Czarnetzky Fall 2012
Bankruptcy law: Financial death. The endpoint of a commercial transaction (Art. 9)
— Historically – creditor’s remedy; U.S. Const. art. I, § 8 – empowerment to create uniform Bankruptcy law
— Bankruptcy Code Today – Title 11: Chs 1, 3, 5 & remaining chs are different types
— Twin Pillars of Bankruptcy Law: Discharge for Debtor AND Protection & Distribution to Creditors
Ch. 7 Liquidation Bankruptcy – liquidizing – used to be exclusive form of bankruptcy. Debtor turns over all assets to trustee; trustee sells/liquidates debtor’s assets/distributes proceeds from liquidation of assets to debtor’s creditors [Creditor’s benefit – orderly distribution; Debtor’s benefit – discharge of their debts] Reorganization – repayment plan – Debtor presents plan (provides at least what creditors would receive in Ch 7); creditors get paid, but they get no vote on the plan; debtor keeps assets & receives discharge.
· Ch. 11 – every “person”; most prominently used by corporate entities
· Ch. 12 – family farmers & individuals with regular income; must be voluntary
· Ch. 13 – individuals w regular income whose unsecured debts do not exceed $336,900 & whose secured debts do not exceed $1,010,650
Commencement of the Case & Eligibility for Relief
I. Voluntary Proceedings – most common
a. Process: file petition for relief; order for relief; AND creation of automatic stay (§ 362) & estate (§ 541)
BAPCPA, bankruptcy action prevention & consumer protection act, revised in 2005:
b. Oprah Winfrey provision § 109(h) – Individual debtor can’t file without first being counseled
c. Means Test § 707(b) – Congress thinks it is an abuse for someone with a decent disposable income to file a Ch. 7. Mechanical test intends to remove bankruptcy judges’ discretion. “
Means test failure = no eligibility for Ch 7 (presumption of bankruptcy abuse)
1. (1) Figure out yearly income;
a. § 101(1)(A) – Avg. debtor income for prior 6 mos.; includes any amount paid to debtor by any source (excluding some military & other things), divide by 6, and multiply by 12 to determine annual income
2. (2) Is annual income greater than / less than median for a family of a similar size where debtor lives? If equal or lower than Census Bureau median, then Ch 7
3. If income is above median à Means Test § 707(b) p. 42
a. (1) Find disposable income – avg. monthly income MINUS statutorily defined expenses = amount that can be used in a reorg. plan
· Permits some “reasonable” & necessary expenses
1. Ex: care of the elderly or children. § 707(b)(2)(A)(ii)
· Deducts secured debt
1. Ex: 12 monthly payments of $100 for appliance = $20 deduction (1200 / 60) or car payments / mortgage payments (secured)
b. (2) Multiply by 60 (Ch 13’s 5-year plan)
· Total amount creditors could receive from Debtor over 5 yrs
c. (3) Passing/Failing – Abuse exists if current monthly disposable income multiplied by 60 is greater than the lesser of (1) $7,025 / 25% of non-priority unsecured debt (whichever is greater), or (2) $11,725
· Alternative way to look at it:
1. (1) If adjusted monthly expenses less than $117.08 ($7,025 / 60 mos), no presumed abuse exists & debtor may file Ch 7.
2. (2) If it’s between $117.08 & $195.42 ($11,725 / 60 mos), the means test requires that you calculate 25% of debtor’s unsecured debts and compare it $7,025.
3. (3) Select the greater number and compare that to the monthly net income times 60.
d. Summary: (1) if adjusted monthly income x 60 (5 years in months) is in between the ceiling ($11,725) and floor ($7,025), then (2) if adjusted monthly income is higher than 25% of your unsecured debt, you must file Ch 13
· Rather arbitrary figures, but at some point it’s not worth it to push someone into a reorganization plan.
ii. Means Test Problems:
1. Problem 2-2 – Alice won $5,000 in the lottery. Definition includes all income debtor receives from any source in the 6 months before commencement of case. Lottery winnings, although a one-time event, are included in avg monthly income, but she may be able to argue special circumstances under § 707(b)(2)(B)(I) and overcome presumption of abuse – bankr. judge discretion. However, if she can pay her creditors an amount that would exceed the minimums set out in § 707(b)(2)(B)(iv), a court could certainly conclude that abuse still exists. Ironically, this added income might put her over the state median income for a similar debtor.
2. Problem 2-4- D’s monthly income = $120; unsecured debt (mostly credit cards) = $20K. Assuming she above state median income, will she be eligible for Ch. 7.
a. Answer: She is above the median income (we are told), so we proceed to means test. $120 x 60 months (5 years) = $7,200 / 25% of $20,000 debt = $5,000. It’s between $7,025 and $11,725, so the means test is failed and it’s greater than 25% of her secured debt, thus you can’t file Ch 7.
