CLASS 1 – STATE LAW DEBT COLLECTION
Race to Get the Lien on the Property:
Consensual Lien
Personal
Article 9:
Property
First to File (inchoate) OR
First to Perfect
Real Estate
Record the Mortgage
Non-Consensual Lien
Majority - Point of Levy
Minority - Delivery of Writ to Sheriff
Record the Judgment (past notice of
levy)
I) Judgment Lien by Recordation
a) Obtain Liens by Recordation
i) Judgment creditor can execute at leisure
ii) Secured place in line against other judgment creditors
II) Perfection – Article 9
a) Two Elements of Perfection
i) Attachment (Mortgages)
(1) Three Elements of Attachment
(a) D signs the security agreement
(b) Creditor gives value
(c) D has rights in the collateral
ii) Filing
b) Relation Back Doctrine
i) If Creditor Files, then Attaches – Priority Measured from time of filing
(1) Inchoate until creditor files
ii) If Creditor Attaches, then Files – Priority Measured from point of filing
c) Must wait 10 days between judgment and execution under Federal Rules
i) Time used to pay or appeal
(1) If D appeals, execution doesn’t stop unless D posts a bond which Creditor
gets from bond proceeds
III) Levy
a) The act of the sheriff taking custody over property of the debtor
i) Credit Bureau – Sheriff does not have to seize the property
(1) It is enough that the officer expresses control over the writ
(a) If goods left in hands of creditor for unreasonable time with consent of
the creditor, the goods will be lost
b) Apparent Ownership Problem
i) D seems to have rights in the assets, but creditor has claim to the assets
(1) “Act” (on chart) cures apparent ownership problem
IV) Execution
a) Sheriff will advertise property for public sale and sell it to the highest bidder
i) The proceeds of the sale will be paid to the judgment creditor until the credit
is paid in full
(1) Any remaining proceeds will be paid back to the judgment creditor Unless
(a) Some subsequent judgment creditor levied on the property
(symbolically) while the property was at the courthouse
V) When a D has serveral judgments against him they become liens on after-acquired
property simoltaneously even though they were docketed at different times
CLASS 2 – GARNISHMENT
I) Vocabulary
a) Garnishee – Third party who
i) Owes a debt to the principal debtor
ii) Has property of the principal debtor
iii) Has property in which the principal debtor has an interest
b) Garnishor – Judgment creditor
i) Must notify both the garnishee and the judgment debtor
(1) Judgment debtor does not want to deposit exempt funds into the garnished
bank account
c) Freeze everything as it was on the date of the writ of garnishment
i) Garnishor stands in the shoes of the Judgment Debtor vis a vis the Garnishee
(1) **As far at the Garnishee is concerned, the Garnishor is the Judgment
Debtor
II) First in Time for Garnishment
a) Court Split
i) Priority date on delivery of writ to sheriff
ii) Priority date on delivery from the sheriff to the garnishee
III) Pro Rata If Multiple Writs Delivered at the Same Time
a) $6 Assets ---- $8 claim (1,2,3,2)
i) Divide: $ Assets/ $Claim = Rate of Return: 6/8 = .75 on the dollar
ii) Multiply: Rate of Return x Individual Claim (.75, 1.5, 2.25, 1.5)
IV) If D owes the Garnishee anything, Garnishee may offset debt from garnishment
before pro rata determination
a) Garnsihee’s unexercised right of setoff takes precedence over garnishor
V) Garnishor Gets a Temporal Net
a) Time between the Writ of Garnishment and the Garnishee’s answer
i) Garnishor may “catch” obligations arising in favor of the debtor
ii) Garnishment of a bank account will”catch” amount on deposit and
amounts deposited prior to the garnishee’s deadline
(1) If the garnishment is contested at trial, deadline may extend to end of trial
iii) Garnishee has responsibility not to reduce the value of the recovery after the
writ of garnishment
VI) Garnishee leasing property of the Debtor
a) Garnishee entitled to a right of turnover after the lease expires and right to receive
the rent payments
b) First in Time
i) Delivery of writ of garnishment beats the interests of after-acquired lessee
VII) Ancillary Lawsuit Against the Garnishee
a) If a garnishee fails to comply with the terms of the writ of garnishment, then the
garnishee may be held liable for the full amount of the debt (Webb)
VIII) Exempt or Consumer Credit Protected Property
a) If money is automatically debted in to the account, then it is not entitled to
protection of the Wage Garnishment or Consumer Protection Act
i) Ohio court has held that D should be given opportunity to withdraw funds
CLASS 3 – EXEMPTIONS FROM SEIZURE
I) Categories of Exemptions
a) Homestead – Must own, not rent
b) Each state has its own categories – must fit property into category to exempt
i) Much has to do with where you live
II) Most States have Caps
a) Different for different kinds of people (family, individual…)
III) Only Apply to Judgment Creditor’s Efforts to Reach the Property
a) No protection for consensual liens– waived- unless otherwise provided by statute
IV) IRS is brutal – Not constrained by any state exemptions
V) Distribution Example
a) Parties
i) Secured Creditor $1,500
ii) Debtor Exemption $1,000
iii) Judgment Creditor $3,000
iv) Car Value
$2,800
b) Distribution of $2,800
i) Secured Creditor - $1,500
ii) Debtor $1,000
iii) Judgment Creditor $300
VI) Classification
a) Disputes between debtors and creditors often center on classification issues
i) Look to things like annuity contracts, tools of trade which are often exempt
VII) Proceeds and Tracing
a) Courts split on proceeds from exempt money
i) Proceeds from exemptions extend to property acquired from exempt property
(1) Requires proof through tracing Williams
ii) Once money received, legislation must protect converted proceeds Holmes
VIII) Forcing Sale of Exempt Property
a) Judge Won’t Do It Unless Requesting Party Recevies Money
i) First, Value the Property (Amount of proceeds from property)
(1) Usually liquidation value rather than market value for valuation purposes
ii) Second, Line Up All of the Claimants in Order
(1) CommissionsConsensual LiensExemptionsNonconsensual Liens
iii) Third, Determine the Amount of Claim Each Creditor Will Receive
CLASS 4/5 – FRAUDULENT TRANSFERS
I) Types of Fraudulent Transfers:
a) 4(a)(1) Actual – Mens Rea required
i) Transfer Made or Obligation Incurred (see: (b)(i)(1)(a))
ii) With actual intent to hinder, delay, or defraud any past, present, future creditor
(1) Look to 4(b) – Factors to determine hinder, delay, or fraud
b) 5(a) Constructive – Fraudulent, but no mens rea required (3 elements)
i) Three Elements
(1) Transfer made or obligation incurred by D that had other claims against it
(a) Obligation Incurred – D guarantees for no benefit OR LBO
(2) Lack of Reasonably Equivalent Value in Exchange
(a) 3(b) May determine reasonableness by looking at the circumstances
(3) Insolvency
(a) Either at the time of the transfer or as a result of the transfer
(b) 2(a) Balance Sheet Test – Are debts greater than assets?
(i) §1(2)(ii) – Exempt property does not count as an asset
(c) 2(b) – Presumed insovlent if generally not paying debts as come due
ii) ONLY works to protect CURRENT creditors – not future creditors (Try § 4)
c) 5(b) – Constructive fraud in transfers made to insiders
d) 4(a)(2)Quasi-Constructive
i) Transfer Made or Obligation Incurred
ii) Without Receiving Reasonably Equivalent Value AND the D:
(1) Engaged or Was about to engage in transaction where remaining assets
were unreasonably small in relation to the transaction OR
(2) Intended to incur, or believed that he would incur, debts beyond his ability
to pay as they became due
II) Remedies
a) 7(a)(1) – Avoid the Transfer – Lien or Obligation Incurred (LBO) Only
b) 7(a)(1)/8(b) – Get a Judgment – Works For Transfers of Property
i) First, avoid transfer under 7(a)(1) in order to get a right to judgment in 8(b)
(1) Creditor may receive lesser of:
(a) Amount of the claim OR
(b) Value of the property
(2) If transferee improves property,creditor may not get improvement $ 8(c)
(a) Mechanics Lien – Worker that adds value gets lien for value
c) 7(b) – Levy Execution on Assets Transferred
i) If creditor already has judgment against D,may levy as if D still in possession
III) Transferee Protection (All Three Defenses Require Good Faith)
a) 8(a) Transfer not voidable if transferee good faith and reasonably equiv value
i) Only works with 4(a)(1) because others require less than reasonably equiv
b) 8(d) If transferee had good faith and gave full value, then full defense, may get:
i) 8(d)(1) Lien or right to retain interest in the asset transferred
(1) Use this if the judgment creditor is seeking 7(b)
ii) 8(d)(2) Enforcement of any obligation incurred
iii) 8(d)(3) Reduction in the amount of the liability of the judgment
(1) They get their money back – Use with 7(a)(1)/8(d)(3)
IV) Debtor Protection
a) Courts split as to rememdy under UFTA to protect nonexempt turned into exempt
property
V) Leverage Buyout Option
a) Company incurs obligation to lender; gives lender lien on all assets
i) Lenders’ money goes to the shareholders that are being bought out
(1) Only value D Co. gets is new management
ii) IF creditor can make a showing under 5(a), 4(a)(1) OR 4(a)(2) THEN 7(a)(1)
is enough to avoid transaction
CLASS 6/7 – PROPERTY OF THE ESTATE
I) What comes into the estate?
