, false oaths, false claims, fee fixing, and a number of other bankruptcy specific actions are made crimes by 18 U.S.C. 151-155. iii) United States v. Cluck (1) Facts: Atty who specialized in the legal avoidance of income, estate, and gift taxes avoided such taxes successfully and led a very luxurious lifestyle. In 1989, a state court rendered a judgment against him in the amount of $2.9 million. He decided to file Ch. 7, but before doing so, he sold some of his assets to dealers with a buy back date and price and returned or excused payments he was due from clients until after the BR. As part of his Ch 7 filing, Cluck filed a schedule of assets and a statement of financial accounts receivable, rights of acquisition, and asset transfers during the prior year. He made no mention of the assets recently pawned or the accounts receivable he was due. The BR court entered an order discharging all debt after which Cluck recollected his hidden assets. (2) Procedure: the BR court found intentional concealment and the US Atty charged cluck with 8 counts of BR fraud. He was sentenced to prison time. AFFIRMED (3) Issue: Whether a pl. must show that concealment or false statements were intentional. YES. (4) Rule: Under Federal criminal code 152(1) and (3) the prosecution must show that the concealment or false statement was made knowingly and fraudulently. h. Class Notes

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i)

More Priority Unsecured Debts (1) 507(a)(8)(A) (i), (ii) Three year ruledue date April 15, Aug. 15, or October 15 (2) 240 day rule assessment (3) Rule: Check the internal revenue Service to see is something has been assessed. It has to have been assessed. Must be within three years of the BR filing. The tax return may be outside the three year due date, it will fall within the 240 day assessment. E.g. 8/15/ 2006 filed; it is priority claim. (4) It just has to satisfy ONE of these, not both. It makes a difference because a priority claim gets paid out before all other claims. (5) 507(a)(8)(A)(iii) (6) 507(a)(8) (B) Property tax incurred. They happen on Jan 1 of each year; however, the payment is not due until you get billed for it. You have until Jan 31, 2007 to pay. (a) Count back one year from the date of petition. If assessed within that one year window, it is a priority. (b) Taxes on mortgage prime or are ahead of the mortgageehe has to pay the taxes when he gets the property. (c) Real property taxes are secured by the real property. (d) Personal property taxes are important because the personal property can be destroyed while the taxes still exist. (7) 507(a)(8)(C) Holds taxes in trust. Trust fund taxes (8) D Unemployment tax on a wage, salary, or commission. Subject to the three year rule. (9) E Excise tax (10) F Custom duty tax (11) G Penaltymust be a penalty that relates to an actual pecuniary loss. (a) Does not include penalties to punish. (b) Has to be an actual pecuniary lossI counterfeit 30 tags and steal themthey are less money that would have gone to them. (c) The filing of a BR is an equitable tolling of the time periodsstop the IRS from its collection will stop during the pendency of a BR. Plus 90 days on top. These statutes are independent and outside the BR rules. (12) 10. Death or Personal Injurymotor vehicle-vessel. (a) Because the debtor was under the influence of alcohol or drugs. (b) It becomes priority. ii) Discharge (1) 523 or 727 (2) 523Shot gun Non-dischargeability (3) 727Global Non-dischargeability : Discharge Death Penalty. (a) No discharge for corporationsthe debtor must be an individual. No corporations, partnerships, limited liability company etd. (b) Intent to hinder delay or defraud transfers, removes, destroys mutilates, concealsproperty of debtor within one year ; property of the estateafter the filing of the BR. (c) Conceals documents and records (d) Signs when they know they are false, or uses a false claim. (e) Cant explain what happened to the assets it had. (f) Refused to obey a lawful order of the courtmaterial questioncan implicate criminal chargehe can claim 5th Amendment rights. However, if he was offered immunity and refuses, his discharge can be denied. (i) 1-5 if you have done bad acts in another BR case related to yours, you can still lose the discharge. (g) Less than 8 years agoyes otherwiseno discharge. If you have filed a Ch.7 and received a discharge. (h) Ch 12 or 13you must wait six years.?????????The debtor has been granted a discharge within the last six years unless payments in the plan equal 100% of the allowed unsecured claims OR 70% of those claims and it was good faith and best effort. (i) You can waive your discharge. (j) If you dont finish the credit counseling class, you will not receive the discharge. (k) You have commited a criminal act or defrauded the Security Regulations. (4) 523 (Here we are only discussing individual debts, not the entire discharge.) (a) Priority Tax is non-dischargeable (i) Have not filed a tax return within two years of filing is nondischargeable. (ii) Filed fraudulent or attempted to evade taxes (b) Fraud Claims (i) Intentional omission

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(ii) Knows its not trueother party reliesother party gets damaged. (iii) It must be a justified reliance. The reasonable person standard. (c) PresumptionsLuxury Goods bought within 180 days of BR. (i) Cash advances of 750 or more within 75 days??? (ii) Open credit. (iii) The creditor has the burden to prove that this was a luxury expense. The debtor has to rebut. (iv) Std: Preponderance of the Evidence. iii) 11 USC 727 DISCHARGE GLOBAL DENIAL OF DISCHARGE DEATH PENALTY PROVISIONS (1) (A) Presumption that debtor will receive discharge unless (a) Debtor is not an individual (b) Debtor with intent to hinder, delay or defraud, destroys, excludes, &Co. (c) If debtor falsifies, destroys books, does not keep records (d) If the debtor knowingly and fraudulently makes a false oath, presents or uses a false claim, worked something under the table with someone, hides things from trustee. (e) Debtor cannot satisfactorily explain what happened to assets (f) Debtor refuses to obey orders of court, other than refusing to answer questions by court (unless a material question) (basically he can raise 5th amendment rights), but discharge can be denied if he was offered immunity for questions, and on a ground other than 5th amendment right, (g) can be denied discharge for bad acts in another bankruptcy (h) If you received discharge less than 8 years ago (i) If you received a 12 or 13 discharge less than 6 years ago, but does not apply if you had 100% planning or 70% planning with good faith (j) You can waive discharge (k) If you do not finish budgeting course, you will be denied discharge, unless exceptions apply (war, language, &co.) (l) If you have bad acts under the exemptions as in abuse of the system, you can be denied discharge (2) (A)(5) provides that the debtor shall be granted a discharge unless the debtor has failed to explain satisfactorily, before determination of denial of discharge any loss of assets or deficiency of assets to meet the debtors liabilities. (3) (a)(2)(A) The court shall grant the discharge, unless the debtor, with the intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed property of the debtor within one year before the date of the filing of the petition. If you bring a 727 action, you do it as a fiduciary to all creditors in the bankruptcy. To drop out, you must notify the other creditors and ask them if they want to take over. IV) 11 USC 523 EXCEPTIONS TO DISCHARGE RIFLE SHOT DISCHARGE (1) (a) A discharge under 727 does not discharge an individual debtor for any debt (a) A1: For a tax or customs duty: of any kind, due or due in the future (b) A2: For money property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by (i) A2(A): False pretenses &co; (ii) A2(B) Use of written and materially false statement of financial condition relied upon by creditor with debtors intent to deceive; (iii) A2(c) Consumer debts owed to single creditor aggregating more than $500 for luxury goods or services incurred on or within 90 days before the petition; Cash advances agregating more than $750 extensions of consumer credit under an open end credit plan on or within 70 days before order of relief. (c) If the debt is not listed or scheduled &co; (d) For fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny (intentional torts) The other party must have relied on the fraud, but in party B, it is a reasonable person standard; (e) For willful and malicious injury by the debtor to another &co (intentional tort); (f) To the extent the debt is for a fine, penalty, or forfeiture payable to and for the benefit of govt and is not compensation for pecuniary loss other than tax penalty; (g) Unless excepting from discharge would impose undue hardship, for educational loans &co. (h) For drunk driver/boater/piloting death liabilities; (i) For debts that were or could have been listed on a previous bankruptcy but discharge was waived or denied; (j) Judgments from Federal Depository &co or debt arising from any act of fraud or defalcation while acting in a fiduciary capacity committed with respect to such; (k) For malicious or reckless failure to fulfill commitment to Federal depository &co.; (l) For any payment of an order of restitution issued under 18 USC;

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i.

(m) Incurred to pay a tax to US which is non-dischargeable; (n) Domestic support; (o) Condo dues; (p) Fees imposed on prisoner by any court (court costs, probation fees, &co.); (q) Owed to a pension, profit-sharing, stock bonus, &co. (ex: loans from pension); (r) For violation of Federal securities laws &co. before, on or after petition date (2) (a) A debt that was excepted from discharge under this act is dischargeable in a case unless excepted by this title. (3) (c) Debtor shall be discharged unless creditor or TIB request and court excepts; (d) If creditor requests a determination of dischargeability, and it is discharged, the court shall grant judgment in favor of the debtor for costs and reasonable attorney fees, but not if the court finds such award unjust Problem Set 12. i) 12.1. Individual has kept poor and spread out financial records. Does he face any difficulties in bankruptcy? Yes, any bankruptcy he tries to file will require a schedule of the debts he is owed and an accounting of his assets, income, and how he has spent money in the six months prior to his filing. Should he? Yes, he should face problems because part of any financial difficulty he may experience may be traced to the haphazard way in which he keeps his financial records. Bankruptcy is a relief system and I think people who file should have to prove that they are in need of relief. Was he required by any law to keep better financial records? Not necessarily; except that it will appear that way if he enters bankruptcy. 727(a)(3) justify that he does not have records under all of the circumstances; if the judge believes, you are okay. If not, you are sunk. ii) 12.2. Client had been in serious financial difficulty for several months before seeking your advice. He gave a financial statement to a creditor to get her to hold off enforcing a judgment shed obtained against him. The statement falsely said he owned 1000 shares of AT&T stock, which he stated would be security for her debt. Meanwhile, he conveyed his only asset to his daughter. When the creditor did not receive the stock, she started searching for property to grab and found out about the sale to his daughter. In response, she attempted to levy against the asset, but before she could obtain it, the client filed for Ch. 7 bankruptcy. Will the debtor have any trouble discharging the debt he owes the filing creditor or other unsecured creditors? Yes, he has essentially defrauded them and made false statements concerning his assets. It appears that he has done so intentionally and knowingly. In addition, his sale to his daughter of his only asset may have been an attempt to hide it and in any case should have come into the estate in the BR. Consequently, any of the debts related to these actions will likely not be discharged. This is a fair result as again, the system is designed for relief; not an excuse not to pay bills one clearly owes. There may be a problem with the reasonable reliance on the statement. There is no leniency for the fact that she is an individual and not a sophisticated lender. You arent expected to look at everything on the list. If the creditor has an option, under which provision should she file her objection? She should filed under 523 since she is really only able to prove his fraud in relation to her own asset. 523(a)(2)(B) (i)-(iv). Objective standard: 523a2B: The statement was materially false, respecting the debtors financial condition, but whether the creditor relied on the statement is a question of fact. If the creditor had said she relied on the stock to make the loan, that would make it imprudent to not check on the validity. However, if she says she completely relied on the financial statement as a whole, it may be less prudent to check on it. iii) 12.3. Couple was divorced in Iowa in a proceeding in which the court ordered the H to pay $10,000 in a lump sum immediately from his separate assets and $2500 per month for the next five years, $1000 per month for the following nine years, and $200 per month until the time that W died. The day after the divorce was final H filed Ch. 7 bankruptcy. What will W get? W will get all that she was awarded and domestic obligations are priority debts that are non-dischargeable. 101(14A) defines domestic support obligation. Would the answer change if the couple lived in TX which permits only a limited form of alimony? No, the federal law preempts state law and as long as the debt was considered a domestic obligation it would have priority and be nondischargeable. It is dependent only whether it is a domestic support obligation not how much either partner makes. If the 10,000 is just settlement and not characterized as domestic support obligation, then it wont be covered. Would it matter if wife were a wealthy, well-educated professional, or a high school dropout that could only hold minimum wage jobs? No, the determination of her need is made in divorce court not BR court. BR court only says that she is priority once the amount has been awarded. Would it matter if H were a wealthy, well-educated professional, or a high school dropout with only minimum wage capability? Here it might matter more as the amount could be reduced due to his circumstances or restructured, but he will still be obligated to pay the sum owed. iv) 12.4. Bankrupt has a tort judgment against him for assault for $800,000. Will the judgment creditor be discharged during BR? No, this is a non-dischargeable debt because it is the result of an intentional tort. 523(a)(6)willful and malicious injury by the debtor to another entity or to the property of another entity, which includes a person. Without just cause and with an intent to cause injurymalicious. v) 12..5. Couple bought a fixer upper and sank all their cash into it relying substantially on credit cards so that their cards now represent $16000 in unsecured debt. The debtors filed for Ch. 7 BR and sold the house which brought in enough to pay off mortgages and home improvement loans leaving a small amount of exempt cash. As an atty, I have looked at the bank statements

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and seen charges for clothes, plane tickets and wall paper three months prior to the filing. The card issuers have filed exceptions to discharge. What will you do at the hearing? I will make sure that I can prove that they did not try to defraud the creditors by making purchases and selling the home; however, I believe I have an uphill battle because the timing suggests that they should have been cutting back instead of finishing their home and running up more unsecured debt. However, using the card to live on could be an understandable action if they were running out of money. Nonetheless, the charges that I have seen, outside of the clothes, may not strike the BR court as living expenses. 523(a)(2)(C)Luxury items are a question of fact. It depends on what they purchased and for what reasons. vi) 12.6. Law student has 122 parking tickets from over three years. If he declares BR, will the parking tickets be discharged? No, because these debts are a result of criminal activity however harmless. 523(a)(7) vii) 12.7. Congresswoman has heard that student loans actually have a lower default rate than other consumer loans and that there is no empirical evidence of widespread abuse. If she has read can be supported in congressional testimony, should that persuade Congress to amend the section so that student loans are treated like all others? No, the fact that there is lower default is probably because people who have student loans have to pay them and have no loophole by which to avoid them. Further, the hardship standard makes allowance for those who absolutely cannot make the payments of their loans. IX. Liquidation Bankruptcy: The Debtors Post-Bankruptcy Position: Reaffirmation pp. 254-277 a. The financial status of post-bankruptcy debtors is often tangled with some of the same debt they had prior to BR. b. Rule: Section 524 At the moment of an individual debtors Ch. 7 discharge, the section 362 automatic stay dissolves and the section 524 discharge injunction slides into its place. i) The discharge injunction forbids any attempt to collect a dischargeable debt. ii) It has potentially unlimited penalties and is enforced summarily by contempt. c. Rule: 524(c) goes on to give the discharged creditor an opening by way of seeking that the debtor reaffirm the soon-to-bedischarged debt. i) The debt can become once again legally enforceable, notwithstanding the discharge, if the debtor signs a reaffirmation agreement subject to the procedures and terms specified in that subsection. ii) A properly-obtained reaffirmation agreement goes much further because it revives the debt and makes the debt fully enforceable in a court of law. iii) 524(c) procedures require that the agreement be filed with the court and that it contain an option for the debtor to rescind the agreement any time before discharge or for a period of 60 days, which ever occurs later. d. Before 1973, debtors were preyed upon by their most aggressive creditors and many left BR in as much trouble as when they filed. e. The 1978 Code required that the BR court make an independent inquiry into whether a reaffirmation was in the debtors best interests. This reduced the number of reaffirmations. f. The 1984 amendments dropped the requirement of BR court approval in all cases in which the debtor was represented by a lawyer. A legally enforceable reaffirmation required the lawyer to certify that the reaffirmation was in the debtors best interest and to file an affidavit to that effect. This caused an increase in reaffirmations. g. Three Important Debtor Incentives to Enter Reaffirmations. i) For a secured debt, the creditors agreement not to repossess collateral that the debtor wants to keep, often a car or a home that is exempt from other creditors but not to the holder of a valid security interest or mortgage. ii) For an unsecured debt, the creditors offer future credit and threaten to object to the discharge of the original debt. iii) Retention. h. Reaffirmation of Secured Debt. i) Rule: Debts are discharged, but liens are not. 506(d). (1) The discharged debtor has no personal liability on any debt, so unsecured debts are totally excused. (2) A secured debt remains attached to its collateral and can be enforced against the collateral after BR, even though the debtor cannot be sued for any deficiency. (3) The discharge injunction prevents only an attempt to collect a debt as a personal liability of the discharged debtor. Collection by seizure of collateral is not forbidden. (4) These rights leave a Ch. 7 debtor with two alternatives: Redeem the collateral or negotiate a reaffirmation agreement with the creditor. Case law creates third option of ride-through or retention. ii) Redemption (1) Requires the debtor to pay the creditor the full amount due on the loan or the full value of the collateral in cash, whichever is less. 722. (2) A debtor can force a redemption on an unwilling creditor if it has the cash to pay the debt. iii) Reaffirmation (1) Requires a cooperative creditor willing to agree to let the debtor keep the collateral. This allows the debtor to keep the collateral so long as the debtor continues to make satisfactory payments on the loan.

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(2) The agreement may be formal or informal. Some creditors require that the debtors formally reaffirm their debts through the BR court. (3) A debtor cannot force a reaffirmation on a creditor who wants to terminate any relationship with the debtor. (4) Reaffirmation is a free-market activity. The creditor may demand what it chooses in exchange for permitting the debtor to keep the collateral. Apparently creditors regularly demand reaffirmation of the entire debt (with or without accrued interest and penalties), regardless of the value of the collateral. iv) Ride-Through / Retention (1) Requires only the maintenance of the contractual payments and has been permitted in only some federal circuits. v) Under secured debts, debtors sign a legally binding agreement to waive the discharge on a given debt under which they could lose the collateral for a subsequent default and be sued for a deficiency. vi) In re Pendlebury (1) Facts: Four Ch. 7 cases filed a motion requesting the striking of a provision in a proposed reaffirmation agreement with a lender who held a valid security interest on their mobile homes. The agreement made the debtors liable for payment of attys fees jointly and severally in the amount of $250. The trustee abandoned the mobile homes as assets in the estate. (2) Procedure: BR court denied Motion. (3) Issue: Whether the BR court may interject itself into the negotiations of reaffirmations in the BR code. NO. (4) Rule: Debtors have two methods by which they can retain possession of secured propertyredemption and reaffirmation. (5) Rule: Redemption permits the debtor to redeem tangible secured personal property from a lien securing a consumer debt upon a lump sum payment to the creditor of the fair market value of the property or the amount of the claim, whichever is less. (6) Rule: Redemption may be voluntary where the debtor and secured creditor stipulate the redemption value of the secured property, but it can also be involuntary. (7) Rule: Reaffirmation contemplates a voluntary post-petition agreement between the creditor and debtor. (8) Section 524(c): authorizes a Ch. 7 debtor to seek renegotiation of the terms of the security agreement with the creditor thereby creating an alternative method pursuant to which the debtor may attempt to retain possession of the secured collateral. It also contemplates that the creditor may, for whatever reason, reject any and all tendered reaffirmation offers. (9) Rule: Debtors or creditors must file reaffirmation agreements with the clerk prior to the expiration of the bar date fixed by the order for meeting of creditors for filing complaints objecting to discharge. 727 (10) Rule: At the reaffirmation hearings held pursuant to 524(d) this court does not interject itself into the reaffirmation process other than is required under 524(c)(5) and (6) and (d). (11) Rule: An attorney by affixing his signature to the declaration or affidavit required by 524(c)(3) certifies that attorneys participation in the reaffirmation process and the accuracy of the representations contained therein to the best of the attorneys knowledge, information, and belief are true and in the best interest of the debtor. (12) Rule: The court will use its equitable power where a debtor is not represented by counsel. (13) Rationale: Under circumstances involving reaffirmation, the debtor has bargaining powerin the absence of reaffirmation, the debt will be discharged leaving him with recourse only in collateral that may be substantially diminished in value, there is expense involved with repossession and resale of the collateral. In short, there may be no profit in the collateral. (14) Rationale: For the most part, attys fees negotiated by secured parties and debtors are fair and reasonable. (15) Rule: A debtors attorney may determine that attys fees requested by a secured party are not fair and reasonable and will impose an undue hardship on the debtor or his dependents and would not execute the declaration or affidavit required. (16) Rule: Redemption can be achieved through installment payments if the debtor and creditor agree that the debtor may redeem by installments and the parties comply with the reaffirmation provisions of 524(c). vii) Creditors may demand what they choose in a reaffirmation and often demand reaffirmation of the entire debt regardless of the value of the collateral. viii) Rule: Under UCC 9-623, a debtor is allowed to redeem collateral after default by paying the full amount owed, including late charges and other costs. Redemption is only allowed if the collateral is exempt property or is abandoned by the trustee. 722 ix) Ride through means keeping the collateral by continuing to make the pre-bankruptcy payments, without redeeming or reaffirming. De facto retention is the most frequent way debtors and creditors deal with property in a Ch. 7 bankruptcy. x) 2005 Amendments: 362(h); 521(a)(2); (6) removes the collateral from the estate and lifts the stay unless the debtor complies with the command in section 521(a) (2) to state an intention to do one of three things and then to do them: surrender the property, reaffirm the contract with the secured party on that collateral, or redeem pursuant to 722. 521(a)(6) has a savings clause if the creditor demands more than originally agreed. Reaffirmation of Unsecured Debt i) The unsecured creditor is in much less advantageous legal position than the secured because he has not collateral to recollect. (1) A debtor may reaffirm an unsecured debt out of gratitude, affection, or to protect a co-debtor.

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ii) In re Paglia, Debtor (1) Facts: Paglia owned F&M Fabricators until it ceased operating in 1990. In January of that year he borrowed $13,000 from First Natl Bank to use in his business. The debt was in the form of a promissory note on which his mother co-signed and pledged the interest of her annuity. Paglia filed Ch 7 in Sept. 1991 and identified First Natl as a general unsecured creditor on his schedules. First Natl sent a letter to his mother in Nov. informing her that Paglia had defaulted and demanded payment of her. In Jan. 1992, Paglia executed a second promissory not in favor of First Natl in the amount of the debt for which he made monthly payments until 1999. In 2002 Paglia brought suit claiming that he was coerced into reaffirming the debt. (2) Procedure: The debtors motion to reopen his BR to hold this adversary action was granted. (3) Issue: Whether a debtors choice to pay a debt to avoid the liability of a co-debtor violates the statutory provisions for reaffirmation. NO (4) Rule: The discharge of a pre-petition debt owed by a debtor in BR does not affect the liability of any other entity or their property for that debt. 524(e). (5) Rule: A debtor is not prohibited from voluntarily paying any debt. 524(f) (6) Rule: Where a creditor has a security interest in property, a discharge extinguishes only the personal liability of the debtor in BR. The right of the secured creditor to proceed in rem against the collateral survives the debtors discharge. (7) Rule: A reaffirmation is not enforceable if it does not comply with the requirements set out in 524. For example, the agreement must be filed with the court, the debtor must know he can rescind within 60 days, and the debtor must know he has no obligation to execute it. (8) Rationale: The second note was not a reaffirmation for the purposes of these provisions of the debt arising under the first note; the debtor instead incurred a different obligation in return for different consideration. The first time it was money the second time it was the agreement to not seize the mothers annuity. iii) Most reaffirmations are the products of creditors threats to take away all future credit or their promises to extend more credit. iv) In re Latanowich (1) Facts: Debtor acting pro se filed a Ch. 7 BR and had unsecured debts totaling $12,805.20 all in the nature of consumer debt. This included a non-priority debt to Sears in the amount of $1073.64. The Ch. 7 Trustee in the case reported that the estate had no assets to distribute. In April 1996 the court entered a discharge. Sears initiated contact with the Debtor and proposed a reaffirmation agreement with the promise that it would extend him credit. However, Sears failed to submit the agreement to the court and make the qualified disclosures to debtors. (2) Procedure: The court took the matter under advisement and thereafter issued two procedural orders. Sears withdrew its brief and later had to show cause to the BR court. (3) Issue: Whether a reaffirmation agreement has to strictly comply with the statutory procedures. YES. Sears had to pay a $300-$500 million in damages. (4) Rule: A discharge order operates as, among other things, an injunction against the commencement or continuation of any act to collect, recover, or offset any debt to which it applies. (5) Rule: A reaffirmation agreement is enforceable only if certain requirements are met. The agreement must be filed with the BR court and in instances where the debtor was not represented by counsel the court must approve the agreement as (i) not imposing an undue hardship on the debtor or a dependent of the debtor and (ii) in the best interest of the debtor. (6) Rule: These requirements are mandatory; and, as they exist to protect a debtor from his or her own bad judgment, the debtor cannot waive them. (7) Rationale: BR is designed to give the debtor a fresh start. Debts to Sovereign States i) BR is a universal proceeding that binds all creditors through Congress plenary power. ii) Exception: When the creditor is a state or local government, the federal courts have very limited powers of enforcement, whatever the theoretical rights of the parties might be under the BR code. iii) If the debtor has stopped all the creditors except a state or local government, the scope of the debtors BR protection will be sharply narrowed. iv) Tennessee Student Asistance Corporation v. Hood (1) Facts: Debtor was challenging the exception to discharge for her student loans against Tennessee (2) Procedure: On certiorari to Supreme Court (3) Issue: Whether the BR clause grants Congress the authority to abrogate state sovereign immunity from private suits. (4) Rule: Congress should have the power to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States. (5) Rule: States, whether or not they choose to participate in the proceeding, are bound by a BR courts discharge order no less than other creditors. . . at least when the bankruptcy courts jurisdiction over the res is unquestioned.

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(6) Rationale: A debtor does not seek monetary damages or any affirmative relief from a State by seeking to discharge a debt; nor does he subject an unwilling State to a coercive judicial process. He seeks only discharge of his debts. The Bankruptcy Courts in rem jurisdiction allows it to adjudicate the debtors discharge claim without in personam jurisdiction over the State. k. Nondiscrimination: The risk that employers or government agencies will look askance at someone who has been bankrupt and will refuse a job, a license , or a permit crucial to the debtors livelihood or well being. i) 525 Forbids discrimination against a debtor by prohibiting the US government from discriminating against a debtor with respect to licensing and employment, prohibiting private employers from discriminating with respect to employment, and student loan issuing entities from discriminating as well. l. 524 Effect of discharge i) (A) A discharge in a case under this title [11 USCS 101 et seq.]-- (1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title [11 USCS 727, 944, 1141, 1228, or 1328], whether or not discharge of such debt is waived; (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; and (3) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the debtor of the kind specified in section 541(a)(2) of this title [11 USCS 541(a) (2)] that is acquired after the commencement of the case, on account of any allowable community claim, except a community claim that is excepted from discharge under section 523, 1228(a)(1), or 1328(a)(1) [11 USCS 1228(a)(1), or 1328(a)(1)], or that would be so excepted, determined in accordance with the provisions of sections 523(c) and 523(d) of this title [11 USCS 523(c) and 523(d)], in a case concerning the debtor's spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived. ii) (C) (c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if-- (1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title [11 USCS 727, 1141, 1228, or 1328]; (2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement; (3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that-- (A) such agreement represents a fully informed and voluntary agreement by the debtor; (B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and (C) the attorney fully advised the debtor of the legal effect and consequences of-- (i) an agreement of the kind specified in this subsection; and (ii) any default under such an agreement; (4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim; (5) the provisions of subsection (d) of this section have been complied with; and (6) (A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as-- (i) not imposing an undue hardship on the debtor or a dependent of the debtor; and (ii) in the best interest of the debtor. (B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property. m. Problem Set 13 i) 13.1. Muscle Mart, a fitness center, has a policy that if two months of dues or sauna fees are unpaid, the membership is revoked, and the former member is not permitted to use any of the equipment until the unpaid balance is paid in full. Client has filed for Ch. 7 BR discharging the two months worth of Muscle Mart dues. However, clients membership has been revoked, but he is frantic to get back to his workouts. His offer to pay a month in advance was refused. What would you advise? Here, he can try to have a reaffirmation but cannot force the creditor to accept it. As a result, he will probably have to redeem the membership by paying the outstanding amount in full. In addition, if he does want to reaffirm, his lawyer should look at its terms. 524 (a)(3) Is the gym violating the discharge by collecting a debt? This is not about reaffirmation or redemption for secured debt. Here depending on what was said. They are not breaking any law; they are a private entity. They are violating the discharge by collecting on the debt by saying he has to pay the two month dues. They can say that they dont want him in the club because it is a private entity. ii) 13.2. You handled a routine Ch 7 bankruptcy for client two months ago. He was in a former creditors store recently where he heard a remark about stiffing ones friends and guiltily signed a promise to repay the already discharged debt. Is the written agreement enforceable? What do you tell him? The written agreement is not enforceable unless I affirm that it is in the debtors best interest and the proper disclosures have been made to the debtor concerning his liabilities. Has to be filed with the court before discharge and must have disclosure described in subsection k. The debtor has 60 days from the date the document is filed

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with the court or after discharge, whichever is later. Atty has to swearincome and expenses. File a notice of rescission just to be on the safe side. There is now an official reaffirmation form. iii) 13.3. Client has a motorcycle on which he owes $18,000, but because it has been wrecked twice, it will only appraise at $15,000. Client decides to declare BR because he is overwhelmed with debt. His only valuable asset is his very small home, which should yield $16,000 after costs of the sale, which would all be exempt. He wants to sell his home to redeem his motorcycle. Will you sign an undue hardship affidavit for client? No, his use of the motorcycle would suggest that though he may be having hardship, he could rethink how he spends his money. He wants to sell his house to pay off his motorcycle. He wants to redeem; therefore, our input is not needed. He must pay the amount of the allowed secured claim, which is only $15,000. to the extent of the secured claim. Undue hardship is for reaffirmation certification. The trustee will abandon if the motorcycle is worth less than is owed on it. The trustee cant use it, but the debtor can. iv) 13.4. Single mom with two children lost her job because the plant moved to another nation. Though she tried to get a technical job like the one she lost, she ended up just having to wait tables and cleaning homes for income. Her main concern is holding on to her house and car. The credit unions policy that holds the loans will only reaffirm the mortgage if the debtor agrees to reaffirm all the debts she has with him. The car loan is due $7300, but the car is only worth $5900. What do you advise her? I think that she is in a position where she has to do a reaffirmation since she clearly does not have the funds to redeem the car and the home. However, I would advise her to try and negotiate for the actual worth of the collateral as the reaffirmation is a negotiation. The two unsecured loans would be her greatest out because if they try to attach this to her collateral perhaps the lawyer could say that this would be an undue hardship. I would help her negotiate. Redemption only applies to personal property; surrender and reaffirmation can be done for both real and personal property. Cross-collateralizationget note 1 for a car; then note 2 which is a promissory, and a credit cardthe car is the collateral for all of the loans. The document must say it; just going to the same bank does not do it. 41.001 limits encumbrances on homes. In TX, you cannot cross collateralize the home with anything else; however, you can do so in Maine. The credit union can do this if it was not cross collateralized. v) 13.5. You are about to file a Ch. 7 for a couple who are a truck driver and an EMS driver respectively. They owe a state tax debt from two years ago. The debt is dischargeable but the creditor is aggressive and has a reputation for pursuing debtors after the discharge. What steps should you consider taking and why? First, the creditor should be included on the schedule I file so that the court is aware of their existence, even if they do not file a claim. In addition, I will be sure to make sure that my client is aware of his and her rights against any coercive affirmation agreements. Reaffirmation has to happen BEFORE discharge. The state cannot be sued, so there is really nothing the BR court can do. Ex parte ? casesue the person in charge of the agency, not the state. What if the state has recently adopted drivers-license suspension for failure to pay taxes? If there is a drivers license suspension attached, the debtor will need to reaffirm. As long as it is just punishment it is fine, but it should not be attached to payment. Suing in rem is okay, but not when you are trying to enforce an injunction against the state. It turns on whether litigation is needed for the dischargestopping the state from doing something it should not be doing. The Supreme Court says you cant make drivers license dependent upon payment. Hood gave in rem jurisdiction to the BR Court but that is not what is happening here. Here the state is trying to collect debt directly. State cannot be sued and cannot be dragged into the BR Court. vi) 13.6. You are about to do a presentation addressing what your firm should do concerning reaffirmation in the consumer bankruptcy context. What will you propose should be the firms practice on the atty. reaffirmation affidavit required in 524(c)? I will suggest that the firm use the form that has been recommended by the bankruptcy court and that it incorporate all of the required disclosures. Skipped. vii) 13.7. Your firm represents a consumer lending bank. The bank wants advice on what to do when it holds a security in an automobile and the debtor files bankruptcy. Under the banks policy, the filing of BR is an automatic default under the loan. For example, a debtor has gone into BR owing the bank $7899 secured by a car worth $6000. It would cost the bank $500 to repossess and sell the car. If the current payment schedule is maintained, the loan will decrease faster than the value of the car. The debtor is not in default and plans to continue the payments. Can the bank get the car back in this situation if it wants to? It cannot unless it gets the stay lifted that automatically goes into effect at the debtors filing. If the debtor keeps the car, what portion of what is owed will it be paid? If it just opts to ride through, it could get all that it is owed. If it embodies the debtors promise in a reaffirmation that is approved by the debtors lawyer and the court, then it is more likely to get all it is owed. If the car becomes part of the estate, it will get the car itself which is worth less than what they are owed. I would advise embodying the promise in a reaffirmation. What is your overall advice about how to handle this sort of problem? In cases where the car is under secured, I would always advise the bank to try and reaffirm. In cases where it is over secured, I would advise it to refuse reaffirmation as the car may be worth more to them if redeemed or resold. viii) 13.8. Client is a sales force supervisor whose responsibility it is to monitor the work of employees closely and to make certain that sales representatives reflect the image of steadiness and integrity his company wishes to promote. He did not fire an employee whose wages were garnished, but now the employee has filed for Ch. 7 BR. He wants to fire him now because of the image he presents due to his BR filing. What do you advise? Though there is a stigma attached to the filing of BR, it is not

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upheld or sanctioned by law. As a result, I would not dare fire someone because of their personal financial woes. He may be looking at a suit for wrongful dischargeone he is unlikely to win. May not discriminate with respect to employment against someone who has been a debtor under this section. solely because such debtor went bankrupt. The emphasis is solely; only when the employer is stupid enough to say that we fired you because you filed BR. n. Class Notes (you were ten minutes late.) i) Student Loans (1) Brunner test has been adopted by most circuits. (2) They are not dischargeable. (3) A system that partially discharges is harsher than an all or nothing. ii) 523 (exceptions to discharge) is not dependent upon the debtor doing something wrong. (1) Partner (agency) can get me in trouble. (2) He has to lie with an intent to get the money. iii) Pre-petition interest on a priority tax claim is non-dischargeable. Post-petition no interest accrues. (1) However, post-petition interest can accrue where there is some left over after the discharge. (2) No post-petition for the purposes of distribution by the trustee. iv) Reaffirmation (1) My obligation is gone; but the lien on the collateral remains in secured transactions. (a) Three Options (i) Surrender 521 (ii) Reaffirm 524c (iii) Redeempay the value of the car in a lump sum 722 (b) A debt has to be reaffirmed BEFORE DISCHARGEafter no reaffirmation can take place. (c) New form lets you know what boxes to check. (d) Disclosures (i) What is the amount of the money you are paying, interest rate, time left, the item secured. (ii) Reaffirmation is voluntarydebtor and creditor may agree. (iii) The debtor has until the later of 60 days from the date the reaffirmation was filed with the court or the day of discharge to rescind the reaffirmation. If I reaffirm right after filing, but if the discharge is the later date then I have until the date. (e) The reaffirmation is entered means that the underlying debt is not going to be discharged. I am on the hook legally. (f) The Retention Optionno where in the codeit made a recourse note non recourse. The obligation is wiped out, so the creditor had no right to the car after discharge. They could pick up the car in spite of your payments. You owe no deficiency amount, but they can pick up the car. There is not an official agreement. Keeps you from being under a K like reaffirmation. (g) 722 Redemption (i) Must be an individual (ii) Must be dischargeable (iii) Must be personal property (iv) Must be for personal or family use (v) Must be paid in a lump sum. (h) What is the difference between reaffirming and signing a new debt, (i) Paglia 1. If his mother had not been on the note, would he have reaffirmed? 2. The execution on moms note was consideration for the new note. 3. He says that this was a separate note. (ii) Reaffirmation Process 1. The right to rescission 2. Filed with the BR court before dischargeif not its a goner. (iii) Latanowich (Sears) 1. They did not file, and got sued. o. Ch. 7 Review i) Petition date the automatic stay goes into effect. Creates a 541 a BR estate. ii) 20-40 days 341 meeting with creditors iii) 30 days whatever you exempt leaves the BR estate. 30 days after the meeting of creditors, exemptions will be finalized. iv) 60 days if you want to challenge dischargeability under 523 (a)(2), (4), (6) runs from the first scheduled meeting of creditors--727

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v) Discharge dateautomatic stay ends and discharge injunction starts and keeps going forward from that date. vi) 20-45 days after the first meeting of the creditors the debtor has to surrender, redeem or start reaffirmation. vii) 521(a)lays out all documents and schedules that must be filed. X. CHAPTER 13 BANKRUPTCY (Elements of an Acceptable Plan) pp. 281-310 a. Code Sections i) 1303 Rights and powers of debtor. Subject to any limitations on a trustee under this chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under sections 363(b), (d), (e), (f), and (l) of this title. The debtor splits powers with the trustee. Debtor remains in possession of property; debtor has the rights of the trustee under 363 (Use, Sale or Lease of property). ii) 1306 Property of the estate. (a) Property of the estate includes, in addition to the property specified in section 541 of this title (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under Ch. 7, 11, or 12 of this title, whichever occurs first; and (2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed or converted to a case under Ch. 7, 11, or 12 of this title, whichever occurs first. (b) Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate. In addition to 541, all property and earnings from services performed by the debtor acquired after the pet. filing but before dismissal, closure, or conversion. Debtor remains in possession of the property of the estate. iii) 1322 Contents of Plan. (a) The Plan shall (1) provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan; (2) provide for the full payment, in deferred cash payments, o f all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim; (3) if the plan classifies claims, provide the same treatment for each claim within a particular class; and (4) notwithstanding any other provision of this section, a plan may provide for less than full payment of all amounts owed for a claim entitled to priority under section 507(a)(1)(B) only if the plan provides that all of the debtors projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan. (b) Subject to subsections (a) and (c) of this section the plan maysee statute for limitations on the planit must last for 3-5 years. iv) The plan MUST: (1) Commit future earnings (2) Provide (not pay) for priority claims (3) Put people in same class and treat them as identical (4) if you have a domestic support obligation that is owed to a gov. entity, you can confirm plan without paying that claim 100% v) The plan MAY: (1) designate a class of u/s creditors, BUT you may not unfairly discriminate against other u/s classes. 2) I can mess with everyones contractual rights except the mortgage so as long as they have a lien against my principle residence (homestead) 3) provide for curing or waiving of any defaults 4) pay secured and u/s concurrently 5) modify the right of a mortagee if you are trying to catch up on your back payments (can put arrearages in the plan)- but cannot change the terms of your contract (ex. change payment amount of interest rate) 6) pay post pet. claims 7) assume, reject, or assign leases 8) provide for the payment of the plan from property of your estate (sell your car) or your own property (income) 9) decide when the vesting takes place, debtor can adjust the terms of 1327 10) if you have a debt that is non dischargeable in a 13, you can pay that debt plus interest, however you have to pay 100% of all those dischargeable unsecured debts first. vi) Until the time of foreclosure you can file bk, stop it, and keep your home. You can provide for the arrearages in a Ch13. You can put your house note in the bk. (allows you to modify the rights of the mortgagee but rarely happens) If the debtors income is above the median = 5 yr. plan ; below median = 3yr. plan but you can extend beyond 3 yr. if there is good cause. If the debtor borrowed from a pension, profit-sharing, stock bonus or other plan and is paying it back, its an allowed expense, not going to count as disposable income. vii) 1325 Confirmation of plan. (a)Except as provided in subsection (b), the court shall confirm a plan if (1) the plan complies with the provisions of this chapter and with the other applicable provisions of this title; (2) any fee, charge, or amount required under chapter 13 of title 28, or by the plan, to be paid before confirmation, has been paid; (3) the plan has been proposed in good faith and not by any means forbidden by the law; (4) the value, as of the effective date of the plan, of property to be distributed under

