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BANKRUPTCY OUTLINE

PURPOSES OF BANKRUPTCY
1. Bankruptcy as Game Theory
a. The race to the courthouse ends up doing two things:
i) Disabling a workout
ii) It will cause assets to be dismembered and sold at distressed values.
b. As a result, some creditors will get money and others wont. That is socially undesirable.
c. In the effort to do what's best for themselves, the creditors hurt the entire group. This would be the world
without a bankruptcy system. It would be bad.
d. The code is designed to stop the race to the courthouse and to stop the potential unequal returns that
different creditors are getting.
2. Why have bankruptcy? To encourage risk-taking.

COMMENCEMENT OF A BANKRUPTCY CASE


1. Voluntary cases. Section 301
a. A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a
petition under such chapter by an entity that may be a debtor under such chapter. Section 301(a).
b. The commencement of a voluntary case under a chapter of this title constitutes an order for relief under
such chapter. Section 301(b)
i) Under the old code, you had to be adjudicated as a bankrupt. Now it arises automatically upon the
petition.
ii) Order for relief matters because that's when the counting date starts for certain events (bar date?). If
voluntary, order starts with petition.
2. Involuntary. Section 303
a. The debtor has the opportunity to contest the petition. Petitioner has the burden of proving the debtor is
insolvent. Only then is an order for relief entered.
b. Can only do this for seven and eleven
3. A bankruptcy can only be started by an entity who can be a debtor under the bankruptcy code.
a. Person [eligible to file bankruptcy] The term person includes individual, partnership, and corporation, but
does not include governmental unit.

THE ESTATE
1. Filing bankruptcy creates the estate. The estate consists of all property, contingent or not, as of the petition
date. Section 541. This includes:
a. All legal or equitable interests of the debtor in property as of the commencement of this case. Section
541(a)(1)
b. All interests of the debtor and the debtors spouse in community property that is
i) under the sole, equal, or joint management and control of the debtor; or
ii) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and
an allowable claim against the debtors spouse, to the extent that such interest is so liable.
c. Any interest in property that the trustee recovers. Section 541(a)(3)
d. Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510
(c) or 551 of this title. Section 541(a)(4)
e. Any interest in property that would have been property of the estate if such interest had been an interest of
the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to
acquire within 180 days after such date Section 541(a)(5)
i) by bequest, devise, or inheritance;
ii) as a result of a property settlement agreement with the debtors spouse, or of an interlocutory or final
divorce decree; or
iii) as a beneficiary of a life insurance policy or of a death benefit plan.
f. Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings
from services performed by an individual debtor after the commencement of the case. Section 541(a)(6)
g. Any interest in property that the estate acquires after the commencement of the case. Section 541(a)(7)
2. Things that are excluded from the estate
a. Post-petition earnings and wages. 541(a)(6)

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i) Prochnow v. Apex Properties, Inc. After petition date, debtor collected commissions on houses he
had sold. Clearly he collected the commissions after the petition date. The employment contract said
that his entitlement to a commission did not occur until the house sale closed and the broker received
the commission.
ii) Holding These commissions are part of the estate. His labor was performed pre-petition. He had
nothing left to do by the time he filed the petition. He had earned the money, though not legally, but it
was his pre-petition labor that generated the commission. There was nothing left for him to do post-
petition.
b. Any power that the debtor may exercise solely for the benefit of an entity other than the debtor. 541(b)(1)
c. Any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the
expiration of the stated term of such lease before the commencement of the case under this title, and ceases
to include any interest of the debtor as a lessee under a lease of nonresidential real property that has
terminated at the expiration of the stated term of such lease during the case. 541(b)(2)
3. Anti-alienation provision. 541(c)(1)(A)
a. Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes
property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision
in an agreement, transfer instrument, or applicable nonbankruptcy law
i) that restricts or conditions transfer of such interest by the debtor; or
ii) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a
case under this title, or on the appointment of or taking possession by a trustee in a case under this title
or a custodian before such commencement, and that effects or gives an option to effect a forfeiture,
modification, or termination of the debtors interest in property.
b. In re Chambers Person running for election for Georgia state legislature filed a petition under chapter 13.
Debtor tried to keep the campaign assets out of the estate. Georgia law said that the funds were not
property of the candidate.
i) Holding 541(c)(1)(A) supersedes Georgia law. The debtor has a property interest, however restricted
by state law, in the campaign funds.
4. Jurisdiction
a. The estate is a res that creates in rem jurisdiction. The jurisdiction of the bankruptcy court is in rem - not
in personam. The court is exercising its jurisdiction over the assets. Can issue orders as necessary to
protect the assets. Thats what in rem jurisdiction does.
5. Three basic areas of controversy involving property of the estate:
a. Future interests. Prochnow
b. Restrictions on transfer created by state law. Chambers
c. Degree of entitlement. (Goes to licenses).
i) Some licenses are not transferable (law license)
ii) Others are (liquor license)
6. Estate Exercise.
a. Parakeet It is property of the estate. The estate includes everything the petitioner owns on the petition
date. It is very broadly concerned. We dont worry for the moment whether it has value to the creditors or
whether an exemption would apply.
b. Ford Focus still subject to purchase-money security interest Doesnt matter that it is subject to a lien or
that the lien exceeds value of the property. Still part of the estate. The trustee may decide to abandon the
car.
c. Candid snapshots of hundreds of his friends Still property of the estate. May be an exemption, but still
property of the estate.
d. Two tickets to upcoming Bjork concert Theres a question as to whether it is transferrable. If not
transferrable, its not part of the estate. Nonetheless, the overwhelming majority would say it is property of
the estate even though not transferrable under state law (the bankruptcy code will override
nontransferability under 541(c)). This goes to the difference between licenses that can and cannot be
transferred.
i) 541(c)(1) generally overrides contractual limitations
e. Household furniture Property of the estate.
f. 25 shares of monumental inc. Same.
g. Undivided 3/48ths interest in big game hunting preserve Property of the estate.
h. 3,214 bubble gum baseball cards Property of the estate.

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BANKRUPTCY OUTLINE

i. Catchers mit Yes.


j. Bank account Yes, but only to the extent of debtors legal title. See 541(d). Beneficial/equitable title
however does not become part of the estate. Creditors wont get the money. The point is that the
automatic stay applies and the bankruptcy trustee becomes the new trustee.
k. Salary Property of the estate. He earned it before.
l. Retirement account Need more information. This falls under 541(c)(2).
m. Parakeets eggs Yes. They are proceeds of the asset (the bird).
n. Annual dividend Yes. More proceeds.
o. Salary post-petition. No. 541(a)(6)
p. Retirement account Need more information. Falls under 541(c)(2)
7. Exclusions v. Exemptions
a. If it occurs in 541, it is an exclusion not an exemption.
b. Something that is excluded from property of the estate is not property of the estate. Whether an exemption
applies requires that it first be property of the estate.

AUTOMATIC STAY
1. Affirmative aspect A petition filed under section 301, 302 or 303 of the bankruptcy code operates as a stay,
applicable on all entities of
a. The commencement or continuation, including the issuance or employment of process, of a judicial,
administrative, or other action or proceeding against the debtor that was or could have been commenced
before the commencement of the case under this title, or to recover a claim against the debtor that arose
before the commencement of the case under this title;
b. the enforcement, against the debtor or against property of the estate, of a judgment obtained before the
commencement of the case under this title;
c. any act to obtain possession of property of the estate or of property from the estate or to exercise control
over property of the estate;
d. any act to create, perfect, or enforce any lien against property of the estate;
i) Two things to have security interest: grant and perfection.
ii) A judgment can be a grant.
iii) Thus, you cant take steps to perfect if you havent done so before the commencement date.
iv) If you violate this, it is void from the moment it is done. If you do it intentionally, you could be subject
to damages
e. any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien
secures a claim that arose before the commencement of the case under this title;
f. any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the
case under this title;
g. the setoff of any debt owing to the debtor that arose before the commencement of the case under this title
against any claim against the debtor; and
h. the commencement or continuation of a proceeding before the United States Tax Court concerning a tax
liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or
concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of
the order for relief under this title.
2. The idea is that the automatic stay applies broadly to everyone in the world (without notice?)
a. How does this pass constitutional muster?
b. It is an in rem proceeding. You are not dependent on in personam jurisdiction. The court is basically
controlling the assets under its control.
c. Sanctions for violations Depends on actual knowledge or intent. But whether you know or not, the
actions taken after the stay is in effect are void.
i) 362(k)(1) Any individual injured by any willful violation of a stay can recover actual or punitive
damages.
3. Things not stayed by the Automatic Stay. Section 362(b)
a. The commencement or continuation of a criminal action or proceeding against the debtor;
b. The commencement or continuation of a civil action or proceeding
i) for the establishment of paternity;
ii) for the establishment or modification of an order for domestic support obligations;
iii) concerning child custody or visitation;

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iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the
division of property that is property of the estate; or
v) regarding domestic violence;
c. of the collection of a domestic support obligation from property that is not property of the estate;
d. with respect to the withholding of income that is property of the estate or property of the debtor for
payment of a domestic support obligation under a judicial or administrative order or a statute;
e. of the withholding, suspension, or restriction of a drivers license, a professional or occupational license, or
a recreational license, under State law, as specified in section 466(a)(16) of the Social Security Act;
f. of the reporting of overdue support owed by a parent to any consumer reporting agency as specified in
section 466(a)(7) of the Social Security Act;
g. of the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act or
under an analogous State law; or
h. of the enforcement of a medical obligation, as specified under title IV of the Social Security Act;
4. In Re Greene School sent debtor invoices for unpaid tuition after debtor filed for bankruptcy (while the
automatic stay was in place).
a. School received notice of the bankruptcy.
b. School claimed the notices were sent by computer error.
c. Holding Willfulness does not refer to the intent to violate the stay, but the intent to commit the act which
violates the automatic stay. Because the office of student loans caused the letters and invoices to be sent
and such actions were a violation of the automatic stay, ECU willfully violated the automatic stay.
d. But had the debtor failed to send notice, the school would not have been on notice of the bankruptcy.
Therefore, they wouldnt have been able to willfully violate the stay.
5. Nissan Motor Acceptance Corp. v. Baker Creditor repossessed a car while the debtor was in bankruptcy.
Creditor wasnt aware of the debtors bankruptcy at the time of repossession, but learned after the fact. Creditor
did not turn over the car, but filed a motion for relief from automatic stay. While that motion was pending, the
creditor sold the car. The motion was eventually granted.
a. Holding This violated the automatic stay.
i) Creditors continued exercise of control over the vehicle after the notice of automatic stay was filed
was a willful violation. Thus, doing nothing violated the stay.
ii) Moreover, the sale was another willful violation. The creditor cannot play dumb and rely on its own
records that the motion was grated at an earlier date.
6. Three ways in which the automatic stay is terminated
a. Abandonment
b. Discharge
c. Relief from the stay.

EXEMPTIONS
1. Exemptions are property of the estate but that is exempted from the estate. All property not listed as exempt is
non-exempt and will be sold by the trustee so that the proceeds can be distributed to the creditors.
2. How exemptions work
a. Hypo 1
i) House worth $100
ii) Applicable homestead exemption: $100
iii) No lien
iv) In this instance, the debtor is going to get to keep the house, period.
b. Hypo 2
i) House still worth $100
ii) Homestead exemption is $40
iii) Trustee sells the house and $40 will go to debtor and the other $60 will go into the estate.
c. Hypo 3
i) Say theres a lien of $60
ii) Homestead exemption still $40
iii) Trustee will probably abandon the property. Bank will sell and get 60
d. Hypo 4:
i) Value of the house is $50

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ii) Homestead is $40


iii) Lien is 60
iv) Trustee will abandon. Homestead will be worth zero. Bank will get 50.
3. Notwithstanding 541, an individual may exempt property listed 522(b)(2) (Federal Exemptions) or (3) (State
exemptions). Section 522(b)(1)
4. Federal Exemptions - Property specified under section (d) (federal exemptions) unless state law specifically
does not so authorize (that is, unless the debtor is in a state that opted out of the federal exemptions.) 522(b)(2)
a. Homestead exemption - The debtors aggregate interest, not to exceed $15,000 in value, in real property or
personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that
owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the
debtor or a dependent of the debtor.
b. The debtors interest, not to exceed $2,400 in value, in one motor vehicle.
c. The debtors interest, not to exceed $400 in value in any particular item or $8,000 in aggregate value, in
household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical
instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent
of the debtor.
d. The debtors aggregate interest, not to exceed $1,000 in value, in jewelry held primarily for the personal,
family, or household use of the debtor or a dependent of the debtor.
e. Wild card - The debtors aggregate interest in any property, not to exceed in value $800 plus up to $7,500
of any unused amount of the exemption provided under paragraph (1) of this subsection.
f. The debtors aggregate interest, not to exceed $1,500 in value, in any implements, professional books, or
tools, of the trade of the debtor or the trade of a dependent of the debtor.
g. Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract.
h. The debtors aggregate interest, not to exceed in value $8,000 less any amount of property of the estate
transferred in the manner specified in section 542 (d) of this title, in any accrued dividend or interest under,
or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the
debtor or an individual of whom the debtor is a dependent.
i. Professionally prescribed health aids for the debtor or a dependent of the debtor.
j. The debtors right to receive
5. State Exemptions - Property listed in this paragraph is- 522(b)(3)
a. 730 Day Rule If you have been continuously domiciled in a state for 730 days (2 years) before filing
bankruptcy, you can use that states exemptions or the federal exemptions if allowed by that state. If this is
not the case, then you must use the 180-day rule to determine which exemptions you can use.
i) 180-day rule If you were not domiciled in the same state for two years, then you have to use the
exemptions of the state where you were domiciled for the longer portion of the 180 day (6 month)
period prior to the two years preceding your bankruptcy.
A. For example, lets say you were domiciled in Oregon from January 1, 2007 to January 1, 2009 and
then you made a permanent move to Florida. On January 1, 2010, you file a bankruptcy in
Florida. Even though you live in Florida, you will need to use the exemption laws of Oregon
because you have not been domiciled in Florida for two years and your domicile was in Oregon
for the effective 180-day period (July 1, 2007 through December 31, 2007).
ii) If the effect of the domiciliary requirement under subparagraph A is to render the debtor ineligible for
any exemption, the debtor may elect to exempt property that is specified under subsection b. 522(b)(3)
b. Any interest in property in which the debtor had, immediately before the commencement of the case, an
interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy
law. 522(b)(3)(B)
c. Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under
section 401, 403, 408, 408A, 414, 457, or 501(a) of the IRC. 522(b)(3)(C)
d. 522(o) - if entitled to homestead exemption, it is reduced to the extent that any portion of the propertys
value is attributable to property the debtor disposed of the 10 year period ending on the date of filing
e. 522(p) Mansion loophole closer Established a 3.3year lookback period (1115 days). This does two
things:
i) For anyone who moved into a new jurisdiction within that period, caps the homestead exemption no
matter what.
ii) Any additions to the value of the exemption that were created during that 3.3 year period is capped at
675

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f. 522(q) Enron amendment Caps the homestead exemption for persons convicted of securities fraud.
6. Recap (Exemption analysis)
a. Is the bankruptcy in a state that recognizes the federal exemptions?
i) For these purposes, determine the applicable state by the 730-day rule
7. In re Johnson - Question as to whether debtors bus was a car for the purposes of a state exemption. Court
held it was.
8. In re Wilkinson - Debtor had a lot of firearms. Texas has an exemption for some of them. Debtor tried to get all
of his firearms covered under other exemptions (decorations).
a. Holding - Court finds that a firearm is a firearm. Doesnt matter if it fires or not.
9. Valuation
a. Certain exceptions have dollar limits. Trying to stay under the cap so you dont have to sell the asset.
b. The extent to which an exemption applies is measured by the fair market value of the property.
i) Willing seller
ii) Willing buyer
iii) No compulsion
iv) Totally arms length
10. In re Sumerell - Fight over valuation. Debtor values property at a very low value. Court went off on how to
value an exemption. This case highlights the importance of expert witnesses in valuation cases. The trustee in
this case got a really good expert who was clearly well prepped. He was willing to buy the property. This was
critical because the definition of value is what someone is willing to pay for it.
11. Bankruptcy planning
a. In re Reed - Debtor had a house subject to liens. He has nonexempt assets as well. So he sells the
nonexempt assets to pay down the liens, so he now has a house free and clear of liens that is completely
exempt from the estate.
i) Analogous hypo:
A. Liabilities
1) $100 lien
2) $200 in general unsecured claims
3) Total liabilities = $300
B. Assets
1) House worth $100
2) Other assets worth $100
3) Total assets $200
4) So $100 in negative equity (insolvent by $100).
C. So he sold the assets and put them into the house, giving him $100 equity in the house. He got rid
of the lien so his equity in the house went from $100 to $200.
D. Technically were in exactly the same place.
E. So Reed basically took $100 out of the estate that would have otherwise gone to the creditors. But
theres nothing in the code prohibiting that. There is nothing wrong with that in terms of the
exemption. Though it might affect discharge (to be discussed in next class). But what Mr. Reed
did went beyond converting nonexempt to exempt assets. He had other stuff going on that appears
to be fraudulent.
F. Thus, while the bankruptcy court found that the debtors house was exempt, the Fifth Circuit
denied the debtors discharge on the basis that he had engaged in obvious fraud.
12. Liens on exempted property. 522(f)
a. Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of
a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the
debtor would have been entitled under subsection (b) of this section, if such lien is522(f)(1)
i) a judicial lien, other than a judicial lien that secures a debt of a kind that is specified in section 523
(a)(5); or
ii) a nonpossessory, nonpurchase-money security interest in any
A. household furnishings, household goods, wearing apparel, appliances, books, animals, crops,
musical instruments, or jewelry that are held primarily for the personal, family, or household use
of the debtor or a dependent of the debtor;
B. implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of
the debtor; or

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C. professionally prescribed health aids for the debtor or a dependent of the debtor.
D. Professor
1) Two ways to perfect a lien: possession and filing
2) Only liens perfected by filing can be avoided under 522(f)
3) Only nonpurchase money security interests. .
(i) Example: Farmer takes out loan to buy new land. Bank secures the loan with other
property (equipment). Therefore, it is purchase money as to the land, but not the
equipment. In this case, cant avoid the lien as to the land because it is purchase money.
But can avoid the lien on the equipment under 522(f)(B)(1)(ii).
iii) For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that
the sum of522(f)(2)
A. the lien;
B. all other liens on the property; and
C. the amount of the exemption that the debtor could claim if there were no liens on the property;
iv) exceeds the value that the debtors interest in the property would have in the absence of any liens.
v) In the case of a property subject to more than 1 lien, a lien that has been avoided shall not be
considered in making the calculation under subparagraph (A) with respect to other liens.
vi) This paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure.