a) 541(a)(1) – Brings in all property of the D into the estate, regardless of value
i) As long as property is something D can sell, TIB will probably accept it
(1) If the property is worthless, D can abandon the property - 554
ii) Estate’s rights to property should be no better than D’s
(1) Restrictions on Transfer
(i) 541(c)(1) – Property that restricts D’s transfer still comes into the
estate
1. Exempt property comes into estate – subsequently dropped:522
2. Entitlements that become legally enforceable only with passage
of time become property of the estate
i. Question of whether the D could have sued for the
property
b. If D has great enough power to amend or terminate the
trust, it becomes property of the estate
3. Nontransferrable entitlements allowed in the estate if they are
bought and sold regularly – Liquor licenses
(ii) Becomes part of the estate even if D does not have possession
(iii)Becomes property of estate even if subject to a lien
iii) 541(a)(6) Offspring, rents, proceeds of property of the estate
(1) Goose Eggs, Dividends of stocks, rent checks
iv) 541(a)(5) – Any interest in property that would have come into estate within
180 days after filing by life insurance, will, demise, property settlement
agreement…
(a) Income from trust that comes in within 180 days of triggering event is
part of the estate
(2) If triggering event happens within 180 days of filing (a)(5) trumps (c)(2) –
trust becomes a legally enforceable interest, and therefore the trust comes
into the estate
v) Paycheck from pre-petition work comes into the estate despite 541 (a)(6)
II) What does not Come into the Estate
a) 541(a)(6) - D allowed to keep all wages earned after commencement of the case
i) Property subsequently bought by the D does not come into the estate
ii) Prizes and awards that come from pre-petition labor
b) 541(b) - Any power D may hold solely for the interest of another entity – Trustee
c) 541(c)(2)Reitrement Account unless it is ERISA or covered under state law
i) If there is an anti-alienation provision, the retirement fund likely stays out
(1) If D still retains significant power over the trust, then it may come in
(a) Property that is subject to contingency (see (I)(ii)(1)(i)(2)(i)
d) 541(c)(2) – Spendthrift Trusts (no control, rations funds out)
i) Future Interests in corpus protected unless triggering event occurs w/in 180
days of filing
CLASS 8 – THE AUTOMATIC STAY
I) Allows parties to maintain status quo while court sorts things out
II) 362(a) Prohibits creditor’s attemtp to continue to collect from D or the D’s property
a) (1) – Commencement or Continuation of proceedings
b) (2) – Enforcement of a judgment obtained before commencement of the estate
c) (3) – Any act to obtain possession or control over property of the estate
d) (4) – Any act to create, perfect, or enforce any lien against the estate
e) (5) – Property of the Debtor
i) Post-petition wages – don’t become property of the estate
f) (6) – Any act to collect, assess, or recover a claim against D
i) Garnishment
g) (7) – Setoff of any debt owing to D that arose before commencement of case
h) Landlord/Tenant
i) Can’t kick D out – (a)(1), (a)(3), (a)(6)
III) 362(b) Exception to Stay
a) (1) Commencement or Continuation of criminal proceedings
i) Prosecution for pre-petition bad check
(1) Some say it involves the debt and is therefore in the stay
(2) Some say it is secifically within 362(b)(1)
b) (2) Commencement, Continuation, Collection of Paternity, Alimony, Support
i) Only post-petition alimony and support, not pre-petition
(1) Collection of property that is not property of the estate – post-petition
earnings
c) (3) Perfection of Transfer
IV) 566 - Utility company cannot refuse service for pre-petition debt
a) May demand deposit w/in 20 days for post-petition debt
i) If they shut off ignorant of filing, remind them of sanctions – 362(h)
V) Creditors generally prohibited from taking any individual action against D or D’s
Estate until stay is lifted
VI) Violations of Stay
a) Take No Affirmatve Steps to Collect
i) Creditors do not have to continue lending to D, but they may not send
“deadbeat” letter shaming D into making payments
ii) If Creditor receives payment, payment should be turned into TIB
(1) Could constitute a violation of the stay
iii) 362(h) Sanctions for violating stay
(1) An individual injured by any willful violation of a stay shall recover:
(a) Actual Damages
(b) Attorney’s Fees
(2) Punitive damages in appropriate circumstances
VII) Anything dealing with property or credit obtained after the stay does not apply to
362(a)
LIQUIDATION BANKRUPTCY
CLASS 9 – FEDERAL EXEMPTIONS
I) 522(d) Federal Exemptions
a) House – 15,000
b) Car – 2,400
c) Household Goods – 8,000
d) Jewelry – 1,000
e) (d)(5) Wildcard - Unused Exemption – 7,500
i) Parties need to use this strategically to maximize exemptions
f) Tools of the Trade – 1,500
i) May use that of D or dependent of D
g) Unmatured Life Insurance
h) Other Insurance Stuff – 8,000
i) Professionally Prescribed Health Aids
j) 522(d)(10) D’s Right to Receive SS, Welfare, Unemployment, Veteran’s
Benefits, Alimony...
k) 522(d)(11) Reward from crime victim’s reparation law, wrongful death of
dependent, life insurance of dependent, ….
II) D has the choice of State or Federal Exemption Law
a) State’s may opt-out of the federal system
III) Married couples may stack exemptions, but they must both choose the same law
IV) Lien Avoidance
V) Lien Impairment
a) Impair – Lien preventing the ability to cliam the exemptions (*Add WC)
i) If the creditor’s equity in the impaired property is greater than exemption,
than D can’t claim exemption
ii) If consensual lien impairs property, exempt amount becomes general
unsecured debt
b) 522(f)(1)(A) Exemption Trumps:
i) Judicial Lien
(1) Not for alimony, maintenance,or support
(2) Not assigned to another entity
ii) [Nonpossessory – As long as D possesses the goods
iii) Nonpurchase money – Loan not made for purchasing the collateral
iv) Security interest in]:
(1) Household items, Clothes, Jewlry, Appliances, Musical Instruments
(2) Tools of the Trade
(a) Remember Car ((d) is not meant to be mutually exclusive!)
(3) Professionally Prescribed Health Aids
c) *D may only avoid up to $5,000 if state opted out – 522(f)(3)
d) When would 522(f)(1)(A) be used:
i) In CA: Tort Claimaint or Medical Services
ii) When D does not claim exemption in timely manner provided by state
(1) Gives the D a second chance to claim exemption
iii) When states don’t opt out of federal bankruptcy and judgment creditor impairs
property not exempt under state law
CLASS 10 – THE CLAIMS PROCESS
I) 502(a) Claim of pre-petition interest is allowed
a) 502(b)(2) – Claim for unmatured interest is not allowed
b) Attorney’s Fees
i) Post-petition attorneys fees not allowed
ii) Pre-petition attorney’s fees provided for in K allowed
iii) Costs of sale of property subject to a lien
II) Post-petition interest allowed for oversecured creditors only
III) 506(a) All Secured Claims Covered
a) 506(c) TIB may cover reasonable costs in recovering secured property as
unsecured claim
i) Costs of sale may come before the lienholder’s claim
b) 506(b) Secured creditors may get post-petition attorney’s fees
IV) 506(b) - Oversecured Creditors get post-petition interest
V) Undersecured Creditors
a) Receive the amount of the collateral, and the rest becomes an unsecured claim
b) Not entitled to interest or post-petition fees
VI) Oversecured Creditors
VII) Timing
a) Date of FILING is key
i) Hit you with my car, file tomorrow – Claim (Garnishing post-petition wages
not prevented from stay)
ii) File today, hit you with my car tomorrow – No Claim
b) Corporation
i) File today, hit you with my car tomorrow – Claim
(1) Supreme Court has held that post-petition courts are part of doing business
– entitled to an administrative expense priority
CLASS 11 – PRIORITY AMONG UNSECURED CREDITORS
I) Secured Claimants Always Get Paid First
II) Unsecured Priorities – Pay 100% as long as possible, then go Pro Rata with next
level, then you are done!