3. Problem 2-4(b) – If credit card debt of $35,000, she would not fail the means test bc 25% of $35,000 = $8,750 (greater than avg. income – can’t repay & is eligible for Ch 7)
a. Tension: The more debt then the more likely you can get into Ch. 7;
b. Bankruptcy Rule 9011 & § 526(b)(4) bars an advising additional debt in contemplation and prior to filing for Bankruptcy
4. Problem 2-5 – She owned a 2009 Mercedes for $800 a month. Suppose she plans to surrender the Mercedes back to the secured creditor. Can she deduct the $800 a month from her otherwise disposable income?
a. Yes, she would pass because she has an extra amount of secured debt so she would have a negative monthly income.
b. Perverse incentive: run up your secured debt before filing a Ch. 7.
c. If she gives car back to creditor can she still deduct it? We don’t know, S Ct did hold that if you don’t have an actual car then you can’t deduct a car payment
d. Documentation Requirements – § 521- Debtor’s Duties (otherwise petition dismissed)
i. (1) Must include financial information, pay stubs, creditors, etc. (2) Tax returns for past year before 1st meeting of creditors. (3) Certification of receipt of credit counseling or attendance in credit counseling course. *Can be conducted online. (4) Automatic Dismissal on 46th day if filing documentation requirements not met. § 521(i)
1. Time can be extended if court “finds justification”. § 521(i)(3)
2. Trustee can also request no dismissal if debtor attempted in good faith. § 521(i)(4)
3. Actual nature of automatic dismissal is disputed (need the court do anything?). Some courts think they have discretion to retain the case beyond the time period
ii. In re Acosta-Rivera (1st Cir. 2009) – Bankruptcy court may excuse non-disclosure = case must automatically be dismissed under 521(i) unless doing so will further some improper purpose of the debtor. Debtors didn’t initially disclose pending COA against employer and once they did disclose they didn’t list the value. Trustee wanted to settle suit; Debtor wanted to dismiss bankruptcy case.
1. Remember the CASE is a COLLECTIVE PROCEEDING – once you invoke Bankruptcy protection you have brought all of your creditors to court and they have an interest going forward.
2. Rule: If the hidden asset has a high enough value to cover all the creditor claims then the disclosure may be waived as a reasonable and pragmatic compromise
a. Court performs this with a “nunc pro tunc” order which basically retroactively indicates that the “court order[ed] otherwise.” (nunc pro tunc – now for then)
3. Held: Extension was appropriate despite the mandatory provision bc the nunc pro tunc order meant material was not needed originally on petition filing
a. Note: Debtors can’t just dismiss their Bankruptcy filing; the Trustee takes control in the interest of Debtors and Creditors
iii. Problem 2-6: The law requires debtor’s attorney to sign petition & provides in Rule 9011 sanctions for misleading the court. 2005 amendments created liability in the attorney if the debtor’s Ch 7 petition is dismissed for abuse. Requires: reasonable investigation – § 707(b)(4) and debt relief agencies are also liable for negligent / intentional issues from aid. §§ 526-527.
1. “Debt relief agency” – “any person who provides any Bankruptcy assistance to an assisted person in return for money payment or other valuable consideration, or who is a Bankruptcy petition preparer under § 110.” 11 U.S.C. § 101(12A).
i. Joint Petitions – Individual and spouse may file jointly under § 302, paying one filing fee but creating two estates; typically construed narrowly to require couple to be “spouses” under applicable state law
ii. Foreign Bankruptcy – it exists, do not need to know substantively. Ch. 15.
iii. Filing Fees – Various filing fees ($245 for Ch. 7; $235 for Ch. 13; $1,000 for Ch. 11; $200 for Ch. 12). *Interesting – you must have money to file for Bankruptcy.
1. These #s overturned U.S. v. Kras, 409 U.S. 434 (1973), which held that the inability to pay the filing fee barred a debtor from obtaining Bankruptcy relief
II. Involuntary Bankruptcy Proceeding § 303
o Only available under Chs 7 & 11
§ Note: Deliberately commenced bankruptcy proceedings are still voluntary, despite debtor feeling pressured by creditors
o Only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corp. (i.e. non profit / charity), that may be a debtor under Ch. which case was commenced.
§ Problem 2-8 – The economics of farming/fishing is that farmers are indebted many months of the year until harvest. Creditors instituting involuntary petitions in these circumstances could be sanctioned § 303(I).
b. Petition Requirements:
o Requisite # of creditors (collective proceeding; not used to settle one-on-one scores)
§ 12 or more creditors à 3 creditors must file petition
§ Fewer than 12 creditors à only 1 creditor needed
§ Can be secured or unsecured, but secured amount can’t add in to aggregate
o Creditors claims must aggregate at least $14,425 (under-secured amount can count)
§ Claims must be non-contingent and not subject to a bona fide dispute
§ Contingent Claims – § 101(5) definition = lengthy list
§ Split of authority: whether 1 creditor comprising most of the amount if that is sufficient; there is no general requirement however that the debts be relative
i. Problem 2-9 – 100+ creditors. 3 Corps., Acme Inc (breach of an implied warranty of fitness, which Diamondback moved to dismiss by denying it existed, and if it did it was satisfied); Consolidated Electric Corp ($46K for electricity bill); & Nightflyer Co (fully secured promissory note for $150K), filed an involuntary petition against D.