ASSET PROTECTION TRUSTS


1. A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable
nonbankruptcy law is enforceable in a case under this title. 541(c)(2).
2. However, a trustee can clawback this property.
a. In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an
interest of the debtor in property that was made on or within 10 years before the date of the filing of the
petition, if 548(e)
i) such transfer was made to a self-settled trust or similar device;
ii) such transfer was by the debtor;
iii) the debtor is a beneficiary of such trust or similar device; and
iv) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the
debtor was or became, on or after the date that such transfer was made, indebted.
3. Security interest
a. In order to have a security interest, you must have a grant
b. Grant can be consensual or judicial
c. Must also perfect the security interest against other creditors.
4. Perfection of a lien
a. The purpose of perfection is a notice device. First in time is first in right. The first one to perfect a claim
wins.
i) Hypo:
A. Bank A Makes loan 4/1
B. Bank B Makes loan 4/10
C. Bank B perfects by filing on 4/11
D. Bank A perfects by filing on 4/15
E. When the asset is sold at a foreclosure, B gets paid first.

POWER OF BANKRUPTCY COURT


The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of
this title. No provision of this title provided for the raising of an issue by a party in interest shall be construed to
preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to
enforce or implement court orders or rules, or to prevent an abuse of process. 105(a)

PROOF OF CLAIM
1. After the chapter 7 petition is filed, there is automatically scheduled a 341 meeting of creditors. After that,
there are 90 days to file a POC. (Bar date). You have to get your claim in by the bar date. If you fail to file the
claim, it will be barred. Once barred, you are cooked.

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a. But you dont lose the right of set-off.


b. There is a doctrine of excusable neglect. But it is impossible to meet. The only way to meet it is to show
that somehow you didnt get notice. Also, you were in some circumstance that made constructive notice
impossible.
2. 501 Filing a POC
a. A creditor or an indenture trustee may file a proof of claim. 501(a).
b. If a creditor does not timely file a POC, an entity that is liable to such creditor with the debtor, may file
such claim.
c. If a creditor does not timely file a proof of such creditors claim, the debtor or the trustee may file a proof
of such claim
3. 502 Allowance of claims or interests
a. A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party
in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter
7, objects.
b. Except as provided elsewhere, if such objection to a claim is made, the court, after notice and a hearing,
shall determine the amount of such claim in lawful currency of the US as of the date of the filing of the
petition, and allow such amount except to the extent that
i) Such claim is unenforceable against the debtor and property of the debtor, under any agreement or
applicable law for a reason other than because such claim is contingent or unmatured.
ii) Such claim is for unmatured interest
iii) If such claim is for a tax assessed against property of the estate, such claim exceeds the value of the
interest of the estate in such property.
4. Burden of proof
a. The POC carries the initial burden of going forward. It is a prima facia case. It creates a presumption that
shifts the onus on debtor to prove it is invalid. They have to overcome the presumption of validity. They
did that here by tearing apart the banks witnesses. But the burden of proof was never on the debtor. It was
always on the creditor and always will be. So when the judge says the burden of proof wasnt on the bank
to substantiate its claim, he was wrong. The bank only prima facia satisfied the burden, but the burden of
proof never left them.
b. A proof of claim is presumptively valid unless somebody objects. Furthermore, it is on the debtor to
overcome the presumption of validity.
c. In re Lanza - When there is an objection, it sets off a trial-type proceeding. It is a contested matter unless it
has to be filed as an adversary proceeding (full blown trial). The judge capped their claim value at the
lowest possibility because of the lack of documents.
5. Calculating claim amount. Section 502
a. Unsecured claims.
i) Balance owed plus pre-petition interest
ii) Post-petition interest on the claim. 502(b)(2)
A. Unsecured creditors are not entitled to post-petition interest on their claims. This is the operation
of 502(b)(2) listed above. Unmatured interest is not collectable.
B. Why dont we allow interest? As the book points out, if you gave everyone interest at the same
rate, you wouldnt be accomplishing everything. Youd be increasing the claims, but their
proportion wouldnt change.
iii) Bankruptcy is a legal acceleration. If somebody owes you $1000 and they agree to pay it back
installments, they have to pay it all back in the bankruptcy proceedings regardless of the schedule.
A. The post-petition payments are part of the estate because the contract arose pre-petition.
B. By that same token, the POC isnt just what was due on that date. It is the entire claim due into
the future based on that pre-petition contract. So you would file a POC for $700
b. Secured claims
i) Balanced owed plus pre-petition interest plus interest and attorney fees to the extent of the value of
creditors interest in the property.
A. Potentially bifurcates the secured claim into a secured and unsecured component
ii) Determination of secured status. Section 506
A. An allowed claim of a creditor secured by a lien on property win which the estate has an interest,
or that is subject to setoff under section 553, is a secured claim to the extent of the value of such
creditors interest in the estates interest in such property, or to the extent of the amount subject

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to setoff, as the case may be, and is an unsecured claim to the extent that the value of such
creditors interest or the amount so subject to setoff is less than the amount of such allowed claim.
B. If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal
property securing an allowed claim shall be determined based on the replacement value of such
property as of the date of the filing of the petition without deduction for costs of sale or marketing.
With respect to property acquired for personal, family or household purposes, replacement value
shall mean the price a retail merchant would charge for property of that kind considering the age
and condition of the property at the time value is determined.
iii) Examples:
A. Example 1
1) Car. FMV = $10k
2) Lien = $12k
3) Does the creditor have a secured claim? Yes. How much is it secured? $10k.
4) In this case, we have a secured claim = $10k and a general unsecured claim equal to $2k.
5) This is called an undersecured creditor because the amount of the claim exceeds the value of
the collateral.
B. Example 2:
1) Lien = $8k.
2) The lien is secured for $8k.
3) The remainder is sent to the estate unless there is an exemption.
4) This is called an oversecured creditor.
C. Example 3: Lien = $10k
1) This is a fully secured claim.
iv) Post-petition interest. 506(b)
A. Oversecured creditors are entitled to post-petition interest until the collateral is exhausted.
B. To the extent that an allowed secured claim is secured by property the value of which, after any
recovery under subsection (c) of this section, is greater than the amount of such claim, there shall
be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or
charges provided for under the agreement or State statute under which such claim arose.
v) Post-petition Attorneys fees and other costs. 506(b)
A. Secured creditors who are oversecured are entitled to post-petition attorneys fees (assuming they
are entitled to them as a matter of state contractual law) until the claim exceeds the remaining
value of the collateral.
B. Undersecured creditors probably are not entitled to post-petition attorney fees. Post-petition
claims are governed by Section 503, which only allows attorney fees under specific circumstances.
Furthermore, 506(b) explicitly grants post-petition attorney fees only to oversecured creditors.
6. Pre-petition attorney fees - If a creditor, secured or unsecured, is entitled to prepetition attorneys fees (by
operation of state contract law) at the moment of a bankruptcy, then the fees are part of the creditors allowed
claim.
7. Priority among Unsecured Creditors. Section 507
a. Domestic support
b. Administrative expenses allowed under 503(b).
c. Unsecured claims allowed under 502(f) (claims arising after the commencement of the case)
d. Wages up to $10k for individuals to the extent they are unpaid on petition date.
e. Allowed unsecured claims of certain kinds
f. Governmental units
g. Allowed unsecured claims
h. Allowed claims for death or personal injury
8. Post-petition Administrative claims. Section 503
9. Distributions
a. Section 726 imports the priorities of 507 and adds the requirement that it has to be a timely filed POC.
After that, they pay unsecured claims which are timely filed, unsecured claims which are untimely filed
10. Disputed Claims
a. TIB might object and argue the debt wasnt valid or amount is lower.
b. In re Lanza

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i) Inquiry is whether certain evidence support objected claimsIn the event of evidential ambiguity
the claim holder bears the burden of proof
Discharge
1. What is a discharge? It essentially replaces the automatic stay.
a. Section 524(a) - A discharge
i) voids any judgment at any time obtained, to the extent that such judgment is a determination of the
personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228,
or 1328 of this title, whether or not discharge of such debt is waived;
ii) operates as an injunction against the commencement or continuation of an action, the employment of
process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor,
whether or not discharge of such debt is waived; and
iii) operates as an injunction against the commencement or continuation of an action, the employment of
process, or an act, to collect or recover from, or offset against, property of the debtor of the kind
specified in section 541 (a)(2) of this title that is acquired after the commencement of the case, on
account of any allowable community claim, except a community claim that is excepted from discharge
under section 523, 1228 (a)(1), or 1328 (a)(1), or that would be so excepted, determined in accordance
with the provisions of sections 523 (c) and 523 (d) of this title, in a case concerning the debtors spouse
commenced on the date of the filing of the petition in the case concerning the debtor, whether or not
discharge of the debt based on such community claim is waived.
b. Section 524(e) - The only person who gets discharged is the debtor. It is very common in chapter 11 cases
to give release to parties other than the debtor
i) When we say nobody but the debtor gets a discharge, thats what we mean. Doesnt extend to
guarantor.
c. Section 524(f) Nothing contained in subsection C or D prevents a debtor from voluntarily repaying a
debt. Once you are discharged, you can pay any debt you want. This creates a tension though. Up in (a),
the creditor is prohibited from pursuing a claim. (f) lets the debtor voluntarily decide to pay. Creditors try
to exploit (f). It is a very fine line to walk.
d. Secured liens
i) In re Henry -
A. A discharge eliminates a debt as a personal liability, but it does not affect a lien that provides
security for the debt.
B. We learn that the discharge injunction does not affect secured creditors with respect to the
collateral. They can go after the collateral as soon as the discharge is entered, or they can go after
it if it had been abandoned. What they cant do is go after the debtor individually for any
deficiency claim. So the discharge injunction doesnt stop a secured creditor from exercising
remedies against its collateral. Automatic stay does. Discharge does not.
2. Chapter 7 cases
a. Timing - the debtor is entitled to a discharge after the bankruptcy is completed. 727(a)
b. Global denials or exceptions to discharge under chapter 7. 727(a)
Global denials apply to every creditor or to all of the debts of the debtor.
i) the debtor is not an individual;
ii) the debtor, with intent to hinder, delay, or defraud a creditor or an 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
A. property of the debtor, within one year before the date of the filing of the petition; or
B. property of the estate, after the date of the filing of the petition;
iii) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded
information, including books, documents, records, and papers, from which the debtors financial
condition or business transactions might be ascertained, unless such act or failure to act was justified
under all of the circumstances of the case;
iv) the debtor knowingly and fraudulently, in or in connection with the case
A. made a false oath or account;
B. presented or used a false claim;
C. gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of
money, property, or advantage, for acting or forbearing to act; or

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D. withheld from an officer of the estate entitled to possession under this title, any recorded
information, including books, documents, records, and papers, relating to the debtors property or
financial affairs;
v) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this
paragraph, any loss of assets or deficiency of assets to meet the debtors liabilities;
A. In re McNamara - Debtor bet $130k on a winner take all poker game. Debtor claimed he could
not recall the details of the incident.
1) Holding - Debtor has the burden of introducing evidence in the disappearance of assets or of
unusual transactions. Debtor failed to meet that burden. Plus there was significant evidence
of bad faith. Thus, discharge was denied.
B. Cf. Problem 8.1
1) Debtor will not be denied a discharge just because hes sloppy or bad at keeping jobs absent
some evidence of bad faith.
vi) the debtor has refused, in the case
A. to obey any lawful order of the court, other than an order to respond to a material question or to
testify;
B. on the ground of privilege against self-incrimination, to respond to a material question approved
by the court or to testify, after the debtor has been granted immunity with respect to the matter
concerning which such privilege was invoked; or
C. on a ground other than the properly invoked privilege against self-incrimination, to respond to a
material question approved by the court or to testify;
vii) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or
within one year before the date of the filing of the petition, or during the case, in connection with
another case, under this title or under the Bankruptcy Act, concerning an insider;
viii) the debtor has been granted a discharge under this section, under section 1141 of this title, or under
section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of
the filing of the petition;
ix) the debtor has been granted a discharge under section 1228 or 1328 of this title, or under section 660 or
661 of the Bankruptcy Act, in a case commenced within six years before the date of the filing of the
petition, unless payments under the plan in such case totaled at least
A. 100 percent of the allowed unsecured claims in such case; or
B. (B)
1) (i) 70 percent of such claims; and
2) (ii) the plan was proposed by the debtor in good faith, and was the debtors best effort;
x) the court approves a written waiver of discharge executed by the debtor after the order for relief under
this chapter;
xi) after filing the petition, the debtor failed to complete an instructional course concerning personal
financial management described in section 111, except that this paragraph shall not apply with respect
to a debtor who is a person described in section 109 (h)(4) or who resides in a district for which the
United States trustee (or the bankruptcy administrator, if any) determines that the approved
instructional courses are not adequate to service the additional individuals who would otherwise be
required to complete such instructional courses under this section (The United States trustee (or the
bankruptcy administrator, if any) who makes a determination described in this paragraph shall review
such determination not later than 1 year after the date of such determination, and not less frequently
than annually thereafter.); or
xii) the court after notice and a hearing held not more than 10 days before the date of the entry of the order
granting the discharge finds that there is reasonable cause to believe that
A. section 522 (q)(1) may be applicable to the debtor; and
B. there is pending any proceeding in which the debtor may be found guilty of a felony of the kind
described in section 522 (q)(1)(A) or liable for a debt of the kind described in section 522
(q)(1)(B).
c. 523 Rifle Shot discharged (applying to 13 and 7s). A discharge under section 727, 1141, 1228 (a), 1228
(b), or 1328 (b) of this title does not discharge an individual debtor from any debt
The rifle shot and the global. The rifle shot is applicable only to a single debt or creditor.
i) for a tax or a customs duty

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A. of the kind and for the periods specified in section 507 (a)(3) or 507 (a)(8) of this title, whether or
not a claim for such tax was filed or allowed
B. with respect to which a return, or equivalent report or notice, if required
1) was not filed or given; or
2) was filed or given after the date on which such return, report, or notice was last due, under
applicable law or under any extension, and after two years before the date of the filing of the
petition; or
C. with respect to which the debtor made a fraudulent return or willfully attempted in any manner to
evade or defeat such tax;
ii) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained
by
A. false pretenses, a false representation, or actual fraud, other than a statement respecting the
debtors or an insiders financial condition;
B. use of a statement in writing
1) that is materially false;
2) respecting the debtors or an insiders financial condition;
3) on which the creditor to whom the debtor is liable for such money, property, services, or
credit reasonably relied; and
In re Hill - The bank could not have reasonably relied on debtors representations because the bank had just
made a loan to the same debtor a few months before, and the information the debtor submitted at that time
was completely inconsistent with the information the debtor submitted for the subject debt. If the bank had
checked its own files, it would have seen the dramatic inconsistencies.
4) that the debtor caused to be made or published with intent to deceive; or
In Re Sharp - Debtor made pretty outlandish oral representations about his financial condition. Creditor
wanted to use this as a basis to disallow the discharge. However, in order to disallow a discharge for
statements made about a debtors financial condition, the statement must be in writing. None of these
statements were in writing. So creditor loses.
C. for purposes of subparagraph (A)
1) consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or
services incurred by an individual debtor on or within 90 days before the order for relief under
this title are presumed to be nondischargeable; and
2) cash advances aggregating more than $750 that are extensions of consumer credit under an
open end credit plan obtained by an individual debtor on or within 70 days before the order
for relief under this title, are presumed to be nondischargeable; and
D. for purposes of this subparagraph
1) the terms consumer, credit, and open end credit plan have the same meanings as in
section 103 of the Truth in Lending Act; and
2) the term luxury goods or services does not include goods or services reasonably necessary
for the support or maintenance of the debtor or a dependent of the debtor;
iii) neither listed nor scheduled under section 521 (a)(1) of this title, with the name, if known to the debtor,
of the creditor to whom such debt is owed, in time to permit
A. if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing
of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for
such timely filing; or
B. if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a
proof of claim and timely request for a determination of dischargeability of such debt under one of
such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such
timely filing and request;
iv) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
v) for a domestic support obligation;
vi) for willful and malicious injury by the debtor to another entity or to the property of another entity;
vii) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a
governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty
A. relating to a tax of a kind not specified in paragraph (1) of this subsection; or
B. imposed with respect to a transaction or event that occurred before three years before the date of
the filing of the petition;

