Bankruptcy. Prof. Ware Chapter 2. State Law Debt Collection A. Collection Remedies. I. Introduction to Judgment collection . p.

33 48 (post judgment devices) A. D and Creditor relationship arise in various contexts. (contracts, tort, family, divorce, employment) civil side in terms of money damages i. D has some duty and court can reduce to judgment ii. D can be client (of lawyer) or owner that services are provided to iii. Plaintiff is creditor and tortfeasor is debtor iv. Also employment relationship v. Seller is Creditor as she didnt deliver goods or delivered defective goods, then court will reduce to damages B. How should the law treat independent who doesnt pay the judgment? What tools should law give the P who get troubled getting judgment? i. Garnishment a. deduct from wages and bank account (child support) 1. wage or bank account, employer or bank ordered to pay it to creditor 2. bailment D owns something but no possession of it, then state law varies, but generalization is call garnishment, bailee ordered to send it to creditor not bailor. b. exempt floor usually lesser of 25% of income C. Execution (sheriff levies/seizes/takes). Judgment gives judgment creditor no interest and no priority in any of Ds property or income. remains an unsecured creditor until execution is obtained on the judgment i. 1) Creditor file lawsuit ii. 2) Court renders a judgment and execution is obtained (if successful) on the judgment iii. 3) collection process begins with a execution writ, court order. Issued routinely by the court clerk upon request of the judgment creditor and is delivered to sheriff for execution a. Execution writ. Order sheriff to look for non exempt property of judgment debtor, to seize, to sell and to pay the proceeds to judgment creditor. iv. 4) sheriff goes out and take physical possession (for small property) and lock it up at courthouse. For big property, its seized by posting notice of seizure and sale a. Entire process of seizure is called a levy (act of seizure), and the sheriff levies upon the property b. Entire process, from writ issuance to seizure execution 1. execution (whole process from whatever happened to being paid) v. 5) once levied upon, judgment creditor becomes a judicial lien creditor as to that property vi. BUT, ISSUE of Exempt property D. Turnover orders. P. 34 (when states have turnover statutes) i. JD ordered to turn over property he possesses or if the property subject to his control under threat of contempt and jail ii. Easier way to do than levy. iii. Sit the D under oath and ask where your assets are located. Sheriff and Creditor chase down the assets with investigator iv. Increasingly common way to chase D E. Judgment liens by recordation. P. 36 quick and simple real property only i. Real property. Major states. Recording a judgment in county land records where deeds of sale and mortgages are filed. ii. Personal property. Minor states iii. Benefits. 1) secure the Ds assets cause no one would buy it with judgment lien and 2) priority over later judgment creditor F. Debt collection by the federal govt. p. 37 i. Federal Debt Collection Procedures Act, 28 USCA 3001 3308 G. Family debts. P. 38. alimony, child support.

II.

Imprisonment. Wage garnishment exception H. Voluntary liens. P. 38 i. Involuntary lien system. Judgment lien creditor ii. Voluntary liens. Consensual liens a. On real property. mortgage b. On other property. Security interest c. Notice giving Writing, Public notice, perfection by recordation, possession, entering interest on certificate of title for automobile d. Purchase money lines. P.40 e. Creditor with consensual lien seize collateral more quickly and cheaply than a judgment creditor who has to go thru all steps of suit and execution before sheriff sells the goods. 1. self help repossession or retain in satisfaction. P. 41 I. Statutory liens and trust funds. P. 41 i. By operation of law. Landlords lien, artisans lien, mechanic to keep a car J. Property exempt from collection process. Family home and household goods p.42 The Struggle Among Creditors: Priorities A. Background p.48 i. General rule in state collection law: First in time, first in right. the first creditor to levy on has right from sale proceeds a. Key is who made some required legal move first perfection ii. Unsecured Creditor vs. Unsecured creditor a. Must first get a judgment and execute or levy on that judgment levy PERFECT the judgment lien on that property 1. item by item execution b. when two writs levied same time. 1. many states: perfection (priority) backdated to the date sheriff got the writ (Because writ is delivered to sheriff when requested by the creditor) 2. some states: date of judgment or the date of sheriffs levy controlling i. if levied at the same time, then pro rata share c. judgment lien by recordation (real state) wins d. More than one creditors. If sheriff sell property, how to divide proceeds? 1. dividing proceeds? i. 50/50? ii. Pro rata. iii. First in time: incentive to act. How does it connect with justice? a. As for tie: there is tie breaker. Relate back to the 1. date of levy sheriff 2. date writ to sheriff creditor (when creditor requests, its delivered) 3. date of judgment court i. if judgment is precondition to get writ and levy, then creditor not really have control over it 4. date suit filed b. should control be deciding factor? iii. Unsecured judgment creditor vs. secured creditor p.50 a. First to perfect wins. b. SC or mortgagee perfects when it records (by filing, by notation on a certificate of title, or other means) consensual lien according to statutory prescription 1. Exception. PMSI. Where SC finances coll, 20 day grace period c. Bank get consensual lien and C get judicial lien 1. bank has to perfect SI before judicial lien happens, then bank wins 2. C judicial lien get judgment and takes sheriff to property and sold it at sale and give proceeds to C, and Bank never objected. After coll sold at sheriffs sale, then what can bank do. the rule is

i.

forced sale like sheriff sale extinguish the lien forcing the sale and liens of a lower priority. Any secured creditor with a higher priority lien has their liens surviving a forced sale i. buyer bought the goods subject to the banks lien. Bank can repossess the goods from the party who bought it from sheriff, but not from C iv. Judgment creditors and SC vs. Buyers. a. First in time, first in right. Measured by perfection through recordation system v. Statutory liens and trust funds. P.51 a. As a matter of law in favor of certain creditors (landlords and subcontractors) b. Tax lien and mechanics lien 1. even if they are in later in time, they have priority. i. Ex. Lawyers lien clients recovery. Client owes lawyer with contingent fees. ii. Support creditors (support payments) iii. State taxing authority iv. Construction: multiple parties involved a. Get your money upfront (you can borrow it) b. Bonds v. Warehouse line. c. Landlord. Most states failed to answer who has priority between these, statutory lien and judicial lien 1. B LL statutory lien creditor (Debtor owed 10k) 2. C judicial lien creditor (car accident) Debtor owed 10k vi. Unsecured judgment creditor and SP vs. TIB B. Competing unsecured creditors. P.52 i. Where two competing judgments have been recorded (docketed) a. Recording or registration of judgment deemed to give notice to other parties creating priority ii. When two judgments recorded before D acquires real estate a. Majority: priority to judgment recorded first once D acquire property b. Minority: NY, In re ESTATE OF ROBBINS 1. Robbins got real estate from mom on April 24, 1967 when she died 2. warrant of State Tax docketed as a judgment on Oct. 18, 1965 & May 10, 1968 3. judgment for Bank of Commerce obtained on Sep 28, 1962 4. priority considered beginning with date of decedents death 5. for newly acquired interest in estate, neither judgment had priority of lien 6. when a D has several judgments, become liens on AA property simultaneously even though docketed different times 7. State Tax Commission, priority under rule giving priority to claims of State as sovereign over other general liens unless creditor obtained priority specific lien iii. Weaver v. Weaver: inactive person may lose vitality. a. Three judgment creditors. Dudas has judicial lien (with judgment) for 5 years after filed, but judgment not revived, lien lapsed and lost priority. C. Execution p.56 i. Levy usually judgment creditors perfection (often relation back to delivery of writ). ii. Dispute when a judgment creditors levy actually occurred. what must sheriff do to complete a priority conferring levy. iii. Credit Bureau of Broken Bow v. Moninger Neb (1979) a. Credit Bureau: writ of execution issued on June 27, 1978. July 7, 1978. sheriff served Moninger with a copy of writ, informed he was executing on pickup. M informed officer bank had title to the vehicle. Sheriff proceeded to vehicle, grabbed ahold of pickpup and stated I execute on pickup for County of Custer). Didnt take possession, not ask for keys b. Bank. SA and notation of SI made on title on July 10, 1978 c. Vehicle seized on July 13, 1978 and sold at sheriffs sale on Aug 14 d. County court. Sheriff knowledge of possible lien made execution subject to lien e. Bureau rely on 9-317. unperfected SI subordinate to right of person who become lien creditor w/o

knowledge of SI and before it is perfected A lien on personal property acquired at time it is seized in execution. become lien creditor when sheriff levied on vehicle g. Manual interference with chattels not essential to a valid levy . sufficient if property present and subject for time to the control of officer holding writ, and express terms assert his dominion over it by virtue of such writ. iv. Other jurisdiction require sheriff take possession or appoint an independent custodian a. Problem that subsequent creditor being misled. b. Levied upon goods left in hands of D for long period of time with consent of creditor, lien will be lost III. Garnishment p.61 A. Client won a judgment for $6k. what are you going to do to enforce? i. Execution. Big obstacle is Exemption of property a. People who cant pay usually dont have that much property that can be levied on b. OJ Simpson, one point very wealthy, but exemption of his household and pension someone with substantial property often get protection ii. If not really much property to levy on, then Garnishment a. Financial situation in terms of snapshot. Balance sheet. Liability and assets, and income statement b. A lot of Ds. Balance sheet looks worse than income sheet. Doesnt have really asset to levy on c. Ex. Bank against those with default on their credit card get garnishment on their wages Target Execution Current assets Garnishment Future income i. Practical importance to get owed money back is garnishment ii. What the judgment creditor has to show to get garnishment a. Self help garnishment. 1. P (JC) --- $ judgment Debt D(JD) --- $ other (third party, garnishee) 2. From garnishees perspective, situations where I owe money, and dont want to be liable to wrong person as I might be again liable to the one I owed, so would want court order to make one payment B. Writ of garnishment. Typically used to attach debts owed to the D for the benefit of Ds judgment creditors. May garnish Ds wages or a bank account. Creditor obtain judgment from court against D and deliver the writ to the garnishee (Employer or Bank) i. 1. whether party served with the writ the garnishee (ER or the bank) owes any money to the D or has any property belonging to the D important issue to check ii. 2. a command to the garnishee to withhold payment or return of Ds property pending further order of court iii. every state has different rules regarding garnishment, but one general way is for sheriff to have a writ authority (order) came from court to sheriff iv. Element for garnishment a. 1) a) whether garnishee owes money to judgment D or b) garnishee holds property of JD 1. p.69. is intangible property the property held by the D? i. Network Solutions, Inc. v. Umbro (VA. Supreme Court, 2000) a. A domain name registration is product of a k for services btw registrar and registrant. A K for services isnt a liability and not subject to garnishment. b. If allow garnishment of NSIs services because those services create a contractual right to use a domain name, we believe that practically any service would be garnishable ii. phone number held to be property of D a. ex. Creditors can have court order garnishee (Phone number company that controls Ds number) turn over the number to JC iii. if the JD owns copyright. Public record as to who owns it exists. Intangible property a. BUT issue of valuation: subjective value that JD attaches to the property maybe taking this intangible property, we might do great harm to those people like taking Nike.com domain name from Nike

f.

2) cap judgment at debt owed to plaintiff 1. Suppose judgment D owes the P a lot of money but garnishee only owes a small amount (ex. JD owes to P $500, garnishee owes $5000 to JD, then garnishee pays $500 to JC) c. 3) cap judgment at debt owed by garnishee (?) NO in AZ, other states not sure 1. Webb v. Erickson (AZ). Bates dispute as to whether he owes any. D didnt contest the law suit. Now Webb (JC) get judgment against Erickson (JD) and Bates (Garnishee) and get garnishment writ on Bates wages as Bates defaults on the garnishment . 2. P.62 Writ of Garnishment and summons contained no info with respect to how garnishee was to answer or where and when garnishee was to appear 3. Bates was recovering from an industrial accident and suffering from depression i. Bates owes small amount of money to Erickson who owes a lot of money to P, but Bates owes big amount of money to P need to pay more than what you owe Garnishee paying more than he owes to JD a. Complaint says I want the money Erickson owed to P, but Bates (D) should have defended himself by showing up and asserting he owes smaller amount of money. ii. This Arizona Court found that no cap on judgment at debt owed by Garnishee a. a defaulting garnishee often may become liable for a debt which is significantly greater than the debt allegedly owed to the D (because of writ of garnishment, garnishees owes debt to creditor) d. 4) cap each garnishment and require many payments e. 5) JD keeps minimum income (percentage minimum level) 1. 1673 Restriction on Garnishment. (a) maximum allowable garnishment lesser of 25 percent of disposable earnings or amount by which his disposable earnings for that week exceed thirty times the Federal minimum hourly wage prescribed by 6(a)(1) of Fair Labor Standards Act of 1938 in effect at the time the earnings are payable, whichever is less f. what if other creditors who want to garnish CDs wages, who has burden (not sure) v. Priority issues. The date writ delivered to sheriff or date sheriff served the writ vi. Temporal net : the time btw service of writ of garnishment and the answer by garnishee any money Bank get during this time, creditor gets it. a. Bank usually must answer the writ on the date garnishment is due. b. Money bank gets after answer but before due date goes to creditor c. Bank has setoff right. C. Garnishees defense i. Garnishee would assert a defense to the writ in form of some superior right in Ds property ii. Garnishee may argue property is leased to him. might be sham lease and creditor need to prove its fraud iii. Even if court decided its okay, not fraud, JC can garnish lease payment to D a. 3.2. Oct 15. JC delievered to marshal garnishment writ against Nic. On Nov 4, Nic answered writ saying he leased equipment belonging to JD and showed a copy of lease. Lease date on paper is Oct 1, but neighbor says lease executed on Oct 20. 1. Nicholson (Garnishee) would say I dont hold property owed to JD, its leased property to me 2. This might be a Deal btw D and garnishee 3. To get a court order for garnishee to deliver the property to JC, what should do? i. JC Should prove there is no lease, its fraud, claiming its lease ii. If can prove no lease, then its sham transaction, sham lease, then garnishee would be ordered to deliver the office equipment 4. Even if its lease, JC can garnish lessee (Nic: garnishee)s payment (Nics owed money to JD) to lessor (JD) 5. down side is there might not be enough lessee payment (like sham payment) $1 per month D. Garnishee (ER)s laying off Debtor (EE) because of garnishment i. 3.3 1674. (a) no ER may discharge any EE by reason of fact that his earnings have been subjected to garnishment for any one indebtedness (b) fined not more than 1k or imprisoned not more than one year or both

b.

ii.

E.

F.

KSA 60-2311. No ER may discharge any EE by reason of the fact that the EEs earnings have been subjected to wage garnishment iii. Federal statute 1674. for any one indebtedness added last part of the above sentence a. for two indebtedness, its okay to fire employee KS doesnt have it b. 1674(b) set forth Administrative remedies with fines or imprisonment. No cause of action by EEs 1. BUT KS doesnt have any correspondent rule we can presume EE can bring cause of action against ER in KS, Prof. didnt see it, but its possible Restrictions on wage Garnishment i. Consumer Credit Protection Act. 15 USC 1671 = less than 25% of disposable income. a. Restricted the access of all creditors to wages of any D ii. Commonwealth Edison v. Denson p.66 support order garnishment > other garnishment in Illinois a. According to IL statute, as btw judgment creditor garnishments and support order garnishments, IL gives priority to those for support regardless of the timing of those garnishments. 1. Usually first in time rule applies. But some get favorable treatment 2. 1673 (b)(2) For support order, in a case supporting spouse or dependent child, 50% of disposable earnings for that week, in a case not supporting such spouse or dependent child, 60% of disposable earnings (this can be increased to 55% and 65%) 3. 1677. State cant be more tougher on D and State can be more protective on D 4. KSA 60-2310. 2313. i. Would Retirement plan be subject to protection as well? iii. Bank account. Common for a business or individual to maintain a checking account with same bank where on or more loans are outstanding. Customer becomes creditor for deposit account and debtor on loan accounts. a. Dispute btw judgment creditor and the bank. Bank almost always wins Prejudgment Remedies p.78. pre judgment attachment. i. Special issues arise when a creditor attempts to seize property prior to obtaining a judgment. ii. Judicial process takes time and creature of state law. iii. Two categories a. (1) traditional protection under state law by means of special requirements that a creditor must satisfy before being able to get a remedy prior to obtaining a judgment b. (2) procedural requirements in prejudgment process that the Supreme Court has found to be necessary to ensure the defendant D due process of law c. state statute require (1) a showing of need, putative D is decamping with its assets and (2) a bond, often in twice the amount of value of the property

C. Fraudulent Conveyances (unsecured creditor) I. Problems this law trying to reduce A. Ex. D owns some assets and owes money to creditors, and D insolvent i. D could hide assets ii. D could transfer assets to friends in exchange for nominal amount of money a. Hole in ground and Friends having assets but have promise to return it back later iii. D eventually get the assets back later iv. Creditors might be having more options with D and third parties v. If there is no fraudulent conveyance law, then what? a. If assets are coin collections, ways to get the assets C could have gotten SI in a coin collection 1. if C is SC, C has legal right to repossess the coin delivered collection from friends b. what the fraudulent conveyance do that secured transaction law doesnt have? 1. Suppose Ds friends dont have collection anymore i. ST law gives right against property. A lien or property interest ii. by contrast fraudulent conveyance law, there is a right of action against the person c. What can C do when Ds friends (transferee) transfer assets to others 1. UFTA 7(a)(3)(i) injunction against further disposition by a transferee

section 8(b) to the extent a transfer is voidable in an action by a creditor under 7(a)(1): avoidance of the transfer (undo the transaction, D get coin collection back then C can have sheriff levy on the coin) i. to get judgment from person (transferee, Ds friends, who transfer coin collections) a. 8(b): creditor may recover judgment for value of asset transferred. The judgment may be entered against (1) the first transferee of the asset 3. Lien property Judgment/liability k (person 1. why cant we have garnishment on friend. D has no legally enforceable right to get the coin collection rights from friend i. BUT collusion. Friends are co-conspirator and this is why D has some confidence even though there is no legal right to get it back. this is what UFTA is fighting against II. In order to prevent a debtor from frustrating collection attempts by giving away property, every state has a rule permitting the court to invalidate the improper transfer III. Most states (41) have adopted the Uniform Fraudulent Transfers Act (UFTA), which governs the invalidation of fraudulent transfers. A. UFTA defines assets as property of the D, but it doesnt include exempt property or property encumbered by a lien UFTA 1(2) B. A present creditor is one whose claim arose before the transfer was made. C. Transfers fraudulent to present and future creditors (UFTA 4) i. Transfers made with actual fraud (i.e., intent to defraud) (4(a)(1)) a. UFTA 4(b) lists badges of fraud to consider in determining intent, including if the transferee was an insider, the D retaining possession, concealment of either the transfer or the asset, timing, etc. 1. 1(7) insider includes (A) relative 2. 1(11). Third degree ii. Transfers made with constructive fraud (i.e., no intent) 4(a)(2) a. Elements 1. the D didnt receive reasonably equivalent value in exchange for transfer or obligation, AND 2. Either i. (i) (Business Debtor) D engaged or about to engage in a business for which the remaining assets of the D are unreasonably small, OR ii. (ii) (Consumer debtor) the D intended to incur, or believed or reasonably should have believed he was incurring debts beyond his ability to pay as they become due D. Transfers fraudulent to Present creditors only (UFTA 5) i. Test #1 (UFTA 5(a)) a. A transfer is fraudulent to a present creditor whose claim arose before the transfer was made or the obligation was incurred if it was not for reasonably equivalent value in exchange for transfer or obligation, AND 1. Ex. Making church contributions while insolvent fraudulent transfer unless value exchanged (spiritual fulfillment not value exchanged probably) b. The debtor insolvent at that time or D became insolvent as a result of the transfer or obligation 1. insolvent is defined by UFTA 2 as either (a) balance sheet insolvency (debts > assets) or (b) D cant pay debts as they come due (latter creates a presumption of insolvency) ii. Test #2 (UFTA 5(b)) a. Transfer is fraudulent to a present creditor whose claim arose before the transfer was made if it made to an insider for an antecedent debt (debt existing prior to the transfer), the D was insolvent at that time, AND the insider had reasonable cause to believe the D was insolvent. E. Remedies of Creditors: avoidance or judgment i. 7(a). creditor may obtain (1) avoidance of the transfer to the extent necessary to satisfy the creditors claim a. EX: One remedy is Avoidance of transaction. Send coin to Bonney (D) and 5000 back to Cousin (transferee) by court order and have sheriff to levy on the coins ii. 8(b). creditor may recover judgment for value of asset transferred or the amount necessary to satisfy the creditors claim, whichever is less.

