Bankruptcy Outline
Czar
Spring 2007
PART I: CONSUMER BANKRUPTCY

Two Models of Bankruptcy
o Liquidation (aka Straight Bankruptcy/ Chapter VII Bankruptcy)
 Bankruptcy debtor turns over all non-exempt assets to the bankruptcy trustee
(BT) who then sells or liquidates those assets, gathers the money into hotchpot
and then distributes that money to the debtor’s creditors.
 In exchange for the turnover of assets, the debtor receives a discharge for his
pre-bankruptcy debts.
o Re-Organization
 3-4 chapters of the BR Code follow the re-organization model
 Primarily Chapter 11 and 13
 The debtor keeps his assets (ex - big screen TV or Delta Airlines jet).
Additionally, the debtor receives a discharge.
 In exchange, the debtor must submit a plan of reorganization under which they
will operate for the next 3-5-10 years. The plan must provide a stream of
payments to creditors such that those creditors are receiving at least what they
would have received had the debtor liquidated today (i.e. under CH 7).

Introductory Material
o The Goals and Policies of Bankruptcy
 Bankruptcy is remedial in nature
 Often, bankruptcy relief is sought only after the debtor’s economic
affairs have deteriorated to the point of collapse.
 Therefore, bankruptcy’s purpose is to manage financial distress and to do
the best job possible of preserving what can be saved. Not necessarily to
give creditors their full entitlement.
 Protection of Detor and Creditor Interests
 The idea of bankruptcy serves two purposes: creditor protection and
debtor relief.
 Helps creditors by providing an evenhanded and controlled environment
for the settlement of the debtor’s affairs and distribution of his assets.
 Helps debtors by providing a haven and affording relief from the
pressure of financial failure.
 Collective and Evenhanded Treatment of Creditors
 Bankruptcy is handled by an uninterested administrator.
 Though most creditors are not paid in full, they share equitably in the
fund.
 Preservation of the Estate
 The BT is given substantial powers to investigate the debtor’s affairs, to
recover dispositions of property in fraud of creditors, to reveal hidden
assets, and to resolve the affairs of the debtor in a way that best enhances
the value of he estate.
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The Debtor’s “Fresh Start”
 Goal of long-term rehabilitation.
 Provided that the debtor has complied with the Code’s requirements and
has surrendered executable assets of sufficient future income for
distribution to creditors, the debtor is entitled to a new beginning,
unburdened by the unpaid balance of pre-bankruptcy debts.
Minimal Interference with Non-Bankruptcy Rights
 Generally, the treatment of such rights under the Code is intended to
affect them only so much as necessary to further the aims of bankruptcy.
Efficient Administration
Preference for Reorganization and Debt Adjustment
o There are two types of creditors  secured and unsecured.
 A secured creditor is a creditor that in exchange for lending money to a debtor
has received some type of pledge (i.e. collateral) to secure repayment.
 Secured creditors can sometimes be secured and unsecured. How? If
you are a secured creditor and the security interest you have is less than
the total amount the debtor owes you, you have both a secured and
unsecured claim. A secured creditor is a secured creditor only to the
amount of the debt or to the amount of the collateral, whichever is lower.

An unsecured creditor is a creditor that has received no security for his debts
other than the credit worthiness of the creditor they lent money to.
 Ex -Credit Cards.
 Because unsecured creditors do not have a pledge of property to secure
their debt, they cannot walk up and take someone’s property. That
would be conversion. How do you collect debts when you are an
unsecured creditor?
o First, obtain a judgment in court.
o Enroll the judgment by filing it in the courthouse of the county
where the debtor owns property in the county in which the
property is located. This has two effects:
 With regard to real property, it gives UC an automatic
lien on all property the debtor owns in that jurisdiction.
 With regard to personal property, the clerk must issue a
writ that must be levied by the sheriff.
o The Federal Nature of Bankruptcy Law
 Bankruptcy law is federal law because Congress has the power to pass uniform
statutes of bankruptcy.
 Article I federal courts
 The order of reference is a standing order in all district courts which
automatically refers all bankruptcy cases to the bankruptcy courts. Practically,
you file your case at the bankruptcy clerk’s office.
o Getting Started: Deciding to File
 Debtor fills out series of documents and forms. The most important document
is the Bankruptcy Petition, which includes a number of schedules.
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Debtor must pay a filing fee ($220), which can be waived upon proof that the
debtor absolutely cannot pay.
Duty of Reasonableness - Lawyers assisting in the filing of the bankruptcy
petition are subject to a duty of reasonableness, meaning they have a
responsibility to look into client’s records for accuracy. This means that lawyers
have a responsibility to look.
o Participants in Bankruptcy
 Bankruptcy Court
 Article I courts/ “arm/unit” of the district courts
 Presided over by bankruptcy judge - no life tenure/ 14 year terms
 The Trustee
 REQUIRED IN ALL BR CASES EXCEPT CH 11
 Impartial administrator whose role encompasses not only management of
the estate but extensive powers to investigate the debtor’s affairs, to
enforce the rights of the estate, and to participate in litigation involving
the estate’s interests.
 Owes a fiduciary duty to maximize the value of the estate for the benefit
of all of the debtor’s creditors.
 Usually an attorney
 Entitle to some % of assets administered.
 Creditors can elect trustee.
 At a minimum the trustee has to conduct §341 meeting (meeting of
creditors with debtors which gives creditors the opportunity to depose
the debt)
 The US Trustee
 Appointed by US Attorney General / different US Trustee regions
 Administrative Responsibilities
 Right to appear on any bankruptcy case on any matter.
 The Debtor
 More passive role in CH 7; more active role in CH 13
 Creditors
 A creditor is defined in §101 to include any entity who has a provable
claim against the estate. In order to establish a claim, the creditor must
fill out a proof of claim form and file it with the bankruptcy court.

The Estate/ §541
o In bankruptcy, remember that we’re gathering all the debtor’s assets, selling them, and
distributing them to creditors. Thus, the natural question is: what assets of the debtor are
subject to being gathered and sold?
o At the moment the bankruptcy petition is filed, an estate is created by operation of law.
o Bankruptcy is, in a sense, a financial death which creates an estate consisting of all the
interests in property owned by the pre-bankrupt debtor. The estate is a new legal entity
separate from the debtor.
o §541: §541(a) defines what is included in the estate and §§541(b) and (d) make
specific exclusions from the estate.
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§541(a) - The bankruptcy estate is defined as all (legal or equitable) property
interests of the debtor as of the filing of the bankruptcy petition.
 §541(a) is intended to capture ALL property of the debtor. It is meant to
include not only tangible property (i.e. living room couch), but also
intangible property (i.e. bank accounts), contingent property interests
(i.e. ability to file a lawsuit), and property in the hands of others (§542 requires anyone holding property of the bankruptcy estate to turn it over
to the trustee) .
 Other Examples o 1999 Taurus still subject to PMSI - yes. Legal interest to possess
the car. Because §542 requires anyone holding property of the
estate at the time of bankruptcy to turn it over, even if the repo
man had repossessed the car the day before debtor filed
bankruptcy, the Taurus is property of the estate.
o 25 shares of Corporation - yes.
o Oil well - yes.
o Property Acquired After the Filing of the Petition
 The most important exception is for “services performed by an individual debtor
AFTER the commencement of the case.”
 Every penny the debtor earns after commencement of the case is kept by
the debtor.
 As such, the debtor always wants to claim the earnings were postpetition, while the trustee, who has a fiduciary duty to the unsecured
creditors to maximize the estate, always claims that everything is prepetition.
 For the typical consumer, this provision means that wages, commissions, and the
like earned after the bankruptcy petition is filed are not property of the estate and
do not have to be surrendered to their creditors.
o “Property of the Estate” Disputes Fall into 3 Categories:
 Legal interests that are not enforceable at the date of bankruptcy but may
be enforceable at a future time.
 Question: Whether they are sufficiently matured and certain to be
included in the estate?
 Sharp v. Dery - Employee Bonuses - BT argues the debtor had a legal
interest in the bonus; debtor argues that he didn’t have a legal interest in
the bonus. Look past the label on the property right. Examine the terms
to determine whether the debtor had a legal interest/ right in the bonus as
of the date of filing.
o Test: Could the debtor have filed a lawsuit over the bonus on
December 21? Look past the label on the property right. If the
court is under no obligation to pay the bonus and/or the bonus is
contingent, it is likely that the court will hold that the bonus is
not part of the estate.
 Certain entitlements, such as permits or licenses that are nontransferable,
which may or may not be property.
 Ex - Liquor Licenses, etc.
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Most courts will hold that liquor licenses are property of the estate
because when a person buys a bar, the only thing of “real value” is the
liquor license. Thus, if you own a bar and file for bankruptcy, the liquor
license is property of the estate and the trustee can market the bar with
the liquor license.
 Examples of other licenses held to be property of the estate: brother
license (In re Burgess), FCC license, airport landing slots, sales tax
licenses, trucking certificates, taxi cab medallions.
 But, the courts are divided over:
o Gambling License? Czar things there is a lot doubt that the result
would be the same because the legislature has done everything
possible to say these licenses are not transferable.
o Sporting Tickets? Bankruptcy courts are evenly divided on the
issue.
 See if you can analogize with liquor licenses!!
Restrictions on transferability imposed by contract or law
 §541(c) - A non-alienable provision is a provision in a K which says the
debtor will not transfer property under any circumstances. Most of these
types of laws that restrict the owner’s ability to transfer property ARE
NOT enforceable in bankruptcy because the debtor’s property is
transferred to the trustee.
 Exception - - §541(c)(2) - Retirement Accounts - Exceptions to
unenforceability restrictions on transferability for retirement accounts.
o “Spendthrift” Trust Provision - This provision enables debtors
to keep their retirement accounts out of bankruptcy estates.
Basically says that when you put your money into a trust which
protects you from getting a lot of money and spending it (i.e.
spendthrift trust), if debtor files bankruptcy, the money does not
become part of the estate.
o ERISA - ERISA qualified plans are beyond the reach of
creditors and outside the reach of the bankruptcy estate.
o In 2005 Amendments, Congress (as upheld by SC in Rousey v.
Jackoway) said most types of IRA’s are exempt from property of
the estate.
o Abandonment of Property by the Trustee
 Any property of the estate that the trustee considers of no value or no benefit to
the estate may be abandoned or given back to the debtor by the trustee. (Ex Pets)
 The trustee’s abandonment of burdensome property is intended to benefit the
estate by disposing of property that will drain the estate’s resources.
 Under §544(c), any property that, at the close of the estate, was included in the
debtor’s schedule but was not administered in the estate will be abandoned to the
debtor.
GENERAL RULE: In bankruptcy, secured creditors are going to get their collateral--either their
collateral or the value of their collateral in cash. Filing bankruptcy is NOT a way to get out of your
secured debt. Rather, the bankruptcy discharge lets the debtor off the hook for their unsecured debt.
The secured creditor is (at least theoretically) fully protected.
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The Automatic Stay
o §362(a) - Except as otherwise provided, the filling of a bankruptcy petition operates
as a stay of-- (1) the commencement or continuation of any other action against the
debtor;
 (2) The enforcement, against the debtor or against property of the estate, or
a judgment obtained before commencement of the case;
 (3) Any act to obtain possession of property of the estate or property from
the estate or to exercise control over property of the estate;
 (4) Any act to create, perfect, or enforce any lien against property of the
estate or to the extent that such a lien secures a claim that arose before the
commencement of the case;
 (5) Any act to collect, assess, or recover a claim against a debtor that arose
before the case.
o Filing a bankruptcy petition triggers an automatic stay that prohibits any creditor’s
attempts to collect from the debtor or the debtor’s property. It is an injunction that arises
by operation of law upon the filing of a bankruptcy case, regardless of knowledge or
notice. It stays any action by creditors to obtain, enforce, or collect on a pre-petition
debt. It also prevents secured creditors from exercising self-help remedies. ALL
COLLECTION SHOULD STOP!!
 It is automatic and operates without regard to notice, etc. If a creditor takes
action that violates the automatic stay without knowing bankruptcy has been
filed, it is still a violation of the automatic stay. The question, rather, is what
result?
 Traditional Rule - Void Ab Initio - All actions taken in violation of the
stay are VOID from the start.
 Minority Rule (5th Cir) - All actions taken in violation of the automatic
stay are VOIDABLE, meaning the court has a choice. Where the court
would have lifted the stay automatically had the creditor followed the
proper procedure by approaching the bankruptcy court in the first place,
the bankruptcy judge will allow the creditor to keep the collateral.
o The Nature and Scope of the Stay
 It is binding on ALL parties.
 It comes into effect immediately upon the filing of the petition and remains in
effect for the duration of the case.
 It applies in ALL forms of bankruptcy.
 Although the stay is comprehensive, it does not cover every conceivable activity.
o Policy
 The automatic stay is essential to the accomplishment of two central goals:
 The debtor’s fresh start; and
 The evenhanded treatment of creditors.
 It allows the trustee to gather assets without the estate disappearing - it allows all
unsecured creditors to share and share alike - and it gives the debtor time to
catch his breath and see where he stands.
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o Broad Application of the Automatic Stay
 Andrews University v. Merchant
 A university withholding a student’s transcript after the student filed for
bankruptcy violated the automatic stay. Because Congress did not
include collection of education loans in the exceptions for the automatic
stay, it is not an exception.
 RULE: Student loan debts are NON-DISCHARGEABLE, but that does
not affect the automatic stay analysis. Unless there is an exception, the
automatic stay applies.
 Nissan Motor Acceptance Corp. v. Baker
 Post-bankruptcy, a secured creditor repossessed an automobile and then
refused to give it back.
 RULE: Knowing violations of the automatic stay permit the debtor to file
for punitive damages and attorney’s fees.
o See Exceptions of the Stay Later
o Termination of the Stay
 The stay may be lifted by the court following an application for relief from the
stay under §362(d).
 §362(c)(1) and (2) provide for the termination of the stay when property is no
longer property of the estate or until the case is closed or dismissed.
LIQUIDATION BANKRUPTCY