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viii) unless excepting such debt from discharge under this paragraph would impose an undue hardship on
the debtor and the debtors dependents, for
A. an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit,
or made under any program funded in whole or in part by a governmental unit or nonprofit
institution; or
B. an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
C. any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the
Internal Revenue Code of 1986, incurred by a debtor who is an individual;
Student loans are not dischargeable unless there is undue hardship. Debtor has the burden of
demonstrating undue hardship.
Majority Brunner test as espoused in Jeperpson.
That debtor cant maintain a minimal standard of living,
additional circumstances exist indicating the state of affairs is likely to continue for a significant
portion of the repayment period, and
debtor has made good faith efforts.
ix) for death or personal injury caused by the debtors operation of a motor vehicle, vessel, or aircraft if
such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another
substance;
x) that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor
under this title or under the Bankruptcy Act in which the debtor waived discharge, or was denied a
discharge under section 727 (a)(2), (3), (4), (5), (6), or (7) of this title, or under section 14c(1), (2), (3),
(4), (6), or (7) of such Act;
xi) provided in any final judgment, unreviewable order, or consent order or decree entered in any court of
the United States or of any State, issued by a Federal depository institutions regulatory agency, or
contained in any settlement agreement entered into by the debtor, arising from any act of fraud or
defalcation while acting in a fiduciary capacity committed with respect to any depository institution or
insured credit union;
xii) for malicious or reckless failure to fulfill any commitment by the debtor to a Federal depository
institutions regulatory agency to maintain the capital of an insured depository institution, except that
this paragraph shall not extend any such commitment which would otherwise be terminated due to any
act of such agency;
xiii) for any payment of an order of restitution issued under title 18, United States Code;
xiv) incurred to pay a tax to the United States that would be nondischargeable pursuant to paragraph (1);
xv) A) incurred to pay a tax to a governmental unit, other than the United States, that would be
nondischargeable under paragraph (1);
xvi) incurred to pay fines or penalties imposed under Federal election law;
xvii) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5)
that is incurred by the debtor in the course of a divorce or separation or in connection with a separation
agreement, divorce decree or other order of a court of record, or a determination made in accordance
with State or territorial law by a governmental unit;
xviii) for a fee or assessment that becomes due and payable after the order for relief to a membership
association with respect to the debtors interest in a unit that has condominium ownership, in a share of
a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee
has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot, but
nothing in this paragraph shall except from discharge the debt of a debtor for a membership association
fee or assessment for a period arising before entry of the order for relief in a pending or subsequent
bankruptcy case;
xix) for a fee imposed on a prisoner by any court for the filing of a case, motion, complaint, or appeal, or
for other costs and expenses assessed with respect to such filing, regardless of an assertion of poverty
by the debtor under subsection (b) or (f)(2) ofsection 1915 of title 28 (or a similar non-Federal law), or
the debtors status as a prisoner, as defined in section 1915 (h) of title 28 (or a similar non-Federal
law);
xx) owed to a pension, profit-sharing, stock bonus, or other plan established under section 401, 403, 408,
408A, 414, 457, or 501(c) of the Internal Revenue Code of 1986, under
A. a loan permitted under section 408(b)(1) of the Employee Retirement Income Security Act of
1974, or subject to section 72(p) of the Internal Revenue Code of 1986; or

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B. a loan from a thrift savings plan permitted under subchapter III of chapter 84 of title 5, that
satisfies the requirements of section 8433(g) of such title; but nothing in this paragraph may be
construed to provide that any loan made under a governmental plan under section 414(d), or a
contract or account under section 403(b), of the Internal Revenue Code of 1986 constitutes a claim
or a debt under this title; or
xxi) that
A. is for
1) the violation of any of the Federal securities laws (as that term is defined in section 3(a)(47)
of the Securities Exchange Act of 1934), any of the State securities laws, or any regulation or
order issued under such Federal or State securities laws; or
2) common law fraud, deceit, or manipulation in connection with the purchase or sale of any
security; and
B. results, before, on, or after the date on which the petition was filed, from
1) any judgment, order, consent order, or decree entered in any Federal or State judicial or
administrative proceeding;
2) any settlement agreement entered into by the debtor; or
3) any court or administrative order for any damages, fine, penalty, citation, restitutionary
payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.
4) For purposes of this subsection, the term return means a return that satisfies the
requirements of applicable nonbankruptcy law (including applicable filing requirements).
Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue
Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final
order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to
section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
C. Notwithstanding subsection (a) of this section, a debt that was excepted from discharge under
subsection (a)(1), (a)(3), or (a)(8) of this section, under section 17a(1), 17a(3), or 17a(5) of the
Bankruptcy Act, under section 439A [1] of the Higher Education Act of 1965, or under section
733(g) [1] of the Public Health Service Act in a prior case concerning the debtor under this title,
or under the Bankruptcy Act, is dischargeable in a case under this title unless, by the terms of
subsection (a) of this section, such debt is not dischargeable in the case under this title.
1) Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from
a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless,
on request of the creditor to whom such debt is owed, and after notice and a hearing, the court
determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the
case may be, of subsection (a) of this section.
2) Paragraph (1) shall not apply in the case of a Federal depository institutions regulatory agency
seeking, in its capacity as conservator, receiver, or liquidating agent for an insured depository
institution, to recover a debt described in subsection (a)(2), (a)(4), (a)(6), or (a)(11) owed to
such institution by an institution-affiliated party unless the receiver, conservator, or
liquidating agent was appointed in time to reasonably comply, or for a Federal depository
institutions regulatory agency acting in its corporate capacity as a successor to such receiver,
conservator, or liquidating agent to reasonably comply, with subsection (a)(3)(B) as a creditor
of such institution-affiliated party with respect to such debt.
3) If a creditor requests a determination of dischargeability of a consumer debt under subsection
(a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of
the debtor for the costs of, and a reasonable attorneys fee for, the proceeding if the court
finds that the position of the creditor was not substantially justified, except that the court shall
not award such costs and fees if special circumstances would make the award unjust.
4) Any institution-affiliated party of an insured depository institution shall be considered to be
acting in a fiduciary capacity with respect to the purposes of subsection (a)(4) or (11).

Post-Discharge
1. A lien remains attached to its collateral and can be enforced against that property after bankruptcy even though
the debtor cannot be sued for any deficiency. 506(d)
2. Debtor can voluntarily repay a debt even after discharge. 524(f)
3. Statement of Intention. 521(a)(2)

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a. If a debtors schedule of assets [which the debtor is required to file under 521(a)(1)] includes debts which
are secured by property of the estate, then within 30 days, the debtor must file a statement of intention with
respect to the retention or surrender of such property. 521(a)(2)(A)
i) within 30 days after the first date set for the meeting of creditors under section 341 (a), or within such
additional time as the court, for cause, within such 30-day period fixes, perform his intention with
respect to such property, as specified by subparagraph (A) of this paragraph;If the debtor wishes to
surrender the property, then it will be foreclosed on after the debtor is discharged or after the creditor
obtains relief from the stay. 521(a)(2)(B)
ii) In re Schwass - Debtor filed for bankruptcy and filed a statement of intent seeking a reaffirmation
agreement for certain collateralized property. Thirty days passed from the date of the first meeting of
creditors with no reaffirmation agreement signed. As a result, secured creditor filed a motion for relief
on the basis that the debtor failed to timely follow through with her intention to reaffirm.
A. Holding - the debtor fulfills its intention to reaffirm by standing willing and ready to execute the
reaffirmation agreement. It is creditors obligation to prepare a reaffirmation agreement.
iii) 362(h)(2) - If a debtor fails to take timely the action specified in a statement of intent, the stay is
terminated.
b. If the debtor wishes to keep the secured property, the debtor has three options:
i) Redemption. 722
ii) Reaffirmation. 524(c)
iii) Ride-through
4. Redemption - Allows the debtor to keep certain types of collateral by paying the creditor the full loan or the full
value of the collateral in cash, whichever is less. 722
5. Reaffirmation - Allows debtor to negotiate to keep their collateral. In consequence, the debtor signs a legally
binding agreement to waive the discharge on a given debt, subjecting the debtor once again to losing the
collateral and being sued for a deficiency claim on the debt not paid off.
a. Creditor is not compelled to agree to a reaffirmation. The key is negotiation.
b. Procedural requirements.
i) Agreement must be made before the discharge. 524(c)(1)
ii) Debtor must receive disclosures described in 524(k) before signing.
iii) Agreement must be filed with the court and accompanied by a declaration of the attorney that
represented the debtor during the course of negotiating an agreement which states:
A. Such agreement represents a fully informed and voluntary agreement by the debtor
B. Such agreement does not impose an undue hardship on the debtor or dependent of the debtor
C. The attorney fully advised the debtor of the legal effect and consequences of:
1) An agreement of the kind specified in this subsection
2) Any default under such an agreement
iv) The debtor has not rescinded the agreement at any time prior to discharge or within sixty days after the
agreement is filed with the court, whichever occurs later.
v) The provisions of subsection (d) of this section have been complied with
vi) If the debtor is pro se, the court must be convinced that the agreement:
A. Is not imposing an undue hardship on the debtor or a dependent of the debtor
B. Is in the best interest of the debtor.
vii) Disclosure requirements. 524(k)(3)
viii) Attorney certification. 524(k)(5)
A. I hereby certify that
B. this agreement represents a fully informed and voluntary agreement by the debtor;
C. this agreement does not impose an undue hardship on the debtor or any dependent of the debtor;
and
D. I have fully advised the debtor of the legal effect and consequences of this agreement and any
default under this agreement.
E. Signature of Debtors Attorney: Date:.
F. If a presumption of undue hardship has been established with respect to such agreement, such
certification shall state that, in the opinion of the attorney, the debtor is able to make the payment
ix) Debtors statement. 524(k)(6)(A)
A. I believe this reaffirmation agreement will not impose an undue hardship on my dependents or
me. I can afford to make the payments on the reaffirmed debt because my monthly income (take

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home pay plus any other income received) is $XXX, and my actual current monthly expenses
including monthly payments on post-bankruptcy debt and other reaffirmation agreements total
$XXX, leaving $XXX to make the required payments on this reaffirmed debt. I understand that if
my income less my monthly expenses does not leave enough to make the payments, this
reaffirmation agreement is presumed to be an undue hardship on me and must be reviewed by the
court. However, this presumption may be overcome if I explain to the satisfaction of the court how
I can afford to make the payments here: XXX.
c. A creditor may accept payments from a debtor before and after the filing of a reaffirmation agreement.
d. A creditor may accept payments from a debtor under such agreement that the creditor believes in good faith
to be effective.
e. The requirements of subsections (c)(2) and (k) shall be satisfied if disclosures required under those
subsections are given in good faith.
f. Mini-budget/Review by Court. 524(m)
i) Until 60 days after an agreement of the kind specified in subsection (c) is filed with the court (or such
additional period as the court, after notice and a hearing and for cause, orders before the expiration of
such period), it shall be presumed that such agreement is an undue hardship on the debtor if the
debtors monthly income less the debtors monthly expenses as shown on the debtors completed and
signed statement in support of such agreement required under subsection (k)(6)(A) is less than the
scheduled payments on the reaffirmed debt. This presumption shall be reviewed by the court.
ii) The presumption may be rebutted in writing by the debtor if the statement includes an explanation that
identifies additional sources of funds to make the payments as agreed upon under the terms of such
agreement.
iii) If the presumption is not rebutted to the satisfaction of the court, the court may disapprove such
agreement. No agreement shall be disapproved without notice and a hearing to the debtor and creditor,
and such hearing shall be concluded before the entry of the debtors discharge.
iv) This subsection does not apply to reaffirmation agreements where the creditor is a credit union,
as defined in section 19(b)(1)(A)(iv) of the Federal Reserve Act. 522(m)(2)
6. Ride-Through
a. Debtor makes payments and creditor accepts them. Debtor doesnt have protection of the automatic stay.
But the property is out of the estate because it is either exempt or abandoned.
b. There is a potential legal protection?
i) State law. If they are paying, they havent defaulted. Under state law, you probably cant foreclose on
a debtor who is making his payments.
ii) Arguably, there has been a technical default. Most contracts have a technical default provision. But
iii) Most important part of ride-through Only works if the debtor is current as of the bankruptcy filing.
c. What are the provisions that have caused a split as to whether ride-through is allowed?
i) 521(a)(2) suggests these arent allowed Imposes statement of intent requirement. But there is a
belief that this only applies to personal property because it is tied to redemption.
d. But how do you make a statement of intent if your objective is ride through?
i) Some people write-in ride through. But technically they are not in compliance with 521(a)(2).
ii) But most write down they will reaffirm and then they dont. They keep making the payments and then
the creditor has to make a decision.
7. In re Duke - After debtor had filed for bankruptcy, creditor contacted debtor offering to reaffirm the debt.
a. Holding - The communication was neither threatening nor coercive. Therefore, it was okay.

Nondiscrimination
---

Jurisdiction
1. 28 USC 1334 - The district courts shall have original and exclusive jurisdiction of all cases under title 11.
2. History
a. Before 1978 Code - Bankruptcy judges were clearly subservient to district judges, hearing bankrutpcy cases
only when the district court judges wanted them to.
b. 1978 Code - Bankruptcy judges were designated adjuncts to the district courts and were given powers to
enter full judgments as if a district court
c. Northern Pipeline v. Marathon (1982) -

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i) Northern Pipeline, debtor, sued third party Marathon for breach of contract.
ii) Marathon contended that as a non-creditor with no interest in the bankruptcy, it had a right to have a
matter within the jurisdiction of the federal courts decided by an Article III judge.
iii) Court found the 1978 Act was unconstitutional
A. If youre a complete stranger to bk, your case cant be adjudicated on a final basis in bk. Youre
entitled to the same article 3 rights you would have if it had not been filed.
B. There are three categories of exceptions to Article III rights: territorial courts, court martial and
legislative courts involving public rights (giving out licenses).
C. Bankruptcy court power generally does not fall into the public right exception. However, there
may be some core bankruptcy powers that do fall within this exception.
d. 1984 Amendments - Divided the bankruptcy universe into core and non-core proceedings.
i) 157(a) - District courts may provide that any or all cases arising under title 11 or arising in or related to
a case under title 11 shall be referred to the bankruptcy judges for the district. Every district so refers.
ii) 157(b) -
A. Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings
arising under title 11, or arising in a case under title 11, and may enter appropriate orders and
judgments, subject to appellate review. 157(b)(1)
B. Core proceedings include, but are not limited to
1) matters concerning the administration of the estate;
2) allowance or disallowance of claims against the estate or exemptions from property of the
estate, and estimation of claims or interests for the purposes of confirming a plan under
chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or
unliquidated personal injury tort or wrongful death claims against the estate for purposes of
distribution in a case under title 11;
3) counterclaims by the estate against persons filing claims against the estate;
4) orders in respect to obtaining credit;
5) orders to turn over property of the estate;
6) proceedings to determine, avoid, or recover preferences;
7) motions to terminate, annul, or modify the automatic stay;
8) proceedings to determine, avoid, or recover fraudulent conveyances;
9) determinations as to the dischargeability of particular debts;
10) objections to discharges;
11) determinations of the validity, extent, or priority of liens;
12) confirmations of plans;
13) orders approving the use or lease of property, including the use of cash collateral;
14) orders approving the sale of property other than property resulting from claims brought by the
estate against persons who have not filed claims against the estate;
15) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the
debtor-creditor or the equity security holder relationship, except personal injury tort or
wrongful death claims; and
16) recognition of foreign proceedings and other matters under chapter 15 of title 11.
C. What is a core proceeding?
1) Central to the administration of the bk case. Things that may relate to critical issues even if
not central to the case
2) Why does this matter? It matters because when a bk judge decides a matter that is core, the
judge is entitled to enter findings of fact and conclusions of law. Those findings and
conclusions become a final order and are reviewed on appeal
3) Core matter is entitled to deference.
D. Non-core proceedings
1) In non-core proceedings, bankruptcy judges can only offer recommendations for district
judges. District court reviews the recommendation de novo. 157(c)(1)
(i) bk court can decide them and issue findings of fact and conclusions of law. But unless
the parties agreed, those findings of fact are simply recommendations and entitled to no
deference. Complete de novo review
2) However, the parties can always consent to bankruptcy adjudication of non-core proceedings.
157(c)(2)

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3) Withdrawal of reference (see 157(d) below)


E. Why does this distinction matter?
1) BK judges tend to be extremely protective of debtors who are honest. BK judges in chapter
11 is how can I prevent this company from being chomped up into bits? They consider
themselves defenders of a system.
2) Debtors have an extraordinary capacity do choose where bk cases are filed. BK judges tend
to be a little reluctant to make their forum less appealing for debtors. Otherwise the cases will
go somewhere else.
3) BK judges will also do things district courts wont. Let you file briefs late. Other shit. Etc.
iii) Appointment of bankruptcy judges. 152
A. Made by circuit court judges. 14 year terms.
iv) Withdrawal of reference. 157(d)
A. Permissive - The district court may withdraw, in whole or in part, any case or proceeding referred
under this section, on its own motion or on timely motion of any party, for cause shown.
B. Mandatory - The district court shall, on timely motion of a party, so withdraw a proceeding if the
court determines that resolution of the proceeding requires consideration of both title 11 and other
laws of the United States regulating organizations or activities affecting interstate commerce.
v) Appeals - 158(a)
A. The district courts of the United States shall have jurisdiction to hear appeals [1]
1) from final judgments, orders, and decrees;
2) from interlocutory orders and decrees issued under section 1121 (d) of title 11 increasing or
reducing the time periods referred to in section 1121 of such title; and
3) with leave of the court, from other interlocutory orders and decrees;
B. and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered
in cases and proceedings referred to the bankruptcy judges under section 157 of this title. An
appeal under this subsection shall be taken only to the district court for the judicial district in
which the bankruptcy judge is serving.
e. Granfinanceria v. Nordberg (1989) - Dispute about the Seventh Amendment right to a jury trail for a
fraudulent conveyance action brought in bankruptcy court.
f. Congress response - Jury trial right for private-right matters in bankruptcy. 157(e)
3. Three categories of cases that can be heard in connection w/ bankruptcy code (from 157)
a. Arise under bankruptcy code
i) If a matter arises under a provision of the BK code (if its only existence is one that comes about
because of a federal statutory right embodied in the bankruptcy code) it has to be exclusively held in
bankruptcy court. It has to be heard. For instance, the automatic stay
b. Arise in bankruptcy proceedings
i) Same
c. Are related to the bankruptcy court.
i) A state law claim that a debtor could bring against someone that is really important to the estate.
Brought in combination with lets say a counterclaim to a proof of claim filed against a debtor. Or a
fraudulent transfer claim. Those are related to.
ii) Generally any claim against a debtor is related to
4. Stern v. Marshall (2011) - Can an article 1 judge can hear a common law state law claim that is not closely
integrated to the bankruptcy code?
a. Ann claimed ex husbands son deprived her of half of her ex husbands estate. Initially lost this in trial
court. Pierce countersued for defamation. Also filed a POC against her estate for that.
b. Anna submits a counterclaim on the facts that he actually did interfere even though it had already been
adjudicated.
c. BK court said they had jurisdiction because it was a core matter. Jurisdiction because clearly related to.
d. What was at issue? If it was core, BK court would get deference on factual issues.
e. Anna won on her counterclaim. District court overturned. Circuit court reversed again. SCOTUS granted
cert.
f. Holding
i) Looks too much like the facts from Northern Pipeline.
A. Bankruptcy court entertaining a state law claim.
1) Not some law regarding a federal statutory scheme like in Thomas

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2) Therefore, does not fall within the public rights exception.


