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I. Sources of Limis o! Lia"i#i$ for De"
%. Commo! La& Limis'
1. Tort Theory:
a. Intentional Infliction of Emotional Distress: some courts buy it. Maryland doesnt.
b. Outright blackmail: prohibited.
c. Maryland common law intrusion on privacy: ot violated by creditors actions: !"hen the debtor
takes creditor# the debtor implicitly agrees to reasonable repayment re$uests.% &'& Md. '( )*+,+-.
2. Lender Liability
a. otice
i. Even without an obligation in the promissory note.security agreement# the good faith re$uires
the lender must give !reasonable% notice before calling a loan. KMC v. Irving Trust# (/.
ii. 0he amount of !reasonable notice% is undefined.
b. 1ender 1iability is generally enforcement of the covenant of good faith in the promissory note.
i. 2ased on ob3ective facts.
ii. 4nd the lenders actual sub3ective intent.belief.
c. "atch for e5ercise of control in a bad faith manner by a creditor over a debtor.
(. Sauor$ Limis'
1. Fair Debt Collection Practices Act: 15 USC 162 et se!.
a. 6cope
i. 4ttorneys are sub3ect to the 4ct# when debt collection is a regular part of their business.
ii. 4ct does not apply to a creditor collecting its own debt. 0his means that the 4ct applies only
to collectors who have essentially sold their debt.
b. 4 debt collector:
i. Must identify self as debt collector7
ii. 4dvise the debtor that he or she has a right to identify or dispute the debt7 and
iii. 4void harassment# false representation or third party communications.
c. "ithin five days of the first verbal communication# the debtor must be sent notice advising him of
his rights.
d. 4fter violation# the debtor is entitled to reasonable damages# 8*#999 and attorneys fees. In class
action# fees are lesser of 8'99#999 or *: of net worth of agency.
e. Md. ;air Debt <ollection 4ct: Md. ComL 14-201 et se$.
2. Fair Credit "e#ortin$ Act: 15 USC 16%1 et se!.
a. <overs how things are reported# what is reported# how long items can remain on the report# how
the consumer can review and dispute items on the report.
b. Maryland analogues: Md. <ode 4nn. <om. 1. = */>*&9+
II. Sae La& Co##ecio!s
%. )*e Co##ecio! Process i! +ar$#a!,'
1. &'d$(ent: )*+ecti,e -ro( the date o- .'d$(ent or recordation./
a. 4 money 3udgment must specify a specific amount of dollars in favor of the receiving party.
b. Once obtained# 3udgment automatically creates a lien on real property in the county of 3udgment.
0he clerk will inde5 and record the 3udgment. <?@A = **>/9&.
c. @udgments from foreign counties must be inde5ed and recorded )domesticated# under s **>
/9&)c-- in the county of the property.
d. 1ien may be stayed by order of the court. <?@A = **>B9/
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2. *0ec'tion:
a. On written re$uest# a 3udgment creditor may re$uest a writ of e5ecution. <?@A = **>/9(7 Md.
Cule &>,/*.
i. 4 3udgment must be ten days old before it can be e5ecuted on# to allow the other party time to
appeal. Md. Cule &>,(&.
ii. 4 levy without foreclosure has no effect if it freeDes the property in bad faith or for an
unreasonable period of time# especially if the levy attempted to create a secret lien rather
than actually e5ecute the 3udgment. Illi v. Margolis# &,E Md. (9 )*+E&-.
iii. If multiple liens are levied on the same property at the same time# priority relates back to the
time the writ was delivered to the sheriff.
b. 0he 6heriff then levies on the property pursuant to Md. Cule &>,/&)b-.
i. 1ien does not attach to personal property until levied upon. <?@A = **>/9(.
ii. 4 levy is effective as long as the 3udgment is outstanding )*& years unless refilled-.
iii. 6heriff files a !return% stating what he levied on in the county of the property ? the county of
the 3udgment. Md. Cule &>,/&)d- F )e-.
iv. 1evy only attaches for *&9 days.
c. 4 levy may be released: Md. Cule &>,/(
i. On satisfaction7
ii. On posting bond7
iii. Gpon motion of the Debtor )that the 3udgment is vacated# e5pired# satisfied# e5empt or the
creditor has done something wrong-7
iv. Gpon election of e5emption7 or
v. Due to claim of a third person.
1. Attachin$ Pro#erty:
a. 0.E and @oint 0ennancy:
i. If the property is held in 3oint tenancy# the lien must be levied before the lien attaches. East
Shore v. Ban o! Sommerset# &'( Md. '&' )*+,+-.
ii. 1evying severs the 3oint tenancy# creating a levy on the 3udgment debtors interest in the
property as a tenant in common.
b. 1eases:
i. Hround rents may be attached.
ii. Iear to year leases# and nonrenewable leases for less than five years may not be attached.
c. ;inding the property:
i. Deposition after 3udgment# or send a $uestionnaire and threaten with deposition.
ii. If the wrong persons property is attached# they may file a motion to release the levy under
Md. Cule &>,/()e-.
iii. 4sk the debtor. )Interrogatories# phone survey-
iv. 6end a small check to the debtor to get the account numbers back.
v. 6erve the resident agent for the local bank and wait for ob3ection.
2. 3arnish(ent:
a. Arocedure:
i. 6erve the garnishment on the garnishee
ii. Harnishee must answer service.
iii. If the garnishee does not answer# the court may enter a 3udgment against the garnishee in the
full amount of the creditors 3udgment against the debtor.
iv. on>answer may not result in complete liability by the garnishee if there are e5ceptional and
outrageous circumstances. "e## v. Eri$son# B(.
v. 0he court determines# by hearing or admission# the amount of money owed by the garnishee
to the debtor.
vi. 0hird parties may assert claims against the garnished funds#
vii. 0he garnishee may assert any defenses it may have# and it may also chose to assert any of
the debtors defenses against the garnishment or the creditor.
viii. 0he court issues a 3udgment in favor of the creditor against the garnishee# up to the lesser of
the amount of the 3udgment against the debtor or the amount of the debtors money the
garnishee has.
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b. Harnishing 2ank 4ccounts:
i. "rit may attach to account with overdraft at the time of service.
ii. "rit attaches to any funds received by the garnishee between service and 3udgment.
iii. 2ank may be able to set off its own debts against the funds attached.
c. Harnishing wages:
i. Aayment is in the order received by the employer. <om. 1. = *'>,9(.
ii. Gp to &': of disposable wages. Md. <om. 1. = *'>,9*.
iii. If greater than E': of disposable wages# a wage>earner may e5empt 8*/' per week7 or (9
times federal minimum wage# for debtors in <aroline# Jent and Kueen 4nnes <ounty.
iv. Disposable wages are gross less all ta5es withheld# health or medical insurance withholding#
child.spousal support.
v. Employer may not fire an employee due to one garnishment per calendar year. <om. 1. = *'>
,9,.
d. Defenses: 4 @udgment creditor cannot obtain rights against the garnishee superior to the
debtors rights against the garnishee. )0he bank may assert all defenses against the creditor that
it could assert against its accountholder. 0he creditor cannot obtain better rights against the
garnishee than the debtor had.-
(. -.em/io!s' 0+ar$#a!,1
1. 4ho (ay ta5e e0e(#tions:
a. Individuals take their own e5emptions.
b. Married people filing 3oint bankruptcy take two sets of e5emptions.
2. Unli(ited e0e(#tions:
a. Money payable in the event of sickness# accident in3ury or death of any person.
i. "hole or term life policies# etc.
ii. Does not apply to inheritances F only applies to third party liabilities on account of death.
iii. Including compensation for loss of profits and future earnings
b. /9*# /9(# /9B and /*/ plans.
c. 0.E property.
i. <reditors of individual creditors cannot attach 0.E property. In re %ord# ( 2.C. ''+ )*+B9-.
);iling does not sever the tenancy.-
ii. 0he lien cannot attach to the 0.E property. 6ome states permit attachment but not levy.
1. Li(ited e0e(#tions: total 6678887 6%7588 in ban5r'#tcy.
a. 6tuff# clothing# e$uipment# necessary for a trade# up to 8&#'99.
b. Lousehold goods# clothing# personal stuff# up to 8'99
c. 4nything# up to 8(#999
d. In bankruptcy# another 8&#'99 of anything.
e. @oint 2ank 4ccounts: <?@A = **>,9(
i. 6pousal accounts cannot be attached unless both are debtors.
ii. @oint accounts in trust cannot be attached unless both are debtors.
iii. ormal 3oint accounts are froDen and the source of the funds traced.
2. 4ai,er o- e0e(#tions:
a. Henerally waiver is not permitted.
b. Lowever# valid collateral cannot be e5empted. 0he e5emption may be taken even though the
property has no e$uity in it# but the e5emption is not effective against the secured creditor# e5cept
under the bankruptcy code.
