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Bankruptcy Outline: 1. Collection remedies:

a. Execution: at the beginning the judgment us worthless. The creditor is only a general/unsecured creditor but the claim is now liquidated

i. Execution writ this is a writ fi fa/ fiere facias, writ of attachment. It allows the creditor to give the sheriff an order to seize the property

ii. Levy: this is when the property itself cannot be moved b. Nulla bona means that no property was found c. Turnover orders: this is used primarily for intangible goods or when one has possession but not

ownership d. Judgment liens: recorded lien against a piece of property usually done at the county land office.

If there is more than one of these, then the first in time prevails. There is a non-consensual creditor involved

e. Voluntary liens: where the unsecured creditor goes from being unsecured to secured by taking a lien in the property. This is covered by UCC article 9 and usually requires a writing

i. PMSI: purchase money security interest, or the money that is lent is lent with the purpose of buying the good

ii. This involves a consensual creditor f. Deficiency judgment: when the item sold does not cover the debt in full; if this is done by a

secured creditor he is now unsecured g. FTC v. Affordable media: the Andersons, defendants, ran a telemarketing venture that was really

a ponzi scheme. Before the house of cards fell, they deposited their money in an irrevocable trust in the Cook Islands. When threatened with a law suit, the trust reverted to the trustee and the money could not be repatriated. The defendants still recovered some money out of this for other things but not this suit. The court held that it was not impossible to get at the money

i. Generally, a total inability to comply with and order of the court is a complete defense to civil contempt even when the ability to not comply is self induced. This trust was set up for this purpose but the defendant does not meet this high burden and his attempts are but a charade. They have received monies to pay off other debts, so they have really retained control.

ii. A debtor may be excused from paying a judgment if it is impossible for him to do so, but this is a high standard to meet

h. Race of diligence: this means that the first to perfect or to turn an inchoate into a choate lien wins. This generally must be done item by item because there is no general levy power. A secured creditor will win over an unsecured one. The first to record a judgment usually has the right to the good

i. In re estate of Robbins: the D inherited his mother’s estate after he became indebted. One warrant was docketed 10-18-65, the other 5-10-68, and another 9-28-62. Decedent dies 4-27-67. D had no interest in the property before this. The court held that the creditor that gave after the D had an interest in the property would take first

1. There cannot be a judgment on property one does not own or control. ii. Weaver v. Weaver: the weavers were divorced but before the property was split there

were 3 judgments entered against the husband. 2 were in 1981, one was in 1986. The 2 in 1981 did not renew their interests, so the wife was given the house free and clear. The one in 1986 did object. The wife had to give the husband 3K for the house. The money may go to the creditor but the liens do not go with the house. Since 2 were not renewed, they are expired and are no unsecured.

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i. Dormant judgment: these still exist but cannot be collected on without renewal. This can be avoided by making periodic attempts to collect

j. Credit Bureau of Broken Bow v. Moninger: B got a lien against M in 1977. M renewed a loan with B in 1978 using his pigs and his truck to secure it. On 6-27, 1978, B got a writ of execution after the loan was renewed. On 7-7-78 the sheriff levied on the truck but did not remove it. On 7-10-78 bank and M signed a security agreement on the truck. On 7-13 the truck was seized and sold on 8-14. The bank wants it money, claiming it was secured and the sheriff had notice of a possible lien. The court held that the creditor, b, became perfected in his security when the sheriff levied the truck.

i. Rationale: a lien is perfected when the sheriff executes the lien; whether or not he removes it is up to him. If one becomes a secured creditor after that date, then they are second in time and nothing can be done to change these priorities.

ii. The act to prefect a lien is to levy on it. iii. A symbolic lien executed at the courthouse should date back to the date it was entered

(4.1) iv. Some courts do not think that there has to be a physical interference with the property for

there to be perfection of the attachment. (4.2) v. If the goods are left in the hands of the debtor for a long time then the inaction of the

creditor will destroy the lien. (4.2) vi. With the question of the quid pro quo pullback, this might be enough to vitiate the lien

even if the sheriff had delivered the writ. (4.2) vii. There is a waiting period between the judgment and the enforcement of the judgment.

Under the federal rules, you must wait 10 days. This is so the debtor can wait to pay or file a notice of appeal. Even if there is a notice of appeal the enforcement does not necessarily stop the enforcement because D must post a bond for the collection to stop. If the D posts a bond and loses then the C collects immediately from the sale of the bond before collecting more money on the remainder of the non-exempt money.

k. Consensual lien: the person who does this grants a property interest in the thing in exchange for a concession which is usually credit. This also means that there is a consensual creditor

l. Real estate mortgages, deeds of trust: these are two-step transactions in which step one establishes the rights between the creditor and the debtor and the second one is accomplished by filing and creating rights against the world

m. Security interests in personal property: these are usually under UCC article 9. This requires 2 steps as well:

i. Attachment: this requires an agreement, value and rights. The debtor must have rights in the collateral but does not have to be the only one with rights in it

ii. Perfection: this can be accomplished by filing which prefects the right against the world. This is the combination of attachment and filing

1. attachment: a. debtor signs a security agreement b. C gives value c. D has rights in the collateral

iii. Article 9 follows the theory that the first in time is the first in right. iv. When there is a filing of the lien there is a relation back. This means that the time of

attachment relates back to the date of the filing. n. Judicial liens: these are involuntary and usually require the creditor to act to get his money o. Real property liens: these usually require filing or docketing to be effective. They are superior to

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any new interest p. Tangible personalty liens: the execution of the lien is called a levy. It must be given to the

sheriff because the sheriff is neutral. Some/most states only require the sheriff to tag the goods but others require a physical interference with the property

q. Garnishments: these exist because third parties hold and control the property of the debtor. This requires a special writ of garnishment.

i. Garnishee: the third party who holds the debt to or property of the debtor. In 5.1 this is the bank ASB.

ii. Judgment Debtor: the debtor who owes the money iii. Garnishor: the people who the obligation is owed to, also the judgment creditor usually iv. Writ of garnishment: this asks the third party what property of the debtor he holds and

commands it to be turned over. When there has been one of these served the property cannot be diminished. These work as an ancillary law suit against the garnishee

v. Webb v. Erickson: W obtained a default judgment against E, a realtor. W served a writ of garnishment against B who bought his house from E. B never answered the petition because he thought his house was in escrow and had no control of payment to E. W then obtained a full default judgment against B who learned of these 3 years later when his wages were garnished. The court held that a writ against a defaulting garnishee should be dismissed if he does not understand the garnishment.

1. Rationale: although a garnishor can obtain full judgment against a defaulting garnishee, the laws allowing this should be construed in the favor of the garnishee. This is because he is an otherwise disinterested party but one that is in danger of being injured. This writ did not contain clear directions on how or when to answer so B’s failure to answer was excusable neglect.

2. A defaulting garnishee may be held liable for the full amount of the default. 3. The key act for the first in time rule in garnishments is delivering it to the

garnishee. (5.1) 4. the person that is unfairly hurt in the garnishment process can ask for a pro-rata

sharing (5.1) 5. There is a duty on the garnishee to not deplete the funds in the account. (5.1) 6. If the check is delivered to the bank before the garnishment it can still be paid

after the writ is served. (5.1) 7. The garnishee stands in the shoes of the judgment debtor vis a vis the judgment

creditor. (5.2) this means that the garnishee has the right to keep the good under a valid agreement but when the agreement is over then he must turn it over. He is entitled to any right that the judgment debtor would have.

8. There is a temporal net that comes into play once the garnishment has been levied. The thing being garnished upon cannot be decreased.

9. What is the garnishor entitled to from the garnishee? a. What rights do the judgment debtor have against the garnishee on the date

of the garnishment—the judgment creditor/garnishor will step into the shoes of the debtor and gain his rights

b. The value of the amount might increase during the time of the net which is the time from service of the writ and the answer to the writ

c. The garnishee may not reduce the amount/value of the thing after the writ is delivered unless there is an unexercised writ of set off which allows the

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bank to take its money first for the debts that the account holder owes before paying the garnishment

d. So does garnishing an employees pay from the bank allow circumvention of the laws that restrict garnishment of wages?

i. Yes, because the bank is not required to determine where the deposit came from, this would invade the privacy of the account holder

ii. Other circuits, the bank must comply with the wage garnishment act. The bank must trace where the money came from. The garnishee must then approach the employer first, then there must be a deposit of these funds, and then the employee must have reasonable time to withdraw these monies

vi. Wage garnishment: 1. There are restrictions on this so that the debtor is not disincentivized from

working. Allowing too much to be taken would drive the D into poverty, and many of these people are already poor and need protection

2. Commonwealth Edison v. Denson: D owed money to ConEd who delivered a writ of garnishment on D’s employer, CAT. CAT sent ConEd money but not the full amount because they were already withholding money for child support. The court held that support order deductions should be taken into account when computing the amount of the debtor’s earnings.

a. Rationale: the law must allow only a deduction of an amount that is the lesser of state law or 25%. State law may establish priorities because there are none in federal law. Support orders and garnishments should be considered together which means that the garnishee does not get a too large chunk of the remaining money. Congress has stepped in to protect the debtor’s family in this respect.

b. there is a limit on how much can be taken from a debtor through the process of garnishment and when determining this, the support he must pay for children must also be considered

c. A bank is not required to consider federal wage restrictions on a direct deposit paycheck. This is because there would be a lot of difficulty in tracing the funds.

vii. Setoff: banks are usually the easiest way to reach the debtor but the bank will have the right to set off. This means that the bank is also a creditor and it may use the deposit account of the debtor to pay off the other debts first. The garnishor then gets the rest of that.

viii. Things that cannot be garnished: 1. Network Solutions v. Umbro International: U did not register its domain name

first. A Canadian did. A court found that umbro was the rightful owner of the domain name and ordered a writ of garnishment to be served on N, who is responsible for registering and keeping track of domain names. N claimed that there was nothing of garnishable property that it had because domain names were assigned through personal contracts. Umbro claims it is an intangible, valuable asset and property which may be garnished. The court held that domain names were assigned under personal contracts and as such they could not be garnished.

a. Rationale: domain names are essentially human readable forms of IP

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addresses. N assigns these on a first come-first-served basis and does not independent verification except to require the registrant to warranty that his use does not interfere with the rights of others. They also have a policy to revoke the name if there is litigation over the ownership. Because the domain name is a contractual right to have an association with an IP addresses and name, it is a contract for a service, making it ungarnishable. Allowing garnishment here will allow garnishment of other services. Just because there is a type of verification does not mean it is any different than other services

b. garnishments may be had on intangible things as long as they can be considered property

c. there can be no garnishment of something that is created out of a contract for personal services because there is no property to garnish

2. Pre-judgment remedies: there must be a hearing in order to comport with due process requirements. There are procedural protections for the person who will face the garnishment.

3. There cannot be reduction of an asset once a garnishment order has been received. If there is, then the garnishee is liable for the difference

r. Exemptions: these statutes put personal property into classes which leads to a lot of disagreement. The personal property in some of these classes may not be seized to fulfill a judgment

i. In re Johnson: the debtor wishes to exempt a 60-person bus, claiming it is a personal car. The court held that a bus can be a car.

1. Rationale: the plain language of the statute says motor vehicles and this cannot only mean cars. The size and the purpose do not matter–it is a species of motor vehicle and may be exempt.

ii. In re Pizzi: P won the lotto and agreed to accept annuity payments. She does not want to give up those payments and claims that they are exempt because they come from an annuity. The court held that the proceeds coming from lottery winnings are not exempt.

1. Rationale generally an annuity may be exempt from seizure, but this was meant to protect life insurance payments and retirement benefits. It is illogical for her to be able to borrow against it and then claim it is exempt.

iii. In re Williams: NH workers compensation law provides that money coming from workers compensation settlements is exempt from creditors. W received the check, deposited it and then took the money out to buy a car. The court held that otherwise non-exempt assets bought with exempt funds may be exempt.

1. Rationale: payments for workers compensation is usually made by check and simply cashing it does not change the exempt nature of the money. There is no basis to distinguish between a bank deposit and what is purchased with that money, even when it is a sports car. These funds are exempt and so are the goods purchased with them as long as it is traceable

2. Non-exempt assets bought with exempt monies, as long as it can be traced, become exempt. This view is not always followed.

iv. Holmes v. Blazer Financial Services: H’s bank account was garnished. He claims that the account was exempt because there can be no garnishment of the wages of the person who is the head of a household. The court here held that the wages lose their non-exempt status on deposit.

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1. Rationale: the intent of this legislation was to protect the wages once they were received but there is no protection of them in the statute once they have been received. Although the law is harsh, it is not the place of the court to rewrite the law

2. Moneys that were exempt before deposit may lose their exempt status on deposit. 3. wages due does not mean wages received

v. Partially exempt: this is property that may be seized and sold but the D is given back money first. He gets money back up to the limit of the exemption. The rest will go to the creditor.

vi. Homestead exemptions: this is the most common and important type of exemption because the home usually represents the greatest source of wealth of most people. These laws were often written to attract settlers and in TX also reflect the Hispanic culture and the value of the hacienda. Some states have limits on these while others do not.

vii. As a general rule, the more generous the state exemptions, the better debtors do. (6.1) viii. Given the right facts and circumstances, debtors can do better in a state that is stingy on

its exemptions (6.2) ix. If the person who wants to seize and sell the property will not realize any money after the

exemption and the senior creditor have been paid, then the court will not order the sale (6.3)

x. The senior creditor will get paid first, then the exemption will come into play. (6.3) xi. 2 points concerning bank garnishments

1. the actual garnishment restrictions laws require more info than that which a bank would have

a. the bank could not do this without great difficulty of getting the information

2. There is a federal social security act that protects those benefits from everything either before or after receipt

a. Court says congress should have used this same language if they meant to protect salary more

xii. General observations: 1. Exemption stand for the basic proposition that the debtor cannot be deprived of

the basic necessities of life so they can keep things that have little or no value to the creditors but have high utilitarian and sentimental value to the debtor.

2. Even exempt property may be seized by the lienholder 3. state law remains the governing law of exemptions because the states may opt out

of the federal rules 4. tenancy by entirety protects spouses and acts like an exemption when one spouse

acts alone 5. Summary on garnishments- (five ideas)

a. What is the garnishor entitled to from the garnishee? b. What rights did the judgment debtor have against the garnishee on the date

of service? The garnishor inherits those rights of the judgment debtor (stands in the shoes of the debtor).

c. The rights of the garnishor might increase during the “net” (the period between the service of the writ to the garnishee and the answer)

d. The garnishor rights against the garnishee cannot decrease as of the date of the garnishee’s receipt of the writ. This differs from the garnishee’s

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unexercised right of setoff (if a previous debt exists between the debtor and the garnishee).

e. What is the fifth idea? s. Fraudulent conveyances and transfers:

i. Twine’s case: P owed T £400 and C£200. P had £300 in chattels which he gave ownership but not possession to T secretly. T then resisted the sheriff’s writ saying that he owned them and not P. The court held that this was a fraudulent transfer.

1. Rationale: there were marks of fraud in this such as the continued possession after the sale, secrecy and the use of a trust. There is a trust when a debtor gives all of these goods to one C and shuns the others.

ii. Most cases will look at the intent of the debtor to delay, hinder or defraud creditors. This presumption arises when there is a sale or gift without transfer of possession.

iii. There are tow main types of FT: actual and constructive. This is a bit of a misnomer because they do not require any mens rea.

iv. Remedies: 1. The concept is that the remedy with the FT is not to give the C more rights against

the D; it is to give new rights against a party who got the gift or who is owed the obligation from the D

2. The key to this is to find a new person to take stuff from, one who might be able to satisfy the j’ment

v. The Uniform Fraudulent Transfers Act was written in 1984 to make technical changes and improvements to this group of laws but contained most of the common law theories such as actual and constructive fraud.

1. fraud, §5(a): an exchange made for unreasonably low consideration and when the debtor was insolvent

2. Reasonably equivalent value: this is a balance between the fair market value and the item given up. Intent is not necessarily a factor, but the REV will look at the totality of the circumstances like the market value for same/similar items

a. ACLI Government Securities v. Rhodes: Dan transferred property that he co-owned with this sister N wholly to N on the day before he suffered a 1.5M judgment against him. The siblings had inherited this property and D had received 3/5 of it; they were tenants in common on the property which was worth about 325K. D transferred it to N for $1 and other good consideration. The court held that that this was a fraudulent transfer.

i. for the creditor to succeed he must show three things. First, the transfer must be made without or for little consideration. N claimed that D owed her for a 400K investment but this does not seem to create a creditor-debtor relationship—it appears to be more a bailment. Without a debt there is not adequate consideration. Secondly, it must appear that the debtor is insolvent. This burden is on the plaintiff. D offers that he has other property but it is not enough to show that he is solvent. Finally, the creditor must show that the debtor acted with actual intent, which may be shown from the circumstances. Inter-familiar transfers are carefully scrutinized. Here the deal was made hastily, to thwart a seizure, in secret with circumspect timing and without adequate consideration.

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ii. In an actual FT, the attacking C must show: 1. The deal was made for little or no consideration 2. The debtor appears insolvent 3. The debtor acted with an actual intent to defraud, hinder or

delay. This may be shown by the badges of fraud. iii. If this is not reasonably equivalent value then what remedies are

allowed 1. See section 7: avoiding the obligation incurred sufficient to

satisfy the C’s claim; §7(a) (1) 2. The suit then is against the person who bought the piano,

see §8B a. The C can recover the j’ment value of the item

transferred or the amount necessary to satisfy the creditor’s claim, whichever is less

3. What if the buyer was in good faith but nevertheless did not pay for full value?

a. See §8D for the protections of the buyer: i. Transfer must be done in good faith

ii. The C can get a lien against the good faith buyer

iii. §8d3: reduction of the amount of liability of the j’ment

iv. here the reduction would be 7.5K—the extent to the value that was given in good faith; they do not get to keep the good deal, but they get their money back

v. enforcement of any obligation incurred vi. a reduction in the amount of liability of the

judgment vii. this helps because the liability can be

reduced by the value given, or $7500 viii. don’t get to keep good deal but get to get

their money back 4. 7B—there is a j’ment against the debtor allows the C to

levy on the asset a. this is new and has an advantage to it—there is

nothing about good faith i. writ of garnishment on the D if the D has

assets ii. it can follow the asset and levy it no matter

who holds it; the court must order this iii. the protection of the party in possession

when the JC follows the assets to wherever it may fit

iv. there can now be a lien vi. Constructive fraud:

1. Section 5 A, constructive fraudulent transfer

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2. There was a transfer made or a obligation incurred a. Here there was a transfer made b. An obligation incurred could be a guarantee of an obligation without

getting any or enough value i. This is what happens in the LBO context, where there is debt

incurred to perform the buyout and there is no value to the company for the buyout

c. There must be an intent to deceive the C d. The C must exist before the claim is made e. Property that is exempt does not count as an asset

3. Element 2: there must be an exchange without getting reasonable value (reasonably equivalent value)

a. This means that the sale fetched a fair market value under the circumstances of the sale

i. Here this debtor is under duress to pay her rent ii. This is discussed in 3B, and argument by analogy: this was written

to protect buyers who participate in properly conducted foreclosure sales—this was written to reverse a line of cases where these buyers were subject to FT because they paid so little

iii. Here she was trying hard, even though this was not a proper foreclosure sale

4. Element 3: there is insolvency—this can happen in the course of the transfer vii. Quasi-FT:

1. This is quasi-constructive FT with a lesser mens rea if negligence a. The C would have to show that the D was negligent in the transfer and

subsequent incurrence of more debt b. This covers creditors both before and after the transfer

2. see problem 7.2 viii. Leveraged Buyouts (LBOs): many of these are considered to be fraudulent because the

company is borrowing money to give to another to buy out the equity holders. Basically, the company is getting nothing of value and taking on a large debt

1. In re Bay plastics: Debtor company, BP brought this action to recover funds it paid out during a LBO. BP was formed by three people who were nearing retirement. M wanted to buy BP and formed a subsidiary N which formed another subsidiary BPI to acquire BP. M did not borrow any money to do this; rather BP borrowed 3.9M from BT giving BT a first security in the company. BT then gave BPI 3.5M and BPI gave BP 3M to buy out the equity holders. Before all of this happened S was a supplier of raw materials to BP. They were talked out of their security agreement with BP to allow the deal to go forward. Then BP crashed and burned. The court held that the LBO was a FT.

a. Rationale: FT substantially hinders the cash flow and the viability of the company. There must be a transfer or an obligation incurred, a lack of reasonably equivalent value in exchange and this must render the debtor insolvent (or the debtor was before) and must be attacked by a pre-transfer creditor. Since there was a transfer, the second element, reasonably equivalent value must be explored. To the shareholders it appears there was a sale but to the creditors it appears they the company got very little in

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exchange for the debt load that it incurred. The D must also be rendered insolvent by the transaction. Although balance sheet insolvency may be arrived at in many ways, adding goodwill to the balance cannot be a sufficient way to show that the company was solvent. This is also suspicious because the company never used this before on their balance sheet, so this should be subtracted, and this makes the debtor insolvent. S was a creditor before and one who become unsecured as a result of the transaction. Although payments at the point of the transfer were current, S was still a C. The secrecy of the transaction is also unsettling. This looks like a gift to the shareholders; one paid in the guise of a sale but is paid by the company itself with a high risk of detriment to the creditors. And LBO cannot force a company into insolvency; it can only survive a FT attack if there are good financial progression or luck; the C should not shoulder the burden of unforeseeable risks in this context.

b. To prove a constructive transfer, the creditor must show that he is: i. there is a transfer or obligation incurred

ii. that there was not reasonably equivalent value given iii. the D is rendered insolvent iv. that the C was a pre-transaction C.

c. An innocent buyer in a FT may get his money back or pay the REV and keep the good. (7.1)

i. This is known as the bona fide purchaser harbor. If the BFP paid full value it cannot be unwound at all, even if it was a FT. Liens will be given to BFP who make improvements to a good when they did not pay full value. (7.4)

ix. If there is a constructive FT, this must be attacked by a preexisting creditor. (7.2) x. The creditor must be insolvent when the transaction was made for there to be a

constructive FT. (7.3) xi. There are a lot of things that can be used to show that a company is insolvent, like not

paying employees. (7.5) xii. The theory behind the prevention of FT is that it is an unfair, un-bargained for risk.

