Bankruptcy Outline1

8/14/2019 Bankruptcy Outline1

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b. Judgment gives the successful plaintiff (aka judgment creditor) no interestand no priority in any of the debtors property or income and remains anunsecured creditor until execution

c. Improvement in the judgment creditors position because the owing of thedebt is not indisputable by the debtor, it has become liquidated

d. Judicial Liensi. Make up a small portion of actual collection remedies and usually only for

real propertyii. Judicial liens arise out of the court proceedings initiated by the creditor

for recovery of the debt, both secured and unsecurediii. After judgment, to prefect the lien, must properly record or docket in the

appropriate recording office in the county where the property is locatediv. The judgment creates a lien on all of the debtors real property within the

county1.The property need not have been involved in the suit or

identified in advancev. The lien is subject to any preexisting 3rd party interest recorded in the

property, such as prior recorded mortgages and liensvi. When the lien is enforced, the lienholder follows a foreclosure procedure

(execution) to sell the property and realize its proceeds5.Execution

a. Unsecured claims are not identified with any particular property, but theirenforcement is dependent on property of the debtor being found and realizedi. Debtor must have property that can be applied to payment of the debt

1.Must consider state law and whether there is a state statute thatmakes the property immune from execution

2.Public policy plays a role to prevent execution on property thatthe debtor values but has little inherent value to the creditor

b. Execution Processi. Begins with a writ which is simply a court order- execution writ or writ

fi fa or writ of attachment1.Writ is issued by the court clerk upon request of the judgment

creditor and is delivered to the sheriff for execution2.The writ will specify that the sheriff must levy on specific,

identified property3.Debtor can apply for a stay of execution pending appeal, but

must usually furnish bondii. Sheriff will take physical possession of any property (aka levy)

identified by the judgment creditor1.If it cannot be seized immediately, the sheriff may tag it with

notice of seizure2.Real property is always seized by posting notice of seizure and a

later sale3.Because the sheriff could be liable for tort damages, the plaintiff-

creditor must provide an indemnity when delivering the writiii. After levy, the sheriff will advertise the property for public sale and sell itto the highest bidder

1.Value of property is usually depressed2.Proceeds are realized and less the costs of execution, are

remitted to the creditor3.May allow for redemption where the debtor reaquires the

property at the depressed price if they can raise the necessaryfunds

6.Turnover orders

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a. The judgment debtor is ordered to turn over property he possesses to thesheriff

b. Debtor risks imprisonment for contempt if he does not complyc. Examination under oath of the debtor so that assets are found

7.Garnishmenta. Used to levy on personal property of the debtor in the possession of someone

else, or on an intangible obligation due to the debtorb. The debtors rights of due process requires that he is given notice of the

garnishment that sets out his exemption rights, and must also have anopportunity to challenge the garnishment

c. The 3rd party who owes something to the debtor is obligated to answer thewrit and must surrender the property or state grounds for not doing so

d. Upon payment to the court or sheriff, funds are sent to the creditor8.Assignment for the benefit of creditors

a. Voluntary transfer of property in trust by the debtor to another person withinstructions to liquidate the property and to distribute its proceeds to thosecreditors who have elected to participate

b. Does not operate as a dischargec. Cannot reserve some rights in the property or continue to use the propertyd. Cannot grant preferential treatment to a particular creditore. Cannot stipulate that the participating creditors must discharge the unpaid

balance of their claimsf. Cannot include less than all of the debtors executable property

II. Secured Debt under Nonbankruptcy LawA. Generally

1.Security agreements effective under 9-2012.The personal obligation of the debtor to pay the debt is reinforced by a right in rem

acquired by the creditor in certain property of the debtor.a. The debt is a personal claim against the debtor, the lien is a right in the

propertyb. Property is defined as goods in 9-102(44) (must be movable)c. Once secured, the property is considered collateral defined in UCC 9-

102(12)3.In a much strong position than an unsecured creditor, it has both a right of actionagainst the debtor for the debt and a claim to property of the debtor to back up thatright.

4.Only when the debtor defaults on the debt that the creditor becomes entitled totake action to terminate the debtors ownership and to sell the property or taketransfer of it

5.Lien rights can be created in almost every kind of property, real or personal,tangible or intangible.

a. A lien can be created in a piece of class of property before that property hascome into existence or before the debtor has acquired rights in it.

B. Purchase Money Security Interests (PMSI)

1.Governed by UCC 9-1032.When a loan or credit is given to the debtor for the express purpose of enabling the

debtor to acquire particular property and the property is itself used as collateral tosecure the debt

3.Purchase money obligation is an obligation incurred by the debtor as all or part ofthe price of the collateral to enable the debtor to acquire rights in or use thecollateral.

a. Example: Loan to buy a car, if debtor defaults, bank can repossess carC. Attachment and Perfections

1.Attachment- when a lien is valid against both the debtor and 3rd parties

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a. If the creditors right to the property is enforceable only against the debtor,the creditor has no protection against the claim of 3 rd parties whosubsequently acquire rights in the property

b. Governed by UCC 9-203(a)c. Attachment date is the date on which the lien become enforceable against the

debtor2.Perfection date is the date on which it becomes effective against 3rd parties

D. Judicial Liens1.Judicial liens arise out of the court proceedings initiated by the creditor for recovery

of the debt2.After judgment, must properly record or docket in the appropriate recording office in

the county where the property is located3.Are a consequence of a particular legal procedure4.Make up a small portion of actual collection remedies

E. Statutory Liens1.Arise under the terms of the statute b/c the legislature has determined that a

creditor of that class or a debt of that type is worthy of the protection of security2.To assert a successful statutory lien there must be:

a. A statutory basis- the transaction and the creditor must fall within theprotected category for the lien to be claimed and the property must be lien-able under the statute.

b. Prescribed procedures are followedc. Attachment and Perfection- Some form of notice or possession is required to

effectuate the lien against the debtor and to make the lien viable against 3rd

partiesF. Effect of a Valid Lien

1.Once the creditor has properly complied with the rules governing attachment andperfection of the lien, an interest is created in the property that is effective not onlyagainst the debtor but also against any 3rd party who thereafter acquires an interestin the property

2.Preexisting interests may be earlier perfected liens or other recorded (sometimeunrecorded) rights that have been conveyed by the debtor or imposed on theproperty by law

a. A prospective lien holder should check filing records and make otherappropriate inquires before agreeing to give credit to the debtor on thestrength of a security interest in property

3.If the debtor defaults on the secured debt, the lien holder is entitled to foreclose onthe lien, and the interest of any subsequent transferee is confined to whateversurplus must be left after the lien has been fully satisfied.

G. Oversecured and Undersecured Debt1.Undersecured- when the value of the property, or the remaining value if there are

already senior claims on record, is less than the amount of the debt, a portion of thedebt will be unsecured

a. This amount is called a deficiency

b. If the value of the debtors equity just barely covers the debt, the lien holderhas no margin of safety to accommodate possible depreciation of the propertyor to cover accumulation of interest or legal fees that may be incurred intrying to collect the debti. A careful prospective lienholder must attempt to make a realistic

appraisal of the property and an accurate prediction of likely decreases inits value.

2.Oversecured- when the value of the property is more than the amount of the debt,this overage resulted in a creditor being oversecured

a. The excess is called an equity cushion

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b. The surplus equity can absorb any adverse change in the ratio of collateral todebt

H. Enforcement of a Lien1.Liens are enforced by a process known as foreclosure

a. Can only be enforced per 9-203(b) ifi. Value is givenii. Debtor has rights in the collateral or the power to transfer rights in the

collateral to a secured partyiii. And one of the following considering is met:

1.Debtor has authenticated (usually by signature) a securityagreement that provides a description of the collateral or

2.It is in the possession of the secured party (creditor) under 9-313pursuant to the debtors security agreement

2.Realization of the collateral involves two stepsa. Seizure of the propertyb. Application to satisfaction of the debt

3.Seizure of the property (levy or execution)a. Not necessary when a lien is perfected by possession, no seizure is neededb. Through self-help= accomplished by the lienholder on its own without

assistance of the courti. Must do so without breach of the peace

c. Other cases, or if the debtor resists, a court order or court officers arenecessary

4.Sale of the collaterala. Are always subject to some form of regulation and standards to ensure that

they are honest, properly conducted, and are likely to provide as reasonable aprice as possible under the circumstances

b. Commercially reasonable manner

I. Lien priority rules1.Ranks the liens, and the proceeds of any sale are applied to the full satisfaction of

each lien in order of priority until the fund is exhausteda. Example: collateral worth $900 with 3 liens each securing a debt of $500. The

senior lien is paid in full with the second ranking lien receiving the remaining$400, with an unsecured deficiencyof $100. The third and most junior lienreceives nothing and becomes an unsecured claim.

