Next Class Ch 12Class #1Thursday, January 18, 20118:10 PM Barkasy - partner in a law firm and RU-Camden 1988 Graduate.

Deuteronomy 15 1: “At the end of every seven years you shall grant a release.”

Deuteronomy 15 2: “And this is the manner of the release: every creditor shall release what he has lent to his neighbor. He shall not exact it of his neighbor, his brother, because the LORD’s release has been proclaimed.”

US Constitution Article I, Sec 8 – Congress shall have the power to established “uniform laws on the subject of Bankruptcies throughout the United States.”

I. HistoryA. Under English Law – Creditor could seize Debtor’s property to satisfy the

debt.

B. Insolvency Laws were voluntary – much like today, but you could turn over all your possessions to your creditors (to get out of jail)

C. Financial Panic – Modern day Recession which tend to precede changes to the bankruptcy filings (increase). When the economy was bad the bankruptcy law was passed that provided affected people some relief, then after the economy rebounds they were repealed as they were thought too lenient on the debtor.

D. First Bankruptcy Law – 1898 Bankruptcy Act

i. Title 11 of the US Code is the Bankruptcy Code

ii. 1898 Bankruptcy Act stayed in effect until 1978 when it was replaced by the Bankruptcy Code

iii. Chandler Act – The Chandler Act was an amendment to the Bankruptcy Act of 1898, and made a number of substantive changes in the straight bankruptcy provisions of Chapters I through Chapter 7. By far its most sweeping changes were in the rehabilitative provisions for business and consumer debtors set

forth as Chapters X through Chapter 13 of the amended Act. Chapter X was an offshoot of § 77B, containing much of the same language together with new investor protection provisions in response to some obvious shortcomings of § 77B suggested by many lawyers. Chapter 10 bankruptcy was restricted to corporate debtors, was intended for situations where a major restructuring was necessary, and was not available where Chapter 11 would suffice.

iv. Bankruptcy is a mainstay of commercial law ever since the Act was created in 1978

v. There is a ton of negotiation in bankruptcy

vi. Settle when you can, because money in the hand is better than going through the following.

1. Debtor’s lawyer: Find the smallest granule of a good faith defense and then delay. The longer the ∆ lawyer can delay the better the ∆ is, since there is no money coming out of the ∆'s pocket

E. Latest updates were made in 2005 – most significant is that it is now harder to file a chapter 7 bankruptcy

II. Title 11A. Title 11 is broken down into several chapters:

i. Ch. 7 – governs the process of liquidation under the bankruptcy laws of the United States. (In contrast, Chapters 11 and 13 govern the process of reorganization of a debtor in bankruptcy.) Chapter 7 is the most common form of bankruptcy in the United States

ii. Ch. 9 – available exclusively to municipalities and assists them in the restructuring of debts. Most famously, Chapter 9 was used by Orange County, California in 1994 to adjust its debts

iii. Ch. 11 – permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals (who exceed the limits in Ch. 13), although it is most prominently used by corporate entities. In

contrast, Chapter 7 governs the process of a liquidation bankruptcy, while Chapter 13 provides a reorganization process for the majority of private individuals

iv. Ch. 12 – similar to Chapter 13 in structure, but it offers additional benefits to farmers and fishermen in certain circumstances, beyond those available to ordinary wage earners. Chapter 12 is applicable only to family farmers and fishermen

v. Ch. 13 – allows individuals to undergo a financial reorganization supervised by a federal bankruptcy court. The Bankruptcy Code anticipates the goal of Chapter 13 as enabling income-receiving debtors a debtor rehabilitation provided they fulfill a court-approved plan. This is in contrast to the goals of Chapter 7 that offers immediate, complete relief of many oppressive debts.

vi. Ch. 15 – a corporate bankruptcy (insolvency) proceeding outside the U.S. can obtain access to the United States courts. It allows cooperation between the United States courts and the foreign courts, as well as other authorities of foreign countries involved in cross-border insolvency cases.

B. When looking in the code add 100 to the chapter i.e. chapter 7 is found in 700.

C. There have been no amendments to the code since October 2005. The only changes to the code are found with the amounts in the debt limits and one adjustment every 2 -3 years based on some formula. Subject to change

III. Debt Collection (State Law)A. Secured Debt

i. Has some sort of collateral: property that the person who owns the debt posts voluntarily to guarantee payment

1. Real Estate: Debt is created by mortgages or deeds of trusta. Collectionb. Taking of the collateral, called foreclosure and

varies widely from State to State.c. ∆ gets some kind of notice of the default, like a

complaint.d. Date of docketing the judgment that sets the time,

not the date of the judgment itself

2. Personal Property: anything not real estate (i.e. a watch or IP), and is created largely through Art. 9 of UCC, execution of a securities agreement

B. Unsecured Debti. An agreement to pay money that was breached, or a tort action?

ii. Collection1. File a law suit and seek a judgment2. Rights flow to a creditor who holds a judgment, but it

doesn't mean that you get the moneya. Judgment: an adjudication of the amount due.b. Filing the judgment will create a lien against all

property owned by the ∆ in that state.c. Creates a secured debt from an unsecured debt.d. Then the lien falls behind any other liens already on

the property.3. For Personal property it is different

a. Writ of execution: provide the sheriff with instructions upon which property he should levy.

i. Actual Levy: picks up the property and takes it somewhere to be stored, and does not happen very often since the creditor has to pay for storage

ii. Constructive Levy: gives the ∆ a paper that says the ∆ cannot do anything with the property until the sheriff sale.

b. From the moment of the service of the levy a lien is created and the unsecured lien is converted into a secured lien.

c. This is important for order in which judgments are dispensed

4. If the property sought is in the possession of 3rd parties they can get a Writ of Garnishment

a. If the person is entitled to wagesb. If the person is entitled to Account Receivablesc. Garnishment is limited under Federal and State Lawd. How do you know what to levy?

i. Info provided upon the loan applicationii. Checks that show the banking and account

number of the ∆'s bank.iii. Public records: show property and other

liens of the ∆

iv. FRCP: post-judgment discovery and post-judgment depositions

C. Judgmenti. It is good anywhere in the state in which it was obtained.

ii. In Federal Court, the judgment is still good in the state in which it was obtained if there are multiple federal districts in the state.

iii. Under the Uniform Enforcement Act the other states can recognize a judgment if the judgment in the original state is filed with the new state before action is taken against the property residing in that state.

Class #2Thursday, January 20, 20118:10 PM 

I. General Principles of Bankruptcy

A. Fresh Starti. Concept that involves the debtor

ii. The idea is that someone who has made financial mistakes should have so way out and should not be burdened by those mistake in perpetuity.

iii. It encourages people to act as entrepreneurs, and allows people to take risks in business

iv. Leveling the playing field (btw. Creditors)1. Treats creditors of a similar type in the same way

B. Battle between the debtors and creditors generallyi. Debtors want to hold on to as many assets as possible.

ii. Creditors want to obtain as much of the debtors property as they can to settle the debts.

iii. Between creditors as to who is going to obtain what property of the debtor to satisfy their debts.

C. Rules of Bankruptcy Code are created by USSC and are rules of procedure that govern bankruptcy cases in all jurisdictions.

i. Can initiate an Adversary proceedingii. Resembles a lawsuit within the bankruptcy proceeding

iii. Certain types of debts that can be dischargediv. Debts incurred as a result of fraud by the debtor are not

dischargeablev. The debtor is sued in the bankruptcy proceeding challenging the

dischargeability of the debt.vi. The 700 rules deal with this and essentially follow the FRCP, the

FRE applies and discovery is permitted.

II. Players in BankruptcyA. Debtor – the corporation or individual responsible for the debtB. Creditor – the lenderC. The Bankruptcy JudgeD. Office of the US Trustee - arm of the DOJ, monitoring, oversight (Not the

same as a TIB)

E. Trustee in Bankruptcy (TIB) - oversees the liquidation or runs a company while the plan is being developed.

i. The trustee is appointed by the regional office of the United States Trustee, and is often a bankruptcy attorney, but can be another person who is experienced in business, such as accountants, bankers, insurance agents, appraisers, real estate brokers or investment brokers.

1. The trustee is paid part of the filing fee as partial compensation for handling a case, and for a no-asset, Chapter 7 case, in which the debtor has no nonexempt property to sell, the fee is the only compensation for the trustee.

ii. Chapter 13 - standing trustee who reviews Ch. 13 plans, recommend approval by the court, and collects plan payments and distributes them to the creditors in accordance with the plan

III. JurisdictionA. 1978 Code granted jurisdiction to Art I judges appointed to limited terms,

and not Art III judges appointed for life.B. Article I judges appointed for a set term by the circuit's court of appeal

C. 28 § 1334 - DC have original and exclusive jurisdiction over the bankruptcy case itself.

i. They also have jurisdiction over the civil cases arising from the bankruptcy case, but it not exclusive.

ii. "Related to" - means anything that could have an impact on the bankruptcy case.

iii. An impact on - is very broad.

D. DC is allowed to refer the bankruptcy case to the Bankruptcy court.

E. Every jurisdiction has an automatic reference to the BC for bankruptcy cases.

i. This can be withdrawn for care shown

F. 1982 Case Northern Pipeline v. Marathon found it unconstitutional to put this broad power in Art I judges not protected by Art III lifetime appointments.

i. Congress could have made b.j. into Art III judges.ii. Senate wanted a two part system, which won and is in place today.

G. 28 USC 1334 - US DC has original jurisdiction over all Title 11 cases except as provided for cases arising under section b, which states things related to Title 11.

H. Related to - (Pacor [pay-core])the outcome of the proceeding could conceivably have an effect on the estate administered in bankruptcy [743 F.2d at 994]

I. § 1334.c.2 - talks about times when the DC would abstain from exercising jurisdiction.

i. DC shall abstain if in a non-core proceeding, the action could not have been brought in a federal court absent the bankruptcy, and it is a state law claim

1. This is a mandatory abstentionJ. § 1334.c.1 is a permissive abstention clause, usually in the interest of

justiceK. 28 USC 157a - US DC has jurisdiction but they are allowed to refer all

bankruptcy cases to bankruptcy judges.i. In every judicial district, this is done automatically.

ii. The DC can withdraw the reference, and the bankruptcy parties can request the withdrawal.