Liquidation Bankruptcy = Classic, “straight” bankruptcy where BT is appointed to gather the
debtor’s property, sell it, and distribute the proceeds to creditors.

Eligibility to File
o §109 - Just about every individual/ entity is eligible to file for bankruptcy.
 Exception - Businesses whose insolvencies are governed by non-bankruptcy law
(i.e. banks, railroads, insurance companies, etc.).
o §707 - The bankruptcy court has discretion to dismiss bankruptcy cases for
unreasonable delay or substantial abuse of the bankruptcy system based upon the
totality of the circumstances.
 There is a presumption that when a debtor files bankruptcy it is not a substantial
abuse.
 In re Shaw - The court said the filing of bankruptcy by this married couple was
substantial abuse of the bankruptcy system, even with presumption. Why? The
court found the evidence showed that they were living beyond their means
rather than having fallen victim to some tragic or unforeseen circumstances.
There were a number of things this couple could have done to relieve themselves
of the necessity to file for bankruptcy. Chapter 7 is not for spendthrifts; rather, it
is intended for the honest, but unfortunate debtor. This is an exception to the
general rule -- and you need strong evidence of abuse.
o Post-2005 Amendments
 The general push of the 2005 amendments is to force debtors whom we suspect
could repay some of their debts into filing a CH 13 case. How?
 §707(b) was amended to give rise to a presumption of abuse of CH 7 when it
can be proven that a debtor has enough disposable income to file a CH 13
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plan. This proof depends upon a calculation laid out in 707(b) called the
“THRESHOLD ELIGIBILITY TEST.”
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THE THRESHOLD ELIGIBILITY TEST:
o Question 1: Whether the debtor’s income exceeds the
median income for similar families in that area.
 If above, go to further calculations.
 If below, the debtor can file CH 7, i.e. no abuse.
o Question 2: If income is greater than median income, take
the debtor’s income and subtract some expenses. Compare
the resultant number to the next formula that is laid out in
the statute. That # tells us whether it was substantial abuse
to file CH 7.
 TO DO THIS CALCULATION IT IS NECESSARY
TO KNOW INCOME AND EXPENSES!!
 Income = wages, interest on checking account, stock
dividends, unemployment compensation, tax refunds,
amounts paid by others toward household expenses,
etc.
o Formula: Abuse is presumed if:
 (1) The debt is greater than $24K, AND the surplus is
at least
 $10K, or
 25% of the debt, OR
 (2) If the debt is $24K or less and the surplus is at
least $6K.
The 2005 Amendments also require the debtor’s attorney to certify that
he made some investigation into the accuracy of the data.
Property Exempt from Seizure
o Remember -- All interests of the debtor become property of the estate unless, within a
certain period of time, the debtor exempts some property from the estate.
o When property is defined as “exempt” under state law, general creditors cannot seize it
to satisfy their judgments.
o §522(d) provides a list of uniform federal exemptions. However, §522(d) allows a state
to “opt out” of these federal exemptions and substitute their own state law exemptions.
 It is not a “the debtor gets to choose” thing. The Legislature either acts to
require debtors to use their state exemptions or they don’t act and the debtor has
to use the federal exemptions.
 The vast majority of state legislatures have chosen to have debtors use state
exemption law.
o The purpose of exemption laws is to allow the debtor to keep enough property so that he
doesn’t have to become dependent upon the state/ federal government.
o Classification of Property
 One of the primary issues that arises under exemption disputes is whether a
particular piece of property actually fits within the exemption list.
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Who argues what? The debtor argues that the piece of property fits within the
statutory classification because then it would be exempt and the debtor gets to
keep it; the trustee argues that the piece of property does not fit within the
exemption because then it would be part of the estate (to be sold and distributed
to creditors).
In re Johnson - Whether a bus w/ a seating capacity of 60 is considered a “motor
vehicle” for purposes of exemption statute. The court applies plain meaning to
the statute and held that the bus is a motor vehicle.
In re Pizzi - Lottery winnings were not considered an “annuity K” for purposes
of FL exemption law, but rather nonexempt assets that must be liquidated to pay
creditors.
For classification issues, look to state law. The bankruptcy code does not vary
non-bankruptcy property rights.
o Valuation of Exempt Property
 Exemption law does not permit you to avoid security interests in property.
EXEMPTIONS WORK SOLELY ON THE DEBTOR’S EQUITY IN
PROPERTY. Thus, an exemption is only of value when the value of the
property exceeds the security interest.
 Ex - Car Note
o Exemption = $2K; Car Value = $3K
o (Ex1) SI in car = $5K. Result? Trustee sells car and proceeds go
to creditors. The exemption is meaningless.
o (Ex2) SI in car = $1K. Result? Trustee sells the car for $3K. The
secured creditor gets $1K. The exemption permits the debtor to
exempt $2K of equity in the car.
 Ex - Homestead Exemption
o MS Homestead Exemption = $75K; House Value = $125K;
Mortgage = $100K
o (Ex1) Result? Debtor may exempt $25K of equity in the house.
The mortgage company will get the house unless the debtor can
strike some type of deal. House will be sold and secured creditor
paid $100K and debtor paid $25K.
 Standard of Valuation - Courts vary on what standard to use.
 Possibilities:
o Liquidation Value
o Fair Market Value
o Retail Value
o Wholesale Value
 The trustee wants the property to be valued higher. The debtor
wants the property to be valued lower. Why? There are caps on
exemptions.
 In re Walsh
o Court held appropriate standard for valuation was liquidation
value. This standard favors the debtor because it probably results
in a lower value for the property -- and the lower the value of the
property, the more valuable the exemptions are.
 In re Mitchell
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o The property was a 6 carat diamond ring. Court refused to adopt
the liquidation value ($7800), instead adopting the fair market
value approach ($36000).
 In re Palidora
o Whether wages, salary or compensation for personal services
means only what is payable or includes what has been paid,
either by cash, check, or direct deposit to a debtor’s bank
account. The court said the moment wages hit a checking
account/ cash in hand, it is not exempt.
o Alimony/ Child Support held in trust by the custodial parent for
the benefit of the child. Any property that is held as a fiduciary
for someone else does not become property of the estate.
Overarching Point -- LOOK TO STATE LAW!!
o Avoidance of Security Interests in Exempt Property
 §522(f) permits the debtor to avoid two types of liens on exempt property:
 Judicial liens on exempt property; and
o Remember--Judicial liens arise automatically on a judgment
debtor’s real property; for personal property in most states some
other action must be taken with the sheriff going out and seizing
property and the property cannot have been foreclosed upon.
o A debtor can avoid a judicial lien on property to the extent of
the exemption.
o Ex1 - Debtor owns house in MS worth $20K. Π has judgment v.
debtor for $30K. Judgment enrolled in county where the house is
located. What would §522(f) permit? The homestead exemption
is $75K. Debtor has $20K worth of equity in the house.
Therefore, debtor could exempt $20K worth of equity. However,
there is a judgment debtor which means that a judicial lien has
arisen on the real property of the debtor in that county. 522(f)
means that this judicial lien is wiped off the $20K of equity in
the house, i.e. judicial lien avoidable to the extent of the
exemption.
 Non-possessory, non-purchase money security interests on certain
property
o Vocabulary:
 A possessory lien is a transaction where the secured
creditor takes possession of the collateral (i.e. pawn
shop). §522(d) does not apply.
 A non-possessory lien is a transaction where the secured
creditor does not take possession of the collateral.
§522(d) does apply.
 A purchase money security interest is a security
interest that arises when a creditor lends money to a
debtor in order for the debtor to purchase a specific piece
of property. §522(d) does not apply.
o What does this type of security interest look like? Ex - Bank
lends money against health aids, household furnishings,
appliances, tools of the trade, etc. Security interests in these types
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of things are not subject to liens. Why? Congress has decided
that a lender who would take such a security interest is in some
way preying upon the debtor. There is no legitimate economic
purpose in having a security interest in these types of things; a
wheelchair is worth far more to the person in the wheelchair than
to the bank.
 v. lender lending money to the debtor to actually
purchase these items. That is a possessory security
interest.
 Also a FTC rule that makes security interests in these
types of goods an unfair trade practice.
o If the debtor files bankruptcy, the debtor can avoid the lien
on the property in these types of situations!

Homesteads, Trusts, and Exemption Planning
o Homestead Exemptions
 The most important type of exempt property for most debtors is the homestead
exemption, which allows you to exempt up to a certain amount of equity in your
home.
 There are different homestead exemptions for different states.
 MS = $75K or 160 acres
 FL has an unlimited homestead exemption.
 20 states protect less than $20K.
o Exemption Planning
 States that protect unlimited value in homestead give the debtor the opportunity
to do some careful planning before filing to discharge his debts. Essentially,
debtors will attempt to take non-exempt property and convert it into assets that
are exempt property.
 Although the legislative history of the code says nothing prevents prebankruptcy exempt planning, courts have said that debtors must comply with
§727(b).
 §727(b) contains a laundry list of things that you cannot do--and if you do
one of them, you will be denied a discharge in bankruptcy.
 One of the things you cannot do is “hinder, delay, or defraud
creditors.”
 In re Reed - Triple BS Corp. liquidated non-exempt property for less than market
value and used the proceeds to pay off his mortgage. 5th Circuit reversed the trial
court’s decision in favor of the debtor, holding that the debtor’s actions were
done with the intent to defraud creditors prior to filing.
 According to Czar, if you do your exemption planning in such an
obvious manner as naming your company Triple BS and selling nonexempt assets to buddies, the court will probably find intent to defraud
creditors. But, if you’ve done everything professional and in good faith
(denying intent to file bankruptcy), you may be okay.
 2005 Amendments
 §522(o) - Includes provision that you must reduce the value of the
homestead exemption by any amount that is attributable to otherwise
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non-exempt property that was disposed of with an intent to hinder, delay,
or defraud creditors. It includes a 10 year reach back period.
o Essentially, you have to do pre-bankruptcy planning 10 years in
advance or else the amount of planning is reduced from the
exemption.
§522(p) - A debtor cannot exempt any amount within 1215 days (about 3
years/ 4 months) preceding the filing of the petition which exceeds in
aggregate of $125K interest unless amounts that were greater than $125
were rolled over from previous houses.
§522(q) - Absolute cap on homestead for people going to be convicted or
responsible for debt arising from securities law violations, fraud in
fiduciary capacity, and a handful of other related bad acts. This was
added in direct response to Enron.
o Unlimited Exemptions and Asset Trusts
 Dr. Tveten - Put significant assets into Lutheran Brotherhood; under state law,
asset trusts run by fraternal organizations are completely exempt from
attachment by creditors. One court in the 8th Circuit said this was okay, but
another said it was a fraud on creditors.
 Congress amended §548 to give a 10 year reach-back period for transfers to
asset trusts actually done to hinder, delay, or defraud--but actual intent
must be shown.
There is obviously something about pre-bankruptcy planning that has Congress siding
with creditors -- hence the hinder, delay, or defraud language in §522, §548, and §727.
But, you have to prove actual intent.
o Moving to Better Exemptions (i.e. Choice of Law Rules)
 In re Coplan - Couple sold house and assets in WI in anticipation of bankruptcy
and bought house in FL.
 2005 Amendments - §522(b)(3) - The applicable state exemptions are the
state where the debtor resided for 2 years (730 days) before filing
bankruptcy. If the debtor moved during that time period, then go back to
the 180 days that precede the 730 days and see where the debtor was for the
majority of that time.

