Chapter Ten. Trustees, Official Creditor Committees, and Examiners After reading this chapter, you will be able to: Describe the role and basic duties of the bankruptcy trustee. Define the role of the debtor-in-possession in Chapter 11 proceedings Identify the United States Trustee Describe the Official Creditors Committee Identify the Examiner

Trustees Section 321 provides that a competent individual who has an office or resides in the district or in an adjacent district where the proceeding is pending may be a trustee in a Chapter 7, 12, or 13 case.

Practice Pointer Remember, a ‘‘disinterested person’’ is a defined term under the Bankruptcy Code. It includes a person who is not a creditor, an insider, or someone who holds ‘‘an interest materially adverse to the interest of the estate.’’ 11 U.S.C. §101(14).

Practice Pointer Remember, once the debtor files for bankruptcy, all legal interests or actions that the debtor could have maintained prepetition now belong to the bankruptcy estate. Once appointed, the trustee represents the estate and may pursue those actions on behalf of the estate.

Office of the United States Trustee The Office of the United States Trustee is charged with monitoring the progress of all cases, regardless of Chapter, and to act appropriately to ‘‘prevent undue delay.”

Debtor-in-Possession The debtor-in-possession is the fiduciary entity created by a debtor filing a Chapter 11 reorganization proceeding. The debtor acts as its own trustee.

Official Creditors Committee The official creditors committee is an entity created in a Chapter 11 proceeding to act on the collective behalf of unsecured creditors.

Examiner An examiner is an individual appointed in a Chapter 11 proceeding to conduct an independent investigation of some or all of a debtor’s financial affairs.

Ombudsmen An ombudsman may be appointed in two discrete situations. First, where an asset sale involves the sale of personally identifiable information, then the court shall order the appointment of an ombudsman to review the seller’s privacy policy and report on the potential losses or gains to consumers and the estate by the proposed sale. Second, in a health care business bankruptcy, the court shall order an ombudsman to represent the interests of patients where necessary to regularly report to the court on the quality of patient care.

Chapter Eleven. Preparing a Proceeding for a Trustee After reading this chapter, you will be able to: Understand the number of simple actions which can be taken to greatly ease the handling of any bankruptcy proceeding Provide a specific checklist of acts which can be taken in an asset proceeding to enhance the likelihood of creditor dividends List questions commonly posed by individual consumer debtors

Prefiling Checklist Value Assets Obtain Documents of Title (Such as Vehicle Ownership Documents) and Keys to All Vehicles Obtain Name and Address of Landlord(s) Obtain Itemized Inventory and Equipment List, with Values, if Possible Obtain Bank Records Compile Accounts Receivable Data Return Leased Equipment to Lessors Maintain Security Obtain Prior Years’ Tax Returns

Postfiling (Asset Case) Checklist Learn identity of trustee Communicate with trustee Close bank accounts and obtain cashier’s check for trustee Encourage insider cooperation with trustee

Chapter Twelve. The Automatic Stay—11 U.S.C 362 After reading this chapter, you will be able to: Describe litigation that occurs in the bankruptcy system Understand the concept of the automatic stay as an element of debtor relief List creditor activities subject to the automatic stay List creditor activities not subject to the automatic stay Understand the procedures utilized by creditors to obtain relief from the stay

Adversary Proceedings When an issue is brought before the court in the form of a motion and is opposed, it is considered a contested matter. A contested matter is treated as an adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 9014.

Automatic Stay Automatic stay is a statutory bar to the conducting of any collection activity by creditors after a bankruptcy petition has been filed.

Activity Subject to the Automatic Stay Section 362(a)(1) prohibits the commencement or continuation of any judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the filing of the petition to recover a prepetition claim.