5. Partially e0e(#t #ro#erty:
a. Aroperty may be declared Mpartially e5empt if it is worth more than the e5emption amount.
b. "hen partially e5empt property is sold# proceeds are allocated first to cost of sale# second to
secured debt# third to the full e5emption amount and fourth to any e5ecuting lien creditors.
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C. Sae La& %#er!ai2es o (a!3ru/c$
1. UCC Article 6 9 :'l5 Sale )-or :'sinesses and Sole Pro#rietorshi#s/
a. Arevent debtor from selling assets to one buyer without notice to creditors
b. <reditors submit claims for payment by deadline
c. Only apply when business selling all assets at one time
d. Disadvantages:
i. <ivil liabilities on seller# buyer# or auctioneer if 4rt , re$uirements are not complied with
ii. o mechanism to stop creditor collection actions while sale is in process
e. 4dvantages:
i. 26 may result creditors getting payments in less time than in 2. <heaper than 2.
ii. 6peed and less cost.
2. Assi$n(ent -or the :ene;t o- Creditors
a. D assigns assets to 0A in trust to sell assets to pay creditor claims
b. 4dvantages: ;aster and less cost for creditors
c. Disadvantages: <reditors can still sue D on deficiency claims
i. 0ransactions can be undone if in violation of normal preferences
ii. <onstitutes grounds for entry of an order of relief in an involuntary <h. E case )= (9(-.
iii. <arries the e$uivalent of 3udgment.
1. State "ecei,ershi#
a. 6tate court receiver F legal control of assets and can sell for benefit of creditors
b. 4dvantages: on>profits# family farmers and churches cant be forced into involuntary 2
c. Disadvantages: C does not have authority and control over D. C cant prevent D from filing for 2
2. Co(#osition A$ree(ent )< la=/ 9 S(all cor#orations and cons'(er
debtors
a. 4greement between debtor and & or more creditors to e5tend repayment terms or accept less
than full payment or discharge of debts.
b. <an have agreement drafted to comply with bankruptcy code )reads like plan of reorganiDation-
and use agreement as plan
c. 4dvantages:
i. Debtor pays less
ii. <reditors receive some payment
iii. <heaper# faster than bankruptcy
d. Disadvantages: Dependant on willing creditors.
i. <ant force creditors to enter in.
ii. One creditor can tank deal by suing D and levying on house and effectively prevent debtor
from making voluntary payments to other creditors.
D. 4rau,u#e! Co!2e$a!ces.
1. Constr'cti,e Fra'd:
a. <onveyance made by a person who is insolvent or will be rendered insolvent by the conveyance
is fraudulent as to creditors without regard to intent# if made without fair consideration. Md.
<om1. = *'>&9/.
i. !Insolvent% for business N engaged or is about to engage in a business transaction for which
the property remaining in his hands is an unreasonably small capital. <om.1. = *'>&9'.
ii. Entity has an unreasonably small amount of capital. <om 1. = *'>&9'.
iii. 4bout to incur debts beyond his ability to pay. <om. 1. = *'>&9,
b. !;air consideration% N received in good faith# in an amount not disproportionately small. Md.
<om1 = *'>&9(. !ot disproportionately small% depends on the circumstances.
c. <onveyance in anticipation of future debt can be fraudulent. <om.1. = *'>&9,. ;uture creditors
may avoid transfers if:
i. Aerson is or will be insolvent because of the transfer7 and
ii. 0he insolvent intends or #e&ieves that he.she will incur debt that he.she will be unable to pay.
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2. Act'al Fra'd:
a. <onveyance made and obligation incurred with actual intent to hinder# delay or defraud present or
future creditors# is fraudulent as to present and future creditors. Md. <om. 1. = *'>&9E
b. Intent must be shown with clear and convincing evidence. 'CLI v. (hoades# *(*.
c. Includes present 4D future creditors.
1. "i$hts o- Third Parties
a. Aurchasers without fraudulent intent# who take for less than fair consideration# may retain a
security interest in the property to ensure repayment. Md. <om. 1. *'>&9+)c-. 0he way this
works is the creditor pays off the purchaser to take the property without the purchasers lien.
b. Aurchaser who made improvements will probably get a lien for the cost of improvements made.
2. Fra'd'lent Con,eyances and the >arried 4o(an?s Pro#erty Act:
a. 0he 4ct:
b. 2asically# married women can do stuff with property as though they were not married.
c. Lusbands creditors cannot attack transfers from wife to third party as fraudulent conveyances.
Md. ;amily = />&9,.
d. 4 transfer between spouses is invalid if made in pre3udice of the rights of present creditors. Md.
;amily = />(9*)d-)&-)i-.
e. o re$uirement of fraud# intent to pre3udice the creditors# etc# merely that a transfer pre3udices a
creditors rights.
f. "here bank has note in single name on 0.E property# the act of titling 0.E may be a transfer
between spouses# and be void because it pre3udiced the right of the present creditor )bank-. "as
there a transfer )gift- of a 0.E interest in property between the debtor and his.her spouse.
5. Fra'd'lent Con,eyances in Le,era$ed :'y@o't
a. E$uity )prior owner- gets a leg up on unsecured creditors: Ariority should be: 6ecured <reditors
first# Heneral unsecured creditors# and finally# E$uity interests.
b. E$uity pledged to support buy>out pledge of assets to support purchasers loan from bank
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III. 5e!era# (a!3ru/c$ Pro2isio!s'
%. 6uris,icio! 7 8e!ue'
1. Aen'e is #ro#er:
a. "here the debtor is domiciled
b. Cesidence# ppb# principal assets# had been located for *B9 days immediately prior# or the place
they were domiciled the most during the last *B9 days.
2. &'risdiction BCorthern Pi#elineD
a. 2ankruptcy courts have only the limited 3urisdiction of 4rticle * 3udges. )0hey also have none of
the protections of an 4rt. ( 3udge.-
b. District <ourt takes and retains 3urisdiction over bankruptcy cases# and then refers them back to
the bankruptcy courts.
c. &B G.6.<. *((/)a- ? )b- District courts have original but none5clusive 3urisdiction over
bankruptcy matters.
d. *B G.6.<. *'E: 4ll bankruptcy matters may be raised in a bankruptcy court.
e. D. Md. Las a rule referring bankruptcy cases to the bankruptcy court.
f. 4ny party may remove to district court.
g. @ury trial permitted if in the bankruptcy courtOs 3urisdiction# authoriDed by the district court rules
and consented to by all parties.
1. Classi;cations:
a. 2ankruptcy <ourt must hear core matters# arising under the bankruptcy court. PIf you have to look
at the code to figure out what is going on.Q 2ankruptcy courts may hear core matters and issue
orders.
b. 2ankruptcy courts may hear non>core matters# but must refer to the District court for an order.de
novo appeal.
c. 2ankruptcy courts may not hear personal in3ury or tort claims.
(. %or!e$s9 4ees'
1. Attorney o- the TE:FDEP
a. If the attorney is employed by the estate )0I2 or DIA- the court must approve employment with an
order.
b. ;ees are paid on application based on statutory compensation. If approved by the <ourt# an
attorney may take a retainer.
c. ;ees are a priority claim against the estate.
2. Attorney o- the Debtor:
a. If the attorney works for the debtor# the attorneyOs employment and fees are not dependent on
court approval# and is not an e5pense of the estate.
b. 4n attorney representing the pre>petition debtor will have conflicts with the estate# because the
attorney is probably a creditor.
c. Cegardless# the compensation must be reported to the <ourt.
d. 0rustee may waive attorney>client privilege with respect to pre>petition communications.
C. I!2o#u!ar$ (a!3ru/c$'
1. *li$ibility o- Petitioners: 181)b/.
a. 0hree creditors whose claims are not sub3ect to a bona fide dispute# and whose unsecured claims
e5ceed )in the aggregate- 8**#,&'.
b. 6eparately incorporated parents ? subs are separate creditors. )i#ra&tor# /EB.
c. <reditors who were paid post>filing retain standing. In re %a#erge# /B'.
d. If the debotor has fewer than *& non>insider creditors# one creditor whose unsecured claim
e5ceeds 8**#,&'.
e. ;ewer than all )general- partners signing a partnership filing is automatically an involuntary case.
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2. *li$ible Debtors: 181)a/.
a. 4ny eligible debtor: = *9+ )a person who resides# has a domicile# place of business in the G6#
and is not a railroad# insurance company# bank# 6?1# etc.-
b. 4 person may only be forced into <h. E or ** bankruptcy.
c. ;amily farms# not>for>profits may not be put into involuntary bankruptcy.