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the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Ch. 7 of this title on such date; (5) with respect to each allowed secured claim provided for by the plan (1) (A) the holder of such claim has accepted the plan; (2) (B)(i) the plan provides that (a) (I) the holder of such claim retain the lien securing such claim until the earlier of(aa) the payment of the underlying debt determined under non-bankruptcy law; or (bb) discharge under section 1328; and (b) (II) If the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable non-bankruptcy law; (3) (ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and (4) (iii) if (I) the payments are in equal monthly amounts (II) the amounts shall provide adequate protection during the period of the plan to the holder of the claim secured by personal property; OR (5) (C) the debtor surrenders the property securing such claim to such holder.. . . (Look at the statute in the book.) (6) The court SHALL confirm a plan: (a) that complies with the provision of this chapter (b) fees have been paid (c) plan is in good faith (takes totality of the circumstances into consideration) debtors conduct before bk may be taken into account (d) **best interest test**, dividend to the u/s has to be not less than what the u/s would have received under the Ch7 liquidation (e) how secured creditor is dealt with (3 options) (i) creditor accepts the plan (ii) holder retains its lien until: (iii) the earlier of payment of debt or discharge (7) if the case is discharged or converted without completion of the plan, the full amount of a claim comes back to life (as if you had never filed) (8) creditor get loss of time interest (9) periodic payments must be EQUAL (10) payments that you make cannot be smaller than the adequate protection payment (11) debtor surrenders the property (12) **feasibility test**- debtor can make the plan payments (13) the petition was filed in good faith (14) if you want to confirm your plan and you have a domestic support obligation, you better be current on it (15) you have to have filed you tax returns as mandated by 1308 (16) hanging paragraph (a) If you purchased a motor vehicle within 910 days of the bk, (it has to be PMI, motor vehicle, for personal use of debtor), then you CANNOT cram down (b) if you purchase personal property within 1 year then you CANNOT cram down viii) section 506(a) does not apply- (bifurcates claims), EVEN SURRENDER, if a client cannot pay for a new car and surrenders it, then its surrendered for value- they dont owe a deficiency ix) If the tee or an u/s creditor objects to the plan, the plan will be denied UNLESS: 1) the value of property in the plan is at least the claim amount OR 2) the plan provides for all the debtors Projected Disposable Income to be applied to the plan x) 1325(b)(2)- Below median Income (1) Sch.I - 707(b)(2)(A)&(B )= p.d.i. projected disposable income (IRS Standards and National Standards) (a) If result is negative, then income actual expenses (subject to reasonable and necessary )= p.d.i. (2) (child support payments, foster car payments, disability payments for a dependent child are NOT included in income) (3) (expenses may include support payments, charitable contributions (up to 15% of gross yearly income) and business expenses if the debtor is in business)) xi) 1325(b)(3)- Above median Income (1) statute says: CMI 707(b)(2)= disposable income (IRS and National) (2) reality: Income 707(b)(2)= p.d.i In above-median, we will use the National standards. b. Elements of an Acceptable Plan (An Overview of Chapter 13) i) Enforcing the automatic stay and deciding what is property of the estate are common to all consumer bankruptcies. ii) An alternative to liquidation for consumers is a Chapter 13 Adjustment Debt or Wage Earners Plan

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iii) Chapter 13 focuses on using future earnings, rather than accumulated assets as in Chapter 7 to pay creditors. iv) The debtor keeps all assets, regardless of whether the assets exceed exemption levels. v) In return, the debtor agrees to turn over a portion of all future income for a minimum of three years. vi) The trustee takes a percentage of the debtors income for each pay period, deducts a percentage to cover administrative expenses, and then distributes the remainder to the creditors according to a court-approved plan. vii) When the debtor has completed the agreed payout, the debtors remaining obligations are discharged. viii) Every debtor who is eligible for both Chapter 7 and 13 can choose to seek an immediate discharge in Ch. 7 or to try to pay some or all debts in installments under a Ch. 13 plan. ix) A debtor must prepare a plan detailing the amounts to be repaid and the terms of repayment in accord with certain statutory requirements. x) From a creditors standpoint, the difference between Ch. 7 and Ch 13 is the prospect of payment obtained by selling the debtors assets versus payment from the debtors future income. xi) Supervision of the BR court will last from the day of the filing until plan payments are completed, generally three to five years. xii) No discharge from debt occurs until the debtor makes the very last payment on the plan. xiii) Timing of the discharge in Ch. 11 occurs when the plan is approved, even before the payments begin. xiv) Role of the Chapter 13 Trustee (1) In Ch. 13, the debtor retains control of the property of the estate; thus, the TIB does not have the function of collecting, preserving, and selling the property of the estate. 1302(b) (2) Rule: The Ch. 13 trustee should object to improper creditor claims. (3) Rule: The trustee is also responsible for ensuring that the debtor gives up the required amount of income. (4) Rule: The trustee asserts any objections to the debtors discharge. (5) Rule: Trustee has a duty to help the debtor in the performance of the debtors duties. (6) Essentially, the trustee scrutinizes everyone in the casethe debtor and creditorsto be sure they are following the rules set down in the BR Code. (7) Rule: The trustees main duties are connected with confirmation of the plan and distribution of the payments. xv) Rule: The trustee will recommend approval or denial of the confirmation of a debtors plan. xvi) Rule: The trustee is obligated to ensure that payments are commenced within 30 days after the plan is filed and that the payments are properly distributed to creditors. 1302(b)(5). xvii) The plan provides that debtors will make a lump sum monthly payment to the trustee and the trustee will then distribute the funds to the creditors, although some creditors may be paid directly (a procedure known as payment outside of the plan. xviii) The trustee monitors the debtors performance, and if the payments fall behind, urges compliance, or if need be files to dismiss the debtors case for non-payment. xix) Wage Attachment Orders may be sought by the trustee when a debtor misses a payment or two. These are routinely granted and because they are made pursuant to federal BR law are not affected by state restrictions on wage garnishment. xx) Standing Chapter 13 Trusteesfound in most urban districts and serve in a large number of cases. (1) appointed by the United States Trustee 1302(a) (2) fees of standing trustees are fixed by the court, subject to statutory maximums. 28 U.S.C.586(e) How the Chapter 13 Case is Filed and How the Plan is Proposed and Confirmed. i) Debtor files a Chapter 13 petition and the Ch. 13 case commences. 301 ii) Only the debtor may commence a Ch. 13 proceeding; there is no provision for an involuntary Ch. 13. iii) The commencement of the case creates an estate which includes, among other things, all legal or equitable interests of the debtor in property as of the commencement of the case, 541 and property and earnings acquired after commencement of the case but before the case is closed, dismissed or converted. 1306(a). iv) The debtor remains in possession of the property of the estate, except as provided in the confirmed plan or the order confirming the plan. The confirmation of the plan vests all the property in the debtor. v) The automatic stay provisions of 362 restrict the actions of creditors against the property of the estate or of the debtor, prohibiting most acts and the commencement or continuation of most civil actions to collect a consumer debt. Remains in effect until the case is closed or dismissed or a Ch 13 discharge is granted or denied. 362(c). vi) It is the debtors responsibility to develop a plan that conforms to the statutory requirements. The debtor files a plan providing for the repayment of all or a portion of the claims against the debtor out of the debtors future income (or out of the estate). vii) Rule: A creditors meeting of creditors, trustee, debtors will occur for examination of the plan. viii) The trustee will recommend that a Confirmation Hearing be held and the proposed plan be confirmed. ix) Rule: Section 1322(a)(2) gives the debtor the power to use a plan to modify the rights of creditors, both secured and unsecured, which includes the reduction of amounts owed and the extension of time to pay.

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x) However, this power is constrained in relation to secured creditors. d. Payments to Secured Creditors i) Most common reasons for choosing a Ch. 13 BR the debtors desire to keep property that is subject to a security interest. ii) When a significant asset, such as a house and a car, is subject to a valid security interest, the Ch. 13 plan is built around satisfying the legal requirements for retaining that property and structuring a new payment schedule. iii) The secured creditor in Ch. 13 is better protected than the unsecured. iv) Often the creditor wants to repossess the property and sell it, while the debtor wishes to keep it. (1) Issue: Whether the creditor can exercise its right to repossession and sale, realizing the value of the collateral and terminating its contract with the debtor will depend on whether the debtor can comply with the provisions of Ch. 13 that are designed to protect secured creditors. (2) Two Issues that Must be Solved by the Courts: (a) Protection of the secured partys interest in the collateral while the case is going on. (i) Because the debtor proposes to keep the property, the secured party is concerned about the risk that the collateral will lose its value. Default later on could result in collateral that is worth less than when the BR was filed. (ii) The debtor or court must provide adequate protection for the secured party. 362(d) 1. Loss of the collateral by fire, theft, or simple neglect 2. Decline in its value such as depreciation over time. (b) Adequate payment to the secured party. (i) Statutory formula calculates the minimum amount the debtor must pay in order to keep the collateral. (3) In Ch. 11 the two issues are handled separately as adequate protection is handled by immediate payments to the creditor during the plan negotiations. The negotiations insure proper long-term payment. (4) In Ch. 13, they are handled together. v) A creditor can move to have the automatic stay lifted under section 362(d), claiming that its interest in the collateral is not adequately protected. (1) This can be done in any proceeding. (2) Rarely argued in Ch. 7 because reaffirmation, redemption or ride-through makes an adequate protection motion unnecessary. (3) Since in Ch. 11 and Ch13, the debtor proposes to keep the property and pay for it over a time often at different rates, the creditor may argue that its statutory rights arent protected. vi) Section 542 requires turnover of property to the trustee if it has been repossessed prior to a Ch. 13 filing. vii) In re Radden (1) Facts: The debtor failed to make the contractually required payments to GMAC for the month of June 1983, which constituted the first default under the assigned installment sales contract. The debtor did not cure the default and also failed to make the required monthly payment in July, 1983. GMAC notified debtor and co-buyer, Priscilla Coe of their right to redeem the property and of a proposed sale of the property on August 12, 1983, if they did not redeem the property. The debtor filed for Ch. 13 relief on August 10. The plan listed the value of the property at $2700 and the balance due as $4,400.30. They proposed to pay GMAC to the full extent of the value of the collateral plus 5% interest per year in 36 monthly installments. GMAC sought relief based on inadequate protection arguing that the debtor had no equity in the property and that the property was not necessary to the debtors effective reorganization. 362(d)(2). (2) Procedure: GMAC filed for lack of adequate protection, and debtor filed for turnover of the repossessed vehicle. (3) Issue: Whether a creditor is entitled to have the stay lifted if the property of the debtor is necessary for an effective reorganization. NO. (4) Rule: If the court finds that the property is necessary for an effective reorganization, they will deny a motion to lift the stay for lack of adequate protection. (5) Rule: Where the debtor lacks equity in the property and it is not necessary to an effective reorganization, the creditor is entitled to relief from the stay. (6) Rule: The debtor bears the burden of proving that the property is necessary for his effective reorganization. 362(g) (7) Rule: Section 1303 provides the debtor with rights and powers that a trustee would have under Ch. 7 or the debtor in possession in Ch. 11; thus, the debtor is a proper party to seek turnover under 542(a). (8) The elements of a 542 Turnover are (1) an entity has possession, custody, or control of the property (2) that the debtor may use the property pursuant to 363 and (3) that the property has value or benefit to the estate. (9) Rationale: A car is necessary for an effective reorganization and GMAC did not demonstrate that the debtors chances of rehabilitation were remote. (10) PROF: The bulk of the time, unsecured debt will probably get 0-1 cent on the dollar. In determining whether the creditor is adequately protected, the court will do a short analysis of whether the debtor can create a good plan. A broad analysis. The attention to detail comes at confirmation time, not at a motion for relief from stay. 59

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Adequate Protection. i) Adequate protection is needed where there is a possibility that the property will decline in value or even be destroyed. Modifying the Secured Creditors Contract i) There is a battle over how much the creditor will be paid under the Ch. 13 plan. ii) Even a secured creditor may find that its contract with a debtor has been modified in BR. iii) Two Requirements for Ch. 13 Plan Payments: (1) A secured creditor must be paid his allowed secured claim in full. (2) A secured creditor must be paid interest on that claim. iv) Amount of the Principal Debt that Must be Paid. (1) Calculation of an Allowed Secured Claiman under-secured claim is bifurcated by section 506(a) to yield two claims: (a) a secured claim equal to the value of the collateral and (b) an unsecured claim for the remainder. (2) Section 1325(a)(5), the cramdown section allows the debtor to promise to pay the allowed secured claim, the value of the collateral, in full, while treating the unsecured portion of the debt like any other unsecured debt. (3) Treatment of an under-secured claim is called cramdown because it can be imposed over the secured creditors objection. (4) If the debtors fail to complete the plan, they will lose the benefits of cramdown; the debt will not be discharged and following BR the secured creditor will be able to enforce its security interest with regard to all the unpaid debt. 1325(a)(5)(B)(i). v) Traditionally, the cramdown applied to all secured debts except home mortgages; however, the 2005 Amendments may have added more. (1) These are not stripped down to the value of the collateral; they must be paid in full, plus interest. (a) Any security interest granted within the year before BR is exempt from cramdown. (Personal Property). (b) If the creditor objects to the plan, a debtor who wants to keep the collateral must promise to pay the debt in full. (c) The holder of a PMSI in a vehicle is exempt if the security interest was granted within 2 years (910 days) prior to the BR petition. (2) The value of the collateral is imperative because it will determine the amount that is to be paid in full. (3) Associates Commercial Corp. v. Rash (a) Facts: Debtors purchased a Kenworth tractor and pledged the truck as collateral. At the time of the BR filing, the balance owed to creditor on the truck was $41, 171. The petition alleged that the value of the tractor was $28,500. ACC objected to the plan and asked the BR court to lift the automatic stay so that it could repossess the truck. ACC claimed it was fully secured for the amount owed and argued that the proper valuation was the price the debtors would have to pay to purchase a like vehicle. The debtors argued that the valuation should be the amount that ACC would recover upon foreclosing on the property. (b) Procedure: The BR court agreed with the debtors and fixed the price at $31,875 the amount ACC would receive if it repossessed the truck. Both the District Court in Texas and the Fifth Circuit affirmed. (c) Issue: When a debtor, over a secured creditors objection, seeks to retain and use the creditors collateral in a Ch. 13 plan is the value of the collateral to be determined by (1) what the secured creditor could obtain through foreclosure sale of the property (the foreclosure-value standard); (2) what the debtor would have to pay for comparable property (the replacement-value standard); or (3) the midpoint between these two measurements? (d) Rule: Value is governed by 506(a), which directs application of the replacement value standard for calculation of the Ch. 13 payment plan. An allowed claim of a creditor secured by a lien on property in which the estate has an interest. . .is a secured claim to the extent of the value of such creditors interest in the estates interest in such property, . . . and unsecured claim to the extent that the value of such creditors interest is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property. (e) Rule: A plans proposed treatment of secured claims can be confirmed if one of three conditions is satisfied: The secured creditor accepts the plan 1325(a)(5)(A); the debtor surrenders the property securing the claim to the creditor (C); or the debtor invokes the cramdown power (B). (f) Rule: Under cramdown, the debtor is permitted to keep the property over the creditors objection and the creditor retains the lien securing the claim. The debtor is required to provide the creditor with payments, over the life of the plan, that will TOTAL THE PRESENT VALUE OF THE ALLOWED SECURED CLAIMTHE PRESENT VALUE OF THE COLLATERAL. (g) Holding: The value of the property (and thus the amount of the secured claim under 506(a)) is the price a willing buyer in the debtors trade, business, or situation would pay to obtain like property from a willing seller.

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(h) Rationale: The key is the disposition or use of the property. In Ch. 13 where the debtor proposes to keep and use the
property, the creditor obtains at once neither the property nor the value and if the debtor defaults, he has a double risk. Adequate protection and interest are not effective to protect creditors alonethe replacement value helps and better reflects the situation the debtors are in. (4) Despite the Supreme Courts finding, valuation remains the most difficult part of the process. g. Computing the Amount the Secured Creditor Must be Paid. i) Once a court determines that there is a secured claim, it has TWO FACTUAL DETERMINATIONS in order to establish CORRECT AMOUNT: (1) the allowed secured claim under 506(a); and (2) the present value of the allowed secured claim under section 1325(a)(5)(B)(ii). (3) The Court must determine a payment schedule that permits the creditor to recover the present value of the claim. ii) Present value means value, as of the effective date of the Plan. A dollar paid a year from now is worth less than a dollar paid now. iii) Because the creditor receives deferred payments over time, the Code gives the creditor the right to receive interest on that amount making it equal to its present value over time. iv) The interest rate that will fix the present value is nowhere in the code and is determined by a formula: v) Till v. SCS Credit Corporation (1) Facts: Till purchased a truck from Instant Auto Finance for $6395 plus $330 fees and taxes paying $300 down payment. He signed a retail installment K that Instant Auto immediately assigned to SCS. The total initial indebtedness was $8285, and SCS retained a purchase money security interest that gave it the right to repossess upon default. Till filed for Ch. 13. At the time of filing, SCS outstanding claim was $4895, but the parties agreed the truck was worth only 4000; therefore, SCSs secured claim was limited to $4000. The proposed plan under Ch. 13 would pay interest on the secured portion of SCS claim at 9.5% per year. Till arrived at this prime plus rate by augmenting national prime rate of 8% to account for risk of nonpayment. The BR court overruled SCS objection (they had proposed 21%) and confirmed the proposed plancram down. (2) Procedure: The district court overruled the bankruptcy court for 21%.The Supreme Court reversed. (3) Issue: Whether the interest rate during the plan is the rate paid under the original K, or whether the BR court sets a rate based on the market rate. (4) Rule: The appropriate interest rate to be applied to installment payments under a Ch. 13 plan is prime plus the national prime rate as adjusted to reflect to the specific risks associated with the debtors. (5) Rule: Ch. 13 expressly authorizes a BR court to modify the rights of any creditor whose claim is secured by an interest in anything other than real property that is the debtors principal residence.1322(B)(2). (6) Rule: The court must hold a hearing at which the debtor and any creditors may present evidence about the appropriate risk adjustment to the prime rate. (7) Rationale: A debtors promise of future payments is worth less than an immediate payment of the same total amount because the creditor cannot use the money right away, inflation may cause the value of the dollar to decline before the debtor pays, and there is always some risk of nonpayment. vi) Cramdown is just one of two processes by which a debtor can reduce an under-secured claim to the value of the collateral. The other is redemption. (1) Same result of payment over time is accomplished under the retention cases of Ch. 7. (2) Retention absolves the Ch. 7 debtor of personal liability because the debt gets discharged. (They can come and get the collateral, but they cannot enforce the deficiency or the debt; it is discharged.) (3) A Ch 13 debtor gets no discharge until the plan has been paid; if he defaults, all the personal liability for a deficiency remains with the debtor. (4) The automatic stay in Ch. 13 lasts until the late dischargeafter the payment plan is completeda defaulting debtor is protected from repossession by the stay while he makes the required payments. A creditor must make a motion to lift the stay. Post Ch 7, a creditor can repossess without going to court. h. Payments on the Home Mortgage i) Often Ch. 13 is filed to save a debtors home. ii) Home mortgages have always been EXEMPTED FROM THE CRAMDOWN RULE. iii) Rule: The only relief in Ch. 13 as to a home mortgage is to cure and maintain that is to catch up on the past due arrearage while making current payments on the mortgage as they come due. 1322(b)(5). iv) Rule: Whenever the value of the home exceeds the mortgage, the mortgagee will nearly always be adequately protected. Cramdown is not an issue. v) Disputes Present two Elements: (1) the difficulties the debtors face in stopping their creditors foreclosure actions, and

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(2) the amount they must pay on their mortgages during the period of the plan in order to satisfy the Code provisions. vi) In re Taddeo (1) Facts: Debtors defaulted on their mortgage three years ago at which time the creditor accelerated the mortgage, declared its balance due immediately, and initiated foreclosure proceedings. The Taddeos filed Ch 13 staying the foreclosure action under the automatic stay and proposing to cure the default and reinstate the mortgage under 1322(b)(5). The creditor rejected the plan to cure the default and applied for relief from the stay in order to foreclose. The creditor contended that once she accelerated her mortgage, the Taddeos had no way to cure the default under the BR code except to pay the full amount as required by state law. (2) Procedure: BR judge held that the debtors could cure the default and reinstate the mortgage and denied the motion to lift the stay, the district court affirmed. We affirm. (3) Issue: Whether a debtor in BR can cure and reinstate in Ch. 13 on a home mortgage once the creditor has accelerated the loan. YES (4) Rule: A default is an event in the debtor-creditor relationship which triggers certain consequences such as acceleration. Curing a default commonly means taking care of the triggering event and returning to pre-default conditions, nullifying the consequences. (5) 1322(b)(5) was intended to permit the cure and de-acceleration of secured long-term residential debt accelerated prior to the filing of a Ch. 13 petition. (6) Rationale: The power to cure must include the power to decelerate loans. While modifying is not allowed, curing a default is not a modification. Modifying reduces payments and extends time; while cure continues the payments. Conditioning this power on its occurring before acceleration will result in races to court. vii) Congress in the 1994 Amendments gave homeowners the right to de-accelerate by statute at any time prior to the foreclosure sale. 1322(c). viii) Section 506 and 1325 permit a strip down of second or subsequent home mortgages that are entirely unsecured. Problem Set 14 i) 14.1. Debtor guaranteed a loan for her brother who skipped town leaving her responsible for the debt. She makes in excess of $52,000 per year and has filed Ch. 13 bankruptcy. Her only asset of significant value is an 18 mos. old computer which is subject to a $4600 PMSI. She testified that it is worth $5,000. Though the creditor will accept that price, it wants the collateral back to re-sell it. The creditor asks for help in repossessing the computer. What can you do? 361, 362(d) We can petition to have the stay lifted asking for adequate protection since we are concerned about the decline of the value of the computer in view of the newer model coming out. If the debtor has equity in the property (here $400) and it is not necessary to a successful payment plan and recovery (There is no indication it is used for income), then the court can lift the stay and allow the repossession. However, it may be hard since the collateral is over-secured and since it appears that the debtor will be able to complete a payment plan. Burden of proof is on the debtor, but the prima facie case must be put forward by the creditor. The only thing the creditor will need to show is cause that the computer will be worthless. ii) 14.2. Debtor was laid off his job for 17 months and incurred medical bills for his younger daughter for over $20,000. In addition, his son just wrecked the car. He has however been rehired for 20 hours per week overtime. He is also prepared to file a Ch. 13 BR. His chief concern is his hunting cabin, which he bought before he was laid off under a $40,000 five-year note. He still owes $39,980 and the creditor claims $12,300 in past due interest and penalties and attys fees provided under the K. Foreclosure proceedings have begun and sale is scheduled for next week. The land will probably not sell for more than $41,000. What can the creditor demand in Ch. 13? The creditor can demand what he is owed or the value of the property whichever is less plus accrued interest as of petition date. However, the interest rate on the payments will be determined by using the prime rate and augmenting it to account for the risk of nonpayment. The creditor cannot incur contractual interest on post-petition amounts owed. Though a home mortgage would be exempt from modification; it is unclear and seems unlikely that this cabin is the debtors residence, so this is not the home mortgage. Under (d)(2) no equity; not needed for an effective restructuring. He is upside down by $11,280. He probably cannot claim that he needs it for a proper restructuring. (b) For causethe cabin could burn down because he has no insurance. They are not entitled to interest, but they are entitled to adequate protection if it is depreciating. They are bifurcated. A creditor is not entitled to maintain his equity cushionmeaning if the collateral is worth $50,000, but they are owed $40,000their plan may just pay the $40,000 within the plan. ???????? iii) 14.3. Debtor filed a Ch. 13 BR and owns a Ford Explorer she bought a year ago. She used the vehicle to travel real estate clients and for personal use. The outstanding balance owed on the vehicle is $30,000 including accumulated interest and penalty payments. Another $250 in interest will accumulate between filing and confirmation of the plan. The BR court has determined 10% as the interest to be charged on vehicle loans under Ch. 13. The car is valued at $28, 400, but would retail at $32,100. In a liquidation sale it would sell for 26,300 and through a private want ad it would sell for $33,300. How much will debtor have to pay for the car in Ch. 13? She will have to pay the retail value, which is 33,300 the amount a willing buyer would pay a willing seller for the vehicle. The price owed cannot be modified since it was purchased less than two years prior to the filing of the BR.

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Rash said it was the replacement valuelook at value from the debtors perspective, which eliminates liquidation. Look at the retail and wholesale and take the midpointmost BR judges. 33,300 is not the price because it is a private seller where the debtor will not likely buy ita cash transaction. Less than 910 days so he has to pay the contract amountTill or prime plus contract rate if he keeps paying direct payment. If the car has some scratches, chipped paint, and a knock in the engine, who will want to point that out? The trustee will raise the issue of the true value of the property and the validity of claims. Also, the debtor may to reduce his payment plan. If you have four values, which value standard would you use? In Rash, look at value from the debtors prospective. Supreme Court has specifically rejected the midpoint value. They said use replacement value. Foot note 6 messes everything up. The debt is $30. If the debtor wants to pay through the plan, interest will be prime plus 3. If she wants to honor contract, interest will be contract rate iv) 14.4. Debtor purchased a Suburban one year prior to filing Ch. 13. He wants to know how much he will owe monthly to keep it. He has been paying $841 per month on the note and is up to date on his payments so far. The balance on the note is $34,000 and it is worth $28,000. How much principal will he have to pay, ignoring interest? $34,000 divided over a three to five year plan. The prime rate is 7.5% and the going rate for a fully secured car loan is 8%. What is the likely interest to be assessed? The court has to account for the time value of money as well as the risk of default. Here the risk of default is high so the court might add as much as 3% to the prime rate making it 10.5% according to the Supreme Court decision. Once he files, when will he have to make his first plan payment and to whom? He will have to make his first plan payment when the plan is confirmed and will have to make it directly to the secured creditor as opposed to the standing trustee since this has not been modified. Can he simply figure out what he owes by looking at a loan table for the current interest rate? No, because this will not include the proper risk he represents or take into account that paying what he owes now and paying what he owes over time are different. v) 14.5. Donnie Rhodes bought a house 7 years ago on a 30 year mortgage. The house is now worth $155,000 and the outstanding mortgage is $182,000. He is required to make monthly payments of $250. He missed six payments in a row. What must his plan provide? His plan must provide for him to cure the amount past due as well as continue the payments at the present contract rate. If this is a rental real property, you cannot cram it down. It must be paid over the five years. There is case law that says you can extend beyond the five years. If they surrender it, there will be a deficiency balance owed. vi) 14.6. Joe and Ethel Gertz fell behind on their house payments and have received a notice of acceleration and foreclosure for today. What do you advise? I would advise that the Gertz take an online debt counseling course and then file for ch. 13 BR hopefully all in that day. Then, they will need to work on decelerating the loan by curing the default and then resuming payments. In TX, foreclosures will take place between 10 and 1p.m. There is no chance for you to work a deal. Run to the Courthouse and file a petition. Filing de-accelerates the acceleration. What should you do? I should ask them to give me a list of all their debts and income and secured property so that we can quickly try and put together a plan. vii) 14.7. A couple has $10,750.42 in unsecured debts. They have missed three payments on their home. You have no doubt that their Ch. 13 would be confirmed. What is your advice? Even though this family could go Ch. 13, I would advise them to go Ch. 7 because they can keep their house and other exempt items under that plan but will receive permanent and immediate discharge from the unsecured debt. If the creditor is going to work with them, I can let them pay it off. If the creditor pulls the rug, then I can convert it to Ch. 13. Class Notes i) Ch. 13 trustee is chiefly a disbursement agent. 1302 ii) 1303 The debtor stays in control of both exempt and non exempt property. iii) 1304 engaged in businessin Ch 7 a business debtor had to close the business downhere business can keep going. iv) Filing of claims post-bankruptcy. If the creditors willing, the creditor can include a claim for post-bankruptcy v) 1306 In Ch 7 post file income not included, in Ch. 13 estate includes income that the debtor earns from services vi) 1307 what triggers a conversion or dismissal. vii) 1308 requirements to file Ch. 13 as far as tax filing. viii) 1321 must file a plan. ix) 1322 divides into two parts A) mandatory parts of plan B) Permissible portions x) 1323 who may modify a plan before confirmationonly a debtor can do that. xi) 1324 tells the timeline to proceed to confirmation20-50 days after filing creditors meeting20-45 days after the creditors meeting must confirm xii) 1325 how to get a plan confirmedhow to treat unsecured and secured creditors xiii) 1326 payments must start 30 days after confirmation, after filing of the plan?????? . xiv) 1327 what happens to the property of the estate when a confirmation takes placeproperty re-vested in the debtor. xv) 1328 what the parameters of discharge are. 523 Action parallelHow much time between filings xvi) 1329 Modification of a plan AFTER confirmationnow trustee, debtor, and unsecured creditors can modify a plan. NOT a secured creditor. xvii) 1330 Revocation of a planparameters for revocation of a plan. More than 180 days go by you cannot modify.

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(1) In Ch. 13 were looking at two different standards: (a) Disposable income the debtor may have to fund the plan. (b) How many non exempt assets that the debtor have. (2) Sequence of Events in A Ch. 13 Case (a) Ch 7 secured creditorsthree optionssurrender, reaffirmation, redemption (b) Ch. 13surrender, direct pay, and Cramdown. (i) Give the collateral back. (ii) Direct PayHonor the terms of the K during Ch. 13maintain the payments and interest rate. This will be binding on the creditordoes not require an agreement. In Ch. 7 Reaffirmation if things went wrong, no discharge; but Ch. 13 if things dont work out, the consequence is not bad. May still change the terms of the plan. (c) Cramdown accomplishes the same thing as redemption, but it will be done over a period of time in installments. (3) From the filing to confirmation, there is a gap. What if the collateral depreciates? Creditor has to get some time of protection. You will pay adequate protection 361 (a) Cash payment (b) Replacement lien to the extent of such stay (c) Equivalent of the creditors interest (d) You pay the amount that the asset is depreciating to the creditor. Supreme Creditor. (e) The debtor must pay adequate protection payments to maintain the status quo. (4) 362 Automatic Stay (a) (a) from perspective of a creditor. (b) (d) party in interest dont have to be a creditor, you can be a party in interest. (i) The court shall grant the secured creditor. leave to lift the stay under one of two conditions 1. Cause E.g. debtor does not care for the car or no insurance; deductible too low OR 2. No equity and not necessary for an effective reorganization. (c) (g) Debtor has the burden of proof on everything except the moving party must prove lack of equity. (i) 95% of all litigation in the BR court centers around 362(d) (5) Co Debtor Stay (a) 1301 Only applies if it is a consumer debt and a Ch. 13 filing. (i) Must be a consumer debt. (ii) Converted to Ch.7, 12, or 11; then there is no stay. (b) (c) What triggers the lifting of the co-debtors stay (i) Given consideration (ii) Plan does not pay the creditor completely (iii) The Creditor will be irreparably harmed by the stay being in place. (6) In re Radden (a) Used to be an adversary proceedingnow it is a motion practice. (b) Try to quickly see if a plan will be doable during a motion for relief from the stay. (c) The real examination comes at confirmation. (7) Deficiencywhat is left over on the debt when the collaterals value does not equal the debt. (8) Cramdown the debt to the value of the collateralthe leftover is unsecured. (9) Associates (a) Foreclosure, replacement, or mid point. (b) Theoretically speaking it is replacement standard. (c) In reality, everybody uses the midpoint between foreclosure and retail. (d) Willing buyer, willing seller will change dependent upon the situation. (e) Two possibilities of cramdown: the creditors accept or object. (f) What or how the value is determined. The Fifth Circuit was leaning on the first sentence and the Supreme Court said you must read them both. (i) The Supreme Court said that it must be from the debtors perspective. (g) This doesnt give guidance because it is a question of fact in which expert witnesses testify. The midpoint is the controlling value. (h) Confirmation the judge determines two things. (i) Value of the Collateral. (ii) Present Value of Money (10) Coming up with the Time Value of Money

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(a) Printing of the briefs on the Supreme Court is 500 to 1000. What??!!! (b) Till Interest must take risk into account. The plurality wants the formula approach. This is a precedential case. (c) +1, 2, or 3 on the market rate. (d) This interest rate is only for the cramdown. (11) Mortgages (a) 1322 and 1325 (b) (a)(1) Shallfuture earnings must be committed to the plan. (2) you must provide for priority claims. (3) in the same class must be treated identical. (4) if you have a domestic support obligation owed to a governmental entity, you can confirm a plan that does not pay this claim at 100% (c) (b)(1) Designate a class of unsecured claims that is different from others, but you may not discriminate against the other class of unsecuredE.g. Borrowed money from my employermy employer is separate and I will pay then 100% but all other unsecured creditors will get .2. I have to keep my job to reorganizejustifies thisno discrimination. (2) I can modify the right of secured claims except for secured creditors who have an interest in real property that is my principal residence. (3) provide for curing or waiving of any defaults (4) pay secured and unsecured claims at the same time during my BR (5) modify the right of a mortgagee if you are trying to catch up on your paymentshowever, you cannot change the term of the mortgage. (6) you may pay post petition claims (7) assume, reject, or assign executory contracts, (8) you can provide for the payment of the plan from either property of the estate or property that is yours and exempt. (9) you can decide when the vesting takes place. (10) non-dischargeable in Ch. 13you may pay it plus interest, but you must pay all the dischargeable unsecured debt first. (d) 1322(c) Until the time of foreclosure you can file a BR and keep your home, and the filing de-accelerates the acceleration. (e) 1322(e) You can modify the right of the mortgagee if the mortgage can be paid in full in less than five years. xviii) 1324 xix) Confirmation must occur not earlier than 20 days or later than 45 days after the date of the meeting of creditors. xx) 1325 The court shall confirm a plan if (1) (2)fees are paid to the trustee (2) (3)Plan is proposed in good faithtest that takes totality of the circumstances into consideration. (3) (4) The Best Interest Testbetter give a dividend to the unsecured than it would have gotten in a Ch. 7 BR. Doesnt have to be betterjust not less than Zero is zero. But if it was a dollar, then we must give a dollar. (4) (5) How secured Creditor must be Treated (a) creditor accepts the plan; the holder retains lien until the earlier of payment under non-BR law or Discharge. (b) Im not entitled to release until discharge. (Release of the property.) (c) If the case is dismissed, the secured creditor has the lien under non-bankruptcy law. (d) It must be paid with interest to address the time value of the money. (e) The periodic payments must be equal for each period. (f) Does not apply to real property????? (g) Payments cannot be smaller than adequate protectionthe amount of depreciation (5) (6)Feasibility test that he can make the plan payments. (6) (7) the petition was filed in good faith (7) (8) Domestic support obligation must be current (8) (9) You have to have filed your tax returns as mandated by 1308 (9) Hanging Paragraphpurchased vehicle within 2 years of petition datePMSIthen it is exempt from Cramdown. It must be for personal use of debtor. (10) Personal property within one yearcannot be crammed down. (He thinks that the book is wrong about it being any propertyhe says it has to be a PMSI.) XI. Chapter 13: Elements of an Acceptable Plan II a. Payments to Unsecured Creditors i) In Chapter 13, a debtor must pay secured creditors payments that satisfy the statutory requirements for present value of the allowed secured claim. ii) All priority claimants under section 507 are entitled to payment in full. 1322(2) iii) The general unsecured creditors have no protection and are pooled together for pro rata treatment. (1) To enhance their claim, unsecured creditors can argue that the debtor should be required to make larger payments under the plan so that they take a pro rata share of a larger pie. (2) Section 1325 provides two provisions for this argument

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(a) Best Interests Test: Requires each creditor, secured or unsecured, to receive at least as much as that creditor would
have received if the debtor had gone into Ch. 7. 1325 (a)(4), (a)(5)(B) (b) Disposable income: All disposable income must be devoted to plan payments during the life of the plan. 1325(b). (c) Good Faith: A plan must be proposed in good faith and not by any means forbidden by law. 1325(a)(3). b. Disposable Income i) Legislature left it to the courts to count income and expenses in order to determine a debtors disposable income. ii) Creditors felt that judges were being too easy on debtors, so the 2005 Amendments delineate a disposable income test. (1) Screening starts with a median-income test. (a) Married debtors who file individually must include the income of their spouses to determine whether the debtors income is above the state median. 1325(b)(4)(A)(ii). (b) Debtors with income below the median filing Chapter 13 are past the threshold test, so they use a modified reasonably necessary test for disposable income. (c) Debtors who have income in excess of the applicable median suffer two adverse consequences: (i) They must pay for five years under Chapter 13, rather than the three-year minimum required of below median debtors. 1325(b)(4). (ii) Because the Chapter 7 Means Test applies here, too, if the debtors would have been barred from Cha. 7 because of surplus of income over expenses, the amount of that surplus is what they are required to pay to unsecured, nonpriority creditors in a Ch. 13 plan. 1325(b)(2)-(3). c. Below Median Debtors i) Below-median debtors are seeking Ch. 13 even though they would have been eligible for Chapter 7 liquidation. ii) To calculate a debtors disposable income, there are two components: income and necessary expenses. This calculation can be unexpectedly complicated. iii) In re Carter (1) Facts: Wife filed individually Ch. 13 BR reporting that her income was $600 and proposing to pay $75 per month for 36 months in her plan after deducting $500 in expenses. One of the unsecured general creditors to whom the wife owed $255,970.27 filed an objection raising the issue of whether the plan provided for all of the Debtors projected disposable income under 1325 and whether it was filed in good faith. (2) Procedure: Objection raised at the confirmation hearing. (3) Issue: Whether a spouse filing individually must report the income of the non-debtor spouse in reporting income. YES. (4) Rule: Upon objection by an unsecured creditor or trustee, a Chapter 13 plan that does not repay the allowed claims of unsecured creditors in full may only be confirmed if it provides for the debtor to commit all of his disposable income to plan payments. 1325(b)(1)(B) (5) Rule: Disposable income is defined as income received by the debtor that is not reasonably necessary for the support of debtor or his dependents. 1325(b)(2)(A) (6) Rule: While the Code does not define reasonable and necessary, case law holds that the standard is directed toward the debtors basic need for support, unrelated to the debtors former status and lifestyle. (7) Rule: To apply provisions to a married debtor who files individually, courts base their calculation of the debtors disposable income on the debtors family budget, including the income and expenses of the non-debtor spouse. (8) Rationale: Consideration of the spouses income is necessary because a portion of that spouses income is likely to be applied to the basic needs of the debtor, potentially increasing the share of the debtors own income that is not reasonably necessary for support. iv) Once income is calculated, there remains the question of what expenses can be deducted as reasonably necessary. v) Payments required to satisfy the secured creditors and the priority creditors are usually deducted from the debtors income, and then the court reviews the debtors proposed expenses to determine if they are reasonable and necessary. vi) IN RE 270 BR 108 (2002): CONTROLLING IN NORTHERN DISTRICT OF TEXAS. vii) In the Matter of Wyant (1) Facts: Debtor filed an amended plan after his ex-wife died, and he no longer had to pay monthly alimony of $1100; however, he also increased his expenses which included feed and other veterinary costs for elderly dogs and horses the debtor kept. The court refused to confirm the plan stating that the expenses for the animals were not reasonable and necessary and reduced them. In addition, the court found that the debtor was trying to offset his increase in income. (2) Procedure: Confirmation Hearing for Amended plan, Counsels Application for Attorneys fees , and Resistance by the Ch. 13 Trustee before BR court. (3) Issue: Whether a discretionary expense is reasonable and necessary. A QUESTION OF FACT FOR THE COURT.