Actions Subject to Automatic Stay Civil actions or administrative legal proceedings. Enforcement of judgments Acts to obtain possession or control of property of the estate Acts to perfect liens upon property of the estate. Acts to perfect liens upon property of the debtor Any act to collect a prepetition claim The making of setoffs (the common law right of a creditor to balance mutual debts with a debtor) Proceedings before the United States Tax Court

Slide 1 of 2 Common Actions Excepted from the Automatic Stay Criminal prosecutions Collection of alimony, maintenance or support from other than property of the estate Lien perfection within statutory grace period Governmental proceedings to enforce police or regulatory powers other than enforcement of money judgments Limited setoffs in commodity broker or stockbroker proceedings HUD foreclosures subject to National Housing Act

Slide 2 of 2 Common Actions Excepted from the Automatic Stay Issuance of notice of tax deficiency, audit, demand for returns or assessment Expired nonresidential real property lease Retirement loan repayments Residential evictions

Motion for Relief from Automatic Stay Moving Party Notice of motion Motion Declaration of provable value Exhibits Promissory note Document evidencing security interest (UCC-1, mortgage, or trust deed appraisal Any other document required by local rule

Motion for Relief from Automatic Stay Opposing Party Request for hearing Declaration or affidavits in opposition Points and authorities Exhibit: appraisals Any other document required by local rule

Motion for Relief from Automatic Stay Motion to Impose Stay for Cause Shown 1. Serial filings 11 U.S.C. §362(c)(3), (4) 2. Statement of Intention 11 U.S.C. §362(h) 3. Small Business Cases 11 U.S.C. §362 (n) 4. Residential evictions 11 U.S.C. §362(b)(22), (l)

30/30/30 Rule 30 days after a request for relief the stay will terminate a preliminary hearing must be held within 30 days of the motion a final hearing, if necessary, must be held within 30 days of the preliminary hearing.

Chapter Thirteen. Objections to Discharge and Dischargeability of Debts After reading this chapter, you will be able to: Understand that a discharge may not relieve a debtor from all debts and that, in certain circumstances, a debtor may be denied a discharge altogether. Describe which debts are automatically not dischargeable Describe which debts are not dischargeable only if a creditor obtains a judgment that the affected debt is not dischargeable List those acts which can prevent a debtor’s discharge altogether Understand the procedure for filing a complaint to determine the dischargeability of a debt or the debtor’s discharge.

Practice Pointer Even if the creditor takes no action, the debtor will normally not be discharged of most debts relating to taxes, domestic support obligations, governmental fines or penalties, and death or personal injury caused by drunk driving.

Nondischargeable Debts A debt not subject to a debtor’s discharge. A debtor is not relieved from legal liability for the affected debt. Some types of nondischargeable debts require the filing of a Complaint to Determine Dischargeability of Debt for the debt to become nondischargeable. Nondischargeable debts are described in Bankruptcy Code Section 523(a).

Nondischargeable Debts The following debts are nondischargeable without an affected creditor being required to take any affirmative action: Priority tax claimsUnlisted debts Domestic support obligationsCertain fines and penalties Guaranteed student loansDamages from DWI conviction Debt nondischarged in prior bankruptcy Financial institution fraud Restitution awardLoans obtained to pay nondischargeable taxes Postpetition homeowner’s assessments Prisoner court costs Pension plan loansDebts arising from federal or state securities law violations

A Creditor May Object to Discharge of the Following Debts Fraud Intentional fraud False written financial statement Limited prepetition credit transactions Defalcation, larceny, embezzlement Willful and malicious injury

Fresh Cash Rule The fresh cash rule covers the portion of a debt incurred by use of a false written financial statement.

Chapter Fourteen. Property of the Estate and Turnover Complaints After reading this chapter, you will be able to: Define “property of the estate” Identify those assets which are not property of the estate and therefore not subject to the trustee’s administration Describe the trustee’s various rights to recover estate property, the turnover rights and the avoiding powers

Property of the Estate All property in which the debtor has a legal or equitable interest at the commencement of a case is property of the estate. During the course of the case, the trustee must “administer” all the property. The figure (next slide) illustrates a typical consumer no-asset Chapter 7 where all property is either collateral for one or more secured creditors, exempt, or abandoned by the trustee as burdensome or of inconsequential value to the estate.

Property of the Estate

Avoiding Powers The ability of a trustee to set aside certain pre- or postfiling transactions that might otherwise be valid under nonbankruptcy law. Preferences, fraudulent transfers, and the ability to set aside unauthorized postpetition transfers are the most common of the trustee’s avoiding powers.

