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Professor Elizabeth Warren_ ewarren_law

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									                                     BANKRUPTCY OUTLINE



NOTE: THIS OUTLINE, PREPARED IN THE FALL OF 2005, BUILDS ON A PREVIOUS OUTLINE
CURRENTLY AVAILABLE IN HL CENTRAL AND ADDS NEW COURSE MATERIALS PER THE
2005 AMENDMENTS TO THE BANKRUPTCY COURT AND THE 2005 CASE BOOK
SUPPLEMENT.

1) INTRODUCTION
   a) Debt collection: a system characterized by bargaining and voluntary payment of
      delinquencies rather than by collection through form legal processes
      i) The bargaining is importantly influenced by each party’s ability to exert
           leverage – usually credible threats of action that will harm the other
      ii) Indirect Leverage: creditors would like to find someone else to help them
           encourage the debtor to repay, especially if the cost to the creditor is
           negligible; e.g. in 1998, the IRS decided to tax individuals for “debt
           forgiveness” on outstanding debts reported by banks, savings and loans, and
           credit unions
   b) Credit Information Process: enabling creditors to make the decision to lend
      based on information about the debtor
      i) Fair Credit Reporting Act: giving the debtor access to credit report
           information and prescribing procedures to assure the accuracy of information;
           to the extent that law makes the credit records more accurate and more
           credible, it may increase leverage they give a creditor
   c) Usury laws: if a creditor charged more than a pre-determined rate of interest, the
      loan would be deemed usurious, and the interest (and under some statutes the
      principal itself) would be deemed uncollectible; some laws even provided
      criminal penalties for usury lenders
      i) Marquette National Bank of Minneapolis v. First Omaha Service
           Corporation (1978): Supreme Court rules that under federal banking law the
           state law of the customer’s location was not relevant
   d) Common Law Remedies: civil and criminal protections for targets of nonjudicial
      debt collection
      i) George v. Jordan Marsh Company (1971): If a creditor intentionally
           caused emotional distress in the overly aggressive collection of a debt, the
           creditor could be liable for any resulting injuries
      ii) Public Finance Corporation v. Davis (1976): Liability does not extend to
           mere insults, indignities, threats, annoyances, petty oppressions, or
           trivialities; liability will be found only where the conduct has been so
           outrageous in character and so extreme in degree, as to go beyond all possible
           bounds of decency
      iii) Neb. Rev. Stat. §§20-204: a creditor who publicizes information about a
           debtor might be held responsible, if the debtor can prove the information to be
           false and offensive and that the collector was reckless in publicizing it
      iv) Schoneweis v. Dando (1989) (where collector reveals financial difficulties of
           debtor to debtor’s family): Court holds that this revelation did not constitute
           adequate publicity
   e) Fair Debt Collection Practices Act: fashioning remedy toward debt collection
      abuses
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       i) Heintz v. Jenkins (1995): court holds deciding that the term “debt collector”
            in the FDCPA does apply to a lawyer who regularly, through litigation, tries
            to collect consumer debts
   f) Collection law: how you initiate collect on debt…
       i) Unsecured Creditors: Must get a judgment and an execution writ (a.k.a. writ
            of attachment) (instructing Sheriff to retrieve assets from debtor and liquidate)
            (1) Writ is issued routinely by court clerk upon request of the judgment
                creditor
            (2) Once writ is delivered, the sheriff will take physical possession of any
                properties and seize it, or tag it with a notice of seizure
            (3) Process of seizure is called a levy. After sheriff levies upon the property,
                he will report to the court with a document called a return, which describes
                the sheriff’s effort to find property of debtor.
            (4) Once sheriff levies upon a specific piece of debtor’s property, judgment
                creditor=a judicial lien creditor as to that property
            (5) Sheriff advertises property for public sale, sell it to highest bidder,
                proceeds paid to the levying judgment creditor till he is paid in full.
                Money left over goes back to judgment debtor, unless another judgment
                creditor levied upon property while it was stored in courthouse. If
       ii) What can sheriff take?
            (1) Must be belong to debtor (cannot be rented)
                (a) Live human beings are entitled to protect a certain amount of property
                    – exemptions; we do not want to impoverish people (note TX as
                    extravagant) Every state allows debtors to keep some stuff. (in DE,
                    gets to keep up to $5000 total things…including house). There are
                    state law determined things. (exemption statutes)
       iii) Alternative writs for creditors:
            (1) Turnover writs-allows judgment creditor to have the debtor ordered to
                produce property, under threat of contempt and jail, once the JC gets the
                necessary information about the assets
            (2) Judgment Liens by Recordation-allows creditors to obtain lien without
                going through full-blown execution; limited mostly to encumbering real
                estate. (CA & ME allow creditor to put a legally effective lien on all the
                debtor’s personal property available for collection anywhere in state
                through a single filing)
                (a) often the fastest and cheapest post-judgment collection step-creditor
                    ties up assets and prevents resale, since no purchaser would buy
                    property with title clouded by earlier lien.
