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Bankruptcy
Wayne State University Law School
Bartell, Laura B.

TRUSTEE or DIP?
Constitutional Provisions
Art. I, § 8, cl. 4:Congress has the exclusive power to establish “uniform laws on the subject of bankruptcy.” This power is subject to the Fifth Amendment takings restriction.
 
Art. I, § 10: Bars states (not federal government) from impairing contract obligations
 
Fifth Amendment:Prohibits taking private property without just compensation. This means that creditors’ property rights (e.g., liens) may not be impaired without compensation.
 
BUTNER PRINCIPLE
1.      Bankruptcy law honors nonbankruptcy laws/rights unless bankruptcy provision or policies require a different rule.
 
2.      Determination of property rights in the assets of a bankrupt’s estate is left to state law.
Classification of state’s interest depends on state law (Butner), such as whether it’s a lien on property itself, perfected SI, or an unsecured claim. (O’Connor, J., concurring)
 
§ 105(a) COURT EQUITABLE POWER
Trustee or Debtor can ask the court to issue an injunction under 105 to restrain an action not covered by automatic stay in 362.
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.
 
CASE MANAGEMENT
Initiation
Type of Debtor
Individual
Corporation 101(9)
                                                              i.      Business trust, not simple trust (Shawmut Bank – fact-intensive inquiry) 
a.       Business trust intended to run a business
b.      Non-bus trust established to protect/preserve (secure repayment)
                                                            ii.      Unincorporated company or association
                                                          iii.      Partnership where only capital subscribed is responsible for its debts
                                                          iv.      Joint-stock company
Partnership – as determined by state law
Municipality
 
Debtor Eligibility 109
Domicile, place of business, or property in the U.S.
Which Chapter?
 
Ch7
 
v/i
individual or entity except railroad, insurance co, bank, savings institution
 
Ch9
v
Municipality
 
Ch11
v/i
individual or entity except insurance co, bank, savings, stock/commodity broker
 
Ch13
v
individual w/ (1) regular income who (2) owes less than $307k unsecured/$922 secured debt except commodity/stock broker
 
If individual and has not filed within 180 days of another bankruptcy case 109(g)
 
Voluntary or Involuntary Petition
Voluntary 301
                                                              i.      Petition operates as an automatic order for relief and places in bankruptcy
                                                            ii.      Automatic stay takes effect 362
 
Involuntary 303
                                                              i.      Requirements
1.      Qualifications for filing in 303(a)(b)(c)
a.       Ch7 or Ch11
b.      Minimum amount of claims of $11,625, 3 or more entities
c.       Non-contingent unsecured creditor
2.      One of the grounds for relief under 303(h)
a.       Debtor not paying debts unless s.t. bona fide dispute OR
b.      Within 120 days prior to petition, custodian appointed or took possession of property
                                                                                                                                      i.      Custodian = receiver/trustee appointed under non-bankruptcy law 101(11)
 
Absention – 305
If interests of creditors and debtor better served by such dismissal or suspension.
 
Substantive Consolidation
 
Bankruptcy courts have the power to substantively consolidate. Sampsell. Equitable doctrine under § 105 so court can modify it to meet the specific needs of the case.
 
When?
                                                              i.      Not feasible to administer estates separately
                                                            ii.      Abuse or fraud intended to conceal assets – like piercing corporate veil
                                                          iii.      Intercorporate guarantees
                                                          iv.      Difficult to sort out property
 
Result 
                                                              i.      Assets and debts are combined. 
                                                            ii.      Intragroup obligations are eliminated, including cross-guarantees. 
                                                          iii.      Duplicate claims are eliminated.
                                                          iv.      Single rorganization or liquidation follows. 
 
Auto Train Test
                                                              i.      Substantial identity between entities to be consolidated AND
a.       Entangled Records or Entangled Operations   Standard Brands
b.      Entangled Records (no one knows who owns what)
                                                                                                                                      i.      Same books, records, accounts
                                                                                                                                    ii.      Consolidated fin statements – only consolidated info provided to creditors
c.       Entangled Operations
                                                                                                                                      i.      Unity of interest and ownership b/w various entities
Subsidiaries established for tax reasons and had no control over its finances
All subsidiaries controlled by one central committee
                                                                                                                                    ii.      Multiple interdebtor guarantees and interdebtor debts. 
                                                                                                                                  iii.      Difficult to segregate and ascertain individual assets/debts
                                                                                                                                  iv.      Transfer of assets w/o observance of corp formalities
                                                                                                                                    v.      Commingling of assets and business functions
                                                            ii.      Consolidation necessary to avoid some harm or realize some benefit. AND
a.       Confirmation of only 1 plan required (if reorganization)
b.      Liquidation and reorganization values need to be calculated for each debtor, which is hard to do b/c debtors operate as single unit
c.       Eliminates classification and voting problems resulting from having to classify claims of one debtor against the others
d.      No harm b/c no party in interest is objecting
                                                          iii.      If a creditor objects and shows that it relied on separate credit of one of the entities and that it will be prejudiced by the consolidation, then consolidation only if benefits of consolidation “heavily” outweigh the harm
a.       Only necessary if objection
 
Augie/Restivo Test
                                                              i.      Creditors dealt with entities as a separate unit and did not rely

keeping supplies
3.      apparel and services
4.      personal care products
5.      miscellaneous
                                                                                                                                    ii.      Local Standards
1.      Housing and utilities (Census and BLS data)
2.      Transportation
                                                                                                                                  iii.      Additional Adjustments
1.      Additional approved food and clothing expenses. § 707(b)(2)(A)(ii)(1)
2.      Medical expenses. § 707(b)(2)(A)(ii)(I)
3.      Expenses for care of family member. 707(b)(2)(A)(ii)(II)
4.      Chapter 13 Trustee Expenses. 707(b)(2)(A)(ii)(III)
5.      Certain educational expenses. 707(b)(2)(A)(ii)(IV)
6.      Additional costs related to home energy consumption. § 707(b)(2)(A)(ii)(V)
7.      Secured debt. § 707(b)(2)(A)(iii)
8.      Priority debt. § 707(b)(2)(A)(iv)
9.      Charitable contributions
10. Other exceptions. § 702(b)(2)(B)
c.       This will provide a figure for the debtor’s net monthly income (i.e., disposable income).
d.      This disposable income is them multiplied by 60 to provide a five year total figure for the debtor’s net disposable income.
e.       This 60-month disposable income figure is then compared to the prescribed standards. Abuse is presumed if the figure is not less than the lesser of:
                                                                                                                                      i.      the greater of 25% of the debtor’s nonpriority unsecured claims in the case, or $6,000. OR
                                                                                                                                    ii.      $10,000
                                                          vi.      Rebutting Presumption
1.      Debtor must demonstrate special circumstances such as a serious medical condition or a call of active military duty and only to the extent that the there is no reasonable alternative to the increase in expenses or adjustment in income. 707(b)(2)(B)
2.      If the court accepts the debtor’s claim, then it must recalculate the formula with a low enough 60-month disposable income to pass the means test.
                                                        vii.      When presumption does not apply, the court may still dismiss under 707(b)(1) if the applicant for dismissal establishes or the court determines that the filing is abusive. 707(b)(3) says ct. should look to the following circumstances:
1.      Bad faith
2.      Totality of the circumstances
                                                      viii.      Sanctions
1.      Ct. may order debtor’s attorney to reimburse Trustee for all reasonable costs in prosecuting a 707(b)(4)(A) motion if:
a.       Trustee files motion for dismissal or conversion; AND
b.      Ct. grants motion and finds attorney who filed case violated Rule 9011.
 
PROPERTY OF ESTA