Claims and Distributions
o How do entities who have claims against the debtor assert those claims?
 One of the lists (schedules) the trustee receives from the debtor is a list of
creditors. The trustee will provide notice to these creditors. On the back of the
notice is a “Proof of Claim” form, which contains space for name/ address,
nature of claim (secured/ unsecured), amount of debt, and it directs the creditor
to attach any supporting documentation necessary to support the claim.
 Filing the “Proof of Claim” constitutes prima facie evidence of the validity of the
creditor’s claim, which means the creditor does not have to put forth any other
evidence, plus the other side will have to come forward and dispute the claim or
the creditor’s claim will be accepted.
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In re Lanza - A bank asserted claims of more than $350K with very poor
documentation. In response, the trustee/ debtor’s wife had no evidence
to refute the claims of the bank. As stated above, proof of claim is prima
facie evidence of the validity of the claim--and despite poor
recordkeeping, the court allowed the claims in the lowest possible
amount the bank could prove they were owed.
Significantly, the bankruptcy trustee has the ability to contest whether or not the
claims that are asserted by creditors against the debtor are valid/ can step into the
shoes of the debtor and dispute the claim. Why? Because it is the duty of the
trustee to maximize the estate and the distribution to unsecured creditors. Thus,
the trustee must make sure that only valid claims of creditors are satisfied
by the estate.
o What is a claim in bankruptcy? How do we know whether or not to file a proof of
claim form?
 §101(5) - The term claim means a right to payment, whether or not such
right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured.
 This is an extremely broad definition. It is meant to include any
potential rights to payment in the very broadest sense possible.
 Ex1 - A patient gets dental work from a dentist. The dentist files for
bankruptcy. After dental works, patient suffered woeful debilitating
injury. Patient files malpractice suit -- is this a violation of the automatic
stay? Yes. The bankruptcy court stayed the lawsuit and the patient had to
file a proof of claim. At the end of bankruptcy, the patient’s claim will be
discharged and the patient will most likely receive less than full
damages.
 Ex2 - Piper Aircraft filed a CH 11 reorganization plan. 10 years after
bankruptcy, one of their planes crashed. Although this is a claim, you
can’t discharge future unknowable claims because you cannot give
notice but the judge can estimate a pool of potential liability of prebankruptcy products and set up a trust to cover future claims (§503, i.e.
authority to estimate claims)--and then instead of being able to file a
lawsuit, go to trust.
o Types of Claims
 Unsecured Claims
 Unsecured creditors are permitted to include pre-bankruptcy interest into
their claim, but the Code does not permit the creditor to add postbankruptcy interest.
 Secured Claim
 Secured creditors in bankruptcy have a secured claim to the extent of
either the amount they are owed or the value of the collateral, whichever
is lower. Secured creditors get paid in full--they get their collateral or the
cash value of their collateral.
 An oversecured creditor (i.e. the collateral securing repayment of the
debt is worth more than the debt/ debt = $100K and article securing debt
= $300K is permitted to add interest to their claim, including post-
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bankruptcy interest and attorney’s fees if their contract so provides until
their claim adds up the amount of the collateral.
 An undersecured creditor (i.e. the collateral securing repayment of the
debt is worth less than the actual debt/ debt = $300K and article securing
debt = $100K) is only secured up to the value of the collateral. In
actuality, the creditor really has 2 claims--1 secured claim (for $100K)
and 1 unsecured claim (for $200K). No post-petition interest can be
added.
Attorney’s Fees
 Attorney’s fees incurred prior to filing are treated the same as prebankruptcy interest. If a creditor, secured or unsecured, is entitled to prebankruptcy attorney fees by K or state law, then the fees are part of the
creditor’s secured or unsecured claim.
 §506(b) - Oversecured creditors, if their contracts so provide, are entitled
to post-bankruptcy attorney’s fees up the value of the collateral.
 Courts are split over whether unsecured creditors are entitled to postbankruptcy attorney’s fees and expenses.
Disposition and Distribution
o §725 - Disposition of Certain Property - After commencement of a case but before
distribution the trustee shall dispose of any property ……
 Generally speaking, the trustee is going to just hand over collateral to secured
creditors. The secured creditor essentially receives the collateral or its value in
cash after its distribution.
 Secured creditors must be taken care of before distribution to unsecured creditors
occurs.
o §726 - Distribution of Property - The estate shall be distributed in the following
order:
 §507 Priority Unsecured Claims
 Unsecured Claims Timely Filed
 Unsecured Claims Tardily Filed
 Fines, Penalties, or Forfeitures
 Interest on any Claim
 Debtor
EACH CATEGORY MUST BE PAID IN FULL BEFORE THE NEXT
CATEGORY DOWN GETS A NICKEL!!!
o §507 - Priority Claims
 (a)(1) - Domestic Support Obligations (DSO’s) - Debt that accrues on or before
the date of bankruptcy filing owed to or recoverable by spouse, former spouse,
child of the debtor, or legal guardian or responsible relative of child that is in the
nature of alimony, maintenance, or child support of such spouse, former spouse,
or child of the debtor.
 This does not include division of property among spouses.
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After 2005 Amendments, DSO’s must be paid first. Caveat: If
administrative expenses can be shown to have benefited DSO’s,
administrative expenses can come first.
(a)(2) - Administrative Expenses - Any expenses that are necessary for or benefit
the bankruptcy estate. Ex - upkeep of property before selling, hiring firm to
collect property, etc.
(a)(3) - Don’t worry about
(a)(4) & (a)(5) - Wages of debtor’s employees and debtor’s employees for
benefits claims/ employee benefit plans
 (a)(4) MAKES CLAIM TO THE EXTENT OF $10K FOR EACH
INDIVIDUAL WHO HAS EARNED W/IN 180 DAYS OF THE FILING,
WAGES, SALARIES, COMMISSIONS, ETC. . . FROM DEBTOR’S
BUSINESS.
 (a)(5) IS THE SAME THING BUT WITH REGARD TO ANY TYPE OF
EMPLOYEE BENEFIT PLAN.
(a)(6) - Unsecured claims of persons engaged in:
 the production of raising of grain against a debtor who owns or operates
a grain storage facility for the proceeds of grain;
 as a US fisherman against a debtor who has acquired fish or fish produce
from a fisherman through a sale or conversion, and who is engaged in
operating fish produce, and who is engaged in operating a fish produce
storage or processing facility.
 ALLOWS UNSECURED CLAIMS FOR FARMERS OR FISHERMAN
WHO HAVE STORED THEIR PRODUCES WITH A FACILITY IF THE
STORAGE PLACE FILES BANKRUPTCY.
(a)(7) - Unsecured claims of individuals to the extent of $2225 for each
individual, arising from the deposit, before the commencement of the case, of
money in connection with the purchase, lease, or rental of property, or the
purchase of services, for the personal, family, or household use of such
individuals, that were not delivered or provided. Ex - Security deposits put down
for property that will be used primarily for family, i.e. furniture, which benefits
consumers.
(a)(8) - All taxes
 Bankruptcy debtors will always, always, always have to pay their taxes,
federal and state!
(a)(9) - Don’t worry about
(a)(10) - Claims arising from motor vehicle or vessel for personal injury if such
operation was unlawful because the debtor was intoxicated from using alcohol,
drugs, or another substance
 Only monetary damage, not property damage!
WHATEVER CATEGORY YOU GET TO AND CANNOT PAY
COMPLETLEY IN FULL, START DOING PRO RATA SHARES!! THIS
APPLIES REGARDLESS OF WHERE YOU RUN OUT OF MONEY. IF YOU
RUN OUT AFTER DSO’s, ADMINISTRATIVE EXPENSES GET PRO RATA
SHARE.
Ex. Estate = $100; Timely Filed General Unsecured = $1K
- $100/$100 claims = .10 cents per dollar on claim
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- $50 claim = $5
- $999 claim = $99.99
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Discharge
o A debtor’s discharge is enforced by a permanent injunction issued by a federal court to
prevent any further collection of pre-bankruptcy debt. Any violation constitutes
contempt of court.
o As defined in §727, there are some things or circumstances in which the debtor receives
no discharge. §727 contains a laundry list of acts or situations in which the debtor will
receive no discharge of any debt. The shot gun discharge provision.
o §727 - The court shall grant the debtor a discharge UNLESS:
 (1) the debtor is not an individual
 Why? Corporations can get a discharge of their debts under CH 11, but
not under CH 7 because at the end of a CH 7 there should be no
corporation. If someone is claiming they need a discharge, then they
have not fully liquidated.
 (2) The debtor, with intent to hinder, delay, or defraud a creditor or officer of
the estate charged with custody of property under this title, has transferred,
removed, destroyed, mutilated, or concealed, or has permitted to be
transferred, removed, destroyed, mutilated, or concealed property of the
debtor within 1 year before the date of the filing of the petition, or property of
the estate, after the date of filign of the petition.
 Ex - Farmer who sold property to feed his pigs because he couldn’t stand
the sound of his pigs starving was sent to jail for 4/5 months.
 (3) Debtor concealed, destroyed, mutilated, falsified, or failed to keep or
preserve any recorded information including books, documents, records,
and papers from which the debtor’s financial condition or business
transactions might be ascertained, unless such act or failure to act was
justified under the circumstances of the case.
 Standard: Reasonableness, i.e. what type of records would we expect this
type of debtor to have.
 (4) Debtor knowingly or fraudulently, in connection with the case, make a
false oath or account, false claims, bribes, or withholds relevant information
from the bankruptcy trustee
 (5) Debtor failed to explain satisfactorily any loss of assets or deficiency of
assets to meet the debtor’s liabilities . . . goes along with (3).
 (6) Debtor has refused to obey any lawful order of the court/ revoked their
privilege of self-incrimination after debtor has been granted immunity.
o But--If you invoke your 5th Amendment, you may be denied a discharge.
 (7) Debtor committed some of these things in another bankruptcy case
within a year of filing of this bankruptcy case.
 (8) Debtor has been granted a discharge under §727 or §1141 within 8 years
before the date of the filing of the petition.
 (9) Debtor has been granted a discharge under §1228 or §1328 within 6
years before the date of the filing of the petition--unless you paid off all your
creditors in full (including unsecured claims) or 70% of your and that was
in good faith/ best that you could do.
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(10)  Upshot of this provision is you cannot waive your privilege of a BR
discharge before BR. You can only waive your right to a discharge in writing
with court approval.
 If we didn’t have this provision, every single credit card agreement
would have a clause waiving right to discharge.
(11)  There is now a requirement for an individual debtor in a Ch. 7 case to
take an instructional course on financial management.
IN SUMMARY: For the most part, §727 contains a laundry list of bad acts
that deny you the privilege of a BR discharge.
NOTE: Majority of Ch. 13 claims are unsuccessful—then you convert to Ch. 7.
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§523 contains a laundry list of specific types of debts which are not dischargeable in BR
even though all their other debts are. The rifle discharge provision.
§ 523(a)—Exceptions to Discharge
 (1)  Any type of taxes that an individual owes are going to be nondischargeable. Taxes and DSO’s are 2 debts that are both going to be nondischargeable and priority claims b/c Congress has decided that as a social policy
matter that repayment of those debts is more important than the fresh start given
to debtors though the discharge.
 (2)(a)  Any debt obtained through false pretenses, false representation, or
actual fraud. Note that anyone with a close relationship to a debtor is an insider.
o (b)  Or a debt that is based upon a statement in writing . . . on which
debtor relied and debtor caused to be made or published with intent to
deceive.
 We are requiring more than creditor leant money to debtor—has
to be a statement in writing concerning financial condition on
which creditor relied and that there was intent to deceive.
 This has been used in situations where someone has a credit card
and goes to casino and use cc to withdraw money; application for
credit card—you have to fill in income so there is a writing;
agreement states that the credit card holder is going to be able to
pay all debts.
o (c)  For purposes of (a), consumer debts owed to single creditor . . . are
presumed not dischargeable and presumably cash advances are not
dischargeable within 90 days of bankruptcy; the term luxury goods or
services does not include anything reasonably necessary for the
support/maintenance of the debtor.
 (3)  If the debtor doesn’t list a debt in their BR filing, then the debt will not be
discharged. The debtor also must list their creditors, so the BR court can send
notice to those creditors. Debts are only discharged if the constitutional
requirements of proper notice are met. Notice doesn’t mean actual notice to
creditors necessarily, but there is lots of constructive notice (i.e. newspaper).
 (4)  Fraud while a fiduciary, embezzlement or larceny.
 (5)  DSO (defined in §101—doesn’t include property settlement obligations
that arise form a divorce decree—SEE also (a)(15)).
 (6)  Willful and malicious injury (intentional tort) by debtor to another entity
or to their property.
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(7)  Fines, penalties payable to government entity.
(8)  Any federally guaranteed educational loan is going to be nondischargeable unless it would impose an undue hardship.
o For cases on student loans, court is more likely to find undue hardship
where debtor has bills but also has dependents.
o Example: Czar goes to med school. Runs up debt on a guaranteed school
loan. Czar asks Aunt Alice if she will sign off the interest rates, and he
will sign a promissory note protecting her from the rest of the debt. Aunt
Alice pays off the student debt, and Czar signs off on the promissory
note. 3 weeks later the Czar files for BR. Is that debt to Czar’s aunt nondischargeable under §532(a)(8)? If you are a clever scoundrel, then you
can probably get away with not repaying. You might be able to use
(a)(2), but a clever debtor will probably wait a while to take that out.
(9)  Debt for death or personal injury caused by drunk driving, boating, or
flying (basically anything with a motor)—does NOT apply to property.
(13)  Payment of any federal criminal order of restitution.
(14)  Debt incurred to pay a tax to a governmental unit other than US or
incurred to pay fines and penalties under federal election law—situation where
people pay taxes on credit cards, then file BR seeking to discharge the bill.
(15)  Any debts other than DSOs that arise from a divorce case will also be
non-dischargeable debt.
o DSO = Domestic Support Obligation—This is any obligation that is on
account of alimony, maintenance, child support.
o Why would Congress separate DSOs from non-DSOs?
 Ch. 13 has more expansive discharge. In Ch. 13 debtor still may
NOT discharge DSO (§523(5)) debts, but (a)(15) debts are
dischargeable. This is broader discharge for debtor, which means
that Ch. 13 should be more desirable to at least some debtors.
Hardship Discharge of Student Loans  In re Gerhardt and In re Patricia M. Miller, Debtor
 Court examines the possibility of giving the debtor a partial hardship discharge
under §523(a)(8)—student loans that are government backed are nondischargeable in BR unless debtor can make showing of undue hardship.
 Other courts use §105 of the code to give a partial hardship discharge.
o §105 gives the judges the general equity pallet that they consider
themselves to have anyways. Allows BR court to act as equity court.
o But §105 does NOT allow judge to ignore a dischargeability provision.
In re Milbank
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FACTS: This debtor is married to a woman, but he is a big fat adulterer. While
he is involved in that, he is also essentially bilking his father-in-law out of
