2005 bankruptcy outline

8/3/2019 2005 Bankruptcy Outline

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1. Introductiona. Debt collection: a system characterized by bargaining and voluntary payment of delinquencies rather than by collection

through form legal processes

i. The bargaining is importantly influenced by each party's ability to exert leverage - usually credible threats of actionthat will harm the other

ii. Indirect Leverage: creditors would like to find someone else to help them encourage the debtor to repay, especiallyif the cost to the creditor is negligible; e.g. in 1998, the IRS decided to tax individuals for debt forgiveness onoutstanding debts reported by banks, savings and loans, and credit unions

b. Credit Information Process: enabling creditors to make the decision to lend based on information about the debtori. Fair Credit Reporting Act: giving the debtor access to credit report information and prescribing procedures to

assure the accuracy of information; to the extent that law makes the credit records more accurate and more credible,it may increase leverage they give a creditor

c. Usury laws: if a creditor charged more than a pre-determined rate of interest, the loan would be deemed usurious, and theinterest (and under some statutes the principal itself) would be deemed uncollectible; some laws even provided criminalpenalties for usury lenders

i. Marquette National Bank of Minneapolis v. First Omaha Service Corporation (1978): Supreme Court rules

that under federal banking law the state law of the customer's location was not relevant

d. Common Law Remedies: civil and criminal protections for targets of nonjudicial debt collectioni. George v. Jordan Marsh Company (1971):If a creditor intentionally caused emotional distress in the overly

aggressive collection of a debt, the creditor could be liable for any resulting injuries

ii. Public Finance Corporation v. Davis (1976):Liability does not extend to mere insults, indignities, threats,

annoyances, petty oppressions, or trivialities; liability will be found only where the conduct has been so outrageousin character and so extreme in degree, as to go beyond all possible bounds of decency

iii. Neb. Rev. Stat. 20-204: a creditor who publicizes information about a debtor might be held responsible, if thedebtor can prove the information to be false and offensive and that the collector was reckless in publicizing it


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iv. Schoneweis v. Dando (1989) (where collector reveals financial difficulties of debtor to debtor's family): Courtholds that this revelation did not constitute adequate publicity

e. Fair Debt Collection Practices Act: fashioning remedy toward debt collection abusesi. Heintz v. Jenkins (1995): court holds deciding that the term debt collector in the FDCPA does apply to a lawyer

who regularly, through litigation, tries to collect consumer debts

f. Collection law: how you initiate collect on debti. Unsecured Creditors: Must get a judgment and an execution writ (a.k.a. writ of attachment) (instructing Sheriff to

retrieve assets from debtor and liquidate)

1. Writ is issued routinely by court clerk upon request of the judgment creditor2. Once writ is delivered, the sheriff will take physical possession of any properties and seize it, or tag it

with a notice of seizure

3. Process of seizure is called a levy. After sheriff levies upon the property, he will report to the court witha document called a return, which describes the sheriff's effort to find property of debtor.

4. Once sheriff levies upon a specific piece of debtor's property, judgment creditor=a judicial lien creditoras to that property

5. Sheriff advertises property for public sale, sell it to highest bidder, proceeds paid to the levyingjudgment creditor till he is paid in full. Money left over goes back to judgment debtor, unless anotherjudgment creditor levied upon property while it was stored in courthouse. If

ii. What can sheriff take?1. Must be belong to debtor (cannot be rented)

a. Live human beings are entitled to protect a certain amount of property - exemptions; we donot want to impoverish people (note TX as extravagant) Every state allows debtors to keepsome stuff. (in DE, gets to keep up to $5000 total thingsincluding house). There are statelaw determined things. (exemption statutes)

iii. Alternative writs for creditors:


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1. Turnover writs-allows judgment creditor to have the debtor ordered to produce property, under threatof contempt and jail, once the JC gets the necessary information about the assets

2. Judgment Liens by Recordation-allows creditors to obtain lien without going through full-blownexecution; limited mostly to encumbering real estate. (CA & ME allow creditor to put a legally effectivelien on all the debtor's personal property available for collection anywhere in state through a singlefiling)

a. often the fastest and cheapest post-judgment collection step-creditor ties up assets andprevents resale, since no purchaser would buy property with title clouded by earlier lien.

b. By recording judgment and getting lien, JC an pursue execution at leisure, knowing that inrace against other JC, the recording creditor's position has been assured.

2. Secured Creditors-extract voluntary liens from debtors, which allow for judicial collection based on mortgages and security interests indebtors' property

a. Perfection-To protect 3rd parties, consensual liens are given legal effect against third parties only if secured party gives publicnotice of interest, usually be recordation or perfection. Security interest must be filed to be perfected.

b. Seizure for sale of collateralforeclosure in real estate and repossession in case of personaltyis governed by is governed byPart 6 of Art 9.

c. Self-help repossession: Creditor can seize the property without any help from sheriff (self-help repossession) or can offer tokeep the property in satisfaction of the debt without any sale.

a. But not allowed to breach the peace.b. Really only good against the ignorant

1. Secured creditor can also sue on debt, obtain judgment, and ask sheriff to seize/sell3. Asset protection: allow creditors to prevent legal judgments from being enforced against htem, often as self-settled trusts that permit

assets to be placed in trusts for the benefit of the settlor and rendering them purportedly immune from claims of creditors.

a. Assets will not be protected if debtors are deemed to be in control of trust, even if the assets are in a trust that removes thedebtors as trustees and prevents the new trustee from repatriating any trust assets to use if an event of duress such as a law


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suit or a TRO occurs. Federal Trade Commission v. Affordable Media (sentencing debtors to 6 mos. in jail for not repatriatingthe assets in a trust protection plan)

4. Prioritiesa. What must sheriff do to complete priority conferring levy?

i. In most jurisdictions, it is not necessary for the sheriff to remove goods in order to complete an effective levy, aslong as the property is present and subject for the time to the control of the officer holding the writ, and he assertshis dominion over it in express terms by virtue of writ. Credit Bureau of Broken Bow v. Moninger(1979).

ii. Other jurisdictions require that sheriff either take possession or appoint independent custodianiii. In either case, if the levied-upon goods are left in the hands of debtor for an unreasonably long period of time with

consent of creditor, lien will be lost.

b. Unsecured vs. unsecured: first unsecured creditor to perfect a judgment lien against the property by executing or levying on ajudgment will win as to the property being levied on.

i. Though levy is essential for perfection and priority, the date of levy is not always the controlling date fordetermining priority

ii. Some states will backdate perfection to the date the sheriff got the writ, while in others it is the date of the judgmentor the date of sheriff's levy that is controlling

iii. For priority purposes, it is the recording or registration of the judgment in a manner deemed to give notice to otherparties, especially other creditors and buyers that creates priority position

1. If two creditors enjoy equal priority under the usual rules, a taxing authority usually turns out to bemore equal than other creditors.In Re Estate of Robbins (1973)

2. Inactive judgments may lose their vitality and go numb. Weaver v Weavera. Dormancy-If judgment creditors fail to seek enforcement of a judgment for a long time, it is

dormant (may lapse, or be subject to collateral attack). Can be avoided by regular attemptstypically yearly, to enforce, even if unsuccessful, or by a reviver action


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b. Expiration expiration of the SOL to enforce judgment may be terminal (generally 10 yrs).Can be avoided by brining a new action on the judgment within the limitations period. Absentany valid defense by judgment debtor, new judgment will result and new limitations periodbegins.

c. Unsecured judgment creditor v. secured creditor: First to perfect wins.i. A secured creditor or the mortgagee perfects when it records its consensual lien according to the statutory

prescription.

ii. If the judgment creditor's lien is later it looses; if the judgment creditor's lien is earlier, it wins.d. Judgment creditors and secured creditors vs. buyers: first in time, first in right, as measured by perfection, usually through

recordation. This puts a premium on checking the certificate of title for automobiles and checking the other perfection devicesfor buyers and creditors seeking an interest in other goods.

