Bankruptcy Law
Professor Knippenberg
Fall 2007
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I. Satisfaction of Claims Outside Bankruptcy
A. General
B. State Law Remedies
II. Bankruptcy Code Layout
A. General
B. Non-Substantive Chapters – Chapters 1, 3 and 5
C. Liquidation – Chapter 7
D. Plan Chapters – Chapters 11, 12 and 13
III. Commencement of a Case
A. Eligibility
B. How a Bankruptcy Case is Commenced
C. Dismissal
D. Conversion
IV. Consequences of Commencement
A. Estate Creation
B. Automatic Stay
V. Discharge
A. General
B. Debtors Who Receive Discharge
C. Debts/Claims Which are Discharged
D. Objections to Discharge
E. Exceptions from Discharge
F. Effects of Discharge
VI. Claim Satisfaction in Bankruptcy
A. Claims (General and Unsecured/Secured)
B. Allowance
C. Distribution
VII.Trustee’s Avoiding Powers – Limits on Transfers of Property Before/After Commencement
A. General
B. Consequences of Avoiding a Transfer
C. Transfers Which May be Avoided
i. Fraudulent Transfers
ii. Preferential Transfers
iii. Right of Setoff
iv. Transfers Not Timely Recorded
D. Transfer Avoidance Process
VIII. Executory Contracts and Unexpired Leases
A. General
B. Choices With Regard to Executory K and Unexpired Leases
C. §365 – Executory Contracts and Unexpired Leases
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I. Satisfaction of Claims Outside Bankruptcy
– General
o 3 Options When Incurring Obligations:
§ 1. Fulfill obligation
§ 2. Breach and get sued
§ 3. File bankruptcy
o Terms
§ Levy – personal property
§ Judgment Lien – real property
· What happens – C gets judgment, then “dockets” the judgment, which means taking it to the county clerk who then enters the info by the D’s name.
o Result – C’s get lien on all of D’s real estate in the county in which the judgment was entered, including after-acquired real estate
§ Garnishment – intangible property
· C’s = “garnishers”
· Entity paying D (probably employer) = “garnishee”
· Debtor = “principle debtor”
– State Law Remedies
o Unsecured Creditors
§ Progression if D defaults on obligation:
· 1. Debtor defaults on obligation
· 2. Creditor initiates informal collection efforts
o (1) Send notice
o (2) Send a “not so nice” notice
o (3) Maybe hire collection agency
o (4) Accelerate Debt
o Note: If unsecured, and you know D has an asset that would satisfy your claim, it’s conversion for you to go take it b/c you have no ownership interest in the property
· 3. Lawsuit
o Parties Present:
§ Creditor’s lawyer
§ Probably no Debtor
o Result:
§ If D shows up – C must only prove the obligation is owed
§ If D does not show up – Default judgment against D. C becomes a Judgment Creditor.
· Note: This is not a conveyance to C. C must somehow obtain an ownership interest
· 4. C seeks a writ of execution pursuant to judgment
o Tells sheriff to “levy on” D’s personal property, bring it back, and sell it
· 5. Sheriff seeks to levy on non-exempt, tangible personal property of D and/or garnish intangible items (i.e, bank accounts).
o Note: Exemptions are usually limited (ex. If you have a $200K Ferrari, sheriff can still seize it and just pay D the $6K exemption)
· 6. C becomes a lien creditor with respect to any personalty successfully levied upon by sheriff.
· 7. Sheriff conducts sale / auction of property that is subject to lien
· 8. After deducting any costs associated with the execution process, sheriff distributes the balance from the sale to the lien creditor
· 9. Excess funds (if any) are returned to D (absent presence of junior lien C’s); D is liable for the deficiency.