2.

8(d). good faith transferee entitled to the extent of the value given the D (3) to deduction in amount of liability on the judgment IV. State collective remedies Alternative to BR (faster and cheaper) A. Assignments for the Benefit of Creditors (ABCs) i. A D can assign all his nonexempt property to a third party and have his creditors go deal with him; it gets all creditors off his back a. Property is in the custody of the court; trustee acts in much the same way as a bankruptcy TIB B. Composition Creditors all agree to a partial payment in full satisfaction of the debt i. This is used in bankruptcy as well, but with important differences such as the inability in bankruptcy for a creditor to revive the debt once the composition has been accepted C. Extension creditors give D more time to pay D. Receivership similar to how a guardian takes over the property of a minor or incompetent; it is commonly used when the D is exempt from bankruptcy protection (such as churches, non profits, certain insurance companies) i. Two types of receivership: regulatory (Ex. SEC takes over a financial institution for breaking regulations) and financial (to protect creditors) E. Why use a state alternative to bankruptcy? Procedures can be faster and less expensive, some options are less public (like compositions); full bankruptcy protections arent always necessary Chapter 3. Introduction to Bankruptcy I. Development A. Non BR Debtor Creditor Law B. BR Individual / consumer i. Three big topics a. Estate & stay b. Chapter 7: property of the estate is used to pay creditors c. Chapter 13: income that D earns is source to pay creditors II. Structure of the bankruptcy code A. Ch. 7: straight bankruptcy liquidation for both consumers and businesses B. Ch. 9: bankruptcy of a municipality or other governmental unit. C. Ch. 11: used by reorganizing businesses D. Ch. 12: specialized version of Ch 13 governing reorganization bankruptcies filed by family farmers E. Ch. 13: excludes corporations, used by consumers and small businesses i. Include those who wish to save non exempt property (like a home), those who wish to try to pay part or all of their debts over time, and those who are ineligible for Ch. 7 Chapter 4. Elements Common to Consumer Bankruptcies I. Liquidations and payout plans A. Liquidation. i. For both consumers and businesses, Ch 7 is liquidation chapter a. D gives up all non exempt assets, TIB sells these assets and proceeds are distributed pro rata to creditors b. Consumer debtor receives a discharge of preexisting debts c. Two objectives: fair distribution of Ds assets for benefit of all creditors and a fresh start for the debtor B. Payout plan. Both consumers and businesses i. Ch 13. for consumers and Ch. 11 for businesses and some consumers with very large debts, ii. a D can propose to keep all assets in exchange for promising to pay off debts over a period of time out of future income. II. Getting started. A. D files a petition, basic request for bankruptcy relief, along with some key certifications, including a requirement that all the info contained in the filing will be true, signed by the D under penalty of perjury

a.

B. Petition is accompanied by schedules in which D must list important financial info. C. Once forms are filled out and signed and necessary fee has been paid, D attorney has a clerk who takes the filing
to bankruptcy clerks office i. Clerk will take filing fee and date stamp the minute, hour and day of petition ii. At that instance bankruptcy estate is created and an automatic stay on all collection actions against the D, the Ds property and the property of the estate is immediately put into place III. The Bankruptcy Estate (541) A. Whats idea behind BR code creating estate? Non human legal person - TIB i. Fresh start (anything accumulated after the petition is yours) post petition property is for D to keep ii. Snapshot of what the D has (Ds property) to gather up property and sell it (like Ch. 7, property of D is source to pay creditors) a. Division btw pre petition and post petition B. At the instant of filing the bankruptcy petition, all property owned by D becomes property of the estate C. Things included in the estate i. Property interests all of Ds legal and equitable interests in property unless an exception applies. 541(a) (1) a. TIB: presumption is all stuff is ours and put the burden of proof on the other side (D) b. 541(a) The commencement of a case creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held (1) except as provided in subsections (b) and (c)(2) of this section, ALL LEGAL or EQUITABLE interests of the D in property as of the commencement of the case 1. 541(a) broad pro creditor 2. 541(b) narrow pro D 3. 541(c)(1) c. Ex. Power the D exercises wholly for the benefit of another is not part of the estate. 541(b)(1). d. Also, nontransferable beneficial interest in a trust (enforceable under state law) is not part of the estate. 541(c)(2). spendthrift trust exception (ex. retirement accounts) 1. MOST restrictions on transferability imposed by k or by law unenforceable. 541(c)(1) ii. Proceeds, product, offspring, rents or profits of or from property of the estate 541(a)(6) a. Important exception no for income from services performed by the D after the bankruptcy filing. 541(a)(6) 1. wages, commissions, and the like earned after the petition is filed are not property of the estate and not have to be surrendered to their creditors. 2. suppose D gets paid Friday and files BR on Thu 80% of works done and Estate gets it earnings five days of earnings i. pre petition wages goes to creditors and post petition wages goes to D ii. 541(a)(1) As of the commencement of the case iii. Inheritance, divorce decree, or life insurance payout the D acquires within 180 days of filing are estate property. 541(a)(5) iv. In re Burgess (Bank. D. Nev. 1999) a. Most cases, liquor licenses are property under bankruptcy laws b. Brothel license is more like a liquor license than a license to practice law. Brothel license is property enormous value to estate c. Ex. 5.6 HH liquor store, filed for bankruptcy. Licenses issued by state and nontransferable, but issued a new license to someone who buys a liquor store from a prior licensee. Very hard to get a new liquor license if not buy an existing store. 1. BR has the pro alienation aspect. Trustee is supposed to sell asset and raise money as much as possible. TIB may sell property (license) to the highest bidder, but may cause conflicts with a licensee v. Practical issue: Inconsequential property may not be turned over to property of estate D. Things not included in the Estate i. Two different sources of argument to keep some particular piece of property

E. F.

(1) property is not property of the estate (2) property is property of the estate, but subject to exemption ii. Sharp v. Dery a. Post petition bonus. D had to labor for his ER more than two months after date of filing in order to be eligible for his bonus pay. b. Bonus check dependent upon the continued services of D subsequent to the petition, -- not property of the estate iii. Retirement Plan. In re ORKIN. a. A plan is ERISA qualified when it complies with requirements of both ERISA and IRC. 1. ERISA i. Pension plan under ERISA includes a restriction prohibiting assignment and alienation of pension benefits. ii. A person functioning as ER cannot be a covered EE under ERISA 2. State law issues. spendthrift trust i. where D has power to amend or terminate the trust, D has such absolute authority over the trust that it must be included as property of the estate b. Ex. Ds retirement account that he cannot touch until he retires two month since petition, continue working, paid salary and ER made contribution to his retirement fund. 1. 541 (b)(7). ERISA: anti alienation. Law wont allow the person to sell the their retirement plan rights i. BR law has pro alienation aspect 2. Philosophy is here Ds putting money into retirement plan. Congress doesnt want individual succumb to temptation to waste their retirement money Restricting ones choices to benefit them from temptations 3. Prohibit from D alienating it to estate 4. Any amount no constraint (cap) on amount of the retirement iv. Any power that the D may exercise solely for the benefit of an entity (including a person) other than D. 541(b)(1) a. Ex. bank account, D is named trustee for benefit of his niece Sherry, $2,750 b. 541(d): D holds only legal title and not an equitable interest most states would characterize trust as having legal title, but not equitable interest 1. becomes the property of the estate to the extent of Ds legal title to such property i. but any value of legal title? Not really v. 541(b)(7). Exclude from estate EE contributions to any ERISA qualified retirement plans, deferred com plans, tax deferred annuities, and health insurance plans vi. 541(b)(5). Protect educational accounts of Ds children or grandchildren. vii. Rousey v. Jackoway (Supreme Court, 2005) IRA was part of estate, but exempt property under 522(d) 541(a)(6) Exception. Post petition services and earnings, which arent subject to estate i. 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 Wares variation (Section 365. Executory Contracts) i. Mar 1. Frances, farmer, contracted to sell her winter wheat crop to a local grain warehouse for 10k delivery on May 1. ii. Apr. 1. Ch 7 bankruptcy iii. Apr. 2. Today. Planted but not harvested it. Hiring someone to harvest by May 1 cost 5k iv. Hiring someone to plant the crop would have cost 3k, unsecured creditors expected to be paid about 25 % of their claims

a.

b.

v.

365. executory contract. a. Executory -- Not fully performed. Material duty remains to be performed. 1. simple case: K is fully performed one side. i. Ex. Normal K in BR is creditor fulfill her obligation with lending money (or other ways) and

10

D fails to pay it back there can be executory on both sides, with both having material duties left 1. 365 give TIB choice to deal with this situation. 365(a). trustee subject to courts approval, may assume or reject any executory contract or unexpired lease of the debtor i. Assume (step into Ds shoes) or ii. Reject (other parties like buyer (supposed to pay money as D supposed to deliver goods: here breach of contract claim D has, but less attractive than another breach of claim) or creditor 2. 365(d). if trustee doesnt assume or reject an executory contract or lease within 60 days, then deemed rejected. vi. if expect market price for this wheat on May 1 to be 6k, what will you do? a. Would Accept (assume) the contract Assume reject 10,000 6,000 -5k (harvest) -5k or waste 5k 1k zero b. if we reject the k then this buyer would sue. How to Calculate damages in states. Put P in the same position as if the k had been performed. Difference price and market price. Actually buyer is better off by breaching. so damage would be zero ii. b) if expect market price for this wheat on May 1 to be 20k, what will you do? a. if you assume k, then get 10k reject k, then get 20k -5k -5k 5k 15k -2500 (unsecured) 25% 12,500 1. buyer would sue and under k law, court will say 20k market price and 10k contract price and 10k damages 2. in the estate not enough assets to pay off all creditors, so this way 25% of claims paid off 3. TIBs incentive to reject 4. Buyer doesnt have SI so become unsecured creditor IV. The trustee. 704. TIB duties to gather all Ds property, protect and maintain it, sell property for the highest possible price, and distribute the proceeds among creditors according to the statutory priorities. V. The Automatic Stay (362(a)) (need to study more) A. Bankruptcy petition triggers an automatic stay that prohibits any creditors attempt to continue to collect from the D or the Ds property unless an exception applies once the petition has been filed i. 362(a)(1) commencement of continuation of a judicial, administrative, or other action or proceeding against the D that was or could have been commenced before commencement of the case or to recover a claim against the D that arouse before the commencement of the case. ii. 362(a)(2). Enforcement of a judgment obtained before commencement (ex. Garnishment) iii. 362(a)(3). Stay of Any act to obtain possession of property of estate or to exercise control over property of the estate. iv. 362(a)(4). Stay of any act to enforce any lien against property of estate a. 542(a). Turnover of property to the estate. 1. any entity in possession of property the trustee may use, sell or lease, shall deliver to the trustee such property unless inconsequential value or benefit to the estate i. Nissan Motor Acceptance Corp. v. Baker (N.D. Tex. 1999). If not turnover, then Punitive damages 2. TIB wants to have this money so that she can have equal distribution to creditors (Financial company and other unsecured creditors should be treated equally, pro rata distribution) get same percentage of what they are owed 3. 362(a)(2) stay enforcement of a judgment (pre petition judgment, this garnishment) 4. where more than two creditors -- equal treatment within class by undoing some of races

1.

11

541(a)(1). The paycheck is property of the estate. i. No exception under 541(a)(6). Services not performed after BR v. 362(a)(6). Act to collect, assess, or recover a claim (ex. Trying to sell property after repossession with writ of execution) a. Andrews University v. Merchant (6th Cir. 1992) 1. 362(a)(6). Withholding of Ds transcript or refusal to issue a transcript until a D pays a prepetition debt is an act to collect, assess, or recover a prepetition debt and thus a violation of 362(a)(6) vi. 362(a)(7). setoff vii. Exceptions to the automatic stay: 362(b) a. Commencement of criminal proceeding (362(b)(1)) 1. Ex. summons for D to appear in court tomorrow morning on a bad check charge i. No stay. commencement of a criminal action against the D b. Actions to establish paternity or alimony/child support, or to collect alimony/child support from nonestate property (362(b)(2)) 1. (b)(2)(A). commencement or continuation of civil action or proceeding i. (i) establishment of paternity ii. (ii) establishment or modification of an order for domestic support obligations iii. (iii) concerning child custody or visitation iv. (iv) dissolution of a marriage, except for division of property of estate 2. (b)(2)(B). collection of a domestic support obligation from property that is not property of the estate 3. (b)(2)(C). withholding of income that is property of estate OR property of D for payment of a domestic support obligation under a judicial or administrative order or a statute 4. (b)(2)(G). enforcement of medical obligation 5. Ex. paycheck Every two weeks thereafter for services performed after BR i. paycheck would not be estate of the property. 541(a)(6). The earnings come from services performed after BR petition ii. BUT, 362(b)(2)(C), withholding of income for payment of a domestic support obligation POSSIBLE garnishment on wages for this possible a. Instead of finance company, child support garnishing on the paycheck, then no stay c. Perfection of PMSI within state law grace period (typ. 10 days) (362(b)(3)) d. Actions concerning a govt.s enforcement of its police or regulatory power (362(b)(4)) e. An audit by a govts agency for tax liability, notice of tax deficiency, or demand for tax returns (362(b)(9) f. Act of lessor to regain property on terminated nonresidential lease (362(b)(10)) g. 362(b)(22). Pre petition eviction judgment okay, but post petition eviction stayed, LL can go after post petition non payment 1. Ex. landlord will evict him if not pay pas due by Friday 2. 362(a)(3). Eviction would be act of obtaining possession of property of the estate i. property would be legal right of leasehold (right of apartment) 3. 362(b)(22). Continuation of any eviction or similar proceeding by a lessor involving residential property in which D resides as a tenant which lessor has obtained before date of the filing i. if LL got a judgment of eviction before the BR filing, then no stay, eviction carries out ii. but if LL didnt get this judgment of eviction before BR filing, then stay effective 4. After BR filed, and LL hasnt receive any rent i. all BR does is to deal with pre petition world: only pre-petition debts are discharged a. Post petition debt isnt discharged. LL can enforce to recover any new debts incurred after petition with non BR laws. LL cant do anything on pre petition debts, but can do anything on post petition debt 5. 365. executory contracts and unexpired leases. i. As for residential lease, trustee nearly always concludes that the lease is worthless so reject the lease.

5.

12

If trustee does not assume it, lease deemed rejected after 60 days. 365(d)(1). Then LL will be able to get rid of the debtor iii. If lease expensive iv. Cf. Leased vehicles. a. D cant keep cars unless have consent from lessor (deal, reaffirmation agreement) or unless you file ch. 13 (big reason D file 13 rather than 7 to keep property) viii. Utility. utility notice service discontinued at midnight a. 366(a) utility may not discontinue service to D (even if debt owed by D to such utility for service rendered before the order for relief was not paid when due) b. 366(b). may discontinue if within 20 days after date of the order for relief, pays no adequate assurance of payment to utility B. BR Preliminary procedures: The schedules include detailed lists of debts, assets, income and expenses. i. 109(h), 521(b): before D can file, Ds must produce a certification that they have attended a debt counseling session a. can be done through internet with small fees with little bit time ii. 523(a)(3). Failure to list a debt may make the debt nondischargeable iii. 727(a)(4). Any false statement in the petition or schedules may result in a complete denial of discharge as to all the Ds debts. a. This may open D to a perjury prosecution iv. Ds duties a. Must file copies of their pay stubs for the two months before they filed, a statement of their monthly income and an explanation of how that was calculated, and a statement disclosing any anticipated increase in income over the next 12 months. 521(a)(1)9B)(iv) (vi) v. Ds lawyers policing job a. 707(b)(4)(C), (D): attorney must sign Ds petition which represents she has performed a reasonable investigation and has no knowledge that the info in the schedules is incorrect. b. 101(12A); 526(a)(2). Lawyers prohibited from making any statement in any document filed in a case that is untrue or misleading, or that upon exercise of reasonable care, should have been known by such agency to be untrue or misleading c. 526(c)(2); 707(b)(4)(A). attorneys who fail to abide by these rules can lose their fees, pay actual damages, or be forced to pay the fees of opposing counsel. vi. NOTICE. 342 a. 342(b) Clerk shall give D written notice containing info of BR and counseling agencies, etc. b. 342(e) Notice of Address: creditors are authorized to file a notice of address with court where all notices in Ch 7 and 13 cases must be sent. a creditor at any time may both file with the court and serve on the D a notice of address to be used to provide notice in such case to such creditor 1. 342(g)(1): if creditor designates a person or organizational subdivision to receive BR notices and has a reasonable procedure to deliver notices to such person or subdivision, a notice is not effective until it reaches that person or subdivision
VI. The Means Test (707)

ii.

A.

Congress changed BR law in 2005 to add the means test i. Purpose of change: Make harder for abusers of Ch. 7 BR a. Especially people who could pay i.e., income is greater than reasonable expenses, ii. Ch 7 v. CH 13 a. Ch 7. source to pay creditors is non exempt pre petition property that goes to trustees that are to be liquidated to create money for creditors one time payment b. Ch 13. Ds income after BR, post petition income, is source of payment to creditors installment payment (typically 3 to 5 years as monthly payments) 1. ch 13 plan has to propose that creditors should get at least as much as what she would have got if D had filed Ch 7 BR idea is to give creditors more B. paradigm of abusing Ds.

13

i.

C.

Making millions of dollars but filing BR. Income is high, a lot greater than reasonable expenses, this D can pay a lot to creditors with Ch 13 ii. liquidating pre petition properties of D doesnt generate a lot of money even though D has higher income therefore could pay (if with ch 13) a. not much of pre petition property because D blew out, not much value b. a lot of properties, but a lot of debts, so creditors would get tiny c. someone with non exempt properties (like million dollars home) Means Test Formula i. Income above state median? 707(b)(6) include spouses income if file jointly YES NO No presumption of abuse to use Ch 7

Calculate (monthly income monthly expenses monthly SD payments) X 60. IS this amount > or = $10,950? 707(b)(2)(A)(i)(II) (5 years. has something with Ch 13 (time period how long ch 13 plan can elect) (if D could over next 5 years pay significant amount of money $ 10,950 on Ch 13, Then D abusing Ch 7.) YES NO Is this amount > or = both $6575 and 25% of nonpriority UnSecured (Debts) claims? Yes No

Presumption of abuse to use CH 7. A. D.