5. Nonbankruptcy Lawa. Garnishment: seizure of property from third persons; debt owed to a debtor by a third party

i. Retrieve judgment and writ of garnishment used to attach debts owed to the debtor for the benefits of thedebtor's judgment creditor

1. A garnishment is an ancillary lawsuit against the third party garnishee2. E.g. W owes bookie $1000 and does not pay; Clark owes W $1000 + interest; bookie can sue Clark

directly

a. The bookie is the garnishor and judgment creditorb. Clark is the garnisheec. W is the judgment debtor

ii. Webb v. Erickson (1982) (where the creditor serves writs of garnishment on parties whose houses had beensold by the debtor, to garnish the commissions the debtor earned as a real estate agent): Garnishee can beliable for entire amount of debt if it fails to answer garnishment writ


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iii. Restrictions on Wage Garnishment1. If a judgment creditor could seize the entire obligation owed by an employer to a judgment debtor,

then the judgment debtor's ability to survive might be seriously jeopardized, thus giving thecreditor too much leverage in exacting promises to pay much higher interest rates and to adhere tonew payment schedules with addt'l charges

2. In response to those concerns, the Consumer Credit Protection Act now restricted access of allcreditors to the wages of any debtor

3. Commonwealth Edison v. Denson (1986)(where employees had multiple creditors, includingsupport garnishers seeking to garnish their wages): Court holds thatsupport garnishments shouldnot be considered separate from judgment creditor garnishments

iv. Garnishment of Bank Accounts: when a customer has a deposit account, the bank acts as debtor (moneyowed to customer); when a customer has outstanding loans from the bank, the bank acts as creditor - hence,the bank then offers the judgment creditor only the amount left in the account after the bank's own setoff for

the outstanding loan.

v. What can be garnished? Network Solutions, Inc. v. Umbro International, Inc. (2000), where court holds that a

contractual right to use an Internet domain name cannot be garnished because it is the product of a contractfor services

vi. 18 U.S.C. 1674 establishes thatno employer may discharge any employee by reason of the fact that his earningshave been subjected to garnishment for any one indebtedness; violators will be subject to a fine not more than$1000, or imprisonment for not more than one year, or both

1. Garnishment of an employee's wages resulting in damage to an employer's reputation is not a legalexcuse for firing that employeeb. Property Exempt from Seizure: exempting some items so that garnishment will not reduce a debtor to impoverishment,

allowing debtor to retain enough basic property to make a fresh start, and to avoid becoming a charge on thecommunity

i. Commonly defined by dollar amount and by type of property, e.g. burial plots, homestead real property,homestead sale proceeds for six months after sale, personal property such as alimony, home furnishings,food, tools used in profession, clothing, car


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1. Items fitting a category but exceeding the dollar limit may be partially exemptii. TX as most extravagant; DE, PA, SD as not generous (p. 105-113)

iii. What is exempt?1. In re Johnson (1981): Court holds that a bus can be exempt as one motor vehicle2. In re Hall (1994): Court holds that a lawnmower is not household furniture3. In re Pizzi (1993): Court holds that lottery winnings, whether received in lump sums annually or

all at once, may not be exempted as an annuity payment

4. In re McCollum (1993): Court holds that a damage settlement given as an annuity contract isexempt

iv. Proceeds and Tracing: issues arise when a property not exempt is traceable to one that is1. In re Williams (1994): Court holds that the amount paid for a car which was directly traceable to

worker's compensation proceeds is exempt

2. Holmes v. Blazer Financial Services (1979): Court cannot protect wages; but legislature respondsin 1993 with allowing six months of wages exempt

v. What order are people paid?1. State law is a race of the diligent - first person to get judgment takes up to the amount he is

owed; i.e. you snooze, you lose

2. Some states only go back to the time of writ, i.e. who gets the actual writ firstc. Fraudulent Conveyances

i. Twyne's Case (1601) (where D was indebted to both P and Twyne and made a secret conveyance to Twyne ofall his goods and chattels, leaving D insolvent): Court holds that this constitutes fraudulent conveyance

ii. Uniform Fraudulent Transfer Act


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1. 1(2): exempt property is an exception to fraudulent conveyance (property subject to valid liens,generally exempt under nonbankruptcy law)

2. 2. Insolvency: (a) A debtor is insolvent if the sum of the debtor's debts is greater than all of thedebtor's assets, at a fair valuation; (b) A debtor who is generally not paying his debts as theybecome due is presumed to be insolvent

3. 3. Reasonably Equivalent Valuea. At a foreclosure sale, items tend to bring a lower price (due to low attendance, no

warranty, no inspection opportunity) - code states that foreclosure sales are notfraudulent conveyances

4. 4. Transfers Fraudulent as to Present and Future Creditorsa. (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor,

whether the creditor's claim arose before or after the transfer was made or the

obligation was incurred, if the debtor made the transfer or incurred the obligation:

i. (1) with actual intent to hinder, delay, or defraud any creditor of debtor; ORii. (2) without receiving a reasonably equivalent value in exchange for the

transfer or obligation, AND the debtor:

1. (i) was engaged or was about to engage in a transaction for whichthe remaining assets of the debtor were unreasonably small inrelation to the transaction; or

2. (ii) intended to incur, or believed or reasonably should havebelieved that he would incur, debts beyond his ability to pay asthey became due

iii. (b) In determining actual intent, consideration may be given to whether thetransfer or obligation wasto an insider; the debtorretained possession orcontrol of the property transferred after the transfer; the transfer orobligation wasdisclosed or concealed; the debtor had been sued or threatenedwith suit; the transfer was ofsubstantially all the debtor's assets; the debtor

was insolvent


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1. ACLI Government Securities, Inc. v. Rhoades (1987): Court holdsthat the conveyance of property to his sister, made the day before ajudgment of over $1.5 million was entered against debtor, inexchange for $1.00, was fraudulent because: (1) there was a closerelationship among parties to the transaction, (2) there was secrecy

and haste, (3) there was inadequacy of consideration, and (4)

transferor knew of his duty to pay the claim and his inability to do so

iv. Note that present creditor means creditor at t ime of transaction5. 5. Transfers Fraudulent as to Present Creditors

a. (a) Fraudulent if the debtor (1) made the transfer or incurred the obligation (2) withoutreceiving a reasonably equivalent value in exchange for the transfer or obligation (3)and the debtor was insolvent at that time or the debtor became insolvent as a result of thetransfer or obligation, (4) which is attacked by a pre-transaction creditor.

b. (b) Fraudulent if the transfer was madeto an insider for an antecedent debt, the debtorwas insolvent at that time, and the insider had reasonable cause to believe that the debtorwas insolvent.

c. Note that 5 is the easier test to prove than 4, but 5 only applies to creditors whoexisted at the time of the transaction

6. 8. Defenses, Liability and Defenses of Transfereea. (a) A transfer or obligation is not voidable against a person who took in good faith and

for a reasonably equivalent value or against any subsequent transferee or obligee

b. (b) To the extent a transfer is voidable, the creditor may recover judgment for the valueof the asset transferred, or the amount necessary to satisfy the creditor's claim,whichever is less; judgment may be entered against:

i. (1) the first transferee of the asset or the person for whose benefit the transferwas made; or

ii. (2) any subsequent transferee other than a good-faith transferee or obligeewho took for value or from any subsequent transferee or obligee.


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7. What does a creditor get in an action for relief against a fraudulent ctransfer? See 7a. Avoidance of transfer or obligation to the extent necessary to satisfy the creditor's claimb. Attachment oagainst remedyc. Injunction against further disposition by debtor or transferee of the asset transfered it

was in good faith, they are entitled to: (1) a lien on or a right to retain any interest in theasset

d. If creditor has obtained a judgment claim, he may levy execution on asset transferred orits proceeds.

e. Good faith buyer8. What is a good faith transferee entitled to, to-->[Author:DB]the extent of the value given the

debtor for the transfer or obligation? See 7

a. (1) a lien on or a right to retain any interest In asset transfer; (2) enforcement of anyobligation incurred, or (3) a reduction in the amount of the liability

i. Transferees/Buyers do not lose any money out-of-pocket, butthey do lose thepresent value of the asset purchased

iii. Leveraged Buyouts: assets of the corporation being acquired are used to secure the purchase price paid forthose assets; later targeted as fraudulent conveyances

1. Not all leveraged buyouts are subject to fraudulent conveyance li tigation; two types of legitimateLBOs:a. The assets mortgaged by a corporation to support an LBO do not exceed the net equity

of the business (after appropriate adjustments), the transaction will not make thecorporation insolvent; open to attack only if the margin of equity is too thin to supportthe corporation's business

b. The cash flow is sufficient to make the debt payments; turns on two factors: degree ofrisk of default undertaken in the first instance, and the degree to which projected

economic developments impacting the business are not overly optimistic
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2. How do you show insolvency? Sum of debtor's debts is greater than all of the debtor's assetsa. Note In re Bay Plastics, Inc. (1995) (where a lot of goodwill is pumped in to make the

assets outweigh the liabilities): Court holds that if the LBO resulted in a margin of equitytoo thin to support the corporation's business, the LBO will be deemed a fraudulent

conveyance, done only to evade debts

6. Consumer Bankruptcya. Two fundamental types of proceedings

i. Liquidations: Chapter 7, debtor gives up all non-exempt assets, Trustee in Bankruptcy sells assets, and proceedsare distributed pro rata to creditors; debtor is discharged of all debts and begins afresh

ii. Payout plans: Chapter 11 (businesses), Chapter 13 (consumers): debtor can propose to keep all assets in exchangefor promising to pay off debts over a period of time out of future income; can mean much higher returns forcreditors

iii. Filing a Petition-in a voluntary bankruptcy petition, the debtor is required to file va rious forms called schedulesall of which are set forth in Officials Forms part of Bankruptcy Rules. Schedules include details list of debts assets,income and expenses

1. Policing Debtor Applications:a. Before they file, debtors must produce certification that they have attended a debt counseling

session, that they have been given information about the other chapters of the code and aboutcredit counseling, and that they have been warned that false information in files can lead topenalties and jail time. 109(h), 521(b)

b. Debtor's schedules must be complete, since failures to list a debt may make the debtnondischargeable 523(a)(3)

c. Debtor's schedules must be accurate, since false statements in the petition or schedules mayresult in a complete denial of discharge under 727(a)(4) (and may open the debtor to perjuryprosecution).