                (b) By recording judgment and getting lien, JC an pursue execution at
                    leisure, knowing that in race against other JC, the recording creditor’s
                    position has been assured.
2) Secured Creditors-extract voluntary liens from debtors, which allow for judicial
   collection based on mortgages and security interests in debtors’ property
   a) Perfection-To protect 3rd parties, consensual liens are given legal effect against
       third parties only if secured party gives public notice of interest, usually be
       recordation or “perfection.” Security interest must be filed to be perfected.
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   b) Seizure for sale of collateral—foreclosure in real estate and repossession in case
      of personalty—is governed by is governed by Part 6 of Art 9.
   c) Self-help repossession: Creditor can seize the property without any help from
      sheriff (“self-help repossession”) or can offer to keep the property in satisfaction
      of the debt without any sale.
              (a) But not allowed to breach the peace.
              (b) Really only good against the ignorant
          (2) Secured creditor can also sue on debt, obtain judgment, and ask sheriff to
              seize/sell

3) Asset protection: allow creditors to prevent legal judgments from being enforced
   against htem, often as self-settled trusts that permit assets to be placed in trusts for the
   benefit of the settlor and rendering them purportedly immune from claims of
   creditors.
   a) Assets will not be protected if debtors are deemed to be in control of trust, even if
       the assets are in a trust that removes the debtors as trustees and prevents the new
       trustee from repatriating any trust assets to use if an “event of duress” such as a
       law suit or a TRO occurs. Federal Trade Commission v. Affordable Media
       (sentencing debtors to 6 mos. in jail for not repatriating the assets in a trust
       protection plan)

4) Priorities
   a) What must sheriff do to complete priority conferring levy?
      i) In most jurisdictions, it is not necessary for the sheriff to remove goods in
           order to complete an effective levy, as long as the property is present and
           subject for the time to the control of the officer holding the writ, and he asserts
           his dominion over it in express terms by virtue of writ. Credit Bureau of
           Broken Bow v. Moninger (1979).
      ii) Other jurisdictions require that sheriff either take possession or appoint
           independent custodian
      iii) In either case, if the levied-upon goods are left in the hands of debtor for an
           unreasonably long period of time with consent of creditor, lien will be lost.
   b) Unsecured vs. unsecured: first unsecured creditor to perfect a judgment lien
      against the property by executing or levying on a judgment will win as to the
      property being levied on.
      i) Though levy is essential for perfection and priority, the date of levy is not
           always the controlling date for determining priority
      ii) Some states will backdate perfection to the date the sheriff got the writ, while
           in others it is the date of the judgment or the date of sheriff’s levy that is
           controlling
      iii) For priority purposes, it is the recording or registration of the judgment in a
           manner deemed to give notice to other parties, especially other creditors and
           buyers that creates priority position
           (1) If two creditors enjoy equal priority under the usual rules, a taxing
               authority usually turns out to be “more equal” than other creditors. In Re
               Estate of Robbins (1973)
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          (2) Inactive judgments may lose their vitality and go numb. Weaver v Weaver
               (a) Dormancy-If judgment creditors fail to seek enforcement of a
                   judgment for a long time, it is dormant (may lapse, or be subject to
                   collateral attack). Can be avoided by regular attempts typically yearly,
                   to enforce, even if unsuccessful, or by a “reviver” action
               (b) Expiration expiration of the SOL to enforce judgment may be
                   terminal (generally 10 yrs). Can be avoided by brining a new action
                   on the judgment within the limitations period. Absent any valid
                   defense by judgment debtor, new judgment will result and new
                   limitations period begins.
   c) Unsecured judgment creditor v. secured creditor: First to perfect wins.
      i) A secured creditor or the mortgagee perfects when it records its consensual
          lien according to the statutory prescription.
      ii) If the judgment creditor’s lien is later it looses; if the judgment creditor’s lien
          is earlier, it wins.
   d) Judgment creditors and secured creditors vs. buyers: first in time, first in
      right, as measured by perfection, usually through recordation. This puts a
      premium on checking the certificate of title for automobiles and checking the
      other perfection devices for buyers and creditors seeking an interest in other
      goods.

