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Bankruptcy
Wayne State University Law School
Bartell, Laura B.

I.       CREDITORS’ RIGHTS OUTSIDE OF BANKRUPTCY
A.    STATE COLLECTION PRACTICES
Security
Why is security so important to a creditor? If they have security, the creditor has a very different set of rights. A secured creditor under article 9 may take possession if their collateral and long as they do not breach the peace
UNSECURED CREDITOR
1.      First thing they have to do is get a judgment. Now you are a Judgment creditor. This does not mean you are guaranteed to be paid. 
2.      Ways to get paid:
1.      BY EXECUTION à JC gets a writ of execution 21 days after the judgment from the clerk and delivers to the Sheriff. Sheriff takes his truck out to pick up property. He first looks for personal property, and then moves to real property. Only property he cannot collect is property that is  NOT exempt. 
2.      After the property is collected, sheriff sells the property, and the proceeds go to the JC and the cost of collection, remaining proceeds go to the debtor. At this point the JC becomes a lien creditor (he has a judgment lien). 
3.     GARNISHMENT
a.       Bank Account
b.      Wages
c.       This process works very much the same as the process above. JC gets a writ of G, the writ is good for a period of up to 21 days.
d.      The JD may file an objection to the Garn, but may not attack the judgment.
e.       Limits:
                                                                                                                                     i.      Restrictions on Garnishment W&W 86 – 91
1.       Debtor has very limited ability to contest garnishment
2.      Federally imposed limits on the amount that can be garnished. 
a.      Why?
                                                                                                                                                                                                              i.      Judgment debtor’s survival would be jeopardized
                                                                                                                                                                                                           ii.      their would be no incentive to work
                                                                                                                                                                                                         iii.      it would give judgment creditor excessive leverage to strike a new (unfair) bargain with defaulting ) judgment debtor
 
                                                                                                                                  ii.      Limits of garnishment
a.      debtor can hid funds, burden on creditor to find employer or bank
b.      lengthy process
c.       other creditors may be before you and have priorty
d.      only apply to money that was available at time writ served
e.       – if more money comes in another writ needed unless it is a wage claim for periodic payments
f.        writs expire after 91 days
 
                                                                                                                                  iii.      Only non-exempt property may be garnished.
                                                                                                                                  iv.      You have to get a new writ every 91 days. 
3.      Remember, these are a race of the diligent, and there may be no non-exempt property. 
 
a.       FORECLOSURE ON COLLATERAL BY SECURED CREDITOR
a.      IF THERE IS A SALE, THIS IS HOW THE PROCEEDS ARE DISTRIBUTED in MI
1.      First thing after sale is that the proceeds go to paying off the costs of the sale. (execution costs)
2.      Second is the mortgage (mortgage lenders are not bound by the exemption (secured creditor). 
3.      If there are still more assets, the debtor gets the exemption
4.      Next, come the judgment lien creditor
5.      If there is anything left, then back to the debtor. 
6.      What is the House worth? 
1.      75k? this is the price as listed with a broker. 
2.      29.5k only one who showed up is the creditor. Why does the mortgage holder have a real advantage. They are bidding on the house with the debtor’s money. Also, no one gets to enter the house with the second kind of sale, you have to buy it “as is”. Also, the house is occupied, and it will remain occupied after the sale, because there is a 6month right of redemption after the foreclosure sale. 
7.      Assume there is a forced sale, how much will be realized? Certainly not more than 40k. Is the judgement creditor going to get anything out of a 40 k forced auction? Would they try to force a sale? Yes. This is leverage, it is a negotiating ploy. 
8.      What If there was not a mortgage, the state exemption amount is 50k, (remember the two values, and similar homes have sold for 29k), would the court order a sale? No, because the creditor will not realize anything on his debt with a forced sale. 
9.      What is the test? You will have expert testimony as to the true value of the house. You see how important the valuation issue becomes.    Also, the experts do not reflect the value to the debtor. If the valuation issue is close, you are not sure whether the court is going to order the sale, this is how the creditor gets leverage. 
 