money. Then he files BR trying to discharge those loans.
HOLDING: Court finds the debts for those loans non-dischargeable—distaste
for debtor allowed them to figure out way to do this. Loan was obtained under
false pretenses that debtor would be faithful husband.
NOTE: This illustrates how flexible the non-dischargeable rules are.
Bankruptcy Crimes  United States v. Cluck
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Crime to hide your assets and use property of the estate without BR Court’s
permission.
o I.e. Farmer who used part of estate to feed his hogs w/o permission went
to jail.
Problem 12.6  If O’Connor files a petition for protection under BR Code, will
the parking tickets be discharged?
o Argument that parking tickets are non-dischargeable? §523(a)(7)—not a
discharge to extent that debt is fine, penalty, or forfeiture payable to and
for benefit of a governmental unit. If this is a state university, then it’s
governmental unit (defined in §101).
Reaffirmation of Debts
 With regard to specific debt (SEE § 524), the debtor and their creditors agree
debt will not be discharged but will be paid under conditions the parties agree to.
 Why? With regard to some secured debts, you might want to reaffirm a debt
where you have pledged collateral that is vital to your existence, i.e. cars, or with
unsecured debt (in order to start future line of credit/maintain business r-ship), or
reaffirm debt out of gratitude.
 Problems: Worried about consumers being preyed upon plus fraud.
o Congress is concerned that creditors are going to prey on unsophisticated
debtors. Remember, the trustee does not represent the debtor.
o Reaffirmation is not a violation of the automatic stay—courts permit this.
Reaffirmation of Secured Debt—Possibilities for Debtor:
 Debtor can turn collateral over to the creditor.
 Reaffirmation
 Redemption (this refers to redeeming collateral)  BR law seeks to disrupt
property rights as minimally as possible. All the debtor has to pay to redeem
property in BR is the value of the collateral.
 There was a 4th possibility up unto the revisions in 2005. This is the “Ride
Through Option.” This is that liens ride through BR unless there’s a provisions
that avoids them.
Reaffirmation of Unsecured Debt  Concerned that debtor is being preyed upon by the creditor.
 Reaffirmation under §524(a)(4) is an extremely complicated procedure.
 If a debtor is represented by an atty, the atty must represent to the court saying
that the reaffirmation will not constitute an undue hardship to the debtor going
forward.
 Reaffirmation must be in writing and filed with the court.
 There’s a cooling off period b/w time that reaffirmation agreement is filed with
the court and the court enters the reaffirmation giving debtor time to change his
mind.
 If no atty, then courts gives debtor equivalent of Miranda.
 No one is forced to reaffirm a debt. The only thing a creditor has no choice about
is redemption of collateral under §722, but beyond that reaffirmation is voluntary
process.
Tennessee Student Assistance Corporation, Petitioner v. Hood
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FACTS: Non-dischargeability action against TN brought by debtor seeking court
order that it would be an undue hardship for a debtor to repay his student loans.
Adversary proceedings in BR courts have almost same rules as normal adversary
proceedings. The COA is 11th A violation which says states cannot be s in fed
courts.
HOLDING: USSC held that the 11th A does not hold here b/c of an exception for
in rem cases. There is a long-standing exception for in rem cases in admiralty
where the state is not in possession of the corpse (ship in admiralty). USSC said
that BR cases are essentially in rem cases.
Nondiscrimination
§ 525  Protection Against Discriminatory Treatment
 (a) This makes it a violation of the BR Code for a governmental unit (this
includes any branch of government—even semi-private municipal businesses
that the government runs) to deny, revoke, or suspend, or discriminate against a
person who is or has been debtor under BR Code—solely b/c such debtor has
been a debtor before BR.
 (b) Notice that private individuals however may refuse to do business with BR
people—does NOT protect debtors who have gone through BR from
discrimination from the private sector.
 (c) Except you (private companies) cannot be discriminated against in getting a
federally granted student loan if you have been bankrupt in the past.
CHAPTER 13 BANKRUPTCY
Theoretical Aspects
 For individual debtors that don’t have too much debt.
 Ch.13 is much more flexible than Ch. 11—easier to use and cheaper to file.
 The court is pretty much in control of the debtor’s process rather than creditors
like in 11.
 Main role of the creditors is to really know Ch. 13 law in order to object on the
debtor’s plan based on the law.
Mechanical Aspects
 There is not a new trustee appointed for every Ch. 13 case, but a standing trustee.
 Ch. 13 trustee will object to debtor’s plan, receive debtor’s plan payments and
distribute those payments every month to creditors pursuant to the plan.
 Trustee also has a significant role in advising the court concerning the
confirmation or rejection of the plan.
Elements of an Acceptable Plan  2 most important rules regarding Ch. 13:
 (1) In general, creditors must receive what they would have received in a Ch. 7
case if we liquidated the debtor’s assets today.
 (2) Debtor must devote all of his disposable income to funding the plan—
disposable income is money leftover after reasonable expenses.
In re Radden
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The automatic stay is zealously enforced by the courts, but it’s also a rather thin
protection for the debtor b/c the stay can be lifted by the judge, which means that
creditors are not stayed.
Lift stay motions are not that frequently seen in Ch. 13 cases b/c in Ch. 13 you
usually have a plan in place fairly quick.
ISSUE: Whether or not the automatic stay should be lifted?
This illustrates situation where secured creditor is using 2 common arguments
for lifting the automatic stay:
o (1) Lack of adequate protection (Loss of c ollateral)  If debtor is
handling collateral in such a way that might lead to it being destroyed or
injured in any way. They are protected if their collateral is protected.
 Secured creditors can be protected from their collateral
depreciating by having the debtor make payments.
o (2) 2 part test:
 (i) Debtor has no equity in property (collateral that secured
creditor has), AND
 (ii) Property NOT necessary for an “effective reorganization.”
HOLDING: Court refuses to lift automatic stay b/c they believe that an auto is
necessary for a debtor to get to work.
Chapter 13—Elements of an Acceptable Plan
What distinguishes a Ch. 13 plan from a Ch. 11 plan?
 Ch. 13 plans are NOT submitted to creditors. In Ch. 11 unsecured creditors get
to vote whether BR plan will be confirmed. Ch. 13 is meant to be a streamlined
organization structure, and it’s meant only for individual debtors with relatively
LOW levels debt ($1M or less).
 In Ch. 13 control is taken away from creditors. Rules are set about what the plan
must provide. As long as those rules are followed in formulating plan, then court
will confirm the plan, even if the creditors don’t like the plan.
Rules Governing Secured Creditors (What Secured Creditors are entitled to):
 Creditors (unsecured and secured) are entitled to what they would receive in a
Ch. 7 case.
 The model or reorganization is that the debtor is going to keep their stuff, so how
do we accomplish that? We have to have a plan that gives creditors at least what
they would receive in a Ch. 7. In the case of secured creditors, we have to give
them the value of their collateral. In order to do that, we have to know what the
collateral is worth (and we have to do that without selling it).
o I.e., In Ch. 13, the plan is going to last 3-5 years. If we have collateral
that’s worth $6K, and a 5 year plan, then that’s 60 months at $100 a
month…would this be a good loan? NO. $100 is not enough because of
the time value of money—need to give secured creditor a little interest.
 Need to know 2 things to ensure creditor is receiving what he’s entitled to:
o (1) Value of the collateral
o (2) Rate of interest reflecting the Time Value of Money (TVM)
Associates Commercial Corp. v. Rash
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FACTS: Debtor buys a tractor-trailer truck. He made a down-payment and
agreed to pay remainder in 60 monthly installments and pledged the truck as
collateral on the unpaid balance. He ended up filing Ch. 13 BR.
Debtor wants as low a valuation as possible, while the secured creditors wants as
high a valuation as possible—the retail price.
Potential Methods of Valuations:
o (1) Bluebook  Problem b/c Bluebook valuations contain extra money
thrown in for things like dealer prep—not appropriate for use in Ch. 13.
o (2) Retail or Contract Value  This is not going to work b/c it’s too
generous to secured creditors, and it doesn’t reflect reality.
o (3) Liquidation Value  This is what tractor-trailer truck would sell for
if we had to sell it tomorrow.
Which method do we use? Congress has said that court should use whatever
valuation standard reflects the reality at that point in the case. The beguiling
argument is that we are in BR, and BR means that the debtor is having a fire sale
(forced liquidation).
However, the SC has adopted Replacement Value. What is this?
o This is the amount a willing buyer would pay a willing seller for a piece
of collateral if neither one of them were forced to buy or sell (so it’s not
a liquidation sale) as a result of arm length’s bargaining.
o The best evidence for this is routine things sold through classified ads.
Home Mortgages  Please note that everything we’re talking about, including valuation of collateral,
does NOT apply to home mortgages. Ch. 13 does NOT permit the modification of home mortgages.
This means if a debtor has a home mortgage in a Ch. 13 plan, they must provide that the bank or the
lender continue receiving payments equal to whatever they’re entitled to under their contract.
 Advantages of filing Ch. 13 if your primary debt is home mortgage:
o (1) Automatic stay which stops the foreclosure sale so that you can keep
the house, and
o (2) You can use Ch. 13 to cure your past defaults.
 ADDITIONALLY  2005 Amendments created 2 types of security interests
granted fairly recently before BR exempt from cramdown, so that they must be
paid in full—plus interest:
o (1) Any security interest granted within the year before BR is exempt.
No modification of secured debt of ANY sort entered into w/in a year
before BR. If the secured debt was entered into w/in a year, then the BR
plan must propose payments equal to the contract.
o (2) For one specially favored secured creditor—the holder of purchase
money security interest (PMSI)—the time period is rolled much further
back, to exempt security interests granted within 2 ½ years (910 days)
prior to the BR petition.
 CONCLUSION: These 2 rules mean that in Ch. 13, there are 3 types of secured
debts (2 of these overlap) that cannot be modified:
o Home Mortgage
o Secured debt entered into w/in a year of BR
o PMSI in a motor vehicle entered into w/in 910 days before BR
Till vs. SCS Credit Corporation
 ISSUE: What is the proper interest rate to be applied?
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Vocabulary Terms:
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Potential Interest Rates:
o (1) Presume the Contract Rate  Many courts presume the K rate b/w
parties was the proper rate of interest—SC rejects this approach.
o (2) Coerced Loan Approach  Ask what the interest rate would be in
this situation with this particular debtor if a lender were forced to lend
the debtor money to purchase what the collateral is—this is market rate
of this collateral if they were forced to purchase this collateral. SC rejects
this also.
o (3) Formula Approach (SEE 1st paragraph under IV on pg. 301) 
Begins by looking to the national prime rate, reported daily in the press,
which reflects the financial market’s estimate of the amount a
commercial bank should charge a creditworthy commercial borrower to
compensate for the opportunity costs of the loan, the risk of inflation,
and the relatively slight risk of default. The approach then requires a BR
court to adjust the prime rate accordingly.
 Example: If prime rate is 2%, and there’s 5% risk of nonpayment, then amount you charge is 7%, and that’s the interest
rate.
Cram Down: We are going to take our Ch. 11 plan and cram it down the throats
of the creditors. Ch. 13 refers to the idea that a secured creditor under the plan or
reorganization is entitled to secure payments only to the value of their
collateral—cram down refers to the general rule that we can cram down the
throats of creditors a plan that is equal to the value of their collateral.
Lien Stripping: The idea that in a reorganization case, once we reduce the claim
to the value of the collateral, this is once the collateral had declined and it’s not
less than the amount it was secured for, then this lien has been stripped down.
o Example: Debt is $100K, and the collateral value is $70K. The lien is
stripped down to $70K, and once this is paid, then the lien strippers
would say that’s it, the lien is gone and the $30K is discharged.
However, the SC said no b/c liens ride through BR.
o Lien stripping refers to idea, rejected by SC, that once we pay off the
secured claim through our reorganization plan that the lien is gone, it’s
stripped off the property. This is rejected b/c liens ride through BR.
o This is only important if collateral goes UP in value post-BR. Then
secured creditor can look to that collateral to satisfy whatever debt
wasn’t satisfied in reorganization.
Lien Strip Off: Refers to ability in some BR courts to do what you can’t
accomplish through lien stripping—wholly unsecured creditor’s lien is viewed as
going away in some BR courts.
o We have secured debtor #1 with $100K and collateral value of $100K,
and a secured debtor #2 with $50K. If Ch. 13 plan provides payments of
$100K, then secured creditor #2 is going to have an unsecured claim,
$50K in the plan. Since liens ride through BR, the question is whether
secured creditor #2 will still have a lien on the property. Logical answer
is yes b/c SC has told us NO lien stripping. However, BR courts are
mixed on this.
23
Payments to Unsecured Creditors—Requirements for Ch. 13 under the BR Code:
 (1) Best Interest of Creditors Test  This is the test that also applies in Ch. 11,
12 and all reorganization statutes of code. Creditors entitled to at least what they
would have received in Ch. 7 Liquidation.
 (2) Disposable Income (or The Best Efforts Test)  Refers to the idea that a
debtor ought to be required to devote all of their disposable income (the amount
of money leftover above reasonable living expenses) to funding their plan of
reorganization or their Ch. 13 plans.
 (3) Ch. 13 plan must also be proposed in good faith.
o Good faith is not defined in the BR code—it’s a litigator’s paradise.
In 2005, Congress decided to distinguish b/w ABOVE-MEDIAN INCOME debtors and BELOWMEDIAN INCOME debtors.
Below-Median Debtors
 Plan only has to be 36 months, but can be longer.
 Debtor’s Ch. 13 plan must be in the best interest of creditors AND must
represent the debtor’s best efforts, i.e. the debtor must devote all disposable
income to funding plan.
 No additional rules or tests are involved. This is b/c these are folks that could
have filed a Ch. 7 plan—you are doing what Congress wants all debtors to do if
possible.
In re Carter  A non-debtor spouse’s income counts towards the debtor’s income for purposes of those
2 tests (Best Interest Test and Best Efforts Test).
In the Matter of Wyant
 The BR court has complete discretion to decide what are a debtor’s reasonable
expenses.
 Disposable Income = Income — Reasonable Living Expenses
Above-Median Debtors
 Required to file 5 year plans.
 If the debtors have a surplus of income under the means test, then they pay
unsecured non-priority creditors an amount equal to that surplus over the 60
months of their plan.
 If the debtors are over the median but do not have a surplus according to the
presumptive abuse test, it appears they are treated like the below-median debtors
for determining how much to pay—this is the Best Efforts Test.
 KEY: Here, Congress is taking away some of the discretion the BR judges have
by requiring that this theoretical surplus calculation is the amount you will have
to pay if you have a surplus and you’re an above-median income debtor.
 Is Congress right to try to force debtors whose income is above average into 5
year Ch. 13 plan? Congress believes that debtors will thereby be able to repay
their unsecured creditors more than they would receive in a Ch. 7 case—we
don’t know if this is true.
Priority Claims in Ch. 13
 General rule  Must be paid in full.
24
In re Leone

