1. © 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 30 Bankruptcy Law Chapter 30 Bankruptcy Law

2. © 2004 West Legal Studies in Business A Division of Thomson Learning 2 §1: Bankruptcy Proceedings 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. 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.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning 3 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. 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.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning 4 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. Chapter 11 – reorganizations. Chapter 12 - adjustment of debts of family farmers with regular incomes. Chapter 13 - adjustment of debts of individuals with regular incomes.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning 5 §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. 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.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning 6 Liquidation Proceedings 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. 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.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning 7 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. Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. Voluntary vs. Involuntary bankruptcy.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning 8 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. 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.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning 9 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 30.1: In Re Lamanna (1998). 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 30.1: In Re Lamanna (1998).

10. © 2004 West Legal Studies in Business A Division of Thomson Learning 10 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. 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.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning 11 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. 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.

12. © 2004 West Legal Studies in Business A Division of Thomson Learning 12 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. 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.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning 13 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. 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.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning 14 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. 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.

15. © 2004 West Legal Studies in Business A Division of Thomson Learning 15 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). 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).

16. © 2004 West Legal Studies in Business A Division of Thomson Learning 16 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. 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.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning 17 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. 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.

18. © 2004 West Legal Studies in Business A Division of Thomson Learning 18 Exemptions 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. 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.

19. © 2004 West Legal Studies in Business A Division of Thomson Learning 19 The Bankruptcy Trustee Court-appointed until first meeting of creditors. Creditors elect permanent trustee Administers estate. Collects proceeds, liquidates assets and pays Creditors in order of priority. Court-appointed until first meeting of creditors. Creditors elect permanent trustee Administers estate. Collects proceeds, liquidates assets and pays Creditors in order of priority.

20. © 2004 West Legal Studies in Business A Division of Thomson Learning 20 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. 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.

21. © 2004 West Legal Studies in Business A Division of Thomson Learning 21 Voidable Rights Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

22. © 2004 West Legal Studies in Business A Division of Thomson Learning 22 Preferences [ 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. 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.

23. © 2004 West Legal Studies in Business A Division of Thomson Learning 23 Preferences [ 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. 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.

24. © 2004 West Legal Studies in Business A Division of Thomson Learning 24 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. 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.

25. © 2004 West Legal Studies in Business A Division of Thomson Learning 25 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. 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.

26. © 2004 West Legal Studies in Business A Division of Thomson Learning 26 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. 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.

27. © 2004 West Legal Studies in Business A Division of Thomson Learning 27 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. 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.

28. © 2004 West Legal Studies in Business A Division of Thomson Learning 28 Discharge Exemptions.  Case 30.3: In Re Jercich (2001). Objections to Discharge.  Case 30.4: In Re Ellison (2002). Effect of Discharge. Revocation of Discharge. Reaffirmation of a Debt. Exemptions.  Case 30.3: In Re Jercich (2001). Objections to Discharge.  Case 30.4: In Re Ellison (2002). Effect of Discharge. Revocation of Discharge. Reaffirmation of a Debt.

29. © 2004 West Legal Studies in Business A Division of Thomson Learning 29 Exceptions to Discharge 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. 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.

30. © 2004 West Legal Studies in Business A Division of Thomson Learning 30 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. 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.

31. © 2004 West Legal Studies in Business A Division of Thomson Learning 31 § 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. 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.

32. © 2004 West Legal Studies in Business A Division of Thomson Learning 32 Reorganizations [2] “Fast tract” Chapter 11 for small business debtors whose liabilities do not exceed $2 million and who do not own or manage real estate. “Workouts”. “Fast tract” Chapter 11 for small business debtors whose liabilities do not exceed $2 million and who do not own or manage real estate. “Workouts”.

33. © 2004 West Legal Studies in Business A Division of Thomson Learning 33 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. 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.

34. © 2004 West Legal Studies in Business A Division of Thomson Learning 34 The Reorganization Plan Filing the Plan.  Within 120 days after date relief order.  Plan must be equitable. Acceptance and Confirmation of the Plan. Discharge. Filing the Plan.  Within 120 days after date relief order.  Plan must be equitable. Acceptance and Confirmation of the Plan. Discharge.

35. © 2004 West Legal Studies in Business A Division of Thomson Learning 35 §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. Case 30.5: In Re Anderson (1998). 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. Case 30.5: In Re Anderson (1998).

36. © 2004 West Legal Studies in Business A Division of Thomson Learning 36 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. 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.

37. © 2004 West Legal Studies in Business A Division of Thomson Learning 37 Law on the Web U.S. Bankruptcy Code at Cornell U. U.S. Bankruptcy Code at Cornell U The Bankruptcy Law Finder. The Bankruptcy Law Finder The American Bankruptcy Institute. The American Bankruptcy Institute Legal Research Exercises on the Web. Legal Research Exercises on the Web. U.S. Bankruptcy Code at Cornell U. U.S. Bankruptcy Code at Cornell U The Bankruptcy Law Finder. The Bankruptcy Law Finder The American Bankruptcy Institute. The American Bankruptcy Institute Legal Research Exercises on the Web. Legal Research Exercises on the Web.