L. 28 USC 157b.2 - states that the liquidation or estimation of contingent or un-liquidated personal injury tort or wrongful death claims are not core proceedings.

i. Except - personal injury claims are not core matters, but are not subject to mandatory abstention , but can be removed by permissive abstention.

M. Bankruptcy judges can hear core proceedings (28 USC 157.b.2) and the judge can hear and rule on it.

i. If it is not a core proceeding, barring consent of the parties, the bankruptcy court can provide findings of fact and conclusions of law to the DC.

N. 28 § 157.b.1 - lists things considered to be core proceedings.

i. Very closely related to the bankruptcy

ii. If it is a CORE issue, the USBJ rendered the decision.

iii. No mandatory abstention, but there can be a permissive abstention

O. Abstention - DC states that is has jurisdiction but it relinquishes jurisdiction.

i. If it is NON-CORE, the USBJ provides proposed findings to the managing DC.

P. Can have a mandatory abstention if both parties do not agree to adhere to the ruling by the USBJ

IV. Appeals A. District Court is the first leg of a Bankruptcy appeal

i. Appeals of the District Court follow the normal course of a appeals i.e. the Court of Appeals then the upon cerci the US Supreme Court.

1. Appeals Court can create the Bankruptcy Appellate Panel, which can take the first appeal.

a. Both parties must agree to adjudication by the BAP.

b. 3rd circuit does not have a BAP, they decided against creating one

B. The DC reviews core matters under "error" standard and non-core matters are reviewed de novo.

  

Class #3Tuesday, January 25, 20106:10 PM 

I. VenueA. Governed by 28 USC 1408

i. Individual: where the person lives or has principle assetsii. Business: incorporated, headquartered or has principle assets or

operations.1. Also, if there is a filing already occurring with a general

partnership, affiliate or subsidiary. (28 USC 1408.2)2. Most large (>50%) Ch. 11 filings are filed in Wilmington,

DE or Southern District of NY.a. DE - since the bankruptcy laws and procedural

benefits are favorable to businessesb. SDNY - many large bankruptcy firms are there and

the laws have changed to be almost identical to DE's.

II. United State Bankruptcy Court DecisionsA. Appealed to the District court

i. Findings of fact are reviewed on "clearly erroneous" standard.ii. Finding of law are reviewed on the "de novo" standard. (Latin for

"anew," which means starting over)B. BAP (Bankruptcy Appellate Panel) - panel of bankruptcy judges in the

circuit.i. Not mandatory, and 3rd circuit does not have one.

ii. Jurisdiction of the BAP is at the consent of the parties, and replaces the District Court level of appeal from the USBJ

iii. DCs hate getting bankruptcy appeals.

III. Property of the EstateA. Estate is created automatically at the moment of bankruptcy petition filing,

thus creating a new entity called the estate.i. §541 - all property of the estate goes into this new estate.

ii. §541.a.1 - all legal, or equitable interests of the debtor at the commencement of the case goes into the estate.

iii. §541.a.6 - post-petition earning of the debtor after the filing are exempt

B. In re Burgess [p. 125] – Appellant debtor sought review of the bankruptcy court's order denying appellant's motion for an order to show cause why the county commission's revocation of appellant's

brothel license was not a violation of the automatic stay. The court held that appellant's brothel license was property, at least for the purposes of 11 U.S.C.S. § 362(a)(3). The fact that state law did not consider the brothel license to be property was not dispositive because federal law determined whether a state created privilege fell within the category of bankruptcy property. Appellant's brothel license had enormous value to the bankruptcy estate because, without the license, there would be no business left to reorganize.i. The court reversed the order of the bankruptcy court and

remanded. Appellant debtor's brothel license was property for purposes of the bankruptcy code. The license was critical to the value of the bankruptcy estate and ability to reorganize appellant's business. County's action in revoking the license was an act to exercise control over the estate, for which there was no governmental exception to protection afforded under the automatic stay.

ii. Sharp v. Dery [p. 117] – Plaintiff bankruptcy debtor received a bonus from his employer in the year after the year when plaintiff filed a petition in bankruptcy. Granting of the bonus was declared post-petition, post-petition employment was required to be eligible for the bonus, and as of the date the petition was filed, plaintiff would not have been eligible, or have had any enforceable claim to, the bonus. Plaintiff appealed the bankruptcy court's determination that the bonus was property of the bankruptcy estate. The court reversed, holding that under the circumstances, plaintiff did not have an enforceable right to receive the bonus when he filed his petition, so that it was not part of the estate. Though the employer had no discretion over the amount of the bonus, it did have discretion whether to pay any bonus at all. Apportionment of the bonus between pre-petition and post-petition was inappropriate.

IV. Problem 5.2 [p. 130]A. The ticket was bought before the filing, so he had a legal and equitable

interest in the ticket prior to filing, therefore the earnings from the ticket, even though they came after, are part of the estate.

B. If the debtor had a legal and equitable interest in a property before the bankruptcy petition was filed, any resulting income from those interests are part of the estate.

C. 11 USC 541.c.1 - 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

Automatic StayConsumer Bankruptcy

  

Class #4Thursday, January 21, 20108:18 PM [p. 130] Problem Set 55.1

a. Property of the Estateb. Property of the Estate - can be subject to a lien and still c. Property of the Estated. Property of the Estatee. Property of the Estatef. Property of the Estateg. Property of the Estateh. Property of the Estatei. Property of the Estate - has an interest in the itemj. Property of the Estate - §541.d includes any item the debtor holds in legal, but not

equitable, titlek. Property of the Estate

 Eggs are from the parakeets and like the dividends are property of the estate (§541.a.6)Post-petition wages are not property of the estate

5.5 Did he receive a letter prior to March 1, detailing the award? Is it coming from the school, or a 3rd party? Did he have a legal or equitable right to the money prior to March 1st? Automatic Stay [p. 131]I. This prohibits any creditor from pursuing the debtor in efforts to collect from him

or his property (11 USC 362)II. Supports the notion of a fresh start by providing the debtor with breathing room.

A. Usually at the time of bankruptcy the situation is dire as the debtor slowly misses more payments to more and more companies.

B. Individuals: Collection agencies must stop calling and foreclosure proceedings are stopped

C. Corporations: 1. gives Chapter 11 filers the space to normalize operations

III. Leveling the playing field among creditorsA. Creditors are vying for places in line to be first at the trough to get

recompensed with the swiftly diminishing assets of the person/companyB. All creditors of a similar type will be treated the same.

1. Secured,

2. Unsecureda. Administrativeb. Priority Unsecuredc. Unsecured

3. EquityIV. The stay remains active until:

A. The case is closedB. The case is dismissedC. A discharge is granted or denied.

V. Actual notice of the bankruptcy is enough to give rise to sufficient knowledge of the stay.A. With no knowledge of the bankruptcy, there would be no damages or

lawyer's fees, but the action taken by the creditor is voided.B. Acting with knowledge of the bankruptcy brings §362.k.1 actions.

VI. 11 USC 342 - new section - a creditor with regard to all cases can file generally with a bankruptcy court in a jurisdiction notifying them where to send notices regarding Chapter 11 or 13 notices.A. Why? Because in large corporations the addresses the debtor lists will

probably be the address where they send their payments and no one at that location would know what to do with a bankruptcy notice. The company may not then protect itself from violating the stay since it was not made aware.

B. 342.e.1, 342.f, 342.g  

Class #5Tuesday, January 26, 20106:12 PM Problem 6-1 [p. 138]

Wages have been garnished 68k in unsecured debt 4.5k in secured Car debt 750 for auto repair Alimony and Child support Doctor threatening legal action The garnishment is removed when the bankruptcy is filed (§362.a.1), and he will

get the full paycheck every week moving forward Post petition wages are not property of the bankruptcy estate.

Eviction actions are stayed under §362.b.2 if no eviction action has been filed If an eviction is filed, but no judgment has been entered, then the action is

stayed If the eviction judgment is entered (an order of possession), the landlord is

not stayed from enforcing the judgment (i.e. they get the sheriff to evict you.) Landlord can apply for relief from the stay under §362.d

Bad check charge is not stayed because it is a criminal proceeding §362.b.1 Alimony and Child support that is not paid from property of the estate

§362.b.2.B/C is not stayed Utilities are stayed under §366

Cannot refuse or discontinue service after 20 days the utility can alter service if the debtor refuses to pay a deposit.

 Problem 6-3 [p. 139]

If they knew about the bankruptcy they aren't allowed to cash the check, and they should probably return the car

Taking the check and cashing it when they knew of the bankruptcy even though they got it before the filing probably violates the automatic stay. 

Chapter 5 [p. 141] Sale Price/ Market Value - Amount of secured Claims/Liens - Exemptions - Cost

of Sale (inc. Trustee Fees) = Amount to Distribute to Unsecured Creditor If this amount is +, the Trustee will sell the property If the amount is 0 or -, he will give it back and people will have to exert

their state court rights upon it (the ownership right, and creditor rights) Sale Price: how much would I get for this Secured Claims: mortgages etc.

Exemptions: applicable exemptions on the property Cost of Sale: real estate costs, auction costs, trustee fees, etc.

  §507 - gives an order of payouts for creditors

Administrative Creditors (paying for the bankruptcy) Priority Claims (wages owed w/in 90days of the filing for a business) General Unsecured creditors

If the money left is $50k and the total amount of debt for the unsecured is 100k then each creditor gets 50% of their debt paid. 

Trustee holds a meeting of creditors §341 Evaluates the amount of debt and will indicate whether it is too high.

  Chapter 13 incentives

Mortgage arrears were forgiven Certain debts were dischargeable under 13 that was not under 7

  Substantial Abuse (Shaw [p. 145]): debtors that had substantial amounts that

could be made under Chapt 13 if they managed their money better. Applies to Chapter 7 filings Substantial abuse to allow these people to discharge their unsecured credit

if their lifestyle was responsible for their high debt and it took time over the years.

