Bankruptcy – Spring 2007
***PROBLEM SET 5*** (p. 119)
1) Consumer Bankruptcy
a) Two fundamental types of proceedings
i) Liquidations: Chapter 7, debtor gives up all non-exempt assets, Trustee in Bankruptcy sells assets, and proceeds are distributed pro rata to creditors
· The benefit is that a consumer debtor receives a discharge of all debts and begins fresh
· The trustee’s duty is not to the debtor, it’s to the creditor
· Liquidation achieves the two classic objectives of bankruptcy
o Fair distribution of the debtor’s assets for the benefit of all creditors, and
o A fresh start for the debtor
ii) Payout plans: Chapter 11 (businesses and some consumers with very large debts), Chapter 13 (consumers): debtor can propose to keep all assets in exchange for promising to pay off debts over a period of time out of future income
· Not only does it permit the debtor to keep assets instead of liquidating them, often at sacrifice prices, it can also mean much higher returns for creditors (which is a better result for creditors).
· The minimum the debtor has to repay is what the creditors would have gotten at liquidation.
· Basically, the idea is for the debtor to keep his assets without harming the creditor.
iii) Filing a Petition: In a voluntary bankruptcy petition, the debtor is required to file various forms called “schedules” all of which are set forth in Officials Forms part of Bankruptcy Rules. Schedules include details list of debts assets, income and expenses
(1) Policing Debtor Applications:
(a) Before they file, debtors must produce certification that they have attended a debt counseling session, that they have been given information about the other chapters of the code and about credit counseling, and that they have been warned that false information in files can lead to penalties and jail time. §109(h), 521(b)
(b) Debtor’s schedules must be complete, since failures to list a debt may make the debt nondischargeable § 523(a)(3)
(c) Debtor’s schedules must be accurate, since false statements in the petition or schedules may result in a complete denial of discharge under §727(a)(4) (and may open the debtor to perjury prosecution).
(d) Debtors sign their petitions under penalty of perjury, must file copies of pay stubs for 2 months before they filed, a statement of monthly income and an explanation of how that was calculated, and a statement disclosing any anticipated increase income in next 12 months §521(a)(1)(iv)-(vi)
(e) Debtors must be able to produce copy of previous year’s tax return on request of court/creditor 521(i)
(2) Policing Debtors via Debtors’ own Counsel
(a) Attorney must sign the petition, and by signing, represents that the attorney has performed a “reasonable investigation” and has no knowledge that the info in the schedules is incorrect (§707(b)(4)(C))
(b) Consumer bankruptcy lawyers have been renamed “debt relief agencies” and are specifically prohibited from making any statement in any document filed that is “untrue or misleading, or that upon exercise of reasonable care, should have been known to an agency to be untrue or misleading.” §101(12A); 526(a)(2).
(c) Failure to abide by these rules might cause attorneys to lose their fees, pay actual damages, or be forced to pay the fees of opposing counsel §526(c)(2); 707(b)(4)(A)
(3) First Meeting of Creditors (Section 341 meeting)
(a) Meeting held at date set by court within 40 days after petition is filed, ordinarily at the courthouse §341, Rule 2003(a)
(b) Primary function is to permit an examination of the debtor by the trustee and any interested creditor
(c) In most cases, creditors might elect a TIB (§702, 1104(b)) or a creditor’s committee (§705(a), 1102(a)(1) )
iv) Property of the Estate, per §541: at the moment a bankruptcy petition is filed, an estate is created by operation of law, consisting of all legal and equitable interests in property previously owned by the debtor as of the commencement of the case
· This occurs without actual notice to the creditors
· Intended to encompass all interests of the debtor, including a debtor’s contract right to future, contingent property
o The property doesn’t have to actually be in the debtor’s possession (“wherever located and by whomever held”)
(1) Property included, per §541(a) – all legal or equitable interests of the debtor in property as of the commencement of the case
(a) Exempt property is included in estate, e.g. pet
(b) §541(a)(5) includes all interests acquired within 180 days of filing by bequest, devise, or inheritance; property settlements with spouse; life insurance money
(c) §541(a)(6) includes as property of the estate proceeds, product, offspring, rents, or profits of or from property of estate (e.g. winnings on lottery ticket purchased pre-petition and dividends on stock owned by debtor)
(i) Doesn’t include earnings from services performed by an individual debtor after the commencement of the case
(2) Property excluded from estate, per §541(b)
(a) Most important exception is for services performed by an individual debtor after the commencement of case; e.
ty of the estate because it is more than “a personal privilege” or “a state matter subject to discretionary control of county.” It was actually “property” of enormous value to the estate, given that without the license, there would no business left to reorganize.
· The majority of bankruptcy courts say that because liquor licenses can be (practically) freely transferred, liquor licenses are property of the bankruptcy estate. This means that if I own a bar and file for bankruptcy, then, in most bankruptcy courts, the license is part of my estate and the trustee will be able to market the bar to another buyer/owner.
· Note that if the interest can be transferred, it is probably of enormous value to the estate
(iii) Restrictions on transferability imposed by contract or by law; Congress has permitted a few specific restrictions on alienation to be effective to keep property out of the bankruptcy estate; e.g. “Spendthrift” trust exception, whereby debtors are often able to keep retirement accounts out of bankruptcy estates (§541(c)(2))
1. In re Orkin (1994): Court holds that the retirement plan is an asset of the estate because the Plan does not contain a transfer restriction enforceable under state or federal law. Debtor had 2 bites at the apple: if account is ERISA qualified, then it is protected by federal law. If not ERISA qualified, can try again under state law-if it had a valid spendthrift trust provision preventing alienation and thus protecting it from creditors, it will not be part of estate. Even with 2 bites, Orkins can’t keep.
(4) The USSC has defined “an interest of the debtor in property” as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings. §541 includes all legal or equitable interests of the debtor in property as of the commencement of the case as property of the bankruptcy estate. Generally, property belongs to the debtor for purposes of §547 if its transfers will deprive the bankruptcy estate of something which could otherwise be used to satisfy the claims of creditors.
(a) Legal interest –