B. The court's jurisdiction was not confined to a narrow set of issues (subject matter)
C. The bankruptcy court issues enforceable judgments
D. Article III review of the judgment was not de novo.
E. Pierce didn't consent to bankruptcy court. He had to file for a determination of dischargeability.
ii) We should be more skeptical about giving non-article III courts judicial power without the Article III
protections of life tenure and salary.
iii) In light of that caution, we should be cautious about giving Article III judicial power outside of the
three traditional roles.
iv) Professor - Pie dividing v. Pie enhancing. Bankruptcy court is not a real federal judge. Assaults my
dignity for you to call yourself a federal judge when you are taking property from someone else. You
are extinguishing someone elses right to have a piece of property. When forcing someone to give
something to the estate, thats a clear right that should be in the hands only of a federal district court
judge.
v) Breyer How can bk court judges oversee the entirety of the case if everyone always has to guess
whether a decision is core or noncore. Hard to know in advance.
A. These judges can always be reprimanded because they are not article 3 courts.
B. Can a bk court determine whether something held in the name of a third party is alter ego of
debtor? Is it a core function of bk court to determine if something really belongs to a debtor?
g. Key takeaway: one section of the court is really focused on functionalism. The other is more interested in
the rights of third party non-debtors and protecting the dignity of the judicial branch.

Venue under Title 11


1. 28 USC 1408
a. a case under title 11 may be commenced in the district court for the district
i) in which the domicile, residence, principal place of business in the United States, or principal assets in
the United States, of the person or entity that is the subject of such case have been located for the one
hundred and eighty days immediately preceding such commencement, or for a longer portion of such
one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the
United States, or principal assets in the United States, of such person were located in any other district;
or
ii) in which there is pending a case under title 11 concerning such persons affiliate, general partner, or
partnership.
2. In re Enron - Defer to debtors choice of venue in first instance.
a. Enron filed in NY even though Houton company
i) Holding - Court retains jurisdiction.
A. New York is the worlds most accessible location
B. Transfer of venue analysis under 1412 considers several factors
1) The proximity of the creditors to the court
(i) On the whole, creditors would not be made worse off because they are spread around the
world.
2) Proximity of debtor to the court
3) The proximity of witnesses
4) The location of the assets
5) The economic administration of the estate
6) The necessity for ancillary administration of liquidation should result
b. Patriot Cole
i) Defendant was based in St. Louis. 7-8 months before filing bankruptcy, debtor set up small office in
NYC.
ii) Reason patriot failed was that its collective bargaining agreements were very burdensome and made it
impossible to be solvent. They were based in DE, but DE had terrible case law for collective
bargaining agreements. Third circuit interprets necessary as meaning necessary. Second circuit
interprets the word to mean really nice to have. People tend to file cases involving collective
bargaining agreements in SDNY.
iii) Debtor didnt do anything wrong here. When you look at all the factors, the center of interest is clearly
not here. Send it back to St. Louis. Work it out there in the interest of justice.

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Exceptions to Automatic Stay


1. Police and regulatory power. 362(b)(4) - Murderers cannot hide from the district attorney by filing a
bankruptcy and invoking the stay. But the question becomes where do we draw the line?
a. United States v. Seitles (1989)
i) United States sued a company under the false claims act. Subsequently, defendants filed for
bankruptcy. The question is whether the automatic stay bars the United States suit or whether this
constitutes a police action under 362(b)(4)
ii) Holding - This is not a police power.
A. Pecuniary purpose test - This case involves no threat to the public health or safety. The
fraudulently obtained printing contracts pose only a monetary, not a safety threat to the
government.
B. Public policy test - Defendant has already been ordered to pay the government restitution in the
criminal case.
2. Financial contracts - Not really covered in class

Lifting the Stay


1. Section 105 - The court may issue any order necessary to carry out the provisions of this title. Often interpreted
as a massive grant of power. BK courts interpret this to mean they can do whatever they want.
2. Section 362(d) The stay facially applies. But Im a secured creditor and want my property back. Why would
a secured creditor want this? Worried if a debtor keeps using it, it will get less valuable over time.
3. Grounds for requesting relief from the stay. 362(d)
a. For cause. 362(d)(1). Includes the lack of adequate protection of an interest in property of such party in
interest.
This principle is derived from the property interest protections in the Fifth Amendment.
The purpose of adequate protection is to guard the secured creditors interest from a decline in the
value of the collateralized property.
Prima facie case of lack of adequate protection - The value of the collateralized property is declining,
or at least threatened, as a result of the automatic stay.
i) The value of the claim is increasing - Claim keeps getting bigger and bigger overtime. Value of the
property gets smaller and smaller. So not adequately protected.
ii) Equity cushion Difference between the value of the property and the entirety of the secured lenders
claims. If you are undercollateralized, meaning your loan is bigger than the value of the property, you
have no equity cushion. That means equity cushion cant play adequate role in protection.
iii) In re Panther - Creditor filed a 362(d)(1) motion to foreclose on property on the theory that the interest
on the property would accrue within 2 years to make the total payoff exceed the value of the property.
A. Creditors argument made a prima facie showing that the property was losing equity. As a result,
the burden shifted to the debtor to prove otherwise.
B. However, debtors provided a sufficient rebuttal.
1) Persuasive testimony that the value of the property was higher than the creditors estimates.
2) Testimony also established that the value of the property was likely to increase.
3) Finally, debtors situation had improved. The debtors were unable to sell the property when
one of them was sick. However, the condition had improved.
iv) Plastech - Cause can look to balance of hardships.
A. Hardships weigh in favor of debtor. If stay is lifted, many plants will have to be shut down.
Debtor has 7700 employees in 36 Manufacturing facilities.
b. No Equity and Not Necessary for Reorganization. 362(d)(2)
i) Both prongs must be met in order to lift the stay.
ii) Plastech -
A. There is no equity in the property.
B. However, the property is necessary for an effective reorganization. An immediate turnover of
possession of the property will result in 11 of debtors plants becoming immediately negative
margin contributes and will cause 8 plants to shut down.
C. Debtor only needs to establish that it has a prospect for an effective reorganization and that the
property the creditor seeks to take is necessary to an effective reorganization.
4. Burdens. 362(g)

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a. In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under
subsection (a) of this section
i) the party requesting such relief has the burden of proof on the issue of the debtors equity in property;
and
ii) the party opposing such relief has the burden of proof on all other issues.

Chapter 13
1. Wage-earners bankruptcy.
a. In chapter 7, debtors non-exempt assets are the source of paying claims.
b. By contrast, Chapter 13 focuses on using the future earnings of the debtor to pay creditors. This means the
debtor gets to keep all of the assets, even if not exempt, in exchange for an agreement to relinquish future
income for the benefit of creditors for a minimum of three years.
c. Creditors file plan objections in chapter 13 rather than cast ballots as are used in chapter 11.
d. Secured creditors are ensured minimum payments based on the value of their collateral. Unsecured
creditors are ensured minimum payments based on pro rata distribution from the debtors monthly
disposable income.
2. Secured Creditors, Treatment
To deal with secured creditors and prevent repossession of the debtors property subject to the security
interests, the debtor must make payments that satisfy the statutory requirements for the present value of
each allowed secured claim. If the plan so provides, secured creditors objections will be denied.
a. Courts must resolve two separate but related issues when a secured creditor wants to repossess and sell the
collateral that the debtor seeks to keep:
i) Does the plan provide for adequate protection?
ii) Are there adequate payments (cramdown)
3. Protection (Adequate) while the case is going on.
a. Rationale - Because the debtor proposes to keep the property, the creditor is naturally concerned that it will
decline in value during the 3-5 years of the bankruptcy. If the debtor defaults later on, the secured party
could be left with collateral worth considerably less than when bankruptcy was originally filed.
i) Two principal risks
A. Loss of the collateral (fire, theft, etc.)
B. Decline in its value (depreciation over time).
ii) Unlike chapter 7, in which liquidation is expected in the near future, a chapter 13 could prevent
liquidation for years.
iii) Adequate protection is necessary to comply with the constitution. You have an interest in property
protected by fifth amendment. In order to stay on the right side of that amendment, secured creditors
are entitled to adequate protection.
b. Creditors may argue under 362(d)(1) that the debtors proposed actions insufficiently protect their interest
in the property.
c. But what constitutes adequate protection for this purpose? Raydon
i) The value of the secured claim as of the bankruptcy filing, PLUS (if oversecured)
A. This is all the creditor gets if it is an fully secured or undersecured claim. That is, if the claim is
less than or equal to the value of the property, that is the value of the secured creditors allowed
claim.
ii) If the creditor is oversecured, it is also entitled to the time-value of money between the time of the
bankruptcy filing and when they can foreclose on the car.
d. Raydon - Debtor had to establish that he was capable of meeting the payments under the plan.
i) Why was creditor fighting here? Because it had no idea what value the judge would assign the car.
The value of the car would become the value of their secured claim. That is the subject of the adequate
payment section
4. Adequate Payments (Cramdown) - If creditor does not succeed in a lift stay motion, the next battle is fighting
for maximum payment. Court must make two factual determinations to establish the minimum amount that a
debtor must pay to a secured creditor under a permissible chapter 13 plan are contained in 1325(a)(5):
a. Valuation / Principal Component - The amount of the secured claim under 506(a). 1325(a)(5)
i) Replacement value = The definition of value for cramdowns

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A. Associates Commercial Corp. v. Rash - Dispute over valuation of the property. Court found that
what it would cost the debtors to buy equivalent property was the proper measure of its value for
the purposes of the chapter 13 plan.
B. Modified replacement value - The Rash court held that deductions could be made from
replacement value for marketing and other costs. This leaves the modified replacement value.
C. However, congress has since amended the bankruptcy code to add 506(a)(2), which adopts the
replacement value rule without providing for deductions.
D. As a practical matter, most courts just split the difference between wholesale and retail prices.
b. Interest Component - The present value of the allowed secured claim under 1325(a)(5)(B)(ii).
i) Rationale - But for the stay, the creditor would be entitled to repossess the property. So adequate
protection compensates a secured creditor for the impact of the automatic stay. The goal of adequate
protection is to keep the creditor neutral with respect to the value of the property.
ii) The total amount to be recovered under the plan must equal the present value, or the value of the
property as of the date of the filing
iii) Formula
1-1/(1+i)^n
Pva= x (a)
i

iv) Interest rate - in order to pay someone the present value of their interest in the debtors collateral, you
need to pay them a market rate of interest. If so, then by definition they are getting present value.
A. Market rate = Prime rate adjusted for the riskiness of the debt. Till v. SCS Credit Corporation.
1) It used to be a very well-defined term. You could look in the Newspaper and every day see
the prime rate listed
2) The prime rate was the published rate that every bank charged its best borrowers (most credit
worthy borrowers).
3) Till The fight in Till was over whether a subprime borrower (meaning already low quality
borrower) would have to pay over time the contract rate (something like 20%) or some other
market rate. The creditor argues under state law, I would be entitled to foreclose. If I could
foreclose, Id have money to reinvest. Im lending money out at 20% Thats why I should
get because thats what Im deprived of.
4) Court No. Not going there. We are going to assume essentially that this reorganized
debtor, with a discharge in hand, is no longer a subprime borrower. Were going to assume
that he or she is a prime borrower, but with a little discount for uncertainty.
B. Current interest rate is used - not the rate of the loan contract signed by the debtor.
5. Lienstripping of secured creditors
a. Debtor can strip a lien off encumbered property upon successful completion of a chapter 13 plan. At the
point of the discharge, the lien goes away. 1325(a)(5)(B)(i)(I)(bb)
i) Example
A. Debtors owe $10k in secured office furniture. They file BK when the furniture is worth 4k. As
part of the plan, debtors offer to pay 50% to unsecured creditors. Thus, lender gets 4k for the
secured portion and 3k (50% of 6k remainder) for the unsecured portion for a total of 7k. If the
plan is successful, debtors get to strip the lien after only paying 7k of the 10k owed.
B. This can be imposed over a secured creditors objection. Therefore, it is a form of cramdown.
ii) If the debtors fail to complete the plan, they will lose the benefits of lienstripping.
b. Exceptions to lienstripping
i) Purchase Money Security (the hanging paragraph) -
A. A secured claim is not subject to bifurcation under 506 if the creditor:
1) Has a purchase money security interest securing the debt that is subject to the claim, and
2) If the collateral is a motor vehicle and the debt was incurred within the 910-day period
preceding the date of the filing of the petition; or
B. In effect, this shifts the value from unsecured to secured creditors.
C. Ford Motor Credit Co v. Dale
1) Guy owns car. Wants to buy new car. Still owes money on old car (more than it is worth).
So the friendly subprime motor dealer accepts that and gives him credit for trade in AND

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loans additional money to pay off old loan. That will be aprt of the balance of the new loan,
then make additional new loan so he can buy the new car.
2) What would the argument be against including that portion of the new loan as PMSI?
3) The secured creditor is getting an unfair windfall
4) Only the money to purchase the new car is PMSI. The portion for the old car should not be
PMSI because it was to pay off the old car.
ii) Home Mortgages
A. The debtor may provide for the curing of any default within a reasonable time and maintenance of
payments while the case is pending on any unsecured claim or secured claim on which the last
payment is due after the date on which the final payment under the plan is due. 1322(b)(5).
B. However, a chapter 13 plan cannot modify the rights of holders of secured liens secured by an
interest in real property that is the debtors principal residence. 1322(b)(2)
1) Thus, a first lien cannot be stripped. The only relief available in chapter 13 for a first lien on
real property that is a principal residence is 1322(b)(5).
2) However, most courts say that you can strip an inferior mortgage that is entirely out of the
money (that is, when senior mortgages swallow all of the value in the home).
6. Reinstatement. Litton
a. Had a BK. Agreed to a certain payout plan. Defaulted and filed new BK for the purpose of reinstating
prior plan.
b. Creditor says you cant do that. ITs a modification.
c. BK agreed, but this court says not a modification but a reinstatement.
d. Reinstatement is an important power. It goes on the basic principle that a creditor really cant complain
about getting its original bargain. If debtor is prepared to say hes putting original bargain back into place,
the fact that there may have been technical defaults along the way wont stop the debtor from being about
to cure in reinstatement. Debtor will come out of BK legally obligated to repay that loan. The creditor will
not be able to foreclose as long as debtor agrees to pay under the agreement.
7. Treatment of Unsecured Creditors
Debtors must pay into a pot of money that will be distributed out to unsecured creditors. The code protects
unsecured creditors by setting a minimum floor on what the debtor must pay into this pot over the course of
the plan. As long as the debtor agrees to pay this amount, any objection by unsecured creditors will be
denied.
If a trustee objects to plan confirmation the court may not confirm the plan unless the plan provides for all
of the debtors projected disposable income received during the life of the plan to be applied to make
payments to unsecured creditors under the plan. 1325(b)(1)(B).
a. Minimum payment requirements for unsecured creditors
i) Debtors must pay priority creditors in full, but without interest.
ii) Best interests test - Each creditor must receive at least as much as that creditor would have received if
the debtor had gone into chapter 7. 1325(a)(4) (or (7
iii) Debtors must devote all of their projected disposable income to funding the pot for the unsecured
creditor payments over the life of the chapter 13 plan. 1325(b).
A. Must be devoted to those payments for the applicable commitment period. 1325(b)(4)(A)
1) 3-5 years
b. Priority claims - They are entitled to payment in full over the course of a chapter 13 case, though not with
interest. 1322(a)(2); 507(a).
i) Arguably even more rights than allowed secured claims.
ii) Why not interest?
A. Secured and unsecured claims are governed by 1325(a)(4) and (5) respectively. Those provisions
refer to value. The court interprets this to include interest. But 1322(a)(2), which governs priority
claims, only says full payment.
iii) Administrative Expenses.
A. Chapter 13 filing fee.
B. Attorney fees. 330(a)(4)(B) - Services necessary for representing the debtor in connection with
bankruptcy are compensable.
C. Domestic Support Obligations - Because they are in 5079a), they are priority claims under
1322(a)(2).

