BANKRUPTCY OUTLINE

1. State-Law Collection Remedies a. Almost all collection remedies are governed by state law i. Creditors are allowed multiple paths to recover outside of court (call multiple time per day) and there is little a debtor can do 1. Debtors can sue under tort law, but only for extreme and outrageous conduct, which actually causes severe distress, when the creditor knew that the behavior would cause the severe distress 2. Debtor can invoke Fair Debt Collection Practices Act (pg 9) a. Prevents even mild harassment. Debtors can completely terminate all contact with the collection agent i. But, it does not apply to a creditor who is trying to collect a debt originally owed to that creditor ii. Nor does it apply to business or commercial debts, or to debtors that are corporations b. Judicial Collections i. Judgments When the creditor sues the debtor in court. All judgments are treated as first-in-time is first-in-right 1. Must have three characteristics a. actionable the creditor may bring a civil action asserting the judgment itself as the basis for the law suit (particularly when a creditor is trying to enforce a judgment in another state) b. executable the judgment gives the creditor the right to use the legal process and the state actors (the sheriff) to seize the debtors property and sell it to satisfy the judgment c. lienable creditor may use the judicial process to obtain a lien on the property of the debtor to secure the payment of the debt c. Execution Liens i. Six steps in the execution of a money judgment (a.k.a. execution lien) 1. the final money judgment is entered 2. the writ of execution is issued by the court clerk 3. the writ of execution is delivered to the sheriff a. the writ generally has an expiration date (69 180 days after issuance). If the expiration date occurs before the sheriff has levied any property, the writ becomes void. The sheriff ust return the writ nulla bona. Sheriff can return a writ nulla bono before the expiration date if he makes a good faith attempt to find property, yet none is found 4. the sheriff levies on s non-exempt property a. lien is created = the creation of a property interest in the property for the creditor b. the sheriff either takes the property with him, or constructively seizes it by placing stickers on property c. sheriff can levy as many times as is reasonable/necessary to satisfy the judgment i. Creditor is in control of the levy process, and the sheriff is to follow all reasonable instructions

ii. necessary and reasonable use of force is allowed in order to seize s property 5. the levied property is sold a. generally 30-60days after levy allows time to appeal judgment 6. the proceeds of the sale, minus sale expenses, are disbursed to the creditor ii. The key to enforceability is priority (problems on page 20-21) 1. Most debtors have multiple creditors chasing after the same assets, thus those first to establish their priority are the ones that are going to get paid 2. Priority is established when a lien is perfected (UCC) or when it is established a. majority view lien is established when the sheriff actually levies property, and the priority date is the date on which the sheriff levies b. minority view lien is considered established when the sheriff actually levies property, but the priority dating is the date on which the writ of execution was actually delivered to the sheriff d. Consensual liens i. always secured, and come in two types 1. consensual liens on real property a. secured by mortgages 2. consensual lines on personal property a. secured interest often governed by UCC i. All Article 9 liens established under the UCC are consensual ii. Consensual liens have unique enforcement vehicles that do not require the courts self help repossession 1. creditor allowed to repose the property as long as they do not breach the peace allowed under Article 9 of UCC iii. Priority status 1. Consensual liens that are perfected before a sheriff levies on a property have priority over the judgment creditor, regardless whether the state is a minority or majority state above a. the relation back principle of date of delivery in minority states does not apply in a priority dispute with a valid and perfected security interest under Article 9 of UCC 2. secured priority perfection a. Usually has terms in a financing agreement, agreed to by both parties at the time of contracting. b. Creditor must take the financing agreement and file it in the public record i. Sec. of State office for personal property ii. County recorders office for real property 1. However there are several layers of protection of owners of real property a. the creditor cannot seize and sell the property without first having an appraisal done of the property

i. the sale of the property must realize a preset percentage of the appraisal value or else the sale will be declared void b. the generally has a redemption period of 6 months after the sale in which to pay off the debt in full and get back the property e. Judgment Liens i. one of the most powerful tools in the creditors arsenal, it attaches to all real property in the county in which the judgment is rendered 1. attaches in 2 ways a. majority states created and executed when the clerk dockets the lien b. minority states created and executed when creditor takes the lien and files it in the county recorders office 2. Judgment liens automatically attach to all after-acquired property in the county as well 3. Remember the judgment lien merely establishes the lien, in order to get any money the creditor must go thru the execution process of having the property foreclosed on by the sheriff. a. however the priority date goes all the way back to the date the lien was docketed (or filed w/ the county recorder in minority states) b. ALSO, purchase money mortgages always have priority over judgment liens, even when dealing w/ after-acquired property i. Moreover, federal tax liens filed after a judgment lien, but before after-acquired property has come into existence, will trump judgment liens US v McDermott pg 33 f. Garnishment i. Enables a creditor to capture property or intangible assets of the debtor in the hands of a 3d party. 1. Most often used against bank accounts and future wages ii. Process: 1. Need to get a writ of garnishment in order to levy against property, a normal writ of execution is not enough a. Affidavit filed w/ court saying: 1) creditor holds an unsatisfied debt owed by , 2) that the 3d party holds s assets or owes money b. clerk issues writ of garnishment i. command to 3d party to hold property from , if 3d party fails to abide, 3d party can be held civily liable by creditor c. writ is delivered to the sheriff and the sheriff serves the writ (establishing levy and priority against other creditors) d. 3d party answers and either admits allegations or assets a defense (doesnt have any of s assets, doesnt owe any $, etc.) e. if 3d party challenges writ, a trial is held f. ct order property turned over to creditor

iii. After-Acquired property 1. states are split a. Majority garnishment can only attach to those assets/obligation currently in the hands of the 3d party at the time of service of the writ (which is that time of the lein establishment). Any assets acquired by 3d party post time of service cannot be touched b. Minority garnishment attaches to after-acquired property/obligations by the 3d party for a specified time period only iv. Special rules for garnishment of wages 1. wage garnishments cannot be unlimited. Federal places a ceiling on the amount of wages that can be garnished (pg 38) g. Dormancy Issues i. Judgments dont last forever. 1. generally expire after 510 years. Creditor must renew a judgment after that time period for another 5-10 years. Renewal can affect priority date 2. If attempts are not made to collect on the judgment for a certain time period (say 3 years), the judgment becomes non-actionable. a. must petition to have judgment revived by the courts. Revival will likely affect creditors priority date h. Prejudgment Remedies i. These are almost always ex parte 1. the whole point of these remedies is to prevent from hiding or getting rid of property ii. Five types 1. Attachment sheriff levies on s non exempt assets and holds property pending the outcome of the lawsuit 2. Garnishment same as attachment, just the property is seized from a third party instead of directly from the debtor 3. Replevin creditor takes possession of property (only when suit is for tort of replevin) 4. Lis pendens clouds the title of the property that is the subject of the litigation 5. preliminary injunction a. preliminary injunctions are not allowed b. judges cannot invent remedies, legislatures job iii. To get prejudgment remedies, the creditor must have already instituted a law suit 1. If creditor wins suit, his priority date will relate back to the date of the prejudgment lien. a. however, creditor will still have to go thru all execution requirements after he wins the suit in order to liquidate the property and receive $ iv. Safe guards 1. Only available for specific causes of action 2. Creditor must show a high likelihood of prevailing in the suit, and that will attempt to evade paying any following judgment a. showing must be made in an adversarial hearing i. must be given adequate notice of the hearing