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d. Debtors sign their petitions under penalty of perjury, must file copies of pay stubs for 2 mosbefore they filed, a statement of monthly income and an explanation of how that wascalculated, and a statement disclosing any anticipated increase income in next 12 months521(a)(1)(iv)-(vi)

e. Debtors must be able to produce copy of previous year's tax return on request ofcourt/creditor 521(i)

2. Policing Debtors via Debtors' own Counsela. Attorney must sign the petition, and by signing, represents that the attorney has performed a

reasonable investigation and has no knowledge that the info in the schedules is incorrect

(707(b)(4)(C))

b. Consumer bankruptcy lawyers have been renamed debt relief agencies and are specificallyprohibited from making any statement in any document filed that is untrue or misleading, orthat upon exercise of reasonable care, should have been known to an agency to be untrue or

misleading. 101(12A); 526(a)(2).

c. Failure to abide by these rules might cause attorneys to lose their fees, pay actual damages, orbe forced to pay the fees of opposing counsel 526(c)(2); 707(b)(4)(A)

3. First Meeting of Creditors (Section 341 meeting)a. Meeting held at date set by court within 40 days after petion is filed, ordinarily at the

courthouse 341, Rule 2003(a)

b. Primary function is to permit an examination of the debtor by the trustee and any interestedcreditorc. In most cases, creditors might elect a TIB (702, 1104(b)) or a creditor's committee (705(a),

1102(a)(1) )

iv. Property of the Estate, per 541: at the moment a bankruptcy petition is filed, an estate is created by operation oflaw, consisting of all legal and equitable interests in property previously owned by the debtor

1. Property included, per 541(a)


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a. Exempt property is included in estate, e.g. petb. 541(a)(5) includes all interests acquired within 180 days of filing by bequest, devise, or

inheritance

c. 541(a)(6) includes proceeds, product, offspring, rents, or profits of or from property ofestate, e.g. winnings on lottery ticket purchased pre-petition and dividends on stock owned by

debtor

2. Property excluded from estate, per 541(b)a. Most important exception is for services performed by an individual debtor after the

commencementof case; e.g. wages, commissions earned post-petition

b. Per 541(b)(1), bank account on which debtor is named trustee for the benefit of another isnotpart of the estate

c. Per 541(b)(6), if the debtor set aside in certain kinds of tax-sheltered accounts to pay for theeducation of children in the family, then such accounts are notproperty of the estate, eventhough the debtor may be named the owner of the account, manage the account and haveright of withdrawal

d. Per 541(b)(7), employee contributions to any ERISA-qualified retirement plans, deferredcompensation plans, tax-deferred annuities and health insurance plans are notpart of theestate. NOTE: Sup Ct expanded protection of retirement funds in Rousey v. Jackoway,holding that IRAs are part of the estate, but they exempt property under 522(d) (despite notbeing specifically mentioned in the laundry list of exempt retirement plans),, and therefore

the debtors are entitled to keep it.

e. Per 541(d), secured property becomes property of the estate only to the extent of the debtor'slegal title, but not to the extent of any equitable interest in such property that the debtor doesnot hold, such as a mortgage secured by real property.

3. Number of expectancies at varying levels of realization or certainty that must be allocated to the debtors'past or future. The problem can be articulated as the determination of the point at which an expectancybecomes property


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a. In re Palmer (1986): Court holds that apost-petition year-end bonus paid by debtor'semployer, dependent on (1) employment at the time that employer declared bonus, (2)

satisfactory performance, (3) employers sole discretion, is not property of the estate because

such payments were sufficiently rooted in post-petition events

b. Sharp v. Dery (2000): Court holds that when a debtor has to work for his employment forsome time beyond the date of filing for bonus pay, the court cannot apportion any part of that

bonus dividend to the estate. At commencement of case, neither terms of bonus plan norMichigan law gave debtor an enforceable part of the bonus, and thus the trustee, who couldtake no greater rights in the property than debtor had, also ha no enforceable interest in thebonus dividend at case's beginning.

c. Three categories of certain expectanciesi. Legal interests that are not enforceable at the date of bankruptcy but may be

enforceable at a future time; question of whether they are sufficiently mature andcertain; Palmer; Sharp v. Dery (E.D. Mi. 2000)

ii. Certain entitlements, e.g. permits or licenses, that are nontransferable;representing a very valuable legal right that is of no value to anyone but the debtor(like a driver's license, versus a license that can be bought and sold and can thusbe property of est)

1. Recall Umbro re: Internet domain names2. In re Burgess held that a brother license, like a liquor license, is

property of the estate because it is more than a personal privilege or

a a state matter subject to discretionary control of county. It wasactually property of enormous value to the estate, given that without

the license, there would no business left to reorganize.

iii. Restrictions on transferability imposed by contract or by law; Congress haspermitted a few specific restrictions on alienation to be effective to keep propertyout of the bankruptcy estate; e.g. Spendthrift trust exception, whereby debtorsare often able to keep retirement accounts out of bankruptcy estates (541(c)(2))

1. In re Orkin (1994): Court holds that the retirement plan is an asset ofthe estate because the Plan does not contain a transfer restrictionenforceable under state or federal law. Debtor had 2 bites at the apple:


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if account is ERISA qualified, then it is protected by federal law. If notERISA qualified, can try again under state law-if it had a validspendthrift trust provision preventing alienation and thus protecting itfrom creditors, it will not be part of estate. Even with 2 bites, orkinscan't keep.

v. The Automatic Stay, per 362: prohibiting any creditor's attempts to continue to collect from debtor or debtor'sproperty; to prevent any property from leaving the newly formed estate

1. Statutory provisionsa. 362(a)(1): bankruptcy petition operates as a stay of all proceedings to collect against

debtors, including most judicial proceedings and even withholding of a student-debtor'stranscript.

b. 362(a)(2): under automatic stay, creditor cannot continue to try to enforce a previousjudgment against the debtor; also protects property of the estate

c. 362(b): exceptions to stay, including criminal prosecution, tax audits, EPA investigations,collection for current alimony and child support

2. Andrews University v. Merchant (1992): Court holds that (1) both education loans and creditextensions are nondischargeable under 523 and (2) they are not listed within the exceptions to theautomatic stay in 362(b)

3. Creditors who violate this stay by soliciting money, sending bills, making phone calls, repossessions,lawsuits, etc. are subject to the court's imposition of excessive fines stemming from actual damages,

including cost of attorney's fees

a. Nissan Motor Acceptance Corp. v. Baker (1999): Court holds that a creditor's continuedretention of estate property after notice of bankruptcy filing constitutes an exercise of control

over property of the estate in willful violation of automatic stay and that adequate protectionneed not be offered for the creditor to turn over its collateral

b. Additionally, where the court sees appropriate, the violating creditor may be subject topunitive damages, per Nissan, where the violation of the provision and the disregard of thecourt's notice have been so egregious


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4. Notice to Creditors:a. Under 342(e), creditors can file a notice of address where the notices for in Ch 7 and

Ch13 must be sent. If creditor designates a person or organizational subdivision to receivebankruptcy notices and has a reasonable procedure to deliver notices to such person orsubdivision, notice is not effective until it reaches that person. 342(g)

b. Creditors may request relief from the stay under 362(d) for cause, including lack ofadequate protection of an interest, or if the debtor does not have equity in such property andsuch property is not necessary to effective reorganization

b. Chapter 7 Bankruptcy: Liquidationi. Eligibility for Chapter 7 filing

1. Under 707(b)(1), court may dismiss a case or convert it to chapter 11 or 13 if it finds that grantingrelief would be an abuse of the provisions in Chapter 7. 707(b)(2) sets forth the new provisions under

which the court may presume abuse.

a. In re Shaw: after finding that the debtor's proposed family budget was excessive andunreasonable within the context of Ch. 7, court reshapes the debtor's budget and requires aminimum 3-year repayment plan if the debtors want any bankruptcy relief, using a totality ofthe circumstances the test to find substantial abuse under 707(b)

b. The 2005 Amendments substitute the totality of the circumstances discretionary test with anew semi-automated screen, employing a fixed formula to determine which debtors should bedeemed ineligible.

c. Even with the revisions, there is still room for court discretion under:i. 707(b)(2)(B) (finding special circumstances that have an effect on income or

expenses that can be quantified or documented, such as medical conditions orservice in armed forces, to justify adjustments to the calculations)

ii. 707(b)(3) (allowing a debtor who was deemed not abusive under the formula tobe deemed abusive nonetheless on grounds of bad faith and totality of thecirucumstances, a catch-all category for any unworthy debtors not captured by

payment formula)


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2. Means Test: The court shall presume abuse according to an intricate formula of income minus expenses707(b)(2)(A).