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1) To get a plan confirmed, the debtor must show he or she is current on all domestic support
obligations that became due after filing. 1325(a)(8).
2) Failure to make payments after confirmation will result in potential dismissal of the chapter
13 case. 1307(c)(11)
D. Tax Claims - While tax debts are not dischargeable, bankruptcy offers three advantages to
delinquent taxpayers
1) Letting debtor pay the taxes over time that can be as long as file years, with the automatic stay
holding off the IRS throughout 362(c)(2)(C)
2) Denying post-petition interest on unsecured claims. 502(b)(2)
3) Allowing that locked claim to be paid in nominal, not real dollars over the length of the plan,
which is especially helpful to the debtor in inflationary times.
c. Disposable income requirement. 1325(b)(1)(B)
The only protection afforded to unsecured creditors is that the debtor must pay all disposable income for
the length of the chapter 13 plan.
If an unsecured creditor believes that the debtor is proposing to pay less than her disposal income, the
creditor can object to the plan confirmation.
i) Projected disposable income = Current monthly income - Expenses
A. Projected income Hamilton v. Lanning -
1) Debtor got a lump sum payment that dramatically inflated her income during that six month
period. But that was not a repeatable event.
2) If you took the mechanical approach and held that she has to take into account all of that
income to determine her plan, she never would have been able to afford a plan. Her future
income was going to be way less than her future income. So the court said the mechanical
approach cant be the right answer.
3) Holding - In calculating a chapter 13 debtors projected disposable income, bankruptcy
courts may use a forward looking approach to account for changes in the debtors income or
expenses that are known or virtually certain at the time of confirmation.
B. Projected expense Ransom v. FIA Card Services
1) Debtor could not claim expense for a car he owned even though he would be entitled to claim
such expense for tax purposes. Another case applying the realistic method.
ii) Current monthly income - The average monthly income from all sources the debtor receives during the
6 month period ending on the last day of the calendar month immediately preceding the
commencement of the case, without regard to whether it is taxable or nontaxable income. All of your
income during the 6 month period leading up to the case. 101(10)(A)
A. In re Waechter, Good Faith requirement. 1325(a)(3)
1) Debtor had a premarital agreement with her nonfiling husband - They would keep their
property separated.
2) In calculating her monthly income, debtor left out her husbands income and claimed that he
does not contribute to her living expenses.
3) Holding - Trustees objection sustained. Look to good faith based on the totality of the
circumstances. Debtors plan in which she proposes to pay a disproportionate amount of the
couples shared household expenses is not proposed in good faith.
B. Excludes benefits received under the Social Security Act. 101(10A)(B)
1) However, the majority of courts has concluded that unemployment compensation benefits
must be counted as income and paid out to creditors.
iii) Expenses -
o Based on its size and state of residence, a household is categorized as either below-median income
or above median income.
A. If the debtor is below median income - Amounts reasonably necessary to be expended for the
maintenance or support of the debtor or a dependent of the debtor. 1325(b)(2)(A)(i).
1) Wyant - Debtors proposed expenditures on veterinary expenses and livestock are
unreasonable.
2) Clearly -
(i) Debtor bears the burden of showing that the expense is reasonable.
(ii) Debtor and his family have shown long term enrollment and parochial schools
(iii) All of the children attend private school, save one

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(iv) The debtors wife attended private school


(v) The debtor has his wife have strongly held religious convictions.
B. If the debtor is above median income - Use the expense equations of 707(b)(2) (IRS guidelines).
1325(b)(3)
1) 707(b)(2) Added in 2005 Essentially says that if you are above median income, expenses
are calculated in accordance with some IRS guidelines.
2) As a result, the expense calculation methodology for 707(b)(2) and 1325(b)(3) are the same.
d. Applicable commitment period - Minimum length
i) Above median = 5 year plan. 1322(d)(1)
ii) Below median = 3-5 year plan. 1322(d)(2)
e. Special Rules for Above-Median-Income Debtors
i) Five-year Commitment Period Unless debtor is paying 100% of unsecured creditors claims, the plan
must be five years in duration.
ii) The Means Test, 707(b). See above.
8. The Means Test. 702(b)(2)
a. The test for determining whether a debtor qualifies for chapter 7 based on his or her means. If the debtor
fails the means test, his attempted chapter 7 is presumed abusive.
b. Steps:
i) Is debtors current monthly income more than his median income in the state?
A. Yes? Step 2.
B. No? Debtor automatically qualifies for chapter 7. 707(b)(7)
ii) Reduce current monthly income by expenses, multiply difference by 60. Is this amount:
A. 10k or more? Yes - Automatic Chapter 13
B. More than 25% of unsecured debt? - Yes - Automatic 13
C. 25% or less of unsecured debt? - Yes - You choose chapter
D. 6k or less? Yes - Chapter choice is yours.
c. The Means Test is one of the bars to chapter 7.
i) Other bars
A. 707(b)(1) for dismissing abusive cases (Living beyond means)
1) After notice and a hearing, the court, on its own motion or on a motion by the United States
trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a
case filed by an individual debtor under this chapter whose debts are primarily consumer
debts, or, with the debtors consent, convert such a case to a case under chapter 11 or 13 of
this title, if it finds that the granting of relief would be an abuse of the provisions of this
chapter.
2) Shaw case
(i) Debtors had a longstanding pattern of excess spending and counting on raises and
bonuses that never materialized. Had a big expensive house.
(ii) They were both employed.
(iii) This was pre-2005. There was no means test issue. Court was applying discretionary
standard for abuse (now substantial abuse).
3) Note - Legislature removed the word substantial in 2005. So any abuse is warranted.
B. 707(b)(3) - Policing against means test manipulation
1) Even if debtor passes the means test, his chapter 7 may still be abusive if
(i) the debtor filed the petition in bad faith. (b)(3)(A)
(ii) the totality of the circumstances (including whether the debtor seeks to reject a personal
services contract and the financial need for such rejection as sought by the debtor) of the
debtors financial situation demonstrates abuse. (b)(3)(B)
2) The purpose of this provision is to police against means test manipulation. In re Deutscher
(i) Debtors were able to pass means test because they had very large expenses for certain
secured debts which they intended to reaffirm. Included a yatch, boat and luxury car.
(ii) Court dismissed petition of abusive and in bad faith.
What was the key to this decision?
(iii) The problem is that they purchased these on the eve of bankruptcy, which altered their
balance sheet.

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(iv) Court says we can find abuse under the totality of circumstances when there is
evidence that the debtor has manipulated the means test
3) In re Durczynski
(i) Debtor passes the means test, but 40% of debtors income went to his housemaid
(ii) Judge dismisses this for bad faith under (b)(3) and also notes that Ms. Durczynski has not
made an effort to increase her income.
C. Distinction between 707(b)(1) and 707(b)(3)
1) Bad faith under 707(b)(3) has to involve some gaming.
2) Debtors in Deutscher saw that they couldnt pass the means test so they went and bought a
yacht
3) Thats the difference between (b)(1) and (b)(3). Manipulation.
4) Living beyond means (707(b)(1)) vs. manipulating rules for means test (707(b)(3))
d. The dual-duties of the Means Test
i) Acts as a screen to chapter 7
ii) The same formula is also used for making budgets for above-median debtors
A. PROJECTED DISPOSABLE INCOME = CURRENT MONTHLY INCOME - EXPENSES
e. Determining income and expenses
i) Income
A. Unlike the rule for 1325(b) under chapter 13, the Chapter 7 means test is purely mechanical. It
looks back at the prior 6 months without taking into account events that may indicate that period
does not reflect the debtors future income.
B. 707(b)(2) does not contain the word projected, unlike 1325(b)
ii) Expenses
A. The chapter 7 test is not purely mechanical on the expense side. In re Fredman
1) Debtors, in calculating their chapter 7 means expenses, took an expense for a house that they
intended to surrender.
2) Court chose to adopt the realistic approach instead of the mechanical approach here.
B. An expense under the means test must be applicable to the debtor. 707(b)(2)(A) ((b)(2)(A)(I)
(debtors current monthly income reduced by the amounts determined under clauses (ii), (iii), and
(iv)); AND (b)(2)(A)(ii)(I) (The debtors monthly expenses shall be the debtors applicable
monthly expense amounts)

Income Expenses
Chapter 7 Means Test Mechanical. 707(b) doesnt Realistic. In re Fredman.
contain projected Applicable to
Chapter 13 Means Test Realistic. Hamilton v. Realistic. Ransom v. FIA
Lanning Card Services
1) Cf. In re Scott
(i) Chapter 7 debtor was allowed to take full IRS deduction for his car even though it was
greater than his car payments.
(ii) This gets to the meaning of applicable. An expense can still be applicable even if it is
greater than the real expense. But a completely fictitious expense (as in Ransom) is not
applicable.
f. Varying results for above and below median debtors
Means Test Chapter 13
Above Median Have to calculate. Expenses IRS. 5 year plan
Below Median Dont have to calculate. Auto pass. Expenses subject to judicial
discretion. 3-5 year plan if you
choose to go into chapter 13.

9. Confirming a Chapter 13 Plan


a. 1324 Confirmation hearing
i) Except as provided in subsection (b) and after notice, the court shall hold a hearing on confirmation of
the plan. A party in interest may object to confirmation of the plan.
ii) The hearing on confirmation of the plan may be held not earlier than 20 days and not later than 45 days
after the date of the meeting of creditors under section 341 (a), unless the court determines that it

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would be in the best interests of the creditors and the estate to hold such hearing at an earlier date and
there is no objection to such earlier date.
b. 1325 Court shall confirm a plan if:
i) The plan complies with the provisions of this chapter and with the other applicable provisions of this
title;
ii) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before
confirmation, has been paid;
iii) the plan has been proposed in good faith and not by any means forbidden by law;
A. In re Crager
1) Debtors only income was social security benefits. 1/3 rd of those benefits went to house
payments. Debtor filed primarily to discharge credit card debt. All of the payments available
under plan went to pay off attorney. Creditors were getting zero under this plan. Motion is
made to deny confirmation.
2) Holding - Plan confirmed. Youre not going to get an intelligent 13 plan without attorney.
Purpose is to give debtor a fresh start. No requirement that creditors have to get paid
anything. No bad faith.
B. Veighlan vl. Essex (In re Essex)
1) Bankruptcy involved more than 100k owed to IRS. Debtors hadnt filed a tax return in years,
which they knew they hadnt done, and then bought a house with a huge mortgage. The
house was immune to seizure because of homestead exemption. If they owned the house
before, they would have gotten the bad faith filing.
2) Holding - This was in bad faith.
iv) the value, as of the effective date of the plan, of property to be distributed under the plan on account of
each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate
of the debtor were liquidated under chapter 7 of this title on such date;
v) Adequate protection
vi) the debtor will be able to make all payments under the plan and to comply with the plan;
vii) the action of the debtor in filing the petition was in good faith;
viii) the debtor has paid all amounts that are required to be paid under a domestic support obligation and
that first become payable after the date of the filing of the petition if the debtor is required by a judicial
or administrative order, or by statute, to pay such domestic support obligation; and
ix) the debtor has filed all applicable Federal, State, and local tax returns as required by section 1308.
10. Modification of Chapter 13 Plan. 1329
Often used when the debtors disposable income changes.
Modification can reduce payments to unsecured creditors but it does not change the statutory minimums
owed to secured and priority creditors.
a. the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured
claim, to:
i) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
ii) extend or reduce the time for such payments;
iii) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent
necessary to take account of any payment of such claim other than under the plan; or
iv) reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase
health insurance for the debtor (and for any dependent of the debtor if such dependent does not
otherwise have health insurance coverage) if the debtor documents the cost of such insurance and
demonstrates that
A. such expenses are reasonable and necessary;
B. if the debtor previously paid for health insurance, the amount is not materially larger than the cost
the debtor previously paid or the cost necessary to maintain the lapsed policy; or
C. if the debtor did not have health insurance, the amount is not materially larger than the reasonable
cost that would be incurred by a debtor who purchases health insurance, who has similar income,
expenses, age, and health status, and who lives in the same geographical location with the same
number of dependents who do not otherwise have health insurance coverage; and
D. the amount is not otherwise allowed for purposes of determining disposable income under section
1325 (b) of this title;
b. Five-year limit still applies. 1329(c)

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i) This means the debtor has to find a way to somehow make up for the missed payments, despite an
income for which all spare change has already been fully committed.
c. In re Drew
i) Debtors were in the middle of a chapter 13 plan when they sought and obtained permission from the
court to refinance their house. The value of their house increased from $90k to $105k.
ii) Trustee moved to modify the plan to require the debtors to pay more to unsecured creditors now that
they have more money.
A. Debtors contend the trustee is locked into the valuation at confirmation
iii) Holding
A. 541 broadly defines property of the estate to include all legal or equitable interests of the debtor in
property as of the commencement of the case. 1306(a)(1) includes all property of the kind
specified in 541 that the debtor acquires after commencement of the case but before the case is
closed. Thus, property that a chapter 13 debtor acquires post-petition becomes property of the
estate pursuant to 1306
B. The estate can be re-created after confirmation if the debtors financial situation improves.
C. Refinancing proceeds are part of the debtors bankruptcy estates post-confirmation because
those proceeds were acquired by the debtors for use in making payments under their
confirmed plans.
D. The new loans were not made to these debtors at one-hundred percent loan to value ratio. Thus,
they were not a wash. Debtor has money to spare.
11. Other requirements of Chapter 13. 109(e)
a. Filer must be an individual.
b. Filer must have regular income
c. noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured
debts of less than $750,000
i) Noncontingent - Debt is not dependent on future events.
A. Compare to a tort liability that has yet to be adjudicated.
ii) Liquidated We know what the actual amount is
12. Discharge
a. The court shall grant the debtor a discharge, unless
i) the debtor has been granted a discharge under section 1228 or 1328 of this title, or under section 660 or
661 of the Bankruptcy Act, in a case commenced within six years before the date of the filing of the
petition, unless payments under the plan in such case totaled at least
A. 100 percent of the allowed unsecured claims in such case; or
B. 70 percent of such claims; and the plan was proposed by the debtor in good faith, and was the
debtors best effort;
b. Debtor does not get a discharge if the debtor has received a discharge
i) in a case filed under chapter 7, 11, or 12 of this title during the 4-year period preceding the date of the
order for relief under this chapter, or
ii) in a case filed under chapter 13 of this title during the 2-year period preceding the date of such order.
c. Revoking discharge - On request of a party in interest before one year after a discharge under this section is
granted, and after notice and a hearing, the court may revoke such discharge only if
i) such discharge was obtained by the debtor through fraud; and
ii) the requesting party did not know of such fraud until after such discharge was granted.
CHAPTER CHOICE
Chapter 7
Pro Con
Immediate discharge Dont get to keep your property (lose house and other
stuff)
Exemptions Liquidation value youll get less for your stuff if there
was equity
Keep future income Must pass means test
Reaffirmation of secured debt
Ride through

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Chapter 13
Pro Con
Keep your stuff Future income has to be used
Shorter lockout Delayed discharge
Avoid means test
IRS expenses might get you out of 13 pretty cheaply
Lienstripping

CHAPTER 11 REORGANIZATION
Getting creditors to agree to a court-sanctioned workout plan
o Distinction from chapter 13
Far fewer restraints than chapter 13. No minimum repayment period
Chapter 11 is an invitation to a negotiation. Creditors get to participate in the court case and
get to vote on the plan of reorganization.
Chapter 11 debtor gets discharge at confirmation. Chapter 13 debtor has to wait 3-5 years.
Causes of corporate BK
o Balance sheet restructuring. Ive borrowed too much money and cant pay it back
Predominantly dealing with financial creditors.
Issues that come up. Fraudulent transfers Some of the borrowed money was fraudulently
transferred.
There is no reason in such a case to change the business operations. Instead, the rights
of the various stakeholders are adjusted
o Operational problems.
Labor contracts
Leases
Product goes out of fashion
We make a product that kills people Asbestos.
We committed really bad fraud.
1. Mechanics of Chapter 11
a. Basic structure
i) Petition filing. Debtor struggles to stabilize
A. Chaos period when Chapter 11 is filed. Vendors who are quite concerned. Employees who are
concerned. Lenders you may not have had a lot of contact with. Lots of agitated people.
B. Debtor needs to continue conducting business. This is what Cook is about.
ii) The debtor attempts to negotiate a plan with its major creditors, figuring how much debt restructuring
they can tolerate.
A. Debtors goal is to confirm a plan in which it will promise to pay creditors a certain percentage of
their claims over a stated period of time, with payment to be made in cash, property or other
securities issued.
iii) Have the plan confirmed by the bankruptcy court
iv) Upon confirmation, the debtor is discharged from all its prepetition debts, except as provided in the
plan. Section 1141(d)
2. Debtor in possession
a. Control of the debtors assets and affairs is given to the debtor in possession (DIP)
i) The DIP is deemed to be the trustee, with all the powers and most of the duties attendant to that role.
1107(a)
A. Every power that a trustee has, the debtor in possession has.
ii) In effect, this puts the existing pre-bankruptcy management in charge of the debtor and the chapter 11
process
b. Scope of DIP control
i) 363
A. If a debtor seeks to use, sell or lease property of the estate in a way other than in the ordinary
course of business, it must be authorized by the court after notice and hearing. 363(b)

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B. However, if the transaction is in the ordinary course of business, no such approval is needed.
363(c)
1) Professor - If you used to do it, you can keep doing it without getting court approval.
2) However, the language of 363(c) says that a court may rule otherwise.
ii) Tests for ordinary course of business (from In re Cook and Sons Mining, Inc.)
A. Horizontal test - Whether, from an industry-wide perspective, the transaction is of the sort
commonly undertaken by companies in that industry.
1) Example: raising a crop would not be in the ordinary course of business for a widget
manufacturer
B. Vertical test - Whether given the situation it makes sense to enter into the contract. Is there some
compelling reason why this company would be doing something other than the general industry
that makes sense in this circumstance.
1) the reasonable expectations of interested parties as to this particular debtor-in-possession
2) Have you historically entered into requirements contracts/
3) Is it consistent with industry practice?
c. Other parties with influence
i) Chapter 11 Trustee
ii) Committee of Unsecured Creditors - Has the right to scrutinize the debtors activities.
A. Its lawyers are paid from assets of the estate.
B. 1102(a)(1) - Except as provided in paragraph (3), as soon as practicable after the order for relief
under chapter 11 of this title, the United States trustee shall appoint a committee of creditors
holding unsecured claims and may appoint additional committees of creditors or of equity security
holders as the United States trustee deems appropriate.
3. Appointment of Trustee or Examiner. 1104
a. Who can seek appointment?
i) Party in interest Equity holders, employees, creditor, basically anybody,
ii) US Trustee
b. On what grounds can a trustee be appointed under the statute?
i) 1104(a)(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the
affairs of the debtor by current management, either before or after the commencement of the case, or
similar cause, but not including the number of holders of securities of the debtor or the amount of
assets or liabilities of the debtor; or
A. Professor - Current management has done something really bad. Fraud, dishonesty,
incompetence, or gross mismanagement of the affairs of the debtor by current management.
ii) 1104(a)(2) if such appointment is in the interests of creditors, any equity security holders, and other
interests of the estate, without regard to the number of holders of securities of the debtor or the amount
of assets or liabilities of the debtor
A. Professor - When its just not in anyones interest to keep current management. They so badly
refuse to do the smart thing that they must be removed, even if they havent committed actionable
wrong-doing. Theyre making it impossible to move the case forward.
c. This power is generally used as leverage
d. It is generally hard to get rid of a debtor in possession. But it has happened. Biolitec, Inc.
i) Fiber-optic device company with controlling shareholder. They have a bunch of litigation that
uncovers that they did a lot of bad things. Fraudulently transferring assets to affiliates to make it
judgment proof. Some of its former officers sued saying they were oppressed by some guy.
ii) Court says that the reasons favoring appointing trustee outweigh reasons against.
iii) Self-dealing is a really important theme. In Sharon Steel, company was borrowing 30% from affiliate
company. Had extraordinarily high interest rates.
e. Workaround Debtor in possession can let creditors pursue the claim on their behalf short of appointing a
trustee. (Citation needed)
4. The operation of a business in Chapter 11 Reorganization
a. First Day Orders
i) Judge may be asked within hours of filing to rule on issues that eminently threaten to derail the
businesss operations
A. Additional injunctive relief, et al.
B. These are routinely entered ex parte

