1. COMMENCEMENT OF THE CASE
  1. ELIGIBILITY FOR BR (p.54)
  2. §109 = who may be a debtor
  3. §109(a) – general qualifications
  4. §109(b-f) – qualifications for the individual Chapters (Chapters 7-13)
  5. §109(b) = Chapter 7, basic “liquidation”
  6. Anyone except railroads, insurance companies, and banks/banking/savings institutions.
  7. Voluntary or involuntary
  8. §109(c) = Chapter 9, insolvent municipalities
  9. §109(d) = Chapter 11, “reorganization” chapter
  10. Anyone under Chapter 7 + railroads
  11. Voluntary or involuntary
  12. But NOT stockbroker or commodity broker.
  13. Chapter 7 has special rules for these people already.
  14. §109(e) = Chapter 13, individual reorganization
  15. Available ONLY to “an individual with regular income”
  16. Voluntary
  17. §109(f) = Chapter 12, “family farms” with regular annual income
  18. Voluntary
  19. §109(g) – a.k.a. “GET A MOVE ON!” NOT allowed to be a debtor if individual or family farmer has been a debtor in a case pending under Title 11 at any time in the preceding 180 days if
  20. Case dismissed for debtor’s willful failure to abide by court orders.
  21. The debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.
  22. FILING PETITION
  23. §301 = Voluntary
  24. Debtor files for BR, and filing the petition leads to order for relief (without any BR hearing).
  25. Date of filing = date of order
  26. §303 = Involuntary (i.e. ONLY Chapter 7 or 11)
  27. Who files?
  28. Person
  29. File petition w/BR court
  30. Three or more entities file
  31. Their claims are not
  32. Contingent as to liability
  33. Subject of a bona fide dispute
  34. An indenture trustee representing such a holder
  35. Fewer than 12 such entities that hold such claims.
  36. Debtor’s business continues to operate
  37. May order interim trustee to take possession of the property and to operate any business of the debtor.
  38. Trial, and court orders relief ONLY IF debtor is generally not paying such debtor’s debts as such debts become due
  39. Can get rid of the case through §305 (abstention), §707 (“for cause”) or §1112 (dismiss case or convert to another chapter for cause)
  40. Shawmut Bank, supp.1, slide 30-46, class 2 & slide 2-12, class 3) – Is the agreement a business trust and thus “bankruptcy eligible?”
  41. Sale and leaseback of airplanes. Created certificates with three priority levels.
  42. Are the certificates equity interests or debts (claims)?
  43. Need to see if the entity is eligible.
  44. Is this trust a business trust?
  45. Trust is only eligible if captured under definition of person (such as a corporation is captured).
  46. PROPERTY OF THE ESTATE
  47. §541 = all legal or equitable interests of the debtor in property as of the commencement of the case (slide 13, class 3)
  48. LTV Steel (supp.7)
  49. LTV creates a separate shell company to sell its accts receivables to, Abbey Nat’l buys the AR from the shell company, company pays LTV with the Abbey Nat’l money. Does LTV still have an interest in the property it’s creating?
  50. Yes, LTV (debtor) does have an equitable interest.
  51. Creating product with its own labor.
  52. Purchasing the materials with which to create the products.
  53. The inventory is part of the debtor’s estate.
  54. §554 – Trustee may abandon any parts of the estate that are
  55. burdensome to the estate
  56. of inconsequential value/benefit to the estate
  57. secured property/collateral
  58. it’s abandoned to the secured creditor
  59. unsecured property
  60. given back to the debtor as part of the debtor’s post-plan estate
  61. AUTOMATIC STAY
  62. §362 = injunction that arises by operation of law immediately upon the commencement of the BR case; automatic b/c act of filing petition brings it into effect.
  63. §362(a)(1, 2, 6, 7, 8) – Prohibits all activity against the debtor relating to the collection of claims that arose before the commencement of the BR case.
  64. §362(a)(5) – Prohibits any steps to create, perfect, or enforce a lien against property of the debtor to secure a prepetition claim.
  65. §362(a)(2, 3, 4) – Stay on all postpetition activity to remove property from the estate or to establish or enforce an interest in it.
  66. §362(b) – Exceptions to the automatic stay include
  67. Does NOT operate as a stay on criminal action or proceeding against debtor.
  68. Does NOT operate as a stay on an action or proceeding by a governmental unit … to enforce such governmental unit’s … police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power