a. Threshold Test of Income for Ch. 7 eligibility: formula for means test begins with debtors'current monthly income and a threshold test for Ch. 7 eligibility, based on a comparison withstate median income figures compiled by the Census Bureau www.census.gov/hhes/www/income/statemedfaminc.html. When there is no current data, courts must adjust the census

report for inflation based on the Consumer Price Income (www.aier.org/cgi-aier/colcalculator.cgi):

i. If income is equal to or lower than the median (as opposed to mean income, whichwould be pulled up by big earners) income for similar families in the state wherethe debtor filed, the debtor has passed through the median-income screen and nopresumption bars the way to Ch. 7. 707(b)(2)(A).

ii. Current monthly income is the average monthly income for the 6 monthspreceding the filing, all sources included (i.e., wages, interest on checking

account, stock dividends, unemployment compensation, tax refunds). 101(10A)

1. Code defines as income received, which suggests that the test usesonly post-tax income, the take-home pay of the debtor after taxes,social security and Medicare have been deducted, but the CensusBureau bases its date collection on pre-tax income

2. Census Bureau income does not count capital gain, money receivedfrom sale of property, value of income in kind (food stamps, taxrefund, etc.), exchange of money between relatives that live together,

and lump sum receipts such as gifts and insurance payments. Some ofthese items are explicitly included as income received in the Code.101(10A)

3. Bankruptcy Code Code excludes Social Security Benefits, but CensusBureau includes them.

iii. Recent data suggests that only about 6% of Ch 7 debtors would have incomeabove state median

b. Expenses: For debtors fail the median-income screen because their currently monthly incomeis higher than the state median, next step is to determine what expenses the debtor may


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deduct, based on IRS National Standards (www.irs.gov/individuals/article/0,,id=96543,00.html). Like the IRS, the Bankruptcy Code permits debtors to deduct the NationalStandard amounts allocated for family size and income level, regardless of what was actuallyspent.

i. Court may increase allowance for food and clothing by up to 5%, if debtor candemonstrate that such expenditures are reasonable and necessary

707(b)(2)(A)(ii).

ii. Courts must include deduction for health insurance, disability insurance, andhealth savings accounts (707(b)(2)(A)(ii)(I); expenses of caring for the elderly(707(b)(2)(A)(ii)(I); and private schools, up to $1500 per child per year(707(b)(2)(A)(ii)(IV).

iii. Through the IRS Other Necessary Expenses list(www.irs.gov/irm/part5/ch14s01.html#d0e122933), the Code permits courts todeduct actual expenses for items such as childcare, legal fees, life insurance, union

dues, taxes

c. Secured Debts:i. secured loans (such as car loans) can be deducted in full, no matter how large,

along with any payments in arrearages. 707(b)(2)(A)(iii). Gasoline, insurance,maintenances then follow Local Standards in the IRS tables 707(b)(2)(A)(ii)(I).

ii. Debtors can deduct the payment to a house mortgage lender in full.707(b)(2)(A)(iii). What to do about other costs (utilities, maintenance, insurance,

etc) is unclear, since the IRS combines all housing costs in a single allowableamount. Currently, statute seems to give debtor both the actual amount of thehome mortgage in 707(b)(2)(A)(ii)(I) and the Full Local Standard deduction in707(b)(2)(A)(ii)(I)

iii. Though car purchasers and home buyers seem to get a break, renters are out ofluck.

d. Income after Expenses: even if debtor has surplus after allowed expenses are deducted, Ch.7 might still be available. To do final calculation, you must know (a) total size of the surplus

income over expenses over 60 months (5 yrs); and (b) how much general unsecurednonpriority debt the debtor owes. Abuse is presumed:
http://www.irs.gov/individuals/article/0,,idhttp://www.irs.gov/individuals/article/0,,idhttp://www.irs.gov/individuals/article/0,,id


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1. if the debt is greater than $24k, and the surplus is at leasta. $10k ORb. 25% of the debt; OR

2. if the debt is $24k or less, and the surplus is at least $6k3. Another way of calculating abuse:

a. If surplus is less than $100, debtor passesb. If surplus is between $100-$166.66, he passes if surplus is

less than 25% of his unsecured debt divided by 60.

c. If surplus is greater than $166.66 he flunks.e. Policing the New Standards

i. Abuse can be alleged against an above-median debtor by judge, Trustee's office orany creditor 707(b)(1)

ii. Creditor cannot raise abuse issue against a median-or-below debtor under either707(b)(1) (general abuse) or 707(b)(2) (means test).

iii. Only judge or trustee can raise claim of general abuse 707(b)(6)iv. Court can award costs and reasonable attorney fees to a trustee who prevails on amotion to dismiss ch 7 filing as a violation of 707(b)(2) in violation of Rule 9011

(requiring that any petition e made only after reasonable inquiry that the allegationhave a factual basis, and requires that legal contentions be warranted by existinglaw) standard for charging for debtor's counsel may be high, but many attorneyswill notice that if they advice debtor to file Ch 13 instead of 7 they are less likelyto end up as defendants

v. If the debtor's motion is challenged under 707(b)(2), the debtor can recover (andpresumably use the money to pay the attorney) if the court finds that the creditor


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or trustee violated Rule 9011 or brought motion solely to coerce the debtor towaive other rights under Code. 707(b)(5)

ii. Exemptions - Federal (522, only for 11 states who did not opt out) and State1. 1898 Actincorporated state exemptions into the debtor's protections in bankruptcy; the 1978 Code

provided for federal exemptions, providing uniform exemptions, but 35 states have taken the option of

opting out of those exemptions, denying their own citizens the benefits of the federal protection whenthey filed for bankruptcy.

a. Texas, with its generous exemptions, did not opt out, leaving a Texan to choose between anunlimited homestead and 30k value in other property, and a federal homestead exemption of$16,150 and about $16k or so in other property.

b. Taylor v. Freeland & Kronz (1992) (where debtor claims as exempt a future settlement of apending lawsuit and the TIB fails to object to the exemption, believing that the debtor wouldnot get the amount she anticipated): Court holds that objection to exemption by the TIB must

be done in a timely manner when the exemption is claimed in good faith

2. Classification of Property: because exemption statuts are often written to exempt only listed types ofproperty, disputes often arise as debtors argue that the property they intend to keep fits within thestatutory classifications and judgment creditors, who are permitted to reach only non-exempt property,argue the property does not.

a. In re Johnson(1981) (finding that a bus fit within state exemption statute for motorvehicles although legislative history suggests that motor vehicle was intended to meanautomobile)

b. In re Hall (1994): Court holds that a lawnmower is not household furniturec. In re Pizzi (1993): Court holds that lottery winnings, whether received in lump sums

annually or all at once, may not be exempted as an annuity payment

3. Valuation of Exempt Propertya. In re Walsh(1980) (where TIB seeks an appraisal of the exempt assets at FMV, rather than

liquidation value): Court assigns liquidation value


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b. In re Mitchell(1989) (where TIB seeks FMV rather than liquidation value on jewelryclaimed as exempt): Court holds that FMV is the proper value

4. Security Interests in Exempt Property: valid, unavoidable consensual security interests trumpexemption claims so that a debtor may only claim an exemption in the equity (value remaining aftersecured creditor has been paid in full)

a. 522(f) permits the avoidance of certain kinds of liens on certain categories of exemptproperty listed therein, namelyjudicial liens and nonpossessory, nonpurchase moneyconsensual security interests

i. Creditors who held these types of liens could be treated as unsecured creditors,entitled only to a pro rata share of the debtor's estate along with other creditors

5. Proceeds and Tracinga. In re Palidora (2004)(finding that an exception for wages ceases to apply upon the debtor's

receipt of those wages, whether paid in cash, by check, or by direct deposit in the debtor'sbank account, because the wage exemption statute only limits what a creditor could obtain bygarnishment of the employer. The exemption for child support payments does include suchmoney received by a debtor.)

b. In re Dasher (2002) (refusing to exempt a pick up truck purchased entirely with moneycashed from an exempt retirement account )

c. Partially exempt property: if there is a dollar limit on a category, property of greater valueis partially exempt. It can be levied on and sold, and the proceeds are allocated first to the

debtor to the full amount of the exemption, with the remainder going to Judg Creditor

6. Exemption Planninga. Converting non-exempt property to exempt property

i. In re Reed (1981) (where debtor, in order to convert his homestead into anexempt asset, sold nonexempt personal property for approximately 50% of itsvalue and applied the proceeds towards liquidation of improvement liens againsttheir resident homestead, in Texas, which has historically jealously protected the

homestead from forced sales except under very limited conditions): Court holds


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that the transactions by debtor were not fraudulent because there is no proof thatthe debtors had applied the proceeds to acquisition of exempt personal property .

ii. However, in In re Reed II (1983): Court holds that a debtor who convertsnonexempt assets to an exempt homestead immediately before bankruptcy, with

intent to defraud his creditors, must be denied discharge in bankruptcy under

727.

iii. In trying to negotiate a line that provides protection for a debtor but does not givethem an undue advantage, the 2005 amendments include a provision to reduce thedollar value of the homestead protection by any amount that is attributable tootherwise non-exempt property that the debtor disposed of with intent to hinderdelay and defraud a creditor 522(o)

iv. Congress also added another provision for an absolute cap on the homestead forpeople convicted of securities law violations, and fraud in a fiduciary capacity.522(q)

b. Shielding assets by converting them to other types of unlimited exemptions:i. Northwest Bank Nebraska v. Tveten (1988) (denying discharge to a doctor who

sold all his assets and put the money into life insurance and annuity contracts,which where exempt without any dollar limit, and could not be attached understate law. Dissent argues that such exemption planning is allowed undercontrolling law in Circuit and thus not unlawful, and cites House report: as undercurrent law, debtor will be permitted to convert nonexempt property into exemptproperty before filing.