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ii) In re Colad Group


A. Debtors sought authority to do a few things, including pay pre-petition wages of employees so it
could stay in business. Court was okay with this.
b. Payments to critical vendors
i) Debtors will want to stabilize their business in chapter 11 . To do this, they need to be able to pay pre-
petition debts of vendors.
ii) Kmart
A. Kmart wanted permission to pay pre-petition debts for what they deemed their critical vendors
were so they could keep operating.
B. BK court allowed this
C. But they failed to meet their evidentiary burden
1) They havent proved that any one vendor is more critical
D. Evidentiary standard (Easterbrook)
1) Must prove that the disfavored creditors will be as well off with reorganization as with
liquidation
2) Also that the supposedly critical vendors would have ceased deliveries if old debts were left
unpaid while the litigation continued.
c. The stay - The business stay protects against a creditor who can shut down the entire operations by levying
or more likely repossessing critical property.
i) The automatic stay cannot be waived by contract before bankruptcy.
ii) Actions taken in innocent violation are voidable.
d. Scope of the Chapter 11 bankruptcy estate
i) Bankruptcy courts do not look solely to state law to determine whether a legal right was property.
State law is the starting point.
A. Property interests are created and defined by state law
B. Unless some federal interest requires a different result, there is no reason why such interests
should be analyzed differently.
ii) In re Burgess
A. Legal brothel in Nevada is in bk. Had their license revoked because they were dealing with hells
angels.
B. Nevada law provides that a prostitution license is not a property interest
C. Holding
1) Nevada law is the starting point but is not dispositive.
2) They note that property is not defined in code. But has been interpreted liberally. Analogizes
a license for brothel with liquor licenses. Liquor licenses can be property. So can brothel
licenses.
3) Can you make money from it? If so, then it is property. So dont want to let someone take it
away without letting the debtor monetize it.
5. Executory Contracts and Leases
a. Structure of 365
i) General Rule DIP/Truste may assume or reject any executory contract or unexpired lease. 365(a)
ii) 365(b)(1) Exception If there has been a default on an executory contract, the DIP/Trustee cannot
assume the contract unless:
A. Trustee cures or provides adequate assurance that he will cure defaults
1) Monetary v. nonmonetary (see below under assumption rules)
B. Trustee will cure any damages resulting from breach
C. Provide adequate assurance of future performance
1) 365(b)(3) - adequate assurance of future performance of a lease of real property in a shopping
center includes adequate assurance
(i) of the source of rent and other consideration due under such lease, and in the case of an
assignment, that the financial condition and operating performance of the proposed
assignee and its guarantors, if any, shall be similar to the financial condition and
operating performance of the debtor and its guarantors, if any, as of the time the debtor
became the lessee under the lease;
(ii) that any percentage rent due under such lease will not decline substantially;

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(iii) that assumption or assignment of such lease is subject to all the provisions thereof,
including (but not limited to) provisions such as a radius, location, use, or exclusivity
provision, and will not breach any such provision contained in any other lease, financing
agreement, or master agreement relating to such shopping center; and
(iv) that assumption or assignment of such lease will not disrupt any tenant mix or balance in
such shopping center.
D. Good business judgment
iii) 365(b)(2) 365(b)(1) does not apply if the breach results from a provision (mirror of 365(e)
A. Requiring the debtor to remain solvent
B. Prohibiting debtor from filing bk
C. Appointment of possession of trustee
D. The satisfaction of any penalty rate or penalty provision relating to a default arising from any
failure by the debtor to perform nonmonetary obligations under the executory contract or
unexpired lease.
iv) 365(c)(1) Exception Trustee cannot assume if:
A. No applicable bk law excuses the other party from accepting performance from a substatitute
B. The other party does not consent
v) 365(c)(2) Exception Trustee cannot assume if the contract is to make a loan, or extent other debt
financing or financial accommodations, to or for the benefit of the debtor, or to issue a security of the
debtor
vi) 365(c)(3) Exception The lease is of nonresidential real property and has been terminated under
applicable nonbankruptcy law prior to the order for relief.
vii) 365(d)
A. (1) If it is a lease of residential real property or personal property, the debtor must assume
within 60 days after the petition
B. (2) Court can order the debtor/trustee to make his decision sooner.
C. (3) Debtor/Trustee must timely perform all obligations of the debtor during the 60 days, except
those arising from any unexpired lease of nonresidential property
D. (4) If the lease is of nonresidential real property, Trustee must surrender within 120 days after
petition or date of plan confirmation.
E. (5) Debtor/Trustee must timely perform all obligations of the debtor w/r/t personal property
(except family stuff) within the first 60 days.
viii) 365(e)
A. (1) Voids any provision that terminates a contract for insolvency, commencing bk, or appointment
of trustee
B. (2) Paragraph (1) doesnt apply if nonapplicable bk law lets the other party off the hook
ix) 365(f) Assignment
A. (2) Trustee may assign an executory contract or unexpired lease only if
1) Trustee assumes such contract or lease in accordance with the assumption requirements
2) Adequate assurance of future performance by the assignment is provided
x) 365(g) If debtor rejects, breach is deemed to occur on petition date. Thus, that is how damages are
timed.
b. Meaning of Executory Contract
i) If a contract is fully performed or terminated before bankruptcy, the trustee gets no special powers
under 365. (365(3) says this much for commercial leases)
ii) Countryman rule (from a law review article)
A. Material breach test. A prepetition contract is executory when both sides are still obligated to
render substantial performance.
1) Under this test, an options contract is not an executory contract because debtors performance
occurred before petition.
2) Thus, debtor cannot get around it.
B. Functional analysis Depends on the benefits that assumption or rejection would produce for the
estate. A contract is executory if each side must render perofmrance, on account of an existing
legal duty or to fulfull a condition, to obtain the benefit of the counterpartys performance. In re
Riodizio
1) Under this approach, a contract need not be immediately bilateral.

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2) Options contract was found to be executory because excusing the debtor would benefit the
estate. Therefore, debtor could reject.
c. The Logic
i) All contracts are deemed property of the estate
A. An anti-assignment clause cannot preclude the debtor from assigning the contract to the estate.
541(c)(1) & 365(f)(1) & (3)
1) What are the substantive differences between these provisions?
2) 365(f)(3) goes beyond the scope of (f)(1) by prohibiting enforcement of any clause creating a
right to modify or terminate the contract because it is being assumed or assigned thereby
indirectly barring assignment by the debtor.
3) In re Jamesway Corp
(i) Lease agreement required debtor to pay 50% of its profits to leasor.
(ii) Debtor attempted to assign the lease to right aid and moved to void the profit sharing
provisions of the lease because they would prevent the debtor from assigning the lease
and satisfying the unsecured creditors.
(iii) Leasor conceded that bk court had authority to assign lease despite their objection, but
argued this did not permit the court to invalidate the profit sharing provision
(iv) Holding This falls within the scope of 365(f)(1). We interpret 365(f)(1) to invalidate
provisions restricting, conditioning or prohibiting debtors right to assign the subject
lease. Thus, the profit sharing provision is unenforceable.
ii) Once property is part of the estate, Section 365(a) allows a debtor in possession to reject or assume
(subject to court approval) any executory contract.
iii) These rules effectively determine the contractual obligations of the estate, including any damage
claims owed by the estate for breach
iv) All damage claims resulting from breach of the contract (either by rejection or whatever) are set at the
filing date, regardless of how long the debtor takes to decide what to do. 365(g) and 502(g).
d. Assignment
i) Debtor in possession may assign an unexpired executory contract only if it assumes the lease in
accordance with 365(a) and provides adequate assurance of future performance by the assignee.
ii) Requirements
A. All of the requirements of assumption (see below)
B. Must be susceptible to assignment under applicable non-bankruptcy law. 365(c)(1)
1) That is, if applicable law excuses the other party from accepting assignment, and the other
party does not consent to the assignment, then the contract is not assignable.
2) i.e. Leonardo DiCaprio cant assign his movie role to some fatso
3) This is distinct from a non-assignment clause
4) In re Footstar Whether this applies only to assignment or to assumption and assignment
depends on whether the jurisdiction uses the actual or hypothetical test.
(i) Debtor footstar was party to a master agreement with Kmart to sell shoes. Wanted to
assume that agreement.
(ii) K-Mart argued the agreement was not assumable based on the language of 365(c)(1)
Trustee may not assume or assign. Since K-mart objected, it claimed 365(c)(1) applied
(iii) Holding
A) Actual test Assume or means and. This would mean that a debtor can assume a
contract for the purposes of actually assuming it with no intent to assign it.
B) Hypothetical test or means or. Thus, no assumption even if intent not to
assign.
C) Court adopts actual test. Thus, assumption is permitted.
e. Assumption
i) 365(a) Subject to courts approval, Trustee may assume or reject any executory contract
ii) Breach If the estate breaches, it becomes a priority administrative expense under 503(b) and
507(a)(2)
iii) Requirements (If there has been a default)
A. Must be able to provide a good business judgment reason.
1) Very low standard.
2) If it is a related party, the standard is good business purpose instead. A bit higher

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B. The trustee must cure or arrange to cure defaults as a condition of assumption. 365(b)(1)(A) and
(B).
1) Non-monetary defaults. 365(b)(1)(A)
(i) Do not have to cure if it is impossible for the trustee to cure such default by performing
nonmonetary acts at and after the time of assumption
(ii) Do have to cure if such default arises from a failure to operate in accordance with a
nonresidential real property lease
A) then such default shall be cured by performance at and after the time of assumption
in accordance with such lease, and pecuniary losses resulting from such default shall
be compensated in accordance with the provisions of this paragraph
C. Provide adequate assurance of future performance. 365(b)(1)(C), (f)(2)(B),
D. The debtor may not assume a contract for a loan or financial accommodations. 365(c)(2)
E. 365(c)(1) if the court adopts the hypothetical test. (see above)
F. Cannot assume
iv) Question What if a contract contains an anti-assumption clause? I assume these are just as
unenforceable as anti-assignment clauses
v) What kind of contracts cannot be assumed?
A. Personal services
B. One other (I missed it)
f. Rejection
i) 365(a)
ii) Cherry-picking good contracts is a major tool for reshaping the estate
iii) The breach gives rise to damages, but that is just a general unsecured claim under 365(g)
iv) Rejection is deemed to have occurred at the moment of filing.
v) Requirements
A. Must be able to provide a good business judgment reason.
1) Very low standard.
2) If it is a related party, the standard is good business purpose instead. A bit higher
vi) Consequences of rejection
A. 502(g)
1) Unsecured claim.
B. Can be a Priority claim
1) It will be a priority claim if it is for wages, salaries and commissions for services as provided
in 503(b)(1)(A)(i)
2) Otherwise it is a general unsecured claim.
C. Benefit conferred to the estate damages - The other party to the contract is entitled to quantum
meruit damages (benefit conferred to the estate) for the use of real property to the DIP during the
decision period (to decide whether to keep or disregard the contract).
1) In re TSB
(i) Debtor filed chapter 11 4/9/03. Case converted to 7 on 6/2/03. Trustee had property
assigned 6/10, but continued to use the property for storage until 6/19
(ii) During this period, Landlord permitted all of this.
(iii) Landlord of property wanted rent not paid for the week between 6/2 and 6/10 as an
administrative expense
(iv) Holding
A) Landlord is entitled to administrative claim for the period between 4/9/03 and 6/9/03
by virtue of 365(d)(3) (detailed below)
B) Landlord is entitled to quantum meruit damages for use of the property between
6/9/03 and 6/19/03 by virtue of 503(b)(1)(A).
C) The latter is equal to the amount Trustee would have paid for offsite storage during
the relevant period. In other words, it isnt the same as the contract rate.
D) This is equitable since Landlord did not exercise his right to remove the property.
2) This is apparently an unsecured priority claim under 503(b)(1)(A)
3) However, this apparently is only a priority claim when it is wages, salaries and commissions
for services as provided in 503(b)(1)(A)(i)
vii) Objection by other party - Irrelevant unless it can show that the contract is not executory.

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viii) Labor contracts / Collective bargaining agreements -


A. You generally dont need to make a counter offer before rejecting a contract.
B. There is an exception for labor contracts. You do need to make a counter offer.
1) Section 1113.
g. Leases
i) The trustee, subject to the courts approval, may assume or reject anyunexpired lease of the debtor.
365(a) again
A. In effect, a debtor can force a landlord to keep the lease until it is set to expire
B. Hypothetical What if there is a month to month lease that lets either party quit at any time within
60 days notice? Assume that the contract has no other expiration provision.
ii) Requirements
A. All of the same requirements of assumption
B. Debtor must timely perform under a lease during the first 60 days of the bankruptcy. 365(d)(3)
1) If not paid, this amount becomes an administrative claim.
C. Debtor must assume the lease within 60 days of the petition or it will be deemed rejected.
365(d)(4)
D. 365(b)(3) - For the purposes of paragraph (1) of this subsection and paragraph (2)(B) of subsection
(f), adequate assurance of future performance of a lease of real property in a shopping center
includes adequate assurance
1) of the source of rent and other consideration due under such lease, and in the case of an
assignment, that the financial condition and operating performance of the proposed assignee
and its guarantors, if any, shall be similar to the financial condition and operating
performance of the debtor and its guarantors, if any, as of the time the debtor became the
lessee under the lease;
2) that any percentage rent due under such lease will not decline substantially;
3) that assumption or assignment of such lease is subject to all the provisions thereof, including
(but not limited to) provisions such as a radius, location, use, or exclusivity provision, and
will not breach any such provision contained in any other lease, financing agreement, or
master agreement relating to such shopping center; and
4) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such
shopping center.
iii) In re TSB (see above)
h. Deadlines
i) A contract must be assumed or rejected by the confirmation date. [Citation Needed]
ii) A creditor can file a motion for relief to get the debtor to move up their decision. 365(d)(2)
i. Timing
i) If the contract expires before the bk filing date, you cant assume it post-petition
ii) If the contract expires post-bankruptcy, you cant assume the contract after it expires.
iii) You can only assume valid contracts that require future performance on both sides.
A. You cant file bk to stop a contract from expiring
6. Cash Collateral
a. Cash collateral is money encumbered by a lien. 363(a)
b. Cash collateral can arise before and after bankruptcy.
i) Pre-petition - In re Carbone Companies, Inc. Judgment lien pre-bk
ii) Post-petition Sale of estate property subject to lien that was perfected before bankruptcy (tracing).
c. 552(a) cutoff
i) If debtor borrowed funds on an agreement attaching a lien to any after-acquired property, the lien does
not attach to any property acquired AFTER the petition date.
A. But this is only useful to a debtor who had cash at the petition date that was not cash collateral.
And it is only not cash collateral if it was acquired before the effect of any after acquired clause
d. As a general matter, debtor can use its property in the ordinary course of business without court approval.
363(b). Even if it is encumbered by a lien.
i) If a secured creditor thinks the debtor is using the secured property in a way it doesnt like, it can file a
motion for relief to seek adequate protection.
A. Equity cushion
B. Insurance

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C. Ect.
ii) Cash collateral is the exception to this rule Cannot be used without the courts permission.
363(c)(2).
A. The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection
unless
1) each entity that has an interest in such cash collateral consents; or
2) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the
provisions of this section.
B. Rationale - It is hard to protect cash because once it is spent, it is gone. There is no equity cushion
in cash. It is either there or it is not. Hard to protect it against diminution in value over time. As a
consequence, courts have said you cant at all use cash without getting permission from the court
upfront.
C. Evidentiary issue - If you want to use cash collateral, you have to prove that the secured lender is
not at risk of having their collateral completely dissipated. Have to prove the cash is likely to be
there either at the time of confirmation or later on in the case. Cash collateral orders usually have
an end date. May have bells or whistles on them.
1) The evidentiary goal is to put on a case that proves we think it is more likely than not that
there will be cash flows in the future.
2) In re Carbone Companies, Inc. Debtors expert witness proved that debtor would have
future cash flows. So debtor was allowed to use its cash collateral.
7. Setoff
a. 553(a) Any rights to setoff that exist under state law are preserved and incorporated into the bankruptcy
code.
i) As a secured creditor, the most powerful tool is to lift the stay. In contrast, as an unsecured creditor,
your most powerful tool is setoff
ii) Economic ramifications - Up to the amount of your setoff, you will get 100% of your recovery. Isnt
subject to pro rata share.
b. Requirements
i) Entity-level mutuality Debtor and creditor have to owe each other money. The relationships have to
be bilateral. Has to be the same entity that is the obligor
A. Elcona Homes Corp - Must interpret this power narrowly
1) Creditor party sought setoff on money it owed to a third party, which the third party owed to
the debtor. Debtor owed creditor money from a separate transaction.
2) Court - No good. They are not mutual obligors. Creditor does not owe the debtor the money
it seeks to setoff
B. Must be the debtor and creditor on both sides
ii) Capacity They must owe the money in the same way. Must be a true debtor/creditor relationship.
A. Both parties have to be acting in the same manner. One cant be a fiduciary and the other a debtor
iii) Temporal matching The debtor/creditor relationship for both sides must arise on the same side of the
petition filing date.
A. But 553(a) says before the commencement
B. If they are both post-petition debts, BK court doesnt even deal with it. It is subject to state law.
c. A creditor with a setoff right is also subject to the automatic stay, just like any other secured creditor, and
may not exercise its right of setoff without the permission of the court. 362(a)(7)
8. Debtor-in-Possession Financing
a. Necessary when the debtor needs cash flow to continue operating its business.
b. Hierarchy of Section 364
i) 364(a) - Trustee is authorized to obtain unsecured creditor and incur unsecured debt in the ordinary
course of business. The debt or credit will be an allowable administrative expense under 503(b)(1).
A. So trustee is authorized to do this without court approval if it is in the ordinary course of business.
But 503(b) says upon notice and hearing
B. Must meet the requirements of 503(b)(1)
ii) 364(b) - The court may authorize the trustee to obtain unsecured credit or incur unsecured debt other
than subsection (a) of this section. Such debt will be an allowable administrative expense under
503(b)(1).
A. So if the credit or debt is outside of the ordinary course of business, must go through the court.