3. Creditor often required to post a bond, if prevails in the suit he can collect damages against the bond 2. Into to Bankruptcy Title 11 of USC a. what is the point of Bankruptcy? i. to prevent a creditors race to get assets, thus leaving some creditors with nothing want a more fair way to distribute s assets b/w multiple creditors ii. State collection laws encourage a race to the courthouse 1. Also, state collections laws increase economic costs b/c each creditor is acting independently, and each creditor is only interested in liquidating s property for an amount sufficient to cover the individual debt, not necessarily interested in achieving a fair market value price iii. Fresh-Start policy dont want people to hounded by problems forever 1. only available for individuals iv. Not all debts are dischargeable 1. cant discharge intentional torts, court fines, judgments for willful injury, and fraudulent acts (incurring debts w/o intending to pay back) b. Prime alternatives to BK i. workouts negotiated deal b/w creditors and to prevent a run on s assets ii. ABCs assignment for the benefit of the creditors 1. gives over all of his assets to a state trustee to be liquidated and the proceeds to be disbursed for the benefit of the creditors a. entire voluntary in terms of participation of creditors, but creditors can still sue for any part of the debt that was not satisfied c. Bankruptcy completely displaces state collection law, once it is invoked i. BK favors creditors that have already moved to protect their claims ii. Creditors cannot opt out of bankruptcy case - 362(a) automatic stay d. Chapter 7 i. available to any debtor 1. but for a non-human, chapter 7 is the end of the line b/c companies will be completely dismantled (There are no non-exempt assets for corporations) e. Chapter 11 i. available to individuals and corporations 1. however, chapter 11 is very expensive, so usually only very large corporations can afford to file it a. Yet, normally chapter 11 is used as a liquidation vehicle a tool to hold off creditors while the corporation shops around for a buyer ii. usually still runs the business as a DIP (debtor in possession) and is treated as a trustee iii. must propose a sufficient plan of reorganization one that will give creditors more than they would have received in a chapter 7 iv. Chapter 11 discharges are for not for debtors, but for fairness to creditors v. Has a creditor committee that monitors the DIP and makes sure u/s creditors 1. generally, made up of the 7 largest u/s creditors 2. can have multiple creditor committees, representing the interests of different classes of creditors f. Chapter 13

i. reorganization plan for individuals only keeps all of his property, and pays all of his creditors from all his disposable future income ii. All creditors must receive what they would have in a chapter 7 liquidation 1. best interest of creditors test iii. Only available if has a regular source of income 3. Commencing A Bankruptcy Case a. Debtor eligibility 109 (see problem 2.1) i. Generally 1. must be a person (individual, partnership, or corporation) who resides or has a place of business or property in the United States ii. chapter 7 109(b), 101(41) 1. cant be a railroad, insurance company, bank, credit union iii. chapter 11 109(d) 1. cant be a insurance company, bank, credit union, stockbroker, or commodity broker iv. chapter 13 109(e), (h), and 101(30) 1. must have regular income 2. has a debt cap, if exceeds the cap, he must file a ch. 11 a. maximum of $307,675 in unsecured debts b. maximum of $922,975 in secured debt 3. must file a briefing from a credit counseling agency showing that received info about available credit counseling info, and a budget analysis. The briefing must have occurred w/in 180 days prior to the filing date of the petition -- 109(h) b. Venue 28 USC 1408 (problem 2.2 pg 78) i. 2 options 1. look back 180 days from the filing date a. wherever has resided for the majority of that time (at least 91 days) is where venue is proper 2. Could have an affiliate of the corporation file in a favorable venue, and then the corporation would be allowed to piggyback into that jurisdiction,, even if it initially would not have been allowed ii. If the trustee sues a 3d party on behalf of the estate, and the amount is less than $15,000, venue is appropriate in the defendants home district c. Voluntary vs. Involuntary i. voluntary 301 1. to start a voluntary bankruptcy, himself fills out a petition and files it w/ the court, and pays all filing fees. Petition must be sworn to as being accurate a. filing fees can be waived under informa pauparis, but it is not mandatory that courts actually waive the filing fee and give the poor access to bankruptcy relief b. if is a partnership, all of the general partners must agree to the filing c. if is a corporation, state law governs who can place the corporation into BK voluntarily, but generally a board of directors resolution is required ii. involuntary 303 1. can only occur in chapter 7 and chapter 11 cases, NOT chapter 13

2. can only be commenced against a person (but not a farmer) or corporation (but not a non-profit) 3. can be filed by s creditors must have at least 3 u/s creditors holding an aggregate of $12,300 in debt 303(b) a. the debts held must be non-contingent and undisputed b. The court can require the creditors to post a security bond to indemnify against creditors wrongful filing of BK see 303(e), and 303(i) i. but this only occurs if the debtor contests the involuntary BK, and wins 4. Grounds that must be satisfied 303(h) a. 2 reasons creditors can use i. is generally not paying his debts when they become due, when the debts are not the subject of a bona fide dispute 1. this is generally a sign of equity insolvency 2. mostly a totality-of-the-circumstances a. judges will compare the percentage of debts being paid vs those not being paid. i. in this calculation, the nonpayment of secured debts counts against , even though secured creditors cannot force an involuntary BK ii. with in the previous 120 days before filing, a non-BK custodian was appointed over substantially all of s assets 5. In a partnership, if some of the general partners wish to enter into BK, but the vote is not unanimous, those general partners can file an involuntary BK. The opposing general partners are free to file opposing motions w/ the court -- 303(b)(3)(A) and 303(d) d. Operating in the Gap b/w filing and discharge i. who runs the show 1. generally, in a chapter 11, the debtor remains possession of a business and all assets, and manages them 303(f) a. is allowed to continue to run business as if a BK was never filed b. is allowed to accumulate new debt, but must give all postpetition creditors priority status guarantee 2. however, the court can appoint a trustee if it sees fit 303(g) 4. Dismissal a. the mechanism for getting rid of cases that dont belong in BK, even if they are properly commenced cases b. most flexible, and easiest for the court to implement 305 i. here the court can dismiss any case, or suspend all BK proceedings in a case if the court determines such dismissal would be in the best interests of the creditors and debtor 1. This gives the court a great deal of discretion to dismiss cases. MOREOVER the decision is not reviewable by the court of appeals or the Supreme Court

ii. Applies to Chapter 7 and Chapter 11 cases

c. Chapter 7 707(a) and 707(b) i. 707(a) 1. cant dismiss a chapter 7 case on her own volition, she must get court permission, and show cause a. can not get a dismissal to add new creditors and re-file later 2. Yet, the court can dismiss a case for cause, which could mean almost anything the court wants it too a. failure to file pre-petition tax returns as required under 1308 b. Also, many courts unofficially have a requirement that the case be filed in good faith, if they believe the case was filed under bad faith, the trustee will dismiss the case under 707(a) i. but there is no provision in the code that requires a good faith filing (except for the means testing provision) ii. 707(b) getting rid of can pay debtors 1. 707(b)(1) a. Court can dismiss a case (or w/ permission of , convert to a ch. 11 or ch. 13) if granting a discharge would be an abuse of the bankruptcy provisions i. only if the debts are primarily consumer debts 2. 707(b)(2) MEANS TESTING (see 11 -34 in supp) a. A certain amount of excess income will constitute presumptive abuse. If the presumptive abuse is not rebutted, the court MUST dismiss case b. Only s whose family income is greater than the state median income for their family size are subject to the presumption of abuse 1. Any with primarily consumer debt, and whose family income is above the state median, and who has net monthly income of $100 - $166 will face the possibility of a presumption of abuse a. calculation or presumption goes: current monthly income less monthly expenses b. multiplied by 60 c. greater than the lesser of $6,000 or 25% of u/s debts; or $10,000 2. if the net monthly income is greater than $166, the presumption will always arise ii. current monthly income is defined under 101(10A) 1. determined by looking at the income received during the 6 months prior to filing the BK petition, from any source 2. includes spouses income, even in a non-joint case if the spouse contributes to household expenses d. Chapter 11 305 and 1112 i. 1112 allows for dismissal if it is in the best interests of the creditors and the estate (just like 305)

