i. introduction - mississippi law...
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Bankruptcy - Prof. Czarnetzky - Fall 2011Table of ContentsI. Introduction....................................................................................................................................................... 2
II. Commencement of the Case & Eligibility for Relief.............................................................................4Voluntary Proceedings........................................................................................................................................................................... 4Voluntary Proceedings - Means Test................................................................................................................................................5Voluntary Proceedings - Other Elements.......................................................................................................................................6Involuntary Bankr Proceedings..........................................................................................................................................................8Debtors Eligibility for Relief..............................................................................................................................................................11Limitations on Repeat Bankr Filings.............................................................................................................................................12
III. The Bankr Estate......................................................................................................................................... 13Property of the Bankruptcy Estate.................................................................................................................................................13Post Petition Earnings from Personal Services.........................................................................................................................16Limitations on Property of Estate...................................................................................................................................................16Exclusions from the Bankr Estate...................................................................................................................................................17Exemptions and Lien Avoidance.....................................................................................................................................................18Claiming the Exemption...................................................................................................................................................................... 20
IV. The Automatic Stay.................................................................................................................................... 21Nature of the Stay...................................................................................................................................................................................21Exceptions to the Automatic Stay...................................................................................................................................................21Violation of the Stay.............................................................................................................................................................................. 22Lifting the Stay.........................................................................................................................................................................................23
V. Claims............................................................................................................................................................... 25Filing Claims............................................................................................................................................................................................. 25Secured claims......................................................................................................................................................................................... 26Priority Claims......................................................................................................................................................................................... 27Future Claims........................................................................................................................................................................................... 28
VI. Discharge....................................................................................................................................................... 28Discharge Generally & Extent of Discharge................................................................................................................................28§ 523 - Rifle Exceptions....................................................................................................................................................................... 28§ 727 - Global Discharge Exceptions (no discharge at all)...................................................................................................29Reaffirmation........................................................................................................................................................................................... 30Reaffirmation/Redemption............................................................................................................................................................... 31
VII. Chapter 13 Cases........................................................................................................................................ 32Eligibility for Relief................................................................................................................................................................................32Codebtor Stay........................................................................................................................................................................................... 33The Chapter 13 Plan.............................................................................................................................................................................. 34Disposable Income.................................................................................................................................................................................35Nuts & Bolts of Chap 13.......................................................................................................................................................................36Treatment of Secured Claims............................................................................................................................................................38Treatment of Home Mortgages under Chap 13.........................................................................................................................40Modification of Confirmed Plan.......................................................................................................................................................41Discharge under Chap 13....................................................................................................................................................................42Conversion & Dismissal of Chap 13 Cases...................................................................................................................................42
VIII. Avoidance Actions/Powers of Trustee.............................................................................................43Avoidance Actions Introduction......................................................................................................................................................43Strong Arm Power - § 544(a)............................................................................................................................................................43Preferences - § 547................................................................................................................................................................................43Fraudulent Conveyances - § 548.....................................................................................................................................................47Statutory Liens - § 545......................................................................................................................................................................... 48
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I. Introduction Structure of Bankruptcy Law
Historically Originated as a creditor’s remedy
Strict penalties historically for being a debtor (i.e., drawn & quartered; debtor’s prison) U.S. Const. art. I, § 8 - Empowerment to create uniform Bankr law
Bankr Code Today Bankr Code enacted in 1978 (replaced Bankr Act from 1898, rev’d 1930s) Organization
Divided into chapters (originally all odd; chap 12 later added) Course focus: chaps 7 & 13 (also 1, 3, & 5); not addressing chap 11 (although shared principles)
Models of Bankruptcy law Liquidation (more ancient form) embodied in chap 7
Model/Procedure Debtor turns over all his/her/its property to trustee Trustee sells/liquidates debtor’s assets Distributes proceeds from liquidation of assets to debtor’s creditors (who have made claims) If insufficient assets for all creditors, then assets shared pro rata among creditors (orderly
distribution) Bankr Discharge (relatively recent addition to liquidation Bankr)
If debtor behaves properly (not hiding assets) Then receives discharge of all pre-Bankr debts; incentive for debtors to come forward before
all assets are exhausted Theoretical Balance
Creditors get orderly distribution Debtors get discharge of pre-Bankr debts
Reorganization Goal: Capture going-concern value of company
The intangible value of a company beyond the plain sum of its total assets (name value) Chaps 9, 11, 12, & 13 - Reorganization chapters Model/Procedure
Debtor keeps assets and at the end of the Bankr the debtor receives discharge of pre-Bankr debts Debtor must present plan (details determined by type of Bank Reorg.)
Over the next months/years Debtor will make a stream of payments to the creditors Equal to at least what those creditors would receive if debtors assets was liquidated today
I.e., equal in today’s dollars; thus interest must be provided for the time taken to repay Theory
Win-win situation: debtor gets to keep running business and paying employees; creditors get paid Congress believes creditors will see greater returns than liquidation.
Essentially given an opportunity to redeem your assets (i.e., article 9 pre-sale redemption)
State Law Discussion Federal law supremacy - Bankr law and discharges preempt state law and other creditors Lien - A Security Interest that a creditor has in property of a debtor to secure repayment of a debt
Types of Liens: Consensual Security Interests; Judicial Lines; Statutory Liens Consensual Security Interests / Lines: I.e.: Article 9 (pledge of property) or mortgages
Debtors voluntarily accept money from creditor in exchange for security interest in property Statutory Liens: State (sometimes federal) laws, mechanics, lawyers
Automatic liens under state law (mechanics, innkeepers, dry cleaners) Mechanics liens are often not just for auto mechanics; also people who work on your house, etc.
They have a security interest in the property they work on / improve securing repayment for the debt owed
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Judicial Liens: Liens that unsecured creditors obtain in enforcing their debt (after going through state law process) Someone who has extended money without giving a security interest in exchange To recover, unsecured creditor must go through process beginning with going to court and get a
judgment Otherwise not entitled to repossess property for nonpayment of debt
Then they are entitled to go through the debtors assets and try to attach their lien to it Example: take judgment and enroll it in the land records - judicial lien is born
The unsecured creditor then becomes a judicial lien holder and can use the facilities of the state of to sell and liquidate the property (foreclose)
Debt Collection Judgment Entry Examples
Real Property is Owned by Debtor Home with mortgage on it, and if the home is worth more than the mortgage, means the home has
equity in it Could enter the a judgment lien into the property records for that property Then could seek assistance from the state to foreclose the property
Attaching Personal Property (Apartment, but not real estate—property in the residence) Minority rule for Personal Property: Some states enrolling the lien applies to real estate and all
property in residence Majority rule for Personal Property: Most states you don’t have a lien on personal property until
the sheriff has gone out and seized the property Sheriff arrives with a writ, and executes or levies the writ based on the judgment
What can Debtors do? Sheriffs have some liability if they take property that isn’t the Debtors Debtor or person on the property will often tell the sheriff this might be someone else’s
property Garnishments (or turn over debtor’s assets)
Cause of action brought against a third party that is holding assets of a debtor and the only defense to the action by the third party is “not in possession of debtor’s assets” Ex: Debtor has bank account. You can sue the bank (need not sue the debtor) to require the bank to
turn over those assets to the judgment creditor Garnish-able Items: Accounts, wages (often smart enough to clear out accounts), tax refunds
Garnishment suit for wages would be against employer (they are holding asset of salary) Limits on garnishment exist: typically 40-60% of salary
Receivership Generally a state law remedy in existence since prior to Bankr Code May also be available as a federal remedy
Procedure Go to state court of equity and ask the judge to create a receivership because:
(a) You think they are looting the Corp, or (b) You think they are so incompetent that they will undoubtedly run the Corp into the ground Receiver would be appointed to protect how the business is run for the interest of the creditors
Uncommon presently because of Bankr Code (trustee gets appointed) Assignment for the Benefit of Creditors
State law remedy that is no longer very popular Debtor would ask court for an assignee to run the business (basically someone voluntarily giving up)
Debtor’s Interrogatories (different states call this different things) Example:
Don’t know what the debtor has, and before you go and try to attach (or after unsuccessful attempt by sheriff)
You have a judgment but no idea what debtor has Procedure
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Enroll judgment Have court issue writ/subpoena ordering debtor to come in for questioning about assets Might be in lawyer’s office; might require presence of judicial officer
Debt Collection Technique If they bring property to the debtor’s interrogatories then you can seize it then Effect is if sentimental attachment to property (i.e., wristwatch), then they might be more amenable
to a pro-creditor settlement Note:
Debt collection techniques typically lead to a Bankr filing
II. Commencement of the Case & Eligibility for Relief Overview
Bankr initiated by a filing of petition for relief Issues are who can file one and whether it is voluntary or involuntary
Voluntary Proceedings Initiated by: filing petition for relief under eligible Code chapter (typically under § 301)
Basically you can file under whichever Chap classifies you as a debtor Filing constitutes and gives rise to an “order for relief” and creates an automatic stay (§ 362) & a Bankr
estate (§ 541) Order of Relief: Bankr court enters order saying they are granting relief to the Debtor under the
Bankr Code Filing Mechanics
Filing indicates the minute and sometimes second so that you know exactly when the debtors has been “granted relief” under the Code (timing is important for things like the Stay)
Great Debate in Bankr Law Tension between protection for debtors and an interest in creditors being paid back as much as possible Ultimately revised (but not rewritten) in 2005 (BAPCPA)
Principle review was to eligibility requirements for Chap 7 (enter: means test) Changes in BAPCPA:
Before: Any individual/entity (with a few exceptions) could file a Chap 7 After: All individuals must pass “means test” to file Chap 7 (can still file Chap 13)
Idea is creditors will get more through Chap 13 (disputed as sometimes people in financial trouble can’t get out of it by funding a 5-year Chap 13 plan)
§ 707 - Dismissal of a Case or Conversion of a Case Under Chap 11 or 13 Restrictions on Filing
Bankr Abuse Prevention & Consumer Protection Act of 2005 Tightened requirements for filing Bankr
Modified many provisions, for example Chap 7 sometimes unavailable until Chap 13 first § 109(h) - Debtor must first undergo approved credit counseling (§ 111(c)) in the past 180 days
before filing (goal is credit counseling and budget discussions to avoid unneeded Bankr) Means Test Note: There is a pre-discharge educational requirement §§ 727(a)(11) and 1328(g)
Problem 2-1 Facts: Can negligent debtor who didn’t see notices file petition w/o credit counseling? (a) His only hope (short of getting credit counseling) is to certify to the court there are exigent
circumstances. But he effectively created his own exigent circumstances and may be barred. See § 109(h)(3) Court will need to find it “satisfactory” Must at least be signed, but not necessarily sworn Must have requested in prior 7 days
(b) the period if for 180 days, and beyond that debtor must return for more counseling (unless the intervening time can be construed as ongoing counseling)
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Voluntary Proceedings - Means Test Overview: Debtor barred from Chap 7 liquidation if enough net income to repay significant amount of debt
under Chap 13 reorganization. See § 707(b) Barred from liquidated if current monthly income exceeds median household by certain amount Fundamentally, is it an abuse of the Bankr Code to allow the Debtor to file Chap 7
Computation 1) Calculate Debtor’s average current monthly income.
Define at § 101(10A). Includes avg. debtor income for prior 6 mos. Average income from all sources over last 6 mos., including any amount paid by entity other
than debtor for household expenses (and excluding some military and other things) This includes the lottery winnings are big bag of money from “aunt” Debtor relief is in 707(b)(2)(A)
Note: Higher amount is worse for debtor wanting to file There also may be some discretion for the judge to reduce what gets included in the
average monthly income 2) Compare Annual Income (current monthly income multiplied by 12 for annual sum) with state’s
median family income for comparable household size Basically compare with the media income for that state for similar debtors
If equal or lower than Census Bureau median household figures, then can file. Safe Harbor provisions of § 707(b)(7)
3) Means Test (see Summary of § 707(b) p. 42) Failure of means test = presumption of Bankr abuse and barred from Chap 7 liquidation
a) Subtract Allowable Expenses (Debtor’s income adjusted for): (i) IRS allowable “reasonable” expenses. § 707(b)(2)(A)(ii) (ii) Can include other reasonable and necessary expenses: support for elderly or disable in
family, education expenses for children, extra housing or utility expenses that are reasonable and necessary
(iii) Secured and priority creditor payments considered, though spread over 5 yrs. / 60 mos. Code basically just says you get to flat-out subtract these things i.e., 12 monthly payments of $100 for appliance = $20 deduction (1200 / 60) or payments
made to car payments (car is secured); Mortgage payments b) Remaining amt. of average monthly income after the subtractions is multiplied by 60 to forecast
the funding of a Chap 13 plan for 5 years (5 years x 12 months = 60) Basically want to determine the total amount creditors could receive from the Debtor over 5
years c) The Means Test is failed (Chap 7 barred) if sum is less than lesser of (1) $7,025 or 25% of non-
priority unsecured debt (whichever is greater), or (2) $11,725 These are rather arbitrary figures: if you can pay above 11,725 then you must file Chap 13
3.a) Alt View / Trigger Points If adjusted monthly expenses less than $117.08 (= $7,025 / 60 mos), then cannot fail means test
and may file Chap 7 If adjusted monthly income is greater than $195.42 (= $11,725 / 60 mos) then the Debtor fails the
means test and cannot file Chap 7 Also between these two monthly figures ($117.08 & $195.42), multiply by 60 and if equaling 25%
of non-priority unsecured debt then fails means test Congressional Amendments
Rev’d Code to force people to file Chap 13 instead of Chap 7 when appropriate Only going to force people out of Chap 7 if we think they could survive in a Chap 13 Bankr
Is a Debtor permitted to file Chap 7 If the calculated adjusted average income is below the mean household income for the area, then
Debtor may file Chap 7 If the calculated adjusted avg income is above the mean household income then must perform the
means test (see above) S. Ct. Case - 2011
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Issue: If Debtor doesn’t actually own a car, can they deduct the IRS scheduled amount for owning a car?
Held: Debtors are not allowed to deduct the amount for the car if Debtor doesn’t own a car Means Test Problems
Problem 2-2 The lottery winnings, although a one-time event, probably cannot be excluded from avg. income Math: 18K + 5K (lottery) = 23K. Divide by 60 Bankr Judge has discretion to reduce for some things in calculating the annual income
Problem 2-3 Avg. monthly income = $5417 [($6500 x 5) + 0 / 6]. Perhaps higher if he put $500 on his credit
card during the month unemployed (either way I don’t think you can deduct the debt from the avg monthly income)
Problem 2-4 She is above the median income (we are told) so we know she must pass means test $120 x 60 = $7200; greater of ($7025 or 25% of $20,000 = $5,000). Fails means test because she
exceeds $7025. Alternative approach
If b/t $117.08 & $195.42 then multiply by 60 and is it greater than the larger of $7025 or 25% of unsecured debt
Credit card debt of $35,000? She does not fail the means test b/c 25% of $35,000 = $8,750 (which is greater than her
average income — she can’t repay it and is eligible for Chap 7) Theoretical Tension:
The more debt then the more likely you can get into Chap 7; so you could advise the client to incur additional debt prior to filing
Bankr Rule 9011 & § 526(b)(4) bars an advising additional debt in contemplation and prior to filing for Bankr (See infra)
Problem 2-5 I am not sure if vehicle expenses play into the deduction for avg. monthly income. Based on the
case law, there does not appear to be a distinction between types of cars There is a flat rate for the IRS amounts You can also take out actual payments to secured creditors
When adjusted she would have negative cashflow b/c of the secured payment There is also a tension here because there is an incentive to run-up your bills before Bankr
What does it mean that “monthly expenses of the debtor shall not include any payments for debts”; does this mean can’t deduct for interest rates / fees?