2.Chronology- Most common method of rankinga. First in time, first in right ruleb. Effective date is usually its perfection datec. Exception- found in statutes or court decisions or when a subsequent party

acquires the property in good faith and in circumstance under which they arenot expected to be concerned about other interests or to check public filingrecords

3.Summary: Issues to consider when dealing with priorities in collectionsa. Are all the liens and interests valid charges against the property?i. Must be valid and effectiveii. Identify the liens or interests and the nature of the property in which they

are asserted (consider statute)b. What is the effective date of each lien or interest?

i. Usually perfection dateii. Consider exceptions

c. Apply the rules of ranking

III.Fraudulent TransfersA. Uniform Fraudulent Transfers Act (UFTA), from 1984

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B. The action to avoid a fraudulent transfer is available to unsecured creditors1.A secured lienholder or another person with a valid and perfected interest in

property does not need fraudulent transfer law to protect those rights, since theyare effective against the subsequent transferee

C. assets 1(2) include only property to the extent that it is nonexempt and not subjectto a security interest and is not co-owned

D. Actual Fraud- 4(a)(1)1.Available to both creditors whose claims existed at the time of the transfer and to

those whose claims arose afterwards2.Concerned with the state of the debtors mind3.The creditor must prove that the debtor made the transfer with the deliberate

motive of removing the property from the reach of creditorsa. Proof of the debtors conduct in circumstances that show a dishonest motive

4.Consideration should be given to these listed in 4(b)a. Transfer to an insider (family, close friend)b. The debtor retain possession or control of the property after the transferc. Transfer or new debt exchange was concealedd. Before the transfer the debtor had been sued or threatened with suite. The transfer was, or was close to, all of the debtors assetsf. Debtor absconded (ran away and hid)g. Debtor removed or concealed assetsh. The debtor was insolvent at the time, or became insolvent shortly after the

transfer ( 5b)i. Transfer occurred shortly before or shortly after a substantial debt was

incurredj. Transfer to a creditor who then transferred to an insiderk. Debtor incurred debts with the actual or imputed intent of not paying them

when dueE. Constructive Fraud- 4(a)(2)

1.In deciding whether to proceed under actual or constructive fraud, must evaluatethe degree to which they are clearly demonstrable and the existence of other indiciaof fraud

2.Relies on specific objective criteria3.Not presumptions, but are inferences that help to establish the creditors case

unless the debtor offers a plausible explanation to the contrary4.Debtor did not receive reasonably equivalent value in the exchange and either left

the debtor with little assets to continue, or intended to incur (or reasonably shouldhave figured) that they wouldnt be able to pay their debts as they became due

5.Reasonably equivalent valuea. The entire context must be examined

i. Consider the relationship of the partiesii. Market environmentiii. Apparent motive for the transfer

b. Must know the value- 3 to know if it was deficient or not

F. Creditor remedies for fraud- 71.Avoidance of the transfer- 7(a)(1)2.Recovery of the property from the transfer so that it can be subjected to levy and

sold in execution- 7(a)(2) or3.Money judgment against the transferee (receiver) for the lesser of either the value

of the property measured at the time of transfer or the amount of the debt due bythe debtor- 8(b)

a. But remember:i. A good faith transferee, and subsequent transferee, who gave reasonably

equivalent value for the property is fully protected- 8(a)1.No matter how guilty the debtors motive

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2.If not reasonably equivalent value, but still good faith, onlypartial protection

G. Leveraged Buyouts, LBO1.A transaction in which the purchase of shares in a corporation is financed by the

corp itself or secured by the assets of the corpa. Corp provides funding to the buyer of its shares

2.Expectation that reimbursement of the corp will come from future profits that thebuyer will make from the operation of the corps business

3.Processa. Seller may give the buyer credit for the price of the shares and secured this

credit by having the corp grant a security interest in its assetsb. Corp may borrow money secured by its assets, and then it may lend this

money to the buyer as an unsecured loan4.Unsuccessful LBO

a. If the business does not produce large enough profits, the debt will not berepaid and the assets will be foreclosed upon

b. The risk of failure is borne not only by the corp, but also by its unsecuredcreditors who have lost the protection of recourse to unencumbered assets

c. LBOs are manipulative devices that result in the plunder of corporate assetsand the imposition of crippling debt on a formally viable corporation

5.LBO fraudulent transfer? Not per sea. However, when a corp fails to pay its debts after an LBO, creditor may look to

fraudulent transfer law to avoid the transfer made by the corp in connectionwith the LBO

b. Likely a constructive fraud case, basis for attacking LBO is constructive fraudi. The grant of a security interest in the corps assets increased its debt

over its assets, rendering it insolventH. Summary of evaluating Fraudulent transfers

1.Determine if it is a transfer- 1(12)2.Determine if the claim was in existence at the time of the transfer and therefore

was a creditor- 1(4)a. If so, look to 5 which is a lower standardb. If not, look to 4(a)

3.Check for actual fraud, if not, check for constructive frauda. Five common law elements of fraud (five fingers of fraud)

i. False representation of material factii. Party making the statement knows it to be falseiii. Made within intent to deceiveiv. The person hearing the representation justifiably relies on itv. The relying part is damaged

b. Consider reasonably equivalent value4.Good faith transferee?5.Creditors recourse6.Defenses of transferee?

IV.Background to Bankruptcy lawA. General Policy1.Remedial system, and collective remedy which encompasses the debtors assets

and debts2.Designed to fulfill two functions

a. Affords relief to the debtor by resolving and settling current debtsb. Protects creditors and guards their interests

3.Is federal law b/c the Constitution grants to Congress the power in Art. I, 84.Uniformity

a. Except when it bows to state law- example: exemptions in 522(b)B. Goals of bankruptcy code

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1.What Congress says2.Fresh start for the bankrupt

a. A rehabilitated individual debtor may once again become self-sufficient andproductive member of society

b. Apparent in the individual debtors exemptionsc. Debtor discharged. Policy favoring rehabilitation (learning their lesson)

3.Deal efficiently as possible with economic adversitya. Maximizing creditor returnsb. Quick fresh start for petitioners

4.Preference for reorganization an debt adjustment5.Manage financial distress and do the best job possible of preserving what can be

saved6.Balances creditor interests and debtor recovery7.Evenhanded treatment of creditors8.Preservation of the estate

a. Trustee and DIP investigates the debtors affairsb. Recover disposition of property in fraud of creditorsc. Reveal hidden assetsd. Resolve the affairs of the debtor in a way that best enhances the value of the

estateC. Structure and Organization of the Code

1.Chapters 1, 3, and 5 contain general provisions that are meant to apply to allbankruptcy cases under consideration unless irrelevant or there is some overridingprovision

2.Chapters 7, 9, 11, 12, and 13 are for separate forms of bankruptcy, only one ofthese chapters is selected when a bankruptcy petition is filed

a. Chapter 7- Liquidationb. Chapter 11- reorganizationsc. Chapter 13- adjustment of debt by individual debtors

V. Debtor Eligibility for Different Chapters- 109A. Take note of whether the code speaks of the debtor or individual debtor

1.Debtor can be individual partnerships, corporations, etc.2.Individual debtor is a regular humanB. Consumer vs. Business debtors

1.An individual is not a consumer debtor unless the bulk of its debt is incurred in thecourse of domestic consumption (household and dependent expenses)

a. Consumer bankruptcies often highlight social policies such as the preventionof homelessness, the protection of the common person and its dependents,and the social ills of the abuse of creditors

b. The stereotypical consumer debtor is a person who earns income fromemployment and spends most of it on living expenses or on buying goods andservices for personal use

2.Where an individual owns a business as a sole proprietorship, it incurs debts in the

course of commercial or other activity unrelated to householder or personalpurposes

C. Limitation on Successive Filings 109(g)1.If the individual debtor has had a case dismissed because of uncooperative or

disobedient behavior, or voluntarily dismissed the case following a creditorsapplication for relief from stay, the debtor may not become a debtor under the Codefor 180 days after the dismissal

2.Rule is intended to make it difficult for a debtor to obstruct creditors collectionefforts with the automatic stay

3.Section also applies whenever a motion for voluntary dismissal is make after amotion for relief from stay

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5.Schedule of income and expenses6.Schedule of executory contracts7.Summary of the debtors financial history and current financial position8.State of intent by the debtor with regard to the proposed surrender of encumbered

property or its retention by reaffirmation or redemption or the avoidance of liens onit