Creditors have a right to think that debtors will act in a normal rational manner xiii. These are susceptible to attack because it seems that the company gets a lot of debt for

little or no value—new management is not usually considered a REV. xiv. summary of FT:

1. Fraudulent transfer: Types a. Actual intent to have an FT §4A1

i. Intent to make an FT—state of mind ii. Protects future and present C

b. Pure constructive FT §5A i. No state of mind

ii. Protects creditors prior to the transaction c. §4A2, quasi-constructive FT: less than reasonably equivalent value,

unreasonably small amount of capital remaining or a reasonable belief that there would be not enough money remaining (negligent state of mind)

i. negligent state of mind ii. protects future & present C

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d. Remedies i. 7A: avoidance of a lien

1. no property transfer ii. 7A1 & 8B: j’ment against the transferee for the amount owed to

the C. 1. there is an actual transfer of property

iii. 7B: lien on the property 1. Direct levy on the property; allows the property to be

followed. There must be a j’ment against the D before this can be done

e. Main defenses—these require that the transferee be in good faith and these are a function of the value of the good faith transferee gave

i. 8A: good faith transferee who gave reasonably equivalent value for the good

1. this should only occur in the context of a 4A1 FT ii. 8D1: lien that works against an 8B action when the C wants to

levy the property wherever it sits. There must be some value given iii. 8D?: reduction in judgment works against a 7A action iv. there is a reduction for the amount that is given in good faith

2. consumer bankruptcies under chapter 7: a. Elements common to consumer bankruptcies: these are generally filed by middle class families

who own a home and are overwhelmingly in debt. They tend to be baby-bombers who experience an income loss, medical problems, credit card troubles or divorce.

b. Chapter & was designed to give consumers a fresh start i. This means that there is nothing that can be seized from what is earned after bankruptcy

to satisfy pre-existing debts ii. But, to get this fresh start the consumer will have his other goods seized from him as long

as they are non-exempt. iii. This also allows for a discharge of all preexisting debt not subject to an exemption

c. Creation of the bankruptcy estate: i. When a consumer files for chapter 7, there is a fictional bifurcation of the person and the

debts. The human being goes on but leaves a shell, known as the estate. Included in this is all of the property of the D, including exempt property. All wages earned after this point are exempt.

ii. What property counts as part of the estate: 1. in re Palmer: P filed on 6-18-85 and on 12-7-85 he received a merit bonus check

from work. P claims it was not expected and cannot be considered part of the estate. The court held that a bonus check based in part on work done before the filing of the estate may be properly excluded from the estate.

a. Rationale: the employee handbook from the place of business brings clarity to this situation. Bonuses are given for meritous work based on performance reviews in April and October. The employee must be employed for the entire fiscal year. It is not a gift or something that happens automatically and remains within the discretion of the president of the company to award and his decision is not appealable. Congress wanted to keep the subsequent wages of the debtor out of the estate. Here the important factor is that this was conditioned on post-petition work,

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which seems to fall within the exemption that Congress intended. Here the work had to continue at the same competent level after filing and he could not quit. The discretion of the president also shows that it was not potential property. He could not have sued to get this in June, so he had not rights in it until the company decided to give it. It should not be included because it is not a property right.

i. Things that cannot be sued on and collected in state court at the time of the bankruptcy filing are not considered property of the estate and cannot be brought in afterwards

ii. Pay that is based on post-petition work is not property of the estate b. In re Orkin: O owned a real estate agency and set up a retirement plan for

himself in an attempt to keep money out of the estate, he filed for chapter 7 the same month he set up the account. The court held that the plan was not exempt and could properly be considered part of the estate.

i. Rationale: §541c2 allows for protection of spendthrift trusts that are ERISA qualified. ERISA imposes many requirements and follows the rules of the IRS. They must also have an enforceable non-alienation provision. But the employee that is also an employer cannot participate in an ERISA plan. The plan may also qualify under state spendthrift rust which means that the D cannot have absolute control of the plan. Here there is a 60-day termination provision showing that the employee had control. Allowing protection here will allow debtors to shield their assets from C.

ii. A person cannot use a guise to shield their assets from the creditors

c. In re Burgess: B operates a brothel under license from the state. He filed for bankruptcy on 7-20-97; his license was revoked on 6-2-98. B petitioned to have this undone because it was property of the estate. The court held that a license could be considered part of the testate.

i. Rationale: congress intended for the estate to encompass a lot but the issue of whether a brother license is to be included is a novel one. Many types of licenses are considered privileges but they can also be property. Liquor licenses are similar and have been found to be property before. Here this license has enormous value and without it there is no business to reorganize, which is contrary to congressional intent.

d. Trustees have the duty to gather and protect the property, maintain it and sell it for the highest price, and then distribute the proceeds among the creditors. The trustee really works for the unsecured creditors and attempts to maximize the estate for their benefit. He then collects a fee based on a percentage of the distribution.

e. If there are no assets, then unsecured C are encouraged to not file a claim. f. Debtors pay $175 to file a claim of which $60 goes to the trustee. g. Anything that can be found can be considered property. (8.1) h. Even if something says it cannot be transferred if it is not a purely

personal right then it can be transferred. (8.1)

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i. Things that can considered offspring of the estate can be considered part of it. (8.1)

j. Things that are encumbered with liens greater than the value are still part of the estate. (8.1)

k. If the income is contingent and the odds are high that it will become property then it cannot be property of the estate. (8.2)

l. If there is a legally enforceable right to be the beneficiary (i.e. there was a contract) then there is more than a mere contingency, there is a property right that would be legally enforceable. This means the concept of the net does not need to apply because there is a legally recognizable interest (8.2)

i. The legally enforceable right/contingent right test: 1. This came from a Supreme Court case where the D would

be entitled to a tax refund because of their losses on their taxes. These did not technically accrue until after the date of the filing, specifically at the end of the calendar year

2. The S.Ct. considered this a property right even though the right to the taxes was not legally enforceable right at the point of filing

a. There was nothing else that could impact the right to the refund; the right became enforceable with the simple passage of time with no further contingencies

b. With life insurance, there is not an enforceable right and there is another contingency that must happen other than the passage of time

3. So maybe in the end the test is: the passage of time is enough to determine if there is an expectancy that is legally enforceable or will it become enforceable with the passage of time?

m. A lottery ticket that is bought with money that would have otherwise been part of the estate is part of the estate and so are the winnings. (8.2)

n. Being named the beneficiary of a will is not enough to become part of the estate because the date of death is not certain and is too contingent. (8.2)

i. Under the operation of 541a5, if the person dies within 180 of the filing then the money can become part of the estate.

o. If the debtor works on the land or property and makes improvements to it then he should be able to recoup this value—this should not be property of the estate. (8.3)

p. Basically all of the property that could be considered part of the estate will be whether or not the debtor has possession of it at filing.

q. Since chapter 7 is considered a fresh start, any assets that the D receives after filing are not part of the estate except in the case of bequest, devise, and inheritances within 180 days and property from a divorce

r. Property can include rent, products and proceeds of the estate but NOT the wages earned after filing, things held for another, leases that expire—these all fall out of the estate.

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s. If faced with the prospect of losing an entire inheritance because of the 180-day rule, it is better to file now because the person may survive the limit. (8.4)

i. When the person dies the trust loses its character as a spend-thrift trust. This means that the triggering event happened.

ii. 541a5 should trump 541c2 in the case where the triggering event occurs because a5 pretends that the even occurred right before the filing.

t. Bonuses will look at whether it is contingent or non-contingent (8.5) u. Sometimes even when a good says it cannot be transferred it can be and if

this is the case then it will have value to the estate especially in the case when there would be noting to reorganize without this good. (8.6). this is the test under 541c1: When to ignore a restriction on transfer: § 541(c)(1)- “Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement transfer instrument, or applicable non-bankruptcy law…”

v. Property of the estate—distinction between an interest and a value to the estate can be different

i. 541A1: this brings into the estate any of the property of the D even if there is no value currently to the estate

ii. this can be abandoned by the trustee by 545 if there is no value iii. it still must be accounted for iv. the estate’s right to the property interest is no better than the debtor

1. so if the debtor has a limitation such as the property has been leased, then the trustee is also subject to the same limitations

2. the trustee will step into the shoes of the debtor v. contingent interests and expectancies: when do these become

property of the estate and when is it too contingent to be considered property of the estate that the trustee can inherit for the benefit of the C

vi. restrictions on transfer: the D may own certain property that is subject to restrictions under 541C1A

1. it will come into the property of the estate and the restrictions

2. 541C2: the only recognized exception is a state-law recognized spend-thrift trust; this will not fall into the estate at the time of filing

d. The automatic Stay: i. Andrews University v. Merchant: M attended school at AU and received student loans

guaranteed by the school. When M defaulted AU became the sole student loan creditor and refused to give M her transcript. M sued claiming it was a violation of the automatic stay. The court held that the school cannot withhold the transcript because it would violate the automatic stay.

1. rationale: the automatic stay attaches immediately so that all debts are due and past deficiencies are wiped clean. Because educational loans are not excluded

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from the automatic stay under 362, the stay attaches. 2. Even when something will not be dismissed in bankruptcy later, the automatic

stay attaches to prevent collection during the period of the confirmation and before dismissal.

3. University transcript case- “good faith” misinterpretation of the law. ii. The automatic stay works to maintain the status quo while the court is in the process of

sorting things out. iii. Nissan Motors v. Baker: B filed for bankruptcy and was in arrears on their payment for

their car. N repossessed the car, claiming they had no notice of the claim. Even after N received notice they sold the car. The court held that the creditor could not do this after receiving notice of the bankruptcy filing.

1. rationale: 362a3 prevents all acts to obtain possession of property. This means that a C cannot engage in self-help. A C cannot play dumb and willfully violate this and if they do then they are guilty of willful violation and might be liable for punitive damages

2. to prevent creditors from violating the automatic stay, the court may assess punitive damages

iv. when a D files for b’ruptcy, he fills out schedules and if he does not do so accurately then he may lose his discharge. After filing these, the creditors meet in a 341 meeting—this is 40 days after filing.

v. The automatic stay does not prevent actions to collect on a bad check because this is a criminal charge under 362b1. (9.1)

1. If the debtor waited a day to file bankruptcy and recovered the paycheck and cashed it, it approaches fraud. He could turn it into exempt assets.

2. 366 will keep the lights from ebbing shut off but the TIB will have to make a deposit

vi. Generally the only actions that can be stayed are non-criminal actions. vii. The power of the court will protect all property of the debtor, even that which has been

seized before the filing. viii. Basically, the idea is to prevent further actions to collect or to persuade collection. There

are some exemptions to this, like payment of child support, governmental actions taken pursuant to police powers and criminal actions. A person who leased goods to the D may retake the goods if the lease expires before confirmation.

ix. The automatic stay terminates when the property is no longer part of the estate under 362c1 or when the case is closed or dismissed, 362c2.

x. A creditor that willful violates the automatic stay may be held for damages under 362h. This does not mean that they cannot contact the debtor, they just cannot act in a way that appears like they are trying to get payment.

xi. §362(a)- categories overlap – they are not intended to be mutually exclusive 1. Future wages- §541(a)(6) post-petition wages are not included. Fresh start. The

garnishment will not continue as to future wages due to § 362(a)(6). The pre-petition claim of the garnishor will be settled within the bankruptcy estate.

2. Waiting until tomorrow to file- any funds remaining from paycheck will become part of the estate. Any purchases made with the funds will become part of the estate. Any exempt purchases would probably be fraudulent transfers. Some courts will not allow any claims to be discharged if a fraudulent conversion took place on the eve of filing.

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3. Criminal charge for bad check writing- § 362(b)(1) exception to stay “…the commencement or continuation of a criminal action or proceeding against the debtor…”. What if in the jurisdiction, criminal charges are dropped if the debtor covers the check? That could be seen as a veiled attempt to collect on a pre-petition debt.

4. Utility service in the future- utilities have great leverage (even greater than creditors). §366 service cannot be refused based on pre-petition history (a), but utility company can require large deposit or security (b). As to pre-petition delinquency, the utility is in no better a position to recover than any other creditor. But the utility can demand a deposit. That deposit, however, cannot be put toward past due amounts.

5. Eviction- stay applies § 362(a)(1), (a)(3), (a)(6). “Consider the negative implication of §362(b)(10).” →What is the landlord to do? §362(d)- lift of stay for cause (creditor’s rights), including the lack of adequate protection. Go to judge and ask whether Joe will remain in lease and pay all back rent (§ 365) or pay damages for breach of lease and get out. Could Joe offer to pay rent for 1 year in advance in order to stay (and not pay for any pre-petition debt)? No, the stay cannot be used as a sword, offensively, to obtain rights not otherwise entitled without filing.

6. Child support- §362(b)(2)(B) exception 7. Repossession of car- allowed in stay 8. Credit card debt- stayed. Shaming or harassing letters to cancel may be seen as

attempt to collect. e. Liquidation bankruptcy: after the D files for b’ruptcy the trustee gathers all of the property,

returns what is exempt fully, and begins selling it. When things are sold, if the property is partially exempt then the trustee returns the amount that was exempt. The TIB must also determine who else might have an interest in the property. After the property is sold and the TIB determines what amount to give back to the D, then the C are paid

i. Exemptions: there is some property that is exempt for the D’s fresh start. The D should not emerge from bankruptcy a pauper and without any assets. The D may even lose his property if there is a security interest in that property.

ii. Federal exemptions: States may opt out of the federal scheme. The federal provisions were written in 1994 and these prices have been price adjustments every 3 years since 1998. this leads to problems of classification of the property

1. Taylor v. Freeland & Kronz: D was pursuing an employment claim against her last employer when she had to file. On her schedule she claimed her potential proceeds as exempt with an unknown value. The C claimed that the suit had a value of 90-110K but the TIB doubted it had any value. D settled for 110K and the TIB demanded that it be turned over and D refused. The court held that because the TIB did not timely dispute the value of the claim it was barred from becoming part of the bankruptcy estate

a. Rationale: 522 and 4003 set out a specific time limit to filing a claim in bankruptcy. This may seem unfair in the particular case but it upholds the reasons for having deadlines. If the TIB could have had a hearing to determine the potential merit of the suit, then the deadline stands. This will not encourage people to file a bad-faith exemption because they may be sanctioned.

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b. Dissent: equitable tolling may apply here been if there is no bad faith because this seriously injures the C

c. If the TIB does not contest the claim of exemption it may stand. 2. Choosing the federal exemptions will allow a debtor to use the 522d5 wildcard

which can allow the debtor to keep something valuable to them that is otherwise not exempt under the federal exemptions found in 522. (9.3)

3. Tools of the trade does not allow a vehicle to be claimed under 522d6 because the exemption is already found in 522d2. (9.4)

4. non-possessory, non-purchase money agreements: a. If the secured C does not get possession as part of the loan deal, then it is

non-possessory b. This refers to whether the secured C possesses it part of the loan deal c. If the loan was not made for the purpose to purchase the collateral—so if

the loan purchased something else it is not a purchase money agreement iii. Valuation: this issue stands at the heart of many bankruptcy appeals. It is the process of

putting a value to the property. 1. in re Walsh: the TIB wants to evaluate the goods at FMV. The D wishes to have

them evaluated at liquidation prices so that he may keep more goods. The court held that the fair market was the correct valuation tool.

a. Rationale: the value under 522 is considered to be the FMV on the date of the filing. This is the plain meaning of the statute. FMV is the price at which the parties are willing to trade, but here considerations should be brought to bear. This means that the definition is not invariable but the value should be looked at in the context of the case and in which the valuation question has arisen. This generally means that the FMV is the liquidation price.

b. The correct value is the FMV in the light of the circumstances and seems to approach a value closer to the liquidation value

2. in re Marshall: M’s w has a 6.18 carat diamond ring that he paid 30K for in 1978, She wears it constantly and claims it is necessary clothing. The FMV valuation of this is 36K, but the liquidation value is 7.8K because the time and cost of reselling it. The court here held that the liquidation value was not the correct value to place on this.

a. Rationale: there is plain language calling for the FMV but when the FMV will only punish the D and not help the C then a lower value should be chosen. TX has chosen to have a cap on personalty and it must be of an approved type. This is sensible and strikes a balance between the debtor and creditor without leaving the D destitute. This balance here is not the liquidation value.

iv. Security interests in exempt property: when exempt property is encumbered by a secured lien, the lienholder moves ahead of the both the D and the TIB. If the C is oversecured then the D may be able to take the equity.

v. Lien avoidance: some liens may be avoidable. Consensual security interests as defined in 522f1b and most judicial liens except alimony and child support may be avoided. Some voluntary security interest can also be avoided. This shows that congress can encumber some property rights validly without running afoul of the 5th amendment takings clause

1. in re Reed: R sold 34.5K worth of goods, which represented 50% of their value, 2

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weeks before filing bankruptcy. He then applied this to his home liens. Many of these goods were sold to friends and acquaintances. D also used these monies to make home improvements. The court held that the homeowners’ lien exemption should not be avoided.

a. Rationale: the D received less than the REV for all these goods. Debtors are allowed to put non-exempt property into exempt ones but they are not allowed to do so in a fraudulent manner. Here, undoing the homestead exemption would do violence to the TX constitution so even in the face of fraud this cannot be undone.

b. A debtor may change non-exempt goods into exempt ones if it is not fraudulently done or if the exemption is provided for in the state constitution.

2. in re Coplan: Coplan’s business in WI was in serious financial trouble. In 1989 he lost 44K and resigned. He then relocated to FL and began to look for work without success. He managed to move within a month of resigning and paid nearly the same amount for their new house in FL. D obtained employment in 8/90 after looking for 9 months. To live during the time the D liquidated most of his non-exempt assets. A year almost to the day after moving, he filed for bankruptcy. The court held that he had not earned the homestead exemption under FL law.

a. Rationale: D is a resident which would normally allow him an unlimited exemption in his home. WI law allows 40K. D’s wife admitted that the move was to take advantage of the FL laws. Here the timing was critical: the D was financially sophisticated and able to take advantage of the timing. They filed a year to the day of the move showing a well-planned scheme. Since this is not an unexpected disaster like the ones that put most people in bankruptcy, the court should see this differently. This is a concerted effort to defeat creditors and maximize exemptions. The court cannot allow this type of manipulation.

b. Bankruptcy planning may backfire if the debtor looks like he is trying to take advantage of the system

3. lien to impair an exemption—this means that the lien prevents the debtor form taking the exemption; lien avoidance then kicks in

a. This is not unlimited. Congress has chosen to limit this to 5K. b. This is because the consensual lien holder will take before the exemption. c. This is found in 522f1a which says that the judicial lien will be avoided to

the extent that it impairs the debtor’s exemption. f. Claims and distributions: creditors will receive a proof of claim from which must be filed within

90 days according to FRBP 3002. this allows for any distribution and is taken on its face unless a creditor objects under 502. most parties usually agree but any party, including the TIB, may object. Basically, Congress decided that some creditors are more equal than others.

i. In re Lanza: PNB held 3 proofs of claims against L. One is disputed in amount. The court held that it may reduce the amount of the claim to the lowest figure presented by both the parties.

1. rationale: the bank’s practices of paperwork were poor but unless the debtor can contest clearly the entire amount then the lowest figure will be sued. The onus is on the debtor to overcome the claim’s validity but the C bears the burden if the

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recordkeeping is poor ii. all claims begin with a calculation under 502.

iii. Unsecured creditors do NOT get interest after filing a 502b2 claim because the interest is unmatured

1. the interest must be matured on the date of the filing 2. So if any interest accrues after the date of the filing then it is not allowed because

it was not there when the claim was filed. iv. 506a gives the secured creditors a claim up the value of the collateral, not to the value of

the loan if they are undersecured. 1. if the collateral is worth more than the loan, then the C is fully secured 2. if the collateral is worth less than the outstanding loan balance, then the C is

partially secured and the remainder of the loan becomes an unsecured claim v. 506(b) allows an oversecured creditor to make a claim for interest up to the value of the

collateral 1. this also entitles oversecured secured C to post-petition attorney’s fees 2. undersecured and unsecured creditors are not allowed any attorney’s feed under

5602b, 506b and 503 vi. 503 allows for a claim of administrative expenses which are given a first priority under

507a1. vii. the TIB will pay for the broker’s fees for selling a stock before he pays the creditors

under 506c, a cost necessary for disposing the claim (11.2) viii. the contract between the c & d must allow for attorney’s fees before they will be given

(11.3) ix. The amount of time and money that the attorney spends on trying to collect on the claim

must be reasonable in the light of the claim. (11.3) x. §101(5) allows claims that are speculative: this is a broad and expansive category.

xi. 502 operates to refine allowed claims. Most claims are allowed without much objection. Some of the limitations of claims vary from state to state but the rest are found in 502(b). some claims will also arise after the case has been filed

xii. administrative claims may be paid before secured claims in 503. These are the costs t preserve the estate, compensation of the trustee and the reimbursement of expenses of selling.

xiii. If the sale proceeds and the creditor that thought he was oversecured ends up with a deficiency then the remaining amount becomes a general unsecured claim (11.4)

xiv. If there is the potential to a claim but it has not been set in amount (it remains un-liquidated) the court may use a reasonable estimate under 502c.

xv. Three types of attorney’s fees 1. pre-petition attorney’s fees provided for by contract or law for secured or

unsecured creditor a. there is a claim

i. it is in time and has a contractual basis 2. post-petition attorney fees of an over secured creditor when provided for by

contract a. there is a claim under 506b

3. post-petition attorney fees for an attorney for the debtor or attorney for trustee in bankruptcy

a. They get claim status and priority for administrative fees

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b. They are an administrative expense priority claim xvi. Timing in claims

1. Suppose an individual debtor negligently runs someone over with a car sustaining injuries

2. File bankruptcy the next day 3. Does one have a claim in the bankruptcy

a. 502a makes it a claim since it happened pre-petition b. The court will have to take its best shot as to what will be owed c. The definition of claim under 501a includes any payment regardless if it is

liquidated, which means it is reduced to judgment 4. Individual debtor injures person post-petition

a. One does not have a claim in the bankruptcy because there is no claim as of the date of filing

b. 502b provides for the date of the filing requirement 5. 101 10a

a. one must hold claim before the order of relief or at the time of b. to be a creditor one must have a claim at the time of filing

6. What about the automatic stay a. Can I still sue you even though you just declared bankruptcy

i. 362a makes a distinction between acts against estate and acts against the debtor

1. acts against the debtor were only barred if they are based on claims that arose pre petition

2. all acts are barred against the estate it seems 3. Thus the injured person would have to go after property not

of the estate, like post petition wages 4. One does not need to get lift of stay for this purpose

xvii. The priorities of unsecured claims 1. administrative 2. 502(f) arising in the course of business/gap claims 3. wage claims up to 4K 90 days before filing 4. contributions to an employee benefit plan 180 days before filing 5. farmers/fishermen’s claims 6. lease/down payment/layaway for purchases of consumer goods and services 7. debts to spouse, ex, child for alimony or support 8. tax, customs, duties and penalties 9. maintenance of capital in compliance with the FDIC 10. unsecured bonds, commercial paper and tort obligations

g. exceptions to discharge: discharge is not given as a matter of right but will be given unless a creditor objects under 523 to a particular debt or under 727 to all of the debts. This may prevent the debtor from getting the relief he has sought.

i. In re Harron: H trans-mingles personal and business funds. He as the sole owner and stockholder. He filed for bankruptcy and several of the creditors objected under 727a. the court held that the debtor should be denied a global discharge.

1. rationale: H began selling assts including his trade name without using adequate record keeping. This lack of records shows the debtor to be disingenuous. Creditors are entitled to adequate record keeping so that they know where they

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stand unless there is a good and justifiable reason for the lack of records. 2. debtors must keep reasonably decent records so that the creditors and TIB can

determine the true state of the debtors affairs 3. when a D does not keep adequate records he may be denied a discharge. (13.1) 4. The court might allow admission of records that are a complete disaster as long

as no one is adversely affected. (13.1) ii. Mere forbearance may make a debt dischargeable. (13.2)

iii. In re Reed: R opened a store which quickly failed. He let the bank run the store through a receiver but in the end was force to sign it over. R has set up a corporation to pay him his salary from his other job. Before he filed he spent money on guns and antiques but then sold these to friends to reduce his mortgage. He also ran through 20K in cash that he cannot account for. The court held that a global discharge should be denied in this case.

1. rationale: people are not allowed to shield asserts or convert them into non-exempt ones on the eve of bankruptcy, except when they act in a non-fraudulent manner. Discharge may be denied when fraud is found. Non all conversions are fraudulent but when there is a patent intent to commit fraud, the court may find that a discharge should be denied. The debtor has the right to rebut this after the creditor makes the prima facie case.

2. debtors that act fraudulently with an intent to hinder or delay may be denied a global discharge.

iv. In re Dorsey: D ran up several credit cards with purchases of luxury goods and services including several trips. During this time she received 480 per month from social security but claimed she received more from her boyfriend. While she wads traveling her mobile home was purportedly broken into but she never reported this to the police. AMEX filed a denial of discharge claiming that the D racked up the debts with no intention to ever pay them. The court held that the discharge should be denied

1. rationale: the court begins by making several observations about how easy it is to obtain credit and how unscrupulous some credit card issuers are. But this does not offer comfort to the debtor: they are not given a license to steal or commit fraud. This would render the debt non-dischargeable under 523a2a. when a debtor takes on debts he knows he cannot pay and never has an intention to repay then there is fraud. The creditor carries the burden to convince the court of this

2. a debtor who runs up a bill with no intention of repaying it commits fraud and may be denied discharge.

v. In re D’Ettore: D studied at devry institute and got a degree in computer programming with average grades. She has not been able to get a job with her degree but is working. She lives with her family and has debts for her education and some luxury items. The court held that there was not an undue hardship so this debt cannot be dismissed.

1. rationale: congress made student loans non-dischargeable to prevent abuse of the system. The undue hardship provision has been interpreted very harshly. Simply because the debtor experiences hardship is not enough. Here this debtor is not experiencing any more than garden-variety hardship and she has made no effort to pay and cannot show that she faces undue hardship

2. undue hardship means that the debtor has a choice of poverty or paying the loan, not just feeling a financial pinch.

vi. In re Hill: D, in his divorce, agreed to not pay support to his wife in exchange for

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assuming the marital debts. Debtor cannot currently make payments on those debts and filed for bankruptcy. The ex wants these paid so she filed an exception to discharge. The court held that these may be discharged on a showing of undue hardship.

1. rationale: sometimes when an ex-spouse assumes the debts he gets a lot of detriment but little relief. These may look more like a property settlement. If it is alimony, on the other hand, I may be dischargeable only if there is an undue hardship which may be shown if it takes so much money from the D that he cannot reasonably support himself. Here this debtor looks exactly like the model for hardship. If the non-debtor ex will not be harmed the debt should be discharged. If there benefit to the debtor ex is very high is should also be discharged.

2. Undue hardship operates to dismiss otherwise un-dischargeable debts if an only if a showing can be made.

3. If the debt taken on after a marriage is alimony or support it is usually not dischargeable (13.3).

4. the debtor may claim that he has a hardship to a non-dischargeable debt under 523a15:

a. Note 523a15 which says that there are a bunch of outs for the debtor who may claim that:

i. If the debtor has so many other obligations that he has not disposable income to pay this then it will be dischargeable

ii. Compare the benefit of the debtor to the benefit to the ex-spouse 1. So what if the wife is wealthy in her work?

a. She should not need this—this tends to cut in the favor of the D

2. If she is a homemaker, then this cuts in her favor 3. If J is wealthy then it cuts in her favor

a. This makes it more likely that he is paying alimony b. Ti might be strange that he is filing for bankruptcy

b. The lump sum sounds like a property settlements c. The monthly payments sound more like alimony and child support

i. The payments decrease after the children are grown d. What if this is in TX where most alimony is disallowed

i. Here federal law controls ii. 523 has some confusing language but this does not modify what

counts as alimony but does modify what counts as a court of record iii. what counts as alimony is in b’ruptcy law

vii. In re Milbank: M and her father S loaned money to M’s ex husband who is the debtor. S loaned D money because the marriage was in trouble and D wanted to have a new building to conduct his business in. S thought the loan would help the marriage. M also gave $ to D to buy a car. During the entire time D was having an affair and finally left M. both M & S thought the money would stabilize the marriage. The court held that these debts were not dischargeable because the debtor never had an intention to repay them.