1. Proced're:
a. On filing# automatic stay takes effect.
b. Debtor will answer and a hearing will be held.
i. <reditor)s- must prove the debtor is generally not paying debts as due# or a receiver has
been appointed. = (9()h-.
ii. RHenerallyR is a wussy word. It means checking a credit report# any friendly bankers and
industry practice in similar circumstances. In re Si&verman# /BE.
iii. 4ssignment for the benefit of creditors appoints a receiver > any creditor may force a <h. E or
** filing.
c. If the court dismisses a petition without consent of all parties# including the debtor# the court
i. May award costs or attorneysO fees.
ii. If filed in good faith# the court may award punitive damages.
d. If the court grants the petition# the case proceeds as if it were a voluntary filing.
i. 4 debtor who is involuntarily placed in <h. E has an absolute right to convert to a <h. **#
unless the case has previously been converted from another chapter. = E9,)a-.
ii. 0he trustee may avoid any transfers taking place +9 days prior to filing the involuntary
petition. = '/E.
D. %uomaic Sa$
1. *0tent o- the Stay
a. 4 creditor may not: = (,&)a-)*- F )B-.
i. 0ake any action against the debtor or the property of the estate.
ii. E.g.# suits for payment# letters re$uesting payment# refusing to perform services due to the
debtor unless the debtor pays.
b. 4 creditor may:
i. <ommunicate with the debtor# including send an accounting that says !this is not a bill.%
ii. 4ccept unsolicited payment.
iii. 0ake action against non>estate property F post>petition wages# guarantors or co>debtors.
iv. Evict a non>residential tenant after e5piration of the lease. = (,&)b-)*9-.
c. Setoff is not permitted# but an administrative freeDe is permitted. Md. v. Strum*!.
i. 1ifting the freeDe is procedurally identical to lifting the stay or obtaining use of cash collateral.
ii. 2ank may e5ercise rights of setoff after a lift>stay# unless: = ''(
)a- 0he claim is disallowed7
)b- 0he claim was purchased by the bank post>petition# or within +9 days pre>petition while
the debtor was insolvent7 or
)c- 0he debt was incurred within +9 days of petition# while the debtor was insolvent# for the
purpose of obtaining a right of setoff.
iii. 0he setoff is avoidable by the trustee: = ''()b-.
)a- 0o the e5tent that the setoff amount improves the banks position by decreasing the
deficiency that e5isted +9 days pre>petition.
)b- 0he trustee may also avoid any setoff within +9 days pre>petition that improves the banks
position.
iv. ;or purposes of setoff# the debtor is presumed insolvent +9 days prior to filing. = ''()c-.
d. 0he stay continues until discharge or dismissal. = (,&)c-.
2. 4ai,er:
a. 4 debtor may not make a pre>petition waiver of the stay# because it 3eopardiDes the interests of
other creditors. %arm Credit# '*,.
b. "aiver may be valid in a single>asset case if supported by special consideration or bad faith by
the debtor.
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1. *0cl'sions -ro( Stay: 162)b/.
a. <riminal actions. = (,&)b-)*-.
b. ;iling of AM6I security interests. )Other security interests may be filed within *9 days of granting#
but will be preferences and subordinate to the trustee.- = (,&)b-)(-.
c. Aresentment of negotiable instruments# protesting and dishonor of such instruments.
d. Miscellaneous: Aaternity or alimony suits# government actions regarding police or regulatory
power# setoffs of margin accounts# ;oreclosure by LGD# audits# demands for ta5 deficiencies or
returns# revocation of accreditation or licensure# etc.
e. E5ceptions are narrowly construed: actions by the government for money 3udgments or punitive
damages are stayed. +S v. Sett&es# '*B. )4ct under ;alse <laims 4ct for treble damages and
penalties not necessary to prevent future damage# thus action was stayed-.
2. Li-t@Stay
a. ;ormal Ceasons: = (,&)d-
i. !;or cause#% including lack of ade,uate *rote$tion. )6ee 4de$uate Arotection# III.H-# p. **-
ii. ;or property in which the debtor has no e$uity and is not necessary to reorganiDation.
iii. In single>asset real property cases# unless not later than +9 days after petition#
)a- 0he debtors plan has a reasonable possibility of being confirmed within a reasonable
period of time# or
)b- If the debtor has commenced monthly interest payments at a current fair market rate on
the value of each creditors claim secured by the real estate.
b. 1ack of 4de$uate Arotection in CeorganiDations:
c. 0he asset is not essential to the reorganiDation# 4D
d. 0he creditor is undersecured or deserves an e$uity cushion7
e. 1ack of 4de$uate Arotection in 1i$uidation:
i. 6tay shall be lifted with respect to assets without e$uity.
ii. 6tay might be lifted if assets are perishable or will otherwise depreciate during the case.
f. Aarty re$uesting relief has burden to establish need for lift>stay. = (,&)g-.
g. 1ift>stay must be heard or is automatically granted within (9 days. = (,&)e-. );re$uently not
enforced-.
-. %##o&e, C#aims
1. A clai( is a ri$ht to #ay(ent7 li!'idated7 'nli!'idated7 contin$ent7 ri$ht to
an e!'itable re(edy7 etc. 181)5/.
a. 0he debtor or the trustee may file a proof of claim on behalf of the creditor# to ensure that the
claim is discharged# to fi5 the claim# or to ensure any notice problems are resolved.
b. 4 guarantor may file a claim under = '9*)d-# in order to take whatever is available from the estate
from the debtor before the guarantee takes affect.
c. <ontingent or unli$uidated claims are litigation or settled.estimated. ='9&)c-.
d. <laims for damages due to re3ected contracts.leases# ta5 claims are deemed to have arisen pre>
petition. == '9&)g-# )h-.
2. Disallo=ed Clai(s
a. <laims for: = '9&)b-.
i. <laims unenforceable against the debtor# unmatured interest# in e5cess of the reasonable
value of the services provided# various claims by employees for post>petition compensation.
ii. <laims for property ta5 in e5cess of the value of the property. = '9&)b-)(-.
iii. Gnmatured alimony. ='9&)b-)'- )by way of = '&()a-)'--.
iv. <laim by landlord in e5cess of back rent due plus: = '9&)b-),-.
)a- * years rent7 or
)b- 0he lesser of )*': of the amount due under the lease- or three years rent.
v. Ariorities# fraudulent transfers# ineligible setoffs# claims for contribution on disallowed claims
etc. == '9&)d-# )e-.
b. If a proof of claim is not filed# the creditor may not receive funds in the bankruptcy. 4 <h. ** or *(
debtor need not file because their claims are scheduled# but the creditor is stuck with the amount
scheduled )or amended- by the debtor. = '9&)b-)+-.
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1. Sec'red Clai(s
a. 4 secured creditors lien is allowed to the ;MS of the property on the date of filing. = '9,)a-.
b. 0he lien is void to the e5tent that it is not an allowed secured claim. = '9,)d-.
i. Lowever# the lien flows through bankruptcy unaffected in <h. E cases. -e.snu*. )"hile
bankruptcy can affect the claim and the debt# it does not affect the lien.-
ii. If the value of the collateral increases after petition# a <h. E creditor receives the benefit of
that increase.
iii. In a <h. ** or *( case# the creditor does not get the benefit of any increase in value# unless
the case converts to li$uidation.
c. ;loating liens do not attach to post>petition collateral. = ''&)a-.
d. 6ecurity interests attach to proceeds of pre>petition collateral. = ''&)b-.
e. 4 right of setoff is treated as a secured claim. = ''(.
2. Unsec'red Priority Clai(s. 58G)a/.
a. E5penses of the estate: 0he first priority unsecured claim.
i. 2efore any other e5penses of the estate are paid# any unsecured claims given administrative
priority under = (,& )lift>stay-# = (,( )use of cash collateral-# = (,/ )post>petition financing-
must be paid. = '9E)b-.
ii. Aaid through a re$uest for payment# e5cept in Maryland# where you have to file a motion for
administrative e5penses. )Rotice ? a hearing# you have to file a motionR-
iii. 4ctual costs to maintain the estate )e.g. Insurance for the assets of the estate.-
iv. E5penses to recover property for the estate# either by the trustee or a creditor. = '9()b-.
b. Other Ariority <laims: = '9E)a-.
i. 6econd# claims under = '9&)f-: claims incurred in the ordinary course of the debtors
business during the pendancy of an involuntary case.
ii. 0hird# 8/#999 employee wages )per person# earned within +9 days of petition-.
iii. ;ourth F 6i5th: <ontributions to a employee benefit plan# governed by a complicated formula7
unsecured claims of grain producers or fishermen7 claims by tenants for security deposits.
iv. 6eventh# 4limony.<hild 6upport !in connection with a separation agreement.%
v. Eighth: 0he last three years of income ta5es# ta5es from fraudulent returns )= '&()a-)*-)2- F
)<-7 Aroperty ta5es !payable without penalty after one year before% bankruptcy day7 all
withholding or employment ta5es7 penalties due on any priority ta5 claim.
vi. inth# claims by the ;DI<.
c. Many of these claims may not be discharged.