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(4) Rule: The 1984 Amendments reasonably necessary test only allow debtors to deduct expenses that are deemed reasonable and necessary to the court. (5) Rationale: As between the pets and the creditors, the court felt that the creditors should receive payment. d. Above-Median Debtors i) Must determine if these debtors have a surplus of income calculated according to the presumptive-abuse test. 707(b)(2)(A)-(B). ii) Different tests are used for above-median debtors who have a surplus according to the presumptive-abuse test and those who do not. (1) Rule: If the debtors have a surplus of income under the means test, section 1325(b)(3) requires that they pay unsecured nonpriority creditors in an amount equal to that surplus over the 60 months of their plan. (a) Their Chapter 13 Expense Budget is determined at the IRS guidelines level as modified by the BR Code under sections 101(10A) and 707(b)(2)(A)-(B). (b) They are permitted the expense allowance they had in the means test. (c) Must pay the trustee the difference between their income and those allowed expenses. (2) Rule: If the debtors are above the median but do not have a surplus according to the presumptive abuse test, they must pay whatever is required by application of the 1984 disposable income test as elaborated by the case law in each circuit and district. 1325(b)(2) (a) They will pay the trustee the surplus after these expenses have been deducted from their income. (3) Above-median debtors with $75 per month surplus are not required to use the IRS guidelines for expenses but must promise to pay whatever is left from their income after reasonable and necessary expenses to unsecured non-priority creditors over five years. There is an incentive to file Ch.7 because this amount could be considerably more or less than $75 per month. (4) The Ch. 13 Debtor with above-median income and a $125 surplus is limited to the means-test surplus. The secured debts could take up so much that there is only a modest amount left for general unsecured creditors. 1325(b)(3). (5) Section 1325(b)(2) establishes additional deductions for domestic support payments and certain charitable contributions as well as the costs of doing business for those debtors who continue to operate their business. e. Competition Among Creditors i) While the secured creditor wants what it can collect of its claim, the trustee as representative of the general unsecured creditors may press to reduce those payments. ii) 2005 amendments require full payment to under-secured creditors whose security interests were granted in the recent past. (PMSI) iii) 2005 amendments in favoring secured creditors will substantially reduce the opportunities for repayment of unsecured creditors through Chapter 13. f. Family Support, Taxes, and Other Priority Claims in Chapter 13 i) Special set of rules for repaying priority creditors. Entitled to payment in full in Chapter 13. 1322(a)(2). ii) Debtors required to pay section 507(a) priorities must adjust their plans to account for these obligations. g. Priority Repayments in General i) Some debtors pay section 507(a) administrative expenses in their Chapter 13 plans. (1) Some debtors pay the filing fee as a priority repayment. (2) Others pay their attorneys fees, but there is a contradiction as to whether these are administrative expenses that can be paid in the plan. Some jurisdictions say yes that the atty is working creating the estate: others say no that the services of the attorney are pre-petition. ii) Some debtors pay alimony or child support, which are priority and must be paid in full. (1) Trustee takes over the function of collecting child support and distributing payments to the recipients. (2) Frequently done through wage orders so that the money is directly diverted to the trustee. (3) Deadbeat parents have more of an incentive to pay as failure to do so will involve potential dismissal of the Chapter 13 case, which can mean the loss of assets the filing was intended to salvage. iii) Rule: Repayment in full of all priority debts is a requirement for confirmation of the plan, and priority creditors do not have to compete as they do in Ch. 7. iv) Rule: Each priority debt must be paid in full, unless the party waives the right. v) Rule: The debtor must pay secured creditors the full amount to which they are entitled. vi) Rule: If the debtor cannot meet both obligations, the plan cannot be confirmed. E.g. If the debtor does not have enough money to pay his house payment, an allowed secured claim on his car, administrative expenses, child support, and have enough to live on, he cannot file Ch. 13. (1) He may give up some of his property for the secured claims and remain Ch. 13 or file Ch. 7.

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vii) Some debtors have to pay tax claims, which are non-dischargeable.
(1) Ch. 13 offers two advantages: (a) The taxes may be paid over time while the automatic stay that does not lift until the end of the plan period (3 or 5 years) keeps the IRS at bay. (b) Post-petition interest is denied on taxes that are unsecured claims and locks the tax at its value as of the date of the BR filing. 502(b)(2). This may provide the only way that the tax debtor can catch up on his obligation and may be the principal motivation for filing Ch. 13. (c) The debt is unsecured if the debtor files BR before the IRS has filed a lien. If the tax claim exceeds the value of the lien or if the lien secures some taxes but not others, there will be an unsecured tax claim as well. The stay will prevent the IRS from securing a new lien on such taxes. (Assuming that it is not three years) viii) Rule: Priority claims, unlike secured claims, are not paid in present value dollars. Instead, the debtor must pay the nominal amount of the claim without interest. ix) 1322(a) governing the payment of priority debt refers only to full payment, in deferred cash payments, an amount the courts have determined does not include interest. h. Good Faith. i) Issue: Can a debtor confirm a Chapter 13 plan if there will be no disposable income left to pay to the general unsecured creditors? ii) 1978 the best interests test was the only explicit statutory requirement for plan payments to unsecured creditors. iii) However it provided no floor on the amount that debtors would be required to pay. In response to plans that proposed too low payments to general unsecured creditors, some courts developed the good faith test to force a higher level of payment. iv) The new disposable income test (reasonable and necessary test) was implemented in 1984, but courts had to decide whether they still needed to perform a good faith review to toss out a debtor who proposed a low payment plan that survived the disposable income test. Prior to 2005 Amendments, courts divided on this issue. Some said that the totality of circumstances test for good faith could still suggest abuse. v) 2005 amendments retain the totality of the circumstances test only as an alternative where the presumptive abuse doctrine (means test) does not apply. 707(b)(2)(B), (3). vi) In re Leone (1) Facts: Debtors plan proposed to pay their mortgage which was going to be worth more than their house was worth and had also adjusted their car payments. As a result, the unsecured creditors were receiving a minimal amount; however, the court said the debtors could conceivably pay more. (2) Procedure: The court found that the debtors in order to be in good faith should seek alternative housing for themselves and their dependant. (3) Issue: Whether a plan that gives a minimal amount to unsecured creditors can be found to be in violation of the requirement of good faith. YES. (4) Rule: The BR Code requires that a Chapter 13 Plan be proposed in good faith, which is a question of fact for the court. 1325(a)(3) (5) Rule: There is no requirement per se that a Chapter 13 Plan provide for substantial repayment of unsecured creditors and plans are routinely approved where debtors are unable to give a significant amount to unsecured creditors. (6) Rationale: Here the debtors have an ability to make distributions. vii) 2005 Amendments removed secured debt from the calculation of income and expenses because Congress now intends that all secured debt be paid before any consideration of the required payments to unsecured creditors. 1325(b)(1)(2) 707(b) (2)(A)(i), (iii). viii) Section 1322(a)(4) permits a plan to be confirmed without paying all priority debts only if all disposable income has been dedicated to that task, in which case nothing will be left for general unsecured creditors, meaning a zero payment to unsecureds is acceptable. i. Modification and Dismissal of Chapter 13 Plans i) Chapter 13 plans rely on projections of future income and living expenses to extrapolate the amount the debtor can pay. ii) However, there can be interruptions to those projections calling for modification of the plan. (1) Rule: The debtor or creditor may move to have the plan modified or dismissed. 1329(a) (2) The debtor most often seeks the modification because of a lost job or other event that has made payment of the original promised amounts more difficult. (3) The 2005 Amendments permit a modification to permit the debtor to purchase health insurance. 1329(a)(4). iii) Modification is affected by the rule that Chapter 13 plans can in no case be longer than 60 months or five years. 1322(d) (1).

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(1) When a plan is modified, it must still meet Chapter 13 requirements, including the five-year limit. A debtor must find a way to make up for the missed payment despite an income with all disposable income already fully committed. iv) Any increase in income can be claimed by creditors because the debtor has to file annual financial updates if the judge or any party in interest requests them. 521(f)(4) Further, any new income is disposable income. j. NOTES ON CHAPTER i) Those above median just use the B22 form (means test) to calculate their income/expenses/disposable income ii) If above median then 1325b3/means test, if below then 1325b2 iii) Chapter 7 is great if you have a lot of unsecured debt that you want to get rid of, but you lose many of your assets and/or the secured creditor does not want to reaffirm the debt k. Problem Set 15 i) 15.1. You are filing your first Chapter 13 plan and are dealing with three BR judges who have differing views about the requirements for confirmation of a Chapter 13 plantwo are strict and one is lenient. All three permit amendments if the plan is not confirmed. Your first client is a single mother with three children who earns $23,000 per year. She is left with $60 per week after she pays rent, utilities, insurance, food, gas, and $10 each Sunday to her church. Her creditors could get 50% of their claim over three years and 80% over five, but there would be no cushion. This would also mean the termination of piano lessons for one child and prevent orthodontic treatment for another. What kind of plan do you propose for her? Depending on the exemptions in her state, I would suggest that she file Ch. 7 so that she will have more moving room after the discharge. If she must stay Ch. 13, it sounds like she should do the 36 month plan, depending on what her secured debts are and what they would require and whether or not she has priority debts due. There is no mortgage to serve and probably no property. No vehicles to catch up on or tax problems that she wants to keep from incurring penalties and interest. If she is below the median, why not put her in Chapter 7? Piano lessons are probably not reasonably necessary. Orthodontics may be relevant. However, what might be reasonable and necessary to one judge might not be to another. Thats why Congress came up with the means testing formula. I would definitely put her in Chapter 7 because it wipes her debts and she gets to let her children take piano lessons and get their teeth fixed. Does your malpractice insurer have an opinion on what she should do? No. Besides her expense for the piano lessons and possibly the orthodontics, her expenses would meet the reasonable and necessary standard. What might be reasonable and necessary to one judge may not be to anothercreated the means testto keep the judges values out of it. She has money for an emergency and her child can play piano. If you file a Ch7 it stays for 10 years and 13 for 7, but it just says bankruptcy. ii) 15.2. A. You represent a fast food store manager in Florida whose total income with incentive bonuses and income from his accumulated stock is over $150,000. He lives above his means with a mortgage larger than the annual income of Third World nations, three cars on which he still owes a lot, two children in private school. After he pays all of his fixed expenses, he has $30 per week for unsecured creditors in a Chapter 13 plan whom he owes $95,000 of which he will only pay $4680 totaling 3% of the debt. The unsecured creditors, due to his states exemptions and the heavy liens on his assets, would get nothing in Chapter 7. Can you get Todds plan confirmed? Most likely, yes. Under the 2005 amendments, the secured creditors are favored and have always had most protection because of the collateral connected with their debt. It is quite possible for a Ch. 13 plan to leave an unsecured creditor with no payout at all. However, if the totality of circumstances test would somehow apply under a presumptive abuse test, the plan could be denied since Todd lives so far above his means. 1325(b)(3) and (2) takes out child support disability, foster care payment, less amounts not reasonable and necessary to be expended (3) 707 expensesIRS national, local, miscellaneous. He gets to deduct all the expenses. Unless he purchased just prior to BR. What are the weaknesses in your case? The high cost of his living and whether or not he meets the presumptive abuse test. If he does, he could be forced to pay a large amount to unsecured creditors for five years. I would suggest that he sell or return some assets and get himself out of trouble. (1) B. You represent two of the fast food managers creditors a Mercedes dealer with a $35,000 PMSI on one of his cars and the debtors caterer whom the debtor owes $5600 for business receptions Todd gave. What position will you take regarding the plan? I will take the position that the debtor is in a position to pay more to the unsecured creditors if he is forced to cut his expenses. I would probably attack the fact that he has three cars and only needs one and that his children attend private school, both expenses that a court may find not to be reasonable and necessary. In doing this, I cannot hurt my secured creditor client because he has the value of his collateral as protection to which my unsecured general creditor cannot get. There is a clear conflict of interestyou cannot represent both the secured and unsecured creditor in the same case. You can represent two unsecured or two secured creditors, but you must be careful. iii) 15.3. Client works for a construction firm and has an engineering degree and earns over $60,000 per year. He has a live-in girlfriend who shares in the expenses. He carries a $40,000 credit card debt; however, he was doing well at trying to reduce the debt until recently. His dad became ill with lots of medical costs for which he cosigned leaving him owing $60,000 in medical debt in addition to the credit cards, so he is contemplating filing BR. He wants to know his options. What other information do you need to know in order to answer his question? I need to know what his expenses are each month without considering the livein girlfriends income though he must only account for what he owes after she has helped him; she is not a spouse as specifically stated in the code. I also need to know what secured debts, if any he has. It appears that he has very few since he rents his

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housing and drives a car that was given to him. I believe I would suggest Chapter 7 so that he could get the discharge and have the fresh start. CMI includes income from all sources, so if she contributes it will count. If she doesnt, then it is not part of the income. In a Chapter 13 the best interests test is a floorthe same they would get in a Ch.7only if you have an asset that is non-exemptall exempt, then there is nothing to give. Best interestswould there have been an unsecured creditor distribution what amountthen the Ch 13 must give at least that much. What if means test says $8000? It is trumped by the best interest floor that says $10,000. His income is probably above the median income. Any money she contributes will count toward his income. In a chapter 13 the best interest test is a floor, because it captures only non-exempt assets. The means test is the determinative factor. If the means test gives you a higher number, go with it. If the means test is lower, go with the best interest test. iv) 15.4. Trauma center nurse has a small son and is carrying too much consumer debt. She incurred $60,000 of medical bills after an accident. Last year she made $33,000, which would be about $400 per month in disposable income, but with overtime she made $45,152. However, she says the overtime is tiring her out, and she wants to spend more time with her son. What do you list for her disposable income in her Chapter 13 plan? Current monthly income is calculated as the average over the last 6 months, so the larger amount will be taken. (1) Bad answer? $400 because the Chapter 13 plan is based on future income, and it appears that she will not be continuing to perform overtime. We need to know what state she lives in to know if she is above median or below median. CMI income from all sourcesgross whether taxable or not. Stop working overtime and come back in six months. v) 15.5. Husband wants to file, but his unemployed wife does not. Their joint income is $45,000. He has about $425 that would be distributable to his creditors. He is reluctant to pay anything and wants to add expenses and finally claims he wants to make a donation to his church of the full $425 a month. He has not made regular contributions in the past. Can he confirm a plan that pays nothing to his unsecured creditors? No, he cannot in this situation. He cant be confirmed because the way that the question is worded he has also ousted any secured creditors with this plan in which case he cannot file Chapter 13. While the church offering can be an allowed expense, it will not be in good faith here as he really is trying to defraud all his creditors. But I am not sure how the court would know. Id advise him to make peace with the fact that he needs to pay his debts if at all possible and tell him that God expects the same. An above-median income cannot make charitable contributions because it is not reasonable and necessary. An above median income person cannot make charitable contributions unless it is reasonable and necessary. If he is below the median, the charitable contribution cannot exceed 15% of his income (or more if your past history has given more). 707b1: continues to make means he must have been making the payment in the past. You could argue that miscellaneous category, if your job depends on you making the contributions. vi) 15.6. You represented a client last year in her Chapter 13 BR who was a widowed unemployed middle aged woman whose debts equaled $120,000. She asked for your help in protecting her assets from her late husbands aggressive creditors. She went Ch 13 and insisted on 25% payment of her unsecured debt, which you thought was too high because she would have nothing left over, but she prevailed. She comes in today and instead of the clerk job she had at a retail store, she has been selling commercial real estate for four months after receiving her license. She just received a call from a well-known real estate developer who wants her to head up his new project and will make up to $50,000. You are delighted for her, but do you have any free advice? She has just increased her disposable income to gargantuan amounts and will have to pay it to her unsecured creditors if they discover through her financial updates, if one is requested that she is now making that kind of money. She will not be released until the five years are up. I would strongly suggest that she apply for a modification so that maybe she can control the amount to which the creditors will have access. Schedule I says that if your income is going to change by 10% or more, she must disclose. It will be able to pass by because of the volume of cases that all the parties in interest have time to check. You always have the right to update her expenseswhich will be higher. In a BR it is the burden of the creditors to protect their own rights. She should in no case ask for the modification herself. Schedule I says if your income will change within 10%, you must disclose to the court. If she amends Schedule I and files, the creditors still may not find out. Even so, if they do start coming after you, you can amend your expenses as well. Better to react. The fifth circuit has said it is the creditors job to pay attention and discover these things to request modifications. Class Notes i) Three tests for confirmation: (1) Best interestthe unsecured creditor will get as much as in Ch. 7. (2) ?Feasibility Test (3) ? ii) Disposable Income (1) 1325(b)(2)means current monthly income received by the debtorprojected or future disposable income. How do you reconcile the simultaneous looking back and forwardNorthern DistrictCMIdetermines the pool of the unsecured creditors. (a) Use the CMIlooking back six monthsuse IRS standardssecured debtspriority debts= CMI. IRS local, miscellaneous, national, secured/60 months, arrearages//60 months, Priority/60 months.

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(b) Do this like you did in Ch.7but look to schedule Iincome the debtor is currently making based on the average. (c) Projected disposable income is found by looking at Schedule I. Deduct retirement money, loan repayments on retirement as an expense found. iii) Above Median and Below Median Debtors (1) The book is wrong. Schedule I is for above median income people. For above median debtors, you use the actual income. (2) Below median income debtors have the courts split. (a) Some say that you look at their actual income. (b) Some still deduct the IRS standards because of its uniformity and certainty. But dont look at CMI but look only at Schedule I. iv) In re Carter (majority opinionspouses income counts) (1) Northern District278 BR 108the Code has plain meaning look at debtors disposable income We will look at that; we will look at the spouses income if we feel the debtors abusing the system. Cant include spouses income unless that spouse is directly contributing to an expense of the debtor for the purposes of the abuse test. v) In re Reynet?? (1) BR court had a lot of discretion to determine what is reasonable and necessary. (2) Now 707 determines what is reasonable and necessaryIRS standards. vi) Above Median Income people who dont pass the test do not have to be in BR 5 yearscontradicts the book. Though this is majority rulehowever, minority rule says this is not a time limit. vii) 1322(a)(2) says priority claims must be paid in fullTHIS IS NOT TRUEthey just must be provided for, not necessarily paid in full. Put it in the planthats all it takes. However, if it is non-dischargeable, you must pay it. Might as well; they can get it after the BR. viii) In re Murphy: debtor did not have a job. The money just has to be coming in regularly. ix) In re Yarn? I dont want you to live in this houseno good faith60 month. You could have paid more of your unsecured creditors. Secured debt is allowed whether it is reasonable or not in the new code. XII.Chapter 13: Threshold Eligibility for Chapter 13 a. Section 109(e) An individual with regular income that owes, on the date of the filing of petition, non-contingent, liquidated unsecured debts of less than $307,675, and non-contingent, liquidated secured debts of less than $922,975, or an individual with regular income and such individuals spouse, . . . that owe, on the date of filing, [the specified amounts, which are the same.] b. Section 109(e) limits access to Chapter 13 to natural persons with limited debts and regular income. c. Sometimes a creditor will challenge a Chapter 13 filing when they would be better off in another chapter. d. Generally courts are liberal and want debtors who want to to try for Chapter 13. e. In re Murphy i) Facts: Debtor had lived with boyfriend for 11 years raising his twin girls and caring for his elderly mother. Initially debtor had worked for the gentleman, but had been in the home for the last two to three years. The boyfriend monthly deposited $800 into the debtors account and took care of all the household expenses. Creditor took a judgment against the debtor attaching her vehicle in which she owed the holder a large amount and also had a $4000 exemption. The judgment creditor could only receive what was left over from there since the debtor filed to avoid the lien to the extent of the exemption and have the car returned. ii) Procedure: Creditor argued that debtor was not eligible for Chapter 13 since she had no regular income. iii) Issue: Whether the Chapter 13 eligibility requirement means that debtors who file under that chapter must have formal employment. NO, THE STATUTE IS WRITTEN BROADLY iv) Rule: 101(30) The term individual with regular income means individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13. . . other than a stockbroker or a commodity brokertwo types that cannot file a Chapter 13. v) Rationale: 101(30) defines individual with regular income by reference to stability and regularity suggesting that the existence of regular income is predominately a fact question answered by examining the flow of money available to the debtor and does not specifically exclude any source of funding from the regular income calculus. Because of a senate report, some courts have narrowed the definition of income by requiring that the debtor have a legal right to funding or the source have a legal duty to make the payments. But this court found that problematic in that it was an at will employment state, thereby making employment less than a legal right to future income. f. Identifying Types of Claims i) The second eligibility requirement for Chapter 13 under section 109(e): that the debtor have non-contingent, liquidated debts under the statutory maximums. ii) In re Huelbig

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(1) Facts: Allstate Insurance brought suit against the debtor who owned an auto body repair shop that did business with the insurance company for filing fraudulent claims. The debtor pled guilty to the criminal charges associated with the actions and was fined restitution of $2480 and given a 10 year suspended sentence and home confinement. On the date of the plea, the Huelbigs filed Chapter 13 and Allstate objected. In a civil complaint, Allstate won a $330,505 judgment against the debtor. (2) Procedure: Allstate objected to the Chapter 13 filing claiming that the unsecured debt exceeded the prescribed limits. The debtors argued that Allstates claim was unliquidated, though it was non-contingent. (3) Issue: Whether disputes over whether the debtor is liable for the debt should be included in the determination of whether they are contingent or liquidated. NO (4) Rule: A claim is defined as right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. (5) Rule: If all events giving rise to liability occurred prior to the filing of the bankruptcy petition, the debt is not contingent. (6) Rule: A claim is liquidated if it is subject to ready determination and precision in computation of the amount due. (7) Standard: The key factor in distinguishing liquidated from unliquidated claims is not the extent of the dispute nor the amount of evidence required to establish the claim, but whether the process for determining the claim is fixed, certain, or otherwise determined by a specific standard. iii) Examples of contingent and liquidated claims: (1) A bet is a contingent claim if the bet is made prior to an event and the outcome of the event is not certain. Until it is, both betters have a contingent claim against one another. Only if legally enforceable (2) A negotiable promissory note, such as when a mother co-signs a loan for her daughter. The note will only be paid by the mother if the daughter defaults; her liability is therefore contingent. (3) Thirty day warranty obligation is a contingent obligation that only kicks in if something happens in the thirty days. (4) Amount of damage to a plaintiff that has not been determined is unliquidated. (5) Future prices for a sale of goods is unliquidated until the price is set. iv) The only debts that count toward the eligibility cap are those that are both non-contingent and unliquidated. v) Section 1129(a)(15) requires a Chapter 13 disposable income test for a natural person who is filing Chapter 11. (1) In Ch. 11, all property remains with the debtor but belongs to the estate and the debtor receives an allowance to live on 1115; 1306(a) (2) Ch. 11 is always going to provide five years of disposable income regardless of debtors above or below median income. Problem Set 16 i) 16.1. Harold Hunt makes $40,000 per fire he fights as an oil well firefighter. Some years he fights seven to eight fires, and some years, he fights none. Though he is current on his bills, he comes to us because of a judgment that has been entered against him. He hit a plumber in the head who was calling his mother vile names. Harold is afraid the plumber will attach his non-exempt house and other property. The judgment is $360,000. What do you advise him? Harold is most likely eligible to file Chapter 13 as his income is regular to the extent that if a fire comes, he will be paid and presumably has money left over from the fat years for the lean ones. On the other hand, it could be argued that his income is not regular enough. At any rate, if he can file Ch. 13, he will not have the opportunity to avoid the lien because 1328(a)(4) states that discharge will not be allowed for any debt for restitution, or damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual. Therefore, he will have to pay the judgment regardless of filing. What if he is appealing the case? There is no argument as to contingency or liquidation, even if he appealsit has already been adjudicated. He is stuck with it in the BR court. 109(e) unsecured debts less $307,675 and secured debts less than $922,975 limit. How can we put him in Chapter 13. He is over the debt limit. He can only qualify if he pays enough to come within the limitations under $3K. Advantages: he can pay it out over five years, he can not be hassled during the stay. Unsecured creditors without discharge will accrue the interest and get it after the plan period even if the entire debt is paid. ii) 16.2. Lawyer owes $120,000 in unsecured debt and $250,000 for her home mortgage; she earns $100,000 per year. She is concerned because she guaranteed the building housing her old law firm and her former partner is having problems making payments. The building mortgage is $775,000, but it is only worth $600,000and is rumored to go up to $900,000 when the area is further developed. What is your advice? Myrtle is an eligible Chapter 13 debtor because she has a regular income and is within the statutory limits of debt to do so without the building. However, if the buildings debt is added to her secured debt, she will owe $1,025,000, well over the $922,975 limit. My advice is that she find the creditor and catch up the default of her own. partner. The firm owns the building and is the one that owes the mortgage. The old firm has transferred it to the new firm which does not automatically discharge her from liability. Her debt is unsecured. This is not a secured debt so it will not add to that. She will however blow the unsecured debt limit and is ineligible. The guaranty of the $775k keeps her from qualifying automatically.

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iii) 16.3. Nino started a small business that absorbed $800,000 and was not successful so that he has given up on it. He is looking for
a job at a larger company but has been unsuccessful as the market is in a slump. He has some money in savings and thinks he will get something soon, but the creditors are pursuing him and he needs help to avoid foreclosure and seizure of his automobile. What do you advise? I would advise Nino to file Chapter 7 because he does not have a regular income for Chapter 13, plus he may well exceed the debt limits which at this time seem unliquidated and undetermined. He will have to rely on appropriate exemptions to avoid losing his home and his car. If he has non-dischargeable debts, he will have to pay them. If he is liable on the $800,000; it automatically disqualifies him for Ch. 13 and automatically qualifies him for Chapter 7 which allows him to qualify because it is primarily business debt. . iv) 16.4. Julio founded his own business and due to its moderate success incurred $400,000 of unsecured debt for which he has put up $200,000 in collateral. He is making $65,000 per year from the business but expects its demise in three years unless he gets a new idea. His only personal debt is a $500,000 mortgage on a home worth $550,000. What are his alternatives under various Chapters of the BR Code? This debtor could file Chapter 7 and receive an immediate discharge and keep any exempted property under relevant law. This would eliminate his debt and give him an immediate fresh start, but it would also foreclose his ability to continue his business. He could reaffirm any debt he wants to keep before the discharge however. Otherwise, he may want to file Chapter 13 because the reorganization would ensure that all the property stayed in his hands. However, he is unsure of whether or not he will have income for the next five years, so his plan would need to fit within the three year limitation, since he projects that his business will last that long at least. On the other hand, if he filed Chapter 11, he would have to finance a plan for 5 years in which his Chapter 13 disposable income would go to unsecured creditors. As to Chapter 11, ignoring the other requirements for confirmation of a Chapter 11 plan, is section 1129(a)(15) a problem? His disposable income will be determined for over the next five years, which means that if indeed he has no income after three years, his plan will fail and the BR case will be dismissed. They will have to look to income and expenses filed under schedule I and it would be necessary and reasonable. Creditors will get to vote here. Ch. 13 is easier to go through. Under chapter 11, ideas and patents which generate income will become part of the estate. The problem is he must give his disposable income. Chapter 13 is much easier to go through than C11. In C11 you have actual income and expenses as opposed to number to plug in. Here the judge will have discretion to try and control your expenses more tightly. Balancing it all out, what should you recommend to him? I think his best bet would be filing Chapter 7 and reaffirming debts for assets he needed to keep to continue operating his business. I believe that he may be able to avoid the non-purchase money non possessory security interests involved with the $400,000 debt. v) 101(3): The term assisted person means a person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $150k. 101(12A): The term debt relief agency is anyone who provides assistance to an assisted person (with some obscure exceptions). h. Class Notes i) Under Chapter 13, second mortgages and below can be modified on residences because they are unsecured. Unless, there is enough equity to cause second and subsequent liens to survive. ii) Above Median and Below Median Chapter 13 (1) Below Medianold law appliesincomeactual expensesdifference is disposable income. (2) Above MedianCMIexpenses in 707(b)(2)(A) and (B)disposable income (3) Case law says look at incomeschedule I707 (b)(2)A and Bprojected disposable incomes (a) Below Medianwe still use 707 because it saves time and it is certain. (b) However, if looking at these expenses would make you infeasibleyour income is so low, you really need to use actual expenses to be okay for Chapter 13, so we will look at Schedule J actual expenses. If you are positive, we will use this. Schedule J is subject to reasonable and necessary. (c) However, the 707 expenses are not because it is already figured into that. XIII. Chapter 13: Chapter 12 for Family Farmers and Fishermen, The Consumer Bankruptcy System a. Chapter 12 for Family Farmers and Fisherman i) Early 1980s economic developments caused farmers to have to enter bankruptcy. ii) Those who wanted to put their farms on payment plans were straddled between Chapter 11 and Chapter 13. (1) They were not eligible for Chapter 13 because they had too much debt in the form of mortgages on their farms and equipment. (2) Chapter 11 was more appropriate for businesses with more regular cash flow and a large degree of creditor control. (3) Created Chapter 12 which was modeled on Chapter 13. iii) Chapter 12 can be defined by its differences from Chapter 13: (1) A debtor can be eligible for Chapter 12 with far higher debts than for Chapter 13. Chapter 12 can total over $3 million 101(18)(A); 109(f)

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(2) Only family farmers are eligible for Chapter 12, a term defined by percentages of incomer or debt related to farming. However, a partnership or corporation can be a Chapter 12 debtor. Farmer is defined in 101(20). Farmers creditors cannot force an involuntary bankruptcy. (3) The family farmer must have a regular income to qualify for Chapter 12, but it may be a regular annual income. 101(19), 109(f) (4) There is a major change in the standard for adequate protection in section 362 stay-lifting proceedings. The 361 definition of adequate protection does not apply in Chapter 12. (a) Section 1205 sets forth modified standards for farmers1205(b)(3) makes payment of a reasonable and customary rent sufficient for adequate protection regardless of any threatened decline in the value of the mortgaged land. (5) A farmer can modify a residential mortgage along with all other secured debt. (6) It is possible for the family farmer to address unsecured debts in the usual 3-5 year plan while modifying payments on secured debt by stretching them out over many years. 1222(b)(2), (9); 1222(c) (7) Debtor must devote all disposable income to the plan during the 3-5 year plan, but disposable income is determined after deducting the business expenses. 1225(b)(1), (b)(2)(B) (8) The Chapter 12 discharge is narrower and an individual debtor remains liable on the same debts made non-dischargeable in Chapter 7 by the provisions of 523(a). (9) 2005 Amendments extended Chapter 12 eligibility to family fisherman with the debt limit set at $1.5 million. 101(19A(19B). b. THE CONSUMER BANKRUPTCY SYSTEM i) Debates over BR oscillate in the tension between the traditional idea of the fresh start and a pervasive fear of abuse. ii) Growth of modern consumer credit practices has occasioned a great increase in the number of wage earners and small proprietors who file BR. iii) The debt incurrence state engages some who are concerned with debtors who will irresponsibly incur debts while others decry irresponsible granting of credit by financial companies. iv) Theories (1) All sides support some version of the present system with certain adjustments. (2) The cost of credit may be greater as creditors count the possibility of non payment. (3) Some argue that the United States has more need for consumer BR laws than other countries where universal medical care, subsidized housing, and generous unemployment benefits provide greater protection against the inevitable risks of a freemarket economy. v) Policy Debates (1) Although business BRs have increased, there remains a strong sense that business cases do not implicate moral and social issues found in personal BR. (2) Major Dispute: Do BR filings result primarily from irresponsibility or from misfortune? (3) Some argue credit irresponsibility: debtors who incur bills or creditors who extend credit. (4) Studies show that BR has gone up in relation to the ease with which high risk debtors are extended credit. (5) Exorbitant interest rates on credit cards make it hard for a debtor who has fallen behind in any way to catch up. (6) Some argue that BR has lost its stigma (7) Laws have been enacted to curb the advertising of BR as a remedy, especially without noting that that is the relief being offered. vi) The Evolution of Consumer BR Law (1) The fresh start was the dominant objective of the BR Act of 1898. (2) Fresh start policy remained dominant in 1978 Act, but added a greater push to consumer payouts. Encouraged debtors to try and pay. Offered a set of incentives for filing Chapter 13 including an opportunity to save ones home and a much broader discharge. (3) By 1984, the credit industry blamed the increase in BR filings on the 1978 Act and pressed for pro creditor remedies. Blocked access to Ch. 7 for abuse, presumed fraud for debts incurred shortly before filing BR, reaffirmation provision was written to make such agreements enforceable, and added that all disposable income must be paid for at least three years. (4) In 1994, legislation created the National BR Review Commission with nine commissioners and a law professor advisor which announced proposals in October 1997 focusing mainly on repeat filings and varying state exemptions from exorbitant to stingy. The proposal was scrapped and ignored explaining the bitterness of the textbook author (5) The 2005 Amendments were passedprompted by a report saying that the majority of debtors could in fact pay their debts the legislation introduced the means test for entering Chapter 7. A substantial preference for domestic support was added. Governed by the idea that a large majority of debtors abuse the system. vii) A Comparative Look

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(1) Other countries besides the United States traditionally have a more strict BR provision not giving discharge until after the debtor has paid some of the debt over a number of years. However, most of these systems are moving toward discharge earlier. viii) The Consumer Bankruptcy System Before and After the 2005 Amendments (1) Did not make fundamental structural changes. ix) Abuses: (1) Repeatedly filing BR cases to use the automatic stay to block eviction by landlords even though the debtors had no intention of going through with the BR. (2) New provisions blocking use of the stay through serial filings of either Chapter 7 or Chapter 13 will reduce this abuse. 365(c) (3) (3) Chapter 20 cases in which debtors filed Ch 7 to dispense with unsecured debt that put them over the Chapter 13 limit and then filed Chapter 13 to modify payments for secured debt. (4) Made impossible by section 1328(f) which denies Chapter 13 discharge for a debtor who has gotten a Chapter 7 discharge within the prior four years. x) Recoveries for Creditors (1) 2005 Amendments intended to steer debtors to Chapter 13 resulting in more recovery for creditors. (2) Chapter 7 and Chapter 13 do not represent no payment v. payment. (3) Unsecured creditors may actually do worse in BR after the 2005 Amendments because of the new Chapter 13 rules requiring many secured debts to be paid in full, regardless of the value of the collateral, leaving less for unsecured creditors. (4) Unsecured creditors may find solace in debt counseling agencies that encourage debtors to pay off debts instead of filing and an increase of reaffirmations. Also the presumption of fraud for eve-of-BR transactions may provide more occasion for plausible claims of objection to discharge. xi) Domestic Support (1) In order to file Chapter 13, debtors obligations must be current. (2) Such obligations are top priority in Chapter 7, but this may not translate to payment due to the fact that money may not be available. xii) Bankruptcy Rates (1) The 2005 Amendments may lower the number of BRs through cost and delay. (2) Require vastly more paperwork, plus debt counseling before filing and post filing as a condition of discharge. (3) Various requirements imposed on consumer BR lawyers require additional work and increase their exposure to liability for malpractice or for sanctions, likely increasing their fees. (4) Increased delays may mean that debtors lose their property before filing and just decide not to. (5) The automatic stay has been diluted such that some debtors may lose property shortly after the filing and accept dismissal for the same reasons making it difficult for them to file again for another year. (6) Requires various disclosures on advertising making it more expensive. xiii) Chapter Choice (1) Most debtors will retain a completely free choice, at least in theory. xiv) Lawyers (1) Debtors lawyer has an overwhelming influence over the decisions of most clients to file or not and which chapter to choose. So the 2005 Amendments impose substantial responsibilities and liabilities on consumer BR lawyers 526-528 (2) Must identify themselves in any advertisement as a debt relief agencydemeans the attorneys but insures that shady lawyers can no longer hide that they are offering BR. (3) Must file man forms and reports on the pain of sanctions for any mistake including professional sanctions, court fines, and damage suits by the U.S. Trustee or the client. (4) Failing to confirm the accuracy of debtors schedules are correctly assessing the value of assets. (5) May cause lawyers to exit the practice, raise their fees, and may change to schedule preparers. xv) In re San Miguel (1) Facts: Lawyer put three of his clients on Chapter 13 plans for the duration of 16 months so that they could pay his fee through a plan as opposed to upfront as in most Chapter 7 plans. (2) Issue: Whether a blatant plan to not pay creditors is an indicator of bad faith causing the denial of a confirmation plan. YES. (3) Holding: Chapter 13 plans are to promote the purpose of repayment of creditors. (4) Lawyers are forbidden to suggest that the debtors borrow money to pay attys fees. xvi) Local Legal Culture determines how the law will work from district to district, not the rules alone. xvii) Conclusion (1) The BR system in America is the most pro-debtor in the world.

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XIV.

a.

b. c.

(2) High risk credit granting insures that the market for BR will continue to grow. (3) The creditors keep granting such high risk loans because they get 29% interest and an annual fee of $50 that is very lucrative. Problem Set 17 i) 17.1. You are developing a new consumer BR practice at your firm and the founding partner has heard that many debtors are having to be turned away because they cannot afford to pay the initial $850 fee to file Chapter 7. He wants to know if there is something to be done to help these people. According to 330 our fees must be reasonable for the time that we are spending on the case and the expertise that we offer which indicates that we can lower the fee if we so desire or even construct our own payment plan. You do not get paid by being nice and if the discharge occurs, attorneys fees will be discharged. ii) 17.2. You make lists of the reports that must be filed and the possible sanctions. What is on your list? Schedules that must be filed and my signing to their authenticity or else being liable also the disclosures that I must make to debtors and my duties on any reaffirmation agreements. 521(a) schedules527 disclosurestriggered by individuals. You must give them a written contract. 528(a)(1) Credit counseling 109(h) and 5???after Chapter 7 they must go 727(a)(11); 1328(g) proper notice to creditors 342; 9011 says that you did diligent search to say numbers are correct. Debtor must provide the wrong information 707(b)(2)(C) presumption of abusetax returns have to be provided. Child support and domestic obligation must be update and falling behind prevents discharge. File financial statements 541What rules of thumb will guide you in advising clients concerning choice of chapter? We will be careful to get the client the most appropriate relief while taking care to insure that the filing will be in good faith. iii) 17.3. You put together a memo to the management committee explaining the need to advertise. What reasons will you give? There is a very lucrative business available as consumer credit practices are increasing the number of filings for wage earners. What will you say needs to appear in newspaper ads? That we are a debt relief agency and that the remedy we are offering is BR and what the consumers responsibility will be in the BR to a certain extent. 528, 526, 527 We help people file BR under the consumer code. iv) 17.4. Debtor who gets $275,000 per year from a spendthrift trust was beating a woman in the park and apprehended. The victim survived but is permanently disabled. The debtor has unsecured debts totaling $4,000 and about $10,000 of non exempt personal property. The family will give you a $100,000 retainer, what will you do? I will take the retainer and advise him that he will not be able to avoid any judgment the victim gets against him since it involves an intentional and malicious attack. I would also advise him that his creditors will have access to his income from the spendthrift trust and that Ch. 13 is probably the best filing since it will let him pay out the millions he will owe to the victim when she wins her civil suit. If the family asks me how they can avoid letting creditors have access to his pay, I will tell them that they can have their money back and should find another lawyer. I will also give the free advice that the debtor probably needs mental assistance. v) 17.5. T.V. producer wants you to discuss the purposes of BR as it exists today. What will you put in your notes? That the purpose is to give debtors a fresh start while curtailing abuses by both debtors and creditors in the consumer credit picture. I will say that abuse can happen pre-BR and post BR and amendments try to address both. vi) 17.6. Congresswoman wants to know one important factual question that could be answered by empirical research that she could push through to improve the 2005 Amendments. I think she should address how the creditors are contributing to the increase of consumer BRs and how their activities can be curtailed to mirror the greater credit responsibility being put on debtors and their attorneys in the amendments. Chapter 7 Liquidation : Introduction, Business Liquidations, Initiation, Involuntary Bankruptcy 303 Involuntary Cases. (a) An involuntary case can only be commenced in Chapters 7 and 11 and only against a person, but not a farmer, family farmer, or a corporation that is not moneyed, business, or commercial corporation. (b)Commenced by filing the petition with the BR court under chapter 7 or 11. . . (1) by three or more entities who are holders of a claim against the debtor that is noncontingent or either the subject of a bona fide dispute over liability or amount, an indenture trustee representing the holder of a claim if the claims aggregate at least $12,300 more than the value of any lien on property of the debtor securing such claims held by the holders; (2) if there are less than 12 holders of claims [the petition can be filed] by one or more of them that hold in the aggregate at least $12,300 of claims, excluding employer or insider of such person and any transferee of a voidable transfer; (3)if the person is a partnership. . . (A) by fewer than all of the general partners in the partnership; or (B) if relief has been ordered with respect to all of the general partners, the case may be commenced by a general partner, his trustee, or a holder of a claim against the partnership; (4) by a foreign representative of the estate in a foreign proceeding concerning the debtor. (c) After the filing of the petition but before the case is dismissed and relief is ordered, an unsecured creditor with a non-contingent claim may join the proceeding with the same effect as if it had commenced the action. (d) The debtor or general partner of a debtor partnership who did not join in the petition may file an answer. (e) After notice and a hearing, and for cause, the BR court may require the petitioners under this section to file a bond to indemnify the debtor for amounts courts may later allow under subsection (i) of this section.