What if she intends to return it? S. Ct. hasn’t resolved, but similar to case above - the statute can be read literally or for
congressional purpose
Voluntary Proceedings - Other Elements Documentation Requirements when Filing
§ 521(a)(1), (b), (e)(2) - Debtor’s Duties (otherwise petition will be dismissed) Must include w/ filing petition much financial information, pay stubs, creditors, etc. Tax returns for past year before 1st meeting of creditors Certification of receipt of credit counseling or attendance in credit counseling course
Can be conduct online Automatic Dismissal on 46th day if filing documentation requirements not met. § 521(i)
Time can be extended if court “finds justification”. § 521(i)(3) Trustee can also request no dismissal if debtor attempted in good faith, etc. § 521(i)(4)
Actual nature of automatic dismissal is disputed (need the court do anything?) Some courts think they have discretion to retain the case beyond the time period
In re Acosta-Rivera Issue: Whether Bankr court may excuse non-disclosure after 46th day has passed (held it could)
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Facts: Debtors petitioned for Bankr and did not initially disclose pending cause of action against employer for back-pay etc., and once they did disclose they didn’t list the value. Trustee wanted to settle employment suit for low number (but good for Bankr), and debtors tried to get suit dismissed under automatic provision
Rule: Provision requiring debtor documentation “unless the court orders otherwise” could be
construed to waive the § 521(a)(1) requirements If the hidden asset has a high enough value to cover all the creditor claims then the disclosure
may be waived as a reasonable and pragmatic compromise to Congressional anti-abuse goals Court performs this with a “nunc pro tunc” order which basically retroactively indicates that
the “court order[ed] otherwise.” (nunc pro tunc - now for then) Reasoning:
Goal of statute amendments was abuse prevention, so there should be abuse preventing discretion interpreted here
If the Debtor wins the collateral employment discrimination lawsuit, then that amount goes to the Trustee as an asset of the estate
Trustee’s goal is to settle the suit low for only the amount needed Held: The extension was appropriate despite the mandatory provision b/c the nunc pro tunc order
meant the material was never needed originally on the petition filing Note: Debtors can’t just dismiss their Bankr filing; the Trustee takes control in the interest of
Debtors and Creditors Twin Pillars of Bankr Law: Discharge for debtor and protection and distribution of assets to the
creditors Attorney Certification - Fed. Bankr. R. 9011
Basically Rule 11 for Bankr court; Interplays with § 526(b) Problem 2-6
Reasonable investigation, not know any information is incorrect, well grounded in fact, warranted by existing law or a good faith reason for changing it. § 707(b)(4)
Debt relief agencies also liable for negligent or intentional issues arising from aid. §§ 526-527 Debt Relief Agency definition includes attorneys
§ 526(a)(4) has penalties for advising additional debt in contemplation of Bankr filing Dispute over First Amend validity of this provision (lawyer’s ability to advise client) See Milavetz, Gallop & Milavetz, P.A. v. U.S., 130 S. Ct. 1324 (2010)
Discussion Rule 11 applies to Bankr proceedings, and the Code contains an additional “Rule-11-like
statement” that the attorney must make a reasonable investigation, etc. Split of Authority:
See discussion on page 50---Fifth Circuit is good for Debtors’ Attorneys Problem 2-7
Whether debt relief company that advised how to do certain debt relief things w/o actually suggesting clients do them is acting as an attorney under the provisions of the Code
They are probably liable as acting as a debt relief agency under the definition for a “Bankruptcy Assistant”
Discussion You are a debt relief agency if you are assisting people in filing Bankr petitions There are statutory requirements/obligations for debt relief agencies
Miscellaneous Joint Petitions
Individual and spouse may file jointly under § 302, paying one filing fee but creating two estates Typically construed narrowly to require couple to be “spouses” under applicable state law
Foreign Bankrs - Just know it is there; not substantive, but ancillary to the foreign Bankr Filing Fees - Various filing fees and the fact that they can be waived ($245 for Chap 7; $275 for Chap
13; $1,000 for Chap 11; $200 for Chap 12)
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Involuntary Bankr Proceedings Generally
Problem 2-8 Cannot commence Involuntary Petition against a farmer, family farmer, or a corporation that is not
a moneyed, business, or commercial corporation [does this mean charities?]. § 303(a) The economics of farming/fishing is that farmers are indebted many months of the year until
harvest Deliberately commenced Bankrs are still voluntary, despite debtor feeling pressured by creditors
Are relatively uncommon b/c state law remedies often favor the first or sophisticated creditor to arrive first (traditionally in Europe Bankr was primarily involuntarily filed)
Can be commenced by creditors of debtor, or fewer than all of P’ship. § 303(b) Only available under Chaps 7 & 11
Order for Relief The way in which the Bankr court takes jurisdiction
Disputing Involuntary cases Two general Hurdles that Creditors must jump over
1) Must be proper number of creditors and sufficient debt 2) Must be proof of insolvency
Basic § 303 Requirements 1) Requisite number of creditors
3 creditors must file petition if there are 12 or more creditors Only 1 creditor needed if 11 or fewer creditors
Don’t want the Bankr courts used to settle one-on-one scores Bankr is a collective endeavor to resolve the rights of multiple creditors
Can be secured or unsecured 2) Claims of the creditors must aggregate at least $14,425 (must be more than value of any lien by a
secured creditor; so if undersecured then the undersecured amount could count) Claims must be non-contingent and not subject to a bona fide dispute
3) Showing of insolvency of some sort Not paying debts as they come due or a receiver has been established
Note: Split of authority as to whether one creditor comprising most of the amount if that is sufficient There is no general requirement however that the debts be relative Argument could be made that this is a one-on-one dispute abusing Bankr Code
Petitioning Creditors in Involuntary Bankr cases Basic Requirements
Petitioner must be eligible creditor and debtor isn’t paying debts or has had trustee/receiver appointed over assets
Filed like a lawsuit; Debtor must answer or Bankr court will enter relief against it 3 creditors must join together in the filing, unless debtor has less than 12 creditors total
Point is to further “organizational” goals of Bankr, as opposed to singular creditor goals Limited to creditors not holding contingent or disputed claims, and must be above a $ amt. above
the liens or security on the claims (this would be when a secured creditor could file) Contingent Claims Defined - § 101(5) (lengthy list) - So would still be a claim, but not one
entitling filing of involuntary petition Problem 2-9
They probably have problems given their contingent and disputed claims, but Bankr R 1003 suggest they could probably get in touch with the other 97 creditors and find some who are eligible to join the petition More than 12 creditors so 3 must petition at least Although Nightflyer is secured, can still petition if aggregate amount is sufficient (but the
secured amount won’t count toward the aggregate amount) Consolidated has a sufficient amount for the claim It is unclear if the debtor is eligible: is it not paying its debts or has a trustee been established?
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Acme is ineligible because the claims are in dispute, and some are contingent on there being a warranty
Does it matter that their claims collectively exceed the monetary amount in § 303(b), despite the contingency and the dispute? Yes, you must not only meet the amount but have eligible creditors Under Bankr Rule 1003 it looks like there could be an opportunity for more creditors to join
who are eligible before the hearing is held on the Involuntary Petition Problem 2-10 (skipped)
It appears that there would need to be a collection of three creditors with claims meeting the § 303(b) monetary amount in order to sustain the involuntary petition (also, the claims have to be overdue?) Rick’s claim for $22,000 is not contingent or in dispute because reduced to a judgment It doesn’t matter that the other creditors are only owed $200 because the aggregate amount
would exceed the § 303(b) requirement I think that the creditors can still initiate involuntary Bankr although HRR is only not paying its
debts to one petitioning creditor because the debtor is eligible and the creditors are eligible Based on the cited case, it might be relevant that the amount of the unpaid debt far exceeds
the other not-yet-due debts Discussed above - there is room to argue de minimis creditors should not count
Grounds for Involuntary Bankr Relief Even if petitioners are eligible, Debtor can still contravene the petition
Grounds for Relief - Must demonstrate some sort of insolvency Debtor is not generally paying its debts as they come due; or A custodian has been employed to take charge of the Debtor’s assets
Receivership in Chancery court, ex.: I am a creditor of debtor who is either looting assets or harming value of assets
Order for Relief Important b/c many Code provisions date from the entry of this order
Voluntary - Occurs at the moment of filing by the Debtor Involuntary (§ 303(h)) - Order entered if:
Debtor does not timely controvert/respond to the Bankr petition (20 days to respond) Debtor responds but is either:
(a) not paying debts as they become due unless subject to bona fide dispute [hard to decide], or bona fide dispute only if there is a substantial factual or legal dispute over the claim
(b) receiver has been appointed in previous 120 days [relatively straight forward to decide] In re Lough
Facts: Bank filed Involuntary Bankr against Lough based on 2 debts. Debtor claimed one had been extinguished be a deed-in-lieu agreement, and that the other was not contemplated by a much earlier guaranty agreement. Court held there was a bona fide dispute.
Rule: Involuntary Bankr petition must be dismissed if there is either a genuine issue of material fact
that bears upon the debtor’s liability, or a meritorious contention as to the application of law to the undisputed fact
Other courts’ tests Four Factors to determine whether claims/defenses are subject of a bona fide dispute:
1) The nature of the dispute; 2) The nature and the extent of the evidence and allegations presented in support of the
creditor's claim and in support of the debtor's contrary claims. 3) Whether the creditor's claim and the debtor's contrary claims are made in good faith
and without fraud or deceit. 4) Whether on balance the interests of the creditor outweighs those of the debtor.
Whether summary judgment could be granted for the creditor; if not then there is a bona fide dispute
Reasoning:
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Creditors were using Involuntary Bankr as a club to punish Debtors fearing stigma of Bankr Problem 2-11
Failing to Pay Debts as they come due: $1 million judgment and various not-yet-due-debts for $800. Can involuntary Bankr be initiated to force Debtor via Trustee to sue insurance company for failure to acquire coverage? The non-payment of this single debt is not sufficient for the § 303 requirement of “not paying
debts as they become due” and the involuntary Bankr is unwarranted No clear answer here because you either look at whether “not paying debts as they come due”
means any debts, all debts, or some proportion of debts Problem 2-12
Business went under and dissolved and paid off what it could of its creditors. It had early issued dividends. Creditors initiate involuntary Bankr on theory that they want to look for fraudulent transfers. Proper? A dissolved corporation that has been liquidated is still potentially “not paying its debts as they
become due” and it would be proper to allow an involuntary Bankr petition to go forward The Trustee has causes of actions that have value (fraudulent transfers, illegal dividends, etc.)
Prudence of Allowing Involuntary Bankr Case Single Creditor Involuntary Petition
Although Bankr is a collective engagement, appropriate sometimes to allow a single creditor to initiate involuntary Bankr when these powers are needed: Preference Recoveries Avoidance powers of the Trustee Gain control over Debtor’s assets and financial affairs
Abstention - § 305 Bankr court may abstain from hearing a case (dismiss or suspend proceedings) if the court
determines it would better serve the interests of debtors & creditors I.e., Debtor and Creditors are working out a plan that doesn’t prejudice creditors, but some
creditors still seek to derail plan Subject to Dispute - § 303(b)
Not allowed to file involuntary Bankr if debt is subject to bona fide dispute because: Would allow creditor manipulation of debtors Would slow Bankr proceedings that are supposed to be expedited Could harm debtor’s reputation and ultimately lead to legitimate Bankr
Problem 2-13 (skipped) Bona Fide Dispute Burden of Proof: the debtors bear the burden of showing that the debt is subject
to a bona fide dispute, and merely asserting without proof that some release/extension was granted is insufficient.
Impact of Involuntary Petitions on Debtor’s Business Harm is that people think you won’t pay your debts, even if the order for relief isn’t granted Goal is to both protect the Debtor’s business and the interests of creditors
Important (other things on p.63 aren’t so important) - Once petition is filed the automatic stay arises § 303 Debtor Safeguards
Debtor can carry on as normal b/t time of Involuntary Bankr filing & resolution of issues. § 303(f) Post-petition transfers protected from Trustee avoidance during this period. § 549(c) Claims created during this resolution period get special priority for repayment. § 507(a)(2) If dismissed & an individual:
Court can order credit reporting agencies (CRAs) not to report on the Bankr filing. § 303(L)(2) If petition deemed to contain false statements court can order it sealed. § 303(L)(1)
§ 303 Creditor Safeguards Interim Trustee can be appointed to take control of Debtor’s assets and business (unless debtor
posts a security bond in court’s discretion). § 303(g) Penalizing Petitioning Creditors
Attorney’s fees & costs against petitioning Creditors authorized when Involuntary Bankr dismissed other than with consent of Debtor and all petitioners. § 303(i)
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Bad faith filing may also warrant actual or punitive damages against petitioning Creditors. § 303(i)(2) Awards are at discretion of court
Debtors Eligibility for Relief Main flavors of Bankr are liquidation and reorganization, but there are many Chaps specially designed
for different types of debtors (outlined in § 109) Municipalities & Chap 9 [most restricted for relief]
Chap 9 is only available to municipalities wishing to adjust debts under a plan Muni must be specifically authorized to file under state law
Family Farmers & Fishermen & Chap 12 Must be a “family farmer” or “family fisherman” with “regular annual income”
See § 101(18)-(19) (family farmer); § 101(19A)-(19B) (family fisherman); Casebook p.65-66 Point is to exclude “casual” farmers who happen to own some cattle or something like that
Essentially have to have sufficiently stable and regular income to fund a plan Individuals & Chap 13 (individual reorganization)
At time of filing must owe less than (§ 109(e)): $360,475 noncontingent, liquidated, unsecured debt, and $1,081,400 noncontingent, liquidated, secured debt. Joint filings must be within these amounts in the aggregate Point for these arbitrary amounts is to place the sophisticated business person into Chap 11
reorganization Also, must be an individual with regular income (defined at § 101(30)
Sufficiently stable and regular income to fund a plan Specifically excludes stockbrokers and commodity brokers
Also, excludes corporations, LLCs, partnerships; but a sole proprietor may file Chap 13 Most Everyone Else & Chaps 7 & 11 [least restricted for relief]
Chap 7 available to any person, other than (§ 109(b)): Railroads, domestic insurances companies and banks, & foreign insurance companies and banks
These are already regulated by regulators Banks & Insurance Companies regulated by state law, so no federal remedy needed Railroads are eligible under Chap 11
Any Chap 7 filer may also be a Chap 11 filer except: Stockbrokers & Commodity Brokers Note: In Chap 11 - the debtor acts as the trustee (debtor in possession) Special Categories (mostly Chap 11)
Small Business debtors Single Asset Real Estate debtors
motels/hotels/resorts Health Care Business debtor
Have special patient record obligations and care delivery Chap 11 is viewed as a little clunky, and these are attempts to streamline it (b/c there is no separate
chapter) Eligibility Test:
Chap 7 = (All Persons) — (Individuals not passing Means Test + Railroads + Domestic Ins. Cos. &
Banks + Foreign Ins. Cos. & Banks) Chap 11 =
(All Chap 7 Debtors + Railroads) — (Stockbrokers & Commodity Brokers) Insolvency/Solvency Requirements (distinguishes US Bankr law from other bankr laws)
Not required to be insolvent under Chaps 7 & 11 No requirement in general to show insolvency in order to file But Bankr judge can dismiss case if there is substantial solvency But see Chap 9 requiring Muni insolvency
Reasoning Solvent entity w/ impending liability or potential losses may want to file preemptively
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May want to stave off a lawsuit using Bankr jurisdiction Problem 2-14
Eligible for Chap 7 or 11 relief? 1) Health maintenance org (HMO) - Some have held these are domestic insurance companies
Depends if the HMO is an Ins. Co. (which may lie in the facts of each case) 2) Individual Debtor - may under both Chap 7 or 11 (no requirement under Chap 11 they be a business) 3) Partnership - Yes, a partnership is defined as a person. § 101(41) 4) A business of Donald Trump - Yes under Chap 7; Yes under Chap 11; although stockbrokers are
restricted under 11 this is a stockbroker’s business 5) Bank Holding Company - these are simply Corps and may file under both Chap 7 & 11 6) Non-Profit - Yes, they are eligible for Chap 7 or 11, but cannot be subject to involuntary filing
Limitations on Repeat Bankr Filings Intent of Congress was to prevent serial Bankr filings and abuse
Automatic Stay Upon the filing of Bankr the automatic stay prevents all creditors from doing anything to collect from
the debtor Includes pending foreclosure sales, and persuasion from creditors to pay
Problem 2-15 Can a debtor file repeat filings, then dismiss them, simply to thwart creditors? No, § 109(g) limits the refilling of a Bankr case if Debtor voluntarily dismissed in prior 180 days
§ 109(g) - Person may not be a debtor (cannot file for Bankr) if in prior 180 days a filing was: 1) Dismissed by court for willful violation of Debtor to follow court orders 2) Dismissed voluntarily by the Debtor following a motion for relief from the automatic stay
Lift Stay Motion - Creditors eventually ask the court for permission to get their collateral (if secured) § 341 Meeting
Convened by the U.S. Trustee and looks at what types of creditor claims exist Bankr judge actually prohibited from being at the meeting
This technically doesn’t qualify under § 109(g)(1) Montgomery v. Ryan
Facts: Debtor filing Chap 13 petition; failed to attend creditor’s meeting. Bankr petition was dismissed. Debtor attempted to refile Chap 13 petition and it was blocked under § 109(g).
Issue: Whether § 109(g) dismissal was proper where first dismissal did not expressly find a willful violation by the Debtor.
Rule: Failure to attend a mandatory creditor’s meeting is a failure to follow a 109(g) court order The burden of showing non-compliance w/ an order was not “willful” is on the Debtor.
Reasoning: Would frustrate abuse preventing goals of § 109(g) to place burden on the creditors Held:
Finding of willfulness was only needed at the time the sanction was imposed (i.e., the § 109(g) dismissal)
Where a § 109(g) issue is raised, the party who filed the Bankr petition bears the burden of disproving the § 109(g) issue (i.e., the Debtor) Debtor has the burden to prove that failure to show at a § 341 meeting
Notes: § 341(a) & (c) (and rule 2003) detail what goes into the creditors meetings
In re Sole Facts: Debtors filed Chap 13; petitions for relief from stay were filed. 20 months later the Bankr filing
was voluntarily dismissed; but three days later a new Chap 13 petition was filed. §109(g)(2) problem? Three approaches to § 109(g)(2):
1) Fuzzy, no-inequitable-result approach that balances the equities of each side Too free-wheeling of an interpretation
2) Strict statutory interpretation (harsh) approach
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Fails to consider interpretation requiring some connection b/t motion for relief filing and voluntary dismissal
3) Middle-ground approach that requires 109(g) dismissal if there is a causal connection b/t a motion for relief from the automatic stay and the Debtor’s dismissal [preferred method] Absent a connection b/t motion for relief and the voluntary dismissal, there is no abuse to curb Court should examine the circumstances surrounding the motion for relief from the stay and
the voluntary dismissal to see if they are connected § 109(g) dismissal will be granted if there is a causal connection b/t the motion to lift the stay
and the dismissal Problem 2-16
Although she dismissed voluntarily and then refiled, she should be able to refile b/c there appears to be no connection b/t the early motion for relief from the stay (which was uncontested) and the later voluntary dismissal b/c she was temporarily unemployed.