5. Proo- o- Clai(: )For( 18./
a. Most creditors have to file supporting documents.
i. 0he IC6 doesnOt have to file supporting documents# because the ta5payer always carries the
burden of proof.
ii. 4 <h. ** scheduled creditor need not file# but if it doesnt the scheduled creditor is limited to
the claim provided by the debtor# which the debtor may amend. = ****)a-.
b. <laims must be filed within +9 days of the first creditorOs meeting.
i. 0he court may permit late filing# but the late filing loses priority.
ii. 4ll govOt claims are allowed *B9 days to file. 0his means it is not unusual for a govOt claim to
come in after a <h. *( plan is approved.
c. 4 claim is allowed unless it is ob3ected to.
i. If an ob3ection is made# the ob3ector must prove that the claim should be disallowed for the
reasons e5plained in = '9&)b-.
ii. 0he usual ob3ectionable claims are unmatured interests: post petition interest on unsecured
or undersecured creditors.
9/6/2014 243352738.DOC Page 10
4. Po&ers of *e )rusee or De"or:i!:Possessio!'
1. Priority o- the Tr'stee: 522 F @11G.
a. 0rustee takes the bankruptcy estate as though the 0rustee obtained an e5ecuted 3udicial lien on
all property. = '//
i. 4 security interest is subordinate to a person who becomes a lien creditor before the earlier
of:
)a- Aerfection7
)b- One of the conditions in = +>&9()b- PattachmentQ is met and a financing statement is filed.
E.g.# the security agreement is signed and a financing statement filed# but the credit has
not yet been used.
ii. 4 AM6I takes priority over lien creditors who e5ecutes between the debtors receipt of the
goods and the AM6I>holders filing.
b. 0rustee is a !bona fide purchaser% of real property.
i. Even if debtor was aware of problems# DIA is a 2;A. "onder-Bo.&# '+9 )4lthough debtor
was aware of un>filed lien on real property# DIA takes free of lien-.
ii. /
th
circuit says that actual knowledge of the debtor is imputed in the DIA.
c. 4 AM6I holder may perfect within its &9>day period# regardless of bankruptcy:
i. 0he automatic stay does not prevent an act to perfect a security interest if the act is permitted
by = '/,)b- or = '/E)e-)&-)a-. = (,&)b-)(-.
ii. 0he 0I2 may not take action under = '// to avoid a lien that state law provides for retroactive
perfection and priority )AM6Is- or continuation of a security interest )re>filing-. = '/,)b-.
iii. 6tates that a transfer )perfection of a security interest- is deemed to occur on the date it takes
effect between the debtor and creditor )attachment- if the transfer is perfected within*9 days
of attachment# or &9 days# if the transfer is a AM6I. = '/E)e-)&-)a-.
iv. 0he trustee takes all of the rights of an e5ecuted 3udicial lien creditor who e5ecuted on
bankruptcy day. = '//. 4 perfected AM6I holder has priority over lien creditor who e5ecutes
within the &9 day period. = +>(*E)e-.
v. 0he transfer of a AM6I is not a preference under = '/E)c-)(-.
2. Po=er to H#erate the Debtor?s b'siness. BAs #er(itted by G217 118%7
1182.D
i. DIA may take action to sell# lease# etc. property of the estate in the ordinary course of
business without the approval of the <ourt#
ii. Gnless the property is cash collateral. = (,()c-)*-.
)a- 0he trustee must negotiate with creditors for use of cash collateral# or get approval for
such use from the <ourt. = (,()c-)&-.
)b- Henerally a pre>negotiated agreement for use of cash collateral is presented with the
petition.
iii. <reditors may demand ade,uate *rote$tion for the use of cash collateral. = (,()d-
)a- "here the cash is the collateral# an e$uity cushion may not be ade$uate protection.
Earth Lite# ''(.
)b- 4de$uate protection will fre$uently be a substitute lien F the creditors floating lean stops
attaching to after>ac$uired cash collateral as of the date of petition# although the lien does
attach to the cash proceeds of pre>petition collateral. = ''&)a-
1. Po=er to Hbtain H#eratin$ Credit. A DEP7 Ch. 11 or 11 tr'stee (ay obtain:
a. Gnsecured credit in the ordinary course of business without permission of the <ourt. = (,/)a-.
i. <redit is only permitted for the actual and necessary costs of preserving the estate !including
wages# salaries# commissions for services rendered#% to pay post>petition ta5es and fines
related thereto. = '9()b-)*-.
ii. 0his unsecured credit is an administrative e5pense and entitled to priority under = '9E)a-)*-.
b. Gnsecured credit beyond what is necessary# )defined by = '9()b-)*-#- with the approval of the
court. = (,/)b-.
i. 0his credit# after approval# is also an administrative e5pense and also entitled to priority under
= '9E)a-)*-.
ii. 4lthough the statute re$uires notice and a hearing# !notice and a hearing% may mean after>
the>fact notice to creditors if re$uired by the business needs of the DIA.
9/6/2014 243352738.DOC Page 11
c. 4dditional unsecured credit with priority over administrative e5penses# with authoriDation of the
<ourt. = (,/)c-)*-.
d. <redit secured by previously unencumbered assets# or credit secured by a 3unior lien on
previously encumbered assets# with authoriDation of the <ourt. = (,/)c-)&- F )(-.
i. "here a creditor is given a non>superpriority lien# any deficiency balance takes administrative
e5pense priority.
ii. If the debtor converts to a <h. E case# the deficiency balance is paid before nonpriority
unsecured creditors.
e. <redit secured with an e$ual or senior lien on previously encumbered property if: = (,/)d-.
i. 0he trustee is unable to obtain such credit otherwise#
ii. 0here is ade,uate *rote$tion of the creditor whose interest will be subordinated to the new
creditor. )6ee = (,* for ade$uate protection.-
iii. 0he trustee bears the burden of proving these elements.
f. 4 creditor may not seek to eliminate or reduce its pre>petition loans deficiency as a condition of
e5tending post>petition credit. Sha*iro v. Sa/#roo Manu!a$turing# 'B&.
5. %,e;uae Proecio!. %,e;uae /roecio! ma$ "e /ro2i,e, "$' < 361.
1. Cash #ay(ents to the creditor.
a. May include post>petition interest# if the creditor is oversecured and entitled to post>petition
interest.
b. May include payments to compensate the creditor for the delay in obtaining the collateral# or to
permit the creditor to use cash collateral.
2. Additional or re#lace(ent liens:
a. 0o the e5tent that the stay or grant of additional credit causing the need for ade$uate protection
decreases the value of the creditors lien.
b. ;loating lien creditors may want this option most# because their floating liens have been cut off. =
''&)a-.
1. *!'itable relie-7 e0ce#t the entity (ay not re!'est #ro(otion to 58G)a/
)1/ #riority.
a. 4de$uate protection may be provision to the specific creditor of an e$uity cushion# regardless of
whether 3unior liens mean the debtor has no e$uity in the asset. In re (ogers# '&'.
b. "here the action of the trustee )in granting further credit- will increase the value of the secured
partys lien# ade$uate protection may not be necessary. In re 0u##ard 1o.er 2 Light# 'E/
)6uperpriority post>petition credit permitted without ade$uate protection payments because work
done with funds will make collateral saleable-.
2. *li$ibility -or Ade!'ate Protection:
a. 6tay: 6ecured creditors are entitled to ade$uate protection# because they cannot repossess and
satisfy their claims. Lowever# undersecured creditors may not be eligible for ade$uate protection.
b. Gse of cash collateral: "here the creditor permits use of its collateral during the stay# the creditor
may be entitled to more !ade$uate protection% than an e$uity cushion.
c. Aost>petition ;inancing: Gnsecured creditors are not entitled to ade$uate protection# even if
actions of the trustee 3eopardiDe their rights. In re )ar&and# 'E&.
5. Debtor ('st establish that #rotection is ade!'ate.
=. Disc*arge. < 523
1. Classes o- non@dischar$eable Debt: 521)a/.
a. 0a5es
b. Debt obtained by fraud# false pretenses# etc. PSee language of = '&()a-)&-Q
c. Gnlisted and unscheduled debt
d. 4limony or child support
e. "illful or malicious in3ury to a person or property
f. ;ines or penalties )including ta5es- assessed by a government unit and not more than three
years old.
g. DGI liability
h. ;iduciary fraud liability
9/6/2014 243352738.DOC Page 12
i. 6tudent 1oans.
9/6/2014 243352738.DOC Page 13
2. Hb.ection to Dischar$e:
a. 4 creditor must ob3ect to discharge of debts of debts listed in = '&()a-)&-)/-),-)*'-: ;raud#
defalcation# embeDDlement# property settlements on separation# debts due to willful or malicious
in3uries.
b. If the creditor does not ob3ect to the discharge# the debt will be discharged. )Gnless the 3udge
notices.-
I8. )*e -sae'
%. Sco/e of *e -sae' < 5410a1.
