Bankruptcy Notes & Outlines
I. GENERAL INFO & COLLECTING THE DEBT
A. Goals of Course:
1. Learning the technical provisions of the Bankruptcy Code
2. Understanding how bankruptcy is used not only by Ds, but also by creditors (i.e., department stores and their creditor-suppliers)
a. Have to understand both legal and economic/business standpoint (what are we going to do going forward?)
3. Becoming professional in your use of bankruptcy law, which includes understanding how the possibility of bankruptcy impacts the non-bankruptcy actions of creditors
a. Bankruptcy is a tremendous weapon for the D – allows D to turn contract law on its ear – bankruptcy is negative contract
b. Worst thing is to be involved with distressed companies where one side is not knowledgeable with bankruptcy law.
B. Bankruptcy – An Overview
1. Bankruptcy is process that affects the relationship b/w Ds and creditors
2. Generally speaking, most bankruptcy Ds are individuals who are insolvent (i.e., they do not have sufficient assets to enable them to pay their Ds in full)
3. With the foregoing in mind, the basic bankruptcy system provides for the D’s assets to be distributed to Crs and for D to be discharged from having to pay the deficiency or shortfall.
4. Two basic goals:
a. Give deserving Ds a fresh start.
b. Equal distribution to Crs.
C. Bankruptcy – Some Basics
1. Debtors (hereinafter referred to as Ds)
a. D are entities that have a monetary obligation to others (i.e., they have debts)
b. Examples: can be individuals, corps and/or partnerships
1) Significance of type of D: indvs Ds have different rights in bankruptcy than corporate Ds (e.g., only indvs have exemptions which, along with the discharge, is another prong of the bankruptcy-provided fresh start).
2. Creditors (hereinafter referred to as Crs)
a. Creditors are entities that have a monetary claim against others (i.e., they are owed money).
b. Examples: could be indvs, corps and/or partnership
1) Significance of type of creditor: irrelevant
c. 2 classes of creditors – this different makes up a substantial portion of the complexity in the bankruptcy system
1) Secured Creditors
a) Example = mortgage
b) Senior or junior secured creditors
2) Unsecured Creditors
a) Some unsecured creditors are more equal than others – priority position
3. Process of creating Ds and creditors
a. Factors used to determine whether credit will be extended or loan made (see list of supporting and negative loan factors on p1).
1) Projected income of D
2) D’s necessary living or business expenses
3) Other debt’s that D owes
4) Credit scoring
5) Debtor’s credit history: to determine the likelihood that D will be able to make credit payments in future – creditor wants to do as much as he can to determine the likelihood that he will get paid tomorrow.
a) What if you still want to give the loan even though credit history was poor?
(1) Interest rates = reflection of risk of non-payment
(2) Require some sort of collateral/security
b. Goal of creditors is to get paid
1) When payment is not voluntarily forthcoming, creditor must take some action to collect what it is owed.
D. Collecting the Debt
1. The Debtor-Creditor Relationship Generally
a. If A gives B a home and B pays A on the spot, there is no creditor-D relationship
b. Debtor-creditor relationship occurs when one side performs and there is obligation of payment to be made some time in future.
2. When payment is not voluntarily forthcoming, creditor must take some action to collect what it is owed.
3. 2 Ways to Collect
a. Judicial Collection Process
1) Summary of characteristics of judicial collection process:
d) Judicial sales and redemption rights
f) Fraudulent transfers
g) Bulk transfers
a) Execution = basic judicial collection remedy
b) Generally used by unsecured Crs to obtain payment.
(1) Compare to Art 9 secured Crs who may be able to grab D’s property and sell it without involving courts.
c) Steps in execution process
(1) File lawsuit.
(2) Win lawsuit – obtain monetary judgment
(3) Prepare a document aimed at clerk of court to get clerk to issue a writ of execution to sheriff
(4) Writ allows sheriff to seize, get, put a levy on property of judgment D that is described in writ – this means sheriff has legal, but not necessarily physical possession of the property.
(5) Sheriff holds sale (auction) of levied property
(6) Cr is paid from proceeds of that sale (unless he is the one who buys the levied property) – if the proceeds do not satisfy the full debt amount, the Cr can start the execution process against another item of the D’s property.
d) How does judgment creditor know what assets the judgment D has available
(1) What assets are available?
(2) How can the attorney discover these assets? tax forms, insurance; depose judgment D in discovery – does not work as a practical matter b/c if you do this, judgment D will move all his assets, close account, etc – THEME – watch for counter-moves
(3) What factors apply to determining the assets that should be executed on?
(4) How did the Goldmans’ attorneys in the OJ Simpson case ascertain what OJ owned in order to prepare the writ of execution in the required detail (read the relevant simulate c.l.e. transcript which is on the web)
e) Attorney Able and Charles Creditor Example: shows difficulties unsecured creditors may face in attempting to collect on their judgments.
a) Definition: any instance in which sheriff or other officer of the court levies, seizes or attaches property or an interest that one has in property.
b) Pre-judgment attachment:
(1) Primarily used to attach property held by D or third parties before obtaining a judgment.