E.

Before Means test. In re SHAW case (BR. M.D.N.C. 2003) judges used discretion, and congress in 2005 wanted to standardize formula, take discretional away and more quality i. The court here focused on Ds ability to repay a substantial portion of the debt with their high incomes Means test general i. 707(b)(1). After notice and a hearing, the court on its own motion, OR a motion by US trustee, trustee, or ANY PARTY IN INTEREST, may dismiss a case filed by an INDIVIDUAL D whose debts are PRIMARILY CONSUMER DEBTS OR with Ds consent, CONVERT to Ch 13. Test for eligibility in Ch 7. i. 1. courts are to dismiss a case or to convert it to a repayment plan in Ch 13 or 11 if Ch 7 filing constitutes an abuse 707(b)(1) two ways to find whether a Ds filing is an abuse a. 1) 707(b)(2)(A)(i). creates a presumption of abuse based upon a formula the court shall presume abuse exists according to an intricate formula of income minus expenses 1. 707(b)(6). General standard of abuse i. only a judge or the US Trustees office can raise a claim of abuse against a median-or-below D if current monthly income of D, or in a joint case, D and Ds spouse, as of date of filing, multiplied by 12, equal or less than median family income ii. if couple files jointly, both incomes included iii. if only one files and claim is general abuse, only income of filer is used b. 2) 707(b)(3). D who passed the means test formula of 707(b)(2) could nonetheless be deemed an abuser by the court 1. grounds for 707(b)(3) dismissal are bad faith and totality of the circumstances catch all categories with no clear guideline element of discretion and subjectivity ii. 707(b)(7). Bars any party, including the judge or a US trustee, from asserting the means test presumption against a below-median debtor. No means test for below median D a. Current monthly income of D including Ds spouse multiplied by 12 is equal to or less than state median family income

14

F.

G.

if only one files and the objection is based on the means test, the non filing spouses income is included to determine whether D is above or below the median income c. if D fails the test, only Ds income and not that of Ds spouse is used for working through the budgets and means test. 101(10A); 707(b)(2)(A)(i) iii. 707(b)(1). a. An above median income D subject to a charge of 707(b) abuse by judge, US Trustees office, or any creditor either because D failed the means test or because of general abuse. iv. 704(b)(1). US Trustees office is required to look at every case filed by an individual D to see if the presumption of abuse is triggered and to file a statement reporting its finding that is sent to every creditor a. for an above median D, office must file a motion to dismiss or convert the case if presumptive abuse is present, or it must file a statement explaining why it has not done so. The formula: Income and Expenses i. Ds who cannot pass the means test are presumed to abuse the BR process and judges are instructed to dismiss their filings without further ado ii. Core idea is to define income and expenses and subtract expenses from income iii. If surplus of income over expenses would pay at least X amount of debt, the D is barred from Ch 7. Income i. Threshold test: whether Ds income exceeds the median income for similar families in the state where D filed a. If Ds income equal to or lower than the median, then D passes through median income screen and no presumption bars Ch 7 1. 101(39A). median family income means for any year (A) median family income both calculated and reported by Bureau of the Census in the then most recent year b. If Ds income is higher than state median, then D has to pass means test. 707(b)(2)(A) ii. 707(b)(2)(A)(i). the court shall presume abuse exists if the Ds current monthly income reduced by amounts determined under (ii), (iii), and (iv) and multiplied by 60 is above or equal to $10,950 or ($6,575 and 25% of non priority unsecured claims) iii. Current Monthly Income defined in 101(10A) a. (A) Calculate Ds average monthly income for six months preceding BR filing. 1. Income from all sources that D RECEIVES (or in a joint case D and Ds spouse receive) included. Wages, interest on a checking account, stock dividends, unemployment compensation, income tax refunds, or in case of a D who runs a small business, revenues and accounts receivable. 2. includes amounts paid by others toward household expenses 3. if D has paycheck deductions, such as savings bonds or retirement contributions included in calculation of income p.23 4. deductions for health insurance. An expense p.23 b. (B) includes any amount paid by any entity other than D, on a regular basis for the household expenses of D or Ds dependents matter how much D spent, National and Local standards matter i. 707(b)(2)(A)(ii)(I). Ds monthly expenses shall be a. Ds applicable monthly expense amounts specified under the National Standards and Local Standards, and 1. Section 19A. National Standards: food, clothing and other items i. Collection Financial Standards for Food, Clothing and Other items (after 10/1/08) Expense One person Two persons Three persons Four persons Food 277 528 626 752 Housekeeping supplies 28 60 61 74 Apparel & services 85 155 209 244 Personal care products & 30 53 58 65

b.

H. Expenses (what expenses D may deduct) be aware need to subtract secured debts from expenses. Doesnt

15

services Miscellaneous 87 165 197 235 Total 507 961 1151 1370 i. if four persons family, then you include 1370 no matter how much Ds have spent each month 1. Section 19B. National Standards: health care (IRS national standards for Out of Pocket Health Care. i. Collection Financial Standards for Health Care Expenses a. Out of Pocket costs 1. Under 65: $57 2. 65 and Older: $144 b. if all four family members are under 65, then 57x4 = 228 included 2. Section 20A. Local Standards: housing and utilities; non-mortgage expenses (by state, county, and family size) i. utility and up keep of the house ii. allows D to take IRS number even actual expenses are lower iii. PA and Montgomery county. Four people $675 3. Section 20B. Local Standards: housing and utilities; mortgage/rent expense (by state, county, and family size) i. IRS Housing and Utilities Standards; mortgage/rental expense (four family PY and Montgomery county = $1529 ii. And need to subtract average monthly payment for debts secured by home a. If this amount is 2300, then would be Zero iii. Subtraction because secured Debts later need to be subtracted again a. Some argue Double taking is allowed b. US Trustees office doesnt buy double taking 4. Section 22A. Local Standards: transportation; vehicle operation/public transportation expense. (by Metropolitan statistical area and census region) Entitled regardless of whether you pay the expenses of operating a vehicle and whether you use public transportation i. Number of vehicles for which D pay operating expenses ii. Ex. For PA, northeast one car is $235 and two cars $470 5. Section 22B. Local Standards: transportation; additional public transportation expenses. If D pay operating expenses for a vehicle and also use public transportation 6. Section 23. local standards: transportation ownership/lease expense: Vehicle 1. i. a. IRS transportation Standards, Ownership Costs = $489 ii. b. Average monthly payment for any debts secured by Vehicle 1 = Ex. $600 iii. Net ownership/lease expense for Vehicle 1 = subtract b from a = zero a. Because later secured debts would be deducted no double taking allowed 7. section 24: . local standards: transportation ownership/lease expense: Vehicle 2. its possible for D to have one car secured and the other car free of SD i. then ownership cost would be deducted = $489 b. Ds actual monthly expenses for the categories specified as Other Necessary Expenses issued by IRS for the area in which D resides, for D, dependents of D, spouse of D in a joint case 1. Section 25. Other necessary Expenses: taxes. Federal, state and local taxes, other than real estate and sales taxes, such as income taxes, self employment taxes, social security taxes and Medicare taxes. i. Here $3394 2. Section 26. Other Necessary Expenses: involuntary deductions for employment. Enter the total average monthly payroll deductions that are required for your employment, such as retirement contributions, union dues, and uniform costs. Do not include discretionary amounts, such as voluntary 401(k) contributions 3. Section 27. Other necessary expenses: life insurance

16

Here $200. dont include premiums for insurance on Ds dependents, for whole life or for any other form of insurance 2. Section 28. Other Necessary Expenses: court-ordered payments. Enter the total monthly amount that you are required to pay pursuant to the order of a court or administrative agency, such as spousal or child support payments. 3. Section 29: Other Necessary Expenses: education for employment or for a physically or mentally challenged child. Enter the total average monthly amount that you actually expend for education that is a condition of employment and for education that is required for a physically or mentally challenged dependent child for whom no public education providing similar services is available 4. Section 30: Other Necessary Expenses: childcare. Enter the total average monthly amount that you actually expend on childcaresuch as baby-sitting, day care, nursery and preschool. Do not include other educational payments. i. Here $1000 5. Section 31: Other Necessary Expenses: health care. Enter the total average monthly amount that you actually expend on health care that is required for the health and welfare of yourself or your dependents, that is not reimbursed by insurance or paid by a health savings account, and that is in excess of the amount entered in Line 19B. Do not include payments for health insurance or health savings accounts listed in Line 34. i. Here we have expected, drugs, other health care supplies for baby = 250 ii. Then subtract 57 (national standards for out of pocket health care for one person under age 65) from 250 = 193 6. Section 32: Other Necessary Expenses: telecommunication services. Enter the total average monthly amount that you actually pay for telecommunication services other than your basic home telephone and cell phone service such as pagers, call waiting, caller id, special long distance, or internet serviceto the extent necessary for your health and welfare or that of your dependents. Do not include any amount previously deducted. b. Additional Living Expense Deductions (in the code) 1. Section 34. Health Insurance, Disability Insurance, and Health savings Account Expenses. 707(b) (2)(A)(ii)(I) 2. Section 35. Continued contributions to the care of household or family members. 707(b)(2)(A)(ii) (II) 3. Section 36. Protection against family violence. 707(b)(2)(A)(ii)(I) 4. Section 37. Home Energy costs 5. Section 38. Education expenses for dependent children less than 18 i. Private schools, up to $1,650 per child per year. 707(b)(2)(A)(ii)(IV) ii. Private or public elementary or secondary school. $137.50 per child 6. Section 39. Additional food and clothing expense i. 707(b)(2)(A)(ii)(I). May increase the allowance for food and clothing by up to 5 percent, if D can demonstrate that such expenditures are reasonable and necessary. 7. Section 40. Continued charitable contributions. i. 707(b)(1) not saying its deducted (in fact interpreted charitable contribution included in computation of expenses) c. In re KIMBRO (US BR Appellate Panel for the Sixth Circuit, 2008) 1. In BR means test, a D may deduct an ownership expense for a vehicle regardless of whether the D has a debt or lease payment on that vehicle. 2. BUT, US Trustee doesnt buy this B. Secured debts. Deductions for debt payment i. 707(b)(2)(A)(iii). Car loans or mortgage loans payment can be deducted in full, no matter how large, along with any payment arrearages a. D who has big mortgage benefit from this side (add more deductible expense to pass means test) good for car lenders if D pay big payments ii. Section 44. payments on prepetition priority claims. a. Priority debts. D is permitted to deduct any expenses to pay arrearages on priority debts 707(b)(2)

i.

17

(A)(iv). Alimony, child support, and taxes divided by 60 is deductible from monthly income dont include current obligations, such as those set out in Line 28. C. Then, if all incomes expenses SD payments = 141 and multiply by 60 = 8460 i. 8460 > 6575 and 25% of non priority unsecured debt (100,000) ii. therefore presumption of abuse no arise a. if D had rented the house, then SD payments (2300) wouldnt have been deducted, then 2441, if multiply by 60, then presumption of abuse D. Distribution process. 726 i. Trustee first determine which creditors have interest ii. Deduct from sale proceeds the trustees own fee and costs of sale iii. Pay amount of claim of secured party a. Any proceeds in excess of that owed to SP go to general distribution fund (general unsecured creditors) iv. Must consider exemption (if sold, D would get dollar value of the exemption) v. Then pay remaining to general creditors (three groups) a. First in line. Priority creditors. 1. among these priority creditors, some get paid before others. 507(a) b. general, unsecured creditors: usually paid pro rata from remaining funds c. Last: subordinated creditors. Paid last because equitably subordinated to everyone else, usually because of some wrongdoing E. Rebuttal of Presumption of abuse i. When presumption of abuse arises, how can D still file Ch 7 BR petition? a. Ex. Michael, competitive skateboarder, Had 30k non priority unsecured debts, rents a modest apartment and drives an old clunker (paid off). 1. Income past six months above the median for one earner family in his state. Need to pass the means test 2. After allowable expenses, Michael $150 available a month i. $150 x 60 = 9000 3. $9000 > 6575 and 25% of non priority unsecured debts ($7,500) i. therefore presumption of abuse arise, cant file Ch 7 ii. FIRST: 707(b)(2)(B)(i), D may rebut the presumption of abuse by demonstrating special circumstances, such as serious medical condition or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. D want to have lower income and more expense to pass means test a. Income adjustment used to have income (above), but cant work now, therefore Ch 7 1. can argue D earned above the median when he could work, but now he cant because he broke his leg then possibility of his income not above state median income i. But, Current monthly income measured for past 6 months. a. if injury to leg happened long time ago, then it doesnt matter b. if happened recently, then having no income, then easier to pass the means test 2. means test is hypothetical that looking at past 6 months income to gauge how much D will make in next 5 years to pay under Ch 13 plan i. Can argue D wouldnt be able to make as much as needed to complete that plan. Income earning ability went down so that should adjust income lowered. b. Justify additional expenses 1. if D shows extra expenses related to the accident (Ex. medical expenses without health insurance or, even if have health insurance, had to pay deductible) expenses have gone up compared to prior to his injury. Independent factor. 2. Second ground re: income side, last six months not representing income, would likely to incur more income c. 707(b)(2)(B)(ii) places burden on D to provide full itemization, documentation and an explanation of any claim of adjustment

18

F.

(b)(2)(B)(iv). Ds disposal income below that which gave rise to the presumption in the fist place pass means test iii. SECOND: if D makes charitable contribution, would increase his expenses, which would decrease disposal income (lets say he makes $50 charitable contribution), then disposable income is 100 (x 60= 6000) a. not greater than 6575 or less than 7500 therefore no presumption of abuse arise b. D can pass the means test this way (no problem under 526(a)(4)) 1. 526(a)(4). Lawyer not supposed to advise incur more debts. iv. THIRD: D can increase secured debts so that D can subtract secured debts, forward looking test amount of SD calculated as total of all amounts scheduled as contractually due to secured creditors 707(b)(2)(A) (iii) a. But 707(b)(3). The Court shall consider Bad faith or totality of the circumstances of Ds financial situation demonstrates abuse 1. 707(b)(3) no distinction btw whether lawyers ideas and clients ideas 2. 526(a)(4), but here distinction in that lawyer should not advise (held by several states unconstitutional) i. Debt relief agency shall not advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title ii. 101(12A). debt relief agency means any person who provides any BR assistance to an assisted person in return for the payment of money or other valuable consideration. Lawyer 3. 707(b)(4)(A). The court may order the attorney for D to reimburse the trustee for all reasonable costs in prosecuting a motion filed under section 707(b), including reasonable attorneys fees, if (i) a trustee files a motion for dismissal or conversion under this subsection; and (ii) the court (I) grants such motion, and (II) finds the action of the attorney for D in filing a case under this chapter violated rule 9011 Federal Rules of Bankruptcy Procedure i. (B) may order pay civil penalty for D and to trustee and US trustee. 4. legal rule for severe consequences for lawyer to advise, but if client thinks of it himself, then what? b. Another way D to change character of debt from unsecured to secured Debts (deal with unsecured creditors) by giving an USC a secured debt to allow Ch 7 filing 1. this would be regarded as fraudulent transfer (transfer whole property or part of, 90 days before filing, maybe that transaction can be flag) 2. Even if not, still does it pass the means test? Even if voidable transfer, it might work for means test The bigger your secured debts, the more likely you pass the means test. Proposal for reform of the means test i. Have a cap on Secured Debts amount (deduction of secured debts) a. to give incentive for D not to buy big houses or vehicles 1. overall lifestyle shouldnt be luxurious (if someone with 1 million housing, then would be easily pass the means test) ii. second proposal, cap on charitable contribution a. 707(b)(1) may not take into consideration whether D has made charitable contribution not saying its deducted (in fact interpreted charitable contribution included in computation of expenses) 1. if cap on this, there should be parallel cap on future charitable contribution re: Ch 13. ii. Good thing about the means test is to prevent abusers of Ch 7 a. Someone (pre petition non exempt property, source of payment to creditors, spent on all pre petition property, and have some properties exempt (converting non exempt property to exempt property or using up all pre petition property) , then their post petition disposable income likely to be high 1. Ex. potential D would be 3L abusers who could pay significant amount of money next 5 years, i. but most of our debts arent dischargeable (student loans)

1.

II.

Property Exempt from Seizure A. Introduction.: Ch 7 cases, fully exempt property is released and cash value of partial exemptions is paid out from estate to the D.

19

i.

B.

541. at filing of BR, all Ds property becomes property of estate subject to exception (de minimis exception despite of such property not exempt) ii. As for exempt property under state law, general creditors cannot seize it to satisfy their judgments iii. Consensual agreements, (mortgages on homes, security interests on cars) can seize it State and Federal System i. With Filing, federal law preempts state collection efforts with the automatic stay ii. 1978. Federal BR Code established uniform federal exemptions, but states permitted to opt out (35 opted out) of those exemptions. 11 USC section 522(b)(2) a. 522(b)(1). An individual D may exempt from property of the estate the property listed in either paragraph (2) or in the alternative (3) 1. 522(b)(3)(A). Property listed in this paragraph is subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of filing of petition i. other than subsection (d) maybe outside BR codes, that there might be other federal law that may gives exemption to D 2. 522(b)(2). property listed in this paragraph is property that is specified under subsection (d), unless the State law that is applicable to the D under paragraph (3)(A) specifically does not so authorize D can use federal exempt law unless a state opts out of those exemptions, denying their own citizens the benefits of the federal protection when filed BR, but having their own exemption law. 522(b)(2) iii. State Exemption: equality issue among Ds and uniformity a. Equality with dollar cap on homestead exemption 1. Reasons for it: Different states would have different situations in terms of value of land (ex) i. high dollar caps placed in CA, but lower cap in MO 2. State of highest dollar cap on Homestead exempt i. No Cap: FL, TX, AR, KS, CO, OK, NE, IA (higher percentage wealth maybe tied to homestead in these states, no big institutions (bank, creditors), D oriented states) b. Argument for cap and no cap 1. Ch 13. exemption more indirect impact on D and Creditors, 2. Under Ch 7. i. if there is a cap, then how much? Average or state median (residential) ii. In MO, cap is $15,000 Mo. Statute. 513.475.1 (most states have caps) iv. Normal State exemption properties a. BR law is individualistic. Each person chooses whether to file or not. So if there are 20 family members at one family unit, each individual determines whether to file or not. 1. Only exception to individual consideration of BR is section 302. i. 302(a). a joint case . . . single petition under such chapter by an individual that ma be a D under such chapter and such individuals spouse. ii. a joint case. Get twice as much as. Get stack their exemptions b. Homestead: KS unlimited homestead exemption, MO dollar cap 1. The issue of whether it is primary residence or not 2. No Cap: FL, TX, AR, KS, CO, OK, NE, IA 3. Kansas Statutes 60-2301. 160 acres of farming land or of one acre within the limits of an incorporated town or city 4. 522(o). provision to reduce the dollar value of the homestead protection by any amount that is attributable to otherwise non exempt property that the D disposed of . . . with intent to hinder, delay or defraud a creditor ten year reach back period. REED case i. when D sold non exempt and paid proceeds on mortgage c. Vehicle. d. Tools of the trade (equipment for D to need to make a living) 1. if there is a cap 15,000. but what if D is lawyer, subscription to legal database, laptop, suits, etc will be exempted

20

C.