 
EXEMPTIONS
a.      Classifications/Classification Disputes
b.      Value Disputes and Partially exempt property—Property worth more than the amount outlined in the statute is only partially exempt. It can be sold, and the debtor will keep the exempt portion. 
                                                  i.      The best way to understand this is to apply statutes to a fact pattern.
 
c.      FORECLOSURE ON COLLATERAL BY SECURED CREDITOR
a.       Problem 6.3
a.       Debtor who has a homestead. Unless the homestead is listed as exempt with no limit as to the amount, the fact that you have a homestead does not automatically mean that the homestead is free from creditor claims. 
b.      The MI homestead exemption is 3.5k. If it is appraised at more than the statutory limit, the debtor has 65 days to come up with the remaining amount. If not, it is sold.
c.       IF THERE IS A SALE, THIS IS HOW THE PROCEEDS ARE DISTRIBUTED in MI
                                                                                                                          i.      First thing after sale is that the proceeds go to paying off the costs of the sale. (execution costs)
                                                                                                                        ii.      Second is the mortgage (mortgage lenders are not bound by the exemption (secured creditor). 
                                                                                                                      iii.      If there are still more assets, the debtor gets the exemption
                                                                                                                      iv.      Next, come the judgment lien creditor
                                                                                                                        v.      If there is anything left, then back to the debtor.  
                                                                                                                      vi.      What is the House worth? 
1.      75k? this is the price as listed with a broker. 
2.      29.5k only one who showed up is the creditor. Why does the mortgage holder have a real advantage. They are bidding on the house with the debtor’s money. Also, no one gets to enter the house with the second kind of sale, you have to buy it “as is”. Also, the house is occupied, and it will remain occupied after the sale, because there is a 6month right of redemption after the foreclosure sale. 
                                                                                                                    vii.      Assume there is a forced sale, how much will be realized? Certainly not more than 40k. Is the judgement creditor going to get anything out of a 40 k forced auction? Would they try to force a sale? Yes. This is leverage, it is a negotiating ploy. 
                                                                                                                  viii.      What If there was not a mortgage, the state exemption amount is 50k, (remember the two values, and similar homes have sold for 29k), would the court order a sale? No, because the creditor will not realize anything on his debt with a forced sale. 
                                                                                                                      ix.      What is the test? You will have ex

                                                                  iii.      What about §8b? The first sentence outlines the way you can get the recovery. 8(b)(2), protects a subsequent good faith transferee who took for value. THE FIRST TRANSFEREE IS NOT PROTECTED.
                                                                                                                      iv.      §8d – Allows a good faith transferee to
1.      get a lien for 7.5k (they become a secured creditor for the amount)
2.      They give back the value of the piano less the 7.5k that they paid.
3.      A reduction in the amount of the liability on the judgment. 
 
2.      Problem 7.2
a.       Trans between Bonny and her cousin à Bonny is insolvent, sold the collection for 70k less than the value (5k). She has creditors on her heels and disposes of the collection to her relative. 
                                                                                                                          i.      §4(b)—says that in determining actual intent, consideration may be given to a host of “badges of fraud” Developed in the context of Twines case. 
                                                                                                                        ii.      This particular transaction has badges of fraud. 
                                                                                                                      iii.      Assuming there is actual fraud, does AE have a remedy? This is a §4(a)(1) cause of action. AE’s obligation was incurred after the transfer, but §4(a)(1) Says that is ok. 
                                                                                                                      iv.      Suppose we cannot prove actual intent. Is there constructive Fraud? Why should AE bother with the Actual Fraud if they can prove CF. 
1.      §5 says that if the transfer is before the claim was incurred, the protection of the section is not available to the creditor. 
2.      Why is this so? AE should be looking at their customer before they let her go out and run up a credit card bill. If she is insolvent, they should pull the card. (this is not the reality, but it is the theory of the statute). 
a.      If it is not a question of solvency but of capitalization and cash flow, those types of claims are available, because they are harder to prove.  
3.      Also, §8(a) will not be available to the relative in an actual fraud case.
4.      § 8(b) will also not be available because she is the initial transferee.
5.      8(d) is only available to good faith transferees. There is an issue of whether she is a good faith transferee. 
b.      Problem 7.3
                                                                                                                          i.      Gift of exempt homestead to a son. Is this a fraudulent conveyance? 
1.      Actual Fraud? Creditors could not reach it anyway.
2.      Constructive Fraud? No REV, it is a gift. Question is, is he insolvent, or is he rendered insolvent by this gift?
a.      §2(a) defines insolvency
b.      §1 Defines what an asset is.
                                                                                                                                                                                                  i.      Property to the extent that it is generally exempt. The homestead does not count as an asset, the only asset is the 55k. This looks like he is clearly insolvent.