1. Yet, 1112 is completely reviewable higher courts e. Chapter 13 1307 i. is allowed to voluntarily dismiss a chapter 13 anytime hey want ii. court can dismiss a case for case as well 5. Conversion a. an alternative to dismissal b. Cant convert a case to ch. 13 without s consent i. Nor can you get around the Means Test by first filing a chapter 13, then converting to a chapter 7 c. Each chapter has its own conversion provisions (p. 2.9 pg 120) i. Chapter 7 706 ii. Chapter 11 1112 1. just b/c cant reorganize successfully, doesnt mean the case should be dismissed. a. convert the case to a chapter 7 if it is in the best interest of the creditors and the debtor i. very important to look at the proportion of the debts owed to different creditors. If the majority of debt is owed to one creditor, it might be in the best interest to convert the case and distribute proceeds on a pro-rata basis instead of allowing small creditors to levy s property and deny relief to the major creditor. (Rolex pg 124) iii. Chapter 13 1307 6. Property of Estate a. Governed almost exclusively by 541 i. Although 323 states that the trustee is the representative of the estate b. Make up the estate i. all legal and equitable interests had in an asset at the commencement of the case are transferred into the BK estate, whether there are encumbrances on the property or not (whether the property will be of value to the u/s creditors or not) 1. Trustee, as the representative of the estate, succeeds to all interests in property that had at time of filing, no matter what type of interest it is a. Always ask if had an interest in a property, and if so, what the nature of that interest was that interest is the same interest that the trustee now has ii. All property interests are created and governed by state law, so state law defines the type of ownership interest the trustee succeeds to. a. EXCEPT when a federal interest requires a different result 2. Property itself is defined by Federal law, the interest that has in the property is governed by state law a. if state law says something is not property, BK doesnt care, the federal law determines if something is property i. see Chicago Board of Trade iii. Property that the trustee brings into the estate, that was subject to prior liens, through the trustees avoiding powers as a super creditor iv. All proceeds, offspring, etc of assets in the bankruptcy estate c. Ipso Facto Provisions i. provisions in agreements that state is automatically in default if he files BK, whether is actually behind on his payments or not

1. Such provisions are unenforceable in BK b/c the goal is to try and prevent from filing BK d. Exceptions to the property of the estate i. 541(c)(2) spend thrift trusts cannot be brought into the BK estate ii. s post-petition earnings from services performed 541(a)(6) 1. but to qualify for the exemptions, the services rendered payment must have arisen from a post-petition activity or agreement (See, Andrews, where pre-petition non-compete agreement payments that were paid post-petition were ruled part of estate) 2. Easiest thing to do is split s life into 2 periods: 1) pre-petition, and 2) post-petition iii. There are NO exceptions for a corporate in chapter 11 or chapter 7 1. all assets and all offspring come into the estate e. Abandonment 554 i. trustee has the power to abandon any burdensome property, or any property that is of inconsequential value or benefit to the estate 1. mainly an issue in chapter 7 cases 2. the property is taken out of the bankruptcy estate, and the creditor and debtor are allowed to fight over it in state court 7. The Automatic Stay a. governed by 362 the automatic stay serves as a time out, maintaining the status quo until the debtors affairs can be sorted out. i. It is an injunction that enjoins all efforts to collect pre-petition debts b. The automatic stay is automatic dont need a court order, only have to file a petition w/ the court i. Dont care if creditor acted w/o notice, any action taken (foreclosure sale, etc.) will simply be undone 1. however, if the creditor knowingly violated the stay, he could be sanctioned under 362(k) 2. 342 covers notice procedures for creditors to find out about BK

c. Scope (prblm 4.1, pg 155)

i. extremely broad applies to everyone everywhere 1. as long as the collection action stems from pre-petition debts, it will not affect post-petition debts from being acted upon ii. Cant go after , s property, or property of the estate 1. 8 specific categories under 362(a) know all 8 a. commencement or continuation of a proceeding against the debtor to recover a claim that arose before commencement of the case b. enforcement, against or property of the estate, of a judgment obtained before commencement of the case c. any act to obtain possession over any property of the estate d. any act to create, perfect, or enforce a lien against property of the estate i. unless creditor loaned money for purchase money interest, and creditor is just perfecting lien, and doing so within 20 days of gaining possession of the collateral

e. any act to create, perfect, or enforce a lien against property of the , to the extent such claim arose pre-petition f. any act to collect or recover a pre-petition claim against the g. setoff any debt owed to against any claim against h. special rules regarding corporate and tax liabilities iii. Stay only applies to pre-petition debts 1. collection activities are allowed to commence for post-petition debts iv. The Automatic stay is not permanent 362(c) and (d) 1. only supposed to preserve the status quo until the court can sort everything out v. Turnover of repossessed collateral 1. the trustee only succeeds to whatever property interest had at the filling, and sometimes that interest is not a possessory interest b/c the property has been repossessed 541(a) a. However, if the property is something that the trustee can use for the benefit of the estate, a third party must turnover the property under 542(a) i. Then 541(a)(7) brings that property into the BK estate b/c it is technically post-petition property created by the estate 1. Whiting Pool 2. The above is dependant on the trustee filing a motion for turnover and providing adequate protection to the creditor a. see Transouth where ct should have allowed creditor to keep car until given adequate protection i. Trustee did not succeed into a right of possession, and the keeping of the car by the creditor was merely a keeping of the status quo until such time creditor was provided with adequate protection d. Exceptions to the stay 362(b) (problem 4.2 page 168) i. criminal proceedings ii. child support payment/alimony payments iii. government proceeding to police & regulatory power, including non-monetary judgments 1. cant use BK to escape non-financial duties polluters cant continue to pollute just b/c they filed BK 2. However, government money judgments are stayed a. to determine if the action is a money judgment break the injunction into two parts Penn Terra i. if an order to stop ongoing violations of the law = viable use of police power, and thus excepted from the automatic stay ii. If the injunction is based solely on past conduct, then it is a money judgment iv. Reason dont want to use BK to gain a strategic advantage over competition e. Time Period i. the automatic stay is not permanent 362(c) and (d) 1. only long enough so that the BK court can sort everything out 8. General Unsecured Claims a. General

i. The bankruptcy estate not only succeeds to all of his interests in property, but it also succeeds to all of s liabilities as well. ii. Once a files BK, all of his known creditors are notified b. In order to be paid by the BK estate, a creditor must file a Proof of Claim 501(a) i. Bar Date creditors only have a certain window of time to file their claim, if they do not meet the filing deadline, and they lack extreme good cause, their claim will not be allowed ii. Claim 101(5) 1. a right to payment a. disputed or undisputed b. secured (lien on an asset) or unsecured (no lien) c. legal or equitable d. matured or un-matured i. The only deference between the two types of claims is the passage of time, so BK accelerates the claim e. fixed or contingent i. a claim can be made even if the triggering event that would give rise to a claim has not occurred yet, but is important to remember that not all contingent claims become fixed claims f. liquidated or unliquidated i. liquidated claim is fixed and can be arithmetically calculated ii. unliquidated claim has not been fixed, and/or it cannot be calculated 1. good example: unresolved tort claim 2. claims are discharged at the close of the BK case a. regardless of whether creditor filed a proof of claim or not b. regardless of whether the claim unliquidated during the BK case or not c. The time when a claim arises is critical i. if the right to a claim arose before the petition date, the claim will be included in the BK. If the claim arose after the petition date, the claim will survive BK, and party can pursue all available state law collection remedies that exist ii. thus must determine when the claim arose, which can be especially difficult in tort cases 1. RULE: we date a claim to have arisen on the date in which the conduct that ultimately gave rise to the claim occurred, NOT when the injury occurs a. Conduct is the critical factor b. while state law determines if a creditor has a claim, it does not determine when the claim arises i. but still look to state law to see what actions must occur to have a claim, and then look independently at all actions and fix the date when such conduct did occur c. Piper twists to the rule i. claim against the is allowed if 1. events occurring before filing created a relationship b/w and claimant a. contact, exposure, impact, or privity