Included as Property of the Estate Community property Property recovered by the trustee Property acquired within 180 days of filing by bequest, inheritance, or devise, domestic property settlement, life insurance proceeds Proceeds, product, or offspring from property of the estate Property subject to an ipso facto clause

Excluded as Property of the Estate Personal postfiling earnings of an individual Chapter 7 or 11 debtor Powers exercisable for the benefit of another (e.g. power or attorney) Interest in an expired nonresidential lease Principal assets of a spendthrift trust Property in which the debtor holds bare legal title

Turnover The concept of turnover is simple. Someone has property of the estate: It may be the debtor, it may be a third party, it could be anyone. If the third party refuses to voluntarily turn the property over to the trustee, the court can order the third party to turn it over.

Chapter Fifteen. Avoiding Powers-- Introduction After reading this chapter, you will be able to: Describe the concept and purpose of the trustee’s avoiding powers List the general limitations upon the trustee’s avoiding powers

Avoiding Powers The abilities given a trustee to avoid certain pre- or postfiling transactions that would otherwise be valid under nonbankruptcy law are known as the avoiding powers. Preferences, fraudulent transfers, and the ability to set aside unauthorized postpetition transfers are the most common avoiding powers.

Strong Arm Clause Section 544 gives the trustee various powers collectively and commonly known as the strong arm powers, or the strong arm clause. The strong arm rights collectively place the trustee in full command of all a debtor’s assets affected by the bankruptcy proceeding.

Chapter Sixteen. Avoidable Preferences—11 U.S.C. §547 After reading this chapter you will be able to: Describe the avoidable preferences under the Bankruptcy Code List he elements of an avoidable preference Understand the affirmative defenses which a creditor may assert to defeat a trustee’s claim of an avoidable preference Describe the basic procedures of a preference complaint

Preferences A preference is a transfer of property or an interest in property to a creditor, on the eve of bankruptcy, in full or partial satisfaction of debt to the exclusion of other creditors. A preference meeting certain defined conditions will be avoidable by a bankruptcy trustee.

Practice Pointers The Code defines a ‘‘transfer’’ to mean: (1) the creation of a lien (2) retention of title (3) foreclosure of the debtor’s equity of redemption (4) any mode, ‘‘direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property.’’

Elements of a Preference Transfer of property or an interest in property To or for the benefit of a creditor On or for account of an antecedent or preexisting debt Made while the debtor is insolvent Made within 90 days of filing or within one year if the transferee is an insider That enables the creditor to receive a greater Chapter 7 dividend than it would otherwise receive

Preference Defenses A contemporaneous exchange for new value A debt incurred and paid in the ordinary course of business Within any nonbankruptcy perfection periods or within 30 days of debtor receiving possession Unsecured debt incurred for new value Floating liens, except for improvement of position Unavoidable statutory liens Domestic support obligations A consumer debtor’s consumer debts of up to $600 (permits preferential payment of nominal debts) Business transfers less than $5,475 Consumer approved repayment plan Noninsider security interests for the benefit of insider

Plaintiff/Trustee Pleadings Summons and Complaint Cover Sheet, as required by local rule Evidence Proving Preference: Checks Contracts Recorded documents Documents of title

Defendant/Transferee Pleadings Answer Evidence Proving Defense Checks Contracts Recorded documents Documents of title

Chapter Seventeen. Fraudulent and Postpetition Transfers After reading this chapter, you will be able to: Understand fraudulent transfers as they exist in the bankruptcy code Describe the avoidability of unauthorized postbankruptcy filing (postpetition) transactions List the damages recoverable by a trustee who successfully exercises the avoiding powers Describe the bankruptcy code’s treatment of a creditor’s common law right of setoff.

Fraudulent Transfer A fraudulent transfer is a transfer made by a debtor with an intent to hinder, delay, or defraud creditors. A transfer without reasonable or fair consideration made while a debtor is insolvent or that renders a debtor insolvent will also be fraudulent. Fraudulent transfers are the subject of Bankruptcy Code Section 548. Fraudulent transfers are one of the trustee’s avoiding powers.

Postpetition Transfers A transfer of estate property after a bankruptcy filing that is made without court approval or is not otherwise authorized by the Bankruptcy Code. An unauthorized postpetition transaction may be avoided by a bankruptcy trustee. Postpetition transactions are the subject of Bankruptcy Code Section 549.

Setoffs A setoff is the common law right of a creditor to balance mutual debts with a debtor.