If there’s not enough property to satisfy the lien creditor, considered a deficiency. Sheriff may start the whole process over again, though they probably got all there was to get in the 1st place.
o Note: The entire process is costly and largely ineffective
o Secured Creditors
§ What’s Happening – Creditor seeks collateral to secure their position
· If for realty – mortgage or deed of trust
· If for personal property – Article 9 security interest
§ Progression if D defaults on obligation:
· Secured creditor has immediate right to seize without judge’s permission as long as they don’t breach the peace
· Note: It doesn’t matter if (ex) car is exempt
II. Bankruptcy Code Layout
– General
o Bankruptcy is purely a function of federal law
o Constitutional Grant of Authority – Art. I, Clause 8, Sec. 1
§ Says Congress shall implement laws with regard to Bankruptcy
o Congressional Bankruptcy Legislation
§ 1898 Bankruptcy Act – lasted until 1978
§ 1978 Bankruptcy Code – reformed Bankruptcy Act and is largely in tact with some amendments (last amendment in 2005)
o Bankruptcy Policy
§ Equality of distribution – underlying notion that there should be an equal distribution among creditors (doesn’t appear in Bankruptcy Code or Act)
o Governmental and Employer Discrimination
§ § 525 – gives debtors protection against discriminatory treatment by the government or employers solely because the debtor has filed for bankruptcy
– Non-Substantive Chapters – Chapters 1, 3 and 5
o General
§ Chapters 1, 3 and 5 are not substantive chapters
· These chapters contain material that is applicable throughout the substantive chapters unless otherwise stated
o Ex. Ch. 13 definition might trump Ch. 5 definition
o Chapter 1 – Definitions that apply throughout
o Chapter 3 – Commencement of a Case
o Chapter 5 – Property of the Estate and Others
– Liquidation – Chapter 7
o 90% of all bankruptcy cases are filed in Ch. 7 and most of these are consumer finance cases where the debtor has no non-exempt assets (therefore no one gets paid)
o Chapter 7 Case Procedure:
§ 1. Debtor files for Ch. 7
§ 2. All non-exempt pre-petition property comprises the bankruptcy estate
· Exempt property is out of the reach of levying unsecured creditors (under bankruptcy law and state law)
o Ex. House, Car, etc.
§ 3. Trustee is appointed and his job is to maximize the return to the estate and divide it up to the creditors pro rata
· Trustee is trustee for creditors, not debtors
· Debtor’s non-exempt estate is distributed to each creditor pro-rata in accordance with the respective weight of their claims in relation to each other
§ 4. Pre-petition debt is discharged (creditors may no longer pursue debtors to get paid)
· Debt is not extinguished (just cannot go after debtor)
o Issues in Ch. 7 Cases (see below for details):
§ Exemptions (§522) – not limited to Ch. 7 but arise most frequently there
§ Discharge (§727)
§ Objections to Discharge (§727(a))
– Plan Chapters – Chapters 11, 12 and 13
o General
§ Plan chapters, as opposed to liquidation chapter, allow the debtor to work out a payment plan with their creditors while retaining possession of their property
· Debtor is encumbering their future income in order to keep the property they have now
§ Creditor Payoff – when debtor finishes paying, it will not be 100 cents on the dollar but cannot be less than the creditor would have gotten under Ch. 7
· Must calculate payoff under Ch. 7 (plus interest brought back to present value)
§ Debtor-In-Possession (DIP) – debtor retains and manages their property in Ch. 11 and 12 as opposed to a trustee under Ch. 7 and Ch. 13
· Trustee is appointed if there are special circumstances that require it (like DIP squandering assets – subject to oversight under § 363)
o Chapter 11 – can be used by individuals or businesses (very complex, expensive and time consuming so not practical for individuals)
§ §1123(b)(4) – Effectively allows a Ch. 11 liquidation because debtor is in possession and can sell all or substantially all of their assets
· Debtors would prefer this over Ch. 11 because they have control over the sale as opposed to Ch. 7 where trustee just has a fire sale (companies usually care about this)
o Chapter 12 – can be used by farmers only (specialized Ch. 13 for farmers)
o Chapter 13 – can be used only by individuals (stream-lined, easier Ch. 11 for individuals)
§ Issues in Chapter 13
· Eligibility – Only individuals (someone with a pulse) can file [§ 109(e)]
· Streamlined and simple
· Trustee is an active trustee
o He collects money each month and divvies it up