9.Copy of the debtors federal income tax return for the last year- 521(d)10. 521(b)- Certification from a nonprofit credit counseling agency consulted by the

debtor under 109(h)F. Dismissal or conversion of a Chapter 7 consumer case

1. 707(b)(1) sets out the basic rule that the court may dismiss a case filed by anindividual whose debts are primarily consumer debts if the court finds that thegranting of relief would be an abuse of chap 7

a. Only requires abuse, not substantial abuse2.Only applies to individual debtors whose debts are primarily consumer debts

a. Consumer debt is defined in 101(8) to mean debt incurred by an individualprimarily for a personal, family, or household purchasei. When the debtors total indebtedness is analyzed, consumer debt must

predominate3.In all cases except those in which the debtor has an annual income above the

median family income, any party in interest can bring a motion to dismissa. median family income is defined in 101(39A)b. Requires the schedule of income and expenditures filed under 521

4.No presumption of abuse, debtor satisfies means test in 707(b)(2)a. 707(b)(7) is a safe harbor that precludes application of the presumption of

abuse if the debtors monthly income is less than the applicable medianfamily income

b. Assumed that debtors who earn less than the median family income do notearn enough to make any appreciable payment to creditors under chap 13and therefore should be able to obtain chap 7 relief

c. Can still dismiss for abuse if the debtor has filed the petition in bath faith5.Presumption of abuse arises where the debtor fails to satisfy the means test in

707(b)(2), unless the debtor can rebut ita. Presumption arises because, based on the formula, the debtors disposable

income would be sufficient to support a payment plan under chap 13b. Can only rebut if debtor demonstrates special circumstances, such as a

serious medical condition, or a call to active military dutyi. These justify an increase in the allowed expenses and has the effect of

reducing the debtors disposable income to a level below that which gaverise to the presumption in the first place

G. Means test- 707(b)1.Formula for determine the presumption of abuse as set out in 707(b)(2)(A)(i)2.Calculate the debtors current monthly income

a. current monthly income is defined in 101(10A) to mean the average

monthly income from all sources that the debtor receives during the 6 monthperiod ending on the last day of the calendar month preceding the filingb. A snapshot of the debtors earningsc. May not accurately represent real historic earnings or what will likely occur in

the future3.Determine if more or less than state average considering the household size4.Deduct from this monthly income the debtors allowed monthly expenses, which are

determined by adding togethera. The monthly expense amount specified under the National and Local

Standards and under Other Necessary Expenses that apply to the debtorb. Average monthly payments made on secured debts

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c. All average monthly payments for priority claimsi. Add the total up and divide by 60 to get monthly amount

d. All reasonably necessary health insurance, disability insurance, and healthsavings account expenses

e. Also include cost of actual utilities if in excess of the allowance specified bythe Local Standards

f. Up to 5% more in food and clothing is debtor demonstrates that this increaseis reasonable and necessary

g. Cost of supporting an elderly or chronically ill or disabled household memberof the family

h. Does NOT include any payments for unsecured debts5.This gives the monthly disposable income amount6.This disposable income is then multiplied by 60 to provide a five year total figure for

the debtors net disposable income for eligibility in chapter 13 bankruptcy7.Then compare to the prescribed abuse standards, abuse is presumed if the average

monthly income 101(10A) in the previous 6 months disposable income figure is:a. Less than S109.58 per month, no presumptionb. More than $10,950 or $182.50 per month, presumption kicks in and the

debtors chapter 7 case is dismissed or converted to a chapter 13 casec. If between $109.58 and $182.50 per month then

i. Calculate the total amount of the debtors nonpriority unsecured claims,then figure out what 25% of this amount is

ii. If greater than $6,575, then abuse is presumed and case is dismissed orconverted

8.Steps in test for abuse presumption/means testa. Is the debtor an individual?

i. Yes, continueii. If not, no means test

b. Determine if debts are primarily consumer debts (tax debts not consumer)i. If not, then no presumption test

c. If so, determine if the annual monthly income and compare to state averagefor size of householdi. If less than average median, then no presumption

d. If more than the average, apply the formula abovei. Remember to deduct all allowable expenses

1.Found in the IRSs National and Local Standards and others in 707(b)(2)

2.Monthly payment on secured debts (unlimited)3.Monthly payment on priority claims (total then divide by 60)4.All others in previous page

H. Sanctions1.Sanctions against the attorney representing the debtor and party who improperly

filed a motion to dismiss2. 707(b)(4)(C) provides than an attorneys signature on a petition or pleading

constitutes a certification that the attorney reasonably investigated the debtorsfinancial position; that the petition or pleading was well grounded in fact andwarrant in law; and had no knowledge, after enquiry, that any information in thedocument was incorrect.

a. Dismissed for abuse and attorney acted wrongfully3. 707(b)(5) allows for an award of attorneys fees and costs to the debtor where the

debtor successfully contests a motion to dismiss and the party in interest (otherthan a trustee) acted unjustly in moving to dismiss the chap 7 case

I. Creditors Meeting1.Trustee must convene meeting under 341

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2.The meeting is held in all cases and must be held within 20 and 40 days after theorder for relief in chap 7 or 11

3.Principle purpose of the meeting is the examination of the debtor under 343 bycreditors and the trustee.

a. A debtor who fails to appear to answer truthfully can be penalized bydismissal of the case, denial of discharge or even criminal charges for perjuryor fraud

VII.The Automatic Stay

A. Provided in 362, its effect is to impose a wide-ranging prohibition on all activity outsidethe bankruptcy forum to collect prepetition debts from the debtor or to assert or enforceclaims against the debtors property or against estate property

B. Purpose1.Creditors can no longer seek an advantage by pressing on with enforcement

measures2.Creditors must channel their claims through the bankruptcy process

C. Nature and Scope of Stay1.Applies to all forms of bankruptcy

a. In Chap 7, the stay is focused on preservation of the property and theprotection of the debtor for the relatively short period during which the estateis collected, sold off, and distributed

b. In chap 11, the ability to keep creditor at bay during the process ofrestructuring is vital to the success of the effort at rehabilitationi. However, creditor can be hurt when the debtor uses estate property

during reorg2.Binding on all entities (entities defined in 101(15))3.Comes into effect upon the filing of the petition against all estate property- 362(a)

a. Upon filing the petition, an estate is created and applicable property isdeemed estate propertyi. A postpetition creditor has no claim to property of the estate and has no

right to try to reach estate property1.However, postpetition transactions by the debtor not involving

estate propertydo not give rise to the claims against the estate.

They are enforced against the debtor through the normalcollection methods of nonbanktrupcy law4.Stay remains in effect for the duration of the case

a. After the case there is usually a discharge so for many creditors the stayforever ends collection efforts under non-bankruptcy law

5.The effectiveness of the stay does not depend on creditors notice of the filinga. A creditor cannot seek to retain an advantage gained by violating the stay on

the ground that it had no knowledge of the bankruptcy when committing theact

b. Trustee or debtor can have the act set aside as voidablec. To willfully violate the stay puts the creditor liable to the debtor for any actual

damages suffered and, if its really bad, punitive damages too

i. Usually just held in contempt of court6.Activity excluded from the stay- 362(b)

a. Fall into two broad groupsi. When the activity is concerned with the enforcement by governmental

units1.Criminal proceedings against the debtor 362(b)(1)2.To enforce police or regulatory powers 362(b)(4)

ii. Under 362(b)(4), a creditor may perform acts to perfect or to maintainor continue perfection if that action is recognized by 546 or 547

1. 546(c)(1)- goods sold to the debtor, while the debtor wasinsolvent, in the ordinary course of such sellers business, the

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seller can reclaims such goods within 45 days before thecommencement of the case

2. 547(c) exceptions to trustee avoiding powers(contemporaneous exchange, payment of debt accrued in theordinary course of business)

b. Exception to the say under 362(b)(2) that protects the support rights of thedebtors spouse, ex-spouse and childreni. Domestic support obligations can be paid from property that is property

of the estate if under a court order or statute7.Termination of the Stay

a. 362(c)(1)Continues against estate property until the property is no longerproperty of the estatei. However, if property is abandoned to the debtor as exempt, it still cannot

be subjected to the claims of prepetition creditors who remain bound tothe stay

b. If the debt is discharged, the credit is permanently enjoined from collecting itunder 524(a)(2), so the stay is succeeded by the post discharge injunction

c. If the stay terminates as a result of dismissal of a case or a debt is excludedfrom discharge, creditors are entitled to continue collection activity undernonbankruptcy law

d. Under 362(c)(3) if the debtor has filed a prior case that was pending withinthe year preceding the petition and that case was dismissed, the automaticstay in the current case will terminate with respect to any action taken withinrespect to a debt or property securing such debt or with respect to any lease30 days after the petition is filed

D. Violation of the stay1.Any act in violation of the say, whether innocent or deliberate is immaterial2. 362(k) Deliberate violation could result in an award of costs, attorneys fees, and

compensatory and punitive damages or a sanction for contempt of courta. For an act to be willful, the action must be motivated by specific intent to

violate the stayE. Relief from stay under 362(d)