D.

E.

Retirement account (Congress has no cap) 1. 522(b)(3)(C), (d)(12). Federal exemption for retirement funds regardless of whether the D lived in a state that opted out of the federal exemptions. f. Clothes, furniture g. Burial plot h. Wedding ring (important spiritual, sentimental stuff) typical i. Livestock? 1. D would argue this is more analogous to tools that you make an earning, so to be exempted j. Hogs Fuel (coal burning)? 1. you can live without this, so argument goes this is not to be exempted, 2. but still some live with this, so exemption may be applicable to them k. Wheelchair or medically necessary equipment l. Pets? v. TIBs obligation to investigate the schedule a. If Ds schedule lists only this stuff, TIB should ascertain (investigate) with appraisal. BUT TIB would do it only if any money left in estate for investigation Support creditors with garnishment i. If D not in BR: D get exemptions on property and restriction on garnishment on future income. support creditors get special treatment to be able to garnish more on future income ii. If D is BR: most states, exemptions and discharge of future income (get exempt property) support creditors who is allowed to garnish future income, but not able to garnish pre petition property Classification of property i. In re JOHNSON (BR. W.D. Ky. 1981) a. 1969 Dodge bus with a seating capacity of 60 passengers is motor vehicle exempted ii. In re PIZZI (BR. S.D. Fla. 1993) a. Unpaid lottery winnings are nonexempt assets that must be liquidated to pay creditors b. Yearly payments paid by State of Connecticut to D isnt considered annuity payments Avoiding Judicial Liens and Non-PMSI liens i. Black letter rule: Consensual lien have priority over Ds exemption which has priority over judicial lien a. Ex. D 40k debt to secured D, 25k cap on homestead exemption. Ds home of similar sold for 75k 1. mortgagee gets first 40k as SC 2. Ds exemption comes next 25k 3. Judgment creditors whatever remaining up to 25k 4. If there is still remaining, then its Ds equity ii. Judicial liens (imposed by a court after a judgment has been rendered and a D has not paid) and nonpossessory, nonpurchase money consensual security interests Exception to Consensual liens priority over everything (C lends money and takes a SI in household goods the D ALREADY owns) Avoidable a. 522(f)(1) D may avoid the fixing of a lien on an interest of the D in property to the extent that such lien impairs (not enough left to give full value to D) an exemption which the D would have been entitled under (b) of this section. 1. if such lien is (A) a judicial lien or i. Ex. torts suit against D and then before Creditor can enforce the judgment, D files bankruptcy, then the judicial lien is avoided ii. why not treat victim as secured creditor? BR is D protective device, provision, hypothetical D has to take it had this not existed iii. would want to undo any progress Creditors made during 90 days leading to the BR For equality of creditors a. would undo progress one creditor has made by winning judgment b. Def. (36). Judicial lien means lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding 2. (B) nonpossessory (D possesses), nonpurchase money SI (SI on old property, not new) i. (f)(1)(B)(i). household furnishings, household goods, wearing apparel, appliances, books,

e.

21

animals, crops, musical instruments, or jewelry that are held primarily for the personal family, or household use for D or a dependent of the D ii. Three requirements a. 1. secured party must not have perfected the interest by taking possession of the collateral b. 2. the loan or credit must not have been provided to enable the D to acquire the collateral c. 3. impaired exemption must relate to one of the three types of property specified iii. Bank takes SI in household furnishing that D already has iv. Congress wants to avoid these consensual lien taken as hostage value for the likelihood that threatened repossession would cause D to make any sacrifice to find a way to pay v. Non possessory mean D still possess it b. To the extent that such lien impairs an exemption 1. 522(f) permits avoidance only to the extent necessary to preserve the exemption i. if Ds equity in the property exceeds the exemption, the lien or SI remains a valid charge on the nonexempt portion of the equity F. Proceeds and Tracing i. In re Palidora (BR AZ 2004) ISSUE: are proceeds of exempt property exempt? a. Issue: whether money in the bank account as proceeds of wages or child support payments is exempted (whether D deposited the money into account or ER transferred it to bank account) 1. money in account coming from wages or child support payments as trust funds 2. is this property exempt? i. Wages and child support payments exempt under AZ statutes ii. Money changed form (earnings to money): a. This court found that proceeds (bank account) from wage not exempt b. Should it be exempt? If Yes, then what if proceeds of wages go through 5 steps, then what? Still want to exempt? 1. Then exempt percentage on proceeds? (like wage garnishment) c. Co mingling problem iii. Child support proceeds exempt. Different treatment, more D protection. a. Exemption. two ways for D to keep property 1. 514(d) property held for trust, then never property of estate 2. not property of estate at all or its property, but exempt G. Exemption Planning. (careful planning before filing for BR to discharge debts, converting non exempt property to exempt property by selling non exempt property and paying liens on mortgages) i. In re REED (BR. N.D. Tex. 1981) a. D selling non exempt property at a lower price and use that money for paying liens on homestead and mechanics lien b. homestead exemption has no dollar cap in TX c. Reeds scheme, sells non exempt property and proceeds (cash) of the sale go to make payment of lien on homestead, which is exempt under TX statute 1. Mortgagee wouldnt be upset with that, non exempt property (which now all sold) is property of estate, then unsecured creditor would hate it d. BR court opinion. Reducing amount of exempt lien is okay, but cannot acquire exempt personal property. e. BUT, 5th Circuit denied discharge of D in this case 1. Ch7 deal is D gives up pre petition non exempt property and gets discharged 2. 707(a)(2). A Debtor may be denied discharge if he has transferred property with intent to hinder, delay, or defraud a creditor 3. Ds entitlement to a discharge must be determined by federal, not state, law. discharge shall be denied a debtor who has transferred property with intent to defraud his creditors f. Would he have not engaged in his action had he known no discharge?

22

H.

Depend on States i. If states like Texas has many property exemption, D would still have merits to bring Ch 7 BR a. Unsecured debtor cant get homestead (then discharge may not be big deal for some Ds with expensive homestead), wages can be garnished but some states current wages are exempt (except for court ordered child support payments like TEXAS) b. But still this may be found as fraudulent transfer 1. intent to hinder, delay or defraud a creditor 2. if you selling properties for what it worth, then maybe not fraudulent transfer big plus to D convert to greater exempt property ii. Homestead 2005 amendment. Congresss efforts to have cap on homestead exemption a. 522(o). provision to reduce the dollar value of the homestead protection by any amount that is attributable to otherwise non exempt property that the D disposed of . . . with intent to hinder, delay or defraud a creditor ten year reach back period. 1. If next court finds that next Mr. Reed disposed of those non exempt coins with an intent, then in BR his equity in his homestead would be reduced by an equivalent amount Moving to Better Exemptions. D moving from a state with stingy exemptions to one that is more generous i. In re COPLAN (BR. M.D. Fla. 1993). P.211 a. instead allowing D to use FL unlimited homestead exempt, but forcing D to use WIs less favorable homestead b. 522(b)(3). If D not lived in the state for two years, then court will be looking pervious six months and using that state as homestead exemption law

1.

III. Claims and Distributions. 502 first step (principal) and if you have SC then go to 506

A. P.135. great majority of consumer filing Ch 7 BR are no asset cases (because all property exempted). Then
typically creditors are advised of this fact and not to bother filing a claim. i. Creditors get notice from BR court. Even if no asset case, creditor may be making claims ii. Automatic stay: State keeps creditors from collecting from D unless they make claims (filing proof of claim) iii. Creditors see no asset case and wouldnt bother pursing it with claims iv. D swears truth with her schedules and lawyer has duty to look whether its accurate. The Claims process. Exceptional case i. Ch 7, Ch 13. a claim be filed within 90 days after first meeting of creditors. Fed. R. Bankr. P. 3002 ii. Creditor must file a claim in Ch 7 or 13 cases in order to receive a dividend, even if creditor listed on Ds schedules, and to receive distribution, Ch 7, 13 creditor must submit a proof of claim iii. 501(a). a creditor may file a proof of claim (similar to complaint) (study more) iv. 502(a). Claim is allowed unless a party in interest makes an objection. a. Norm in Ch 7 BR is if there is proof of claim, and nobody objects, then claim is allowed Disputed Claims i. TIB may object to paying creditors, rare on doubtful claims ii. In re LANZA (BR. E.D. Pa. 1985) a. Mortgage executed for indebtedness of 200k, but 125k was advanced and later advanced 170k to Ds D grant mortgage for 350k using improved property as coll b. Conflicting testimony on outstanding balance remaining on mortgage lowest figure presented by Creditor 300k adopted c. Burden of proving is on objecting party, not the claimant not satisfied by mere filing of an objection Unsecured Claims i. All pre-petition claims (secured or unsecured) must begin with 502 calculation ii. 502(a). A claim or interest, proof of which is filed under 501 is deemed allowed, unless a party in interest, including a creditor of a general partner in a Pship that is a D in a case under ch 7 of this title, objects. a. Under section 502, pre petition interest entitled

B.

C.

D.

23

iii. 502(b)(1). If someone objects, then court shall determine account of such claim, . . . and shall allow such
claim in such amount, except to the extent that a. (1) such claim is unenforceable against the D and property of the D under any agreement or applicable law (whether its valid or not: contract, torts, estate and trust, property, family law, federal law, securities law, environmental law, etc) for a reason other than because such claim is contingent or unmatured 1. any reason under any law which doesnt allow claims then not allowed. Any law can defeat claim for reasons i. BR judges hearing any kind of cause of action. Applying a lot of substantive laws, ii. Exam. Move forum to BR. Difference in procedure. Things can get drag in civil cases, but in BR cases, it can get resolved very quickly, pressure of resolving the dispute quickly and distribute it to creditors because D and trustee money restrained. Quick and dirty adjudication 2. other than because such claim is contingent or unmatured i. ex. installments loan (series of payments) 3 remaining Unmatured loans on cars, creditors having acceleration clause (if D defaults, then we can accelerate all future payments immediate due on now), this claim ALLOWED b. (2) But under (b)(2) we dont accelerate interest c. (b)(5). 523(a)(5) unmatured domestic support, cannot be accelerated iv. 502(b)(2). Unsecured creditors dont get unmatured interest (post petition interest), but entitled to interest accrued prior to bankruptcy provided that their agreements with D so provided. a. Post petition attorney fees? Because they cannot claim post petition interest, may not be able to claim it Secured claims (think also avoiding power, strong arm clause) i. 502(b). permissible nature and extent of an allowed pre-petition claim ii. 506(a). grants a SC an allowed secured claim up to value of its collateral a. if claim less than or equal to value of coll, then entire claim is secured (fully secured) 1. oversecured creditor value of coll of creditors worth more than claims secured creditors would get entire claim plus interest b. if claim greater than value of coll, then claim is partially secured, remaining portion of initial claim continues as an unsecured claim against the estate iii. 506(b). secured creditor entitled to post petition interest if provided for under the agreement or state statute under which such claim arose. a. if SC is oversecured (value of coll exceeds pre petition debt including pre-petition interest, SC can receive post petition interest at its contract rate, until value of coll is exhausted b. SC who is oversecured entitled to post petition attorneys fee iv. 506(c). trustee may recover from property securing an allowed secured claim the reasonable, necessary cost and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim (such as advertising, other cost of sale) source of payment in Ch 7: Pre petition non exempt property of D i. Cf. for ch 13? Post petition disposable income ii. if secured creditor, then the creditors particular collateral is source of payment to her iii. if unsecured creditor, would get what is left over (some proceeds of collateral) only after SC is paid first full amount, then pro rata share of liquidation of non exempt property iv. Different Treatment btw Secured and Unsecured creditors: if you were congress, is this good? Why Secured creditor gets better treatment a. Different treatment 1. Unsecured creditor has mere contract right against debtor as opposed to Secured creditors equitable interest (like injunction) i. Secured creditor can force a party to do something or not to do something with equitable right 2. Secured creditors property right? Equitable right: Security interest (Ex. mortgage in real

E.

F.

24

G.

property) lien is property interest that SC has. i. other lien holder has interest in Ds property (ex. judicial lien) a. Example of property interest? Lien, Leasehold, easement, future interest, joint tenancy 1. Ex. Joint tenancy: D filing BR might have stuff subject to any of this property interest (joint ownership, D and his brother owns 50% joint ownership in something) b. Then. Trustee. you can understand Trustee has shared interest with Secured creditor in Ds property like joint tenancy 1. If one with joint tenancy sells entire land, then would have to pay half proceeds to other in joint tenancy 2. Likewise: lien holder has part interest in property, then Trustee should give what lien holder (secured creditor) is entitled for i. much bigger number goes to SC. SC get bigger number because its their property as if trustee jointly owned in property. If sell entire, then have to pay her brother half proceeds, pay the lien and keep the remaining in estate Avoiding powers i. Strong Arm Clause. Make unperfected secured creditor to become unsecured creditor (?) a. 544(a). The trustee shall have . . . the rights and powers of, or may avoid any transfer of property of the D or any obligation incurred by D that is voidable by 1. (1) a creditor that extends credit to D at the time of commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on all property i. Trustee avoids SI entirely under 544(a)(1) and secured party loses its sI and becomes a general unsecured claimant. ii. 544(a). trustee shall have rights of (1) a creditor (hypothetical) that extends credit to D at the time of commencement of the case (here not giving much to TIB) and that obtains at such time a judicial lien on all property on which a creditor on a simple k could have obtained such a judicial lien, (means all same day, TIB wins lawsuit, gets a judicial lien, hypothetical). a. Then Article 9-317. unperfected SI subordinated to judicial lien creditor or perfected SI is greater than judicial lien creditor b. TIB has this right of acquiring judicial lien. Bank subordinate to judicial lien, which is trustee under 544(a)(1) hypothetical creditor 2. give TIB rights and powers as of the date of BR filing of a judicial lien creditor, an execution creditor or for real estate a bona fide purchaser. avoiding unperfected security interests in personal property ii. Preferences: the General Rules. 547(b) a. Ability to dismantle certain transaction btw the D and creditors that took place within the 90 days immediately preceding the BR filing 1. then this creditor must surrender any preferences received from the D. b. Gilbert v. Gem City Savings Assn. (BR. S.D. Ohio 1981) 1. Test: whether creditor received more than he would receive if the case were a CH 7 case, the transfer had not been made and the creditor received payment to the extent provided for by the provisions of Title 11. 2. payments to a fully secured creditor during the 90 day period preceding the filing of BR will not be considered a preferential transfer c. 547(b). Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property (seven requirements, (there has to be transfer and interest of D in property transferred). Trustee has to establish all these requirements 1. transfer. 101(54)(D). transfer means each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property or (ii) an interest in property 2. interest of D in property. Cash, giving SI in property, variety of things, D has to have some kind of rights in property

25

(1) transfer has to go to creditor. To or for the benefit of a creditor (Debtor and creditor relationship involved). 4. (2) transfer has to be for or on account of an antecedent debt owed by the D before such transfer was made (because of pre existing debt) 5. (3) transfer has to be made while the D was insolvent (BC 101(32)) i. (f) presumption that D is insolvent on and during 90 days immediately preceding the date of filing petition (trustee dont have to prove that) 6. (4). Transfer has to occur (A) on or within 90 days before the date of filing of the petition. transfer has to occur that time frame unless it is made to insider, 101(31)) OR (B) btw ninety days and one year before the date of filing of petition, if such creditor at time of such transfer was an insider, AND 7. (5). that enables such creditor to receive more than such creditor would receive if i. (A) the case were a case under chapter 7 of this title ii. (B) the transfer had not been made; AND iii. (C) such creditor received payment of such debt to the extent provided by the provisions of this title iv. Requires inquiry as to how a creditor would be treated in a liquidating distribution. You look to see how unsecured creditor would be treated in ch7 bankruptcy. If this transfer enabled creditor to receive more than they would have received under ch 7 liquidation (Transfer make better off creditor had it never happened), then trustee can avoid. v. all creditors similarly situated has to be treated equally. D cannot deplete assets of estate to benefit one creditor she chooses. d. 547(c). never gets to (c) unless you dont establish any of (b) requirements 1. 547(c)(1). Trustee may not avoid under this section a transfer (1) to the extent that such transfer was (A) intended by D and creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to be D, AND in fact a substantially contemporaneous exchange. i. If same day. Intended to be contemporaneous IV. The Order of Distribution in Bankruptcy. 726 A. SECURED CLAIMS. 506 i. Fully Secured debts ---- secured claim --------paid in full plus interest and costs (to extent of equity cushion) ii. Partially secured debts ---- Secured portion -------paid in full to extent of collateral ---- Deficiency --------------General unsecured claim

3.

iii. 725. (FIRST: Secured claims) After commencement of a case but before final distribution of property of
the estate under 726, trustee after notice and a hearing shall dispose of any property in which an entity (secured party) other than the estate has an interest, such as a lien and that has not been disposed of under another section of this title. B. Abandon of property i. Two ways to deal with distribution of property a. FIRST: 554(a). abandon of property 1. Trustee may decide to abandon this property thinking this property may not worth 400k. if all value used up by lien, then not really much worth left. Automatic stay can be lifted on non mortgage part: (no automatic stay on mortgage and mortgagee gets its value with foreclosure) 2. 554(a) trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. b. SECOND: 725. sell it and pay proceeds equal to the secured claim to mortgagee C. 726. (SECOND. 507 priority, and THIRD unsecured): Distribution of property of the estate. property of the estate shall be distributed (1) first in payment of claims of kind in 507 and (2) second in payment of any allowed unsecured claim (unsecured general) D. PRIORITY CLAIMS 507(a) and 725(a)(1)

26

i.

