Bankruptcy outline April 22, 2006.

Trustee In Bankruptcy: Chp 7 TIB is appointed by the bankruptcy court to run the case. The TIB is not the debtor’s lawyer. The TIB owes fiduciary duties to the unsecured creditors – he often challenges misfiled security interests. The TIB’s duty is to gather and administer the bankruptcy estate. The estate arises under §541 of the Code.

§541a1-a6: The commencement of a case creates an estate. Such estate is comprised of all property of the debtor by whomever held and wherever situated. All legal or equitable interests in property as of the commencement of the case. So this includes un-settled tort claims where the accident occurred before the bankruptcy was filed. The bankruptcy case can be re-opened to distribute later-paid tort or other claims. But wages earned post-petition are not property of the estate.

Sharp v. Dery: Petition in mid December 00. Yearly bonus paid Feb 01. Debtor still had post-petition obligations to perform before he was entitled to collect bonus. So as of petition, debtor could not have sued to get bonus (no legally enforceable right to it). Bonus is property of debtor, not property of estate.

§541c1 says that contractual restrictions you made against transfer of property don’t keep the bankruptcy trustee from getting it. §541c2 says that spendthrift trusts work to keep assets held in trust away from the bankruptcy estate. (Applies to retirement accounts). New section §541(b)7 in the 2005 amendments expands and clarifies the exemption.

Fraudulent conveyance is any transfer of assets to 3rd party in exchange for insufficient consideration any time a debtor is insolvent or with the intent to evade creditors. You sue the transferee for fraudulent conveyance, then they have to turn over the assets.

Licenses: In general licenses (such as driver’s license) are not property. But liquor licenses, airline gates, radio spectrum are usually considered property and go into the estate. The court must decide whether, practically speaking, the type of license is routinely sold. (Regardless of whether the licensing statute seems to limit transferability).

Abandonment – personal property with no real value (ie, family photos & pets) the trustee can abandon it back to the debtor.

Exemptions: All property goes into the estate. Then, the debtor can take it back out using exemptions. For example, household goods like pots and pans will to into the estate, and then the debtor has to claim the exemption to take the pots and pans out.

§362a – Automatic Stay. As soon as the bankruptcy petition is filed, there is an automatic stay against creditors collecting / repossessing from debtor. A stay is a type of injunction. It is extremely broad.

  • applies to all entities – secured, unsecured, governmental, judgment creditor, etc.
  • applies against debtor and any property of the estate. Cannot create or perfect a lien at this point.
  • But a judge can lift the stay wrt particular debts. Example: case is about to go to the jury, and the D files bankruptcy. Must lift the stay to send the case to the jury.

§362b are the exceptions – where there is no automatic stay.

Student Loans: Congress made student loans non-dischargable in bankruptcy. So, the student won’t be off the hook for the debt. But until the final order, the automatic stay still applies to the non-dischargable debt unless it is listed in §362b exceptions. School has to grant you a transcript during the automatic stay period.

Knowing violation of the automatic stay opens creditors up to both actual and punitive damages. In Nissan v. Baker the reposessor had to buy a new truck for debtor when the repossessed his upside-down truck in knowing violation of stay.

Unknowing Violation: The schedule filed with petition has addresses of creditors. Court mails notice to creditors. It’s an unknowing violation before creditor gets notice in the mail. C gives back $ or collateral… actions taken in violation of stay are void.

But courts increasingly hold that unwitting violations of stay that would have been allowed if bankruptcy J had been asked, then J has the option to let the acts stand rather than undo them. (Look for this on bar exam).

Criminal Prosecution: §362b says a criminal D can spend his money to defend himself, even after the automatic stay is in effect. But – if DA asks debtor to make good on a prepetition ‘bounced’ check or face prosecution, the DA is violating automatic stay.

L Signs Petition: the attorney must sign saying he has performed a reasonable investigation and has no knowledge that the information in the petition/schedules is incorrect. Typical attorney prices went up from $900 to $2400.

§341 Meetings: within X days of filing a bankruptcy case, a meeting of creditors presided over by the (assistant) US Trustee takes place. Debtor is available for answering questions about petition, assets, liabilities. It’s type of discovery.

Old §707 Substantial Abuse: (In re Shaw 2003). High-income debtors living beyond their means. Court says that Chapter 7 bankruptcy is not available, they have to cut expenses and use their large income to pay their creditors. The §707b motion could only be brought by J or US Trustee, not creditors. Old system before 2005 amend.

New §707: Substantial abuse calculated according to a formula. If the debtor has less than $100 a month left over (income-expenses) always Chp 7 available. If debtor has $100-166 left over, do calc. If debtor has more than $166/mo surplus, Chapter 13. Lawyer has to certify he has done reasonable investigation and sign off on the petition.

Policy- this may be too blunt (no j discretion) and too expensive (L calculates and US Trustee checks) compared to the old system.

State Exemptions: The Federal Bankruptcy code permits state legislatures to opt-out of the Federal exemption scheme and therefore impose the state scheme on debtors in bankruptcy. The 40 or so states have opted-out.