a) 1 – Administrative Expenses
i) 503(b) TIB as trustee and lawyer
ii) Insurance protecting estate prior to sale
b) 2 – Gap Claims
c) 3 – Earned Wages
i) Must show claimant is employee rather than independent contractor
ii) If independent contractor – 75% of earnings w/in year were from bankruptcy
d) 4 – Contributions to Employee Benefit Plan
e) 5 – Agricultural Claims
f) 6 – Money Connected with Rental, Purchase, and Services of Property
i) Consumer down payment rule:
(1) Claims arising from pre-petition deposit of $ with D OR
(2) Purchase of services that have not been delivered or provided
g) 7 – Alimony, Maintenance, and Support
h) 8 – Taxes
i) (a) – Income Tax
(1) Within 4 Taxable years to get the priority
(a) If D filed between 1/1 and 4/15 – Previous 4 years
(b) If D filed between 4/15 and 12/12 – Previous 3 years
ii) (b) – Property Tax
(1) Must have been within a year of filing
(2) Penalties that make up for actual pecuniary loss
iii) (c) – Any current tax for which the D is liable
iv) (d) – Employment Tax
v) (g) – Penalty in compensation for actual pecuniary loss
(1) Only penalties that matter are those that substitute for interest
(2) Punitive Penalties don’t count
i) 9 – Federal Depository Institution
III) General Unsecured Claims
IV) No Claim At All
a) Any post-petition debt incurred
i) Utilities
ii) Attorney’s Fees
V) Punitive Penalties for not paying subordinate to general unsecured claims Nondischageable
CLASS 12 – DISCHARGE
I) 727 Global Denial – Going to Lose Entire Discharge – N/A to Chapter 13
a) (a)(2) – Transferred property with intent to hinder, fraud, delay w/in year of filing
i) Actual fraudulent transfer – Not constructive fraudulent transfer
b) (a)(3) –Destroy/Failure to Keep Adequate Records – Court must balance
i) Whether D’s failure to keep records really matters to creditors
c) (a)(4) – Fraud in Connection with the Case
i) (a)(4)(3) – Fraudulently giving money in conneciton with the case
d) (a)(5) – Failure to satisfactorily explain losses
e) (a)(6) – Refusal to answer questions
f) (a)(7) – Any of the above within a year
g) (a)(8) – Granted Ch. 7 within six years/ (a)(9) - Ch. 13(later)
II) 523(a) Rifle Shot – Certain Property Nondischargeable: Any Debt For:
a) (1)(a) – Taxes – 507(a)(2)/(a)(8)
b) Fraud - (2)(a) – Any debt for money, property, services, extension, refinancing
obtained:
(1) By false pretenses, false representation, or actual fraud
(2) By writing that is 1materially false 2representing d’s financial condition
3creditor reasonably relied upon AND 4 d made with intent to deceive
(a) Courts disagree as to whether a fraud that induces forbearance counts
when it is not being used to get any money
ii) (2)(c) – Luxury goods bought within 60 days from single creditor
(1) Aggragate more than $1,150
(a) Some courts say extravegant items
(b) Some courts say items not absolutely necessary
c) (a)(5) – Alimony, Maintenance, Support
(1) Even if state doesn’t recognize alimony (goes by alimony, not state law)
(2) The less the spouse is making, the easier it is to say that it is alimony or
support
(a) The more money the D has, the easier it is to say alimony or support
ii) (a)(15) – Divorce or Separation agreement UNLESS
(1) (A) – D does not have the ability to pay OR
(a) If D has too many obligations, this one has to go
(2) (B) – Discharging would result in a benefit to D that outweighs detriment
to spouse
(a) Cuts in favor of D if spouse does not need the money
d) (a)(6)Willful or Malicious Injury
e) (a)(7) Fine by Government Unit (Subordinated, but nondischargeable)
f) (a)(8) Education Loans
g) (a)(9) – Drunk Driving
h) (a)(13) Restititution
i) (a)(17) Court Fees
III) Choice Between Rifle Shot and Global
a) Go for the rifle shot - If all other debts are discharged, then creditor will be in a
much better position post-bankruptcy
THE DEBTOR’S POST-BANKRUPTCY POSITION
ClASS 13/14 – REAFFIRMATION
I) 524(a) Post – Discharge – A Discharge:
a) (a)(2) – Enjoins commencement or continuation of action to get discharged Debt
i) Begins at point of discharge, never ends
ii) Does not apply to debt that is not discharged
iii) Has nothing to do with post-petition claims
iv) 362(a) Automatic stay ends at the time of discharge
II) 524(c) Reaffirmation – Deaccelerate and Renegotiate
a) Legally binding agreement to waive discharge – Renegotiation of terms of debt
i) 362(a) – Argue not trying to collect on old debt, but rather making a new offer
b) Incentives for Unsecured Debt
i) Agreement not to repossess collateral
ii) Offer of Future Credit
iii) Threat of an Objection to Discharge
c) Procedure 524(c)
i) (1)D must file the reaffirmation before discharge
ii) (2) Agreement has clear statement advising D that D may rescind any time
before discharge or within 60 days after agreement is filed
iii) (3) Must file the agreement with the court with affidavit of attorney
(1) Fully informed and involuntary agreement of D
(2) No undue hardship on D or dependent AND
(3) D fully advised about legal effect and consequences
(a) Unsecured Debt – Must be some discernible benefit (see (II)((b))
(b) Secured Debt –
(i) D’s Ability to Secure Debt
(ii) Collateral/Value Ratio – If value is low and claim is high
iv) (4) Rescission Period must pass with no rescission
v) (5) Court must inform the D of the effect of reaffirmation
vi) (6) Court may intervene if D does not have an attorney - Paternalistic
III) 722 Redemption – Right to Strip Debt Down to Value
a) D may redeem:
i) Tangible Personal Property
ii) Intended for household/family use AND
iii) D must exempt Property or TIB must abandon
(1) TIB will abandon property whenever there is an undersecured creditor
(2) If the avaialable exemption is short of the necessary amount, D may
acquire the money from friend or family and pay off the estate
b) D Must Immediately Pay the Lesser of:
i) Full Loan
ii) Full Value of Collateral
IV) Retention (Ride Through) – Goes Against Acceleration of all Things Owing
a) Keep making payments without reaffirming or redeeming
i) Non-recourse option for the D
(1) Only right creditor has is against the property – No personal liability
(2) Strictly at the D’s option – No negotiation
(3) Discharges the unsecured portion of the debt
(4) Must be at least current going into bankruptcy
V) Discharge of Government Debts
a) Can’t Sue the State in Connection with the Dischargeability Issue
i) D must determine dischargeability of debts by motion, rather than suit
(1) If the state still pursues:
(a) *Go after state official
(b) Use the 14th Amendment
(c) Look to a Waiver Provision
VI) 525 Discrimination
a) Employers may not discriminate solely on account of bankruptcy
CHAPTER 13 BANKRUPTCY
CLASS 15 - PAYMENTS TO SECURED CREDITORS
I) 362(d) Lift of Stay
a) (d)(1) For Cause, Including Lack of Adequate Protection
i) Decline in Value
(1) Rate of Depreciation - If the value drops faster than payments coming in
(a) Won’t be long until collateral is worth less than what is owed
(i) 361(a) – Periodic Payments making up for decline in value
(ii) 361(b) – Additional or Replacement Lien on other property
(iii)Oversecured Creditors have a harder time making argument
because of the equity cushion
1. Best to argue for lack of protection when cushion dissolves
ii) Collateral Might Get Lost or Destroyed
(1) Value relative to the debt is irrelevant
(a) 361(c) – Purchasing Insurance can easily meet this argument
b) (d)(2)BOTH Lack of Equity AND Not Necessary for Effective Reorganization
i) (d)(2)(A) Lack of Equity AND
ii) (d)(2)(B) Not Necessary for Effective Reorganization
II) Payment to Secured Creditor
a) Three Step Approach
i) What is the total claim that existed at the time of the plan
(1) Legitimate claims under 502
(a) Unpaid Principal
(b) Pre-Petition Interest
(c) Pre-Petition Penalties
ii) What is secured/unsecured?
