Bankruptcy Outline

BANKRUPTCY
BROWN
SPRING 2013
 
 
 
 
 
1)      General overview of Bankruptcy:
a)      Bankruptcy tries to stop individual lawsuits – once bankruptcy petition is filed an automatic stay is put in place to prohibit creditors from filing hundreds of individual lawsuits
i) This allows for even distribution of liquidated assets
b)      State law normally determines the extent of the debtor’s interest in property, while bankruptcy law determines whether that interest is property of the estate
c)      Benefits to debtors
i) Allows for orderly winding down or restructuring
ii) The automatic stay provides for peace of mind
iii) Not all assets that an individual debtor owns will go into the protected estate
(1) Property of Estate exemptions exist
d)     Benefits to creditors
i) Designed to maximize pool of assets which can be drawn from equitably
ii) Creditors are paid in this order:
(1) Secured Creditors
(2) Administrative claims
(3) Priority claims
(4) General unsecured claims
(5) Equity – shareholders if the most is in a corporation or to the debtor if an individual bankruptcy
iii) Bankruptcy code mandates transparency of all debtors assets and liabilities – lying can be grounds for debtors case to be thrown out immediately
iv) Right to examine debtor (meeting of creditors)
v) Creditor has right to vote on plan of reorganization or restructure if his interests have changed from what they were originally, prior to bankruptcy
e)      Debtor can voluntarily file bankruptcy or a group of creditors can file an involuntary bankruptcy
f)       A system of checks and balances exists to regulate the filing of bankruptcy
g)      Once the petition is filed an estate is formed consisting of all assets at the time of the filing – the estate is protected from creditor and debtor abuse
h)      The debtor can reject executory contracts, and unexpired leases – these then become general unsecured claims
i)        Debts that will not be lifted after bankruptcy:
i) Student loans
ii) Child/alimony payments
iii) Tax fraud
iv) Violent crime exception
j)        A feasibility requirement exists – the debtor must prove that the plan of repayment is feasible – cannot be a visionary dream
k)      Good-faith requirement exists
l)        Bankruptcy court must approve everything outside the normal course of business
2)      Bankruptcy Court Organization
a)      Bankruptcy Judges have a limited power with the majority of the authority sitting with district court judges
b)      The district court judges have complete control over the work of the bankruptcy judges
c)      Federal courts retained the broad new bankruptcy jurisdiction they had received under the 1978 code, but the ultimate power to manage that jurisdiction was shifted to the Article III judges
d)     Courts of appeal appoint bankruptcy judges
e)      Bankruptcy judges have jurisdiction over “core” proceedings in bankruptcy; their decisions become final unless they are appealed to the district court
f)       “noncore” proceedings – a bankruptcy judge can only hear them as a master who submits proposed findings to the district court, unless, the parties involved consent to a binding decision by the bankruptcy judge
g)      Bankruptcy judges’ decisions on matters within their jurisdiction can be appealed to the district court, which reviews them on a “clearly erroneous” basis.
h)      Core issues are matters arising in or under the bankruptcy
i)        Noncore issues are related to bankruptcy generally
j)        Dist. Ct. reviews all factual assertions under abuse of discretion and all legal issues de novo for CORE MATTERS
k)      If the bankruptcy court mislabels a noncore issue as core, the issue will be reviewed de novo for both fact and law by the district court
l)        The Code permits any of the circuit courts to adopt a special appellate procedure whereby the first appeal from a bankruptcy court decision is to a panel of bankruptcy judges and from there to the court of appeals. Code s. 158(c).
i) These alternatives are known as BAPs – Bankruptcy Appellate Panels – currently used by the First, Sixth, Eighth, Ninth, and Tenth Circuits
3)      Structure of the Bankruptcy Code
a)      Title 11 of the U.S. Code is divided into chapters: 1, 3, 5, 7, 9, 11, 12, 13, and 15
b)      Chapters 1, 3, and 5 are general provisions that are applicable in all proceedings in bankruptcy unless explicitly made inapplicable in a specific context
c)      Chapters 7, 9, 11, 12, 13, and 15 each govern a different type of bankruptcy proceeding
i) Except in certain situations in Chapter 15 (which covers multinational bankruptcies) a debtor can be in only one of these chapters at any given time
d)     Chapter 1: Devoted to structural subjects such as definitions, rules of construction, general powers of the bankruptcy court, and the qualifications of debtors eligible for each of the types of proceedings available