But under the strict rule, this isn’t allowed Problem 2-17
Bankr filed, then negotiations w/ creditor going badly and motion for relief was imminent and Debtor dismissed and then refiled prior to foreclosure. Debtor sought to refile 170 days later.
Should not be barred under § 109(g)(2) b/c there has been no motion for relief actually filed yet In Chap 13, voluntary dismissal is basically automatic
Problem 2-18 Debtor had been in Bankr, won lottery, and then got out. But less than a year later he needed to refile.
Is the automatic stay applied? No, under § 362(c)(3) the automatic stay will expire after 30 days with respect to the debtor and the
debtor’s property, but not the property of the estate, b/c the debtor has refilled w/in a year of dismissing early Bankr filing Some courts find that the stay expires after 30 days for property of the estate also
If there have been 2 or more filings in one year then no stay goes into effect. § 362(c)(4) Limits on the Automatic Stay - § 362 (p.76)
Chap 7 Discharge Limits
A debtor cannot obtain a discharge under Chap 7 (only real benefit for debtors) if the Chap 7 case was commenced w/in 8 years of a prior discharge under this chapter If previous case was a Chap 12 or 13, then can file a Chap 7 w/in 6 years after a discharge under
Chaps 12 or 13; unless debtor paid all allowed unsecured claims, or at least 70% using “best effort” Debtor can still commence a Chap 12 or 13 Bankr, just not a Chap 7 w/ potential for discharge
III. The Bankr Estate Property of the Bankruptcy Estate
Estate arises when Bankr petition is filed, and that estate consists of property classified under § 541(a)(1) Property of the Estate: Assets of bankruptcy debtors. § 541(a)(1)
Consists of all legal & equitable interests of the debtor in property as of commencement of the case Not limited to merely possessory interest (can be dispossessed or only have a part of the property)
If interest arises after Bankr filing, then not property of the estate § 541(a)(5) - interest arising after Bankr filing is still property of the estate if arising from inheritance,
divorce, or a life insurance policy so long as w/in 180 days of filing § 541(a)(6) - Excludes earnings from services performed by individual debtor after filing of Bankr
Claims: Liability of bankruptcy debtors Important b/c:
1) the auto stay only protects property of the estate, and 2) minimum creditor distributions are determined based on evaluation of property of the estate using
the “best interests of creditors” test US v. Whiting Pools Inc.
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Facts: IRS seized pool equipment, and promptly thereafter Debtor filed voluntary petition. Debtor seeks return of pool equipment and needs it to fund a Chap 11 reorganization plan
Rules: The Definition of property of the estate is broad and includes things that may not be in the Debtor’s
possession. § 541 § 542 requires an entity (which can include a gov entity) to turn over property of the debtor to the
trustee so that the trustee can use it under § 363 for the Bankr proceedings. The reasoning is that the goal of allowing a reorganization would be thwarted if property
necessary to run the business were unavailable to the debtor to use Debtor still has an interest in the property: the equity of redemption of the property
The IRS is basically a secured creditor Estate consists of all legal and equitable claims of the debtor: debtor had the legal right of equitable
redemption, which passed into the estate and drags the entire pool cleaning equipment interest into the estate
Held: The reorganization estate includes property of the debtor that has been seized by a creditor prior to the filing of a petition for reorganization
Note: If the property is necessary for the reorganization then it will become part of the estate and the debtor will probably get to hold onto the collateral
General Idea The Bankr estate takes the good and the bad of whatever property the Debtor has; i.e., if the property is
encumbered then the Bankr estate will hold it with the same encumbrance Roughly speaking, the property interests of creditors before Bankr ought to be preserved after Bankr
(relatively speaking) Exceptions: sometimes there is a compelling Bankr reason for changing the relative interests
Problem 3-1 Property of the estate is defined as all legal & equitable interests of the debtor in property before
commencement of the case The race winnings are not property of the estate b/c acquired after the Bankr filing. § 541(a)(6)
Post-petition earnings of an individual debtor are not property of the estate. §541(a)(6). This is part of the debtor’s fresh start
Problem 3-2 (not testable - Art. 9 related) Issue: To what extent post-Bankr can the trustee capture these uncollected accounts The accounts that have already paid to the secured creditor before Bankr are property of the secured
creditor that it has foreclosed on. These accounts that are yet to be paid would be included in the estate (b/c they originated b/f the filing,
but are being paid after the filing?). Problem 3-3
A restriction in property that reverts it to someone else upon Bankr filing is not valid. § 541(c)(1) These are known as “bankruptcy clauses” and are invalid under the Bankr Code
Clauses that say “such and such happens upon the filing of Bankr or insolvency” Restrictions based on insolvency of the debtor are not permissible and unenforceable Also any provision in a contract where you are not allowed to file for Bankr is not enforceable
Problem 3-4 Even though the property was acquired after commencement of Bankr, it was included in the estate b/c
it devised to the debtor by will w/in 180 days (although it took longer than that to clear disputes). § 541(a)(5)(A)
Post-petition earnings are the debtor’s to keep, but these three things do become part of the Bankr estate: bequests, life insurance, or divorce settlements w/in 6 months of filing Bankr Entitled to: the language includes in the Bankr estate anything the debtor is entitled to w/in 6
months of commencement of the case. Thus, if there is a drawn-out will dispute and you prevail, then the date you became “entitled” will be the date of death.
Rationale: potential for abuse for someone who has a lot of debt and may inherit money from a sick relative soon (or kill someone on the Lifetime version)
Problem 3-5
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Is a lottery ticket purchased pre-filing, but not selected as winning until post-filing part of the estate? Probably, seems he had an equitable/legal interest in the ticket Also, the estate had an interest in the ticket, and then the ticket belonging to the estate gained value
Proceeds of property of the estate, are property of the estate. The winnings are proceeds of the estate. § 541(a)(6) (lottery winnings are not services performed) Profits in subsection (a)(6): refers not to business profits, but the right to take minerals
Another Example: Debtor owns race-horse b/f filing of case. A week after the filing, the horse wins the race. Are the amounts won from the horse proceedings or earnings? Hard call.
Chicago Bd. of Trade v. Johnson (USSC) Issue: Debtor owned a seat on the board; debtor filed Bankr and trustee wants to sell the seat. Bd. of
Trade had rules for transferring seats (have to pay debts first) and required trustee to pay debts first. Held: The estate takes property subject to any burdens on that property at the time of filing
Licenses/Liquor Licenses Special Nature of Licenses vs. Property Interests
With a liquor license you don’t get a property right to sell liquor (or run a radio station) You get a privilege to engage in that business
A bar has little value w/o the liquor license; it is worth more as a going concern In re Chris-Don Inc.
Facts: Security interest had been issued on the liquor license b/f Bankr commencement Issue: Whether the sale of a liquor license requires payment to a private lender’s lien, or to the state
under the argument that liens do not attach to liquor licenses in NJ (whether Art. 9 superseded NJ liquor license law)
Held: Under NJ law a liquor license is not property, and Art. 9 only allows you to grant a security interest in property
Split of Authority: Trend is if any of these things are traded regularly and the state acquiesces in them being
traded, then the Bankr court should hold constructively that they are property But there are arguments the other way; that if there is a state law as in In re Chris-Don that bars
creation of security interests, then it won’t be property . . . . FCC v. Next-Wave Comm.
Facts: FCC, which was the licensor, essentially canceled the interest of the debtor in the license for the radio waves and auctioned it off to a new buyer
Held: Government cannot cancel a license issued by the government to a debtor solely because of the debtor’s insolvency or Bankr filing. § 525
Reasoning: § 525 says that the government cannot cancel a license of a debtor solely because a debtor has filed
a Bankr case Was apparent in this case that the only reason the Gov canceled the license was b/c of Bankr filing
Outcome: Regulatory boards will now find some other reason than Bankr to cancel the license
Problem 3-6 (skipped) It seems that law outside the Bankr Code regarding licenses may be sufficient to limit who can have a
claim to the regulated license in the Bankr court
Post Petition Earnings from Personal Services Post-Petition Earnings § 541(a)(6) - Earnings for services performed after commencement of the case are
not property of the estate Overview: Only becomes interesting whenever there are timing issues (Bankr court
Component of the debtor’s “fresh start” Only applies under Chap 7 (Post-petition earnings are part of the estate under chaps 11, 12, & 13.
§1207(a)(2); §1306(a)(2); §1115(a)(2).
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Primary issue on Chap 7: whether post-petition earnings are truly earnings attributable to prepetition activity of the debtor or the result of efforts from some other than the debtor (i.e., work two weeks, then file b/f paycheck)
Issues: Employee who is Paid: Bankr court can apportion the part of the paycheck that was pre- and post-
petition Commission Work: Treated like salaries; court can apportion how much of the amount received a
month after filing was really pre-petition earnings Bonuses: Discretionary v. Contractual/Vested
Important to look at all the facts surrounding the bonus and how it is paid (employee manual is helpful)
Debtor will argue the bonus was discretionary and that it isn’t property of the estate Creditor will argue that this was really more of deferred salary
Military Retirement Pay Courts reject argument that this is essentially deferred salary (policy reasons probably) Counter argument is that they can be called-up at any time, thus this is not pre-petition service
and is based at least partially on post-petition services Problem 3-7
What if you run a sole-proprietorship, and out of that you pay yourself a salary but that the amount is attributable not just to your services but others as well (i.e., other doctors you hire) The physicians earning from his investment are probably post-petition for Chap 7 reasons. The physician can keep the amount that is attributable to the doctor/debtor’s own post-petition
services The amount attributable to his colleagues that he receives would be part of the Bankr estate
Problem 3-8 Whether or not these bonuses are applicable under the Chap 7 estate depends on whether they are
discretionary or contractual; if contractual then they “existed” b/f filing the case The status of something as post-petition will depend on what the debtor has to do “post-petition” in
order to get them.
Limitations on Property of Estate In re Omegas Group Inc.
Facts/Issue: Debtor has arguably defrauded a creditor pre-bankruptcy. The Bankr court imposed a constructive trust on some of debtor’s assets in favor of allegedly defrauded creditor. Does the constructive trust carve out property from the estate
Rule: § 541(d) - Estate gets all legal & equitable property of the debtor, but if the debtor only has a legal
interest then that is all the estate will have For example, a traditional trust would not come into the Bankr estate (i.e., settlor/trustor takes
some property and hands it over (entrusts it) to the trustee whose job is to administer the trustee for the benefits of the trust (trustees))
Constructive trust: Merely a court order finding that the defrauded person essentially deserves a trust These are equitable remedies imposed by the courts
Allowing enforcement of a constructive trust in Bankr elevates an unsecured creditor to basically a lien holder who has priority over other unsecured creditors Bankr courts should refuse to enforce them because this would allow favoring one creditor
over another. This idea extends even to creditors who have been defrauded Held: Constructive trusts are not enforceable (some courts say they are, but the majority holding is that
they don’t) Apparently, even if a constructive trust has previously been applied under state law, then the Bankr
courts are not bound to use the state’s court definition of what qualifies as a “claim” There may be some variation among the circuits
Problem 3-9
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Is the swindled necklace property of the estate? What type of title does the thief of property have? A thief has void title to property and under the
law they can only pass on void title When someone defrauds someone, then they have voidable title that can be voided by the person
who really owns the property. But if an innocent third party buys the property b/f the true owner can void the title, then good title passes on to the innocent buyer
The Bankr estate is in the position of the innocent third party of dealing with Wanda the thief (not Wanda the fraudster). Wanda’s title was void from the get-go, so the Bankr court never gets the necklace
Non-Dischargeable Debts § 523: There is a remedy in the Bankr Code for creditors who are defrauded by fraudster-debtors A debt that arose because the debtor defrauded a creditor will not be discharged
Problem 3-10 Car is titled in mother’s name, but is really the daughters car. The mother files Bankr
Courts will go out of their way to find that this was an express oral trust under state law in these types of situation.
They will find that the grandparents giving title to the mother and saying “hold this in trust for the daughter” created a trust and then that is safe from the estate
If there was evidence of fraud in this express trust creation, then the court might be able to exercise its power to undo the trust and then the property would become part of the Bankr estate
Exclusions from the Bankr Estate Rationale for Exemptions
Integral to creating a fresh start for the debtor Allowing all things to be taken in Bankr would make these people a social burden
Spendthrift Trusts are Exempt - § 541(c)(2) Although ipso facto and anti-alienation clauses are not enforceable,
A restriction on transfer of the beneficial interest of a debtor that is enforceable under applicable non-Bankr law is enforceable
A spendthrift trust is designed to prevent an heir to a fortune from spending all the money in a trust It is an ironclad trust where the beneficiary cannot transfer their interest in the trust voluntary or
involuntarily The Bankr trustee cannot trust money in this trust
Patterson v. Shumate Facts/Issue: Whether a federal statute for ERISA that makes money untouchable is exemptible under
the spendthrift trust section Held: § 541(c)(2) does not only apply to state law, and the federal ERISA law falls w/in the exception
in the this provision. An ERISA qualified retirement plan is exempt from property of the estate when a debtor is Bankr (these are more like spendthrift trusts than retirement plans that people can touch).
Exam: If tested, Czar will say if this is ERISA qualified retirement plan or not. Note: There is an ongoing dispute over what qualifies as an ERISA qualified plan. [not on exam]
Can a self-employed person create an ERISA plan that is protected under § 541(c)(2) Problem 3-11
Spendthrift trusts are enforceable, but can you advise the parent of a spendthrift to put money in a trust just before filing Bankr.
There is an argument that it is ethical (this is the function of trusts), but you are acting unethically if you are only doing it to defraud creditors There is arguably nothing unethical about doing something you can legally do (create the trust)
Exemptions and Lien Avoidance § 522 - Exemptions
State Legislators: Code gives state legislators the choice to either: (a) opt-in to a set of federal exemptions that will apply in Bankr courts in that state, or
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(b) opt-out of the federal exemptions and had debtors bound by exemptions under state exemption law
State Exemptions Every state has series of laws whereby if someone gets a judgment against them in state court, you
can nonetheless keep some of your property Homesteads; 1-2 electronics; household items (clothing & pans); some equity in an automobile 30 states have opted-out of the federal exemptions (Mississippi included)
Generally NE is more stingy than the South and the West. Translating Non-Exempt Assets into Exempt Assets: Exemption planning
Some argue that this should be presumed to be non fraudulent (this is based on legislative history) Debtors can, however, push courts too far
It is within the power of the Bankr courts to undo a transfer if it was fraudulent. In re Triple B.S. (5th Cir):
Based on the record of the debtor’s conduct and what they had been saying it was apparent that this was a fraudulent exemption planning
Lutheran Brotherhood Example (Minn Fed Circ) Separate panels of the court on the same day reached opposite conclusions
In re Tveten Debtor placed all their money into the Lutheran Brotherhood retirement fund (that was fully
exempted by the State of Minn and they opted out of the federal exemptions) Problem 3-12
House value = $75k; Mortgage = $50k; State Home Exemption = $10k Secured creditors can still enforce that interest in Bankr (to the amount they are owed)
They are entitled to the value of the collateral to the amount they are owed (or the collateral itself and then they can dispose)
Debtor has equity in property: $25k for the value beyond the mortgage Rule: Exemption work only on debtor’s equity in property.
Debtor is claiming $25k in equity and they get an exemption of $10k; the remaining $15k goes into the Bankr estate to be distributed
As an example, house might not get sold if debtor could get $65k (to pay off the $50k mortgage and the $15k that the trustee has a right to)
Note: Chap 13 lets a debtor stay in their house, but the trustee would still be entitled to that value What is the meaning of the numbers for exemptions?
It is the legislature saying how much house is appropriate for someone who goes through Bankr Some states say, you can keep $10k to put towards your home (or in Miss. you can keep $75k
towards buying your next home after Bankr) It is a reflection of what standard of living the state deems appropriate for bankrupt debtors
Problem 3-13 (a) Sam can exit Bankr still living in his palace . . . . (b) Made 2 million in improvements 2 years b/f Bankr.
§ 522(o) - If we can show that the debtor plowed money into their home and the money was transferred from non-exempt to exempt; and we can show actual intent to hinder/delay/defraud creditors w/in 10 years b/f the filing; then the exemption can be avoidable
Badges of Fraud: Court will label certain facts and will use then that will impute intent to defraud to debtors The types of facts that qualify as “badges of fraud” have increased over time and if there are
enough badges of fraud then bad intent will be imputed Basically if anything looks fishy then call it a badge of fraud b/c you can probably find a case
supporting it (c) If no intent to defraud/etc. but still invested in home three years b/f Bankr?