(1) Whatever the collateral is worth is secured
(2) Whatever is in excess of what the collateral is worth is unsecured
(3) If creditor is undersecured, they will have a bifurcated claim
iii) What is the creditor entitled to demand for secured claim? 1325(a)(5)
(1) Go along with the plan
(2) Surrender collateral OR
(3) 1325(a)(5)(B) Retain Lien and Receive Present Value of Secured Claim
(a) Value of Collateral
(i) Somewhere between liquidation value and fair market value
1. D will argue low to reduce the amount of the secured debt
2. Creditor will argue high to get more money
a. May be a conflict of interest representing both parties
(b) Interest Rate
(i) Look at the interest that we would charge today if making the same
loan
(ii) 506(b) Oversecured claims get interest at contract rate
III) Turnover Power
a) 1303 D inherits TIB’s 363 Power
i) Creditor’s Failure To Return Power Violates Automatic Stay
REPAYING HOME MORTGAGES
I) Payments to the Home Mortgagee
a) 1322(b)(5) Cure and Maintain (Works for any property)
i) Maintain Payments according to terms of the original plan
ii) Cure Pre-petition arrearages within reasonable time
(1) Reasonable Time – No longer than length of plan
(2) Courts split over interest on unsecured pre-petition arrearages
(a) Secured arrearages definitely get post-petition interest – Becomes part
of the secured claim that must be paid in plan
(3) 1322(c)(1) – Cure must take place before foreclosure sale
b) Deacceleration is Part of Curing
i) Implied Exception to:
(1) 502 – Filing of bankruptcy serves to accelerate all claims
(2) 1322(d) – Mortgage payments outside of plan don’t run afoul of max time
period
c) Payments Outside of the Plan
i) If you were to pay in the plan, you would have to do it in 3-5 years, which
would be too much for a D in bankruptcy on a 30 year mortgage
ii) Can’t extend the mortgage any longer than the plan allows
(1) Would be modifying while curing and maintaining – Not Allowed
II) Choice Between Cure and Maintain and Pay in the Plan
a) If wildly oversecured creditor for a big debt – Better to pay outside of the plan
i) Get to stretch the plan out longer
ii) There is no strip down advantage when the collateral is worth considerably
more than the debt
b) If wildly undersecured for a big debt – Better to Pay Within the Plan
i) Unsecured portion is only treated with other unsecured creditors
(1) Incentive to strip downthe claim so that you are only paying present value
on the secured portion
ii) If you cure and maintain, you are choosing to pay the full amount of the claim
CLASS 16 – PAYMENTS TO UNSECURED CREDITORS
I) Unsecured Creditor Entitlements:
a) All of the D’s Disposable Income
i) 1325(b)(2) – All income not reasonably necessary for maintenance and
support of D and D’s dependents
(1) Basic needs for support, unrelated to the D’s former lifestyle or status
(a) Aiming towards frugal, middle life income
(2) Contingency Cushion – Allow room for unexpected expenditures
ii) TIB or Unsecured Creditor retains standing to object to the plan
(1) 1325(a) Court arguably does through good faith requirement
iii) Secured Debt not necessarilly immune from challenge
(1) Unsecured creditors may object to a luxurious lifestyle protected by
secured debt
iv) Projected future pay does not have to be counted as disposable income
v) Charity – May give up to 15% of gross income regardless of history of giving
b) Pro Rata Payment With Other Creditors
c) At Least As Much As they Would Have Gotten In a Chapter 7
i) Time value of money, not just nominal value – Present value dollats
REASONS TO EXTEND TO FIVE YEARS (ONLY D MAY INITIATE)
I) 1325(a)(4) Best Interest to Creditor Test
a) D may have a lot of nonexempt property with a high value that they want to keep
i) Must give creditors at least as much as a 7 would have
(1) Disposable income may not cover unsecured creditor’s entitlement
II) Strip Down Undersecured Creditor
a) Must still pay present dollar value for the secured portion of the claim
i) Disposable income may not cover this
III) Super-Discharge
a) Courts may look at how long plan is to determine good faith
i) May have violently or maliciously torted someone which is dischargeable
(1) Court may say that the least you can do is give victim more cents on the
dollar
(a) 3 year plan is rarely per se bad faith
IV) 70% Payment to Unsecured Creditors
a) Preserves ability to get Chapter 7 discharge immediately or later
i) Otherwise, you will have to wait 6 years
V) 1322(a)(2) Unsecured Priority Claims
a) Must be paid in full during the course of the plan
i) May not be possible in a 3 year plan
CLASS 17 – PRIORITY REPAYMENTS
I) 1328 Super Discharge
a) 13 Plan Incorporates 507 Priority Claims
i) 1322(a)(2) Plan Must Provide Full Payment of All Priority Claims Under 507
(1) No Interest On Priority Claims
b) 1328(a) Chapter 13 Discharge
i) Nondischargeable
(1) 1322(b)(5) Cure and Maintain Outside Plan Debt
(2) Only Three 523 Claims:
(a) Alimony
(b) Education
(c) Drunk Driving
(3) Restitution, or Criminal Fine in D’s conviction of a crime
II) Marriage
a) Alimony and Support covered in Chapter 13, but Divorce Agreements are not
i) Co-Debtors In General
(1) If one co-debtor defaults, creditor can go against others regardless of any
agreement between the two co-debtors
(a) 362(a) does not provide a co-debtor stay
(b) 1301 – Codebtor Stay
(i) 1301(c)(2) Court shall lift stay to the extent that the stay does not
provide for payment of debt
(2) 1322(b)(1) D may designate an unsecured class for better treatment
(a) There is nothing requiring the D to do this
III) Taxes
a) Dischargeable in 13, but Often Subject to Priority
b) Important for IRS to get a Lien
i) Lien is not considered judicial lien – not subject to 522(f)(1)(a) lien avoidance
ii) Lien will keep the interest accruing
iii) Will enable IRS to get full payment on taxes that are too old for priority
IV) Three Ultimate Tax Advantages to Filing Chapter 13
a) Interest Stops Accruing Upon Filing
b) Claims Too Old Will Get Discharged
c) Truly Punitive Penalties Will Get Avoided
CLASS 18 – MODIFICATION AND DISMISSAL OF CHAPTER 13 PLAN
I) Trustee
a) 1302(b)(5) The TIB in charge of ensuring D commences making timely payments
i) TIB gets a percentage of each payment
(1) Won’t have great desire to dismiss the case
(2) US TIB can sanction by failing to give TIB more cases
II) Conversion or Dimissal
a) 1302(b) Voluntary Dismissal With Intention of Refiling
i) Lose the automatic stay
ii) 109(g) Can’t Refile for 6 months
b) 1307(c)Judge May Convert to Chapter 7 or Dismiss, whichever is in the best
interests of creditors and the estate, FOR CAUSE, including:
i) Unreasonable Delay that is prejudicial to creditors
ii) Failure to file a pan timely under 1321 (“The D shall file a Plan”)
iii) Failure to Commence Making Payments under 1326
(1) 1326 – D shall commence making payments within 30 days
iv) Material Default by D with respect to a confirmed plan
(1) Courts would rather cure these defaults than dismiss plan altogether
(2) Court looks to the totality of the circumstances
III) 1329(a) Modification of Plan AFTER CONFIRMATION
a) Upon request of D, TIB, or Unsecured Creditor, plan may be modified to:
i) Increase or reduce the amount of payments on claims of a particular class
(1) Unforeseen Change of Circumstances
(a) If there is a judgment against the D, for instance
(2) Improvement In D’s position
(a) Clean Hands Doctrine – Can’t ask for something in a court of equity
unless you yourself have clean hands
(b) 1325(b)(1) Creditor is entitled to at least 3 years of ALL of D’s
disposable income
(i) 1329 Allows Modification
1. 1329(b) says all Requirements Still Must Be Met
a. 1329 (b) encompasses 1325(b)(1)
i. 1325(b)(1) is disposable income test – Best Argument
for Entitlement
ii) Extend or Reduce the time for such payments
iii) Alter the amount of distribution due to change in circumstances
IV) 1323(a) Modification of Plan BEFORE CONFIRMATION
a) D may modify, but still has to meet other requirements
i) Still, payments must be made within 30 days of filing
CLASS 19 – THRESHOLD ELIGIBILITY FOR CHAPTER
I) 109(e) Who Wants to Be a Chapter 13 Debtor
a) Individual
b) Regular Income – Measured At All Points Throughout the Plan
i) 101(30) Individual whose income is sufficiently stable and regular to enable
such individual to make payments under a Chapter 13 plan
(1) People that don’t earn traditional amounts, but rather enjoy sporadic
amounts, are okay as long as they account for times when they do not earn
(2) If reasonable doubt, allow D to make payments
(a) Look to whether there is a reasonable chance that they will be able to
make payments
(3) Money saved up may suffice as regular income
(a) At the least, argue that the interest is the regular income
(4) Regular contributions from someone is enough
ii) Get a part time job until you find a better job
c) Noncontingent – Measured at the Point of Filing
i) No event need take place to give rise to liability
(1) Don’t look to events that may occur to take away liability (appeal)
(2) The mere fact that a debt is in dispute does not make it contingent
d) Liquidated – Measured at the Point of Filing
i) Easily Ascertainable (Doesn’t even have to be deterimined)
ii) Even Cases that have not occurred are liquidated
e) Unsecured Debt of Less that $290,525 – Measured at the Point of Filing
i) D may get the difference in money from an outside source
(1) Need not take the D as we find them
f) Secured Debt of Less than $871,550 – Measured at the Point of Filing
i) If there are oversecured/undersecured issues – need to bifurcate the claim
II) Eligibility After Filing Bankruptcy Previously
a) 1328(a) – Having filed Chapter 7 is not an exception to discharge
b) 727(a)(8) – Can’t get Chapter 7 if Chapter 7 w/in 6 years
c) 727(a)(9) – Exceptions to Chapter 7 Discharge
i) Can’t Get Chapter 7 Discharge if 13 granted discharge w/in 6 years UNLESS:
(1) He paid the plan at 100% of the allowed unsecured claim
(2) He paid the plan at 70% of the allowed secured claim and used good faith
and his best efforts
(3) If discharge was not granted, may be able to get 7 discharge
d) D’s sometimes file Chapter 7 Just to Get the Stay
2 TYPES OF CHAPTER 13
I) How can a D file 13 in 2001, and then again in 2002? - Hardship Discharge
a) Two Types of Discharges
i) 1328(a) – D Completes All Payments Under Plan
(1) Exceptions:
(a) 1322(b)(5) – Long term cure and maintain debts
(b) 523(a)(5) – Alimony
(c) 523(a)(8) – Student Loans
(d) 523(a)(9) – Drunk Driving Torts
(e) 523(a)(3) – Criminal Restitution Payments
(f) Post Petition Claims Which D failed to get permission
ii) 1328(b) – Hardship Discharge – Not As Good For D
(1) D has not completed payments under the plan