 2005 Amendments

1st Screen: Means Test [p. 150] §707 - there is a presumption of abuse regarding filings under Chapter 7 If the income of the debtor is greater than the median income for similar

sized families in the state in which the bankruptcy is filed. Using US Census data which is available online, and this is

Statewide, not local. In NJ for family of 4: $103k

Look at the: Size of the family The family income - look at the income of both spouses to make

the determination Compare the income with the median income in the state,

and if the family income is larger, then you cannot file Chapter 7. Average income over 6 month period

2nd Screen: Income/Expense test Income side

Over the last 6 months (wages, interest earned, unemployment, etc. [p. 152])

Expenses Amount owed on a monthly basis for cars and mortgages Other expenses (i.e. food, clothing, life insurance) - 23 categories

of expenses Uses IRS National standards - guidelines that the IRS

employs when figuring out settlements. Expenses - Income [p. 161]

Abuse is presumed if the difference is less than $110/month  

Class #6Thursday, February 03, 20116:11 PM 

I. Fraudulent Conveyances: transfer of an asset made to avoid an obligation to a creditor.

a. Two Types

i. Actual Intent to Hinder, Delay or Defraud Creditors

ii. Element of an actual intent

b. A Transfer for Less than fair consideration while insolvent

i. The element of intent is missing, and the person made the transfer while unable to meet debts or obligations.

c. Balance sheet test or unable to pay debts regularly when they come due.

II. Eligibility to file Ch. 7a. Means test 11 USC §707

1. Presumption of abuse if your income is greater than the mean income of your state

2. You may still be eligible for Ch. 7 if you pass the income/expense test.i. After you complete the income/expense test [p. 161] you must

fall below certain dollar amounts to be eligible for Chapter 7 - else the presumption of abuse applies.

3. If you fall below the income test line, the presumption of abuse does not exist and the debtor is allowed to file under Ch. 7.

4. The presumption of abuse is rebuttable for items under 11 USC 707.B.2.b.i

b. Substantial abuse was amended in 2005, and was replaced by the means test, which looks at the income for 6 months.1. If you make less, there is no presumption of abuse2. If you make more you must pass the income/expense test.3. If you make enough the presumption of abuse applies.4. If you make less than the amount no presumption applies.

5. The case can still be dismissed based on the court's discretion if it finds that debts were made in bad faith or "totality of the circumstances". 11 USC §707.b.3

6. US Trustees office is required to look at every filing to see if the presumption exists [p. 162]

c. There are more hurdles places in front of consumer bankruptcies.d. Fees for the filing of the bankruptcy have gone up due to the changes to the

process by the 2005 Amendments.e. Mandatory credit counseling before filingf. Increase in the complexity of the forms to fileg. 2005 Amendments were there to ensure that more people would put money

towards their unsecured debt instead of discharging all of their unsecured debt through Chapter 7

1. Prior to the 2005 Amendments, Judges could prevent Chapter 7 if they found substantial abuse.

2. Only 8% of Chapter 7 debtors had incomes above their state's median income.

III. ReCapa. Know that there is a means testb. Know that the means test is the gateway to Chapter 7

1st : income greater than the median of the state2nd: income/expense test is require only if you have greater income3rd: Trustee is required to investigate all chapt 7 filings4th: Presumption of abuse is rebuttable5th: Even if the consumer passes means & income/expense the case can be dismissed through bad faith & "totality of circumstances.

Exemptions [p. 167]Example 1

100,000 property

-50,000 1st lien

-10,000 2nd lien

-10,000 Cost of sale

-10,000 Exemption

20,000 left

In this case, the trustee will sell the property and the debtor will be paid the exemption from the proceeds of the sale.If the property comes into the estate, and without the exemption, the property would return money the trustee would sell it.However, if the exemption would make the value negative, the Trustee abandons his interest in the property.

IV. All states have exemption Lawsa. Certain types of property, or up to certain dollar amounts, there will be

exempted from collection attempts.b. Those exemptions apply outside of bankruptcy as well.c. State law apply to only State law collection efforts.

V. Bankruptcy Exemptions a. 1898 - Bankruptcy law followed the state laws.

i. 1978 - Should create a uniform bankruptcy policyii. Some states though they weren't generous enough

iii. Other states thought they were too generous.iv. A compromise was created where states could opt out of the

Federal Codev. If the state did not opt out of the Federal exemptions, the debtor

can select to use either the Federal or State exemptions as a whole, not parts

vi. If the state opted out, you have only the choice of the State exemptions

b. Exemptions vary widely from state to state.i. TX provides a homestead exemption of 10 acres in the city/200

acres in ruralii. WY allows a married couple $20k exemption for the homestead

c. List of Exemptions can be found at 11 USC § 522.di. 10k in household stuff, but limited to $500/item.

ii. $40k for a married couple's home propertyiii. 1350 for jewelryiv. 1075 and 10k from the homestead exemption if it is left over.

   

Class #7Thursday, February 04, 20108:13 PM 

Valuation - is one of the most contested issues in bankruptcy litigation. In re Walsh [p. 184]: Fair market value must be considered to be

liquidation value in a Chapter 7 case. Mitchell court [p. 186]: you don't look at liquidation value only, but also

consider the value of the exposure of the item on the open market for a time. This is not a fast forced sherrif's sale, the trustee will have time to

market the item, but buyer's will be aware that the sale is for a bankruptcy Form 4003a - debtor must list all items he wants to declare as exempt The laws governing bankruptcy require that you be domiciled 730 days (2 years)in that location to take advantage of the exemption laws of that state (i.e. the homestead protections of Texas, of FL's annuity contract protections) §522.f - debtor can avoid 2 kinds of liens if they impair an exemption.

Judicial lien - a lien created by a judgment. Exception: a liens secured for a domestic support obligaton

Nonpossessory Nonpurchase Money Security Interest (PMSI) in household goods.

Non-possessory: Creditor doesn't have it Non-purchase Money: the loan was on incurred to buy the specific

thing. Household goods are listed under 522.f.4

  Remember the Lien is taken before the Exemption so if the exemption is

impaired because of the lien, the liens in these two cases are ignored. Policy reasons: judicial liens are viewed as unsecured creditors

who got levies quickly. PMSI - to prevent consumer financiers that would take liens

against things they would never repossess like pillow cases and crockery.  

Problem 8.1 [p. 196] §522.d - Federal Exemptions - the values of the exemptions are doubled

since the pair are filing jointly, giving them 21550 for household expenses. §522.d.5 - Wildcard exemption - since they don't have to use the

Homestead exemption they can use that to cover the rest of their stuff. This is also doubled since they are filing jointly.

Household Furniture 8000 Household exemptions

10775-8000=2775

Clothing 2000 Household Exemptions

2775-2000=775

Lois' Law Books 2400 Tools of the Trade 2775-2400=375

Lois' Moped 800 Auto Credit (1 time)

 

Cash Value of Lois' Insurance

2000 §522.d.7  

Lois' Wedding Ring 1000 Jewelry  

Lois' Computer 1200    

100 Shares of Stock 5000    

Joint Checking 400    

Harv's Computer 7500    

Friendship Sloop 6000    

Harv's Wheelchair 18000 §522.d.9 Health Aids

 

Fluffy the Cat 200 Household Good 775-200=575

Soccer Ball 2 Household Good 575-2=573 §522.d.11: sets an exemption for personal injury, but not for pain

and suffering. Claims

A creditor in a 7 or 13 case must file a proof of claim form to be eligible for a distribution.

Claim form must be filed within 90 days of the first meeting of creditors Claim is allowed, unless it is objected to

Trustee has a fiduciary duty to object to claims that are deemed improper.

If an objection is raised it becomes a contested matter under 9.0.14? Which is a "mini-lawsuit"

Pp. 221 - mini-trial tends to be shorter and involve less litigation, though FRCP are mostly relevant.

These are fast because there are limited fund available from the debtor, and their fees are paid by the estates, so the longer the trial the more funds that are used in contesting the fees.

In an 11 claim, if the debtor lists you on their schedule as a creditor, the creditor does not have to file the claim form, but will be limited to the amount the debtor lists on their schedule.

There is not statutory deadline, the judge sets it. The bar order is issued by the court, stating that the proofs of claim must

be filed by the date set or they are barred. Unsecured Claim

Amount that is due, is the amount owed as of the petition date. This would include all components of the claim, which is everything in the contract between the debit/creditor (interest, counsel fees, etc.)

The amount on the filing is everything owed pre-petition date, the accelerated amount

Debt acceleration: creditor declares the entire lent amount due. There is no post-petition interest on unsecured claims

Secured Claim For secured claims the value owed is not to be more than the amount of

the collateral used to secure the loan. Over secured - the collateral is worth more than the amount owed Under secured - the collateral is worth less

Here the secured part would be the value of the collateral, and the remainder is unsecured.

You can run post-petition interest up until the value of the collateral is met.

Collateral is $4 mil but you owe $2 mil, the difference is called the "Equity Cushion"

  

Class #8Tuesday, February 09, 20106:03 PM 

Claims (con't)§507 - Priority list for those that are uninsured.The order in which claims will be paid after exemptions and secured creditors.

Domestic support obligationsAdministrative expenses

Those incurred by the trustee after the bankruptcy is filed.AuctioneerLawyers

Other administrative expenses (?)Tax obligationsLate filed claims - those that missed the filing deadline will be paid after all other claim levels are satisfied and the claims are valid.

Each claim, at each level, is satisfied in full before the next level is paid.Whenever there is not enough money to fulfill the obligations of a priority level, those creditors are paid on a pro-rata basis.

Example: If one creditor has $50k, and 5 other creditors have $10k and there is only $50k left for their level, that first creditor will get $25k, or half the available pool and the other creditors will get $5k each for 10% of the pool.

Taxes

Problem 12.5 [p. 258]523.a.2.C: consumer debts owed to a single creditor that aggregate over $550 for luxury goods are presumed to be non-dischargeable if done within 90 daysDebtor must show that it is not a fraud.

Wallpaper is not a luxury item.Clothes are for work, or for looking for a new position/job.

