Bankruptcy Korybut Fall 2016
Goals of Bankruptcy
Debtor gets a “fresh start” without any debt to become a productive member of society
Preservation of value (fairness to creditors who are owed money)
Commencement of a Bankruptcy Case
Voluntary cases.Section 301
301(a): file a petition
301(b): The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter
vast, vast majority are voluntary
The debtor has the opportunity to contest the petition.Petitioner has the burden of proving the debtor is insolvent.Only then is an order for relief entered.
Can only do this for seven and eleven
A bankruptcy can only be started by an entity who can be a debtor under the bankruptcy code.
Person [eligible to file bankruptcy] – The term person includes individual, partnership, and corporation, but does not include governmental unit.
The Bankruptcy Estate
: Filing bankruptcy creates the estate. The estate consists of all property, contingent or not, as of the petition date. Each section of 541 deals with types of property included in the estate.
The instant the petition is filed, all debtor’s property becomes part of the estate except for narrow exceptions in 541(b)
Debtor must have some property interest as of BFD for it to enter estate
Value of the property is irrelevant – all property becomes part of estate, but trustee has right to abandon worthless property under 554(a)
541(a)(1) – (7) lists the specifics
Exceptions to Property becoming part of the estate (“Exclusions”) – 541(b)
Post-petition earnings and wages.541(a)(6)
Prochnow v. Apex Properties, Inc. – After petition date, debtor collected commissions on houses he had sold. Commissions are part of the estate because his labor was performed pre-petition. He had already “earned” the money, just hadn’t collected it.
541(b)(1): Any power that the debtor may exercise solely for the benefit of an entity other than the debtor.
541(b)(2): Any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case under this title, and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease during the case.
Spendthrift Trust Exception. 541(c)(2)
A trust that is a valid restraint on the transfer to the beneficiary
Money already given to rich kid becomes part of estate because he has legal title to it
Money still in the fund is not part of estate because it is a separate legal entity
Rich kid’s right to future income goes into estate (because it’s property right), but this 541(c)(2) exception keeps it out of the estate
Anti-alienation provision.541(c)(1)(A)
In re Chambers – Person running for election for Georgia state legislature filed a petition under chapter 13. Debtor tried to keep the campaign assets out of the estate. Georgia law said that the funds were not property of the candidate.
Holding – 541(c)(1)(A) supersedes Georgia law.The debtor has a property interest, however restricted by state law, in the campaign funds.
Jurisdiction is in rem
Three basic areas of dispute involving property of the estate:
Future interests – a question of timing.Prochnow
Restrictions on transfer created by state law.Chambers
Degree of legal entitlement (licenses)
Some licenses are not transferable (law license)
Others are (liquor license)
Estate Exercise.
Parakeet – It is property of the estate. The estate includes everything the petitioner owns on the petition date. It is very broadly concerned. We don’t worry for the moment whether it has value to the creditors or whether an exemption would apply.
Ford Focus still subject to purchase-money security interest – Doesn’t matter that it is subject to a lien or that the lien exceeds value of the property.Still part of the estate.The trustee may decide to abandon the car.
Candid snapshots of hundreds of his friends – Still property of the estate.May be an exemption, but still property of the estate.
Two tickets to upcoming Bjork concert – There’s a question as to whether it is transferrable.If not transferrable, it’s not part of the estate.Nonetheless, the overwhelming majority would say it is property of the estate even though not transferrable under state law (the bankruptcy code will override nontransferability under 541(c)).This goes to the difference between licenses that can and cannot be transferred.
541(c)(1) generally overrides contractual limitations
Household furniture – Property of the estate.
25 shares of monumental inc. – Same.
Undivided 3/48ths interest in big game hunting preserve – Property of the estate.
3,214 bubble gum baseball cards – Property of the estate.
Catcher’s mit – Yes.
Bank account – Yes, but only to the extent of debtor’s legal title.See 541(d).Beneficial/equitable title however does not become part of the estate.Creditors won’t get the money.The point is that the automatic stay applies and the bankruptcy trustee becomes the new trustee.
Salary – Property of the estate.He earned it before.
Retirement account – Need more information.This falls under 541(c)(2).
Parakeet’s eggs – Yes.They are proceeds of the asset (the bird).