2. the basis for liability is the s conduct in

designing, manufacturing, and selling a defective or dangerous product 2. What about future claimants who have not been injured yet from already completed conduct, but who will likely be suffer an injury in the future (i.e. claim is both contingent and unliquidated)? a. 2 possible options i. the court can appoint a future claims representative 1. duty to negotiate a fund to be set up for future claimants, and to negotiate a sufficient amount to be deposited into the fund to cove all likely future claims 2. generally only occurs in mass-tort cases ii. court can simply hold that all future claims will not be discharged, because the future claimants were not represented (due process violation issue) d. The type of claim can matter as well i. Pure equitable claims (injunctions) are not discharged by bankruptcy ii. However, some equitable claims are dischargeable 1. if the injunction actually forces a to perform some type of action (not refrain from committing some act) AND 2. the remedy for the failure to perform gives rise to a right to payment, or the payment of money would resolve the obligation a. if the injunction can be converted into a monetary remedy, or if there is an adequate monetary substitute for s performance, then the claim will be included in the BK, and it will be discharged at the end of the case 3. EXAMPLE: a. is ordered not to pollute a stream after BK, is still not allowed to pollute the stream i. no amount of money will equal not polluting the stream, the creditor cannot go in and not pollute the stream and charge for the cost b. is ordered to clean up the stream he already polluted i. this equitable relief would be the exact same thing as cleaning the stream, and then billing for the cost 1. thus, the injunction will not survive BK, and the claim will be paid out of the debtors assets e. Claim Allowance (prblm 5.2, pg 208) i. All claims are deemed to be allowed unless a party in interest objects 502(a) 1. Unless, the claim falls under one of the 19 kinds of debts that are nondischargeable, and are thus not allowed as claims 523 ii. mechanics of allowing/disallowing a claim 502(b) 1. the claim would be unenforceable under applicable non-bankruptcy law 2. service claims cannot exceed the reasonable value of the service provided 3. claims cannot consist of unmatured interests 4. all claims relating to damages to landlords resulting form a breach of a lease are capped

a. damages are capped at the higher of either: 1 years rent or 15% of the remaining rent due on the lease (the 15% total of the remaining rent cannot exceed the amount the would have to pay for 36 months of rent) b. Also, add any amount of rent that was outstanding on the date of filing 5. breach of long-term employment contracts are capped at 1 years salary iii. Disputed Claims 1. a court has three options when a claim is disputed a. adjudicate the claim (try the claim in the BK court) i. if the claim is adjudicated, the trial is a judge trial no right to a jury in BK 1. exception: claims for personal injury and wrongful death will be given a jury trial in the federal court 28 USC 157 b. let the creditor try its claim in the state court i. creditor is given relief from stay 362(d)(1) 1. creditor can now litigate in state court, and obtain a judgment a. However, creditor must return to the BK to enforce the judgment. Creditor has not been given stay relief for the judgment, only to try the case in state court c. estimate the value of the claim 502(c) i. allowed if fixing or liquidating the claim would be burdensome 1. burdensome standard is very flexible, it to gives the court a lot of discretion to estimate values ii. A court could do an initial estimate of the value of a claim when allocating voting rights to particular creditors at the outset of the case, then hold a full blown adjudication to determine the real value of the claim 1. the real value would be the basis for the distribution to the creditor, but would not affect voting rights f. Distributions i. creditors are paid in the following order 1. Secured Claims a. these are paid out of the liquidation of the collateral 2. Unsecured Clams 507 a. domestic support obligations b. administrative expenses 503 c. 507 statutory priority claims d. general unsecured claims e. subordinated claims i. non-compensatory fines and damages 3. Individual debtor or owners (stock holders) 9. Priority Unsecured Claims 507 a. Administrative Expenses treated in detail 503

i. administrative expenses include actual and necessary costs and expenses of preserving the estate 503(b)(1)(A) 1. includes pre-confirmation, post-petition torts committed by DIP, trustee, or estate a. Any claim that arises post-petition AND post-confirmation will not be allowed 2. includes professional serves required by the estate a. lawyers fees b. trustee fees 3. 2 part TEST to determine administrative expense status a. the expense must arise from a transaction w/ the DIP, or trustee (thus, the expense must be post-petition / arise during the pendency of the BK) AND b. the expense must be beneficial to the DIP in the operation of the business i. actual and necessary to the administration of the BK estate ii. What does actual and necessary to the administration of the BK include? 1. Midlantic debtor polluted a piece of land pre-petition, and the trustee was not allowed to abandon the property based on public policy (protect public from eminent harm). Under 541, trustee succeeds to all interests had, in this case was required to clean up the property so trustee had obligation to clean up property. a. The clean up cost less than the cleaned up property was worth, so the estate and the unsecured creditors benefited from the clean up treated as administrative expense i. Also, some value in preventing a threat to public safety 2. third parties claims that allow to continue business post petition (through the extension of credit post-petition, or the making of a loan post-petition) 3. Post-Petition costs ordinarily incident to the operation of a business, but do not benefit the estate a. post-petition tort claims a policy of fairness to persons injured by the estate. i. creditors benefit from having a business continue to operate, and thus should also assume risks involved with the potential benefit b. abiding by state laws 959(b) i. Alabama Surface Mining pg 228 any fines for violating a state law that are incurred post-petition are given administrative expense status 1. encourage to abide by law, and prevent a from gaining an unfair advantage over competition via bankruptcy 2. However, cannot continue to fine for violations of the law if the company has been shut down these fines will be given general unsecured status

3. Also, any fines on top of those has already

been fined for pre-petition will be treated as unsecured claims (but only if fine is a continuation of the pre-petition fine) a. punitive in nature, and BK doesnt like punitive damages (only hurts creditors, and doesnt teach the individual a lesson) 10. Secured Claims a. General i. secured claims have priority over unsecured creditors, and are entitled to be paid in full, up to the value of the collateral securing their claim 506(a) ii. lien interest in s property that secures a debt or obligation 1. liens come into bankruptcy intact b. 7 things that can happen to a property w/ a lien in bankruptcy i. the trustee can sell the property and payoff the secured creditor 363 ii. the trustee can abandon the property under 554 1. fairly common occurrence if the has no equity in the property, or the property is of little value/consequence to the estate 2. if the property is abandoned, it leaves the bankruptcy estate and is returned to . a. Yet, any lien that existed on the property before BK stays with the property through BK, and stay valid after the property is abandoned by the trustee i. creditor is free to pursue all state law collection actions 1. known a lien pass through iii. can claim an exemption in the property and remove it from the BK estate (almost the same thing as abandonment) 1. the property leaves the BK estates and is returned to , but the lien on the property is still valid iv. keeps the property, subject to all liens, and pays off the creditor through a plan of reorganization (ch. 11 or ch. 13) v. Creditor can ask for relief from automatic stay, and if granted, the property is removed from the BK estate 362(d) 1. creditor must show there is no equity in the property, and defeat s argument that the property is necessary for reorganization 2. creditor could also argue that it lacks adequate protection vi. could redeem the property under 722 1. payoff the debt owed in one lump sum (extremely rare) a. creditor consent is not needed 2. only available in a chapter 7 case, and only available on personal, family, or household property (NOT business property) 3. Also, redemption is only available for personal, tangible property a. CANNOT be used on real property vii. could re-affirm the debt under 524(c) 1. would enter into a new agreement w/ the creditor post-petition 2. only available in a chapter 7 case, and only available with the creditors consent c. Statement of Intentions in a Chapter 7 (prob 6.3, page 53 of supp)

i. 521(a)(2)(A) must file a statement of intentions within 30 days of the petition date 1. the petition must identify all the property that intends to surrender to the creditor, and all the property plans on retaining a. if retaining the property, must identify whether he plans on redeeming the property, reaffirming the debt, or claiming the property as exempt 2. 362(h)(1)(A) if fails to file his statement of intentions within the 30 day window, or fails to properly identify his intentions toward all of the secured assets, the automatic stay will automatically be terminated regarding such property ii. 521(a)(2)(B) within 30 days of the date set for the first 341 hearing, the debtor must execute all of his stated intentions 1. 362(h)(1)(B) if fails to execute his intentions within the 30 day window, the automatic stay will automatically be terminated regarding such property a. Unless, the only reason execution did not occur was that the creditor refused to consent to a reaffirmation iii. 521(a)(6) within 45 days is to execute all of his intentions regarding all personal property serving as a collateral for a purchase money debt. 1. If fails to execute such intentions, the automatic stay is lifted as to such property, and the property is removed from the BK estate. iv. However, the trustee can negate the relief of automatic stay provisions found in 362(h) and 521(a)(6) by filing a motion showing that the property is valuable to the bankruptcy estate d. Valuing Secured Claims i. valuation of a secured claim is important for 3 reasons 1. trustee need to know how much equity is available for unsecured creditors 2. need to know how much he would need to pay to redeem the property under 722 3. Bankruptcy estate needs to know so that it can arrange to pay the secured creditors in a reorganization plan ii. Ways to value a secured claim where is not planning on keeping the property inside the BK estate 1. if the property is sold by the trustee, the price the trustee gets for the property is the value of the property 2. if the trustee abandons the property, then the court will estimate the value of the property a. it is important to remember that if the property is abandoned, the lien on the property will still survive, even if the creditor receives some distributions from the BK estate i. if the creditor does receive distributions from the BK estate it only lowers the overall debt owed to him, it does not discharge the debt (unless the debt is paid in full through the BK estate) iii. Ways to value a secured claim where is attempting to keep the property (see pg 261 in text, and prob 6.4 on pg 69 of supp) 1. 506(a)(1) a. value will be set at the replacement value of the property