1.Grounds for relief from staya. For cause 362(d)(1)

i. Applicant must allege cause and make out a prima facie case that causeexists, the burden of non-persuasion falls on the opposing party

2.Most common: lack of adequate protectiona. The debtor has no equity in the property AND the property is not necessary

for an effective reorganization 362(d)(2)i. Applies only to the stay of action against property and cannot be used to

obtain relief from say of acts against the debtor1.When neither the debtor or the estate will obtain an economic

advantage by keeping the property so the applicants right toenforce its claim to the property should not be further suspended

ii. Under 362(g), the applicant for relief bears the burden of proving thatthe debtor has no equity in the property1.Must establish that the value of the property does not exceed

existing valid encumbrances2.Determined by valuing the property, usually by expert testimony

iii. If the property is a necessary component of the debtors businessoperations, depriving the debtor of the ability to use the property willdamage its chances of overcoming its financial difficulties

1.To rebut, the debtor must show that it is necessary AND that theproposed reorganization is feasible

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2.Automatic in a business chap 7 case, because no property isnecessary for a business that will not exist

iv. Most common problem is the different values to use and conflictingexpert testimony

1.Market value2.Distress value3.Liquidation value4.Determine which one is more appropriate

3.Termination of the staya. Lifting is so that the debtor can commence or resume suspended activity

4.Annulment of the staya. Terminates the stay retroactively so that the stay is treated as if it was never

in effecti. Prior acts in violation of the stay become validii. Used only in exceptional circumstances

5.Modification of a staya. Appropriate when the court decides to permit some activity but not to all the

persona applying for the lift full right to proceed with enforcement of a claim6.Conditioning of a stay

a. Leave the stay in effect, subject to the debtor or trustee satisfying somecondition

VIII.Claims Against the EstateA. Defined in 101(5)- To qualify as a claim, the obligation must give right to a right to

payment1.Includes unliquidated, contingent and unmatured and disputed claims

a. Unliquidated if its amount is not fixed and certain and cannot be calculatedarithmetically from known data

b. Contingent if the debtors liability is conditional upon the happening of afuture uncertain event with the possibility of this contingency occurring whenthe parties formed their relationship

c. Unmatured claim is when the time for payment has not arrives/lapsedd. Disputed if the debtor challenges the existence or the extent of the liability

B. General rule1.Only prepetition debts of the debtor are claims against the estate, any debt incurredby the debtor after the petition are charges against the debtors fresh start estate

a. Exceptions- claims arising from the administration of the estate and 1305(a)(2) that enables proof of claim by a person who extended credit to thedebtor in a postpetition consumer transaction for the debtors purchase ofproperty or services necessary for the debtors performance under the plan

2.Ranking of claims are the same in all chaptersa. A senior class must be paid in full before the next class is entitled to

distributionb. If the fund is insufficient to pay all claims in a class in full, it is shared pro rata

in that class

C. Process1.A proof of claim is the creditors formal submission of a claim against the estate2.In a chap 11 case, a creditor need not prove a claim unless its claim is listed as

disputed, contingent, or unliquidated or the claim is unlisted and the creditorotherwise comes to know of the bankruptcy

3.Secured claims do not have to be proved because there is property to prove it.a. An undersecured creditor must prove a claim to receive a distribution on its

deficiency4.Unsecured creditor must prove their claims5.Once a claim is proved, it is allowed automatically unless a party in interest files a

timely objection to it

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a. Most common is 502(b)(1) that the claim is unenforceable against the debtorand the debtors property under an agreement or applicable law

D. Secured claims in Bankruptcy Law1.Secured claims are satisfied by the collateral or its proceeds

a. If there is more than 1 lien on a piece of property, the secured claims areranked in accordance with priority prescribed by nonbankruptcy lawi. Lien is defined in 101(37)ii. If the collateral is worth more than the debt, the surplus is applied to any

junior claims, and if there is none, then the secured creditor has a right tointerest and costs under 506(b), but only up to the value of thecollateral

1.Costs and fees are subject to the test of reasonableness and thecourt can reduce them if it considers them unreasonable

b. 506(a)(1) states that collateral must be valued in light of the purpose of thevaluation and of the proposed disposition or use of the propertyi. Example: if the property is to be liquidated, liquidation value is usedii. Example: if the property is to be used by the debtor or sold on the

market, market-value is usediii. Value is factual question on which experts can differiv. When the property is personal property that is collateral for a secured

claim in an individual debtors case under chap 7 or chap 13, the value ofproperty must be based on the replacement value

1.The price that a retail merchant would charge for property of thatkind considering its age and condition at the time of valuation

2.A lienholder is entitled to adequate protection of its interest and to ultimate fullpayment of its secured claim (value of the property)

3.Under 506(a)(1) a claim is secured to the extent of the collaterals value and isunsecured as to any deficiency

a. If the deficiency is not paid and later discharged, the secured party wouldnever be able to obtain more than the court-determined value in thebankruptcy case- called strip down

E. Unsecured claim in Bankruptcy Law1. 507(a) lists 10 priority classes of unsecured claims in descending order

a. All except for chap 7 require 507 priority claims to be paid in full unless theholders of such claims agree to the contrary

2.Followed by general unsecured claimsF. Order of Claims Distribution in Bankruptcy

1.Trustee and lawyer are paida. Or else no one would take a case

2.Secured claimsa. Fully secured debts paid in full plus interest and costs (to the extent of any

equity cushion)b. Partially secured debts

i. Secured portion paid in full to extent of collateral

ii. Deficiency becomes general unsecured claim3.Priority claims- 507(a)a. Domestic support obligations

i. Defined in 101(14A)b. Administrative expenses

i. 1st rank- superpriority claims under 364(c)(1)1.Credit obtained by trustee for estate during pending case-

postpetition financingii. 2nd rank- superpriority claims under 507(b)

1.Expenses of the estate that are actual and necessary costs ofpreserving the estate

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Include trustee compensation

Fees for professional services

Postpetition taxes due by the estate

Performance under executory contracts2.When adequate protection is not adequate enough

iii. 3rd rank- other administrative expenses under 5031.For involuntary cases

c. Wages and salaries with a $ cap- 507(a)(4)

i. With anything exceeding the limit becoming a general unsecured claimii. Only covers prepetition earnings, if employees render services after the

commencement of the case, these are admin expensesd. Employee benefits with a $ cap- 507(a)(5)e. Grain producers and fisherman (ignore)f. Deposits for consumer goods or services with a $ capg. Various taxes with a $ and type cap- 507(a)(8)

i. For income taxes for the 3 to 4 years prior to the petition and propertytaxes payable in the year before bankruptcy

h. FDIC (ignore)i. Claims for wrongful death or personal injury resulting from the debtor driving

while intoxicated

4.General unsecured claimsa. Those timely filed or where the credit didnt have proper noticeb. Tardy claims

5.Claims for finds, penalties, forfeiture, or punitive damages, which are notcompensation for actual pecuniary loss

6.Interest on priority and general unsecured claims7.Any surplus remaining goes to the debtor

G. Priority Claims- in General1.To the extent that a claim exceeds the limit, it is a general unsecured claim

a. Therefore, possible for a single debt to be partly a priority claim and partly ageneral claim

2.The policy of preferring admin expenses makes practical sense because if they were

not given a high priority, it would be difficult to find people who would be willing toperform services for the estate

3.Because bankruptcy administration is supposed to benefit creditors of the estate, itis regarded as appropriate that the expenses involved in the preservation of theestate come out of the fund before it is distributed to creditors

IX.Adequate ProtectionA. Is cause for relief from a stay under 362(d)(1)

1.Permits relief from stay when the applicants interest in property lacks adequateprotection

B. Only available to holders of interests in property of the estate or the debtor and cannotbe sought by unsecured creditors

C. Confined to claims such as secured creditors, lessors who have leased property to thedebtor, co-owners of the debtors property, and others with a valid interest in property ofthe estate.