Annual dividend – Yes.More proceeds.
Salary post-petition.No.541(a)(6)
Retirement account – Need more information.Falls under 541(c)(2)
Automatic Stay
362(a): Filing bankruptcy petition triggers automatic stay which prohibits creditor from collection actions on the debtor or his property – consequences of violating stay are very severe
Stay creates a turnover duty in 542 and 521
The idea is that the automatic stay applies broadly to everyone in the world — extremely broad
How does this pass constitutional muster?
It is an in rem proceeding.You are not dependent on in personam jurisdiction.The court is basically controlling the assets under its control.
Sanctions for violations – Depends on actual knowledge or intent.But whether you know or not, the actions taken after the stay is in effect are void.
362(k)(1) – Any individual injured by any willful violation of a stay can recover actual or punitive damages.
542(c): innocent violations of stay are not subject to damages
362(b): Exceptions to the Automatic Stay
They are pretty narrow – just realize how broad and powerful the stay is
Exceptions for DSOs or criminal proceedings
In Re Greene –
Willfulness does not refer to the intent to violate the stay, but the intent to commit the act which violates the automatic stay.Computer program automatically sent invoices, which was a violation of the automatic stay, ECU willfully violated the automatic stay.
Nissan v. Baker – Creditor repossessed a car while the debtor was in bankruptcy. Creditor wasn’t aware of the debtor’s bankruptcy at the time of repossession, but learned after the fact. Creditor did not turn over the car, but filed a motion for relief from automatic stay. While that motion was pending, the creditor sold the car. The motion was eventually granted.
Holding – This violated the automatic stay.
Creditor’s continued exercise of control over the vehicle after the notice of automatic stay was filed was a willful violation.Thus, “doing nothing” violated the stay.
Moreover, the sale was another willful violation.The creditor cannot play dumb and rely on its own records that the motion was grated at an earlier date.
Willfully violating stay is bad news
: Three ways
ponse to Reed, Congress enacted 522(o) which preempts all state law
522(o): exemption shall be reduced by amount that non-exempt property was liquidated into exempt property in the last 10 years
A 10-YEAR REACHBACK IF THERE WAS INTENT TO DEFRAUD CREDITORS
522(p) Mansion Loophole
Established a 3.3year lookback period (1115 days).This does two things:
For anyone who moved into a new jurisdiction within that period, caps the homestead exemption no matter what.
Any additions to the value of the exemption that were created during that 3.3 year period is capped at 675
Annuity / Life Insurance
The “new frontier” where lots of money is being shielded
Tyeten case
Asset Trusts
Discussed in stay section
522(f): Liens on exempted property
Judicial (involuntary) liens do NOT beat exemptions: debtor is always paid the exemption first, then judicial lien creditor is paid, then remainder goes into pot
522(f)(1)(A): if there isn’t enough for lien creditor to get paid in full, then he becomes a GUC
Consensual (voluntary Art 9 liens) DO beat exemptions: Art 9 SP is paid first, then debtor is paid exemption, then remainder goes into pot
522(f)(1)(B) Analysis:
Is there an exemption in the property? 522(d).
Is there an avoidable lien on the property? 522(f)(1)(B).
Does the lien “impair” the exemption? “Impair” = debtor cannot be paid exemption amount in full after creditor is paid off first.
If lien does impair exemption, debtor gets paid the exemption amount first and the creditor gets paid whatever is left.
If it’s a PMSI, it’s an unavoidable lien and so the exemption will not apply
So long as it’s non-PMSI, then this analysis works
Asset Protection Trusts
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.541(c)(2).
However, a trustee can clawback this property.
In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if—548(e)
such transfer was made to a self-settled trust or similar device;
such transfer was by the debtor;
the debtor is a beneficiary of such trust or similar device; and
the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.
Security interest
In order to have a security interest, you must have a grant
Grant can be consensual or judicial
Must also perfect the security interest against other creditors.
Perfection of a lien
The purpose of perfection is a notice device.First in time is first in right.The first one to perfect a claim wins.
Bank A – Makes loan 4/1
Bank B – Makes loan 4/10
Bank B perfects by filing on 4/11
Bank A perfects by filing on 4/15
When the asset is sold at a foreclosure, B gets paid first.