i. replacement value = price a willing buyer would pay a seller for an item the same age and in the same condition as the collateral securing the claim 2. 506(a)(2) a. only applies to personal property of s in a chapter 7 or chapter 13 b. value will be set at the replacement value of the property i. replacement value = the price a retail merchant would charge considering the age and condition of the collateral 1. cannot deduct the cost of the sale or marketing when determining the value (might be able to deduct the cost of warranties) iv. Bifurcating secured claims into secured and unsecured components 506(a)(1) 1. a secured creditor has a secured claim to the extent of the value of the property, and 2. an unsecured claim to the extent the value of the claim exceeds the value of the property a. non recourse debts are not allowed unsecured status if their clam exceeds the value of the collateral, because such a claim would be unenforceable under applicable state law 502(b)(1) v. The trustee is allowed to charge secured claim holders for expenses the trustee incurs in preserving or disposing of the property vi. Lien Pass Through 506(d) 1. general rule In Rem rights survive bankruptcy a. a lien is not voided by a discharge if the failure on the part of the creditor to file a proof of claim was the only reason the lien was not allowed as a secured claim in the bankruptcy proceeding 2. What about lien stripping? a. lien stripping occurs when the trustee proceeds in valuing the secured portion of a creditors claim, bifurcates the secured portion and unsecured portion from each other, but then abandons the collateral i. any amount that creditor receives in from distributions to unsecured creditors thru the bankruptcy is subtracted from the original full claim amount ii. the full amount of the lien passes through the BK and continues to be enforceable under state law collection remedies (minus any amount the creditor received in a bankruptcy distribution) 506(d) 1. Thus, Creditor can foreclose on the property, realize an amount on the sale that was greater than his secured claim was valued at by the BK court (up to the total amount originally due the creditor) and be ok. a. However, the creditor does not have a right to sue for any deficiency between the amount the collateral sold for, and the original amount that was due to creditor (that deficiency is the

equivalent of u/s debt and is discharged via the BK) b. Ex. A has a $120k mortgage on Cs property. C files BK, where the property is valued at $30K creating a secured claim for A of $30k and an unsecured claim for $90k. Trustee abandons the property, but A receives $10k distribution from the BK estate for his $90k unsecured claim. A forecloses on Cs property, and sell it for $60k i. A gets to keep the full $60k from the sale, but cannot sue for the remaining $50k of the original debt vii. Undersecured vs. Oversecured (see problem 6.2, page 245) 1. undersecured creditors a. the debt owed is greater than the value of the collateral securing the debt b. creditor will have both a secured claim and a general unsecured claim i. the secured claim = the full value of the collateral securing the debt ii. the unsecured claim = any deficiency left over 1. here the creditor will have to receive distributions on a pro-rata basis, along with all the other general unsecured creditors c. if the original debt was a non recourse debt, then the creditor will only get paid for his secured claim portion, and will not be allowed a unsecured claim 2. oversecured creditor a. the collateral securing the debt is worth more than the debt i. creditor will be allowed to have his entire claim be treated as secured, and will be paid in full viii. Special Rules regarding post-petition interest on pre-petition debt 1. secured creditors a. secured creditors are only allowed post-petition interest if the collateral securing the debt has a greater value than the secured claim itself (over secured) 506(b) i. under these circumstances, interest is only allowed up to the value of the surplus value of the collateral 2. unsecured creditors a. if there is not enough equity in the estate to pay all claims in full, no unsecured creditor is allowed post-petition interest 502(b)(2) b. if there is more equity in the estate than is required to pay all unsecured claims in full, then unsecured creditors are allowed to recover post-petition interest at the state judgment interest rate ix. Rules on interest when proposes to keep the property in a plan of reorganization (after the value of the claim is set) 1. creditors are allowed interest to the extent that the time value of their f/c rights today are not diminished by allowing to make monthly payments a. formula method creditors are allowed to charge the prime interest rate (determined by the petition date) plus a small risk premium (usually 1% to 3%). Till pg 56 of supplement. 11. Stay Relief 362(d) problems 7.1-7.4 on page 284, problem 7.5 pg 299

a. a creditor who is seeking stay relief in order to proceed with a an act against the property in state court b. Two main grounds that a creditor can request stay relief i. For Cause 362(d)(1) 1. lack of adequate protection is main reason a. this occurs where there is a risk that the value of the property will be less over time than what the creditor could get if it liquidated the property right now i. if this is the case, the creditor must be given some form of adequate protection 1. creditor can be given cash payments from trustee 361(1) 2. creditor can be given additional secured liens in other property/collateral that the holds 362(2) 3. any other agreement that will give the creditor the equivalent of the current lien (catch-all provision) a. exception i. cannot agree to give the creditor administrative expense status b. if there is lack of adequate protection, the court will grant relief even if shows that the property is necessary to a successful reorganization, and there is a reasonable chance of a successful reorganization c. How often a creditor can claim inadequate protection i. no limit, the creditor can repeatedly raise an inadequate protection claim 1. most of the time this will result in nothing 2. but could result in stay lift, or additional protections being granted d. if the adequate protection turned out to be inadequate i. the court will grant whatever deficiency the creditor incurred a super administrative expense status under 507 1. creditor will be paid before any other administrative expense claim 2. Equity Cushions and Adequate Protection a. Equity cushions can be a form of adequate protection, as long as the value of the collateral is reasonably stable b. Equity cushions are not required to be maintained in order to provide adequate protection, as long as the decrease in the cushion is due to interest payments being given to the creditor i. the increase in the secured claim via interest payments is capped at the total value of the collateral ii. the only thing that adequate protection is meant to protect is the value of the base lien, not the creditors right to unlimited interest payments 1. however, an over-secured creditor is entitled to adequate protection regarding interest payments that it expected to receive at the beginning of a case, but was unable to collect due to the

unexpected depreciation in value of the collateral c. Example i. owes $1,000,000, and collateral is valued at $1,100,000, but is depreciating at the rate of $10,000/month 1. here, creditor expects $100,000 worth of interest payments 2. so, creditor will be given $10,000/month for ten months to secure the interest payments, then will receive $10,000/month to protect against depreciation a. if the creditor was under-secured, he would still be allowed the $10,000/month payment to combat the depreciation of the collateral ii. creditor is entitled to relief 362(d) 1. Two Part Test a. has no equity in the property (creditor must prove) AND b. the property is not necessary to an effective reorganization ( must prove that the property in necessary) i. needs the property in order to reorganize ii. there is a reasonable probability of a successful reorganization occurring in a reasonable time period c. Ownership of Post-Petition Collateral i. generally, any proceeds, product, or offspring from a collateralized property in the BK estate becomes the property of the BK estate 552(a) 1. Unless 551(b)(1) or (b)(2) apply a. 551(b)(1) i. post-petition proceeds, product, offspring, and profits of the collateral are given to the creditor if the security agreement expressly provides that such proceeds should be turned over to the creditor AND the security agreement and interest in the proceeds are perfected under non-bankruptcy law b. 552(b)(2) i. a lien holder on commercial real property is given the right to rents received from the property, if the mortgage agreement provided for such payments 1. but this is true only to the extent that the trustee did not expend funds to generate the rent (the trustee is allowed to deduct any expenses incurred from the creditors distribution) d. Automatic Stay and Abusive Filling i. Main tool against abusive filing 109(g) 1. any debtor that had a bankruptcy case dismissed within the preceding 180 days for willful failure of the debtor to abide by orders of the court is ineligible to file BK