You have ability to classify your creditors, and then as long as everyone w/in a
class is treated the same way, you can treat different classes differently.
However, you can’t unfairly discriminate. This is more common in Ch. 11, than
in Ch. 13.
o If one of your debts in Ch. 13 case is non-dischargeable debt, and it’s
unsecured, and all other debts are just unsecured—what would you do?
o RULE: Classes must contain similar claims (all secured/all
unsecured), but there’s not a requirement that all similar claims be
in the same class.
o Reason to classify these separately would be to treat unsecured claims
differently.

FACTS: Even though debtor followed statute, the court hones in on fact that
total payments under plan are going to exceed the house value by $67K, and that
is bad faith.
HOLDING: The court really wants the debtor to sell the house if they want to
remain in Ch. 13, and they will be able to pay more to their unsecured creditors.
o Not all courts would agree with this court.
This idea that the debtor’s Ch. 13 plan does NOT maximize payments to
unsecured creditors is the most common source of good faith objections to Ch.
13 claims. Where do you see this?
o (1) Leone case
o (2) Where debtor proposes to pay off non-dischargeable debt at greater
rate than other unsecured claims, as long as debtor proposes to pay their
other unsecured creditors at least what they would receive in Ch. 7.
o (3) Some creditors take position that Ch. 13 plan where unsecured
creditors receive zero is a bad faith plan—courts think debtor should just
liquidate.


Threshold Eligibility for Chapter 13
 §109(e)  Basically limits access to Ch. 13 to natural persons with limited debts
and regular income.
 You are eligible to file Ch. 13 if you are living breathing human and you have
non-contingent, liquidated, unsecured debts of less than $307,675 and noncontingent, liquidated, secured debts of less than $922,975.
o Eligibility requirements are for small businesses that are sole proprietors
 Small businessperson can always file a Ch. 11, but what are some advantages of
Ch. 13?
o It’s the difference b/w in Ch. 13 the debtor having complete control over
the plan vs. Ch. 11 where in addition to legal requirements, you have to
get votes from your creditors in order for your plan to be confirmed.
o Ch. 13 is designed to be very streamlined.
o Ch. 11 is more expensive.
ELEMENTS:
1. Individual
2. With regular income and
3. With non-contingent, liquidated debts below certain levels
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In re Murphy—What about regular income?
 FACTS: There is a live-in arrangement whereby the debtor has certain tasks in
the relationship, and S.O. (significant other) gives her a stipend.
 Creditors argued that stipend from a S.O. is NOT regular income.
 What was the argument that it is? Legal right—in order for something to be
regular income, the debtor must have a legal right to it. This is an entitlement
they could own in court.
o Because this debtor would not be able to go into court to compel her S.O.
here for payments, then she has no legal right to them.
o RULE: Unless you have a legal right, then you are not a person with
regular income.
 Not all BR courts would agree with this decision.
Other issues with regard to regular income:
 Regular income does not necessarily mean monthly payments. I.e., sales person
who works on commission.
 Government payments, such as SS payments, do count as regular income.
Identifying Types of Claims
 Contingent Claim: A right to payment that depends upon a future event
occurring, which event may or may not occur.
 Liquidated Claim: A claim that can easily be calculated or it can be reduced to a
number.
In re Huelbig—Whether or not a liquidated claim exists?—Two issues:
 (1) How difficult is it going to be to calculate damages assuming there’s
liability? If it’s very hard, then perhaps we don’t have a liquidated claim at all.
 (2) What is the role of liability?
o Some courts will require that all litigation be at end and the claim be
calculated before court will hold that judgment claims is liquidated
claim. So when judgment debtor immediately files BR b/c they see a hit
coming, then the judgment creditor wants to argue that they can’t be in
BR.
o Some courts will require that a judgment is enough for a liquidated
claim.
Co-Debtor Stay




