Purposes of Bankruptcy
1. Bankruptcy as Game Theory
a. The race to the courthouse ends up doing two things:
i) Disabling a workout
ii) It will cause assets to be dismembered and sold at distressed values.
b. As a result, some creditors will get money and others won’t. That is socially undesirable.
c. In the effort to do what's best for themselves, the creditors hurt the entire group. This would be the world without a bankruptcy system. It would be bad.
d. The code is designed to stop the race to the courthouse and to stop the potential unequal returns that different creditors are getting.
2. Why have bankruptcy? To encourage risk-taking.
Commencement of a Bankruptcy Case
1. Voluntary cases. Section 301
a. A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter. Section 301(a).
b. The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter. Section 301(b)
i) Under the old code, you had to be adjudicated as a bankrupt. Now it arises automatically upon the petition.
ii) Order for relief matters because that's when the counting date starts for certain events (bar date?). If voluntary, order starts with petition.
2. Involuntary. Section 303
a. The debtor has the opportunity to contest the petition. Petitioner has the burden of proving the debtor is insolvent. Only then is an order for relief entered.
b. Can only do this for seven and eleven
3. A bankruptcy can only be started by an entity who can be a debtor under the bankruptcy code.
a. Person [eligible to file bankruptcy] – The term person includes individual, partnership, and corporation, but does not include governmental unit.
1. Filing bankruptcy creates the estate. The estate consists of all property, contingent or not, as of the petition date. Section 541. This includes:
a. All legal or equitable interests of the debtor in property as of the commencement of this case. Section 541(a)(1)
b. All interests of the debtor and the debtor’s spouse in community property that is—
i) under the sole, equal, or joint management and control of the debtor; or
ii) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.
c. Any interest in property that the trustee recovers. Section 541(a)(3)
d. Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510 (c) or 551 of this title. Section 541(a)(4)
e. Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date— Section 541(a)(5)
i) by bequest, devise, or inheritance;
ii) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or
iii) as a beneficiary of a life insurance policy or of a death benefit plan.
f. Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case. Section 541(a)(6)
g. Any interest in property that the estate acquires after the commencement of the case. Section 541(a)(7)
2. Things that are excluded from the estate
a. Post-petition earnings and wages. 541(a)(6)
i) Prochnow v. Apex Properties, Inc. – After petition date, debtor collected commissions on houses he had sold. Clearly he collected the commissions after the petition date. The employment contract said that his entitlement to a commission did not occur until the house sale closed and the broker received the commission.
ii) Holding – These commissions are part of the estate. His labor was performed pre-petition. He had nothing left to do by the time he filed the petition. He had earned the money, though not legally, but it was his pre-petition labor that generated the commission. There was nothing left for him to do post-petition.
b. Any power that the debtor may exercise solely for the benefit of an entity other than the debtor. 541(b)(1)
c. Any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case under this title, and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease during the case. 541(b)(2)
3. Anti-alienation provision. 541(c)(1)(A)
a. Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law—
i) that restricts or conditions transfer of such interest by the debtor; or
ii) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.
b. In re Chambers – Person running for election for Georgia state legislature filed a petition under chapter 13. Debtor tried to keep the campaign assets out of the estate. Georgia law said that the funds were not property of the candidate.
i) Holding – 541(c)(1)(A) supersedes Georgia law. The debtor has a property interest, however restricted by state law, in the campaign funds.
a. The estate is a res that creates in rem jurisdiction. The jurisdiction of the bankruptcy court is in rem – not in personam. The court is exercising its jurisdiction over the assets. Can issue orders as necessary to protect the assets. That’s what in rem jurisdiction does.