In general a. After SC satisfied by sale of coll, unsecured creditors divide remaining assets. Also undersecured creditors also join. ii. 507(a) (1) Domestic support obligations a. defined in 101(14A). 1. (B) in the nature of alimony, maintenance, or support b. (A). recoverable by related party (a spouse, former spouse, or child of D, or childs parent, legal guardian, or responsible relative) c. (B). unsecured claims for domestic support obligations assigned by related party to a governmental unit or are owed directly to or recoverable by a governmental unit under applicable non BR law. d. (C) first priority within (1) administrative expenses of the trustee allowed under 503(b)(1)(A), (2) and (6) . . . shall be paid before payment of claims under (A) and (B) 1. trustees fees and expenses that are directly related to the administration of assets used to pay domestic support obligations must be paid as a very top priority. e. Here first: 507(a)(1)(C). TIB 1. Policy reason: TIB has to be first paid who divide Ds properties among the creditors, otherwise TIB in first place wouldnt work. f. Second (A) + (B) Domestic Support Obligation (Alimony, Maintenance, Support) g. Then rest of TIBs effort is paid after these two (administrative expenses with respect to DSO and payment of DSO) h. Ex. Suzan Smith, Ds ex wife, negotiable note 1. this may be domestic support obligation, 2. But it may have been loan because nature of alimony would be like 1k a month for 3 years 3. not all payments to Ds ex wife would be necessarily regarded as DSO 4. here, probably not nature of AMS. iii. (2) Administrative expenses (TRUSTEEs administrative expenses but for efforts to collect money for DSO) a. 1st rank superpriority claims for postpetition financing under 364(c)(1) (not talked) b. 2nd rank superpriority claims under 507(b) (not talked) 1. if Trustee provides adequate protection of interest of a holder of a claim secured by a lien on property of the D and if such creditor has a claim allowable under (a)(2) arising from stay of action against such property from use, sale or lease or from granting of a lien, this creditors claim has priority. c. 3rd rank other admin. Expenses under 503 1. 503(b)(1)(A). broadest group of expense: actual and necessary costs of preserving the estate including i. (i) wages, salaries, and commissions for services rendered after the commencement of the case ii. All manner of expenditures deemed by the court to be reasonable in advancing the estates interests, preserving or enhancing its assets or furthering the Ds efforts at rehabilitation. 2. 503(b)(2). Com and reimbursement awarded under 330(a) i. 330(a)(1)(A). court may award to a trustee . . . reasonable com for actual, necessary services rendered by the trustee examiner, ombudsman, professional person or attorney and by any paraprofessional person employed by any such person. 3. 503(b) includes trustee com, fees for professional services and post petition taxes due by the estate. iv. (3) Ordinary course business expenses in gap period btw filing and order for relief, in involuntary cases a. D entitled to continue operating its business or conducting its financial affairs in period btw petition and order for relief or appointment of a trustee. b. 503(b) excludes these expenses from second priority administrative expenses, but (a)(3) allows. v. (4) wages and salaries of employees (limited)

27

FIRST: 180 days requirement. Earned within 180 days before the date of the filing of petition or the date of cessation of Ds business whichever occurs first 1. maybe want to punish lazy employee who had not taken steps to get that money back during those 6 months. they might have been paid in other ways b. SECOND: amount claim cap: $10,950. c. Ex. John Harry, a private duty nurse whom D hired while his father was quite ill: 11k 1. social security taxes would fall in (8) not here (might argue its part of salary) d. lawyer is independent contract not an employee probably vi. (5) Employee benefits (limited) a. such as pension, life insurance, or health insurance vii. (6) Grain producers and fishermen claims against processor or storehouse (limited) viii. (7) Deposits for consumer goods or services deposit of money in connection with the purchase, lease, or rental of property or the purchase of services, for the personal, family or household use of such individuals, that were not delivered or provided (limited) a. 4. down payment against a tractor lawnmower D had agreed to sell to George: 300 ix. (8) various taxes (limited). defined 101(27) to include federal, state, and local govt. a. lots tax are secured debts in BR. Taxing authority usually gets tax lien before D fling BR. b. Policy: Taxing authority that fails to get a lien by the time D files the BR (that becomes unsecured claimant) get punished as being lazy c. these taxes are nondischargeable under 523(a)(1). If not paid full, then D remains liable after BR for any unpaid balance d. (A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of filing of the petition 1. (i) for which a return, if required, is last due, including extensions, after three years before the date of filing of the petition i. actually it can be 4 years of priority debts if someone file BR btw Jan and April 15th ii. Policy: here also getting punished not being able to get paid for unpaid taxes 2. Ex. state Department of Revenue and IRS, income taxes: state 4k, federal 14k e. (B) property tax incurred before commencement of the case and last payable without penalty after one year before the date of the filing of the petition 1. 3. property taxes to city: 3k per year for last three years plus 500 per year penalties for each of the tree years. i. only 3k allowed. x. (9) claims arising out of federal depository insurance xi. (10) claims for wrongful death or personal injury resulting from Ds driving while intoxicated xii. Problem In sum, if note to ex wife is domestic obligation, then not much left, but if not, taxes and general unsecured credit can be paid which is unusual in Ch 7 E. Next. GENERAL UNSECURED CLAIMS (includes balance of undersecured or limited priority claims together with all other claims proved and allowed and not covered by a priority category) i. (1) Timely filed general unsecured claims and late claims where creditor had no notice or knowledge of the case to file in time but filed early enough to be able to participate. 726(a)(2) ii. (2) other tardily filed general unsecured claims. 726(a)(3) a. 12. other unsecured, general claims: 17k F. Claims for fines, penalties, forfeiture, or punitive damages, which are not com for actual pecuniary loss. 726(a) (4),. Ex. tax penalties 500 per year a. is it com for actual pecuniary loss suffered by the holder of such claim or straight fine or penalty?. (if punitive nature, then yes subordinated claim here) G. Interest on priority and general unsecured claims. (pre-petition) 726(a)(5) H. Any surplus remaining goes to D. 726(a)(6)
I.

a.

DISCHARGE A. Only Prepetition debts that were or could have been proved in the estate get discharged (most post petition debts incurred by D are obligations of fresh start estate and not affected by discharge.

28

i.
B.

Discharge brings about injunction against creditors from collecting from Ds Exceptions to discharge. i. 727 global denial of discharge: renders all of debts nondischargeable a. (b) Except as provided in 523, a discharge under (a) discharges D from all debts that arose before the date of order for relief (BR filing) under this chapter (pre petition debt) and any liability on a claim that is determined under 502 as if such claim had arisen before the commencement of the case, whether or not proof of claim based on any such debt or liability is field under 501 b. (a) the court shall grant the D a discharge UNLESS c. Ds who are not individuals cannot receive a discharge under Ch7. 727(a)(1). 1. corp. association, or other legal entity (no discharge) must reorganize to obtain a discharge. i. Discharge and free start is only for a human being d. Waiver. 727(a)(10). Validates a written waiver of discharge executed by D after order for relief and approved by the court e. Improper D conduct in or in anticipation of the Ch. 7 case. 1. 727(a)(2) through (6) require court to deny discharge if D has been guilty of specified dishonest, unlawful, or uncooperative conduct either during the case or in anticipation of it. fraudulent transfer of property, concealment of or damage to property, unjustified failure to keep records, destruction or falsification of records, inability to explain a loss or deficiency in assets, refusal to obey a court order or to answer questions, or unjustified refusal to testify i. (2) D, with intent to hinder, delay, or defraud a creditor or an officer of the estate, has transferred removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, a. (A) property of D, within one year before date of filing OR b. (B) property of the estate after date of filing ii. (3) D conceal, destroy, mutilate, falsify, or fail to keep or preserve any recorded info, including books, doc, records, and papers from Ds financial condition or business transaction, unless justified. falsifying financial records (another way hiding property) iii. (4) D (hindering process of BR). During BR case, making a false oath or false claim (perjury). D knowingly and fraudulently a. (A) made a false oath or account b. (B) presented or used a false claim c. (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 d. (D) withheld from an officer of estate entitled to possession, recorded info, iv. (5) D failing to explain satisfactorily, before determination of denial of discharge, any loss of assets or deficiency of assets to meet the Ds liabilities. a. In re ROBERT W. MCNAMARA, D. (BR. D.Conn. 2004) 1. Ex wife is creditor and 150k ordered by state court (divorce court) to go to escrow 2. But, suggestion is D didnt lose it but put the money in offshore account i. Ds explanation that he didnt care he lost money believing it was his to lose not satisfactory 3. if D did lose money in gambling, should he be denied discharge? i. If lose money, then D loses creditor and trustees money ii. But He will get discharged if he told the truth. iii. If deny discharge, then someone who makes risky investment (like stock) before filing BR, then what? How to draw the line? 4. if court denied discharge, that doesnt put any money in clients pocket. Not automatic transfer from off shore account to ex wife. How she can collect money? Turn over order. State divorce Court orders D to turn over this asset (money in the bank account) i. concerns of other creditors (not just two parties disputes), why favor this creditor over other creditors and this 150k isnt domestic support obligation

29

ii.

State court judge (not thinking about other creditors), you enter judgment against D, putting 150k in escrow, BR court said you get no discharge. iii. If factual disputes as to whether bank account, Puts burden on wife to prove whether there is bank account. iv. if persuaded as a matter of fact, and order of turn over, then D says no, then order of contempt and D will be locked up v. D somehow will get money with in jail f. Improper conduct in relation to another case. 1. 727(a)(7) authorizes the court to deny a discharge to a D who has committed any of acts in (a)(2) through (6) in connection with BR of an insider while Ds own case is pending or within a year before the Ds petition g. Successive BR filings. 727(a)(8) and (9) place a restriction on Ds ability to obtain successive discharges 1. (8) precludes a D from a ch7 discharge in a case commenced within 8 years of filing of an earlier case under Ch 7 or 11 in which D received a discharge i. no two CH 7 discharges unless 8 years apart ii. but D can get Ch 13 and there may be discharges with that. And still can file Ch 7 and there will be automatic stay. then delay of Creditors trying to collect debts from D. 2. (9) bars D from a discharge under Ch 7 for 6 years after commencement of a case under Ch 12 or 13 in which D received a discharge UNLESS payments under the Ch 13 plan totaled at least i. (A) 100 percent of allowed unsecured claims OR ii. (B) (i) 70 percent of such claims; AND (ii) the plan was proposed by D in good faith and was Ds best effort. h. Failure to take the required course on financial management. 727(a)(11) i. Pending proceedings to determine reduction of the homestead exemption. 727(a)(12) 523 Denial of discharge: renders only one debt nondischargeable. Debt by debt analysis. a. Introduction 1. exception from discharge. How to categorize the reason of exception i. First category a. blatant fraud (theft, malicious injury) b. burden on society first theory 1. domestic support 2. taxes 3. fines and penalty (quasi penalty) like taxes i. Ex. Penalty on environmental law violation if discharged, then burden on society to cleanse pollution 4. any debts that unpaid?: if discharged eventually burden will be imposed on society i. i.e., if credit card debts discharged, then first less business revenue will lead to less revenue to govt. and second credit company will pass its losses to others in forms of increased fees, interests, etc. ii. Second category a. Distinction btw willing/consensual creditor (like credit card, lenders) and unwilling/unconsensual creditor (like domestic support, tax, fines, penalties, blatant fraud) discharged vs. nondischarged iii. Third category a. Student loans ought to be willing, consensual creditor, but this is excepted from discharge unlike credit card or lenders 1. Public policy exception? Lending but not investment. b. why excepted from discharged? 1. Congress must have concerned that D knowing that her student loans would be discharged after getting degree, D would file BR Then gets education and degree, and discharged from debts? c. Student loans different from other debts

ii.

30

b.

what if a D had every intention to pay that off, but difficulty later, then they may get discharge with undue hardship 2. And creditor cant get collateral with student loans as opposed to other debts (a) discharge under 727, 1141, 1228(a), 1228(b), or 1328(b) doesnt discharge an individual D from any debt for 1. priority taxes. 523(a)(1). Taxes that are entitled to priority under 507(a) are not discharged 2. Obligations incurred fraudulently. 523(a)(2). For money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by i. (A). more general ground of fraud covering debts induced by Ds false representations, pretenses, or actual fraud other than a statement respecting Ds financial condition. misrepresentation of INTENT (to repay the loan) a. In re DORSEY (BR. M.D. Fla. 1990): obtaining money by actual fraud, not merely a claim of nondischargeability based on misuse of a credit card by exceeding credit limits 1. Facts: credit card debts (unsecured) totaling 106,923.39. D claims incurred credit charges in good faith believing JJ (mysterious boy friend) would continue to furnish funds necessary to meet the obligations 2. if shown at the time D incurred charges he knew that they would be unable to live up to the obligation and pay charges, or it appears they had no intention to pay charges when charges were incurred, that would clearly be an actual fraud 3. Exception from discharge? Policy argument. CREDIT CARDs RESPONSIBILITY i. Issue of creditors responsibility: Amex sent numerous credit application not considering Ds paying ability ii. If D lied on the application then (B) case where D falsely stated iii. if didnt lie on application, Amexs extension of credit problematic? She in fact knew she had little prospect ever being able to pay misrepresented intent (to repay), given her minimal income, she would have known that she unable to pay off iv. Punish of Amex by denying the exception of discharge? What if put this into code if creditors has reasonable expectation to be repaid Amex could still argue reasonable expected to be paid v. if creditor did investigate with due diligence then Amex wouldnt be excepted from discharge b. In re MILBANK (BR. S.D.N.Y. 1979). Prior to current BR law. 1. son in law got loans from father and daughter whom relied on Ds representations that D and his wife would make a good faith effort to strengthen their marriage. the loans were made with false pretense. 2. Plaintiffs (ex wife, her father) wouldnt have made loans had they known that bankrupt was having affairs. ii. (B). when debt was induced by a materially false written financial statement a. (i) materiality, (ii) respecting Ds financial condition, (iii) creditors reliance (creditor to whom D is liable for such money, property, services, or credit reasonably relied) AND (iv) intent to deceive 1. common law element of fraud b. Ex. D filling credit card application with wrong info (income) iii. (C). presumption of fraud in last minute consumer spending sprees a. presumption applies if within 90 days before the order for relief (filing the BR), D incurred consumer debts for luxury goods or services aggregating more than $500 owed to a single creditor can be rebutted 1. (a)(2)(C)(ii)(II). luxury goods or services defined as those not reasonably necessary for the support or maintenance of the debtor or her dependent

1.

31

3. 4.
5.

6.

7.

8.

523(a)(3). unlisted or unscheduled debts. Protects creditors who didnt know of BR in time to file a claim 523(a)(4). Debts arising out of Ds dishonesty as a fiduciary or from embezzlement or larceny. Domestic support obligations (523(a)(5)) i. 101(14A). defined. alimony, maintenance, or support of such spouse, former spouse, or child of the D or such childs parent, without regard to whether such debt is expressly so designated ii. definition covers prepetition and postpetition support debts established by court or administrative order or by divorce decree or separation or property settlement agreement, and owing to a spouse, ex spouse, child, person responsible for a child, or a governmental unit. a. Debt must actually be for support. Debts for willful and malicious injury. 523(a)(6) i. Liability for deliberate wrongful conduct. Intentional rather than negligent behavior a. The actor must not only intend the act, but also its consequences. ii. Ex. Ds creditor is a tort claimant who has an 800k judgment against D for breaking four of his fingers, favorite kneecap, and bog toe (in process of debt collection) Governmental fines, penalties, and forfeitures. 523(a)(7) Educational loans and benefits. 523(a)(8). unless excepting such debt from discharge under this paragraph would impose an undue hardship on D and Ds dependents i. In re GERHARDT (5th Cir. 2003) a. District court held undue hardship didnt apply finding D could earn more. Nothing stopping him from pursuing other jobs 1. Court might look at Lack of good faith issue as to how much of the debts he paid 2. Court might look at Ds lifestyle: Monthly income includes Health club membership and internet access whether item is non essential item b. Undue hardship test. Second circuit in Brunner three part showing 1. (1) D cannot maintain, based on current income and expenses, a minimal std of living for D and dependents if forced to repay the loans; i. Ds monthly expenses exceed his monthly income no ability to maintain a minimal std of living if forced to repay 2. (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, AND i. no persistent undue hardship he could obtain additional steady employment in different arenas 3. (3) D has made good faith efforts to repay the loans ii. Public policy argument: D has better position with education to pay off debts a. General point is benefits of D in terms of earning. 1. with credit loan, D may have done business, bought foods, nothing left value to the D after D consumed money. 2. Student loans. D earning potentially higher as opposed to credit card debts. 3. Basic distinction btw ch 7 and ch 13 i. Ch7 D gives up pre petition non exempt property: with student loan, D dont have pre petition non exemption property, but great potential for post petition disposable income. ii. Ch 13. postpetition disposable income b. student loan (non dischargeable) different character as opposed to other loans 1. Ex. car loans: issue of collateral. With student loan, creditor cant put any collateral 2. no collateral creditors can repossess with student loans c. also commonality with tax. A lot of student loans associated with government. Govt. makes rules.

32

II.

Liability for driving under influence of drugs or alcohol. 523(a)(9) 10. Debts from a prior case in which a discharge was waived or denied. 523(a)(10) 11. Payments under an order of restitution in federal cases. 523(a)(13) 12. Matrimonial debts that do not qualify as domestic support obligations. 523(a)(15) i. Protection to matrimonial debts (arising out of a property settlement on divorce or separation) that dont qualify for exclusion from the discharge as domestic support obligations under (a)(5). c. (c). Except as provided in (a)(3)(B), D shall be discharged from a debt of a kind in (a)(2), (4), (6) unless on request of creditor to whom such debt is owed and the court determines such debt to be excepted from discharge. C. Tax priorities and discharge i. Unpaid taxes (with 507(a)(8)) is exempted from discharge by 523(a)(1)(A). ii. Pre petition interest on 507(a)(8) priority claims enjoys nondischargeable status iii. Pre petition interest doesnt accrue on unsecured tax claims against TIB and property of the estate 502(b), but post petition interest does accrue against D. iv. Penalties on nondischargeable taxes nondischargeable, 523(a)(7) D. No discharge and worse BR crimes. i. Concealment of assets, false oaths, false claims, fee fixing and a number of other BR specific actions are made crimes in 18 USC 151-155 ii. Ds Concealing property, selling property to buddies with right to reacquire it not denial of discharge. Criminal case. Cant commit crimes debtors Post-BR position A. Consequence of BR Discharge i. At moment of individual Ds Ch 7 discharge, 362 automatic stay dissolves. 362(c)(2)(C) ii. And 524 discharge injunction slides into its place. 524(a) Forbids any attempt to collect a dischargeable debt a. 524(a)(1). Discharge voids any judgment for personal liability with respect to any dischargeable debt b. 524(a)(2). Operates as an injunction against commencement or continuation of an action, process, or an act to collect, recover, or offset any such debt as personal liability of D AND c. 524(a)(3). Injunction against commencement or continuation of an action, . . . collect or recover from, or offset against property of D acquired after commencement of an action. B. 524(c). Reaffirmation: exception for discharge injunction reaffirmation of the soon-to-be-discharged debt i. Secured creditors a. FIRST: BR filing causes automatic stay and stops collection efforts, therefore Secured creditor must file proof of claim to BR court. b. SECOND: need to know value of the car? 1. 506(b) if value of coll more than debt (oversecured), then to the extent that an allowed secured claim is secured by property the value of which is greater than the amount of such claim, there shall be allowed interest on such claim and reasonable fees, cost, or charges provided for under agreement or state statute under which such claim arose i. what is secured claim? a. 506(a). allowed claim of creditor secured by a lien on property is a secured claim 1. What if the 506(a) had ended here, then SC would have been entitled to entire secured claim no matter what the value of the property is i. so if car worth 500, then still allowed claim is 2000 2. But with current statute, allowed claim is up to the value of collateral i. Allowed claim is 500 secured claim under secured creditor 2. what if car worth 5k. oversecured claim i. Loan made --interest (pre petition)--- petition--- interest (post petition) distribution ii. SC entitled to Post petition interest and attorney fees up to the date of distribution (to creditors) also storing fees and other fees a. SC gets 2k claim and post petition interest and any fees provided in agreement

9.