5) NONBANKRUPTCY LAW
   a) Garnishment: seizure of property from third persons; debt owed to a debtor by a
      third party
      i) Retrieve judgment and “writ of garnishment” used to attach debts owed to the
           debtor for the benefits of the debtor’s judgment creditor
           (1) A garnishment is an ancillary lawsuit against the third party garnishee
           (2) E.g. W owes bookie $1000 and does not pay; Clark owes W $1000 +
               interest; bookie can sue Clark directly
               (a) The bookie is the garnishor and judgment creditor
               (b) Clark is the garnishee
               (c) W is the judgment debtor
      ii) Webb v. Erickson (1982) (where the creditor serves writs of garnishment on
           parties whose houses had been sold by the debtor, to garnish the commissions
           the debtor earned as a real estate agent): Garnishee can be liable for entire
           amount of debt if it fails to answer garnishment writ
      iii) Restrictions on Wage Garnishment
           (1) If a judgment creditor could seize the entire obligation owed by an
               employer to a judgment debtor, then the judgment debtor’s ability to
               survive might be seriously jeopardized, thus giving the creditor too much
               leverage in exacting promises to pay much higher interest rates and to
               adhere to new payment schedules with addt’l charges
           (2) In response to those concerns, the Consumer Credit Protection Act now
               restricted access of all creditors to the wages of any debtor
           (3) Commonwealth Edison v. Denson (1986)(where employees had multiple
               creditors, including support garnishers seeking to garnish their wages):
                                 BANKRUPTCY OUTLINE



            Court holds that support garnishments should not be considered separate
            from judgment creditor garnishments
   iv) Garnishment of Bank Accounts: when a customer has a deposit account, the
        bank acts as debtor (money owed to customer); when a customer has
        outstanding loans from the bank, the bank acts as creditor – hence, the bank
        then offers the judgment creditor only the amount left in the account after the
        bank’s own setoff for the outstanding loan.
   v) What can be garnished? Network Solutions, Inc. v. Umbro International,
        Inc. (2000), where court holds that a contractual right to use an Internet
        domain name cannot be garnished because it is the product of a contract for
        services
   vi) 18 U.S.C. 1674 establishes that no employer may discharge any employee by
        reason of the fact that his earnings have been subjected to garnishment for
        any one indebtedness; violators will be subject to a fine not more than $1000,
        or imprisonment for not more than one year, or both
        (1) Garnishment of an employee’s wages resulting in damage to an
            employer’s reputation is not a legal excuse for firing that employee
b) Property Exempt from Seizure: exempting some items so that garnishment will
   not reduce a debtor to impoverishment, allowing debtor to retain enough basic
   property to make a fresh start, and to avoid becoming a charge on the community
   i) Commonly defined by dollar amount and by type of property, e.g. burial plots,
        homestead real property, homestead sale proceeds for six months after sale,
        personal property such as alimony, home furnishings, food, tools used in
        profession, clothing, car
        (1) Items fitting a category but exceeding the dollar limit may be partially
            exempt
   ii) TX as most extravagant; DE, PA, SD as not generous (p. 105-113)
   iii) What is exempt?
        (1) In re Johnson (1981): Court holds that a bus can be exempt as “one motor
            vehicle”
        (2) In re Hall (1994): Court holds that a lawnmower is not household
            furniture
        (3) In re Pizzi (1993): Court holds that lottery winnings, whether received in
            lump sums annually or all at once, may not be exempted as an annuity
            payment
        (4) In re McCollum (1993): Court holds that a damage settlement given as an
            annuity contract is exempt
   iv) Proceeds and Tracing: issues arise when a property not exempt is traceable to
        one that is
        (1) In re Williams (1994): Court holds that the amount paid for a car which
            was directly traceable to worker’s compensation proceeds is exempt
        (2) Holmes v. Blazer Financial Services (1979): Court cannot protect wages;
            but legislature responds in 1993 with allowing six months of wages
            exempt
   v) What order are people paid?
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       (1) State law is a “race of the diligent” – first person to get judgment takes up
           to the amount he is owed; i.e. you snooze, you lose
       (2) Some states only go back to the time of writ, i.e. who gets the actual writ
           first
c) Fraudulent Conveyances
   i) Twyne’s Case (1601) (where D was indebted to both P and Twyne and made
       a secret conveyance to Twyne of all his goods and chattels, leaving D
       insolvent): Court holds that this constitutes fraudulent conveyance
   ii) Uniform Fraudulent Transfer Act
       (1) §1(2): exempt property is an exception to fraudulent conveyance (property
           subject to valid liens, generally exempt under nonbankruptcy law)
       (2) §2. Insolvency: (a) A debtor is insolvent if the sum of the debtor's debts is
           greater than all of the debtor's assets, at a fair valuation; (b) A debtor who
           is generally not paying his debts as they become due is presumed to be
           insolvent
       (3) §3. Reasonably Equivalent Value
           (a) At a foreclosure sale, items tend to bring a lower price (due to low
                attendance, no warranty, no inspection opportunity) – code states that
                foreclosure sales are not fraudulent conveyances
       (4) §4. Transfers Fraudulent as to Present and Future Creditors
           (a) (a) A transfer made or obligation incurred by a debtor is fraudulent as
                to a creditor, whether the creditor's claim arose before or after the
                transfer was made or the obligation was incurred, if the debtor made
                the transfer or incurred the obligation:
                (i) (1) with actual intent to hinder, delay, or defraud any creditor of
                     debtor; OR
                (ii) (2) without receiving a reasonably equivalent value in exchange
                     for the transfer or obligation, AND the debtor:
                     1. (i) was engaged or was about to engage in a transaction for
                         which the remaining assets of the debtor were unreasonably
                         small in relation to the transaction; or
                     2. (ii) intended to incur, or believed or reasonably should have
                         believed that he would incur, debts beyond his ability to pay as
                         they became due
                (iii)(b) In determining actual intent, consideration may be given to