· Confirmation Standards
o Only D can file – must be timely or ct will throw you out
o No involuntary Chp. 13’s
· Test like the Means Test – Disposable income is what’s used
o If you exceed the median income, it’s going to be a 5 yr plan. If you don’t exceed the median, 3 year plan. (this seems backwards)
· Distribution
o Best Interest of Creditor’s Test – can’t get less in installments that you would have gotten under Chp. 7, discounted to present value
· Secured Parties in Chp. 13 – A debtors options are to:
o 1. Cash out the secured party and get full equity
o 2. Pay in installments, OR
o 3. Give up the property
III. Commencement of a Case
– Eligibility
o General
§ This section is discussing who is eligible to file a bankruptcy case
· Subsections tell exactl
etition under Ch. 7 or 11—
o (1) by 3 or more entities who are holders of non-contingent claims (without bona fide dispute as to liability or amount) that total at least $13,475 (unsecured including unsecured deficiency of secured claim);
§ Note: Oversecured claims are not subtracted
· Its okay if some of the creditors are secured as long as their aggregate unsecured claims total this amount
o (2) by 1 or more holders that hold in the aggregate at least $13,475 (unsecured including unsecured deficiency of secured claim) of such claims if there are only 11 or fewer such claim holders;
§ Only operates when there are 11 or fewer such holders excluding employees or insiders (§101(31))
Insider – § 101(31)
If debtor is individual, insider is essentially a family member
· If debtor is not an individual (i.e., corporation), insider is someone like CEO
o (3) if such person is a partnership—
§ (A) by fewer than all the general partners in such partnership; or
§ (B) by a general partner, trustee in such general partnership, or holder of claim against such partnership if relief is ordered under this title with respect to all general partners
· (c) After filing and before dismissal or relief, unsecured non-contingent creditors (other than those under (b)) can join in the petition with the same effect as if they joined in under (b)
· (d) Debtor can file an answer to the petition under this section
· (e) After notice and hearing, and for cause, court may require petitioners to file a bond to indemnify debtor for amounts court may allow later under (i)
o Bond protects against actions that result in injuries to debtor’s business because of the filing of petition
§ If it looks like there is potential of injury to debtors business because of the creditors, make them file bond
· (f) Debtor can keep running his business and continue to use, acquire and dispose of property as if an involuntary case had not been commenced until the court orders otherwise or there is an order for relief
o Protects debtors because we don’t want creditors to be able to shut debtors down just by filing involuntary bankruptcy
· (g) At request of party in interest after notice and hearing and if necessary to preserve property of estate or prevent loss to it, court may order a trustee to be appointed and take possession of property or operate business
o Debtor can get property back after filing bond
· (h) If debtor does not timely answer (controvert the petition), the court shall order relief against the debtor under petition chapter (default judgment)
o If debtor answers within a reasonable time then creditors must show:
§ (1) that debtor is equitably insolvent (generally not paying debts as they come due unless they are in dispute); or
§ (2) that a custodian (§101(11)) (other than a trustee), receiver or agent has been appointed under state law to take over less than substantially all of debtors property within 120 days before filing of petition
· (i) Sanctions for bad faith or frivolous involuntary petitions
– Dismissal
o General
§ Once a debtor is in bankruptcy, it doesn’t mean they stay there
§ Bankruptcy cases are capably of being dismissed, either voluntarily or involuntarily
· Each chapter has its own dismissal section setting out the standards for the dismissal of a case under that chapter
o Voluntary Dismissal
§ Chapter 7 Voluntary Dismissal
· Rule – Debtor can dismiss after notice and hearing, but must show cause
o Note: Courts will deny voluntary dismissals even if D is involved in a no-asset case if there is prejudice
ex. D involved in post-petition incident, and so tries to dismiss so she can later refile, which would transform the post-petition claim into a pre-petition claim that could be discharged. D has no assets, so in her mind it makes no