This is meant to encourage people to file Ch. 13 over Ch. 7.
§ 1301 of the Code provides that the automatic stay in Ch. 13 case extends to
parties that are also liable on a debt with the debtor.
When would you use this? Someone in your family co-signing a note for you.
What does the stay actually do? It prevents the co-signor, mom or dad, from
having to pay the debt. During the Ch. 13 BR the automatic stay extends to the
co-signor.
Discharge Provisions—§ 1328  Scope of the Ch. 13 Discharge and Ch. 13 v. Ch. 7:
 Traditionally, Ch. 13 was known as the chapter whereby individuals could get
the broadest discharge of debts.
26


o § 523 makes certain debts for debtor non-dischargeable in Ch. 7.
o Ch. 13 use to be much broader than Ch. 7, but amendments have
significantly narrowed dischargeability in Ch. 13.
§ 1328 (a)(2,3,4)  Most of the most frequent types of a debt that are nondischargeable under §523 are also non-dischargeable under Ch. 13.
Most important debts left are non-DSO (property settlement) debts arising from
divorce decree. Any debts / obligations arising from divorce decree that are not
alimony, maintenance or child support ARE dischargeable under Ch. 13.
Hardship Discharge
 Normally, a debtor will receive a discharge of their debts under Ch. 13 when
they have fulfilled their plan.
 The majority of Ch. 13 plans do not end up being fully repaid, so §1328(b)
permits a so-called Hardship Discharge in Ch. 13—If the debtor fails to fully
make payments under their plan and if debtor can show 2 elements they can still
receive a discharge.
o (1) Failure to fund Ch. 13 plan fully was based on circumstances beyond
the debtor’s control. I.e., illness, job lay-off, or natural disaster.
o (2) The amount of payments that the debtor did make under the plan is
not less than the amount that would have been paid to the debtor in a Ch.
7 liquidation (still have the Best Interest Test for the creditors).
 §1328(c)  Notice though that the hardship discharge only gives the debtor the
equivalent discharge of a Ch. 7 case.
 NOTE: What happens in a Ch. 13 case if a debtor gets laid of his job or gets a
raise?
o Traditional rule is that if creditor notices that income has gone up or if
debtor notices that income has gone down, then they can run to court and
ask for a modification, but all Ch. 13 tests still have to be met.
o With 2005 amendments, creditors can requests that debtors file a yearly
financial statement.
Chapter 12 for Family Farmers and Fishermen
 Even in ag state like Mississippi, Ch. 12 is used very rarely.
 A family farmer is a person who conducts farming operations with a large
percentage of their household income derived from farming. This is to separate
purely corporate farming operations from family/gentleman farming.
 Why wasn’t Ch. 13 sufficient to deal with farmers?
o (1) Because of the debt thresholds of Ch. 13 ($1M)—rather than simply
lift the debt thresholds across the board b/c that would let a lot of another
individuals in, they decided to draft a separate section limited in
eligibility only to farmers with higher debt limits ($3M).
o (2) Non-modification of mortgages—Home mortgages in Ch. 12 are
modifiable. It can be modified and payments on account of a secured
debt can be stretched out over many years. Unsecured debt still must
have plan and be paid out over 3-5 yrs
 I.e., Mortgage on land $1M, but only have to pay S500,000 over
a number of years, and $500,000 deficiency is discharged so long
as farmer uses all disposable income over years to pay towards
plan.
27


In re San Miguel



Adequate protection payments simply have to be a fair rental
value of the property. So secured creditors really take it in the
neck in times of deflating land value. This is favorable to farmer;
theoretically, the costs of farmland out to be higher since the idea
is that the debtor should pay value of decrease in collateral to
creditor.
The only place where Ch. 12 is less favorable than Ch. 13 for farmers is in the
discharge. The Ch. 12 discharge is congruent with the Ch. 7 discharge, so largely
no practical difference from Ch. 13 other than the non-DSO discharge.
FACTS: Debtors file Ch. 13, and they have very modest incomes and very little
disposable income, so they pay $1 a month to each unsecured creditor. Their
income was eaten up by that and attorney’s fees.
Most people have to hire a lawyer to file for BR. Debtors lawyers want to get
their money upfront before they do any work (also prevents that money from
being re-captured). Or the alternative is to get clients to file Ch. 13 case and let
them under this plan pay the lawyer’s fees as quickly as they can.
o Presumable the lawyer would be in one class, and the other unsecured
creditors in another class.
o If this is more than debtors would be paid in Ch. 7 and decent amount of
debtor’s disposable income is being used, then this is adequate for Ch. 13
HOLDING: Court says this is NOT what Ch. 13 is for. It’s for greater repayment
to creditors, and not to spreading out attorney’s fees. Court sympathizes with
what lawyer was helping her clients to do here, but this is not what Ch. 13 is
supposed to do.
PART II: BUSINESS BANKRUPTCY
CHAPTER 7—LIQUIDATION
Involuntary Bankruptcy
 These are quite rare and are almost exclusively filed against businesses.
 Why are involuntary cases so rare today?
o Cumbersome procedures
o BR is viewed as a last resort when attempts at consensually working it
out have failed—giving all parties opportunity to resolve case before BR.
o Economic notion that for businesses the whole (the company) is greater
than the sum of its parts—profits made worth more than equipment.
o BR, depending on what type of creditor you are and what type of
resources you have at your disposable to collect debts, is ether a curse or
a boom.
§ 303  Involuntary Cases
 This provision applies to any type of BR case.
 (a) Only can have under Ch. 7 or 11, NOT Ch. 12 or 13 or 9 (governmental
units). Chs. 7 or 11 can be filed against legal person (this includes
corporations—any person who themselves is eligible to file 7 or 11), except a
farmer, family farmer, or corporation that is not money, business, profit or
commercial corporation.
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
o Why the latter 2 limitations? Farmers are highly favored by Congress,
and non-moneyed corporations refer to charities.
(b) Commenced by 3 or more entities with claim against person if such noncontingent undisputed claims aggregate at least $12,300 more than value of any
lien on property. If fewer than 3, by 1 such holder of claims that aggregate at
least $12,300.
o The type of creditors in either case that count are holders of noncontingent claims against the debtor and are not subject to bona fide
dispute as to the amount or liability—only creditors whom we are certain
are owed money by the debtor can force debtor into involuntary BR.
o We want involuntary cases to the extent we can control them only to be
filed when there is a collective problem—debtor really isn’t paying their
debts in general or debtor really is insolvent in general. How does BR
Code ensure this?
 Put restrictions, monetary and limit on number of creditors, on
when involuntary BR can happen.
 Creditors must have more than a minimal stake measured by the
amount of debt.
o SEE (1) and (2). If there are 12 or more creditors, then there must be at
least 3 creditors joining in the involuntary petition, and the amount of
their claims must aggregate $12,300.
 These are unsecured claims, not lien holders. Amount of secured
liens do not count b/c secured creditors are going to get the
benefit of their secured bargain—the collateral or its value in BR.
 Remember that undersecured creditor has both secured claim up
to value of collateral and unsecured claim for any excess amount.
In re Gibraltor Amusements
 ISSUE: If the creditors that are the petitioning creditors of the involuntary
petition are all members of the same corporate family but are separate
subsidiaries, should we really count them as separate petitioners for the purposes
of § 303 or should we recognize that really what we have is one corporate
family?
 HOLDING: These are separate corporations. BR law does not have its own
piercing the corporate veil law.
 RULE: Subsidiaries can count as separate petitioning creditors as long as in fact
they are separate legal entities.
In re Faberge Restaurant of Florida, Inc.
 FACTS: Debtor approaches 1 or 2 of the 3 creditors that joined in involuntary
petition against them and paid off the debt. Is this petition still valid?
 HOLDING: Case stays in BR court.
 RULE: As long as the creditors met the requirements of §303 as of the filing of
the BR petition, then the BR court has proper jurisdiction over the court.
§ 303(h)—Acts of Bankruptcy
 Not only must there be requisite number of creditors, but Code also provides a
substantive basis (act of BR) for having case remain in involuntary BR
proceeding. What are acts of BR?
29


o Debtor is generally not paying debts as debts come due, OR
o Within 120 days a custodian other than trustee, receiver or agent is
appointed or took position.
Involuntary petition is filed and if it’s not timely controverted, then the court
should enter the order of relief (this gives court full jurisdiction over the debtor).
o Sometimes events are measured from date of petition and sometimes
form order of relief.
o The involuntary gap period is for debtor to argue that requisite number of
creditors aren’t there or that the acts required in §303(h) for BR are not
there.
Petition is filed. Debtor will have a certain number of days to file a response in
BR court. Petition itself will look a lot like a federal complaint, and the debtor’s
response will look like an answer. Grounds for debtor to answer—flaw in
petition or not act of BR under §303(h). We will simply have a federal court trial
over whether or not the BR petition will stand.
PART III: Bankruptcy Outline
CHAPTER 11--REORGANIZATION

The D.I.P.
o In CH 11, unlike CH 7, 12, or 11, no trustee is appointed, at least not automatically.
o D.I.P. = Debtor in Possession
 The debtor remains in possession of his assets, but unlike CH 12 and 13, there is no
standing trustee appointed. Instead, the D.I.P. acts as trustee and has virtually all the
powers and responsibilities of the bankruptcy trustee.
 Why? The concept of DIP stems from the idea that most CH 11 cases will be
filed by corporations or individuals with a very substantial business. We
don’t want the management to lose control b/c the management is more
familiar with the way the business works and has a personal interest in trying
to keep the corporation afloat. Presumably, the management knows where
the problems lie and will have better insight and a better ability to reorganize
the company in a relatively short period of time.
 Neither the BR Code nor case law indicates who specifically becomes the DIP.
 Problems/ Criticisms:
 The D.I.P. is in a position to hide liabilities or assets (i.e. fraud).
 If the debtor remains in possession, conflicts of interest could arise. It raises
a question of whether the management can step back and do things in the
best interest of the corporation instead of in the best personal interest of the
individuals involved.
 Essentially - There is tension in acting as trustee and in managing the
company.
 But Note: If things get bad--i.e. if the D.I.P. is looting, stealing or severely
mismanaging the company, the creditors can get together and ask the court to
appoint a trustee.
THE AUTOMATIC STAY AND ADEQUATE PROTECTION

What happens if action is taken in violation of the automatic stay? There is a circuit split.
30
o The traditional rule is that actions taken in violation of the stay, even if unwitting, are void.
 Void actions have no meaning in law, so they must be undone.
 Ex - Debtor’s car is repoed by creditor. Under the traditional rule, the creditor must
give the car back. After giving the car back, the creditor could go to court and argue
for the court to lift the automatic stay.
 Why might the court lift the automatic stay?
o Lack of adequate protection
o Automatic stay is not needed for an effective reorganization and
debtor has no equity in property
o The minority rule (but 5th Circuit follows) is that actions in violation of the stay are
voidable.
 Ex - Debtors car is repoed by a creditor. Debtor runs to BR court and argues that his
car was repoed in violation of the automatic stay. If actions taken in violation of the
stay are merely voidable, then the BR court can ask whether or not the court would
have lifted the automatic stay had the creditor first come to court and asked the court
to lift the stay. If the court would have lifted the stay, no harm has been done and
the creditor would have gotten his collateral either way.

§ 362(b) - Exceptions to the Automatic Stay
o Note: Congress has decided that there are some things more important than BR. As such,
some actions ought to be able to go forward even in the face of a bankruptcy filing by a
debtor because they are more important from a social policy standpoint.
o
(b)(1)  A case is not stayed if it is the commencement or continuation of a criminal
action or proceeding against the debtor.
 Anything that cause as BR debtor to have to spend property of the estate to defend
themselves without court permission is violation of the automatic stay.
 United States v. Seitles
 Courts interpret exceptions to the automatic stay narrowly (because we don’t
want people to take advantage of these exceptions).
 Some criminal proceedings look like criminal proceedings--ex. bouncing a
check. Give the person who bounced the check the opportunity to pay the
amount owed and dismiss the case. This doesn’t look like a prosecutor
trying to act as bill collector for the merchant.
 However, some so-called criminal prosecutions look like debt collection.
 RULE: If what the state is doing is collecting money based on prebankruptcy debts, then there is a pecuniary, rather than a criminal
prosecution, reason for the case. Any pecuniary interest that the state has is
not a true criminal proceedings, but rather debt collection proceeding. A
majority of courts have agreed.
 Ex - If someone is pouring mercury into river, the government has many ways to
stop the person, including criminal prosecution. Here, the government brings a
criminal prosecution under some environmental law and says to Δ, bankruptcy
debtor, agree to clean up property and we will drop the prosecution. The
government has a pecuniary interest because if the debtor doesn’t clean up the
property, the government will have to clean it up. THIS IS A TOUGHER CASE
AND CZAR IS NOT SURE WHICH WAY THE COURT WILL HOLD!
31
o
(b)(2)  A case is not stayed if it’s civil proceeding for the establishment of paternity,
DSO, matter concerning custody/visitation, dissolution of marriage, or regarding
domestic violence, i.e. all pure domestic relation type cases will not be stayed.
 Anything having to do with the status of the parties or their dependents is NOT
stayed by the automatic stay. Even if you can make an argument that these actions
required spending assets of the estate, too bad.
 BUT - An action for property division in a divorce action does NOT fall within the
exception; it is stayed.
 Enforcement of everything but property division in a divorce are not stayed by the
automatic stay!
o (b)(3)  LATER
o (b)(4)  A case is not stayed if it’s the commencement or continuation of any action by
a governmental unit . . . . to enforce such governmental unit’s or organization’s police
and regulatory power, . . . .
 Congress thinks the government ought to have the ability to enforce their police
powers.
 This doesn’t mean that the government can bring a COA for judgment they obtained
in expenses for cleaning up (for ex) mercury in a river. So the judgment leaves the
government as an unsecured creditor in the amount of damages they were awarded.
Congress could make this a priority debt to avoid this if they wanted to because in
CH 11 if a debtor cannot pay all priority debts in full, they have to liquidate.
o (b)(9)  Tax audits, etc. are not stayed and can go forward.
 In other words, you can’t file bankruptcy to avoid a tax audit.