  69. Nextwave case (p.113)
  70. Nicolet case (p.116)
  71. Pecuniary test
  72. Seeking to enforce $ judgment.
  73. For the $ à NOT protected by this exemption
  74. For the public interest à okay under this exempton.
  75. §362(c) – Duration of the stays
  76. Property of the estate: until such property is no longer property of the estate.
  77. Everything else is stayed until the earliest of:
  78. Time the case is closed
  79. Time the case is dismissed
  80. Chapter dependent
  81. Chapter 7 individual or Chapter 9, 11, 12, 13
  82. The time a discharge is granted or denied.
  83. §362(d) – Relief from stay (after party applies for relief from stay)
  84. CLAIMS
  85. Definition in §101(5) = right to payment or right to equitable remedy for breach of performance if such breach gives rise to a right to payment
  86. When does claim arise?
  87. Three tests
  88. Accrued state law claim – claim does not arise until it has accrued under state law
  89. Conduct test – when the conduct giving rise to liability occurs
  90. Prepetition relationship test
  91. Conduct test PLUS
  92. Claimant must have prepetition relationship to debtor
  93. Future claimants
  94. Claim under §101(5) against a debtor-manufacturer if
  95. events occurring before confirmation create a relationship, such as contact, exposure, impact, or privity, between the claimant and the debtor’s product; and
  96. the basis for liability is the debtor’s prepetition conduct in designing, manufacturing and selling the allegedly defective or dangerous product
  97. Impact of Piper test – Companies can use BR as protection against product liability in torts (a strict liability rule) which requires the company to compensate all victims, born or unborn, who are injured as a result of coming in contact with the product.
  98. §501 – FILING CLAIMS
  99. A creditor or an indenture trustee may file a proof of claim. An equity security holder may file a proof of interest.
  100. If a creditor does not timely file a proof of such creditor’s claim, an entity that is liable to such creditor with the debtor, or that has secured such creditor, may file a proof of such claim.
  101. §502 – ALLOWANCE
  102. Claims/interests are deemed allowed unless a party in interest objects.
  103. Allowance recognizes creditor’s right to share in the assets of the estate. Assets are distributed to holders of allowed claims at the end of the BR process.
  104. When are claims allowed?
  105. YES, allowance: obligation owed under applicable nonbankruptcy law.
  106. Obligation not given time to accrue à claim allowed for unaccrued obligation.
  107. Raleigh v. Illinois Dept. of Revenue (p.140)
  108. Claims in BR are understood by reference to substantive nonbankruptcy law.
  109. “The ‘basic federal rule’ in BR is that state law governs the substance of claims.”
  110. NOT allowed: no obligation is owed under applicable nonbankruptcy law.
  111. Upon objection, there’s notice and a hearing to determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that –
  112. Such claim is unenforceable for a reason other than that it’s contingent or unmatured.
  113. Such claim is for unmatured interest.
  114. Such claim is a lessor’s claim for property damages done by lessee and the claim exceeds an amount determined by rent percentages and the unpaid rent that’s left. (slide 18, class 5, §502(6))
  115. Estimating the claim
  116. Not disputed/liquidated claims: obligation owed under applicable nonbankruptcy law
  117. What about contingent or unliquidated claims (i.e. uncertain as to estimate)?
  118. Two approaches:
  119. BR Court approach (slide 28, class 5)
  120. Assess weight of evidence (0 v. 100%, 49 v. 51%, 100 v. 0%, etc.)
  121. Apply standard of proof. (preponderance of evidence, beyond a reasonable doubt, etc.)
  122. Bittner v. Borne Chemical Co. p.144
  123. More concrete – take weight of evidence (say 40%) and multiply by estimated liability.
  124. “Where there is sufficient evidence on which to base a reasonable estimate of the claim, the BR judge should determine the value.”
  125. Standard of appellate review:
  126. When reviewing method BR court used to ascertain value of claim, appellate court may only reverse for abuse of discretion. (p.145)
  127. When reviewing the findings of fact (usually a dispute arising when the facts are the ones the BR court based its estimation of value), appellate court may only reverse when they are “clearly erroneous.”(p.148)
  128. Are punitive damages allowed?
  129. In re A.H. Robins Co.: No, punitive damages are not allowed.
  130. “If Robins is to be given the opportunity provided under Chapter 11 to successfully reorganize and function as a viable entity,” punitive damages must be disallowed.
  131. Unfair treatment of claimants otherwise.
  132. Don’t allow a windfall claim to certain creditors that could jeopardize the full compensation of claims to all others.
  133. §506 SECURED CLAIMS
  134. Secured claim = loan supported by a contingent property interest.
  135. Special protection under the Code.
  136. Unsecured claims treated as ordinary general obligations.
  137. How to value secured claims?
  138. §506 (class 6)
  139. Determined in light of the purpose of the valuation and the proposed disposition or use of such property and in conjunction with any hearing on such disposition or use on a plan affecting such creditor’s interest.
  140. §506(a) – allowed secured claim = “a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property”
  141. §506(b) – if the property that secures the claim is more valuable than the secured claim, then secured creditor may receive interest on the difference in value.
  142. §506(c) – trustee (who is using the property secured by the claim) may recover from the property securing the interest the reasonable, necessary costs and expenses of preserving or disposing of the property to the extent that it benefits the secured claim holder. (slide 7, class 6)
  143. §506(d) – secured but DISallowed claim à lien is void unless
  144. it was only disallowed under §502(b)(5) or (e) OR
  145. it was only disallowed because entity failed to file proof of the claim under §501
  146. Associates Commercial Corp. v. Rash (supp.27) – ACC has secured interest in a truck Rash buys.
  147. Truck has three values:
  148. If ACC forecloses, it’s worth $31,000.
  149. PV of truck = $28,000.
  150. New on marketplace = $41,000.
  151. In the plan, Rash wants to keep the truck and pay PV of truck over time.
  152. §1325(a)(5) – court confirms a plan re: allowed secured claim if
  153. secured creditor has agreed to the plan
  154. the plan
  155. lets secured creditor keep the lien securing the claim AND

b.  the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim;

  1. debtor surrenders the property to secured creditor
  2. CRAM-DOWN case where the court will be confirming the plan in opposition to the secured creditor’s wishes. US SC says value is replacement value.