1. Pro#erty o- the Debtor at the ti(e o- ;lin$.
a. If Debtor had interest at time of filing of case# it becomes property. = '/*)a-
b. 0.E Aroperty:
i. 0he 0.E interest is property of the bankruptcy estate# as are all beneficial# e$uitable# etc.
interests# but the 0.E interest is e5empt under = '&&)b-)&-)2- because the property is not
sub3ect to attachment under state law.
ii. 0he bankruptcy trustee may sell 0.E property for the benefit of 3oint creditors# because 3oint
creditors outside of bankruptcy may e5ecute on 0.E property# and thus it is not e5empt with
respect to the 3oint creditors under = '&&)b-)&-)2-.
c. "hile property sub3ect to security interests are property of the estate# assets securing
undersecured claims are generally abandoned by the trustee.
2. Cla=@bac5: 521)a/)5/.
a. 4ny interest that would have been property of the estate if the debtor had ac$uired it before
bankruptcy day is part of the estate if the debtor ac$uires the interest within *B9 days of filing# by
be$uest# devise or inheritance or as part of a divorce settlement or as beneficiary of a life
insurance policy.
b. Divorce settlement within *B9 days of petition becomes property of the estate. = '/*)a-)'-)2-.
c. 4limony that comes in within *B9 days may be part of the estate. <ases go both ways.
1. Sec'rity Enterests:
a. Are>petition floating liens do not attach to collateral ac$uired after the petition. = ''&)a-.
b. Aroceeds of pre>petition collateral are property of the estate and sub3ect to the pre>petition
security interest of the creditor. = ''&)b-.
(. -.c#usio!s from *e -sae' < 5410"1.
1. Cot #ro#erty o- the Debtor
a. <hild support payments are not property of the estate# but are funds held in trust for children.
2. F'nds recei,ed a-ter ;lin$.
1. F'nds not attachable 'nder state la=.
a. 0.E property
b. 6pendthrift trusts F does not become property of the estate. = '/*)c-)&-
i. Arotects the beneficiary. 2eneficiarys creditors cant get at the corpus.
ii. 0rust may still make maintenance payments to beneficiary.
iii. 4 retirement plan with effective anti>alienation provisions are not estate property.
9/6/2014 243352738.DOC Page 14
C. -.ecuor$ Co!racs 7 Leases'
1. The tr'stee (ay ass'(e or re.ect any e0ec'tory contracts or leases.
165)a/.
a. Even if the terms of the lease.contract prohibit assumption or assignment after bankruptcy. =
(,')e-7 In re Kr/sta& Cadi&&a$# ,/+# In re 3ames.a/# ,'( )0erm providing that tenant shall pay
landlord '9: of profits from assignment invalid-.
b. 4 contract is e5ecutory if
i. ;ailure of either party to perform would be a material breach. )<ountryman definition.-
ii. Ce3ection conveys a benefit. );unctional definition- In re (iod4io# ,E9 )<ontract for stock
warrants e5ecutory# sub3ect to re3ection-.
iii. Aroof is sub3ect to de novo review.
c. 0here must be a business purpose for re3ection or assumption. In re "atins# ,'+ )01<-.
d. Ce3ection gives rise to a pre>petition claim for breach of contract. = (,')f-.
e. Once the lease.contract is assumed# it may be assigned. = (,')f-. If assigned# the 0I2 is
absolved of any liability for the assignees breach. = (,')k-.
2. E- there has been a de-a'lt7 165)b/.
a. 0he trustee may cure the default and assume the contract.lease.
b. 0he trustee must provide ade$uate assurance )note# code does not use !ade$uate protection%-
that the trustee will pay compensation for pecuniary loss due to the default.
c. 0he trustee must provide ade$uate assurance of future performance and
1. Dee(ed re.ection: 165)d/
a. 0he DIA.0I2 must assume or re3ect leases of nonresidential real property within ,9 days# unless
e5tended by the court. If the trustee does not# the lease is deemed re3ected.
b. In <h. E# a lease of residential real property is deemed re3ected unless affirmatively assumed
within ,9 days of petition.
c. In other bankruptcies# the trustee.DIA may assume or re3ect leases of residential real property at
any time.
2. "i$hts o- Lessees:
a. 0enant may treat re3ection as termination of the lease. = (,')h-)*-)4-)i-.
b. 0enant may retain the lease until its e5piration. = (,/)h-)*-)4-)ii-
c. 0enant may set off rent by the damages caused by the landlord.debtors failure to provide
services. = (,')h-)*-)2-
D. Prefere!ces
1. *0ce#t as e0#licitly #ro,ided7 a tr'stee (ay a,oid: 11 USC 52G)b/
a. 4 0ransfer of any interest of the debtor )including a security interest-
b. 0o or for the benefit of a creditor
c. ;or or on account of an antecedent debt
d. "hile the debtor was insolvent
i. 0he debtor is presumed to be insolvent within +9 days of bankruptcy.
ii. If the creditor presents evidence of solvency# the trustee must then establish insolvency.
e. "ithin +9 days of the petition# or * year# if the creditor is an insider
f. 0hat enables the creditor to receive more than the creditor would receive in <h. E li$uidation# if
the transfer did not occur# and if the creditor received full normal payout.
i. ;irst# determine the position of the creditor on the +9th day.
ii. 6econd# determine the )actual- value of the claim on 2ankruptcy day if the transfer had not
occurred.
iii. 4ny increase is an Rimprovement of position#R but fluctuations between the two points in time
are irrelevant.
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2. Certain transactions =ill loo5 li5e #re-erences b't are not:
a. ;ully secured debt: "here the debt is fully secured# additional payments do not improve the
position of the oversecured creditor.
b. 4ntecedent Debt: "here the transfer of a security interest is on account of a debt that was not
more than *9 days old on the date of transfer# the transfer )perfection- was deemed to take place
on the same day as attachment# and thus the transfer was not on account of antecedent debt. =
'/E)e-.
c. 0ransfers from a bank on a letter of credit are not transfers by a debtor.
1. Date o- Trans-er:
a. 0he !transfer% of a security interest is deemed to take place on the date of attachment if it is
perfected within *9 days of attachment. = '/E)e-.
b. <hecks: 0he date of transfer is the date that the check clears# because the debtor can )a- stop
payment# )b- withdraw the money and )c- obtain credit based on the funds.
2. The tr'stee >AI CHT a,oid: 11 USC 52G)c/.
a. 6ubstantially <ontemporaneous E5change:
i. Intended to be made as a contemporaneous e5change
ii. ;or new value given to the debtor.
iii. 4nd was in fact a contemporaneous e5change
)a- ;or security interests *9 days is !contemporaneous.% = '/E)e-.
)b- ;or other transfers# !contemporaneous% depends on facts and circumstances.
b. 0ransfers in the Ordinary <ourse of 2usiness.
i. 4 transfer:
ii. In payment of a debt incurred by the debtor in the ordinary course of business of the debtor
and the transferee#
iii. 0hat occurred in the ordinary course of business of the debtor and transferee# and
iv. Made according to ordinary business terms.
)a- Ob3ective and sub3ective tests: 4ctual ordinary course of business# and according to
ordinary business terms.
)b- 0erms changed in light of debtors pre>bankruptcy insolvency are generally not !in the
ordinary course of business.%
)c- 1ate payments are generally not in the ordinary course of business
c. AM6Is: 4 transfer
i. 0hat creates a security interest
ii. 6ecuring new value# that was:
)a- Hiven by or on behalf of a secured party# at or after signing a security agreement
describing the collateral7
)b- Hiven to the debtor to enable the debtor to ac$uire such property7 and
)c- 0he debtor in fact ac$uires the property.
iii. 0hat was perfected on or before &9 days after the debtor receives possession of the property.
iv. 0his parallels 4rt. + definition# but if a state adopts a non>conforming provision# this definition
prevails.
d. 0ransfer for ew Salue:
i. 4 transfer to a creditor is not a preference to the e5tent that the creditor gave new value that
is unsecured or secured by an avoidable lien# on account of which the debtor did not make an
otherwise unavoidable transfer to the creditor.
ii. In other words# if a creditor delivers supplies on a weekly basis# each new delivery e5tends
new unsecured credit# new value# and !covers% payment for last weeks transfer.
e. ;loating 1iens
i. 4ttachment of security interests to after>ac$uired collateral during the preference period is
only a preference to the e5tent that it improves the position of the creditor. = '/E)c-)'-.
ii. 0he transfer does not relate back to the date of perfection under = '/E.
f. 5e. 6a&ue7 Money or moneys worth in goods# services# new credit# or release of property
previously transferred to the creditor. Does not include the substitution of one obligation for a pre>
e5isting obligation.
9/6/2014 243352738.DOC Page 16
-. 4rau,u#e! Co!2e$a!ces.
1. :eca'se the tr'stee ta5es the #osition o- an e0ec'ted lien creditor7 the
tr'stee (ay 'se state la= to a,oid -ra'd'lent con,eyances. 522)b/.
2. Tr'stee is $ranted the #o=er to a,oid 52% -ra'd'lent con,eyances.
522)b/.
