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Bankruptcy
University of Connecticut School of Law
Marrion, Thomas S.

BANKRUPTCY
 
I.       OVERVIEW
¨      Power from Article I, Section 8 Clause 4 of the Constitution
·         Current Act passed in 78
¨      Goals of Bankruptcy
·         Orderly and equitable repayment of claims for the benefit of creditors
·         Economic fresh start to debtor
¨      Bankruptcy Judges
·         Serve 14 year terms
·         May be removed for less than impeachable offense
·         Salaries can be reduced while in office
¨      Insolvency
·         Two methods to determine
o       Balance sheet method
o       Equity test (do they have ability to pay debts as come due)
¨      Assignment for the benefit of creditors – State law alternative to bankruptcy. in most states a debtor might go to the court and ask for the appointment of assigns for the benefit of creditors who will manage their assets selling them off to pay creditors. Does not discharge debts unless creditors agrees to it
II.    LIENS
¨      Unsecured loan – loan that is not secured by any collateral
¨      Most banks and business prefer secured  loans
·         When you get a secured loan you receive a security interest in the collateral
¨      Types Of Liens
·         Consensual lien – where debtor voluntarily nominates some his property as collateral loan (ex: mortgagee)
o       Security interests are a type of consensual lien
§         Security interest – you get priority, enforceability and encumbrance
·         This means that:
o       You get paid first
o       You have certain remedies under Article 9
o       Encumbrance – if the debtor sells the collateral the bank can still seize it even if the debtor is no longer in possession (note that for the holder of a security interest to do this against a bona fide purchaser for value the security interest must usually be perfected)
§         Possible types of Collateral
·         Accounts receivable – the right to a future payment.
·         Inventory – raw materials, work in progress and finished goods
·         Machinery and equipment
·         Real estate
o       Note that real estate is not governed by Article 9 but is governed by mortgage law
§         Creation of a Security Interest
·         3 requirements to create a security interest
o       Signed or authenticated security agreement OR secured party takes possession of collateral
§         In the security agreement the property is described. In the case of property that is yet to be acquired there will be ‘an after acquired property clause’.
§         A ‘future advances clause’ will cover the current line of credit and any future ones
o       Secured party must have given something of value to debtor
o       Debtor must have rights in the collateral (this does not necessarily mean ownership rights but there must be some interest)
§         A security interest only deals with the interests of the parties between themselves. In order for the security interest to have effect against the rest of the world it must be perfected
§         Once the lien is perfected it cannot be attacked
·         Methods of perfection
o       Filing of a finical statement – most typical way. Identifies secured party and debtor and its filed is specific office
o       Possession or control
§         Possession – this method is permitted for all tangible assets but rarely utilized. This is the ONLY acceptable method for cash.
§         Control – works for bank accounts and security accounts. Giving someone control over your bank account means that you can’t withdraw without their approval.
o       Automatic perfection – available for certain types of security interests.
§         Applies in Purchase Money Security Interests (PMSI) in consumer goods. This is where you buy an item on credit (ex: washing machine)
·         Requirements for perfection
o       Mortgage – when the collateral is real property the lien is perfected by filing in real property records
o       Security interest – when the collateral is personal property requires several steps (governed by Article 9 of UCC)
§         Attachment – process that gives creditors rights against the collateral that are valid between creditor and debtor
§         Perfection can then occur either by the creditor taking physical possession of the collateral OR filing a public notice (financing statement)
·         Judicial lien – occurs when there is a judgment against the debtor. If the debtor is unwilling or unable to pay the winning party might levy an execution of judgment by having the local law go and seize property which is then sold with the proceeds going against the judgment.
o       Can include judgment
·         Statutory lien – certain creditors are automatically given liens on debtor’s property to protect a creditor’s interest under certain laws
o       Mechanic lien – gives a lien on real property to construction project or suppliers of materials. 
o       Artesian’s lien – usually receive a possessory lien on the item on which they are working
o       Tax liens – Revenue service (state or federal) receive a lien on your property if you fail pay taxes. They then will seize and sell your property.
¨      Priorities Outside Of Bankruptcy
·         9-201 – General rule is first in time, first in right
o       Note there is an exception for purchase money security interests (9-234a) when the secured party perfects within a set time.
·         Security interest is better than not having a secured interest
o       Holder of even a unperfected security interests beats a non secured interest
·         Perfected Security Interest beats out non perfected security interest
·         Liens creditor (post judgment remedies, non consensual liens…) beats out an unperfected security interest 9-317
¨      Enforcement of security interests
·         Prejudgment remedies – remedies available at beginning of suit to give creditor security for any eventual recovery.
o       These did not exist under common law
§         Purely a creature of statute and so vary with the state
o       Types of Prejudgment remedies
§         Attachment – a seizure of defendant’s property. Could be actual or constructive
§         Garnishment – Requires the garnishee to not hand over property or funds to debtor w

transfers to insiders as these are subject to closer scrutiny
o       Court finds insolvency under balance sheet method
§         Although can also prove through equity test (not paying debts as come due)
·         Remedies for fraud
o       equitable
§         Avoidance of transfer
§         Attachment against transferred asset or other property
§         Injunction against further disposition of property
§         Appointment of a receiver to take charge of transferred asset
o       Money recovery
·         Can recover up to amount of claim or value of asset, whichever is less
·         Protection for the debtor when debtor was insolvent
o       New value defense
o       Ordinary course of business defense
o       Made pursuant to a good faith effort to rehabilitate debtor
·         Fraud allows the creditor not only to go after the initial transferee but even subsequent transferees
·         Protection for Transferee
o       A transfer is not voidable against a the initial transferee if he was a bona fide purchaser for good value
§          if initial transferee did not pay good value the transfer can be avoided but he will receive a lien for the value paid
§         Bad faith receives nothing
o       A transfer is not voidable against a subsequent transferee if he was a bona fide purchaser and gave value (note: it does not have to be reasonably equivalent value)
§         Further if one transferee in line had good faith and value (one transferee from whom trustee cannot recover) then later trustees are protected unless they acted in bad faith
IV.JURISDICITON
¨      Pre 1978
·         Gave bankruptcy courts broad jurisdiction to hear any cases
·         Held unconstitutional under Northern Pipeline v. Marathon
o       Seen as giving Article 3 power to Article 1 Courts
¨      Post Pipeline
·         Congress passes 1984 provisions
o       Have not been successful challenged
·         Bankruptcy power is vested in district courts
o       §28 USC 1334
§         -(a) district court has original and exclusive jurisdiction over cases arising under 11
·         this is only the petition and its adjudication
o       the umbrella under which everything happens (in re portion)
§         -(b) district court has original (but not exclusive) proceedings of all civil proceedings
o       arising under title 11
§         covers bankruptcy litigation other than actual case
§         must involve adjudication of rights and obligations provided in Code