(2) D’s failure to complete was due to circumstances beyond D’s control
(3) Creditors receive at least as much as they would in a 7
(4) Finishing 13 is not practicable
(a) Exceptions:
(i) 1328(c) – Secured Debts
(ii) 1322(b)(5) – Long Term Payments
(iii)1328(d) – Certain Post Petition extensions of credit for which the
D failed to give prior commission
(iv) Anything that is nondischargeable under 523(a)
(b) Advantage:
(i) Not subject to the global discharge exception 727(a)
CLASS 20 – CHAPTER 13/CHAPTER 7 CHOICE
I) 1325(a)(3) Good Faith
a) The court shall confirm a plan if the plan is proposed in good faith and legal
i) Willful/Malicious Injuries dischargeable, student loans are not
(1) Much more common, people care much more about them
II) Chapter 20
a) File 7 to Take Care of Unsecured Debt, Then File 13 to take care of Secured Debt
i) Some courts closely scrutinize these
ii) Reason to file Chapter 20
(1) Debt Ceilings – Ineligible for Chapter 20
(2) Immediate Discharge without using disposable income
(3) De-acceleration after Chapter 7
(a) Without 13, Creditor could come and repossess or foreclose
III) Substantial Abuse
a) Main factor is the ability to pay substantial portion of the debt in chapter 13
i) Switching Jobs Thus Maing Less Disposable Income
(1) Creditor must prove motivation is to pay less
(a) As long as D would have switched jobs anyway, this will be okay
ii) Attorney Feeds
(1) Split Courts
(a) Nobody will take the D under 7 because no payment
BUSINESS LIQUIDATIONS
CLASS 21 – INITIATION/INVOLUNTARY BANKRUPTCY
I) Business Bankruptcy V. Consumer Bankruptcy
a) 727(a)(1) – Court shall grant dischage unless D is not an individual
i) Corporations are ineligible for Chapter 7 Discharge
(1) Individual describes flesh and blood human
b) Chapter 11 Gives Business Fresh Start
II) Bankruptcy Sales
a) Depends on If in the Ordinary Course of Business
i) 363(c)(1)Sales in the Ordinary Course of Business
(1) D authorized to make sales without notice and a hearing
ii) 363(b)(1)Sales not in the ordinary course of business
(1) D Must have Notice and Hearing before sales
(a) 102(1) Hearing does not necessarilly require a hearing IF
(i) Nobody requests a hearing OR
(ii) Court determines there is no time for a hearing
(2) Damages for Violation
(a) Difference between what claim would have been and what it is
(b) 363(m)Where the court authorizes the sale, good faith buyers protected
(i) Unclear if opposite is true
(c) Possible action against TIB – Unclear
(d) BEST RELIEF – Run into court and stop the sale
III) 363(n)Collusive Sales
a) Sale price was controlled by an agreement among potential bidders
i) Damage
(1) TIB may avoid sale OR
(2) TIB may get the difference between the value and what property sold for
(a) Includes costs, attorneys fees, and expenses incurred
(b) Punitive damages in some circumstances
INVOLUNTARY BANKRUPTCY
ELIGIBILITY FOR INVOLUNTARY BANKRUPTCY
I) 303 Involuntary Bankruptcy
a) 303(a) Who is Eligible for Involuntary Bankruptcy?
i) Person
(1) Corporation, Bank, Partnership
b) Not Eligible
i) 101(20) Farmer
(1) Person that receives 80% of income from farming operation
(2) 101(21) Farming Operation
(a) Farming, tillage of soil, dairy, ranching, crops, livestock
(b) Production of poultry or livestock in unmanufactured state
ii) 101(18)Family Farmer
(1) Individual whose aggregate debts don’t exceed $1.5 mil
(2) At least 80% of debt comes from farming
iii) Unincorporated, Nonprofit Charity type things
iv) Government Entity
c) Getting Money From Ineligible Parties
i) Who has responsibility for the money
ii) Who individually signed the loan
iii) Who individually received the benefit
iv) State law may allow action to garnish or levy assets
II) 303(h) Equity Insolvency Test
a) Generally Not Paying Debts as they Come Due AND
i) Three Factors
(1) Length of Lateness
(2) Relative Number of Creditors Not Paid On Time
(a) Unmatured don’t count b/c don’t know if they will be paid on time
(3) Relative Amount of Debt Not Being Paid On Time – Most Significant
(a) Unmatured don’t count – Look only at those that have come due
(b) Relative percentage of debts not being paid on time
ii) Determination
(1) Call others in industry
(2) Discovery
(3) Credit Report
(4) Private Investigator
(5) Trade Journals
b) Not Contingent AND
c) Subject To a Bona Fide Dispute
i) Creditors may try to claim that undisputed part of a claim should count
ii) D will argue that debt is the only way to retain leverage in dispute
WHO MAY BRING INVOLUNTARY BANKRUPTCY
I) Who May Bring
a) 303(b)(1) If 12 or More Creditors –
i) 303(b)(2) 12 Creditor Requirement Exclusions
(1) Insiders
(a) 101(31)(B) Corporation – Director, Officer, realtive of either
(b) 101(31)(A) Relative, Partner, Corporation which D directs
(i) Affinity or Consanguinity in 3rd Degree
(ii) In Laws Count
(2) Employees
(3) Vodiable transferees under strong arm
(4) Voidable transferees under Preferences
(5) Voidable transferees under Fraudulent Transfers
ii) Must Have Three or More Creditors
(1) Secured Creditors May Join
(2) Creditors with Unmatured Claims May Join
(3) Contingent Claim Holders May Not Join
(4) Parent corporation may join subsidiary under conditions
(a) Must be a truly separate corporation
iii) Where Claims Aggragate $11,625
(1) Claim – Very Broad: Matured, Unmatured, Nojudgment,Unliquidated
(a) Fully Secured – Lien Does Not Count
(b) Undersecured – Unsecured portion counts toward aggragate
(c) Unmatured Claims Count
(i) Creditor worried there will be nothing left
b) When there are 11 or Less Creditors:
i) Same rules but only one creditor may bring suit
ii) Insider may force D into voluntary bankruptcy
II) Keeping Creditors From Filing
a) 303(i) D Can Remind Creditors of Sanctions
i) Attorneys Fees, Costs, Possible punitive damages
b) D can offer forms of legal bribery
i) Lien, Contingency Fees, Renegotiation, Good Interest Rate
c) Come up with any way to convince creditors that not in their best interest
ISSUES INVOLVING THE GAP PERIOD
I) Issues Involving the Gap Period
a) Issue
i) If the Involuntary Bankruptcy is succesful, then there is a bankruptcy
(1) Order for Relief
ii) If the Involuntary Bankrtupcy is unsuccesful, there is dismissal
iii) What Do We Do While The Case Is Being Determined?
II) Rights and Duties of The D and Creditor
a) D May Continue Business as usual – ordinary course
i) TIB may only take over after notice and a hearing
b) Automatic Stay is in Effect During Gap Period
III) The Case
a) Challenging Involuntary Bankruptcy
i) D has 20 days to respond to summons
(1) 303(h) May Say that he is generally paying debts as they come due
(2) 303(b) Not sufficient number or types of creditors D for involuntary
(3) D may just do nothing, the court shall issue an Order for Relief
ii) If D Challenges
(1) Trial on the Issues of the Challenge – Court decides winner
DOING BUSINESS WITH CREDITOR DURING GAP PERIOD
When Did
You Do
Business
What Is
Payment
Method
Provide
Services
During Gap
Period
Cash
Rights of
Party Doing
Business
With Debtor
No Problem.
Explanation
303(f) Ordinary
Course of Business
During Gap Period
549(a) (b) – PostPetition Transfers are
okay to the extent that
D received postpetition value
Provide
Services
During Gap
Period
Provide
Services
Before the
Gap Period
Credit
No Payment
Before Order
For Relief
Receive
Payment
During the
Gap Period
Second
Priority
Unsecured
Creditor
503(b)(1)(A)
Administrative
Expenses Get Priority
502(f) – Defines Gap
Claim – Allows claim
to exist despite arisal
after the petition
General
Unsecured
Claim
507(a)(2) – Second
Priority Goes to
502(f) claims
549(a)(2)(A) TIB may
avoid a transfer of
property authorized
only under 303(f)
303(f) Ordinary
Course of Business
During Gap Period
549(b) Transfer
not avoidable
to extent value
was given after
commencement
of the case
DOES NOT
WORK AS A
SHIELD
HERE
REORGANIZATION
AUTOMATIC STAY IN BUSINESS BANKRUPTCY
I) Creditors Arguments
a) If the Creditor Wants Lift of Stay For Lack of Adequate Protection, Argue Low
i) If the Creditor is Undersecured, it is easier to lift the stay
(1) If there is an equity cushion, the Creditor will have no good argument
b) If the Creditor Wants the D to reorganize, Argue High
i) If the Creditor is Oversecured, Creditor is Entitled To Post-Petiiton Interest
c) If the Creditor Argues Lack of Equity in Property, Argue Low
i) If value is high, chances are it will go over the debt, and D will be have equity
II) Burden of Proof In Adequate Protection
a) 362(g)(2) D has burden to prove that Creditor is adequately protected
b) Creditor has burden of proof to show that D has no equity
c) The Party Opposing relief has burden of proof in all other issues
III) Lift of Stay 362(d)(2)
a) Lack of Equity
i) If the principal lien on the property is undersecured, there is no equity
ii) If there is principal lien on the property, as well as junior lien on the property
or unsecured claim
(1) Courts Split
(a) Some courts won’t let principal get the lift of stay and sell the property
because the principal will only have incentive to get enough for
himself, rather than for the good of both creditors
(i) Here, Junior Creditor would be entitled to lift of stay because they
have the incentive to sell for enough – won’t get anything until
after the principal gets full value
b) Necessary For Effective Reorganization
i) Creditor may look to the D’s overall chances of the effective
IV) 362(d)(3) Single Asset Real Estate
a) Creditor Gets the Same Rights For Any Adequate Protection PLUS
i) D has 90 Days to
(1) File a plan that has reasonable possibility of confirmation OR
(2) Pendency Payments - Commence monthly interest payments at fair market
(a) Unclear whether the creditor can get adequate protection payments at
the same time they get pendency interest payments
V) 362(e) Ruling on Stay
a) Court Must Deal With Stay Within 60 Days Or The Stay Is Automatically Lifted
WHO IS RUNNING THE SHOW
I) 1107 DIP Takes the Position as TIB
a) 1106 Given the Duties of 704
i) 363 Power to Use, Sell, or Lease Property
ii) 544 Power to Avoid Unperfected Security Interest
iii) 547 Power of the TIB or DIP to Avoid Preferences
II) 363(c)(1) TIB Power to Use, Sell, Lease Property in Ordinary Course of Business
a) No need for notice and hearing
III) 363(c)(2) TIB may not use, sell, or lease Cash Collateral UNLESS
a) Each entity with an interest in cash collateral consents OR
i) 363(a) Cash Collateral
(1) Must be property that a creditor has an interest in
(a) Two Kinds of Interest
(i) Lien
(ii) Right of Setoff
(b) TIB or DIP can avoid security interest
(i) Still don’t want to start using property until you are sure
(2) Must be derived from other collateral
(a) Proceeds, rents, leases….