If the filing of bankruptcy was unforeseen the presumption can be rebutted.Problem 12.6 523.A.7: for fine or penalty to a governmental unit then it is non-dischargeable

Fraud, Willful and Malicious Injury, Debt incurred while DUI, Student Loans, Taxes, Fines owed the government are not generally dischargeable under §523.

 

Class #9Tuesday, February 8, 20116:20 PM 

I. Discharge - §727 and §523 There is some overlap between 727/523 since debts incurred due to fraudulent conduct are not dischargeable. Prefiling suit was filed against the debtor

A. Requires : Preponderance of the evidence or higher and is there a finding of actual fraud (collateral estoppel or res judicata applies)

B. ∏ lawyer should seek to have the special findings sheet contain the terms found in §523 to use collateral estoppel

i. Example: willful and malicious injuryC. The creditor does not file a fraud claim before the bankruptcy filing

II. This could be tried in a bankruptcy adjudication and those findings used to prevent discharge.

A. §524.a.2: Discharge is a permanent injunction

i. Trustee or creditor gets 90 days to file a dischargeability

complaint.

ii. If no complaint is filed the claim is discharged automatically.

B. §523.a.2/4/6: require the filing of a complaint to obtain a judgment

that the debts are non-dischargeable. The rest of the sections do not

require a lawsuit

i. §523(a)4 are fraud fiduciary capacity claims – this includes

theft and or larceny – Exam Question

ii. §523(a)6 are intentional torts – must file a complaint

1. It will be binding if the underlining judgment if there

was a specific finding of willful malicious

2. The finding must be based on a abundance of the

evidence

iii. §523(a)2 are debts obtained by false pretenses

1. The use of a statement that is materially false which

states the debtor financial status

2. Cash advances of $870 within 70 days of filing or

charged $600 on Credit cards within 90 days (which are

not in support of the debtor) – Exam Question – a

question like this – rebut the presumption – put on

evidence that the client needed the items and argue that

they are not luxury items

iv. §523(a)7 fines to a government – i.e. tickets

v. §523(a)8 student loans unless it causes undue hardship to the

debtor or dependents – Exam Question

C. §523.c.1: says that the above issues require a complaint to avoid a

discharge. If you have done something fraudulent or illegal the

discharge can be denied, such as:

i. False oath, or account

ii. Submitting false documents

iii. Failing to explain to the trustee what happened to assets.

D. Grounds for a Discharge in total is listed in §727

i. There is a list of reason why charges are not dischargeable

ii. Such as fraudulent conveyances within one year or move

property in an attempt to hide it then it may be non-

dischargeable

E. Corporations do not get a discharge in a chapter 7 case.

i. This is because the corporation is liquidated as ceases to exist.

F. §523 list the types of debts that are non-dischargeable

i. If an individual creditor believes that his debt is not

dischargeable and the request is granted that only applies to

that debt and not all other debts

ii. §523 - deals with particular debts, and for public policy reasons

Congress determined at the debts contained within are non-

dischargeable.

G. 19 different types of non-dischargeable debts

i. Domestic Support Obligations

1. Child support

2. Alimony

H. §523(a)1(A) taken from §507 – Exam Question difference beteen

priority and nondischargable

i. Taxes

1. §523.a.1.A: exempts all taxes listed in 507.a.8

2. If the tax credit is paid in full, then 523 does not apply.

3. However, if the taxes are not paid, then the balance in

non-dischargeable §523 – The balance also accrues

interest.

I. Damages from DUIs – Exam Question

J. Other stuff does not require the filing of a complaint, i.e. §523(a)15

equitable distribution in a divorce proceedings – Exam Question

K. Debts are discharged, but liens are not.

III. Discharge Problems

A. In re McNamara [p. 230]

i. Debtor had trouble explaining how $130k was lost in a winner

take all Stud Poker game.

ii. Debtor stated that he did not have good recall because he was

under the influence of alcohol and anti-depressants.

iii. Debtor was denied discharge because he could not provide any

information/evidence to the Trustee concerning the loss of the

money.

iv. Under §727.a.5 the debt was denied.

B. In re Sharpe [p. 233]

i. 523.a.2.a & b - debts incurred as a result of fraud are non-

dischargeable

ii. Oral statements misrepresenting the debtor’s financial

condition are an exception

iii. Statements must be in writing and not merely spoken to satisfy

non-dischargeability. Look at the bottom of [235]

C. In re Hill [p. 237]

i. Bought the home for 200k, and refinanced several times for

683k

ii. Despite the debtors not making more than 65k they were able

to secure loans by claiming they made 145k

iii. Debtors filed bankruptcy and the bank filed a non-

dischargeability action

iv. The court found that the debtors did make deliberate

misrepresentations

v. However, the Court found that the bank did not reasonably rely

upon those fraudulent income statements

vi. Bank ignored the red flags, and changes, on the two

applications the debtors made, the Court denied the

dischargeability claim

vii. Bank did not verify the income and was making the

determination upon the value of the asset, the debtor's home.

viii. Statements regarding the debtor’s financial condition were

made in writing, but the lenders must have relied upon the

misrepresentations.

D. In re Miller [p. 242]

i. Undue hardship, 2nd circuit test in Brunner [p. 245]

1. That the debtor cannot maintain based on current

income and expenses a "minimal" standard of living for

herself and her dependents if forced to repay the loans

2. That additional circumstances exist indicating that this

state of affairs is likely to persist for a significant

portion of the repayment period of the student loans,

AND

3. That the debtor has made good faith efforts to repay the

loans

ii. It was found that discharging 55k of the 89k the debtor owed

leaving 34k

iii. §105 of the bankruptcy code provide the Bankruptcy court with

the authority to make any ruling in pursuance of their mandate.

iv. However, it was remanded by the Circuit Court because they

said the Bankruptcy court did not actually make a finding of

undue hardship.

v. Found that debtor did not meet items 2 & 3 prongs of the test.

vi. The debtor only made 398 in payments while maintaining non

essentials

vii. Did not show that her financial situation is more than

temporary

viii. There was not authority under §523 for the bankruptcy court to

do the partial discharge.

IV. Abandon Property

A. When the Trustee abandons a property 1 of 3 things can happen

Redeem (§722)- using post-petition earnings or other non-property of

the estate.

Redeem and keep - buy the property from the Trustee for fair market valueGive back the secured credit to the creditor and the deficiency claim is discharged (if the amount owed is less than the value of the property)EX: closely held businesses where the stock in the

Reaffirm (§524)- enter into an agreement with the lender to reaffirm the debt. Through contract notwithstanding the bankruptcy to repay the debt.

Agreement must be reached before the discharge is granted.Agreement must be filed with the court.Debtor has 60 days to rescind the agreementIf the debtor was represented by counsel, the attorney must file an affidavit claiming that the agreement was voluntarily entered into by the debtor, and the agreement is fair and not burdensome.Without counsel, the court must approve the agreement in the

best interest of the debtor.Ride through - debtor needs to file a statement of intention within 30 days. Keep making the payments on certain debts, and the lien rides

through the bankruptcy since the bankruptcy court will not allow the creditor to repossess a car that the debtor has not defaulted on. (p. 267)

§525: deals with the protections of the debtor against discrimination for filing for bankruptcy

§525.a - deals with governmental discrimination§525.b - concerns itself with private sectorCreditors can make choices based on their assessment of the debtors credit score, including the bankruptcy judgment.

Class #10Tuesday, February 15, 20116:10 PM Chapter 13 Bankruptcy

Individual debt adjustment case, or wage earners plansFocus on potential future earningsDebtor remains in possession of their assets.Debtor commits to turning over a portion of their income for 3-5 years in a plan that they file shortly after the bankruptcy filing.Standing Trustee is present in a Chapt. 13 case (no estate Trustee)

Collects plan payments and distributes payments in accordance with the plan.Objects to payments and discharges.Assists Debtor in performing his duty.

Chapt 7 the discharge is granted by the court if no one complains before the closing of the time to file such grievences.Chapt 13: the discharge occurs after paying all of the payments under the plan.

The creditors cannot be left in a worse place that they would have been left in under a Chapt 7Essentially, the debtor is buying back the equity in the property they would have lost if they files a Chapt 7.

Chapter 13 - get a discharge if you make your payments for the 3-5 years of the payment plan. Debts are discharged – liens are not – the creditor is allowed to redeem the property or reaffirm the debt

o Secured Claims [p. 225]o Creditor bargained for that collateral o 1325.a two requirements for a secured claim.

Secured creditor must be paid the entire amount of its secured claim

Secured creditor has to receive interest to compensate it for the time/value of its money.

Under 506 – Secured Claim is limited to the value of the collateral Ex. If the loan is for 150k, but the collateral is worth 100k,

the creditor must be paid $100k, but the remaining 50k is then unsecured.

o Surrendering the collateral is always sufficient to satisfy the secured claim to the value of the collateral.

o Pay the full amount of the secured claim + interest

o Cure and maintain - if payment is over 5 years - arrearages are cured through the plan and resume and maintain regular payments under the loan agreement after you emerge from the plan.

You can cure up until the Sherriff's sale. Arrearages do not accrue interest. If the last payment is within the 5 year period then you can't do a

cure and maintain for a home loan.o Cram Down (term of art) plan (§1325.a.5)- propose the secured creditor

take the lesser of the loan balance for the secured debt and the difference be made unsecured.

The creditor may not accept that plan insisting that the value of the property is the full amount owed. The creditor may not like this and that is what it is called a cram down. See Rash pg 285 – 506(a)(2) the value shall be determined upon the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. Why? Because having the unsecured debt portion removed reduces the amount owed on the secured debt substantially.