1. rationale: although the ex said the money would be used to help the marriage the entire time he was subtroverting the relationship. These loans were made on reliance of good faith—otherwise S would not have made them. The bankruptcy

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conduct was a sham and he advanced may false pretenses. In other words, he committed fraud and rendered the debts non-dischargeable.

2. if a person acts in a fraudulent manner to get the money, he may be denied discharge of this debt

viii. Tort debts: debts that come from the commission of a tort are usually not dischargeable if there is a willful and malicious injury. (13.4)

ix. Luxury goods: debts that come from the purchase of luxury goods are not dischargeable. (13.5). this will look at the definition of what is a luxury.

x. Tax priorities and discharge: taxes are given a priority under 507a8a-g and ay unpaid portion is exempted from discharge. Prepetition interest shares this priority if the claims and also enjoys non-dischargeable status.

1. Penalties are not dischargeable either unless the tax debt is also dischargeable under 532a7, See also 13.6, the parking tickets case.

xi. A C cannot refuse to deal with a customer if this refusal to deal with them is a thinly veiled attempt to get them to pay the dues. (14.1).

1. a refusal to deal is not allowed under 524a2 2. This may also be seen as discrimination against a bankrupt which is also

specifically disallowed under 525. xii. Bankruptcy crimes: these may also trigger a denial of the discharge and may also end in

jail sentences. 1. United States v. Cluck: C had a judgment issued against him for 2.9M. C at the

time owned some cars which he sold for 32K with a right to repurchase. He then filed for chapter 7 with no mention of the cars or the right. He received his discharge and then required the cars. He was caught and convicted of concealment. The court held that he committed intentional fraud and could be sentenced.

a. rationale: it is manifestly clear with the reposted omissions that there was a clear plan sufficient to find fraud.

xiii. General observations: 1. discharge is the goal of most debtors. It is an individual thing and is given to the

individual debtor, not those also jointly responsible with him. 2. liens will survive bankruptcy but this is not the same as a secured claim which

does not survive bankruptcy unless the debtor wants it to 3. denials of discharge may either be global (the whole thing) or specific to a debt. 4. the common reasons to deny a discharge are:

a. fraudulent transfer or concealment b. failure to maintain minimal records: concealment or destruction will count

unless there is a good reason. This operates to save creditors from the negligence of the debtor. There is no specific way in which people have to keep their records

c. repeated filings: the 6 year bar d. not filed by a human

h. the end of the automatic stay and the beginning of the new world: i. 362 and 524a2 are bookends of protection of the bankrupt

1. under 362a the automatic stay begins as soon as the petition is filed and runs under 362c2 at the earliest at the time the case is closed, dismissed or the case is discharged/denied discharge

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a. it can end at another time for a particular creditor under 362d where there is a lift for cause by a single creditor

b. this bars actions on certain claims: i. possession of property of the estate

ii. bars pre-petition claims from continuing iii. there is not a bar on actions brought post-petition unless it is an

action of the property of the estate 2. under 524a2 begins at the discharge and does not end

a. this bars actions on: i. discharged claims

ii. with claims that cannot be discharged they cannot be attacked during the automatic stay period but the creditor may begin their attack anew after the discharge

ii. Once the case is closed, the debtor cannot agree to pay the old discharged debt unless the creditor files this with the court. (14.2)

iii. Hardship affirmations: 1. 14.3: BM has a motorcycle with an 18K debt which is worth 15K. He also has a

house which he proposes to sell to redeem the bike. Should there be a hardship agreement?

a. This would be under 722 if it is applicable b. This looks at the congressional intent: they wanted a hardship

reaffirmation procedure but not as big of a worry for the redemption i. This is paternalistic

ii. With a reaffirmation the debtor might be taking on a greater hardship than they originally had

iii. This also looks at which is more important—the secured debt or the secured debt

1. With the unsecured debt the court would have completely discharged the unsecured debt

2. With the secured debt, if there is a debt the debtor pays for the asset (FMV) so the debtor will never pay more than the fair market value

iv. If he did redeem here, how much would he owe? 1. 15K in cash today, not over time 2. this is not a bad deal because the debtor pays either the fair

market value or the loan amount, whichever is less 3. This is tangible personal property intended for personal,

family or household use. There is another pre-requisite, which is the debtor must exempt the property or the trustee must abandon it

a. Here, will there be a need to exempt or will it be abandoned?

i. It will likely be abandoned because the loan payoff amount is more than the FMV of the bike

ii. With the exemption, there is a consensual lien holder, so the first question is there

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equity in the property (the debtor cannot exempt what he does not have)

iii. This really means that the consensual secured creditor is unsecured

iv. There is nothing to exempt v. There is no equity brought into the estate so

it will likely be abandoned i. reaffirmation, redemption and ride through

i. reaffirmation: when the D gets a discharge, the automatic stay disappears and a 524 post-discharge injunction falls into place preventing any attempt to collect a discharged debt. The debtor may not want to discharge all of his debts and may choose to reaffirm under 524c. this must be filed with the court and the debtor has a 60 day rescission option. This must be affirmed by the attorney in the case. since liens are not discharged the debtor may redeem the collateral or reaffirm it. Some states also allow a ride through/retention. This is binding and makes the debt non-dischargeable. The C can also repossesses or sue to get the deficiency.

1. in re pendlebury: FLSA wants their debtors to reaffirm their loans. For each of these, FLSA tacks on a $250 attorney fee. The court held that they may not collect this fee

a. rationale: if the contract specifically allowed for this it would be allowed. Debtors may add terms to the negotiation as a part of the give and take. This does represent the real cost that the bank endures. Still, this is unjust and the debtors will seek the court’s help if the amount is too much. This is not a job the court wants

b. when the debtor reaffirms his loan that is all he is reaffirming unless the contract provides that the creditor may tack on fees

2. when the debtor is negotiating for the reaffirmation the creditor has the advantage but may not take advantage of the D in this situation.

a. In re Latanowich: L filed a chapter 7 bankruptcy in which he owed Sears, who contacted him about reaffirming the debt. L did this in the promise of getting new credit. S never filed a report with the court. L did use the new credit. L then wanted to reopen the case and have the debt discharged. The court held that this may be reopened because a creditor cannot elicit a reaffirmation and not file it with the court.

i. Rationale: reaffirmation is only allowed when it will not harm the debtor and when it is filed with the court. These requirements are mandatory and exist to protect the D form his own stupidity. Here, this was a very bad deal for the D and S manipulated the process to make it un-reviewable. This makes it unenforceable. Because it was void ab initio S is enjoined from any recourse. This conduct was blatant and sanction-able.

3. Note 524c for the requirements: a. C1: must be before discharge b. C2: clear and conspicuous statement that it may be voided in 60 days or

until the discharge—the rescind ability must be clear c. C3: must be filed with the court and represents a fully informed decision

and is not a hardship on the D

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i. This is what was discussed in Sears d. C4: the rescission period passes with no rescission e. C5: the court has to inform the D of the effect of the reaffirmation f. C6: not represented by an attorney then the court looks at the undue

hardship of the D—this is a paternalistic role 4. Is there a discernable benefit to the debtor when he reaffirms the unsecured

debtor? 5. With secured debt, reaffirmation as a matter of course should be encouraged

unless: a. If the debt-collateral ratio is out of whack, or the debtor is upside-down

ii. Redemption: the debtor must pay off the loan or value of the collateral whichever is less. This is in 722.

iii. Retention/ride through: this allows the bankrupt to keep making payments as he did before without redeeming the collateral or reaffirming the debt. This is not in the code specifically.

1. in re Burr: B owned a van with an 8K PMSI. When they filed for bankruptcy the bank sent them a letter asking them to redeem, reaffirm or surrender. The bank then sought lift of the automatic stay. The court held that the debtor must choose one of these options.

a. Rationale: 521 does not contemplate remedies that are outside of the system of bankruptcy. The language is clear and unambiguous—there is no right to retention in the code. The debtor must make a choice of one of the options in the code.

b. There is a split among the circuits if there is a retention option. iv. It will depend a lot on the creditor if the debtor will be allowed to reaffirm or retain the

good he seeks to. It will also depend on the laws of the jdiction if ride through can be elected. (14.4)

j. Bankruptcy is an in rem proceeding. It is universal and binding on all of those involved except the state and federal government under the 11th amendment.

i. In re Collins: C was a bail bondsman who filed for bankruptcy and was discharged. The state continued to press him for repayment claiming that they had 11th amendment immunity. The court held that the bonds may be discharged.

1. rationale: this was not a suit against a state and the state did not claim SI in the proceeding. The state was not names as a creditor or required to appear in court. They may have been involved but here was no jdiction issue because the jdiction extends to the bankrupt and his estate. It may alter the state’s rights but this is not a tax, fine, penalty or forfeiture and is not a suit against the state.

2. the state’s rights can only be reordered when there is not a suit against the state—basically the state can be a creditor as long as it isn’t a party

3. The debtor cannot institute an adversary proceeding to get old tax problems dismissed but the court can hold that they are discharged and not butt up against the 11th amendment. (14.5)

ii. In re Neary: N filed owing the state 2.2K, an amount not disputed. The state filed suit claiming that a determination of the discharge-ability of the debt violated SI as did the automatic stay. The court here held that the bankruptcy court was barred from acting

1. rationale: the state claims that the bankruptcy court can only proceed if the state concedes jdiction, if there is a valid abrogation or if this is brought under the Ex

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Parte Young doctrine. The D may continue if there is no other court that will hear the case. this is not the case as it was not properly pled under one of these theories.

3. chapter 13 bankruptcies: a. general observations:

i. Chapter 13 focuses on the uses of the D’s future earnings by taking a percentage of them to pay the creditors. When this plan is completed then the D gets a discharge. This is done under the supervision of the court and this last usually between 3 and 5 years. The D retains control of his estate. The TIB has to object to the claims and assist the D in his performance. The TIB must also approve the plan and ensure they the payment of the plan begins within 20 days.

ii. The most common reason people choose chapter 13 is when they have significant non-exempt assets, like a home.

b. Secured creditors and adequate protection: i. A chapter 13 secured creditor has a better position because he must have adequate

protection under 362d. the secured party is entitled to have his payments during the plan in exchange for forbearing to collect

ii. In re Radden: D bought a 1979 mustang on an installment contract which he then missed 2 payments under. He did not cure these before filing for bankruptcy. The car’s value is 2.7K, but he owes 4.4K. under the plan G will receive full payment of the secured portion but only 70% of the unsecured part. G does not like this and wants to repossess this claiming it is not necessary for the reorganization. The court held that a car is necessary and that G was getting adequate protection.

1. rationale: people need cars and he easily shows that he needs this for reorganization. G is in the best position to protect this. Because they will get interest they have adequate protection

2. the debtor may defeat an adequate protection claim by showing that the thing is necessary for an effective reorganization

iii. A claim that the newer model is coming out and the current collateral that the debtor has will decrease in value might be a good basis for an inadequate protection argument. (15.1)

1. This will mean that the creditor is basically making an argument that the depreciation of the good will leave them without AP soon.

2. When the C is oversecured the AP argument is harder to make but the C will also have the right to an equity cushion.

a. This means that there is a hedge against the depreciation of the good compared to the rate of the payments on the debt

b. Although the equity cushion might shrink a bit, the court will not feel sympathy for the C

c. If the equity cushion will shrink to nothing or the over secured C will become under secured because of depreciation then the court will have more sympathy. This will be a decent argument here, but might not always win

d. Alternatively, the C might argue that there is not adequate insurance being maintained as required by the contract. This will mean that the value of the collateral will not matter.

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3. The argument under 362(d)(2): the C does not have equity in the collateral will trigger the use of this subsection

a. When does the D have equity in the property is the main question here, and the D will have equity when the collateral is worth more than the debt

b. This will be an unsuccessful argument because both parts of this must be met. Since the first part is not met, the argument is lost.

iv. Steps in the allowed secured & unsecured claims: 1. What is the creditor’s secured claim in chapter 13

a. 3 steps i. What is the total claim (same as chapter 7)

1. section 502 tells us what are allowable claims 2. principle and interests and fees are allowable

ii. What part of that claim is secured and what part is unsecured (same as chapter 7)

1. 506a says what the collateral is worth is the secured claim 2. bifurcated claim when under secured

a. have secured claim and unsecured claim iii. What then is the creditor entitled to demand for its claim

1. for secured claim 1325a5 tells us one can a. secured creditor can agree to plan b. debtor can surrender collateral1325a5c c. 1325a5b must let the creditor retain lien and is

entitled to present value of secured claim over the course of the plan

i. What interest rate should be used ii. Hollins case says lets look at what the

market interest rate would be for a comparable loan with this collateral securing it

iv. What is an unsecured claimant entitled to? 1. 3 things

a. paid pro rata in the plan along with other claimants 1322b1

i. equal treatment b. get paid at least what they would under chapter 7

i. 1325a4 ii. best interest of creditor’s test

iii. this is tough because one must pay the value of the non-exempt property had one declared chapter 7

c. demand all disposable income used to fund plan i. 1325b1b

v. when the creditor seeks to have the stay lifted they will have an uphill battle to show that they do not have adequate protection

vi. Associates Commercial Corp v. Rash: R purchased a truck and had 41.1K remaining on the loan when he filed. R claimed that the value was 28.5K and A claim that they were fully secured. A wanted the stay lifted. At the bankruptcy court they found that the

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replacement value was 41K but that A would only realize about 32K if they repossessed it and sold it. The supreme court held that the correct value of the truck is the replacement value.

1. rationale: the code that the value the C has secured is the value to the estate. This is looked at in the light and circumstances of the case and the use under 506. this leads to valuation of what the estate would pay to replace it. The code speaks obliquely on how this should be done in the 2nd sentence of 506a: proposed disposition or use. This allows the D to pay for the item or return it. Allowing the lower standard renders these words meaningless. Replacement value measures the use, not the foreclosure which will now not happen. Legislative history here is of no use

2. dissent: the meaning is unclear but points to the repossession value. The language suggesting valuation from the creditor’s point of view, which is the repossession value. This also holds with the larger goal of the code to keep recovery the same for all creditors.

3. Replacement value: because of FN6 in this case the value is not crystal clear. It is somewhere between the retail and the wholesale.

4. The debtor will want to argue that the lower amount should apply in her case because this allows her to make lower payments. (15.3)

5. There is no strip down o a secured claim in bankruptcy according to 1322b2. (15.4). this is not allowed because it would be a form of modification.

a. Once there is a secured debt, it cannot be modified in amount. Large long-term debts cannot be modified to make them short-term debts.

b. 1322b2 prevents these modifications c. Interest charges and the rate: the rate of the interest is one of the more litigates portions of

chapter 13. this is allowed under 1325a5. the actual rate to be used is no where in the code but secured creditors are allowed present value treatment which means that they get interest so that the dollars they get 3 years from now, with the interest are roughly equivalent to the dollars they laid out for the debtor. This is added to the collateral on the date of the filing.

i. In re Hollins: H has a car with equity and was paying 11.5% on the note. He proposed to pay 6% under the plan but the C objected saying it was not enough. The court held that the debtor does not have to pay the contractual interest rate during the plan.

1. rationale: some courts have found that when the prime rate is lower when the case is filed the lower interest rate should prevail. The correct rate is that for a loan that is similar in character, duration and amount. There is no reason to give bankrupts preferential treatment and the rates do not serve to put the C in the same place. This would require the C to operate at a loss. So the correct rate is the one that seeks to re-compensate the C. Using a similar loan standard provides a bright line. The K does not act as a cap but may be a starting point of the negotiations. The C should get the time value of its money because it is forced to accept deferred payments

2. the correct percentage rate for interest during the life of the plan is that percentage rate that would be charged for same or similar loans

a. in determining the interest rate the court must also determine the amount of the secured claim under 506a and the present value under 1325a5bii. This idea reflects that a dollar today is worth more than a dollar tomorrow and absent the automatic stay the C would repossess and see his money

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today 3. There are three steps that the C will want to use in a AP claim: the amount, the

amount of the security and the present value of the collateral. (15.2) a. if they are allowed present value, this means that they will be entitled to

interest which is based on the same loan for the same customer b. With the unsecured portion, 1325a4 mandates the BIOC test so that the

person will get as much as they would in the hypothetical chapter 7 case. c. A person that is partially secured and partially unsecured can make a claim

for interest on the secured portion under 506b. i. right over time when they could and would otherwise foreclose on

the collateral ii. This will be from the confirmation of plan to the end of the plan

d. cure and maintain: i. payments of a home mortgage, because many/most of the people that file for chapter 13

own a home present a special problem. They are allowed to catch up on the past due portion and make payments as they come due in the course of the plan. The courts have looked at the plain meaning of 1322b2 and the idea of adequate protection drops to the rear in this case. the major problem in these cases is saving the home from FC and protecting the lenders in the long term

ii. in re Taddeo: T had a mortgage that he fell behind in. P held the mortgage and sought to foreclose. T filed a chapter 13 listing P as the only creditor. P sought lift to foreclose because state law allowed it. The court held that the bankruptcy code prevented action under state law because the case had been filed.

1. rationale: the plain language of the code comprehends the ability to cure & maintain which necessarily allows for deceleration. This is the long term history of this provision and it is strongly supported by policy considerations. This is not a modification and it is allowed. Just because the lender has a cause of action under state law does not mean that the mortgagee does not have a remedy under federal law

2. when the case has been filed creditors cannot resort to state law for self-help 3. when the case is filed the loan is decelerated 4. As long as the house has not been sold at the FC sale, 1322c1 allows the debtor to

cure and maintain. (15.5) iii. When the law allows a debtor to cure, it means in real dollars, not bankruptcy dollars

because the D must pay for the privilege of using the thing. (15.4). iv. When the good is not something necessary to the estate of the debtor for successful

reorganization then the court is less willing to let the debtor keep it and is more willing to find that the creditor does not have adequate protection. (15.7)

e. payments to unsecured creditors: i. priority claims are under 507 and they are entitled to payment I full. Unsecured creditors

are best served by high payments but have security in the best interest of creditor’s test which is in 1325. this says that the D must devote all of his disposable income to the plan payments during the life of the plan, the plan must be in good faith and the payments have to be at lease as much as the creditor would have gotten in a hypothetical chapter 7. this leads to a lot of litigation

ii. What is disposable income under 1322? 1. In re Carter: C is married and resides with her H as a tenant-in-entirety. C

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suffered a judgment and filed for chapter 13 alone. S, a creditor objected and says that her husband’s income should be considered. The court held that the income of the non-paying spouse should be considered as a part of the disposable income.

a. Rationale: disposable income is not defined in the code. This should look at what is reasonably necessary for support, and this means that the spouse must be considered. Married people live as a unit pooling their resources. This omission is not in bad faith though

b. Even if the debtor files alone a spouse’s income must be considered to determine what is truly disposable income

2. in re Matter of Wyant: D engaged in extensive pre-bankruptcy planning designed to avoid payments to unsecured creditors. He was divorced and was ordered to pay alimony but his ex-wife died. He did update his schedules to reflect her death but this change upped his other expenses as well. The court held that these adjustments were not allowed.

a. Rationale: some of the adjustments are minor and reflect correction of errors which would be allowed. Others, however, are totally new expenses which are not allowed. The D must act in a reasonable manner to best pay his creditors.

3. good faith: chapter 13 plans divvy the money between necessities and payments. This may be a 0% payment to unsecured C if it represents to best effort of the D. this is a flexible standard and is designed to force the D to live a more modest lifestyle.

a. In re Greer: G owed an outstanding balance on the mortgage but were current on the luxury cars. G was also behind on the unsecured payments. The plan was proposed to pay 1% of the unsecured amount and basically appeared to be a method to cram-down the car note and not pay much unsecured debt. The court held that a 1% payment to unsecured creditors is not per se in bad faith and the creditors cannot force a longer plan.

i. Rationale: good faith is not defined but the general idea is that substantial payment is not required if the D meets the best interest of creditors (BIOC) test and agrees to give up his disposable income for 36 months. D may have left a cushion in this, but this is small and necessary to help the D meet emergency expenses and to possibly prevent modification later. Here the D did not act unfairly or in bad faith, which would be required to determine bad faith. Instead, they acted equitably and meet the BIOC test. A more substantial payment to unsecured C is not enough to extend the plan; otherwise most plans could be extended.

ii. Making no or a small payment to unsecured creditors is not in bad faith per se

b. In the Matter of Strauss: S had filed chapter 7 but accumulated substantial new debts quickly, so they filed a chapter 13. their plan pays nothing to unsecured creditors who object to the plan saying it is in bad faith. The court held that this plan was indeed in bad faith.

i. Rationale: the C claims that the plan is in bad faith because it is a chapter 7 in disguise. Here these D could not file another chapter 7 so quickly. When a chapter 13 is really a chapter 7 in disguise it is

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in bad faith. A debtor should not be denied relief of the court simply because they have used the system before. The court should look at the totality of the circumstances and determine if they represent an abuse of the provisions and the purpose of chapter 13. here these D give a large portion of their income over 60 month. If the plan proposes to pay nothing to unsecured C and the same would occur under chapter 7 it may be a disguised chapter 7 liquidation. Here, since the priority claims will be paid in the same way it appears like a disguised 7 and an attempt to circumvent 727

ii. It is in bad faith to propose a chapter 13 plan that would accomplish the same thing as a chapter 7 plan

4. a debtor with few or no assets that will require modifications of the plan as it progresses would fare better under chapter 7 in many cases (16.1)

5. chapter 13 is not designed to support a luxurious lifestyle, it is meant to support the ‘Target/Wal-Mart lifestyle’ so that the children cannot continue in the private schools. Private schooling is a luxury that is not allowed in chapter 13 (16.2)

6. creditors cannot force the debtor to work overtime so that they will be paid more money. The amount of income should be based on the salary that the person makes before any additionals (16.4)

7. debtors may make contributions of their salary, up to 15% to a charity even though they have never done this before according to 1325b2 (16.5)

f. A creditor cannot bring a cause of action to extend the debtor’s plan to more than 3 years. So why would a debtor choose a five year plan? There are several scenarios where this might happen:

i. 1325(a)(4) best interest of creditors test; the debtor might have a lot of non-exempt property that he or she would like to keep and this test will require the debtor to give the unsecured creditors as much. There might not be enough disposable income to meet this without the 5 year plan

ii. If there is an under-secured creditor and the debtor wishes to strip down the claim so that the unsecured portion is paid for pennies on the dollar. Rather than cure and maintain, the debtor wishes to pay as little as possible even though they will take care of the secured portion. But the D may not have enough income to take care of this in 3 years but can accomplish this in 5 years

iii. The super discharge option: there may be a debt resulting from a violent tort. Under a chapter 13 claim, this is dischargeable where it is not under chapter 7. This might cause the court to look at the plan to see if this is in good faith, so the court might require the plan to be 5 years before they will confirm it. This is under 1325(a) (3), the requirement of good faith. It is not bad faith per se to have a 3 year plan with a 0% payout however, according to the Greer court

iv. If one is in the position to make a 70% payment then a chapter 7 discharge is available within 6 years of a chapter 13. this is 727(a)(9), but if there is less than 70% payment then there cannot be a chapter 7 within 6 years of the chapter 13

v. 1322(a)(2) the priority unsecured claims must be paid in full during the course of the plan. The D might not be able to meet this within 3 years but can do this in 5 years. If these are not paid then they will not be discharged

g. taxes and other priorities:

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i. bankrupts may pay the filing fee as a priority ii. priorities are found in 507(a)

iii. repayment in full of priorities is a requirement if chapter 13 for the plan to be confirmed; these C no longer divvy up the pie like they did in chapter 7. if the D cannot pay these then he cannot go into chapter 13. disposable income is not the cap but is the floor

iv. taxes are not dischargeable under either chapter 13 or chapter 7. when debtors have tax problems, many time chapter 13 is better for them. This is because 502 prevents the addition of post-petition interest for unsecured tax claims. Pre-petition interest is allowed. If the taxing authority has taken a lien then the post-petition interest is allowed under 506, 1325a5.

1. tax penalties that represent an actual pecuniary loss (i.e. they are more interest than anything else) are allowed

2. in re Baker: B filed C13 in 1995 after receiving a C7 discharge in 1994. he owed taxes of 72.8K from 1990, 1991, and 1993. they have a graduated payment scale planned with the last payment representing a balloon payment. The IRS objected because the payment ins only 32K, not the full amount due and owing. The D are elderly, one has cancer and they both want to retire. The court still held that the plan could not be confirmed.

a. Rationale: the IRS has a properly formed lien and a secured claim for the 60K. the IRS may apply the payments it receives in any way they so choose according to their own statutes. This policy of the IRS is to pay the oldest tax first but the court may order that the IRS do otherwise to allow for successful reorganization of the D. Here this is not required to reorganize the D so the court may not direct the debts be paid in any particular manner

b. If a D is not going to pay the tax bill in full then the chapter 13 plan cannot be confirmed

3. in re Zeig: Z filed fraudulent returns in an attempt to avoid taxes. Z then filed C13 and the IRS objected claiming that the taxes were a priority. The court held in an ironic twist of fate that prepetition taxes with respect to a fraudulently filed return or a willful evasion could not be entitled to a priority under 507a8.

a. Rationale: these charges are specifically non-dischargeable but they are also not specifically a priority claim under 507a8Aiii and 523a1c. this is the plain language of the statute. Congress has not changed this but could have done so and voiced their intent. It is not inconsistent with the rest of the code

b. Taxes that are not paid because of tax evasion are not paid as a priority under C13

v. When a spouse has taken debts out of a marriage according to the marriage decree and then defaults on them, the ex-spouse may be liable for the debts but would be able to later seek contribution. (17.1)

vi. The automatic stay may work to protect the co-debtor but only if the debtor wants it to under 1301a2. (17.1)

1. This is very narrow though and only protects the co debtor to the amount that the person will pay, so if the debtor is going to pay 10% then the creditors cannot come after the co debtor for 10% of the debt but they can come after them for the other 90%.