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d. (f) Notwithstanding section 363 (use sale and lease of property) and unless the court orders otherwise, until relief is ordered in the
case, any business of the debtor may continue to operate, and the debtor may continue to use, acquire, or dispose of property as if an involuntary case has not been commenced. e. (g) Any time after the commencement of an involuntary case under Chapter 7 and before the order for relief in the case, at the request of a party in interest, after notice to the debtor and a hearing, in order to preserve the property of the estate and prevent loss, the court can order the U.S. Trustee to appoint an interim trustee to take possession of the property and to operate any business of the debtor. Before relief in the case is ordered, the debtor may regain possession of property if he files the bond that the court requires, conditioned upon the debtors promise to return such property to the trustee when relief is ordered. f. (h) if the petition is not timely controverted, the court will order relief against the debtor in an involuntary case under the relevant chapter. Otherwise, after trial, the court shall only order relief against the debtor in an involuntary case only if. .. (1) the debtor is not paying his debts as they become due unless they are the subject of a bona fide dispute as to liability or amount; OR (2) within 120 days BEFORE the filing of the petition, a custodian was appointed to take possession. (The custodian cannot be a trustee, receiver, or agent appointed or authorized to take charge of less than all of the debtors property.) g. (i) If the court dismisses the petition other than on the request of the debtors and creditors, and the debtor does not waive the right to judgment, the court may grant judgment. . . (1) against the petitioners and in favor of the debtor for . . . (A) costs; or (B) reasonable attorneys fees; or (2) against any petitioner that filed the petition in bad faith for . . . (A) proximately caused damages; OR (B) punitive damages. h. (j) A case may be dismissed under this chapter only after notice to all creditors and a hearing(1) on the motion of a petitioner; (2) on consent of all petitioners and the debtor; or (3) for want of prosecution. i. (l) (1)(A) If the petition is false or contains any materially false, fictitious, or fraudulent statement; (B) the debtor is an individual; and (C) the court dismisses the petition, the debtor can motion for the court to seal all the records relating to the petition and all references to the petition. i) (2) If the case is dismissed and the debtor is an individual, the court may enter an order prohibiting all consumer reporting agencies from making a report that contains any information relating to the petition. ii) (3) When the statute of limitations expires, the debtor can motion for the court to expunge any records relating to the petition and for good cause the court may do so. j. Chapter 7 LiquidationIntroduction i) Businesses have the same choice between sellout (liquidation) or payout (reorganization) as consumers do. ii) Considerations are different in the business context for both creditors and debtors. (1) While all consumer BRs involve natural persons, most business filings have businesses as the debtors. (2) Business BRs involve elaborate financial maneuvers, litigation, and custom lawyering. (3) Rule: One fundamental distinction between a corporate liquidation and a personal liquidation is that there is no discharge for a Chapter 7 debtor that is not an individual. 727(a) (a) The business will quietly expire instead of being freed from debt. (4) Rule: There are no exemptions for corporate debtors; all property is available for repaying the creditors. (a) The debtor in a typical Chapter 7 liquidation of a business has no interest in the outcome of the case; this is the stage at which the debtor has given up. (5) Though the prototypical debtor in this context is a corporation, many business BRs are filed by individuals. (6) In many cases there are both consumer and business assets and consumer and business debtors. Some will be consumer cases with a business caveat, and some will be business cases with a consumer twist. k. Business Liquidations i) Reorganization BR under Chapter 11 is the central focus of modern business BR law and practice. Thus, Ch. 7 liquidation is performed within Chapter 11 often. ii) Chapter 7 is the original creature because it reflects the most basic purposes and devices of BR as a legal response to the circumstance of general default. iii) Chapter 7 is the end game, the place where an unsuccessful reorganization goes to die. iv) All chapter 11 negotiations are held in the shadow of Chapter 7 as the debtor has an absolute right to convert the case to Chapter 7. 1112(a) v) Rule: Creditors can also covert a Ch. 11 to a Ch. 7 on a proper showing. 1112(b) vi) Rule: Conversion to chapter 7 is required if the creditors do not approve a plan by the majorities specified in section 1126(c). vii) Consequently, the substance of negotiations depend on what would happen to all parties in Chapter 7. viii) Parties must always work through the likely outcome in a liquidation for each of them and then work backward from there to determine a reasonable settlement position in Chapter 11.

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ix) A non-bankruptcy workout takes place in the shadow of Chapter 11what happens to parties in that chapter. x) Must do a liquidation analysis. xi) Chapter 7 is often a much better place to liquidate a business than state law procedures: (1) The automatic stay in Chapter 7 brings everything to a halt and ensures an orderly sale of assets as opposed to the race and grab of state proceedings. (2) Permits a whole group of assets to be sold together instead of piecemeal where they have less value: E.g. Restaurant furniture, appliances, and the building it is housed in. (3) BR does not have the rigid timetables and procedures that are characteristic of state execution laws. (auctions) The TIB can negotiate with buyers and, with court approval, pick the best method of disposition. (4) The BR court imposes some supervision on the debtor with the creation of an estate, disclosure of assets and payments made, nationwide simultaneous control of all of the debtors property. (5) Orderly distribution is based on legal rights rather than a mad scramble. (6) However, some creditors are disadvantaged. The creditor that has received a preferential payment will lose it in BR, and the creditor who is secured may be primed. (7) The battle in BR is modified from debtor v. creditor to creditor v. creditor. (8) Chapter 7 is most often the chapter in which an involuntary BR petition is filed. l. Initiation i) A central problem is initiation of a BR proceeding. ii) Debtors have a strong incentive to resist filing BR and it will be sought only as a last resort. Consequently, companies wait until it is too late to save them and most of their value has been dissipated. iii) Initiation by creditors often fails too because that lack the necessary information to make a sound decision about the appropriateness of the BR remedy. In the United States, involuntary proceedings are rare. iv) Ideally, the party with the best information, the debtor, should open a BR proceeding while there is still substantial value in the company that can be distributed in liquidation or used to rescue the company in reorganization. v) The United States provides incentive by leaving the debtor in control during reorganization. vi) Other countries, where involuntary filings are more commonplace, place penalties on debtors who should have known they were in trouble earlier. m. Involuntary Bankruptcy i) Section 303 of the Code reflects the decision in the U.S. to protect debtors by making involuntary BR relatively difficult. ii) Involuntary BRs have real significance, though they are rare: (1) Important creditor protection provisions: (a) Restricts the post-BR behavior of debtors. (b) Permits creditors to dismantle certain pre-BR transactions. (c) Creditors may need the protection given here because the debtor is wasting assets or paying certain favored creditors while ignoring others. Plus, any security interests that might be unperfected may be invalidated increasing the pool from which the creditor may be paid. (2) Involuntary petitions are most often filed by unsecured creditors because secured creditors are protected by their preferred collection rights. (3) Can be used as a credible threat during negotiations for a workout. (4) Rule: A involuntary case can be filed by the creditor under both Chapter 7 and 11, though traditionally it was only done in Chapter 7. 303(b) (Chapter 11 allows the debtor to reorganize while continuing operations.) (5) Rule: Creditors are not allowed to file involuntary petitions just to bully debtors and the Code provides attorneys fees and costs and sometimes punitive damages against unsuccessful involuntary petitioners. 303(b)(1). n. In Re Gibraltor Amusements i) Facts: Gibraltor Amusements owed the Wurlitzer Company $1,000,000 for which Wurlitzer filed an involuntary petition against Gibraltor in March of 1960. The petition alleged insolvency, numerous acts of BR and that the debtor had fewer than 12 creditors. Gibraltor asserted that it had more than 12 creditors which meant that Wurlitzer had to be joined by two other creditors to file. Wurlitzer was then joined by Wurlitzer Acceptance Corporation as one of the three petitioning creditors. ii) Procedure: On appeal to the 2d. Cir. iii) Issue: Whether a subsidiary counts as a separate BR creditor for purposes of the three creditor requirement under 303. IN THIS CASE, YES, IN LATER CASE NO. iv) Rule: Three or more creditors who have provable claims liquidated as to amount and not contingent as to liability against any person may file a petition to have him adjudged bankrupt. v) Rationale: If Congress had wanted to exclude parents and subsidiaries, it could have done so explicitly.

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vi) Friendly Dissent: The intent of the legislature should be enacted and in light of Congress purpose to protect debtors from being
forced into BR by any one aggressive creditor, it is unlikely that it would allow a subsidiary and a parent company to count separately for filing involuntary BR. vii) Vida--5thCircuit: This case is controllingputs the burden on the debtor to show that the creditors are one in the same as opposed to independent and separate creditors. BR courts are always looking to pierce the corporate veil. viii) Notes after Case: (1) Rule: Where the claims are interwoven and full of subrogation and joint obligations, the court finds that the companies are one creditor with one claim. (2) Two Principal Safeguards against Unjustified Involuntary Petition (a) Three creditor requirement (b) Requirement that the creditor allege and prove that the debtor was in financial trouble. (3) The concept of acts of bankruptcy was the law until 1978. Focused too much on fault of the debtor as opposed to his financial condition. (a) The 1978 Code abolished the required showing of an act of bankruptcy for involuntary filing and substituted a test of the debtors financial condition. 303(h)(1) (b) Use the equity standard instead of the insolvency standard (inability to pay) which could force someone into BR merely because of a cash-flow or liquidity problem even though the creditors are arguably protected by state remedies. (c) The possible harshness of the equity standard is ameliorated by the debtors absolute right to convert to a reorganization proceeding to pay debts over time. 706(a) (d) The generally not paying standard is creditor oriented and encompasses both a refusal to pay as well as an inability to pay. (e) The 1984 Amendments specifically excludes debts in bona fide dispute as such creditors cannot join the involuntary petition. 303(b),(h). (f) Congress has made it clear that a dispute about either the fact of liability or the amount owed is adequate to classify the debt as disputed. In re Faberge Restaurant of Florida, Inc. i) Facts: An involuntary BR was filed against Faberge by three creditors. The debtor filed a motion to dismiss disputing the debt of two of the three creditors since he paid them post the filing. ii) Procedure: Motion to dismiss. iii) Issue: Whether the debtor has generally not been paying and whether paying off creditors post filing can defeat the involuntary petition. THE FIRST ISSUE IS A FACT QUESTION, NO. iv) Rule: Post-petition payments will not deprive the court of jurisdiction or require dismissal of the petition. v) Rationale: Debtor stated that he would not pay many of the creditors because he did not have the money. vi) Vida: You cant pay off creditors to get rid of the three; after the petitioner is filed, before relief is ordered others can join in. A panel trustee is simply a TIB appointed by the US Trustee from the standing panel of persons qualified to serve as trustees. i) In re Silverman (1) Facts: Creditor, Cantor, petitioned for an involuntary BR against former friend and debtor Silverman claiming that the debt was not in dispute despite a denial of both total and partial summary judgment in another court which was still pending. He also claimed that the debtor was in financial trouble which contradicted the good credit report of the debtor. The creditor was suing on a $200,000 promissory note. IN fact, Silverman did have over 12 creditors and had paid all his creditors on time and when due. (2) Procedure: the court awarded attorneys fees, costs, and punitive damages for a bad faith filing. (3) Issue: Whether the failure to meet section 303 requirements for an involuntary petition is per se bad faith. YES ????? Whether a finding of bad faith automatically triggers punitive damages. NO (4) Rule: Section 303(i) authorizes the imposition of fees, costs and damages if an involuntary petition is dismissed without the consent of the debtor and all petitioning creditors. (5) Rationale: The Code section is permissive, however, leaving the assessment of fees, costs and damages to the exclusive discretion of the court. (6) Rule: The imposition of punitive damages, unlike fees and costs, must be predicated upon a finding of bad faith. 303(i)(2) (B). (7) Vida: Qausi-involuntary BRI am going to foreclose. You cant pay, so you have to go through BR. The creditor is not filing, but he is forcing the debtor to file. WorldCom Examplecreditors can take action to try and force debtors into BR without filing an involuntary petition.

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NOTES i) Business do not need exemptions because they dont have clothes, etc. to hang onto ii) So why file chapter 7 at all? Reorganization (1) Can always try for 11, but might get pushed to 7 iii) Chapter 11, debtor stays in control of the estate; in 7, a trustee controls the estate iv) Equity Test 303(h) generally not paying debts as they come due (1) Generally could mean cash flow difficulties, industry practice, but there is no set threshold. Could look for sheriff sales, which means that someone else has sued them. Problem Set 18 i) 18.1. Client, Ramsco, is a manufacturer of mud used to lubricate drilling lines for oil wells. Because of the recent recession, many of its clients are as much as 20 months behind. Ramsco has called you about the possibility of filing an involuntary case for one of its largest debtors Greenhill Inc. who owes it $2.1 million. Ramsco is concerned that Greenhill will file BR and its unsecured debt will be reduced to worthlessness. What kinds of facts will the firm have to uncover to show that Greenhill is generally not paying debts? First, we will need to know what other debts he owes and to how many creditors and whether those debts are secured or unsecured. Run a credit report. Private investigator, internet searches, trade magazines, a friendly banker. Hard to run a credit report on a business. Talk to other people about itsue them and get discovery. We would also need to know what assets he had and whether he admitted to owing us the debt or considered it a disputed debt as to either liability or amount. Does generally not paying mean balance sheet insolvencyliabilities v. assets or equitable insolvency generally not paying your debts. Are we looking at percentage of creditors not getting paid or are we looking at numbers of creditors not getting paid, number not getting paid, dollar amount not paid, crucial debts not being paid. What about paying all bills late? What are the different theories of what constitutes generally not paying under 303(h)? The theories are that the debtor is not paying due to financial difficulty and cannot pay or the debtor will eventually not be able to pay. What are the risks to Ramsco for filing an involuntary case that could be dismissed under 303(i)? If the case is dismissed Ramsco will be responsible for attorneys fees and costs; if the court finds that it was filed in bad faith, there may be consequential damages and punitive damages. ii) 18.2. Client had a real estate deal go bad and had to write to assure his personal debtors that he would pay them. All agreed to wait except one whom he inadvertently angered at a law suit. He owes the creditor $200,000 on a note that became due two weeks ago. His assets comfortably exceed his liabilities. Ask him key questions, give him your analysis of the situation, and describe the action you might take on his behalf. First, we would need to know what assets the client has and determine how they would be distributed under BR to determine if the creditor is justified in his filing because he is afraid it will lose its rightful return if it waits for actual insolvency. Further, I need to know how sure the debtor is that he will receive income to do what he has promised the creditors. I need also to see how far behind he is on his bills. The action I would take for him right now is to try and negotiate with the creditor outside the BR with the ever present threat of attorneys fees, costs, and consequential and punitive damages the creditor could incur if it filed an erroneous involuntary petition. Vida believes that bad faith is not an issue here because the bank is owed the moneythe fact that they are doing it for non-BR reasons makes it look like its bad faith. . iii) 18.3. The TIB was appointed for Lucky Lectronics, an appliance business that recently failed. Our client, Solid State Bank loaned money to the business on an unsecured basis. The officer from client bank called to inform that the paper advertised a Bankruptcy sale at Luckys and it was negotiating to sell the equipment from the store to another store for a better price than the 75% off contemplated in the ad. 363(b)(1); (c)(1); 102(1). According to the listed sections, there is nothing we can do unless the court has ordered that the trustee cannot sell the property of the estate, he is free to do so without notice and a hearing. I suppose we could as persons in interest file an involuntary BR depending on the number of total creditors and what we are owed under the theory that the value of the property is being diminished and he pool from which we would get paid is being diminished. 363(a) cash collateralcash, etc (b)(1) trustee may use sell or lease other than in the ordinary of course of businesshere it was in the ordinary course of business. If it is doing something in the ordinary course of business, it does not need the Court s permission. (1) 363(2) may not use sell or lease cash collateralunless the party that has the lien consents or the court tells him how to use the cash. iv) 18.4. Client is at a heavy equipment sale for a failed company at which only three bidders have shown. They agree to bid and split the price as a unit. The client wants to know if there is a legal pothole he should avoid and calls you from a pay phone to ask. What do you say? 363(n) This code section says that a trustee may avoid a sale if the sale price was controlled by an agreement among potential bidders at a sale. The trustee may recover from any party to such an agreement and may be awarded attorneys fees, expenses, punitive damages. Thus, I would advise the client to leave the sale immediatelyhe is tainted and cannot now claim he was not a part of the pricing deal.

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v) 18.5. Our client, Universal Tire, wants to file an involuntary BR case against its customer Wetumka Automotive. Wetumka has
not paid Universal in four months and has changed its main supplier suggesting that it never will. When Universal threatened Wetumka, the president said it could not be done because it had more than twelve creditors and Universal could not get two more to join as required by the code. Universal agreed and came up with the scheme to bring the case under itself, Universal finance its financing subsidiary, and Universal Service Body School, another subsidiary. All three entities were owed separate debts by Wetumka. What advice will you give Universal? 303(b),(h) Under these codes, I would tell Universal that it may be headed to bad faith damages it will owe to Wetumka. Congress and the BR Courts have held that subsidiaries for the purposes of the three creditor requirement in the involuntary BR filing context are all one entity. He should attempt to get two of the small town creditors to join him. Any debt is a debt. 303(b)(2) the brother in law does not count because he is an insiderrelative of a debtor or a relative of a general partner. We can knock him out and may not need three. May then be able to just go in as one creditor. Some courts say small debts dont count. vi) 18.6. Client is owed $50,000 by a campaign for printing services he provided. After losing the campaign, the politician appears to no longer care about his bills. Two members of the campaign remaina small businessman and his secretary. Client believes there are still funds in the campaign but that they may be contributed to another candidate or pay off campaign creditors. Do you have any suggestions for him? He can file an involuntary BR only if the campaign is a debtor against whom such a BR can be filed. It would have to be a partnership or he would have to file against the candidate himself. He would need to check to see how many debtors the campaign or the candidate had, how far behind he is in other payments, and again, the status of the debtor. 101(9) Unincorporated company or association is a corporationdepends on whether it is a moneyed corporation or not. If it is a campaign fund, it is non-moneyed corporation, and you can file on the organization. vii) 18.7. Client is an unsecured creditor of Alexanders Fine Furs, Inc who is experiencing financial difficulty and who has fallen behind on its obligations to the bank. The client bank is afraid that the debtor is wasting assets and value and preferring favored creditors and wants to know if there are any actions it could take under the BR laws to protect its position. They raised the animals from which they made the furs. 303(a) I think it is significant that the company is vertically integrated which may make it a creditor against whom an involuntary BR cannot be filed????? Did this corporation have 80% or more from its animal hides farming operationthen they could be farmers against whom an involuntary action cant be filed.. viii) 18.8. Congresswoman read LoPucki article which suggested that creditors should be encouraged to file involuntary BRs by granting them priority repayment in BR to compensate for the risks they must take in filing an involuntary petition. Explain to the Congresswoman why you would or would not recommend an amendment to the Code along the lines suggested by LoPucki. I dont think this is a good idea simply because such a horrible textbook author suggested it. Further, I think the idea of the BR provisions for involuntary filings is to protect the debtor from being forced into bankruptcy by aggressive creditors who are generally out for themselves against other creditors. In general, they do not need to be encouraged to file as the option is available when they have legitimate need of the protection the code provides for them. t. Class Notes i) Unsecured and under-secured creditors can put a debtor in involuntary BR. ii) If the debtor does not have twelve creditors, only one can do it if he has. iii) The creditor can ask two others to joinmust be BEFORE order for relief is granted. iv) The court can appoint an interim trustee to operate the debtorthe debtor can go ahead and gain the business back before the order of relief if he goes ahead and posts the bond. v) 303(h) If the debtor does not respond to the petition for involuntary BR, then the court shall give an order of relief if 1) the debtor is generally not paying debts. Debtors defense is subject to dispute as to liability or amount 2) 120 days prior to BR a custodian has been appointed, but not a trustee, receiver, trustee, or someone who can take possession. XV. Chapter 11 Reorganization: Introduction to Business Reorganization, The Automatic Stay and Adequate Protection a. 361 Adequate Protection. When adequate protection is required of an interest of an entity in property, it may be provided by (1) requiring the trustee to make a cash payment or periodic cash payments to the entity to the extent that the stay, use, sale, or lease, or the grant of a lien results in a decrease in the value of the entitys interest in the property; (2) providing an additional or replacement lien; OR (3) granting such other relief as will result in the realization by the entity of the indubitable equivalent of the entitys interest in the property. b. 362 Automatic Stay. (d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay such as by terminating, annulling, modifying, or conditioning such stay-(1) (1) for cause, including the lack of adequate protection of an interest in property of such party in interest; (2) (2) with respect to a stay of an act against property under subsection if (a) (A) the debtor does not have an equity in such property; and (b) (B) such property is not necessary to an effective reorganization (3) (g) debtor has burden of proof on everything except for lack of equity.

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c. 1101. DEFINITIONS FOR THIS CHAPTER: In this chapter (1) "debtor in possession" means debtor except when a person that has qualified
under section 322 is serving as trustee in the case; (2) "substantial consummation" means-- (A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan. 1107 Rights, Powers, and Duties of Debtor in Possession. Shall have all the rights, other than the right to compensation under section 330, and powers, and shall perform all functions and duties, except the duties in 1106(a)(2), (3), and (4) of a trustee. (b) Notwithstanding 327(a), a person is not disqualified for employment under 327 by a debtor in possession solely because of that persons employment by or representation of a debtor before the commencement of the case. Introduction to Business Reorganizations: Overview i) The debtor wants to reorganize its debt by extending the time in which to pay it and reducing the total amount to be paid. ii) A plan of reorganization in Chapter 11 might typically provide that the debtor will pay only 75% of its bank loans and will have five years to do it rather than the two under the original contract. 25% forgiveness is called a haircut. iii) Chapter 11s central focus is to facilitate this reorganization process. iv) Permitted the creation of procedures that do not follow the traditional linesliquidations, sale of a going concern, and prepackaged bankruptcies. v) Debt structures may include public bondholders or note holders, subordinated levels of debt, suppliers from around the country and the world, and institutional lenders such as banks, insurance companies, and pension funds. vi) Available for individuals as well as corporations. vii) Some reorganizations are purely financial, and the business operations remain the same, while the debts are written down or eliminated. (Business has loaded up on debt but is operationally sound because revenues comfortably exceed costs, but the business cannot pay its debts.) Rights of various stakeholders are adjusted. Balance Sheet Reorganizations. viii) Other reorganizations involve wholesale reshuffling of the business operations. The debtor will use the automatic stay to close or to sell money-losing divisions, trim excess staff, refocus product lines, cut back on the number of company cars, and so forth. Will result in a leaner, smaller company with a reduced debt burden. ix) In all reorganizations, all or part of the business is preserved as a going concern rather than sold off one piece at a time in an old-fashioned courthouse steps sort of sale. The whole is greater than the sum of its parts. The Debtor in Possession i) The business debtor almost never wants to liquidate because there is no benefit in it for the debtor. No discharge from debt, no exemptions. ii) Advantages of Reorganization (1) Managers may retain as many jobs for employees as possible and can avoid the calamitous effects that a liquidation can have on a community. (2) Management can save something for equity shareholders. (3) Managers who would face certain termination of their jobs in Chapter 7 can retain the hope that their jobs and benefits may survive the reorganization. (4) Managers retain control of the business so long as they can hang on, giving them the chance to manage it successfully. iii) Sometimes the management that makes the decision to file for Chapter11 is not the same management that rode the business downhill, especially in public companies. (1) Turnaround Management firms are consultants who manage troubled businesses, taking them through the BR for a thorough cleaning before the businesses are stabilized. (2) Turnaround Management Association (TMA) A Brief History of Business Reorganization i) Chapter 11 has a statutory basis and was constructed in the after math of the Great Depression of the 1930s by the Chandler Act. ii) Originally there were two chapters, Chapter X and Chapter XI. Chapter XI was for small businesses, but many public companies kept filing under that chapter. Chapter X required close scrutiny of the SEC to determine why the company filed. Further a TIB had to take over operations of the business. Chapter XI allowed the current management to run the business. iii) Businesses whose only asset was real estate were to file Chapter XII. iv) Chapters X, XI, and XII were merged in the new Chapter 11. SEC involvement was greatly reduced and the presumption was that the debtor should remain in control absent strong proof to the contrary. v) Debtors are now more likely to enter Chapter 11 earlier and will be healthier. vi) The small case/ big case distinction reemerged in 2005, and small businesses are treated differently than big businesses. (1) Small Business businesses with debt less than $2 million at the time of filing 101(5) (D) (2) Face increased reporting requirements, greater Trustee supervision, shorter deadlines, and more drop dead points at which they can be forced out of Chapter 11.

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(3) 2005 Amendments gave suppliers of Big Businesses greater leverage and reduced managements control of the reorganization plan process. Both will likely increase the cost of reorganization. h. High Theory and Personal Trauma i) Chapter 11 engenders heated debate in the business and legal world. ii) Corporate fraud leading to BR raises interesting questions about the role of BR law, along with SEC investigations and criminal trials, in the policing of our financial markets and corporate boardrooms. i. The Traditional Chapter 11: Mechanics of a Chapter 11 i) Rule: When a debtor files a petition, the section 362(a) stay is imposed. The business continues to operate in the ordinary course 363(c), under the control of the debtor in possession (DIP). ii) Rule: The DIP controls a new legal entitythe estateand has most of the rights and duties of a TIB 1107. iii) E.g.: A debtor transferor in a fraudulent conveyance does not have the right to attack its own conveyance and get the property back at state law; however, the DIP can do so as he is acting on behalf of ALL OF ITS CREDITORS, not merely itself. iv) Ordinarily, no TIB is appointed in Chapter 11. v) Rule: The DIP is limited in the use of its assets if those assets are subject to a security agreement. 363(c). (e) vi) Secured creditors may seek court approval for lifting the automatic stay as to their collateral, unless the DIP can provide adequate protection of their interests. 361, 362(d) vii) The DIP may obtain financing and other credit during BR with the approval of the court. 364 viii) The debtor may offer post-petition creditors relatively attractive terms, which is important because further financing is often vital to the debtors survival. ix) Provisions also increase the risk that a debtors overly optimistic attempt to survive will merely consume what few assets might otherwise have been left for pre-existing creditors. x) Rule: A TIB and DIP have avoiding powers which include the power to recover preferences (payments or transfer of property to favored creditors within 90 days of BR) 547; the power to assume or to breach outstanding executory contracts 365; the power to void fraudulent conveyances 548 and 544(b); and the power to set aside unperfected or late-perfected security interests in debtors property 544(a) and 547. xi) Rule: The TIB or DIP has the power to require turnover of property of the debtor being held by another entity. 542 and 543 xii) Avoiding Powers are used more often in Chapter 11 Business Reorganizations where the stakes are higher and there are more resources to support both the investigation and litigation that may be required to recover these asserts on behalf of the estate. (1) Important in the negotiating process that will lead to the reorganization of the business. xiii) After a business files a Chapter 11, an initial period of chaosthe debtor is obtaining financing, getting approval for the use of cash collateral, arguing about adequate protection of secured creditors, firing employees, reassuring customers, closing moneylosing facilities, and so forth. xiv) Debtor then must negotiate a plan with its creditors. xv) Rule: A creditors committee is appointed to scrutinize the debtors activities on behalf of all creditors and to negotiate with the debtor 1102. This often does not happen in smaller cases. xvi) Once negotiations come to a close the plan is confirmed. xvii) Rule: To conclude the BR, 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 payment to be made in cash, in property, or in securities issued by the reorganized debtor. xviii) Rule: If the plan is approved by the specified majorities of creditors in each class, 1126(c), it will be confirmed by the court, provided that it also conforms to the requirements of section 1129, including the requirement that every creditor who has not accepted the plan will get at least as much as that creditor would have gotten in a liquidation. 1129 (a)(7). xix) Rule: Upon confirmation of the plan, the debtor is discharged from all its pre-petition debts except as provided in the plan 1141(d). (Different from Chapter 13 where the discharge does not occur until the plan is paid and Chapter 7 where businesses receive no discharge at all.) j. The Logic of a Traditional Chapter 11 i) A chapter 11 petition is an invitation to a negotiation. ii) Creditors who are over-secured may have no interest in negotiating a rearrangement of the debtors obligations because they know they are well protected and see no reason not to be paid in full and on time. iii) Other hard-pressed creditors may not want to suffer the delay in payment, and others may be involved in substantial disputes wit the debtor and there may be bad blood on a personal level. iv) Creditors want the pain to be shared equally among all creditors, and BR may be necessary to force the minority to go along.

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v) Creditors may not share the debtors optimism that the business can survive the BR. These creditors may file an involuntary BR even if it is in Chapter 11 and they desire liquidation. 303 vi) Many creditors will want to work things out workout because the customer is important and the creditor wants the business to survive. vii) BR offers a Debtor the following Aids in Negotiations: (1) The automatic stay and breathing room (2) The possibility of adopting a plan that will legally bind all creditors, even the minority who rejects it. (3) The turnover and avoiding powers, which can greatly augment the assets available and provide powerful leverage over certain creditors. k. Analysis of Chapter 11 Negotiation i) Most debtors are in extremis when they enter Chapter 11, and a number fail before they develop and offer a plan of reorganization. ii) Sometimes debtors file Chapter 11, even though they ultimately plan to liquidate. iii) Courts have an important gatekeeper role in Chapter 11 proceedings, to dispose of such cases quickly by dismissal or conversion to Chapter 7. iv) A debtor has the exclusive right to propose a plan within the 120 days of order for relief??? which gives it reason to negotiate. 1121(b). v) In the case of litigation, the plan will provide for an escrow of money or property pending resolution of the litigation. vi) The litigation trust has been born of the effort to confirm a reorganization plan quickly while continuing litigation that may eventually yield assets for the creditors of the reorganized business. vii) When creditors vote on the plan of reorganization, they have no idea how much they are giving up and how much they are getting. viii) Chapter 11 gives the debtor the right to use, or to threaten to use, the avoiding powers that the DIP may exercise in the shoes of the TIB who would exercise them in liquidation. ix) Sometimes adversary proceedings are brought in Chapter 11 to avoid liens or other transfers, and the threat of such actions is a source of powerful leverage for the DIP and other creditors. l. Control i) The courts are in charge of the debtor and its business and are empowered to impose socially mandated policies on the process of sorting out the effects of a debtors general default. ii) Though the DIP is in control of the BR estate in Chapter 11, Congress did not define its role. iii) Management may act on behalf of stockholders, creditors, or other constituencies like employees and communities. It will also protect its own interests. m. Large Public Companies and Non-Traditional Chapter 11 Cases i) Auctions and Pre-packaged BRs are more prevalent in public companies. ii) Auctions: A company in chapter 11 will resolve its financial difficulties by a sale of the entire business or what remains after closing down losing operations. (1) The sale is performed through the auction process and negotiated by lawyers and investment bankers in the merger and acquisition departments of large firms. (2) There will almost always be no recovery for the shareholders of the business (3) May be held pursuant to a confirmed plan, but often is not. (4) Completed under section 363 prior to any creditor vote and the plan is simply a mechanism for allocating and distributing the proceeds of the sale. iii) Pre-packaged Bankruptcies: A case in which the debtor has negotiated the deal with its creditors before the petition is ever filed, but needs the help of the BR law to close the deal. (1) These cases can proceed with far less public disclosure of information in BR court than the ordinary Chapter 11, and they may or may not be liquidating. n. Single Asset Real Estate Cases (SARE) i) Defined in 101(51B) ii) A typical example is a corporation or partnership whose only real asset is an apt. home or office building and whose only substantial debt is the mortgage on it. o. Liquidation in Chapter 11 i) Chapter 11 provides a highly flexible approach to maximizing the sale value of the debtors assets. ii) It is a negotiated resolution of a debtors general default and therefore permits much more flexibility in the realization and distribution of value than do the relatively fixed rules of chapter 7 supervised by a disinterested trustee in BR.

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p. Costs of Chapter 11
i) Because Chapter 11 required individual crafting and involve profound complexity, they are costly. ii) Involve lawyers fees, accountants fees, and appraisers fees. iii) Creditors must deal with accelerated debts, claim forms, and demands for repayment of earlier transactions. Direct costs also include loss of value in the company. q. THE AUTOMATIC STAY AND ADEQUATE PROTECTION: General Considerations i) Automatic stay is a great advantage to the debtorgreat freeze. ii) Makes secured debtors, the most powerful ones, put off foreclosure and repossession. iii) Stay-lifting litigation is difficult, time consuming, and expensive, and the stay is unlikely to be lifted in the early days of Chapter 11. Further, repossession immediately preceding BR will not improve the creditors position because the DIP or TIB can force return of the collateral. iv) Rule: Stay litigation will be filed by creditors early in the case and that the court must act on a request to lift the stay within 30 days or the stay will automatically be lifted as to the requesting creditors collateral. 362(e) v) Rule: The burden will be on the DIP to show the existence of adequate protection of the secured partys interest in the collateral 362(g). r. Scope of the Stay i) The stay is nationwide and world wide and must be strictly enforced. ii) Comes into effect against a large number of people who had no prior notice or opportunity to contest it. iii) Even actions taken in violation of the stay, without notice of the BR filing are void or voidable. iv) The BR Code protects an estate that represents a host of creditors and other interests, not just the debtor. v) Farm Credit of Central Florida, ACA v. Polk (1) Facts: Polk and Farm Credit entered into a Forbearance Agreement on May 1, 1992, whereby Farm Credit agreed to extend the date of the foreclosure sale in exchange for Polk agreeing not to contest a motion for relief from stay by Farm Credit in the event that Polk filed for BR protection. (2) Procedure: Bankruptcy Court held that the waiver was invalid. The district court AFFIRMED. (3) Issue: Whether creditors and debtors can enter pre-petition a waiver of the automatic stay in BR. NO. (4) Holding: Pre-petition agreement that entitled the creditor to an immediate lifting of the automatic stay, in and of itself, is not sufficient to lift the stay unless there is a showing of other criteria, such as bad faith. (5) Rule: Relief from the automatic stay must be authorized by the BR court. (6) Rationale: The automatic stay prevents the dissipation or diminution of the debtors assets while rehabilitative efforts are undertaken, and prevents certain creditors from gaining a preference for their claims against the debtor and avoids interference with the orderly liquidation or rehabilitation of the debtor. (7) Rationale: Courts who have upheld such waivers have done so in cases where there was bad faith and there was no prospect for a successful reorganization. Allowing the debtor to unilaterally waive the stay ignores the fact that the stay also protects creditors. vi) Exceptions to the Stay 362(b) (1) United States v. Seitles (2) Facts: The government commenced this action against def. Westbrook Publishing Co. and its president and sole remaining executive Seitles under the False Claims Act. The government sought treble damages and civil penalties. The corporate debtor filed Chapter 11and the debtor and Seitles asked the court to stay the pending government case in federal district court in order to permit the BR court to adjudicate the governments claim in BR. Westbrook argued that the action was subject to the automatic stay for it since it was a debtor in Chapter 11 and should be so as to Seitles since he will be involved in the reorganization. The government argued that its suits were not subject to the stay and in any case, Seitles was not the debtor. Defendants committed printing fraud against the government. (3) Procedure: On appeal to the District Court. (4) Issue: Whether the governmental action is a necessary governmental function geared towards the protection of the public health and safety or instead whether this claim is a proprietary governmental function aimed at the protection of pecuniary interests, and therefore, subject to the stay. (5) Rule: The public policy test distinguishes between proceedings that adjudicate private rights and those that effectuate public policy; those proceedings that effectuate a public policy are excepted from the stay. Examines whether the government in the action in question is engaging in an action which affects the immediate parties to yhe action or whether it concerns a wider group subject to the authority of the governmental unit. (6) Rule: The presence or absence of continuing harm as well as a threat to public health is relevant in determining the applicability of 362(b)(4).

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t.

