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Bankruptcy
University of California, Hastings School of Law
Johnson, Stephen L.

Bankruptcy

Johnson

Spring 2011

Liens

· Introduction

o Bk is federal law, but a lot of issues are governed by state law. BK law only changes substantive rights under state law where it says it does.

o Consensual Liens: also called security interests, arise because of a credit transaction.

o Judicial Lien: after a lawsuit judgment has been entered, the state will seize property and sell it to satisfy the plaintiff.

o Statutory Lien: certain creditors are favored by the state and are given the rights of secured creditors even though they did not bargain for security. Ex: warehouse owner can keep stored property until the debt for storage has been paid. Ex: tax lien so the government can get what you owe them.

· Lien Concepts

o Creation: granting language in security agreement, Deed of Trust, Mortgage, Security Agreement.

o Perfection: Taking necessary steps to put the world on notice of your lien.

§ Recording with the county recorder

§ UCC recording with the state of CA

§ Automobile Title Document

§ Statutory liens are perfected as a matter of law.

o Priority: Often first recorded has priority over the later liens. Low priority secured liens could be treated as a GUC and not get paid.

o Deficiency Claims: payment obtained from the sale of collateral does not cover the debt. Owed 100k, collateral only worth 80k. You have a deficiency of 20k. You will be treated as a GUC for the 20k.

· Consensual Liens

o Personal Property: governed by UCC rules.

o Real Property: must be perfected.

· Judicial Liens

o Judgment Liens: The lien attaches to all real property of the judgment debtor in the county in which the judgment is docketed or in which the judgment or an abstract is recorded in the land records. Attaches to after acquired property as well.

Overview of Bankruptcy

· Priorities: protect the creditors against each other, protect the creditors from the debtors, relieve the debtor from debt.

· Types of BK

o Chapter 7: the simplest kind, for individuals and businesses. All of the property owned by the debtor becomes part of the bankruptcy estate, except for property that an individual is allowed to exempt. Any property that a lienholder or a co-owner has an interest is either 1) also excluded from the estate or 2) sold and satisfied. The bankruptcy estate is sold and it is used to pay the costs of the proceedings and the debts. The debtor is relieved of all liability and walks away with the exempt property.

§ Debtor files petition and attends meeting of creditors

§ Assets are turned over to a trustee, trustee becomes legal owner

§ Debtor keeps earnings after filing bk, no garnishment of wages

§ Trustee reduces estate to cash

· Preference

· Fraudulent conveyance

§ Trustee uses all nonexempt assets to pay claims

§ Debtor obtains a discharge of debts

o Chapter 13: only be used by a debtor who is an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than 336,900; and non contingent, liquidated, secured debts of less than 1,010,650. The debtor gets to keep most of their property. The court makes a payment plan for 5 years and the creditors are bound to it, whether they like it or not. Any money that is earned after the proceedings are begun go to the trustee, who distributes them first to the creditors then back to the business.

§ Debtor files petition and attends meeting of the creditors

§ Debtor retains assets

§ Debtor commits to pay the trustee a portion of income over 3-5 years

§ Debtor may try to recover preferences, fraudulent conveyances

§ Trustee is a disbursing agent, pays creditors pro rata

§ Debtor obtains a discharge of debts. This discharge is better than in 7 because it includes fraud, defalcation

§ Costly: requires years of payments.

o Chapter 11: may be used by individuals and corporations. A payment plan is agreed upon by the creditors and the debtor; the creditor has a voice. The company pays it back and is restructured.

§ Debtor files petition and attends meeting of creditors

§ Debtor retains control of assets

§ Debtor attempts to improve the estate’s posting

· Preferences and fraudulent conveyances

· Improper liens

· Assume or reject executory contracts

· Negotiate with lenders

§ Debtor files a plan of reorganization

§ Creditors vote on the plan by class. Guaranteed to get at least the liquidation value under Chapter 7.