1. A -ra'd'lent con,eyance is a trans-er7 (ade =ithin one year o-
:an5r'#tcy Day7 52%)a/)1/
a. "ith actual intent to hinder# delay or defraud any entity.
b. Made for less than a !reasonably e$uivalent value%:
c. "hile the debtor was insolvent#
d. If the debtor became insolvent as a result of the transaction#
e. If the debtor was operating with an unreasonably small amount of capital#
f. If the debtor intended to incur debts beyond its ability to pay.
2. A trans-eree =ho ta5es in $ood -aith -or ,al'e has a lien on or (ay retain
any interest trans-erred to the e0tent that the trans-eree $a,e ,al'e to
the debtor. 52%)c/.
a. Salue includes an antecedent debt# but does not include an unperformed promise.
b. 0he trustee may recover the property or the value of the property transferred from the initial
transferee. = ''9)a-.
c. 4ny transferee has a lien for the lesser of the cost of any improvements or increase in value due
to improvements. = ''9)e-.
d. 0he trustee may not recover from the transferee of an initial transferee that takes in good faith# for
value# without knowledge of the avoidability of the transaction. = ''9)b-.
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8. C*. 7'
%. -#igi"i#i$'
(. -.em/io! a!, %2oi,a!ce'
1. Federal *0e(#tions: 522
a. Only individuals may take e5emptions.
b. Most )(+- states have opted>out of the federal e5emptions. In other states# a debtor may chose
the state or federal e5emptions. 4 few states re$uire a debtor to claim the federal e5emptions.
c. @oint debtors may each claim their own e5emptions.
d. "aiver# e5cept in favor of secured creditors# is ineffective. = '&&)e-.
e. Otherwise# state e5emptions apply.
f. E5emption Alanning: "here the debtor clearly takes actions in order to take advantage of state
e5emptions# to the surprise of creditors# the bankruptcy court may avoid the e5emption on the
e$uities.
2. Hb.ections to e0e(#tions.
a. Must be filed within (9 days of the = (/* meeting.
b. If ob3ection is not filed# debtor may e5empt the property regardless of whether the e5emption is
otherwise impermissible.
1. A,oidin$ liens on *0e(#t Pro#erty. 522)-/.
a. 0he 0I2 may avoid:
b. @udicial liens or nonpossessory non>AM6Is#
c. In the items listed in = '&&)f-. )Lousehold goods# furniture# clothes.-
d. 0o the e5tent that:
e. 0he sum of liens and the amount of e5emption that the debtor could take in the property e5ceeds
the value of the debtorOs interest in the property )not counting liens-.
f. In other words# the amount that can be avoided is: 1ien you want to avoid# plus all other prior
liens# plus e5emptions# minus value of the property.
g. E5ample: 1ien is 8+/# 4voidable 1ien is 8*,# E5emptions are 8'# ;MS is 8*9'. +/T*,T'>
*9'N*9. 0hus 8*9 of the 8*, avoidable lien can be avoided.
h. 0his permits the debtor to take all e5emptions possible in the property# to the e5tent of the
avoidable lien. Essentially# the e5emption goes into the priority list above the avoidable lien.
C. >ee/i!g Pro/er$' ?ea@rmaio! 7 ?e,em/io!'
1. 3eneral Conce#ts: Debtors li5e to 5ee# #ro#erty.
a. ;irst# the property must be abandoned by the trustee or e5empted from the general creditors.
b. Debtors then may avoid liens to the e5tent they impair the e5emption.
c. ;inally# the debtor may redeem or reaffirm the debt.
2. "ede(#tion: G22
a. 4pplies to tangible personal property of individual people# in <h. E bankruptcy.
b. 0his is not optional for the creditor. 0he creditor must accept the Rallowed secured claimR );MS of
the collateral at the time of filing- if offered by the debtor. )0his goes back to Dewsnip: 4llowed
secured claim# in '9,)a-# is the ;MS of the car.-
c. 0he debtor pays off the debt against the collateral# and the remainder of the claim is discharged
with the rest of the unsecured claims.
d. Aroperty must be either e5empted or abandoned prior to redemption. 0rustees will generally
abandon assets without e$uity.
1. "etention: <ee# #ayin$ the debt. Per(itted in the 2th circ'it by
:ellin$er.
a. 2ankruptcy still discharges personal liability on the car# but staying current on payments prohibits
the secured creditor from repossessing the car.
b. If the debtor subse$uently crashes the car# the debtor has no liability to the bank.
c. 0his is only an option if the debtor is current on payments F only reaffirmation or ch. *( can cure
default and deaccelerate the loan.
9/6/2014 243352738.DOC Page 18
2. "eaJr(ation: 522
a. Must be signed prior to discharge and filed with the court. = '&/)c-.
b. May be rescinded within ,9 days after filing or discharge. = '&/)c-.
c. Debtors attorney must provide an affidavit that reaffirmation is in the best interests of the client.
i. o court approval re$uired for reaffirmation of real property of a represented client.
ii. If the debtor is pro se# the court will have a reaffirmation hearing to determine if the
agreement is in the best interests of the debtor.
d. 0his is voluntary on each side.
i. 4 debtor may want to reaffirm for several reasons:
)a- 0o protect co>debtors.
)b- 0o keep the collateral.
)c- 0o keep some credit history.
ii. 4 creditor may want to reaffirm because the debt e5ceeds the value of the collateral.
)a- Lowever# the creditor must not demand payment on a dischargable debt.
)b- 4 creditor may promise or withhold future credit.
e. "hile reaffirmation must comply strictly with the re$uirements of '&/)c-# a debtor may voluntarily
repay without incurring liability on the discharged debt. '&/)s-.
D. Or,er of Pa$me!'
1. Sec'red clai(s.
2. 58G)a/ #riority 'nsec'red clai(s )in order/. G26)a/)1/
1. G26 clai(s )in order/:
a. 4llowed unsecured claims filed on time.
b. 4llowed unsecured claims filed late.
c. <laims for fines# penalties# forfeiture# multiple# e5emplary or punitive damages.
d. Interest on any of the above# in order.
e. Debtor
-. Disc*arge
1. :lan5et Dischar$e. G2G. A co'rt ('st deny dischar$e i- the debtor:
a. Is not an individual#
b. Las been granted discharge within the last si5 years# or
c. Debtor has defrauded# destroyed# interfered# refused to obey the court. = E&E)a-)&- > )E-.
i. <onverting non>e5empt assets to e5empt assets is permissible. Lowever# doing so with
fraudulent intent is may be a basis for denial of discharge.
ii. 0he debtor may be denied discharge for truly awful recordkeepting.
iii. 0he party trying to prevent discharge bears the burden of proof.
d. R6ubstantial abuseR is a debtor with high income# high debt and no assets. 0he <h. E payout
would be 89# but a <h. *( plan could pay significant percentage of the debt.
i. 4 substantial abuse dismissal can only be sought by the trustee.
ii. 0he debts must be primarily consumer debts.
iii. 0he /th circuit looks at e5cess lifestyle vs. unforeseen calamity ? the debtorOs ability to pay
under <h. *(.
iv. 6ettlement is generally to voluntarily flip to <h. *(.
v. 4 few courts find that after a dismissal under = E9E# the debts filed for under <h. E are
nondischargable.
vi. In Maryland# you have to pay at least *9: > *': to unsecured creditors to avoid ob3ection by
the trustee.
e. Discharge is granted# e5cept for debts listed in = '&(.
2. *+ect o- Dischar$e:
a. Soids any debts for personal liability.
b. 2ankruptcy does not actually destroy the debt# but it creates a permanent bar against collection
actions against the debtor# personally.
c. Lowever it does not avoid liens. 0he liens are claims against your property not against the
person.
d. Gnder = (,,# utility services may not be refused solely because the debtor did not pay.
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8I. C*a/er 13
%. -#igi"i#i$'
1. Ch. 11 is only a,ailable to:
a. Individual debtors# )sole props may file ch. *( but other business debts may not.-
b. "ith regular income#
i. @ust needs to be RCegular enough to fund a plan.R Murphy# /9&.
ii. 6ome courts will be much stricter# and prohibit unmarried cohabitates from providing income
for each other.
c. Owing noncontingent unsecured li$uidated debts of less than 8&,+#&'9 and noncontingent
li$uidated secured debt of less than 8B9E#E'9.
i. 4 guarantee is a contingent liability after the first payment is missed# before the creditor goes
after the debtor.
ii. 1i$uidated 3ust means a sum certain.
iii. 0he limits apply to both single and 3oint debtors. "hile e5emptions double# debt limits do not.
d. Debtor M4I have filed <h. E within the last , years.
2. The Codebtor Stay: 1181
a. <odebtor stay lasts until the debt is discharged or converted out of <h. *(.
b. 4 co>debtor is !any individual liable on such debt with the debtor# unless such individual became
liable in the ordinary course of such individuals business.% = *(9*)a-)*-.