                     whether the transfer or obligation was to an insider; the debtor
                     retained possession or control of the property transferred after the
                     transfer; the transfer or obligation was disclosed or concealed; the
                     debtor had been sued or threatened with suit; the transfer was of
                     substantially all the debtor's assets; the debtor was insolvent
                     1. ACLI Government Securities, Inc. v. Rhoades (1987): Court
                         holds that the conveyance of property to his sister, made the
                         day before a judgment of over $1.5 million was entered against
                         debtor, in exchange for $1.00, was fraudulent because: (1)
                         there was a close relationship among parties to the
                         transaction, (2) there was secrecy and haste, (3) there was
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        inadequacy of consideration, and (4) transferor knew of his
        duty to pay the claim and his inability to do so
(iv) Note that present creditor means creditor at time of transaction
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     (5) §5. Transfers Fraudulent as to Present Creditors
         (a) (a) Fraudulent if the debtor (1) made the transfer or incurred the
             obligation (2) without receiving a reasonably equivalent value in
             exchange for the transfer or obligation (3) and the debtor was insolvent
             at that time or the debtor became insolvent as a result of the transfer or
             obligation, (4) which is attacked by a pre-transaction creditor.
         (b) (b) Fraudulent if the transfer was made to an insider for an antecedent
             debt, the debtor was insolvent at that time, and the insider had
             reasonable cause to believe that the debtor was insolvent.
         (c) Note that §5 is the easier test to prove than §4, but §5 only applies to
             creditors who existed at the time of the transaction
     (6) §8. Defenses, Liability and Defenses of Transferee
         (a) (a) A transfer or obligation is not voidable against a person who took
             in good faith and for a reasonably equivalent value or against any
             subsequent transferee or obligee
         (b) (b) To the extent a transfer is voidable, the creditor may recover
             judgment for the value of the asset transferred, or the amount
             necessary to satisfy the creditor's claim, whichever is less; judgment
             may be entered against:
             (i) (1) the first transferee of the asset or the person for whose benefit
                  the transfer was made; or
             (ii) (2) any subsequent transferee other than a good-faith transferee or
                  obligee who took for value or from any subsequent transferee or
                  obligee.
     (7) What does a creditor get in an action for relief against a fraudulent
         ctransfer? See §7
         (a) Avoidance of transfer or obligation to the extent necessary to satisfy
             the creditor’s claim
         (b) Attachment oagainst remedy
         (c) Injunction against further disposition by debtor or transferee of the
             asset transfered it was in good faith, they are entitled to: (1) a lien on
             or a right to retain any interest in the asset
         (d) If creditor has obtained a judgment claim, he may levy execution on
             asset transferred or its proceeds.
         (e) Good faith buyer
     (8) What is a good faith transferee entitled to, to the extent of the value
         given the debtor for the transfer or obligation? See §7
         (a) (1) a lien on or a right to retain any interest In asset transfer; (2)
             enforcement of any obligation incurred, or (3) a reduction in the
             amount of the liability
             (i) Transferees/Buyers do not lose any money out-of-pocket, but they
                  do lose the present value of the asset purchased
iii) Leveraged Buyouts: assets of the corporation being acquired are used to
     secure the purchase price paid for those assets; later targeted as fraudulent
     conveyances
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(1) Not all leveraged buyouts are subject to fraudulent conveyance litigation;
    two types of legitimate LBOs:
    (a) The assets mortgaged by a corporation to support an LBO do not
        exceed the net equity of the business (after appropriate adjustments),
        the transaction will not make the corporation insolvent; open to attack
        only if the margin of equity is too thin to support the corporation’s
        business
    (b) The cash flow is sufficient to make the debt payments; turns on two
        factors: degree of risk of default undertaken in the first instance, and
        the degree to which projected economic developments impacting the
        business are not overly optimistic
(2) How do you show insolvency? Sum of debtor’s debts is greater than all of
    the debtor’s assets
    (a) Note In re Bay Plastics, Inc. (1995) (where a lot of goodwill is
        pumped in to make the assets outweigh the liabilities): Court holds that
        if the LBO resulted in a margin of equity too thin to support the
        corporation’s business, the LBO will be deemed a fraudulent
        conveyance, done only to evade debts
                                      BANKRUPTCY OUTLINE




                             CONSUMER BANKRUPTCY

6) CONSUMER BANKRUPTCY
   a) Two fundamental types of proceedings
      i) Liquidations: Chapter 7, debtor gives up all non-exempt assets, Trustee in
           Bankruptcy sells assets, and proceeds are distributed pro rata to creditors;
           debtor is discharged of all debts and begins afresh
      ii) Payout plans: Chapter 11 (businesses), Chapter 13 (consumers): debtor can
           propose to keep all assets in exchange for promising to pay off debts over a
           period of time out of future income; can mean much higher returns for
           creditors
      iii) Filing a Petition-in a voluntary bankruptcy petition, the debtor is required to
           file various forms called “schedules” all of which are set forth in Officials
           Forms part of Bankruptcy Rules. Schedules include details list of debts assets,
           income and expenses
           (1) Policing Debtor Applications:
                (a) Before they file, debtors must produce certification that they have
                    attended a debt counseling session, that they have been given
                    information about the other chapters of the code and about credit
                    counseling, and that they have been warned that false information in
                    files can lead to penalties and jail time. §109(h), 521(b)
                (b) Debtor’s schedules must be complete, since failures to list a debt may
                    make the debt nondischargeable § 523(a)(3)
                (c) Debtor’s schedules must be accurate, since false statements in the
                    petition or schedules may result in a complete denial of discharge
                    under §727(a)(4) (and may open the debtor to perjury prosecution).