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2. It is often that when one spouse assumes the debts from the marriage and then defaults, the other spouse is also thrown into bankruptcy. They may have claims for contribution to the payments that they had to make but usually cannot make the payments.

vii. For a chapter 13 case to be confirmed all of the tax liabilities have to be paid. (17.2) viii. there are some things that are not dischargeable under a chapter 13 except for things

listed under 1328(a) 1-3: 1. Student loans, drunk driving payments, criminal fines 2. Since this is not specifically listed then they are dischargeable 3. If this is so, then why do people not always choose chapter 13 if they have tax

problems? a. There are 3 years, possibly 4 that must be paid in full as a priority b. 1322(a)(2) makes these payable in full over the life of the plan—this

means that if there is a large liability it does not make this more attractive ix. Tax penalties do not get a priority under chapter 13 according to 507a8g. (17.2) x. The automatic stay will prevent the IRS from filing a lien if it has not already done so

under 362a. 17.3 xi. Are taxes dischargeable? The simple answer under chapter 13 is that they are

dischargeable, but why isn’t this always the better choice for one with a lot of tax debt 1. the footnote to the statement that taxes are dischargeable, to the extent that the tax

is a priority they must be paid in full although the interest does not continue to accrue interest.

2. in 17.2 there is a huge difference between tax liability that are really taxes which is payable in full and those that are real punitive penalties—these do not have a priority and do not have to be dealt with in full under the plan

3. In problem 17.3 there is a question of why is important for the IRS to have a lien when it is a priority creditor. Having a lien allows the IRS to accrue interest to the amount that they are over-secured

a. This also allows the IRS to get paid for those taxes that are too old to have a priority. These would otherwise be dischargeable in the absence of a lien.

b. The lien changes the claim for a non-priority dischargeable claim to a secured priority claim that gets interest

4. What is the advantage to filing a chapter 13 for someone who has tax problems? a. These are only advantages when there is not a lien b. The interest stops running c. To the extent that the claims are too old to qualify for a priority then these

are discharged without payment in full d. In the extent that the claim is punitive penalties these are also

dischargeable without payment in full h. Favoritism in repayments:

i. Generally debtors cannot discriminate among their claims to determine who gets paid first. The only exception to this is when there is a co debtor. This reflects life: there is a special need to protect these debts because usually it is a relative who guaranteed them. Additionally, although not discussed, it is not fair for the bankruptcy process to ruin the other person’s credit rating.

ii. In re Bentley: the debtor here proposes a 5 year plan in which he ranks his debts, paying

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off 100% of his student loan but only 5% to the other unsecured creditors. The court held that this kind of discrimination among creditors was not allowed.

1. rationale: some debtors may discriminate if there is a reasonable basis for this and if this is in good faith. It boiled down to a reasonable balance among the debts. Here the D does this simple because student loans are not dischargeable which alone does not justify the discrimination. There must also be a good reason, such as a public policy concern for this type of discrimination

2. a debtor cannot simply rank the unsecured creditors and pay the ones that he ones that he likes.

iii. Discrimination is allowed for an alimony or child support payment (17.1) i. Modification and dismissal of C13:

i. Because of the financial difficulties that often place D in C13m their plans and expectations do not always work out as they wish. This means that the court will allow them to seek modification as necessary.

ii. In re Faaland: Debtor has missed several payments because of bad weather. D believes that with a modification he would be able to pay in full according to the plan. The C seeks dismissal. The court held that missing 2 monthly payments is not reason enough for dismissal.

1. rationale: 1307a6 allows conversion for material default. Until the time of the default, C had substantially complied. This default was outside of their control and does not evidence good enough reason for dismissal

2. missing a payment or two is not enough reason for dismissal without other factors being present

iii. some courts simply will step up enforcement through garnishments but this will not work when the D has lost their job.

iv. This may take several months before the dismissal v. If there is a dismissal then the D cannot re-file for 6 months.

vi. Courts are often lenient with late payments but not with D who change their minds about paying the plan

vii. In re Meeks: D filed for relief and proposed to repay G over 36 months instead of the 14 remaining on the contract. The D then wanted to modify the plan and surrender the car, which was allowed. G sold it and there was a deficiency, which G wanted to get as an unsecured payment. The court held that on modification and surrender, the deficiency cannot be reclassified as an unsecured claim

1. rationale: because §1329 and 1327 operate together, res judicata does not operate when there is a material and substantial change, allowing for modification of a plan to deal with problems that occur after confirmation. Under 1329, once a plan has been confirmed there is no modification of the amount but acceleration and deceleration are both allowed. There are no other modifications allowed in the code. Congress intentionally limited modifications and barred all of the rest.

2. A debt, once a plan has been confirmed, cannot change from secured to unsecured or the other way around.

3. modifications can only be to accelerate or decelerate the payments viii. in re Delmonte: D filed a plan and agreed to pay 395 a month for 6 months, 595 a month

for 30 months and a balloon payment of 10K at the end representing a 30K deficiency form a judicial sale before the case. D then came into some money and paid the whole thing in 2 months. The court held that this was not a permissible modification and did

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not count as the completion of the payment plan. 1. rationale: modification is usually allowed but the D must complete the plan.

There is compliance on two levels. Neither the amount not the number of payments alone is dispositive of completion—they both have to be done. This here does not show that the D has paid their C to the extent of their abilities during the plan period. This, if allowed, reads the code disjunctively, without respect for its reasons and goals.

2. a debtor cannot come into money and pay off the plan early simply to be able to escape bankruptcy.

ix. The court may allow a debtor to begin making payments after the 30 day deadline, but only if there is good cause and it looks like the D will be able to complete the plan with this help. (18.1) See also 1326a1 & 1323

x. Trustees are reluctant to dismiss debtors from their plans even when they miss payments because this is how the trustee gets paid. (18.2) See 28 USC §528c

xi. When a debtor begins making more money the creditors are entitled to a modification because they are entitled to the debtors disposable income during the plan period. (18.3)

1. This is because the bankruptcy court is one of equity—the debtor that is asking for relief must have clean hands.

xii. General observations: 1. a plan, once modified, is the plan 2. modification cannot change the rights of the creditors 3. there is no requirement that the debtor show cause at all for modifications but

usually there is an unexpected expense 4. the trustee cannot bring issues up at the modification hearing that could have been

brought before the court earlier—these are barred because of res judicata j. regular income:

i. to be able to qualify to go into bankruptcy, one must have regular income according to §101(30). Naturally, this is not defined (oh, joy). So there has been litigation to determine what exactly regular income is. It can be annuity payments, payments from the government, and payments from a job. Regular income does NOT include an allowance that is given by another person though

ii. in re Murphy: the Debtor lives with her employer and takes care of members of the family. She receives about 800 a month to pay her bills. Her car was seized after a judgment was levied against here but she filed for c13 before it was sold. The JC objected to this because she did not have a regular income. D would fund the plan and pay 600/month and the JV would receive 100% after lien avoidance. The other unsecured C would receive at least 20% in a 5 year plan. The court held that this income was regular enough to qualify.

1. rationale: 101(30) defines regular income as regular and stable enough to fund a plan. The source is not important. Here the employer has signed something agreeing to fund the plan. There does not have to be a legal right to the income because then people that live in a right to work state could not file c13. This is at least as regular and stable as other incomes.

iii. An income that comes from sporadically working may not qualify as a regular income because it cannot meet the test of stable & regular (19.1)

k. Types of claims: i. In re Mazzeo: M was the president of a company that withheld taxes from the employees

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but, whoops, forgot to send them to the DOR. M was responsible for making these payments and the person who was responsible within the company may be held personally liable for the deficit. M filed c13 and partially listed the tax liabilities but not fully because he claims that he was unaware of the true nature of the, the trustee objected to the plan saying that his liabilities exceeded the amounts allowed for a c13 debtor—the statutory max in 109(e) was exceeded. M said that is was still a contingent claim because it was not final that he was responsible for these taxes. The court held that these tax debts were not contingent and they were liquidated.

1. rationale: 109(e) says that only non –contingent & liquidated debts can be including in c13. these are not defined but congress meant for this to be broad and encompass a lot of different dents. Non-contingent means that no future event has to happen for there to be liability. Here, the responsible person is unconditionally liable for the unpaid taxes—there is no contingency. Liquidated refers to the amount, not the existence of the liability. Liquidated means that the amount is easily ascertainable, which it is here

2. simply because one disputes a debt does not mean it is not liquidated and not contingent.

ii. Even when a debt is uncertain, the D should not be denied access to c13, but on the other hand, allowing this D in means that the court has to spend precious resources determining how much the D has to pay. This is why the debts have to be non-contingent and liquidated.

iii. When a debtor only works sporadically, even if it is at a well-paying job, he does not have a stable and regular income. (19.1)

iv. A debtor can pay down some of his debts so that he can fit under the debt ceiling, or in other words, the attorney does not have to take the debtor as he finds him. (19.1)

v. A debtor cannot file for c13 if her debts exceed the ceiling or if she is not really in financial trouble and owes a debt (19.2)

vi. A guarantor would have a right to subrogation which says that the person guaranteeing the debt bay step into the shoes of the C and go after the collateral. (19.2)

vii. The cash savings of a person might be able to be used to fund the payments of a plan if they are in interest bearing accounts. (19.3)

viii. The court may delay the first payment of a debtor if he is in the process of getting a job or if there is another good reason. (19.3)

ix. A court will look with a lot of suspicion to the debtor who files a lot of bankruptcies, even if they are spread out over the years. (19.4)

x. If a person files for a chapter 7 now and gets the regular old discharge then the bankruptcy system will be closed to them (at least chapter 7) for a period of 7 years. (19.4)

xi. The debtor that was granted a hardship discharge under 1328b then he may refile under chapter 7 even though he did not complete his payments under chapter 13. (19.4)

1. hardship discharge: is not as good for the debtor but this is because he is not as good to his creditors

a. this is under 1328b b. debtor has not completed payments under the plan c. the debtors failure to complete these was due to circumstances outside of

his control

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d. the creditors end up receiving through the unfinished plan at least as much as they would have gotten in chapter 7

e. modification under 1329 is not practicable f. this tends to arise when the debtor begins the plan in good faith, loses their

job and cannot continue to pay & modification will not work g. there are a number of exceptions in 1328c

i. any secured debts ii. 1322b5 long term payments

iii. debts that have no prior permission iv. anything that is not dischargeable under 523a is also not

dischargeable here h. So what good is this? i. It is still better because this is not subject to the global discharge

exceptions in 727a j. This would happen if a C found one of these then the debtor gets no

discharge at all k. Even if a debt is not discharged under the hardship he still gets credit for

the payments he or she did make xii. When the debtor files in anticipation of being made to pay a claim, since the claim is not

liquidated and is contingent, the filing is in bad faith. (20.1) l. Policy debates about the consumer bankruptcy system:

i. B’ruptcy policy making should be based on empirical and normative conclusions. When using normative views, this leads to policy debates about what conclusions to draw from the facts

ii. One of the first questions to ask in determining policy is do the creditors fair better inside or outside bankruptcy

iii. There is a general feeling that people use c7 when they really could have repaid some of their debts

1. the national Bankruptcy review Commission made some recommendations about this.

2. Another study, called As We forgive found that 2-7% of people could repay some—this focuses on the question of whether debtors are taking advantage of the system

3. a group led by creditors found that 20% or better could repay some of their debts iv. this highlights the second question of whether bankruptcy comes from irresponsibility or

misfortune v. there has been a general lowering of the standards to get credit in the last decade but just

because credit is easy to get does not mean that people should act irresponsibly m. the c7-c13 choice:

i. because D pay back some in c13, there has been a push to create incentives for filing c13. creditors, especially unsecured C are pushing to limit the access of people to c7

ii. c13’s incentives include: 1. the ability to keep your property. This incentive includes the ability to:

a. lower the monthly payment b. the ability to keep the home—this has a perverse effect that it forces non-

homeowners into chapter 7, and this has little/no effect in a state with a homestead exemption

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c. the ability to keep personalty: this does not always work because of the exemptions under state laws

2. the broader grant of discharges aka the super discharge a. this has been shown to not really affect D’s choices

3. Denying a c7 discharge until years has passed from the last one a. This will force many 2nd timers into c13 because there is no time limit

here. Courts may also disallow c7 if there appears to be substantial abuse. 4. To save the home from foreclosure; this allows the debtor to cure the default and

decelerate the mortgage 5. Broader discharge, also known as “super discharge”

a. This is based on the exceptions in 523 6. Debtor gets to keep all of the non-exempt property, but this comes at a cost to the

debtor, which is the best interest to creditors test. This means that the creditors must receive under a chapter 13 at least as much as they would under a chapter 7

a. Although the debtor gets to keep the property, it is more like they are buying it from the estate on an installment payment plan

n. Substantial abuse: i. In re Walton: w had filed c7 in 1974 & 1985. the b’ruptcy court found that he had over

200/mo in disposable income and said that this was substantial abuse. W feels that this is not because he filed in good faith and the code is there to give him relief. The appeals court held that this was substantial abuse.

1. rationale: there is not unfettered access to c7 any longer; only needy D should have access. If the D can meet his debts without difficulty as they come due then there is substantial abuse. Although the standard of finding this is flexible and may consider other factors, finding the future income sufficient to repay debts is sufficient, by and of itself it should be sufficient to show substantial abuse.

2. dissent: the future-income test looks at too many speculations and seems to undo the intent of the congress. Finding substantial abuse should not rest on a results-oriented test alone but should look for actual abuse

3. the court may consider a future-income test to determine if the debtor has the ability to pay back some of his debts, and if he does then a c7 filing may be substantial abuse.

ii. 707(b) does not allow a filing when there will be substantial abuse. This is looked at usually sua sponte and some courts never consider it. Because it is litigated on a case-by-case basis there is little impact of this.

4. Strategic and systematic incentives: a. In re San Miguel: A bunch of debtor cases are included in this appeal. Each of them has a 16

month c13, paying the unsecured C $1 each but spreading the attorney fees out. The attorney felt this was good for the clients because it allowed them access to the system because they did not have to pay up front—this was the only advantage for these clients to file c13. each of the D in the case is dismissing less than 10K of debt and each feels it is his best effort. The court held that these cases were not in good faith and violated the spirit of c13 laws.

i. Rationale: good faith means more than paying unsecured more than what they would have received in c7. here these plans are carefully crafted to defer attorney fees for those who file and would otherwise be denied access to the system. None of these plans promotes repayment and although it is not bad faith to pay unsecured C nothing, its suspicious

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ii. A debtor cannot file chapter 13 simply to spread out the attorney fees iii. This seems backwards because chapter 7 is supposed to be for people who really cannot

pay their debts b. Chapter 20: this is filing a chapter 7 and following up quickly after the dismissal of this with a

chapter 13. i. In re Saylors: S filed c7 and owed money on their house. They reaffirmed this debt.

Without curing this, they then filed for a c13 right after the discharge from the c7. they filed the 13 because right after the discharge the ME was going to FC on their house. The court held that it was allowable to file a c13 on the heels of a c7.

1. rationale: the c7 turned this into a non-recourse loan which can be cured in c13. there is nothing in c13 that prevents this cure. C13 is closed to undeserving D, but filing c7 does not necessarily make them undeserving or have filed in bad faith. The previous c7 does not prevent them from meeting 1325a requirements. Not allowing this prevents the intent of congress.

c. A bankruptcy case will be stayed and the automatic stay will remain in place while a criminal trial is going forward. (20.1)

d. When a debtor files a chapter 20 this is not a reason to dismiss the claim but it is reason for the court to view this with extra scrutiny. (20.3)

e. The notion of the person’s potential future income can form a backbone to a claim of substantial abuse but it should not be counted if the income is contingent and very indeterminate. (20.4)

f. The court cannot make a person stay in a job or return to a job simply so that they can make higher payments to their C. (20.5)

g. An attorney cannot force a client into chapter 13 simply to get a higher fee; the attorney should make the best choice for the client, not the attorney. The attorney may get the chapter 7 fees as a priority later in the case. (20.6)

5. business bankruptcies: a. general observations:

i. there is no discharge under chapter 7 for something that is not a human. This is because when the business is liquidated, there is nothing left to get a discharge. This means that the individual seeing the corporation into the liquidation rally has no interest in the final result

ii. after a bness goes through c7 there is nothing left iii. the classic liquidation is primal: it is the collective response to a total collapse iv. a lot of liquidations begin as c11; c7 is the endgame when reorganization is not

successful so the c11 will always work in the shadow of the 7. v. The automatic stay is one of the most important functions because this will prevent a

free-for-all and promotes an orderly procession, giving the TIB room to breathe and then work with the C. the second most important part is the ability to undo preferences.

vi. Legal rights, not a mad scramble should take precedence—this is why the automatic stay can hurt the C as much as help them

vii. Business bankruptcies 1. Under 727a7 the court shall not grant a chapter 7 discharge to an individual

a. Here this means a flesh and blood human being b. One must be more than a person, they must also be an individual c. Why is this? Don’t corporations need a fresh start too?

i. No because after a chapter 7 liquidation he corporation ceases to exist

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ii. Under chapter 11 there is something left and this is where the corporation gets their fresh start

d. With this there is a bifurcation of the person from the estate, where the person goes on debt free and the estate goes into bankruptcy

e. There cannot be such a bifurcation with a corp. because when it gets dissolved and distributed there is nothing left; the property is the corporation and there is no individual to send forward

b. initiating the case: i. there is a consensus that may companies will wait to long to go into proceedings. C are

allowed to initiate the proceedings but this is restricted because of a lack of information and the operation of the law.

ii. Ideally the party with the most information, usually the D, should start the proceeding when there is still some value within the company.

c. involuntary bankruptcy: this is under §303 of the code. It allows the creditors to file for the D. the procedures for this are cumbersome and the penalties can be high, so there number of these is low.

i. General observations: 1. These are usually filed by unsecured C. 2. These can be used as a threat to the D 3. Traditionally these were c7 but the C can put the D into a c11. this would allow

the C to get important information about the D 4. Attorney’s fees and sanctions under 303i prevent marginal cases from being filed 5. The other protection that is offered to the D is that there must be at least 3 C to

file the case. 6. Involuntary bankruptcy:

a. This is in the context of the business but an individual can be forced into this

i. Individuals are not forced into this because the creditors do not want this because the C will get less in b’ruptcy

ii. For a business the C is worried about several things: 1. The corp. might be choosing a preference 2. They might be dissipating the assets 3. There might be unperfected securities

ii. Who may file: 1. In re Gibraltor Amusements: G runs juke boxes and is indebted to W. WA is a

subsidiary of W and deals with their commercial paper. G is also indebted to WA. W & WA filed together to put G into involuntary and G said that they could not count more than once. The court held that a wholly owned but separate subsidiary could count towards the three creditors.

a. rationale: there is a complete absence of fraud and a strict honoring of the corporate firm. Connivance of friendly creditors was contemplated by the code. The counting is liberal but it should not be too liberal. WA took these notes in the OCOB without reference to bankruptcy. Since there was not direct control of this, the corporate form should be honored.

b. dissent: just because they appear to be separate does not mean that they really are. There should be a good look at this because of the stigma that

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goes with bankruptcy. This means that C should not be allowed to scheme. 3 separate C really means just that.

2. 22.1: R is a mud supply company who has late-paying customers. G owes 1.1m and is 10 months late. R thinks it can find other C that G owes. How can R show that G is not paying its debts as it comes due? What factors should be shown to do this?

a. Are they making payments as this comes due? i. This will consider what the custom is in the field

ii. There is a three factor ‘test’ that is applicable here: 1. Length of the lateness of the payments (how late are they?) 2. The relative number of creditors that are not being paid on

time a. This will look at the percentage of people that are

not being paid on time and the size of these claims 3. Relative amount of debt not being paid on time

b. Is the debt between the two companies disputed? c. What are the sources of information that one could use to determine if the

D is not paying on time i. Informal search in the community

ii. Suit in state court 1. This will lead to discovery and allow one to discover if this

company is not generally paying iii. Credit reports iv. Private investigators

d. What is the risk if one is mistaken about the company? i. If the court finds that the company is generally paying the debts as

they come do then the court may also award the company attorney’s fees and the like under 303i

1. Although this may be permissive this is the usual practice of the court

ii. If there is bad faith on the part of the person who brought the company to court then there can be damages under 303i2

1. Punitive damages are unusual however e. Suppose 2 months ago D owed 8 creditors 10K each. Since then 5 have

been paid in full and on time. The remaining 3 are overdue. Of the remaining 3, D has a dispute with one of them claiming that he only owes 7K, not 10K. The D has a 4th C whose claim of 50K will be due one year from now. The 5th C is owed 20K but the debt is due one year from now. This is all of the C.

i. Under 303h how is the disputed claim handled? 1. This will not be ignored completely per the insolvency test 2. 7K is undisputed so this should be counted against the D 3. the D will claim that 7K is undisputed but the leverage in

settling the dispute is not paying; if the D pays part of this then the D will lose their leverage—they should not be forced just to keep them from bankruptcy

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ii. Is D late on 3 of 8 or 3 of 10—which is the more fair way to look at this?

1. The wording in 303h is “as such debts come due” 2. Why should there be credit for those if we do not know if

he will pay those or not 3. These are unmatured debts and they might or might not be

paid 4. This will give him credit for something he has not done

iii. Is he 27K late on 77K or 27K late on 157K? 1. On 77K because again this would give him credit for

something he has not done 3. 22.2: B is behind on his bills but has written to his creditors. He owes 22K to

SSB who wants to foreclose. He wants to work with the C and has offered to do so.

a. Is there any way for him to come up with 20K? Can he sell anything or borrow more money?

i. Certain provisions in the agreement make this un-sellable—it is not liquid enough to borrow against

b. There are 40 C, of which some are SSB customers. Some of these have been paid on time but B is worried SSB will pressure these to help file.

i. They could be liable for the action if it fails ii. They could be liable for sanctions if they file in bad faith

c. Legally bribing SSB? 4. 22.3: L is debtor store. SSB has noticed an ad in the paper for a liquidation sale.

What can be done? a. If this is a chapter 7, then the property is turned over to the estate and the

D does not have further control over the property b. If this is a chapter 11 then the D becomes a D-in-possession c. This looks like a fraudulent transfer; this is not in the best interest of the

creditors d. Note 363

i. Compare 363b1 with 363c1 ii. In c1 the trustee may come in and run the business

1. In the ordinary course of business without notice or hearing iii. Under b1 the trustee may come in only after notice and hearing iv. So the question is the sale the ordinary course of business

1. If this is then there is no need for a notice and hearing 2. If this is not then there must have been notice and a hearing

to the creditors 3. A hearing is not necessarily a hearing under 101

a. The court might not decide to have one because there is not time

b. The parties may also waives this c. Basically a hearing means that there is notice of one

e. What if this is an unauthorized sale—what will the damages be i. The extent to which the return on the claim will be reduced by the

lower amount versus sale through a sale in the proposed method

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ii. But whom may this be recovered from? 1. Good faith buyers have protection if there is an authorized

sale but this is later overturned; this means that by implication if there is not an authorized sale the BFP might not have protection

2. Maybe against the TIB for negligence f. Best relief

i. Stopping the sale in the court ii. There is not a good chance of recovery if the D is sued

5. In class hypothetical: A is owed 12K past due but has a perfected security in the property for 14K. B has a state tort claim that has not been determined or settled but if B succeeds it will yield up to 20K. C is owed 8K which is past due and has a security interest worth 6K. D is owed 10K which is unsecured but the loan is not due for a year.

a. 11,625 in unsecured claims; number of C must also be met to bring an involuntary action under 303b. what do each of the C contribute to the case

i. A is over secured but it is still a claim; it is not contingent but does not contribute to the 11,625

ii. B’s claim is un-liquidated and is contingent. This means that this is contingent and disputed and this is not counted as a claim

iii. C is under secured. They have a claim and 2K will count towards the 11,625

iv. But what if the debtor wants to aggregate the claims and the securities?

1. He wants to add the claims and the secured portions 2. But C has no legal right to the portion that A holds 3. C cannot take advantage; A’s claim is limited to the lesser

of the size of the claim or the collateral v. Does D have a claim?

1. Yes even though it is not due yet 2. The definition of the claims under 101 is very broad and

takes into account even unmatured 3. This would count against the 11,625 and push it over the

top b. Does this mean that a D in no trouble could be placed in involuntary

b’ruptcy i. He must be acting as if he is in bankrupt

ii. He must generally be not paying the debts iii. 303b1 is where the 3-separate C test is found. iv. There used to be a requirement that the business had committed an act of bankruptcy but

this antiquated system was gotten rid of in favor of the generally not paying creditors standard.