5. Three basic areas of controversy involving property of the estate:
a. Future interests. Prochnow
b. Restrictions on transfer created by state law. Chambers
c. Degree of entitlement. (Goes to licenses).
i) Some licenses are not transferable (law license)
ii) Others are (liquor license)
6. Estate Exercise.
a. Parakeet – It is property of the estate. The estate includes everything the petitioner owns on the petition date. It is very broadly concerned. We don’t worry for the moment whether it has value to the creditors or whether an exemption would apply.
b. Ford Focus still subject to purchase-money security interest – Doesn’t matter that it is subject to a lien or that the lien exceeds value of the property. Still part of the estate. The trustee may decide to abandon the car.
c. Candid snapshots of hundreds of his friends – Still property of the estate. May be an exemption, but still property of the estate.
d. Two tickets to upcoming Bjork concert – There’s a question as to whether it is transferrable. If not transferrable, it’s not part of the estate. Nonetheless, the overwhelming majority would say it is property of the estate even though not transferrable under state law (the bankruptcy code will override nontransferability under 541(c)). This goes to the difference between licenses that can and cannot be transferred.
i) 541(c)(1) generally overrides contractual limitations
e. Household furniture – Property of the estate.
f. 25 shares of monumental inc. – Same.
g. Undivided 3/48ths interest in big game hunting preserve – Property of the estate.
h. 3,214 bubble gum baseball cards – Property of the estate.
i. Catcher’s mit – Yes.
j. Bank account – Yes, but only to the extent of debtor’s legal title. See 541(d). Beneficial/equitable title however does not become part of the estate. Creditors won’t get the money. The point is that the automatic stay applies and the bankruptcy trustee becomes the new trustee.
k. Salary – Property of the estate. He earned it before.
l. Retirement account – Need more information. This falls under 541(c)(2).
m. Parakeet’s eggs – Yes. They are proceeds of the asset (the bird).
n. Annual dividend – Yes. More proceeds.
o. Salary post-petition. No. 541(a)(6)
p. Retirement account – Need more information. Falls under 541(c)(2)
7. Exclusions v. Exemptions
a. If it occurs in 541, it is an exclusion – not an exemption.
b. Something that is excluded from property of the estate is not property of the estate. Whether an exemption applies requires that it first be property of the estate.
Thus, “doing nothing” violated the stay.
ii) Moreover, the sale was another willful violation. The creditor cannot play dumb and rely on its own records that the motion was grated at an earlier date.
6. Three ways in which the automatic stay is terminated
c. Relief from the stay.
1. Exemptions are property of the estate but that is exempted from the estate. All property not listed as exempt is non-exempt and will be sold by the trustee so that the proceeds can be distributed to the creditors.
2. How exemptions work
a. Hypo 1
i) House worth $100
ii) Applicable homestead exemption: $100
iii) No lien
iv) In this instance, the debtor is going to get to keep the house, period.
b. Hypo 2
i) House still worth $100
ii) Homestead exemption is $40
iii) Trustee sells the house and $40 will go to debtor and the other $60 will go into the estate.
c. Hypo 3
i) Say there’s a lien of $60
ii) Homestead exemption still $40
iii) Trustee will probably abandon the property. Bank will sell and get 60
d. Hypo 4:
i) Value of the house is $50
ii) Homestead is $40
iii) Lien is 60
iv) Trustee will abandon. Homestead will be worth zero. Bank will get 50.
3. Notwithstanding 541, an individual may exempt property listed 522(b)(2) (Federal Exemptions) or (3) (State exemptions). Section 522(b)(1)
4. Federal Exemptions – Property specified under section (d) (federal exemptions) unless state law specifically does not so authorize (that is, unless the debtor is in a state that opted out of the federal exemptions.) 522(b)(2)
a. Homestead exemption – The debtor’s aggregate interest, not to exceed $15,000 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.
b. The debtor’s interest, not to exceed $2,400 in value, in one motor vehicle.
c. The debtor’s interest, not to exceed $400 in value in any particular item or $8,000 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.
d. The debtor’s aggregate interest, not to exceed $1,000 in value, in jewelry held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.
e. Wild card – The debtor’s aggregate interest in any property, not to exceed in value $800 plus up to $7,500 of any unused amount of the exemption provided under paragraph (1) of this subsection.
f. The debtor’s aggregate interest, not to exceed $1,500 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.
g. Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract.
h. The debtor’s aggregate interest, not to exceed in value $8,000 less any amount of property of the estate transferred in the manner specified in section 542 (d) of this title, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.
i. Professionally prescribed health aids for the debtor or a dependent of the debtor.
j. The debtor’s right to receive—