a. a new BK filed in violation of 109(g) is not eligible for the automatic stay provision 362(b)(21) 2. however, the can get around this provision by voluntarily dismissing a chapter 13 case before the case is dismissed a. but 109(g) also imposes a 180 day filing ban if voluntarily dismisses the case after a motion for relief is filed ii. 362(b)(22) filing a bankruptcy does not stay the residential-tenant eviction of , if the landlord obtained a judgment for possession of the property against (eviction judgment) before the BK filing 1. Really was an act to allow creditor evict without having to get an MFR from the court a. however, most creditors still go to court and ask court to verify that they are eligible for this provision iii. 362(c)(3) if an individual s chapter 7, 11, or 13 case is commenced with in one year of the dismissal of an earlier case, the automatic stay will in the current case will expire 30 days after filing unless makes an affirmative showing that the current case was filed in good faith 1. does not apply if the previous case was a chapter 7 dismissed because they failed the means test of 707(b) iv. 521(i) individual s must file all required financial schedules, statements, and certificates w/in 45 days of the petition date, or the case will automatically be dismissed (anti- face sheet filing provision) 12. Executory Contracts 365 a. Executory K a K under which the obligation of both parties as so far unperformed that the failure to complete performance would constitute a material breach an asset coupled with a liability i. i.e. a K to which neither party has finished performing its material obligations 1. if has already performed substantially, has an asset (right to performance) 2. if 3d party has already performed, all that exists is a liability b. Trustee generally has three options in regards to executory Ks (first 3 require court permission) i. assume 1. must assume with all the burdens in the original K intact 2. the 3d party is given administrative expense status for its claim ii. assume and assign iii. reject 1. if the agreement is rejected, then all claims the 3d party has are treated as general unsecured claims iv. do nothing c. How long trustee has to make a decision i. if case is a Ch. 7, then trustee must make his decision within 60 days of the filing date, or the K is automatically rejected ii. in Ch. 11, the trustee has until the confirmation of a plan of reorganization iii. 3d party can petition court to force the trustee to make a decision early 365(d) (2) iv. If the executory K id leasing commercial R/E from a landlord, trustee only has 120 days to assume or reject 365(d)(4) 1. after 120 days passes, the K is resumed to be rejected d. Assumption 365(b)

i. generally, if the trustee finds a K to be beneficial after weighing the costs and benefits to the estate, the trustee should assume the K. 1. the BK estate no becomes a party to the executory K a. the BK estate becomes entitled to the benefit of 3d partys performance, and b. promises to perform all of s responsibilities 2. BK estate can only assume the K as it existed when it came into the BK estate a. no line-item veto ii. Once the K is assumed, the BK estates future obligations to the non- become entitled to administrative expense status 1. if BK estate later breaches the K, the non- is still entitled to full administrative expense status a. Klein trustee assumed a store front lease, then breached the K i. landlord was entitled to full K rent, via administrative expense status, for the time that the BK estate used the property, and to full K rent for the remaining months of the lease, even though was not using the property (and not getting benefit) 1. this provision is not capped to one year under 502 2. the non- might be required to mitigate his damages, and re-lease the property a. if the property is re-let, that decrease the amount creditor can recover from BK estate iii. Requirements to assume a K 1. if property was in default before filing of BK a. cure the default b. compensate the non- for any monetary loss incurred from the default c. provide adequate assurance that future payment will be made 2. if party was not in default a. just has to get ct. permission (no requirement to provide adequate assurance of future performance) iv. REMEMBER under 365(c)(1), that if a K is not assignable b/c local law would allow a 3d party to not accept or render performance from anyone other than 1. a trustee or DIP cannot ASSUME an executory K if 3d party objects (applies both to assumption and to assignment) (Perlman pg 371, 379) v. In a chapter 7, the decision to assume a K is really a decision to assign e. Assume & Assign 365(f) i. Assignment allows the estate to capture the excess value of a K for the BK estate, as well as escape liability 1. Under 365(k), the assignment relieves the trustee and the estate from any liability for breach of the K occurring after assignment ii. 365(f)(2) In order to assign a K, the trustee must: 1. assume the K exactly as it came into the estate 2. provide adequate assurance of future performance by the assignee

f.

iii. 365(f) Anti-Assignment Provisions 1. Generally the court will strike down anti-assignment clauses a. Sometimes, landlords will try to cloak anti-assignment clauses in use-clause provisions i. use-clause stating that the property can only be used for a specific use. These provisions will be jettisoned 1. UNLESS a. landlord to show actual and substantial detriment would be incurred by him if the deviation was permitted; OR b. Shopping Center under 365(b)(3) iv. Special Rule regarding Shopping Centers 1. First, strict performance of the lease will be required 365(b)(3) a. even use-clauses will be strictly enforced 2. Second, adequate assurance takes on a whole new meaning, it now includes: a. the source of the rent b. that the financial condition and operating performance of the assignee be similar to that of the debtor when the debtor was first granted the lease c. that the percentage of rent will not decrease substantially d. that assignee will be held to all provisions of the previous lease, AND the assignees presence will not violate any other leases in the shopping center (exclusivity agreements) e. assignment will not disrupt any tenet mix or balance in the shopping center v. Exceptions to Assignments 365(c) 1. 365(c)(1) Personal Services (non-delegable duties) a. if applicable non-bankruptcy law would excuse the 3d party from accepting or rendering performance to an entity which is not the debtor, BK will not force 3d party to perform/accept performance (Consent from 3d party is absent) 1. Ex. Cant assignment Michael Jordans duty to play basketball for the Chicago Bulls to Donald Trump ii. This provision also bars assumption by the trustee or DIP, if the 3d party doesnt accept iii. Also applies to patent cases, and contracts with the US government 1. patent cases cant force patent holder to allow another company access to its patents 2. cant force US government to contract with anyone other than who they chose 2. 365(c)(2) Financial Obligation Contracts a. Cant force a party to make a loan, extend credit, or extend debt financing to a debtor or assignee after BK is filed Reject 365(g) i. rejection is treated as a breach, but that breach is dated to the moment before filed BK, so claim is treated as a general unsecured debt 502(g)

1. rejection = pre-petition breach ii. 3d party is no longer obligated to perform its duties under the K, and can file a claim for any damages it suffered due to the breach (general u/s) iii. if the K is an unexpired lease, the landlord has the equitable right to retake the premises iv. if the K has a non-compete agreement which would give rise to an injunction if the K was breached, and the trustee rejects the K, the injunction will go into affect 1. rejection = pre-petition breach, pre-petition breach = injunction to enforce non-compete agreement (after 3d party gets MFR and goes to state court) a. there is no monetary substitute for the non-compete agreement performance, so it is not discharged via BK v. Special Cases 1. Three types of special cases a. is landlord, 3d party in tenant 365(h) b. is a seller of R/E, and 3d party is purchaser 365(i), and (j) c. is a licensor of intellectual property, and 3d party leases 365(n)