§ 522(p) - If in the previous 1215 days (3 years) back then an improvements to your home over $146,450 won’t be exempt
This has no meaning in states like Miss where the exemption is only $75k (because that is less than the $146,450).
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Sam is innocent, but we aren’t going to ask his intent, he just can only exempt up to that number (d) Sam moved from Wyoming, to Colorado (2 years b/f filing), then to Texas (2 weeks prior)
§ 522(b)(3) - Debtor can use state law applicable to the exemption if Debtor’s home has been located in that
jurisdiction for the previous 730 days (2 years) then he can claim that state’s exemption law, or If not located somewhere for prior 730 days, then debtor uses the exemption law of the place
he lived for 180 days prior to last 730 day period Thus, he must use Wyoming’s exemption law
Problem 3-14 Waivers of the right to discharge/file Bankr/etc. are unenforceable
§522(e) - Security interests are going to be enforced in Bankr (meaning she can only exempt what she
has as equity), but Two types of consensual and one type of nonconsensual will be avoidable if attached to
exempt items (problems 3-14 & 3-16) Judicial Liens Non-purchase money, non-possessory lien on household goods
§ 522(f)(4) (a) Portia granted SI in her things from store and other items.
The things she bought and were covered by the PMSI are not avoidable under this section I.e., most cars are bought w/ PMSIs so those are rock solid and enforceable
But non-possessory and non-purchase money SIs in household goods (and other things) are avoidable This provision doesn’t work for PMSI or possessory (pledged) items Think also Pawnshops as possessory lenders
Rationale: Congress believes that this sort of lender attachment to household items that are not covered by a PMSI is to coerce the debtor and hold them hostage There is also a federal law that voids these transactions (FTC), but their household goods
definition differs Problem 3-15 (skipped) Problem 3-16
Judicial Lien: Lien that an unsecured creditor obtains on someone’s property through judicial process (a) Creditor filed judicial action and then executed it via sheriff and sheriff seized pet dog
§ 522(f)(1)(a) - A judicial lien is avoidable if it would impair an exemption (except for debts for alimony, child support, etc.)
Problem 3-17 Creditor loans money and takes a SI in the goods of the debtors. Creditor burns goods in the street. Can
SIs be avoided? § 522(f)(1)(b) - You can avoid non-possessory, non-purchase-money SIs in several things (goods,
animals, crops, etc.) As long as the items are exempted, even consensual liens can be avoided Not a pawnshop and not a PMSI
A lien, even consensual liens, to the extent it impairs the ability of the debtor to claim an exemption will be avoidable.
Steps: 1) is it non-possessory and non-PMSI 2) Is the item that is secured under the SI something that the debtor could exempt (under federal or
state law) 3) Then the lien can be wiped out to the extent that the law allows the exemption
Problems 3-18 through 3-21 (skipped) Situations of multiple liens on property that is arguably exempt
Claiming the Exemption Overview
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Bankr petition contains a schedule for claiming exemptions (wants as many exemptions as possible); rules contain time period for Trustee to object to the exemptions (this is Trustee’s duty to knockout as many exemptions as possible).
Taylor v. Freeland & Kronz Facts: Taylor is Trustee; Freeland is debtor’s atty. Debtor claims on Bankr schedules an on-going
employment lawsuit as an exemption. Appears no one thought much recovery was likely, but she won big damages (~$100k). Probably fell under wildcard exemption Issue: Trustee never objected to the exemption (thinking it was worthless or that Bankr court would
probably allow re-adjudicating the contingent award) Rules
Bankr R 4003 - Very clearly says Trustee only has 30 days to object Reasoning:
Balance b/t role of the judge to strictly interpret rules/statutes; or exercising prudential judgment Held: The Trustee has 30 days to object, and if he does not object in this time period then the debtor
keeps the recovery If you don’t object to exemptions under R 4003 w/in the 30 days then you lose out and likely
committed malpractice If debtor claims an exemption up to its total value then it is deemed appropriate if not objected
Problem 3-22 Personal injury lawsuit pending when Bankr filed; claimed exemption for $1 thinking success unlikely.
No objections to exemption; Later wins big settlement - can debtor keep the large amount Old practice was to allow nominal valuation of exemptions until we have real value numbers, then
we would go back and revise the schedules Used to be a Split in Circuits
Some circuits hold that this practice doesn’t work, and if debtor makes nominal exemption then debtor is limited to the amount of the value they claimed
Other circuits allow for nunc pro tunc revising of schedules Schwab v. Riley, S. Ct. (2010)
Debtor will be held to the value of the exemptions that they list on the schedules In claiming the exemption, if a debtor is not sure what the value is worth, they can simply write
100% of the fair market value This puts the Trustee on notice that the Trustee should be objecting in case the debtor is
claiming more than the exemption is worth Trustee can then argue that he objects to the extent that the claimed exemption exceeds the
allowed exemption Problem 3-23 (skipped) In re Drentell
Facts: Drentells move from Minn to Arizona; under BAPCPA Amend of 2005 you calculate where the debtors previously lived for homestead exemptions. In this circumstance b/c of the short time in Ariz., the Ariz. Bankr court would need to apply Minn. exemption law. Issue: Minn. has homestead exemption and can the Minn. homestead exemption operate on Ariz.
property? Held: Yes, one state’s homestead law can operate in another state. Should have Held: No (according to Czar) Statutory Exemption Language (start here first)
Could say that the exemption applies to Mississippi homes (which would mean no interstate application)
Could say something different, more general about debtor may exempt $75k in equity in real property
IV. The Automatic Stay Nature of the Stay
Overview
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Upon filing of Bankr case, injunction known as “automatic stay” arises by operation of law and is binding on the whole world § 362(a) Is binding regardless of whether one or more persons/businesses are on notice
Congress has made it very clear that all creditor activity must cease. This includes state court trials on, for example, credit card debts Also includes foreclosure sales and any subtle/unsubtle direct/indirect creditor activity FDCPA: Fair Debt Collection Practices Act lays out various ways of how you can collect debt
Rationale: Automatic stay is intended to provide a “breathing spell” (a respite) for the debtor from the pressures of creditor activity Purpose is to give the debtor a chance to get a grip of their financial affairs
Another rationale is orderly distribution to creditors (but the court can lift the stay sometimes) It means that the less zealous creditors (who don’t instantly foreclose) will not be outdone by the
hasty-to-foreclose creditors
Exceptions to the Automatic Stay Basically - § 362(b)
Types of activity which should continue despite the automatic stay Exceptions
(b)(1) - Commencement / continuation of a criminal proceeding EXAM Exception: Any criminal proceeding where the prosecutor is collecting a debt (i.e., writing
bad checks). The practice for 1st or 2nd offenses is to threaten criminal prosecution in the interest of leverage debt payment Bankr courts consistently re-characterize these proceedings from criminal proceedings to debt
collection proceedings (b)(2) - Paternity, custody, support modifications, etc.
You don’t get to game your divorce or alimony case by filing for Bankr And others . . . .
Government unit exercising police/regulatory powers generally excepted from Auto Stay (distinguish from Government collecting a debt)
(b)(9) - Really Important - IRS and state tax authorities Any action to assess or collect a tax is not stayed by the Auto Stay
(b)(11) - Check passing through check clearing house not violative of the Auto Stay (b)(14) - Action by accrediting agency regarding accreditation status of educational institution
If you are in the middle of getting your accreditation yanked, that can go forward Problem 4-1
Creditor activity in violation of the Auto Stay - All of these actions here violate the Automatic Stay § 362(a)
Attempt to perfect SI - barred under stay Donning letters or posting sign - Barred by stay Attacking someone - This is attempt to collect so violates stay Self help remedies of foreclosing on property - violates stay
Upon Discharge a permanent injunction issues (discharge injunction) and you cannot try to collect the debt
Problem 4-2 The disbarment can go ahead despite Bankr Auto Stay b/c this is withholding or restriction of an
occupation license Divorce trial could go ahead, and the divorce trial could include the award of alimony and support
Problem 4-3 (a) Does this cut-off the creditor’s state law rights to perfect liens w/in the time allowed
Although the auto stay stops creditors from perfecting liens post-petition, there is one exception: If non-bankruptcy law gives a grace period for a creditor to perfect a SI and that grace period has
not run as of the filing, then the creditor may go ahead and perfect the SI. §§ 362(b)(3); 546(b)
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(b) If the repossession is done w/o knowledge of the Bankr, does it violate the stay? Majority and minority rule below
Penalty for Violating Stay: What if the creditor had knowledge of the Bankr filing? Any violation of the stay can lead to compensatory damages (although there are often no
compensatory damages) Willful violations of the stay can result in punitive damages
(c) Punitive Damages for Corporate Debtors Courts are split on whether § 362(k) permits recovery of punitive damages by Corporate debtors General Grant of Equity Power - § 105: Bankr courts have general equity powers (may enter any
order necessary to effectuate provisions of the Code) § 105 orders must be tied to some Bankr Code section/provision (or face likely reversal) For example, court could issue § 105 order & say he was bolstering purpose of § 362 generally
Violation of the Stay Minority / Traditionally, the law held that violations of the stay was void, not voidable.
Void: if an act is void under the law it must be completely undone Any action taken in violation of the stay will be required to be undone because it was always void
The creditor must then give the property back and return and ask for lifting the stay Majority Alt View: Acts taken in violation of the auto stay are voidable (not void)
In re Siciliano (citing Sikes v. Global Marine, 881 F.2d 176 (5th Cir. 1989)). If creditor does something in violation of the stay, the Bankr court doesn’t have to automatically undo a
voidable transaction; court will ask: Had the creditor come to the court and followed the proper procedures for lifting the auto stay,
would I, the judge, have lifted the stay and allowed foreclosure Key is that you must go to the Bankr judge and ask for permission
Problem 4-4 Facts similar to In re Whiting Pools: Had to return the car b/c the right of redemption remained as one
stick in the bundle that makes of the interest of the property Cf. 11th Cir. case that found through a quirk in Ga. law there was repossession title. Case wrongly
held that the creditor could keep the property (this was contrary to In re Whiting Pools and based on the law of Ga.)
If non-Bankr law gives debtor a right to redeem collateral, until the collateral has been sold at a foreclosure sale then the creditor has to return the collateral to the Bankr Estate
In re Cordle What Constitutes Willful Stay Violation:
A violation of the stay is willful if the creditor knew of the Bankr case and acted intentionally in such a way that the stay was violated
Takes place where the creditor knows a Bankr petition has been filed, and nevertheless they act in such a way that the stay is violated
No room for arguments/defenses of acting in good-faith Informal knowledge is sufficient here
Can escape punitive damages only if you can show you lacked knowledge of the Stay (but still may be subject to compensatory)
In re Siciliano (3d Cir. following the 5th Cir.) Actions taken in violation of the stay are merely voidable, not void Bankr Code gives the judge power to “lift . . . annul the automatic stay”
This means the judge can retroactively say that the stay was lifted from the get go Citizens Bank v. Strumpf (USSC) p. 143
Facts: Debtor files Bankr having a checking account at a bank. Debtor also simultaneously has a loan at the bank.
Issue: Can the bank setoff the amount of money in the debtor’s bank account against the amount of the loan post-petition without violating the stay?
Setoff Rules
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Banks are not holding your cash in a vault in the back as a bailee; it is a highly regulated debtor/creditor relationship Debtor owes bank; bank owes the debtor for its deposit account; bank can setoff the amounts
Setoff cannot happen post-petition; but bank can place a hold on the account and freeze it Administrative Freeze: These are permissible b/c not an actual setoff until we change the actual
accounts This is merely freezing the status quo, and one or both of the debtor or creditors will come to the
Bankr court and ask the Bankr judge for resolution (we want the Bankr judge to resolve the issues) In re Holford
Recoupment: Recoupment by a creditor does not violate the stay Recoupment is the situation when the two debts (debt owed to the creditor by the debtor; and debt
owed by the debtor by the creditor) arise from the same transaction
Lifting the Stay § 362(d) (main lift-stay provision). See also § 362(f) (irreparable harm)
§ 362(d) - Court shall grant relief from the stay when (1) for cause, including lack of adequate protection of an interest for such party in interest (principally
referring to secured party) What constitutes “cause”: Adequate protection (defined in § 361)
A secured party, when the collateral is declining in value, is entitled to insist upon compensation/payments (or the indubitable equivalent) equal to that decline in value If secured creditor’s interest is declining then they are entitled to payments that make up for the
loss Debtor must come up with cash or cash equivalent
If the debtor cannot provide for this adequate protection then the judge should lift the stay Policy: Congress is saying Bankr is not a means to screw secured creditors; they are entitled to
the value of their lien Bankr takes time, so we want to protect secured creditors’ interest in collateral
Drop-dead Order Often entered by the judge after the debtor has staved off an initial lift-stay motion and then fails to
make adequate protection payments; Court will say either make the payments or under the new order the stay will automatically lift next time you miss a payment
§ 362(d)(1) Lack of Adequate Protection / Secured Creditor Lines of Cases
Value of Property Declining Typically we are referring to adequate protection for secured creditors Adequate protection means the creditor is entitled to be reimbursed for any decline in the value
of its SI A secured creditor who interest in collateral is declining is entitled to be reimbursed for that
decline Debtor is Damaging/Misusing the Property
If debtor can be shown not to be taking care of the collateral, then the court will lift the stay If the debtor stops paying insurance on the collateral then that can be sufficient to lift the stay
For Cause Line of Cases Hypo:
B/f Bankr filing there is some litigation taking place; debtor may file when served w/ complaint or when it looks like debtor will lose and face a big judgment Note, the Bankr Judge will evaluate the extent of such a non-adjudicated claim
Cause is present if some non-Bankr litigation was pending and was on the eve of decision; in such instances Bankr courts will often lift the stay and allow a decision in the litigation to go forward This really will be limited, however, to things that are on the eve of decision
§ 362(d)(2) Overview
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Permits Bankr court to lift the stay if (a) debtor doesn’t have an equity in property of the estate, and (b) such property is not necessary to an effective reorganization
No Equity Interest When the debtor has not equity interest left in the collateral, then there is no reason for the creditor
not to just get their collateral and be on with it, unless it can help the reorganization Hypo: Debtor owes $2k; collateral given worth $1k. Debtor files Bankr. Debtor is protecting
secured creditor’s interest, so no lifting stay under § 362(d)(1). But debtor has no equity b/c the collateral is less than the loan balance. If the creditor is undersecured then the debtor has no equity
Necessary for Reorganization In reorganization cases if the property is necessary to the reorganization, even if he has no equity in
it, then the stay will not be lifted The collateral could help fund the reorganization plan and the secured creditor is still going to
get their secured amount, plus other creditors might also benefit Chap 7 Liquidations: Should this Prong be Considered in such cases?
Split of authority, but many courts will apply this prong even in a Chap 7 when appropriate (i.e., someone needs their car to get to work while they are being liquidated)
Note Otherwise Lifting Stay: Aside from § 362(d)(1)&(2), it is hard to get the court to lift the stay Keep in mind the Void/Voidable distinction: these are the things that play into whether the stay would
be lifted (popular BAR EXAM) § 362(d)(3) - Single Asset Real Estate
Gap-Filler/Rationale Single asset real estate category is meant to fill void where Chap 11 is too cumbersome and Chap
13 is unavailable except for really small businesses It was an undue burden on secured creditors b/c the only asset was the realty and it would be
necessary to the reorganization, so the secured creditor would take it in the neck re: lifting stay Single Asset Real Estate stay automatically lifted w/o judge doing anything unless before 90 or 30 days
Debtor has a plan of reorganization on file w/in 90 days, or Debtor makes monthly payments that are equal to the interest on the principal balance (this differs
from adequate protection) Single Asset Real Estate cases must be paid interest on the principal
Timbers (USSC) p.156 Secured creditors are not entitled to interest on the value of the collateral as adequate
protection Creditor is still losing a very real benefit when not able to lift the stay and dispose of the
collateral (b/c these Bankrs can take so long) Lost Opportunity Cost: Even if the secured creditor’s collateral isn’t losing value, if the
secured creditor had the cash instead of the collateral, then they could invest it But there is no reason for Single Asset Real Estate cases to take very long
Problem 4-5 (complete on your own) Skip
In re Indian Palms (not responsible for case) Issue: When determining if debtor has equity in property, do we consider subordinate claims? Courts go both ways on this issue
Indubitable Equivalent (not responsible for this)
V. Claims Claims Intro
How do creditors claim their portion in the estate? Creditors submit their claims and the court decides (if there is dispute) who will get what
§ 521 - Requires debtor to file a schedule of debtors (telling world who they own money to, and the amount they think they owe) Uses this to prepare Notice of Bankr Filing
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Will contain a Proof of Claims form § 502 - Regulates Claim Process (along with § 506)
Claim Definition - § 101(5) Very broad definition, basically includes everything
Contingent Claims Contingent right to payment is a right to payment that may or may not ever occur
Property Valuation Resh Case (USSC)
Standard for valuation is replacement value Broad definition:
Startling use of “contingent” Even contingent claims will be discharged, even though they may or may not ever occur
Insolvency Requirement If a debtor is grossly solvent when they file for Bankr, then there can be grounds to file for dismissal
b/c of filing in bad faith
Filing Claims Filing of petition -> notice sent to creditors -> proof of claim form on the notice -> creditors send it in with
proof of the claim Proof of Claim Form: prima facie evidence of the validity of the claim
If proof of claim is not objected to, then it will be deemed admitted Trustee has the responsibility to object to proofs of claims (his duty to maximize return to creditors by
having the fewest claims total) Basis for Objection
Trustee can object on any basis that the debtor could have objected (reasons in nonbankruptcy are almost limitless)
Who Resolves Claims Bankr Judges are responsible for resolving disputes/objections over claims Bankr Judge has the power to estimate the value of a unresolved claims
How does this resolution of claims comport w/ due process? Due process is what is reasonable under the circumstances, and the notice and hearing here is enough
Bar Date Proof of claim form or the Bankr Notice will indicate a bar date: date by which creditors must file a
proof of claim in the Bankr case § 502(b) discusses claims
502(b)(2) - Disallows the running of unmatured interest; basically no unmatured on unsecured or undersecured claims (allowed on oversecured claims) None of the un- or under-secured creditors will really benefit from post-petition interest and it
would be a pain to calculate (trustee can rely on direct numbers in the proof of claim) 502(b)(6) - Lessors: A rare provision that specifically limits the ability of a particular type of creditor to
make their full claim Limits lessor’s claim for damages on rent for real property If you are landlord the most you can get is the greater of 1 year’s rent or 15% of the remaining
lease time not to exceed 3 years It was excessive to allow such extreme damages when the lessor has a duty to try and mitigate their
damages and they can re-rent the property (Congress basically made a policy choice to what the value of the lessor’s claim should be)
Problem 5-2 Unsecured / undersecured post-petition interest cannot be claimed.
