Basic Bankruptcy
I. Creditors’ Rights and Remedies
A. State Law Debt Collection
1. First in time, first in right
i. As to creditor priority, this is the general rule.
ii. Race to the courthouse.
iii. First to obtain a lien would be first in line for debtor’s property.
iv. For admiralty, last in time, first in right is the rule.
v. Priorities are disturbances in the equal distribution to creditors.
vi. Policy Reasons
a. Reward creditors who actively pursue claims.
b. Insistence on certainty.
c. Insures title.
d. Reduces the cost of credit.
2. Secured v. Unsecured Creditors
i. A secured creditor is someone who gives credit in exchange for a promise to pay along with collateral.
a. Liens granted by owner of property to secure the obligation.
b. There is always collateral (tangible or intangible) that goes along with
ii. An unsecured creditor holds no collateral.
a. Unsecured creditors are paid out of cash flow.
3. Consensual
i. State law allows renewals, renegotiations, modifications but they cannot be forced.
4. No Discharge
B. State Law Creditors
1. Unsecured Creditors
i. Consensual – creditor determines whether to work with debtor.
ii. Nonconsensual – creditor who does not get to determine whether to work with a debtor. Example is a car accident victim.
2. Consensual Secured Creditor
3. Judgment Creditor
i. Form of nonconsensual unsecured creditors.
ii. Judgment allows a lien over creditor’s property.
4. Statutory Lien Creditor
i. Certain types of businesses can receive statutory liens. Classic example is a mechanic’s lien or contractor’s lien.
C. Remedies Under State Law
1. Sue on debt or obligation owed
i. Get judgment
ii. Formal Post-Judgment Collection Efforts
a. Judgment lien
b. Execution
1). Directs sheriff to find and seize all debtor’s property
c. Garnishment
1). Wages and Bank Accounts
2). Garnishment order can include personal property located in a bank safe-deposit box.
3). Pre-judgment garnishment of bank accounts freezes the accounts awaiting final judgment.
d. Attachment
1). In many jurisdictions, attachment is necessary for personal property.
iii. Repossession of personal property
a. Secured creditors under Article 9 can repossess personal property, as long as peace is not breached.
b. Court is not involved.
iv. Replevin of personal property
a. Similar to repossession.
b. Court is involved.
c. Must show lien is involved.
v. Turnover of intangible property
a. Involves intangible property
b. Funds, commercial paper
vi. Foreclosure of real property
2. Every state has exemptions which are beyond the reach of creditors.
D. State Law Collective Actions
1. Extensions and compositions
i. Negotiation with creditor for extensions
2. Assignment for benefit of creditors
i. Debtor assigns assets to representative who distributes
ii. Trigger for involuntary bankruptcy
3. Receivership
i. Receivers are appointed to take control of debtor’s assets.
ii. Trigger for involuntary bankruptcy
II. Overview of Bankruptcy
A. Constitutional in Origin
1. Article I, Section 8, Clause 4
2. “Uniform laws on bankruptcy…”
B. Title 11, USC, Bankruptcy Code
1. Title 28 is also important.
i. 28 U.S.C. § 1334 is grant of original and exclusive jurisdiction to district courts.
ii. 28 U.S.C § 151 allows district courts to create bankruptcy courts within district.
2. Title 26 – IRC – is also important.
C. Bankruptcy cases reported in West Bankruptcy Reporter and on-line
D. Bankruptcy in History
1. 1800 Act
2. 1841 Act
i. First hint of discharge of debts in bankruptcy.
3. 1867 Act
i. Discharge weakens.
4. 1898 (the “Act”) with 1938 Chandler Act Amendments
i. Chandler Act was precipitated by business failures of great depression.
ii. Chandler Act provided for reorganization of businesses.
5. 1978 (the “Code”)
i. Forgiving, discharge, and pro-debtor provisions.
ii. Broad provisions for discharge.
iii. Broad mechanisms for dispute resolution.
E. Why Bankruptcy as Opposed to State Law
1. ABC
i. Generally, did not involve court.
ii. Assignment for the benefit of creditors.
iii. State law has exemptions that do not allow certain assets to be taken.
iv. Debtor transfers all assets not exempt to an assignee who sells the property and pays of the creditors.
2. Receivership
i. Similar to ABC
ii. Receiver is appointed by state court. Takes control over all of assets not exempt. Receiver takes legal title.