e)      Chapter 3: Governs case admin, including appointment and compensation of Trustee in Bankruptcy (TIB) and of professional persons such as attorneys and accountants – as well as provisions regulating the operation of a bankrupt estate
f)       Chapter 5: Includes regulation of the claims and distribution process, discharges and the TIB’s avoiding powers
g)      Chapter 7: Governs the classic straight bankruptcy liquidation for both consumers and businesses
i) Following chapter 7 a debtors slate is wiped clean
h)      Chapter 9: Has the special provisions for the bankruptcy of a municipality or other government unit
i)        Chapter 11: Is the chapter most often used to reorganize a business
i) Assets stay with debtor while fulfilling the payment plan
j)        Chapter 12: Is a specialized version of Chapter 13 governing reorganization bankruptcies filed by family farmers
k)      Chapter 13: Excludes corporations, and is used by consumers and small businesses to make payments over time.
i) Assets stay with debtor while fulfilling the payment plan
l)        Chapter 15: A special ancillary proceeding in which the US Court assists a foreign court that has the primary bankruptcy jurisdiction over a foreign debtor
m)    Exemptions are vital to an individual debtor, but unavailable to a corporation
4)      Consumer Bankruptcy
a)      Remember 2 fundamental objectives
i) Fresh start for debtor
ii) Distribute to creditors fairly
b)      Two fundamental types of proceedings
i) Liquidations: Chapter 7, debtor gives up all non-exempt assets, Trustee in Bankruptcy sells assets, and proceeds are distributed pro rata to creditors; debtor is discharged of all debts and begins afresh
(1) Achieves the two fundamental purposes of bankruptcy: fair distribution of the debtor’s assets for the benefit of all creditors and a “fresh start” for the debtor
ii) Payout plans: Chapter 11 (businesses), Chapter 13 (consumers): debtor can propose to keep all assets in exchange for promising to pay off debts over a period of time out of future income; can mean much higher returns for creditors
iii) Filing a Petition-in a voluntary bankruptcy petition, the debtor is required to file various forms called “schedules” all of which are set forth in Officials Forms part of Bankruptcy Rules. Schedules include details list of debts assets, income and expenses
(1) Policing Debtor Applications:
(a)    Debtor may be eligible for in forma pauperis filing if their income is less than 150% of the official poverty line; they can request a fee waiver from the court.  28 USC §1930(f)(1). Otherwise the fee for Chapter 7 is $299.
(b)   Before they file, debtors must produce certification that they have attended a debt counseling session, that they have been given information about the other chapters of the code and about credit counseling, and that they have been warned that false information in files can lead to penalties and jail time. §109(h), 521(b)
(c)    The instant the petition is filed and stamped a bankruptcy estate is created and an automatic stay on all collection actions against the debtor, the debtor’s property, and the property of the estate is immediately put into place.
(d)   Debtor’s schedules must be complete, since failures to list a debt may make the debt nondischargeable § 523(a)(3)
(e)    Debtor’s schedules must be accurate, since false statements in the petition or schedules may result in a complete denial of discharge under §727(a)(4) (and may open the debtor to perjury prosecution).
(f)    Debtors sign their petitions under penalty of perjury, must file copies of pay stubs for 2 mos before they filed, a statement of monthly income and an explanation of how that was calculated, and a statement disclosing any anticipated increase income in next 12 months §521(a)(1)(iv)-(vi)
(g)   Debtors must be able to produce copy of previous year’s tax return on request of court/creditor  521(i)
(2) Policing Debtors via Debtors’ own Counsel
(a)    Attorney must sign the petition, and by signing, represents that the attorney has performed a “reasonable investigation” and has no knowledge that the info in the schedules is incorrect (§707(b)(4)(C))
(b)   Consumer bankruptcy lawyers have been renamed “debt relief agencies” and are specifically prohibited from making any statement in any document filed that is “untrue or misleading, or that upon exercise of reasonable care, should have been known to an agency to be untrue or misleading.” §101(12A); 526(a)(2).
(c)    Failure to abide by these rules might cause attorneys to lose their fees, pay actual damages, or be forced to pay the fees of opposing counsel §526(c)(2); 707(b)(4)(A)
(3) First Meeting of Creditors (Section 341 meeting)
(a)    Meeting held at date set by court within 40 days after petition is filed, ordinarily at the courthouse §341, Rule 2003(a)
(b)   Primary function is to permit an examination of the debtor by the trustee and any interested creditor
(c)    In most cases, creditors might elect a TIB (§702, 1104(b)) or a creditor’s committee (§705(a), 1102(a)(1) )
c)