2. in these cases, the 3d party has two choices

a. take the rejection as breach, get out of the K, and file a claim for u/s damages b. force to honor K 1. continue to stay in property 2. force to sell the property 3. allow 3d party to continue to use IP ii. However, cannot force to perform his obligations under the K 1. doesnt have to provide heating/air conditioning, electricity, elevator service iii. Moreover, 3d party must still continue to perform his obligations under the K (pay rent, royalties, purchase price, etc.) iv. 3d party waives all collection rights as well 1. 3d party is only allowed to offset whatever portion of the rent = his damages g. Do Nothing Limbo Period i. time period in-between filling the BK, and the trustee finally deciding to reject or assume the K ii. During this time period, the K is unenforceable against the BK estate, but the non-debtor 3d party may still have obligations that he must perform 1. if the K is eventually assumed, this problem is not important, because all money due to the non- will be awarded an administrative claim status 2. If the K is eventually rejected, things become more difficult a. to the extent the 3d party is forced to perform during the limbo period, the non- is entitled to compensation

i. his compensation will be provided as an administrative

expense, but only for the value of the benefit the estate actually received iii. Special Rule Commercial R/E and Commercial Personal Property 1. Commercial R/E Leases 365(d)(3) (see problem 8.4, page 342) a. the trustee must perform all obligations (include paying rent, taxes, etc.) that are required under the K, until the K is assumed or rejected i. this obligation starts at the time the petition is filed ii. the full claim is granted administrative expense status, not just the portion the portion that benefits the estate 1. trustee must pay the full contractual rate of all the obligations regarding the lease of the commercial R/E iii. true whether uses the property or not

2. Commercial Personal Property Leases 365(d)(5) (8.5 on 343) a. Goes into affect 60 days after the filing of the petition, if the
trustee has not assumed or rejected the K, the trustee must pay all of the obligations under the K at the full contractual rate i. this is true whether uses the property or not ii. for the time period between filing and 60 days after filing, 3d party only gets administrative expense status for the portion which actually benefited the BK estate b. Generally applies to equipment leases 13. Avoiding Powers of the Trustee a. General i. Generally, there is a two step process in the avoidance powers of the trustee 1. First, the trustee avoids the transfer (via fraud or preference, etc) 2. Second, the trustee uses 550 to recover either the transferred property, or its value, for the estate a. REMEMBER, trustee will often just sue to get cash value of the interest transferred i. thus if transferred a list of subscribers to X worth $150,000, the trustee will sue X for $150,000 Not for the list back ii. Who can be liable under 550 1. the entity to whom the initial transfer was made, or the entity for whose benefit the transfer was made a. initial transferee = First party who has dominion and control over the property b. Fraudulent Transfers 548 i. Generally 1. the fraud provisions act as a safety net for creditors ii. Actual Fraud 548(a)(1)(A) and UFTA 4(a)(1) 1. Under 548, there is a reach back period of 2 years, so trustee can analyze all transfers/obligations incurred for the two years prior to filing BK a. Remember, the trustee can invoke the UFTA 4 year reach back provision under 544(b)

2. Trustee must demonstrate a. actual intent to hinder, delay, or defraud creditors i. a transfer is still fraudulent if did not intend to prevent his creditors from being paid, but intended only to delay the moment of payment for a while 3. Actual Fraud can be hard to prove, because it requires proving intent, which is subjective a. Use the badges of fraud to see if intent existed i. transfer made in secret ii. transfer made to a family member/insider (Dean pg 404) iii. retained possession and use of the property after the transfer iv. there was no consideration for the transfer, or less than full consideration v. was insolvent at the time of transfer vi. transfer was of substantially all of s assets 4. Defenses to Actual Fraud for 3d parties (problem 9.1 page 397) a. Good Faith Transferee for Value i. initial transferee 548(c) 1. the initial transferee took the transfer in good faith, and gave reasonable value for the transfer Must have GF and have paid value a. GF = could not have known about s financial hardships 2. in this case, the trustee could avoid the transfer, recover the property, and the good faith purchaser would be allowed a secured claim on the collateral for the amount that he paid debtor ii. immediate/mediate transferee of initial transferee 550(b)(1) 1. this clause protects a subsequent transferee, who had no involvement with the initial transfer 2. If subsequent transferee takes transfer in Good Faith, and pays reasonable value to original transferee, subsequent transferee is protected, and the transfer is not voidable or recoverable a. Had to give value b. Had to have had Good Faith = not known anything about original transfer 3. in this scenario, the trustee will likely try to recover the value of the transfer from the original transferee iii. Constructive Fraud 548(a)(1)(B) 1. Do not have to show any fraudulent intent on the part of the debtor a. just prove objective elements 2. 2 Elements of constructive Fraud (NEED BOTH) a. received less than reasonably equivalent value in exchange for the property i. reasonably equivalent is not defined, just a rough test

b. When mad the transfer, it w was unlikely that could satisfy all of his creditors claims i. was actually insolvent at the time transfer was made 1. liabilities exceeded non-exempt assets) ii. was engaging in a business with unreasonably small capital at the time of transfer 1. subjective and industry dependant iii. believed at the time of transfer that he would incur debts beyond his capacity to repay 3. Most of the litigation that occurs in this area revolves around the reasonably equivalent value a. some general rules i. the price received in a F/C sale conducted within the state law qualifies for reasonably equivalent value BFP pg 408 ii. Gambling losses will be treated as reasonably equivalent value Allard pg 415 1. at the time the bet is made has a real possibility of winning money 2. entertainment value also counts for something in the analysis iii. Special Rule Charitable Contributions 548(a)(2) 1. charitable contributions will not be voidable: a. if they dont exceed 15% of s annual income; OR b. does not exceed s historical giving pattern 2. HOWEVER, the above exceptions may still be voidable as an Actual Fraudulent transfer c. Trustee as Successor to Actual Creditors/Strong Arm Clause 544 i. Under 544, the trustee is using state law to fraudulent void transfers and bring transferred property back into the estate 1. Main advantage to using this provision is that the reach back period is 4 years from the date of filing (Not 2 years as is the case in 548) 2. With both 544 and 548 the trustee must bring his challenge to the transfer within two years after filed his petition (546) ii. There are two options that the trustee can use under 544 1. 544(b) Trustee can act as a successor to an actual creditor a. here, the trustee steps into the shoes of an actual creditor i. There must be an actual unsecured creditor who is still existing at the petition date, who has standing to avoid the transfer 1. standing = claim must have existed on the date of the transfer b. the entire transfer will be avoided if the above is satisfied, no matter how small the i. Also, all creditors share in the recovery, not just the creditor whose standing the trustee assumed 2. 544(a) Trustee can use the Strong Arm Clause

a. The purpose of this clause is to allow the trustee to avoid secret transfers b. here trustee steps into the shoes of a hypothetical creditor, and commences a priority battle with real priority creditors i. the critical time frame is date the BK was filed c. 2 situations covered i. enables the trustee to avoid unperfected security interests in personal property (9.6 pg 431) 1. if any possible hypothetical creditor would have a greater priority than the transferee, the transfer is avoided a. IF an unperfected security interest would lose to a lien creditor under the UCC, the transfer is recaptured i. Thus, if the security interest is unperfected at the time of filing the petition, then the trustee as hypothetical lien creditor will win ii. however, the converse is also true, if the interest was perfected before filing date, trustee cannot prevail under 544(a), and must use a different provision

ii. trustee can set aside unrecorded real property

conveyances (9.7, 434) 1. If under applicable state law, the a Bona Fide Purchaser would take title over an unrecorded interest in real property, the unrecorded interest will be wiped out a. Only care if the interest was recorded before the BK petition was filed i. this depends heavily on state law, and their recording statutes ii. Also depends heavily on what state law considers notice some states may say that active possession of the property w/o recording will still trump any BFP b/c possession gives notice 3. Special Protection for Purchase Money Security Interests a. if a creditor lends money to specifically to buy the collateral securing the loan, the UCC gives that interest priority over a judgment lien i. Creditor must still perfect its security though