D. Trustee or DIP, as the party opposing relief from stay, bears the burden of proving thatthe interest is adequately protected

E. When is it necessary?1.When the stay creates a risk for the secured creditor

a. Because the stay prevents immediate foreclosure, the creditor faces the riskthat its collateral may decline in value while the stay is in effect so that if theproperty has to be sol, it will generate fewer proceeds

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2.In a chapter 11 or 13 case, if the debtors attempt toward rehabilitation fails, theestate ends up in liquidation and the secured creditor is left with property valued farless than before

3.If the relationship between the debt and the property value will change adverselyduring the period of the stay, the creditor is prejudiced in having to wait

F. Factors to consider when lifting/not lifting a stay1.If the stay is lifted and foreclosure proceeds, what is the claimant likely to receive?

a. Requires a factual determination of the present value of the property inrelation to the debt

2.If the stay is not lifted and the estate deals with the property as proposed, what islikely to happen to the value of the property in relation to the debt

a. Compare future value of the debt, damage to the property through use,insurance coverage

3.What is the likelihood of a successful rehabilitation?a. Must consider the risk of eventual liquidation of the property under adverse

circumstancesi. Ie. Fire sale

4.The amount of equity cushion, that is, the surplus of the debtors equity in theproperty related to the secured claim

G. When is there lack of adequate protection?1.The debtor has no equity in the property AND the property is not necessary for an

effective reorganization 362(d)(2)a. Applies only to the stay of action against property and cannot be used to

obtain relief from say of acts against the debtori. When neither the debtor or the estate will obtain an economic advantage

by keeping the property so the applicants right to enforce its claim to theproperty should not be further suspended

b. Under 362(g), the applicant for relief bears the burden of proving that thedebtor has no equity in the propertyi. Must establish that the value of the property does not exceed existing

valid encumbrancesii. Determined by valuing the property, usually by expert testimony

c. If the property is a necessary component of the debtors business operations,depriving the debtor of the ability to use the property will damage its chancesof overcoming its financial difficultiesi. To rebut, the debtor must show that it is necessary AND that the

proposed reorganization is feasibleii. Automatic in a business chap 7 case, because no equipment is necessary

for a business that will not existd. Most common problem is the different values to use and conflicting expert

testimonyi. Market valueii. Distress valueiii. Liquidation value

iv. Determine which one is more appropriateH. Ways to furnish adequate protection1.Cash payments- 361(1)

a. if the state has sufficient income it can make payments to reduce the debtand maintain the ratio between the claim and the property value

2.Additional collateral- 361(2)a. If there is unencumbered property of the estate, the trustee can grant a lien

on this property or replace the existing lien with a lien on property of greatervalue

b. Most common when the creditor is a secondary lienholder (junior lien) on theproperty

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3.Grant of indubitable equivalent- 361(3)a. Any form of relief that measures the form of protection against the debtb. Expressly excludes the grant of an admin expense priority as a means of

providing the protectionI. Superpriority under 507(b)

1.If realization of the property eventually becomes necessary, it may turn out thatdeterioration of the property to debt ratio was worse than anticipated, so that theinterest was no adequately protected

2.Intended to provide relief to the secured creditor if the trustee provided adequateprotection to the claimant, and that protection turned out to be inadequate

a. The shortfall is treated as priority claim that ranks at the top of the adminexpense priority category- just below domestic support obligations

3.Assures that if the trustee miscalculates the amount of protection needed, theclaimant will be paid before anybody else (except DSO)

X.Property of the EstateA. Date of filing the petition is the crucial date for determining the debtors property

interests that pass to the estate1. 541(a) states what is included in the estate

a. Must determine whether the debtor has an interest in property and the natureand extent of that interest

2. 541(b) and (d) are exclusionsa. Covers property such as educational savings accounts, tuition benefit fundsand contributions to employee benefit plans (covered under ERISA)

b. Also funds that the debtor is holding in trust for someone else- legal title, notequitable title

c. Ask whether the debtor has title to the propertyB. Property acquired after the filing of a petition

1.In a chap 7 and chap 11 case, the general rule is that all earning and propertyacquired by the debtor subsequent to the filing from sources that are not related tothe prepetition property remain property of the debtor and do not become propertyof the estate

a. 541(a)(6) and (7) includes estate proceeds

b. In a chapter 7 case, as soon as the debtor files for bankruptcy, the debtorbegins to accumulate a new estatei. The new estate consists of earnings and property acquired after the filing

as well as property that has been released to the debtor from the estateas exempt or abandoned by the trustee having no economic value

1.Part of the debtors fresh start2.In a chap 13 case, the estate includes all property under 541 owned at the time of

the petition and property acquired up to the time the case is closed, dismissed orconverted

a. 1306- Property and income of the debtor continue to enter the estate untilthe case comes to an either

b. Trustee has supervisory power over them during the plan (legal, not physical)

C. Trustees power to compel discovery of property of the estate (turnover)1.Under 542 any property of the debtor in the possession of other persons must be

delivered to the trustee or its value accounted fora. Duty to deliver property of the estate is turnoverb. Exception under 542(a) if the property is of inconsequential value or benefit

to the estate2.Even a creditor with interest in the property is required to relinquish possession to

the trusteeD. Abandonment of the Property by the Trustee- 554

1.Property that enters the estate is of no value or benefit to the estate can beabandoned

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a. May be because it is fully encumbered and is not needed for the debtorsrehabilitation

b. Because it is fully exempt and cannot be liquidated for the benefit of creditorsc. Because it costs more to maintain that it is worthd. It has no economic value

2.Allowed to abandon after notice and hearinga. Notice and hearing is defined under 102

3.In a chapter 7 case, the retention of the property imposes an admin burden on theestate with no corresponding advantage when all the proceeds of the collateral areneeded to satisfy a secured claim

4.Lack of equity in property is not dispositive in chap 11 or 13 if it is needed by thedebtor to reorganize successfully

E. Who does the property go to?1.If the debtor has some right to the property, it is abandoned to the debtor

a. This does not release the property from the stay of enforcementb. Example: property worth $1,000 is subject to a security interest of $800 and

the debtor has an exemption of $400, the estate has no interest in theproperty (secured creditors interest is $800 and the debtors is $200), theproperty is abandoned to the debtori. Unless the debtor successfully negotiates a reaffirmation agreement or

makes some other arrangements with the secured creditor to retain theproperty, the secured credit has the right to apply for relief from stay, andif granted, the secured creditor can foreclose on the property and getcosts with cushion

2.If the debtor has no rights to the property, it is abandoned to the party that holds aninterest in it

XI. Exemptions- 522A. Policy

1.Only available to individual debtors and available under all chapters2.Goals of exemption is to insulate certain property from the claims of creditors so

that the debtor is not rendered destitute by seizure or liquidation3.Property released to the debtor as exempt forms part of the debtors new estate

thereby helping the debtor gain a fresh start4.Help the debtor because they are deducted from the liquidation value of the estatea. Obvious in chap 7, in chap 11 and 13 liquidation value is taken into account in

determining the minimum level of pay required for plan confirmation5.Because exemption detract from creditor interests, they should be limited and

controlled so that they are no more generous than they need to be to accomplishtheir goal of preventing the debtors impoverishment

6.Assets that qualify for exemption are ordinary necessities such as household goods,debtors home and car and items of sentimental value and the property that debtordepends on for a livelihood such as tools of the trade or disability or pensionpayments

B. Procedure/Process for exemptions

1.Exemption do not automatically take effect, debtor must file a list of exemptproperty under 522(l)

2.The trustee or a creditor has the right to challenge the debtors claim of exemptionsa. Rule 4003(b) requires the objection to be filed within 30 days of the creditors

meeting3.When the monetary limit is too small to enable the debtor to exempt the asset in its

entirety (the exemption does not cover the debtors entire equity in the property, itis partially exempt)

4.Partially exempt property is NOT returned to the debtor

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5.The trustee sells the partially exempt property, pays out the value of the exemptionto the debtor, and places the balance of the proceeds in the fund to be distributedto creditors

C. State Opt Out1. 522(d) provides a set of uniform bankruptcy exemption, but 522(b) allows a

state to elect to substitute its own exemptions, known as opt-out2.The state opt out of 522(d) by enacting a statute the specifically does not

authorize debtors domiciled within its jurisdiction to use the exemptions listed in 522(d)

a. Debtors are then confined to the exemptions provided by state law, togetherwith any applicable federal nonbankruptcy exemptions

3.If the state has not opted out, a debtor domiciled in that state may choose to claimeither the exemptions provided in 522(d)or the applicable non-bankruptcyexemptions

a. WI has NOT opted outD. Which state exemption law rules? 522(b)(3)(A)

1.The state law that determines which set of exemption applies in a bankruptcy caseis the state of the debtors domicile

a. More than physical residence, but intend to remainb. Problems with forum shopping remedies in 2005 amendments

2.Provides that the law that governs the debtors exemption rights is the law of thestate in which the debtor was domiciled for the 730 days (two years) immediatelypreceding the petition