Problem 5-3 § 502(b)(3) issue - Any type of ad valorem tax claim (tax based on the value of property) is capped or
limited to the value of the property Problem 5-4
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§ 502(e) - Claims for reimbursement based on subrogation or guaranties are disallowed to the extent the claim is contingent Contingent claims are disallowed when a non-debtor 3d party is on the hook for the debtor’s debt
to one of the debtor’s creditors (who will be filing a claiming Bankr) Eleanor’s claim is disallowed b/c we are worried about the estate paying out twice on account of the
same debt (for both the debt and the guaranty for the same debt) The guarantor has a contingent claim because the creditor may or may not seek to fix the
deficiency against the guarantor Note: Review Examples on p. 161
Secured claims Bifurcation: Bifurcation of Undersecured Claims
When the creditor is owed more than the collateral is worth, then the claim is bifurcated (split into two): (1) a secured claim (for up to the value of the collateral), and (2) an unsecured claim (for the value that the creditor’s claim exceeded the value of the collateral)
This means that interest on the secured part of the bifurcated claim exists, but there is no post-petition interest on the unsecured part of the bifurcated claim
Importance is that the secured part of the bifurcated claim is paid dollar-for-dollar, and the unsecured part of the bifurcation claim is paid in Bankr dollars (ie, ten cents on the dollar)
Oversecured Creditor and Post-Petition Interest (no bifurcation here) § 502(b)(2) doesn’t apply to oversecured creditor, the general bar on the post-petition interest, because
§ 506(b) supersedes it. § 506(b) Oversecured Creditors have a right to post-petition interest and any other contractual amounts
owed under the loan agreement (cost of collection, etc.) Equity cushion - the amount that the value of the collateral exceeds the debt owed a creditor
When the post-petition interest starts eating away we call this consumption of the equity cushion Ron Pair Case
Oversecured creditor based on a nonconsensual tax lien. Is this creditor allowed to collect post-petition interest based on § 506(b)?
Held: Nothing in § 506(b) limits it to consensual liens, but the other items in § 506(b) (fees or penalties) will need to be by agreement only (unless so provided for in the tax collection law, or other nonbankruptcy law)
Problem 5-5 Problem 5-6
Valuation issues for a consumer’s automobile Note: in a reorganization case, the debtor gets to keep the collateral if necessary for a
reorganization and the secured creditor will have to live with assurances on the value B/c we aren’t actually selling the vehicle as secured property, we must estimate the value
Generally (and unhelpfully): Code requires at § 506(a)(1) valuations are based on the use to which the valuation will be put (i.e., whatever makes sense under the circumstances to the judge)
§ 506(a)(2) - If a debtor is an individual in a case under Chaps. 7 or 13, such value w/ respect to personal property securing an allowed claim shall be determined based on the replacement value as of the date of filing the petition . . . . Replacement value - Price the willing seller would arrive at in an arms length transaction where
neither party is required to deal with the other I.e., we don’t use firesale value We also don’t use full retail value
In re Rash (source of replacement value language) Since Rash we have the issues of how do we prove replacement value
Maybe evidence in newspaper classified ads Bluebook value (bluebook wholesale + resale and divide by two) Debtor’s opinion?
Priority Claims
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Maxim Equity is Equality Overview
Some creditors are value more than others in the view of Congress The priority unsecured creditors must be paid in full before others get paid Once all the priority creditors are paid off in full, then go to non-priority unsecured creditors If all the assets get expended then the remainder is divided pro rata
§ 507 - Priorities: Each category must be paid in full b/f payments to the next category (a)(1) Domestic Support Obligations (DSOs, see § 101)
DSO - Obligation in the nature of alimony, maintenance, child support that arises from a valid domestic relations order (doesn’t include property settlements from a divorce)
These get paid first (and also nondischargeable as we see later) Lawyer fees accrued in collection of DSOs might get top priority
(b)(2) Administrative Expenses from § 503(b) Any expenses that are reasonably necessary for running or preserving the estate
This allows the trustee to get paid for running the estate Also, without this people wouldn’t keep doing business with an entity that has filed Bankr out of
fear of not being paid Trustee Compensation: Get a % cut of the estate (no timesheets)
For zero-asset cases, there is no payment really (but you hope for the good cases) They get a cut off the estate when it is created before any of the priorities But how do you get someone to represent the trustee in situations where the DSOs will wipe
out the estate (b)(3) - Has to do with involuntary claims (b)(4-5) - Unsecured claims for wages,
Salaries w/in 6 mos. of filing (wages, salaries, severance pay, commissions) Severance Pay: Code says “earned w/in 180 days” but there may be an issue if you are given a
severance package prior to 180 days and then the company never starts paying it b/f filing Minority Rule: You earn a severance package over the time you work for an employer, so the
argument is that you pro rate the severance package against the time you worked somewhere Majority Rule: You earn the severance package when it is offered to you
Any obligations debtor had to fund a benefit plan for employees limited to ~11k per employee (b)(6) - Grain Elevators and Fish Processor issues
If a farmer has stored their produce/grain somewhere then they ought to have heightened priority for some of their stuff (same w/ fishermen)
Farmers & Fishermen are popular w/ Senators (b)(7) - Claims for individuals to the extent of $2600 for products anyone who has put down a deposit:
layaway, tenants (b)(8) - Basically any type of tax is going to be priority (b)(9) - Federal deposit issues (b)(10) - Claims resulting from death/injury resulting from DUIs from drugs or alcohol Note: Student loans are nondischargeable but still not priority
Future Claims Overview - Often involves mass-tort claims that affect large parts of the population
When the product is going bad and the company is going into reorganization Bankr, the company wants to stem off all the future claims that are yet to manifest
Claims includes all contingent claims and the Bankr judge should have power to estimate the claims Process
Look at the extent of the claim X the likelihood of success How do you accomplish the notice problem for the uninjured persons (appoint a representative trustee)
The representative was sufficient for constitutional notice, so the contingent debts could be discharged
Trust fund can be created based on the Bankr judge’s estimate
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Judge Estimates both the amount of the claims and the total number of claims to develop a trust fund of money for discharged contingent claims can be paid
Claim Definition: Broad and includes contingent future events that may or may not happen Due Process & Takings:
How do we deal w/ discharging future claims so we don’t have a taking w/o due process? 11th Cir. - Appoint trustee to represent hypothetical claimants
Representative trustee petitions for a pool of assets and then those are held in trust for future, discharged claimants
This primarily addresses the Notice issue
VI. Discharge Discharge Generally & Extent of Discharge
Controlling Sections for Exceptions to Discharge: §§ 523; 727 These are basically debts that are too important to discharge
Overview of § 523 - Rifle Exceptions Specific types of debts that are nondischargeable, but other, unaffected debts can be discharged
Overview of § 727 (also applies in individual Chap 11 Bankr) = Global / Shotgun Exceptions List of activities and things that debtors can do and they lose all dischargeability Only applies in Chap 7 liquidation cases Under § 727 you can be stuck in Bankr but with no discharge awaiting you at all
§ 523 - Rifle Exceptions (a)(1) - All taxes are nondischargeable
Essentially, don’t get to file Bankr and eliminate your tax debt (except for some reach-back time periods)
(a)(2) - Punishes debtors for having obtained loans / credit through some sort of fraud or misrepresentation Two General Categories
False statements / misrepresentations about your financial condition Written, not Oral, Misrepresentations required for things about your financial condition Example: Casino markers (cash advances)
523(a)(2)(B) - Credit card companies have been very aggressive in arguing that cash advances on credit cards are nondischargeable Most important thing needed is a writing: I.e., the credit card agreement
Idea is that someone who takes out large cash advances on a credit card doesn’t have an intent to pay as they promised in the written credit card agreement Often depend factually on the amount of a person’s income versus the amount of debt
on the credit card (i.e., $30k a year income & $100k debt over a few months) All other Misrepresentations you Could Make
(c) - Consumer debts owed to a single creditor for luxury goods occurring w/in 90 days of filing Also, cash advances w/in 70 days of filing
Basically means that pre-Bankr spending-sprees are nondischargeable (a)(3) - Basically any debt not listed on the debtor’s Bankr schedules (a)(4) - Fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny (a)(5) - Domestic Support Obligations (DSOs - § 101)
Debts for alimony, maintenance, and child support (a)(15) - Any debts that arise from divorce that are not DSOs (generally property settlements from divorce)
Reason for having (a)(5) & (a)(15): In Chap 7 (maybe 11 too) these two provisions mean that all divorce related debts are dischargeable; but in Chap 13 Bankr you can only discharge (a)(5) debts Congress wants to encourage people to file Chap 13 over Chap 7 (even if you can file Chap 7)
(a)(6) - Willful & malicious injury by debtor to another entity or the property of another entity (generally this only includes intentional torts) Note: you can generally discharge negligence actions
(a)(7) - Debt consists of fine, penalty, or forfeiture payable to a governmental unit Parking Tickets: Yea, governmental unit includes subsidiaries of the government like U. Miss.
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(a)(8) - Unless undue hardship on debtor or dependents, any debts for educational loans guaranteed by a governmental unit Virtually all student loans are now backed by the government But non-government backed loans can be discharged
(a)(9) - Death or personal injury caused by operation of motor vehicle (vessel or aircraft) if operation was unlawful b/c debtor was drunk or high (any type of intoxication for any reason essentially)
(a)(10) - (12) - Skipped (a)(13) - Any order of restitution under title 18 (federal criminal law) (a)(14) - Stops work-around for (a)(1) for taxes - I.e., can’t pay taxes on credit card and then file
Note: there is no similar fix for work-around to education debt (i.e., using someone to payoff your education debts)
(a)(14B) - Fines or penalties under Federal Election Law (a)(16) - Skipped (a)(17) - Fee imposed on a prisoner
Prisoners would previously file frivolous lawsuits and then later discharge the fines for that (no-more) (a)(18)-(19) - Skipped Overview - Taxes important; spouses important;
§ 727 - Global Discharge Exceptions (no discharge at all) (a)(1) - Debtor is not an individual
If any business files a liquidation case we want them to liquidate everything Differs from the other § 727 exceptions relating to bad acts
(a)(2) - Intent to hinder, delay, defraud; hidden, transferred, mutilated; Property of the debtor or estate There is also a federal crime linked to this section
(a)(3) - Concealed, destroyed, mutilated, falsified, or failed to keep or preserve any books or records from which debtor’s financial condition or business transactions can be ascertained; unless justified and reasonable under the circumstances Courts take final sentences seriously, and if debtor is unsophisticated and couldn’t be expected to have
financial records then there is no issue here (really only when it seems suspicious) (a)(4) - Debtor knowingly and fraudulently made a false oath, bribed or tried to bribe someone, presented a
false claim, or withheld from an officer of the court. (a)(4) - Again, no bribes, etc.
Attorneys can brush against this when they negotiate w/ creditors about not certain claims, etc., in a quid pro quo fashion (that would be bribery)
(a)(5) - If debtor fails to satisfactorily explain what happened to some “assets” then they can lose discharge This provision is not zealously enforced in every case; only where there is some obvious assets that
have gone missing (a)(6) - Skipped (a)(7) - If you have done certain acts in other cases (a)(8) - Debtor has been granted a discharge in this section or in Chap 11 in last 8 years
You only get 1 Chap 7 or 11 discharge every 8 years You can still file a Chap 13 case, but there are some limits on that Rationale: Bankr discharge is a privilege and if it is too available then it will be abused because people
will live recklessly knowing they can file a Bankr case (a)(9) - Limits for discharge under Chap 7 if you have had a discharge under Chap 12 or 13 in last 6 years
Or if you have paid off all the creditor’s claims or you paid 70% and that was the best you could do (a)(10) - Court approves a written waiver of discharge executed by the debtor after the order for relief
This means that credit cards can’t put a provision in the cardholder agreement that purports to waive discharge
(a)(11) - Failure to complete financial management course These instructional courses, can be completed online
(a)(12) - Skipped
Reaffirmation
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Overview Congress could make the discharge unequivocal (i.e., debtor couldn’t negotiate to pay it), but
sometimes debtors choose to: reaffirm or repay a debt Reasoning may be to keep something that is secured, or out of a moral sense of rightness
Congress allows for reaffirmation, but in a cumbersome way § 524 - Reaffirmation
Note (k) - Literal language that must be incorporated in a reaffirmation agreement (just know it exists)
Overview Essentially, like a Miranda agreement for reaffirmation procedures (certain safeguards, warnings,
and literal language that is required) Courts don’t enter stay violation orders if the creditor and the debtor are discussing reaffirmation Court cannot force a debtor to reaffirm a debt if they don’t want
There are provisions for redemption for certain situation w/ secured creditors Implied Reaffirmation or Contractual reaffirmation
No, reaffirmation can only happen with court approval of the reaffirmation Implied Reaffirmation - If you start paying back some of your discharged debts there is no
implied reaffirmation Contractual Reaffirmation - Some agreement entered into outside of Bankr will not create a
reaffirmation (c) - Heart of reaffirmation process
Any agreement to pay a creditor (either wholly or in part) based on a dischargeable debt is only enforceable if the 5-6 provisions are met
In re Jamo (read case) Issues: (1) does discussion of reaffirmation violate the automatic stay, and (2) creditor also wanted to
reaffirm all the debt to the credit agency (unsecured and secured) just to get the secured house debt reaffirmed; is this a violation of the stay to tie the reaffirmation to unwanted debt?
Held: Was not a violation of the stay in either circumstance (but courts are split as to whether discussion about unwanted unsecured debt to reaffirm secured debt is a violation of the stay)
Note: Also okay probably to reaffirm a continuing supply of inventory for goods to sell in store Also okay probably to reaffirm so as to be given one credit card for getting back on your feet
Problem 6-14 You can offer her legal help b/c under § 524(c) the promissory note is unenforceable § 524(c) - Conditions for enforceability of agreement based in whole or in part on discharged debt
Problem 6-15 § 523(a)(3) - Any unscheduled debts are not discharged in Bankr
Caveats 1) Unscheduled debts in a case where the creditor owed has actual notice (even if not formal)
that debtor has filed Bankr, then those debts are dischargeable & § 523(a)(3) wouldn’t apply 2) This is arguably fraudulent filing of documents w/ the Bankr court and your other creditors
may argue for a global bar on the discharge under § 727 Attorney Affidavit - § 524(c)(3)
You should be worried about filing this affidavit b/c of the financial condition of the debtor Attorney has to represent that the client can afford this, or the dependent of the debtor (also cross
reference to Rule 9011). This is tough to do b/c the debtor has already had financial problems Problem 6-16
(a) Don’t sign attorney affidavit if client has no real prospect of paying back the debt (b) Even though him losing his job is a good reason, you still shouldn’t sign the affidavit (he could fire
you and then go to the judge himself) (c) Still no (d) 524(m)(1) - It is presumed that a reaffirmation agreement is an undue hardship if upon the required
disclosure debtor must make it is clear that the debtor’s income post reaffirmation will be less than the expenses that the debtor must cover
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Presumption is rebuttable if there is some other source of income What about Employers?