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B. This can be better than a secured claim because it is paid first. But if the case is converted to
chapter 7, secured claims go ahead of super priority claims.
1) Anyone with a secured claim under chapter 11 must get at least as much as they would have
gotten under chapter 7. [Citation needed]
2) So a lien against encumbered property comes ahead of priority lien or super priority. Same
with Jr. lien. Comes before admin claims and super priority claims
iii) 364(c) - If the trustee cant get financing under 503(b)(1), the court can, after notice and hearing,
authorize the obtaining of credit or incurring of debt:
A. (1) - Super Priority Claims under 503(b) and 507(b) - Basically admin claims that are prioritized
over all other claims.
B. (2) - The claim can be secured by an asset not already subject to a lien.
C. (3) - The claim can be secured by a lien junior to an existing lien.
D. The Trustee must be able to show that it couldnt get financing under 364(a) or (b).
1) Case
iv) 364(d)(1) - Priming - The creditors lien can be secured by a lien that is equal or senior to an existing
lien. The court, after notice and hearing, may authorize the obtaining of credit or incurring of debt by a
senior or equal lien on the property. But only if:
A. The Trustee/DIP cannot obtain such credit otherwise. 364(d)(1)(A)
1) Hire investment banker to see if anyone is willing to give credit on any of these bases. The
only way I can give you this money is if you make me first priority.
2) Courts have interpreted unable to mean having made reasonable efforts, were you unable to
obtain credit from other people? if no, then you are able to move on to the next step.
B. There is an adequate protection of the interest of the holder of the lien on the property of the estate
on which such senior or equal lien is proposed to be granted. 364(d)(1)(B)
1) Equity cushion Whatever the size of the first lien lenders claim, the collateral is at least
worth that much plus. If it is zero to 9%, that is iadequate.
(i) If 10-20%, good chance if offering other good stuff
(ii) If above 20%, youre home free
2) Hubbard case If you can prove to the court that the asset currently subject to a first priority
lien would lose all of its value without new debtor in possession prime financing, you can
non-consensually finance.
c. Reversal or modification of DIP financing on appeal does not affect the validity of any debt so incurred.
364(e)
d. Colad Group - This loan is so overwhelming in its proposed interest rate that it is usurious. They court
wont approve it. Court seems to believe it has provisions that may discourage competitive bidding going
forward in the rest of the case.
e. Rollup - Undersecured creditor can agree to extend more financing if it is turned into a super priority claim.
In re Michael Day Enterprises (pg. 444)
9. Chapter 11 plan. 1121
a. The debtor may file a plan with a petition commencing a voluntary case, or at any time in a voluntary case
or an involuntary case.
b. Except as otherwise provided in this section, only the debtor may file a plan until after 120 days after the
date of the order for relief under this chapter.
10. Preferences. 547(b)
a. The Trustee may avoid any transfer of an interest of the debtor in property
i) To or for the benefit of a creditor. 547(b)(1)
ii) For or on account of an antecedent debt owed by the debtor before such transfer was made. 547(b)(2)
A. Chase Manhattan Mortgage Corp. v. Shapiro
1) A debt is antecedent if it is incurred before the transfer in question.
2) Lenders who advance loan proceeds prior to the recording of the mortgage are undertaking a
transfer of an interest in the subject property
3) A borrower who later becomes a debtor incurs an antecedent debt at the time the mortgage
is recorded
B. Grace period. 547(e) Provides a 30 day grace period for perfecting a security interest. As long
as the mortgage is recorded within the grace period, the associated mortgage debt will not be
deemed antecedent.

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1) An interest is perfected when a bona fide purchaser of the property from the debtor against
whom applicable law permits such transfer to be perfected cannot acquire an interest that is
superior to the interest of the transferee. 547(e)(1)(A). So look to state law to see when
perfection occurs. In Chase, it occurred at recordation.
iii) Made while the debtor was insolvent. 547(b)(3)
A. Debtor is presumed to be insolvent within the first 90 days preceding the bankruptcy. 547(f)
1) So debtor does not have to affirmatively prove this.
2) Creditor may rebut this presumption by introducing some evidence that the debtor was not in
fact insolvent at the time of the transfer. In re Pysz
3) Insolvent means financial condition such that the sum of the entitys debts is greater than all
of such entitys property at fair valuation, excluding property that may be exempt under 522.
In re Pysz
(i) $100k homestead exemption excluded from debtors asset calculation
iv) Made; 547(b)(4)
A. On or within 90 days before the date of the filing of the petition; or
B. Between ninety days and one year before the date of the filing if such creditor at the time of such
transfer was an insider
v) That enables such creditor to receive more than such creditor would receive if
A. This were a case under chapter 7 of this title. 547(b)(5)(A)
B. The transfer had not been made; and
C. Such creditor received payment of such debt to the extent provided by the provisions of this title.
547(b)(5)(C)
D. A payment under assignment can never be a preference because of (b)(5). Because that creditor is
paid in full. So never better off than they would have been in chapter 7.
E. Whether this prong is met depends on the status of the creditor to whom the transfer was made. In
re Pysz
1) If the payment is made to an unsecured creditor, and as long as the final distribution in
bankruptcy to the unsecured creditors is less than 100%, any payment to an unsecured creditor
during the preference period will enable that creditor to receive more than he would have
received in liquidation had the payment not been made.
2) As a matter of law, whenever a general unsecured creditor obtains, within the preference
period, a judicial lien against a debtor who cannot fully pay his unsecured creditors, that is a
preference.
3) Professor - Any time you get paid a dollar outside of bk, if in case of chapter 7 you would
have gotten less, you have received a preference.
(i) But this generally will not apply to secured creditors
F. Exercise 21.1.A
G. Preferences dont have to be cash. Can be any transfer of property
b. Exceptions to 547(b) in 547(c) The Trustee may not avoid under this section a transfer (even if (b) is
met)
i) Contemporaneous Exchange 547(c)(1)
A. To the extent that such transfer was
1) intended by the debtor and the creditor
(i) To be contemporaneous
(ii) For new value
A) Defined as money or moneys worth in goods, services, or new credit, or release by
a transferee of property previously transferred to such transferee in a transaction that
is neither void nor voidable by the debtor or the trustee under applicable law.
547(a)(2)
(iii) Given to debtor
2) in fact a substantially contemporaneous exchange;
(i) Payment made by a bounced check does not count as a contemporaneous exchange. In re
Stewart
(ii) What is it about bouncing of check that changes the calculus?
A) UCC says it was a debt instrument, which is not contemporaneous. Court basically
determines that when the checks were dishonored, they became a credit transaction.

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You dont have this contemporaneous exchange. You now have your normal
payment on an antecedent debt. Therefore, you dont have the bright line of
contemporaneousness
B. Rationale Because interpreting 547(b) literally would void basically all of the debtors
transactions within the past 90 days. Dont have to worry about the sequence in which the parties
execute the transaction. Blesses transactions that are intended to be contemporaneous.
ii) Ordinary Course payments. 547(c)(2)
A. To the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary
course of business or financial affairs of the debtor and the transferee, and such transfer was
1) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(i) Because the payments were made to satisfy debts that the debtor incurred in the ordinary
course of his business dealings with Barry County Livestock, the court finds that Barry
County meets the first element. In re Stewart
2) made according to ordinary business terms;
(i) This element deals with the way the parties actually conducted their business dealings.
(ii) Factors from In re Stewart
A) The length of time the parties were engaged in the transactions at issue
B) Whether the amount or form of tender differed from past practices
C) Whether the debtor or the creditor engaged in any unusual collection or payment
activity
D) Whether the creditor took advantage of the debtors deteriorating financial condition.
(iii) Not met in In re Stewart because cashiers check was out of the ordinary
B. Rationale The need to encourage pre-bankruptcy transactions that are essential to keep the
business alive.
iii) Purchase Money. 547(c)(3)
A. Rationale Transactions that give the debtor additional property are regarded as the most
beneficial and therefore deserve the greatest protection
B. Would this have helped the creditor in In re Pysz
iv) New Value. 547(c)(4)
A. Steps:
1) Identify a payment that is preferential under 547(b).
2) See if the avoidable amount of the preference can be reduced by the amount oflater-advanced
new value that qualifies under (c)(4).
(i) i.e. Debtor makes $100k payment, and then creditor subsequently delivers $70k worth
of property.
(ii) This strongly resembles setoff
3) Make sure the newly delivered property was not accompanied by a nonavoidable transfer.
v) Floating Lien NOT ON EXAM!!!!111
c. Core Matter Preferences is a matter arising in bankruptcy because it isnt a state law remedy. Therefore,
Preferences are a core matter. It is triable to final decision by a bankruptcy court, which is subject to
substantial deference to findings of fact.
11. Fraudulent Transfers
a. The debtor is basically trying to undo something which it voluntarily entered into without any of the usual
defenses.
b. Federal Claims
i) 548(a) - The trustee may avoid any transfer...of an interest of the debtor in property, or any obligation
(including any obligation to or for the benefit of an insider under an employment contract) incurred by
the debtor made or incurred on or within 2 years before the date of the filing of the petition, if the
debtor voluntarily or involuntarily
A. made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any
entity to which the debtor was or became, on or after the date that such transfer was made or such
obligation was incurred, indebted; or
B. Consideration - received less than a reasonably equivalent value in exchange for such transfer or
obligation; and
C. Insolvency - was insolvent on the date that such transfer was made OR such obligation was
incurred, or became insolvent as a result of such transfer or obligation;

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D. was engaged in business or a transaction, or was about to engage in business or a transaction, for
which any property remaining with the debtor was an unreasonably small capital;
E. intended to incur, or believed that the debtor would incur, debts that would be beyond the debtors
ability to pay as such debts matured; or
F. made such transfer to or for the benefit of an insider, or incurred such obligation to or for the
benefit of an insider, under an employment contract and not in the ordinary course of business.
ii) Statute of limitations - Two years. 548(a)(2)
iii) Remedies
A. Once a transfer has been determined to be voidable as a fraudulent conveyance, the question is
whether the DIP or Trustee can recover from the transferee. This depends on whether the
transferee is an
1) Initial transferee - 550(a) The trustee can recover, for the benefit of the estate, the property
transferred, or the value of such property from
(i) the initial transferee of such transfer or the entity for whose benefit such transfer was
made; or 550(a)(1)
A) The right to recover from an initial transferee is absolute.
(ii) any immediate or mediate transferee of such initial transferee. 550(a)(2)
A) The right to recover from a subsequent transferee is limited by 550(b)
2) Subsequent transferee, 550(b) The trustee may not recover under 550(a)(2) from
A) a transferee who pays in good faith (mirrored in 548(c))
B) For value
(1) Not reasonably equivalent value. Just value.
(2) If you give a dollar, that may implicate good faith.
C) Without knowledge of the voidability of the transfer avoided; or
(1) Very little meaningful difference between this and good faith requirement
D) OR any immediate or mediate good faith transferee of such transferee.
3) Rationale Imposes on the initial transferee the burden of inquiry and the risk if the
conveyance is fraudulent. The initial transferee is in the best position to monitor the
transaction. In re Video Depot
B. 548(c) Except to the extent that a transfer or obligation voidable under this section is voidable
under section 544, 545, or 547 of this title (the state law provisions), a transferee or obligee of
such a transfer or obligation that takes for value and in good faith has a lien on or may retain any
interest transferred or may enforce any obligation incurred, as the case may be, to the extent that
such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.
(i) I dont quite understand this provision
iv) Standing - Do not have to prove that there would be one creditor who would be able to bring the cause.
Distinct from state claims under 544.
v) The cause of action belongs to the estate. It is the trustees case to bring. Cause of action is brought
for benefit of entire company.
c. State Law Claims
i) Uniform Fraudulent Conveyance Act
A. Section 4(a) Proving actual intent
B. Section 4(b) Badges of fraud
ii) Standing to bring state law claims. 544(b)(1)
A. DIP/Trustee has derivative standing to bring state law claims.
1) There must be an actual unsecured creditor eligible to bring the avoidance action under state
fraudulent conveyance law into whose shoes the trustee can step.
iii) Statute of Limitations State law governs. UFTA allows four years.
iv) Actual intent fraud - Very much focused on intent of transferor. Intent of recipient is relevant for
affirmative defenses.
A. Factors ACLI Government Securities, Inc. v. Rhoades
1) A close relationship among the parties to the transaction
2) Secrecy and haste of the sale
3) Inadequacy of consideration
4) The transferors knowledge of the creditors claim and his own inability to pay it.
v) Constructive Fraud Permits a creditor to avoid any transfer made:

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A. In exchange for an unfairly low consideration


1) What is the definition of fair consideration?
(i) The conveyance must satisfy an antecedent debt or constitute a present exchange. The
value of the consideration may not be disproportionately small.
B. At a time when the debtor was insolvent.
1) The element of insolvency is presumed when conveyance is made without consideration. IF
there is no fair consideration under New York law, presume that the transferor was insolvent.
Then it becomes recipients burden to demonstrate insolvency. Fanmie Mae v. Olympia.
Does this only apply to NY law?
d. In re Video Depot Original transferee has control.
e. Corporate Transfers
i) In re The Personal and Business Insurance Agency
A. The owner and CEO of the company obtained loans on behalf of his company and pocketed the
proceeds. His company made the loan payments.
B. Company filed for BK and sought to recover the loan payments from the lender as an avoidable
transfer
C. Lower courts found there was no actual or constructive fraud because the company made the
payments in repayment of a debt incurred by the company. The debt could be imputed to the
company because the CEO was the sole owner.
D. Chapter 7 Trustee on appeal argued that the fraud cannot be imputed to him because he has clean
hands. That is, the court must consider post-petition events (appointment of trustee)
E. Holding
1) Dont impute the conduct of the former CEO to the trustee
ii) Transfers to related entities. In re Image Worldwide LTD
A. Image Worldwide guaranteed a loan of its sister entity Image Marketing.
B. IW paid the lender $100k on the loan
C. After IW filed BK, it sought to avoid the prior transfer on the basis that it brought them into
insolvency.
D. Issue Is it a fraudulent transfer when guarantor receives no direct benefit?
E. Holding No. Indirect benefits may be considered.
1) Synergy within the corporate group The guarantee strengthened the corporate group as a
whole.
iii) Leveraged Buyouts
A. An investor buys the stock of a corporation from the stockholders with the proceeds of a loan
secured by the corporations own assets.
1) Consequently, if the assets are still secured when the corporation goes into bankruptcy, the
unsecured creditors cannot satisfy any part of their claims from a sale of the assets.
B. By definition cannot constitute reasonably equivalent value
C. Very fact intensive inquiry. Boyer v. Crown Stock Distribution Inc.
1) Defendants sold their company to debtor in an LBO. They took 3mil in cash the debtor has
borrowed to finance the purchase.
2) This LBO was highly likely to plunge the company into bk
3) Holding While courts usually give this practice a pass, this LBO was highly likely to plunge
the company into bankruptcy.
(i) New company had made payments and incurred obligations without receiving
reasonably equivalent value in return.
(ii) The assets given in exchange were unreasonably small.
12. Safe Harbors for Settlement Payments
a. 546(e) Stockbrokers defense - Limits the ability of a trustee to avoid a transfer that is a settlement payment
made in connection with a securities contract by or to any entity falling in a laundry list of financial
industry players, such as commodity brokers and forward contract merchants.
b. Contemporary Industries Corp v. Frost
13. Equitable subordination
a. The elements - SI Restructuring Inc.
i) The claimant must have engaged in inequitable conduct

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ii) The misconduct resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on
the claimant
iii) Equitable subordination of the claim must not be inconsistent with the provisions of the BK code.
b. Rationale
i) Is it a good idea to let insiders give money to a struggling company?
ii) The benefit is obviously permitting turnaround.
iii) The detriment is that an insider who controls the company who may have some responsibility for the
condition of the company may be able to take collateral interests in great property. While they still
have to put new money on the table, what if they command a high interest rate? Could wipe out
recoveries for unsecured creditors.
iv) At the end of the day it comes down to facts and circumstances.
c. 510
i) (a) A subordination agreement is enforceable in a case under this title to the same extent that such
agreement is enforceable under applicable nonbankruptcy law.
ii) (b) For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale
of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale
of such a security, or for reimbursement or contribution allowed under section 502 on account of such
a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest
represented by such security, except that if such security is common stock, such claim has the same
priority as common stock.
A. You cant dress up a securities fraud lawsuit as a breach of contract lawsuit.
iii) (c) Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may
A. under principles of equitable subordination, subordinate for purposes of distribution all or part of
an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all
or part of another allowed interest; or
B. order that any lien securing such a subordinated claim be transferred to the estate.
iv) Interest is a right to equity
v) Claim is a right to debt
d. Consequences
i) An equitably subordinated creditor has to give back the money and wait to get paid until everyone else
is paid.
e. Fact patterns:
i) An insider extracts favorable treatment from the debtor
ii) A seeming outsider acts like an insider
iii) A creditor does something just too icky for comfort
f. Equitable subordination focuses on peoples behavior. What they have done.
i) Subordination is more about behavior than the nature of the debt.
14. Equitable recharacterization
a. Focuses on the nature of the debt. Doctrine of recharacterization is all about the documents what the
parties did and meant at the time.
b. Might lead to subordination of a claim if a business insider tries to mask what is clearly an equity
investment into a company as a loan in the hopes of getting paid back with the creditors pro rata in
bankruptcy.
15. Ethics of Bankruptcy practice
a. Competence
i) Dont be incompetent / take on more cases than you can handle. In re Spickelmier
A. Debtors attorney shows up completely unprepared to hearing. Gets fees disgorged
b. Employment of professional persons
i) DIP or Trustee attorney must be approved by the court
A. 327(a) - Employment of professional persons Except as otherwise provided in this section, the
trustee, with the courts approval, may employ one or more attorneys, accountants, appraisers,
auctioneers, or other professional persons, that do not hold or represent an interest adverse to the
estate, and that are disinterested persons, to represent or assist the trustee in carrying out the
trustees duties under this title.
ii) Must be a disinterested person. 327(a)
A. Definition - A disinterested person is a person 101(14)

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1) that is not a creditor, an equity security holder or an insider.