3.If the debtor has not been domiciled in any single state for that 730 day period, theapplicable exemption law is that of the state in which the debtor was domiciled inthe 180 days immediately preceding the 730 day period

a. Must look back to the period before the two yearsE. Homestead Exemptions

1.Bankruptcy exemption under 522(d)(1) is $20,200a. Means that the debtor cannot claim the house as exempt in full, debtor is

limited to a relatively small portion of equity in the home2.Some states have higher homestead exemptions, WI is $40,0003.Some states provide for an unlimited homestead exemption- Texas and Florida, to

control this Congress limits the exemption where the debtor has behaveddishonestly or manipulatively

a. 522(b)(3) prevent the debtor from moving to a state on the eve ofbankruptcy to take advantage of desirable exemptions

b. 522(o) reduces the debtors homestead exemption under state law to theextent that the value of the debtors interest in the homestead is attributableto the disposition of the nonexempt property in the 10 years before thepetitioni. The idea being that if the debtor had sold nonexempt property in the 10

years before bankruptcy and had invested the proceeds in exempthomestead property, the exemption is reduced by the amount of that

investmentii. Must prove that debtor had intent to hinder, delay or defraud creditors1.Consider badges of fraud

c. 522(p) limits the debtors interest in a homestead exempted under state lawto $136,875 if the debtor acquired the homestead within 1,215 days (3 years,4 months) from the date of the petitioni. But proceeds from prior home that went to new home is not included

F. Debtors Power to Avoid Interests that Impair Exemptions1.General Rule: a debtors exemption in property DOES NOT win against the holder of

a valid consensual security interest in that property

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2.If the debtors equity in the property exceeds the exemption, the lien or securityinterest remains a valid charge on the nonexempt portion of the equity

3.States cannot override this avoidance power in its opt-out statutes4. 522(f)(1)A)- An exemption does take precedence over a judicial lien that attaches

to the property, whether created by prejudgment proceedings, by recording thejudgment, or post judgment proceedings such as execution- applies to all types ofexempt property

a. Only to the extent that the judicial lien impairs the exemptionb. Exception- liens related to domestic support obligations

5. 522(f)(1)(B)- the debtor may avoid a nonpossessory nonpurchase money securityinterest in specified household or consumer goods, tools of trade, or professionallyprescribed health aides to the extent that the security interest impairs anexemption in such property

a. BUT, must meet three requirementsi. Secured party must not have perfect the interest by taking possession of

the collateralii. The loan or credit must not have been provided to enable the debtor to

acquire the collateraliii. Must relate to one of the three types of property specified

1.Household or consumer goods2.Tools of the trade3.Professionally prescribed health aids4.Policy: in many cases, the property is likely to be worth more to

the debtor than its realized value so that the threat offoreclosuregives the creditor great power over the debtor.Congress was concerned about abuses in these types oftransactions, which it regarded as manipulative and unethical

6.To determine amount of impairment to be avoided as defined in 522(f)(2)(A):a. Determine if security interest is avoidable

i. Judicial lien orii. Nonpossessory nonpurchase money security interest

b. If so, determine what the value of the debtors interest in the property wouldbe in the absence of liens- 522(a)(2) uses market value

c. Add togetheri. The lien to be avoid; plusii. Other liens on the property; plusiii. The amount of the debtors exemption (dont forget about wildcard

exemption if still available- 522(a)(5))d. Compares i and ii, the exemption is impaired to the extent that ii is greater

than i

XII.Reaffirmation and RedemptionA. Redemption- 722

1.When property is subject to a lien that secures a dischargeable consumer debt, anindividual debtor in chap 7 liquidation can redeem the property from the lien holder.

2.By redeeming the collateral, the debtor in effect buys it from the secured creditorfor the amount of the allowed secured claim

3.Requirements:a. The property MUST be tangible personal property andb. intended primarily for personal, family, or household use , andc. The property MUST have been either fully exempted or abandoned (not

necessary for reorganization or of any benefit to the estate)4.Must pay the claim in full

a. Redemption price is limited to the value of the collaterali. If the collateral is worth less than the debt (so that the creditor is

undersecured) the allowed secured claim and hence the

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b. No right to redeem by installmentsi. Must use reaffirmation

5.If the value is exactly equal to or less than the secured debt, the estate has nointerest in the property, so it is likely to be abandoned, thereby allowing the debtorto redeem it by settling the secured claim.

6.If the property is worth more than the debt but the equity is fully exempt, the estatehas no interest in it and redemption can be affected by paying the secured claim

7.If the equity exceeds the debtors exemption, the estate does have an interest inthe property, and redemption is not possible unless the debtor first pays out theestates interests so that the trustee will abandon the property

8.Not needed in chaps 11 and 13 because the debtor is able to retain desired propertyupon confirmation of a plan which provides protection of the security interest andperiodic payments on the debt

B. Reaffirmation- 5241.An agreement between the debtor and the creditor under which the debtor agrees

to pay a debt that would otherwise be discharged2.An alternative to redemption where the debtor wishes to keep the property, but

cannot find the cash to settle the secured claim or otherwise meet the qualificationsof 722

3.Requirements- 524(c) and 524(d)a. Can be both secured and unsecured debts and not confined to chap 7 cases,

but is not really needed in other casesb. Must be made before the discharge is granted and must be filed with the courtc. Set out in 542(k), a lengthy standard disclosure must be provided to the

debtor by the creditor at or before the agreement is signedd. If the debtor was represented by an attorney

i. the attorney must file a declaration with the agreement stating that thedebtors consent was informed and voluntary and

ii. that the agreement does not impose an undue hardship on the debtor ora dependent and that the

iii. Attorney fully advised the debtor of the legal effect and consequences ofan agreement of that kind, and what happens if the debtor defaults

e. If the debtor was not representedi. the agreement needs court approval andii. is granted only if the agreement does not impose an undue hardship on

the debtor or a dependent andiii. is in the debtors best interest

f. Valid only to the extent that it is enforceable in non-bankruptcy lawi. Doctrines such as unconscionability, fraud or duress make the agreement

avoidableg. Debtor can rescind the agreement at any time before the discharge is

granted, or within 60 days of the agreement having been filed in court,whichever is later

4.Creditors who solicit or offer a reaffirmation must be careful not to violate (or

appear to violate) the automatic staya. Most courts do not consider a mere suggestion of reaffirmation to a be a perse violation of the stay

b. However, must still not appear to use 524 as a pretext for trying to evadethe strictures of the stay

5.Motivation for debtora. Where the debt is secured, the debtors motive in entering a reaffirmation is

the desire to keep the collateral, instead of losing it to liquidation andforeclosure

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b. For unsecured debts, the advantage to the debtor is usually somethingsuspect. Courts therefore approach the reaffirmation of unsecured debt withgreater suspicion

C. Ride-Through1.Some courts have allowed the debtor to elect to retain the collateral while

continuing to pay installments to the secured party as required by the originalcontract

2.A secured transaction rides-through the bankruptcy without being formallyadministered and dealt with as part of the estate

3.However, 521(a)(6) makes is clear that redemption for cash or reaffirmationarethe only courses available to a debtor where the creditor has a secured claim inpersonal property to secured that property (PMSI)

a. If the debtor fails to make the election to redeem or reaffirm within 45 daysafter the first meeting of creditors, the property ceases to be property of theestate and the stay ends so that the creditor can proceed to foreclose understate law

XIII.Trustees Avoidance Powers- GenerallyA. Remember that the debtor has the right under 522(f) to avoid certain liens that impair

exemptionsB. Applicable to all chapters

1.Under chap 7, avoidance benefits the creditors by making the estate larger2.Under chap 11 and 13, the debtor may benefit but it mainly benefits creditors byincreasing the liquidation value of the estate which determines the minimum levelof payment under the plan

a. Leads to the weird result under chap 11 that the DIP is avoiding transfers thatthey themselves made a short time ago

C. The avoidance powers enable the trustee to set aside certain transactions entered intoby the debtor prior to filing the petition

1.Aimed at transfers of property by the debtor and obligations the debtor assumeda. Transfer is defined broadly in 101(54)b. Transfer can be voluntary or involuntary and can be an outright disposition of

property of the grant of an encumbrance or other interest in it

2.Most common is a creditor (initial transferee) who acquired the property insatisfaction of a debt. When the transfer is avoided, the previously settledindebtedness becomes an unpaid claim once again

a. To encourage such creditor to surrender property to the estate followingavoidance of a transfer, 502(d) provides for the disallowance of thecreditors claim unless the property is returned

D. Policy1.Part of the trustees function of collecting estate property and maximizing the

estates value2.By enabling the trustee to overturn certain prepetition transfers of the debtor, the

Code allows the estate to recover property interest that the debtor had relinquishedbefore bankruptcy

a. In many cases, the debtors bankruptcy is preceded by a period of financialcrisis in which creditors jostle for advantage by collection activity and thedebtor responds to pressure by making payments to particular creditors ordisposing (selling off) its property

b. Some of the practices could be dishonest or manipulative3.Exceed the powers available to creditors under nonbankruptcy law

a. If it is understood that certain advantages given to a creditor are avoidable ifthe debtor becomes bankrupt, creditors will be discouraged from pursuing thedebtor because the gains will be short-lived or completely worthless

4.Tries to avoid transactions that Congress deemed were irregular or illegitimate

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5.When non-bankruptcy law requires an act of publicity to perfect a lien, failure tocomply with the rules makes the lien avoidable

E. Avoiding Statutes1.Strong Arm Statute- 544 allows the trustee to avoid transfers and obligations that

could have been avoided under non-bankruptcy law (unperfected and fraudulenttransfer, normally) by an actual or hypothetical unsecured creditor

2. 545 gives the trustee limited power to avoid certain kinds of statutory liens3. 547 avoid preferential transfers that occurred within 90 days before the petition (1

year for insiders)4. 548 power to avoid fraudulent transfers and obligations that occurred within a

year before the petition5. 553 avoid setoffs to the extent they involved disallowed claims within the 90 days

prepetition period6. 559 permits the trustee to avoid unauthorized postpetition transfers7. 546 limitations on avoidance powers8. 550 and 551 the estate takes over the rights of the defeated receiver of

transferred property so that it benefits the estate rather than the holders of juniorinterests in the property

F. Process1.If the avoidance action concerns an obligation incurred by, or an interest in property

granted to the debtor, the courts determination of avoidability results in eitherdisallowance of the claim against the estate or an invalidation of the claim to theproperty.