§ 525(a) - A governmental unit may not decline to renew a license, etc., or discriminate against a person who has been a debtor, solely b/c such debtors has been a debtor under this title
§ 525(b) - No private employer may discriminate solely on account of having been a debtor in Bankr Difference b/t Two Provisions: Governmental unit may not refuse to hire you on account of Bankr, but
private employer can Similarity b/t Two Provisions - Neither can fire your or discriminate against you for filing a Bankr Key: Solely - They just have to find 1 other reason
Problem 6-17 Court cannot order a creditor to sign a reaffirmation agreement
§ 524(m)(2) - Presumption doesn’t apply where the creditor seeking reaffirmation is a credit union Secured Creditor & Redemption
At a foreclosure sale, what is foreclosed is your right of redemption of your property § 722 - Redemption provision
Rather than reaffirming the debt for his car, he can just use redemption and the creditor cannot refuse as long he can tender the amount of the creditors claim
But remember, secured creditors will either get their collateral or the cash they are owed (even if the debtor gets to keep the car for part of their reorganization)
Problems 6-18 to -19 skipped Work Problems 6-20 to -23
Reaffirmation/Redemption Problem 6-18
Can creditor of discharged debtor who later loans him an amount extend credit at a rate that sneaks in the discharged amount § 524(c) talks about you debts in whole or part based on dischargeable debts are only enforceable if
there is a § 524(c) reaffirmation Note, he can voluntarily pay this debt But b/c this note was based at least in part on the discharged debt then all or more likely some of it
won’t be enforceable (i.e., to the extent of the prepetition debt) § 524(m)
There is a presumption that a reaffirmation is an undue hardship if the reaffirmation amount exceeds the debtor’s income/assets, but this presumption doesn’t apply to credit unions
Problem 6-19 § 722 - Individual debtor redemption provision; If the property is exemptible then the if it exceeds the
secured claim Something about you tender the amount of the collateral and the value of the secured claim in
Bankr Basically she needs to come up with $1k not out of the Bankr estate (could be post-petition
income) If she can pay the $1k then she can get the car
Better alternative would be to file a Chapter 13 b/c this means that the debtor can keep their property Chapter 13 preview: the focus is to allow debtors to redeem their stuff from their creditors Problem 6-20 skipped Problem 6-21
Can the creditor succeed in either of these lawsuits (against credit union or employer) Government cannot discriminate against bankrupt persons (private employers can discriminate in
hiring, just not firing) Problem 6-22
§ 366 - Utility companies get special treatment; can’t completely cut someone off, but we don’t impose governmental unit status on them (i.e., they can discriminate some against bankrupts) Utility company can require adequate assurances of being paid (which can vary based on the
debtor) (individuals vs. industrial debtors)
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VII. Chapter 13 Cases Overview
Allows debtor to redeem non-exempt property from their creditors Note: Chap 7 debtors can keep exempt property.
So if all you have is exempt property, then there is no reason not to file Chap. 7 But if you have non-exempt property then you can use Chap 13 so it doesn’t go to the trustee
Origins Came from the idea of corporate reorganization Bankr Rationale was why not allow individuals to try and capture their “going concern value” by letting them
fund a plan High Chap 13 Filing Areas
Miss, Ark, Tenn: high concentration of Chap 13 filings originally before Chap 13 was required (b/f there was the Chap 7 value test)
Why would a lot more debtors file Chap 13 Maybe: ignorance; people just normatively want to repay more of their debt; people here are so
poor that they need to hold on to their collateral more often; local legal culture? Miss. bar exam Qs often have to do w/ Chap 13.
Goal of Chap 13 Have the debtor redeem their property from creditors through federal court procedures
Review p. 309 (re: Chap 7 vs. Chap 13)
Eligibility for Relief Overview
Only Voluntary - There are no involuntary Chap 13 cases allowed to be filed by creditors Although, some Chap 13 cases will be involuntary under the eligibility/means test in Chap 7
Debtor w/ Regular Income - To file Chap 13 you must be a debtor with a regular income You can only accomplish a plan to redeem property by being able to pay back over time
Must be an Individual - Corporations cannot file Chap 13 Debt Limits - § 109(e) limits Chap 13 access to debtors who owe less than certain amounts
For joint/spouse cases the debt limits are not doubled; it is the aggregate debts Rationale: At some level of debt individuals become so much more complicated (more like Donald
Trump than Joe the Plumber) We want people like Joe the Plumber to file Chap 13 b/c it is designed for small wage earner
efficiency Others we want them to file Chap 11 b/c its procedures are better suited for more complex
debtors (in Chap 11 creditors have more control over the plan) Determination of Debts - The debts are determined at the time of filing Contingent & Unliquidated Claims - These are excluded from the calculation of the debt limit
We only consider debts that we are certain as to liability and certain as to the amount owed Financial Counseling - Must also undergo financial counseling in Chap 13 The Plan: Creditors don’t get to vote on the plan. Debtor submits and court confirms
Problem 8-1 Is Phast eligible for Chap 13 relief? The amounts of his noncontingent unliquidated debts determined at
the filing were $210k and $175k secured amounts. Even though the judgment was obtained during the Bankr case, you don’t count it b/c you look at
the debt as of the filing The consumer agency had a claim that was unliquidated and contingent (but why wasn’t it merely
disputed?) Problem 8-2
If Cosmo owes $950k and has collateral worth $600k, is he eligible for Chap 13? We bifurcate claims for unsecured creditors He has $600k in secured claims (that is within the limit for secured claims) He has $350k in unsecured claims (this is probably w/in the debt limit)
Problem 8-3
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An unperfected security interest is going to be wiped off the collateral, and the previously secured claim will be deemed an unsecured claim Here it seems the result would be a total unsecured indebtedness beyond the debt limit, but we
measure at the time of the filing and a unperfected SI does not become unsecured until deemed so by the court
A court would see her as eligible for Chap 13 b/c the secured claim has not been deemed an unsecured claim yet
Manipulation of Chap 13 by sole shareholder of Corp Can he dissolve the Corp and assume the debts of the Corp and then file a Chap 13 There is seemingly no statutory impediment, but it could be risky
Regular Income Wage earners, farmers, and worm farmers are eligible for relief; you don’t have to show that you are
earning an actual salary from someone else May be any type of payments that are regular and continuing
Problem 8-4 (a) The monthly stipend from wife is probably sufficient for regular income (check case) b/c this
agreement had been going on for some time that suggested it would continue (b) They may not be eligible for relief b/c this is parents not wife (although the relationship suggests
the payment is likely to happen), but this appears to be a one-time shot so it isn’t regular (c) Fluctuating income as part of business being up and down over 6 months to a year, then you can
average it out and have regular income People who work on commission or are in seasonal industries are likely to have regular income so
long as there is a history of the income
Codebtor Stay Overview - Co-Debtor Stay - Chap 13 (unlike Chap 7) creates a stay of creditor activity for co-debtors who
may have co-signed on the loan This is principally for co-debtors on a consumer debt (see later) The co-debtor will be shielded for the duration of the plan from the debtor’s creditors This is a big advantage when family member has co-signed a consumer note on a car/loan (originally
creditors could manipulate them Requirements
Must be a consumer debt of the debtor Can’t be in the ordinary course of business (i.e., not if you are a surety) Intended to protect relatives who co-sign on loans
Problem 8-5 (a) No, he is protected by the codebtor stay. In a Chap 7, he could only get protection by filing for
Bankr himself (b) No, doesn’t protect businesses (c) No, this wouldn’t be a consumer debt; the codebtor stay only applies to codebtors who have
guaranteed a consumer debt (d) No, there is a provision that lets you go after the guarantor where the guarantor is the functional
recipient of the loan. (e) You can go after the money by asking for permission under this section by showing irreparable
harm, etc. Note:
The codebtor stay isn’t intended to entirely disable creditors, but that the debtor will propose a plan that proposes to pay the claim in full (but with the creditor backing off for a while)
Congress envisions that the debtor in their plan will present a plan that will pay the claim in full Problem 8-6
This creditor failed to file their claim, should the codebtor stay be lifted? The only exceptions to the codebtor stay are irreparable harm and the creditor is unlikely to be repaid in
full Here the claim is $0 b/c claim wasn’t filed, so creditor is being repaid in full
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Chapter 13 Plan 3 Primary Requirements
Note: Creditors don’t get to vote on the debtor’s plan in Chap 13 cases (unlike Chap 11); thus legal requirements for a Chap 13 plan are important
1) Best Interest of Creditors Test - § 1325(a)(4) - In a Chap 13 plan creditors must receive at least what they would have received in a Chap 7 liquidation of the debtor Often easy to meet as Chap 7 debtors usually have $0 in non-exempt assets (thus in most cases
creditors must receive at least $0) 2) Good Faith Requirement - § 1325(a)(3) - Chap 13 plan must be presented in good faith
Plans that only called for $0 to be paid to the unsecured creditors were often attacked as not being in good faith (not entirely clear if this was bad faith or not)
3) Disposable Income Requirement - § 1325(b) - Debtor during the plan must also devote all of their “disposable income” to the plan
Discussion The best-interest-of-the-creditor and the disposable-income-requirement work together to set upper
and lower limits for Chap 13 debtors Disposable Income Calculations
BAPCPA Amendments - Took away discretion for Bankr judges where the debtors are making more than median income (cross reference the Chap 7 “means test”) This links in with the means test which determines whether someone can even file a Chap 7 or not
Problem 8-8 Time value of money must be considered, so $10k today in a Chap 7 is worth more than $10k in five
years through a Chap 13 plan (doesn’t provide for interest) Best interest of creditors test requires that creditors receive what they would have received in a Chap 7
Bankr in today’s dollars Above/Below State Median Income
If the debtor is below the state median income, then the old rule applies: look at current average income and subtract reasonable expenses The court will use the remaining amount to calculate disposable income to pay creditors
If the debtor is above the state median income, then you use the means test See flaws in the In re Johnson case
Class Discrimination May classify creditors into different classes when you create a plan
But, may not unfairly discriminate b/t classes of creditors Why Classify
You may want to pay different creditors in different ways or frequencies (cash vs. stock) You may actually want to try and discriminate on them (i.e., pay your nondischargeable claims
more first) You would try to pay the minimum to the dischargeable creditors based not eh best interest of
the creditors test, and then pay all the rest to the nondischargeable creditors In General under § 1322(b), a Chap 13 plan may not discriminate against/between claims
Problem 8-9 Note: Don’t worry about priority claims (have to be paid in full anyway) so they can be given special
treatment (b) Code allows different treatment of some debtor claims under the plan (c) This will get confirmed if no one objects. But this difference in the rate of return b/t Mom’s claim
and the other unsecured claims would violate the nondiscrimination rule Student Loan Issue (p.317-18) - They are not priority, but they are nondischargeable
Some courts used to find that you could separately classify and treat debts differently, but most courts today would refuse to permit such distinctions
Problem 8-10 Courts will sometimes permit some disparate treatment
Problem 8-11
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Term of Art - Chap 20 (Chap 7 + Chap 13) (but he would have to be eligible for both) Debtor would first file Chap 7 and then get all of the benefits of a full discharge of dischargeable debts
under Chap 7. Then Debtor would file a Chap 13 for the payment plan benefits of the nondischargeable student loans via Chap 13. See § 1328(f) - Can’t get a Chap 13 discharge anyway w/in so many years of the prior Bankr filing
Problem 8-12 This is not permissible under § 1322(b)(10) You don’t get to divide up your payments in this way unless you pay off the other claims in full
Problem 8-13 BAPCPA added provision that a Chap 13 plan provide for payment in full for any loans that the debtor
has taken from their pension plans. § 1322(f). Problem 8-14
Debtor files Chap 13, does their calculations properly, then gets a better job and income goes up Do you recalculate the additional income, and what are the calculations/methods for doing so?
Court is always able to modify a confirmed Chap 13 plan Can a Chap 13 plan be modified to take into account a debtor’s increase in income?
Disposable Income BAPCPA Amendments: Shifted the power/discretion Bankr court judges have over above median income
debtors (these types of debtors are uncommon) Took away Bankr court discretion by invoking the means test as the way that disposable income is
calculated using the means test from Chap 7 Remember the means test uses standardized deductions It was important to Congress to take away court discretion for above median income debtors
(basically Congress thought judges were too lenient) Means test fails to take into account the subjective facts of the particular debtor
Permits deduction of expense for a car, even if the debtor has no actual car—this isn’t fair for the determination we should be making for Chap 13 plan abilities
Problem: Sometimes people above the median income are getting more or less than they should be Courts are split on this, but the Ransom case suggests that this split ought to begin to lean in the
direction of maximizing creditor return under BAPCPA Note: Supreme Court Case - Ransom v. MBNA, 131 S. Ct. 716 (2011) (8/1-Scalia dissenting)
Issue: For purposes of Chap 13 for an above median income debtor who doesn’t have a car, get to take a deduction for a car payment under the means test
Held: Yes the means test to the letter requires this deduction, but that can’t possibly be the intent of the policy and goals of BAPCPA; point of BAPCPA was to help creditors The goal of BAPCPA was to avoid abuse, etc.
Scalia: Not our job to rewrite Congress’s laws for them EXAM Note: Czar is unlikely to ask about actual details of applying means test, but there might be an
argument about the policies of BAPCPA, if you like it, etc. Could comment on the Means Test addition, the Chap 13 additions (910 car claims) Know that the means test is used for above median income debtors, but that we won’t have to actually
determine the figures (if you get a Chap 13 debtor above median income, then just say they would face the means test and standardized deductions in light of Ransom) Ransom: Basically look at real world circumstances not nonsensical statutory interpretations
Disposable Income Note This test was not originally in the code, was added in 1984. Originally you had to argue that aside from
the best interest of the creditors test, you only had to avoid allegations of bad faith In re Johnson
Issue: How do we take into account post petition income of the debtor for Chap 13, when the post petition income is significantly less than the prepetition income
Facts: Debtor prior to Bankr was getting more income from Workers’ Comp, but they ended after the Bankr
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How to Determine Current Monthly Income - Statute says look at sum of 6 months prior income and then divide by 6; then use that figure to calculate disposable income There are basically three ways to consider things: (1) post-filing income and actual expenses, (2)
six month pre-filing income and means test expenses, or (3) post-filing income and means test expenses
Plan Time - regularly a three year period, but a five year period if an above median income debtor Determining Disposable Income - Three approaches
Conclusive Approach - Follow the statute at all costs Presumptive Approach - Six month pre-filing is presumed to be the right number unless debtor can
rebut presumption (but says there is no statutory basis) Harmonizing Approach - He would focus on the Chap 13 usage of “current monthly income”
This allows him to look at the actual current monthly income of the debtor (as opposed to the presumptive approach that isn’t based in the statutory law)
Problem 8-15 Courts are split . . .
Must Calculate - Current monthly income to determine how long the plan will be (if above median income then 5 years; if below median income then it can be for 3 years) Remember, this assumes someone objects (if they don’t then you can probably get away with it) We don’t inquire into this secured debt (who cares if it is a vacation home). Instead we just inquire
into what they are paying to secured creditors What about if the debtor has an intent just to give the collateral back? Will the amount being paid
to them still come out of the monthly income determination? Courts are split
Chap 13 Nuts & Bolts Standing Trustee - Specific trustee generally not installed for each Chap 13 (unlike 7) b/c the trustee isn’t
charged with taking control of the estate property (debtor gets to hold onto it) Often there will be one standing trustee for a district The Standing Trustee is in charge of getting the debtor’s disposable income and distributing it to the
Chap 13 creditors (he is basically like the debt collector for the creditors) Calculating Current Monthly Income
Debtor is told they can deduct payments to secured creditors in determining net monthly income Note: real winner is the secured creditor b/c no criteria on the necessity of the secured item
Overall, know there are unintended consequences of BAPCPA Problems
Problem 8-16 Courts are split . . .
There is a divergent b/t statutory interpretation is sacrosanct and a desire to not interpret that statute in a way that provides a crazy result
Problem 8-17 If someone is the sole proprietor of a business, then how to compute average median income?
Gross income or net income? You won’t be making what your store may be grossing b/c you have to spend money to stock your store, etc.