1. This means that the D must not be generally meeting his debts as they come due 2. The presence of paying some is not enough to save the D’s skin 3. On the other hand, disputed claims are not counted towards this.

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4. In re Faberge restraint of Fl, Inc.: F owed and 3 people filed. He objected to 2. 3 more then filed. F then paid these people off and said that there were no longer 3. the court held that on the date of filing there were 3 that had filed and had not been paid.

a. Rationale: there are many tests that work to help the D including the generally not paying debts, the 10K minimum and the 3 person requirement. A payment to these people after the filing does not deprive the court of jdiction though. This is because at the date of filing there were 3 who met the other tests.

b. paying off C will not save your skin in an involuntary if they had a claim on the date of the filing

v. sanctions and penalties under 303i: these operate to make it a stiff penalty if one files an involuntary and there is not a case. this is permissive but operates to chill those who might file. At the very least attorney’s fees are given and there is also the possibility of sanctions.

1. in re Silverman: C filed an involve c7 against S. they have been bness partners for years and then apparently S stiffed C. S did some digging and found one other C but also found that C was generally was paying his debts on time. S filed saying that a dispute amount cannot count towards the amount needed but C said it could here because S admitted he owed C at least 50K. the bankruptcy court agreed with C and awarded him fees and assessed a sanction against S. the appeals court upheld this saying that there is the ability to put punitive damages on S because of his actions in bad faith.

a. rationale: 303i is permissive and within the discretion of the court. The court may also sanction for a filing in bad faith under 303i2b. filing when there was a bona fide dispute can show an action in bad faith. The amount of sanctions should be considered because S could have researched thoroughly and the absence of forbearance is telling. We have to punish pissed off millionaires. This petition was to harass and a substantial award, 50K (S is worth 30M) is allowed.

vi. Problem 22.5- 1. Gibraltar case – as long as three companies earned debt separately and as long as

the corporations are truly separate (and separateness is recognized under state law)

2. What is the argument against allowing sibling companies to force involuntary bankruptcy? See Gibraltar dissent. →Public policy behind requiring 3 creditors. This may influence the way creditors set up their companies

3. Perhaps the creditor can show that the debtor artificially created other debts, such as hardware store and brother-in-law attorney, to prevent creditor from being able to file for involuntary bankruptcy [§303(b)(2) “insiders”].

4. *Will the brother-in-law be considered an “insider”? §101(31) “insider includes (B) if the debtor is a corporation—(VI) relative of a general partner, director, officer, or person in control of the debtor.”

5. *Will the brother-in-law be considered a “relative”? §101(45) “relative means individual related by affinity (marriage) or consanguinity (blood) within the third degree as determined by the common law, or individual in a step or adoptive relationship within such third degree”

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6. →Why have exclusion under §303(b)(2)? To prevent the debtor from creating “friendly debts” to avoid involuntary bankruptcy.

7. If there are not 12 legitimate creditors, one creditor with aggregate, unsecured claim of at least $11,625 may file.

vii. Problem 22.6- 1. §303(a) – exceptions: farmer, family farmer, or corp. not operating for business or

money 2. §101(9) – “corporation (A) includes—(I) association having a power or privilege

that a private corporation, but not an individual or a partnership, possesses; (ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association; (iii) joint-stock company; (iv) unincorporated company or association; or (v) business trust; but (B) does not include limited partnership.

3. It is a corporation, but is a not for profit corporation, so it is exempt. 4. Consider state law claims against persons within the committee.

viii. Problem 22.7- 1. Is AFF a “farmer”? §101(20) – “farmer means person (incl. corporation) that

received more than 80% of such person’s gross income during the taxable year…[and] was commenced from a farming operation owned or operated by such person”

2. §101(21) – “farming operation” ix.

d. Chapter 11 reorganization: i. General observations:

1. Many of these are known as balance sheet reorganizations because there is no shifting of the operations and old equity is often wiped out as unsecured become stockholders.

2. In smaller businesses especially, there is no reason to believe the managers are replaced because they are the business

3. Managers will face definite termination in c7 so they will urge for c11. 4. Other times, TMA firms will come in and stabilize the company. 5. There is a benefit for stockholders for a c11: the company will often emerge but

generally they have little or no protection 6. There is a push to get a company into a c11 before it collapses.

e. Mechanics of Chapter 11: 362(a) puts the automatic stay into place, but the bness continues to operate under 363(b) OCOB with the DIP who controls a new entity, the estate

i. §1107 give a DIP most of the rights and duties as a trustee ii. the DIP is limited in the use of assets encumbered by a security interest under 363c & e

iii. the DIP has avoiding powers under 547, he may assume or breach executor K under 365; avoid fraudulent transfers, 548, 544; set aside unperfected/late perfected security interests 544, 547

iv. a creditor’s committee is formed under 1102. there is a representative from each of the classes. These people supervise the activity of the DIP

v. a plan must be proposed that deals with each class of C to pay them a percentage. It must be approved of by the majority of each creditor class, 1126c. if the committee approves of it then the court will also usually approve it if it meets the BIOC test under 1129a7

f. logic of c11:

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i. there are substantial assets at stake: jobs, bness relationships, legal obligations ii. some question the use of c11 as a high priced delaying tactic. Others see it as the

opportunity for a lower cost negotiation iii. if c11 is an invitation to negotiate, then it is one that is issued at the 11th hour iv. bigger businesses will use c11; smaller ones just go straight intoc7 more often. This is

because there are a lot of c in a big business and they can be forced to play along. For the smaller bness that one c may be the only one in its class, which can lead it to be obstinate. This has led to the emergence of the pre-packaged or pre-ranking by the bness facing difficulties. This is used to separate the dissenters and put them in different classes where they will not impact the outcome.

g. The automatic stay: this is one of the most valuable tools to the DIP but it is one that is not without cost. The DIP must show adequate protection under 362g.

i. Innocent actions that violate the automatic stay may be voidable ii. Farm Credit of Central FL v. Polk: Before bankruptcy F & B had agreed that F could

violate the automatic stay. B now claims that it cannot contract out of this and wants the automatic stay in place. The court held that the DIP cannot contractually waive the automatic stay.

1. Rationale: this is an older business with may different C and a lot of Obligations. Courts have allowed the enforceability of these contracts when there is one creditor and there is no prospect of a successful reorganization. Here, this Is not the case. the automatic stay is a key component of bankruptcy law and goes into effect regardless of the contractual provisions that the creditor and the debtor have in place. The purpose is to protect the debtor and the interests of the other creditor. One creditor cannot waive these rights. this prevents a creditor from seeking this remedy to the disadvantage to the other creditors. Otherwise, what is the point of the automatic stay?

2. The automatic stay may be violated in the single asset, single creditor case when there is no hope of reorganization

3. The debtor cannot be forced into a contract that waives protection of the automatic stay because this would do violence to the code

iii. US v. Seitles: the US brought an action against W, the company that was run by S for violation of the false claims act. The claim is for a total of 1.67M. S had bribed a government officer and the government is not seeking restitution. S has to repay the amount levied against him personally. W filed for c11 and sought a stay of the government proceeding claiming it was a violation of the stay. S also sought protection under the stay. The court held that the stay may operate to stop an ongoing case by the government.

1. Rationale: the stay is part of the larger purpose of the code, which is to obtain protection against the creditors and to provide an orderly resolution. This may not operate against government actions that are taken pursuant to police powers and that are necessary to protect public health and welfare. To determine this, a public policy test is used and a pecuniary test is also looked at. The pecuniary test will look at the presence or absence of a continuing harm as well as the threat to the public health/safety. Here this was a monetary threat and it has been ended. The public policy test will look for good reasons to prevent the automatic stay. It only appears that the government is trying to get its money in another suit when they could have gotten it before. As for S, bankruptcy laws are only designed to

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protect the entity that filed under the code. A non-debtor codefendant is usually not entitled to protection under the bankruptcy code but the court has a lot of power to extend the stay under §105 if there is going to be irreparable harm and either there is a success likely on the merits or there is a sufficient question on the merits and a balance of hardships tips the scale to the non-debtor codefendant. Here there is harm and this will prevent the successful reorganization of the company. S will also undergo serious hardship.

iv. Involuntary gap period: this is the period between he filing of the involuntary petition and the order of relief of the b’ruptcy court.

1. Is the automatic stay in effect? Yes according to 362(a) a petition filed under 303 qualifies for this

2. How should one do business with the debtor during the gap period: A is a cleaning service, B is a hotel. How should A do business with B

a. E is the Credit b. R is repayment c. A will do this on a cash-basis, to the credit and repayment are

simultaneous d. A is being paid with property of the estate—property comes into place

when there is a petition filed e. Is this a permissible transfer of the property of the estate to do business on

a cash basis i. 303f allows the debtor to operate in the ordinary course of business

during the gap period ii. 303f does not deal directly with how a C is dealing with the D

during the gap 1. this is under 549a-b: any post-petition transfer of the

property of the estate are allowed as long as the D got value during the gap period

2. this is allowed to the extent that the debtor received value 3. Suppose A provides cleaning services for B on a credit basis during the gap

period. Now suppose of being paid immediately, and A is not paid during the gap period. There has been no pay until the order of the relief. With the respect to A’s claim can they argue for a better position than a per-petition C? 503b1a, 502f, 507a2 and one other might work here:

a. 503b: the intro to this is instructive b. this refers to 502f: a claim arising after the commencement of an

involuntary case but before the appointment of a TIB and the commencement of the claim

i. this is a definition of a gap claim which is an exception to the general rule that claims must arise before the filing of the case

ii. this is an exception to the timing problem, and is an exception to 502a-b’s requirements of timing

c. 502b1a: this is not an administrative expense d. 507a2: this gives priority to claims under 502f

i. this is not as good as an administrative claim but this is a very high priority

e. so the repayment here will be tendered

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4. Suppose A did cleaning prior to the filing. During the gap period A demanded and received payment for the pre-petition claims during the gap period.

a. If A asked for it then it is a violation of the stay b. Even if they did not it is receipt of the property of the estate c. 549a2a and 549b make this a void-able transfer d. 303f allows the debtor to act in the ordinary course of business, and A will

say that this is ordinary course of business e. the trustee may avoid a transfer made under 303f according to 549a2a f. Does 549b give this a shield/is this one of the exemptions?

i. A claim is not avoidable if the transaction arose and the value was given after the filing of the claim

ii. Because this occurred before the filing of the claim then the claim does not fall into this exception. This means that it may be voided

g. When the payment is avoided, what will a get in the actual case? i. A will have to give the money back

ii. There is a claim still iii. It becomes a general pre-petition claim, and the debtor will only

pay a portion v. 23.1: this brings us back to the automatic stay in some detail. PA is owed 186K at prime

+6. They have a secured claim in D’s equipment. This has a value at 140K wholesale but 220K in retail. There is only one buyer out there. Can they lift the stay and foreclose

1. If they want to lift the stay then they will argue for the lower wholesale value 2. Under 361d2: argue lack of adequate protection because the C is under-secured

a. This will mean that they will want to argue the lowest possible value b. This is not impossible; this is not the liquidation value but might be the

replacement cost for the debtor c. They might also want to argue that the debtor has no equity in the

property, which will mean that the C will want to argue that there is a low value of the property, so the debtor owes more than it is worth

3. 361d1 will have to make the argument that there should be a lift of stay for cause 4. If they wanted to have the highest secured claim possible to get a highest return

possible, then they will argue for the high value. They would do this if they thing the debtor can re-organize

a. this will mean that they can get 506b post-petition interest if the payments will not eclipse the value of the goods

b. they will get present value treatment of whatever portion of their claim is secured

vi. 32.2: C owns CWI, a bunch of theme parks. AF is owed 1.8m on a jet. C wants to keep the jet; AF wants to foreclose on it. It was valuated at 1.1m. It will not decrease much in value in the next few years. What is the C, AF’s, best argument?

1. 362d will allow this if the C can argue that there is no adequate protection a. this will mean they will want to show that the collateral is under secured b. and there should be a declination in the value of the collateral, which is

not occurring here c. the other way the interest in the collateral might be lost is if the D does not

have proper insurance on the collateral—this means that the D could crash it and AF would lose all of it

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d. the D will respond to the lack of adequate protection by showing that the value is not declining much

e. D can offer small cash payments to make up the difference f. Offer other property for replacement liens where other property is

substituted for the loss of value 2. Under 362g, who has the burden of proof?

a. D has the burden of proof to show the C is adequately protected and for all other issues other than initial proof of value

b. The C will have the first burden of proof to make a realistic argument to show he is not adequately protected—this will mean that the C will have the burden of showing the value of the property

c. If the argument is under 362d2: there is no equity cushion and the plane is not necessary for the reorganization

d. The D will claim that he needs the plane to travel on corporate business and it is more efficient than commercial air travel

vii. 23.3: R borrowed 12M from BOW. BOW has a lien on the leases and the equipment. R makes payments of 100K of interest only. She agrees to make further payments after filing but finally misses one before confirmation. At filing the equipment was worth 12.3M but now it is only worth 11.4M.

1. What is the C 362d1 argument: a. They are not going to get paid and the collateral is declining

2. Suppose D claims that the post-petition payments were to reduce the principle, giving the D a 400K equity cushion

3. The C will argue that the original loan was for interest only payments, and these post-petition payments did not reduce the principle

4. Under 506b, this is problematic—at the point of filing they were only 200K over-secured. How then can they get 1M in post-petition interest? this would eclipse the value of the collateral

5. There is nothing in 506b about the timing of the post-petition interest must be paid

6. What some courts will do is look at the value at filing and allow this to be the extent of the post-petition interest

7. Other courts are willing to look at the debt level and collateral value at other points; this would lead to problems in a case like this: there is a problem of valuations and restructuring the payments at different times.

viii. 23.3: The collateral was originally was worth 12.2m. After the petition was filed the value fell below 12M, the value of the loan. It is now worth, 10 months later 11.4M. The payments per month have been 100K.

1. If these were all interest then a. The secured creditor has become under secured and is not entitled to 506b

interest payments b. This would be inconsistent and as such cannot be all interest

2. If these were all adequate protection payments a. This seems to be inconsistent because of the original loan

3. What if there was 200k in interest payments and 800K in balance payments a. The creditor is still over-secured b. This means that they are entitled to post-petition interest

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4. Known: a. 506b interest payments do not reduce the loan balance b. to the extent that the payments are intended to be adequate protection they

do reduce the loan principle i. this is like a series of mini-liquidations by use

ii. the debtor can use it and is paying for the reduction of value 5. unknowns: where courts differ:

a. when there is an entitlement to interest should there be a snap-shot at the beginning of the case and say that is the extent to which the creditor can get post petition interest or should there be a series of measurements

i. if they are both declining then they might decline at different rates; this might mean that at times the creditor is over-secured and at other times they are under-secured

ii. this will allow the C to get interest at times and not at other times b. is there an entitlement to 506b interest at the start of the case or when it

becomes part of the claim—this is a timing question i. this is not in the code per se

ii. 506b does not say when the post-petition interest payments should be made, it just says that there is an entitlement

iii. this allows the court to make the decision to pay this now or later when the claim is brought into the plan

c. whether an equity cushion at the debtor has at the beginning of the case ought to be preserved for the benefit for the creditor

i. here there is a 200k equity cushion here ii. the court may do one of 2 things with that:

1. the collateral is declining in value and the debtor will make adequate protection payments to reflect the value of the collateral decline

2. this means that the secured creditor remains over-secured throughout and will be entitled to interest payments throughout the case

3. other courts could say that when the equity cushion dissipates then they may not get interest payments

a. they would get adequate protection payments at the point when they cease to be over-secured

6. preserving the rights of the secured creditor rationale: a. they thought ahead b. they gained a property right in the asset c. if bankruptcy law did not protect this right then it would impinge on the

constitution because of the taking of property without compensation d. this would be the end of the secured property loaning institution

i. this would be bad because secured loans are a win-win situation: 1. the cost of loaning the money is cheaper and the creditor

has some comfort 2. for the debtor they get to use the property and get the

money cheaper

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3. for creditor this accommodates the taste for a low-risk proposition

ix. 23.4: AS has recently filed for chapter 11. They owe H 35K in a press; H has a PMSI in the press. This is secured. C has an unsecured loan in the press for 30K; this is a non PMSI. The press is worth 50K. Can H get the press?

1. AS owes 55K in the press that is worth 50K. 2. H will argue lack of adequate protection to which AS will respond that H has a

15K equity cushion in the press a. Is this successful?

3. Under 362d2 can the creditor point to the success of the D overall or must they simply point out that this debtor does not need this for an effective reorganization

a. The court will allow the creditor to look at both 4. Here there are two questions to keep property:

a. Not necessary for reorganization—this does not matter if there is equity or no equity

b. If there is equity in the property then we do not want the creditor to come in sell it even if the property is not necessary for effective reorganization

i. Hypothetical: there is a 3K PMSI in property worth 5K. If they get lift and sell it, they will not care about the price if they get their amount.

1. Any additional amount will go to the unsecured creditors 2. This creditor will not want to do this—the estates interests

are at the margin, they do not care about the unsecured creditor

ii. If the property is worth 2K and they are owed 3K, they will have a high incentive to get all of the money that they can.

c. Here because the debtor has equity in the collateral they will not have an incentive to get more than their PMSI. They do not care about the junior lien holder’s interests

5. What if the junior lien holder wants to lift the stay, will the court use a different rationale?

a. The junior has the best incentive to sell because the senior lien-holder will be paid first

b. They will be willing to look at for purposes of equity the senior leases; if the junior creditor is the one petitioning then it is well-settled that the court will look at the senior notes first

x. 23.5: B has a building that was built for 4.5M. It is now running at about 30% occupancy. The FDIC has taken over a bank that held a secured loan in the building. The property is worth 2M and has a chance to decline more. What should the strategy be?

1. He has not put together a plan for reorganization which is required within 120 days; if the debtor has not done this then the creditor may do so

2. In single assets real-estate cases, there was a special provision for these types of cases.

a. This was because in these cases, the building owners would file bankruptcy and wait for the market to turn around

b. They would wait for the market to turn around and never file a plan

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3. They might be able to get adequate protection payments 4. The debtor lacks equity in the property. It is necessary for reorganization but will

this debtor be able to reorganize a. In real estate this became hard to prove so D3 was written

i. the debtor must file a reasonable plan that has a chance of being confirmed

ii. OR they must commence adequate protection payments, so if they want to wait they must make payments

5. Can the creditor get payments ob both types? a. No, they will not be able to get both because the D will not be able to do

this b. Cannot get blood from a turnip c. This was reversed in D3 for the single asset real estate cases

xi. 23.6: the judge must deal with the lift of stay case within 60 days or the stay is automatically lifted.

xii. If the bankruptcy court is not following the law it is hard to get writ of mandamus to have the BAP/circuit to tell the bankruptcy court to tell the judge he or she is not following the law

xiii. Tactically this is pretty stupid because this attorney will have to deal with the bankruptcy judge in the future

6. operating in c11: a. the central concern here is the operation of the business b. the amount to be paid to the C depends on the past successes of the bness c. because this is often the same people who ran the bness into the ground there is often an

acrimonious relationship. Out of this there are a lot of disputes on running the bness. i. In re Sharon Steel Corp.: two C are appealing the appointment of a trustee for S.

One of the furnaces was down at the company and the other was on the verge of breaking down. The company filed c11 and S remained the DIP. In 5 months some of the C became dissatisfied with the progress that S was making so they filed to have a trustee appointed. S had made some avoidable transfers and fraudulent conveyances in the months leading to the filing of the case and the C cited these as reasons to have a TIB. S had not acted to recover these payments. The court also criticized the accounting firm S was using because it had not provided accurate statements and furthermore, S had not sought to refinance some loans to a lower interest rate. Finally the court questions the expenditure of 300K in attorney’s fees to fight having a TIB appointed. The court held that the lower court’s determination of the need to appoint a TIB was accurate.

1. rationale: 1104 requires the court to appoint a trustee when it finds cause to do so. There is also a flexible standard under 1104a2 which means that review of this is under abuse of discretion. The lower court paints a picture of a company floundering and doing little to get itself out of financial trouble. The prepetition management did not try to recover preferential payments and the company could not afford to fix the furnace that is responsible for producing the sole product of the company. It is not per se a conflict of interest for the same management to keep running the business and without adding to their mistakes they may continue to do so. But here nothing has been done to correct the prepetition incompetence.

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2. the court may appoint a trustee if it feels the DIP is not making progress in an effort to reorganize

3. the old management may stay in place as long as they try to correct their mistakes

ii. appointment of the trustee becomes a life or death struggle for many of these companies. this comes because the C wants to oust the management who they do not think they can work with. Often it is problems with this management and these particular C that brought the case to the court in the first place.

iii. The C will usually face a lot of difficulties when the want to have a trustee appointed even when the DIP has done some fishy things.

iv. Because of the many problems with both sides, the courts will turn to the middle option: appointment of a trustee under 1104(c). this allows the DIP to stay in place and this can be valuable because he is the one that knows how to run the bness. This provides the comfort that the C seek because there is now a court appointed neutral babysitter. This problem has also seen the rise of a new profession: turnaround management

v. Sometimes the problem is opposite: the DIP management team wants to leave. 1. in re Geneva Steel Co.: G wanted to implement an employee retention

program to keep the core management in place. This provided for severance payments equal up to 9 months of salaries and bonuses if they stuck around to get the plan approved. The bonuses were 20-50% of the yearly salary. G feels that this is critical to keep the management in place and is based on sound bness j’ment. Some of the C groups agree with this but the trustee and the union think it stinks. This may be a priority if the case is converted. It also does not have a lot of definite terms and the people would be paid if the bness liquidated. The court held that THIS plan was not allowed but that the debtor could choose another plan that was not so expensive.

a. Rationale: granting this motion or the availability of a plan to keep key employees may be critical to the company but it will also serve to piss off the union. The union covers the people who actually make the products. There can be a severance plan put in place but this should be lessened in case they find other work—otherwise it is a windfall. The severance payments would be entitled to a priority payment. This is necessary because replacing these people would be expensive both in terms of time and money. But to get the severance as a priority then the company would have to be liquidated which could adversely impact the chapter 7 case. the emergence bonus should be paid entirely in stock because otherwise they would get it in c7.

b. Here the court is acting to make sure that the management team does not walk away with they keys to the kingdom and leave nothing behind but a carcass

c. It is important to keep the key executives during the reorganization but not at the expense of making the C mad or possibly jeopardizing the later case.

vi. Running the business: 1. Oddly enough the management that ran the business asunder will be the

management that runs the business in bankruptcy

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2. Appointing a trustee to run the business is an odd situation because this person will have to come in and learn the business

3. The congress gave the management the benefit of the doubt: a. There was a bad market b. The management knows the business c. If another person comes in there will be some time while they learn the

business and during this time the business could go fully under and be liquidated

d. What happens to the cash?: i. A lot of times a company will file c11 because they are facing a lot of cash

difficulties. Right when they really need an infusion of cash the financing sources dry up. Congress has placed few restraints on the DIP’s use of the cash as long as it is within the OCOB.

1. many times the DIP will agree to a lock box where he agrees that payments will be sent to a post office box and collected by a third party who will then hold it in escrow and divvy it out.

2. this will also implicate the cash collateral problem. This will often arise early in the case.

a. in re Earth Lite: S brought an action to lift the automatic stay. S had loaned money to E both before and after the filing of the case. when it agreed to make the post-petition loans, E’s insiders personally guaranteed them. E was in the process of paying down the loans. In addition, payments it received went into a lockbox controlled by a 3rd party. E then missed one payment and S freaked out. S sought to have the stay lifted so it could go in and raid the business. E resisted this claiming that it was well on its way to a successful reorganization. The court here held that S was adequately secured and could not move to lift the stay.

i. Rationale: if this is allowed E will be doomed. 363 allows for special protection of cash collateral because of its highly volatile nature. D points out that S has an equity cushion but this is not the type of protection that was envisioned. It is nice, but not sufficient. There are also personal guarantees showing that S is protected against the people who run the company as well. Here the D should be allowed to use its cash collateral to cure the deficiency and missed payment. S is more than adequately protected because the business is worth more than its debts, there is an equity cushion and S has personal guarantees of its loans

ii. The right of setoff: this is not a bankruptcy right per se but is recognized to coexist with the bankruptcy code under 533. the right is to basically seize the money that the D has in the bank account and use this money to pay off the loan

1. this is a state law right. Many courts allowed this but others did not. To clear this up, the supreme court accepted and heard Citizens Bank of Maryland v. Strumpf. Here the court held that the C had to seek the approval of the court before taking the money but while it was in the process of seeking approval it could put a freeze on the account.