§1325.a.4: Best Interest Test - you have to pay the unsecured creditors under your plan at least the same amount, as they would get under a Chapter 7. See the Till case pg 292 – which said the interest rate begins with the prime rate the adjust the rate for the secured risk to the creditor because the borrow is not credit worthy – the adjustment (not the contract rate – the SC rejected the contract rate)

The debtor will do a liquidation analysis to determine what this amount should be:

Look at the assets The exemptions Then the bottom line number - an unsecured creditor will

receive at least the amount in a 13 as if it was a 7

§1325.b - debtor must devote all disposable income to plan payments during the life of the plan

Above Median debtors (No discretion from Court) fill out the form B22C

o Above the median in the means test requires a proposal for a 5-year plan (cannot do a 3 or 4 year plan, unless the debtor does not have disposable

income and will not have to pay anything to unsecured creditors – see In re Kagenveama pf 313)

o Disposable income = §707 Means Test Amount = whatever the surplus is after they do that calculation that is the disposable income

o Includes spouse income – even if only one spouse is filing Br.

Below median debtors (Court has discretion)o Propose a 3 to 5 year plano Disposable income is whatever is not reasonably

necessary for the support of one's dependents. Income of both spouses considered

Above median debtors are subject to a formula, while below median debtors get a "reasonableness" standard.

What is considered "disposable"? see Disposible income test under §707

Cases - In the Matter of Wyant 217 BR 585 Cannot do a Cram Down (§1325.a.5) if

1. PMSI w/in 1 year of bankruptcy2. PMSI in motor vehicle w/in 2.5 years of bankruptcy filing

Congress' concern with the 2005 amendments was curtailing the abuse of bankruptcy

o They did not want people purchasing expensive secured items and then being able to cram down the debt shortly thereafter.

o §1322(b)(5) Cannot do a cram down on the mortgage of your principle residence – unless it is a second mort and it is higher than the value of the home less the principle mort – this is called stripping of the subsequest mort.

o Can do what is called a cure and maintain under § 1322(b)(5) – e.g. six months behind in mort payments but want to keep the house – cannot do a cram down but you can take the six months of arrears and term them out over the 3 to 5 years aspect of the plan. At the same time resume the monthly mort payments.

o See Taddeo pg 302 – to see how long one may wait to do a cure and maintain in a Br claim – the cut off is in the foreclosure sale – see §1322(b)(5)

Chapter 13 is generally used by people who want to keep their homes. Assoc. Commercial Corp. v. Rash [p. 285]

Replacement value standard. 2005 Amendments § 506.a.2 essential codified the Rash decision, but codified

it a little more. §506.a.2: determines how to valuate the cost of the property, you look to the

replacement value for the actual thing. Replace a 5 year old TV with a similar 5 year old TV and not a brand new

TV to perform the same function. 

Contested Matter (§9014) - the filing of an objection and the rules of discovery apply. Till v. SCS Credit Corp [p. 292]

decided by the SCoTUS in a plurality what interest rate should apply in a Cram Down: the contract rate or a different rate.

ScoTUS decided that it was national prime rate plus an adjustment for a bankruptcy debtor.

Prime rate is what a commercial bank would lend money to a credit worthy debtor.

A bankrupt debtor is not creditworthy, therefore the enhancement is for an increased risk of lending to such a debtor.

People are going to litigate over how much the adjustment over the prime rate would be.

Creditor would argue about interest on sub-prime loans. Debtor would state that they aren't the usual debtor. The item that led to

bankruptcy was sudden and unexpected. 

 If the primary residence is underwater, you have to be 100% undersecured to get out of exception for Cram Down on the primary residence.

The value to the debtor is 0, since there is no value that attaches to the property the debtor really doesn't have a mortgage.

 In re Kagenveama [p. 313]

Trustee states that an above median debtor must file a plan for 5 years. Kagenveama said that their calculated surplus was 0 and they shouldn't have

to propose a 5 year plan.

The court agrees stating that Congress got exactly what it was looking for with the formula in Chapter 13.

 In re Farrar-Johnson [p. 321]

  Class #11Tuesday, February 22, 20116:10 PM §507 - Chapter 13

Priority Claims Entitled to be paid in full under 1303.a.2 Interest need not be paid on the claim, but the claim needs to be paid in

full. Disposable income standard is the floor, not the ceiling on the Chapt 13

plan. If you file a Ch 13, and you have 0 disposable income in either test Priority claims may eat up all of your disposable income. Non-secured

non-priority creditors may receive nothing under the Chapt 13 payment plan. Chapt 13 allows one to satisfy tax debt over the life of a plan because

TAX debt is non-dischargeable. [p. 320] The benefit is that, even though you must pay off the balance

within the 3-5 years, there is no interest or penalties that accrue. Further, Tax debt is not dischargeable under Chapt 7 bankruptcy.

Chapt 13 plan must be proposed in good faith, conduct of the debtor during the bankruptcy case is usually the reason for objections.

In re Farrar-Johnson [p. 321] Lived on a military base for free, but was allowed an 1100 deduction for

living expenses Court found that it was not bad faith to follow the plain language of the

code. §1329: seek to modify the plan after confirmation [p. 323]

Usually made if the debtor lost his job, or got a new job where he makes less money the debtor may seek to reduce his payments over the plan.

Likewise a creditor who discovers that the debtor is making more money, can request a modification to get more money.

  Problem 15.1 [p. 324]

Means test: is she above the median income or below the median Below median - use the reasonable and necessary test

Above Median - straight mathematical formula [§707.b.2] 

Automatic Stay for Chapt 13. §1301: Stay of claims against co-debtors on consumer debts.

For example: stay extends to the spouse of the debtor whose income is used in the calculation for disposable income.

§362.c: stay exists until the closing of the case or the discharge or dismissal of the case, whichever is earlier.

For Chapt. 7 this makes sense. For Chapt. 13 the discharge does not happen until the end of the

plan payments (3-5 years) The stay exists through confirmation of the payment plan at

least, but does it exist longer? §350: when the estate is fully administered How long the stay exists for is an open issue.

  

Eligibility: Not everyone can file a Chapt. 13 – see the last paragraph on page 334 §109.e

Limited to natural persons, Cannot be a business entity With regular income – you have to be able to fund the plan – see In re

Murphy 226 BR 601 on page 326 Non-contingent, liquidated, unsecured Debt < $366,475

Non-contingent: All of the conditions that have to happen for the debtor to become liable has happened.

Non-contingent means all events related to liability has occurred – i.e. co-signing for a car not and the borrow has not defaulted then it is a contingent debt – if they defaulted then it is a non-contingent debt

A claim that is being paid by someone who has guaranteed the payment, even though they are not the primary debtor, that claim is contingent. Meaning it requires the guarantor to stop payment for the debtor to be liable.

Liquidated: the claim is subject to ready determination and precision in computation

Invoices: absolutely qualified and are considered liquidated Pain and suffering: are not liquidated because it is tough to assign a

dollar amount to something that is not easily quantifiable. Take a look at page 330 to help identify types of claims e.g. In re

Huelbig 299 BR 721 Non-contingent, liquidated, secured debts < $1,081,400 Failing to qualify for Chapter 7 or 13, you need to file an individual Chapter 11.

§1129 - Individual filers of Chapter 11

Much like a Chapt. 13 plan must contribute all disposable income Must file a 5 year plan

 In re Murphy [p. 326]

A person with no income of their own, but lives in a house with someone who did have regular income was found to have an income.

A note points to the Duval case [p. 330] finding the exact opposite outcome with similar facts 

Business Bankruptcy (Chapter 11) No discharge under a Chapter 7 for a business since the business folds after the

assets are liquidated. Easier and faster to shutdown a business since the trustee handles the

administration Chapt 7 is essentially handled like a personal Chapt 7.

   Class #12Thursday, March 04, 20108:13 PM Guest Lecturer: Strong-Arm Clause

Nick LaFleur: Temple Grad Represents Creditors in Bankruptcy Cases. 30 years from 4 year evening program

  DIP stands in the shoes of a bonafide purchaser

A purchaser of property would prevail over an unperfected lien like a mortgage. 

In re Bowling [p. 472] It didn't matter about the bankruptcy, the TIB is a bonafide purchaser and the

mortgage is ineffective 

Preferences (§547) : Bring money back into the estate to share among the general unsecured creditors

Transfer of a debtors property §547.e.3: a transfer is not made until the debtor has acquired rights in the

property transferred. To, or for the benefit of, the creditor

For satisfying an antecedent debt Antecedent from the moment it is incurred.

While the debtor is insolvent §101.32: definition of insolvent There is a presumption of insolvency, unless the debtor proves otherwise

Usually by producing a balance sheet, but then there is litigation surrounding the actual value of the items listed.

Within 90 days of the filing or 1 year if the filer is an insider (§101.31) Creditor received more than they would have received under the Chapt 7.

If you are unsecured and you receive anything outside of the bankruptcy you are considered to have received more than you would have received under Chapt. 7.

  Intent to prefer one creditor over the other was required, but Congress has since

changed from Intent to Effect upon the bankruptcy. Defenses: appear in the statute

Contemporaneous exchange (§547.c.1) The timing is important. The payment must be relatively

proximate to the delivery of goods. New Value Defense

Encourages creditor to do business with the debtor. It gives the debtor the value of the new product they had supplied New value must come after the transfer. If the debtor pays 20k of a 50k bill, then the creditor sells the

debtor another 5k within the 90 days before the bankruptcy, the new value of 5k protects 5k of the prior 20k the debtor paid. The creditor would only be exposed the 15k instead of the entire 20k that the debtor originally paid.

Ordinary Course of business (§547.c.2) Facts that showed intent would be used to prove it was done in the

course of business Whether the exchange is ordinary in the industry. Only need to show that the transfer was made either in the ordinary

course of business, or the ordinary course in the industry. Anything that is out of the ordinary invalidates this defense. Trends within the particular business can create the "ordinary

course of business" Earmark Adoption (non-statutory)

 Chase Manhattan [p. 481]

Earmarking does not apply in the circumstances listed.

 In re Denochick [p. 487]

The guarantors are contingent creditors of Susan. The transfer of the money to NBOC was viewed as a benefit to the guarantors The Trustee was able to recover from the guarantors the monies that Susan

paid to NBOC because it was seen as a preference. Problem Set 23 [p. 490]

1. Voided because the payment is more than they would get under Chapt 7.2. Voided, because it is the transfer of debtor's property w/in 90 days that allows

them to get more than they would get under the liquidation3. Voided because it is a conversion of an unsecured interest to a secured interest

w/in the 90 days4. Voided because the perfection, which is its own transfer, of the security interest

was within the 90 days.5. Commercial would not get their money taken because they were over-secured,

while Magic Chef was under-secured. The transfer to Magic Chef would be labeled a preference and would lose the money.