                (d) Debtors sign their petitions under penalty of perjury, must file copies
                    of pay stubs for 2 mos before they filed, a statement of monthly
                    income and an explanation of how that was calculated, and a statement
                    disclosing any anticipated increase income in next 12 months
                    §521(a)(1)(iv)-(vi)
                (e) Debtors must be able to produce copy of previous year’s tax return on
                    request of court/creditor 521(i)
           (2) Policing Debtors via Debtors’ own Counsel
                (a) Attorney must sign the petition, and by signing, represents that the
                    attorney has performed a “reasonable investigation” and has no
                    knowledge that the info in the schedules is incorrect (§707(b)(4)(C))
                (b) Consumer bankruptcy lawyers have been renamed “debt relief
                    agencies” and are specifically prohibited from making any statement
                    in any document filed that is “untrue or misleading, or that upon
                    exercise of reasonable care, should have been known to an agency to
                    be untrue or misleading.” §101(12A); 526(a)(2).
                (c) Failure to abide by these rules might cause attorneys to lose their fees,
                    pay actual damages, or be forced to pay the fees of opposing counsel
                    §526(c)(2); 707(b)(4)(A)
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    (3) First Meeting of Creditors (Section 341 meeting)
        (a) Meeting held at date set by court within 40 days after petion is filed,
            ordinarily at the courthouse §341, Rule 2003(a)
        (b) Primary function is to permit an examination of the debtor by the
            trustee and any interested creditor
        (c) In most cases, creditors might elect a TIB (§702, 1104(b)) or a
            creditor’s committee (§705(a), 1102(a)(1) )
iv) Property of the Estate, per §541: at the moment a bankruptcy petition is
    filed, an estate is created by operation of law, consisting of all legal and
    equitable interests in property previously owned by the debtor
    (1) Property included, per §541(a)
        (a) Exempt property is included in estate, e.g. pet
        (b) §541(a)(5) includes all interests acquired within 180 days of filing by
            bequest, devise, or inheritance
        (c) §541(a)(6) includes proceeds, product, offspring, rents, or profits of or
            from property of estate, e.g. winnings on lottery ticket purchased pre-
            petition and dividends on stock owned by debtor
    (2) Property excluded from estate, per §541(b)
        (a) Most important exception is for services performed by an individual
            debtor after the commencement of case; e.g. wages, commissions
            earned post-petition
        (b) Per §541(b)(1), bank account on which debtor is named trustee for the
            benefit of another is not part of the estate
        (c) Per §541(b)(6), if the debtor set aside in certain kinds of tax-sheltered
            accounts to pay for the education of children in the family, then such
            accounts are not property of the estate, even though the debtor may be
            named the owner of the account, manage the account and have right of
            withdrawal
        (d) Per §541(b)(7), employee contributions to any ERISA-qualified
            retirement plans, deferred compensation plans, tax-deferred annuities
            and health insurance plans are not part of the estate. NOTE: Sup Ct
            expanded protection of retirement funds in Rousey v. Jackoway,
            holding that IRAs are part of the estate, but they exempt property
            under 522(d) (despite not being specifically mentioned in the laundry
            list of exempt retirement plans),, and therefore the debtors are entitled
            to keep it.
        (e) Per §541(d), secured property becomes property of the estate only to
            the extent of the debtor’s legal title, but not to the extent of any
            equitable interest in such property that the debtor does not hold, such
            as a mortgage secured by real property.