(2) Good weapon for Cr.
c) Post-judgment attachment:
(1) Primarily used to attach property held by the third parties
(a) If property held by D, would usually be referred to as “execution”
a) Definition: process by which property of D in the possession or control of third persons is attached or executed upon.
(1) Common Scenario is with ER: Cr will serve complaint on ER, direct ER to make payment over to garnishing creditor.
(2) Think about this from view of ER: have to adjust bookkeeping and accounts payable – ER will start to look at EE in negative light – result was that ER would fire EE whose wages were being garnished.
b) Pre-Judgment Setting:
(1) Property held by D or third party
(2) ??? Not property held by D which would be referred to as “attachment”
c) Post-Judgment Setting:
(1) Property held by third parties
(2) If property held by D, would usually be referred to as “execution”
d) Wage Garnishment:
(1) Limitations on amount of money that can be garnished:
(a) Rationale = EE has to get something.
(b) CCPA limitations – 303, 15 USC s1673
i. If creditor is owed more than monthly wages, there are laws that say that creditors can only get a certain percentage of $ due to EE/D
ii. Rationale: b/c some people live from paycheck to paycheck.
(c) More D-friendly state laws: 307, 15 USC 1677: D can chose lesser of the two laws.
i. Creditor wants $ owed to EE/D (by ER) to be paid directly to creditor, rather than to EE/D.
ii. Once ER received garnishment notice, ER would fire EE whose wages were being garnished
(b) Congress came to rescue
i. CCPA Limitations – s304, 15 USC s1674
ii. RULE – ER is
y the Statute of Elizabeth.
(2) Generally only unsecured Crs need to use this power.
(3) Both acts make actual intent to defraud actionable.
(a) Look for badges of fraud.
(4) What about constructive intent to defraud?
(5) Remedies include:
(a) Setting aside the conveyance
(b) Disregarding the conveyance and attachment the property
(d) Appointment of receiver
b) 3 Rules for Whether Foreclosure Sales = Potential Fraudulent Transfers:
(1) Durrett Rule: a regularly conducted mortgage foreclosure sale can be invalidated as a fraudulent conveyance when foreclosure price is less than 70% of the property’s fmv (see Durrett v. Washington Nat’l Ins. Co., 621 F.2d 201 (5th Cir. 1980)).
(2) In re Madrid Rule: a regularly conducted mortgage foreclosure cannot be invalidated as a fraudulent conveyance regardless of the foreclosure price because such a sale is not a “transfer” (see In re Madrid, 725 F.2d 1197 (9th Cir. 1984)).
(3) In re Ruebeck Rule: courts should consider the following factors in determining whether a regularly conducted mortgage foreclosure sale should be invalidated as a fraudulent conveyance (see In re Ruebeck, 55 B.R. 163 (Bankr. D. Mass. 1985)):
(a) Fmv of property at time of sale
(b) Nature of property and its marketability
(c) Number of persons appearing and bidding at sale.
c) Influence on Bankruptcy Code:
(1) Influenced the Trustee’s avoidance of fraudulent transfers powers [544(b) and 548].
(2) Rule for Bankruptcy Code: price paid for property at a regularly conducted, non-collusive mortgage foreclosure sale will be deemed reasonably equivalent value (see BFP v. Resolution Trust Corp., 114 S. Ct. 1757 (1994))
(a) Although 548 does not expressly immunize mortgage foreclosure sales from attack, the effect of CT’s decision immunized such sales from attack under 548 except in cases of actual fraud.
(b) ??? Are they still subject to attack under 544(b).
8) Bulk Transfers:
b. Non-Judicial Means:
1) Continually calling the D and demanding payment.
2) Flooding D with barrage of collection letters.
3) Sending D notices that look as if they are court subpoenas or sheriff sale notices.
4) Threatening to blacklist D with businesses in D’s community.
c. Limitations on Creditors Collection Rights in both judicial and non-judicial collection efforts.
1) State Exemptions.
2) Due Process:
a) Due Process informs all the other limitations.
b) Generally means advance notice.
c) In Application:
(1) Garnishment limitations (see Di-Chem and Finberg).
(2) Replevin (see Fuentes).
(3) Confessions of judgment (see Overmyer and Swarb).
3) Fair Debt Collection Practices Act (FDCPA).
a) Cr cannot:
(3) Communicate to D’s ER; or
(4) Threaten to take unintended action.
b) What = “debt collector”:
(1) Court said that lawyers (regularly?) engaged in litigation fall within definition of “debt collector” (see Heintz, et al. v. Jenkins, 115 S. Ct. 1489 (1995)).
c) Identical state acts: states made identical acts applicable to the actual creditors.