(7) Rationale: The present case involves no threat to public health or safety and implicates the pecuniary interests of the government. (8) Rule: Section 105 enables [BR courts]. . . , in the exercise of its equity powers, to stay proceedings not covered by the automatic stay provisions of 362(a); however, non-debtor stays are not to be granted freely. (9) Primary Considerations for determining When a Non-Debtor Co-defendant may be Granted a Stay under 105: (a) Irreparable harm and (b) Either (1) the 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. (10) Rule/Standard: The test is met when the action against the non-debtor codefendant is so inextricably interwoven with the affairs of the debtor that it would substantially hinder the debtors reorganization effort. (11) Holding: The 105 stay is necessary and appropriate to enable Seitles to devote his full attention to rehabilitating Westbrook. (12) This is not a permanent release; after the stay the action will resume. Lifting the Stay i) Section 362(d) lists three alternative tests for lifting the stay, and the secured party can win by successfully invoking any one of them. ii) The first alternative is lack of adequate protection and requires the court to go outside section 362 to section 361, where adequate protection is defined. iii) In re Rogers Development Corp. (1) Facts: Debtors filed for relief in Nov. 1979 and eight days later the creditors commence this adversary proceeding by filing two complaints to lift the stay under 362(d)(1) and (2). Debtors were engaged in real estate development and home construction. Heritage Savings And Loan Association made a loan of $520,000 for acquisition as well as a $360,000 line of credit. In May of 1978, the debtors went into default; however, Heritage continued to make advances from the line of credit and homes were completed and sold. In July 1979, the debtors went into default on the construction loan. Debtors total amount due was $548,188.41 and is increasing approximately $63,000 per year. The main issue between the plaintiff and the debtor was the propertys present market value. Heritages appraiser testified that the current FMV was $704,200, and the debtors appraiser said that it was $801,000. A representative of the debtor said that the property was essential to a successful reorganization of the debtors. Heritage argued that it had a lack of adequate protection and alternatively that the debtors had no equity in the property. (2) Procedure: (3) Issue: Whether the appropriate standard of value is the liquidation value, the full going concern value, or some value in between is the proper valuation for determining whether adequate protection is required or exists. (4) Rule: Section 361 of the BR Code offers three non-exclusive methods of providing adequate protection to an entity with an interest in property of the debtor. (a) 361(1) periodic payments; 361(2) additional or replacement lien; 361(3) catch all permitting such other means of providing adequate protection as will result in the realization by such entity of the indubitable equivalent of such entitys interest in such property. (5) Rule: Maintenance of the status quo is not necessarily granting such other relief and is not equivalent. (6) Rule: An adequate cushion of surplus security over debt can constitute adequate protection with nothing more. (7) Rule: Since an equity cushion can be adequate protection, the amount of the debt and the value of the property must be determined to establish whether an equity cushion exists. (8) Standard: The most commercially reasonable disposition practicable in the circumstances should be the standard of value universally applicable in all cases and at every phase of each case, which is determined by the nature of the debtors business, the prospects for rehabilitation, and the nature of the collateral, which all enter into the determination of the standards of value to be applied. (9) Rule: An equity cushion between FMV and the amount owed is adequate protection. . (10) Rule: Where collateral is appreciating, nothing needs to be done by the trustee as the mere passage of time constitutes adequate protection. (11) Rule: Section 362(d)(2) lifting the stay is only for relief from the stay of an action against property and in order for the secured creditor requesting relief to prevail two facts must be proved: (a) The Debtor has no equity in the property (b) The property is not necessary to an effective reorganization. (12) Rationale: This issue (of value) is to be decided on a case by case basis. (13) Rationale: Although the debtors have no equity in the property, the property is necessary for the debtors to effectively reorganize and relief from the stay should not be granted. Payments While the Chapter 11 is Pending

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Some automatic stay litigation focuses on how much the debtor must pay to the creditor during the proceeding in order to provide adequate protection to the secured creditor. Only if the debtor cannot make the adequate protection payments does the litigation lead to lifting the stay. ii) The determination of what is required for adequate protection, much like the motion to lift the stay, is often a life or death struggle for a post-filing debtor. iii) There is a need to provide adequate protection against the decline in value of the collateral during the proceeding. iv) The debtor must provide protection against the secured creditors anticipated loss of collateral value. v) Whether the debtor must make cash payments or an equity cushion or additional lien will suffice is crucial to the survival of a cash strapped debtor. vi) Rule: All creditorsover-secured, under-secured, and unsecuredadd pre-petition interest to their claims according to the terms of the contract or applicable non BR law. 502 vii) Rule: The over-secured creditor is allowed to add interest to its allowed secured claim under section 506(b) during the pendency of the BR. The claim grows until it hits the value of the collateral. Under-secured creditors do not get post-petition interest. viii) Rule: When a Chapter 11 plan is confirmed, the calculation of interest is that secured creditor will be entitled to the present value of their allowed secured claims, while unsecured creditors will be entitled to the present value of what they would have received in a chapter 7 liquidation. 1129(a)(7) ix) Over-secured creditors will earn interest post confirmation on the allowed amount that has accrued up to the time of the confirmation. x) Under-secured creditors will receive the value of their collateral at the time of filing, plus post-confirmation interest on that amount, plus payment of the deficiency part of their claim at whatever rate the unsecured creditors get,--but no postpetition interest. xi) Over-secured creditors interest can be demanded now or over time???? xii) The 2005 Amendments expanded a special adequate protection rule for SAREs. The debtor must quickly propose a plan or face having to pay interest amounts immediately. (This was done to address the abuse of filing just to gain a delay.) The debtor may use rents to make adequate protection payments, but the lenders get the interest rate set at the preexisting contract rate. u. Good Faith i) Only a secured creditor is in a position to seek a lifting of the stay. Other creditors are limited to a motion to convert a Chapter 11 to a Chapter 7 or a motion to dismiss the case. Must prove bad faith. ii) Because the United States allows solvent companies to file BR, it leaves open the possibility that the filer filed the case in bad faith. However this encourages early filing to preserve value to stakeholders and insolvency is difficult and expensive to prove. iii) In re SGL Carbon Corporation (1) Facts: SGL carbon manufactured and sold graphite electrodes used in steel production and the US commenced an investigation of alleged price fixing by such manufacturers. Thereafter, steel producers filed class action antitrust lawsuits against SGL and other manufacturers. SGLs German parent approximated that its liability could be $240 million and on Dec. 16, 1998 at the direction of the parent SGL filed Chapter 11. It only discussed the litigation and proposed a reorganization under which only one type of creditor would be required to accept less than full cash payment for its account antitrust plaintiffs. They would receive credits against future purchases of SGL product. The plan also barred any claimant from bringing suit against SGL or its affiliates based on the antitrust claims. However, the company admitted that it was financially healthy and only brought the suit to innovatively defend against the antitrust claims. (2) Procedure: The Dist. Ct. found SGL was filed in good faith because the antitrust litigations were a distraction and posed a serious threat to successful operations and because the litigation might result in a judgment that could cause the companys financial and operational ruin. Third Circuit REVERSED. (3) Issue: Whether a BR filed by a financially healthy company to defend against future claims is filed in good faith. NO. (4) Rule: A chapter 11 case is subject to dismissal if not filed in good faith. (5) Rule: Though a debtor need not be insolvent to file BR, this does not open the door to premature filing, nor does it allow for the filing of a BR petition that lacks a valid re-organizational purpose. (6) Rationale: Bad faith is determined on a case by case and court by court basis. v. Problem Set 19 i) 19.1. Bank has a perfected security interest in the tools of a Chapter 11 debtor. The amount owed to the bank is the current balance of $180,000 at prime plus 6%. The tools are specialized repair tools with an expected life span of 10 years with no salvage value. The debtor took a 20% depreciation deduction last year for tax purposesthe wholesale value of the tools is $140,000 and the retail value this year is $220,000. The debtor believes that he could sell the tools for $160,000 to another bike shop just starting, but does not know anyone else who would be interested in buying such tools. What do you advise the bank to

i)

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ii)

iii)

iv)

v)

ask for in the Chapter 11? 361,362 The bank should ask for adequate protection since the tools are going to lose value in the reorganization. They probably will not be able to get the stay lifted because they may be necessary to an effective reorganization for the debtor if its plan is to continue repairing bikes. In addition, the debtor does have some equity in the product$20,000; however, the tools have already lost 20% of their value and the creditor needs to ask for payments to make up for the loss of its value in these tools. Two strategieslift the stay or let them reorganize. You can only sell it for 140,000 or 160,000. If the debtor reorganizes, what value will you want the debtor to pay on the equipment? The depreciation is for tax purposes, so it is really irrelevant as to the value of the property. 362 (d)(1)cause 362(d)(2) lack of equity & not necessary for an effective reorganization. Cause means unable to reorganize. To argue cause, you have to attack their finances. Why is valuation going to be an issue? We have to determine whether they have equity or not. Also, we must determine if the debtor is undersecured or over-securedattorneys fees and interest. If there is an equity cushion, that may be seen as adequate protection. There are problems here because he could make himself under-secured, over-secured and be auto adequately protected. If the property is going to increase in value, then the creditor would be entitled to the benefit of its bargain and a new valuation will be done. 19.2. Debtor has had to file Chapter 11 due to accidents and resulting suits arising out of the operation of theme parks as well as some labor disputes. Debtor bank moved to have the stay lifted in regard to its security interest in the debtors jet. The creditor is owed $1.8 million with 12% interest, but the jet is worth $1.1million. The jet has a lifespan of 40 years and the value wont change for a couple of years if it is well taken care of. He insists that you keep it for him, what will you argue in the proceeding to lift the stay and what will likely happen? I will argue that the jet is necessary for an effective reorganization, but I will likely lose since the jet appears to have little to do with the operation of theme parks. I will also argue that the jet is not losing its value. The debtor is upside down. Debt is $1.8 and fair market value is $1.1. Its net life will be about 40 years The item is not going to depreciateis that enough? There is no equity here. We will pay the 1.8 million even though it is 1.1 million. The unsecured creditors will cry foulthey are giving up the 700,000. That he must prove two elements (d1 or d2). 1. There is a lack of adequate protection. 2. There is no equity and he runs a theme park and does not need a plane. Unless you can prove that effective reorganization requires the plane, the judge will not go for keeping it and will likely lift the stay. There is no really good argument in this case because it is way under secured. Even an argument for necessary for effective reorganization will likely fail because the jet has little to do with the operation of theme parks 19.3. You are suing a light fixture business for breach of warranty and fraud as a result of light fixtures he put in the house of your client, Sam. Sam wants all he has and due to the high cost of litigation, the stress and time of fighting, the light fixture business filed Chapter 11 listing only his debt to his lawyer and the disputed debt to your client. What should you tell your client about the effect of the Chapter 11 filing? I will tell him that the filing has resulted in an automatic stay that will put the proceedings of our suit for breach and fraud on hold. Therefore, he and I will have to stop our proceedings unless we plan to move to have the stay lifted. The amount is unliquidated and they are fighting about it. Therefore, he should settle. They should determine the price and decide what it is and then there could be a valid BR claim???? 1112 the Court shall convert and liquidate rather than dismissing it [or may dismiss]. This is only conversion from 11-7. 706 governs going from 7-11, 12, or 13. Cause is a laundry list of failures by the debtor. Theres a preference for converting a case and liquidate it, rather than dismiss it. What steps can you tell him that you will take to get his case back on track? I will try and see if we have any of the reasons for which to lift the stay. The only one appears to be for cause in that he may be a very solvent business that is simply trying to avoid the consequences of our law suit which the courts have found is filing in bad faith and thus a grounds for dismissal of the whole case. The absence of other creditors belies that his business may not be in trouble after all. 19.4. Client has a company whose primary product, the slide rule, has fallen into such disuse that it had to file Chapter 11. However, the president has an idea for bringing the company into the computer age; however, the one asset the company owns is being sought by the secured creditor. The metal stamping machine is worth $50,000 and the creditor has a valid PMSI for $35,000, but the machine also carries a non-PMSI of $20,000. Can the PMSI creditor get the machine? 362(d) Though this is a single asset, it is not real property; consequently, it is subject to the same requirements for lifting the stay for cause, lack of adequate protection, no equity and not necessary for effective reorganization. Here, the debtor does have equity in the machine, but it may or may not be necessary for the new venture the president is contemplating. I dont think the stay can be lifted here for the creditor to get the machine. There is an equity cushion of $15,000, but it has been given to another creditor. For the debtor to keep it, he has to pay two claims. Lien avoidance only has to do with exemptions, and the corporation has no exemptions. Therefore, the stay can be lifted since there is no equity. Debtor has no equity in the machine because he has two liens which, when added together exceed the value of the collateral. This is also not necessary for an effective reorganization. Therefore, both elements of 362d2 are met (no equity, not necessary). 19.5. Business developer has a single asset, a Denver office building that is 30% occupied. He lost his fortune due to the Denver real estate market crash and now has $2.5 million in unsecured debt and deficiency judgments and $40 million secured debt. The developer filed Chapter 11 a month ago rather than selling the building and predicts that if the market comes back up, he can pay his debts from the revenue from the building. The FDIC agrees but the developer may be untrustworthy or just over optimistic

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and the deferred maintenance on the building could reduce its value to $12.5 million in a year. What strategy do you suggest for the FDIC? I think that the FDIC should ask for adequate protection in light of the high likelihood that the building will lose its value. In this case, I think there should be payments which would account for the possibility that the market will rebound. According to statute he has 90 days to file a plan of reorganization that has a reasonable possibility of being confirmed, which leaves him 60 more days or he must commence monthly payments which can be made from rents or other income generated from the building. In this way, he could avoid the stay. 362(d)(3) 101(51B) other than residential real property. And.. are in an amount equal to interest of the contract rate. Basically this developer is mowing the grass and hoping for the market to come around. 362d3: Is triggered by single-asset-real-estate. This must be real property, other than residential real property with 3 or less units, which generates all of the debtors income. This situation fits. The debtor should commence monthly payments of an amount of interest at the contract rate to secure by adequate protection. vi) 19.6. Chapter 11 debtor financed her equipment leasing business with a $12 million dollar loan from a bank secured by her longterm leases and underlying equipment. Her payments were interest only payments of 1.2 million per month. Since her payments were up to date at the time of filing, she made an agreement with the bank to pay $100,000 per month in exchange for its promise not to file for adequate protection. However, when she eventually missed a payment under the agreement, the bank moved to lift the stay. The leases and equipment were valued at 12.2 million at the time of filing, but now is worth $11.4 million. What will you argue at the hearing? If I am arguing for the debtor, I will argue that the equipment is necessary for an effective reorganization and that she can use the rents from the leases to give the creditor adequate protection. What will happen? The debtor will likely have to make payments to give the creditor adequate protection. 12.2 million is the FMV and 12 million is the debt. She does have $200,000 equity. The value is 11.4 million. 1 million has been paid, and if applied to the principal, it would be The asset has depreciated $800,000they have been paid 1 milliontheir position has been improved. 200,000 goes toward interest, and the other $800,000 should be principal. The idea of a re-organization is to make sure that the unsecured creditors are not totally left out. It would have meant that all of the 1million dollars went up in smoke. But, now we have gone ahead and allocated 800,000 to go toward the principal to give something to the unsecured creditors. Because the creditor is actually undersecured the million dollar payment is re-divided to 200,000 for interest and 800,000 for principal which leaves the unsecured creditors in the same position?????? w. Class Notes i) We look at BR from a legal entitys prospective is a corporation. ii) A corp. cannot file a Ch. 13they do not have any exemptionsonly an individual. iii) In chapter 13, no discharge until plan completedin chapter 11 the legal entity receives a discharge upon confirmationbut an individual filing Ch. 11 will not get a discharge until the end. iv) In Chapter 13, no creditor vote. In Chapter 11, the creditors get to votean invitation to negotiate. A plan is a K between the debtors and the creditors. v) The whole process is negotiation between the debtors and creditorsCommittees can be formedrepresentative creditors who represent a certain classunsecured creditors committee. The creditor will have to participate in the BRlawyers and accountants which the debtor will end up paying for. Have as few as possibledebtor. Creditors want committees. XVI. Chapter 11 Reorganization: Operating in Chapter 11 pp.437-457 a. Whos Running the Show? i) In Chapter 7, the debtor and creditors are interested in calculating past debt and liquidating non-exempt assets for distribution to creditors. ii) In Chapter 13, the focus is usually on the debtors new budgethow much of Ds income will be used to pay creditors and if those payments are adequate. iii) In Chapter 11, the DIP retains control of business or the estate and continues running it. Thus, debtors and creditors focus on the operation of the business. (1) The amount to be paid in Chapter 11 depends on the success of the business. (2) Debtors and creditors are economic partners hoping for the success of the business. (3) If new management takes over at the insistence of one of the creditors, then the other creditors may worry that the business will be run for the benefit of that creditor alone, not all the creditors. (4) Disputes between debtors and creditors run the spectrum from disputes over daily operations to allegations of dishonesty and unfair dealing, also making business decisions that are hostile to the creditors interest. (5) The DIP may want to gamble assets where the creditor wants to preserve and protect assets. (6) In some cases, future profits may outweigh current losses. (7) Investors in the company may have subordinated debt or only equity, which means they will see no return on their investment unless the business succeeds. (8) Rule: If the disputes between the DIP and a group of creditors become serious, the creditors may seek appointment of a trustee to run the business. 1104.

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(a) The appointment of a trustee has enormous importance. (b) In re Sharon Steel Corp (i) Facts: Sharon Steel manufactured steel in Penn. They had two blast furnaces. In April 1987, only one of these was operational. On April 17, 1987 with 742 million in liabilities and only 478 million in assets, Sharon filed Chapter 11. Sharon management remained in control of the corporations operations as DIP. At all times, Victor Posner served as chairman, president, and CEO. DWG provided financial management services to Sharon and other Posner companies. It also provided office space to Sharon to house its executive offices and charged rent. Five months after the filing, the creditors committee was dissatisfied with the progress and petitioned the BR court for appointment of a trustee under 1104. As reasons, the committee cited prepetition transfers of assets that were voidable preferences or fraudulent conveyances, and Sharon did not try and recover them. Nor had Sharon closed out books for before the reorganization. The debtor was further continuing to lose money. Further, the BR court questioned the large expenditure in attorneys fees. (ii) Procedure: The BR court determined that the described behavior was cause under 1104(a)(1) and demonstrated the necessity of new management. A trustee was appointed. AFFIRMED. (iii) Issue: Whether creditors can apply for the appointment of a trustee in a Chapter 11 and show cause. YES (iv) Rule: Appointment of a trustee should be the exception rather than the rule. (v) Rule: 1104(a) mandates appointment of a trustee when the BR court finds cause, which is in the discretion of the court. (vi) Rule: (a)(2) creates a flexible standard which instructs the court to appoint a trustee when doing so addresses the interests of the creditors, equity security holders, and other interests of the estate. (vii) Rule: Appointment of a trustee is inappropriate where prepetition gross mismanagement has been corrected and no postpetition gross mismanagement has occurred. (viii) Rule: A DIP manager can be replaced for cause where the debtors many competing business interests render questionable his commitment to rehabilitation. iv) Creditors can seek liquidation in Chapter 11, in which case it may be easier if the initial management is ousted. v) A trustee can be appointed when dealings between the creditor and management have themselves become a source of the debtors troubles. vi) It can be problematic when the outgoing management who has engaged in fraud gets to appoint its successors because they are more likely not to pursue or investigate the fraudulent behavior. vii) 2005 Amendment Rule: The U.S. trustee shall move for the appointment of a trustee if there are reasonable grounds to suspect that those in control of the business participated in actual fraud, dishonesty, or criminal conduct as they managed the debtor or made financial reports. 1104(e) viii) 2005 Amendment Rule: If there is a reason to dismiss the case, the court may replace the DIP with a trustee if such a move is in the best interests of creditors and the estate. 1104(a)(3) ix) Though the trustee will be more trustworthy, he or she is less likely to know how to run the business and is an unattractive option to most courts. Courts have turned to the middle option. (1) 1104(c) Appointment of an Examiner. The central function of an examiner is to investigate the affairs of the debtor to identify pre-BR fraud and mismanagement as well as causes of action that should be brought against parties by the estate. Finally he or she monitors the DIPs performance. Can be appointed at anytime before confirmation. (2) Attractive to creditors and courts. It permits experienced and knowledgeable management to continue to run the business while providing the comfort of a disinterested examination and monitoring. (3) Courts venture outside the statutory guidelines in appointing examiners. They have been used as mediators and facilitators as well as negotiators in a BR case. Try to use the examiner as a special investigator. (4) Change in control seems almost inevitable in publicly held companies. This has caused the development of turnaround management (TM). Provide stability, vision, and leadership to get the company out of its present hole. Gives courts and creditors somewhere else to turn when they lose faith in current management. b. What happens to the cash? i) There is not the same free reign given to the DIP as before BR. ii) The Code restricts DIP powers and strikes a balance between the debtors need to run the business without undue constraint and the creditors need for reassurance that the assets of the business are not dissipated. iii) Most Chapter 11 businesses have insufficient cash flow to operate the business. iv) The first critical step is to keep the business going until longer range plans can be finalized, which requires cash in amounts often greater than needed before the filing. Debtor needs to be able to use the cash.

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v) Congress also recognizes the danger of letting the DIP control cash especially in relation to creditors who have lent against inventory and accounts. (1) There are few constraints on the DIPs use of the cash not subject to a lien, only that it be used in the ordinary course. 363(c)(1) (2) The DIPs use of cash that is subject to a lien, usually derived from the sale of inventory or the collection of accounts, called cash collateral. (3) Rule: Cash collateral may not be used by the DIP without the permission of the BR court. (a) Lockbox arrangement involves giving directions to those who owe money to the debtor to send their payments to a certain post office box. The post office box is under the control of the lender or of a third party acting as an escrow agent. Part of the money goes to the lender and part to the debtor. (4) The cash collateral problem usually arises early in the BR. (5) In re Earth Lite (i) Facts: The Pl. Sun Bank and Trust Company sought relief from the automatic stay from the BR court in the case of Debtor, Earth Lite, Inc. However, unwilling to wait the 30 days required, Sun Bank moved within 24 hours to have a preliminary injunction to prevent Earth Lite from using any of its collateral, which was the inventory and the money made from it. Earth Lite filed a Motion and sought leave to use cash collateral and other collateral under 363. Earth Lite was the DIP in the case. Earth Lite and Sun Bank had entered into a new agreement in which Sun Bank agreed to lend to Earth Lite in exchange for additional collateral and for personal guarantees of insiders. There were to be periodic payments including attorneys fees. The agreement called for the establishment of a lockbox for accounts receivables supervised by a firm. This worked until Feb. 1981. At the time of commencement, Earth Lite had $500,000 in inventory and approximately $90,000 in accounts receivable. The debt has been reduced from 425,000 to 288,000, which is secured by the accounts receivable. The court argued that if Sun Bank was granted relief, it would effectively put Earth Lite out of business. (ii) Procedure: Heard in the BR court. (iii) Issue: Whether an equity cushion is alone sufficient to provide adequate protection to use cash collateral. NO (iv) Rule: 363 provides that cash collateral means cash or other cash equivalents in which the estate and an entitiy other than the estate has an interest. (v) Rule: Whenever non-cash collateral is liquidated, the resulting proceeds are cash collateral so long as the proceeds continue to remain subject to the original lien. (vi) Rule: The debtor must provide adequate protection which may include giving an additional or replacement lien to the secured party to compensate the secured party for diminution of its cash collateral. (vii) Rule: A debtor cannot rest on its equity cushion for adequate protection to use cash collateral but must offer the secured party collateral. A personal guarantee is not legally sufficient to supply adequate protection. (viii) Rationale: The debtor should not be permitted to use cash collateral without making some payments to the creditor; however, the court will make this determination on a case by case basis. (b) Rule: The use of cash on hand at the time of filing is constrained if it represents the proceeds of assets subject to a security interest. (c) Rule: The BR court recognizes the right of a creditor to setoff a debt it owes to the debtor against a debt owed to the creditor by the debtor, subject to some qualifications and limitations. 553 The creditor will receive nothing nor pay anything and will cancel the debt. (i) Especially important for banks. (ii) The right to set off is not technically a security interest and is expressly excluded from the general rules of Article 9, except the rights of banks is acknowledged. 9-109(d)(10), 9-340. (iii) However, it is treated like a security interest in BR. (iv) Rule: A creditor with a right of setoff is treated as secured for the amount of its setoff right. 506(a) Thus, the account subject to setoff is cash collateral and governed by the rules set forth in 363. (v) Rule: A creditor with the right of setoff is also subject to the automatic stay and may not exercise setoff without the permission of the court. 362(a)(7). (vi) Though the bank cannot setoff without applying to the court to have the stay lifted, it can put the money in an administrative freeze pending that outcome. However, sophisticated debtors will drain the accounts prior to BR. (vii) BR does not create a right to setoff; it simply enforces the right given by non-BR law.

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(viii) The bank cannot setoff against special purpose escrow accounts, just the regular accounts. E.g. A debtor business account to pay its employees. (ix) The government can be both the debtor and creditor of a business also. (x) In re Hal 1. Facts: On 9/21/93 HAL Inc. along with related entities filed Chapter 11. Hawaiian Airlines paid Air Transportation Excise Taxes to the IRS quarterly. Aft the filing, the IRS conducted an audit and concluded that HA Airlines had committed errors in the reporting and paying of those taxes. After seeking relief from the stay, the IRS assessed the correct Excise Taxes, readjusted HA pre and post petition payments and determined that it had overpaid $215,000. On 9/9/94 the US filed a Motion for Relief from Stay to Effectuate a Setoff. It wanted to use the $215,000 to offset the claims of other government agencies. Under the confirmation plan, unsecured non-priority creditors were to receive stock of the reorganized debtors as payment. Without setoff, so would the Government. 2. Procedure: BR court permitted the setoff. 3. Issue: Whether the US has a nonbankruptcy right to setoff, and if so, whether the BR court abused its discretion in permitting setoff. 4. Rule: The filing of a BR petition does not, except in special 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. 553(a) 5. Rule: To enforce a setoff right, a creditor must establish that (1) it has a right of setoff under non-BR law; and (2) this right should be preserved in BR under 553. 6. Rule: The principal element of setoff is mutuality, which requires that the debts are in the same right and between the same parties, standing in the same capacity and same kind or quality. 7. Rationale: The mutuality requirement is strictly construed. 8. Holding/ Rule: Federal government agencies, with the exception of those acting in a distinctly private capacity, are a single entity for purposes of setoff under 553. 363 USE SALE OR LEASE OF PROPERTY (1) (a) Description of what cash collateral is: including negotiable instruments, rents, proceeds, products, offspring, etc. (2) (b) trustee can use, sale, lease or distribute(transfer) property unless debtor DISCLOSES a policy prohibiting the transfer of personally identifiable information (privacy policy) AND [a bunch of gobledy gook about privacy]. (3) (c) (1) Trustee may transfer property of the debtor and enter into transactions in the ordinary course of business without hearing or notice; (2) Trustee may not transfer CASH COLLATERAL without permission from creditors with interest in the collateral OR court authorization; (3) hearings can be preliminary and the court can determine the best interest; (4) Trustee must give an accounting. (4) (d) Trustee can transfer property under (b) and (c) only in consistence with applicable non-bankruptcy law AND to the extent not inconsistent with relief under the automatic stay provisions. (5) (e) the court shall prohibit the transfer of the property if a party in interest is not adequately protected. (6) (f) Trustee can transfer the property free and clear of liens only if (1) non-BR law permits; OR (2) the lien holder consents; OR (3) sale price is greater than the aggregate liens; OR (4) the lien is in bona fide dispute; OR (5) the creditor can be forced to take a money satisfaction for the lien. (7) (g) Trustee can transfer property free and clear of a vested or contingent interest in dower or curtesy. (8) (h) Trustee can transfer both the estates interest and the co-owners interest in property owned in which debtor had at commencement an undivided interest as tenant in comment, joint tenant, or tenancy by the entirety ONLY IF: (1) partition in kind is impracticable; AND (2) sale of the undivided interest would bring considerably less than sale free and clear of the other interest; AND (3) Benefit to the estate outweighs detriment to the co-owner; AND (4) such property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power. (9) (i) Spouse or co-owner has the option to purchase the interest at the sale price. (10) (j) Trustee shall deliver to spouse or co-owner their proceeds of the sale after costs. (11) (k) Lien-holder may bid at the sale and off-set their claim against the purchase price. (12) (l) Trustee may transfer property notwithstanding any contract provisions related to insolvency-forfeiture. (13) (m) An appeal of the transfer shall not affect a purchaser-in-good-faith if they had no knowledge of the appeal unless the appeal had issued a stay pending appeal. (14) (n) Trustee may avoid a transfer if the purchase price was controlled by agreement among bidders, and collect attorneys fees, purchase price over agreed amount, and even punitive damages. (15) (o) Any sale to a consumer is subject to TILA.

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(16) (p) (1) the trustee has the burden of proof on the issue of adequate protection; and (2) the entity asserting an interest in property has the burden of proof on the issue of the validity, priority, or extent of such interest. VII) 553 SET-OFF (1) (a) A creditor has the right to set off any debt incurred before commencement with its own UNLESS (1) it is disallowed; OR (2) the claim was transferred to the creditor after commencement or 90 days before petition and debtor was insolvent; OR (3) the debt owed by creditor to debtor was INCURRED by the creditor 90 days before commencement while debtor was insolvent for the purpose of right to set off. (2) (b) (1) If a creditor sets off a mutual debt with debtor on or before 90 days before commencement, the Trustee may recover that amount to the extent that any insufficiency on the date of the set-off is less than the insufficiency on the later of 90 days before petition OR the first date during the 90 days where there is an insufficiency. (2) Insufficiency means amount by which claim against the debtor exceeds the mutual debt owing to the debtor by creditor. (3) (c) Debtor is presumed insolvent during the 90 days pre-petition. Class Notes i) In re Sharon Steel Corp. (1989) ii) A determination of cause is within the discretion of the court for appointing a TIB to run a business in Chapter 11. iii) Appointment of a trustee is inappropriate where pre-petition management has been corrected and no post petition mismanagement has occurred. iv) Business dealings between the debtor and its subsidiaries do not per se create a conflict of interest. However, if there is something more than mere transfers, then the picture changes. v) The code has been amendedit is settled that appointment of the trustee should be the exception rather than the rule. The management hand pick their management successors will impede investigation of fraud from the old management. Now, 1104(e) the US trustee shall move for the appointment of a TIB if there is any suspicion of fraud or misconduct. Nudging the BR court to appointing a trustee quicker. vi) Used to be that filing the motion was just a tool for leverage. vii) Courts will more quickly appoint an examiner, but many times the courts appoint them to do things outside the scope of the examiners role in the statute. viii) When a Ch11 is filed, the debtor becomes the DIP. E.g. Petition Datepre-petition he is debtor, during pendency of confirmation he is the DIP, and after confirmation he is the reorganized debtor. The examiner or TIB can be appointed prior to confirmation, not after because then the contract or plan controls. ix) Unsecured creditors get nothing during pendency and secured creditors get only adequate protection during pendency, so that the DIP can have a nice cash stash during pendency. However, some debtors have security interests in inventory, floor planthings that turn into cash quickly which can be dissipated quickly. Cash Collateral you must get permission of court or the consent of the lien holder for its use. x) BR debtor needs to use its cash. Debtor will file a series of first-day motions---Allow me to pay my employees out of postpetition funds. Cash collateral use is one of the first motions you can file. (1) Generally, the judge will ask if you have contacted the creditor10-15 day interim orderat which time we will come in with the creditor and then we will decide if you should use cash collateral for the rest of the time. (2) This is an extremely important hearing that the debtor does not want to lose. (3) In re Earthlite (a) a debtor, before it is authorized to use cash collateral, cannot rest on its equity cushion, but must offer more to the secured party before it is entitled to use cash collateral. Minority View. (b) Majoritycan rest on this, until the court rules. xi) Setoff (1) The automatic stay has to be modified or terminated with respect to the act. (2) Bank has my checking account and I owe them on my car payment; they can take from my checking account for my default on the car loan. (3) RecoupmentIBM employee, and I got $5000 advance, they take $500 each weekmy employer can keep taking even after filing BR. (4) There must be mutualityif I owe money to Chase and have a claim against Bank of America. (5) In re Hal, Inc. (a) Its all Uncle Sams pot and we have the right of set off. (b) If these had all been different entities, then there would be no set off. (c) Any money collected goes to the US treasury even though there are different hands. (d) Army Air Force Exchangeclaims to be both.

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(e) Rule: Federal Government agencies with the exception of those acting in a distinctly private capacity are a single entity d.
for the purposes of set off under 553. (f) Minority View: Each are different units and they sue one another. So they must be treated as separate. 363 Use, sale, or lease of property. (a) cash collateral means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate or an entity other than the estate has an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to the security interest whether existing before or after the commencement of the case. (b)(1) After notice and a hearing, the trustee may use, sell, or lease OTHER THAN in the ordinary course of business, property of the estate, except he cannot sell personally identifiable information to any person under a policy in effect at the time of filing not to do so unlessthe sale is consistent with the policy or the court approves after the appointment of a privacy official. (2) If notification is required under the Clayton Act in the case of a transaction, then the debtor must give such notification and the waiting period will end 15 days after the date of receipt of notification unless it is extended. (c)(1) If the business of the debtor is authorized to be operated and unless the court orders otherwise, the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of he estate in the ordinary course of business without notice and a hearing. (2) the trustee may not use, sell, or lease cash collateral under paragraph (1) unless each entity that has an interest n such cash collateral consents; or the court, after notice and a hearing, authorizes such use, sale, or lease. (3) A hearing for permission to use cash collateral may be a preliminary hearing, but shall be scheduled in accordance with the needs of the debtor. If the hearing is preliminary, the court may authorize such use, sale, or lease only if there is a reasonable likelihood that the trustee will prevail at the final hearing. The court shall act promptly. (4)The trustee shall segregate and account for any cash collateral in the trustees possession, custody, or control. (d) The trustee may use, sell, or lease property in and out of the ordinary course of business only in accordance with applicable non-bankruptcy law that governs the transfer of property by a corp. or trust that is not moneyed, business, or commercial corp. or trust; and not inconsistent with any relief granted under the automatic stay. (e) Notwithstanding any other provision of this section, an entity who has an interest in property used, sold, or leased, by the trustee may request the court, with or without hearing, to prohibit or condition such disposition of the property to provide adequate protection of the interest. Unfinished. . . . 553 Setoff. (a) this section does not affect any right of the creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case in BR against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that (1) the claim of such creditor is disallowed; (2) such claim was transferred, by an entity other than the debtor, to such creditorafter the commencement of the case; or after 90 days before the date of the filing of the petition and while the debtor was insolvent; (3) the debtor owed to the debtor by such creditor was incurred by such creditor after 90 days before the date of the filing of the petition while the debtor was insolvent and for the purpose of obtaining a right of setoff against the debtor. (b)(1) if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so setoff to the extent that the insufficiency on the date of setoff is less than the insufficiency on the later of 90 days before the date of the filing and the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency. (2) Insufficiency means amount, if any, by which a claim against a debtor exceeds a mutual debt owing to the debtor by the holder of the claim. (c) the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition. Problem Set 20 20.1. Tiny Telephones is about to enter Chapter 11, and its principal lender, The Maine State Bank, holds a security interest in its inventory. The president wants to know if he can operate the business normally after filing without having to go to court. What do you tell him? No. Since his principal lender has a security interest in the inventory, he will have cash collateral, which he cannot use without the permission of the court. He probably has some type of deal with the bank where he has to place the proceeds for the sale of the inventory in a special account. 363(c) He has to get court permission or permission from the creditor. 20.2. First National Bank is the principal lender of Teddys Toasters, a kitchen appliance dealer. Teddys also keeps all its checking accounts with FNB and as of June 1 owed FNB about $150,000 in unsecured debt. By July 1, Teddys was in financial trouble and the bank demanded that Teddys keep a compensating balance in its checking account of 10% of its debt to the bank. Consequently, from July 1 on, Teddys kept a balance of at least $15,000 in the account. On September 10, we filed Chapter 11 on Teddys behalf and on that date Teddys checking account had a balance of $40,000. Is the $40,000 cash collateral? Yes, though FNB had no collateral to secure their debt that the cash could represent, 506(a) states that an allowed claim of a creditor that is subject to setoff under section 553 is a secured claim to the extent of the amount subject to setoff, and is an unsecured claim to the extent that the amount so subject to setoff is less that the amount of the allowed claim. Thus, the money is cash collateral. If a setoff right is cash collateral, how much, if any, right to post petition setoff does the bank have and why? 553(a)(3) states that a creditor cannot set off amounts that were incurred within 90 days before the filing the petition while the debtor was insolvent for the purpose of obtaining a right of setoff. Thus, FNB would have rights to all of the checking account balance because the compensating balance was not incurring a new debt, but forcing the debtor to insure that the bank would get some compensation in the case of BR. If it is considered

e.

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a debt incurred, since it occurred on July 1 and BR was filed on September 10 so that the creditor violates the 90 day rule, and it is clear, the bank was interested in setting off at least 10% of the debt when they asked for the minimum balance. Outside the BR context, the compensating balance is legal, but it doesnt work in BR. The bank tells you you have to have it, and this hurts the unsecureds. The bank gets $25,000 but not the $15,000 since the compensating balance is illegal. 20.3. Gretchen owns Funtime Vehicles who gets its motorbikes from Winston Motorbikes. Gretchen buys the motorbikes with unsecured credit and owes Winston $50,000, for which she pays using a line of credit from Citywide Bank . Gretchen received a bill to pay on the line of credit and learned that Citywide had purchased the $50,000 debt from Winston at Winstons request for $40,000. On the day before Gretchen planned to file Chapter 11, there was $61,000 in the bank to meet her payroll due four days later. How much of the cash in the checking account will Gretchen be able to use without getting the courts permission? Since the bank now has a right to set off $50,000, it appears that she can only get to $11,000. However, 553(a)(2) says that the creditor has no right to setoff if the claim was transferred to the creditor by someone other than the debtor, which is what happened here; thus, she can access all of it without court permission since none of it is cash collateral. It was transferred after 90 days of before the commencement of the date of the filing of the petition presumably if she files soon and she is presumed insolvent during that time so it was transferred while she was insolvent. None of the money goes to Citywide Banktheir claim that they purchased just went out of the window. Gretchen keeps every dime. Mathematically, none of the money goes to citywide. They have no right of setoff. They owe Funtime $61k. The claim for $40k was transferred so they do not have a right of setoff. 553A2. Transfer of debt is the problem. If transferred during this time it is presumed it is transferred to create a right of setoff. 20.4. We are counsel to the equity holders of eBump, technology firm that lost $52 million of our clients investment and filed Chapter 11. The business owed $20 million in debt and had assets valued at $10 million. Reorganization has been pending for 8 months, but the plan rumored will give the outstanding equity to creditors in return for forgiveness of their debts, wiping out our clients completely. Our clients want a plan in which they invest a little more and creditors are offered some cash and some equity for forgiveness of some debts, but they are not being allowed to negotiate. The current management team is trying to cater to its largest creditor to the exclusion of equity holders and other creditors. Clients also suspect that the management team has been spending frivolously, plus the management team has announced that after confirmation they will get 5% of stock. We know the plan will be confirmed if the creditors vote for it, so we will have to use other leverage for our clients. What is your best idea? We need to try to get a TIB appointed for cause by the BR court since it appears that the new management team may not be acting in the best interest of all creditors and may not be interested in helping the business survive BR. In most BR, the equity holders get wiped out. General unsecured creditors get stocks. If you need to investigate for more information, what will you look for? 503(c)suggests that the 5% transfer may not be allowed under BR law if it is incurred for the benefit of an insider of the debtor for the purpose of inducing him to remain with the debtors business, unless the court finds there is a bona fide job offer from another business at a greater rate and his or her services are essential to the survival of the business and the amount of the transfer is not greater than 10 times what the transfer would have been to non management employees or if no such comparison exists, the amount of the transfer is not greater than 25% of the amount of a similar transfer to the insider during the year. Further, the stock cannot be a severance payment unless it is applicable to all full time employees and is not greater than 10 times the amount of the mean severance pay given to non management employees during that calendar year. Further, there can be no other transfers outside the ordinary course of business to managers hired after the date of the filing of the petition. Thus, we need to know why management is receiving the stock and how much it would amount to in comparison to what would be given a non-management employee. 364 Obtaining Credit (I can borrow money as long as it is in the ordinary course of business. But if I want to go to bank, outside the ordinary course of business, I must get the Court to say so and the creditor can demand any of the following. You must prove that no one will give you an unsecured loan. The DIP can ask the court to give the priorities. ) i) 507(a) Priority ii) 507(b) Super Priority iii) 364(c) Super Super Priority iv) 364(c)(3) I want to have another security. On Blackacre that is unencumbered v) 364f(d) give a lien against Blackacre that is equal to the lien another person had before. Both are first lien holders. Are the BR court can prime the lien. vi) Reversal or modification on appeal is not going to undo a transaction that has already been done. Chapter 11 Reorganization: Operating in Chapter 11 II 364 Obtaining Credit. (a) If the trustee is authorized to operate the business of the debtor, unless the court orders otherwise, the trustee may obtain unsecured credit and incur unsecured debt in the ordinary course of business allowable as an administrative expense. i) (b) After notice and a hearing, the court may authorize the trustee to obtain unsecured credit or to incur unsecured debt other than subsection (a), allowable as an administrative expense. Administrative Expenses are always Priority Debts.