(. A!,ersecue, C#aims a!, Cram:Do&!'
1. Cra(@Do=n: 1122)b/)2/.
a. ;reeDes the amount of the secured claim at the date of filing# and declares the remainder
unsecured.
b. 0he allowed secured claim is paid completely plus a time>value of money component7 and
c. 0he unsecured portion is paid Rmore than the creditor would get under <h. ER > 9: to *99:
depending on the Alan. )4vg. is *9 > (9:-
d. "hat home mortgage holders canOt be forced to do is accept less than *99: payment of any
under secured portion of their debt.
2. C're: 1122)b/)1/.
a. 0he payment that cures the arrearage and provides for the reinstatement of the contract.
b. During cure# there are ongoing current payments and RcureR payments# curing the arrearage.
c. 0he arrearage may include late fees and interest# depending on the terms of the note.
1. Ko(e >ort$a$es: 1122)b/)5/.
a. Lome mortgages may not be bifurcated and crammed>down. *(&&)b-7 obleman v. 4merican
6avings 2ank# **( 6. <t. &*9, )*++(- )despite the fact that '9, bifurcates the claim > if its
prohibited under *(&&# it is not permitted under '9,-.
b. Default on home mortgages may be cured.
c. Mortgage payments are not included in the plan and ongoing payments will be made outside the
plan. 0his means that the debt# not mentioned in the Alan# is not modified.
2. *0a(#les:
a. Debtor owes 8*+#+B9 plus 8,#(99 on past due interest on a 8&*#999 vacation property.
;orelosure sale is scheduled ne5t week. Debtor also owes 8*9#999 unsecured.
i. 2ecause the vacation property is not Rresidence#R loan can be crammed down# and
accumulated interest can be converted to unsecured claim.
ii. Mortgagor will get 8&*#999 )allowed secured claim- under the plan over a time period not
longer than the term of the note or end of the plan. = *(&')a-)'-)2-)i- ? )ii-.
iii. Interest on the allowed secured claim depends on the creditorOs lending market and the
creditorOs costs obtaining such loans. Interest rate is capped at the contract rate. Gnited
<arolina 2ank v. Lall# +(( ;.&d **&, )/th cir. *++(-.
iv. 0he remaining 8'#999 is lumped with the *9#999 unsecured debt. = '9, ? *(&&)b-)&-. 0he
amount of money going to the unsecured creditors depends on the best interests of the
creditors and the debtorOs disposable income.
9/6/2014 243352738.DOC Page 20
b. 8,&#999 debt on 8''#999 residence# , monthly payments of 8&'9 missed. 0o keep the home:
i. <urrent payments must be kept.
ii. In addition# 8*#'99 plus contract interest )= *(&&)e-- in arrearages is amortiDed over the life of
the plan.
iii. 1ien and debt will continue. 0otal payments on principal will remain 8,&#999 because home
mortgages cannot be crammed down.
C. Crieria for P#a! Co!Brmaio!'
1. "e!'ire(ents o- the Plan )See hando't/
a. 6ecured and = '9E)a- priority unsecured creditors must be paid in full. = *(&&)a-)&-
b. If the plan contains classes# each claim within a class must be treated e$ually. =*(&&)a-)(-.
c. Gnsecured creditors must get more than they would under <h. E. = *(&')a-)/- )2est interests of
the creditors-.
i. If unsecured creditors will get nothing in <h. E# they donOt need to get anything in <h. *(.
ii. Salue Ras of the effective date of the planR must not be less than the value the creditors would
receive in a <h. E. 0hus# under a time>value>of>money analysis# the total payments under a
<h. *( plan must be larger than the total payments under a <h. E li$uidation.
d. 0he debtor must dedicate all of his disposable income into the plan# unless the debtor proposes
*99: repayment. == *(&&)a-)*-# *(&')b-)*-)2-.
i. 0his is fact intensive.
ii. 0hings like private school tuition# additional cars# etc. may need to be forfeited.
e. 0he plan must be proposed in good faith. = *(&')a-)(-.
f. 0he secured creditors must either accept the plan# the creditor must keep their lien# or the debtor
must surrender the collateral. = *(&')a-)'-.
2. Per(itted Feat'res o- a Plan:
a. <lassifications of Debt: = *(&&)b-)*-.
i. <lassifications are permitted# but may not be forced on the debtor.
ii. <laims may be classified based on priority# co>debtor status# etc.
iii. <laims within a given class must be treated e$ually. = *(&&)a-)(-.
iv. Discrimination between classes of general unsecured creditors is permitted where: );our
factors# 2entley# (B'.-
)a- 0he discrimination has a reasonable basis7
)b- "here the debtor may not be able to complete the plan without classification7
)c- "here the discrimination is in good faith7 or
)d- "here the degree of discrimination is directly related to the rationale of the
discrimination.
)e- E5tra Md. ;actor: is there a meaningful payment to the unsecured creditors that have
been discriminated against. In re Jolbe ? In re "hitley# +'>'E''*>6D )@uly (*# *++,#
Derby# @-.
v. <odebtor debts with individuals on consumer debt may always be classified separately. =
*(&&
b. <ramdown and cure. = *(&&)b-)&- F )'-.
c. Ce3ection or assumption or assignment of e5ecutory contracts or leases. = *(&&)b-)E-
1. >odi;cation:
a. Is voluntary.
b. 0he trustee may re$uest modification due to changed circumstances )increased income during
the life of the Alan-.
c. On re$uest of a party in interest# within one year of discharge# the court may revoke discharge if
the discharge was obtained by fraud. 0hus# modification may be necessary to avoid this penalty.
9/6/2014 243352738.DOC Page 21
D. Disc*arge' < 1328.
1. Ch. 11 LS'#erdischar$e.M 112%)a/.
a. 4vailable if the debtor makes all payments.
b. Discharges all debt EU<EA0: = *(&B)a-.
i. = '&()a-)/-#)B-# )+- debts: 4limony and child support# student loans and DGI liability.
ii. <riminal restitution.
c. Debts as a result of fraud# intentional or willful in3ury# nonpriority ta5 claims )priority ta5 claims get
paid-# larceny# divorce agreement undertakings to pay third parties are discharged. = '&()b-.
2. Kardshi# Dischar$e: 112%)b/)1/
a. If the debtor has not completed payments# the debtor may still receive discharge if
i. onpayment is due to changed circumstances that are not 3ustly the fault of the debtor7
ii. 0he payments to date under the plan are still in the best interests of the creditor7 and
iii. Modification of the plan is not practicable.
iv. Henerally the courts re$uire e5treme circumstances.
b. Debtor discharges all debts but = '&()a- debts. )Identical to <h. E.
-. I!ce!i2es of C*. 13'
1. Debtor $ets to 5ee# their st'+.
2. Pay(ents li(ited to dis#osable inco(e.
a. Debtor must have enough income to cure any arrearages during the Alan.
b. 0here must be enough in the Alan to cover the best interests of the creditors.
1. Treat(ent o- Sec'red Debt:
a. <ramdown the amount of the debt.
i. E5tend the term of repayment to the length of the plan.
ii. 1iens may be avoided and then crammed down.
iii. ote# that claims that are being crammed down do not need to be cured: arrears are
allocated to the unsecured portion of the cramdown.
b. Alan may cure defaults on home mortgage in installments over the length of the plan as a matter
of right.
c. 4ny accelleration may be deaccellerated.
2. S'#erdischar$e.
9/6/2014 243352738.DOC Page 22
8II. C*a/er 11
%. -#igi"i#i$
(. De"or:i!:Possessio!
1. Po=ers
a. 4 DIA has all powers of a trustee. = **9E)a-. P4ttack fraudulent conveyances under = '//# '/B#
preferences under = '/E.Q
b. DIA may not take compensation for service as DIA. = **9E)a-. Lowever# DIA may be paid for
services rendered to the debtor.
c. DIA has authoriDation to operate the debtors business# unless the court orders otherwise. =
**9B.
2. A##oint(ent o- a Tr'stee: 1182
a. On re$uest of the G6 0rustees office or a party>in>interest# after notice and a hearing
b. ;or cause# including fraud# dishonesty# incompetence or gross mismanagement by current
management
i. Either pre> or post>petition.
ii. <ause does not include the number or holders of securities# assets or liabilities of the debtor.
iii. <ause may be wasting of the debtors assets for nonbusiness purposes of insiders or related
corporations. In re Sharon Stee&# '(+ )Are>petition assets of debtor used for sister
corporation# criminal defense of e5ecutive# failure to close books# etc.-.
c. If such appointment is in the interests of the creditors# e$uity security holders or other interests of
the estate.
d. 4n e5aminer may be appointed if it is in the best interests of the estate# or if inside debt e5ceeds
8'M.
e. 2urden of proof is on party seeking appointment of the trustee.