(3) Must be cash or cash equivalent
(4) *Ex: If C has secured interest in D’s inventory, this is collateral. D can
sell the inventory (which is property of the estate) in the ordinary course
of business.
(a) **Once this is sold, however, it becomes cash collateral, which may
not be sold without consent or notice and a hearing
b) Court approves after notice and a hearing
i) 363(e) Creditor May Insist on Adequate Protection - 361
IV) 363(c)(4) TIB required to segregate separate account for cash collateral
V) 552 Post-Petition Effect of Security Interest
a) 552(a) If DIP buys inventory post-petition with its own money, it does not
become subject to the security interest
b) 552(b) Exception
i) U.C.C. 9-315(a) Does not count when the money traces to property subject to
the interest – Identifiable Proceeds of Collateral
VI) 1104 Appointment of TIB
a) Court may appoint AFTER commencement but BEFORE confirmation:
i) 1104(a)(1) For Cause – Fraud, Dishonesty, Incompetence…
(1) Discretionary standard that courts must evaluate
ii) 1104(a)(2) Interests of Creditors, Equity Holders, or Other Interests of Estate
(1) Flexible Standard
b) 1104(c) Any time BEFORE confirmation of plan court may appoint examiner IF
i) Appointment is in the interests of the creditors OR
ii) D’s unsecured debts exceed $5,000,000 (Matter of Right)
c) 1129(d) Insist on costly rate of valuation on what the going value of the
reorganization will be
i) Most used option – See if old equity really will be worth something
SETOFF
I) 506(a) Valid Right of Setoff is Equivalent to a Secured Claim
a) The amount in the bank is fully protected
II) 553(a) Rights of Setoff Outside of Bankruptcy Recognized in Bankruptcy
a) Both Sides Must Have a Mutual Debt
i) Debts are in the same right and between the same parties, standing in the same
capactiy and the same kind of quality
b) Debts Must Both Be Matured
i) Maturity won’t be a problem because bankruptcy accelerates all claims
c) Must Be Some Act of Setoff
i) 362(a)(7) Automatic Stay Applies to Setoffs
(1) Creditor Must get lift of stay in order to exercise right
(a) Should be received unless it falls within exception
III) 553(a) Exceptions to the Right of Setoff
a) 553(a)(3) Debt Incurred for Purpose of Right to Setoff:
i) As much of the debt that was incurred:
(1) Within 90 days of bankruptcy filing
(2) While the D was insolvent
(3) For the purpose of obtaining a right to setoff
(a) Any amount the creditor insists on holding onto while D is in financial
trouble
(b) If within 90 days the creditor had D’s money, and the creditor insisted
on keeping the money, it is unlikely that this would qualify as an
exception
b) 552(a)(2) Transferring Debt ot Another Creditor
i) As much of the claim that was given to another entity, other than the D:
(1) 552(a)(2)(A) After the commencement of the case OR
(2) 552(a)(2)(B) Within 90 days of filing and while the D was insolvent
OBTAINING POST-PETITION CREDIT
I) First Thing That Must Be Offered to Post-Petition Lender: EITHER
a) 364(a) Obtain Unsecured Credit In the Ordinary Course of Business
i) Creditor Entitled to First Priority Under 503(b)/507(a)
ii) No need for notice and hearing
b) 364(b) Unsecured Credit Not In the Ordinary Course of Business
i) Creditor Entitled to First Priority Under 503(b)/507(a)
ii) Must have notice and hearing
(1) If DIP Thought It Was Ordinary Course of Business But It Wasn’t
(a) Probably going to give the creditor general unsecured claim
c) DETERMINING Ordinary Course of Business
i) Look to how the business ran before to see if they would normally do this
ii) Trade in General – Ordinary Course of Business
iii) Bank Loans – Not in the Ordinary Course of Business
iv) Small Loans more likely to be in the ordinary course of business
II) Second, If UNABLE to get credit for priority: May OFFER:
a) 364(c) After Notice and a Hearing:
i) 364(c)(1) Priority Over All Administrative Expenses
(1) Superduper Priority
(a) Trumps 507(b) Where Adequate Protection turns out to be inadequate
III) Third, (may go along with 2nd) May OFFER:
a) 364(c) After Notice and a Hearing:
i) 364(c)(2) Lien on property of the estate not otherwise subject to a lien OR
ii) 364(c)(3) Junior Lien on Property of the Estate that is subject to a lien
IV) Fouth, May OFFER:
a) 364(d)(1) After Notice and Hearing:
i) Senior OR Equal Lien ONLY IF
(1) The TIB is unable to obtain credit otherwise AND
(2) There is adequate protection of the interest of the holder of the lien
(a) Extremely difficult to get adequate protection
(b) When a D has unencumbered property on which he could offer
adequate protection, he could just do that.
(c) Most Courts look to an equity Cushion
I) Cross-Collateralization
a) Securing a Pre-Petition obligation with new or additional collateral post-petition
in connection with a post-petition loan
i) Should the creditor’s pre-petition obligation get promoted in exchange for
post-petition financing?
(1) Could argue that it is the lesser of tow evils:
(a) If the best offer was a rip-off, and pre-petition creditor were willing to
offer a prime rate in exchange:
(i) Seems like a preference, but it is still a much better offer
ii) 11th circuit is the only one that says no under any circumstances
PRIORITIES FROM TOP TO BOTTOM IN CHAPTER 11  CHAPTER 7
I) Secured Claims
a) Look to state law requirements to see if lien is valid
b) Look to Bankruptcy Laws to See if Lien Is Valid
i) Pre-Petition Security Interests
(1) 544 Strong Arm Powers
(2) 547 Preferences
ii) Post-Petition Security Interests
(1) 364(c)/364(d) (Previous Page)
c) Look to State Law to determine multiple liens on same property
i) Who took the necessary act first? - Race Statutes
d) Look to See if Bankruptcy Law Changed Priority As it Existed In State Law
i) 547 Preference Law
ii) 364(d)(1) Post-Petition Priming Lien
II) 726 Post-Conversion Administrative Expenses
a) Only an issue in a case that started in 11, 12 or 13 and switched to 7
III) 364(c)(1) Chapter 11 Incurred Super Duper Priority
a) Post-petition lenders
IV) Chapter 11 Incurred Super Priority – Adequate Protection was Inadequate
a) Value
i) (Collateral at Time of Granting Adequate Protection) – (How Much the Lien
Ultimately Realized)
V) Chapter 11 Incurred Administrative Expense Priorities on Post-Petition Credit
a) 303(a)(1) Administrative Expenses
b) 327(a) TIB Attorney Fees
c) Ordinary Course Extensions of Credit
d) Nonordinary Coure Extensions of Credit
e) D’s Attorney Fees
i) Sometimes the court may allow fees throughout case, and the case crashes
(1) Court may be reluctant to make payments
(2) Court may allow if they think the 11 will work
(3) Court may demand a refund if the 11 did not work
(4) Court may just let it be, dude
VI) 507(a) Remainder of Priority Claims in the Order they Are Given
a) Regardless of whether they are 7 incurred or 11 incurred
VII) General Unsecured Pre-Petition Claims
a) 502(a) and 502(b)
VIII) Unusual Unsecured Claims
a) Late Filed
b) Purely Punative Fines and Penalties
i) Rarely is there a case where money will get this low
DIP DUTY TO SHAREHOLDERS AND CREDITORS
I) DIP Given New Powers During Bankruptcy
a) Pre-Petition – The Duty Was to the Shareholders
i) Margin Is High – Solvent - Corporation’s Assets Exceed Liabilities
(1) When a Bad Decision is Made
(a) Margin Goes Down – Shareholders are Effected
b) Post-Petition – The Duty Goes to the Creditors
i) Creditor’s Claim is at the Margin
(1) Company that makes a conveyance sues to say that it was fraud
(a) D and only D has the capacity to sue for recovery of conveyance it
made itself
ii) Shareholder’s Interest In Bankruptcy
(1) Equity is Worth Zero
(a) If the Company Emerges from Chapter 11 with a value that exceeds all
of the unsecured claims that used to be the estate – They Get Money
iii) Strategy DIP should pursue with Business Plan
(1) High-Risk Approach or Conservative Approach
(a) Shareholders want the DIP to take the risk – Nothing to Lose
(b) Unsecured wants the conservative
(i) All they see is the DIP wasting money that would otherwise go to
them
iv) As A General Proposition the Duty Goes to the Unsecured Creditors
STRONG ARM CLAUSE
I) 544(a) Hypothetical Lien Holder
a) TIB shall pretend that he is a
i) 544(a)(1) Creditor with a judicial lien on all property not already properly
perfected
(1) 9-317(a)(2) – A security interest is subordinate to the rights of a person
that becomes a lien holder at the time the security interest is perfected
(a) Hypothetical lien creditor that does all that they have to do
(b) DOES NOT WORK FOR PMSI perfected within 20 days
(c) Creditor gets general unsecured claim
(2) 9-334(e)(1) Fixtures perfected in any method at all will beat a judicial lien
creditor
ii) 544(a)(2) Creditor that obtains an execution against the D that is returned
unsatisfied
iii) 544(a)(3) BFP of real property that state law permits to perfect
(1) FIXTURES – Does not apply
(a) Must go to (a)(2) and try to beat him as a judicial lien creditor
(i) Otherwise, if this was not expressly stated in the statute, fixtures
would lose to a BFP – but it is, so they don’t!