    (3) Number of expectancies at varying levels of realization or certainty that
        must be allocated to the debtors’ past or future. The problem can be
        articulated as the determination of the point at which an expectancy
        becomes “property”
        (a) In re Palmer (1986): Court holds that a post-petition year-end bonus
            paid by debtor’s employer, dependent on (1) employment at the time
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           that employer declared bonus, (2) satisfactory performance, (3)
           employers sole discretion, is not property of the estate because such
           payments were sufficiently rooted in post-petition events
       (b) Sharp v. Dery (2000): Court holds that when a debtor has to work for
           his employment for some time beyond the date of filing for bonus pay,
           the court cannot apportion any part of that bonus dividend to the
           estate. At commencement of case, neither terms of bonus plan nor
           Michigan law gave debtor an enforceable part of the bonus, and thus
           the trustee, who could take no greater rights in the property than debtor
           had, also ha no enforceable interest in the bonus dividend at case’s
           beginning.
       (c) Three categories of certain expectancies
           (i) Legal interests that are not enforceable at the date of bankruptcy
                but may be enforceable at a future time; question of whether they
                are sufficiently mature and certain; Palmer; Sharp v. Dery (E.D.
                Mi. 2000)
           (ii) Certain entitlements, e.g. permits or licenses, that are
                nontransferable; representing a very valuable legal right that is of
                no value to anyone but the debtor (like a driver’s license, versus a
                license that can be bought and sold and can thus be property of est)
                1. Recall Umbro re: Internet domain names
                2. In re Burgess held that a brother license, like a liquor license,
                    is property of the estate because it is more than “a personal
                    privilege” or a “a state matter subject to discretionary control
                    of county. It was actually “property” of enormous value to the
                    estate, given that without the license, there would no business
                    left to reorganize.
           (iii)Restrictions on transferability imposed by contract or by law;
                Congress has permitted a few specific restrictions on alienation to
                be effective to keep property out of the bankruptcy estate; e.g.
                “Spendthrift” trust exception, whereby debtors are often able to
                keep retirement accounts out of bankruptcy estates (§541(c)(2))
                1. In re Orkin (1994): Court holds that the retirement plan is an
                    asset of the estate because the Plan does not contain a transfer
                    restriction enforceable under state or federal law. Debtor had 2
                    bites at the apple: if account is ERISA qualified, then it is
                    protected by federal law. If not ERISA qualified, can try again
                    under state law-if it had a valid spendthrift trust provision
                    preventing alienation and thus protecting it from creditors, it
                    will not be part of estate. Even with 2 bites, orkins can’t keep.
v) The Automatic Stay, per §362: prohibiting any creditor’s attempts to
   continue to collect from debtor or debtor’s property; to prevent any property
   from leaving the newly formed estate
   (1) Statutory provisions
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          (a) §362(a)(1): bankruptcy petition operates as a stay of all proceedings to
              collect against debtors, including most judicial proceedings and even
              withholding of a student-debtor’s transcript.
          (b) §362(a)(2): under automatic stay, creditor cannot continue to try to
              enforce a previous judgment against the debtor; also protects property
              of the estate
          (c) §362(b): exceptions to stay, including criminal prosecution, tax audits,
              EPA investigations, collection for current alimony and child support
      (2) Andrews University v. Merchant (1992): Court holds that (1) both
          education loans and credit extensions are nondischargeable under §523
          and (2) they are not listed within the exceptions to the automatic stay in
          §362(b)
      (3) Creditors who violate this stay by soliciting money, sending bills, making
          phone calls, repossessions, lawsuits, etc. are subject to the court’s
          imposition of excessive fines stemming from actual damages, including
          cost of attorney’s fees
          (a) Nissan Motor Acceptance Corp. v. Baker (1999): Court holds that a
              creditor’s continued retention of estate property after notice of
              bankruptcy filing constitutes an exercise of control over property of
              the estate in willful violation of automatic stay and that adequate
              protection need not be offered for the creditor to turn over its collateral
          (b) Additionally, where the court sees appropriate, the violating creditor
              may be subject to punitive damages, per Nissan, where the violation of
              the provision and the disregard of the court’s notice have been so
              egregious
      (4) Notice to Creditors:
          (a) Under § 342(e), creditors can file a “notice of address” where the
              notices for in Ch 7 and Ch13 must be sent. If creditor “designates a
              person or organizational subdivision” to receive bankruptcy notices
              and has a reasonable procedure to deliver notices to such person or
              subdivision, notice is not effective until it reaches that person. § 342(g)
          (b) Creditors may request relief from the stay under §362(d) for cause,
              including lack of adequate protection of an interest, or if the debtor
              does not have equity in such property and such property is not
              necessary to effective reorganization
b) Chapter 7 Bankruptcy: Liquidation
   i) Eligibility for Chapter 7 filing
      (1) Under §707(b)(1), court may dismiss a case or convert it to chapter 11 or
          13 if it finds that granting relief would be an abuse of the provisions in
          Chapter 7. §707(b)(2) sets forth the new provisions under which the court
          may presume abuse.