Exemption Definitions: litigation around the edges – is a schoolbus a “car” for exemption purposes? Is an annuity purchased by State to pay your Lotto winnings an ‘annuity’?

Exemption Valuation: many states cap $ amount exemptable. So debtor looks for low valuation of existing car, jewelry, etc to keep it from being sold. §522a2 – value means fair market value as of the date of filing the petition, or as of the (later) date the property goes into the estate.

Mitchell: Value of unsecured personal goods (eg, diamond ring) is the liquidation value since the alternative to keeping the goods is for the trustee to do a liquidation sale. Minority rule from Walsh is the opposite.

Grablowsky: debtor on bankruptcy schedule lists partnership value as $1. Standard practice for unknown value - amend later if trustee objected. Instead of objecting, Trustee found a purchaser willing to pay more $. Debtor got $1, trustee got the rest.

  • lesson – debtors must claim exemptions at full value to get them.
  • lesson – all property goes into the estate, claimed exemptions let out. That’s why $99,999 was estate property, $1 was exempt as claimed.

Child Support Money: pre-petition child support $ from ex-spouse does not go into estate. Those $ are held in trust for the child. (Palidora)

Partially Exempt Property: If the debtor has equity of $2000 in a car, but the exemption is only $1800, trustee can sell the car and keep $200. Debtor gets $1800 cash. But most debtors have no equity in car and get nothing on sale.

Avoidable Liens: §522(f)1. Types of liens, to the extent they impair a debtor’s ability to claim an exemption in exempt property, will be avoided.

1) a judicial lien other than child support, maintenance, alimony. An unsecured creditor who has obtained a judgment and a lien pre-petition… but has not yet foreclosed on the lien. That lien is avoided to the extent it keeps debtor from claiming an exemption such as homestead.

2) a nonposessory, nonpurchase money lien in consumer property. Or tools of the trade, or professionally prescribed health aids. We don’t want lenders to give you money for food and take a security interest in your wheelchair. The lien is just there for arm-twisting. (Purchase-money means the loan is to buy the item. Car loan to buy car. Possessory lien is a pawnshop lien… where you give the property to the lender upfront to get the money).

Exemption Conversion: Debtor sells nonexempt assets and converts them to exempt property as defined/legal in state law. It is not a §522 violation per-se. But, if you have a purpose to hinder, delay, or defraud creditors, you will lose discharge under §727

Fraudulent Conveyance: if you give (or sell below value) an asset to a transferee, the bankruptcy trustee will sue the transferee and get the asset back into the estate. So don’t give Mom the Renior unless you want Mom to get sued.

Contrast §727 (bad acts mean debtor gets no discharge) and §523 (some types of debts are not dischargeable).

Loss of Discharge §727: Significant punishment. You keep your state exemptions, but all your nonexempt property is liquidated and given to creditors… and you still owe the creditors. And you cannot re-file for bankruptcy for several more years.

§522b3: debtor has to live in a state for last 730 days to get that state’s exemptions. Idea is to prevent debtors all moving to Florida and Texas. If you have moved within the 730 days, then you go back 180 + 730 days and use that state’s law. This is new law – the CL has not developed. Random results may ensue for debtors who move a lot.

Claims Process: Claim form is legally prima facie evidence of the validity of your claim. IE, if the trustee doesn’t object the claim is accepted. Trustee has a fiduciary obligation to the unsecured creditors – duty to knock out as many claims as he legitimately can. Claim definition is very broad – includes unmatured, contingent, nonliquidated, etc.

  • Tort victims have to file a claim against the debtor in bankruptcy – even if the tort happened the day before the filing. Court will estimated claim’s value – no jury trial. If you wait until after discharge to file suit, your suit will be barred!
  • Contingent claims (ex: dad guarantees son’s car loan, then either dad or son goes bankrupt) have to be asserted as well.
  • Product Liability: side effect of Piper bankruptcy was that New Piper not liable for product liability claims for pre-petition Piper aircraft. Often J will estimate damages and make a trust for mass tort future victims.

Interest: pre-petition interest is part of your claim. Collection fees, atty fees provided for in pre-petition contract are part of claim. But unsecured creditors don’t get post-petition interest. Otherwise the high % creditors have incentive to run the clock.

Secured creditors, if under-secured, get no post-petition interest. Over-secured secured creditors get post-petition interest and atty fees up to the amount of the over-security. §506

Allowed Secured Claim: the allowed secured claim is the lesser of the value of the collateral or the value of the claim. So if oversecured, it’s the value of the claim. If undersecured, it’s the value of the collateral only and the remaining claimed amount is an unsecured debt.

