Debtor and Creditor Rights Outline
I. Introduction
A. Abbreviations used
1. UFTA – Uniform Fraudulent Transfers Act
2. TIB – Trustee in Bankruptcy; DIP – Debtor in Possession
3. FMV – Fair Market Value; TVM – Time Value of Money; PV – Present Value; FV – Future Value
4. PMSI – Purchase Money Security Interest
B. Definitions:
1. Liquidation – debts are paid out of current assets (i.e., by selling them)
2. Payout – debts are paid out of future earnings; the debtor keeps the assets
3. “Code” – The bankruptcy code
C. In all instances, code citations are to the bankruptcy code unless otherwise indicated.
D. A brief overview of the bankruptcy code (Title 11 of the US Code):
1. Chapters of General Application
a) Ch. 1 – definitions, types of eligibility
b) Ch. 3 – administration of the bankruptcy estate
c) Ch. 5 – creditor’s claims, debtor’s duties, and the definition of the estate
2. Operating Chapters
a) Ch. 7 – “straight” liquidation
b) Ch. 9 – municipal bankruptcies
c) Ch. 11 – business reorganizations (some individuals use, also)
d) Ch. 12 – family farms
e) Ch. 13 – individual reorganizations (“payouts” for natural persons)
E. Law of Debtors and Creditors
1. State Collection Law – regulates how individuals collect debts
2. Bankruptcy Law (federal law)
F. Classic bankruptcy dichotomies
1. Individual vs. Creditors – under state law, it’s all a race to the courthouse (the law of the jungle); bankruptcy is different – it is based on collective action, preventing one creditor from getting ahead of another.
2. Liquidation vs. Payout – Bankruptcy is divided into liquidations (Ch. 7) and payouts/reorganizations (Ch. 11 and 13.)
3. Purpose: Business vs. Consumer Bankruptcy – consumer bankruptcy is premised on the idea of a “fresh start” for an overwhelmed debtor; business bankruptcy is focused more on saving the business (not killing the goose that lays golden eggs).
II. Secured Transactions
A. Process of securing interests in property – §Article 9 of UCC is guide
1. Security interest – an interest in personal property or fixtures which secures payment or performance of an obligation (e.g. television set purchased on credit from circuit city or a mortgage).
a) Conditional interest – s/i is a conditional interest that springs if the D defaults on the loan.
b) Collateral – property subject to a security interest
2. Once a secured (S) CR obtains s/i, worried about D, general unsecured CR (UCR), other secured parties (SP), and other lien CR (e.g., other owners of collateral, purchasers or collateral, etc.)
3. To get s/i protected against D and UCR, need to fulfill requirements of ATTACHMENT
a) Agreement between the parties and
b) CR gives value and
c) D has rights in the collateral
4. To get s/i protected against D, UCR, other SP, and other lien CR, need to perform PERFECTION STEP
a) File statement that covers property that with appropriate agency to publicize the interest OR
b) Take possession of the property
5. Contest between SP and SP
a) 1st to file or take ownership wins
6. Contest between s/i and lien holder
a) Does SP perfect interest (file) before sheriff levies on property
III. Collection without Courts
A. The concept of leverage and collection outside of court
1. Leverage is an extremely important concept. It basically means using your legal position to gain a better bargaining position in negotiations.
2. For instance there is “hostage value” – debtors pay high-priority items like their house or their car first because the consequences of losing them are so great. Thus, the threat of collection is a more powerful tool than collection itself.
3. Also, one can use legal system as leverage (e.g., failure to pay alimony results in jail time).
4. Also, one can threat of adverse credit ratings as a leverage to have one pay a debt.
a) PAGE 9 – The Fair Credit Reporting Act (FCRA), 15 USCA 1681 et. seq., provides limitations on how much leverage can be attained by placing limits on the procedures for debtors to challenge the accuracy of their credit report.
B. Restrictions on Nonjudicial Collection
1. Usury laws – CR cannot charge more than pre-determined rate of interest. Generally, no longer applicable due to Marquette v. First Omaha – SC hold that bank can charge interest rate based on law in home state – caused many states to deregulate interest and attract banks.