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ii) (c) If the trustee is unable to obtain unsecured credit allowable as an administrative expense (You must prove no one is willing to
give you an unsecured loan under (b)), after notice and a hearing, the court may authorize the obtaining of credit or the incurring of debt (1) (1) with priority over any or all administrative expenses; super, super priority (2) (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or lien on property that is unencumbered (3) (3)secured by a junior lien on property of the estate that is subject to a lien. Junior lien on property that is encumbered. iii) (d)(1) After notice and a hearing, the court may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if the property is already subject to a lien, but the debtor is allowed to give creditor a lien that primes that lien as long as the original creditor is adequately secured. Equal lienthey split the proceedsthey will each get a portion of the proceeds. (1) (A) the trustee is unable to obtain such credit otherwise, and (2) (B) there is adequate protection of the interest of the holder of the lien on property of the estate on which such senior or equal lien is proposed to be granted. Priming the Lien. iv) (2) In any hearing under this subsection, the trustee has the burden of proof on the issue of adequate protection. v) (e) The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt or of a grant under this section of a priority lien, does NOT AFFECT THE VALIDITY OF ANY DEBT SO INCURRED, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not the entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal. (MOOTNESS) Safe Harbor for the Creditor. vi) (f) [A] security does not apply to the offer or sale under this section of a security that is not an equity security. (Unless the entity is an underwriter as defined by relevant securities law???? ) b. Post-petition Financing i) Because an increase in operating capital is essential for survival of the business debtor, interim financing to keep the present operations afloat must be secured. ii) The debtor must find someone who is willing to make new infusions of cash in order for the business to survive. iii) Challenging to find such a lendercurrent lender are often the most likely sources because they have the most to lose if the debtor does not survive. iv) Some lenders specialize in high risk business loans made to reorganizing companies. v) When sufficient assurances can be offered, lenders may be persuaded to lend. The debtor can offer new inducements such as new security interests or priority repayments. vi) BR Code encourages post-petition lending by giving these creditors special protection. (1) Most important protection a DIP can offer a post-petition lender is a security interest in its property. (2) Pre-petition security interests with after-acquired property clauses cease to operate at the instant the BR is filed. (3) Rule: While a security interest may lock up all property the debtor owns at the moment of filing, under section 522(a) prepetition security interests do not attach to property acquired by the DIP after BR. The estate is a new entity not bound by the old security agreement. (4) Thus, an after-acquired property clause in a pre-petition SI is not fed by property acquired by the DIP. It belongs to the estate which represents all creditors. (a) E.g. If Drugstore has $100,000 in inventory at the time that it files, the creditor with a SI in it has first claim to that property. But the inventory Drugstore acquires after it files will be property of the estate. Inventory purchased from cash from the inventory will be cash collateral that can only be used with permission from the court. vii) Rule: A secured creditor can claim a security interest in post-petition property by way of a proceeds argument under UCC 9-315, if they can trace the new post-petition inventory back to the sale of the old, pre-petition inventory in which it held the SI. Must be able to trace the value in an un-broken chain. viii) Rule: The post-filing debtor will be able to offer as security for a post-petition loan both an interest in property that was not encumbered before BR plus an interest in any new property it acquires after BR. ix) In re Garland Corp. (1) Facts: In an emergency appeal from various orders of the BR judge during the early stages of a Chapter 11 filing, the Garland Corporation, a seller of knitted goods and sportswear for women, defended its seeking authorization to borrow operating funds from New England Merchants Bank and Prudential Insurance Company. In an ex parte hearing the same day of the request, the BR judge authorized the loans. He fixed May 7, after the formation of a Creditors committee to have further analysis of the application. The debtor borrowed $700,000 and a line of credit of up to $1.4 million. These post-

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petition claims were later deemed priority costs of administration under BR Code 507(b) and a first encumbrance on all assets of the debtor. On May 16, the Creditors Committee objected to the debtors request to borrow an additional $500,000. (2) Procedure: After a hearing, the Judge approved the $500,000 and increased the line of credit. The Creditors Committee appeals. (3) Creditors Argument: the evidence did not demonstrate a reasonable likelihood that the debtor could be successfully rehabilitated, and the borrowing of operating funds secured by unencumbered assets require adequate protection of the interest of unsecured creditors under 361. Without such adequate protection, the borrowing constituted a taking of property. THIS IS AN INVALID ARGUMENT. (4) Issue: Whether a debtor must provide adequate protection to unsecured creditors to give security interests in unencumbered property for post-petition borrowing. NO (5) Rule: 364 (c)(2) After notice and a hearing, upon sufficient showing that the debtor was unable to obtain unsecured credit. the court may permit the use of unencumbered assets as collateral to secure post-petition indebtedness upon compliance with section 364(c)(2). (6) Rationale: There is no express statutory requirement that holders of unsecured claims be provided adequate protection. Adequate protection within the meaning of the BR code 361 need be provided only as expressly required in sections 362, 363, and 364. x) In re Hubbard Power & Light, inc. (1) Facts: Hubbard the debtor sought authorization for HPL to incur $750,000 of post petition financing from Enron Capital under section 364(c) and (d) of the BR Code. The debtor filed a Memorandum of Understanding embodying the agreement for the loan between it and Enron. The debtor proposed to give Enron a super-priority lien in exchange for the loan. New York State Department of Environmental Conservation interposed as representatives of bondholders holding a lien on all the Debtors real and personal property and who is the Debtors senior secured creditor. The DEC commenced an action n NY State Supreme Court to keep debtor from burning adulterated wood which effectively shut the business down. In August 1995 wood chips caught fire and burned the adjacent property. The town spent a million dollars to clean up an assessed a real property tax lien against the debtors property for the entire amount of that cost. The debtor did not have the necessary moneys to engage in the cleanup of the facility. As a result it filed Chapter 11. It sought to borrow $750,000 from Enron which would be due a year after Hubbard became operational. Enron was to receive a priming lien on all of the Debtors assets as well as an assignment of and a first priority SI in all the revenues the D received from the sale of electric power. $300,000 to $400,000 was slated to be used for the clean up. (2) Procedure: The court found that the clean up had to happen in order for the land to be used for any purpose, and the increase in value would be adequate protection. (3) Issue: Whether an increase in the value of its collateral can be deemed adequate protection for the purpose of granting a super priority to a post petition lender to a secured creditor. YES. (4) Rule: Pursuant to 364(d) the debtor must present evidence that the interest of the holder of an existing lien on its property is adequately protected which is to protect the secured creditor from diminution in the value of its interests. (5) Rationale: Adequate protection is not expressly defined and the statute confers upon the parties and the courts flexibility by allowing such other relief as will result in the realization by the protected entity of the value of its interest in the property involved. xi) Two Controversial issues in Post-Petition Financing: Cross collateralization and Mootness (1) Cross Collateralizationinvolves securing a pre-BR loan with new or additional collateral granted post-BR as part of a new post BR loan. Should a creditors pre-petition status (undersecured) get promoted in exchange for post-petition financing? (2) MootnessDifficult for appellate courts to review because the delay would sink the business but it cannot make the review absent a stay. (3) Rule: 364(e) is designed to encourage post-petition lenders by assuring them that their rights will not be upset by an appeal of the order that gives them security or a priority, leaving them with a very high risk loan. A party appealing a financing order must apply for a stay of the order and that the party will usually be required to post a substantial bond. Means that the actions of the lower court may never be subjected to meaningful review. xii) Shapiro v. Saybrook Manufacturing Co. Inc. (1) Facts: Shapiros objected to the BR courts authorization of the Chapter 11 Debtors to cross-collateralize their pre-petition debt with unencumbered property from the BR estate. Debtors applied for use of cash collateral and for authorization to incur secured debt. Manufacturers Hanover agreed to lend the debtors money in exchange for a SI in all the debtors property both property owned prior to the filing of the BR and acquired subsequently. This SI not only protected the post-petition $3 million loan but also protected the $34 million it was owed pre-petition. Hanovers pre-petition debt was under-secured by $24 million which it originally would have had to share pro rata with other unsecured creditors. The debt is now fully secured.

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(2) Procedure: The BR court overruled the objection and refused to grant a stay of its order pending appeal. The Dist. Court dismissed the appeal as moot under 364(e) of the BR code because there was no stay. REVERSE AND REMAND. (3) Issue: Whether cross collateralization is authorized under section 364. NO. (4) Rule: Section 364(e), exempting post-petition loans from review, is only applicable if the challenged lien or priority was authorized under section 364. (5) Rule: Cross-collateralization is not authorized as a method of post-petition financing under 364. (6) Rule: Section 364 authorizes Chapter 11 debtors to obtain secured credit and incur secured debt as part of their reorganization and by their express terms (c) and (d) apply only to future extensions of credit and do not authorize the granting of liens to secure pre-petition loans. (7) Rationale: Section 507 sets the priority order of claims and expenses against the BR estate and creditors within a given class are to be treated equally and BR courts may not create their own rules of super-priority for a single class. Cross collateralization is inconsistent with the priority scheme of BR. Here they were trying to make the old loan a priority too. (8) Vida: If the cross collateralization would take money out of the hands of the unsecured creditors, the courts will not likely allow it. If you are over-secured, the courts may allow the cross collateralization up to the amount of the value of the property. xiii) Owner Financing (1) Some debtors turn to equity holders as another source of funds. (2) Some are willing to make additional investments in the business to keep it running. (3) Investors however do not use the priority and super-priority provisions discussed here and instead they receive continued ownership of the post-BR business. (4) Rule: the BR Code restricts the participation of old equity in the post BR corporation, so equity cannot retain value unless all the creditors have been paid in full, the so-called Absolute Priority Rule. Old equity will normally be killed post petition. Why would the old ownership want to retain ownership in a losing entity anyway? Tax-consequences. If the entity ceases to exist, their carryovers will discontinue (5) Exception: When equity provides new value that cant be obtained elsewhere to finance the reorganization, the court may permit equity to retain ownership if it is convinced that the bargain is fair and that creditors will be benefited. (6) In the context of small business in which there is no business without the current owner-operator, as a practical matter, the creditors may accede to continued participation of old equity. xiv) Financing Goods and Services (1) Unless suppliers are willing to supply necessary goods and services the debtor will not be able to reorganize. (2) The BR Code only requires suppliers to continue to deal with the Ds where there is a legally enforceable K for future goods and services. (3) Rule: Absent an on-going K, many suppliers will be reluctant to extend any further credit despite the fact that they will be entitled to administrative priority if they do. 503(b); 507(a)(1). (4) This is a central focus of the early stages of BR getting suppliers to support the BR debtor. (5) There has always been an exception to pay employees and critical vendors outside of the pro rata scheme reserved for other unsecured creditors. (6) Critical Vendorsa supplier whose continued delivery to the D was absolutely crucial to the success of the Chapter 11 case and who refused to supply any more goods unless pre-petition debt was paid. (7) Rule: Unless the debtor could produce evidence in court that payment to these suppliers was necessary and would substantially benefit the estate, then the pre-petition debts of the suppliers would have to wait for disposition pro rata. (Represents a split in authority because others just accepted the Ds designation.) (8) Goods suppliers enjoy the right of reclamation under UCC 2-702. The seller can get back the goods it had sold to a buyer who turned out to be insolvent even without a security interest. (9) The BR Code limited the time this reclamation could occur since it put some creditors at an advantage. (10) Section 546 states that if the debtor receives the goods while insolvent and within 45 days of filing for BR, the seller may have a right to get the goods back if it makes a timely written demand. (a) (c) (1) Except as provided in subsection (d) of this section and in section 507(c), and subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such seller may not reclaim such goods unless such seller demands in writing reclamation of such goods-- (A) not later than 45 days after the date of receipt of such goods by the debtor; or (B) not later than 20 days after the date of commencement of the

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case, if the 45-day period expires after the commencement of the case. (2) If a seller of goods fails to provide notice in the manner described in paragraph (1), the seller still may assert the rights contained in section 503(b)(9) (11) Rule: A seller of goods received by the debtor within the last 20 days before BR gets an automatic administrative priority, a one-hundred cent right to payment for those goods. 503(b)(9) (12) This provision does not work against a secured creditor who claims the newly delivered property as inventory. 506(c) A blanket security interest will work against the vendor blocking the right of reclamation. Only if it was given before the BR and became part of an inventory security interest. xv) First Day Orders (1) The debtor presents the order to the court and gets it signed on the same day the Chapter 11 petition is filed. (2) Types of First Day Orders: (a) Additional injunctive relief beyond the automatic stay (b) Requirements for operating reports (c) Authorization to buy or sell outside of the ordinary course (d) Authorization to pay employees wages due, and other operating items of that sort (e) Use of cash collateral and other matters related to cash management (f) Approval of a post-petition financing arrangement (g) Employment of counsel for the debtor and for a creditors committee (3) Routinely entered without notice or an opportunity to be heard for many of the stakeholders in a Chapter 11 debtor. (4) Will be presented to the court with one principal lender in attendance and perhaps a large creditor or crucial customer. (5) Creditors committees counsel may also attend. (6) Often temporary and will expire if not renewed. c. Class NotesYou missed them all. Good job, Tammy! d. Problem Set 21 e. 21.1. As TIB of GoGo Properties, a real estate development, I am faced with an excellent piece of suburban property. However, a no growth statute makes it impossible for a buyer to develop the property as profitably. GoGo is the beneficiary to a grandfather clause that makes the statute inapplicable to existing owners and also makes it inapplicable to transferees if the property already has water and sewage service at the time of transfer. However, GoGo does not have water and sewage service, and it will cost $100,000 to get them installed. The time of transfer, according to the statute, is the time that the property is first advertised or the first discussion concerning possible transfer. Therefore, you cannot get a potential buyer to finance the work. How could you get someone to lend you the money to install the water and sewage service and thus greatly increase the value of the property? 364 First, I will have to try and get financing of unsecured debt, but if that is impossible, I will tell the court. The court can authorize the obtaining of credit for me by giving priority to a creditor willing to loan the funds. The fact that the property can be developed may mean that it is in the creditors best interest to loan funds to have it survive the BR and build. However, the no growth statute may signify that there is no demand for the property, in which case the creditor wont get as great a return. 364(a); 503(b)(1)507(a)(2) 364(b) 503(b) (1)507(a)(2); 364(c); 364(d) You must show the court that you could not get it under a and b. 101(54) BR code calls a lien a transfer. But here it is recorded as state law. Thus, if it is a transfer, will cause the debtor to lose his Grandfather clause. You look to state law to see what the property rights are, but you look to federal law to find the right in BR after the property is defined. This could be in the ordinary course of business and they would not need permission from the court to get the loan. If not in the ordinary course of business, then you would need court approval for any financing. First, you would attempt unsecured financing. Then you would attempt super priority financing. Then you would attempt super-super priority. f. 21.2. Low Price, Inc. had a $500,000 debt to First State Bank, which was secured by a lien on the inventory. $250,000 of that amount was unsecured. Low Price Inc. got a post-petition loan for $250,000 from Hanratty Finance secured by a lien in its equipment. FSB sought adequate protection and asked for the stay to be lifted; however, the court did not lift the stay but offered an additional lien on the accounts receivable to provide adequate protection. The inventory was much depleted by the time he got to Chapter 7 and the accounts have become impossible to collect because of customers warranties, and FSB is still owed $250,000 after all is collected. Hanratty got $150,000 from the sale of the equipment, and there is $350,000 in unencumbered real estate. The only unpaid debt from the corporation plan is the debtors lawyer whose claim is $150,000. The Ch. 7 trustee and her lawyer are owed $50,000. How much will the trustee and her lawyer get? 726(b) They will get the $50,000 they are owed because according to this section, when a case is converted to chapter 7, allowed expenses incurred after the conversion are given priority over claims that are incurred before the conversion. How much will FSB, Hanratty, and the debtors lawyer get? 364(c)(1); 507(b). Hanratty will have priority as a postpetition creditor and will receive $100,000 because it has priority over 507(b) expenses, FSB will have priority as it was provided adequate protection 507(b) but still had a claim resulting from the stay so that it will receive $250,000. This will mean that the debtors lawyer will get nothing because his claim has been primed by the other priority loans. If this were just a Chapter 11 and not converted: Where does the lawyer fit in? 503(b) allowed administrative expenses to level 507(a)(2). Hanratty was given a lien and nothing elsethis means this is not a priority debt. 507(a) is a priority, but 507(b) is super priority. Both Hanratty and the Attorney

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share the remaining 100,000 pro rata (proportionate) Hanratty and the Atty were both priority, but the lack of adequate protection made FSB a super priority. 507b: If TIB provides adequate protection that turns out to be inadequate, the creditor will have a claim that is superior to a 507a claim (priority) and now have a 507b (super priority). Essentially, FSB, because the adequate protection failed, has priorty over Hanratty. If there is $350k, FSB gets first $250k, HF & Attorneys share the remaining $100k pro rata. In chapter 7, the Trustee, under 726b, has ultimate priority in getting paid. If everyone is not getting paid, then the adequate protection puts them back in their proper order. g. 21.3. Our client, Murphy Investments, Inc., holds the $3 million first mortgage on the companys principal manufacturing facility. The facility is worth $2 million and the debtor, Video Excitement, Inc., has $ 1.5 million in unencumbered assets of the company. Initially, our client refused any further financing prior to BR. However, Yankee State Bank has agreed to loan the debtor $750,000 in operating money with a lien on the unencumbered assets on the condition that the court give it priority standing. Our client now wants to consider giving the loan on the condition that it be secured by all of VEIs assets. What are the chances of getting court approval for Murphys proposal, if the management agrees? 364(c)The chances are slim because this will be cross collateralization which is not authorized by the Code and is not held up by the courts. Why does the lender want the debtor to go into BR? They want a super priority. Outside the BR, you dont have the scheme to give you priming benefit. Yankees higher interest is not a reason to get cross collateralization, but you can try to get a lower interest rate. What if Yankee takes another look at VEI financials and decides to find some business somewhere elsewill prospects improve? The prospects might improve because then VEI will be able to claim that it can find financing no where else; however, Murphys plan will be problematic still and will likely have to be reformed. Maybe the numbers are such that you will be able to get it or maybe no one will challenge it. Courts will not approve it initially. h. 21.4. We filed Chapter 11 BR three weeks ago for Bens Auto Parts, and now Ben has received letters from suppliers demanding the return of the auto parts they supplied. He has more than 150 suppliers, but none of them have a lien. The largest supplier, National Vehicle Wholesale Parts arrived at the store and physically took all the National parts they could find. The police told Ben that the courts had to sort out whether the men had a right to take the parts, and Myron, Bens bookkeeper wants to know what to do about the letters. Ben wants to know what we will do about National? My answer depends on whether or not Ben is going to keep the business going. If he is, we should look into getting National named a critical supplier for whom the court will give priority on his debt. However, since Ben has said that it is construction that has shut him down, it will depend on whether he thinks that situation will improve such that the business will improve in time for him to survive BR. According to section 546(c), a seller who sold goods to the seller has a right to take the goods back if the seller 1) sold them in the ordinary course of business, 2) while the receiver was insolvent which is 45 days before the date of the commencement of the case, and 3) makes the request in writing not later than 45 days after the case commences or not later than 20 days after the case commences if the 45 days expires after the commencement of the case. Here, it is unclear when National sold the goods and whether one of the letters was such a demand coming from them. Under 503(b)(9), National can retrieve the value of the goods if they were sold within 20 days of the commencement of the case to the debtor in the ordinary course of business. We will check to see that National complied with all of the required procedures. Self-help will cause chaos. Courts are probably going to say that they cant exercise self-help. This may be a breach of the peace. The code is unclear. You will have the later if 45 day s or 20 days which kicks in during the BR, whichever one ends at a later date. He doesnt know how this will shake out legally. The automatic stay did kick in. However, under reclamation, you can reclaim. 546 gives the supplier the right to reclaim merchandise if the debtor purchased the goods, without paying for them, while they were insolvent. If debtor is insolvent within 45 days of petition. After the date of receipt of goods by debtor, within 45 days, you can reclaim. i. 21.5. We are newly appointed bankruptcy judges and counsel for Supertech Computers has come to our home on the weekend trying to file numerous motions, one of which is an approval of a financing order that would approve the making of a loan by Revere State Bank of $100,000. RSBs new loan would be secured by inventory and accounts as is its old loan of $200,000. No creditors representative is present, but counsel claims that all of the actions have been creditor approved. Counsel claims that Supertech has three problems: 1) A creditor has just obtained a $50,000 judgment against them and the company cannot afford the bond for the appeal; 2) a major supplier has refused to deliver unless paid in cash and if it does not deliver the assembly line will shut down and will not be restarted except that the company pay $30,000 at which time Supertech will have to liquidate. However, if Supertech ships computers through next week it will receive a payment of $25,000 which will enable it to survive. Supertech has 413 creditors to whom it owes $800,000 and assets worth only $300,000. You ask numerous questions. What other questions will you ask debtors counsel before you rule? I will ask whether Supertech can obtain financing from another source that is unsecured before I approve the RSB post petition loan. I will tell them that RSB has to have a separate lien on the post-petition loan because they cannot cross collateralize. I would ask what they are offering Supertech for adequate protection. What would you need to hear before you granted the debtors motion? The answers to the questions???? XVIII. Chapter 11 Reorganization: Reshaping the Estate; The Strong Arm Clause. a. 544 Trustee as lien creditor and as successor to certain creditors and purchasers. (a) The trustee has, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains at that time a judicial lien on all property on which a creditor on a simple

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contract could have obtained a judicial lien, whether or not such a creditor exists; (2) a creditor that extends credit to the debtor at the time of the commencement of the case and obtains an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or (3) a bona fide purchaser of real property, other than fixtures from the debtor against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists. (b)(1) the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable . (2) Not a charitable contribution and any such claim will be preempted by the commencement of the case. b. RESHAPING THE ESTATE i) The avoiding powers of the TIB are equally available in both consumer and business BR, the amount of money at stake in the business BR make it far more important in Chapter 11. ii) Avoiding powers permit the TIB to undo pre-BR transactions between the Debtor and certain creditors to the benefit of all unsecured creditors. iii) In doing so, they police compliance with state law, which is UCC 9, and serve BR policy. iv) The DIP or TIB has leverage with the creditor because in an avoidance it could face the loss of its SI or a requirement to return amounts it has been paid shortly before BR. v) Once cash flow problems are under control, the TIB assesses the legal position of each of the creditors in preparation for constructing a workable plan. vi) The DIP is not the debtor before BR and can try to save the business on behalf of all the creditors as well as employees, stockholders, and the community. The rights of the DIP are not just the rights of the debtor but also the collective rights of the creditors to preserve the business assets. vii) The DIP may avoid transactions the old debtor would never have been allowed to challenge. He will challenge any secured creditors demand for better treatment than an unsecured creditor, until the challenged creditor establishes that the SI under which it claims is not avoidable. c. The Strong Arm ClauseSection 544(a) i) The BR code determines the TIBs status in the state law pecking order. ii) Section 544 compares the TIB to all other creditors by giving the TIB the rights and powers as of the date of the BR filing of a judicial lien creditor, an execution creditor, or for real estate, a bona fide purchaser. Strong Arm Clause knocks off unperfected interests. iii) Section 544 has a special provision for real estate. 544(a)(3) gives the TIB even greater powers than against personal property interests, such as SIs under Article 9. iv) Rule: Against a holder of a real property interest, the TIB has the status of a bona fide purchaser of real property. The BFP generally has much greater rights under state law than a mere lien creditor and the TIB can avoid real estate interests under the strong arm clause. v) In re Bowling (1) Facts: Debtor Bowling owned real estate. On July 12, 2001 he executed a promissory note in favor of Alta Financial Corporation in the amount of $116,073. He also executed a mortgage that same day conveying the real estate as security for the promissory note. The mortgage was recorded on August 1, 2001. On its face the mortgage reflects that Mr. Bs signature was notarized by Sharon Eisenhunt in which she certifies that Bowling executed it in her presence. Bowling filed Ch. 7 in January 2003. The trustee filed a complaint seeking to avoid the mortgage on the basis that it was defectively executed and thus avoidable. The debtor admitted that he did not know Ms. Eisenhunt and that she did not notarize the signature. The law of Ohio governs whether the mortgage was legally executed. (2) Issue: Whether failure to execute a mortgage according to law can make it avoidable by the Trustee in BR. YES. (3) Rule: Where the Trustee has avoided a mortgage pursuant to its strong arm powers, the mortgagees interest is preserved and becomes a part of the BR estate without the need for the trustee to resort to the recovery process pursuant to 550 (a). He doesnt have to have an adversary proceeding; it automatically becomes his. (4) Therefore, the statutory provisions of 550(e) providing for a replacement lien for the creditor are not triggered for the benefit of the mortgagee. Usually the TIB has to pursue the initial transferee and give them any improvement money they are due; here is it automatic. (5) The person who gets jumped when the trustee avoids the lien, the person who did it in good faith will get a lien for the value that it has put into the home. vi) While a purchaser would see the defective mortgage, it would still have notice of the mortgage and could not attain BFP status in the purchase. The TIB similarly would be charged with notice and could not set aside the defective mortgage. vii) Some courts hold that 544(a) means that the provisions apply without regard to the knowledge of the trustee or any creditor. d. Other Property

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i) In personal property, the TIB only has lien creditor status 544(a)(1)-(2). This is much less power under state law. ii) UCC limits lien creditor power by denying it priority it gives other secured parties and buyers. iii) Only secured parties and buyers are protected from misinformation of certain types in a filed financing statement, while the
unsecured creditors represented by the TIB are bound by defective and misleading filing even if they actually relied on it. UCC9338. e. Federal Tax Liens i) Repayment of taxes and discharge of tax debt are controlled by the BR code as a part of the broader provisions relating to priority claims in Section 507 and discharge in section 523. ii) A federal tax lien arises when assessment is made, and it attaches to all the taxpayers property and rights to property. iii) Until the lien is filed, it is treated as an unfiled SI: good against the debtor, but not good against most other interested parties, including the TIB. Before it is filed, the TIB has priority over the tax lien. iv) After it is filed, the TIB must treat the government like any other secured creditor. f. Problem Set 22 g. 22.1. Eight months ago Western Fliers, a small charter airplane service, purchased a ten-passenger aircraft for $255,000. It paid $25,000 in cash and it gave a promissory note for $230,000 secured by the aircraft. The sellers attorneys gave the papers to her young assistant after the deal was closed with instructions to file these right awaythe assistant did so in the file drawer. Western Fliers has a major personal injury judgment against it and filed Chapter 11. When the seller learned of the filing, it pulled out its files on Western and discovered the security agreement and financing agreement and called you immediately. What do you advise? The seller is in trouble because since the security interest wasnt filed as of the BR date, it will not have priority over other creditors. However, it is perfected and the seller is still a secured debtor. They need to file immediately. Because they were not secured, the trustee could avoid their claim. A PMSI is automatically perfected for only 20 days, then the creditor must file. The lien creditor trustee can avoid if this is not done????? Everything is measured from petition datethe lien was not recorded on petition datecan you fileit depends. As a general rule, automatic stay stops you from filing???? Unperfected secured creditorhe loses to the trustee. No ifs and buts, they lose end of the story. h. 22.2. Western Fliers bought another plane the week before the filing purchased from Aero for $10,000 down and a promissory note for $160,000 secured by the plane and all of Western Fliers other planes, spare parts and servicing equipment, including the tenpassenger plane. It immediately filed copies of the financing statements in all the appropriate locations. What can Aero get in the Chapter 11? Aero, unlike the earlier creditor, has met the 20 day perfection requirement and is not going to be subject to avoidance on the ground that it was not perfected at the time of the BR filing.. However, it has cross collateralized and encumbered too much of Westerns equipment in the deal. Aero will only be able to reclaim its plane and will obtain the value from it???? As soon as Mitchell Aeronautics files it will prime Aeros security interest. 362 the automatic stay does not always stop filing, especially in the case of a PMSI 362(a)(3)-(4) prohibits. 362(b)(3)to perfect or maintain continue perfection546(b)within 547(e)(2)(a)30 days. Any other property or after-acquired propertydragnet clausesthis the trustee can avoid. It is meant to protect the PMSI. The trustee will still win546(b)it will help with PMSI, but not with the after acquired property. i. 22.3. Larry Cochran invested in Dynamic Investments secured by borrowers houses. For the agreed upon amount, each investor got a signed mortgage from a homeowner. The owner closed abruptly and disappeared but the investors thought they had secured investments. But Cochrans homeowner/debtor went into BR. He has come to us to be reassured that he is protected on his loan. Our paralegal found that though the mortgage was filed it was missing the signature of witnesses required by law. What is your analysis of Cochrans situation? Some courts have found that as the bona fide purchaser, the trustee of BR can avoid Cochrans lien because it is not legally correct; however, others have found that such a trivial omission does not invalidate the lien. He needs to correct the mistake as soon as possible. If you dont comply with the statute, there may be no constructive notice. We will look to the state law to see if the recording is sufficient. j. 22.4. Topson Air Conditioning sold Sallys Boutique a central air conditioning system for $12,200 taking a $3000 down payment and a lien on the system for the balance. Sally had paid $500 or more when she filed Chapter 7 BR. Topsons lien was promptly filed in the Secy. of States office. Will the companys lien stand up in BR? Yes, the companys lien should stand up in BR unless it is primed by priority liens for post-petition loans. This is a fixture, which is different than personal propertyit depends on what the state law is. What do you tell him? He should have the value of the air conditioning system which he will get at liquidation. This is a fixture and not real estate; therefore, the trustee cannot avoid the lien. Not covered by 544, so they are safetrustee cannot get it. k. Class Notes i) Avoiding Powers by the Trustee: the DIP is a trustee and has the same rights in enforcing these powers. ii) 544 Starts as of the commencement of the casedoesnt matter who has or doesnt have knowledgeknowledge is not going to be imputed to the trusteemay avoid any transfer. (b)(1) Judicial Lien Creditorhe has this hypothetical powerjudgment creditor. (2) is the same thingit just covers some states where you are required to execute. (piece of paper saying you win

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record it in county where you believe the loser has property (abstraction)executionsend the sheriff to see if the debtor has anything you can take, sell, and satisfy judgment. iii) (3) Bona fide purchaserhypothetical powerto act as a bona fide purchaser beats a lot of creditors out. iv) These parties can beat others and take others liens away. v) 544(a) (1)-(3) All federal law. 544 (b) gives the trustee the right to use laws from the state. There has to be an actual creditor. (2) You cannot use strong arm powers to undo any charitable contributions. vi) In re Bowling: The wife did not sign the documents and it appeared a notary public was present who in actuality was never there. Can this transaction be undone? Trustee has power to jump into the shoes of a bona fide purchaser, but once he does, state law controls. All property is subject to the law of the jurisdiction in which it exists. Thus, the court looked at Ohio lawMERSdid not get the wifes signature, did not have the notary public presentthey would have lost the fight to bona fide purchaser. The trustee wins, even though he had knowledge of the whole transaction; his knowledge is irrelevant. DIP is different person, so that the knowledge that the debtor had cannot be imputed to the DIP. Thus, he can set aside the transaction by MERS. That interest is now part of the BR estate available for distribution. MERS has an unsecured claim that must share pro rata with everyone else in the case. vii) This court let the technicalities knock the secured creditor out; some courts have gone the other way. State laws are different. TX is one of the states that says you must look a little further than the surfacenotice inquiry. viii) Federal Taxthe moment you file your return and dont pay, IRS will send a demand letter. The moment that letter comes out a lien is on everything the taxpayer owns. That lien is only good against the taxpayerthird parties have no idea. If IRS records in the county where the tax payer resides, it takes precedence over all other liens because it is notice. E.g. the judgment got recorded before the IRS files, it wins. But once they record, all others will be inferior to IRSin BR court. ix) Federal StatuteUnited States of America beats any and every body. The Supreme Court has ruled against every party who has tried to challenge that statute. Has not addressed whether the statute creates a first lien mortgage. In the world of BR, this statute is not applicable. The U.S. is bound by the BR codethe United States has waived its sovereign immunity in the context of BR. Chapter 11 Reorganization: Reshaping the Estate; Preferences I 547 (a) In this section(1) inventory means personal property leased or furnished, held for sale or lease. . . including products such as crops or livestock; (2) new value means money or moneys worth in goods, services, or new credit, or release by a transferee or property previously transferred to it in a transaction that is neither void or voidable by the D or TIB. . . including proceeds of such property, but not an obligation substituted for an existing obligation; (3) receivable means right to payment, whether or not such right has been earned by performance; and (4) a debt for a tax is incurred on the day when the tax is last payable without penalty, including any extension. (b) The trustee may avoid any transfer of an interest of the debtor in property(Elements of a Preference, which must all be proven by the Trustee) i) ii) iii) iv) To or for the benefit of a creditor For an antecedent debt owed by the debtor before such transfer was made; Made while the debtor was insolvent; Made (1) (A) on or within 90 days before the date of petition filing (2) (B) between 90 days and one year before the date of petition filing, if such creditor at the time of the transfer is an insider; and v) That enables such creditor to receive more than such creditor would receive if (1) (A) the case were a Chapter 7 (2) (B) the transfer had not been made; and (3) (C) such creditor received payment of the debt to the extent provided by this title. (c) The trustee may NOT avoid a transfer i) To the extent that the transfer was (1) (A) intended by the D and the Creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor: and (2) (B) in fact a substantially contemporaneous exchange: ii) to the extent that the transfer was in payment of a debt incurred by the D in the ordinary course of business or financial affairs of the D and the transferee, and such transfer was (1) (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (2) (B) made according to ordinary business terms.

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iii) that creates a security interest in property acquired by the debtor(A) to the extent the security interest secures new value that was(i) given at or after the signing of a security agreement that contains a description of such property as collateral; (ii) given by or on behalf to the secured party according to that agreement; (iii) given to enable the debtor to acquire such property; and (iv) in fact used by the debtor to acquire such property; and (1) (B) that is perfected on or before 30 days after the debtor receives possession of such property; iv) for the benefit of a creditor that gave new value to or for the benefit of the d that is (A) not secured by an otherwise unavoidable security interest; and (B) the debtor did not make an unavoidable transfer to or for the creditor. v) That creates a perfected security interest in inventory or a receivable or the proceeds of either, unless the aggregate of all transfers causes a reduction on the date of filing to the prejudice of or other creditors holding unsecured claims of any amount by which the secured debt exceeds the value of all security interests for the debt on the later of (A)(i) 90 days before filing for a security interest (b)(4)(A); or (ii) one year before the date of filing for a (b)(4)(B); or (1) (B) the date on which new value was first given under the SA creating the SI. vi) that is the fixing of a statutory lien that is not avoidable under section 545 of this title: vii) that is a bona fide payment of a debt for a domestic support obligation; viii) for a primarily consumer debtor, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or ix) for a primarily business debtor, the aggregate value of all property that constitutes or is affected by the transfer is less than $5000. d. (d) trustee can avoid a transfer of an interest transferred to or for the benefit of a surety to secure reimbursement that furnished a bond or other obligation to dissolve a judicial lien that would have been avoidable by the trustee. . . . e. (e) (1) (A) a transfer of real property other than fixtures . . . is perfected when a bona fide purchaser of such property from the D. against whom the transfer may be perfected, cannot acquire an interest that is superior to the interest of the transferee; and (B) a transfer of a fixture or property other than real property is perfected when a creditor cannot acquire a judicial lien that is superior to the interest of the transferee f. (2) [A] transfer is made(A) at the time the transfer takes effect, if the transfer is perfected at or within 30 days after that time; (B) at the time the transfer is perfected after the 30 days; or immediately before the date of petition filing, if the transfer is not perfected at the later of(i) the commencement of the case; or (ii) 30 days after the transfer takes effect between the transferor and the transferee. i) (3) a transfer is not made until the D has acquired rights in the property. g. (f) the debtor is presumed to be insolvent on and during 90 days immediately preceding the filing h. (g) the trustee has the burden of proving avoidability and the creditor has the burden of proving non-avoidability i. (h) may not avoid a transfer made as part of an alternative repayment schedule created by an approved non-profit budgeting and credit counseling agency. j. (i) If the trustee avoids a transfer made to an entity that is not an insider for the benefit of a creditor that is an insider, the transfer will only be avoided with respect to the creditor that is an insider. k. PREFERENCES: The General Rules i) The Code give the trustee or DIP a strong position as a lien creditor or a bona fide purchaser under state law and gives the trustee extraordinary new powers: (1) The ability to dismantle certain transactions between the debtor and creditors that took place within 90 days immediately preceding the BR filing. (2) Designed to permit the TIB to review the activities of the debtor as it neared the BR and to determine whether some creditors received preferential treatment before the BR was filed. (3) If such preferences have occurred, these creditors are not allowed to preserve their improved position in BR. They face the trustees demand that they surrender any preferences received from the debtor. ii) 547(b) determines what constitutes a preference. It lists the key elements of a preference, all of which the TIB must prove before demanding return to the pre-transaction status. iii) Gilbert v. Gem City Savings Assn (1) Facts: The trustee filed a complaint against the def. creditor, Gem City, seeking to recover a payment of $1079.64 made by the debtor on the grounds that it was a preference under 547. Gem City held a valid mortgage on the debtors real estate and within 90 days preceding the filing of the petition, the debtor paid the amount. The debtor was insolvent at the time of payment and the payment included an arrearage. The value of the real estate was $38,000 with approximately $24,000 owing The claim was fully secured both before and after the payment. (2) Procedure: Heard in the BR court. (3) Issue: Whether the creditor received more than he would receive if the case were a Chpt. 7 case had the transfer not been made and the creditor received payment to the extent provided for. IN THIS CASE, NO. Whether an oversecured credit can receive a preference. NO

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(4) Rule: Payments to a fully secured creditor during the 90-day period preceding the filing of BR will not be considered a preferential transfer. (5) Rationale: If the payment had not been made, the creditors claim would be increased to 25,239.81, and because the creditor is fully secured, in a Chapter 7 it would receive the full value. iv) In re Calvert (1) Facts: Duenow Management Corporation appeals the decision of the BR court that a pre-petition transfer made to Duenow by the debtors is a preference avoidable under 547 and ordering that trustee recover $8875 plus the costs of the action. The Calverts filed BR in 3/97. Calvert managed a KFC, which was owned by Duenow. Calvert lost his job in 11/96 because Duenow believed he had embezzled money. The claim was settled in Dec. 1996 for $11844.90; he borrowed $12,000 from his parents for the purpose of paying the settlement to Duenow. On the same day that the Calverts lawyer transferred the cashiers check to Duenow, the Calversts executed a Mortgage Note in favor of the parents and also gave them a mortgage against their home. Finally, they gave the parents a lien against their 1992 Truck. There was no security agreement for the truck just a certificate of title showing the notation of a lien in favor of the parents. The transaction was done within 90 days of the BR. (2) Procedure: Though the court found that the house was worth $52,755, after considering the two mortgages and the taxes payable as well as the escrow account balance, they only had $17 equity in it. The truck was valued at $8875. Trustee filed an action to recover the payment to Duenow. REVERSEDdid not consider the certificate a security interest. (3) Issue: Whether a transfer of an interest of the debtor in property occurred, and whether an exceptionthe earmarking doctrineapplies so as to save the payment. (4) Earmarking Doctrine: The transaction must meet three requirements: (1) the existence of an agreement between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt; (2) performance of that agreement according to its terms; and (3) the transaction viewed as a whole (including the transfer of the new funds and the transfer out to the old creditor) does not result in any diminution of the estate. (5) Rule: If the earmarking doctrine applies, no avoidable transfer is made because the loaned funds never become part of the debtors property. There is no preference if the new creditor merely substitutes the old creditor. the new and old creditors enjoy the same priority (not when a security interest is given for funds used to pay an unsecured debt) (6) Rationale: The earmarking doctrine applies when a security interest is given for funds used to pay secured debts, but not when a security interest is given for funds used to pay an unsecured debt. If this security interest exception applies, the transfer is not earmarked and is therefore avoidable to the extent the transfer depleted the debtors estate or to the extent of he value of the collateral given up by the estate to secure the loan. (7) Burden: The trustee bears the burden of proving that the earmarking doctrine does not apply and thus bears the burden of proving the SI exception does apply. v) The voidable preference section of the BR Code allows the reshaping of the troubled business by permitting the DIP or TIB to avoid certain transfers made on the eve of BR. vi) Being able to use the voidable preferences provisions has been a primary motivation to reorganize through Chapter 11 rather than attempting a workout outside BR. vii) A special twist on preference law is the indirect preference which arises from the language of section 547(b)(2) concerning transfer to or for the benefit of a creditor. There may be two or more persons potentially liable for a preferential transfer: the transferee and others who benefit indirectly from the transfer (guarantor). viii) In re Denochick (1) Facts: Appellants agreed to guarantee a debt consolidation loan from NBOC to Denochick. The debtor made $1713.35 in loan payments to NBOC in the year prior to filing BR. Appellants received none of this money, but the payments had the indirect effect of reducing their exposure on the guarantee. The trustee commenced an adversary proceeding to avoid a preference and recover from appellants the money Denochick paid to NBOC. (2) Procedure: BR Court concluded that appellants fell within the definition of creditors and that they failed to establish the applicability of the ordinary course of business exception. AFFIRMED. (3) Issue: Whether creditors indirectly benefiting from a preference can be pursued by the trustee for disgorgement. YES. ix) 1994 and 2005 Amendments (1) 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 the BR x) Voidable Preferences at State Law (1) State law has adjusted to the presence of a voidable preference section in the BR laws under the Uniform Fraudulent Transfer Act. (2) The new UFTA reflects an enhanced concern for fair treatment among creditors outside of BR.