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2. this case said that the bankruptcy code did not preempt this law 3. a bank may setoff against a regular account but it may not do so against an

account held for special purposes. 4. in re HAL, Inc.: HAL filed a c11 and the aviation broad decided that HAL

had overpaid excise taxes. HAL owed other government agencies, so the excise tax surplus was used to pay off the other agencies. This was contrary to what HAL wanted to do, which was pay off all unsecured people with stock. The court held that government agencies could be considered mutual bodies under the bankruptcy code and thus setoff was thus allowed.

a. Rationale: §533 allows for the right of setoff as defined by state law. State law says that setoff can only happen when the parties are the same or substantially the same. Here, it must be determined if government agencies are mutually equivalent. There is some precedent to hold that they are not under the confines of bankruptcy law. The court dismisses this and noted that they were the same thing. For the purposes of bankruptcy law it is fair to say that they are the same party. The organization of the government is enough to find that they are the same party. Because they are, then their right may exist. The scope of 533 reduces the right to setoff because it may be a preferential priority. Absent a compelling showing of this though and a showing that other creditors will be really harmed, this may stand

5. Banks routinely rely on the availability of this remedy. 6. 24.1:

a. 1107 is one of the most important principles: the DIP has almost all of the powers and duties as the trustee

b. this refers to 1106 which refers to 704: these are solely the duties of the trustee

c. 1107: powers and duties d. to find the powers of the trustee and DIP:

i. some are under 363—use, sell or lease property ii. 574 and the power to avoid unperfected security interest

iii. 547 and the power to avoid preferences e. Here the DIP wants to business as usual. Can he do this?

i. Assuming here this will mean using the proceeds of the sale of inventory

ii. the inventory is also Main State’s collateral iii. 363c1—the business of the debtor is allowed to operate under 1108

1. there is a right to utilize this 2. the trustee may enter into a sale in the ordinary course of

business 3. the issue is then can he spend the money: this allows the

property of the estate to be used in the ordinary course of business

4. this is the default; there does not have to be a hearing for this unless there is an exception

5. here the 363c2 contains the exceptions:

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a. trustee may not use sell or lease cash collateral under ¶1 of this subsection—even if this the ordinary course of business

b. unless each entity in each cash collateral consents, so if the person consents to the sale

c. if there is a recalcitrant secured creditor if the court orders this to be used as the DIP wants

d. 362a defines cash collateral i. cash or cash equivalents

ii. what makes it cash collateral in which the creditor has an interest in; in which someone other than the debtor has an interest

iii. this does not say what the interest is or needs to be

iv. the most common kind of interest to make something a cash collateral is a secured interest

v. the other way to make it cash collateral is if the bank has a setoff right in the cash

iv. will the lien holder have a right under 552a 1. when a creditor has a perfected pre-petition security interest

in the inventory of the debtor what happens to the security interest

2. this section is a little odd: it starts with a default mode 3. under 552b1 the exception usually swallows the rule 4. 552a: the D took his own money and bought things with

this. That security interest in all of the inventory does not stretch to this collateral

5. usually the creditor’s right is cut off at the point of filing but if the property is bought with traceable proceeds then the lien does attach to the new property

6. this concept 9-315a also talks about this v. Here the proceeds are being used to purchase new goods; the

proceeds are directly traceable to something that the creditor had a lien in at filing. This is indeed cash collateral

1. the bank has an interest under 362a, 9-315a, 552a, 552b1 2. once these are brought together it is indeed cash collateral 3. then 362b2 comes in and says that the trustee many not use,

sell or lease the cash collateral without authorization of the creditor or court

f. If the creditor allows the DIP to use the cash collateral, what are the rights of the creditor pursuant to 363?

i. Under 363c4 the creditor has some protections but there is an exception under ¶2—the debtor must segregate and account for this

ii. But here has been given authority to use the cash collateral so where does the creditor get his protection from?

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1. 362e, noting the first sentence 2. the court should give the creditor adequate protection of the

interest; this is a concession given to the C in exchange for the D to use the property

3. when there is adequate protection this entails the same queries that are made under 362d motions

4. this gives the C usually cash payments or additional liens 7. Supposing that the lien has not been perfected pre-petition should F use the

proceeds of the inventory or should he abstain? a. Before perfection there is attachment; attachment means the agreement is

effective between the parties. Without perfection it is not effective to third parties but here this should be effective between the parties

b. At the point when the security interest is discovered to be unperfected it should be struck down (later this week) under 544

c. The cash collateral should not be used because this has not been avoided as of yet

iii. 24.2: T owes the bank 150K. On the date of filing T has money in the account of 40K. The bank had made a demand on July 1st that T keep money in a bank account. Is this money cash collateral?

1. Cash or equivalent with a security interest or a right to setoff 2. So here, what is the right to setoff on the part of the bank?

a. 506a a setoff right is the equivalent to an allowed secured claim b. this right is further explained in 553: if the C has the right to offset a

mutual debt; this means that bankruptcy sees a right to setoff that exists outside of bankruptcy

i. the right to setoff outside of bankruptcy depends on a mutual debt ii. the debts both have to be matured; due and owing on both sides

iii. bank accounts are considered due on demand to depositor; the debtor owed to the bank is mature, due on filing of bankruptcy because the claims will be accelerated

c. there must be an act of setoff under 362a7 i. the automatic stay applies to setoff

ii. So one portion allows setoff but the other says they are subject to the automatic stay. How can this be reconciled by the party who seeks to use setoff

1. there must be a judicial hearing 2. the C will be asking for lift of stay 3. this should be obtainable under 553 4. there should be a right to do this subject to the exceptions

of 553a d. how does 553a cut back the right of this creditor to use the setoff

i. how much of the debt was owed 90 days before the date of filing: 553a3a3

1. after 90 days before the filing of the petition 2. this gives the benefit of the assumption that the debtor is

insolvent under 555a3c 3. How much is accepted from the setoff right?

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a. There is an exception to setoff of 10% of the loan, which is 15K here, leaving a right to setoff of 25K

e. So how much is cash collateral? i. 25K is valid setoff and this is considered to be the cash collateral

ii. 15K is income for the debtor 3. If on may 1st there was 15K. The bank then demanded that the D keep a

compensating balance in the account. This is 120 days before filing. Does this change the analysis

a. this does not implicate the 552a3a requirements b. But seems that there is a difference in the 90 days. Before this it was

simply an account, after this it was required to be kept in the account c. to look at the policy implications to this exception to setoff, why should

the bank be punished for looking ahead and acting prudently i. the bank is trying to prefer itself as against other creditors

ii. this violates the equality of distribution principle iii. The bank does not have the right to help itself at the expense of

others. iv. 24.3: how much of the 61K in the account will FT be able to use without court approval?

1. The account is a special use account set aside for the payment of payroll 2. This is back to setoffs under 553a 3. Usually a creditors state law rights of setoff will be honored, but there are some

exceptions under 553a: a. 553a2: the debt was transferred by someone other than the creditor

i. within 90 days before the date of the filing ii. this disallows the right of setoff

b. here this will effect the entire setoff right but-for the exception they would have had a right to setoff of 50K

c. this means that this is not cash collateral so the D will have the right to use all of the money in the checking account because the right to setoff is not good here

v. 24.4: E owes 20M, had 10M in equity. What is the best idea? 1. 1104 would allow for the appointment of a trustee—the D will have to oppose this

and this takes time 2. there could be an examiner, which is a matter of right because of the amount the

unsecured debt 3. insist on the valuation of the going concern value of the reorganized company; if

this is in excess of 20M, then there is an entitlement that is not being met for the old equity holders and the unsecured creditors get more than the value of the claims 1129b

4. these are costly and time consuming; when they are threatened with these provisions the bankrupt will usually make concessions for the person bringing the claim

e. post-petition financing: i. for some businesses already suffering a cash flow problem, a cash injection is needed for

survival. Finding a lender can be a challenge though. This will cause the DIP to want to offer the post-petition lender a security to be able to get money on a reasonable term (or at all). The pre-petition security interest may lock up all of the property that the D has at

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the moment of filing but 522(a) works to prevent these interests from attaching to any property that is acquired after the filing of the case.

1. this can be undone by the C under an argument that comes from UCC §9-315 which says that if the new property can be directly traced to the proceeds of selling the old stuff then the interest attaches to the new stuff. This is sometimes known as a proceeds argument.

a. in re Garland Corp.: G manufactures and sells women’s clothing for its own label and Levis. After filing for chapter 11 they sought to borrow money from NE Bank and P. the judge allowed this and then later after the creditors committee gave their approval allowed them to borrow another 700K, for up to a 1.4M credit line in total. The committee then blocked them getting another 500K saying that it is unlikely that they will reorganize successfully. When the moneys were originally given the banks were given senior liens on the receivables and junior liens on everything else. The C felt that this was a taking without compensation. The court held that the D could borrow the money because with it there is a chance they will be rehabilitated.

i. Rationale: there is a high likelihood that there will be substantial benefit if the DIP is allowed to take this money. There is a good chance that they will emerge from this. The DIP cannot obtain credit without offering a security—otherwise money was not available. There is no requirement that unsecured C get adequate protection and these liens do not hurt them

b. in re Hubbard Power & Light Co.: H wants to borrow 750K from Enron. H collects wood and debris, burns it and turns it into energy. They were found to be in violation of the DEC ordinances and their power production was stopped. Then their woodchip piles caught fire and burned the factory to the ground. They spent 1M to fight the fire and to clean up from it. Then the town put a lien on the property for back taxes. They did not have the funds to finish the cleanup job they had been ordered to do. No one else would lend them money except E who was to get a super priority claim under 362c and a priming lien under 364d and a first priority interest on the revenues. Of these proceeds there is a budget of 300-400K for cleanup and the rest is start up capital. O has a pre-petition interest on the property and contests this. The court held that this deal could go through.

i. Rationale: if the D is to reorganize he needs this money. Without it there will be liquidation. If the D does not get the money the land will likely be abandoned and the county will be forced to clean it up. No one will be able to buy it because they will have to clean it up first. Without the clean-up the property has no value. The lien will improve the value of the property to the amount of the lien, so it is of greater property to the estate if its cleaned up. The county’s interest will not be harmed—it is protected through this. In fact, if they can clean it up and reorganize they will get the full value of their lien. The D cannot get money without these liens. The goal of adequate protection is the give secured liens so that the D may reorganize. This safeguards the C too, because like

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here, the land is worthless but giving the D the money will greatly improve the value of the land. It will improve the position of all of the creditors so it should be allowed.

ii. Cross-collateralization: this involves in some cases the securing a pre-petition obligation with new or additional collateral post-petition obligation with a new post-petition loan.

c. Shapiro v. Saybrook Manufacturing Co: SM filed c11 and filed for a motion to use their cash collateral and incur some debt. At the time of the filing they owed H 34M. the value of the collateral for this debt was less than 10M. H still agreed to let them borrow more money—3M to facilitate reorganization. H received a security interest in property obtained before and after filing for this loan. This secured the pre-petition debt as well as the post-petition. This enhanced their position greatly as compared with other creditors. The court held here that cross-collateralization was not allowed.

i. Rationale: the purpose of 364e is to encourage the extension of credit to D be eliminating the risk that any lien securing the loan will be modified on appeal. By its own terms this is only applicable id the challenged lien or priority came from 364. cross collateralization is not mentioned in the code. This means that it cannot be found in 364. this is beyond the scope of the equitable power of the court and contrary to the scheme of the code. This does not authorize the granting of liens to secure pre-petition debt. This would allow the court to treat one class of C differently, and this is not within the power of the court. This would operate to give the lender’s per-petition unsecured claims a priority over other unsecured pre-petition claims

ii. This is the minority view. Other courts allow this because they see it as the lesser of the two evils. Yes, it might not be in the code per se, but on the other hand it allows the D to reorganize so it cannot be all bad.

• Lending money to the bankrupt: The question is who would want to lend money to the DIP The DIP usually needs an infusion of money to continue operations A lot of time the lender is the same lender as before bankruptcy The code made this more attractive for the lender to give them

protection • This favors the lenders who lend after the commencement of

the case • 25.1: G owns some property this is in an area where there is a no-growth statute.

Because the property is subject to a grandfathering clause and can develop the property. If there is water and sewage on the land then it can be sold but the purchaser cannot provide a loan for this. How can a lender be convinced to give the DIP money to do this?

362b or d will give the lender some protection the code does force one to walk through a certain sequence if the aim

is the highest level of unsecured claim

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only as a last resort will the DIP give the lender a security in the land the loan is under 364

• the default rule is 364a which is an administrative claim under 503b

• 364a covers two situations: • normal unsecured credit in the normal operation of business

o if the extension of credit or the borrowing is part of the ordinary course of the business then the debt is under 364a

o there is no need to go to court and have a hearing for this loan

• this then is a priority under 507a as an administrative expense priority

• if the extension is not part of the ordinary course of business then the claim is under 364b

o this requires the DIP to have a hearing here this loan would be a 364b loan

• This is not in the ordinary course of business. • To determine if something is within the normal course of

business the court will look at: • How the business works and where they spend their money

o Trade credit v. bank loans o Trade credit is getting supplies from suppliers, which is

considered to be ordinary course • Bank loans are not considered to be OCOB • Small loans v. big loans: small loans are generally considered

OCOB; big bank loans usually indicate a large improvement which is not OCOB

• What if the lender lends and the later appellate court disagrees with this later. The loan has been made already; they considered it the OCOB

o They should be given a claim but they should not be given a 597 administrative claim

This is because they did not do their due diligence

The claim should be allowed but as a general unsecured claim

But this treats them as a general unsecured creditor which is only pre-petition—claims are usually are pre-petition

This is a problem because this is not a pre-petition claim and might lead to problems

Suppose the lender is not willing to give the loan on the basis of 364b. What can the DIP do?

• Under 364c they can be given the highest administrative claim • This looks at 503b allowance provisions; 507a1 orders the

priorities

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• This gives the unsecured claim the highest claim and then refers to 507b claims

o This is for the case where there is adequate protection granted by the court and it is later discovered that the adequate protection is inadequate

o This gives a super-priority for claims o But if 507b is a super-priority then what is 364c1

claims? They trump the 507b claims o Although all of these give a priority none of them is a

lien or gives the lender a priority If the lender will not agree to this, 362b: lien on unencumbered

property • There is 364c: junior lien in unencumbered property • 364d: a joint lien or a priming lien

o this allows the post-petition creditor to come before the older lender

o But what protection will the pre-petition lender have? This is only given when the existing lien holder

has adequate protection A 364d1 claim is difficult to obtain: the DIP has to give adequate

protection to all of the previous lenders • This is hard to prove because this will require the DIP to make

payments to the other lenders or to give them replacement liens—neither of these situation is very likely with a bankrupt

• 25.2: LP has a 500K loan from FSB. LP has an unsecured debt of 250K. They got a post-petition loan of 250K. FSB brings a claim for adequate protection claim. This throws the bankrupt into liquidation. FSB as a 250K shortfall, HF has a 100K shortfall. There are attorney’s fees owing: 150K for the chapter 11 attorney, 50K for the chapter 7 trustee. There is also an additional debt, unsecured and pre-petition claim of 250K. There are total assets remaining of 350K.

FSB • 507b super-priority; their claim when they were granted

adequate protection but it was later found to be inadequate • can this be converted into a 507b, 364b super-ultra-priority

HF: had a lien under 364c2 but this has been exhausted • This means that this is now an unsecured claim because the

lien was realized • This is a post-petition administrative expense claim; this should

have the benefit of 364b o This is because there was court approval, this was

outside of the OCOB and was granted as a secured claim

• They will claim that to the extent that there is a shortfall they should be given a 364c1 claim

o They were not given this from the outset

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o This means that because this was not given at the outset they cannot default into this—it must be given from the beginning

Chapter 11 attorney: • They are under 507a as an administrative claim • This is a 507a1 claim

Chapter 7: • They are originally a 503b2 claim which allows their claim to

be under 507a1 Pre-petition unsecured have no priority Ranking of claims:

• FSB has the highest priority claim • Chapter 7 attorney because of operation of 726b

o This speaks about claims incurred after conversion into this title from another

o This means that the chapter 7 claim comes before the chapter 11 attorney

o This trumps any 503b claims from o This is known as the burial expense trump:

How else could someone get a chapter 7 attorney to come in and finish the job

The theory is that to get someone to do this is to make them the highest priority under the chapter 7 case

• HF and the chapter 11 attorney are tied in priority but • Outcome:

o Chapter 7 attorney gets 50K o FSB comes second and gets 250K o HF and the chapter 11 attorney are tied, get pro-rata

shares o They will each get 20% o Unsecured claims: nothing

• 25.3: what are the chances of getting court approval for the proposed plan? This is a cross-collateralization claim Some circuits allow it, the 11th circuit does not This is seen as a bad thing and is disfavored

• The Shapiro court notes that this gives the post-petition lender too much power over the DIP and allows them to perfect their pre-petition claim

• This seems to be a priority of the pre-petition claim • But this could be the lesser of two evils

o If the other creditors have a better chance for repayment by allowing this to happen

o It might be the lesser of two evils: there might be a cross-collateral loan at a better rate than there would be of a new loan

f. Owner financing:

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i. Some debtors will turn to old equity holders as a source of funds. The bankruptcy code prevents the participation of these people in the post-bankruptcy corporation. The code follows the rule that equity cannot retain value unless all of the unsecured creditors have been paid in full. This is aka the absolute priority rule

ii. when equity provides a new value to the company that cannot be obtained from elsewhere to finance the reorganization then the court may allow this because it represents the best bargain that can be made

g. reshaping the estate through the strong arm clause: i. these types of avoiding powers give the DIP real teeth during the c11. this is because no

matter how similar they appear, the DIP is not the same person as the D. the DIP works for the C and other constituencies come second. This means that he has the job of working to pay off creditors in a fair and rational manner.

ii. The strong-arm clause is found in §544(a). this determines the TIB’s pecking order in state laws and under the UCC. The TIB has all of the rights on the date of filing as a judicial lien holder and as a BFP.

iii. Wonder-bowl Properties v. Hi Ja Kim dba Laura’s French Baking Co & Laura’s bakery: K is the DIP in the c11. K filed an adversary proceeding to set aside a j’ment lien against W that it had obtained for 208K. W had filed its lien against some of the real property of H. When W filed the abstract of j’ment it did not complete all of the information that was needed on it. It then sought, after H filed, to amend this. The court considers the issue of whether a hypothetical BFP charged with notice of the defective j’ment would have been deprived of notice and held that yes he would have been deprived and thus lien could be avoided under the strong arm powers.

1. Rationale: §544 says that a trustee may avoid any lien that he does not have actual knowledge of. Because the abstract did not have all of the information it did not impart actual knowledge. Only actual knowledge is relevant because of the wording of the statute. This is because the DIP assumes the same amount of knowledge as the TIB. The TIB was not privy to the transaction and acts a BFP without any special knowledge. Looking at constructive knowledge would undue the words chosen by congress. This would also make the action brought by a DIP different than the one brought by the TIB, which was not the intent.

iv. When the subject is personal property and not real estate, the TIB has only the lesser of the two powers, that of the lien creditor.

1. This can work to establish the TIB’s position regarding federal tax liens. • Payment for the attorney:

o The firm that takes on the representation will often go to the court and asked to be paid early

o If the business crashes there is a problem if the attorneys have been paid 100% of their claim

This means that comes courts are reluctant to make the interim payments especially if the company has a chance of going insolvent

If the case does go administratively insolvent then the court will go back and get the money back from the firm

• The alternative is to not try to get this back but this sets bad precedent This is a hotly contested issue

• Summary of priorities in a chapter 11 case that is converted to a chapter 7 case: • Secured claims

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o A lien is the best way to go o But the question is the validity of the lien

Are the state law requirements met? • This means that there must be an act to give them a priority

Then is there anything in bankruptcy that changes this? • 541 strong arm powers • 547 preference powers

if the lien was recovered post-petition then the bankruptcy requirements must be met under 362c2, c3 and d1

• c2: on previously unencumbered property • c3: post-petition junior lien on encumbered property • d1: a priming lien on property that already has a lien on it

o who comes first of there are multiple liens go to state law and looks at the priority of lien holders this is the notion of the race—who took the action first with respect to the

collateral under state law could be changed by bankruptcy

• both by preference law • and by 364d1 priming lien: there is a post petition loan made and

there is a demand for a priming lien; this is within the court’s discretion as long as adequate protection is given to the senior lien

• 726b post-conversion administrative expense claim, the so called ‘burial expense’ o it must start out as something other than chapter 7 o first in category o second: 507b—adequate protection that is not adequate o third: basic 507a1/503b things including if the chapter 7 debtor incurred debt

after the first filing under 364a or 364b, the fees of the trustee • chapter 11, pre-conversion, 364c1, the so called super-duper-priority incurred in the pre-

conversion case • chapter 11 incurred 507b super-priority claim for the secured creditor who has inadequate

protection to the amount that the adequate protection is inadequate o how much was the adequate protection worth when the C asked for it and how

mush is it worth now • chapter 11 expense priority claimants

o 507a1, 726a1 o the key ones: OCOB under 361a, approved by the court under 364b, incurred by

the estate under 362b12, • rest of the 507 priority claimants in the order of 507a claims

o other than 507a1 claims, these are all pre-petition so they are all incurred pre-petition

• general unsecured pre-petition claims o 502a & b

• finally, under 726a3-6 unusual claimants o late filed pre-petition un-secured claims, punitive fines and penalties o these are in a worse position than unsecured claims

• The DIP and his identity:

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• this is the same business as the pre-petition debtor • even though it is the same entity at another level it is a totally different entity

o the DIP has certain powers that the pre-petition debtor did not have o this is because of to whom the fiduciary duty runs o pre-petition the fiduciary duty of the corporation runs to the shareholders

the shareholders claim here is at the margin the assets exceed the liabilities the shareholders feel the gain or pain of decisions

o if the corporation is insolvent, there are more liabilities than assets the general unsecured C are the ones that feel the pain/gain this means that they are at the margin this is to whom the fiduciary duty is owed this is why the DIP wants to strike down the unperfected claim

because this will help the unsecured C • the DIP has the right to sue to recover payments and transfers

made pre-petition; this seems strange but this is because the fiduciary duty is to another person

• So what interest do the shareholders have in bankruptcy? o Their equity is worth nothing right now o But suppose the company emerges from chapter 11

with a going-concern value that exceeds the claims against the estate

o So for now the shareholders are holding a future of a sort

o This leads to a lot of conflicts of interest with the business plan that the company will pursue

o So for the shareholders a high risk strategy that could have a high return looks good; to the C this is not good because they are owed the fiduciary duty and they see their money disappearing

• 26.1: W bought a plane. W just filed for chapter 11. M never filed the claim on the plane which they sold on credit to W. What can M do?

o According to 544 there is not much they can do This means that they cannot act to give themselves a priority The trustee will use 544a1: lien on property

• There is not a real judicial lien holder • This is a hypothetical one whose lien arises at filing • How do we know that the trustee wins with the hypothetical

judicial lien holding • This then will refer to state law and look to see if the property

has been levied on—but this is a hypothetical lien holder, but he must still do everything he can to perfect his claim

• Under UCC §9-317a2 a security interest is (look this up) • They will be an unperfected security interest which is really no

security interest o Is there an advantage to an unperfected security interest

over an unsecured interest? yes

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• There is still an interest between the creditor and the debtor, but not to the rest of the world

• The C can foreclose on this as long as this can be done without breach of the peace

• This is not as good as the perfected interest which gives the C a type of title which is effective between the C, D and the rest of the world—this means that the C has won the race and will get the profits at the foreclosure sale

• 26.2: W bought another plane from another person from Aero a week before filing. When A learned of the filing they filed their claims with the proper persons. A’s financing agreement gave them property in this plane as well as others

o Their claim is secured at the moment of filing • 546b is a limitation on the 544 voiding powers

o subject to generally applicable law….before the date of perfection • A has a PMSI because the proceeds of the loan were used to purchase this

collateral; also known as an enabling loan o This is distinguished from the case where the D borrows money but

gives collateral in something they already own o This is under 9-17(e) which says that one who gives a PMSI and files

within 20 days has a priority over a unperfected judicial lien holder • The lien on the other things may be avoided but they will still retain the lien

on the plane which their money enabled them to purchase • 26.3: LC bought a mortgage from DD. DD never filed this. The ME is now bankrupt

o 544a3: BFP and gets priority against LC because he never took the act that gave him the lien that would be good against third parties

o he has an unsecured claim against the purchaser in bankruptcy o suppose LC can show that the homeowner knew about the lien

this does nothing to the interest—it is whatever knowledge that the hypothetical BFP would have from looking at the record

LC cannot make an argument that any hypothetical BFP would have knowledge of the interest that LC had

• 26.4: T sold S an a/c with a lien and down-payment. T filed this lien with the secretary of the state. Will this hold up?

The lien is valid under 544 Which section will apply?

• Not under 544a3 because this is a fixture • This is under 544a1 • So why is this important?

o Because 9-334e3 makes it clear that a perfected interest in a fixture will defeat the interest of a lien creditor in the real property

o The filing will be good enough under 9334-e3 o Noting 9-334e1 to measure the rights of a BFP and the

fixture filing makes it less clear that a filing with a secretary of the state and not the real estate files is sufficient to give knowledge

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This says that it must be in the county land records to be sufficient

They are still able to beat a lien creditor but not a subsequent BFP

o This is critical that 544a3 because this places them as a judicial lien creditor because this is easier to defeat than a BFP under 544a3 as to the fixture.

7. preferences: a. general rules & observations:

i. This is a new power given to the DIP in bankruptcy. It is unlike anything found elsewhere in the law.

ii. These are all under 547b which constitutes what is a preference iii. These permit the Dip to review the payments it made as it neared bankruptcy and get the

money back b. Defining a preference

i. Gilbert v. Gem City Savings Association: the TIB filed a complaint against GC seeking to recover a payment of 1,079 made before the filing. G holds a mortgage lien on the RE of the D, G. This payment was made less than 90 days before the filing. The D was insolvent at the time of the payment. The payment represented the current amount due plus an arrearage. The value of the RE is 38K and the loan had a balance of 24K on the date of the filing. The court held that this was not a preferential transfer.