2. PAGE 15 – Fair Debt Collection Practices Act (FDCPA) – 15 U.S.C.A. 1692 §802 – restricts abuses of debt collectors from collecting debts.
a) Heintz – A lawyer is a “debt collector” for FCRA and FDCPA purposes
IV. State-law debt collection
COLLECTION REMEDIES
A. Judgment collection
Process for Judgment CR to get paid.
Judgment –»writ of execut. or garnish –»delivery to sheriff–»levy (active or constructive exert dominion over prop.)–»sale or get $ from garnishee
Judgment –»docket (record) –»get lien—————»sale
1. Judgment may be time limited
a) Dormancy – if after 1 year and do nothing, can revive but need special action for that purpsose (Weaver)
b) Statute of Limitations – approximately 10 years. If desire to extend, get new judgment.
2. Execution (by a lien creditor) – being a judgment creditor alone gives no interest in the debtor’s property or income; you have to go get a writ of execution and have the sheriff levy (or execute) on a specific piece of the debtor’s property.
a) A lien can apply to after-acquired real property (Estate of Robbins) (min. rule), but you have to take steps to keep the judgment alive (Weaver).
3. Turnover orders – requires D to turnover property to CR
4. Judgment liens by recordation – some states have a “short-cut” process, typically for real estate only, that permits a creditor to get a lien via a simple filing process.
5. Family debts (alimony, child support) – in many states, the debtor can be imprisoned for failure to pay, and property exemptions often don’t apply.
6. Voluntary liens – secured creditors get a voluntary lien on collateral that permits them to collect via self-help (i.e., repossession).
7. Collection by the federal government – When the federal government is a creditor, it follows the Federal Debt Collection Procedures Act, 28 USCA § 3001 et. seq.
8. St
o after greater than 1 writ. Want employee to be protected against undue leverage by CR (threat to get fired), but also want to limit employers liability to garnishor.
FRAUDULENT CONVEYANCES AND SHIELDING D’S ASSETS
A. Fraudulent conveyances
a. In order to prevent a debtor from frustrating collection attempts by giving away property, every state has a rule permitting the court to invalidate the improper transfer.
· Twyne’s Case – a “badge of fraud” is the debtor selling ownership of an asset while retaining possession.
· Most states (39) have adopted the Uniform Fraudulent Transfers Act (UFTA), which governs the invalidation of fraudulent transfers.
1. The UFTA defines “asset” as property of the debtor,” but it doesn’t include exempt property or property encumbered by a lien.
2. A “present” CR is one whose claim arose before the transfer was made.
3. Transfers fraudulent to present and future creditors (UFTA § 4)
a. Transfers made with actual fraud (i.e., intent to defraud) (UFTA § 4(a)(1))
i. UFTA § 4(b) lists “badges of fraud” to consider in determining intent, including if the transferee was an insider, the debtor retaining possession, concealment of either the transfer or the asset, timing,
ii. ACLI Gov Sec v. Rhoades – lawyer conveys property to sister day before judgment against D.
b. Transfers made with constructive fraud (i.e., no intent) (UFTA § 4(a)(2))
i. Elements:
1. The debtor did not receive reasonably equivalent value, and
2. Either the remaining assets of the debtor are unreasonably small, or the debtor reasonably should have believed he was incurring debts beyond his ability to pay.
3. NO NEED FOR D TO BE INSOLVENT, BUT IF D INCURS LOTS OF DEBT (as compared to UFTA §5.
4. Transfers fraudulent to present creditors only (UFTA § 5)
a. Test #1 (UFTA § 5(a))
i. A transfer is fraudulent to a present creditor if it was not for reasonably equivalent value, and
ii. The debtor was insolvent
1. “Insolvent” is defined by UFTA § 2 as either balance sheet insolvency (debts > assets) or debtor can’t pay debts as they come due (latter creates a presumption of insolvency)
iii. In re Bay Plastics – founders got paid off and by doing so, made the company insolvent; therefore, the company’s CRs were f-ed.
b. Test #2 (UFTA § 5(b))
A transfer is fraudulent to a present creditor if it made to an insider for an antecedent debt (i.e., debt existing prior to the transfer), and the insider had reasonable cause to believe the debtor was
