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Chapter 16: Creditor-Debtor Relations and Bankruptcy

Chapter 16: Creditor-Debtor Relations and Bankruptcy

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Chapter 16: Creditor-Debtor Relations and Bankruptcy

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  1. Chapter 16: Creditor-Debtor Relations and Bankruptcy

  2. §1: Laws Assisting Creditors • Liens: • Consensual; • Statutory; or • Judicial. • Other Remedies: composition agreements, ABC’s. • Suretyship.

  3. Liens [1] • Consensual Liens. • Personal property as collateral (UCC Art. 9 UCC Secured Transactions). • Real property as collateral (Mortgage). • Statutory Liens. • Mechanic’s Lien: Nonpossessory filed lien on real estate for labor/services. • Artisans’ Lien: Possessory lien on personal property for labor done to property. • Innkeeper’s Lien: Possessory lien on baggage for unpaid hotel charges.

  4. Liens [2] • Judicial Liens: Court-ordered seizure/sale of property. • Judicial Liens: Attachments, Writs of Execution, Garnishment: • Case 16.1: U.S. v Smith(1995).

  5. Mortgage Foreclosure[1] • Mortgagor (Debtor-Borrower). • Mortgagee (Creditor-Lender). • Foreclosure: Mortgagor defaults; Mortgagee petitions court to have sheriff seize, advertise, and sell property. • Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left.

  6. Mortgage Foreclosure [2] • If there is still money owed to creditor after foreclosure there is a deficiency, and the debtor is still liable for this. • Equity of Redemption: Mortgagor can “redeem”: the property by paying full amount plus any penalties and taxes.

  7. §2: Suretyship and Guaranty When a 3rd party promises to pay a debt owed by a Debtor who doesn’t pay, either a suretyship or guaranty is created. Principal Debtor Creditor Surety / Guarantor

  8. Suretyship • Express contract between the surety and the creditor. • Creditor can demand payment from surety at any time after debt is due. • Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible.

  9. Guaranty • Secondarily liable, debtor must default, creditor has attempted to collect from the debtor. • Statute of Frauds requires guaranty to be in writing. • Case 16.2: Wilson Court Limited Partnership v. Tony Maroni’s (1998).

  10. Defenses of the Surety & Guarantor [1] • Surety can use any of the Debtor’s defenses EXCEPT incapacity, bankruptcy, or statute of limitations. • Surety can use his own defenses, EXCEPT fraud between Debtor and Surety that is unknown by creditor.

  11. Defenses of the Surety & Guarantor [2] • Material contract modification between Debtor and Creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss. • Surrender or impairment of the Debtor’s collateral releases surety to the extent he is damaged. • Release of a co-surety releases surety to the extent he is damaged.

  12. Rights of the Surety & Guarantor • Right of Subrogation. • Right of Reimbursement. • Right of Contribution from Co-sureties: • Sureties in equal amounts. • Sureties in equal amounts, one or more co-sureties missing or insolvent.

  13. §3: Protection for Debtors • Exemptions (Federal and State): • Homestead; and. • Personal property • Holder in Due Course does not work against consumers. • Consumer Credit Protection Act. • Truth-in-Lending Act.

  14. §4: Bankruptcy and Reorganization • Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. • Bankruptcy Reform Act of 1978, amended by Reform Act of 1994. • Federal court under U.S. district court, can appeal to district courts. • Secured vs. Unsecured creditors.

  15. Types of Bankruptcy Relief [1] • Bankruptcy code has 8 chapters. • 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate • Chapter 7 - liquidation proceedings. • Chapter 9 - adjustment of debts of a municipality.

  16. Types of Bankruptcy Relief [2] • Chapter 11 – reorganizations. • Chapter 12 - adjustment of debts of family farmers with regular incomes. • Chapter 13 - adjustment of debts of individuals with regular incomes.

  17. Chapter 7: Liquidation • Chapter 7: Ordinary or straight bankruptcy. • All assets are turned over to a trustee. • Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged. • Available for any person, individual, corporation, partnership. • Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors.

  18. Filing the Chapter 7 Petition • Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. • Voluntary Petition. • Involuntary Petition.

  19. Voluntary Petition [1] • Petitioner must understand there are other chapters available. • Debtor does not have to be insolvent. • List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. • Swear to these and sign. Federal crime to misrepresent.

  20. Voluntary Petition [2] • Court issues order of relief. • Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. • Court will deny if “substantial abuse” of Chapter 7. • Case 16.3: In Re Lamanna(1998).

  21. Involuntary Bankruptcy [1] • Creditors force Debtor into bankruptcy proceedings, but not against a farmer or charitable institution. • If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition.