33

C.

iii. Trustee. How to distribute that claim to SC? a. Can sell the property. 2k plus interest. Rest money goes to pool of general unsecured creditor b. Use 725 first and then 726 c. Protection for lien holder regarding the property: SC paid first? 1. The way Secured Creditor wouldnt get any during BR. i. 554. abandonment of property because of burdensome or inconsequential value, but Lien survives BR. a. ex. 1800 car value used by lien. Unsecured creditor wouldnt get any money with debts 2k. b. if trustee abandons it, then D would have possessed it. c. Then, Probably D has possessed it. W/o getting physical possession, estate might have abandoned the car, if the D still got the car d. But, SC can repossess it. SI (lien) still there, even though not paid, SC still has lien. 2. Lien survives BR (right to repossess coll as soon as BR is closed. During BR automatic stay) i. 506(d). to extent that a lien secures a claim against the D that is not an allowed secured claim, such lien is void. a. Ex. 2k debt. 1800 secured claim 200 unsecured claim. To the extent that lien secures a claim (200) that is not an allowed secured claim the lien is void okay to pay 1800 to Secured creditor, but above 1800, secured claim avoided. b. Negative impression. To extent that a lien secures a claim against the D that is an allowed secured claim, not void 3. SC may not want to repossess the coll. WHY i. IF coll not worth much. Cost to repossess and sell it ii. If worth, but still, SC wants D will pay to SC affirmation issue a. Down the road, getting payment from D better than repossessing the car and selling the car ii. debt can become once again legally enforceable, notwithstanding the discharge, if D signs a reaffirmation agreement subject to (c) iii. Four ways that D can deal with secured debts. a. 521(a)(2). If an individual Ds schedule of assets and liabilities includes debts which are secured by property of the estate, D shall file with clerk a statement of his intention with respect to the retention or surrender of such property and specifying that such property is claimed as exempt that the D intends to redeem such property or that D intends to reaffirm debts secured by such property b. Surrender, Redemption, reaffirmation, retention c. No authority for retention (ride through) under BR Reaffirmation = Waiver of Discharge (used by D as a means of keeping property that would otherwise be liquidated) i. 524(c) An agreement btw a holder of a claim and D, consideration for which is based on a debt that is dischargeable (under 727, all debts discharged subject to exceptions: as for secured debts, personal liability discharged) in a case, . . . is enforceable . . . only if a. (1) . . . made before granting of the discharge . . . ; AND AFTER BR (congress intended) b. (2) D received disclosures in (k) at or before time at which D signed the agreement; c. (3) agreement filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented D during negotiating an agreement, which states that -- AND 1. (A) agreement represents a fully informed and voluntary agreement by D 2. (B) agreement doesnt impose an undue hardship on D or dependent AND 3. (C) attorney fully advised D of legal effect and consequences d. (4) D hasnt rescinded agreement at any time prior to discharge or within sixty days after such agreement is filed with the court. e. (5) provisions of (d) have been complied with AND

34

Court MAY hold a hearing at which court tells D agreement is not required by law and explain its effect and determine whether agreement satisfies all requirements above. f. (6) where individual not represented by an attorney during negotiating an agreement, the court approves such agreement as (i) not imposing an undue hardship and (ii) best interest of D ii. Reaffirmation = Contractual waiver of discharge. How do you know first promise to pay off the debt discharged? a. (1) Once D is into BR 1. 524(c). An agreement is enforceable only to any extent . . . only if (1) such agreement was made before the granting of the discharge i. Original loan ---------Petition in BR ------------------------- Discharge ii. Btw petition in BR and Discharge (c)(1). Agreement has to be made before discharge iii. Prior to filing BR, agreement cant be made? a. 524(c) contracts purport to waive discharge even though no BR filed, not going to be enforced. Pre-BR contract waiving discharge (upon BR) will be not enforced in courts. This is what congress intended b. (2) Pre discharge c. (3) Filed with ct. d. (4) disclose to D info (pursuant to (k) about total amount of debt, total of any fees and costs accrued as of the date of disclosure statement (interest rate) like TILA (Truth in Lending Act) e. (5) D has option to rescind within sixty days after agreement is filed with the court f. (6) Ds attorneys affidavit substantively fair. To ensure no undue hardship on D 1. legal duty to render judgment on substantive fairness on clients g. (7) informed consent by D iii. Congresss intention behind these requirements: Protect D from pressure of making agreement educational for D iv. Three incentives creditors can use to attract a D into a reaffirmation a. FIRST. Secured Debt. Agreement not to repossess coll that D wants to keep (car or home) that is exempt from other creditors but vulnerable to holder of a valid SI or mortgage 1. 506(d). liens are not discharged 2. 524(a). Discharge injunction forbids only an attempt to collect a debt as a personal liability of the discharged D. Collection by seizure of coll is not forbidden. i. Secured debt remains attached to its coll and can be enforced against coll after BR, but D cannot be sued for any deficiency. 3. Redemption. Requires the D to pay the creditor the full loan or the full value of the coll in cash, whichever is less. 722. i. Prior to BR. D needs to pay whole amount of debts, but after BR, D needs to pay lesser of value of coll or debts amount a. Ex. IF D wants to keep vehicle and only worth 1800 and debt of 2000. D need to pay 1800. prior to BR, then D wants to pay off, then need to pay 2000. ii. 722 D may redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under 522 or has been abandoned under 554 by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption No undue hardship Requirement a. 13.3. D owes 18k on the motorcycle but worth 15k. overwhelmed with unsecured debt and filed BR. One asset, very small home with 4.5 % mortgage. Equity in home 16k after costs of sale, all exempt. Monthly rent on apt will double. D proposes to sell home and use money to redeem his hog. Will you sign an undue hardship affidavit for D? 1. There is no undue hardship redemption as long as D wants to redeem, D can do it, lawyer cant stop with respect to redemption. 2. D taking property (equity) he got in his house transferring the form to motorcycle

1.

35

D.

BR court more protective for people who have to pay for future debt (previous case, with reaffi, there is undue hardship issue) but seems to see transferring form of debts to another form okay. iii. Source of redemption payment: By selling of exempt property, from post petition income (after BR) or loans from relative or friends iv. Oversecured debts. Trustee losing potential property that would have been distributed to general unsecured creditors. a. Ex. 5k car. 2200 debt. D can redeem this car by paying 2200 under 722. then Trustee potentially losing 2800 value that could have gone to other general unsecured creditors b. Not realistic fact pattern. If a property worth, trustee wouldnt abandon. If exempt, then with state exemption, most of 2800 likely to be exempted (thus not belonging to the estate) v. In re PENDLEBURY. Court says (p.260) redemption can be achieved through installment payments (reaffirmation provisions of 524(c) and Ds filing of a petition under Ch 13 4. Reaffirmation. Requires a cooperative creditor willing to agree to let D keep the coll through court. 524(c) i. Voluntary. Creditor may reject any tendered reaffirmation offers. ii. D sign a legally binding agreement to waive the discharge on a given debt, subjecting to losing coll and being sued for a deficiency claim if debt not paid would have been discharged (personal liability), but with reaff, waived that discharge right. 5. Ride through. Requires only maintenance of the contractual payments, (permitted only in some federal circuits) i. keeping coll by continuing to make the pre BR payments, without redeeming or reaffirming. ii. Effect is to permit the D to keep and use the car or the washing machine after a Ch 7 BR, while discharging any personal liability on D iii. 362(h); 521(a)(2), (6) b. Second. Unsecured debt. An offer of future credit c. Third. Unsecured debt. The threat of an objection to discharge. Reaffirmation of Unsecured debt. i. Reasons. Gratitude (e.g., to a doctor) and affection (e.g., to a friend). As for a merchant or lender, Ds desire to protect a co-D, agreeing to pay off the loan that Mom had cosigned a. In re PAGLIA, Debtor. (BR. W.D.Pa. 2003) P.263 1. Facts: Ds PN in exchange of consideration that creditor forgo its lawful right to take action against the annuity pledged by Ds mother not reaffirmation (why?) 2. Issue: whether creditor had violated the discharge injunction (524(a)(2) and the automatic stay (362(a)) when it coerced him to execute the second PN 3. where a creditor has a SI in property, a discharge extinguishes only personal liability of D in BR. The right of a secured creditor to proceed in rem against the coll survives Ds discharge. 4. Court finds, D, acting out of filial loyalty took the initiative and volunteered to execute second note so creditor wouldnt take legal action against Ds moms annuity 5. Creditor didnt attempt to collect (524(a)(2)) and 362(a)(6). no violation of automatic stay ii. Why D would reaffirm their debts? Because otherwise, creditor would possess collateral. (?) a. Reaffirmation occurs during BR (before discharge), then how creditor can have legal right to repossess collateral? 1. Trustee holds it as the property becomes estate of trustee. But, Trustee might abandon the property under 554 (likely inconsequential value such as TV and Value less than debts, not worth). then Lift stay. Creditor is welcome to repossess it. 2. Many giant retailers like Sears go through unenforceable reaffirmation agreement (not complying with 524(c)) i. D doesnt know whether this agreement unenforceable. D might not have attorney ii. Many Ds lawyer fail to do job (fail to disclose)

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iii. Even well informed D still may want to pay property that worth less than debts the
retailer gives line of credit a. Paying more than what coll worth b. Ex. Worth 500 and 800 debts. Most people wouldnt pay 800 to keep 500 worth property. BUT, transaction cost. Your used to that property. Difficulty to find financing. iv. Want to have future financing from sears. Line of credit iii. In re LATANOWICH. (BR.D.Mass. 1997) a. Sears was owed both secured and unsecured debts and used both the threat of repossession and the incentive of new credit. b. D. assets only 375, unsecured debts 12,805.20 (consumer credit), 1073 owed to Sears c. Sears initiated contact with D by mailing him a letter, with reaffirmation agreement. 1. account balance. 1161.34. and SI in Battery and TV 2. if reaffirm, then a line of credit 1,161 will be granted d. D signed reaffirmation agreement, but Sears didnt file it in Ds BR case. (to avoid 524(c) constraints) e. upon entry of discharge order, the Ds prepetition obligation to Sears was discharged, and Sears was thereby enjoined from engaging in any act to collect it as a personal liability of D. f. D was entitled to com for post petition payment and time (effort and travel and other) incurred securing benefit of discharge. And attorneys fees. And punitive damages. iv. Creditors typical step for reaffirmation a. Step 1) CONTACT Ds lawyers b. 2) saying interested in reaffirmation 1. Is this violating automatic stay? 362(a)(6) stay any act to collect, assess, or recover a claim i. if accused by D for, then liable? a. okay to threaten co signer, but not D ? b. does creditor has to be passive? OR does D has to initiate the discussion? ii. But in this case Creditor pressuring not D, but Ds lawyer iii. Person debt liability v. property lien secured creditor has both right but non secured creditor has personal liability (reaff is waiving discharge and for Unsecured, injunction against creditor bringing personal liability waived) a. 362(a)(6) applies only personal liability 2. not clear whether D (not creditor) has to initiate discussion for the reaffirmation to be enforceable. Maybe over the phone happens a lot, nobody accuses it Chapter 13 Bankruptcy A. Elements of an Acceptable Plan 1. Secured creditor I. Overview of Chapter 13. Adjustment of debt 7 13 Sources of payment: Pre poet non exempt property Post pet disposable income Redemption, reaff, retention Modify or reinstatement/cure Exceptions to discharge Fewer exceptions to discharge i. Reaff v. modify 7 13 a. Non exempt property D loses property (but can keep with reaff) D keeps b. Property subject to lien B. Ch 7. assets become property of BR estate. Keeps assets within exemption limits and turns excess over to the trustee for sale and distribution to the creditors. In return, D is relieved of any future obligations to pay dischargeable, pre BR debts and all Ds subsequent earnings are free form reach of pre petition creditors C. Ch 13. Post petition earnings source to pay creditors. D keeps all assets, agreeing to turn over a portion of all future income for a minimum of three years. Trustee takes a percentage of Ds income for each pay period, deducts a percentage to cover administrative expenses, and then distributes the remainder to creditors according to a court approved plan. When D has completed agreed payout, Ds remaining obligations are discharged.

37

II.

Two big legal consequences same as ch 7 a. 541. Technically Property of D becomes Property of estate, and remains true through 13 b. 362 automatic Stay ii. Most common reason to choose 13 is Ds desire to keep property that is subject to a SI iii. How to initiate Ch 13 case a. Commenced by filing of a Ch 13 petition. 301 b. Commencement of the case creates an estate which includes, among other things, all legal or equitable interests of D in property as of commencement of the case 541, and property and earnings acquired after commencement of the case but before the case is closed, dismissed or converted, 1306(a) c. Confirmation of a plan vests all of property of the estate in D. 1327(b) d. From time of filing of Ch 13 petition, automatic stay provisions of 362 restrict actions of creditors against property of estate or of the D. 362 e. Process of plan to be confirmed by BR court. 1. creditors meeting and confirmation hearing has to approve the plan 2. 1321. filing of plan 3. 1322. contents of plan iv. D choosing Ch 13 must prepare a plan detailing amounts to be repaid and terms of repayment in accord with certain statutory requirements. v. D retains control of property of the estate. 1303 and 1306 a. 1303. D shall have, exclusive of trustee, the rights and powers of a trustee. b. 1306(b). D shall remain in possession of all property of the estate. vi. Ch 13 trustee charged with objecting to improper creditor claims. Trustee scrutinizes everyone connected with the case, to be sure they are following the rules set down in BR code. Main duties are confirmation of plan and distributions of payment. 1302(b)(1), (4) a. 1302(b). The trustee shall 1. (2) appear and be heard at any hearing that concerns (A) value of property subject to a lien, (B) confirmation of a plan, OR (C) modification of the plan after confirmation. 2. (4) advise, other than legal matters, and assist D in performance under the plan 3. (5) ensure D commences making timely payments under 1326 i. Ensure payments are commenced within 30 days after plan is filed and properly distributed to creditors. 1302(b)(5), 1326 b. Ordinarily plan provides Ds will make a lump sum monthly payment to the trustee and trustee will then distribute the funds to creditors. vii. Ch 7 v. Ch 13 a. Cf. Ch 7 gather up property and sell it, asking questions to D 1. like balance sheet. Ds assets and liabilities at that time. (liquidation and pay off) quick snap shot. b. Ch 13 revolves around the plan, D proposes a plan when D files ch 13 and the plan includes that D expects Income and expense for next 3 to 5 years, D going to have more income than expenses to pay off creditors so that disposable income pay creditors. 1. more like moving picture than snapshot 2. D has to have the court confirm the Ds proposed plan Perform discharge Confirm convert to ch 7 Not perform Dismiss (Non BR law) Hardship discharge Convert to ch 7 Not confirm Non BR law 1. majority 13 case fail to make full payment 2. D may amend the plan to get courts confirmation Payments to Secured Creditors

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A. 1325(a)(5). Unless a secured claimant accepts different treatment, the plan must either provide for coll to be
surrendered to the claimant, or it must preserve the claimants lien and provide for full payment of present value of secured claim. i. (B)(ii). as of the effective date of the plan Include interest B. Creditor can move to have stay lifted. when a secured creditor wants to repossess and sell collateral. SC concerned about coll losing value loss of coll (fire, theft or neglect) and a decline in its value (depreciation) SC can move to have automatic stay (362(a)) lifted under 362(d) i. D retains coll and pay over a long time, often on terms different from original contract. ii. 362(d). Adequate protection for secured party. a. (1) for cause, including the lack of adequate protection of an interest in property of such party in interest 1. Interest in property protected if plan is effectively consummated. Reasonable likelihood of having plan confirmed and consummated. Radden 2. if there is equity, court unlikely lift the stay. b. (2) with respect to a stay of an act against property under (a), if 1. (A) the D doesnt have an equity in such property; AND 2. (B) such property is not necessary to an effective reorganization 3. Only available to undersecured creditor iii. 362(g)(1) burden on creditor on issue of equity and (2) burden on D whether necessary iv. 361. Adequate protection. Such adequate protection may be provided by a. (1) requiring trustee to pay to extent of decrease in value b. (2) provide additional or replacement lien to the extent c. (3) grant other relief v. Adequate payment to SP C. In re RADDEN (BR. E.D. Va. 1983) i. undersecured creditor: value of coll less than amount of debts. Over a long period of time, creditors would be undersecured. Creditor greatly concerned about the value decreased (and doubt whether D would consummate its plan to pay off) ii. Creditor motion to Lift stay. SC tends less optimistic about Ds potential to pay off iii. 362(d). creditor undersecured, D lacks equity. And automobile pretty much necessary for Ds effective reorganization. Need means to get to the job. a. Unsecured creditor wants this D to keep the coll so that with that job, D can continue to pay unsecured creditors iv. Maybe coll depreciate faster than payment schedule, you might have SC to have a good argument for AP in addition to scheduled payment, but court not go that far in general v. GMAC repossessed the car before BR filing, but automatic stay, moved to lift the stay, arguing 362(d)(1) and (2). a. 362(d)(2). No equity, but automobile necessary for Ds effective reorganization (driving to work, medical, other services) b. 362(d)(1). Interest in property protected if plan is effectively consummated. Reasonable likelihood of having plan confirmed and consummated. vi. CH 13 plan proposes to pay, through standing Ch 13 trustee, GMAC in full to extent of value of the coll plus interest over 36 months. vii. 542(a). turnover. Under 13 Ch, creditor possesses Ds property, then has to turn it over to D a. 542(a). an entity in possession custody, or control during the case, of property that trustee may use, sell, or lease under 363, or that D may exempt under 522, shall deliver to the trustee of such property unless such property is of inconsequential value or benefit to the estate 1. here D may use it in ordinary course of business b. 1303. D has rights and powers that a trustee would have under Ch 7. D. 14.1. D file 13 BR. Only asset of value (non exempt) is 18 month old Apple com worth 5k. Creditor wants it back so that it can resell before Apple announces a new cheaper model with enhanced features. i. 5k computer and 4600 debt to security creditor. Creditor Over secured

39

ii.

E.