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(3) In addition to deeming a conveyance fraudulent when it was undertaken with fraudulent intent or when the insolvent debtor received inadequate consideration, the UFTA provides that a transfer is fraudulent whenever it is made in payment of an antecedent debt by an insolvent debtor to an insider who had reasonable cause to know of the insolvency. UFTA 4, 5 (4) In or out of BR, insiders should not be paid before other creditors. The UFTA restricts only transfers to insiders. (5) A debtor in BR may have two kinds of voidable preference actions availablethose under section 547(b) and those under section 5(a) of the UFTA in the states that have adopted it. Problem Set 23 23.1. Mountain Lakes Fuel Oil is an unsecured creditor of Wilson Manufacturing to whom it owes $140,000. 60 days prior to its Chapter 7 liquidation filing, Mountain Lakes made a $14,000 payment to Wilson. In the liquidation, unsecured creditors receive 10% pro rata distribution. Is Wilsons payment to Mountain Lakes a voidable preference under section 547(b)? It meets the first two criteria in that it was for a debt that was owed before the transfer, and was within 90 days of filing when the debtor was presumed insolvent. If 10% pro rata means that whatever is left from the entire BR after the debtor has paid secured creditors, then this may be voidable as he may have gotten more than he would have in the liquidation. He subtracted the 14,000 and it will have left 126,000 and he would get 12,600 + 14,000 and said he got $26,600, so he did get an advantage. Just because he got money before BR does not mean he wont enter back into the BR. i) Transfer ii) Property of Debtor iii) (b)(1) to or for the benefit of the creditor iv) (b)(2) antecedent debt v) (b)(3) insolvent vi) (b)(4) within 90 days [insider within one year] vii) (b) (5) creditor got more than he would have in a Chapter 7. 23.2. Wildcat drillers last three holes have been dry and he fears he is insolvent. On Oct. 1, one of his suppliers OKC Supply calls him to discuss a large unsecured account. The debtor suggests that OKC take some of the loose equipment still left at the warehouse and drilling sites, some of which OKC sold to it. On Nov. 15 , the debtor filed for BR. Can the trustee get the equipment back from OKC? Yes, though OKC had sold some of the equipment to the debtor, it had no security interest in it as an unsecured creditor. The trustee can get it back because it is well within the 90 days prior to BR when the debtor is presumed insolvent, and it certainly put him at an advantage over other unsecured creditors who have no equipment to use to return their value. It is also for a debt that existed prior to the transfer. Creating a lien is a transfer!!!! Yes, it is a transfer of property, OKC is unsecured, and it puts them in a better position than other unsecured creditors. The transfer was when he gave a security interest. 23.3. One of the debtors unsecured creditors, within the 90 days prior , obtained a security interest for its previous unsecured debt in the debtors previously unencumbered equipment. The bank filed and perfected on the same day, Feb. 1, and the debtor filed Chapter 11 on April 25. The debtor was insolvent when the bank took the security interest. Is there a voidable preference? It appears that the trustee can avoid this because there was no new value given for the security interest; thus, it is not an exception and was made while the debtor was insolvent for an antecedent debt at a disadvantage to other unsecured creditors. It also gave the bank more than it would have gotten in a Ch. 7 liquidation. A creation of a security interest is a transfer. 23.4. North Woods, Inc. has been insolvent for several months, but it believes that an upturn in the construction industry will allow the company to become profitable again. It persuades VenCap to lend it $50,000 to survive the next few months. The loan is made on June 1 and VenCap takes a security interest in the unencumbered equipment, which it perfects July 1. On September 15, North Woods cannot meet its payroll and declares Chapter 11. Has there been a voidable preference? No, this is within 90 days of the filing of the BR and it is for the benefit of a creditor and it is an antecedent debt; however, this is an exception because this was consideration for new value given, and as a secured creditor, VenCap would get the value of its collateral in a liquidation. Since the equipment was unencumbered, it is not to the detriment of other creditors, unless the unsecured creditors count. Antecedent debt is any debt that has occurred in the past June 1 $50,000; July 1 Perfection; Sept 15 Petition date547(e)(2)(A) within 30 daysit is like exchanging cash. ?????? A preference occurred under 547 because it is an antecedent debt since the lien was perfected July 1 and the transfer was made June 1. It would not have been antecedent debt if it was within 30 daysthen it would have been a contemporaneous exchange. The money was for payment of antecedent debt because the money was given on June 1 and security interest was given after the debt. Antecedent debt: Any debt that was incurred in the past. The debt must have occurred 30 days before security interest is perfected within 30 days. 23.5. On Feb. 1, Hartford Baking, Inc. has two secured creditors. Magic Chef Co. sold four $10,000 specialized ovens a year ago and perfected its SI before delivery for which Hartford had a loan balance of $35,000 as of Feb. 1. The value of the ovens was $30,000. The other creditor, Commercial Bank, made a loan six months earlier and perfected at the time of the loan; on Feb. 1 the balance of the loan was $40,000 and the collateral was worth $50,000. On Feb. 2, Hartford paid each creditor $5000 and on April 2 it filed BR. Hartford was insolvent throughout, but the value of the collateral was stable. Would either creditor have a problem keeping the payment under 547(b). Both payments are within the 90 day window and are both for the benefit of a creditor on an antecedent debt.

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Both payments were made while the D was insolvent. However, both debts were incurred in the course of ordinary business and financial affairs and neither creditor received more than it would have received in a liquidation because both are secured. CBthere was a transfer of $5000, to or for the benefit of the bank, it was an antecedent debt, the debtor was insolvent, made within 90 days, and they did not get more than they would have. There is no preference with respect to CB. MCCpreferenceyes a transfer, yes for the benefit of a creditor, yes it was an antecedent debt, insolvent, within 90 days, but they did get more than it would have in Ch.7. In Ch 7, the creditor would have gotten $30,000. As it is they will get that 30,000 + 5000= 35,000 they got a better deal. r. 23.6. Virginian Air Conditioning Service owes $250,000 to First Richmond Bank. The loan is secured by a perfected security interest in all current and after acquired equipment, which on Mar. 1 is worth $150,000. On April 15, Virginian acquires another $200,000 in equipment from a supplier who sells on credit but who fails to take a security interest in the goods. On May 25 after having been insolvent for six months, Virginian files for BR. Has there been a voidable preference? No, because though the transfer happened within the 90 day window, no value has been given to the supplier. The equipment that Virginian acquired from it is unencumbered and is part of First Richmond collateral as after acquired property or part of the all. There is no transfer that has been made for the benefit of the creditor just the debtor. The transfer because of the after-acquired property redounded to the secured creditor and gave him more collateral than he would have had. They became over secured. It is avoidable up to $200,000. When the after acquired equipment clause attached on April 1, it was a benefit to First Richmond Bank who now has more security than before. Now First is fully/over secured which is the transfer. And they bought the new equipment within 30 days of the initial loan, it would not have been an antecedent debt. This is avoidable up to the $200k. s. 23.7. Clear Springs Bottling Cos principal asset was a two-ton bottle-capping machine. As of June 1 a year ago, CSB owed Hillside Bank $280,000 secured by a perfected security interest in the bottle-capping machine, which was then valued at $300,000. On July 1, CSB made a $20,000 payment to Hillside and on July 15 the business burned and the machine was completely destroyed. Contrary to the Security Agreement, CSB had let the insurance lapse. CSB declared BR on August 1. Has there been a voidable preference? There was a transfer for the benefit of the creditor Hillside made 90 days prior to the filing of the BR on an antecedent debt. CSB is presumed insolvent in that time period. It is appears that Hillside would receive more than it would in a Chapter 7 since its equipment has been destroyed. If so, then it is a voidable preference. However, I think the lapse of insurance does not change its secured status and they may get to keep the payment. 260,000 on August 1 is owed, but the collateral is worth 0. 280,000 if they had not been paid. So they got a better deal than they would have under Ch 7. There is a preference. Hillside is completely unsecured. t. 23.8. If CSB had purchased another bottle capping machine after the fire using unsecured credit from the seller, and the new machine were worth $300,000 would there have been a voidable preference? As to Hillside, no. The machine would be there collateral still. The unsecured creditor will have had no benefit. It is still an unsecured debt because the proceeds did not come from insurance moneythey got this from unsecured credit. There is still a voidable preference. u. 23.9. Courts, a small, family owned hardware store has been insolvent for several months; moreover, two large home centers have moved to its location. John Court, the president, foresees disaster and feels bad particularly about his creditor Granny Court, who made a $20,000 unsecured loan to the business. First Oregon City Bank extended $30,000 in unsecured credit and its president is a golfing buddy of Johns. He however does not feel bad about Minnesota Manufacturing, a materials supplier who has an unsecured debt of $45,000 and Wayne King, a local painter who did extensive remodeling for Courts and who is still owed $5000. John goes to New York National Bank and asks for a $50,000 loan to consolidate some of the debt offering a lien on the stores forklift worth about $20,000. NYN agrees and sends checks directly to Granny Court and First Oregon. Two months later Courts files BR. Can the trustee recover the payments to Granny and First Oregon? Yes, this is a classic preference as the debtor chose to pay these debts over secured debts. They were made on antecedent debts for the benefit of unsecured creditors who got way more than they would have gotten in a Chpt. 7 liquidation. Earmarkingtries to nullifyif there is no diminution in the estate; you are just replacing one creditor with another. Replaced Granny Court and First Oregon with NYN and it was for them and did not go to the debtor. But here the unsecured creditor is being replaced with a secured creditor. It does not count. v. 23.10. Steven Zetillo is president of Zetillos Model Trains and Planes, Inc. and owns 50% of the stock. A large highway has cut off access to the store and the business has suffered for several months making some late payments and having some inventory repossessed. On April 20, Zetillo paid himself for an unsecured loan of $22,000 that he made to the store, which completely wiped out the last of the liquid assets in the business. Ten weeks since that time, Zetillo has simply quit paying store bills. A group of creditors visit us on July 15 for advice. What do you advise? They should accelerate their loans and check into forcing the store into involuntary BR to protect their assets. Does it matter if they file an involuntary petition now or later? Yes, they need to do it as soon as possible because the actions of the creditor are dissipating the value of the collateral and they need to file when the trustee can disgorge the preference he paid himself. However, because he is an insider, they technically have a year. The presumption is only for 90 days, if you wait, you will have to prove insolvency. w. Class Notes i) 547definitions of terms of artinventory, new value, receivable, when a tax debt is incurred. ii) Preference is to prevent a debtor to prefer certain creditors over others in a short period before the filing of the BR. Just a mechanism to promote the policy that similar creditors should be treated similarly.

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iii) Elements of Preference (1) 547 (b) May avoid any transfer of an interest of the debtor (it must be the debtors property) (2) (1) to or for the benefit of a creditorfor is very important because it can cover a transfer not actually made to a creditor (3) (2) for an antecedent debt (4) (3) debtor must have been insolvent (5) (b)(4) made on or within 90 days of petition dateif an insider one year or 90 days (6) (b)(5)creditor ends up with more than it would have in a Chapter 7 case. (7) ***** Use this to analyze every preference problem****** A no to anyone of these elements means there is no preference. iv) 547(c) Defenses to Preferences9 of them are available. (1) Contemporaneous Exchange (2) Ordinary Course (3) Enabling Loan DefensePMSI (4) New Value Defense (5) Floating lien Defense (6) Statutory lien Defense (7) Domestic Support Obligation Defense (8) Consumer Debt Defense (9) Dollar Amount Defense (10) PMSI v) 547(e) (1) This section only applies in 547. (2) A transfer of real property is perfected when a bona fide purchaser cannot get a greater interest (3) A transfer of a fixture or property when a creditor on a simple contract cannot acquire a judicial lien. (4) These are the dates that the transfer has taken place??? vi) 547 (e)(2) (1) At the time such transfer takes place and perfected within 30 daysit will trigger back to when the actual transfer. Important because of the 90 day preference captureit can take me outside of the 90 day preference trap. (2) (e)(2)(B) If I sign it today and wait more than 30 daysit will be assumed that it took place on the day I actually perfected. The transfer date has changed. (3) (e)(2)(C) the day before the filing of the petitionif I dont perfectwhich puts me squarely within the 90 days. (4) 547(b) elements must be proven by the trusteethe burden shifts to the creditor to prove 547(c) to raise a defense to the preference has taken place. vii) Gilbert v. Gem City Savings Assn: the creditor had a fully secured claim before the filing of the BR and received a big chunk of payment. Did he receive more than what he would have gotten in a hypothetical Chapter 7? This is the only issue since all other elements are proven. When there is a fully secured creditorover-secured creditor can never be subject to a preference action because they always get paid in full, and the fifth element can never be satisfied. viii) In re Calvert: Earmarking Doctrine is a mess up in Vidas opinion. It is a judge-made doctrine and not part of the Code. He went over the elements listed in the case. The Creditor Duenow (Im not kidding) is appealing. Duenow is a creditor of the debtor and it paid him moneypaid on an antecedent debthe was insolventhappened within 90 dayshe was an unsecured creditor got paid 100% of its debt. Where did the money come from? Debtor got the money from another creditor mother and fatherin return the debtor agreed to take the money and give it to Duenow. Did mom and dad jump into the shoes of Duenow? Must replace a creditor with a creditor of the same class. There was no equity in the house, even though they were intended to be secured. They did not recognize that the certificate of title as enoughthere was no security agreement. 8th Circuit said they werent so they were within the rules. Came from mom and dads pocket, not the debtors so none of his creditors are any worse off. Mom and dad have to share the car proceeds pro rata. ix) In re Denochick: The concept of indirect preference. Guarantor is benefited when I pay my loan, and if my guarantor is a relative, he or she is an insider. x) Uniform Fraudulent Transfer Act: Adopted by most statesTX has adoptedgives the trustee a tool to use state law for reaching back and undoing transactions. So the trustee is not limited to a 547(b) action. Chapter 11 Reorganization: Reshaping the Estate Preferences The Exceptions The Exceptions i) 547(b) insures that debtors cannot prefer certain creditors on the eve of BR and that creditors who seek such preferences will find them undone in BR.

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ii) Voiding preferences has a healing effect on the debtors business because the voidable preference provisions create a disincentive for a creditor to expend time and money to extract preferential payments or SIs that will be avoided if the business cannot survive BR. iii) This prevents the creditors from dismantling the ailing business, which helps ailing businesses to recover without being harmed by creditors. iv) Could also work against the businesses as a disincentive to creditors to deal with businesses on the eve of BR. Thus, the exceptions allow beneficial transactions to the ongoing business and ultimately to all the other creditors. This also protects transactions that were not intended to prefer certain creditors in anticipation of a demise. v) There are EIGHT exceptions 547 (c): the following FIVE are the most commonly used: (1) Contemporaneous exchange (2) Ordinary course of business payments (3) Purchase Money (4) New Value Rule (5) Floating Lien b. Contemporaneous Exchange i) Section 547 (c)(1) allows a seller to deal with a buyer or borrower without worrying about whether the order could create a voidable preference. The contemporaneous exchange exception makes clear that such transactions are not subject to avoidance if the debtor declares BR within 90 days. The good and the cash are exchanged at the same time. Such a seller is technically unsecured between the two events. ii) A view toward time: Even if the exchange is not contemporaneous, if a reasonable amount of time goes by, it could still be considered contemporaneous. Congress has extended 547e2 to thirty days. The courts dont always go by this. Case law says many different times. The requirement is that it ACTUALLY be contemporaneous. c. Ordinary Course Exceptions i) 547(c)(2) is intended to encourage pre-BR transactions that are essential to keep the business alive. Therefore, some ordinary course transactions are allowed to stand, notwithstanding fact they permit some unsecured creditors to be paid in full. (1) The 1978 Code required that the payment be made for a transaction made (1) in the ordinary course of business and (2) that the time between the extension of credit and the debtors repayment did not exceed 45 days. However, in 1984, the 45-day Rule was dropped. And in 2005, more exceptions were permitted. ii) In re Stewart (1) Facts: Stewart filed a Chapter 13 BR on April 11, 2000. On Jan. 29, 2000, the debtor purchased cattle from Barry County by personal check in the amount of $17,580.70. The check was returned to Barry County for insufficient funds on Feb. 12, 2000, so the debtor tendered a cashiers check in that amount on that day to satisfy the obligation. This was repeated with a second check. The cashiers checks were purchased with money of the debtor, and the payments were made while the debtor was presumed insolvent within 90 days of the filing of the BR. Thus, Barry County received more than it would have in a Chapter 7 liquidation. Barry County received notice of the BR on April 14 and attended the creditors meeting. In June 2000 representatives of Barry County acting individually went to the Ds residence and police had to be called. A few days later the Ds mother paid $15000 to Barry County toward the debt owed and an insufficient check was returned to the mother. (2) Procedure: Heard in the BR court. (3) Issue: Whether payment with a check despite the delay in payment is substantially contemporaneous. YES. Whether a bounced check is still substantially contemporaneous. NO. (4) Rule: To qualify for contemporaneous exchange for new value exception under 547(c)(1), a creditor must prove that an otherwise preferential transfer was (A) intended by the debtor and the creditor to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange. (5) Rule: New value is defined as money or moneys 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 or voidable by the D or the T under applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation. (6) Rule: A debt is antecedent if the debt is incurred prior to the preferential transfer. 547(a)(2) (7) Rule: A transfer involving a check is considered to be intended to be contemporaneous and if the check is presented for payment in the normal course of affairs, which the UCC specifies as 30 days, the transfer will be deemed in fact substantially contemporaneous. (8) Rule: A contemporaneous exchange defense cannot involve a dishonored check. (9) Rule: When the checks were dishonored by the bank, the transactions became credit transactions and created an antecedent debt. Any subsequent payment, no matter how quick, would satisfy an antecedent debt. (10) Rule: A debt is incurred on the date upon which the debtor first becomes legally bound to pay. (11) Rationale: Here the debts were incurred two weeks before the delivery of the cashiers checks.

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(12) Rule: The ordinary course of business exception requires a creditor to prove that the transfer was (A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee; (B) made in the ordinary course of business or financial affairs of the D and the transferee; and (C) made according to ordinary business terms. 547(c)(2) (13) Standard: To determine whether a transfer occurred in the ordinary course of business, the court must look to the consistency of the transaction in question as compared to other, prior transactions between the parties. The Factors are as follows: (a) The length of time the parties were engaged in the transaction at issue (b) Whether the amount or form of tender differed from past practices (c) Whether the D or the C engaged in any unusual collection or payment activity AND (d) Whether the C took advantage of the Ds deteriorating financial condition. iii) Now the creditor only has to prove the second elementthat the transfer was in the ordinary course of the Ds business OR the third element that the transfer was made according to ordinary business terms. Not both. iv) In re Shreves (1) Facts: The debtors obtained a loan from United to purchase a truck but before United perfected its interest, the Ds refinanced this loan through Valley. Valley executed a check on April 5, 2000 and sent it to United. United recorded its lien on the title on April 21, 2000 and on May 1, 2000 United released this lien. However, the DMV did not record Valleys lien on the title until August 11, 2000. From May 1 until August 11, no lien was recorded on the title. The reason for the late recording was delay by both Valley and the debtors. Valley submitted its application to record on August 11. On October 18, 2000 the debtors filed a petition for Chapter 7 On December 11, the trustee filed this adversary proceeding to set aside Valleys security interest. (2) Procedure: Heard in the BR Court. T seeks to avoid the lien perfection as preferential under 547(b). Valley raises three defenses: contemporaneous exchange, equitable subrogation, and earmarking doctrine. (3) Issue: Whether a transaction can be avoided because of the creditors failure to protect its security interest. Whether 547(c) (1) is applicable to protect PMSI perfected more than 10 (30) days after the debtor receives possession of the property. (Enabling Loan) (4) Rule: The Contemporaneous Exchange exception does not apply to PMSI transactions perfected more than 10 (30) days after the debtor receives possession of the collateral. (5) Rationale: Here Valley did not give a purchase money loan; it simply refinanced it and cannot benefit from the PMSI exception. (6) Valley could have protected itself completely by getting United to transfer its security interest to Valley at the time of payment. In that case, there would have been no transfer of an interest of the debtor in property because the transfer would have been of Uniteds interest v) There is a question about creditors who make delayed filings during the preference period. (1) One position is that it is a mistake to police delayed filing of security interests through the preference power. (2) The counter considers that other creditors may have extended credit on the basis of a public record prior to the late filing. They also believe it could help prevent fraud. d. The Purchase Money Exception i) Section 547 (c)(3) provides that purchase-money creditors will receive special protection in BR because of all the transactions regarded as beneficial to the estate, those that bring in new property are regarded as the most beneficial and therefore deserve the greatest protection. ii) In 2005, the amended rules give the PMSI creditor who files within 30 days full protection against a voidable preference. Most states under the UCC provide for 20 days. e. The New Value Exception i) Subsection 547(c)(4) only shelters preference payments that come before a particular extension of new value and only applies on a payment-by-payment basis. (1) Identify a payment that is preferential under 547(b) (2) See if the transfer can be reduced by the amount of later-advanced new value that qualifies under (c)(4). E.g. creditor receives $1000 then makes a $700 delivery. The preference of $1000 should be reduced by $700; only $300 can be avoided. THESE TRANSACTIONS MUST BE SIDE BY SIDE. (3) Test new value for qualification under c(4) by determining whether it was accompanied by a payment or other transfer or was secured which payment was itself unavoidable. E.g. if the creditor receives $1000 then delivers $700 in supplies for which he gets cash; the $1000 is still avoidable.

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(4) The exception rests on the premise that we should not extract repayment of preferences from a helpful creditor who, after the preferential payment, extended new, unsecured credit to the extent of that new credit. The creditor should not get new value credit against prior preferences when the debtor paid for (or gave security for) that new value (5) The process: (a) Start by working forward chronologically from the ninetieth day to BR day, identifying each payment or transfer that qualifies as preferential under 547b. (b) Then work backward from each grant of new value to determine whether it is subsequent to a given preference with the same creditor having advanced unsecured credit to the debtor. (6) Any advance of unsecured credit after the preference will work to trigger 547c4, but the dollars of each advance can be counted only once. The Other Exceptions i) Subsection 547(c)(6) permits statutory liens that violate the voidable preference provisions to survive if they are unavoidable under section 545. Statutory liens will be dealt with in 545 despite their 547 implications. (mechanics lien; artisans lienbuilt cabinets and have a fixtures lien) ii) Only in Consumer Settings. 547(c)(7) states that alimony and support payments will not be recoverable as voidable preferences even when made during the preference period. iii) Dollar Amount Exception Subsection 547(c)(8) and (c)(9) permit creditors to keep value transferred to them preferentially if the amount in question is less than $600 in consumer cases and less than $5000 in business cases. Problem Set 24 24.1. Fun City Go-Karts was in a failing financial condition and legally insolvent. Its chief supplier, Exaco, knew about the troubles and told them that it would only make gasoline deliveries with cash payments. Fun City completed about two deliveries per week for about $2400 each during the 90 days preceding a filing for BR. Three times during that period the truck delivery arrived and Fun City did not have the cash. On these times, Exaco did not take the check but agreed to take his cash on his next delivery which was always done. Can the trustee recover any payments made to Exaco? Yes, they can recover the payments that were deferred until the next delivery because those do not qualify as contemporaneous exchanges as an exception to the voidable preference. However, they may still be excepted since the exchanges are below $5000 and are made by a creditor who was trying to support a failing business. We want to see if there is a preference because cash and good exchange means that there is contemporaneous exchange. Anytime an exchange takes place within 10 days of the transfer is still contemporaneous. Here it is 7 days or less. What was the intent here? They wanted to pay at the time of delivery; therefore, this could never have been a contemporaneous exchange. Took it outside of 547(c)(1). The problem is that the intent was never there so the time limit does not matter. It has to be mutual intent by both. He doesnt know how the $5000 will be calculated so he doesnt know if each transaction counts are you add them together. Always check to see if there is an antecedent debt!!! Since they did not get paid on the date of delivery of the product, then it created an antecedent debt. In this case, the exchange took place within 7 days or less. The intent here was to pay at the time of delivery and they did not do it. So an antecedent debt was created. The contemporaneous exchange exception does not apply here because an antecedent debt was created. So, when the antecedent debt was paid, the payment was a preference. You must have the intent and the timeline must bring about the intent. You could argue that c9 is an issue because each transaction is under $5k. No one has litigated whether it is an aggregate of all the transactions or each individual transaction. 24.2. Big Rig Equipment is an Oklahoma rental company that has been insolvent for several months. In a final gamble, it ordered ten new pieces of heavy equipment, began an aggressive advertising campaign, trim its office staff, etc. John Deere financed the sale of the ten new pieces of equipment to the business taking a PMSI in the new equipment. Order was placed on July 1; Big Rig agreed to pay $300,000 giving John Deere a SI in the new equipment. On July 12, it was identified to the K in the factory. July 20 custom work was completed and July 24 the equipment was delivered to the local dealer. On July 28 the dealer delivered it to Big Rig. On August 21, the JD dealership filed a financing statement in the office of the Secy of State. On Sept. 30 Big Rig filed for BR. The only valuable assets are the new equipment. Who gets the equipment? John Deere, if the delivery date is the transfer because it was perfected before 30 days on August 21. John Deere is going to be going against the Trustee in BR. This is new value because it gave them money to buy it. Would your answer change if Liberty National Bank had had outstanding, perfected security interest in all of Big Rigs equipment, current and after acquired for more than a year before the BR filing? In this case, it would go to LNB because it is outside of the preference period and would be in control of the after-acquired property. Therefore, there would be a valid SI in the after acquired property that would prime BigRigs PMSI. Except, I think that PMSIs always prime dragnets, but I am not sure. Liberty would beat John Deere because it has a 20-day exception under state law. JD did not comply with state law. By not perfecting the lien within 20 days of the debtor possessing it, the property fell under the after-acquired clause instead of belonging to Jd. The trustee v. libertythe trustee wins because Liberty got a preference, and he can avoid it. . As far as the Trustee is concerned this is an avoidable preference since it came in within 90 days. Here the after-acquired property cannot prevail over the PMSI unless the creditor does not meet the state and BR requirements.

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j. 24.3. Golden View Nursing Home filed for BR in September. The trustee later reviewed the books and found among the entries
evidence of the following transactions. Which of these payments can the trustee recover? i) $14,200 in utility bills paid four weeks before filing including a three month past due amount that had been paid after a threat of shutting down the power. The trustee cannot recover this because this is a contemporaneous exchange and a giving of new value. Paying under threat is not in the ordinary course of business. The threat letter takes it outside of the ordinary course of business. Being late is not an issue because there are certain businesses where it is always late. Must fit in the affairs of the debtor and the transferee. You as the atty will pick the area that is an example of the ordinary course of business. ii) June, July, and August mortgage payments that included a late penalty of $50 that is undersecured. No, the trustee may not recover these payments; this is for new value and is secured regardless of being undersecured. Mortgage and penalty are in the ordinary course of business. iii) Solid State Bank received a payment in full of a $10,000 unsecured six month loan made of July 15, the date it was due. Yes, the trustee can recover this because it is paid in the 90 days prior to the filing and is paid when the debtor is presumed insolvent. As an unsecured creditor it is doubtful that SSS would have received its full due so it got more than it would in liquidation. It may be a mitigation that it was on the due date qualifying it for the ordinary course exception. This is ordinary course of business. Its normal to pay when something is due. iv) Jack Melroy, the principal stockholder, was repaid on the due date of a 30-day loan of $6000 made to help the business meet its payroll. Yes, the trustee can recover this because it is within the window and though it is due, it is unsecured and gives Melroy, an insider, more than he would have gotten in Chapter 7 liquidation. 24.4. Odd Notions has been insolvent since January 1 but has continued to operate based on an unsecured line of credit from the Des Moines Peoples Bank. The arrangement has been that whenever Notions needs money to make payroll or pay bills, it will call on its line of credit and whenever Notions receives payments from its buyers, it deposits them directly to pay down the DMPB loan balance. The account is summarized on p. 510. How much of the payments from Notions can DMPB keep? All of the new credit must be added because the creditor will be exempt from being identified as a preference where it has extended new credit. DMPB extended $27,000 in new credit, and Odd Notions has made $27,000 in payments. Therefore, DMPB gets to keep all the payments. Based on encouraging a creditor to deal with a debtor in trouble. The first payment is outside of the preference period. It gave new value and did not take a lien or insist on cash. The second payment is protected on new value. The third payment is completely protected. Neither the $9000 or $10,000 because they are not protected. The company has to give $19,000 and will have a $99,000 claim to share pro rata. It cannot carry forward new value. New value always has to be given after the preferential payment. Transaction Payment New Balanced owed to Bank can keep value Bank Beginning balance 80,000 0 This is the Antecedent debt Payment from notions 5000 75000 This payment is outside preference 96 New credit from 4000 79000 Bank Payment from notions 2000 77000 Not preference because new value Covers it. New credit from bank 8000 85000 New value New credit from bank 9000 94000 New value Payment from notions 1000 93000 Not preference because new value Covers it New credit from bank 6000 99000 New value Payment from notions 10000 89000 Preference Payment from notions 9000 80000 Preference Notions files BR Class Notes i) Contemporaneous Exchange (1) Used to be limited by a 10 day time limit; now it is focused on the intent of the parties. (2) ??????????p. ????? ii) New Value Chapter 11 Reorganization: Reshaping the Estate: Executory Contracts 365 Executory Contracts and Unexpired Leases

k.

Date 1/1 1/3 1/15 2/10 2/28 3/4 3/10 3/17 3/20 4/1 4/10 l.

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i) (a) The trustee, subject to the courts approval, may accept or reject any executory K or unexpired lease of he debtor. (b)(1) If
there has been a default in an executory K or unexpired lease, the T may not assume either unless, at the time of the assumption of the contract or lease, the trustee (1) (A) cures or provides adequate assurance that the T will promptly cure such default other than a provision arising from any failure to perform non-monetary obligations under an unexpired lease of real property, if it is impossible for the trustee to cure by performing non-monetary acts (other than a penalty provision), except if the default arises from a failure to operate in accordance with a nonresidential real property lease, then the default shall be cured by performance at and after the time of assumption in accordance with the lease, and pecuniary losses shall be compensated (2) (B) compensates, or gives adequate assurance that he will compensate a party other than the D for pecuniary losses resulting from default (3) (C) provides adequate assurance of future performance under the K or lease. ii) (2) Paragraph (1) does not apply to default that is a breach of a provision relating to (1) (A) insolvency or financial condition of he debtor before the closing of the case: (2) (B) the commencement of a case in BR (3) (C) the appointment of or control by a trustee or custodian before the commencement of the case. (4) (D) the satisfaction of any penalty rate or penalty provision relating to a default arising from failure to perform non-monetary obligations. iii) (3) Adequate assurance of future performance of a lease of real property in a shopping center includes adequate assurance(A) of the source of rent and other consideration due and in the case of assignment that the assignee and its guarantors have similar financial condition and operating performance of the D and its guarantors, (B) that any percentage rent due will not declines substantially; (C) that assumption or assignment of such lease is subject to all the provisions thereofsuch as radius, location, use, or exclusivity provision and will not breach any such provision; (D) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center. iv) (4) The trustee may not require a lessor to provide services or supplies incidental to a lease before assumption of it unless lessor is compensated under the terms of the lease for any services and supplies provided under such lease before assumption of such lease. v) (c) The trustee may not assume or assign any K or lease whether or not the K prevents such assignment of rights and duties, if (A) a party, other than the debtor, is excused from accepting or rendering performance to an entity other than the debtor or the DIP and (B) such party does not consent to assumption or assignment; or vi) (2) such contract is a contract to make a loan or extend other debt financing or financial accommodations to or for the benefit of the debtor or to issue security of the debtor; or (3) the lease is of nonresidential real property and has been terminated under applicable non-BR law prior to the order for relief. vii) (d) (1)If the trustee in a Chapter 7 case does not assume or reject a K or lease within 60 days after the order for relief, or within such additional time as the court allows within that 60 days for good cause, then the contract or lease is deemed rejected. (2) in chapters 9, 11, 12, and 13, the trustee may assume or reject at any time before the confirmation of the plan but if a party requests the court can set a time by which the trustee has to assume or reject. viii) (3) The trustee must timely perform all obligations except those arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected. . . The court may extend, for cause, the time for performance of an obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond the 60 day period. ix) (4) An unexpired lease of nonresidential real property shall be deemed rejected, and the T shall immediately surrender that property if the trustee does not assume or reject the lease by the earlier of (i) 120 days after the date of the order for relief; or (ii) the date of he entry of an order confirming the plan. (B)(i) Court may extend the period prior to the expiration of the 120 days for 90 days on the motion of the T or lessor for cause.(ii) if the court grants an extension, the court may grant a subsequent extension only with prior written consent of the lessor in each instance. x) (5) the trustee shall timely perform all of the obligations first arising from or after 60 days after the order for relief in a case under Chapter 11 under an unexpired lease of personal property other than that leased to an individual for personal, family, or household purposes until the lease is assumed or rejected, unless the court order otherwise. xi) (e)(1) An executory K or unexpired lease of the D may not be terminated or modified at any time after the commencement of the case solely because of a provision of the K or lease that is conditioned on (A) the insolvency or financial condition of the D at any time before the closing of the case; (B) the commencement of a case; (C0 the appointment or taking possession by a trustee xii) (2) Does not apply to a K or lease whether or not the K allows if (A)(i) a party other than the debtor is excused from rendering or accepting performance by applicable law and (ii) such party does not consent to such assumption or assignment; or (B) such K is

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a K to make a loan or extend other debt financing or financial accommodations to or for the benefit of the debtor or to issue a security of the debtor. xiii) (f) (1)Trustee can assign despite provisions in Ks or leases forbidding assignment. (2) The trustee may assign a contract or lease if(A) the trustee assumes the contract or lease; and (B) adequate assurance of future performance by the assignee of such K or lease is provided, whether or not there has been a default under the lease. (3) Notwithstanding a provision that allows a party other than the debtor to terminate or modify the K or lease on assignment, the K or lease may not be terminated or modified under that provision because of the assumption or assignment of such K by the trustee. xiv) (g) the rejection of an executory K or unexpired lease constitutes a breach of the K or lease (1) if the K or lease has not been assumed or under this section or a plan confirmed under chapters 9, 11, 12, or 13 immediately before the date of the filing of the petition; OR (2) the K or lease has been assumed (A) if before such rejection the case has not been converted at the time of such rejection or (B) if before the rejection the case has been converted (i) immediately before the date of conversion if it was assumed before then or (ii) at the time of the rejection, the K or lease was assumed after conversion. xv) (h)(1)(A)If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and (i) if the rejection allows the lessee to treat the lease as terminated , then the lessee may treat it as terminated by the rejection; or (ii) if the term of the lease has commenced, the lessee may retain its right under the lease that are in or appurtenant to the real property for the balance of such term and its renewal to the extent applicable by non-BR law. xvi) (2) if the lessee retains its rights it may offset against the rent for the balance of the term after the date of the rejection and for the term of any renewal or extension the value of any damage caused by nonperformance of any obligation of he debtor under the lease, but the lessee has no other rights against the debtor or the estate on the account of such damage. xvii) (C) rejection of a lease in a shopping center does not alleviate the lessees duty to perform under requirements of use, exclusivity, location or tenant mix or balance. xviii) (D) Lessee includes any successors or assigns. (I gave up here. There is still more statute.) Class Notes i) Executory Contracts and Unexpired Leases (1) Treated differently under the BR Code. (2) An executory K is generally a K that something is expected to still be performed by each party of the K. If one side has fully performed, then that K is no longer executory. (3) 365(a)(1) (4) Issue: When the debtor goes into BR, does he want to assume or reject the K or lease? (a) If you assume, you are bound by the terms. (b) If you reject it, you have just breached it. The party suffering the breach has all the remedies. A breach does not equal termination. It is only a breaking of the K and there will be consequences. (c) If a K is assumed, then you honor it. If the contract is assumed, then later breached, the Debtor will be bound by the consequences in the contract. The DIP will pay under the terms of the contract. (d) If a K is rejected, it is as though it was breached right before the filingthe party has an unsecured claim. However, if you assume the K and then breach it, you are bound by the consequences of the K; it must be paid in full. The consequence is not as bad if it is rejected when one files BR. (e) It is sometimes prudent to keep Ks goingE.g. Montgomery Ward rejected the leases of unprofitable stores and paid for profitable stores. If as an unsecured creditor, the rejected leases will be cheaper in BR. (f) 502(b)(6) limits the amount of damages from rejecting a lease. (g) The general rule is that the K can be assigned so long as the person will take over and be in as good a financial situation as the debtor was prior to BR and will make the guarantees and will not violate the strip center balanceWe dont need two nail shops. (5) What does the T need to do before assuming a K? 365(d) DIP must promptly cure that three month default. A cure in six months is usually considered a prompt cure. (a) D1: The trustee must, in order to assume or reject an executory contract or unexpired lease: (i) He must promptly cure all defaults before assuming. Case law says even three years is prompt, but as a general rule, six months is a prompt cure. (ii) He must promptly compensate for any pecuniary losses to the landlord, such as attorney fees, but not penalties. (iii) He must provide adequate assurance of future payments. (iv) He does not have to cure the following defaults: 1. Insolvency or financial condition 2. Penalty provisions for breach of contract 3. Non-monetary obligations (ex: lease says you must continuously operate store, but you stopped operations for a period) b1D, if it is non-monetary you do not have to cure.