b) Knowledge
i) Constructive Knowledge Is All that Matters
(1) Actual Knowledge is irrelevant
(a) The test is whatever knowledge the BFP would have had in an
unperfected security interest
II) 544(b) Other Applicable State Law Avoidance Power
a) TIB may avoid any transfer or obligation:
i) Voidable By A Creditor Holding Unsecured Claim
(1) TIB must have a creditor eligible to bring the claim - UFTA
III) 546 Limit on Avoidance Powers
a) 546(a) Can’t avoid a lien after the later of (APPLIES TO PREFERENCES TOO):
i) 2 years after entry for relief OR
ii) 1 year after the appointment of the first TIB
b) 546(b) TIB rights limited to “generally applicable law” that:
i) Allows a grace period for perfection OR
(1) 9-103(b)(1) PMSI allows 20 day grace period to perfect after D gets
POSSESSION
(2) 9-317(e) Only allowed to the extent of the collateral
ii) DOES NOT APPLY TO PREFERENCES
PREFERENCES
ELEMENTS OF A PREFERENCE
I) Seven Elements of a Preference
a) Transfer of an interest in D’s Property
i) Can take the form of money or property for preference purposes
b) Of Property of the Estate
c) To or for the Benefit of a Creditor
d) On Account of an Antecedent Debt
e) While the D is Insolvent
i) Presumed Insolvency 90 Days Before Bankruptcy
(1) Applies to insiders as well
f) Made Within 90 Days of Filing
i) Within 1 year for insiders
g) Enabled the Creditor to Receive More than It Would Have in a Chapter 7
i) Almost always met UNLESS
(1) Creditors receive 100% OR
(2) The Creditor Was Fully Secured
ii) If the D had a guarantor, or some other way to ensure that creditor would have
gotten the 100%, it does not matter
(1) 547(b)(5)(C) Only look at the way that the creditor would have received
payment under the provisions of Bankruptcy Law
iii) Majority of courts measure the (b)(5) element as whether they would have
been better off at the time of filing, rather than whether they would have been
better off at the time of transfer.
(1) Fire burns collateral – Look to whether they would have been better off at
the filing, which was at the fire, rather than if they would have been better
off than they would have been at the time of transfer, in which they were
fully secured with adequate protection (insurance) so they would have
never guessed that they could have been liable for a preference
II) Earmarking Doctrine
a) Three Points
i) Lender Directed Earmarking is Not an Avoidable Preference
(1) Lender says he will lend money as long as proceeds go to other creditors
(a) Other creditors are not being made worse off, just trading debts
ii) Debtor Directed Earmarking Is an Avoidable Preference
(1) If the D, rather than the lender controls who the debt is going to, it is a
preference
(2) This is how it becomes “An Interest of D in Property”
iii) If the New Lender Demands Collateral It Is A Preference
(1) Unsecured Creditors Replaced by Secured Creditors
b) Avoidability
i) 550(a)(1) TIB can recover from:
(1) Transferee OR
(a) Otherwise this would be a contemporaneous exchange
(2) Creditor Who Was Benefited – “To or for the Benefit…”
DEFINING THE TIME OF TRANSFER
I) Three Reasons It Is Important to Define the Precise Time of Transfer
a) 547(b)(2) On Account of an Antecedent Debt
i) E must be before T
b) 547(b)(3) While the D is Insolvent
c) 547(b)(4) Within 90 Days of the Time of Filing
II) 547(e)(1) Perfection
a) For purposes of this section perfection is:
i) Real Property – Time that no later BFP can get interest better than transferee
ii) Personal Property – No later Judicial Lien Creditor can get greater interest
I) 5 Variables
a) E – Extension of Credit to the Creditor
b) A – Time of Attachment of the Security Interest
i) Creditor Gets Value
ii) D Signs Agreement
iii) D Has Rights in the Collateral
c) P – Perfection
i) Attachment
ii) Notice
(1) Possession
(2) Filing
d) C – Commencement of the Bankruptcy Case
e) T – Time of Actual Transfer
II) 4 Step Approach
a) Is there a Transfer of a Security Interest?
i) If yes, go to b)
ii) If no, T = Physical Time of Transfer, go to c)
b) When is T?
i) Place 4 Variables on the Timeline
(1) (e)(2) Time of Transfer
(a) (e)(2)(A)
(i) If P is within 10 days of A, then T=A
1. 10 day grace period for placing the transfer preferences
a. 20 day grace period for PMSI
(b) (e)(2)(B)
(i) If P is more than 10 days after A, then T=P
(c) (e)(2)(C)
(i) If no P by the 10 days after (c) or (a), then T=C
1. **Technically the moment before C, so that it will qualify as a
preference
c) Given T, is E before T (E>T)?
i) If yes, go to d)
ii) If no: Is T within 90 days before C?
(1) If Yes, go to d)
(2) If No, not a preference
d) Are All Other Elements of 547(b) Met?
i) If No, not a preference
ii) If Yes, Preference
(1) Look to see if one of the 547(c) exceptions apply!
(2) If C>P Strong Arm Powers overrule P, unless E is a PMSI, in which case
P must be within 20 days
EXCEPTIONS TO PREFERENCES – DAY 1
CONTEMPORANEOUS EXCHANGE FOR NEW VALUE
I) 547(c)(1) Contemporaneous Exchange For New Value Exception
a) TIB May Not Avoid to the Extent That Transfer Was:
i) Intended by the creditor and the debtor to be a contemporaneous exchange for
new value AND
(1) Says nothing of “substantial” – must be
(a) Payment by check would be a preference for 547(b) purposes because
transfer is not technically made until the check is honored, but the
parties intend a check to be contemporaneous – so it falls within
exception
(2) Must go with the intent closest to the time of transfer
(a) If the intent changes at the least second, must go with that intent
ii) Was in fact a substantially contemporaneous exchange
(1) Exchange involving a security interest cannot be substantially
contemporaneous unless perfection occurs within an applicable grace
period
(a) Can’t be used as a fallback for a missed grace period
ENABLING LOAN (PMSI) EXCEPTION
I) 547(c)(3) Enabling Loan Exception
a) TIB May Not Avoid Transfer When
i) The Creditor Gives the D “New Value” to Acquire Real or Personal Property
ii) The D signs a Security Agreement Giving the Creditor a Security Interest
iii) The D in fact Uses the New Value Supplied By the Creditor to Acquire the
Property AND
iv) The Creditor Perfects its Security Interest No Later than 20 Days after the D
receives POSSESSION
(1) 546(b) TIB power subject to generally applicable law (therefore giving
him the right to avoid because of Strong Arm Power) does not apply
because it does not mention 547.
(a) Strong Arm Power does not rock this because strong arm power is
subject to the generally applicable law, i.e. the 20 day grace period for
PMSI
(i) Thus, this is the only protection for PMSI preference.