2.If the action is aimed at the avoidance of a transfer of property by the debtor,judgment in favor of the trustee obligates the transferee to return the property or itsvalue to the estate

a. 550(b)- However, the trustee does not have the right to recover from asubsequent transferee who takes the property for value, in good faith, andwithout knowledge of the voidability of the transfer (a bona fide purchaser)i. A bona fide purchaser is not liable to return the property or its value, any

later transferee is protectedb. 550(e)- any transferee (initial and subsequent) who acquired the property in

good faith but who is not entitled to protect under 550(b) (likely becausethey had knowledge or didnt pay what its worth) is given a lien on theproperty to secure the lesser of the its costs of any improvement to theproperty or the increase in value resulting from the improvement

G. Statute of limitations on avoidance powers1.The trustee can reach back only so far into the pre-bankruptcy period to avoid

certain transfers2. 546(a) limits avoidance to these, whichever is sooner

a. the duration of the case (case closed, no avoidance); orb. the later of these

i. 2 years before order for relief (filing of petition in voluntary case)ii. 1 year before the appointment or election of the first trustee

3. 550(f) when recovering property under avoidance, must be the earlier ofa. 1 year after the transfer has been avoided; orb. By the time the case is closed or dismissed

H. General limitation on avoiding powers1.When a creditor can still perfect

a. Under 546(b) if the interest is unperfected at the date of the petition but theperiod prescribed by the non-bankruptcy law for perfection has not yetexpired, the holder of the interest can perfect at any time between the expiryof the applicable period

2.Sellers repossession rights- 546(c)a. Sale must be in the ordinary course of business

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b. Demand from seller must be in writingc. A buyer is deemed to make an implied representation of solvency when

purchasing goods; if the buyer was insolvent upon receiving the goods, andthe seller was unaware of this, the seller may rescind the contract and reclaimthe goods on grounds of fraud

d. Confines the right against avoidance to sales in which delivery to the insolvent( 101(32)- balance sheet test) buyer occurred within 45 days before thepetitioni. Then seller has to make a demand for the property between 10 days and

45 days after the debtor receives the goodsii. If the 45 day period ends after the petition, the demand must be made no

later than 20 days of the petitione. If goods delivered to the buyer within 20 days of bankruptcy, then the seller is

able to claim the price of the goods as a priority admin expense under 546(c) read with 503(b)(9)

XIV.Trustees Avoiding Powers- Strong Arm Statute- 544A. 544(a) is known as the strong arm statute because it confers 3 hypothetical roles on

the trustee:1.As a judicial lienholder

a. 544(a)(1) gives the trustee the power to avoid any transfer of property or

any obligation incurred by the debtor that would be avoidable in non-bankruptcy law by a creditor who has a judicial lien on all of the debtorsproperty at the time of the petitioni. Used when some lien is not perfected, therefore a judicial lien over all the

debtors property would take precedence over it2.As an unsatisfied execution creditor, and3.Bona fide purchaser of real property

a. 544(a)(3)- only for real propertyB. 544(b)(1) states that the trustee may avoid any transfer made or obligation incurred

by the debtor that is avoidable in prevailing non-bankruptcy law by a creditor holding anallowable unsecured claim

1.Does not create a hypothetical creditor- instead the trustee succeeds to the

avoidance rights of an actual unsecured creditor2.All the section requires is that the claim would be allowable if proved3.Used when the debtor has transferred property fraudulently (fraudulent transfer)-

only time when an unsecured can void a transfera. 548 allows the trustee to avoid fraudulent transfers made within 2 years

before the petitionb. Therefore if the state law reaches back more than 2 years, the trustee applies

544(b)(1)i. UFTA 4 or 5 has a statute of limitations of 4 years (Under UFTA 9)

C. Trustees Power to Avoid Statutory Liens- 5451.Statutory liens are defined in 101(53) as liens arising solely be force of a statute

on specified circumstances or conditions

2.General rule: If the lien is validly obtained and perfected under non-bankruptcy law,then it cannot be avoided UNLESS if fits into one of these 3 categories

a. 545(1)- if it is specifically created to take effect upon the debtorsinsolvency, bankruptcy or financial distress

b. 545(2)- if it is no perfected or enforceable against a hypothetical bona fidepurchaser who is deemed to have purchased the property on the date thecase was filed

c. 545(3)- statutory lien for rent

XV.Avoiding Preferences- 547A. 547 permits the avoidance of transfers in the 90 days (for insiders, one year) before

the petition that give a creditor an advantage to which it is not entitled to in bankruptcy

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B. Not concerned with the state of the mind of the debtor or creditorC. Has no requirement of bad faith, knowledge, or deliberate advantage-takingD. Purpose

1.To identify transfers that illegitimately prefer the creditor thereby undermining thecollective process of bankruptcy and offend the goals of evenhanded treatment ofcreditors and preservation of the estate

E. Requires a hypothetical chap 7 liquidation to be calculatedF. Requirements- 547(b)

1.Must have been a transfer of an interest in property of the debtor to or for thebenefit of the creditor

a. Transfer is defined in 101(54)b. Creditor is defined in 101(10)c. Claim is defined in 101(5)d. Debtor must have a right in the property

2.Transfer must have been for, or on account of, an antecedent debta. Debt is defined in 101(12)b. Antecedent= if the debt arose before the transfer was madec. Question of when the debt arose must be determined and is not necessarily

when the debt is duei. when liability is fixed, matured and unconditionally payable

3.Debtor must have been insolvent at the time of the transfera. Insolvent is defined in 101(32)- balance sheet test

i. Liabilities exceed assets at fair valuationii. Not discounted if the debtor does not remain in business

4.Transfer must have occurred within the prepetition avoidance perioda. 90 days before filing the petitionb. For an insider, 1 year

i. Insider is defined in 101(31)- close relationship to, officers of a corpc. 547(e)- date of transfer is the date on which it became effective between

the parties under non-bankruptcy law (has it been perfected?)i. Transfer occurs on the date of perfection unless the act of perfection is

completed within 30 days of the transfer taking place5.Transfer must have improved the creditors position

a. Must have enable the creditor to receive more than it would have received ifthe transfer had not been made and the debt had been paid under a chap 7liquidation distribution

G. Exceptions to avoidance- 547(c)1.A substantially contemporaneous exchange for new value

a. New value is defined in 547(a)(2)b. Intended to protect transfers from avoidance on the technicality that they

were made subsequent to the debt, where the parties intended an immediateexchange and the delay between the creation of the debt and the transfer isinconsequential

c. Involving a check

i. If the parties reasonably understood this to be a cash transaction ratherthan a credit sale, the fact that a check was used does not matter2.Ordinary course of business payments

a. Must meet one of two requirements:i. The debt must have been created by a transaction that was in the

ordinary course of business of both the debtor and creditor; orii. Payment of the was in the ordinary course of business and made

according to ordinary business terms3.Purchase money security interests, when perfected

a. Loan or credit used to acquire the very collateral subject to the interest (carloan)

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8.Exempts charitable contributions to a qualified religious or charitable entity unless itexceeds 15% of the debtors gross annual income, or if in excess of 15% wasconsistent with the debtors practices in making such contributions

B. Post-petition transfers- 5491. 549 gives the trustee the power to recoup estate property that has been

transferred without authority after the petition has been file2.Policy

a. Preservation of the estateb. Debtor lacked authority to make the transfer

XVII.Use, Sale or Lease of Estate Property and CreditA. Doesnt really apply in chap 7 cases because the business is going to dissolve anywaysB. Policy

1.To allow the trustee or DIP to conduct the affairs of the estate to its best advantage2.Discretion to enter into ordinary business transactions without court approval

streamlines the process making it easier to focus on the problemsC. Distinction between Ordinary and Extraordinary Transactions