STAY ANY ACTIONS AGAINST THE GUARANTOR OF THE DEBT. THE AUTOMATIC
STAY ONLY APPLIES TO THE DEBTOR (EXCEPT IN CH 13 WHICH EXTENDS TO CODEBTORS)!
THE BANKRUPTCY COURTS EQUITY POWER

§ 105 - The court may enter any order, process, or judgment that is necessary or appropriate to carry
out the provisions of this title.
o This § gives BR courts equity power; they have the authority to enter any order it sees fit to
foster the objectives of the BR Code.
o To use this section, the proponent must generate some nexus between the equity they are
seeking and some section of the BR Code.
PREFERENCES/ §547

There are two avoidance powers: Strong Arm Power (already discussed), and Preference (§547(b))
o Ex - Right before bankruptcy, debtor’s assets equal $100 and debtor’s owes: $100 to credit
card company, $100 to bookstore, and $100 to Mom.
 If debtor makes no transfers, then each of the creditors will receive $33.
 But--if debtor pays off Mom all $100 right before bankruptcy, the debtor has
preferred Mom. In the bankruptcy world, this is an unjust result.
32

Even if Mom was paid only $50, she was still preferred because she still received
more than the other creditors will receive.
o Generally
 By receiving any payment before BR, a creditor is preferred. Again, this does
not necessarily mean being paid in full. Even partial payments will amount to a
preference.
 There is NO INTENT REQUIREMENT to be shown by the trustee!!!
 Purpose of the Preference Statute - - It is meant to correct any preferring of
creditors that would undo/ subvert the bankruptcy distribution scheme, which is
meant to be fair.

ELEMENTS OF PREFERENCE STATUTE: § 547(b)
The trustee may avoid any transfer of an interest of the debtor in property:
o To or for the benefit of the creditor;
 This could be a transfer of property, cash, a security interest, etc.
 Ex - What if Mom owes money to creditor and debtor pays off Mom’s creditor? That
can be a preference because the language covers not only direct payments to a
creditor but also payments to a creditor of debtor or anything else that benefits the
creditor is avoided under preference.
o for or on account of an antecedent debt (i.e. pre-existing debt) owed by the debtor
before the transfer was made;
 IT MUST BE PRE-EXISTING DEBT!!
 What about the preference problem when a person seeking to file for bankruptcy
asks an attorney to file the petition? There is a preference problem because if the
attorney is not paid by the day they file they are an unsecured creditor and if they are
paid they have a preference. How do debtor’s attorney’s deal with this? Get a
retainer up front in cash. This way when the debtor pays the lawyer, there is no preexisting debt because the lawyer hasn’t done any work yet
o made while the debtor was insolvent;
 547(f) - Rebuttable presumption that in 90 days before bankruptcy the debtor is
insolvent.
 Therefore - Within 90 day period, the transferee, or the person being sued, must
come forward with evidence that the debtor was not insolvent (since the debtor is
presumed to be insolvent). Beyond 90 days, the trustee has the burden to prove
insolvency.
o made
 on or within 90 days of the date of the filing; OR
 This is the normal reach-back period/ can always avoid within 90 days
 up to a year of the date of filing if the creditor was an “insider” of the debtor ;
 101(31) - An insider = anyone the debtor is really close to; includes relatives,
general partners, a corporation of which the debtor is an officer, director or
person in control, etc.
 Thus, can avoid up to 1 year if creditor involved in the transfer was an
insider of the debtor.
33
o that enables such creditor to receive more than such creditor would receive if--the case
was under CH 7; the transfer had not been made; and such creditor received payment
of such debt to the extent provided by the provisions of this title.
 According to Czar, this element WILL ALWAYS be met UNLESS the transfers
took place in 1 of 2 situations:
 situation where debtor solvent (which means not a preference anyway b/c
has enough assets to make payments in full), OR
 where payments made to an over secured creditor.
o Ex - Secured creditor owed $100,000 but property which is secured
is worth $200,000. During the preference period, the debtor makes
cash payments to the creditor to pay down the debt. Why is this not a
preferential transfer? Because we want to prevent creditors from
receiving more than they would have if they had followed normal
bankruptcy distribution.
THE ABOVE ARE THE ELEMENTS OF A PREFERENCE!! It makes avoidable a transfer
to or for the benefit of a creditor, within the reach-back period, at a time the debtor was
insolvent, on account of antecedent debt, that which transferred gave the creditor more than
the creditor would have received in a CH 7 on date of transfer.

THE EARMARKING DOCTRINE (In re Calvert)
o Before bankruptcy, one creditor steps completely into the shoes of another to pay off a debt
in exchange for a promise by the other creditor to repay him. According to the Earmarking
Doctrine, so long as economically speaking there is no diminution in the debt, there is no
preference problem.
 ELEMENTS:
 The existence of an agreement between the new lender and the debtor that
the new funds will be used to pay a specified antecedent debt;
 Performance of that agreement according to its terms; AND
 The transaction viewed as a whole (including the transfer in of the new funds
and the transfer out to the old creditor) does not result in any diminution of
the estate.
 Ex - In Calvert, debtor was someone’s child who owed money for embezzlement
and his parents paid off money that was owed to the creditor. The son, debtor, agreed
to repay parents. All that has happened is that one debt completely replaced a preexisting debt. It is not as if the creditor was preferred because the same debt is still
there in the same amount.

In re Deprizio
o Facts - Debtor is Deprizio Construction Corp. Mr. Deprizio, the Debtor’s President,
guaranteed the debts of the corporation. He was assassinated in a parking lot. The
corporation made payments on the loan to the bank. The trustees tried to attack the
preference payments not only within 90 days but also within 1 year by arguing there was an
insider involved. Remember--the usual preference period is 90 days unless the transferee is
an insider.
 How was an insider involved? Deprizio, as President and guarantor of his
corporation’s debts, was an insider under the BR Code definition. For every penny
the corporation paid to the bank, Deprizio’s liability was reduced.
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o The court held that payments made by the debtor corporation more than 90 days but less
than 1 year before bankruptcy to non-insider bank was a preference because the payments
indirectly benefited an insider officer who was a guarantor of the debt.
The Deprizio “Fix”
o Congress tried to fix this by amending the BR Code. The 1994 and 2005 Amendments
insulate the non-insider creditor from the effects of an insider benefit for transfers
made more than 90 days before bankruptcy. However, remember that the guarantor is
still on the hook!! The “fix” doesn’t help the guarantor, only the bank who received the
payments.

Voidable Preferences at State Law
o Ex - Obtained a judgment against Δ and go to collect and find out that sometime after the
judgment, the debtor has paid off a bunch of other creditors and at the time the judgment
debtor made those payments, he was insolvent. State law used to permit a judgment debtor
to avoid preferential payments, but states have done away with a lot of these preference
statutes.
o §544(b) - Permits the bankruptcy trustee to use any avoidance statute that is on the state law
books. Also discussed at end of outline.

THE EXCEPTIONS TO 547(b)
o In answering preference questions, DO NOT immediately jump to the exceptions. Always
analyze the elements of a preference first!!
 STEPS OF ANALYSIS:
 Are the elements of §547(b) met; if yes,
 Look to exceptions to see if there is a defense to what would otherwise be an
avoidable preferential transfer.
o AS A GENERAL RULE, COURTS INTERPRET THESE EXCEPTIONS VERY
NARROWLY!!
o The Contemporaneous Exchange Exception
 547(c)(1) - To the extent the exchange is substantially contemporaneous, there is no
preference, i.e. just about the same time.
 Normally no more than within the same day (and certainly no more than 2).
 Ex - Czar goes to Kroger. Cahier rings up $500 but Czar doesn’t have his wallet.
He has to run out to the car to get it. Has there been a delay? Is this an antecedent
debt? Is this payment technically a payment on antecedent debt 90 days before
bankruptcy? For the instant between the two events, the seller was technically a
general unsecured creditor. The contemporaneous exchange exception makes it clear
as long as the exchange is substantially contemporaneous such transactions are not
subject to avoidance if the debt declares bankruptcy within 90 days.
 Ex - What if in the above hypo Czar paid by check? At what point does transfer by
check take effect for purpose of the preference statute? Is it when you tender the
check to Kroger or is it when the check clears? The Supreme Court has said (in
Barnhill) that transfer by check is not effective until the check clears--that is, until
the $$$ hits Kroger’s bank account.
 Debit cards and credit cards would most likely be contemporaneous.
o The Ordinary Course of Business Exception
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
547(c)(2) - To the extent that such transfer was in payment of a debt incurred by the
debtor in the ordinary course of business, there is no preference.
2005 AMENDMENTS - The transferee must prove (1) that the debt was incurred in
the ordinary course of business of the debtor; AND EITHER (2) that the transfer was
in the ordinary course of the debtor’s business OR (3) that the transfer was made
according to ordinary business terms.
 Ordinary course of business of the debtor means that the DEBT between the
debtor and creditor was entered into during the ordinary course of business,
i.e. the debt on which the creditor is receiving payments was entered into in
the ordinary course of business.
o Is an initial small business loan ever in the ordinary course of
business? Sometimes. Some courts say that a business has to start
somewhere and, therefore, initial loans are in the ordinary course,
while some courts take a more narrow position that once-in-alifetime loans are never in the ordinary course of business.
o The Purchase Money Exception - WILL NOT BE ON THE EXAM!
o The Subsequent New Value Exception
 §547(4) - To the extent that such transfer was to or for the benefit of a creditor, to
the extent that, after such transfer, such creditor gave new value to or for the benefit
of the debtor, there is no preference.
 This is a very important exception! It often arises in bankruptcies between a
debtor and creditor who have an ongoing relationship. Congress does not
want to deter creditors from continuing their relationship with the debtor as
the debtor slides toward bankruptcy.
 Ex - During the time the debtor slides toward bankruptcy, debtor makes a payment
on an antecedent debt. Creditor and debtor have an ongoing relationship. Because
we want to encourage creditors to keep doing business with the debtors, the
subsequent new value exception offsets against the creditor’s liability ANY
subsequent advances of credit that the creditor made to the debtor. In other words, if
the creditor turned around and lent the debtor more, the creditor would get to offset
the new credit with the amount that was paid.
 THERE MUST BE AN ACTUAL EXTENSION OF CREDIT (AND NOT JUST A
“LINE OF CREDIT”). THE DEBTOR MUST ACTUALLY RECEIVE MONEY,
GOODS, VALUE, ETC.
 Ex - Within the preference period, debtor paid creditor $1000 on antecedent debt. 5
days later, creditor extended $5000 credit to the debtor. Under §547(b), there is no
doubt that this is an avoidable preference. Absent any exceptions, the creditors
would have to pay back the $1000 to the estate. But, under the subsequent new value
exception, the creditor gets to offset $5000 of subsequent credit against any prior
preferential payments - and will not have to pay the $1000 back into the estate.
 STEPS OF ANALYSIS:
 Make a list of all payments by the debtor to the creditor and all extensions of
new credit or value that the creditor extended to the debtor during the
preference period.
 Go through and, for every payment by the debtor, determine whether it was a
preference and if so, whether an exception applies. Remember--multiple
exceptions may apply.
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
If there is a preference payment, determine whether there was a
SUBSEQUENT extension of value/ one that occurred AFTER the preference
payment? If so, the preference payment can be offset.
 If there is a final payment of X amount and there was no subsequent
extension of credit, the creditor is subject to X amount of preference
exposure (unless another exception applies).
Security Interest - 547(e) - Tells us when delayed perfection of a security interest constitutes a
preference.
o Gives creditors a 30 day grace period to perfect their security interests.
o Ex. - Bank is granted a security interest in collateral. 20 days after granting security interest,
bank finally filed financing statement to perfect (within preference period). Is perfection of
security interest a preference?
 Under 547(e), if the creditor perfects the security interest within 30 days of the
security interest attaching, then the perfection relates back to the initial transaction of
the parties and there is no preference because law deems perfection to have occurred
at initial time of transaction. After 30 days, the security interest is deemed to have
been perfected on the day it was actually perfected.
o FYI--I’M NOT SURE WHETHER THIS WILL BE ON THE EXAM--LAUREN’S
NOTES SAID NO, BUT MINE AND MC’S DIDN’T SPECIFY.
STATUTORY LIENS
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
A statutory lien is a lien created by statute. Ex - Innkeeper’s Lien, Mechanic’s Lien, etc.
When a debtor files bankruptcy and property of the debtor is subject to statutory liens, the general
rule is that liens ride through bankruptcy unless we can point to some specific avoidance power in
the BR Code that gives the court the power to avoid the line.
o As such, most statutory liens remain valid and enforceable in bankruptcy.
o Ex - If mechanic fixes car and debtor refuses to pay and then files for bankruptcy, the
mechanic will probably get to keep the car.
§545 - However, two types of statutory liens that are avoidable in bankruptcy.
o §545(2), (3), and (4) - Landlord’s Liens
 Landlord liens are avoidable. In other words, a lien that arises by operation of a
statute to secure the repayment of rent is avoidable in bankruptcy.
o §545(1) - Bankruptcy Priority Liens
 aka Statutory Liens that Arise Upon the Insolvency of the Debtor
 Any lien that arises by operation of statute upon insolvency of the debtor is
avoidable in bankruptcy.
 By doing this, Congress does not permit state legislators to favor creditors
and allow them to opt out of bankruptcy. Otherwise, you would have
creditors (farmers, credit card companies) lobbying state legislatures for
statutory liens. As lien holders, they would be allowed to get their collateral
where as without the lien they would be considered unsecured creditors. This
is what the BR Code is trying to avoid!!
 §545(1) has a list of tests for insolvency: (A) through (F)
 When a petition for bankruptcy is filed;
 When another proceeding indicating insolvency is filed;
 When a custodian is appointed or authorized to take possession of property;
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When a debtor becomes insolvent;
When the debtor’s financial condition fails to meet a specified standard; OR
At the time of an execution against property of the debtor levied at the
instances of an entity other than the holder of such statutory lien.
 IF A LIEN ARISES UNDER ANY OF THE ABOVE CONDITIONS THEN
THAT LIEN IS DEEMED TO HAVE ARISEN UNDER THE
INSOLVENCEY OF THE DEBTOR AND IS AVOIDABLE IN
BANKRUPTCY!!
o Ex - Merchants Grain - A farmer got a statutory lien on grain in silo
to extent of the value of grain that the farmer deposited in silo 60
days after silo refused to pay farmer. Under 545, that is not
necessarily a lien that arises upon the insolvency of the debtor. If
the statutory lien affixes to the debtor’s property other than upon
insolvency of the debtor, the lien will ride through bankruptcy.
 To analyze problem . . . . go through the specifications of §545(1) to see
when/why the lien affixed. If affixed upon insolvency of debtor, it is
avoidable!!
o But Remember --The avoidance powers ARE NOT mutually exclusive. A statutory lien
may be okay under §545, but sill be a preference under §547. A lien arising 60 days after
filing of bankruptcy might be considered a preference b/c preferences include involuntary
transfers of the debtor’s property.
FRUADULENT CONVEYANCES/ §548