EXCEPTIONS TO PREFERENCES – DAY 2
ORDINARY COURSE OF BUSINESS
I) 547(c)(2) Ordinary Course of Business
a) TIB May Not Avoid To the Extent that Transfer Was:
i) In payment of a Debt Incurred in the Ordinary Course of Business
(1) How this particular debt was incurred
ii) Made in the Ordinary Course of Business
(1) Payment must be ordinary as to the two party’s dealings with each other
iii) Made According to Ordinary Business Terms
(1) Industry Standard of Ordinary Terms of Business
(a) Minority looks at the transfer between the two parties
b) Ordinary
i) Means Not Extraordinary
(1) 5% or more of the time – Within the Outward Bounds of the Industry
(a) Late payments to undersecured creditors are extraordinary
(b) Long Term Debts paid on due date are not categorically eliminated
from extraordinary
(i) Used to be a 45 day limit on debts that were due, change cuts in
favor of creditors
(2) Sniff Test – How do these transfers smell when all else is considered
(a) Something like the principal stockholder getting repaid pre-bankruptcy
II) Side Note – UFTA and Preferences
a) 544(b) Bringing in State Avoidance Provision
i) TIB can bring claim as long as there is an actual unsecured creditor that could
make the claim
(1) This is how you bring in UFTA
b) Why Would You Use UFTA 5(b) When You Can Bring Claim Under 544(b)?
i) UFTA 8(f) A transfer is not voidable under 5(b):
(1) To the extent the insider gave new value for the benefit after the transfer
(a) Unless new value was secured by a lien
(2) If made in the ordinary course of business OR
(3) If made in Good Faith effort to rehabilitate D and the transfer secured the
present value in order to rehabilitate the D
ii) Transferee would rather defend a claim under 8(f) because there is no industry
standard to meet
c) When Does UFTA come in to play?
i) Preferential payment to an insider but the D is not in bankruptcy
ii) Want to claim fraudulent conveyance, but you don’t want the D in banruptcy
NEW VALUE EXCEPTION
I) Quick Approach
a) Look at the Balance Owed Column During the 90 Days Before Filing
i) Find the Point at Which the Balance Owed is the Highest
b) Look at the Balance at the Point of Filing
c) If the D is better off at the highest point than the D is at the point of filing, then
there is a preference in the amount of the difference
i) Only works when the creditor extends unsecured credit
EXCEPTIONS TO PREFERENCES – DAY 3
FLOATING LIEN EXCEPTION
I) 547(c)(5) Accounts and Receivables
a) Mere Increase in Value does not Make a Preference – Not a Transfer
i) If the increase came from collateral purchase, it would be a transfer
ii) If the increase came from some unsecured supplier or it came from
unencumbered cash, it would be a transfer
iii) If the increase comes from collateral purchased by interest in which creditor
already has a security interest, then it is a transfer under (e)(3), but it can’t
make the D better off than he already was:
(1) 547(e)(3) Transfer can’t have taken place until D has rights in the
collateral
b) When the creditor is Oversecured on Day 90, Collateral Purchase Can’t be a
Preference – (c)(5) Looks Solely at Day 90
i) “Except” Language is a Test of Measuring the Reduction in Insufficiency
c) Repayments Do Are Not Protected By 547(c)(5)
i) Issue is a (b)(5) Issue
(1) Remember that if the creditor is oversecured, he will get a 100%
repayment anyway, so there won’t be a preference
SETOFF PREFERENCE AVOIDANCE
I) 553(b) If a creditor offsets a mutual debt on or within 90 days before filing, then the
TIB may recover the amount offset to the extent that the insufficiency is less than the
insufficiency on the LATER OF:
a) 90 days before the filing AND
b) The first day during the 90 days before filing on which there is no insufficiency
i) If there is no insufficiency on Day 90, find the first day where there was an
insufficiency
ii) If there is no insufficiency at point 2, the most that can be avoided is the
insufficiency at point 1
II) Setoff Decision
a) Downsides of Setting Off Prior to Bankruptcy Filing:
i) May precipitate a voluntary bankruptcy
(1) If D files within 90 days, the setoff will be avoided
b) Downsides of Not Setting Off
i) D could withdraw money from account prior to filing
(1) However, creditor may freeze assets if this is feared
III) 553(b) Setoff Test
a) Significant Dates
i) Point 1 – 90 Days Before Bankruptcy (or the first date in there where there is
insufficiency)
ii) Point 2 – Day of Filing (Which will assumedely be day of filing)
b) (Insufficiency at Point 1) – (Insufficiency at Point 2) = The Amount of the
Avoidable Preference
i) Best thing to do in assessment is to assume that D will setoff at the exact
moment of bankruptcy
IV) Strategic Planning
1. Figure out how much of a collateral purchase there was within
the 90 days prior to filing bankruptcy
2. Determine the Insufficiency on Day 90
I=D–C
3. Determine Day 0
C=
D=
4. Put Repayments Back
(Amount of Repayment) + (Amount of Debt Given at step 3)
C=
D=
5. Put Reductions of Insufficiency Due to Market Change Back
(Value Change ) + (Collateral)
C=
D=
6. Look at the Insufficiency Now At Day 0 (D-C)
(Amount of Insufficiency at Step 2) – (D From 5 – C From 5)
THIS IS THE AVOIDED COLLATERAL PURCHASE
7. Take the Avoided Collateral Purchase Out
(C at Step 3) – (Avoided Collateral Purchase)
THIS IS THE FINAL COLLATERAL
8. Put the Repayment Back
(D at Step 3) + (Repayment)
9. Looking at C from Step 7 and D from Step 8,
If the Collateral is Less Than the Debt then the Entire of
Repayment is Avoidable and this is the Final Debt.
***C at Step 7 / D at Step 9 is the final amount
1. Figure out how much of a collateral purchase there was within
the 90 days prior to filing bankruptcy
2. Determine the Insufficiency on Day 90
I=D–C
3. Determine Day 0
C=
D=
4. Put Repayments Back
(Amount of Repayment) + (Amount of Debt Given at step 3)
C=
D=
5. Put Reductions of Insufficiency Due to Market Change Back
(Value Change ) + (Collateral)
C=
D=
6. Look at the Insufficiency Now At Day 0 (D-C)
(Amount of Insufficiency at Step 2) – (D From 5 – C From 5)
THIS IS THE AVOIDED COLLATERAL PURCHASE
7. Take the Avoided Collateral Purchase Out
(C at Step 3) – (Avoided Collateral Purchase)
THIS IS THE FINAL COLLATERAL
8. Put the Repayment Back
(D at Step 3) + (Repayment)
9. Looking at C from Step 7 and D from Step 8,
If the Collateral is Less Than the Debt then the Entire of
Repayment is Avoidable and this is the Final Debt.
***C at Step 7 / D at Step 9 is the final amount
1. Figure out how much of a collateral purchase there was within
the 90 days prior to filing bankruptcy
2. Determine the Insufficiency on Day 90
I=D–C
3. Determine Day 0
C=
D=
4. Put Repayments Back
(Amount of Repayment) + (Amount of Debt Given at step 3)
C=
D=
5. Put Reductions of Insufficiency Due to Market Change Back
(Value Change ) + (Collateral)
C=
D=
6. Look at the Insufficiency Now At Day 0 (D-C)
(Amount of Insufficiency at Step 2) – (D From 5 – C From 5)
THIS IS THE AVOIDED COLLATERAL PURCHASE
7. Take the Avoided Collateral Purchase Out
(C at Step 3) – (Avoided Collateral Purchase)
THIS IS THE FINAL COLLATERAL
8. Put the Repayment Back
(D at Step 3) + (Repayment)
9. Looking at C from Step 7 and D from Step 8,
If the Collateral is Less Than the Debt then the Entire of
Repayment is Avoidable and this is the Final Debt.
***C at Step 7 / D at Step 9 is the final amount
1. Figure out how much of a collateral purchase there was within
the 90 days prior to filing bankruptcy
2. Determine the Insufficiency on Day 90
I=D–C
3. Determine Day 0
C=
D=
4. Put Repayments Back
(Amount of Repayment) + (Amount of Debt Given at step 3)
C=
D=
5. Put Reductions of Insufficiency Due to Market Change Back
(Value Change ) + (Collateral)
C=
D=
6. Look at the Insufficiency Now At Day 0 (D-C)
(Amount of Insufficiency at Step 2) – (D From 5 – C From 5)
THIS IS THE AVOIDED COLLATERAL PURCHASE
7. Take the Avoided Collateral Purchase Out
(C at Step 3) – (Avoided Collateral Purchase)
THIS IS THE FINAL COLLATERAL
8. Put the Repayment Back
(D at Step 3) + (Repayment)
9. Looking at C from Step 7 and D from Step 8,
If the Collateral is Less Than the Debt then the Entire of
Repayment is Avoidable and this is the Final Debt.
***C at Step 7 / D at Step 9 is the final amount
GRACE PERIODS
Who is
Eligible
9-317(a)
PMSI
Creditor
Only
Length of
Grace
Period
Starting Point /
Ending Point
20 Days
D’s Possession /
(generally, Perfection
subject to
variation)
What
Avoiding
Powers is
the Grace
Period
Effective
With?
Intervening
Liens
(state)
What
Avoiding
Powers is
the Grace
Period Not
Effective
With
547(b)
544(a)
Any
10 Days
547(e)(2)(A) Consensual
Lien
Holder
547(c)(3)
PMSI
20 Days
Attachment/Perfection
544(a)
547(b)
D’s Possession /
Perfection
Intervening
Liens in
State Law
544(a)
547(b)
Intervening
Liens In
State Law