Creditor probably cannot repossess because of stay. iii. 362(d). the court can lift the stay iv. 362(d)(2). Here oversecured, D does have equity on the property. Some value of the property not used by the lien. a. rationale the way (d)(2) is written. 400 belongs to unsecured creditors, 400 not belong to D but estate, Ds going to keep the equity. Ch 13 makes D pay unsecured creditors for letting her keep the equity. Some extent D protected here. b. if coll worth less than debt, (d)(2) only available for undersecured creditors v. 362(d)(1). Lack of adequate protection. a. 361. adequate protection. Tells how it can be provided. b. The court unlikely lift the stay 1. D has equity and with equity cushion. If value of property depreciate, equity cushion. 2. big decrease in value here. Ch 13 plan requires D to pay client full debts. Because most ch 13 fails to make payment, creditor worries about decrease in value with repossession of the collateral. 3. if creditor remains oversecured during the course, the court could tell creditor dont worry. Long period of time coll worth less than debts worries going from oversecured to undersecured. c. if court believes creditor, then the court might order D to make up additional payment, to keep creditor from becoming undersecured creditor adequate protection payments. d. also another option is D to provide insurance on coll Modifying the Secured Creditors contract (1322 and 1325) Modify = cram down i. 1322(b)(2). The plan may modify the rights of holders of secured claims, other than a claim secured only by a SI in real property that is Ds principal residence. ii. 1325 has requirement with respect to secured plan. a. Two requirements. SC must be paid its allowed secured claim in full and interest on that claim b. the court shall confirm a plan if (5) with respect to each allowed secured claim provided for by the plan. 1. (A) the secured creditor accepts the plan 2. (C). D surrenders the property securing the claim to the creditor 3. (B). D invokes the cram down power = series of monthly payments equal to allowed secured claim + prime rate plus 1 to 3 % i. (i) D is permitted to keep the property over the objection of the creditor; creditor retains the lien securing the claim ii. (ii) D is required to provide creditor with payments, over the life of the plan that will total the present value of the allowed secured claim; a. Creditor would get principal. 502 1. 502(a). a claim or interest, proof of which is filed under 501, is deemed allowed, unless a party in interest objects as for principal, wouldnt object b. as for total debts other than principal, such as interests, penalties, attorneys fees. 1. 506(a)(1) gives secured claim (to the extent of value of coll) and unsecured claim c. as of the effective date of the plan present value of series of payment. 1. present value of allowed secured claim. Allowed secured claim + prime rate plus 1 to 3% (risk adjustments) Till (?) 2. allowed secured claim 502(a) and 506 3. Does principle include interests, penalties, attorneys fees? 506 d. Ch 7. 7 petition and discharge. 1. Secured creditor (oversecured) get interests (506(b)) after 7 fling and before discharge 2. All creditors receive pre petition interest 502. e. Ch 13, petition followed by confirmation of plan and 3 or 5 years later competition of the plan and discharge 1. all creditors can pre petition interest if non BR law allows it (502)

40

2.

3.

4. 5.

only over secured creditor get post petition interest (506(b)) accrued before confirmation of the plan oversecured and undersecured creditors after confirmation of plan get interest until discharge (during the plan period, 3 or 5 years). interest only on secured claims here 41000 secured claim and 11280 is unsecured claims. So creditor would get interest on 41000 secured claim series of payments equal to 41000 + prime rate (plus 1 3%) = creditor would be compensated for present value of money 14 and 21 would have been imposed prepetition BR. If prime rate is 3 or 4 % then would be greatly lowered

F.

iii. (iii) if a. (I) property to be distributed is in form of periodic payments, such payments shall be in equal monthly amounts AND b. (II) payments shall not be less than an amount sufficient to provide to the c. Exemption from cramdown. Instead of being stripped to the value of the coll, they must be paid in full plus interest 1. Last sentence of 1325(a). Two types of SI exempt from cramdown. 506 shall not apply to a claim if i. SI granted within the year before BR is exempt (ex. vehicle bought within one year for business use) ii. PMSI in a motor vehicle granted within two and a half years (910 days) prior to BR petition acquired for personal use 2. Congress wanted to Prevent people from filing BR to get the loan crammed down (undersecured loan made recently) personal car (910 days) d. Difference btw reaff and ch 13 payments 1. Ch 7 creditors choice (consent on reaff) but Ch 13. court shall confirm Ds plan and Creditor stuck with often crammed down to value of coll (not full amount of debt) 2. With ch 7. creditor might have had full payments because otherwise no consent to reaff. But D may threat I will convert to ch 13, so lets have cramdown like payments iii. Associates Commercial Corp. v. Rash US (1997) a. Issue: value of collateral. 506(a) directs application of replacement value standard b. Facts. In 1989, D purchased 73,700 tractor truck for use in business. In 1992, Filed Ch 13 BR. Debts 41171. Then issue at hand is what is value of the collateral c. Petitioner proper valuation was net amount that creditor would realize upon foreclosure and sale of coll (foreclosure value standard) VS Creditor argued proper valuation was price D would have to pay to purchase a like vehicle, 41000 (replacement value) d. Holding: value of property is the price a willing buyer in Ds trade, business, or situation would pay to obtain like property from a willing seller. e. Codification of Rash 506(a)(2) 1. If D is an individual, such value of secured property to be determined based on the replacement value of such property as of the date of the filing of petition. 2. Property acquired for personal, family, or household purposes, replacement value is 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. Computing the Amount the SC must be paid (SC failed to lift the stay) i. Two factual determinations to establish correct amount for D to pay under plan a. Amount of allowed secured claim under 506(a) AND b. Present value of the allowed secured claim under 1325(a)(5)(B)(ii) 1. present value = value as of the effective date of the Plan 2. a dollar paid a year from now is worth less than a dollar paid now 3. PVa = {(1-1/(1+i)^)/i} x (a) i. Where a = a dollar amount of installment payment ii. i = current annual interest rate

41

G.

iii. ^ = number of annual payments Till v. SCS Credit Corporation US (2004) a. As for present value of allowed secured claims, Secured creditor would get principal + prime interest rate + 1 to 3% risk adjustments rate 1. Not Creditors subprime loans (21% rate it would obtain if it could foreclose on vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan made to D). b. Creditor cannot use money right away, and inflation may cause value of dollar to decline before D pays and risk of nonpayment 1. interest rate to be established to account for present dollar value 2. post BR obligor is court supervised estate, risk of default is reduced c. Court take formula approach. straightforward, familiar, and objective inquiry and minimizes need for potentially costly additional evidentiary proceedings. iii. last sentence of 1325(a) a. for purposes of (5), 506 shall not apply to a claim if creditor has PMSI, the debt incurred within 910 day preceding date of filing of the petition and coll consisting of a motor vehicle acquired for the personal use of D, OR if coll for that debt consists of any other thing of value, if debt was incurred during the 1 year period preceding that filing i. here this debt incurred before one year before filing, then no need to worry about this Payments on the home mortgage i. Home mortgage exempt from the cramdown rule. 1322(b)(2). Supreme Court in Nobelman v. American Saving Bank a. 1322(b)(2). The plan may modify (cramdown) rights of holders of secured claims other than secured claim in Ds real property of principal residence. b. Policy of no cramdown rule regarding home mortgage. 1. If cramdown rule, then might hurt future homeowners. (Higher interest rates, harder to purchase homes, etc.) i. Creditors might also have to charge future higher interest rates in the different states. ii. This changes the interest rates, more desirable to have lower interest rates for home loans and not for vehicles. 2. Also, some states allow for deficiency judgments while others do not. This would basically make a uniform law not allowing for deficiency judgments. 3. This might hurt creditors. i. It might not hurt creditors because they can simply hand over their keys. ii. The creditors would only receive this amount regardless. ii. 1322(b)(5). Only relief in Ch 13 regarding a home mortgage. To cure and maintain to catch up on the past due arrearage while making current payments on the mortgage as they come due. (ex. D pays six months of arrears to cure the default and continue to make the monthly payments) a. 1322(b)(3). the plan may provide for the curing or waiving of any default b. 1322(b)(5). notwithstanding (2), the plan may provide for the curing of any default within a reasonable time (time after the petition was filed) 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 1. Deals with long term debt. (payment of debt outlasts the plan period during BR) allows D to adhere to contractual payment schedule, rather than accelerating it to bring it within the term of the plan. D maintains regular installment payments while the plan is pending (can pay through trustee or to claimant) and continues to make contract payments after conclusion of the plan until debt satisfied 2. 1328(a)(1) excludes debt from Ch 13 discharge. c. D first cure their default under (b)(3) and then maintain payments under (b)(5) iii. 1322(c)(1). Notwithstanding (b)(2) and applicable NonBR law (1) a default with respect to a lien on Ds principal residence may be cured under (b)(3) or (5) until such residence is sold at a foreclosure sale. Can cure the default as long as no foreclosure sale has occurred. iv. 1322(c)(2). If final payment under the mortgage falls due within the period of the plan (the original ii.

42

contractual due date for the final payment occurs within the plan period), payment schedule can be amended by the plan to stretch out the mortgage payments over the entire length of the plan. v. Adequate protection might not be at issue D has some equity (finance less than 100% or real estate prices risen) vi. Litigation likely to involve two problems. 1) saving home from foreclosure sale and 2) proposing a plan to comply with the strict limitations imposed by ch 13 to protect the rights of mortgage lenders. vii. In re TADDEO. (2d Cir. 1982) a. Held D could cure the default and reinstate their mortgage. 1. D defaulted on mortgage and creditor accelerated the mortgage, declaring its balance due immediately, and initiating foreclosure proceedings. 2. D filed a plan proposing to pay off arrears on mortgage in installments of 100 per month, proposed to restore the mortgage and its original payment schedule. Creditor rejected the plan b. 1322(b)(5) intended to permit the cure and de-acceleration of secured long term residential debt accelerated prior to filing of a Ch 13 petition c. power to cure any default granted in 1322(b)(3) and (b)(5) not limited by ban against modifying home mortgages in 1322(b)(2) because curing defaults or curing defaults and maintaining payments not modifications of claims d. D first cure their default under (b)(3) and then maintain payments under (b)(5) III. Payments to Unsecured Creditors: unsecured creditors paid pro rata from Ds disposable income. A. In general i. With Ch 7, D keeps collateral and non exempt property, but Ch 13 enables D to keep all or most property and use part of future income to pay creditors at least as much as they would have received from the liquidation of prepetition assets ii. Ch 13. First secured claims get paid, then leftovers to D and unsecured creditors for non exempt property (would have turned them over to trustee for liquidation and distribution had been under Ch 7) for pro rata. iii. Confirmation requirements under 1325(a). a. 1325(a)(1). The plan must comply with Ch 13 and all other applicable provisions of the Code b. 1325(a)(2). All fees required to be paid before confirmation must have been paid c. 1325(a)(3) and (7). D must both have filed petition and proposed the plan in good faith, and the plan must not violate the law d. 1325(a)(5). Unless a secured claimant accepts different treatment, the plan must either provide for coll to be surrendered to the claimant, or it must preserve the claimants lien and provide for full payment of present value of secured claim. e. 1325(a)(6). The plan must be feasible. Based on financial data furnished in the schedules, it must be apparent that D will be able to make all payments under the plan and to comply with it B. D must satisfy three requirements for a plan to be confirmed i. FIRST: Best interests test. Requires each creditor, secured or unsecured, receive at least as much as that creditor would have received if D had gone into Ch 7. 1325(a)(4), (a)(5)(B) a. 1325(a)(4). Distribution to be paid to each unsecured claimant under plan must be at least equal to what it would have received had the estate been liquidated under Ch 7. 1. INTEREST: Claimant receives the present value of its hypothetical Ch 7 distribution i. 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 . . . b. To determine present value, hypothetical Ch 7 distribution must be calculated based on value of estate property at petition date and to that amount a market interest rate for period of payments under plan ii. SECOND: Disposal Income Test. 1325(b). D must devote all disposable income to plan payments during the life of the plan. a. Paying secured claim in full and leftovers (after your expenses) to unsecured. 1. D would get reasonably necessary expenses. 2. leftovers go to unsecured creditors pro rata basis i. USC. Priority USC and general USC a. 1322(a)(2) The plan shall provide for full payment in deferred cash payments (no interest) of all claims entitled to priority under 507.

43

b.

c.

d.

Cf. as of the effective date of the plan secured claims 1325(a)(5)(B)(ii) and 1325(b) (1) unsecured claims interests given to secured and unsecured creditors during period of plan 1325(b)(2). Disposable income = income less reasonably necessary expenses - courts deciding case by case by 1. 1325(b)(1)(B) projected disposable income i. the court may not approve the plan unless, as of the effective date of the plan, the plan provides Ds all projected disposable income to be received in applicable commitment period ii. In re KAGENVEAMA (9th Cir. 2008) a. projected means still formula, mathematically doing number and anticipating the future based on past incomes as opposed to based on realistic circumstances. b. Court is assuming the future is like the past in determining disposable income c. If the court consider Ds realistic situation how much she will be earning, then administrative cost to project it by case and debtors will manipulate the process 2. Disposable income. Income received by D that is not reasonably necessary for support of D or his dependents. 1325(b)(2)(A) i. current monthly income received by the D (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable NonBR law) less amounts reasonably necessary to be expended a. (A)(i) for maintenance or support of D or dependent or for a domestic support obligation and (ii) for charitable contribution not exceeding 15 % of gross income of D for year in which it is made 1. Ex. D 15.5. income 45k. 425 a month disposable income. D want starting make charitable contributions. i. D in past hadnt made significant contributions and now has plan to make big contributions. ii. Statute. Doesnt mention projected expenses (no projected) for income looks at past income and project future income. So would D be able to start making that contribution if pass best interest test and less than 15% of 45k (okay) this charitable contribution faced no opposition during 2005 amendment. iii. 1325(a)(3) creditor would argue not good faith b. (B). if engaged in business, for payment of expenditures necessary for continuation, preservation and operation of such business ii. Current monthly income. Defined in 101(10A) average income that D receives from all sources for six month period preceding the petition. Threshold test: A median income test. 1. Married D who files alone must include spousal income in determining whether Ds income is above the state median. 1325(b)(4)(A)(ii) i. In re Carter. Policy Including nonD spouses income necessary because a portion of that spouses income likely to be applied to basic needs of D, potentially increasing share of Ds own income that is not reasonably necessary for support. Below median Ds. survives the threshold test and governed by slightly modified version of reasonably necessary test for disposable income adopted in 1984 i. Ds plan must satisfy 1325(b)(2). ii. In re Carter (BR. E.D. Pa. 1996). Income a. upon objection by an unsecured creditor or trustee, Ch 13 plan that doesnt repay allowed claims of unsecured creditors in full may only be confirmed if it provides for D to commit all of his disposable income for the applicable commitment period (36 month for below median1325(b)(4)(A)(i)). 1325(b)(1)(B) iii. reasonably necessary

b.

44

e.

In re KAGENVEAMA (9th Cir. 2008). determining what was reasonably necessary for the maintenance or support of the D was dependent on each Ds individual facts and circumstances b. In the Matter of Wyant (BR. D.Neb. 1998): Ds proposed expenditures on veterinary expenses and livestock feed unreasonable. c. Univest-Coppel Village, Ltd. v. Nelson (E.D. Tex. 1996). Ds paying 395 a month to keep 15 old daughter in private school. District not allow this expense, sending her to public school. iv. would have been eligible for Ch 7 liquidation Above median Ds. For D excess of applicable median income. Amount that D pays is limited strictly to the means test surplus 1. 1325(b)(3). Amount of reasonably necessary expenses determined by 707(b)(2)(A) and (B) (means test) i. Must determine if these Ds have a surplus of income calculated according to presumptive abuse test of 707(b)(2)(A),(B) ii. Expenses must be calculated under 707(b)(2) 2. Must propose paying for five years. i. 1325(b)(1)(B). plan pays Ds projected disposable income in applicable commitment period to unsecured creditors. ii. 1325(b)(4) (A)(ii). Applicable commitment period for Above median debts is 5 years 3. In re Kagenvenama (2008, 9th Circuit) i. Average monthly gross income 6168.21 for six months prior to BR petition. But disposable income -4.04 ii. Projected disposable income was a negative, then not subject to applicable commitment period. a. D has no projected disposable income, then no required to propose a plan with five years. iii. Ch 13 D with above median income and no disposable income under 707(b)(2) standards can file for Ch 13 and pay nothing. FORMULA for Determining disposable income

a.

STEP 1 Calculate Ds current monthly income as defined in 101(10A): I. Unless courts can find some flexibility of language of 101(10A), this is calculated by taking Ds actual earnings from all sources for the six months before BR, divided by six to get the average monthly income STEP 2 Ascertain the median family income for a household of Ds size in the state of Ds residence: annual income figure obtained from the Census Bureau report STEP 3 IF Ds current income less than median family income (a) calculate Ds disposable monthly income A. Deduct from his current monthly income (excluding child support payments received) the actual expenses reasonably necessary to support D and any dependents, as well as postpetition expenses for domestic support, charitable contributions and running a business (b) multiply Ds monthly disposable income by 36. IF Ds current annual income is more than median family income (a) Calculate Ds disposable monthly income B. Deduct from his current monthly income (excluding child support payments received) only

45

those expense allowed to D under 707(b)(2)(A) and (B) as well as postpetition expenses for domestic support, charitable contributions and running a business (b) multiply Ds monthly disposable income by 60

iii. THREE: Good Faith TEST: 1325(a)(3). A plan must be proposed in good faith and not by any means
forbidden in law a. Creditor Divine Cuisine, D owed 15600 for a series of business receptions D gave for bosses and coworkers. 1. 1325(a)(3). Can say the court dont confirm the plan because of bad faith. D Trying to protect secured claims, keep big three cars and home 2. Bad faith to file this plan? D doing Ch 13 to keep home and cars (secured debts) i. Whats designed to catch with good faith? a. people who dont disclose truthfully b. took unsecured debts, non exempt assets, apply those to home Family support, taxes and other priority claims in Ch 13 i. Priority claims. D required to pay nominal amount of claim, without interest. a. 1322(a)(2). All priority claimants under 507 entitled to payment in full 1. full payment, in deferred cash payments not include interest (not paid in present value dollars) 2. D with not enough cash to pay filing fee may pay it as a priority repayment in Ch 13 3. some D pay attorneys in Ch 13. some courts hold they cannot be paid in Ch 13 ii. Taxes. Interest payments on tax debts stop at time of filing a. Two advantages 1. paying taxes over time, with automatic stay holding off the IRS 2. denial of post petition interest on unsecured claims will lock tax claim at its value as of the date of BR filing. 502(b)(2) b. if D gets into BR before IRS files a lien, tax claims will be unsecured. If tax claim exceeds value of lien or if lien secures some taxes but not others, there will be an unsecured tax claim as well. iii. Consider 13 plan of D with substantial tax debts or who has recently divorced a. 1322(b)(1). The plan may designate a class or classes of unsecured claims but may not discriminate unfairly against any class so designated 1. Ex. D has two USC. One issuer of Visa card and other is student loan department i. If the law says you can discriminate unfairly a. Better to pay down student loan. Paying all disposable income to student loan and after the plan is confirmed, visa debts discharged b. USC paid pro rata. 1325(a)(4). Present value calculation. ii. As the date of BR filing, petition. VISA 20k and Student Debt 40k. 10% plan. Will pay 2k and 4k to each and end of the plan. Creditors will get Series payment of present value of 2k and 4k a. Both getting same interest rate (pre BR interest not matter) iii. student loan. 523(a)(8). excepted from discharge a. Ch 13 BR. 1328(a)(2). Student loan Excepted from discharge from CH 13 as well b. give all 6k to student loan and zero to visa bill. At the end of plan period, discharged after the plan is completed and student loan still 34000 liable. Because not discharged. BUT you cant do that 1322(b)(1) no discrimination iv. Ex. tax (or alimony) and visa. a. Tax you have to pay in full. Unlike student debts, priority debts. 507(a)(8) b. 1322(a)(2). Plan shall provide for full payment for priority debts (priority debts no interest) c. if D can discriminate you as a D, shall pay in full tax debts. v. phrase that D has to pay them (referring visa and priority debts) in full 1322(a)(2). Phrasing that D gets to pay them in full D wants to discriminate in favor of tax against Visa. (?)

C.