1. Note: Under Bankruptcy Rule 1003 it looks like there could be an opportunity for more creditors to join who are eligible
2. Acme’s claims are in dispute – must be a bona fide dispute. Fear = creditors will use involuntary petition threat to gain an advantage in their one-on-one dispute with their debtor, so this is the way that we limit disgruntled creditors’ ability to do this.
a. As long as they have A claim that is not subject to a bona fide dispute, then that claim would count and they can count as a creditor.
ii. Problem 2-10 – Rick got a judgment against HRR for $2K in compensatory and $20K in punitive . Involuntary petition against HRR. HRR moved to dismiss. Of 14 creditors, HRR identified 3 that are owed less than $200 and each of
1. Remember: a sole proprietor may file Ch. 13
d. Most Everyone Else & Chs 7 & 11
i. Ch 7 Eligibility = (All Persons) — (Individuals not passing Means Test + Railroads + Domestic & Foreign Ins. Cos. & Banks)
ii. Ch 11 Eligibility = (All Ch. 7 Debtors + Railroads) — (Stock & Commodity Brokers)
1. RRs are eligible under Ch. 11 (can be reorganized, just not liquidated)
iii. No Insolvency Requirement under Chs 7 & 11, but judge can dismiss if substantial solvency
1. Solvent entity w/ impending liability or potential losses may want to file preemptively
iv. Problem 2-14
1. Partnership – § 101(41) – can file either a Ch. 7 or Ch. 11; means test only applies to individuals, not partnerships)
2. Non-Profits – under Ch. 7 or 11, but not as an involuntary filing
IV. Limitations on Repeat Bankruptcy Filings – intended to prevent serial filings
a. § 109(g) limits refilling for individual debtors & family farmers – if in prior 180 days a filing was dismissed: 1) by court for debtor’s willful violation to follow court orders OR 2) voluntarily by Debtor following a motion for relief from the automatic stay
i. Montgomery v. Ryan (8th Cir. 1994) – debtor’s burden to show non-compliance w/ an order was not “willful”.
ii. In re Sole – court fashions a middle ground approach – requiring some sort of causal connection between a motion for relief from automatic stay and the debtor’s dismissal. Other two approaches = (1) no inequitable result (fuzzy) – remedy a perceived wrong and (2) strict statutory interpretation (harsh) – broad rule of dismissal any time stay relief came before voluntary dismissal. Here, there was no causal connection bw the agreed relief from stay and the much later voluntary dismissal of the debtors first case
1. Problem 2-16 – Re-file bc no connection bw relief from stay (uncontested) & the later voluntary dismissal bc she was temporarily unemployed.
2. Problem 2-17 – If Dave settles with the creditor who has filed a motion for relief and then later dismisses the case for other reasons, there is no causal connection between motion & dismissal, and arguably the 180-day bar would not apply.
b. Automatic Stay – prevents creditors from doing anything to collect from debtor, but secured creditors may petition for a Lift Stay Motion to get collateral (if secured)
i. Problem 2-18 – If debtor has refilled within a year of dismissing 2+ earlier Bankruptcy filing then no stay goes into effect. § 362(c)(4). But here, debtor paid off all existing creditors from first case, so the subsequent filings did not have any negative impact on them. It seems courts would not “count” his first filing for § 362(c)(3) or (4)
1. § 362(c) amendments intend to make serial filings less attractive by limiting or entirely preventing application of the automatic stay.
c. Ch. 7 Discharge Limits:
i. § 727(a)(8)(9) – Ch 7 discharge = only real benefit for debtors
1. No Ch 7 discharge if current Ch 7 commenced within 8 years of prior Ch 7 discharge
2. No Ch 7 discharge within 6 years of receiving a Ch 12 or 13 discharge UNLESS debtor paid all allowed unsecured claims or at least 70% using “best effort”
3. Limitation on entry of a Ch 7 discharge, not eligibility. However, debtor can still commence a Ch 12 or 13 case if eligible
Chapter 3: The Bankruptcy Estate
I. The Bankruptcy Estate
i. Section 541(a) – upon filing, an estate arises that contains all the D’s legal AND equitable interests in property (includes all property lent, pets, and worthless property; not limited to merely possessory interest (can be dispossessed or only have a part of the property)
1. Property not in D’s hands – if debtor has any legal right in the property, it would have to be turned over to the trustee; if it was a legitimate gift, then the trustee would have no claim over it
2. Sentimental property abandoned back to debtor – trustee can do this, but first the item would come into the estate § 551
3. Legal Interests Only – if D only has legal title to property, but has no equity in the property, only that legal interest becomes property of the estate § 541(d)
a. Mortgages – whole house comes into the estate, but the estate only gets D’s legal interest. The bank has the equitable interest until the house is paid for. Estate gets the interest to the extent that D has it.