2) is not and was not, within 2 years before the date of the filing of the petition, a director,
officer, or employee of the debtor; and
3) Catchall rule - does not have an interest materially adverse to the interest of the estate or of
any class of creditors or equity security holders, by reason of any direct or indirect
relationship to, connection with, or interest in, the debtor, or for any other reason.
B. So if attorney did work for debtor prior to bk, they are owed money and therefore a creditor. If a
creditor, they are not disinterested.
C. Also means you cant have common stock.
1) If youre part of a firm with multiple partners, you have to check that you dont own any of
their equity securities.
2) It matters if your partners do
D. Who is an insider
1) Officer or employee
2) Director
3) Lawyer sitting on board of client
iii) How does an attorney prevent himself from being a creditor on the petition date?
A. If attorney accepts payment within 90 days, that is a preference. It can be avoided, which would
make attorney an unsecured creditor.
B. Solution - Large retainer. This is not a preference because it is not for antecedent debt. It is for
future services to be performed. Youre getting paid in advance. The debt arises when you do
the work.
iv) Employment of professions other than attorneys. 327(e)
A. Trustee, with courts approval, may employee for a specified special purpose, other than to
represent the trustee in conducting the case, an attorney that has represented the debtor, if in the
best interest of the estate, and if such attorney does not represent or hold any interest adverse to
the debtor or to the estate w/r/t the matter on which such attorney is to be employed
1) So this lets you keep pre-petition counsel in an non-bankruptcy matter as long as he is
disinterested w/r/t that matter.
v) 327(b) - If the trustee is authorized to operate the business of the debtor under section 721, 1202, or
1108 of this title, and if the debtor has regularly employed attorneys, accountants, or other professional
persons on salary, the trustee may retain or replace such professional persons if necessary in the
operation of such business.
vi) 327(c) - In a case under chapter 7, 12, or 11 of this title, a person is not disqualified for employment
under this section solely because of such persons employment by or representation of a creditor,
unless there is objection by another creditor or the United States trustee, in which case the court shall
disapprove such employment if there is an actual conflict of interest.
c. Application
i) Must disclose every conceivable conflict to the court. In re Lee
d. Conflicts
i) You cant ask for waivers of conflicts of interest before filing BK.
ii) So you have to disclose on the application.
iii) At that point, the adversely affected parties can object to the representation. If they dont object, they
are deemed to have waived the conflict.
e. Terms of Compensation
i) 328 - Trustee can employ or authorize employment of professional person on any reasonable terms or
conditions
A. Can be retainer, hourly, etc.
B. Notwithstanding, the court may allow compensation different from that provided after such terms
and conditions after conclusion of such employment
C. So the court always has a last look on fees.
ii) 330 - Fee application process
A. There will be a fee application process by which court will approve fees as reasonable and
necessary for reimbursement of actual and necessary expenses.
B. 330(a)(1)(A)- Reasonable compensation for actual necessary services rendered by professional
person or employee.

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1) Actual, necessary and in a reasonable amount.


2) So you have to write good descriptions of your time. That means someone has to understand
what you were doing. At the same time, it is a publicly filed document.
3) Lumped entries dont work. Need to break out time for each thing you list.
4) Must be in 10ths of an hour.
iii) Interim compensation - A trustee, an examiner, a debtors attorney, or any professional person
employed under section 327 or 1103 of this title may apply to the court not more than once every 120
days after an order for relief in a case under this title, or more often if the court permits, for such
compensation for services rendered before the date of such an application or reimbursement for
expenses incurred before such date as is provided under section 330 of this title. After notice and a
hearing, the court may allow and disburse to such applicant such compensation or reimbursement. 331
iv) 504 - Prohibits fee sharing agreements
f. In re Lee
i) Lawyer applied to represent Dwho is his wife
ii) Fails 327a two prong test
A. 1st they do not hold or represent in interest adverse to estate
1) Adverse interest means possessing or asserting economic interest that would tend to
lessen value of estate or possess predisposition under circumstances that render such
bias against the estate
B. 2nd they must be disinterested persons
iii) Court has power to disqualify counsel on following grounds
A. Failure to disclose retainer
B. Failure to disclose parallel employment applications
C. Attempt to represent Ds with interest in conflict
g. In re SonicBlue Inc
i) Law firm that served as Ds corporate counsel, issued bondholders opinion letter regarding bond
issuancelaw firm didnt disclose when D filed for bankruptcy that it had worked with bondholders
earlier
ii) 327a no adverse interest that may impair impartialitysince no disclosure they were
disqualified
iii) Disclose, disclose, disclose
16. Chapter 11 Plan
a. 1121 At the outset of the case, only a debtor can propose a plan of reorg
i) Can be used as a bargaining tool in cash collateral negotiations
ii) Except as otherwise provided, only debtor can file a plan during the first 120 days. 1121(b)
A. 1121(c) - Any party in interest (anybody) can only file a plan if and only if
1) a trustee is appointed. Exclusivity terminates and anybody can propose anything.
2) If debtor has not filed a plan before 120 days
3) If plan hasnt been confirmed by 180th day, then exclusivity ends
iii) So proposed within 120 days or confirmed with 180 days
iv) Exceptions
A. Debtor can get extensions for cause within the period.
B. Move for cause to terminate exclusivity shorter than the 120 th day. Very rare.
b. 1123 Contents of a plan
i) Contract setting out rights, responsibilities, privileges and obligations of all parties. It is a reordering
of a debtors business affairs.
ii) Specify any class or claims that are not impaired under the plan. (see 1124 for impairment)
iii) Specify the treatment of any class or interests that is impaired under the plan.
iv) Once you have classes, cannot intraclass discriminate unless someone in the class agrees to be treated
differently.
v) Provide adequate means for the plans implementation.
A. If youre going to sell an asset, wipe out a lien, cramming someone down with new note, what are
the terms of that note? New equity? What are the terms of that equity.
B. If youre going to be issuing equity, cannot create nonvoting equity. Must be a single class.
((a)(6))
c. Impairment 1124

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i) Unimpaired creditors dont get to vote in plans. If your legal rights are not affected, you dont get to
vote.
ii) Might have a good reason to leave a class unimpaired
iii) Impairment isnt limited to monetary rights
d. Classes - 1122
i) May place in a similar class only if it is substantially similar (a)
A. Cant put secured claim in same class as unsecured claim
B. Cant put admin claims into unsecured class
ii) Plan may designate a separate class of claims that the court approves as necessary (b)
A. Bunch of people owed $50k or less can be put into a single class.
B. In order to create different business classes, must have a good business reason. Piano case (see
below)
iii) People argue that like or similarly situated people have been put apart into different classes
(Gerrymandering)
A. Piano case
iv) Or youve taken people with different interests or rights and put them into the same class
v) What kind of voting do you need for a class to accept a plan?
A. 2/3rds in dollar of debt
B. in number
vi) If people dont vote, their votes are counted as effectively yeses.
vii) 1126(e) Designation
A. Upon notice and motion, a vote can be designated. If you aggressively try to buy other peoples
votes as a creditor, your own vote can be designated. In other words, if you voted against plan,
will be treated as if you voted in favor of the plan.
B. This can happen when you try to buy off votes.
C. use of obstructive tactics or hold-up techniques by a creditor to extract better treatment for its
claim than that given to the claims of similarly situated creditors in the same class;
D. casting a vote for the ulterior purpose of securing some advantage to which the creditor would not
otherwise be entitled; and
E. casting a vote motivated by something other than protection of a creditors own self-interest.
e. How 1125 Disclosure statement / Prospectus
i) Heres what my plan does
ii) Heres how it affects each class
iii) Heres what you need to know as a creditor
iv) Have to get it approved by a bk judge.
v) Cant start soliciting votes until you have that in place
vi) Bars you from soliciting votes before agreement is approved. 1125(b)
f. Classification and Gerrymandering
i) In re Bernhard Steiner Pianos
A. Debtor was a world-renowned piano retailer that went into bankruptcy
B. Debtor asserted that continuing its consignment piano operations was critical to its business, and
that prioritizing payment to unsecured consignment piano creditors was necessary to maintain its
consignment business.
C. Thus, in debtors chapter 11 plan, debtor proposed to pay unsecured consignment piano creditors
before the rest of the unsecured creditors.
1) Consignment pianos, class 4 First 10 months
2) Everyone else, class 6 about a year later
D. Fifth Circuit precedent requires claims which share common priority and rights against the estate
to be placed in the same class absent good business reasons for the separate classification.
E. Holding Debtor presented sufficiently good business reasons
1) Selling consigned pianos has historically been an important part of the debtors business
2) Debtor presented evidence that consignment business had suffered significantly
3) This will help the debtor repair its reputation for consignment piano sales.
4) There was no evidence of gerrymandering presented at the confirmation hearing.
(i) That is, the debtor did not give the consignment creditors this right to buy their
confirmation votes.

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g. Court can confirm a plan only if


i) The plan complies with the applicable provisions of this title.
ii) The proponent of the plan complies with the applicable provisions of this title.
iii) The plan has been proposed in good faith and not by any means forbidden by law.
iv) Any payment made or to be made by the proponent, by the debtor, or by a person issuing securities or
acquiring property under the plan, for services or for costs and expenses in or in connection with the
case, or in connection with the plan and incident to the case, has been approved by, or is subject to the
approval of, the court as reasonable.
v) Best Interests Test. 1129(a)(7)
A. An objecting creditor is entitled to receive at least as much under the plan as that creditor would
have received in a liquidation under chapter 7.
1) Cant be outvoted of this interest.
2) Everyone has to do better (or as good?) in Chapter 11 than chapter 7.
B. Burden Once an objection is raised, the proponent of the plan must show that the plan dividend
equals or exceeds the liquidation value of the company.
vi) Must be accepted by the statutory majority of creditors in each impaired class under the plan.
1129(a)(8)
A. Exception Cramdown under 1129(b) (see below)
vii) Feasibility. 1129(a)(11)
A. The likelihood that the plan will succeed and that the business will survive and proposer, at least
long enough to make the scheduled payments.
1) Plan can be confirmed only if confirmation of the plan is not likely to be followed by the
liquidation, or the need for further organization of the debtor or any successor to the debtor
under the plan.
2) The plan need not guarantee success. But it must present reasonable assurance of success. In
re Made in Detroit, Inc.
B. In re Malkus
1) Debtor owned a motel encumbered by a mortgage
2) After filing for bankruptcy, debtor and lender entered into a cash collateral stipulation which
set out a budget for the debtor and required monthly installments to the creditor. The debtor
repeatedly failed to comply with the stipulation.
3) Debtor sought confirmation of a plan of reorganization with a seemingly identical budget
4) Creditor argued that debtors post-petition performance indicates that the plan is not feasible.
5) Holding Court agrees with creditor. Does not meet 1129(a)(11) feasibility.
C. In re Made in Detroit, Inc.
1) Debtors plan is based on wishful thinking and visionary promises. It is contingent on exit
financing from a lender and there is no reasonable assurance that the lender will be able to
provide the loan.
2) What didnt they have that they needed?
(i) Concreteness. It was all based on conjecture. Is a sale without a buyer a sale?
D. Feasibility is not a guarantee of success. It is a reasonable likelihood that the company is not
going to fail in the near future. Im pretty sure there wont be chapter 22 (second time in bk).
h. Cramming Down Unsecured Creditors. 1129(b).
i) When this arises
A. All other requirements are met but no consensus from all of the classes.
B. At least one class of impaired creditors must consent. 1129(a)(10).
ii) Two requirements:
A. Nondiscrimination 1129(b)(1)
B. Fair and equitable requirement -
iii) The plan cannot unfairly discriminate between classes. 1129(b)(1)
A. Debtor proposes to pay two identically situated classes of creditors different dividends.
B. Can be overcome if the debtor comes up with a justifiable ground of distinction. See e.g.
Bernhard Steiner Pianos
iv) Fair and Equitable requirement
A. Unsecured creditors must either be paid in full (1129(b)(2)(B)(i)), or be protected by the absolute
priority rule (not in the code).

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B. Absolute priority rule No parties junior to the objecting class can get a distribution under the
plan. 1129(b)(2)(B)(ii).
1) Nobody situated lower than you can get paid until you are fully satisfied.
(i) This is a class based rule. Not an individual rule. So your class can bind you.
2) Equity holders are junior to unsecured creditors (stockholders get paid after the creditors), a
plan already sufficiently repugnant to the unsecured creditors to trigger a no vote cannot be
confirmed through the vote-overriding bypass of cramdown. The unsecured creditors can
insist on ensuring their absolute priority over equity.
(i) This is to prevent equity holders from giving themselves equitable treatment
3) The New Value Corollary - Equity may not receive or retain anything under the
reorganization plan on account of their junior interest in the vent of a cramdown.
1129(b)(2)(B)(ii). Just because you used to own equity doesnt preclude you from owning
equity forever by providing new value.
(i) Bank of America v. Savings Association 203 North Lasalle
A) Debtor owed 92 mil to an undersecured creditor.
B) Debtor proposed plan whereby creditor would get $54 million accounting for the
secured portion, and the debtor would be discharged for the deficiency balance after
paying 16% of that amount.
C) The plan also provided that the partners of the debtor would contribute money in
exchange for the partnerships entire ownership of the reorganized debtor
D) Debtors argument A plan would not violate the absolute priority rule unless the
old equity holders receive or retained property in exchange for the prior interest,
without any significant new contribution.
E) Court No. On account of means because of (i.e. causation).
(1) But this may not mean any degree of causation.
(2) In either event, that isnt to be determined here because the plan fails for other
reasons.
(3) The plan proposes that the benefit of equity ownership may be obtained by no
one but old equity partners. This opportunity is an item of property in its own
right. Thus, this violates the absolute rule.
(ii) In re Red Mountain Machinery Co.
A) Couple had been operating a machinery renting business. Went into Bk.
B) Issue is that the couple that owned it wanted to receive equity in the plan. Because
of the absolute priority rule, they cant obtain it without putting a new value into the
company. So they propose putting in 480k in cash.
C) Five factor test of new value
(1) New
(2) Substantial
(3) Money or moneys worth
(4) Necessary for a successful reorganization
(5) Reasonably equivalent to the value or interest received
D) How does the court know that the contributions that the cowing family are
reasonable? What had happened in the case?
(1) Exclusivity had expired. So anyone could submit a plan. It meant that there
was no abuse in essence of the market. Anybody could come in. Lasalle was
concerned about letting people extract value or pay a below market price from
having the opportunity to re-equitize the debtor without a market check.
(2) So have to make it in clear that the company is in play.
(iii) Castleton Plaza Easterbrook
A) Cant be getting a benefit on account of your old equity. If youre getting this unique
opportunity because youre married to equity owner, that violates the new equity
rule.
i. Special rules for small business debtors
i) Definition of small business debtor 101(51D)
A. Person engaged in commercial or business activities with aggregate noncontingent liquidated
secured and unsecured debts as of the date of the petition in an amount not more than $2 mil

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B. AND only applies in cases in which no creditors committee has been appointed or in which the
committee is not sufficiently active and representation to provide effective oversight of the
creditor will be tagged for treatment as a small business. 101(51D)(A).
ii) The Rules
A. Different forms under 1116
B. Must file periodic financial and other reports. 308
C. More scrutiny from trustee
D. Plan confirmation
1) Modified solicitation and disclosure rules apply
2) Exclusivity rules narrowing that crucial element of debtor leverage. 1121(e)
3) Upon second bk within 2 years, must prove that its bankruptcy resulted from circumstances
beyond the debtors control.
17. 363 Sales
a. Selling all of the debtors assets under the guide of 363(b) (outside the ordinary course)
b. Advantages - No creditor can vote against this or lobby against this. Must file an objection to the sale.
c. External constraints - Case law regarding when judge should withhold approval of 363 reorganization
i) Lionel Corp. - Good business reason requirement
A. 363 doesnt require an emergency, but it doesnt give carte blanche either
B. There must be some articulated business justification other than appeasement of major creditors
for using, selling or leasing property outside of the ordinary course of business under 393(b)
C. Thus, the judge cant grant 393(b) without a good business reason
1) Insistence of creditors committee isnt enough
D. Salient factors:
1) Look to such relevant factors as the proportionate value of the asset to the estate as a whole,
the amount of elapsed time since the filing, the likelihood that a plan of reorganization will be
proposed and confirmed in the near future, the effect of the proposed disposition on future
plans, the proceeds to be obtained, asset increasing or decreasing in value.
d. Internal constraints
i) 363(f)- Trustee can sell assets free and clear of liens if any of the following apply:
A. applicable nonbankruptcy law permits sale of such property free and clear of such interest;
1) Does state foreclosure law allow this
B. such entity consents;
C. Lien-Value test - such interest is a lien and the price at which such property is to be sold is greater
than the aggregate value of all liens on such property;
1) Value = Secured claim, not the face value of the claim (including unsecured parts). Oneida
Lake Development
2) Whether value is the actual value of the collateral or face value of the lien.
3) Two ways to look at value:
(i) If the face value of the interest at stake exceeds the purchase price, then you cant compel
this person to accept. The question is whether the underlying interest is being fully
satisfied. Hard to satisfy this test because most sales wont clear all of the secured debt.
Then you cannot sell free and clear. May substantially limit peoples interest in buying.
(ii) Other approach. As long as the value being paid is greater than or equal to the lien, and
the liens value is determined by reference to the market price, then youre fine. But then
your defining the lien by the amount a purchaser is willing to pay. Which means youre
always going to satisfy this as long as your auction captures market price.
A) If the secured lender doesnt like this, it can credit bid to protect their interest.
B) You can cramdown a creditor on this plan and theyd only get the value fo their
collateral. That gives people who view 363(f)(3) some comfort. Neither one is
terribly satisfying.
C) Thats the problem with insisting to strip liens, you have to pay full value of
underlying interest.
D. such interest is in bona fide dispute; or
1) Must have a substantial chance of success on the merits. Oneida Lake Development
E. such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction
of such interest.

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1) Picks up most state law claims


e. Sale procedure
i) Texas Rangers Baseball
A. Under 363(b)(1), the court is permitted to regulate the mechanism of a sale outside the ordinary
course of business.
ii) Credit bids. 363(k) (Buying claims to buy companies)
A. Fisker
1) Court can limit credit bids for cause.
2) Evidence shows that there will be no bidding unless court limits the credit bid.
B.

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Stuff that doesnt fit anywhere yet


549- A trustee may avoid certain transfers of property after the commencement of the case if...
Applies to debtor in possession as well because of 1107(a)

365(d)(2) The statute gives some possibility of protection for the counterparty. Pg 562

Is the chapter 7 estate the same as the chapter 11 and 13 estates?

In analyzing whether a contract is assumable, should we run the 365(c)(1) analysis? I ask because the Footstar case
(pg 570) indicated that some courts will hold that a contract cannot be assumed under the 365(c)(1) standard (when
1) the other party to the contract is excused from performance under applicable nonbankruptcy law, and 2) the other
party does not consent).

Consequences of a rejected claim

Question 25.1 on pg. 574


Who functionally receives the benefit in chapter 7? In chapter 11?

Question 25.3 on same page.

365(b)(1) v. (2). Personal property v. real property? Are they treated differently? Is there a difference between the
treatment of personal and real property?

Have to get through (b)(2)(D) This refers to personal property. The fact that Jacky didnt maintain insurance on
this personal property

Does the court care?

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