ii. Hanson v. First Natl. Bank in Brookings (1988) (allowing to a couple offarmers to discharge their debt after selling all their non-exempt property formarket value to family members, used the money to pay down mortgage and buyexempt life insurance policies, and then retained by agreement with purchasers,retained possession of the goods sold)

1. case was decided on the same day as Tveten, and judge from Tveten'sdissent noted that the same argument that justified conversion forHanson's


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2. noted that the only differences between the cases was the backgroundof the applicants and the amount of $ at stake

iii. In re Johnson (1989): same facts and circuit as Tveten, but drew a differentjudge, and obtained discharge

c. Squirreling assets in asset protection trustsi. If the self-settled trust is structured correctly, including a spendthrift provision and

an automatic appointment of a third party as a trustee if the trustee-debtor is sued,the debtor will claim that the property in such a trust is not property of the estate541(c)(1)

ii. The 2005 Amendments include a 10 year reach-back for transactions made withintent to hinder, delay or defraud creditors but such transferes are fraud when theyare in anticipation of any judgment or to escape judgments in connection wit hsecurities fraud 548(e)

d. moving to states with more generous exemptionsi. In re Coplan (1993) (where the debtors incurred substantial indebtedness in their

home state of Wisconsin, moved to Florida - for its liberal exemption laws -converted non-exempt assets into exempt assets, and filed for bankruptcy): Courtholds that the debtors' relocation to Florida with attendant purchase of home wasfor purpose of shielding their assets from creditors

iii. Distributing the Estate under 726: TIB is appointed to gather all debtor's property, sell it and distribute proceedsto creditors. He must (1) determine if some other person has any interest in that property (secured parties, liens), (2)consider valid exemption claimed by debtor in a particular item. Once the proceeds from the sales of all propertyhave been obtained and the secured parties and other entities with property interests have been paid, the TIB (3)distributes the remaining funds among three general creditors:

1. Priority creditors: first in line, entitled to payment in full before others are paid2. General, unsecured creditors3. Subordinated creditors: last to be paid, likely because of some wrongdoing


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iv. Claims and Distributions1. A claim is anything the debtor owes or any right to payment, per 101(5)2. Who can file claims? See 501(a)

a. A creditor or indenture trustee may file a proof of claimb. Equity security holder (i.e. shareholder) - may file a proof of interest

i. Note that if everything is distributed to creditors, shareholders get nothingc. If a creditor does not timely file a proof of claim, an entity liable to such creditor - debtor or

TIB - may file on behalf, per 501(b)

i. Incentive to the debtor to file is that he would like to expunge all debts; also,debtor can be held liable for a crime if he does not file claim he knew about;

creditor will be drawn in if he knew and purposefully did not claim

3. In Chapter 7 and 13 cases, a claim must be filed within 90 days after the first meeting of creditors; aclaim is allowed unless a party in interest makes an objection, per 502(a) and Bankruptcy Rule 3002

4. Once a debtor has filed for bankruptcy, his debts are discharged; accordingly, he has very little interestin the validity of claims, so the TIB must be very careful in reviewing the claims

a. In re Lanza (1985): Court holds that burden of going forward for proof is on objecting party5. Unsecured Claims-501 lays out procedure for filing claim; 502 explains mechanics of calculating aclaim (for both secured & unsecured)

a. Claim-includes any amount to which creditor is entitled by contract (e.g., attorney fees, costsof collections).The difference between what creditor will be allowedthe same amount as ina nonbankruptcy lawsuitand what it getsa percentage of what it had comingis to bedischarged at the conclusion of the case

b. Interest-unsecured creditors can not collect any interest on its unsecured claim after thefiling and while the bankruptcy is pending. 502(b)(2). By treating all unsecured creditors the


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same, in allowing all to collect a pro rata share of whatever remains in the estate, bankruptcyreinforces goal of equality among these creditors

c. Accelerated Claims-because the debtor's obligations are about to be resolved in a singleforum, once and forember all prebankruptcy claims must be accelerated whether they'vematured or not.

6. Secured Claims,per 506: To the extent that the an allowed secured claim is secured by property, thevalue of which is greater than the amount of the claim (fully secured), there shall be allowed to theholder of such claim, interest on such claim and reasonable fees, cost or charges provided for under theagreement

a. E.g. Sears sells to debtor lawnmower and takes security interest on it; Sears is still owed$5000 at time of filing

i. If TIB sells lawnmower for $6000, Sears gets $5000, $1000 goes to general fundfor unsecured creditors

ii. If the lawnmower only brings $3000 in liquidation sale, then Sears gets $3000 insecured claim and $2000 in unsecured claim (this is called bifurcating the claim,with $3000 being the allowed secured claim and$2000 being the generalunsecured claim)

b. Note that valid, unavoidable consensual security interests trump exemption claims, so that adebtor may claim only an exemption in the equity the value remaining after the securedcreditor has been paid in full

7.

Interest: both secured and unsecured creditors are entitled to interest accruedprior to bankruptcy; butan unsecured creditor cannot claim any interest for the period following bankruptcy (502(b)(2)),unmatured interest), while some secured creditors who are oversecuredwill be able to collect post-bankruptcy interest; interest must be specified in contract

8. Attorney's fees: incurred prior to filing of bankruptcy, can be claimed by secured and unsecuredcreditors, provided that they are specified in contract

a. Secured creditors who are oversecured are entitled to post-petition attorney's fees


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b. Unsecured creditors should not be entitled to post-petition attorney's fees (as indicated by502 (b) and 506(b)), though the case law is somewhat confused (e.g. In re UnitedMerchants and Manufacturers, 1982)

9. 502(b) disallows certain unsecured claims, including unmatured interest; unreasonable amount chargedby debtor's attorney or insider; unmatured alimony, child support; excessive claim by landlords who losefuture money on leases (can claim past rent due); late payments on taxes

v. Summary of Process1. Debtor files for bankruptcy2. Automatic stay for all creditors, per 3623. Estate is created, including all property of debtor, per 5414. Secured property is taken out (bifurcated, if needed), per 5065. Exempt property is taken out6. 502 claims, i.e. unsecured claims, are given priorities, per 5077. Unprioritized go into 502 general unsecured pot

vi. Priority Among Unsecured Creditors: after the secured creditors have been satisfied by the sale of their collateral,unsecured creditors begin the process of dividing the remaining assets

1. 507(a). Priorities: claims in the following order:a. Administrative expenses under 503(b) and fees (lawyers'), insurance premiums paid on

items in the estate, costs of liquidation sale 507(a)(1)(C), (1)(a)(2).

b. Allowed unsecured claims for domestic support obligations-as owed to or recoverable byspouse/ex-spouse, child or child's parent 507(a)(1)(A)

c. Unsecured claims allowed under 502(f) - business debt arising after filing, beforeappointment of TIB


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d. Allowed unsecured claims, to extent of $10k for each individual or corp, earned within 180days of filing, for wages, salaries, or sales commission

i. Note that service providers are different because there is no security interestavailable (i.e. nothing available for collateral)

ii. Providing incentives for employees to continue workingiii. Employees are smaller players and cannot diversifyiv. Union lobbyv. Note that salesmen fall under 507(3)(b)

e. Allowed unsecured claims for contributions to a employee benefit plan arising from serviceswithin 180 days of filing to extent of number of employees covered by plan $10k minusaggregate amount to such employees

f. Allowed unsecured claims of persons producing/raising grain or engaged as a US fisherman,to the extent of $4,925 per person

g. Allowed unsecured claims to the extent of $2255 for each individual, arising from deposit ofmoney in connection with the purchase, rental of property or the purchase of services thatwere not delivered

h. Allowed unsecured claims for taxes - property, income, employment, excisei.

