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Bankruptcy
University of California, Davis School of Law
Ayer, John D.

Bankruptcy Outline Ayer
Spring 2011
 
 
I.        Taxation of a discharge (random class discussion, very not likely on test)
a.       Your residence, Blackacre, is subject to a million dollars of debt. Blackacre is worth $800,000, and you abandon it to the lender. There is a shortfall of $1m-$800k=$200k, but it is statutory nonrecourse so you don’t have to pay it.
b.      Tax law treats it as a sale at $1 mill, so the sale price cancels the debt and you have no debt forgiveness.
c.       BUT suppose you bought the house for, say $300,000 (basis). You surrendered property worth $800,000 that you bought at $300,000. Tax law treats this as a taxable gain of $800x-$300k= $500k. Which is taxable.
d.      BUT tax law gives you an exemption of $250k for a single person, $500k for a married couple. So in this case, if the taxpayer is married, there would be no tax effect.
 
II.      Collection Law:
a.       Collection Process
                                                   i.      Judgment issued
1.       In most cases, payment is simply made.
2.       Buying judgments: There’s also a large market where people buy judgments (at discounted value) and take over the job of collecting.
                                                 ii.      Judgment Entered
1.       CA requires formal entry of a judgment by the clerk before the judgment can be effectuated/executed for any purpose
a.       Jackson v. Sears, Roebuck (1957, AZ)
                                                                                                                           i.      Judgment creditor gets execution on a judgment b/f judgment is entered.  Court holds that the execution and subsequent sale void as AZ law requires entry of judgment b/f judgment (like CA).
                                                                                                                         ii.      A judgment with a defect is voidable until cured
                                                                                                                        iii.      Odd facts missing: Judgment was only for $600, but were able to foreclose on $200k property. Why couldn’t the debtor come up with that small amount? Why was it able to sell for so little?
2.       Federal rules follow the rule of the state in which the district court is located unless a federal statute is applicable and provides otherwise
                                                iii.      Writ of Execution
1.       Must file “writ of execution” form with civil clerk w/ accompanying declaration. Judge approves (or not).   Writ tells sheriff (or marshal or levying officer) to levy against (take) some form of property.
2.       Must know of good property to levy against—
a.       Do you know of any property already?
b.      Search public records (auto, property records)
c.       Get court order for D to disclose property (Rule 726–still?)
3.       Judgment must specify what property is to be levied
                                               iv.      Court officer (sheriff) levies upon (takes) the property of the debtorà Now you have Execution Lien
1.       Must give NOTICE of levy.
                                                 v.      Sheriff sells levied property—proceeds go to pay collection cost first and remainder toward judgment.
1.       CA requires sale of personal property, unless otherwise ordered
2.       If any surplus, goes back to debtor.
3.       Likely that some NOTICE of Sale or Public Auction is required. (Prof. not sure what CA law is).
                                               vi.      Can repeat as often as needed with other property.
b.      Secured Creditors: Intro
                                                   i.      Follow a difference procedure that bears a family resemblance, but has differences
                                                 ii.      Creditors w/ Security Interest in Personal Property: Art. 9 of UCC
1.       Private right of repossession. Can repo property on own if can do w/o breach of the peace.
a.       Not available to a judgment creditor.
2.       Can also bring a claim if the collateral was insufficient to bring the claim and then go through writ of execution process if needed.
                                                iii.      Creditors w/ mortgage on Real Estate
1.       If own a mortgage, called a “mortgage trustee” in CA.
2.       1st step is Notice from creditor of non-payment.
3.       2nd step is Notice that house will be sold through foreclosure.
a.       If sale is sufficient to cover assets, creditor is satisfied.
                                                                                                                           i.      If sale insufficient, creditor does NOT have option to pursue deficiency in court. Mortgage lender is simply out of luck.
b.      Do not need judicial approval to foreclose.
 
 
III.    Balance Sheet
Assets Owned
Liabilities Owed and Equity
Current
Cash
Accounts Receivable
Debts (Claims): Short and Long Term
Notes Payable
Accounts Payable
Tax
 
Long Term
Land
Building
Tools/Equip.
IP
Intangibles (Good will)
 
Sh. Equity (Interests)
 
 
Net worth = assets – liabilities
 
Note: value of assets or liabilities not always certain. Eg. assets valued at “80” might be a reflection of the fact that there’s a 50% chance the Co. will yield 160 and a 50% chance it will yield 0. Or a 50% chance it will yield 81, and 50% at 79. In other words, share value of a company may be vastly different that asset value listed on balance sheet.
 