          (a) In re Shaw: after finding that the debtor’s proposed family budget
              was excessive and unreasonable within the context of Ch. 7, court
              reshapes the debtor’s budget and requires a minimum 3-year
              repayment plan if the debtors want any bankruptcy relief, using a
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        totality of the circumstances the test to find “substantial abuse” under
        §707(b)
    (b) The 2005 Amendments substitute the “totality of the circumstances”
        discretionary test with a new semi-automated screen, employing a
        fixed formula to determine which debtors should be deemed ineligible.
    (c) Even with the revisions, there is still room for court discretion under:
        (i) §707(b)(2)(B) (finding “special circumstances” that have an effect
             on income or expenses that can be quantified or documented, such
             as medical conditions or service in armed forces, to justify
             adjustments to the calculations)
        (ii) 707(b)(3) (allowing a debtor who was deemed “not abusive” under
             the formula to be deemed abusive nonetheless on grounds of “bad
             faith” and “totality of the cirucumstances,” a catch-all category for
             any unworthy debtors not captured by payment formula)
(2) Means Test: The court shall presume abuse according to an intricate
    formula of income minus expenses 707(b)(2)(A).
    (a) Threshold Test of Income for Ch. 7 eligibility: formula for means
        test begins with debtors’ current monthly income and a threshold test
        for Ch. 7 eligibility, based on a comparison with state median income
        figures compiled by the Census Bureau www.census.gov/hhes/www/
        income/statemedfaminc.html. When there is no current data, courts
        must adjust the census report for inflation based on the Consumer
        Price Income (www.aier.org/cgi-aier/colcalculator.cgi):
        (i) If income is equal to or lower than the median (as opposed to mean
             income, which would be pulled up by big earners) income for
             similar families in the state where the debtor filed, the debtor has
             passed through the median-income screen and no presumption bars
             the way to Ch. 7. §707(b)(2)(A).
        (ii) “Current monthly income” is the average monthly income for
             the 6 months preceding the filing, all sources included (i.e., wages,
             interest on checking account, stock dividends, unemployment
             compensation, tax refunds). §101(10A)
             1. Code defines as “income received,” which suggests that the test
                 uses only post-tax income, the take-home pay of the debtor
                 after taxes, social security and Medicare have been deducted,
                 but the Census Bureau bases its date collection on pre-tax
                 income
             2. Census Bureau income does not count capital gain, money
                 received from sale of property, value of income “in kind” (food
                 stamps, tax refund, etc.), exchange of money between relatives
                 that live together, and lump sum receipts such as gifts and
                 insurance payments. Some of these items are explicitly
                 included as “income received” in the Code. §101(10A)
             3. Bankruptcy Code Code excludes Social Security Benefits, but
                 Census Bureau includes them.
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    (iii)Recent data suggests that only about 6% of Ch 7 debtors would
         have income above state median
(b) Expenses: For debtors fail the median-income screen because their
    currently monthly income is higher than the state median, next step is
    to determine what expenses the debtor may deduct, based on IRS
    National Standards (www.irs.gov/individuals/article/0,,id=
    96543,00.html). Like the IRS, the Bankruptcy Code permits debtors to
    deduct the National Standard amounts allocated for family size and
    income level, regardless of what was actually spent.
    (i) Court may increase allowance for food and clothing by up to 5%,
         if debtor can demonstrate that such expenditures are reasonable
         and necessary §707(b)(2)(A)(ii).
    (ii) Courts must include deduction for health insurance, disability
         insurance, and health savings accounts (§707(b)(2)(A)(ii)(I);
         expenses of caring for the elderly (§707(b)(2)(A)(ii)(I); and private
         schools, up to $1500 per child per year (§707(b)(2)(A)(ii)(IV).
    (iii)Through the IRS “Other Necessary Expenses” list
         (www.irs.gov/irm/part5/ch14s01.html#d0e122933), the Code
         permits courts to deduct actual expenses for items such as
         childcare, legal fees, life insurance, union dues, taxes
(c) Secured Debts:
    (i) secured loans (such as car loans) can be deducted in full, no matter
         how large, along with any payments in arrearages.
         §707(b)(2)(A)(iii). Gasoline, insurance, maintenances then follow
         Local Standards in the IRS tables §707(b)(2)(A)(ii)(I).
    (ii) Debtors can deduct the payment to a house mortgage lender in full.
         §707(b)(2)(A)(iii). What to do about other costs (utilities,
         maintenance, insurance, etc) is unclear, since the IRS combines all
         housing costs in a single allowable amount. Currently, statute
         seems to give debtor both the actual amount of the home mortgage
         in §707(b)(2)(A)(ii)(I) and the Full Local Standard deduction in
         §707(b)(2)(A)(ii)(I)
    (iii)Though car purchasers and home buyers seem to get a break,
         renters are out of luck.