  22. Involuntary Bankruptcy [2] • If there are less than 12 creditors, one or more having a claim of $10,000 may file. • Court will order relief if: • Debtor is generally not paying debts as they come due. • A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing. • Severe penalties for frivolous petitions against debtors, including Punitive damages.

  23. Automatic Stay • Either voluntary or involuntary. • Creditors cannot commence or continue most legal actions. • Damages for violation of stay. • Creditors can get “adequate protection.” • periodic or one time cash payments or indubitable equivalent.

  24. Property of the Estate [1] • Debtor’s Estate includes: • All Debtor’s legal and equitable interests in property presently held, including community property; • Property transferred in a “voidable” transaction; and • Property which Debtor becomes entitled within 180 days after filing.

  25. Property of the Estate [2] • Estate includes (cont’d): • Proceeds and profits from the property of the estate; and • After-acquired property such as inheritances, property settlements, and life insurance death proceeds. • Case 16.4: In Re Andrews(1996).

  26. Creditor’s Meeting and Claims [1] • Ten to thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. • Within 90 days, Creditors must file “proof of claim” with court clerk. • Leases cannot be for more than one year.

  27. Creditor’s Meeting and Claims [2] • Claims allowed unless disputed. If claim is disputed or unliquidated, court will decide value. • It is a crime to file a false claim. • Employment contracts and real estate.

  28. Exemptions • See list in text pages 350-351. • States may pass law requiring Debtor use state exemptions. • In some states, Debtor may choose state or federal exemptions.

  29. Bankruptcy Trustee • Court-appointed until first meeting of creditors. • Creditors elect permanent trustee • Administers estate. • Collects proceeds, liquidates assets and pay Creditors in order of priority.

  30. Trustee’s Powers • Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: • Debtor against the creditors. • Lien creditors against the creditors. • Bona fide purchaser against the creditors. • Trustee still loses to the PMSI creditor who perfects within his “magic” 10-day period.

  31. Voidable Rights Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

  32. Preferential Transfers [1] • A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. • For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

  33. Preferential Transfers [2] • Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. • Creditor gets more than he would in a Chapter 7. • Consumer can transfer up to $600 without constituting a preference.

  34. Liens on Debtor’s Property • Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. • Can avoid liens which were unperfected on date of bankruptcy.

  35. Fraudulent Transfers • Trustee may avoid fraudulent transfers made within one year of filing of petition. • Trustee may proceed under state law for fraud with a 3 year statute of limitations.

  36. Distribution of Secured Property • Consumer debtors: • Have 30 days from filing petition or before first meeting of creditors. • Debtor must tell what she intends to do with collateral-- keep or surrender. • Trustee must enforce within 45 days. • If Consumer surrenders: Creditor can keep or sell • If creditor keeps collateral the debt is fully satisfied. • If creditor sells the collateral, she can use extra for costs, or can become unsecured creditor for deficiency.

  37. Distribution of Unsecured Property • Paid according to bankruptcy law. • All of one class must be paid before moving to next. • Creditor within last class receive proportionately if not enough: • See Priority List on page 353. • All creditors paid, trustee gives extra back to debtor.

  38. Discharge • Exceptions (p.354). • Objections to Discharge. • Effect of Discharge. • Revocation of Discharge. • Reaffirmation of a Debt.

  39. Exceptions to Discharge(List on p.354) • Claims for back taxes. • Claims for amounts borrowed by Debtor to pay federal taxes. • Claims against property/money obtained by Debtor under false pretenses. • Claims by Creditors who did not know about bankruptcy. • Case 16.5: In Re Seixas (1999).

  40. Reaffirmation of Debt • Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. • Agreement is filed with court. • Debtor can rescind agreement at any time.

  41. Reorganizations • Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. • Same debtors as are eligible under Chapter 7. • Creditors and debtors can settle private “workouts” outside of bankruptcy proceedings.

  42. Reorganizations [2] • “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. • Debtor in Possession (DIP): • Trustee may be appointed. • DIP has same powers as trustee in Chapter 7. • Strong-arm clause

  43. Reorganizations [3] • Collective Bargaining Agreements. • Creditors Committees. • The Reorganization Plan: • Designate classes of claims and assets. • Specify treatment of classes. • Provide adequate means of execution.

  44. Chapter 13:Individual Repayment Plans • Chapter 13: For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750. • Not for partnerships, corporations.

  45. Law on the Web • U.S. Bankruptcy Code at Cornell U. • Creditor-Debtor relationships at Cornell U.. • The Bankruptcy Law Finder. • The American Bankruptcy Institute. • Legal Research Exercises on the Web