1.Trustee or DIP is able to maintain routine business operation with minimuminterference but should not be able enter into extraordinary transaction withoutgiving notice to creditors and other interested parties, making the trustee prove itsreasons for this extraordinary transaction

2.Two-prong test for deciding if a transaction is in the ordinary course of the debtorsbusinessa. Vertical dimension- the reasonable expectations of parties in interestb. Horizontal dimension- looks more broadly at the commercial context in which

the debtors business is operated3.Whether parties in interest could reasonably have anticipated a transaction of this

type, given the range and scope of the debtors business and the normal practicesin the business environment in which the debtor participates

D. When outside the ordinary course of business1.Must have notice and hearing as defined in 1022.The court must determine whether it should be approved under 363(b)(1)

a. Will determine whether the transaction is advantageous to the estate

b. Whether the transaction is compatible with the larger scheme of rehabilitationc. Whether the transaction is likely to further or hamper the debtorsrehabilitation strategy

3.Creditors have an interest in protecting their propertya. A creditor may seek adequate protection under 363(e)

E. When dealing with cash collateral1.defined in 363(a)

a. not only includes paper money but also negotiable instruments, documentsand securities

b. Treated as cash equivalents because they can be liquidated easily2. 363(c)(2) freezes the use of cash collateral even when dealing with it would be in

the ordinary course of business

a. Trustee must either obtain permission from the interest holder or get authorityfrom the court

3.Cash collateral may not be dealt with by the trustee even in the ordinary course ofbusiness unless the holder of the interest in that collateral consents or the courtauthorizes the transaction after notice and hearing

4.Policya. A creditor who has a security interest in such assets is in a much greater

danger than other secured creditors because of how easy it is to sell suchproperty

F. Postpetition Credit- 364

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1.Credit transaction outside the ordinary course of business and the creation ofsecured debt must be authorized by the court following notice and hearing

2.Policya. The assumption of new debt by the estate is potentially detrimental to an

existing unsecured creditorb. If the debtor is allowed to secure new credit, its chances of a successful

rehabilitation are improved, and prepetition unsecured creditors have achance at receiving higher level of paymentsi. However, if the new credit is obtained that the debtor fails in rehab, then

the estates assets are further encumbered3.Debts incurred during administration are given the priority of an administrative

expense that they will be paid before all unsecured claims4.Order in which trustee (DIP) must seek credit

a. Unsecured credit in the ordinary course of business- 364(a)i. Do not require notice or hearing

b. Unsecured credit outside the ordinary course of business- 364(b)i. Must further the interests of the estate and not impose an unjustifiable

burden or risk on the parties in interestc. Secured or superpriority credit- 364(c)

i. After notice and hearing the court approves a security or special priorityfor the debt

ii. Places it ahead of administrative expensesd. Credit secured by a senior or equal lien on encumbered property- 364(d)

i. Infringes on the rights of existing secured claimantsii. Used only if credit is unobtainable by any other means and credit is

desperately needediii. Made after notice and hearingiv. Requires the existing interest to be adequately protected

5.Cross collateralizationa. Not clear in some courts whether this is permissibleb. Use an existing creditor for future advances by getting postpetition credit from

it to the estate on the condition that the collateral securing the new creditalso covers the unsecured and undersecured prepetition claim

c. Why would a creditor do this?i. Existing creditor has a stake in the debtors rehabilitation and has

incentive to provide new financing if it believes that the debtorsreorganization may be successful

ii. Collateral being secured has a present or an anticipated excess equitybeyond the new debt so that when its value increases, the creditorbenefits

iii. Creditor can use its bargaining power in negotiating postpetitionfinancing to improve the position of its undersecured prepetition debt atthe expense of other unsecured creditors

1.However, this offends the bankruptcy policy of evenhanded

treatmentd. Debtor must be willing and able to provide collateral to secure both the newcredit and the unsecured prepetition credit

XVIII.Executory ContractsA. Most common in chap 11 business cases, but can be applied in any chapterB. Goal of 365

1.To empower the trustee to take best advantage of the rights and assets of theestate while according some protection to the countervailing interests held by otherparties

C. What is an executory contract?1.Law review article by Professor Countryman:

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a. A contract is executory if the obligations of both parties are so farunperformed that the failure of either to perform would be a material breach

b. In other words, a contract only qualifies as executoryfor bankruptcy purposesif at the time of the bankruptcy, both parties had material obligationsoutstanding. If either had fully or substantially performed, the count is nolonger executor and should not be dealt with in 365

2.Functional approacha. Looks at the materiality of the unperformed contract and takes into account

the materiality of the contract and the impact on the estate of allowing thetrustee to assume or reject the contracti. If focus is on mutual performs, then some contracts are unassumable

b. Whether its assumption or rejection best serves the interest of the estateD. Is the contract assumable/assignable/rejectionable?

1.General rule of contract law that contractual rights and duties can be transferreda. Transfer of rights is called assignmentb. Transfer of duties is called delegation

2. 365(c)(1) prevents the assumption of a contract if applicable law (nonbankruptcylaw, state law) excuses the other party from accepting performance from orrendering performance to someone other than the debtor or the DIP

a. Examples:i. Personal performance contractsii. Contracts with the government

3. 365(c)(2) forbids the trustee from assuming a contract to make a loan, to extendother debt financing or financial accommodation to the debtor, or to issue a securityof the debtor

a. Only for loan and financing contractsi. Doesnt include those in which the debtor was given credit

4.Ipso Facto Clause- A provision in a contract that allows the nondebtor to declaredefault or to terminate the contract on the grounds of insolvency, financial conditionor bankruptcy

a. Like the avoidance of statutory liensb. No cure for default of these clauses is necessary

E. Reject or assume contract?1.The trustee must always serve the best interests of the estate2.Assume-

a. If the contract is advantageous and profitable, or if in rehabilitation itadvances the debtors plans for economic recovery, the trustee shouldassume it

b. Assumption must be approved by the court following motion by the trusteeand notice to interested parties

3.Reject-a. If the estate could do better by using its resources elsewhere, or the contract

imposes an unacceptable burden or risk on the estate, the trustee shouldreject it

b. The trustees election to reject the contract constitutes a breach that istreated by 365(g)(1) as a prepetition breach by the debtori. The other party to the contract becomes a creditor and its claim for

damages for breach of contract is classed by 502(g) as a generalunsecured prepetition claim

1.Paid at whatever fractional rate due such claimsii. Because of its unsecured creditor status in bankruptcy proceedings, the

estate pays damages at the reduced rate and cannot result in excessiveclaims against the estate

iii. The estates breach is a lot more profitable than the debtor would have ifno bankruptcy existed

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c. However, courts sometimes refuse to approve a rejection unless it is clear thatperformance would place an undue burden on the estatei. Debtors good faith is relevant here, if the bankruptcy filing was

motivated by the ability to use the rejection powers to escape andunwanted contract

d. Rejection is automatic and does not require court approval, unless the courtdisagrees

4.Contract in default- 365(b)(1)a. Trustee must comply with rule by curing the default, compensating for any

loss caused by it, and giving the party adequate assurance of futureperformance under the contract

b. Assurance is provided by showing that resources are likely to be available forthe discharge of the contractual obligations and performance appears to becommercially feasible

F. Assignment of contract1.When the trustee assumes the contract and then sells it to someone else, the buyer

of the contract takes assignment of it (both the debtors rights and duties) and theestate is able to realize the value of the debtors contractual rights without incurringthe obligation to perform

2. 365(f)- trustee can assign an assumed contract, on the condition that the assignee(person assuming assigned contract) provides adequate assurance of futureperformance

a. Intended to protect the other party from being forced into a contractualrelationship with someone who is financially unstable or otherwise unlikely toprovide performance that conforms to the contract

b. Important because the other party has no recourse against the estate if theassignee breachesi. 365(k) relieves the estate of all liability for post-assignment breaches

G. Business Judgment Rule1.The court will not interfere with the trustees decision if it was based on a good faith

reasonable business judgment that appears beneficial to the estateH. Other party to terminate

1.Because the debtors contract rights are property of the estate, the other partymust apply for relief from stay before exercising termination rights

XIX.Chapter 13 planA. Designed to enable the debtor to keep all or most of his or her property and to use part

of future income over a period of years to pay creditor at least as much- and maybemore- that they would have received from liquidation of prepetition assets under chap 7

B. Policy1.Policy favors rehabilitation under chap 13 over liquidation under chap 72.Code provides incentives to the debtor to choose chap 13 over chap 7 (carrot)3.(stick) the means test in 707(b) is intended to restrict chap 7 only to those who

are deemed unable to afford a chap 13 planC. Generally

1.Automatic stay is extended under 1301 to any codebtor or surety of the debtor ona consumer debt

Documents

Bankruptcy Outline1