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Bankruptcy
Rutgers University, Newark School of Law
Ondersma, Chrystin

Professor Ondersma

Bankruptcy – Fall 2011

I. Creditors’ Rights and Remedies

A. State Law Debt Collection

1. First in time, first in right

i. As to creditor priority, this is the general rule.

ii. Race to the courthouse.

iii. First to obtain a lien would be first in line for debtor’s property.

iv. For admiralty, last in time, first in right is the rule.

v. Priorities are disturbances in the equal distribution to creditors.

vi. Policy Reasons

a. Reward creditors who actively pursue claims.

b. Insistence on certainty.

c. Insures title.

d. Reduces the cost of credit.

2. Secured v. Unsecured Creditors

i. A secured creditor is someone who gives credit in exchange for a promise to pay along with collateral.

a. Liens granted by owner of property to secure the obligation.

b. There is always collateral (tangible or intangible) that goes along with

ii. An unsecured creditor holds no collateral.

a. Unsecured creditors are paid out of cash flow.

3. Consensual

i. State law allows renewals, renegotiations, modifications but they cannot be forced.

4. No Discharge

B. State Law Creditors

1. Unsecured Creditors

i. Consensual – creditor determines whether to work with debtor.

ii. Nonconsensual – creditor who does not get to determine whether to work with a debtor. Example is a car accident victim.

2. Consensual Secured Creditor

3. Judgment Creditor

i. Form of nonconsensual unsecured creditors.

ii. Judgment allows a lien over creditor’s property.

4. Statutory Lien Creditor

i. Certain types of businesses can receive statutory liens. Classic example is a mechanic’s lien or contractor’s lien.

C. Remedies Under State Law

1. Sue on debt or obligation owed

i. Get judgment

ii. Formal Post-Judgment Collection Efforts

a. Judgment lien

b. Execution

1). Directs sheriff to find and seize all debtor’s property

c. Garnishment

1). Wages and Bank Accounts

2). Garnishment order can include personal property located in a bank safe-deposit box.

3). Pre-judgment garnishment of bank accounts freezes the accounts awaiting final judgment.

d. Attachment

1). In many jurisdictions, attachment is necessary for personal property.

iii. Repossession of personal property

a. Secured creditors under Article 9 can repossess personal property, as long as peace is not breached.

b. Court is not involved.

iv. Replevin of personal property

a. Similar to repossession.

b. Court is involved.

c. Must show lien is involved.

v. Turnover of intangible property

a. Involves intangible property

b. Funds, commercial paper

vi. Foreclosure of real property

2. Every state has exemptions which are beyond the reach of creditors.

D. State Law Collective Actions

1. Extensions and compositions

i. Negotiation with creditor for extensions

2. Assignment for benefit of creditors

i. Debtor assigns assets to representative who distributes

ii. Trigger for involuntary bankruptcy

3. Receivership

i. Receivers are appointed to take control of debtor’s assets.

ii. Trigger for involuntary bankruptcy

II. Overview of Bankruptcy

A. Constitutional in Origin

1. Article I, Section 8, Clause 4

2. “Uniform laws on bankruptcy…”

B. Title 11, USC, Bankruptcy Code

1. Title 28 is also important.

i. 28 U.S.C. § 1334 is grant of original and exclusive jurisdiction to district courts.

ii. 28 U.S.C § 151 allows district courts to create bankruptcy courts within district.

2. Title 26 – IRC – is also important.

C. Bankruptcy cases reported in West Bankruptcy Reporter and on-line

D. Bankruptcy in History

1. 1800 Act

2. 1841 Act

i. First hint of discharge of debts in bankruptcy.

3. 1867 Act

i. Discharge weakens.

4. 1898 (the “Act”) with 1938 Chandler Act Amendments

i. Chandler Act was precipitated by business failures of great depression.

ii. Chandler Act provided for reorganization of businesses.

5. 1978 (the “Code”)

i. Forgiving, discharge, and pro-debtor provisions.

ii. Broad provisions for discharge.

iii. Broad mechanisms for dispute resolution.

E. Why Bankruptcy as Opposed to State Law

1. ABC

i. Generally, did not involve court.

ii. Assignment for the benefit of creditors.

iii. State law has exemptions that do not allow certain assets to be taken.

iv. Debtor transfers all assets not exempt to an assignee who sells the property and pays of the creditors.

2. Receivership

i. Similar to ABC

ii. Receiver is appointed by state court. Takes control over all of assets not exempt. Receiver takes legal title.

3. Discharge cannot be done under state law, except as agreed by creditor or by full payment.

4. Bankruptcy provides the ability to discharge.

5. Federal bankruptcy was needed to prevent favoritism for local creditors.

6. Very nature of state action (quick action) leads to sub-optimal level of return.

i. Common pool of oil example.

F. Why File a Bankruptcy Petition

1. Becomes an adversarial relationship between debtor and creditor.

2. Bankruptcies create exposure to the world – bankruptcy documents are public documents.

3. Individual

i. Excessive liabilities

a. People who just love credit.

b. Living outside their means.

ii. Unforeseen circumstances or event

a. Loss of job, sickness, medical expenses, divorce, etc.

b. Spending patterns based on projected income that are not realistic.

iii. Pending dramatic creditor action

a. About to los

i. Trustee appointed in every Chapter 7 case by U.S. Trustee

ii. Comes from panel of Chapter 7 trustees within each District.

iii. Have important duties under Code.

6. Chapter 11 Trustee

i. Generally, is not appointed because DIP retains control.

ii. In some instances, court will displace DIP with Chapter 11 Trustee

iii. Presumption is for DIP to remain in control.

iv. Chapter 11 Trustee becomes the holder of attorney-client privilege. Trustee can waive attorney-client privilege.

7. Bankruptcy Court

i. Non-Article III Adjunct Court to Federal District Court

ii. 28 U.S.C. § 1334 gives jurisdiction for bankruptcy to District Court

iii. Appointed by judicial council of each circuit.

J. Jurisdiction and Venue

1. Jurisdiction

i. Where does jurisdiction reside?

a. District courts shall have original and exclusive jurisdiction of all cases under Title 11.

ii. Statutory Roadmap

a. 28 U.S.C. § 1334 – grant of jurisdiction for bankruptcy to District Courts

1). Bankruptcy court has in rem jurisdiction

b. 28 U.S.C. § 157 – Congressional grant that allows District Court to refer petition to Bankruptcy Court.

iii. Title 11 Case

a. CASE – The whole ball of wax

1). The overarching “proceeding”

2). Civil Proceeding

i). Adversary proceedings

a). Civil action

b). Governed by Part 7 of Bankruptcy Rules

c). § 7001

d). Incorporates Federal Rules of Civil Procedure

ii). Contested matters

a). Anything that is not an adversary proceeding

b). Governed by Part 9 of Bankruptcy Rules

c). § 9014

d). Initiated by motion

iv. Jurisdiction for Bankruptcy Courts

a. Cases under Title 11

1). Original and exclusive

b. Proceedings arising under Title 11

c. Proceedings arising in a case under Title 11

d. Proceedings related to a case under Title 11

v. Wood v. Wood

a. Supreme Court had struck down Bankruptcy Court adjudication over state law claims.

b. Problem in this case is whether District Court can address proceedings “related to” a case under Title 11.

vi. Jurisdictional Structure

a. Bankruptcy jurisdiction rests with the District Court

b. District Court may assign cases through reference to the Bankruptcy Court