6. The floating lien held by First Richmond Bank is still considered a preferential transfer during the 90 day window. The transfer is voidable as a preference.

7. Voidable since the value of the equipment is taken at liquidation. Since the equipment was destroyed at the time of the filing, the 20k is a preference.

8.   Class #13Tuesday, March 09, 20106:06 PM http://gizmodo.com/5487928/new-iron-man-2-trailer-soooo-worth-it-just-for-the-last-10-seconds Two ways to start a Bankruptcy

Debtor goes and files a petition Involuntary Bankruptcy : A creditor files the bankruptcy for the debtor

Cannot put someone into an Involuntary Chapter 13, only 7 and 11. Governed by §303

Creditor wants to ensure that it gets paid (debtor is preferring other creditors)

Level the playing field

More valuable to liquidate a business than to have it keep on operating.

Must establish under §303.h §303.h.1: Need to establish that the debtor is not paying bills as

they come due. Petition is served to the debtor If the debtor does not timely answer and order for relief is

entered If the debtor does answer, or the creditor does not meet the

requirements for filing an involuntary, there is a trial If the basis is found the court enters an order for

relief. Must find an insolvency because you don't want to

find someone in bankruptcy unless they are NOT paying their bills.

Petitioners must have aggregate claims of at least 13,475 unsecured debt

This excludes claims that are contingent, or subject to a bonafide dispute

If there are 12 or more creditors, 3 or more creditors must join in the petition.

These creditors must meet the non-contingent, non-bonafide dispute requirement.

1-11 creditors only a single creditor is necessary A solo petitioner must make a good faith investigation to

determine if there are 12 or more creditors. At least look at the public record to see if there are more

than 12 creditors In re Faberge Restaurant of Florida [p. 377]

Debtor does not want to be in involuntary, so he pays off two of the three creditors which reduces the number of necessary creditors.

Ruling: post-petition payments does not affect the jurisdiction of the court to rule on the bankruptcy of the debtor

In re Silverman [p. 378] Involuntary filing by a creditor who sued the debtor Creditor filed for summ.j. and lost then filed for an involuntary

bankruptcy Judge found that the debt was in dispute since the creditor was

denied summ.j Judge entered ruling against creditor for lawyer fees, damages and

punitive damages

Judge found that it was in bad faith. Damages are the money lost when it is found that the debtor is in

bankruptcy. 

Chapter 11 Missing a bunch due to work that had to be done 6:30-7:20. This is expensive Have to deal with the debtor, the creditors, the equity committee, the US Trustee

Trustee objects to fee applications by professional § 1106: idf the DiP (Debtor in Possession) does something bad, or the case is not

moving swiftly to resolution, a trustee can be provided. Not a US Trustee, but a Trustee as in a Chapt. 7.

Trustee takes over the running of the business and ultimately proposed a plan.

It is considered an extreme step to have a trustee appointed. Submitted Plan

Formulate a Plan: this can take a while This can take time because the debtor has to restructure its

infrastructure since it is losing money and that is why the debtor is in bankruptcy

The plan must be feasible. There must be some months of improvement You want as the plan to be adopted as unanimously as possible,

and this requires negotiating with the creditors. File Disclosure statement Confirmation Hearing

  Farm Credit of Central FL v. Polk [p. 407]

The stay not only benefits the debtor, but it benefits all the bankruptcy. The debtor cannot bargain away the stay for a pre-bankruptcy benefit.

  US v. Seitles [p. 409]

A bankruptcy court can use §105 of the Code to extend the stay 

In re Rogers Development Corp. [p. 415] §362.d: relief from the stay

For cause - including lack of adequate protection (means: the collateral is properly preserved i.e. needs to be stored from winter elements, properly insured, diminution of value, etc., or

No equity in the property AND property not necessary for an effective reorganization – meaning the collateral is underwater and it is not need for reorganization

If the creditor establishes that there is no equity and it is not necessary for the reorganization the creditor can get relief from the stay

The debtor needs to prove that it is necessary for the reorganization

Think factory in default, it is necessary for the reorg since the debtor needs it to continue operation even if there is no equity in the property.

  Class #14Tuesday, March 23, 20105:25 PM Automatic Stay

§362.d : On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay

1. for cause, including the lack of adequate protection of an interest in property of such party in interest;

1. What is adequate protection? a. Interest in collateral. The secured creditor deserves to be protected

against the decline in value of the property.b. Since the debtor has the property in his protection, the creditor's

interest in the property must be protected from decline.c. §361: Adequate Protection - periodic payments which represent of

the decrease in value of the property while the property is in possession of the debtori. Additional/Replacement Lien: A lien on something else

with equityii. Equity cushion: the difference between the FMV and the

Lien where if the FMV drops during the bankruptcy, the lien by the secured creditor is still protected.

a. The protection is for the lien, not the FMV to lien ration.

b. The debtor would have to do nothing until the FMV dropped to the value of the lien. Then the debtor would have to do something else to protect the debtor.

2. What is for cause?a. Ex. There is no reason to delay a creditor from recovering from

insurance since there is no damage to the estate since the insurance carrier will handle defense and payment.

b. Permit the case to go to judgmentc. Recover the amount from insurance proceeds.d. the court will always require proof of insurance.

§362.g: DIP has burden of proof on all other issues save, proof of equity in property which falls to the creditor. §364: Credit [~p. 462]I. Allows the business to operate as it would outside of bankruptcy

A. If the debtor obtains credit in the ordinary course of its business it does not need court approval to do that.a. Purchase items/materials on invoice which is unsecured credit.

B. If the debtor sells inventory in the ordinary course of business it does not require court approval to do that.

II. Outside of the ordinary course of business it requires court approval.A. Obtaining credit in a non unsecured basis.

a. If the debtor acquires unsecured credit and does not pay the creditor gets an administrative claimi. Administrative claim is a priority claim over all other

unsecured debtorsa. Professional fees for estate professionals (debtor or

Committee)b. Confer a benefit on the estate post-petition.

(suppliers operating under regular invoice terms)1. Incentivizes people/companies to continue

to deal with the debtor 2. Creditors get more than they would in a

Chapt. 7c. Upon approval of the plan all Administrative claims

are paid in full ahead of all general unsecured creditors, unless the Administrative claimant agree otherwise.

d. §503.b.9: for providers of goods, not service providers- the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business are treated as an Administrative Claim.

e. Critical vendor order: authorize the debtor, on his motion, to make payments to the creditors that the debtor contends are vital to the operation of his business. (§105.a - equitable power to carry out their orders, not used in all districts, but used in DE and SDNY which are the 2 most influential districts)1. These guys get paid immediately.2. Administrative Claims get paid on approval

of the reorganization plan and are paid next3. General unsecured creditors come last, and

no one wants to be here.III. Need credit outside of the normal course of business to keep the business

going. A. You can offer three things to the creditor to gaurantee the loan

a. Superpriority: the highest level of Administrative Claim, where this lender gets paid before all other ACs.

b. Lien on unencumbered propertyc. Priming lien: jumps up in front of existing liens

B. Must meet certain criteria to receive the authorizationa. Debtor cannot otherwise obtain the credit through normal

administrative channelsi. In the case of the priming lien, it must be shown that the

other options are not available.b. Credit transaction is necessary to preserver the assets of the estatec. Terms of the agreement are fair and reasonable

i. The lenders are wary of lending to corps in bankruptcy so the terms of a loan while in chapter 11 can be more onerous than a loan agreement while outside of bankruptcy.

d. If it is a priming lien, the debtor must show that there is adequate protection for the existing lien holder.i. This is generally not a problem if an existing lender

extending a loan on the property they already have a lien on since they are priming themselves.

ii. If the lender is new to a piece of property, the original lien holder may object

iii. Unsecured creditors may object to even a lender self-priming a loan since more debt lowers the amount of money coming to them on a liquidation.

§363.c.2 Cash Collateral [p. 464]I. If there is a lien on receivables or a lien on cash there is no cash capital usage

unless there is approval by the court or all entities with an interest consent

A. Lender does have the ability to essentially shut the business down if the lender feels that their assets are not adequately protected and prevent the debtor from spending cash.

B. Must get court approval to spend cash.C. Must do it at the beginning of the case to be able to spend cash.D. Debtor must show creditor's interests are protected.E. Spending controls are a way in which the court ensures that the creditors

interests are protected by mandating what the debtor can spend the cash on, and how much.

  Class #15Thursday, March 25, 20108:16 PM §365 Executory Contracts and Unexpired LeasesI. Executory Contract: there is performance required on both sides. Such

that a failure to complete the performance would be considered a material breach.A. If all that is left for the debtor to do is pay money, it is not an

executory contract even if the non-payment would be a material breach.B. Countryman's definition of an executory KC. If a K was terminated before the bankruptcy it cannot be assumed

1. There is no K to assume after the bankruptcy.D. Unexpired leasesE. Cannot assume, or reject, a K to loan money because the code says

you can't.II. §365.d.2: u-leases and executory k's can be done at anytime before the

activation of the plan.A. The contractee can request, from the court, a shorter deadline for

the decision on their, or all, contracts. The contractee must show cause for the court to rule in its favor.

III. §365.d.4: Non-residential lease of real property where the debtor is the leaser

A. 120 days to assume or reject non-residential leases.B. Court can extend the time once, for 90, with proper cause.C. The order must be entered BEFORE the expiration of the original

120 day period.D. After that 120 days it can only be extended with the consent of the

landlord.IV. Reasoning

A. §365 is used to help restructure the business by removing the poorly performing locations, by letting the leases terminate.

V. You must assume or reject the entire contract or lease.A. The assumption or rejection must be approved by the bankruptcy

court.B. Creditors may have a disagreement with the decision, so it allows

the parties in interest to be heard and stop the debtor from making a bad decision, for them.