IV.    The Eternal Triangle
a.       Deals with relationships between creditors when debtor does not have enough to go around
b.      Fraudulent Transfers and the Eternal Triangle
                                                   i.      Cases where debtor colludes with one creditor at expense of another.
                                                ii.      Twyne’s Case (1601)
1.       Pierce owes Twyne 400 and C 200, so C sues P. P secretly pays goods valued at 300 to T in satisfaction of the debt, but maintains pssn. of the goods to earn money off of them and sold some of them again. Transfer was made while writ of execution pending. Valuation of goods was done b/t parties and not by an objective 3rd party.
2.       C sues and court finds the tx was fraudulent for reasons reflected in italics.
a.       Did the holding rest on the fact that P and or t intended to defraud C? Or simply that C was mislead? Or did both (intent and a misleading) need to be present? Not clear.
b.      Contrast subjective fraud (intentional by debtor/transferor) w/ objective (aggrieved creditor was misled).
3.       Issue not addressed, but now common: Debtors who need to keep their property so that they can continue to make income to pay off their debts. P’s actions may not be so shady, looked at in this light.
4.       Can view case as a struggle between commercial law and property law. Commercial law very undeveloped in 1600s, but now common.
                                                iii.      Badges of Fraud from Twyne’s and elsewhere (not in CA or Fed. Bankruptcy Law, but a version is in some state law).
1.       Did the transferor retain possession or control? (Is this really bad or just enabling income earning?)
2.       Was the transfer or obligation disclosed or concealed?
a.       Disclosure negates fraud while concealment evidences fraud
3.       Was the transferor recently sued?
4.       Was the transfer of substantially all the debtor’s assets? 
5.       Was the transfer to an insider? (i.e. spouse/family member/corporate officer or director)
6.       Did the debtor leave the jurisdiction?
7.       Did the debtor remove or conceal assets?
8.       Was the value of the consideration transferred reasonably equivalent to the obligation? 
9.       Was the debtor insolvent or did he become insolvent shortly after the transfer was made?
10.   Did the transfer occur shortly before or shortly after a substantial debt was incurred?
11.   Did the debtor transferred the essential assets of the business to a leinor who transferred the assets to an insider of the debtor? 
                                               iv.      Cal. Civ. Code §3432: A debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another.
1.       Is this exactly contrary to Twine’s case?
2.       In Bankruptcy, it is contrary to law to prefer one creditor to another. Absent bankruptcy, though, it’s not wrong to prefer one creditor to another.
                                                 v.      11 USC §548(a)(1) : adopted from the Uniform Fraudulent Transfer Act (UFTA applies outside bankruptcy, UFTA and §548 apply in bankruptcy) Fraudulent Transfers and

e Equiv. Value fraud.
2.       UCC Art. 6 “Bulk Tx Act” (§6104(1)(c)).
a.       Bulk sale =  a sale not in ordinary course of biz of more than ½ of seller’s inventory. Seller in a bulk sale must give notice to all unsecured creditors of the sale. If not, transferee may have to pay twice (the buyer and the unsecured creditor).
b.      (Secured creditor can simply go after buyer.)
c.       Still law in CA, but not in many states. Policy is to protect against debtors liquidating assets and leaving town. Puts liability on transferee, so they’ll be more careful in buying.
                                               ix.      Fees on Fraudulent Tx Cases
1.       Defending against a fraud claim is costly, and you often aren’t sure it will be plead against you or not. Bankruptcy judges reluctant to let you renegotiate fees after the fact. If likely to be an issue, better to charge more up front—but don’t breach confidentiality on why when explaining why fees are so high. Tough issue.
c.       Multi-party sales and the Eternal Triangle: seller sues subsequent BFPV when buyer has not made good on promise and has fled the jx or does not have “enough to go around”
                                                  i.      UFTA § 8 Defenses, Liability, and Protection of Transferee. 
1.       (a) A transfer or obligation is not voidable under Section 4(a)(1) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.
a.       Good faith and REqV are often intertwined: low value is evidence of bad faith.
b.      Any transferee down the line who can establish bona fide purchaser (good faith and equivalent value) will be able to keep the property
c.       Nature of bona fide purchaser defense is intensely fact driven
d.      Exception:  Can’t take title from a thief
2.        (b) Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor under Section 7(a)(1), the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy the creditor’s claim, whichever is less. The judgment may be entered against:
a.       (1) the first transferee of the asset or the person for whose benefit the transfer was made; or
b.      (2) any subsequent transferee other than a good-faith transferee or obligee who took for value or from any subsequent transferee or obligee.
                                                                                                                           i.      So, a non-BFP transferee may have to pay twice. The seller and the original creditor.
3.       (c) If the judgment under subsection (b) is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.
4.       (d) [BFP defenses against creditor suit] Notwithstanding voidability of a transfer or an obligation under this [Act], a good-faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to
a.       (1) a lien on or a right to retain any interest in the asset transferred;
b.      (2) enforcement of any obligation incurred; or
c.       (3) a reduction in the amount of the liability on the judgment.
5.       (e) A transfer is not voidable under Section 4(a)(2) or Section 5 if the transfer results from:
(1) termination of a lease upon default by the debtor when the termination is