46

iv. Modification and dismissal of Ch 13 plans

D, trustee, or a creditor may move to have the plan modified or dismissed. 1329(a) 1. modification may either increase or reduce payments to a particular class, alter the time period for such payments, or change the amount of the distribution to a creditor to take account of payments outside of the plan 2. the plan as modified must satisfy same standards and requirements under 1322 and 1325(a) (full payment of priority claims, good faith, best interests test), but not 1325(b) (disposable income test) b. D must file annual financial updates if judge or any party in interest requests them. 1. updates must describe Ds income and expenditures for latest tax year under penalties of perjury. 521(f)(4). D. Threshold Eligibility for Ch 13 who may become a D i. First Requirement: debts <limit $ (USC 336,700, SC 1,010,650) 109(e) a. 109(e): only an individual with regular income that owes, on the date of filing of petition, noncontingent, liquidated, unsecured debts or less than 336,900 and noncontingent, liquidated, secured debts of less than 1,010,650, . . . may be a debtor under chapter 13 of this title 1. Policy argument: Proposal to eliminate 109(e) i. Regular income restraint? Purpose of Ch 13 is for D to make payment for 3 or 5 years. If no regular income, wouldnt be able to pay a. Could have judges decide whether income reliable as case by case decision. But we have statutory rule requiring D to have regular income ii. Debts < limit $ a. if no limits on amount of debts, D cant really pay b. But if D doesnt have to pay all debts for Ch 13. full dollar payment for secured debts, full nominal dollar for priority, general unsecured creditors, (not guaranteed to get paid full) c. Then why have limitation of debts amount? 1. D who has high debts, cant do Ch 13, likely to choose CH 11. (family farmer CH 12) ii. Second Requirement: D with regular income. 101(30), a. 101(30). individual with regular income means individual whose income is sufficiently stable and regular to engage such individual to make payments under a plan under Ch 13. b. In re Murphy (BR. M.D. Tenn. 1998): Congress intended to expand and broadly define individual with regular income to include funding from diverse and nontraditional sources. Incomes with Promises and performances from unmarried boyfriend is regular income c. In re Duval, (BR D Mont 1998). Allowance from live in boyfriend didnt have regular income d. Student loan income? Qualifies stable and regular income? 1. D would argue money coming from federal govt. thus stable and coming regularly 2. 526(a)(4). Debt relief agencies. Ds lawyer shall not advise client to incur more debts in contemplation in filing the petition. i. Cant tell Soon to be BR client to get loan and file petition 3. Argument of this stream of income insufficient to pay other debts, then doesnt pass regular income test iii. Third Requirement: noncontingent, liquidated debts a. In re Huelbig (D.R.I. 2003) 1. noncontingent. if all events giving rise to liability occurred prior to filing of BR petition then debt is not contingent. i. Example of contingent claim: a betting creates legally enforceable obligations . Negotiable promissory note (contingent but liquidated, indorser agrees to pay only if maker of the note (son) doesnt); dealer sells with 30 days warranty (contingent, unliquidated) 2. A claim is liquidated if it is subject to ready determination and precision in computation of the amount due a.

47

E.

F.

Doesnt take into account the issue of liability in determining whether or not this claim is liquidated ii. Dollar amount of claim may be calculated by simple arithmetic and claims are liquidated regardless of whether D dispute the liability iii. Courts may consider merits of claim where the claim is farfetched. Chapter 12 for Family Farmers. Like ch 13. but easier for high D farmer can use Ch 12. i. Ch 12. Ch 12 has much higher debt limits than Ch 13 totaling over 3 million. 101(18)(A), 109(f) ii. Permits family farmers to modify a residential mortgage along with all other secured debts. Permits plan to last for more than 5 years to deal with secured debt. Consumer Bankruptcy System i. Purpose of BR: Discharge and fresh start. ii. Cost: a. Amendments require vastly more paperwork, plus debt counseling before BR and post filing financial counseling as a condition of discharge. increase cost of BR by some amount. b. Impose on BR lawyers require additional work and increase their exposure to liability for malpractice or for sanctions, likely increasing their fees iii. Delay. Some Ds will lose their property to creditors before filing. iv. Chapter choice a. Almost 90 percent of those who now file in Ch 13 are below median debtors who could have filed in Ch 7 despite the means test b. For Ds with above median income, not barred from Ch 7 by means test will face IRS budget for five long years in Ch 13. may decide CH 7 looks more attractive. v. Lawyers. Substantial responsibilities and liabilities on consumer BR lawyers. 526 528 vi. In re San Miguel a. The plan had 16 months payment plan, discriminating in favor of one unsecured creditor, Ds lawyer gets favorable treatment. And paying one dollar to other unsecured creditors 1. can you get 16 months confirmed? i. 1325(b)(4)(A). commitment period: it shall be 3 years ii. (B), can be less than 3 or 5 years, only if plan provides for payment in full of all allowed unsecured claims b. 1322(b)(1). The plan may not discriminate unfairly against any class. c. 1322(a)(2). the plan can discriminate in favor of priority claims 1. usually D likes this because usually priority claims not dischargeable. 2. Under Ch 13, lawyers fees are priority debts. i. 507(a)(2). Administrative expenses are priority ii. 503(b)(2). Com and reimbursement awarded under 330(a) iii. 330(a)(4). In Ch 12 or 13, the court may allow reasonable com to the Ds attorney for representing the interest of D 3. Under Ch 7, Ds lawyer chooses to get fee upfront because treated as unsecured debts, if not paid upfront, then will be discharged 4. Ch 13. lawyers fee treated as priority claims, Ds have time to pay for period of time. d. D selecting Ch 13 as opposed to Ch 7 is to spread attorneys fees over sixteen month period. e. In Ch 7, lawyers typically require D to pay attorneys fee in advance f. Real purpose of 16 month, minimum repayment plans here is to avail D of opportunity to defer attorneys fees, since it appears difficult to obtain counsel in Ch 7 without payment of fees in advance. g. Purpose of plan is to provide creditors what they could achieve under Ch 7 now, while paying expenses of administration over a period of time that seems to be an abuse of spirit, purposes of Ch 13. vii. Policy question: Possible reform of Ch 13. a. Get rid of the means test for above median Debtors. No longer treat above median debtors differently. Lets have above median debtors with lots of houses and cars not being able to deduct his secured debts. 1. But, the means test has positive connotation. Mechanical and low discretion given to the court

i.

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2.

b. c. d.

e.

with this reform, make hard for judge to exercise discretion? current means test. Deduct contractual debts for mortgage. Then ought to be lesser amount to the extent of value of coll or what? 4. what if eliminate 707 subsection (iii). Dont count secured debts payment at all (so monthly Income monthly expenses monthly secured debts) too extreme? i. Then D having national and local standard. back to standard. D just deduct the IRS amount ii. Expenses ought to include secured debts but not include unsecured debts? a. Ch 13: Discharge unsecured debts (some of it) and keep property you would have lost under Ch 7 Change 910 days requirement. Have it change to maybe 180 days. Make Creditors approve it 1. arbitrary. But, Congress aims people buying a car before filing BR Charitable contribution: can only deduct up to the level of D had in the past. Creditors want to extend beyond 5 years. D who confirmed the plan making low payment and gets higher paying job interim. Counter argument: How long delay fresh start? 1. But, another argument is D should be held accountable 2. Problem of longer CH 13 plans. With present Ch 13 system, 2/3 hasnt completed the plan, then longer period would lead to more failure Change 109(e) debts limit so that more people can file BR. Relative percentage of Ds income

3.

Chapter 9. Jurisdiction (As TIB, want to bring a case in BR court, faster, easier to get more favorable results) I. The 1978 Code A. Marathon case. The US Supreme Court. i. BR court has no jurisdiction to adjudicate the contract suit. ii. Congress violated separation of powers doctrine and principle of judicial independence by conferring extended jurisdiction on a judge who didnt have security of tenure and salary protection under Article III of the Constitution. held channeling of jurisdiction through the district court by legislative delegation didnt overcome constitutional objection II. The 1984 Amendments A. Didnt give BR judges Article III status. BR judges appointed for fixed terms (14 years) and subject to termination for cause such as incompetence or misconduct. B. BR judges subject to control and supervision of the district court III. This jurisdictional scheme revolves around Article III and Article I judges. A. Types of judges: i. Article III Classic federal judges: Congress does not want to give bankruptcy judges life tenure. ii. Article I Administrative federal judges B. The scheme is an end-run around the problem. Federal district courts get the jurisdiction for the cases. 1334. We then allow these district judges the discretion to refer the cases to Bankruptcy judges. 157(a). i. The 1984 version of the statute dealt with the unconstitutionality of the earlier scheme. IV. Current System A. THREE questions for federal bankruptcy jurisdiction i. (1) Is there federal court jurisdiction? 1334 Federal jurisdiction v. state jurisdiction a. 1334(a). district courts shall have original and exclusive jurisdiction of all cases under title 11 (the case itself is the BR filing) 1. a state court cannot hear these types of claims 2. provides one basis for jurisdiction 3. exclusive means only federal court has jurisdiction. If BR case brought, yes federal J b. 1334(b). district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11 1. provides three different bases for jurisdiction i. civil proceedings arising under BR code itself creates COA, claims being brought ii. arising in cases under title 11. like breach of K, where matters not created by BR law, but arise within BR case

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iii. related to cases under title 11. like breach of K, where matters not created by BR law, but
arise within BR case c. 1334(c)(1). The District court with voluntary discretion can abstain from hearing a particular proceeding arising under title 11 or arising in or related to a case under title d. 1334(c)(2). District Courts Mandatory abstention, upon timely motion of a party in a proceeding based upon a state law claim or COA, related to a case under title 11, but not arising under title 11, arising in a case under title 11, could not have been commenced in a court of United States absent jurisdiction under this section, if an action is commenced and can be timely adjudicated in a state forum of appropriate jurisdiction. State Court would hear pre petition State suits (?) 1. Ex. Estate v. Assault. Pure state claim. Standing alone, no federal claim to get into federal courts. i. 1334. Estate as a plaintiff makes it civil proceeding related to cases under title 11. impact assets of the estate significant way, then enough to be related to cases under Title 11. ii. However, if, prior to filing BR, suits are commenced in a state court, and creditor opposes Dcts jurisdiction, then District court should abstain from hearing it. ii. (2) which federal court has jurisdiction? BR court or district court? a. 157(a). Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the BR judges for the district 1. Dividing within federal courts which federal court will hear this case. Either BR judges or district judges 2. Gives district court discretion to review BR cases to BR judges b. 157(b). divides the types of cases into core proceedings. (b)(1). BR 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, referred to under (a), and may enter appropriate orders and judgments, subject to review (de novo) under 158 1. 28 USC 157(b)(2). Core proceedings include, but are not limited to i. (A) matters concerning the administration of the estate; ii. (B) allowance or disallowance of claims against the estate or exemptions from property of the estate BUT not liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims (non core proceeding) against the estate. iii. (C) counterclaims by the estate against persons filing claims against the estate; iv. (D) orders in respect to obtaining credit; v. (E) orders to turn over property of the estate; vi. (F) proceedings to determine, avoid, or recover preferences; vii. (G) motions to terminate, annul, or modify the automatic stay; viii. (H) proceedings to determine, avoid, or recover preferences; ix. (I) determinations as to the dischargeability of particular debts; x. (J) objections to discharges; xi. (K) determinations of the validity, extent or priority of liens; xii. (L) confirmation of plans; xiii. (M) orders approving the use or lease of property, including the use of cash collateral; xiv. (N) 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; xv. (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity-holder relationship, except personal injury tort or wrongful death claims; and xvi. (P) recognition of foreign proceedings and other matters under chapter 15 of title 11. 2. 157(b)(4). Non core proceedings under 157(b)(2)(B), shall not be subject to mandatory abstention under 1334(c)(2) iii. 157(b)(5). Shall be district court a. personal injury tort claim go to the district court. Ps lawyer wants state court, trustee wants BR court, compromise intermediate court 1.

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157(b)(5). District court shall order that personal injury tort and wrongful death claims shall be tried in District court in which BR case is pending, or in district court in which the claim arose 3. Under the case and core proceedings arising under the code or arising in a case under the Code. i. Core proceedings: Issue of Whether proceedings are inextricably linked to a substantive right or obligation that owes its existence to the Code ii. arising under if the right in issue owes its existence to the Code, the litigation over it is a core proceeding arising under the Code iii. arising in if proceedings concern an essential part of the administration of the estate, then arising in. 4. Non core proceedings. A proceeding that is not a core proceeding but otherwise related to a case under title 11. BR judge may hear it but cannot enter an order. i. BR judge make a finding and submit a recommendation to district court which enter final judgment after considering BR courts recommendation. 157(c)(1) a. A BR judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11 ii. 157(c)(2). A related to proceeding may be referred to a bankruptcy judge to hear and determines orders and judgments with the consent of all the parties. b. District Court control. 1. 157(d). retains ultimate control over all BR cases. It may withdraw any case from BR court. i. 157(d). If a case involves both issues of BR law AND some other federal law regulating interstate commerce (antitrust issue), district court, on timely motion of a party, must withdraw any case or proceeding referred (to BR), on the timely motion of a party a. permissive withdrawal for cause shown b. Mandatory withdrawal when a party timely files a motion, and the resolution requires consideration of both title 11, and other laws of the US regulating organizations or activities affecting interstate commerce c. If the party requests the district judge to hear claims that are not totally bankruptcy related then this must be heard by the district court. Prof: It is a political compromise that the person gets to the district judge if a party asks for it. They can waive it similar to 7A or magistrate judge. 2. Anti trust claim? i. (1) is there federal court jurisdiction? a. Anti trust differs with the state law claim, because it has federal jurisdiction ii. (2) which federal court has jurisdiction? a. Anti trust will probably be referred to the district court under 157(d) 3. Ex. Estate v. ER. Title VII. FIRST: Easy one to bring claims in federal courts i. SECOND: 157(d). District Court shall withdraw case referred (Dct hears it). BR court Not independent court, just adjunct court. If Dct determines BR issues and laws of US regulating organizations or activities affecting interstate commerce. ii. regulating about any statue would have that sort of regulating stuff 4. Estate against bank. Federal statute, federal jurisdiction, 157(d). District court will take it because of affecting interstate commerce 5. Estate v. ER. Contract. Even though state law claim, so connected to other concurrent federal claims, federal court can exercise jurisdiction. And Second question: District court v. BR court c. Note: You can almost structure the analysis backwards. **You can look to section 157 first to determine whether there is federal bankruptcy jurisdiction. 1. We have a core proceeding under 157(b). 2. Because we have a core proceeding then the federal court has jurisdiction under section 1334. iv. (3) What is standard of review? a. If the matter constitutes a core proceeding under section 157(b) then there is a clearly erroneous deferential standard of review. 28 U.S.C. 157(b)(1).

2.

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B.

If the matters does not constitutes a core proceeding then the district courts review the matter under a de novo standard of review. 28 U.S.C. 157(c)(1). 1. A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judges proposed findings and conclusions and after reviewing de novo those matter to which any party has timely and specifically objected. 28 U.S.C. 157(c)(1). 2. This is reviewed de novo by the federal district court. Professors Chart 1334 (fed/st) 157 (BR ct/District ct) Arising in Arising under Core BR Ct (reviewed C.E. by Dct 157(b)(1)) unless w/drawn by DCt under 157(d)

b.

Related to

Non core P.I.

BR ct (reviewed de novo by Dct157(c)(1) unless withdrawn by DCT under 157(d) Dct 157(b)(5)

V.

If we can treat arising in jurisdiction and arising under jurisdiction synonymously with a core proceeding we get consistent treatment. The same consistent treatment applies if we can treat related to jurisdiction as synonymous with a noncore proceeding. ii. First step is proceeding or a case in federal court at all or state court B. There are two different types of appellate processes: i. Traditional appellate process: BR then D CT then CCA then S CT ii. Some circuits have created a Bankruptcy Appellate Panel. a. BR then BAP then CCA then S CT. b. The Tenth Circuit has created a BAP. The person has the choice to go to district court instead of BAP. The Jury trial in BR A. Seventh Amendment. Right to trial by jury in suits at common law i. Suits at common law dont include proceedings in equity. BR relief is equitable. B. US Supreme Court in Granfinanciera. i. Congress may not deprive parties of a jury trial where COA involves a private right in respect of which 7th guarantees a jury trial. ii. Fraudulent transfer law, treated as an action at law. iii. The suit involved private rights and qualifies as a suit at common law for which 7th guarantees a jury trial iv. A creditor can be held to have waived right to a jury trial merely by filing a proof of claim and submitting to the courts equitable power. C. 157(e). If right to a jury trial applies in a proceeding that may be heard under this section by a BR judge, the BR judge may conduct the jury trial if specially designated to exercise such jurisdiction by District court and with EXPRESS CONSENT OF ALL THE PARTIES. D. Ex. Problem. Ds fraudulent conveyance, which has two years SOL. As a TIB, want to file in BR court. i. Fraudulent transfer. UFTA. Unsecured creditor brining this action against D. multiple target for actions and multiple remedies. Bring the property back to the D. ii. It wasnt Ds claim. Unsecured creditor COA. iii. Trustee has two ways to bring fraudulent transfer action in BR a. FIRST: 544(a)(2). gives trustee a right of certain creditor including right to bring a fraudulent transfer. 4 years SOL in a state court. (?). 544(b)(1)? b. SECOND: 548. right given to trustee to bring fraudulent transfer action. SOL is two years. c. Estate v. Ds sister for recovering fraudulent conveyances from Ds sister 1. core proceeding, Trustee can bring this case in federal court (1334(b)(2)(H) and also its core BR

i.

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d.

e.

judge can hear and determine Ds sister wouldnt want to have suits in federal BR court (judge having Clearly Erroneous review with discretion). Would prefer district court or state court. For most favorite court would be state court. BR judge would be least favorable court. 3. Ds sister would argue she has right to a jury trial. 7th Amendment. Actions at law as opposed to equity. BR court thought of court of equity. Concerning money damages. Maybe equitable remedy having the land returned. 4. 157(e). BR judge may conduct jury trial with express consent of all parties and if specially designated to exercise such jurisdiction by the district court. i. Why congress write this? Why not eliminate all restrictions and allow BR judges to have jury trial? ii. If gives BR jury trial with less restrictions, its like making BR judges more like life tenure judges iii. BR court is court of equity. Very rare this jury trial would happen in BR court. 5. US Supreme Court. Ds sister has constitutional right to jury trial. Counted as actions at a law. Still doesnt know jury trial can be held in BR court If you are creditor collecting money. Breach of k. Against D not in BR. Right to jury trial? Yes. Action at a law 1. IF D files BR. Ds filing BR effect on creditors jury trial right? 25k claims. BR judge would determine. Creditor wants jury to be trier of the fact. But BR judge says no. creditor having Constitutional right to jury trial. D filing BR overrides Creditors Con right? i. Creditor may have waived jury trial when filing proof of claims ii. If file suit in district court, then 157(a) district court will refer it to BR court iii. Breach of K, diversity J and 75k the district court. But district court will refer it to BR court, then creditor ended up waiving her con right to jury Ds sister. By filing of proof of claim, creditor waived, but if Ds sister files suit, then you cant argument against her waiving con right.

2.

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