VI. Test for assumption/rejection is the Business Judgment test.A. There is some discretion in this standard, where the debtor's

decision is given quite a bit of weight.B. Debtor has to cure any default.

1. If the debtor is behind in his payments in the contract/lease he must come current.

C. Provide adequate assurance of future performance.1. Demonstrate that the debtor is able to continue to fulfill the

contract.VII. Assuming/Assigning Contracts

A. A contract that is assumed, can be assigned EVEN IF there is language in the contract that prevent assignment.

B. Adequate assurance by the assignee, must be shown for the assignment to be validated

C. If it is a lease, the lessor can require a new security deposit as part of the assignment.

D. The other party to the K is usually very happy when there is a motion for their K to be assumed since

1. All back payments need to be cured.2. They will get what they bargained for3. Most of the time, the only objection is a dispute over the

amount to cure the default.E. If the contract is rejected, the other party must total up the cost of

the arrears and the damages and join the pool of general unsecured creditors. A bad thing.

VIII. Special rules for leasesA. Pre-bankruptcy rent (Unsecured Claim)

1. Total up the amount owed up to the day before the petitionB. Administrative Rent (Administrative)

1. Administrative claim of the rent from the petition date to the date of the filing.

2. The landlord has conferred a benefit upon the estate, during the bankruptcy and therefore they are allowed a beneficial recovery.

C. Full Lease expectancy (Unsecured)1. Limited to the greater of 1 year of rent or 15% not to

exceed 3 years.2. If there are more than 3 years left on the lease, the landlord

only gets 15% of 3 years.3. Should there be 2 years, then the landlord can only get a

max of 15% of 2 years of rent. 

Plans I. Reorganizations under Chapt 11

A. Debtor files bankruptcy, restructures its business, files a plan of its business to settle the debts, pays administrative claims with cash on hand, and agrees to pay unsecured creditors a set amount going forward.

1. Ownership remains the same2. Debtor may reduce secured claims down to the principle

amount (Cram down)3. Unsecured claims are paid out of future earnings.

B. Another company buys up the debts of the debtor company when it is in trouble. When the company goes into insolvency, the debt owner agrees to accept equity in the company in exchange for forgiveness of the debt.

1. The debt owner becomes the new owner2. The balance sheet is cleared since the debts have been

forgiven.C. The company is sold, and the proceeds of the sale are paid out to

the creditors according to a plan. This can be done with a sale pursuant to the plan, or sold before the plan (§363) and the money doled out in accordance to the agreed future plan.

1. Sales of substantially all assets to provide money to pay the creditors.

II. Excusivity [1121.b]A. Debtor has the exclusive right to present a plan for the first 120

daysB. Court can extend the exclusivity period for not more than 14

months past the initial 120 day period (18 month maximum exclusivity period) [§1121.d.2]

C. After that period the parties in interest may file a competing planD. The plan proponent must have a disclosure statement approved.

1. Disclosure statement is supposed to provide a reasonable vote enough reasonable information for a vote to cast an informed ballot.

2. Creditors should only object on informational, not substantial grounds.

a. If the complaint is on substantial matters, the objection raised: Dispute on Confirmational grounds

III. Confirm a plan [§1129]A. A plan is confirmed if all the impaired classes vote yes on the plan.

1. Must meet just the general requirements2. Judge is more than happy to approve the plan

B. A non-unanimous number of the impaired classes vote yet. (Cram down)

1. At least 1 impaired class must vote yes2. Must meet all the general requirements3. The plan must be shown to be "fair and equitable "

C. General Requirements (two easiest ones)1. §1129.a.7: Best Interests test

a. Debtor must show that each of the creditors will receive at least as must under the Chapt. 11 plan as they would under a Chapt. 7 liquidation.

b. A liquidation analysis must be prepared and is usually supplied with the disclosure statement.

c. The complexity of liquidation analysis depends upon the size of the company

d. Dispute is usually a valuation dispute of the assets.2. 1129.a.11: Feasibility

a. Debtor has to show that confirmation of the plan will not result in liquidation of the debtor unless the plan is the liquidation.

b. The standard just dependsc. In re Malkus Inc. [p. 617]

i. Analysis of the performance of the debtor during the bankruptcy. Did they lose/make money? The performance of the company over the course of the bankruptcy?

ii. The debtor plan was not feasible because of the general failure of the debtor to improve the financials of the business.

iii. See [p. 618-9] for language concerning feasibility.

d. In re Made in Detroit [p. 620]i. A plan submitted on a conditional basis is

not considered feasible and confirmation of such a plan must be denied.

  Class #16Tuesday, April 06, 20106:05 PM Exam:

Downloadable For the whole exam period 6 hours to complete it Format

Fact patterns Questions Check online exams

Understand different issues and discuss those issues. If the answer is a close call, describe what the issue is and support it. Likes us to get to the point, and analyze it in a clear concise way Cite cases when they meet the fact pattern. Set for 6 hours, but it is expected to only take about 4.

 Chapter 11 Plan Confirmation

Consensual Plan: 16 different requirements in section 1129.a All impaired classes must vote in favor of the plan.

 Cram Down: 1129.b

At least 1 impaired class must vote in favor Plan must be fair and equitable. Not unfairly discriminatory Must meet all other 1129 requirements Can be raised by ANY affected Creditor

1129.a.11 - Feasibility (will not see "feasibility" in the rule 1129.a.7 - Best Interests test (will not see "Best interests" in the rule):

requires that the debtor show that the creditors will get as much under the plan as they would under the Plan.

1129.a.9 - Administrative claims will be paid in full on the effective date of the plan, unless the administrative creditor agrees otherwise

Effective date: is the closing date

Can be raise by DISSENTING creditors only Fair and equitable Unfair discrimination Does not meet other 1129 requirements

1129.a.9.c - Unsecured Tax Claims: must be paid in full within interest within 5 years

1129.a.3 - Good Faith: the plan must be proposed in good faith. In re Coram Healthcare (271 B.R. 228)

Various corporations decide to exchange the debt for the ownership of the company and all shareholders would lose their interest and the unsecured creditors will get a little payment.

The largest public shareholder (Sam Zell) doesn't like the plan because it wipes out the interest and they believe that the company is worth more than the debt.

In discover the committee learns that Crowley has a $1mil year fee with Cerberus, the original owner of Coram.

Sam Zell states that the offer was in bad faith because of the undisclosed agreement.

Judge agrees because of the conflict of interest between Crowley who was being paid by the largest creditor and was also the CEO of Coram, and it was not disclosed.

After this decision a trustee was appointed. A serious conflict cannot put forth a Chapt.11 plan in good faith.

 §1122o 1/2 in number of debtorso 2/3 affirmative vote in amount of the debt

 Classification

To be placed in the same class, the claims must be substantially similar Insider claims are separate general unsecured claims though they are all

GUC. Separate classification of similar claims are permitted for "good business

reasons" Cannot classify for the sole reason of getting one affected class to vote in

favor. Administrative convenience classes allowed.

 §1124 - What is an impaired claim?

Any alteration of the legal, contractual rights are impaired. Any creditor getting 100% of their credit are not impaired. Secured creditors where their payment under the contract is changed, is impaired. If the creditor is unimpaired it is deemed to have accepted the plan. [1124.f]

 In re PPI Enterprises [p. 638] (are you impaired by a cap in the bankruptcy code?)

Debtor rejected the lease and the creditor had a rejected lease clause The landlord said that he was impaired because he was not getting everything

under his lease. The debtor argued that the landlord was not impaired since he was getting

everything that he was guaranteed under the bankruptcy code The 3rd circuit found that the landlord was not impaired because it was not the

plan that was impairing the landlord, but a mandatory clause in the Bankruptcy Code.

 "Fair and Equitable"

Absolute priority rule [1129.b.2.b] A lower class in the priority scheme cannot be paid anything until a

member of a higher class is paid everything (100%). Unsecured creditor come before equity holders (stockholders,

owners, etc.), so equity owners cannot receive anything until unsecured creditors get 100% under the plan.

Owners retain ownership interest in the debtor company, and the unsecured creditors are not getting 100%, so the owners are getting something before the USC are not 100%

Only an issue if the impaired classes dissent, voting against the plan

New Value Exception USC not paid in full, and debtor is retaining ownership

interest, If the owners are contributing new value they are not blocked by the Absolute Value Exception

In 1978 rules, the new value exception was taken out. BoA v. 203 N. LaSalle St. Partnership [p. 664], the USSC

was confronted with a case where they could have decided the New value Exception

BoA voted against the plan. BoA was going to get 16%, and the new owners

would get the company for $6mil of new value. USSC reversed the plan's approval.

New owners claimed the new Value Rule existed.

Bank said no New Value exception USSC stated that if the NV existed it would

have been violated by the plan, since it gave the current owners the rights to repurchase an ownership interest for $10mil.

This was prohibited by §1129.b.2.B.ii, which required that previous owners compete with the open market.

Requirements for New Value Exception Contribution must be new, it cannot have been made before

the company filed for bankruptcy Must be money, or money's worth and not work/effort

invested into the company Reasonable equivalent to value of new interest in the

reorganized company Must pay into the company the value of the interest

you are going to keep in the company Necessary for implementation of the plan: money comes in

and goes out to the creditors Exposed to the market, not exclusive to the debtor owners:

but must be available to the rest of the market. Get to the NVE IF

Current owners are to retain their ownership interest USC are not getting 100% of their debt The impaired class votes against the plan.

  Class #17Thursday, April 08, 20108:16 PM Cramdown review

One impaired class must vote in favor Plan must be "fair and equitable" to dissenting classes

Absolute priority rule: all members of a higher priority class must be paid before a lower priority class can get a cent

This comes into play most often when the debtor owners are keeping an ownership interest and the USC are not getting 100% of their investment back.

New Value Exception exists for this circumstance

Contribution must be new, it cannot have been made before the company filed for bankruptcy

Must be money, or money's worth and not work/effort invested into the company

Reasonable equivalent to value of new interest in the reorganized company

Exposed to the market, not exclusive to the debtor owners: but must be available to the rest of the market.