Allowed unsecured claims to a Federal depository institution regulatory agency

j. Allowed claims for death or personal injury resulting from operating of motor vehicle orvessel while intoxicated with drub or alcohol

vii. Discharge: the purpose of liquidation bankruptcy is almost always to discharge outstanding debt1. Debtor is not entitled to discharge as a matter of right; but it will be granted unless challenged by the

TIB or creditor


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2. Creditor can make global objection, per 727, rendering all debts nondischargeable for, among others,lying or filing false documents in connection with the case, failure to complete a personal financecourse, lack of financial records unless justified under the circumstances

a. 727(a)(2): for transfer of property with intent to hinder, delay or defraud creditors (i.e.fraudulent conveyance)

i. In re Reed (1983): Court holds that a debtor who converts nonexempt assets to anexempt homestead immediately before bankruptcy, with intent to defraud hiscreditors, must be denied discharge in bankruptcy

ii. In re Robert W. McNamara (denying global discharge to a debtor who claimeda gambling loss in a fictional attempt to hide money that he considered to be hisand not his ex-wive's, where the effort to transfer remove, destroy, mutilate,conceal property of the wife occurred within one year before filing date).

b. 727(a)(5): for failing to explain satisfactorily any loss of assetsi. In re Robert W. McNamara (denying global discharge to a debtor who claimed

a gambling loss in a fictional attempt to hide money that he considered to be hisand not his ex-wive's)

3. Creditor can also object to the discharge of a specific debt, per 523a. 523. Exceptions to Discharge: denial to debts obtained by lying on a credit application,

debts for luxury goods worth more than $500 obtained within 90 days of filing, fraud by afiduciary, alimony and child support, judgments from drunk driving or boating, tax or

customs duty; willful, malicious injury; fine to government; student loans;

i. In re Dorsey (1990): Despite the debtor's gross mismanagement of her creditcard, court holds that as there is no evidence to establish that the debtor submitteda materially false written statement concerning her financial condition when she

originally applied for her first credit card, the complaint is dismissed.

ii. In re Gerhardt (2003): Court holds that the student loans of a professional cellistcould not be discharged because it would not be an undue hardship under523(a)(8) for him to repay the loans. Court suggests that the debtors should get

another job in another field. Applies theBrunerthree part test for showing unduehardship is:


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1. that the debtor cannot maintain, based on his current income andexpenses, a minimal standard of living if forced to repay;

2. additional circumstances exist indicating that this state of affairs islikely to persist for a significant portion of the repayment period

3. that debtor made a good faith effort to repay the loaniii. In re Miller(2004): Court may grant debtor a partial discharge of her student loan

obligations, by relying on 105(a), allowing court to issue any order, process, orjudgment that is necessary or appropriate to carry out the provisions of this title,but such court must make a finding of undue hardship. 523(a)(8) always appliesto the discharge of student loans in bankruptcy, regardless of whether discharge isfull or partial. 2005 Amendments from a Congress fervent in protecting creditorsdid not attack this line of cases.

iv. In re Milbank(1979): Court holds that the loans made by father-in-law and wifeto debtor are nondischargeable as they were obtained by false pretencesdeliberately created by the debtor

4. Tax Priorities and Dischargei. The kinds of taxes in section 507(a)(8)(A)-(G) are not only given priority in

payment, but any unpaid portion of those taxes is exempted from discharge

ii. Pre-petition interest on a(8) shares the priority of the claims themselves andenjoys their nondischargeable status.

iii. Penalties on nondischargeable taxes are also nondischargeables 523(a)(7),although such penalties do not get priority in payment under (a)(8)

iv. IRS can satisfy nondischeargable tax debts by seizing property that is otherwiseexempt under state law.

5. Bankruptcy Crimes: United States v. Cluck(1998): The Court holds that where the debtor hasconveyed his property pre-petition for less than a reasonable price and with a right to reacquire (in orderto shield them from creditors), he is guilty of bankruptcy fraud under 18 U.S.C. 152(1)&(3) (intentional

concealment of assets)


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viii. Reaffirmation, per 524(c)1. At the moment of an individual debtor's Chapter 7 discharge, the 362 automatic stay lifts ((c)(2)(C)),

and the 524 discharge injunction slams into its place (524(c))

a. Per 524(c), a debtor may have his debt become legally enforceable again, if the debtor signsa reaffirmation agreement subject to the procedures and terms specified.

i. A reaffirmation agreement revives the debt and makes the debt (and any futurepenalties and interest provided in the agreement) fully enforceable in court.

ii. 524(c): reaffirmation agreements are enforceable only if, among others, it isstated not to be required, has been filed in court, is fully informed and voluntaryby debtor, does not impose hardship on the debtor, the attorney has fully advisedthe debtor, is in the interest of the debtor (where unrepresented)

2. Secured Debta. Debts are discharged, but liens are not (506(d)); a secured debt remains attached to its

collateral and be enforced against the collateral after bankruptcy

b. Three alternatives to avoid surrendering collateral:i. Redemption: requires debtor to pay the creditor the full loan or the full value of the

collateral in cash, whichever is less (722)

ii. Reaffirmation: requires a cooperative creditor willing to agree to let the debtorkeep so long as the debtor continues to make satisfactory payments on the loan524(c)

iii. Retention or ride through: requires maintenance of the contractual payments.Debtor keeps collateral by continuing to make pre-bankruptcy payments withoutredeeming or reaffirming, while discharging personal liability on debt. If collateralis damaged/destroyed, debtor can abandon it without liability. If debtor keepspaying, creditor is repaid in full.

1. 521(a)(2) removes collateral from the estate and lifts the stay unlessthe debtor complies with the commands in section 521(a)(2) to state an


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intention and follow thorough on one of three things: surrenderproperty, reaffirm contract with secured party, or redeem pursuant to722.

2. 521(a)(6) is similar in overall intent, but has a savings clause for thedebtor is the creditor demands more than original terms

3.

unclear whether this solves the problemsstate-law collection issuesthat persuaded courts that ride-through is permissible might havesurvived the 2005 amendments.

c. In re Pendlebury (1988): Court declines to intervene, at request of debtors, in thenegotiation of their respective reaffirmation agreements for the purpose of limiting the termsof those agreements

3. Unsecured Debt: Debtors may reaffirm unsecured debt because of (1) gratitude, (2) protection of acodebtor, or (3) threat of objection to discharge or offer of credit

a. In re Paglia (2003): Debtor reaffirms debt to protect co-debtor, agreeing to pay off the loanthat mom had cosigned. Creditor did not violate the automatic stay by undertaking an act tocollect a pre-petition claim against debtor when it threatened to take legal action against theannuity belonging to debtors mom, and then permitted debtor to execute a second promissorynote as an alternative.

b. In re Latanowich (1997): Court holds that in order for this reaffirmation to have beenenforceable, the agreement must have been filed with the bankruptcy court(524(c)(3)) andwhere debtor is unrepresented in course of negotiation, the court must approve the agreement

as (i) not imposing undue hardship on the debtor and (ii) in the best interest of the debtor(524(c)(6)(A))

c. 524(c) includes elaborate series of disclosures to debtors, reminiscent of Truth in LendingAct disclosures, but the effectiveness on this may be undermined by the addition of thisboilerplate to help consumers understand better the requirements of the reaff, and force themto focus on actual ability to make those payments. 521(c)(2), (k)(6)(A)

d. 524(1)(3) gives creditors a safe harbor against any failure to abide by the rules by requiringonly a good faith attempt to do so.


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4. Debts to Sovereign States: where the creditor is a state, the federal courts have very limited powers ofenforcement, whatever the theoretical rights of the parties might be under the Bankruptcy Code becauseof the principle of sovereign immunity..

a. Tennessee Student Assistance Corporation v. Hood (2004) (holder of a state-administeredstudent sought to discharge her indebtedness). Court held that Congress had notunconstitutionally infringed state sovereignty by making requiring debtors to file an

adversary proceeding against the state in order to discharge student loan debt,. In adjudicatingthe undue hardship determination sought by the debtor the bankruptcy court, was properlyexercising its in remjurisdiction, and not in personamjurisdiction over the State.

5. Nondiscrimination: 525 forbids employers or government agencies from discriminating againstdischarged debtors

c. Chapter 13 Bankruptcy: Payout Plans (301), known asAdjustment of Debt or Wage Earners' Plan. Ii. What is the estate? Per 1306, everything in 531 + future income (3-5 years)

ii. Debtor always has a trustee in Chapter 13; trustee recommends approval or denial of plan confirmation(1302(b)(2)(B)), ensures payments are commenced within 30 days after filing, and that payments are properlydistributed (1302(b(5), 1326), moves to have debtor kicked out of bankruptcy when he stops paying, modifiesplan.

iii. What is the difference between Chapter 7 and Chapter 13?1. Focuses on future earnings, rather than accumulated assets, to pay creditors; debtors keep all assets and

agrees to turn over a portion of all future income for a minimum of three years

2. Paying over time; no discharge until all payments are made, with court supervision that lasts from thelast day of filing until plan payments are completed, as compared to Ch 7 debtor, who is underjurisdiction of the court only from filing to discharge hearing, usually held within 6 months; 2/3 nevermake it to the end of Chapter 13 (either liquidate or drop out altogether)

3. And getting to keep all property (exempt and non-exempt) 1302(b)(1), subject to trustee supervisioniv. How does it work?