1. Rationale: the court will look at seven factors. Most important in this case is whether the payment has an effect on the equal distribution of the estate of the D and not the effect on the C. This will determine if the C received more than his fair share as compared to other C in his class. The court is required to determine what he would have received if there had not been a payment. This will construct the hypothetical case. Here this C would have received the same thing because he was fully secured so there is not a preference.

ii. In re Calvert: C filed a petition in March 1997. He was a manager of a KFC owned by DN. In December 1996 C borrowed money from his parents to pay a settlement with DN. C had stolen money from the KFC. His parents gave him the money, directly payable to C’s attorney. C executed a note on the house promising to repay the amount. They also gave a lien on their car, of which the only writing is the title. The house was worth 52K but at the time of this mortgage they had no equity. The car was unencumbered but worth less than the lien. The trustee filed this to recover the payment made to DN. The court held that the earmarking doctrine saved this from becoming a preference.

1. Rationale: there must be a transfer of a security interest. In order to satisfy the earmarking doctrine, there must be 3 things: the existence of an agreement must be the existence of three things between a new lender and the debtor that the new funds will be used to pay a specific debt; 2—performance of that agreement according to its terms; 3—the transaction, viewed as a whole (including the transfer in of the new funds and the transfer out of the old C) does not result in the diminution of the estate. There is not a preference when a new creditor is substituted for an old one. The trustee bears the burden of showing that this does not apply. For there to be a lien against a vehicle the indebted party must be in possession of it and there must be a signed agreement. There is no written

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evidence here and therefore it is not enough to show a security agreement. Although the new C has the title, this is not enough. But this is not enough to show that one never existed. So there is a presumed one and the earmarking doctrine can apply.

iii. Fidelity Financial v. Fink: B purchased a car and gave FF a promissory note secured by the car. 21 days later FF mailed this to be filed along with the correct application fee. 2 moths later B sought relief under c7. The court held that this was perfected when the party loaning the funds takes the last step to make the security perfected.

1. Rationale: F cannot avoid the lien if it falls under 547c3 which requires that the transfer of the security interest be perfected on or before 20 days after the debtor receives possession. Perfection then means that a transfer of real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. There is a relation back doctrine so that the perfection, if it occurs within the 20 days, is said to relate back to the day the debtor took possession. Not until the secured party takes the final act is the interest perfected. This will prevent anyone from getting a superior interest in the item. 20 days is given for the perfection of a security interest in presonalty. This means that under the plain reading of the code, the secured part has 20 days to perfect his lien if he wants to qualify under the enabling loan exception under 547c3b.

iv. Voidable preferences can act as a sword for the bankrupt because he can say: if you make a demand of me today and I file tomorrow you won’t get to keep the money because it is a preference.

v. For the benefit of allows one that will indirectly benefit from the payment to be called into question. In the important case, because the payment indirectly benefited an insider, the length of time was extended under the insider rule. It may also work to promote a junior lien holder to a senior because the old senior is now gone—should this be an indirect preference?

c. Voidable preferences at state law: i. The UFTA, discussed earlier, promotes the idea that there should be fair dealing among

the C. ii. This means that in the case of an involuntary the payments can be set aside by the

petitioning C. iii. This also requires the insider that received the payment to know or should have known

that the debtor was insolvent when he received payment. • Problem set 27: 27.1: ML is an unsecured creditor of W. W owes ML 14K. 60 days

before the filing W pays ML 1.4K. He then liquidates and unsecured get 10%. o Look at 547b and the elements of a preference (7):

First are in the introduction to b: • Transfer

o Although this seems silly, but there are cases where there is an issue if there has been a transfer

• Of the property of the debtor To or for the benefit of a C On account of an antecedent debt While the D is insolvent—b3

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• Here is the benefit of 547f: presumed to be insolvent on an 90 days before the petition

Made within 90 days of filing or 1 year for insiders Enabled the C to receive more than it would have if this was a chapter 7

liquidation (b5) o Here the only issue is the b5 element

The payment they received prepetition is the same it received in the liquidation, 10%

This is the wrong analysis though: • After the payment there is a claim of 12.6K • In the bankruptcy they got paid 10% of this, or 1.26K • This is on top of the other money they received, the 1.4K, bringing

the total to 2.66K • Had the transfer not been made, their recovery would have been

1.4K, not 2.66 • This is because they would have taken a claim of 14K into the

bankruptcy o Suppose the unsecured C got 100% of their claims, would this affect?

Yes, the b5 element would not be met They would have gotten their full claim regardless

o Suppose that the C was fully secured: The b5 element would not have been met because they would have

received full payment anyway This is what the Gilbert case in the book said

o Suppose that there is a rich guarantor of the D and will make sure that all C are paid in full

Provided by the provisions of this title, meaning that we should only look to the bankruptcy estate under a chapter 7.

This does not look at any outside elements, just the estate The third party source does not affect this

o B5 is met unless the creditor is fully secured, priority unsecured that would receive full payment or if all unsecured receive full payment

• 27.2: U files for bankruptcy. Before he did this he allowed OKC to take some equipment. Is this an avoidable transfer?

o B5 is the major question here • This creditor would not have gotten 100% • There is a transfer of actual property—this question is to emphasize that transfers can be money

or property • 547e:

o This is one of the hardest provisions of the code o The function of this is to define the time of a transfer for preference purposes o The usefulness is when the transfer involved is the transfer of a security interest o The grant of a security is a transfer of property o This defines at what point in time the transfer of a security interest has taken place o If we are talking about something other than the transfer of a security interest (money or

property) then the timing question for preference purposes is that the time of transfer is when there is a physical movement of the property

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• The only exception to this is checks, in which the transfer is when the payer bank pays the check not when the check is delivered

o 547e1: defines when a transfer is perfected • this is defined as expected: if of real property then it is perfected when no later

BFP can get a superior interest to the transferee: 547e1a • if it is a fixture or personal priority then it is when no judicial lien holder could

get a superior interest: 547e1b o 4 variables in a secured credit situation, e, a, p & c

• e: which is the extension of credit from the C to the D • a: attachment of the security interest which occurs: C has given value, the security

interest has been signed by D, the D has rights in the collateral • p: point of perfection which is attachment and notice to the world which can be a

filing or actual possession of the collateral • c: commencement of the debtor’s b’ruptcy case by filing • depending on the time of the transfer, t, it will equal a, p or c

o 547e2 will tell us when the time of transfer takes place • 547b2 says that the transfer has to be on account of antecedent debt; the extension

of credit must come before the debt so here e is always before t • b3 says that the debtor is presumed to be insolvent at time t • b4 says that the transfer must be within the 90 day time limit, 90 days before c • so if b4 is met then it is likely that b3 is also met because of the benefit pf the

insolvency presumption of 547f • this is why it is important to define t • 547e2a says the following: if perfection occurs within 10 days of attachment then

the transfer of the security then the attachment is the time of the transfer (if p occurs within 10 days of a, then t = a)

• this is the grace period • it is also a relation back to the time of the attachment

• 547e2b: if perfection is more than 10 days after transfer, then the transfer is deemed to have occurred at the time of perfection

• if p > 10 after a, then t = p • 547e2c: if there is more than 10 days after the transfer and the filing of the case,

then the transfer is deemed to have occurred at the date of the filing • if no p by later of (10 days after a) or c, then t = c • technically it is the moment immediately before c

o security interest transfer test • Step 1: is it a transfer a transfer of a security interest

• if yes, then step 2 • if no, then t = time of physical transfer

• Step 2: when is transfer (t)? • This involves placing the four variables (e, a, p & c) on a time line • Then this will lead you to the correct 547e section

• Step 3: given the time of t, is e before t? • Is the transfer on the account of antecedent debt • Is t within 90 days (1 year for insiders) of c? this is the b4 element

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• If no to either question then it ends because there is not a preference • If yes to both then step 4

• Step 4: are all the other elements of 547b met? • If yes, then there is a preference

o Look for the 547c exceptions o I.e. 547c3 allowing the secured creditor 20 days to perfect their

claim • If no, then there is not a preference

• 27.3: R’s C had borrowed money form IC. They received a security interest on unencumbered assets. Is there a preference?

• Security interest? yes • Step 2:

o E = Jan 1 o A = 2/1 o P= 2/1 o C= 4/29 o When is t?

Here this is a 547e2a • More than 10 days • Therefore the t = a

• Is e before t? Yes within 90 days? Yes • Are the other requirements met? Yes, it appears so • This means that there is a preference here

27.4: time line: June 1, V makes a loan to NW for 50K. It perfects on June 20. On September 15, NW files for bankruptcy.

• Day 90 (90 days before filing) June 17th • Day 0 (date of filing) = September 15 • Steps:

o Yes there is a security granted o The date of the extension is June 1st o Attachment is also considered June 1st because V met the deadline o Perfection is June 20th, which is day 87 o Is there an 547e2a, b or c case

This is a 547e2b case because perfection was more than 10 days after attachment The timing of transfer t = p, which here is June 20th Is e before transfer (was the transfer on the account of antecedent debt) yes Is t the transfer within 90 days before c

o Are all of the other elements met: Insolvent yes Are the b5 element met in this case? yes because they went from unsecured to secured

• If the transfer had not taken place would they have been just as well off without it? No, they are much better off here

• Variation 1: As in original, V makes the loan on June 1st, day 106. Here the security agreement is not signed until June 12th, day 95. The signing is the date of attachment. The perfection still takes place on June 20th, day 87. The debtor files on September 15th

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o This is a transfer of a security interest o Is this 547e2a, b or c

This is an e2a case, because perfection occurs within 10 days of attachment, therefore t = a, June 12th

This is still on account of an antecedent debt But here this is outside of the preference period of 90 days The point of this is to show you how the 10 day grace period of 547e2a will save this

from being a preference by causing the date of perfection to fall outside of the 90-day window, due to the relation-back doctrine

• This kicks this back to the date of attachment at least for the terms of preference • Even though perfection was within 90 days

• Variation 2: V makes an unsecured loan on day 85, June 18th. On the same day there is attachment, so a = day 85. Perfection takes place on day 78 when a financing statement is filed. Has there been a preference?

o Is this an 547e2a, b or case This is e2a because of the timing of perfection The date of perfection is the date of attachment, day 85.

o Is e before t? they are at the same time Because they are at the same time this is not on account of antecedent debt The 10 day grace period saves the C again by pushing pack perfection to the date of

perfection • Variation 3: at day 85 V makes a loan. Day 78 V decides it wants collateral so it both attaches a

perfects on this date. Debtor files on September 15th. o Is this an e2a, b, c case?

It is again an a case because p occurs within 10 days, so t = a o Is e before a? yes o Is p within 90 days? Yes o Other elements met? Yes o The point of this is to show that the 8 day delay in the attachment and perfection but because the

gap is between e and a & p the grace period does not operate to change the date of transfer like it did above

o The only gap that is closed by the grace is 10 days or less between a & p, not between a & e, or e & p even where the C does not have a PMSI

o If the C has a PMSI they will be better off because they will have 20 days not 10 days • Variation 4: Makes unsecured loan on day 85. On day 37 V asks for and gets a signed security

agreement. On day 29 V perfects with filing of a financing statement. When the D files, has there been a preference?

o This is an e2a case, p is within 10 days after a o The t = a again, which is day 37 o Does e come before t? yes o T is within 90 days? Yes o Other elements met? Yes o The point of this is to show even where the grace period operates; it does not save the C from

preference operations. Yes it may be operating here but the mere fact that it operates is not enough under these facts is not enough to prevent liability

o The placement of the transfer is still a preference because it is on account of an antecedent debt and within 90 days

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• Variation 5: the loan is made on day 85. On day 37 there is attachment. At the point of filing there has not been a financing statement. There is no perfection. Is there a preference?

o Is this under e2a, b or c? it is under p because it has not occurred yet o This means that t = c (really the moment before c to make it within the 90 days before c) o Is e before t? yes o Is t within 90 days before c? yes o Are the other elements met? Yes o This is an example of the operation of 547e2c. How else could this be avoided?

With the strong arm powers This is a basic unperfected security interest This could be avoided under this rationale, the 544a1 the hypothetical judicial lien

creditor power • Variation 6: V makes the loan on day 4. They also get a signed security agreement on this date, day 4.

At the point of filing there is not a financing statement. V does perfect on day -3, 3 days after the filing of the bankruptcy. Has there been a preference?

o Is this e2a, b or c? this is under e2a It is not under e2c, because of the later of two points time Because of the relation back and the filing within 10 days, t = a

o E is not before t This is not a transfer on the account of antecedent debt

o Was V’s post-petition perfection allowable under the automatic stay? Note 362b3

• If this falls within the period under 547e2a, then the automatic stay does not prevent this

• This is allowable o What about 544a1:

This is the strong arm powers of the trustee Notes 546b1 which the 544 powers are subject to

• This refers to the generally applicable law; this means that it will refer to laws outside of bankruptcy

• Since 547e2a is only in bankruptcy it is not generally applicable • The PMSI would have a grace period as found in UCC article 9, as an example of

generally applicable law • What 546b is telling us is that the strong arm powers are not subject to the grace

period because this is not a generally applicable law o The surprise ending is that although this is not a preference, it is not good enough to save it from

the strong arm powers 27.5: HB files for bankruptcy. A year earlier MC had sold them 50K ovens. On Feb 1 the balance was 35K. On Feb 2, each C received 5K in payment. HB was insolvent throughout. The unsecured would get less than 100% of their payment—this is true if they were insolvent throughout. Is the (got called on):

• C 2 is not avoidable because it is not a preference • MC is avoidable because it was a preference

27.6: V, debtor filed May 25th. Day 90 is about February 25th. Here the problem does not say when the loan on the original collateral was made or perfected. Assume that this was done on February 1st for the 150K in collateral. On day 40 they get more equipment for 200K. This is an unsecured loan. Is this a preference?

• The tricky question is where does the floating lien attach to? Attachment requires that the debtor has rights in the collateral.

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o Here the debtor had no right in the collateral until day 40 o This is an e2a case where perfection is within 10 days. The date of this is the date the debtor got

the equipment. o Does this meet the b5 element? Yes o They are now over-secured. o E3 makes this clear that the date is the date of the acquisition because a transfer is not made until

the date that the debtor acquires rights in the equipment This was written to reverse case law which was using the Mississippi rive theory of the

floating lien: if you get the security interest in the whole river then all transfers were considered to be dated back to the date of the first acquisition; this was reversed by the code provisions

There is a provision in 547c for the inventory receivables and this is considered one of the hardest provisions of the code, but were are not there yet (we will get there)

27.7: CS has a lien to HB on its machine. A fire destroyed the machine. On July 1st, before the fire, they had made a payment of 20K. On august 1st because the fire they declared bankruptcy. Before the fire, the lien was properly secured. The perfection was contemporaneous with the machine. If there is a preference then it must be the payment.

• CS is assumed to be insolvent • Under 547b5 is the creditor better off with the payment or is there no difference

o The issue is when is the b5 element met: at the time of the transfer or at the point of the filing If this is at the point of filing the creditor would not have received this much

• This is more convenient because there are schedules filed by the bankrupt and this means that there is only one analysis not multiple ones at the point of each transfer

If the point is the time of the payment then the payment is not preferential if there is a hypothetical liquidation

• The policy is if preference law is trying to prevent creditors form taking advantage vis a vis other creditors, at this point they already have an advantage; they are not preferring themselves anymore than they already were

o Getting the payment does not seem like there is a preferential motive or intent on their part

o This also seems fair 27.8: what of CS has purchased another machine worth 300K unsecured after the fire but before the filing?

• The notion of buying this unsecured is unusual to say the least • Is there is a preference?

o If HB does not have an after-acquired property clause to cover machines of this sort then there is no preference because there is no transfer by the debtor

o If there is an after-acquired property clause works as it is supposed to then what is the debtor transferring to HB? A security interest in the machine

This is then a question of timing; of when HB got their priority in the collateral • It has been held under article 9 state law, a floating lien, the priority in the

collateral dates back to the date when the financing statement was filed • Just because this is when the priority is measured under state law does not mean

that this is the point of transfer for preference purposes; this is not answered by article 9

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• Note 547e3, which says a transfer is not made until a debtor receives rights in the property

o This means under preference law the transfer is when the debtor gets the machine, not at the date they gave the original security agreement

This then turns into a b5 question • Here clearly the creditor is better off at either point • In this case there is a preference • Even if the element is measured at the point of filing, the security interest in the

new machine will be avoided, but will the payment of 20K be a preference? Yes because if above

• Suppose CS has insurance and used the proceeds from this to buy a new machine. HB has a security interest in the proceeds of insurance payments if there is one under article 9, 9-203f, 9-315a2. This means that there is a continuous attachment in the collateral, whether it is money, a new machine or what. Is this a preference?

o It appears here that the collateral changes form but it is a continuously perfected interest; they are not any better of but-for the change in the nature of the collateral

27.9: has there been a preference? • Assume that there is not a security interest when the lien is made

o This falls more under the earmarking doctrine when unsecured money is borrowed to pay off another unsecured debt

o Was it the debtor who said the C, lend me 50K so I can pay off existing C, and just send it to the existing C. Or was it the bank saying, I will make you this loan but it was to go directly to the creditors. So who is directing the payments?

o In the classic earmarking case, where the creditor is directing the payments, one of the elements of 547b is not met.

This element is in the intro is that there was no transfer of the debtor in interest in the property because the debtor did not direct the money; he had no choice

If the debtor had a choice then they do meet this standard because this is property of the debtor

Basically, this emphasizes the question of who has control because this determines the outcome

If the creditor directs the payment then the debtors are not any worse off; there may be new faces but there is still old debt

o Here the lender is directing the payments and is perfecting with a lien on a forklift. Is there a preference there?

The new creditor is not the same as the old There is a lien for 20K, and as for that collateral the C will be paid 100% of this This is not the same as the other unsecured creditors These unsecured remaining creditors are hurt to the 20K If there is a preference, what is it? Is it the payment to the other C or is it the receipt of

the lien on the forklift • This is complicated • The transfer of the security interest is a preference • If the creditor is paid off, then look at b1, to or for a creditor. Here this meets the

for the creditor—this is a transfer for the benefit of the creditor who is paid off o There is also an antecedent debt here o This is an indirect preference

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o Remember: even if the transfer of the security interest is for them (although not to them) they TIB can recover from the creditor who made the transfer

Note 550a1: the TIB can be from the initial transferee or from the one who got the benefit

Once the transfer is a preference then the trustee can recover from either party

27.10: April 20, SA repaid himself and this wiped out the last of the liquid assets. Within the 90 days the C banded together to get advice. Should they file now or does it matter?

• The president is an insider and is subject to an expanded period • Under 547f the benefit of insolvency presumption is limited to only 90 days before filing—there is not

an automatic extension for an insider • The benefit that the insolvency presumption only lasts for 90 days • Under state law there are other solutions:

o SA’s earlier contributions were equity and not loans; if this is own then it is an unlawful dividend

o There is also fraudulent transfer law under the UFTA Under §5b of this a transfer to an insider for an antecedent debt is fraudulent if the D is

insolvent and the C had reasonable information the D was insolvent A D is insolvent is presumed to be insolvent if the debtor is not paying their debts as they

come due; this is rebutable There is a 1 year statute of limitations on this type of transfer

8. The exceptions:

a. Congress has made it clear that on the eve of bankruptcy C cannot act in a way that is unfair to the other C. On the other hand, we want C to continue to do business with a D so that they may reemerge from b’ruptcy. Because of this concern, there are 5 major exceptions written into the code (well, there are really 8, but 3 are not used very often). They are:

b. Contemporaneous exchange/enabling loan i. In re Alexander: borrowed money from F to buy a house. F filed the deed 14 days after

the loan. A declared b’ruptcy about a month after buying the house. A claims the property is exempt but they are behind and F wants to FC. F claims that this is was a contemporaneous exchange and that they should be allowed to keep their secured interest. The court held that is was not sufficiently contemporaneous and that the lien could be avoided as a preference.

1. Rationale: the person contesting this has to show that both of the parties intended for this to be a contemporaneous transaction and that it was indeed, substantially contemporaneous. The intent of the parties makes no difference if the actions were not substantially contemporaneous. This provision was written to avoid the problem of the secret lien. Some delay is allowed when the transaction is contemporaneous in fact. One good rule of thumb is if the security was granted within 10 days. If it is not substantially contemporaneous then the security is granted on the account of antecedent debt and may be avoided as a preference. There is not a lot of room for flexibility in substantially. The only flexibility should be within the 10 day window—if the filing is done in this time then it is SC.

2. this should be policed for several reasons:

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a. Prevent people from hiding secret liens and then filing them on the eve of bankruptcy to give themselves a better position.

b. Preventing the C from attracting new unsecured debt by holding out something that looks like it could be a security or be seized and sold to pay the debt

c. Prevention of fraud c. Ordinary course of business: this was written to balance competing concerns that we want C to

deal with debtors and we do not want to punish them for it. We do not want to punish the business that supported the debtor as they slid into b’ruptcy

i. In re Roblin Industries: R filed a c11 that was converted into a c7. The trustee in the case seeks to recover a payment that R made to F. F supplied R with raw materials and when R fell behind in their payments they sought to have a deal with F. F agreed to this and asked for payments every month. F continued to supply R with goods during this time. Still, R managed to go bankrupt and the trustee wants to recover payments as preferences. The court held that these were indeed preferences because they feel outside of the ordinary course of business exception.

1. Rationale: this has three key provisions which the C must prove to be able to keep his payment. Here the question turns on whether this was OCOB within the industry. OCOB refers to the practices within an industry and what is normal. As long as something is not so far outside of the range of normal, it can be OCOB. Looking to see if it is OCOB between the tow people would render the third requirement redundant which was not the intent of congress. This promotes the ideas that C are encouraged to not pillage the D and that there should be fair distribution among the C, especially those who play by the rules. This is an objective standard and requires a factual inquiry. Here, if the industry standard was to restructure a defaulted debt, then it would be allowed. F did not advance any evidence that it was consistent with the OCOB.

d. Purchase money i. This is based in part on UCC article 9. The idea behind it is that it is beneficial to the

estate to bring in new property and the people who deal with a failing D deserve the most protection.

e. New value i. See page 629.

ii. This only shelters preference payments that come before the new extension of value iii. We do not extract repayment of preferences from the C who extended a new line of credit

to the D after receiving the payment. iv. In essence, a new extension will wipe out an older payment but only to the amount of the

extension if it is smaller than the payment f. Floating lien:

i. This was written with the intention to catch up to modern business practices where the goods that the D is holding may change on a daily, even hourly basis. This allows the C to have a lien on whatever goods the D is currently holding.

ii. This prevents the after acquired property right from being disturbed in bankruptcy. iii. This also flatly rejects the relation back doctrine for the purposes of the floating lien. The

lien becomes good when the D acquires an interest in the thing. iv. These are usually seen on accounts receivable

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v. If there is an improvement in the position of the C during this time, then that amount can be avoided.

vi. In re Nivens: N is a farmer and filed for b’ruptcy when the crop was in the field. He was entitled to a disaster payment and the SBA wanted those payments. Since priority in the support checks is derived form the rights in the crop, priority in those checks goes to the one who has priority in the crop. B had a security interest in the crop but the TIB claimed that taking the checks would be a preference. The court held that there was no improvement in position and there was no preference so the bank could keep the money

1. Rationale: crops in the field are inventory. A preference will not result unless the person goes out and improves his position during the 90 days. If there is an increase in the value of the inventory due to market fluctuation outside of the control of C or D then there is not a preference. If there thing comes into existence during the period and the lien attaches to it, then there is a preference. There was an increase in the value of the crop but it did not come into existence during this time.

2. here there is no doubt that the farmer will be reimbursed for his work 3. if the debtor had used his own money to increase the value of the crop, then there

would be a pro-rata share 28.1: E delivered gas to F. Because F was in financial trouble, E only made deliveries for cash. Three times F did not have the cash on hand. F paid at the next delivery. Is there a preference?

• The three times when F paid later are preferences • Suppose that with the cash deliveries, E pumps the gas first and then F pays the driver. Are those cash

payments preference? o Technically this is antecedent debt o But this will never stand as preferences because they are substantially contemporaneous under

547c1 A very short delay of a few moments be considered substantially contemporaneous Will 547c1 save the few days delay from being a preference

• There must be intent o The transfer must be intended by both the creditor and the debtor for new

value o The intent must be for an exactly contemporaneous exchange o The classic case for this is payment by check o Here the intent should be measured with each transaction which updates

intent o At the times of these 3 transfers the intent was not for contemporaneous

transactions o As it turns out here this is failed so there is not a 547c1 exception

o This may fall under 547c2 ordinary course o This could also fall under 547c4

This works to eliminate the first preference when there is a subsequent extension of new value

Here the third time there is an extension then this is not eliminated Even when there are new contemporaneous giving of gas, there it fails part of the test

28.2: B decided to buy 5 trucks on credit from G. They traded in 5 old trucks and signed a note for 300K. They gave G a security interest in the trucks on the same day they signed the note. 90 days is July 2nd, the day

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after the security was signed. On July 12, the trucks were built. On July 28th the trucks were delivered to the dealer. On August 11th the security interest was perfected. On September 30th, B filed for bankruptcy.