1. Creditor has 20 days from day gains

possession of the collateral to file its security interest a. This can be done even if files BK before the 20 days are up the automatic stay does not prevent the creditor from perfecting its security interest iii. Constructive Trusts 1. these are legal fictions that a court creates, stating that debtor was holding the property for the creditor, and thus never had legal title a. Courts are divided on whether they buy this argument i. Most just say the trust was fictitious, and is nothing more than a claim that the creditor is exercising with the hopes that court will grant it special priority d. Preferences 547 i. Almost entirely based on notions of creditor equality, this provision allows the trustee to set aside transfers that, while perfectly legal when made, preferred one creditor over the others 1. the trustee has the power to avoid any transfer of any interest in property of any kind ii. 547(b) Trustees Prima Facie Case (need all 6 prongs) 1. transfer of s property 2. to or for the benefit of a creditor 3. the transfer must be on account of an antecedent debt a. i.e. the debt must have been owed prior to the payment/transfer i. pre-payments are not considered preferential, they are securing a future good or service ii. gifts are not preferential payments (they maybe fraudulent conveyances though) 4. the transfer must have been made within the 90 days prior to s filing bankruptcy a. however, if the preferential payment was executed to, or for the benefit of an insider, the reach back period extends to one year prior to filing of petition 5. the transfer was made while was insolvent (liabilities greater than assets) a. when using the 90 day reach back prong, it is always assumed that was insolvent, so the creditor must prove was solvent when the payment was made if they hope to win 6. improvement in position test a. if the creditor received more than they would have received had the payment never been given, and instead the creditor had to take its pro-rata share of a Ch. 7 liquidation i. Under this requirement, payments to fully secured creditors will not be considered preferential 1. by paying the secured creditor, debtor is simply decreasing the secured creditors claim on s property, there is no decrease in the available proceeds for the estate, so no preferential

treatment exists (besides, secured creditor would get paid in full any way iii. GENERAL RULE any payment to an unsecured, or under-secured creditor are presumed to be preferential (prob. 9.9 on page 449 is helpful) iv. Remember, the second prong of the analysis is powerful 1. Example: P guarantees a $5,000 loan for provided by C. One month before files bankruptcy, pays C the full $5,000 back. a. This is a preferential transfer, and the trustee can recover from C; OR i. the trustee can recover from P, because the transfer was made for the benefit of P (P is no longer liable to C for the original loan). Thus, the trustee could sue P for the $5,000, even though P was never given the money 1. P would have to file a claim in s BK v. Earmarking Doctrine 1. Where a third party loans debtor money on the condition that it be used to pay a specific creditor/debt a. This transaction is not considered to be preferential i. No money is leaving the estate, and the obligations of the debtor are not increasing; one creditor is simply replacing an earlier creditor. The distribution scheme for the creditors in the bankruptcy estate is not affected 2. Requirements a. both creditors must be unsecured b. one of the creditors must be paid with the borrowed money vi. Defenses to Preferential Transfer (Top three) 1. 547(c)(4) subsequent advance of new value (pg 469) a. the trustee cannot avoid a transfer to, or for the benefit of, a creditor, to the extent that after the transfer, the creditor gave new value to, or for the benefit of, the debtor i. This new value added cannot be secured debt, and it cannot be paid for afterwards b. Example: owes C $10,000 on May 1. On May 14, sends C a payment of $8,500. On May 20, C ships new goods to worth $4,000. On May 30 files bankruptcy i. under 547(b), the trustee would be able to recover the full $8,500 payment 1. but because of 547(c)(4), the trustee can only recover $4,500, because C gave new value subsequent to the $8,500 payment a. $8,500 $4,000 (new value added) = $4,500 2. 547(c)(1) contemporaneous exchange for value a. 2 requirements i. both and the creditor intended for the transaction to be a contemporaneous exchange for new value given to ; AND

ii. there was in fact a substantially contemporaneous exchange for new value b. Example: purchases a car from C. gives C $5,000 in cash, and C hands the keys and the title to the car. i. not preferential b/c the exchange was contemporaneous, and involved new value added to s estate c. Special Rule regarding checks i. the date of transfer (exchange) when checks are involved when the bank honors the check 1. NOT when the debtor hands the check to creditor, and not when creditor deposits the check a. However, most courts will hold that if the creditor waited a couple of weeks to deposit the check, without s knowledge, the transaction will still qualify. i. but if it was common practice for the creditor to hold s checks for three weeks before depositing them, then the parties will not have meant for the exchange to be contemporaneous, and thus the transfer will be preferential d. Example 2 On June 5 buys 10 crates of bubble gum from J. gives J a check for $1,000. J tells that he deposits all checks on the 1st of every month. J deposits the check on July 1, and it clears the bank on July 6. i. this will be a preferential transfer 1. the parties did not intend for the transfer to be contemporaneous 3. 547(c)(2) ordinary course of business a. If the payment is within the ordinary course of business, then the trustee will not be able to recapture the payment under preference liability i. ordinary course of business can be judged wither form 1. the stand point of the industry norm OR 2. from the norm between the and creditor b. 3 requirements i. payment of a debt ii. debt must have been accrued in the normal course of business for both and creditor iii. payment should be through the ordinary course of business for each party 1. either a. the structure of the payment was normal in the industry (objective) OR

b. the structure of the payment was within

the normal bounds of payments between the particular and creditor 14. Discharge a. General i. the rational for providing a discharge 1. perceived public good incentive for to continue to work and be productive in society ii. a can never waive his right to a discharge, through contractual agreements or other wise -- 524 iii. s never have to surrender their human capital (future wages) to creditors in order to get a discharge b. The automatic stay in BK is automatically terminated when a discharge is either granted or denied i. However, a general injunction against suing the debtor for a discharged debt is put into force 1. No court is allowed to hear an action to collect a discharged debt a. if a court happens to pass judgment anyways, the BK court will strike down that courts ruling 2. if a creditor tries to collect a discharged debt, he will face sanctions c. Generally, you cannot be discriminated against for filing BK 525 i. cannot be discriminated against by 1. governmental units (state refuses to grant driver license until debt paid) 2. employer (cant fire b/c he filed BK) ii. However, must be able to prove that the only reason he was discriminated against was the BK filing (hard to do) d. Achieving a Discharge i. a will be granted a discharge unless the trustee or creditor file a timely objection e. 2 Exceptions to Discharge i. 727(a) a complete denial of discharge of all of s debts (almost always due to debtors misconduct) 1. 727(a)(1) Corporations cannot receive a discharge of debt, b/c they are not individuals a. Corporations cease to exist after ch 7 2. 727(a)(2) cannot hinder, delay, or defraud a creditor by transferring, destroying, or concealing property (i.e not listed on schedules) a. must list all property he owns, even if it is valueless or illegal 3. 727(a)(3) failed to keep adequate records from which the debtors financial condition or business transactions might be ascertained a. UNLESS i. such act was justified under the circumstances 1. like the husband always took care of such matters, and had no warning anything was wrong a. sophistication of is very important here 4. 727(a)(4) submits a false schedule or renders a false oath a. if knowingly assert a false condition on your BK filings (like failing to list property you have)

i. this is true even if the property you own is illegal to posses still must be listed on schedules (marijuana is a good example) 5. 727(a)(8) previous BK discharge a. if a previous chapter 7 case was filed within 8 years of s current chapter 7 i. measured from petition date to petition date b. if previous case was a chapter 11 or 13, and the current case is a chapter 7 i. must have 6 years pass between petition dates, and then only if the chapter 13 plan was a 70% or greater pay back plan c. if previous case was a chapter 7, and current case is a chapter 13 (1328) i. 4 years must pass between petition dates d. if previous case was a chapter 13 and current case is a chapter 13 (1328) i. waiting period is two years ii. 523(a) a list of specific debts that will not be discharged 1. In order for these debts to not be discharged, creditor must timely object to their discharge a. once that is done, and court declares the debt not dischargeable, the creditor can proceed to state court and pursue state court collection remedies 2. Top 3 debts not allowed a discharge a. fraud, embezzlement, and intentional torts 3. Fraud a. elements of a fraud i. made a false representation of fact ii. knew the representation to be false when made iii. made representation with the intent and purpose of deceiving the creditor iv. creditor justifiably relied on the representation v. representation was the proximate cause of creditors injury b. Requires creditor/trustee to prove actual fraudulent intent on the part of which is pretty hard to do c. SPECIAL RULE regarding CREDIT CARDS i. 523(a)(2)(c) rebuttable presumption of nondischargability on all credit card transactions which fall under the following: 1. cash advances made with in 70 days of filing (if the aggregate amount was more than $750) 2. luxury goods items purchased with in 90 days of filing (if aggregate amount of over $500) ii. can rebut the presumption by showing that she didnt have the intent necessary for fraud (i.e. that she intended to pay the amount back when it was charged)Barney