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1. TIB takes a percentage of the debtor's income for each pay period, applies it to the administrativeexpenses, and then distributes the remainder to the creditors according to a court-approved plan, whichdetails the amounts to be repaid and the terms of repayment in accord with certain statutory requirements

2. When the debtor has completed the agreed payout, the debtor's remaining obligations are discharged3. TIB's responsibilities include objecting to improper creditor claims, asserting objections to debtor's

discharge, confirming the plan (1302(b)(2)(B)), and distributing payments

4. Confirmation of the plan vests all of the property of the estate in the debtor (1327(b))5. Automatic stay provisions remain in effect, as in a Chapter 7 filing

v. Payments to Secured Creditors: one reason to choose a Chapter 13 filing is to keep property that is subject to avalid security interest; i.e. holding collateral over time while payments can be made

1. Secured creditor is naturally concerned about the risk that the collateral will lose its value, either bec ofloss or neglect or depreciation

a. Hence, a creditor can move to have the automatic stay lifted under 362(d), claiming that itsinterest is not adequately protected OR that both the debtor retains no equity in the assetAND the asset is not necessary to effective reorganization

b. Per361, adequate protection may be provided by:i. Requiring TIB to make a cash payment or periodic cash payments to such entity,

to the extent that the stay results in a decrease in value of such entity's property

ii. Providing such entity an additional lien to the extent that the stay results in valuedecrease

iii. Insurance, to be used in event of destruction or loss of collateral1. In re Radden (1983): Court holds that if the debtor (1) procures

adequate insurance on the property at the time of recovering possessionand (2) makes monthly payments under contract until the time that aplan is confirmed, the creditor's interest in the subject property will be

adequately protected


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2. Modifying the Secured Creditor's Contract through Cramdown, per 1325 (a)(5): A debtor maymodify the terms of a undersecured debt in Chapter 13 plan, as long as the debtor paying debt off overtime pays (1) the allowed secured claim (debt or value of collateral, whichever is less) plus (2) interest,i.e. paying present value of collateral over time.

a. Value of Collateral: Associates Commercial Corp. v. Rash (1997): Court holds that whena debtor seeks to retain and use the creditor's collateral in a Chapter 13 plan, the value of the

collateral will be the replacement standard (what the debtor would have to pay for thecomparable property). Codified in 506(a)(2).

b. Once court determines that the security interest in asset, it has to make two factualdeterminations to establish the correct amt for debtor to pay under Ch. 13 plan:

i. The amount of the allowed secured claim under 506(a)ii. The present value of the allowed secured claim under 1325(a)(5)(B)(ii) (value as

of the effective date of the plan

c. Capping Interest Rates: Till v. SCS Credit Corporation (2004): Sup Ct. finds that theadequate interest rate in computing present value under 1325(a)(5)(B) is the formula rate,which looks to the national prime rate, as reported in the press, adjusted for risk (does notdecide the proper scale for risk adjustment)

d. Payments to a Home Mortgage: lienstripping is not available on a home mortgage ; the onlyrelief in Chapter 13 is to cure and maintain - to catch up on the past-due arrearage whilemaking current payments as they come due

i.

Problems arise involving (1) saving the home from foreclosure and (2) proposinga plan to comply with the strict limitations imposed by the provisions of Chapter13 to protect the rights of mortgage lenders

ii. In re Taddeo (1982): Court holds that the debtor's power to cure in1322(b)(5) contains the power to de-accelerate, despite accelerating payment bydeclaring the entire balance due immediately after default in mortgage payment

1. Congress intervenes with the 1994 amendments, giving homeownersright to de-accelerate by statute at any time prior to the foreclosure sale

(1322(c))


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vi. Payments to Unsecured Creditors1. General unsecured creditors can best enhance their position by arguing that the debtor should be required

to make larger payments under the plan, per 1325:

a. Best Interests Test, per 1325(a)(4): requires that each creditor, secured or unsecured,receive at east as much as that creditor would have received if the debtor had gone into

Chapter 7

b. Debtor must devote all disposable income to make payments during the life of plan, per1325(b)(1)(B)

i. Disposable Income: income minus expenses that are reasonably necessary1. In re Carter (1996)(where debtor's plan did not include her husband's

income): Court holds that the debtor has not satisfied the burden ofdemonstrating that all of her projected disposable income is being

committed to the plan, given that her husband's income will certainlysatisfy some of her expenses

2. In the Matter of Wyant (1998)(where the Court must decide whatexpenses are reasonably necessary): Court holds that the debtor'sincreased expenditures upon not having to pay alimony and his

allocated expenses for the care of his farm animals are not reasonable,and the plan must be reconfigured to include larger payments

c. Additionally, a plan must be proposed in good faith and not by any means forbidden in law,per 1325(a)(3)

i. Good Faith: whether the debtors acted equitably in proposing the plan1. In re Greer (1986)(where debtors propose a plan that would pay

approximately 1% of outstanding unsecured debt): Court holds that theplan was entered in good faith and that a zero-payout to unsecured

creditors is not sufficient cause to extend a payout plan beyond 3

years, per 1322(c)


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2. In the Matter of Strauss (1995)(where debtors were not permitted tofile a Chapter 7 liquidation because they had filed one fours prior):Court holds that a plan will not be confirmed where (1) debtor receivedChapter 7 within 6 years; (2) 727 would bar the debtor from

obtaining a Chapter 7 liquidation; and (3) proposed Chapter 13 plan

amounts to no more than a disguised Chapter 7 liquidation

ii.

Such factors to be considered in determining whether the debtor files plan in goodfaith:

1. Amount of proposed payments2. Debtor's employment history and earning capacity3. Duration of plan4. Accuracy of information on plan5. Whether there is preferential treatment between creditors6. Whether plan modifies secured claims7. Type of debt sought to be discharged8. Whether debtor filed bankruptcy before

d. Consumer Bankruptcy System: An Overview: policies oscillate in tension between the traditional idea of a fresh startand a pervasive fear of abuse

i. Theories1. Scholarly interest focuses primarily on the ex-ante problem, arguing that the cost of credit may be

greater because creditors must account for the risk of the bankruptcy discharge at the time the credit isextended.

2. Other scholars assert that bankruptcy is a form of social safety nest, supplementing unemploymentinsurance, public medical care, etc.


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3. Reason that the focus is on the ex-ante stage is: research shoes that most debtors who file simply can'tpay-once debt incurred, little to be done

ii. Policy debates: Is bankruptcy the result of irresponsibility or misfortune? Some argue that credit irresponsibility,whether of the debtors who incur the bills or the irresponsibility of the lenders who extend it, is the leading cause ofbankruptcy, while others say that bankruptcies are more often the consequences of economic forces beyond anindividual's control (layoffs, illness). Both theories have support in empirical data

1. Aggressive marketing of credit and default rates of interests and penalty fees make it impossible fordebtor to catch up

2. Increasing economic volatility of modern America put larger share of middle class at risk for economiccollapse due to layoffs, serious medical problems, and divorce.

iii. The Consumer Bankruptcy System Before and After the 2005 Amendments 1. Abuses: New amendments deny a Chapter 13 discharge for a debtor who has gotten a Ch 7 discharge

within prior 4 yrs 1328(f), eliminating the filing of so-called Chapter 20 cases, in which debtor filed7 & 13 in close succession, to discharge debt under 523, and then put the nondischargeable debts intopayment plan and pay them over time in 13

2. Recoveries for Creditors: Tries to steer debtors into Ch 13 to generate greater recoveries for creditors.BUT lots of ch 7 reaffirm and Ch 13 don't complete plans, and unsecured creditors may do worse withamendments bec of the new ch 13 rules requiring many secured debts to be paid in full, regardless of thevalue of the collateral, leaving less for unsec.

a. 524(l) gives more safe harborb. provisions such as tightening of presumption of fraud and eve-of-bankruptcy transactions in

523(2)(C) may provide creditors with more occasions for plausible objections to discharge, tobe settled with reaff

3. Domestic Support-domestic support obligations are given top priority in ch 7, and they must be currentfor debtor to confirm or maintain ch. 13

4. Bankruptcy rates-number of bankruptcies filed might be lower bec of cost and delay (more paper work,pre-bankruptcy debt counseling, post-bankruptcy financial counseling), which might cause some debtorsto lose property without filing, and thus lose incentive to file


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5. Chapter choice-on ch. 7 side, the means test means applies only to 10-15 of debtors, but on ch 13 side,almost 90% of those who now file in Ch. 13 are below-median debtors who could've filed in 7 despitemeans test. choosing which chapter to file is still a completely free choice(p. 229-230)

a. Choice might be affected by whether courts will permit zero payment or low-payment plansfor debtors who are essentially restructuring secured debt only

b.

Bec most potential ch 13 filers will be below-median debtors, lowering the disposable incomebar might encourage more 13 filings

c. IRS budget for 5 years might be unattractive for above-median filers who are not barred from7 by means test

d. Cost of failure in 13 has risen substantially, and anecdote and data suggest that most ch 13plans fail.