§ Debtor obtains discharge of debts, and reorganization of business structure.

· Writ to Enforce Collection

o Execution: take debtors property to sell and satisfy the debts, through the sheriff.

o Garnishment: take property belonging to the debtor in hands of a third party, like their employer. CA: you can only garnish up to 15% of their wages. FED: 25%. You serve the employer.

o Receiver: person you appoint to deal with this.

o Order of Examination: limited to CA. Drag them into court under oath. Creates a lean as an operation of law, like a mechanic’s lien. – Rolex watch guy

PROPERTY OF THE ESTATE – § 541(a)

§ 541(a) Property of the estate, wherever situated and by whoever held

· All legal and equitable interests

· Community property

· Avoided transfers (preferences, fraudulent conveyances)

· Inheritances if acquired within 180 days of filing bk

· Proceeds, rents from estate property

§ 541(b) Exclusions from the Estate (different from exemptions)

· § 529 tuition plans

· ERISA retirement / Spendthrift trust

· Expried leases

· Money withheld from a paycheck, garnishment

· In Chapter 7 only, earnings after bk is filed.

Property of the Estate

· Bunter Principle: the substantive rights of the parties are ordinarily determined by otherwise applicable non-bankruptcy law unless a specific bankruptcy rule or principle alters those rights. Bankruptcy is mostly procedural.

· Whiting Pools: The debtor’s interest in property with a lien on it is the property, subject to the lien. It is not the value of the property minus the lien. The IRS has to give the pool tools back.

· Turnover: when the trustee gets possession of the debtor’s property that is in the possession of a third party.

· Property leaves by: case closing, exemptions, abandonments, relief from stay, and when the property is returned to debtor subject to the lien b/c its underwater.

EXEMPTIONS

Introduction

· The exemptio

judicial lien is a GUC to the extent that it is avoided. If the property appreciates then it goes to the judicial lien and not to debtor’s equity.

Fraudulent Use of Exemptions

· It is okay to plan for bankruptcy, and deposit money into accounts or property that is exempt under state law.

· General Rule: a debtor will be denied discharge if he has transferred property with intent to hinder, delay defraud a creditor within one year before the date of filing. Transfers without adequate consideration are presumed to be fraudulent. Ex: giving a classic Porsche to your brother in law for 5k when the car is worth 250k, or whatever.

· Tveten: “Pigs get fed and hogs get slaughtered.” Under state law, a Lutheran Brotherhood account is entirely exempt without cap. Debtor owes 19 million, but he deposits 700k in the account. Court incorrectly decided that this was fraudulent. Under Butner, it’s fine.

· Hanson: Parents sold car, other property for FMV to son, used the cash to put more equity in their house and to buy life insurance policies, all below the exemption limits. Mere conversion of nonexempt property into exempt property, without extrinsic evidence of fraud is perfectly legal.

· Examples of fraud: obtain goods on credit, sell them, and put this cash into exempt properties.

· Addison: The conversion of the nonexempt property to exempt property on the eve of bankruptcy for the express purpose of placing the property beyond the reach of creditors without evidence of indicia of fraud beyond mere use of the exemptions can not be challenged.

CLAIMS, PRIORITIES, LIEN STRIPPING

Introduction

· § 105: Any right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, including a right to an equitable remedy for breach of performance if such breach gives rise t a right to payment.

· Three Kinds of Claims

o 1) Secured Claims: secured by a lien on the debtor’s property that enables the creditor to proceed against this property to satisfy the debt if the debtor defaults.

o 2) Priority Claims: certain unsecured claims are given priority over other unsecured claims. Ex: domestic support, alimony, child care.

o 3) Unsecured Claims: creditors share pro rata the property of the estate without respect to when their claims arose or became due.

· Allowed Claims: the creditor can collect from the estate b/c 1) they filed a proof of claim within 90 days of the creditor’s meeting and 2) the court found it to be valid. This is very easy! In Chapter 7 no asset cases, no claims are filed.