Bankruptcy Outline

I. Individual Debt Collection (Ch. 1)
A. Rights of General Creditors
1. Unsecured creditors may get a judgment giving the rightto force debtor to pay only, but doesn’t cause payment
2. Way to actually collect
a. Docket judgment lien
b. Writ of execution signed by judge
c. Sheriff served with writ may go and seize the property filed upon to satisfy judgment
3. Problems
a. 1A(1): Fi. Co. lends $100K to D, who uses it to start a business. The business fails, and D defaults on the loan. D owns a house, but it is subject to a mortgage held by the Bank. D owns a late-model car free and clear. D has $10K in a checking account and earns $35K a year at a job. In addition, D owns several prints by Matisse, as well as a few pieces of antique furniture inherited from grandparents. What are the problems Fi. Co. is likely to encounter trying to recover the money it has lent?
1) Finance company doesn’t have right to go after any property it wants. It must first attempt to get voluntary payment and then if that fails, get a judgment from the court. Once follow through with the steps, then sheriff can go after property, breaching the peace if it has to!
2) What if there’s a mortgage on the home?® the judgment is a jr. lien holder to mortgagor and is also junior to the homestead exemption amount in the equity
3) The car may be sought unless there is an exemption, but is easier to sell at a decent value b/c bluebooks and a ready market to price efficiently
4) Matisse paintings are difficult to get good value for sale b/c sheriff will just plop on door step and sell
a) Sheriff usually doesn’t care about price received
b) May hold the item over the head of the debtor if know that it’s of sentimental value to make pay® “Hostage”
5) Wages can be garnished to a limited amount so that the debtor retains 30 times the minimum wage
b. 1A(2): D defaults on $20K obligation to Bank, which then sues to collect. After Bank wins and dockets its judgment, D negligently injures Victim, who sues and obtains a prejudgment attachment of D’s automobile, which D owns outright at that time. Later Bank levies on the same automobile, and the sheriff conducts a sale that raises $25K. Assume victim is also claiming $20,000 in damages. What should the sheriff do with the money?
1) Whoever wins the race to the property gets the first $20K from the sale of the care and the jr. lien holder gets $5K
2) Victim’s prejudgment attachment is a lien
a) First in line, yet inchoate since judgment hasn’t come down
b) Can’t take possession of car for prejudgment and must show extraordinary circumstances b/c otherwise plaintiff could create hostage situation that would force defendant to settle
3) Bank’s post judgment lien may also give rights to the proceeds
a) Judgment alone is insufficient to give actual lien until levies
b) Since bank has levied, the sheriff has taken possession of the vehicle® lien perfected
c) Should have created security interest at time of loan
4) Priority is established by first in time
4. Issue in bankruptcy is that creditors aren’t all able to satisfy their claims in full… one gets where the other gives up
B. Rights of Secured Creditors
1. Establishing in the beginning or just shortly after extending credit, creditor may get consensual interest in debtor’s property
2. Benefits
a. Priority (only right left in Bk proceeding)

b.

Bk stops w/ auto. stay

Self-help repossession if don’t breach the peace or get quick writ of replevin from court for sheriff to go get if may breach the peace

c. Article 9 Right of Sale
3. To Create
a. Written security agreement® attachment
b. File financial statement giving notice to public
c. When both completed, security interest is perfected and priority is established
d. Bk proceedings make sure all appropriate steps are taken to perfect properly
4. If secured creditor takes property, then must sell in reasonable time in good faith
a. Surplus® goes back to debtor or jr. lien holder
b. Deficiency® may get judgment of deficiency and pursue as general creditor
5. If secured party takes possession of the collateral then there is less confusion about who has the security interest and also secures priority
6. Problems
a. 1B(1)Mfr. Sells machine to D on 1/1. D promises to pay Mfr. on 2/1. D never pays. On 3/1, Bank lends to D and takes security interest in machine. On 4/1 Bank files. Mfr. sues D, receives judgment 5/1. Sheriff seizes machine under writ of execution on 6/1. Who prevails w/respect to machine, Mfr. or Bank?®Assuming financing statement is written – Bank gets priority b/c secured creditor b/f Mfr. got lien.
1) Would your answer change if Bank never filed financing statement? … filed on July 1? ® Yes, in either case, Bank would be 2nd b/c judgment lien first, on 5/1.
2) What should Sheriff do w/excess if sale proceeds exceed amount owed to creditor w/priority? ® Excess should go to Mfr. b/c still has an interest, it’s just 2nd in line.
b. 1B(2) D bought a drill press from Seller two years ago. D borrowed $50K from Bank on unsecured basis to pay for it. Last year, D borrowed $50K from Fi. Co., granted it a security interest in the drill press, and signed a written security agreement. Fi. Co. never files a financing statement. Last month, Bank sued D, but its claim has not been reduced to judgment, and no prejudgment remedies are available. Last week Fi. Co. took possession of the drill press. Who has priority?® If financing company can take possession prior to levy of execution, then claim is perfected and Fi. Co. takes priority
c. 1B(3) Bank takes and properly perfects a s.i. in D’s inventory. Several months later, D defaults on an unsecured loan from Fi. Co., as it has on loans from many others. Fi. Co. threatens to sue, but before it does so, D sells the inventory and uses the proceeds to repay an unsecured loan from Fi. Co. Does Bank have any recourse against Fi. Co.?
1) Essentially, bank can’t chase money
2) UCC9-332 (a) provides that a transferee (Fi. Co.) takes money free of a security interest unless the transferee acts in collusion with the D in violating the rights of the secured party. The facts do not indicate that there is any collusion; therefore, Bank has no recourse against Fi. Co
3) Since bank only has interest in the inventory, they can’t necessarily go after money in D’s bank account unless it can trace it to the sale of the inventory b/c bank does have a claim on proceeds traced from the sale of the inventory
II. Bankruptcy As a Collective Debt Collection Remedy (Ch. 2)
A. In General- attempt to bring all creditors together to collect debts owed as a unit to eliminate the “race” atmosphere of the non-bankruptcy situation
B. Purposes of Bankruptcy and the Butner Principle
1. Theme: Bankruptcy is limited and is essentially procedural
a. Changes basic structure of state law regarding debt collection to create a uniform federal system
b. Butner Principle- “Bankruptcy courts and laws aren’t meant and shouldn’t interfere with non-bankruptcy state and federal law unless it is overridden by a bankruptcy provision or policy”
2. Problems Bankruptcy attempts to Remedy the “Destructive Race” to property
a. Limited assets
b. May “over-fish” the pool of assets
c. Some creditors get screwed if not fast enough
d. Increased costs of monitoring

Corporate Business Entity
Stopping “Race”

Consumers/ Ind