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4. Shopping center lease rules do have certain restrictions that may have to be fulfilled. (2) What type of defaults does the T NOT have to cure? (a) Insolvency or financial condition (b) Penalty provisions for breach of K (c) Non-monetary obligations (ex. Lease says you must continuously operate store, but you stopped operations for a period) b1D, if it is non-monetary you do not have to cure (d) Shopping center lease rules do have certain restrictions that may have to be fulfilled. (3) (d)(2)A lease residential real property or personal property must be assumed within 60 days or it is presumed rejected. You can assume at any time before confirmation of the plan. In Ch. 11 or Chapter 13. (d)(1) applies to Chapter 7 with regard to residential real property and personal property. The court can give an extension for cause, but the code is silent as to how long. (4) (d)3 applies to non residential real property60 day limit to assumebut there can be an extension of 60 days for good cause by the court. If you do not assume within 120 days or the date a plan is confirmed, then it is presumed that the lease is rejected and possession has to be surrendered to the landlord. Once the court has maximized the extension, the only way to extend is to get the landlords consent. This gives him leverage but he may worry that if he does not extend, Debtor may reject and he would end up with an unsecured claim. (5) If a contract has a provision that says you cannot assign a lease, that is an ipso facto clause, and can be avoided in the BR context, so long as the assignee has at least the same caliber of guarantee as the debtor. (Cannot put in an Albertsons where there is already a Kroger). Executory Contracts a) A business on-going contractsthose negotiated before the filing for which performance is continuing or is due in the future are a central concern in restructuring the business. b) Some of the debtors pre-BR Ks may have been good bargains, while others may have been bad. c) Some may be worth more to someone else than the debtor. d) The Code gives the DIP several choices concerning these contracts. Problem Set 26 a) 26.1. PetroCo, Inc. filed Chapter 11. It had a contract with Con Ed which provided that it would furnish 100,000 barrels of oil, nearly six months output from the small refinery, for $30 a barrel, a price proposed 11 months ago. Two weeks from delivery, the price of oil has surged because of trouble in the Middle East and a strengthening OPEC. If PetroCo negotiated the K now, it would be able to sell the barrels for $50 per barrel. What should PetroCo do? The trustee or DIP may with the courts approval assume or reject any executory contract or unexpired lease of the debtor. Thus, PetroCo should apply to the court to reject the K. However, it may be unwise to reject the K since the debtor needs the income. 765 requires the trustee to comply, to the extent practicable with any instruction received from a customer regarding such customers desired disposition of any commodity K specifically identified to such customer. If this is a commodity K, then PetroCo will have to deliver the oil as the customer demands and may not be able to reject the K. The K has already been identified to ConEd. Otherwise, according to 365, this can be rejected. PetroCo Inc. has received no money, ConEd will have a $2 million claim of which if they reject it, they will only pay $600,000. The $2 million is because ConEd will have to pay $5,000,000 instead of the $3,000,000 they contracted for. They are damaged $2,000,000. They have an advantage in rejecting the contract because since they will only have to pay $600,000 in damages out of the 5,000,000 which leaves them $4,400,000, which is more than the $3 million under the K. Assuming Petro will pay unsecured creditors 30 cents on the dollar, what will ConEd get if Petro rejects. 502g: A claim arising out of rejection from an executory contract will be treated as if it had arisen pre-petition. They will likely have a $2 million unsecured claim which would give them $600k. In a Ch. 7 liquidation of PetroCo who would have received the benefit? In chapter 7, the management is dead and the money goes directly to the creditors. But it will not likely make a difference, because the unsecured creditors still get the same amount; 30 cents on the dollar. In PetroCos Chapter 11, who will receive that benefit? In C11, the business receives the benefit because it gets to use money for operations as well as paying unsecured creditors .Is there a general principle that supports the result? b) 26.2. Jamesons Fruit Distributors has recently filed Chapter 11. It has one large contract outstanding: It has agreed to buy 750,000 bushels of oranges for $1.02 per bushel from Florida Growers of Tallahassee. The futures market for oranges is active and Jamesons president wants to know what his options are since a high orange count will cause his K price to be to high and a low count will cause it to be too low. If the high count comes the contract will be rejected and if it is low, it will be assumed. If it is rejected the debtor will pay in BR dollars; if the growers breach they have to pay real dollars. Go to the Court and have them force the debtor to assume or reject now, not wait and see. Florida Growers are also concerned about the orange count. They want to know what they can do if the count is high, and Jameson no longer wants the fruit. What should the lawyer have told them? She will have told them that under BRC 365(d)(2) the trustee can reject a contract any time before the confirmation of a plan. Growers should file a motion to force the debtor to assume or reject immediately, to give Growers the edge to where they 115

wont have to breach to get the market price. What does 365d add to the DIPs options? If at the time, it has already been 60 days, before the census comes out, DIP can move to extend based on the cause that it is waiting on the census. c) 26..3. Farrs Manufacturing makes canteens for the armed forces but has had to file Chapter 11 due to major business setbacks. Farrs deals almost exclusively with the federal government and will not survive without its Ks. Farrs wants to know if the government can cancel the K now that they have entered BR since the K has a no assignment clause and a bankruptcy termination clause. What do you tell Farrs? 541(c)(1) states that the K becomes property of the estate in spite of any provision in an agreement, transfer, or applicable non-BR law(A) that restricts or conditions transfer of such interest by the debtor. Thus the K is part of the BR estate despite its no assignment clause. The government cannot modify or change the K according to 365(e) and the trustee may not assume or assign it according to 365(c); however, the trustee can still reject it, which he wont do since they are vital to the going concern. He should continue to perform the K. Personal Ks cannot be assumed. 365(c)(1) So personal in nature that no one can perform itso long as applicable laws allow it. (2)Loansyou can never assume a loan. (3) an office building whose lease has expired or been terminated, then it cannot be assumed. The government cannot keep the K from going into BR by its clause. 365(e) an executory K cannot be modified or terminated; it can only be assumed or rejected. 541c: Says the contract becomes part of the estate; the contract is trying to prevent the contract from becoming part of the estate; therefore, that part of the contract is inoperable for the purposes of the bankruptcy. Exceptionmatters of National security trump BR law. d) 26.4. American Molding and Manufacturing, Inc. has filed Chapter 11. However, before filing, AMM decided to go into the MP3 business and now has some K holders and orders that it is unable to fill. What should the DIP management do? 365(a)(c)(f) The DIP Management should assume the K under 365(a) as presumably it would be able to fill the orders. However, under (c), the DIP Management must get the consent of the customers to assume the K. Finally, under (f) the DIP management can assign the contracts to someone else if it first assumes the K and provides adequate assurance of future performance by the assignee of the K, whether or not there has been a default. 541(c) brings the contract in and assumes it under (b) and under (f) assigns it. You must assume and then assign. e) 26.5. Jane Stover bought a franchise and her franchise K provided for (a) her purchase of the store and the land it sits on from Dons Inc for 5% down and the rest of the purchase price on a 20-year mortgage; (b) her purchase of food and other supplies on easy credit terms for the first two years, and (c) her option after one year to borrow up to $100,000 repayable in easy installments. She was to lease the business for the first year and then complete the real estate purchase. A tremor damaged her business causing her to close and lose revenues. She wants to know if she can keep the franchise in Chapter 11? 365(a)(c) She can only keep it if Dons allows because the lease is for non-residential real property and if it has been terminated under non-BR law through a default prior to the order for relief, the trustee cannot assume or assigned. However, he can reject it, which the debtor does not want. Short term lease of real estate 365(a) you can assume the lease; purchase of real estatevery intertwined with the loancourts have said no; purchase of goods365(a) she can keep it; loan transaction365(c)(2) a loan cannot be assumed. If you need money after the BR, there is a mechanism under 364 for Super Priority. If the transactions had not been separated, then the answer would be no on the whole thing. B. Chapter 11 Reorganization: Reshaping the Estate: Fraudulent Conveyances. 1. Fraudulent Conveyance and Other State Avoidance Laws in BR a) Rule: State fraudulent transfer laws hold that the transfer of assets by an insolvent debtor for less than reasonably fair equivalent value is regarded as an injury to all creditors that they may request a court to set aside. b) Section 544(b) of the Code preserves those state law rights but gives them to the TIB or DIP to set aside fraudulent conveyances on behalf of all the creditors in a BR action. c) The TIBs rights are DERIVATIVE so there must be an actual unsecured creditor who could have brought the avoidance action under state fraudulent conveyance law. The TIB has to step in that creditors shoes. d) The BR Code provides its own fraudulent conveyance provisions in section 548. e) Section 548 creates a federal fraudulent conveyance law that is designed to ensure baseline protection in BR for all creditors, regardless of underlying state law. f) The two Approaches come together in Avoidance Remedies. Section 550 provides the remedies for avoidance actions under all the avoiding powers, including 544(b) and 548. 2. Transfers Among Related Entities a) Some transactions are deemed fraudulent because they are made with the intent to hinder, delay, or defraud creditors. b) A number are fraudulent because they constitute a transfer (1) when the debtor was insolvent; (2) for a consideration less than reasonably equivalent value. UFTA 4, 5. ; 548(a)(1) c) The lack of REV occurs when the transferee gives too little value, or when the value is given to the wrong party. d) In re Image Worldwide, Ltd.

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(1) Facts: Image guaranteed loans paid to an affiliate corporation Image Marketing, Ltd. Both were owned by the same person, but only Image Marketing Ltd received funds from the loan. The BR trustee for Image filed suit to avoid the guarantees as a fraudulent transfer alleging that the guarantees made Image insolvent, and that Image did not receive REV in exchange for the guarantees. Steinberg was the sole shareholder, sole officer, and sole director of Image Marketing who obtained a line of credit from a bank secured by a first lien against all of its assets. The line of credit allowed IM to borrow against up to 70% of its eligible accounts receivable and required it to reduce its indebtedness to 70% in the event its accounts declined. In 1993 IM was in great debt, so Steinberg incorporated Image and used the same suppliers and had substantially the same customers. In early 1994, Steinberg liquidated IM, but instead of demanding that IM pay its debt, the bank allowed Steinberg to use the money obtained from the liquidation to pay down IMs trade debts. Instead, the bank demanded that Image guarantee the debt from IM which it did on 5/27/94 secured by a first lien of all of its assets. At trial the bank stipulated that the guarantees made Image insolvent. (2) Procedure: The BR court allowed the bank to take all Images accounts receivable. (3) Issue: Whether Image as guarantor received REV for its guarantee when the direct benefits of the transaction were received by a third party. (4) Rule: Section 548 contains a one year statute of limitations that bar the trustee from using that section to avoid a transfer. Now it is two years within the filing of petition. However, section 544(b), allows the trustee to avoid any transaction of the debtor that would be voidable by any actual unsecured creditor under state law. The trustee need not identify the creditor so long as it exists. (5) Rule: A shift of risk from the creditors of the debtor to the creditors of the guarantor is a fraudulent transfer. (6) Rationale: The creditors of the guarantor making a cross-stream guarantee can sometimes lose out in the transaction, because the guaranteeing corporation may not receive a direct economic benefit from the guarantee. A court will not recognize an indirect benefit unless it is fairly concrete. E.g. when the guarantor receives some of the consideration paid for it from the debtor. (7) REV can be found for a debtor corporations guarantee of an affiliates debt when the loan strengthened the corporate group as a whole, so that the guarantor corporation would benefit from the synergy within the corporate group. Can include intangibles such as goodwill and an increased ability to borrow working capital. e) Rule: The creditors of each separate entity in corporate group can insist that the transactions of that entity be made only for reasonably equivalent value for that entity. f) 2005 Amendments have extended the reach-back period for section 548 to two years. g) In re Video Depot Ltd. (1) Facts: The trustee of Video Depot brought a fraudulent conveyance action to recover the proceeds of a cashiers check purchased by Video Depot and paid to the Las Vegas Hilton in partial satisfaction of the gambling debts incurred by Video Depots principal. In May of 1990, Video Depot purchased a cashiers check payable to Hilton in the amount of $65,000 at the direction of Arlynn, which Arlynn transferred to Hilton. Video Depot commenced the BR on September 14, 1990. Both parties stipulated that the check was a fraudulent transfer under section 548. (2) Procedure: Hilton appeals the District courts decision affirming the BR courts judgment in favor of the trustee. AFFIRMED. (3) Issue: Whether Hilton is the initial transferee lacking good faith knowledge of the voidability of the transfer within the meaning of 550(b). (4) Rule: Once a transfer has been determined voidable as a fraudulent conveyance under 548, the trustee of the D may recover it from either: (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; OR (2) any immediate or mediate transferee of the initial transferee. 550(a) (5) Rule: The trustees right to recover from an initial transferee is absolute; however, the trustee may not recover from a subsequent transferee if the subsequent transferee accepted the transfer for value, in good faith, and without knowledge of the transfers voidability. This is a defense unavailable to initial transferees. (6) A transferee is one who, at a minimum, has dominion or control over the money or other asset, the right to put the money to ones own purposes. The P does not have control and dominion unless he or she has legal dominion and control, the right to put it to ones own purpose. (7) Rationale: this scheme protects creditors from last minute diminutions of the pool of assets in which they have interests while guarding against the waste that would occur if transferees had to look into how their transferors obtained their property or to accept the risk of reversal for no reason they could perceive at the time. (8) Rationale: While the ps actions are a breach of a fiduciary duty, they have no relation to the initial transferee inquiry. The extent of the principals control over the corporation generally and over the corporations actions in transferring the disputed funds to the bank is entirely irrelevant to the initial transferee issue. The Extraordinary Powers of the TIB

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a) Rule: the debtor conveying fraudulently could not later rescind the transaction on those grounds. In Chapter 11 however, now the
debtor is the DIP acting for the benefit of all the creditors and trying to save the business. b) In re Bakersfield Westar, Inc. (1) Facts: Bakersfield provided air and ground ambulance services. The Saunders co-owned the company as community property. On Jan 1, 1992 Saunders applied to have Bakersfield treated as an S corporation to the IRS; however in Feb. of 1994, he submitted a statement of revocation. The legal effect was to make Bakersfield a C corporationa separate taxable entity. The Saunders filed for BR that same month. The trustee in the case filed the Chapter 7 on behalf o f the company on March 4. Due to the pre-petition revocation, the debtors BR estate did not succeed to the debtors S tax attributes because they had already passed to the Saunders. The trustee of the business case filed an adversary proceeding against the Saunders seeking to avoid the revocation as a fraudulent transfer under 544(b) and 548. He also sued the IRS. The trustee alleged that the Saunders intended to shift to the debtor the significant capital gains tax burden that would arise from the future sale or other disposition of the debtors assets, and with the actual intent to hinder, delay, and defraud creditors. (2) Procedure: The trustee moved to avoid the revocation stating that its right to revoke the election was property and the revocation was a transfer. (3) Issue: Whether the ability to revoke tax characterization of a business debtor is property under the BR Code. YES. Constitutes a transfer. YES. Whether BR Code trumps the IRC. YES. (4) Rule: Section 548(a)(1) allows a trustee to avoid any fraudulent transfer of an interest of the debtor in property, which is defined as that property that would have been part of the estate had it not been transferred before the commencement of the BR proceeding. (5) Section 541 includes all legal or equitable interests of debtor in property as of the commencement of the case as property of the BR estate. Property belongs to the debtor if its transfer will deprive the BR estate of something which could otherwise be used to satisfy the claims of the creditors. (6) Rule: BR Code provisions may override provisions of the Tax Code even absent specific Congressional or statutory authorization to do so. (7) Rationale: If the revocation had not occurred, the Saunders and the creditors of their BR estate would have been responsible for payment of the tax liabilities shifted to the business. c) Rule: 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. d) Aiding and Abetting (1) Allegations that a third party aided and abetted a corporations officers in some wrongdoing. (2) The liability to creditors of individual officers and others for participating in a debtors pre-BR fraud is well established. (3) However, the TIB is often not allowed to recover from officers who committed fraud acting on behalf of the corporation. (4) Most litigation will occur on constructive fraud because actual fraud is harder to prove. Constructive fraud can be found when someone has done nothing wrong. Class Notes: Fraudulent Transfers a) 548 (1) (a)(1)(A) Actual Fraud Trustee can avoid a transfer of the interest of a debtor that is voluntarily or involuntarilyintent to hinder delay or defraud any creditors that existed or came into existence afterwards (2) (a)(1)(B) Constructive Fraud Trustee can avoid . . . so long as the D(i) did not get Rev; and (1) was insolvent or (2) was engaged in business but when the transfer took place what was left and was unreasonably small (You can have any of the FOUR combinations) or (3) you knew that what was left to be paid was beyond your ability to pay or (4) the transfer was for the benefit of an insider and it was under the employment contract of the insider and not in the ordinary course of business. (3) Prove actual fraud by proving intentvery hardso most try to prove constructive fraud. (4) Sometimes there is no fraud at all; its just the way things are. (5) (a)(2) A transfer that is a charitable contribution is unavoidable as long as it does not exceed 15% of the income for the year or is over that but is consistent throughout the year. Charitable Contribution defined 548(d)(3) must be made by a natural person and consists of a financial instrument or cash. (d)(4) What is a charitable organization? Does not have to be religious (6) (c) A person whose interest gets avoided under 548 can have a lien on the property to the extent that it gave value and did it in good faith as long as it cant be avoided under 544, 545, or 547etc. The trustee can avoid the transfer, I lose the property, but I have a lien for what I put in it. (7) (d) A transfer is assumed to have been done when a bona fide purchaser cannot beat that transfer but if the paper has been filed but not gone through it will be deemed to have occurred immediately before the filing of the BR. 548 (d) (8) (e) The trustee may avoid any transfer made within 10 years if it was in a self settled trust, by the debtor, was the beneficiary, and intent to avoid creditors. Reach back of 10 years

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(a) (ii) A transfer includes one in anticipation of judgment, settlement, penalty, equitable order, criminal filing. This has to
do with securities fraud. b) Image Worldwide (1) Corporations guarantee each others loansupstream, downstream, or cross. (2) Substituted one company as a sacrifice for another. c) Video Depot (1) Who is in the best position to know where the money is coming from? Hilton can see who the check came from. (2) Whoever is an initial transferee has no defense. (3) Is the P really a transferee if he holds all the important offices in the corporation? The P is the corporation. (4) The check said that it came from Hilton so that Hilton should have known the money was coming from the corporation. (5) Hilton will still get something. But they still have to get the money back. d) Bakersfield (1) Revoked their Regulation S status. (2) Sued both the individuals trustee and the debtors? (3) The debtors should have waited. Feb 1Feb 14. e) Foreclosure that was non-collusive. Okay. If I pay less than $70,000 equals fraudulent. Now this is gone. Problem Set 30. 30.1. Burt DiAngelo owned and operated Be Well, Inc. He employs 106 employees, but he makes all the decisions. Bad press caused the business to decline and Burt has taken it into Chapter 11. Only six months ago, Burt spent $40,000 cash from business funds to take his extended family on a cruise to celebrate his parents fiftieth anniversary. He knew the business was faltering at the time but thought it would come back. You are getting a tingling feeling in the back of your neck. Whats wrong? 548(a)(1);(2) This transfer for the cruise was a transfer of an interest of the debtor in property and it was incurred by the debtor within the TWO years before the filing of the petition. The debtor received less than a reasonably equivalent value in exchange for such transfer or obligation since the transfer was fully for the benefit of Burt in his personal capacity. At the time of the transfer, the debtor was insolvent and it was made to and for the benefit of an insider who may be under an employment K and it was not in the ordinary course of business. We need to know if Burt is under an employment K and whether he is the initial transferee. Here it appears he is. It may be uncomfortable to try and force him to pay the money back to the company. If he paid with a corporate check, the cruise is the initial transferee and the money can be gotten back from the cruise line. The trustee is entitled to one satisfaction under subsection (a)of this section. Get it from the cruise line, but dont tell them that they can go after him because it would be a conflict of interest. 30.2. Ben Goldberger organized a start-up company to take advantage of the opportunities in personal communications service. At an FCC auction for licenses, he was the high bidder at $5 billion for 63 C block licenses, putting 20% down and agreeing to pay the balance in six months. At the time of the bid, unbeknownst to Goldberger or any of the other bidders, the FCC had scheduled the sale of thousands more licenses so that the value was actually $1 billion. Goldbergers investors backed out a week later. What advice do you give him? I do not see where he will have any recourse under BR law. If he were to file BR, he could avoid the sale because he did not get reasonable equivalent value for the licenses. ???? His remedy would be under state law. File bankruptcy and get the trustee to avoid because of the lack of REV and that the debtor is insolvent. This is a fraudulent transfer. He received less than REV, causing the debtor to become insolvent. Beyond the debtors ability to pay. 30.3. Advant Advertising, Inc. filed Chapter 7. Jefferson and Jefferson, CPA firm, was appointed to investigate the horribly kept records and sent a file on a deal in which Cheri traded a small office building worth $900,000 that the company owned for Sure Fire stock that both Advant and Sure Fire thought was equivalent, but was really only worth $90,000. The transaction happened about six months before the petition filing. Sure Fire has spent about $300,000 in renovations, but was only able to get $1 million for the building when it sold it to Wang, a real estate developer. What action should you take on behalf of the TIB? 548(a); (c)I would try and avoid the transfer since it is within the time limit for avoidance. The building was an interest of the debtor in property and was made within two years of the filing. Because of the mistake of both Sure Fire and Advant the debtor received less than a reasonably equivalent value in exchange for such transfer. However, it is unclear whether Advant was insolvent at the time? If it was not, we cannot avoid this transfer. It may be enforced by Sure Fire to the extent that it gave value for the property in good faith. Thus, $390,000 of it belongs to Sure Fire because it did not know it was not exchanging equivalent value Against whom will you take it and what relief will you ask for?; 550 we need to go for the initial transferee of the transfer which would be Sure Fire; however, according to (b)(1) the trustee cannot recover from a transferee that takes for value, including satisfaction or securing of a present or antecedent debt without knowledge of the voidability of the transaction. Under (e)(1)(A), the good faith transferee has a lien on the property to the extent that it improved the premises as well as any increase in the value of the property. It looks as if this transfer is at best partially avoidable. You can recover from either Sure Fire or Wanghe is the immediate transferee. Is Wang a good faith purchaser who gave value without knowledge. Sure Fire may get $100,000 for the value increase; so they get $200,000 of a lien. You can make the argument for the improvement but not for the purchase price. This area is unclear. The TIB cannot recover from a person who purchases for value, good faith, and without knowledge of the fraudulent transfer?? 550(e)(1) Advant gave good value

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and had good faith. They would get either $100K or $200K lien on the property on the property but the property would have to be delivered to the debtor. Does the transferee get unsecured claim for the value he actually gave? Does the initial transferee have the defense of good faith and for value? 9. 30.4. Commercial Investors invested in Held Real Estate whose owner and operator had a break down causing the company to fall to pieces. However, the second in command managed to pay Commercial Investors, most of the key players of the business have left. Consequently, CIs collateral, accounts receivable, is virtually worthless. However, the building is unencumbered and was worth about $850,000. Last week, it sold at a sheriffs auction for $1600 due to a plumbers lien judgment for an unpaid plumbing bill. CI is willing to share with the plumber and the other creditors but needs the building to prevent a $1.2 million dollar loss. What advice do you give Moran? When Held Real Estate goes into BR voluntarily, the DIP will be able to avoid the transfer if it occurs within two years of the filing because it is clearly not reasonably equivalent to what it is worth and is certainly going to be avoidable. The only problem may be that CI is not an unsecured creditor and the DIP or TIB must have an unsecured creditor that could bring the claim. I guess they could be unsecured if their collateral is truly worthless. Depending upon how much CI is owned, it may be able to force Held into BR. They cannot undue it because it is non-collusive and he bids for the house. This is not a fraudulent transfer. 10. 30.5. Our client, Illinois Vacuum, is owed $30,000 on an open account by a debtor who is 90 days behind in its payments. IV thinks the failure is really as a result of the retirement of the president and the takeover of his son. However, the former president refuses to believe that the business is in trouble because he just received a dividend on his 75% of common shares. What are the possible remedies available to IV in regards to the dividend? Again, outside BR, there is no remedy. However, in BR this may be a transfer that the TIB or DIP could avoid because it is a transfer to an insider and if within the unallowable time may be a transfer that would leave the debtor insolvent and unable to survive. Would your analysis be different if the dividend were a regular preferred stock dividend in the amount provided for by the terms of the preferred stock (e.g. $100 to be paid per share each year cumulatively)? No. C. Chapter 11 Reorganization: Ethical Issues 1. 327 2. 330 3. Rule 2014 4. Compensation and Disclosure a) Ethical aspects of representing parties in Chapter 11 proceedings is important because the issues are complex, the cases are heavily littered with hidden snares, delayed decisions mean changes in legal position, negotiation are multiparty and dynamic and parties who were friendly can become adversaries overnight. b) The court has a much more active role in supervising the attorney-client relationship than it does in ordinary litigation. c) The atty represents a new legal entitythe DIPand court supervision is closely akin to supervison of attys of decedents estates and of minors. d) There are special obligations imposed on attys by the Code when they advise assisted persons (Consumer debtors with property valued at less than $150,000) and certain constraints on the advice attys may give their clients. e) Section 330 excludes any compensation from the estate for the debtors attorney. Supreme Court upheld this in In re Lamie. (1) This provision forced attys to demand payment up front. (2) However, attys of DIPs in Chapter 11 BRs kept their payments. f) Rule: The BR Code requires that counsel serve only with court approval 327(a) (1) That counsels fees be approved by the court 328(a); 329(b); 330(a) (2) That only disinterested persons may serve as counsel 327(a) (3) That the representation and fee arrangements be disclosed to the court and creditors. 329(a) (4) These rules apply to all BR cases but are especially important in business cases. g) In re Lee (1) Facts: Debtors filed BR both individually and as a corporation. They sought to have the same law firm represent the debtors in both filings. However, the law firm did not disclose that it was working on both cases. The BR court found that there was a substantial overlap in creditors in both filings though some of the creditors were not shared. The atty said that he had been paid a retainer to represent the individuals but not the corporation; however, it was not disclosed in the application of employment. The only reason the court recognized that counsel was the same in the two filings is because they arrived in chambers on the same day. (2) Procedure: Denied appointment of counsel in one of the cases due to conflict of interest. (3) Issue: Whether an attorney must disclose that he or she is working in largely parallel cases and whether such representation forms a conflict of interest that is unethical. THIS IS A QUESTION OF FACT FOR THE COURTS BUT DISCLOSURE IS REQUIRED. (4) Rule: 2014(a) requires that an attorney disclose that he or she has received a retainer for taking the BR case it must set forth the applicants proposed arrangement for compensation, which includes a requirement to disclose any retainer received by or promised to the applicant.

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(5) Rule: The failure to disclose the parallel applications is a violation of Rule 2014. (6) Rule: 2014 requires the disclosure in an application for employment of all the applicants connections with any other party in interest. (7) Rule: Disclosure is required of any application to represent more than one related party, including the representation of debtors in related cases. (8) Rule: All facts that may be relevant to a determination of whether an attorney is disinterested or holds or represents an interest adverse to the debtors estate must be disclosed. (9) Rule: To represent an adverse interest means to serve as agent or attorney for entities holding such adverse interests which means to possess or assert any economic interest that would tend to lessen the value of the BR estate or that would create either on actual or potential dispute in which the estate is a rival claimant, OR to possess a predisposition under circumstances that render such a bias against the estate. (10) Test: Section 327 requires a two prong test: A debtor in possession or trustee may employ attorneys with court approval only if (1) they do not hold or represent an interest adverse to the estate, and (2) they are disinterested persons. (11) Rule: While lack of financial resources is not a reason for representing conflicting interests it is a reason for waiving a conflict of interest. Rule 5012 permits an attorney to represent conflict in interest upon the written consent of all parties concerned. (12) Rule: An attorney who desires to represent a debtor in possession and a conflicting interest must obtain written waiver from the debtor, all creditors and the US trustee. (13) Rationale/ explanation: The purpose of disclosure is to permit the Court to determine whether the connection disqualifies the applicant from employment or whether further inquiry should be made before deciding. In re Filenes Basement, Inc. (1) Facts and Procedure: Filenes Basement, Inc. and Filenes Basement corporation filed Chapter 11 which the court ruled would be jointly administered. The debtors made applications to have Hale and Dorr represent both debtors. The appointment was approved but TAC filed a motion for reconsideration of the appointment alleging that H&D was not a disinterested party and that there was a conflict of interest due to its past representation of TAC a major creditor and potential judgment creditor of the debtor. TAC alleged that the president of the debtor had been released by it and that as general counsel H&D had drawn up his termination papers. However, subsequent to this, H &D had also helped him get hired by the debtor. H&D diminished its role as counsel for TAC, but TAC detailed intricate and long time representation by H&D. (2) Issue: (3) Rule: Failure to be forthcoming with disclosure provides the BR court with an independent ground for disqualification. (4) Rule: Coy or incomplete disclosures which leave the court to ferret out pertinent information from other sources is not sufficient. (5) Rule: The mere fact of competition between two clients is not disqualifying where the two parties do not hold or assert claims against each other and do not assert competing claims to an economic interest. (6) Rule: Adverse interest refers to any interest, however slight, that would faintly color the independence and impartial attitude required by the code and BR rules. (7) Rule: When there is actual conflict of interest, disqualification is mandatory. A potential conflict constitutes a ground for disqualification under 327. (8) A Disinterested Person includes any person that does not have an interest materially adverse to the interest of he estate or of any class of creditor or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor. 101 (14)(E) (9) Standard: The determination whether any competing interest of a court-appointed professional created a meaningful incentive to act contrary to the best interest of the estate and its creditors that could place both parties at more than acceptable risk, or even the reasonable perception of one. (10) Rationale: Requirements of the rule transcend 327(a), as they mandate disclosure of all connections with the named parties, rather than being limited to those which deal with disinterestedness. Even if there is not in fact a competing interest, if there is a reasonable perception of such an interest, the applicant should be disqualified. In re Martin (1) Facts: Deals with the right of a lawyer, prior to submitting clients petition under Chapter 11, to take security for payment of attys fees to be incurred while representing the client in connection w/ BR proceedings. The law firm demanded a $5000 retainer and issued a note secured by a second mortgage for attys fees. (2) Procedure: The BR court found that the mortgage constituted an interest adverse to the BRs estate. (3) Issue: Whether an attorney under 327 may take a security interest for the payment of his fees. YES, IF APPROVED BY THE COURT AND DISCLOSED.

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(4) Rule: Bankruptcy courts routinely recognize the validity of retainer agreements, although most courts require that the agreement be disclosed as part of the general requirements for disclosure of fee arrangements. Attorneys must still seek court approvbal before taking as fees the money in the retainer account. (5) Rationale: 327 will not support, either by its terms or objectives, a bright line rule precluding an attorney at all times and under all circumstances from taking a security interest to safeguard the payment of his fees. Privelege and Conflict of Interest a) Special difficulties arise because off the attys representation of the company rather than of the corporate officers. Complications arise when a TIB later demands disclosure of earlier conversations between the officer and the attorney. b) Commodity Futures Trading Commission v. Weintraub (1) Facts: The CFT was investigating CDCBthe debtorfor violating the Commodity Exchange Act. In 1980, the CFT filed a complaint against the debtor, and that same day McGhee acting as sole director and officer of CDBC entered into a consent decree which provided for appointment of a receiver and for that receiver to file BR. The receiver filed BR and was later appointed trustee. Former counsel, Gary Weintraub was called by the Commission to give testimony and wouldnt answer some of the questions because they were covered by privilege. The Commission sought to have the trustee waive the corporations privilege. (2) Procedure: The Dist. Court ordered Weintraub to testify without asserting privilege. The Court of Appeals reversed. The Supreme Court REVERSED. (3) Issue: Whether the trustee of a corporation in BR has the power to waive the debtor corporations attorney-client privilege with respect to communications that took place before the filing of the petition. YES. (4) Rule: The trustee of a corporation in BR has the power to waive the corporations atty-client privilege with respect to pre-BR communications. (5) Rule: If a debtor remains in possession, the debtors directors bear essentially the same fiduciary obligation to the creditors and shareholders as would the trustee for a debtor out of possession. (6) Rationale: Vesting in the trustee control of the corporations attorney-client privilege most closely comports with the allocation of the waiver power to management outside of BR without in any way obstructing the design of BR. (7) Explanation: The trustees exercise of the Corps atty.-client privilege will benefit only creditors, but there is nothing anomalous in this result; rather, it is in keeping with the hierarchy of interests created by the BR laws. c) Courts are undecided as to whether a trustee can waive an individual debtors attorney client privilege. Two TX courts with the same issues chose opposite alternatives. d) The greatest challenge facing BR attorneys is the conflict between a corporation and its owner or manager. This is an irony since in most Chapter 11 cases the owner and corporation are one entity and the debts are identical. However, BR law requires that the atty represent the corporation and not the owner. Class Notes a) BR courts police lawyers very closely. b) In re Lee: (1) Is it reasonable to have to get a separate atty for the principal and the corporation? (2) Problemthe atty did not make the proper disclosures. (3) He was surprised that the two cases ended up with the same judge and at the same time. (4) Two Prong testadverse interest and disinterested person. (a) Problem Set 40 a) 40.1. As part of one of the most successful BR boutiques in the area; however, more than 30% of the hours and expenses the firm bills in BRs are never paid and revenues are down. Most of the cases are consumer bankruptcy BRs, and the business BRs make more money. What do you recommend? I recommend that we begin to use retainers and that we try to stay within the legal limits and try to get security interests to secure retainers. b) 40.2. Our firm has represented Summer Enterprises for over a decade. Because you have had experience with failing firms, the senior managing partner of the Summer account has asked you to investigate the corporation because of its low returns in spite of record sales. You are given carte blanch and discover that there may be employees involved in fraud. You are going to interview them. What will you say to the employees as you begin your interview? I will make it clear to them what my purpose is and whom I represent. They should know that any privilege in our communications belongs to the corporation and not them personally. You must disclose that you are the corporations atty. You must Mirandize them. Does it matter whether Summer seems to be on sound financial footing despite the problems under investigation? No, because if there is fraud, they could really be insolvent though it appears they are not. I have been sent in because the finances look suspicious. c) 40.3. Jesses Jet Clean has been a client of the firm for 22 years. I have been on the account for a year and you have been counseling him about a Chapter 11 filing. The company owes about $300,000 to the firm for work over the past six months, and

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they will file in the next couple of weeks. Do you foresee any problem in the firms handling the BR? There may be a problem that we are a substantial creditor and that our interest may be avoided having been incurred in the six months while the debtor will be presumed insolvent. We will have to make sure that we are not adverse to their interests. Since we will be unsecured, chances are we will be. I think it is always best to let someone other than general counsel handle the BR. Youve gotten to know Jesse pretty well working with him and he wont want to get a new lawyer. If there is a problem, how best to solve it? I will recommend an atty for him that may take the edge off. You can also get all interested parties to sign a waiver. The element has to be there is disinterested. He suggests waiving the fee. You know all the skeletons and will have to turn in Jesse. Continuity v. Disinterested. He said he would disqualify the attorney. 40.4. You are becoming a partner and head of Reorganizations and Workouts. Because of increasing director liability, the corporate law department has asked for a special management meeting on the issue of whether firm members should continue to be permitted to serve on the boards of directors for different clients. What position will you take? I think that this is always a potential conflict of interest though I know its importance in rainmaking. The problem just needs to be solved by a firm deciding that it will forego representing such firms in issues where conflict is inevitable. There should be a system by which the firm insures itself that it is not in any conflict in any of the cases that it undertakes. If we serve on boards, we have to be able to live with the cost-benefit analysis and know that there will be a cost. Most judges do not even like the perception of insider/interestedness.

D. Review 1. A debtor with primarily business debt is not subject to the means test. 2. Ch 11 individuals are discharged at the end of the plan. For businesses, it is at confirmation. 3. Debts up to Chapter 11 are subject to Confirmation???? Subject to the agreement reached in the negotiation. 4. Creditor to debtor is $400 and $600. Prior to this a payment of $1000. You may aggregate two new values in a row if there is no intervention of a preferential payment. 5. A PMSI is not new value; if you take a lien, then it is not new value. We want to encourage people to continue to do business with the debtor. 6. Skipped a lot of stuffget from Constance and Helene. 7. Schedule I is forward looking and applies in Chapter 13 where disposable monthly income is key; however, CMI which looks back 6 months and applies to Chapter 7. 8. 523(a)(2)(C)???? If you purchase a luxury item within a certain amount of days or get cash advances; non-dischargeability is presumed. 9. Earmarking doctrineEverybody remains in the same place. 10. You can do more than onesuper priority, and super, super prioritybelts and suspenders. 11. You cannot prime a lien if the lien is worth $10,000 and the property is worth $10,000. You can only prime if he has a 10,000 lien on property worth more than that. REVIEW SESSION NOTES A. If you have primarily business debt, the means test does not apply. B. No statutory liens, no equitable subordinationNot going to be on the test. C. Discharge is upon confirmation for businesses and upon completion of the plan for individuals. In C11 debts up to confirmation are subject to chapter 11, not original contracts. D. Can you aggregate two distribution of new value to except from one large preferential payment? 1. So long as the two new values are not subject to lien, you can aggregate them only to the extent of the new value. 2. Preferential Payment $12k ---- $6k +$6k = Okay, the preference is excepted. E. Does new value come in two forms? New unsecured property and PMSI? 1. PMSI is not new value. You are taking a lien 2. New value is to encourage creditors to give unsecured credit. 3. PMSI exception is based on the UCC compliance efforts of the creditor. F. Adequate protection applies to every chapter. It is the money you are paying to SC to cover depreciation on the collateral. G. Exemptions apply in every chapter for individual debtors. H. When a bank has the right to set off, it is still part of the stay but you file a motion to lift the stay and then an administrative freeze is put on the account. I. If trustee avoids a mortgage, he jumps into the shoes of that person, if the person was a good faith person and gave value, the person would get a lien in the property to the extent it gave value. This may be different from fraudulent transfer; Strong Arm Provision. J. You challenge a discharge under 727 only. You challenge dischargeability of a debt in 527. You have sixty days from scheduled meeting of creditors to challenge. If you dont do it in sixty you are stuck. You can revoke a discharge within a year of discharge. There is a higher standard of proof in revocation than denial. The courts have interpreted revocation that the proponent is required to have not had the

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information for revocation within the time limit that it could have challenged the discharge. They must have info that they gathered after the period of challenge or they will be denied. In order to file BR in a district to have a valid venue, you must have lived in the venue out of the preceding 180 days 91 or more days. If you want to take exemptions from that state, you must have resided there for the preceding 730. Texas does not have extraterritorial homestead exemptions. Oregon does. If there is a break in the 730 days where you lived elsewhere, then you go to the 180 days preceding the 730 days and wherever you lived for the majority of the 180 preceding days will be the states exemptions you will be allowed to take. Federal exemptions are restricted by whether your state has opted out or not. The only way you can take federal exemptions where the state has opted out is if you cannot take any exemptions because of moving around. He does not know the answer as to whether you must be denied home or personal exemptions or both. Pre-petition security interests in after acquired property cease to operate on petition. Inventory liens, cash collateral, the judge could decide not to allow the estate to use the cash collateral and force them into C7. Or he could allow the estate to use the cash, and give, or not give, the inventory lien holder a lien in the new inventory. Lack of adequate protection is a cause for the purpose of 362 to lift the stay. 522(9): No exemptions over $125k if.(look herein statute). 1215 Days If you are above the median and dont qualify for the means test, you must stay in BR for 36 months. When calculating income, in terms of expenses, you will have expenses in IRS national standard, IRS local standard, and IRS miscellaneous. They are not in the BR code. You must go to IRS code. Local standards handle housing and utilities, National standards handle clothing, food, things not different where ever you go, other than Hawaii and Alaska; misc. cell phone, computers, etc. These numbers are in tables. 1. You also have actual expenses like home mortgage expense. You get to pick the higher between actual for utility, housing, and vehicles. You can increase local standards for utilizes, housing, and vehicles. 2. If you cannot fit the standards of urban, then you are rural. Texas exemptions. Urban gets fire protection and police protection, sewage, water, gas, electricity, etc, then you are probably rural. Schedule I v. CMI. CMI looks back to see your history for past six months (Ch 7 only). In C13, you use projected disposable income. Something grabbed for the past six months cannot project for the future. Ex: you are unemployed two months ago but now make $6k. That is not realistic. (7 for the past; 13 for the future). 523 gives exceptions in C7. 1323 gives exceptions also. Willful or Malicious in 13. Willful AND malicious in 7 is the higher standard. 523(a)(2)(C): if you purchase luxury goods or services exceeding $_____ within 90 days of BR, there is a presumption of nondischargeability. The 910 PMS anti-cram down is only for cars. For personal items, it is 1 year. If you file BR while you have ANY money, the money becomes part of the estate. Once employer cuts the check, unless you can exempt it, it is part of the estate and may go to the creditors. Be sure to distinguish between avoiding a lien and preferential payments they are two different things. Essentially, the Ear marking doctrine applies if there is no diminution of the estate. Priority is for unsecured claims. Priming a lien is giving a lien for a loan. You cannot prime a lien if there is no more value in the property. You can however prime a lien holder who is owed more money than you. If the property is sold and you have been primed, and it does not sell for enough to pay you, the remainder of your claim will have super or super super priority depending on the facts.

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