C. Pa$me! of C#aims
1. Sec'red Creditors
a. Aresent value of the allowed secured claim must be paid in full.
b. Cemainder of the claim is bifurcated and classed as an unsecured debt# identical to the <h. *(
cramdown procedure.
2. Priority Unsec'red Creditors
a. 4dministrative claims )and claims arising during involuntary discharge proceedings- must be paid
in cash at confirmation# unless otherwise agreed. = **&+)a-)+-)4-
b. Other = '9E)a- claims must receive: = **&+)a-)+-)2-.
i. 0he value# as of the filing date# of their entire claim7 unless
ii. If = '9E)a- creditors re3ect the plan# they are only entitled to the actual value of their claims.
iii. 0hese payments may be made over an unspecified term of years.
c. Ariority ta5 claims = '9E)a-)B- must be paid within , years.
d. Ariority unsecured creditors may accept the plan without receiving full payment.
1. Unsec'red Creditors
a. Henerally must receive as much as they would in a <h. E li$uidation.
b. = ****)b- election: 0reating partially secured debt as fully secured.
i. Henerally non>recourse loans are treated as recourse loans# such that the creditor has
recourse against the estate. Instead# a creditor may elect under = ****)b- and receive the net
total value of the claim.
)a- Debtor need not pay the total present value F creditor does not receive time>value>of>
money payments.
)b- Debtor will not receive interest.
)c- 6uch elections must be made by class.
)d- "here the secured property does not need to be sold# the debtor may stretch payments
over a very very long time. Lowever# if the debtor has another reason to release the lien#
the creditor might get more money.
9/6/2014 243352738.DOC Page 23
D. ?e;uireme!s of *e P#a!
1. *li$ibility to ;le a Plan: 1121.
a. Debtor has the e5clusive right to file a Alan within *&9 days of petition.
i. If the debtor does so# the debtor has *B9 days to get the petition approved.
ii. 0he court may e5tend or terminate the time limits# for cause.
iii. ;ailure to file a plan within the court>ordered time period is grounds for dismissal. = ***&.
b. If the debtor does not file a Alan within *&9 days# or get their plan confirmed within *B9 days# any
creditor or party>in>interest may file a Alan.
2. Classi;cations: 1122.
a. <reditors may be placed together in a class if their claims or interests are substantially similar to
other claims in the class.
i. Alan is O0 re$uired to classify all similar claims in the same class. 0herefore the debtor can
gerrymander the classes.
ii. <lasses are designed so that one impaired class approves the plan.
b. E5amples:
i. 6ecured claims would be a class.
ii. Ariority claims would be another class.
iii. <o>debtor or guarnateed debt may be a class.
c. 4 debtor may or may not be able to separately classify substantially similar debt. +.S. Tru$# B9B.
1. "e!'ired Feat'res. 1121)a/. A Plan ('st:
a. Designate classes of claims.
b. Identify all unimpaired classes.
c. Identify how each class will be treated
d. Gnless otherwise agreed# similar claims must be treated e$ually.
e. Arovide ade$uate means for the AlanOs implementation. = **&()a-)'-.
2. Per(itted -eat'res o- a Plan. 1121)b/. A Plan (ay:
a. Impair# or leave impaired any class of secured or unsecured claim
b. Arovide for assumption or re3ection of e5ecutory contract or lease.
c. 6ettle any claim or interest of the debtor# or designate a person to pursue such claims or interest.
d. Arovide for the sale of all or substantially all of the property of the debtor. )li$uidate-
e. Modify the rights of holders of secured claims# other than claims secured by debtorOs personal
residence. P1ike <h. *(.Q
f. Include any other appropriate provision# not inconsistent. :-
5. Disclos're State(ents:
a. 6ent &' days after the Alan is filed.
i. E5pedited review may be obtained# and the court will re$uire a provisional statement with the
Alan and hold a single hearing on approval and confirmation of both.
ii. 6tatement must include date and time of confirmation hearing.
b. 6tatement must provide creditor with enough information to vote on the Alan:
c. 4ssets# business plan# how the debtor has performed since filing# why people are getting the
amounts they are getting. Ma&i$# B('.
i. <reditor must receive li$uidation analysis# and = **&')a-)*-.
ii. Enough information for a typical investor typical of holders of claims or interests of the
relevant class to make an informed 3udgment. = **&')a-)&-.
d. 4cceptance or re3ection may not be solicited without a copy of the Alan# a summary of the Alan
and an approved disclosure statement.
e. If the disclosure statement has not yet been approved# it must carry disclaimers.
f. 0he 6E< may comment on a disclosure statement but may not ob3ect.
g. 4s long as the statement is filed in good faith without negligence# there is no liability. = **&')e-.
0his applies to securities fraud as well as bankruptcy law.
h. "hile in bankruptcy# a debtor may e5ercise rights under state corporate law without considering
securities law. = **/'.
9/6/2014 243352738.DOC Page 24
6. Aotin$ and Acce#tance o- a Plan:
a. <oncludes &' days after disclosure statement sent at the <onfirmation Learing.
b. Soting: 6ec. **&,.
i. If a claim is not impaired under = **&/# the claim is deemed to accept the Alan. = **&,)f-.
ii. 4 class of claims accepts a Alan if two>thirds of the debt in the class and more than half of the
creditors accept the Alan.
iii. 4 class of )stock- interests accepts a Alan if two thirds of the value of the interests accepts
the Alan.
iv. Soting is by actual ballot. Only those creditors who vote are counted towards the &.( ratio.
0he ballots are tallied for the @udge.
c. Impaired <laims:
i. 4 claim is impaired unless the Alan does not modify the contractual rights of the creditor. =
**&/)*-.
ii. 4voidance of contractual rights which mature only on bankruptcy is not impairment of the
claim I;: = **&/)&-.
)a- 4ny default is cured# 4D
)b- Are>petition rights are restored to the creditors.
iii. 0hus# a trustee may cure all pre>petition defaults to make claim unimpaired. = **&/)&-.
iv. Economical Impairment: "here the creditorOs rights are impaired because the legal rights
provided are not actually e$ual to the what they would have.
d. 4 class of creditors accepts the Alan if more than half of the number and &.( of the value of the
creditors who participate in the vote approve the plan. = **&,)c- F )d-.
G. "e!'ire(ents -or A##ro,al o- A##ro,edFPaid in F'll Plan. 112)a/)1/ @
)11/:
a. Alan complies with <ode.
b. Alan proponent complied with <ode.
c. Alan proposed in good faith and not illegally. P4 plan proposed for ta5 evasion is not proposed in
good faith.Q
d. ;ees paid to issuers of securities must be approved.
e. Aost>confirmation management must be approved.
f. Cegulated sales must be approved by the applicable agency.
g. <ourt must find that for each impaired class of claims# each individual claimholders have either
accepted the Alan or the amount received under the Alan# valued as of its effective date# the
same amount that the creditor would have received in <h. E.
h. Each class either accepts the Plan or is unimpaired (paid in full).
i. Alan will pay in cash on the effective date of the Alan all administrative claims and priority ta5
claims. )See Aayment of <laims# SII)<-# p. &&-
3. If there is an impaired class# at least one impaired class accepts the Alan.
k. CeorganiDation is not likely to be followed by further reorganiDation. P;easibility test.Q
l. 4ny fees due the <ourt will be paid in full on the effective date of the Alan.
m. ECI64 plans have special re$uirements.
%. "e!'ire(ents -or Cra(do=n A##ro,al: 112)b/.
a. Alan that meets the provisions of **&+)a- EU<EA0 )a-)B- )total approval-
b. 0here must be one accepting class of impaired creditors.
c. Alan does not discriminate unfairly# is fair and e$uitable# with respect to all nonconsenting
impaired claims.
d. 0o be ;air and E$uitable# 6ec. **&+)b-)&-.
i. 6ecured claims must retain liens and receive the present value of their allowed secured claim
on the effective date of the Alan.
ii. Gnsecured creditors who are part of an impaired class that re3ected the Alan must receive:
)a- 4n amount e$ual to the allowed amount of the claim7 or
)b- 4ll claims subordinate to the unsecured claim will receive 89 until the unsecured claim is
paid in full. )0his means that e$uity must be wiped out# and legal rights associated with
e$uity are wiped out.-
9/6/2014 243352738.DOC Page 25
)c- "hat happens is that where e$uity gives new value in money or moneyOs worth# they may
retain thier e$uity interest. ew value must not be sweat e$uity. Case v. Los 'nge&es
Lum#er
-. Disc*arge' Sec. 1141.
1. A bindin$ contract:
a. Must be included in the Alan.
b. Is granted as the contractual result of fulfillment of the debtors obligations under the Alan.
c. May be granted to partnerships or other business entities.
2. Sco#e:
a. = '&()a- debts may not be discharged.
b. Discharge will be denied if:
i. 0he plan provides for li$uidation#
ii. 0he debtor does not continue in business
iii. 4ny of the = E&E)a- factors for denial of a <h. E discharge are present.