Priorities: (Secured creditors get the collateral or its value in cash, then -)

  1. DSO’s– alimony, maintenance, child support but not divorce-property-division. 507(a)1.
  2. Administrative expenses of estate can get super-priority over these DSO’s if the expenses were necessary to administer the estate to provide these DSO’s. 507a(1)c
  3. Administrative expenses of the estate. (Normal, not super priority).
  4. Involuntary Bankruptcy costs under 502f. (Rare in practice)
  5. Employee wages for the 180 days before filing.
  6. Employee benefits for the 180 days before filing.
  7. Grain storage and fish storage debts
  8. Layaway - $2225 per consumer
  9. Taxes owed to government units (allowed unsecured)
  10. Debts to FDIC institution to help it meet deposit mins (unsecured)
  11. DUI claims.
  12. (No priority…. general unsecured claims get pro rata payout).

§523 – Denial of Discharge for a single debt. (Several have changed since Tapes).

  • student loans – but see hardship exception. Hardship discharge to Czar means “the kids are going to starve. Single debtor working under 80hr/wk no discharge. Some circuits allow partial discharge of student loans based on hardship – maybe you can pay half without hardship.
  • Fraud - Debtor got the loan through fraud, false pretenses, material false stmts.
  • Credit card companies will look for facts to indicate you had no intent to repay when got the cash advance at Tunica, therefore fraud since your credit card agreement says you agree to repay. This fraud is not related to your financial condition (see below).
  • Material false statements about debtor’s financial condition must be in writing, with intent to deceive and reasonably relied on by creditor to cause §523 non discharge. (this cuts down on creditors’ overuse of §523)
  • Luxury goods/services over $500 from a single creditor bought within 90 days or cash advances over $500 within 70 days (presumed fraud).
  • Taxes and their penalties (taxes that get priority in §507)
  • DSO - child support, maintenance, alimony. (a5) Property division in divorce (a15).
  • Fail to Disclose: Debts you know about but don’t disclose in your petition.
  • Priority Interest - pre-petition interest that gets §507 priority
  • Intentional tort debts, drunk driving (MADD) injury debts. No freebie on battering your enemies the day before you declare bankruptcy.
  • Criminal Restitution: Federal criminal law restitution payments.
  • If you put taxes on your Visa, that Visa debt becomes nondischargable.
  • Loans taken from pension (smart to leave $ in pension)
  • Violating Federal Securities laws, judgment is nondischargeable.

§727 – Denial of Discharge for all debts for one debtor.

  • Loss of Assets: debtor has failed to explain satisfactorily any loss of assets
  • No Records: debtor has no records of much of anything
  • Fraudulent Conveyance: debtor with intent to hinder, delay, or defraud a creditor has transferred, removed, destroyed, mutilated, or concealed property.
  • Fraud under Oath: debtor knowingly and fraudulently…in connection with case.

§524c Reaffirmation: Debtor can reaffirm 1) by filing with bankruptcy court before discharge 2) counsel must approve the agreement as not imposing an undue hardship on the debtor and in the best interest of the debtor (or J if no L for D)

  • debtor can rescind the agreement at any time before discharge or within 60 days of the agreement being filed, whichever is later.
  • will not be examined on the 524(k) disclosures, new in 2005.

In re Pendlebury

Debtors wanted to reaffirm, but didn’t like the bank’s terms. They ask the court to change terms based on fairness, etc. Court says no, reaffirmation is a free-market activity. Parties have to agree on terms between themselves.

Redemption: upon payment of the amount of the allowed secured claim, you can redeem a secured asset. §722. Seldom used.

Ride-Through: controversial third option. Debtor would continue to make payments without reaffirmation and creditor would not repossess. Liens (as opposed to debts) ride through bankruptcy discharge.

Today debtors have to list all property with security interests against them on the petition schedule. Declare whether you will redeem, reaffirm, or not. You have to do what you say or the automatic stay is lifted under §362 wrt that asset. This was an attempted fix to solve the ride-through problem.

Hood Case: SC says that suits about debts (often education loans) to sovereign states fall under bankruptcy jurisdiction. Even though general 11AMD rule is that states get sovereign immunity from suit in federal court. Ex: if MS violates §362 stay.

Nondiscrimination: Code §525. Government unit cannot revoke (etc) licenses/charters…Government unit cannot discriminate wrt employment…solely b/c the debtor has been through bankruptcy. §525 narrowly construed in court. Often the Govt puts you under higher scrutiny and finds any other reason to revoke license/employment.

No private employers may discriminate wrt employment solely because of person has been through bankruptcy. So private entity doesn’t have to do business with former bankrupt, but cannot fire ee based solely on it.

§362d(1) – Court shall grant relief from automatic stay for cause, including lack of adequate protection. (ie, secured creditor can insist on adequate protection against decline in collateral value)

§362d(2) – lets creditor get automatic stay lifted wrt an asset if the debtor has no equity and the asset is not necessary for an effective reorganization.

Chp 13 Cramdown: secured creditors’ claims will basically be bifurcated and the unsecured portion will get the same % on the $ as other unsecured creditors. They will get the full allowed secured part of the claim.

Example: Loan for $10k and car worth $5k. Debtor will pay the $5k allowed secured claim – not as a lump sum but as a PV=$5k stream of payments under the plan. The unsecured $5k will get the same treatment as other unsecured claims.