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Bankruptcy
Washington & Lee University School of Law
Howard, Margaret

Creditors’ Rights and Remedies
 
1)      Creditor/Debtor Relationship
a)      Overview
i)        An obligation imposed on one party (the “debtor”) to pay money to another (the “creditor”).
ii)      When a debtor defaults on an obligation…
(1)   Collection
(a)    Unsecured (general) creditor
(b)   Secured creditor
(i)     Definition
1.      A collateral interest in the property of the debtor
(ii)   Examples
1.      Execution lien
a.       Consensual
2.      Judgment lien
a.       Nonconsensual
3.      Statutory lien
a.       By statute
b)      Sources of Obligation
i)        Contract terms
(1)   A loan or a purchase, each of which create an obligation to pay thet derives from an agreement between the debtor and the creditor.
ii)      Tort
(1)   A careless driver who plows into another car becomes a debtor and the injured party a creditor.
iii)    Statute
(1)   Taxpayer (debtor) owes tax to government (creditor)
(2)   Corporation (debtor) that pollutes
(3)   Parent (debtor) who owes child support
c)      Creditors’ Rights and Remedies
i)        Among competing creditors, what rights does the creditor enjoy against the debtor and the debtor’s property (rights) and as against other competing creditors seeking to be paid by the same debtor or property (priority)?
 
Collection Under Nonbankruptcy Law
2)      Creditors’ Rights
a)      Collection Remedies of Judgment Creditors
i)        Obtain Judgment
(1)   A debtor defaults on an obligation
(a)    Failure to pay on a loan contract, or
(b)   Debtor is liable under tort
(2)   Creditor files a lawsuit seeking a judgment, which may then be enforced by…
ii)      Judgment Lien
(1)   Creation
(a)    Varies by state
(b)   Either judgment lien is automatically obtained when judgment is entered, or
(c)    The judgment must be “docketed” before a lien is created.
(2)   Attachment
(a)    Generally the judgment lien attaches to any real property the debtor owns in the county in which the judgment lien was docketed
(b)   In Alabama, Georgia, and Mississippi, the judgment attaches to real and personal property.
(3)   Enforcement
(a)    Foreclosure (common law writ of elegit)
(i)     A judicial foreclosure on the real property to satisfy the judgment lien.
(b)   Writ of Execution (common law writ of fieri facias)
(i)     Directs a sheriff to seize personal property for sale to satisfy the lien, which becomes an execution lien.
(4)   Debtor’s Exemptions
(a)    Specific items of property are immune from the reach of creditors – to provide the debtor a minimum amount of property necessary for survival
(b)   Policy: To protect the debtor and the society upon which the debtor would otherwise become dependent.
 
3)      Creditors’ Priority
a)      Multiple Judgment Liens
i)        Since a debtor often defaults on payments to more than one creditor, multiple judgment may be taken against a single creditor.
ii)      What rights does the creditor enjoy against other creditors also seeking to be paid by the debtor or debtor property?
b)      Order of Priority
i)        Generally determined by statute
ii)      Never determined by agreement between the debtor and creditor, because such an agreement would affect the rights of third parties.
c)      Process
i)        When execution is accomplished, the collateral is sold and the proceeds are made available to the lienholders.
ii)      A lien with first priority is satisfied first out of the collateral.
 
 
 
 
Overview of Bankruptcy
1)      Bankruptcy in History
a)      History
i)        The term bankruptcy originates from “banca rupta,” which was the medieval custom of breaking the bench of a defaulting merchant.
ii)      Bankruptcy laws have always been collective remedies, enabling creditors to gather and divide a debtor’s assets.
b)      U.S. Constitution
i)        Article I. § 8 clause 4.
(1)   Congress given power to enact “uniform laws on the subject of bankruptcies.”
2)      Purposes of Bankruptcy
a)      General Purpose
i)        Rights and obligations originating from other areas of law, such as contracts and torts, are brought into bankruptcy and processed according to its special procedural and substantive rules.
b)      Policy
i)        Equality of distribution among similarly-situated creditors.
ii)      Fresh start for debtors, facilitated by the discharge of unpaid debts.
(1)   Local Lohan Co. v. Hunt (Sup. Ct. 1934)
(a)    Gives the honest but unfortunate debtor who surrenders the property he owns at the time of bankruptcy, with exception, a new opportunity in life and a clear field for future effort.
iii)    Encourages creditors to cooperate because bankruptcy usually presents the creditor’s only chance to get paid; effectively compulsory.
(1)   A creditor not paid in bankruptcy will generally not be paid at all, subject to exceptions, because bankruptcy offers a discharge from unpaid obligations.
iv)    Reduce overall collection costs
v)      Preserve the estate in order to maximize creditors’ recovery
 
Structure of the 1978 Bankruptcy Code
 
3)      Process
a)      Trustee
i)        The trustee is charged with administrative responsibility of the bankruptcy estate.
(1)   Trustee powers
(a)    Avoiding Powers
(i)     Bring back into the estate property that the debtor transferred before bankruptcy was filed.
1.      Permits recovery of:
a.       Fraudulent conveyances
b.      Preferences
(ii)   Incr

ept less.
c)      Creditors
i)        Class of creditors
(1)   The plan deals with similarly-situated creditors grouped together by class.
(2)   If any class of creditors refuses to accept the plan, it can nonetheless be confirmed (“crammed down”) if:
(a)    It does not “discriminate unfairly;” and
(b)   It is “fair and equitable,” i.e. either the dissenting class is paid in full or no class of creditors with a lower priority receives anything.
(i)     “Absolute priority rule” – The creditors usually become owners of a debtor corporation at the end of bankruptcy because shareholders cannot retain any ownership interest unless unsecured creditors are paid in full.
ii)      Debtor
(1)   Discharge
(a)    Corporate debtors receive a discharge as soon as the plan is confirmed, so the creditor’s rights in such cases are those specified in the plan.
(b)   Individual debtors receive discharge upon successful completion of the plan.
 
4)      Chapter 12 – “Reorganization”
a)      Reorganization provision for family farmers and fishermen with a steady source of income.
 
 
The First Consequences of Bankruptcy
 
Policy Interests
1)      Collectivism
a)      “Common pool” problem
i)        A situation created when a debtor’s assets are insufficient to satisfy the demands of a common pool of plaintiffs.
(1)   Self-interested creditors acting independently through nonbankruptcy collection devices – first-come, first-serve – will result in less of a recovery than if creditors acted as a group.
ii)      A bankruptcy proceeding, unlike state debt collection proceedings, brings together all of the debtor’s creditors in a single, collective and compulsory forum.
iii)    By seeking to protect creditors and debots in a single forum, the proceeding achieves the Code’s purpose of giving “honest but unfortunate” debtors a “fresh start.”
2)      Traditionalism
a)      The bankruptcy system is and should be designed to address a broad range of interests affected by the collapse of a debtor enterprise.
i)        The financial collapse of a firm presents questions of loss allocation and community interets not implicated in individual debtor-creditor disputes.