6. Lawyers-must call themselves debt relief agencies in any bankruptcy ads, higher sanctions that can beimposed for any mistake (professional sanctions, court fines, damage suits by trustee or client) 527-28,707(b), such as failing to confirm the accuracy of debtor's valuation of assets, and to predictinterpretation of ambiguous term such as replacement value of an asset. Many lawyers, especiallynonspecialist, may exit practice, and those who remain may raise fees.

a. Using Chapter 13 to Pay Fees: In re San Miguel (1984): Court holds that where the onlyreason debtors chose a Chapter 13 plan over a Chapter 7 is to disseminate payment ofattorney's fees (where requested upfront in Chapter 7) and that because the Chapter 13 plan aspresented will pay creditors $1, the purpose of the Chapter 13 plan is frustrated

7. Corporate Liquidation, Chapter 7a. Main differences between personal and corporate liquidation: no discharge for corporation, which instead expires under state

corporate law; no exemptions for corporations, so that all property is available for repaying creditors.

i. Because negotiations in Ch. 11 take place wth Ch. 7 as the alternative, and bec the analysis of the hypothetical Ch11 position requires an analysis of the hypothetical ch 7 position, in any workout situation (in or out of bankruptcy,ch. 7 or 11), each of the parties in the business negotiation will do a liquidation analysis which shows the likely

result for the party in ch. 7


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ii. Ch. 7 a better place to liquidate than state law proceedings, since state law encourages a grab rule instead of anorderly sale of assets

b. Involuntary Bankruptcy: because it always leads to a debtor's loss of control, partial or complete, over company, and may hurtbusiness itself through loss of credit and general reputational damage, combined with the natural optimism of an entrepreneur, debtorshave strong incentive to resist filing. Ideal solution is for the debtor to initiate

i.

303 of the Code reflects the decision in the U.S. to protect debtors by making involuntary bankruptcy relativelydifficult. Traditionally for ch 7 but also available in ch 11.

ii. Involuntary petition can only be filed against a person, except a farmer, family farmer, or corporate that is not amoneyed, business, or commercial corporation, per 303(a)

iii. Person, per 101(41), includes individual, partnership, and corporation, but does not include governmental unitiv. Corporation, per 101(9)(iv), includes unincorporated company or association

a.

303(a)(3)(A): An involuntary filing is commenced against a person if such a person is a partnership by fewer than all of thegeneral partners in such partnership

b. 303(h): If it is not timely objected to by debtor, an involuntary bankruptcy will be filed(followed by automatic stay andproperty of the estate), same as debtor himself files, or, if it is contested, after trial, if (1) the debtor is generally not payingsuch debts as they become due unless such debts are the subject of a bona fide dispute, or (2) within 120 days before the dateof the filing, a custodian, etc. was appointed or took possession

i. Note varying definitions of insolvency1.

Bankruptcy insolvency: liabilities outweigh assets

2. Equity insolvency: debtor is unable to pay his debts as they mature3. Generally not paying standard, as employed in statute

ii. In re Faberge Restaurant of Florida, Inc. (1997): Court holds that creditors filing involuntary bankruptcy cannotbe involved in bona fide dispute over whether the debt is owed and that

c. Additionally, the court requires that, where there are at least 12 creditors, 3 of those creditors must join in most involuntarypetitions, per 303(b)(1) (only one to file if less than 12, excluding insiders); also creditors filing must hold at least $12,300


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i. In re Gibraltor Amusements (1961): Court holds that creditor and its subsidiaries are two distinct creditors for thepurposes of303

d. Involuntary bankruptcy can be used a bullying tactic by creditors, so 303(i) imposes attorney's fees and costs (and sometimespunitive damages) against unsuccessful petitioners

i. In re Silverman(1998): Court holds that where petitioner persisted in filing of involuntary bankruptcy againstSilverman after the court adjudged that the petitioner was a subject of a bona fide dispute, the petitioner isresponsible for paying attorney's fees, and since he acted in bad faith, punitive damages

8. Corporate Bankruptcy: Chapter 11a. Introduction

i. Resembles in broad conceptual outline the other rehabilitation chapter, Chapter 13; reorganizing the debt byextending the time in which to pay it and reducing the total amount to be paid

ii.

Companies choose Chapter 11 because Chapter 7 means corporation death

iii. Purely financial reorganizations occur when a business is operationally sound but has acquired loads of debt; here,old equity is wiped out, while unsecured creditors become new stockholders; this is called a balance sheetreorganization because it takes place on paper and does not shift the operations

iv. Wholesale reshuffling occurs when the operations need revamping; DIB will sell money-losing divisions, trimexcess staff, cut back on number of company car

b. Mechanics of Chapter 11i. When a debtor files a petition, the automatic stay is imposed (362(a)); the business continues to operate in the

ordinary course (363(b)), under the control of the debtor in possession (DIP)

ii. DIP is limited in the use of its secured assets (363(c), (e)); also faces prospect that secured creditors will seek courtapproval for lifting the automatic stay as to their collateral, unless the DIP can provide adequate protection of theirinterests (361, 362(d))

iii. DIP may obtain financing and other credit with court approval (364)iv. DIP had avoiding powers:


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1. Power to recover preferences (payments of transfer of property to favored creditors within 90 days ofbankruptcy), 547

2. Power to assume or breach outstanding executory contracts, 3653. Power to void fraudulent conveyances, 548, 544(b)4.

Power to set aside unperfected or late-perfected security interests in debtor's property, 544(a), 547

5. Power to require turnover of property of the debtor being held by another entity, 542, 543v. Creditors' Committee is appointed to scrutinize the debtor's activities on behalf of all creditors and to negotiate with

the debtor, per 1102

vi. To conclude, debtor will propose Plan of Reorganization, in which it will offer to pay each class of creditors acertain percentage of their claims over a stated period of time. Payment can be in cash, property, or securities issuedby reorganized debtor

vii. The Plan must be accepted by the majority of creditors in each class; those creditors that have not accepted must bepaid at least as much as it would have gotten in a liquidation (1126(c), 1129(a)(7), analog to best interests test)

viii. Upon confirmation, debtor is discharged from all pre-petition debt, except as provided in the Plan, per 1141(d);contrast to Chapter 13, giving discharge only after plan has been completed and Chapter 7, giving no discharge atall to a corporate debtor

c. The Automatic Stay and Adequate Protectioni.

Automatic stay is immediate, nationwide (or even worldwide) and strictly enforced even against a large number ofpeople who had no prior notice or opportunity to contest it, and in action taken in innocent violation of stay bypeople without notice of filing.

ii. Repossession immediately preceding bankruptcy (within 90 days) will not improve the creditor's position; the DIPcan force return of the property to the debtor (i.e. voidable preference)

iii. Court must act on a request to lift the stay within 30 days or it will automatically be lifted as to the requestingcreditor's collateral (362(e)); burden will be on DIP to show the existence of adequate protection of the securedparty's interest in the collateral (362(g))


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1. Farm Credit of Central Florida, ACA v. Polk (1993): Court holds that pre-petition agreement byappellee to waive right to contest appellant's relief from stay is not valid because the purpose of stay is toprotect all creditors and put them on even footing with one another and therefore cannot be waived

iv. Exceptions to the Automatic Stay: Government Claims, 1051. For determining when a stay for government is excepted:

a. Pecuniary purpose test: whether the government's proceeding relates primarily to theprotection of the government's pecuniary interest in the debtor's property or to matters ofpublic safety

b. Public policy test: distinguishes between proceedings that adjudicate private rights and thosethat effectuate public policy

2. United States v. Seitles(1989): Court holds that where the harm caused by defendant is neithercontinuing nor public health-related and where the case is primarily an adjudication of private rights,there is no exception to the automatic stay for governmental claims; also, though non-debtors (even non-debtor codefendants, as Seitles) are not entitled to 362 relief, 105 enables an exception where (1) thereis irreparable harm or (2) sufficiently serious questions and a balance of hardships

a. The test for non-debtors applying the stay is met when the action against the non-debtorcodefendant is so inextricably woven with the affairs of the debtor that it would substantiallyhinder the debtor's reorganization effort

v. Lifting the Stay1. Lack of Adequate Protection (362(d)(1), (2)): creditor must make a motion to lift stay if the value is

slipping below cushion; ex post complaint will not help

a. In re Rogers Development Corp. (1980): Court holds that plaintiffs are adequatelyprotected by equity cushion that exists between the amount of debtors' obligation and thevalue of property (under 361(3)), where such property is increasing in value; further, even ifthe plaintiff has no equity in the property, stay will not be lifted if such property is essentialto the debtor's reorganization

i. Value is determined to be the average of the FMV estimates offered by the twocompetent appraisers


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ii. The lack of an equity cushion is not indicative of whether the stay will be lifted;but the less the equity cushion, the more compelling the argument that the declinewill hurt; a fully secured creditor will have to show a steeper decline

iii. Note that the secured creditor can only be paid for interest to the extent by whichhe is oversecured

b.

362(d)(3) forces small single-asset cases to propose workable plans promptly or toimmediately start paying interest on value of collateral

2. Recall362(d)(2):a. Does the debtor have equity in the property?b. Is such property necessary to effective reorganization?

3. Why don't we allow secured creditors to go after their assets immediately upon bankruptcy filing? Value-enhancing, i.e. preventing one secured creditor from single-handedly destroying the business bytaking his one, but consequential, asset

d. The Plani. Creditors may file plan, per 1121(b)(2) or (3), if and only if the debtor has not filed a plan before 120 days after

the date of the filing or the debtor has not had his plan accepted by the majority in each class of creditors within 180days of filing, respectively; hence, if the debtor has filed but has failed for 4 months to provide a plan, the creditormay himself file a plan

1. The court may increase or reduce the number of days (120 or 180) on request by party in interest afternotice and a hearing

ii. What do creditors get under the plan?1. Oversecuredcreditors get full amount of claims, including post-petition, pre-confirmation interest (up to

the

2005 bankruptcy outline

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