  3. the price a willing buyer in the debtor’s trade or business, or situation would pay to obtain like property from a willing seller
  4. Timing for conflicting perfected security interests and agricultural liens rank according to priority in time of filing/perfection.
  5. What happens to the property?
  6. Debtor doesn’t keep it. It’s either abandoned to secured creditor or agreed to be surrendered to secured creditor.
  7. Actual number ≠ secured interest
  8. The secured creditor (to whom the property is returned) keeps the difference between the actual number and the alleged value of the property.
  9. Debtor keeps the property. (Rash)
  10. Cram down situation: Replacement value paid back to secured creditor.
  11. EXECUTORY CONTRACTS (slide 12, class 7)
  12. In an executory contract, debtor and third party have made promises to each other (that they have yet to execute). Material performance owed on both sides.
  13. Can be a net asset or liability, depending on the circumstances.
  14. §365 and unexpired leases (property leases!)
  15. §365(b)(4)
  16. trustee may not require lessor to provide any more than the lease provisions
  17. §365(d)(3)
  18. nonresidential real property (business real estate): estate is obliged to perform the debtor’s lease obligations at the full contract rate during period before rejection whether or not the estate derived any economic benefit from the premises
  19. §365(d)(10)
  20. requires estate to perform obligations to a nonconsumer personal property lessor (who leases the debtor personal property used for business/commercial use) “first arising from or after 60 days from the order for relief”
  21. i.e. 60 days leeway before performance to a nonconsumer personal property lessor must begin
  22. Time limits
  23. Chpt. 7 and/or leases of nonresidential real property: assume or reject within 60 days of the order for relief
  24. If no action is taken within the prescribed period, then the rejection is assumed and automatic (w/o court’s approval).
  25. All other chapters may assume or reject at any time (except K for nonresidential realty lease).
  26. An affirmative decision to assume or reject must be approved by the court following a motion by the trustee on notice.
  27. Three actions for BR trustee –
  28. Assume = bring it into the estate, assume obligation to perform the contract (Trustee will do this if it’s a net asset and even if the contract says you can’t assign the contract)
  29. Before assuming, ask
  30. Is the contract in default?
  31. If so, then need to cure the default UNLESS it’s a type (there are two) of default that cannot be cured
  32. Violation of an ipso facto clause (which says debtor is in default if debtor files for bankruptcy)
  33. Failure to pay a penalty rate or some nonmonetary default (such as debtor’s failure to stay open certain hours specified in the K)
  34. Is it assumable in the first place? There are three non-assumable executory contracts: §365(c)(1)
  35. Contracts that are NOT assignable in nonbankruptcy law. Respects rights of nontransferability under nonbankruptcy law.
  36. Assignment seems to be the key issue in this part of the statute.
  37. Perlman case (p.215(
  38. Hypothetical test: Is the ID of the other party material? If yes, then may not assume K w/o other party’s permission
  39. Institut Pasteur case (p.221)
  40. Rejects hypothetical test
  41. Actual test (case-by-case inquiry) into whether nondebtor party actually was being “forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted.”
  42. Loan and financing transactions – forbids trustee from assuming a K to make a loan, to extend other debt financing or financial accommodations to the debtor, or to issue a security of the debtor.
  43. Terminated leases of nonresidential real property
  44. Reject = §365(g) do not bring into estate, let them deal with it with the solution that would be available outside of BR
  45. Rejection if performance would “place an undue burden on the estate.”
  46. Register, D rejects covenant not to compete b/c would place burden on D, π says D can’t do this!, court says that “the principle issue is whether the court is capable of reducing the injury that Silk Plant incurs as a result of the breach of this covenant to a dollar amount.”
  47. Outside of BR, it would be a breach of contract suit by the other party. (Trustee will do this if it’s a net liability.)
  48. When other party sues for breach of contract, the resulting damages owed to other party gives other party status as a general creditor
  49. What is rejection?
  50. It’s a breach! According to Leasing Services (p.231)
  51. It’s merely rescission! According to Register (p.234)
  52. Assign = debtor can’t really use the K, but it’s still valuable à sell (assign) the K EXCEPT
  53. as prohibited by §365(c)
  54. and, if an unexpired lease, as governed by §365(f)
  55. Trustee’s Avoiding Powers -- §544, 545, 547, 548, & 553. 552, 558, 549, 546 to some extent
  56. §544(a): BRC gives trustee right to step into the shoes of other people, hypothetical and actual.
  57. Trustee obtains this status as a matter of law.