Generally
o The fraudulent conveyance statute is based upon a fundamental insight about human nature - that as a debtor slides toward bankruptcy, it is simply an aspect of our nature that many
debtors will try to hide their assets.
 Ex - Necklace from Titanic - Instead of throwing it over the side of the boat, she
gave it to her niece to hold onto. Lady files bankruptcy saying she has no assets,
goes back to niece and gets necklace back, and pawns it for money.
o The bankruptcy judge has the power to avoid such transfers. Actual and constructive
fraudulent conveyances are avoidable.
o The reach-back period for fraudulent conveyances is 2 YEARS.

Actual Fraudulent Conveyances/ §548(a)(1)(a)
o Any transfer of an interest in debtor’s property which incurred within 2 years of the
bankruptcy petition if the debtor voluntarily or involuntarily made such transfer with the
actual intent to hinder, delay, or defraud creditors.
 Who get’s sued? The transferee (i.e. the niece).
 The trustee has to prove an actual intent to hinder, delay, or defraud creditors.
o Badges of Fraud - Demonstrate intent to defraud creditors. If these factors are present, the
court will impute to the debtor the actual fraudulent intent to hinder, delay, or defraud
creditors.
 Two Major Badges of Fraud = Transfer of debtor’s property occurred right before
filing bankruptcy; AND any transfer made to a close relative/ insider.
 Anything else you can point to in fact pattern that looks suspicious, just call
it a badge of fraud!!
o NO REQUIREMENT OF PROVING INSOLVENCY AT THIS STAGE!!!
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Constructive Fraudulent Conveyances/ §548(a)(1)(B)
o Makes avoidable voluntary or involuntary transfers by the debtor within 2 years of
bankruptcy at a time when the debtor was insolvent and when debtor received less than
reasonably equivalent value in exchange for such transfer.
 When a debtor is insolvent and transferring assets, he is under a greater legal
responsibility -- the responsibility to get reasonable value for whatever items he is
selling because his major obligation is to pay off his creditors. MUST BE JUST
BEFORE GENEROUS!!
 Under §550, a transferee that has to give back the property or pay back its value
retains a security interest in the property to the extent the transferee paid for the
property. Ex - niece will retain a lien of $500 for heart of ocean.
 The BR trustee can also sue any subsequent transferees. Ex - If niece sold the
necklace to Sketchy Jeweler Inc. for 20 million, the trustee can sue the niece and
jeweler.
 A voluntary and involuntary transfer can be a constructive conveyance.
 Ex - Car repoed and sold at local foreclosure sale, where didn’t get full
bluebook value. Trustee sued the secured creditors under the theory that the
foreclosure sale was a constructive fraudulent conveyance. But, the USSC
held that the price obtained for collateral at a properly conducted foreclosure
sale is by definition a sale for reasonably equivalent value.
o “Less than reasonable equivalent value” - what does this mean??
 In re Image Worldwide, Ltd.
 Facts - Parent Corporation P and smaller corporations A, B, C, and D. Corp.
A guaranteed the debt of Corp. D. This is called a cross-stream guarantee.
When a corporation files bankruptcy, the question is what is the liability for
A for the debts of D? It appears to meet all the elements of a fraudulent
conveyance if A was insolvent because guaranteeing the debts of another is a
transfer of property - but the question is whether it was for reasonable
equivalent value. The argument is that by cross-stream guaranteeing the
debts of another affiliated company the family itself was better off, which
benefited A as well as all other members of the corporate family.
 HOLDING: The court held that this type of intangible benefit CAN
constitute value. A, by guaranteeing D, made D a more financially stable
company and that is a benefit to A that constitutes value. The court was not
wrong to hold that the value was not sufficient--that is was not a reasonably
equivalent value.
o Sometimes things that wouldn’t normally seem to fall within these definitions as property
can be squeezed into the definition!!
 In re Bakersfield Westar, Inc.
 Facts - Before BR, the shareholders of a corp. decide to take a Subchapter S
election, which means the corporation will be treated as a partnership for tax
purposes and gets to take advantage of corporate tax deductions. Later, both
the SH and the corp. start sliding toward bankruptcy. The SH’s filed a form
to revoke the Subchapter S election. Why? Because the SH’s would have to
pay taxes on corporate capital gains once they file for BR and liquidate the
corp. The trustee argued that the revocation of the tax status was a
fraudulent conveyance.
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
HOLDING: The court held that these tax benefits are definitely things that
people are willing to pay for and, therefore, they are property interests within
the meaning of the fraudulent conveyance statute.
Specific Examples: Gambling and Charity
o What constitutes “value”??
o Charitable Contributions
 Ex - Within 2 years of bankruptcy, debtor gave $1000 of $3000 a month to his house
of worship. Debtor then filed bankruptcy. The bankruptcy trustee looked at debtor’s
transactions during the reach-back period. Put aside evidence of actual fraud. Look
for transfers within 2 years at time debtor was insolvent for which debtor received
less than reasonable equivalent value.
 The church will get sued and will have to argue that one of the elements of
fraudulent conveyance is not satisfied.
 The trustee argues that there is no value received in exchange for charitable
contributions - what do you get in exchange for $1000 a month contribution
to your church? The church might argue tax write off, better chance at being
made a deacon, childcare provided, also maybe that when you support a
church they will come back and help you if you’re ever in need. Still, the
vast majority of courts have said that you don’t receive any value in
exchange for charitable contributions.
 §548(a)(2) - CONGRESS STEPPED IN AND FIXED THIS PROBELM. A
transfer of a charitable contribution to a qualified religious or charitable
entity SHALL NOT be considered to be a transfer covered by the fraudulent
conveyance statute in any case in which-o The amount of that contribution does not exceed 15% of the gross
annual income of the debtor for the year in which the transfer of the
contribution is made; OR
o The transfer was consistent with the practices of the debtor in making
charitable contributions.
o Gambling
 Ex - Debtor, at a time when he was insolvent, cleans out bank account and goes to
casino and goes to casino saying “I’ll be -- if creditors get my money.” He loses all
his money and the next day he files bankruptcy.
 Great argument for actual fraudulent conveyance because of statement.
 Constructive Fraudulent Conveyance - Debtor’s BR trustee would sue the
casino to get $$ back. Trustee argues that he received no value in return for
gambling. But, the casino argues that that the intrinsic value of the
entertainment causes the debtor to receive something in return. Most
bankruptcy courts accept this idea that you are receiving reasonable
entertainment value. Most courts also refuse to look into the reasonable
equivalency of that value.
WHENEVER YOU SEE A TRANSFER OR A TRANSACTION BY A DEBTOR BEFORE
BANKRUPTCY, ALWAYS ASK WHETHER THAT TRANSACTION LED TO AN
AVOIDABLE TRANSFER, i.e. PREFERENCE OR FRAUDULENT CONVEYANCE (OR
BOTH)!! ALWAYS! ALWAYS! ALWAYS!!

§544(b) - The last of the trustee’s avoidance powers.
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o The trustee may avoid any transfer that is avoidable by applicable law by a creditor holding
that an unsecured claim that is allowable under …………..
 Note: Charitable contributions also excepted again.
o This § permits the trustee to take advantage of any non-bankruptcy code avoidance powers
that might be out there (including state law avoidance powers) that an unsecured creditor
could use if there were no bankruptcy (b/c bankruptcy takes away power of unsecured
creditor to collect their debts and substitutes power of the trustee).
o Traditionally, the main utility of this provision is in fraudulent conveyance because the one
avoidance power which we can say with certainty that every state grants to unsecured
creditors is the power to avoid a fraudulent transfer.
 Ex - Unsecured creditor is owed a debt, gets judgment, enrolls judgment, and seeks
to enforce judgment. Through discovery, creditor finds out that at a time debtor
knew there was a judgment against him, he gave away, destroyed, or hid assets.
 State law gives the creditor in that situation the ability to sue in court and ask the
court to get the assets back. The law of every state contains an avoidance power on
behalf of unsecured creditors, although states can very in that law.
 3 approaches:
o UFTA - Uniform Fraudulent Transfer Act
o UFCT - Uniform Fraudulent Conveyance Act
o Statutes that trace lineage back to English Law
o §544(b) has been important because the reach-back period of SOL for fraudulent
conveyances is longer than under the BR Code. Under the BR Code, the reach-back period
is 2 YEARS, while state fraudulent transfers SOL’S tend to be 2-3 YEARS.
o IF CZAR GIVES US A §544 QUESTION THEN HE WOULD HAVE TO GIVE US A
STATE STATUTE!!
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