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Chapter 30 Bankruptcy Law. 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. Federally appointed judges. .

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bankruptcy and reorganization
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.
  • Federally appointed judges.
1 types of bankruptcy relief 1
§1: 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.
types of bankruptcy relief 2
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.
2 liquidation proceedings
§2: Liquidation Proceedings
  • 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.
filing the chapter 7 petition
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 vs. Involuntary bankruptcy.
voluntary petition 1
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.
voluntary petition 2
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.
involuntary bankruptcy 1
Involuntary Bankruptcy [1]
  • Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, 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.
involuntary bankruptcy 2
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.
involuntary bankruptcy 3
Involuntary Bankruptcy [3]
  • Court will order relief if:
    • 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.
  • Penalties for frivolous petitions against debtors, including Punitive damages.
automatic stay
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.
property of the estate 1
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.
property of the estate 2
Property of the Estate [2]
  • Estate includes (cont’d):
    • Proceeds and profits from the property of the estate.
    • After-acquired property such as inheritances, property settlements, and life insurance death proceeds.
    • Case 30.2: In Re Andrews(1996).
creditor s meeting and claims 1
Creditor’s Meeting and Claims [1]
  • Ten-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.
creditor s meeting and claims 2
Creditor’s Meeting and Claims [2]
  • Allowed unless disputed.
  • If claim is disputed or unliquidated, court will decide value.
  • It is a crime to file false claim.
  • Employment contracts and real estate.
  • See list in text pages 549-550.
  • States may pass law requiring Debtor use state exemptions.
  • In some states, Debtor may choose state or federal exemptions.
bankruptcy trustee
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.
trustee s powers
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.
voidable rights
Voidable Rights

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

preferential transfers 1
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.
preferential transfers 2
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.
liens on debtor s property
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.
fraudulent transfers
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.
distribution of property 1
Distribution of Property [1]
  • If 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 surrenders: creditor can keep or sell.
      • If creditor keeps = full satisfaction of debt.
      • If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.
distribution of property 2
Distribution of Property [2]
  • 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 in text.
    • All creditors paid, trustee gives extra back to debtor.
  • Exemptions.
  • Objections to Discharge.
  • Effect of Discharge.
  • Revocation of Discharge.
  • Reaffirmation of a Debt.
exceptions to discharge list on p 604
Exceptions to Discharge(List on p.604)
  • 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.
reaffirmation of debt
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.
3 reorganizations
§ 3: 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.
reorganizations 2
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.
  • “Workouts”.
reorganizations 3
Reorganizations [3]
  • Debtor in Possession (DIP).
    • Trustee may be appointed.
    • DIP has same powers as trustee in Chapter 7.
      • Strong-arm clause.
  • Collective Bargaining Agreements.
  • Creditors Committees.
  • The Reorganization Plan.
4 additional forms of bankruptcy relief
§4: Additional Forms of Bankruptcy Relief
  • Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750.
  • Not for partnerships, corporations.
additional forms of bankruptcy relief 2
Additional Forms of Bankruptcy Relief [2]
  • Chapter 12: Family Farmer Plans
    • “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related.
    • Procedure for filing.
    • Content of plan.
    • Court confirmation.
case 30 1 in re lamana voluntary bankruptcy
Case 30.1: In Re Lamana(Voluntary Bankruptcy)
  • FACTS:
    • Lamanna lived with his parents and had no plans to move out. His monthly expenses were $580. His monthly income was $1,350.96, leaving a difference of $770.96.
    • During a four-week period, he charged $9,994.45 on credit cards. Three months latter, when his total unsecured debt was $15,911.96, he filed a Chapter 7 petition in a federal bankruptcy court.
    • The court dismissed Lamanna’s case because he was capable of paying all of his debts under a Chapter 13 repayment plan and dismissed the case.
case 30 1 in re lamana voluntary bankruptcy1
Case 30.1: In Re Lamana(Voluntary Bankruptcy)
    • Lamanna argued that he was being penalized for living with his parents.
    • Granting Lamanna’s petition would constitute substantial abuse. Under a “totality of the circumstances” test, Lamanna “has sufficient disposable income to repay his debts under a Chapter 13 repayment plan in three to five years.”
case 30 2 in re andrews property of the estate
Case 30.2: In Re Andrews(Property of the Estate)
  • FACTS:
    • Tarmac Acquisition, Inc., bought AMAX Corp. The AMAX owners, including John Andrews, signed agreements not to compete with Tarmac.
    • Andrews was to receive $1 million, payable in quarterly installments over a five-year period.
    • Three years later, Andrews filed a bankruptcy petition. He asked the court not to include, in the property of his estate, any future installments. The court refused. Andrews appealed.
case 30 2 in re andrews property of the estate1
Case 30.2: In Re Andrews(Property of the Estate)
  • HELD:
    • The Fourth Circuit affirmed.
    • “Pre-petition assets, like the NCA [noncompetition agreement] payments, are those assets rooted in the debtor’s pre-petition activities, including any proceeds that may flow from those assets in the future.”
    • The payments “are plainly rooted in, and grow out of, Andrews’s pre-petition activities.”
case 30 3 in re jercich discharge
Case 30.3: In Re Jercich(Discharge)
  • FACTS:
    • In 1981, Petralia began to work for Jercich, Inc., a mortgage company wholly owned and operated by George Jercich.
    • Petralia’s primary duty was to obtain investors to fund the home loans. Jercich agreed to pay Petralia a salary plus monthly commissions for loans that were funded through his efforts.
    • When Jercich failed to pay the commissions, Petralia quit and sued Jercich. Jercich filed bankruptcy. The bankruptcy court held the debt was dischargeable. Petralia appealed.
case 30 3 in re jercich discharge1
Case 30.3: In Re Jercich(Discharge)
    • Jercich’s debt to Petralia was not dischargeable.
    • “An intentional breach of contract generally will not give rise to a nondischargeable debt.”
    • The court held, however, that “where an intentional breach of contract is accompanied by tortious conduct which results in willful and malicious injury, the resulting debt is excepted from discharge.”