Secured claimant The secured creditor must receive the entirety of the value of their

collateral with interest Sale of the collateral with the lien of the secured creditor to attach

to the proceeds. Realization of the indubitable equivalent

i.e. The secured creditor will receive some property that is equal to its secured claim

i.e. The secured creditor reclaims its collateral. 1111.b Claims and interests

A secured creditor who is under-secured, has two options Secured claim up to the value of the collateral, and an

unsecured deficiency claim for the balance to be mixed in with the other unsecured claims.

Under 1111.b the secured creditor can choose to treat its entire loan amount as secured.i. SC must make the decision before the

ii. If this is done the secured creditor must pay the entire loan over the course of the plan, where the secured amount is paid with interest and the otherwise unsecured amount is paid without interest

a. Depends upon the payout amount to unsecured creditors

b. The unsecured claim is waived and the creditor loses the ability to vote the unsecured rules.

c. This constitutes the loss of leverage to dissent and control the creditor class, and the loss of the ability to force compliance to the Absolute Priority Rule and/or the New Value Exception.

1111.b also changes non-recourse loan into standard recourse loansi. Non-recourse loan - A loan where the debtor is not

personally liable, f the borrower defaults, the lender can take

the property used to secure the loan, but no other property of the borrower.

If the plan calls for the sale of the collateral and the creditor is to be paid out of the sale the creditor cannot claim 1111.bi. Can only make an 1111.b claim if the secured

creditor is to be paid out over time in the plan. Plan does not unfairly discriminate against dissenting classes

This almost always applies to USC only. SC are not usually substantially similar and are classified differently since there are wide variations between either the collateral and the situation of the creditor in relation to their collateral.

USC [§507: Priorities] are all the same priority level. It is possible to separate unsecured claims into different classes,

where their relation is similar, by providing a good business justification. [1122.a]

i.e. Trade creditors, Deficient Secured Creditors, Manufacturing creditors, etc.

Still need to provide One impaired class to vote for the plan. Separating the creditors out can get one impaired class to vote for the plan by separating the fors from the againsts.

What is unfair discrimination? Generally:

Can't pay insiders more than other creditors If the difference is close then it may not matter.

Cranbury - can treat trade creditors differently than deficient creditors, if there is proof that the trade creditors would not deal with the debtor unless they received 100% under the plan.

Buick - did not ratify the plan because it was shown that the trade creditors looked to make a deal with the debtor.

In re Aztec In Re Great Bay - a difference of 76% and 80% recovery between

the USC classes is not unfair, the 4% difference was immaterial. In re Century operating Co. of TX - confirmation was denied 100%

of USCs in one class received 100% and the other class 1%. 1129.a

Administrative Claim: paid in full when the plan is confirmed, unless they agree otherwise.

Unsecured Tax - paid in full over 5 years with interest. Tax Lien is a secured debt

Secured creditors - 3 options listed above:

The secured creditor can be paid in full up to the entirety of the value of their collateral with interest (Till Rule)

Sale of the collateral with the lien of the secured creditor to attach to the proceeds. (i.e. they are paid out of the proceeds of the sale)

Realization of the indubitable equivalent of its secured claim (i.e. give the collateral back)

This is the least used. Unsecured Creditors

Best interest Test: at least as much as they would get in a chapter 7 Absolute Priority Rule

New Value Exception  

Doctrine of Equitable Mootness Objecting Creditor where the plan is confirmed can appeal to the District

Court. If you appeal the confirmation of a plan and things have happened as a

result of the plan, too many things have happened, the appeal is equitably moot.

Things done under the plan, cannot be undone. Have to get a stay pending appeal.

To do so, a bond must be placed to cover injury to the people who would be harmed by the delay.

Till?  Class #18Tuesday, April 13, 20106:12 PM When would equity be entitled to get something under a plan, if there was to be an exchange fro debt?

When the unsecured creditors get paid in full. §1141: Discharge

Most pre-confirmation debts are discharged by plan confirmation Post-petition fees are usually Administrative fees

 What happens to creditors that did not receive adequate notice of the bankruptcy proceedings?

To discharge under 1141, assumes adequate notice to creditors.

Notice must be reasonably calculated to reach all interested parties. For known creditors, actual notice is required.

Debtor has actual knowledge, or the identity is reasonably ascertainable by the debtor.

Publication is sufficient for Unknown creditors Debtor does not know the creditor, or the creditor is not ascertainable by

the debtorAscertainable - requires a reasonably diligent effort by the debtor to discover the identity of the creditor.

Failing to provide adequate notice to the creditors results in no discharge of the debt. 

Litigation Trust : where the company's assets are sold to distribute under the plan, and all that is left is the shell of a debtor

Creation of a private trust for the benefit of USCs Has someone act as a trustee, usually from the panel of trustees, and completes

the litigation claims and uses the money left in the company after the sale of the assets to pay out the remaining claims. 

1123.b.4 - Authorizes a plan that provides for the sale of a substantial amount of a debtor's estate.

Why would Congress allow, what is essentially a Chapt 7, in a Chapter 11? The business ceases to exist in a chapt 7. A business that is still in

operation and functioning is worth more than a closed, non-functional business.

The most common form of a Chapt 7 case is the sale of all of the debtors assets. 

§363.b.1: ordinarily, code provides for sale of assets outside of the ordinary course of business by the debtor, through the approval of the interested parties.

If the debtor contemplates a sale free of liens, etc, then it has to be on motion, and the court must approve the sale.

This is a much faster way to go since there is no need for balloting and such through the other method.

Approving a §363 Request Sale supported by a sound business judgment of the debtor Sale price is fair and reasonable Buyer must be acting in good faith.

"Stalking horse" bidder/offer: enters into an buying agreement with the debtor, and the debtor files a motion to approve the sale

Debtor files a motion to have an auction sale with the stalking horse bid being the floor bid.

Debtor files a motion to have the court approve the auction bid. If the Stalking horse bidder is not the winner at the auction he is entitled to

Usually entitled to reimbursement of expenses Break-up fee The reason is because they created value for the estate, by setting a

floor for the value of the property at auction, and as such they are entitled to reimbursement of the money they expended.

To bid at one of the auctions, a bidder usually has to agree to the same terms as those set forth by the Stalking Horse, so that the bids are all based on the same premises (apples-to-apples)

Unsecured creditors are going to be concerned with price, since they get paid last, so they have an incentive to make sure that top price is received for everything.

So say that §363 sales should receive more scrutiny because it removes decisions from the plan and places them into motions.

"Sub Rosa Plan": you can't do a sale that is a plan in disguise The more that the rights of a party in interest are dealt with in a

§363 the more likely it is a "sub rosa". You know it when you see it.

§363.f: Two important parts. Trustee = debtor The trustee may sell property under subsection (b) or (c) of this section

free and clear of any interest in such property of an entity other than the estate, only if—

1. applicable nonbankruptcy law permits sale of such property free and clear of such interest;

2. such entity (lien holder) consents; 3. such interest is a lien and the price at which such property is to be

sold is greater than the aggregate value of all liens on such property; 4. such interest is in bona fide dispute; or 5. such entity could be compelled, in a legal or equitable proceeding,

to accept a money satisfaction of such interest. Lien holder will be paid first out of the sale of the property "In bona fide dispute": the bankruptcy will settle the dispute and the lien

attaches to the proceeds of the sale "Free and clear": the buyer receives the property without any

encumbrances (clear title), and they get a nice court order saying so. Interests: has been a subject of debate primarily under tort law.

Free and clear of any previous legal claims against the original owners? This is the subject of some debate.

 Exam: Not on state law.Represented an ad hoc committee of people with claims against Chrysler

   Class #19Tuesday, April 20, 20106:19 PM Chrysler - Spring 2009

Was asked by the government for a plan to structure outside of bankruptcy Look for an alliance partner, but was unsuccessful April 30, 2009 Chrysler filed for bankruptcy (Chapt. 11) Dissolution of the old Chrysler, and a new corp to be owned by US/Canada

governments, Fiat and a fund for unemployed workers. Assets of oldCo were to be transferred to NewCo free and clear of liens

Also, 3bil was to be paid to NewCo from OldCo NewCo would also assume only certain debt responsibilities.

Gov't provided 10bil in additional financing to get OldCo through the bankruptcy. 2bil of that would go to OldCo. Secured creditors for OldCo were owed 6bil.

They agreed to accept 2bil in cash in order to agree to the sale to NewCo. 800mil was the liquidation value and 2bil was more attractive than

liquidation. State of Indiana for the Pension tried to block the sale, but were prevented

from doing so because they were bound by the terms of the agreement in bankruptcy that was accepted by the majority of secured creditors.

The previous tort claims against OldCo were not allowed to proceed against the newCo.

Successor liability laws allow people to sue a company that looks like the old company, sells the same products, and takes the place of the old company when it is dissolved.

This is stronger in product liability claims. OldCo was self-insured up to $25mil of initial liability.

Tort claimants were not able to recover damages from OldCo, and insurance would not pay unless your claim was more than 25mil.

They could not sue OldCo since it was bankrupt, and were blocked against bringing a claim against NewCo.

 Objections to the 363 Sale

Purchaser had acted in good faith. Sound business judgment Fair market value 363 has less disclosure than a plan under Chapter 11.

Is it less fair than a sale under a plan? It does not give you the same ability to challenge a sale under 363 than

under a Chapt 11. plan. "Melting Ice cube" Theory

The collateral is being devalued so the sale needs to be expedited. Government said that they would not fund OldCo any longer and the

OldCo was burning through cash quickly. Argue that the sale was not fair, and the purchaser was not acting in good

faith. US gov't owned the oldCo and also was the NewCo The people harmed we US citizens And their right to sue was being extinguished to correct the balance sheet.

Argued what interest meant under 363.f Said that it was different than claims under 11. So, Congress did not say "claims" they said "interest" so the two are

different. TWA case stated that interest encompassed claims.

NewCo agreed to accept liability to people who were injured after bankruptcy went through by OldCo products, not just products developed/produced by NewCo.

OldCo claims were still extinguished. 

Object to a sale transaction and the transaction is approved, and you cannot get a stay, your appeal will be equitably moot.