If individual is sole proprietor and files Chap 13 - Courts called upon to figure out what income to look at will generally take the business component of that persons income and adjust it for the business expenses (this would be net income instead of gross income). Individuals don’t get to make these types of gross/net income distinction; but some courts make narrow exceptions for sole proprietor businesses
In re Clearly Facts: Family is barely under the median income level. They are spending lots of money to send their
kids to Catholic school Test for under median income: Current Monthly Income - Reasonable & Necessary Living Expenses
(reasonable and necessary for the care of the debtor and any of the debtor’s dependents) Held: The Catholic School tuition was reasonable under the below-median-income test Reasoning:
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Family was sacrificing a lot to begin with to put them in the parochial school Mom is working at the school and most of her salary goes to the school tuition Also looks at BAPCPA amendment calculations for means test (which doesn’t apply) allows for a
deduction for private school, although it wasn’t as much as taken here. Judge makes the point that this makes private school reasonable and Congress left judge discretion in this below-median-income case
Overview - Most courts won’t permit expensive private school tuition in a Chap 13 case Problems
Problem 8-18 Lady has expensive car payment and says that she needs it b/c it helps her business image (and
presumably she is below median income) Courts are split . . . Some may require a very high evidentiary showing that the expensive vehicle
really is important Country Club Membership? Probably not going to fly if really expensive
Problem 8-19 How much house is too much for a Chap 13 debtor (high rent) Courts are split . . . some would say move out and get a cheaper place, but some would say that this
could end up costing more overall b/c the associated expenses of moving Sometimes the amount is so large that this is an easy call; other times it is going to seem more
reasonable Problem 8-20
What about a Chap 13 debtor who wants to make charitable contributions? Congress passed RFRA (religious freedom restoration act) and this permits debtors in Bankr to
give 15% of gross income to religious charities and without it having to be calculated into the disposable income If they are giving more than 15% then have to show some sort of history of giving
Chap 13 - Unsecured Claims Review - Entitled to: (1) At least what they would receive under Chap 7 (best interest of creditor test) (2) That all disposable income of debtor go to paying claims (above/below median income disposable
income tests), and (3) That all similar situated creditors receive substantially similar treatment (no unfair discrimination)
Chap 13 - Treatment of Secured Claims Secured Creditors entitled to:
In Chap 7 - Either their collateral or payment in cash of value of the secured claim (value of the collateral. See § 506)
In Chap 13 - § 1325(a)(5) - Requirement for Confirming Plan w/ Secured Claims (A) Holder of secured claim can accept the plan
Typically would be when they might accept less than normally entitled to (B) Plan is confirmable if it provides that in equal payments that at the end of the plan the
payments will add up to (equal) the value of the claim (i.e., collateral) (C) Debtor surrenders Property to Creditor
Particulars for § 1325(a)(5)(B) Elements - Components/Calculations (arithmetic not required on the exam) Elements
Interest Rate Value of the Collateral
Calculations Problem is we aren’t selling the collateral so how do we know the value)
Since there is no market-value test, then we must come up with a value Then we apply the interest rate against the value of the collateral
In re Rash (S. Ct.)
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Facts: Rashes owned semi-truck (they were sole proprietors). Semi = source of income. They got into problems and filed a Chap 13. They wanted to hold on to the source of their income (the truck). § 1325(a)(5) means that creditor must receive a stream of payments equal to value of collateral
Issue: How to determine value if we aren’t actually selling the truck Held - Value of Collateral: Standard for valuation is replacement cost
Amount/value that a willing buyer and a willing seller (neither of whom being forced to buy/sell; i.e., non-emergency) would arrive at for this particular piece of property
Does not mean bluebook value or retail; must actually analyze what a willing buyer/seller would arrive at as price for it. Maybe look at eBay, wanted ads, etc. (some marketplace where property is auctioned);
or call in expert witnesses (generally compromise is met) In re Till (S. Ct.)
Held - Interest Rates: The Formula Approach Begin with interbank prime rate of interest (interest rate one bank would charge another;
i.e., the nearly-risk-free rate of interest) Add to that interest rate, sufficient additional interest to reflect the actual risk of non-
payment of the plan payments (what would be appropriate to charge them based on their circumstances) (typically compromise met)
Implication on Secured Claims - What if the Value of Collateral Declines Traditional Bifurcation - § 506
The secured claim would consist of the value of the collateral and the deficiency payment would be an unsecured claim.
Rules on Treatment of Secured Creditors (1) If there is a past default and the debtor can’t cure the past default, then the creditor can go get
the collateral Beauty of Chap 13 - A debtor may cure past defaults over the plan period Can cure past defaults by spreading them over the plan period
(2) Filing a Chap 13 case decelerates loan payments When you enter into acceleration clause area (i.e., by missing a payment) then all payments can
be come due. (skipped 8-21 & 8-22) Twist #1 - Hanging Paragraph - § 1325(a)(9)
§ 506 doesn’t apply if: Collateral is motor vehicle w/ PMSI incurred in prior 910 days Anything else subject to a PMSI security agreement purchased in the last year
Translation Benefits creditors b/c those under this section won’t have their claims bifurcated under § 506 in
the event the value of the collateral has dropped: their claim on the value of the collateral and their deficiency claim would still be secured
Basically means a § 1325(a)(9)-hanging-paragraph creditor is secured for the entire value of their collateral, even if they are undersecured.
Rationale Automobile value declines rapidly after vehicle purchase
Problem was that lots of debtors were buying cars, letting the value depreciate, filing bankruptcy, and then redeeming the car for the value of the collateral and then the creditor was screwed with the deficiency as a unsecured claim
This has arguably led to a rise in interest rates Also, however, applies to all PMSIs in the prior year
Hanging Paragraph Issues: In re Hall - Negative Equity
Facts: Person had financed a car and still owed money on it (i.e., still in debt on the old car and it isn’t worth enough to pay off prior note). They go to dealer for a new car and get a loan for the new car that adds in the value of the old debt to pay off the old car (for example, Negative
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Equity Loan: $60k loan representing $50k for auto being bought and $10k for paying off the old loan)
Issue: How does hanging paragraph apply to the negative equity situation? Problem is that some of the funds didn’t go to purchasing the property
Circuit Split - Some courts hold not a PMSI whatsoever, others hold that only the part that went toward the car was a PMSI
Majority - We can apportion the PMSI part for the car off from the value for the negative equity, so that the hanging paragraph would only apply to the true PMSI portion
Tidewater Finance Issue: Does BAPCPA prevent a creditor with a PMSI in a 910-vehicle from exercising its
contractual right for the deficiency portion of the debt left over when the vehicle is turned back over to the secured creditor under § 1325(a)(5)(C) Debtors argue that turning the collateral over means the debtor is free; Creditors argue that
they should still be able to pursue their deficiency claim as an unsecured claim when the disposition of the property left a deficiency
Trial Court Interpretation - Majority of Bankr. Trial Courts have held that when the debtor turns over the property then the creditor is left without a claim for the unsecured deficiency
Circuit Courts - Trend has been that Circuit Courts of Appeals are adopting the minority rule that there can be an unsecured deficiency claim when the collateral is turned over and there is a deficiency after disposition of the collateral Rationale: There is no reason that the state law right for the deficiency is not available b/c
there is no clear indication that the right has been taken away Bankr Code does not do away with state law rights that are not expressly taken away
Twist #2 - § 1322(b)(2) - Claims Secured by a Mortgage on the Debtor’s Principal Residence Chap 13 plan may not change rights of a mortgagee
So the plan payments for a home mortgage must essentially be the rights in the contract (rate of interest, etc.)
Rationale: We want to keep home mortgage rates low by reducing their loses in Chap 13 There is a trend of arguments for going back to the default rule for creditors under § 1325(a)(5)
(secured claim for value of collateral and deficiency becomes an unsecured claim) Problem 8-23
No, he cannot do this. § 1322(b)(2) prevents it. No lien stripping on his home mortgage. USSC Affirmed this view in Nobleman case.
A number of courts had accepted a novel argument that lien stripping was okay, but Nobleman clarified no, that § 1322(b)(2) doesn’t allow lien stripping
Why File Chap 13 Anyway if He Can’t Lien Strip He gets to keep his house, which he probably couldn’t do in Chap 7 or if there were a foreclosure He can also cure his past defaults over the past few years
Treatment of Home Mortgages under Chap 13 Nobelman
Issue: If a home mortgage is underwater, can we bifurcate under § 506 even though there is § 1322(b)(2)
Held: No stripping down of under water home mortgage under § 506 where § 1322(b)(2) has been complied with. Basically must present payments post-Bankr that are the same as they would have been pre-Bankr Payments must continue unchanged for the long term mortgage, as they would have been under the
mortgage contract Note, there is a twist if the last payment will come due during the plan period
If the debtor makes all their payments for the 5 years under the Chap 13 plan. Debtor will get a discharge, but there is a catch
At the end of the Bankr case, if the debtor still owes money under that long term debt then that would not be discharged (the long term Mortgage won’t be discharged)
There are some other twists in the non-modification home mortgage issues (balloons, etc.)
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Problem 8-24 (first twist to § 1322(b)(2)) General, unresolved/majority, rule is that Second bank will be subject to having their lien stripped b/c it
is completely underwater This is despite Nobelman and § 1322(b)(2) Thus they’ll be treated as an unsecured creditor
What if home is worth $75k and 1st mortgage is owed $74,800 and 2d mortgage holder is owed $10K 2d mortgage holder is not completely underwater, so Nobelman says no lien stripping
Valuation will take place at the commencement of the case (so even if 2d mortgage was not underwater when it was taken, the 2d mortgage will lose if underwater at time of the filing of the case).
Problem 8-25 (second twist to § 1322(b)(2)) Overview: 1st loan not underwater; 2d loan underwater; 2d loan has a 3 year term and a balloon
payment. Can either loan be crammed down? § 1322(c)(2) - Notwithstanding (b)(2), if the last payment on a secured home mortgage claim is due
before the plan concludes (either 3 or 5 years depending on the applicable commitment period), then the plan may provide for the payment of the claim as modified by § 1325(a)(5)—thus payments can be modified or spread out. You still have to pay the whole thing, but if you have high payments or a balloon coming due then
you can spread out the payments If this part that is coming due during the plan period, then you might could also bifurcate under
§ 506 Take Away - If a mortgage on residential real property is coming due during the plan period then
§ 1322(b)(2) doesn’t apply, and we treat them just like any other secured claim under § 1325(a)(5) Skipped 8-26 In re Guilbert
Issue: The language of § 1322(b)(2) says sole collateral must be real property, and the real property must be the debtor’s principal residence; Real property = mixed use; Loan given based on additional collateral Aside: What about a trailer that someone lives in? It depends
Most State Rules: Can the property that we are discussing be removed from the real property without causing substantial damage (average house cannot)
Presume a mobile home is going to be personal, not real, property unless it is sufficiently affixed to the real property The issue becomes can someone modify payments on their principal living place when the
thing isn’t really “real property”? Principal Place of Residence Issues
Building is multi-unit dwelling (many people living in them) Doesn’t normally fit within § 1322(b)(2); argument is bank knew they were lending against an
apartment and thus the bank shouldn’t get this homeowner loan bank benefit Office on first floor of home - Probably falls under § 1322(b)(2) Mortgage is secured not just by the real estate, but also other collateral/personalty
This would mean that § 1322(b)(2) wouldn’t apply Determined as of Date of Filing Case - So if you take out a loan for your principal place of residence,
but move b/f you file for Bankr, then § 1322(b)(2) might not apply Problem 8-27
If it a house and he does business there, then that can still fall under § 1322(b)(2) Problem 8-29
§ 1322(c)(1) - Default may be cured until such residence is sold at a foreclosure sale Situations:
Filed a minute b/f the foreclosure sale, then that violates the automatic stay and § 1322(c)(1) will allow you to cure this in your plan (can spread cure payments out over time)
Filed a minute after the foreclosure sale, then § 1322(c)(1) doesn’t apply Frequent Bar Question - What are the relevant benefits of Chap 13 over Chap 7?
You still have to pay the full mortgage payments. Can’t force creditor to allow you to stay in your house under Chap 7
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Can cure past defaults in Chap 13 so that you can pay them over time (is practically significant)
Modification of Confirmed Plan Effect of Confirmations
Property of estate re-vests in the debtor Plan gives the parties bound by it enforceable rights against the other parties bound by it (i.e., res
judicata effect) Was no requirement that debtors or anyone else inform about changes in circumstances, but now you
have to submit Tax Returns Modifiable at request of:
Debtor Trustee Holder of an unsecured claim (secured creditors not included b/c they are already getting everything
they are owed, otherwise we couldn’t have had a confirmable plan). Generally
Plan may be Modified - B/c of: Increase or decrease in debtor’s income No requirement to file paperwork w/ court re: change in circumstances BUT BAPCPA requires debtor file tax return yearly with the court (so creditors can monitor debtor) Most plans don’t get completed (Czar’s opinion)
In re Szostek Facts: Plan was confirmed, but actually didn’t meet the requirement for secured creditors (were
receiving less than they were entitled to). Plan got confirmed. Asked court to reopen plan to modify it on the ground that it was faulty. Note: If you represent anyone in a Bankr case, pay attention
Held: Bankr court shouldn’t reopen the case and permit modification in this situation The list of provisions in § 1325 are things a plan should have, but it doesn’t say these are
mandatory items for a plan to be confirmed (i.e., such as when creditor/trustee doesn’t object) Absent objection, a confirmed plan will be res judicata (b/c a plan becomes binding unless objected
to) and not subject to relitigation Only subject to reopening and modification based on changed circumstances
Chap 13 - Discharge Generally
Super Discharge No More - Previously, Chap 13 had a super discharge and got rid of most everything. Now, the dischargeability of Chap 13 and Chap 7 are about the same. See § 1328(a)(1)-(4)
§ 1328(a)(1)-(4) Non-Dischargeable
Student Loans, tax debts, alimony/support payments (3) - Restitution and criminal penalties (compare with § 523(a) that only limits federal restitution) (4) - Willful / malicious injury
Differences in Discharge b/t Chap 13 & Chap 7 § 523(a)(15) - DSOs and Property Settlements
(a)(5) makes DSOs non-dischargeable in Chaps 7 & 13 But other types of debts can arise from a domestic relations case (property settlements
These other types of debts are dischargeable in Chap 13 (but are not in Chap 7) Even though you can discharge these, you still must pay some of this back
Hardship Discharge (p.373) Something happens and debtor cannot continue making payments under the plan § 1328(b) - Review requirements (2d requirement hard to meet) More likely that a Chap 13 will be converted to a Chap 7, than a hardship discharge will be granted
Problem 8-33 Circumstance - Chap 13 plan calls for the discharge of student loan debts b/c plan asserts continued
payment of the student loan debts will be an undue hardship Student loan debts are nondischargeable unless you can argue undue hardship
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Undue Hardship Examples Violist or cellist for orchestra and has student loan debt from getting music degree. Loans
~$800 a month and he earned ~$2k a month. Had about $600-$700 a month. Held, not undue hardship b/c he had been on vacation and b/c the orchestra doesn’t make
him play all the time. Don’t promise undue hardship b/c it is really rare
Best argument - Debtor has dependents or an elderly person who won’t be cared for b/c of the student loan debt payments
Attorneys were placing language in plans that discharged the student loan debt, and if creditors weren’t careful then it came in! Considered unethical in some circumstances
Conversion & Dismissal of Chap 13 Cases Marrama v. Citizens Bank
Facts: Acts like he transfers valuable asset, then files Chap 7 Bankr (but he really still has the asset). He doesn’t put the asset on his schedule. Claimed it was just a scrivener’s error later on. Once he got caught he tried to convert his case to a Chap 13 (that way the property wouldn’t belong to the estate).
Held (5/4) - Although code indicates it is up to the debtor whether to convert a case, that conduct always carries with it the obligation to act in good faith both when filing originally and when converting This was not conduct in good faith, so he was not allowed to convert the case
Dissent - Code doesn’t explicitly tie a good faith requirement to the conversion requirements Chap 11 - Skipped
A lot of things are similar b/t Chap 7 & Chap 13
VIII. Avoidance Actions/Powers of Trustee Avoidance Actions Introduction
Overview Bankr Trustee owes fiduciary duties unsecured creditors b/c they are most vulnerable
Not secured b/c Bankr code provides that secured creditors will either get their collateral or the value of it; thus, trustee not needed to protect their interests
Bankr Code imputes on the trustee (except for in Chap 9) an obligation to maximize the return to unsecured creditors By maximizing the property of the estate By minimizing exceptions, claims, preferential transfers, etc. against the estate
Code gives Bankr trustee ability to avoid/undue certain transactions by the debtor b/f Bankr filing Allows the trustee to undue the transaction and then bring the property into the Bankr estate
If there was no Bankr code, then the avoidance actions are things that unsecured judgment creditors could otherwise do under state law, but they would be duking it out with each other For example, under state law if you get a judgment and then find out the debtor transferred
property, then you can get it returned under a fraudulent conveyance argument Bankr Code takes away ability of individual creditors to take advantage of collection law under state
law, so the Bankr code gives that power to the trustee, and makes him do it by creating fiduciary duty Rationale of Avoidance Abilities - 3 Major Ones
Strong Arm Power - § 544(a) Preference Action - § 547 Fraudulent Conveyances - § 548 (debtor hides assets to keep away from Bankr estate)
Strong Arm Power - § 544(a) (a)(1) - Hypothetical Lien Creditor - Permits Bankr trustee via the court to avoid (wipe clear) any
unperfected interest whatsoever in the debtor’s property Drafted enigmatically like this so as to try and preserve the various state law property rules At the filing of the case the trustee has the power of a hypothetical lien creditor (i.e., judicial lien
creditor defeats any unperfected interest in the property). See UCC § 9-317(a)-(e)
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As soon as Bankr case is filed, then any unperfected interests will become property of estate via the trustee as hypothetical lien creditor, and trustee will divvy it up among the unperfected interests
Thus, Bankr trustee will ask the court to strong-arm aside the unperfected/unsecured interests, and court will wipe away their state law interests Issues typically arise where someone is claiming/has an interest, but failed to perform all the
perfection steps Trustee’s job becomes to scrutinize all the claimed interests for an error somewhere to avoid them
if he can EXAM - Would have to tell us a lot about an interest and Art. 9 to give a strong arm question, so that
will key us in this it is an avoidance action question. Result is the same as would happen in non-Bankr situation (judicial lien creditor beats unperfected
secured creditor), but Bankr code keeps things civil by just making the trustee the main guy (a)(3) - Trustee also has the status of a bona fide purchaser of real property as of the date of the filing
Sometimes an unperfected secured interest in real property will defeat a lien creditor . . . when it is a bona fide purchaser of real property (i.e., in a secret lien situation) This addresses law in some states where a good faith unperfected real estate purchaser will still
beat a judicial lien holder (a)(2) - Never been used (there was a quirk in the law of one state, but isn’t used really) Review - § 544(a) gives the trustee the status needed to defeat unperfected interests.