3. Discharge cannot be done under state law, except as agreed by creditor or by full payment.
4. Bankruptcy provides the ability to discharge.
5. Federal bankruptcy was needed to prevent favoritism for local creditors.
6. Very nature of state action (quick action) leads to sub-optimal level of return.
i. Common pool of oil example.
F. Why File a Bankruptcy Petition
1. Becomes an adversarial relationship between debtor and creditor.
2. Bankruptcies create exposure to the world – bankruptcy documents are public documents.
3. Individual
i. Excessive liabilities
a. People who just love credit.
b. Living outside their means.
ii. Unforeseen circumstances or event
a. Loss of job, sickness, medical expenses, divorce, etc.
b. Spending patterns based on projected income that are not realistic.
iii. Pending dramatic creditor action
a. About to lose car to repossession.
b. Garnishment of wages.
4. Business
i. Distortion of right side of balance sheet.
a. Debt and equity out of balance to assets.
b. Might use bankruptcy to trim debt.
ii. Mismanagement of assets
a. Left-side of balance sheet.
b. Mergers and acquisitions can create problems with management of assets.
iii. Time
a. Time to get things back on track.
b. Allows businesses to keep creditors at bay.
G. Purposes of Bankruptcy
1. Efficient collection of debts
2. Distribution of debtor’s property in accordance with uniform and national priorities (not equal treatment)
3. Capturing going concern value
4. Establish of debtor’s right to discharge or reorganize (reallocation or rehabilitation)
H. Structure of the 1978 Bankruptcy Code
1. Chapters Governing Overall Bankruptcy
i. Chapter 1: Definitions, rule of construction, and general provisions
a. Definitions (§ 101)
b. Rules of construction (§ 102)
1). Singular includes the plural (but not the other way around)
c. § 105 has been read to allow equitable measures
ii. Chapter 3: Case administration
iii. Chapter 5: Creditors, the debtor, and the estate
2. Substantive Chapters
i. Chapter 7: Liquidation
ii. Chapter 9: Adjustment of debts of a municipality
iii. Chapter 13: Adjustment of debts of an individual with regular income
iv. Chapter 11: Reorganizations
v
e Bankruptcy Court
c. Bankruptcy Court may hear all matters (unless specifically limited by statute) but can render final judgment in core matters only.
d. If it is a non-core proceeding, Bankruptcy Court judge can issue proposed findings of fact, but District Court issues final judgment and is not bound by Bankruptcy Court findings.
e. If it is a core proceeding, District Court review is “clearly erroneous” standard
f. If it is a non-core proceeding, District Court review is “de novo” standard
g. Bankruptcy Court CANNOT hear wrongful death
h. District Court can always take any part of a Title 11 case.
2. Venue
i. Venue of the Case
a. Proper venue for the entire bankruptcy case (where the petition under §§ 301, 302, or 303 is filed) lies in the place where the debtor’s domicile, residence, principal place of business or principal assets have been located for the greatest period of time in the six months preceding the filing of the petition.
b. Governed by 28 U.S.C. § 1408
ii. Venue of Proceedings
a. Governed by 28 U.S.C. § 1409
b. Proper venue for a proceeding in a bankruptcy case lies in the district court in which the bankruptcy case is pending.
c. Two Exceptions
1). If Bankruptcy trustee or DIP attempts to collect a money judgment of less than $1,000, recover property worth less than $1,000 or collect a consumer debt of less than $5,000, venue lies in the district where the defendant resides.
i). 28 U.S.C. 1409 (b)
2). If a claim arises from the debtor’s business after commencement of the bankruptcy case, venue lies in the district in which a state or federal court would have had jurisdiction in the absence of bankruptcy.
i). 28 U.S.C. 1409 (d)
d. If a claim arises from the operation of the debtor’s business after the filing and the plaintiff is the non-debtor, rather than the trustee or DIP, then venue lies in the district court for the district in which either a state or federal court would have had jurisdiction under applicable non-bankruptcy law, or in the district in which the bankruptcy case is pending.
e. 28 U.S.C. § 1409 (c) provides an alternative venue for proceedings brought by the trustee or DIP to claim property of the estate under § 541, or to avoid certain transfers under § 544(b). Such a proceeding can be brought in the district in which the suit could have been filed, either in state or federal court, in the absence of bankruptcy.
iii. Change of Venue
a. 28 U.S.C. 1412 allows a district court to transfer a case or proceeding in bankruptcy to another district court in the interest of justice or for the convenience of the parties.
b. Factors for evaluation
1). The economic harm to the debtor and creditors that would result from the change of venue;