• E was July 1st • The issue is when the debtor had the right in the collateral, and under UCC article 2, this is the date of

identification of the collateral. This would make it July 12th • Perfection is on August 11th • When is t?

o Note 547e2b o This is clearly a preference o If this was avoided then the there is an avoidance in the trucks o Does the 547c exception apply?

Note 547c3b • There is a timing question • This had to be perfected within 20 days of delivery

• Suppose that B received the trucks on July 18th. Suppose also that in this state the D was in a state that had a 30 day grace period under Article 9-317e for a PMSI. Does this help them for preference purposes?

o They have a valid perfected security interest o 547b makes reference to generally applicable law, but this exempts the section in 547c3, which

makes the 20 day window the only applicable law o If they lose her could they win under 547c1?

Is this a contemporaneous exchange? The transfer was at a later date The Alexander case says that when a party misses a grace period in c3, or another one

they cannot fall into the generally applicable category of c1 • This is the so called enabling loan grace period

There are three grace periods that we have covered so far. They are: • 9-317(e)

o Who is eligible? This is for the PMSI secured creditor only

o Length of the grace period: Generally 20 days (some states might give one longer)

o Starting and end point of the grace period: Start: debtor’s possession End: perfection

o Effective with: Intervening liens 544a strong arm powers, 545, 549

o not effective with: 547(b) avoiding powers

• 547(e)(2)(a) o who is eligible

for any consensual lien holder o Length of the grace period:

10 days o Starting and end point of the grace period:

Start: attachment End: perfection

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o Effective with 547(b) avoiding powers

o not effective with: strong arm powers 544(a) intervening liens

• 547(c)(3) o Who is eligible?

PMSI only o Length of the grace period:

20 days o Starting and end point of the grace period:

Start: possession End: perfection

o Effective with 547(b) avoiding powers

o not effective with: 544(a) strong arm powers intervening liens

Preference liability and the ordinary Course of Business exception (OCOB) 28.3: GV filed for bankruptcy. Four weeks before filing they paid the utility bill of 4.2K. The utility had threatened to cut off the power. Is this a preference?

• This is antecedent debt, made within 90 days, and they are insolvent. It appears that this is a preferential payment

• Does the OCOB exception apply? o How was the debt incurred? There is nothing unusual getting electricity on credit o Made in the OCOB of the debtor and of the transferee?

It must be ordinary with the two parties dealing with each other Must also be made in accordant with ordinary business terms This gives three factors (the debtor, the transferee and the terms)

• But under 547c2c, what are ordinary business terms o This could look solely to the party o Of this could be measured from an industry standard o This is in the roveland case which held that the ordinary course of

business should look at an objective industry standard o The minority view looks only at the parties

Why do we need the subjective standard twice—it is already in 547c2b

One must show that the debt was incurred in an ordinary way They must also then show it is ordinary in an objective sense

• But then what are ordinary terms of business? o This is more of a statistical dimension o How ordinary must it be o The seventh circuit has held that ordinary means not extraordinary; as long

as it is inside the outer bounds of the business. See also Roveland This does not fall under 547c2a This is not under 547c2b

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• Since GV pays late all of the time and they were more than 90 days late, this does not seem ordinary

547c2c: this does not seem extraordinary • the meaning of this provision is to allow companies who are in distress to keep

operating • in a way this looks at preferential intent • should this be construed broadly

o this encourages people to deal with insolvent companies so they might be able to restructure

o this has a cost on the estate because the estate will be smaller • in the long run the judge will perform a ‘sniff test’: all other things considered

does this smell bad • The June, July and August mortgage payment are all late and have a 50 penalty with them. Is this

ordinary course? o The courts usually allow late penalty charge as OCOB

• SSB got a repayment in full of a loan on the day it was due o Should OCOB extend only to short term trade debt or does it extend to long term debt o There used to be a 45 day requirement: the loan had to be made 45 days before payment was due o This was then eliminated in the 1984 amendments o The Supreme Court then decided this in 502 US 151 and held that all debts could fit within the

547c2 could be considered OCOB debts no matter when they were acquired There is no category exception for payment of long term debt

• Malloy was paid on a debt that he had given to GV could make payroll. This was a 30 day debt. M is the principle stock holder. Is this OCOB?

o This does not appear to be OCOB o In fact this really seems to be odd o Was this really a loan or an equity infusion—a lot of time when stock holders loan money to

their company makes a loan it is an equity infusion This also often fails the sniff test because this seems to be all too convenient

o What about section 5b of the UFTA Under 544b lets the trustee use state law avoidance mechanisms as long as the trustee can

find an actual unsecured creditor who would have been in the position to use the state law avoidance

So the trustee is not in the 544a role, but looks for an actual creditor in the bankruptcy estate and would be in the position to do or use the avoidance

If the trustee can find this person then the trustee can use 5b which says that there is an avoidance for payment to an insider

Why use this when it appears that 547b does the trick? • There might be a situation where this works when 547 does not

There are then exceptions under 8f: • Subjective portion only • Subject to help the debtor and on an antecedent debt of the debtor; the debtor

gives a security interest to an insider and is on account of an antecedent debt and is for new value and is done with the insider’s best intentions

• The granting of the lien might be a 5b preference but under 8f there might be an exception

o Here will the payment more qualify under 547c2 or under UFTA?

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Under the UFTA because there is only a subjective test which is a lower standard to meet than the objective factor

But since the UFTA is derived from bankruptcy law it does not have any other remedies. It does apply outside of bankruptcy which means that it can be used under state law; this is its real utility

28.4: ON has a line of credit from DM. DM periodically advanced ON monies and when there have been monies advanced ON pays it back. The timeline looks as such:

1. 1/1 Beginning balance of 80K 2. 1/3, payment of 5K, balance of 75K 3. 1/15, credit of 4K, balance of 79K 4. 2/10, payment of 2K, balance of 77K 5. 2/28 Credit of 8K (this wipes out the preference on 2/10) 6. 3/4, credit of 9K 7. 3/10, payment of 1K 8. 3/17, credit of 6K (this wipes out the preference of 1K on 3/10) 9. 3/20, payment of 10K 10. 4/1, payment of 9K

• the easy way to do this is to find the highest balance and the balance on the date of filing, subtract

• all this assumes that the payments themselves were preferences which they likely were and that the advances were all unsecured and the bank got nothing they could keep on account of the new value

Class hypothetical: B prepays for a shipment of sugar, 2K, on day 88. On day 70 the sugar is delivered. Manufacturer of sugar files for bankruptcy on day 0. Was the delivery a preference?

• T is on day 70. • The transfer must be a transfer of the property of the debtor. The bakery will argue that this is not a

transfer of the property of the debtor because they had already paid for it. Since they had paid for it the transfer was a transfer of the creditors property

• But couldn’t all creditors make this argument—the creditor has always already given the debtor money and they could claim it is their money they are getting back

• What should the bakery have done when it prepaid the sugar? They should have sought a lien and this would then be in a position that they would be no better off by the transfer of the sugar

Class hypothetical: D buys a 15K car with 5K down. This is on day 180. D agrees he will make payments for the remaining 10K on a 60 month note. C gets a PMSI on the car. The seller insisted as a condition of the deal that the D got insurance on the car; failure to insure would be a reason for repossession. D pays off the car in full on day 88. D then quits paying the insurance because this is not a condition of keeping the car. On day 10 the car is totaled. D then files on day 0. Is this a preference?

• If we measure b5 on the point of filing without the payment there is a preference o There is no car o There is no insurance o But this does not seem fair to the seller

If the transfer had not been made is an element Here if the transfer had not been made there would have been insurance and there would

be insurance proceeds making the seller whole He is not being made better off by the payment then

o There is a question of how far the hypothetical world is going to be taken. • If this is measured at the time of the payment then the C is fully secured and there is not a preference

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29.1: P has a line of credit with C. At day 90 the debt was 4.0m and the collateral was worth 4.2M. In the 90 days before bankruptcy, C extended 600K in money and the collateral was worth 5.2M. At day 0 when P filed for bankruptcy the debt was 4.6M and the collateral was worth 5.2M. Can the TIB make an attack against C? Is there a preference under 547b, and how much is saved by 547c5?

• If there is a preference it is the increase in the value of the collateral o To determine if this is a preference, then ask 2 questions

Was there a transfer at all • According to Nivens, a mere increase in value is not a transfer • If the debtor has bought the collateral with otherwise unencumbered money or it

they had made the purchase with an unsecured loan from a new creditor then there would be a transfer

o It would be picked up by the ‘after-acquired’ security agreement and this is the transfer that is the preference

• The middle ground would be if the 1M increase in collateral was purchased from the proceeds of a sale of the collateral in which the C already had a security interest

o It is a transfer because there is a transfer of security agreement from one thing to another

o The transfer cannot take place until the debtor has rights in the collateral Was the 547b5 element met

• No because there was not a transfer • With the other two hypothetical ways that the collateral was increased (taking

unencumbered cash, making a sale) would the creditor be made better off o With the unencumbered cash is the creditor better off? Yes because the

creditor did not have any claim for the money before the purchase and now they do

The question is where would they be without the transfer • They would have no claim in the money • Now they have a special claim in the money

o When the debtor sells some inventory and purchases new inventory the creditor is not better off because they still have a lien; the transfer does not make them any better off

• In this situation it appears that the only transfer is the one where the debtor makes a purchase of collateral made with unencumbered cash or with the proceeds of a new unsecured loan, is there a 547c5 exception?

o Will this help the creditor and make this a not preference or not work so that the transfer is still a preference

o This section identifies a certain type of preference which is the creation of a security interest in inventory or receivables, and then says that any perfected security in inventory/receivables then it is excepted from preference at all

This is the starting point but there is an exception that says to the extent that the aggregate that all such transfers to the transferee causes a reduction

The line of credit is given within the 90 days then this is the first point of the two-point net improvement test

To the extent that these type of preferences are serving to reduce the unsecured deficiency claim this is the extent to which we will call these preferences and not protected

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This makes one look at the first point and look at the unsecured deficiency claim and whatever that is this will define the extent to which these transfers can be deemed presences

Basically, you look to the beginning and see if there is a deficiency If there is a deficiency then how much was it reduced during the 90 days before the filing If there is no deficiency to be reduced then the statement that begins 547c5 is where one

should look—to the extent that this might have made the creditor better off it did not and this is not recoverable because in reality the creditor is not made any better off

• Basically when there is no deficiency at the first time, then there is not a preference because the creditor is not any better off

29.2: the C had made payments totaling 200K each in the 90 days before filing. Is this a preference? • These will not be protected by the 547c5 exception because this is not the transfer of a security interest

in inventory/receivables • The issue is a 547b5 issue • This will be measured at the point of filing • Here the payments reduced the debt to 4.4M but the creditor is over secured even if the absence of those

payments • This means that there is not a preferential transfer

29.3: R has a value 450K. They owe N 430K. N becomes worried when the collateral drops in value. R buys more inventory. Is there is preference

• Yes there is a preference under 547b when they bought the 200K in new inventory o This is a transfer of the value under 547 and giving the C a new perfected security interest

• There is an exception under 547c5 because there is no improvement in the position of the creditor o At day 90 the creditor is over secured o Even though during the 90 days the collateral value drops to the point where the creditor is

unsecured, this is ignored for the 547c5 exception o This is because 547c5 looks at day 90 alone and ignores flux in between day 90 and the time of

the filing o This is a very wooden test and can protect the creditor who may have a preferential intent to

make the debtor shore up the creditors security interest 29.4: when the creditor’s value improves by a mere increase in value then there is not a preference. The fluctuation in value is not a transfer under 547b. Hypothetical 1: on Day 90, the debt was 15M. The line of credit was 10M. On the day of bankruptcy the debt was 13M and the collateral was worth 11M. During the 90 days there was a collateral purchase from unencumbered money of 1M and a repayment of 2M. What is the preference and how much can be avoided?

• Under 547c5 there is an assumption that the collateral purchase is not a preference except to the extent that it put the creditor who was under-secured in a better position

• Here the purchase decreased the deficiency by 1M dollars. This is fully avoidable and not protected by 547c5

• The repayment of 2M is a preference under 547b5 o Here the collateral must be hypothetically be put back to 10M o If the payment had not been made then the debt would have been 15M o This made the creditor better off when the creditor was better off o Here the preference is 2M

• Adding the two preferences there is 3M in avoidance

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Hypothetical 2: 15M in debt 10M in collateral. On day 77 there is a purchase of collateral fro 4M. On day 71 there is a repayment of 3M. On day 64 there is a collateral purchase of 2M. On the day of filing the debt is 12M and the collateral is worth 16M. Is there an avoidable preference?

• First aggregate the collateral purchases, which is 6M. o Under 547c5 the collateral purchases would be protected except to the extent they reduce the

deficiency claim o Here this means that it reduces the deficiency by 5, meaning that there is 5M in preference avoid-

ability o 1M is not subject to preference avoid-ability

• Then the debt is hypothetically 15M and the collateral is worth 11M. with the repayment the creditor is under-secured and the payment of 3M is a preference

Hypothetical 3: at day 90, the position is the same as in 1 & 2. On day 77 the collateral is destroyed completely and there is no insurance. On day 71 there is a collateral purchase of 13M. On day 64 there is a payment of 10M. On the date of the filing the debt is 5M and the collateral is worth 13M. Is there an avoidable preference. What is the total preference liability? Hypothetical 4: On day 90 the facts are the same. On day 71 there is collateral purchase of 30M. On day 64 there is a repayment of 10M. On the date of filing the collateral is worth 40M and the debt is worth 5M. What is the total preference exposure for this creditor? Hypothetical 1: on Day 90, the debt was 15M. The line of credit was 10M. On the day of bankruptcy the debt was 13M and the collateral was worth 11M. During the 90 days there was a collateral purchase from unencumbered money of 1M and a repayment of 2M. What is the preference and how much can be avoided?

• Under 547c5 there is an assumption that the collateral purchase is not a preference except to the extent that it put the creditor who was under-secured in a better position

• Here the purchase decreased the deficiency by 1M dollars. This is fully avoidable and not protected by 547c5

• The repayment of 2M is a preference under 547b5 o Here the collateral must be hypothetically be put back to 10M o If the payment had not been made then the debt would have been 15M o This made the creditor better off when the creditor was better off o Here the preference is 2M

• Adding the two preferences there is 3M in avoidance • Here the collateral preference is 1m • The repayment preference is 2M • This means that the total preference is 3M • If a creditor becomes wildly over-secured, the total amount of the avoidable preference is only the

amount that the deficiency is reduced for the purpose of 547c5; under 547b this would be the amount that the creditor becomes over-secured

Hypothetical 2: 15M in debt 10M in collateral. On day 77 there is a purchase of collateral fro 4M. On day 71 there is a repayment of 3M. On day 64 there is a collateral purchase of 2M. On the day of filing the debt is 12M and the collateral is worth 16M. Is there an avoidable preference?

• First aggregate the collateral purchases, which is 6M. o Under 547c5 the collateral purchases would be protected except to the extent they reduce the

deficiency claim o Here this means that it reduces the deficiency by 5, meaning that there is 5M in preference avoid-

ability o 1M is not subject to preference avoid-ability

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• Then the debt is hypothetically 15M and the collateral is worth 11M. with the repayment the creditor is under-secured and the payment of 3M is a preference

• There is a total transfer of 6 million o This qualifies for protection except to the extent that it serves to reduce the insufficiency on day

90 o So here this 6M reduces the insufficiency by 5M so the creditor loses 5M of this as an avoidable

preference but gets to keep 1M under the protection of 547c5 • The repayment of 3M has a 547b5 question but this must be asked as if the additional gains in the

collateral had been avoided already o This means that the repayment preference is 3M o The collateral preference is 5M o This means that the total preference is 8M o For purposes of c5 all we really care about is the reduction in collateral insufficiency by

increases in the value of the collateral—this means that the 547c5 question should be asked first What is the amount of the insufficiency And what is the addition of the collateral This does not implicate in the first step any of the payments under 547b

Hypothetical 3: at day 90, the position is the same as in 1 & 2. On day 77 the collateral is destroyed completely and there is no insurance. On day 71 there is a collateral purchase of 13M. On day 64 there is a payment of 10M. On the date of the filing the debt is 5M and the collateral is worth 13M. Is there an avoidable preference. What is the total preference liability?

• Looking first at the 547c question, the collateral purchases: o The 13M purchase is an addition of collateral and would be protected except to the extent that it

reduces the insufficiency o This means it is not protected to the extent of 5M o At the date of filing this is an under-secured creditor receiving payment o Here 5 would be the maximum amount of liability o The collateral acquisition is 13M o Since the deficiency is 5M, and the purchase was for 13M, the transaction is avoidable to the

amount of 5M; 8M is not avoidable • The repayment is also meeting the b5 element • Alternatively:

o At day 90 there is an insufficiency of 5M. At day 0, with the payment is 2M. this means that the cap on the preference is 3M

o This can only be avoidable to the extent that it reduces the insufficiency, which is 3M o Here this means that 10M is protectable o The maximum is still 5M, but here the reduction on the insufficiency is 3M o The repayment is considered here first; what is the reduction due to acquisitions not by payments o After the c5 analysis is complete then the payments are considered and determined whether they

are also preferences Hypothetical 4: On day 90 the facts are the same. On day 71 there is collateral purchase of 30M. On day 64 there is a repayment of 10M. On the date of filing the collateral is worth 40M and the debt is worth 5M. What is the total preference exposure for this creditor?

• Here this creditor goes from being slightly under-secured to being very over-secured • The preference for c5 purposes will be subject to the cap of 5M

o This means that there is only a 5M preference o The rest of the collateral acquisition is not a preference

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• With the repayment of 5M and the collateral value is adjusted for the 5M preference (making the collateral to this creditor worth 35M) then the question must be asked if the payment must make the creditor better off

o The 10M repayment is not making the creditor any better off if the payment had not been made o This is because at the date of the filing they are over-secured o This means that the payment is not a preference

29.5: CB has a loan to M and M is in trouble. The bank wants to set off against the bank to prevent likely losses. What questions should the firm ask the bank?

• What are the downsides of setting off right now o This might precipitate an involuntary filing o Then under 553b the set-off might be avoided if the debtor ends up filing within 90 days of the

set-off • Without the set off if the debtor files

o Seek lift of stay and do a post-petition set-off o Under 553b: this will not operate at all to the extent that the bank waits to post position to wait

and get lift of stay o If this is done post-petition then the avoidance cannot be used to avoid this o The downside of this

• While the bank does not set off the debtor can withdraw the money from the account and there goes the set off

• If the debtor tries to withdraw then the bank can stop this without doing a setoff • To clarify which position is better

o What is the clients vulnerability under the 553b test • When while the person file for bankruptcy if at all • If this was known then the avoidance test could be run

o Will the set-off immediately force the debtor into immediate bankruptcy • This is often the case, so this should always be considered • What then should be the things considered under the 553b standard

• How much was owed 90 days ago • How much was in the account 90 days ago • How much the debtor owes today and how much is in their account today • Ideally the two numbers should be charted on a daily basis over the past 90 days • Then this would allow one to look for this highest and lowest insufficiency points • The test of 553b is similar to c5, but is different. It says that a set off that is made

within 90 days of filing is recoverable by the trustee to the extent that this improved the creditor’s insufficiency compared to the insufficiency at the later of 2 dates which are 90 days before filing or when there was first an insufficiency

Variation No. 1 to 29.5: Suppose at the time of the phone call from Consolidated Bank there is $75K in the mobile-home dealer's bank account and the bank is owed $200K. You look at the chart the bank has prepared and see that 90 days ago there was $30K in the account and the bank was owed $210K. If the bank did the setoff today and the debtor immediately filed bankruptcy, what would be the trustee's 553(b) recovery? Knowing these numbers, does it make sense to set off now?

• The insufficiency right now is 125K. So even if the bank set it all off them would still be owed 125K. • 90 days ago the insufficiency was 180K. • the trustee can recover from the bank assuming that the debtor immediately files under 553b to the

extent that the insufficiency was less than it was 90 days ago

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o 180K-125K =55K o this may be recovered so that 55K will be avoided

o And the bank really might have hurt them because the rest of the claim now might be unsecured Variation No. 2: suppose at the time of the phone call there is $125K in the bank account and the bank is owed $100K. You look at the chart the bank has prepared and see that 90 days ago there was $130K in the account and the bank was owed $210K. If the bank did the setoff today and the debtor immediately filed bankruptcy, what would be the trustee's 553(b) recovery? Variation No. 3 Suppose at the time of the phone call there is $125K in the bank account and the bank is owed $100K. You look at the chart the bank has prepared and see that 90 days ago there was $130K in the account and the bank was owed $110K. You also see that while the loan balance stayed the same, the amount in the account fluctuated as follows: Day 90:$130K; Day 85:$109K; Day 80:$200K; Day 75:$10K. Under these facts, when does it make the most sense for bank to set off if we assume that debtor will file bankruptcy as soon as the setoff is affected? If the bank did the setoff today and the debtor immediately filed bankruptcy, what would be the trustee's 553(b) recovery? Given these facts, suppose the bank did set off and the debtor had some flexibility about when to file. If you were advising the debtor, how many days would you have the debtor wait before filing to maximize the trustee's recovery under 553(b)?

A. Assume that if you do setoff there is a good chance that the debtor will file bankruptcy B. Problem hypo from email

a. The debt owed to the bank was 200k b. The credit in the bank is 75k c. The insufficiency from the banks perspective is 125k d. On day 90

i. The bank is owed 210k\ ii. The collateral in the account was 30k

iii. The insufficiency is 180k e. The 553b formula says

i. IP1-IP2=AP 1. insufficiency at point 1 minus insufficiency at point 2 equals the avoidable

preference 2. 180k-125k=55k

ii. This means the trustee can take 55k back iii. The AP will always be capped by the amount the bank actually setoff, it cannot be for

more than they actually took f. Why would one setoff

i. Because one could spend the whole 75k and the trustee would get noting C. Variation 2

a. Day of setoff and filing i. 125k in bank account

ii. 100k in debt iii. There is no insufficiency, there is a collateral overage of 25k iv. The lowest the insufficiency can be is 0, one does not call it a negative 25

b. Day 90 i. 130k in account

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ii. bank owed 210k iii. insufficiency of 80k

c. formula i. 80k-0=80k is avoidable preference

d. variation 3 i. day 90

1. d=110k 2. c=130k 3. I=0

ii. Day 85 1. 109k=c

iii. day80 1. c=200k

iv. day 75 1. c=10k

v. What will be the best day for bank to setoff 1. must go to first point in the 90 days where there was insufficiency 2. on day 85 the insufficiency was debt 110 and collateral 109 so 1k insufficiency 3. Day 85 becomes the first point of the 2 point test because day 90 there was no

insufficiency and day 85 is the first date there is an insufficiency vi. 1k-0=1k avoidable preference

vii. If one were advising the debtor how many days would one wait to maximize recovery? 1. I would wait another 15 days so that day 75 would be day 90 2. There would be a huge insufficiency 3. He said wait ten days

a. Only 200k in account on that day 90 so no insufficiency, point one still moves to the 10k balance day which achieves what I wanted of having the huge insufficiency

4. The bank would be able to avoid 100k instead of just a thousand dollars D. Problem 29.6

a. Liberty bank lent money to Tulsa pool on i. 90k outstanding debt

ii. Tulsa pool gets money to boost inventory from 30k to 100k b. What do you advise the bank do to get the most money with the least avoidable preference

i. Assumptions 1. current line is 90k outstanding with the debtor 4 months behind on payments 2. day90 d=90k as well 3. c=30k on day 90

ii. April 30 c=100k iii. On day 0

1. d=90k 2. c=100k 3. no insufficiency

c. The c5 exception here will fail to protect the preference that improves the position of the creditor, so the 60k will be avoidable

d. So one does not want to push them into bankruptcy

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e. This means tell the bank to wait long enough so that when you force them in to bankruptcy the purchase is outside the 90 days of preference avoidance

f. There is a risk to this strategy because if you do not force them in you might have to prop them up for a little while

g. Is it unethical to prop a debtor just for self interested reasons i. This not unethical because there is always the chance the debtor will succeed

h. Also, one usually takes a security interest in the proceeds of the collateral as well so waiting does not prejudice you too badly, unless the debtor runs off to Reno with the money

g. Setoff preferences: the TIB is allowed to recover from the bank the amount it setoff and improved its position.

i. if the C waits until bankruptcy and then does this with the permission of the court then there is no problem

ii. In re Wild Bills, Inc.: WB filed for chapter 11 and this was converted to c7. Prior to the petition U made loans to WB. 90 days before filing the opening balance for all of their accounts was 211K. During this day another 130K was deposited giving a total of 341K. They owed 1.433M on the loans on this date. 88 days before filing the bank declared the loans in default. The bank then exercised its right of setoff. The remainder of the loans was unsecured. The trustee contested this and the bank said that it had a valid right of setoff. The court held that there was a valid right of setoff and that the bank had the right to exercise it.

1. Rationale: the 90th day before b’ruptcy includes all of the activities that went on in the account on the 90th day. Otherwise, we are only counting 89 days. On the 90th day WB owed 1.433M. After the setoff the bank was owed 1.094M. On the 90th day the insufficiency was 1.083M. This means that they did not act in a way to put themselves in a better position as compared with position they were in 90 days before filing.