Preferences - § 547 Overview
Hypo - Imagine happy family Czar is sliding towards Bankr. Has assets of $100 in the bank. Has the following debts: AMEX
$100; Mom $100; Square Books $100. Normal person would pay Mom $100. Then there would be assets of $0 and debts of $200, so
debtors would get nothing. Bankr Code, however, wants to distribute the assets evenly and orderly b/t all the creditors
Bankr code permits trustee in situation where debtor pays off a creditor b/f filing (a preference) to undo the transaction; trustee can sue the preferred creditor and get the assets back
Review A preferential transfer does not comport with the idea of fair sharing in the Bankr code When a debtor prefers one creditor over another just prior to Bankr, then they undermine those
Bankr goals Trustee given preference/avoidance action in the Bankr court whereby they can order preferred
creditor to return the improperly transferred assets § 547 - Preferences
Overview Intent
There is no intent requirement in § 547 for the debtor or the creditor This means that some innocent payments will technically be classified as preferential (all you
need is the requirements of § 547 to be met) Over-inclusiveness
B/c there is no intent requirement, § 547 can be over-inclusive Exceptions in § 547(c) try to prevent most of this over-inclusiveness
(b) Trustee may avoid any transfer of an interest of the debtor in property What is covered:
Can be a preferential transfer even if it isn’t cash being transferred (property too) when it is given for antecedent debt Examples: Stocks, bonds, [big one] granting a security interest in property You give someone a security interest in some item and that can count as a preferential
transfer b/c you are turning them from an unsecured to a secured creditor (whenever it for an antecedent debt)
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EXAM: if the facts indicate the debtor has transferred property b/f bankr (3 mos or 2 years), then ask yourself what transfers did the debtor make and were they of an interest in property; and even if it is a partial interest that will meet § 547(b)
(b)(1) to or for the benefit of a creditor Not only when given to a creditor, but also when someone tries to circumvent this by, for
example, paying off a creditor’s creditor (b)(2) for or on account of an antecedent debt owed by the debtor before such transfer was made
Basically has to be for a preexisting debt Lawyer Exception: When you take a retainer fee these can look like antecedent debt but often
escape this requirement (b)(3) made while the debtor was insolvent
You can give away all the money you have and prefer any creditor you want as long as you are solvent But, when insolvent, the law regulates you
Business Insolvency: Can be challenging to show whether a business was insolvent at a given moment Corporate Bankr often focuses and litigates heavily regarding solvency
(b)(4) Reach-back Provision (a) The transfer is voidable if made within the 90 days preceding filing (this is the normal
amount) (b) Reaches back to 90 days to 1 year before the date of filing if creditor is an insider
Insider defined at § 101(31) as: relative, general business partners, family (b)(5) Must enable creditor to receive more than they would have received under Chap 7, would
have received had the transfer not been made, or more than they would have received under this example Any Pre-Petition transfer that meets § 547(b)(1)-(4) will meet (b)(5) except two circumstances:
1) All creditors are being paid in full 2) A payment to an oversecured creditor Otherwise, any pre-petition transfer will satisfy (b)(5) b/c the transfer is diminishing the
assets that are available to the creditors (mathematically she will have received more) Rule of Thumb: Unless all creditors are being paid in full or the creditor is oversecured, then
any pre-petition transfer will satisfy § 547(b)(5). § 547(f)
Presumption of debtor insolvency for purposes of § 547 within the 90 days preceding Bankr filing But it can be rebutted with evidence brought forward by the debtor
Problems Problem 7-5
Not a preference b/c no antecedent debt (might be a fraudulent transfer) KIM: Whenever debtor is making transfers b/f Bankr filing, start worrying about avoidance actions
Problem 7-6 Giant bill at grocery store and then debtor pays $3k. There is an exception for substantially contemporaneous exchanges not being preferential (and this
quick exchange at a retailer wouldn’t amount to a preference) Barnhill v. Johnson, (USSC): You pay with a check
Checks are not cash equivalent. There is a delay while the check clears Not contemporaneous, there is a delay and this results in a preferential transfer
Problem 7-7 No, payment to an oversecured creditor (who would receive full payment of their claim in Bankr)
Problem 7-10 All that happened was that one creditor was exchanged for another by borrowing money from a
new creditor to pay off the old creditor Net-to-net your financial situation hasn’t changed, it is just owed to someone else
Earmarking Doctrine - Three elements Old creditor paid off w/in 90 days
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New creditor who provided funds to pay off the old creditor Then the funds are said to be earmarked and are not an avoidable preference
§ 547(c) Exceptions - Trustee may not avoid the following transfers (1) Contemporaneous Exchange: Intended by the creditor and debtor to be a contemporaneous
exchange for new value and was a contemporaneous exchange for new value As long as the bank does not unduly delay perfection of the new value, then the creation of a
security interest for a new loan will not be a preference Undue Delay: § 547(e) classifies the delay as undue if more than 30 days
Substantially Contemporaneous: No definition in the code; court determined; generally within 1 hour to 1 day probably okay. A week would most always be too long
(2) Ordinary Course of Business (can be excepted): Transfer was in payment of debt incurred in ordinary course of business for both the debtor and the transferee, and the transfer was:
Made in ordinary course for both parties, or Made according to ordinary business terms
If you regularly pay your debts, and then keep paying them, then there is an argument that it was not a preferential transfer
This exception most often will create a settlement likelihood for the trustee so they don’t have to litigate this exception
Requirements Debt must have been in ordinary course of business of creditor and debtor, and The payments must have been made either:
In the ordinary course of business b/t the actual parties (subjective), or In accordance to ordinary business terms (objective).
Union Bank v. Wollus (S. Ct.) Facts/Hypo
Czar starting a business, needs capital, takes a revolving line of credit from the bank who then takes security interests. Relationship has been ongoing, and payments are intermittently made. Payments made w/in the preference period and meets the § 547(b) requirements. Bank will argue ordinary course of business on this enabling loan (enabled person to
start business) But, counterargument is that an enabling loan is extraordinary b/c it is the loan that
starts the business b/c the debt allowed creation of the business Issue: Whether payments w/in the preference period to a lender who had given the business
debtor a long term loan fit w/in this exception Held: Yes, such payments can fit w/in the ordinary course of business exception. An enabling
loan can fit w/in the § 547(c) exceptions Typical Losing Situations: Creditors often won’t get to claim the exception when the debtor starts
spacing out payments prior to Bankr filing (i.e., the method where you pay off the smaller creditors and don’t pay off the others; or
you make your payments late for some creditors) Problem is that this method doesn’t comport w/ the history b/t the debtor & creditor
(7) DSO Payments - Payments excused from preference to the extent that the payment was for a DSO (8) Consumer Bankr. Small Transfer - In a consumer Bankruptcy, consumer debtor making payments
and the aggregate value of all property involved in the transfer is less than $600 are excepted (9) Non-Consumer Debts and the Small Transfer Limit - In non-consumer situations there will be an
exception for transfer amounts aggregating less than $5,850 (4) Subsequent New Value Exception - Exception to transfers to the extent that after such transfer the
creditor gave new value / credit to the debtor Note, only applies to subsequent new value
Policy Goal - Encourages creditors to keep the money flowing and help keep the creditor in business whenever the risk of Bankr is growing; chance is that maybe debtor can turn things around w/o going into Bankr
Mechanics If creditor gets sued for preferences -
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Get the Following From Creditor Get a statement of the account (statement of all the debtor/creditor transactions) Track when payments were being made on the debt and then when new credit was
extended Must analyze each transaction in the 90 day preference window Means that a payment won’t be avoidable to that extent that new value of was extended, so you
can offset the otherwise preferential payments in the amount of new value that was given by the creditor Note, the new credit has to come after some otherwise preferential payment
If the subsequent value given exceeds the amount given as preferences b/f the new credit, then you can only offset to the amount that was prior to the new value
Preferential Transfer Review - Intended to prevent creditors from “opting out” of Bankr by getting paid ahead of time Allows the Bankr court to undo transfers where the creditors get more than they would in the Bankr Intent not required - Don’t have to inquire into creditor’s/debtor’s intent; just look at payments made
prior to the Bankr Thus, the Preferences will be over-inclusive, so we have exceptions
Note: All exceptions to the preferences are narrowly interpreted (general agreement b/t courts)
Fraudulent Conveyances - § 548 Background
Hiding Assets: Burying items, giving them away, selling at “bargain” prices can all be fraudulent transfer (also called fraudulent conveyances)
Fraudulent Conveyances Outside Bankr - Each state has its own fraudulent conveyance statutes People try to hide their assets both in and outside of Bankr After you obtain a judgment against someone, check and see if they have secreted some asset
Trustee takes on this power of creditors to sue for fraudulent transfers under state law Two Types of Fraudulent Transfers
Actual Fraudulent Transfers - § 548(a)(1)(A) Constructive Fraudulent Transfers
Actual Fraudulent Transfer - § 548(a)(1) Trustee can recover any transfers in 2 years prior to Bankr if, voluntarily or involuntarily,
(A) Debtor made transfer with actual intent in the debtor to hinder, delay, defraud See also Title 18 - Federal Crimes - There is a section that makes it a crime to transfer
property with the intent to hinder, delay, defraud creditors Badges of Fraud - Don’t need an admission of “actual intent”; Court allows the imputation of
actual intent from badges of fraud. Anything in a fact pattern that smells-to-high-heaven (i.e., makes us suspicious of debtor
hiding things), then label it a badge of fraud Primary Badges of Fraud - (1) Transfer to an insider (family member, business advisor),
and (2) Transfers made closer to the Bankr filing Ex: Triple B.S. Corp. - That is probably a badge of fraud; mocking name
(B) Constructive Fraudulent Conveyance Elements
(i) Debtor received less than a reasonably equivalent value in exchange for such transfer or obligation, and
(ii)(I) was insolvent on the date of the transfer or became insolvent from the transfer, (II) left debtor w/ insufficient capital to run their business, (III) left the debtor w/o sufficient capital to pay debts as they become due
Hypo Myers goes into casino and just starts drinking and starts to gamble his last $1k, then winds up in
drunk tank.
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Does the trustee have an argument against the casino? Argument is he was insolvent at the time (a)(B)(ii)(I), and he received less than valuable consideration for his money (a)(B)(i) because the house often wins
Almost universally rejected by courts b/c you are getting entertainment value from the casino Debtor had been giving money to church ($1k a month for 2 years). Assume debtor is insolvent
when made (a)(B)(ii)(I) and there was no actual fraudulent intent (a)(1) Is this money being given away for unreasonable value in exchange? More often than the casino situation, trustees were winning this argument against churches But Congress has fixed this
Constructive Fraudulent Conveyances Review Before Crash
2 year reach-back period Transfer made while debtor was insolvent (based on one of the statutory tests) Made for less than reasonably equivalent value
Doesn’t mean exact precise value, but appraised value will often play a role Less than 50% is often an indicator
Involuntary Transfer Property is repossessed w/in 2 years b/f Bankr - can still qualify as a constructive
fraudulent transfer if the value received at foreclosure sale is not reasonable USSC - These types of involuntary transfers can be okay as long as the foreclosure sale
was not less than reasonable value Constructive Transfer: where debtor sells piece of ppty, w/in 2 years of bankruptcy, and receives less
than what ppty is worth (and) + done when debtor was insolvent (assets are less than liability) or engaged in business where they had insufficient capital or beyond the debtors ability to pay as debts as they mature. Principle: must be just before being generous Elements:
Transfer w/ in 2 years Less than reasonably equivalent value
a. Not Defined BUT does NOT mean appraised/exact value. There is no set guideline, but…
b. When one gets to 50% or below = courts tend to find not r’bly equivalent value 3. This can also be involuntary. So if someone seizes the debtor’s property and sells it at a
foreclosure sale is there a fraudulent conveyance argument? The U.S. Supreme court held that if the price received from the foreclosure is less than what is worth there is no fraudulent conveyance as long as the foreclosure sale is conducted properly.
4. At a time when debtor was insolvent This will be an action against the person the debtor sold the property to. If the trustee takes the
property back because of a fraudulent conveyance then the Person who purchased ppty will have a lien on the ppty and get what they paid for it.
Two Interesting Fraudulent Conveyances Cases/Issues: People going to casinos and gambling everything away and saying it was to screw the creditors.
Fraudulent conveyance under (a)(1) Change the facts, he didn’t say anything about screwing creditors.
Creditor will argue fraudulent conveyance b/c transfer and didn’t get ANY value from casino so the less than value
BUT: Court says you get entertainment value and have rejected this no value argument. Fraudulent Conveyance Recovery Process
If trustee gets an item transferred back from a creditor, then the creditor will retain a lien on the house taken away for the value that the creditor gave for the transfer If they paid less than reasonable value, then when it is resold for reasonable value, they’ll get paid So the purchaser won’t be screwed out of what they paid
When Debtor files Bankr, Trustee Must . . .
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One of the Trustee’s first obligations when Debtor files Bankr is to analyze what transfers the debtor made for the prior 2 years
Trustee must examine every transaction by the debtor and see if they were preferences or fraudulent conveyances On EXAM, check every transaction/transfer
Trustee also should look for unperfected interests in property Casino/Charity Issues in Fraudulent Conveyances
Courts will often presume there is reasonably equivalent entertainment value in gambling, but before congressional amendments the Bankr courts weren’t giving the same deference
Religious Freedom Restoration Act - RFRA § 548(a)(2) - Transfer of a charitable contribution to a qualified charitable entity shall not be
construed to a be a fraudulent conveyance if Amount of conveyance doesn’t exceed 15% of gross annual income for the year the transfer
was made, or If the contribution exceeded 15% of gross income, but it was historically consistent with
debtor’s donation practices
Statutory Liens - § 545 Overview
Statutory Lien - A lien that arises by operation of law in the sense that it isn’t a consensual lien between the parties It is a lien that the state has granted to a creditor who would otherwise be an unsecured creditor Examples
Mechanics Liens - Anyone who provides services or improvements to your property, then they can keep your car if you don’t pay for it by way of the mechanics lien Often apply not just to mechanics, but also to others who improve property Many times will trump consensual lines
Purpose of Passage Custom of the trade is not to grant securities and these are people who are vulnerable to being
ripped-off Sometimes passed to circumvent the priority scheme of the Bankr code (i.e., allows for favored
creditors to circumvent normal priority rules) Bankr Treatment - These statutory liens are enforceable in Bankr just as they would be treated outside
of Bankr (so if the statutory lien gets top priority under state law, then the Bankr court will treat them likewise) Except: except for statutory liens that arise simply when the debtor becomes bankruptcy/insolvent
These types of liens will be avoidable If the statutory lien simply goes into effect whenever one of the statutory creditor’s debtors go
bankrupt or insolvent, then that would allow those creditors to always avoid the Bankr process Note: Congress does give special treatment to a few people, like farmers and silo owners in
§ 507 Elements
On exam, if given statutory lien statute then look out for this General rule is that they are enforceable in Bankr, with the one exception about Insolvency/Bankr.
BAPCPA Changes Primary Change - Chap 7 Eligibility Test DSO Treatment Strengthened - Nothing helps you here
Non-dischargeable, not avoidable, priority claims above administrative expenses
Chapter 12 - Summarized at a general level (but not on exam) Almost identical to chapter 13
Only applicable to family farmers Primary Difference
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In a Chap. 12 plan, instead of the rule that you can’t modify a home mortgage on a residence, Chap. 12 gives very favorable treatment to farm land / home values
Farmer only required to pay the reasonable rental values for land/property The family farmers can modify the payments they are paying their mortgagor in the event that property
values plummet Not dischargeable, lien still preserved b/c it goes beyond the plan period, but you get to drag out
your payments in Chap 12 But you do have the whole plan period to cure deficiencies (JUST LIKE CHAP 13) If land values are way up, then you may be better off filing Chap 13 (and farmers can)
Exam Format Write on exam Series of no less than 7 and no more than 12-13 short fact patterns w/ limited space (approximately 2x
space really needed provided, generally) Most questions traditional fact patterns Tend to give one “essay” type question tied to the class about general aspects of the code Occasionally a true/false question Exam Writing Philosophy: (1) tries to write challenging questions that are meant to be super unfair; (2)
tries to cover most material that we addressed Expect avoidance, automatic stay, etc.
Grading - No points subtracted for incorrect statement; points awarded for good things Time Pressure - Quite possibly will be close call NOTE - Review pages in book where author lays out parameters for Means Test (extent of knowledge we
need to know) But will not have to calculate anything
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