(d) Income after Expenses: even if debtor has surplus after allowed
    expenses are deducted, Ch. 7 might still be available. To do final
    calculation, you must know (a) total size of the surplus income over
    expenses over 60 months (5 yrs); and (b) how much general unsecured
    nonpriority debt the debtor owes. Abuse is presumed:
         1. if the debt is greater than $24k, and the surplus is at least
             a. $10k OR
             b. 25% of the debt; OR
         2. if the debt is $24k or less, and the surplus is at least $6k
         3. Another way of calculating abuse:
             a. If surplus is less than $100, debtor passes
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                      b. If surplus is between $100-$166.66, he passes if surplus is
                         less than 25% of his unsecured debt divided by 60.
                      c. If surplus is greater than $166.66 he flunks.
        (e) Policing the New Standards
            (i) Abuse can be alleged against an above-median debtor by judge,
                 Trustee’s office or any creditor §707(b)(1)
            (ii) Creditor cannot raise abuse issue against a median-or-below debtor
                 under either 707(b)(1) (general abuse) or 707(b)(2) (means test).
            (iii)Only judge or trustee can raise claim of general abuse §707(b)(6)
            (iv) Court can award costs and reasonable attorney fees to a trustee
                 who prevails on a motion to dismiss ch 7 filing as a violation of
                 707(b)(2) in violation of Rule 9011 (requiring that any petition e
                 made only after reasonable inquiry that the allegation have a
                 factual basis, and requires that legal contentions be warranted by
                 existing law) standard for charging for debtor’s counsel may be
                 high, but many attorneys will notice that if they advice debtor to
                 file Ch 13 instead of 7 they are less likely to end up as defendants
            (v) If the debtor’s motion is challenged under 707(b)(2), the debtor
                 can recover (and presumably use the money to pay the attorney) if
                 the court finds that the creditor or trustee violated Rule 9011 or
                 brought motion solely to coerce the debtor to waive other rights
                 under Code. §707(b)(5)
ii) Exemptions – Federal (§522, only for 11 states who did not opt out) and
    State
    (1) 1898 Act incorporated state exemptions into the debtor’s protections in
        bankruptcy; the 1978 Code provided for federal exemptions, providing
        uniform exemptions, but 35 states have taken the option of opting out of
        those exemptions, denying their own citizens the benefits of the federal
        protection when they filed for bankruptcy.
        (a) Texas, with its generous exemptions, did not opt out, leaving a Texan
            to choose between an unlimited homestead and 30k value in other
            property, and a federal homestead exemption of $16,150 and about
            $16k or so in other property.
        (b) Taylor v. Freeland & Kronz (1992) (where debtor claims as exempt
            a future settlement of a pending lawsuit and the TIB fails to object to
            the exemption, believing that the debtor would not get the amount she
            anticipated): Court holds that objection to exemption by the TIB must
            be done in a timely manner when the exemption is claimed in good
            faith
    (2) Classification of Property: because exemption statuts are often written to
        exempt only listed types of property, disputes often arise as debtors argue
        that the property they intend to keep fits within the statutory classifications
        and judgment creditors, who are permitted to reach only non-exempt
        property, argue the property does not.
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      (a) In re Johnson(1981) (finding that a bus fit within state exemption
          statute for “motor vehicles” although legislative history suggests that
          motor vehicle was intended to mean “automobile”)
      (b) In re Hall (1994): Court holds that a lawnmower is not household
          furniture
      (c) In re Pizzi (1993): Court holds that lottery winnings, whether received
          in lump sums annually or all at once, may not be exempted as an
          annuity payment
(3)   Valuation of Exempt Property
      (a) In re Walsh (1980) (where TIB seeks an appraisal of the exempt
          assets at FMV, rather than liquidation value): Court assigns liquidation
          value
      (b) In re Mitchell (1989) (where TIB seeks FMV rather than liquidation
          value on jewelry claimed as exempt): Court holds that FMV is the
          proper value
(4)   Security Interests in Exempt Property: valid, unavoidable consensual
      security interests trump exemption claims so that a debtor may only claim
      an exemption in the equity (value remaining after secured creditor has
      been paid in full)
      (a) §522(f) permits the avoidance of certain kinds of liens on certain
          categories of exempt property listed therein, namely judicial liens and
          nonpossessory, nonpurchase money consensual security interests
          (i) Creditors who held these types of liens could be treated as
              unsecured creditors, entitled only to a pro rata share of the debtor’s
              estate along with other creditors
(5)   Proceeds and Tracing
      (a) In re Palidora (2004)(finding that an exception for wages ceases to
          apply upon the debtor’s receipt of those wages, whether paid in cash,
          by check, or by direct deposit in the debtor’s bank account, because
          the wage exemption statute only limits what a creditor could obtain by
          garnishment of the employer. The exemption for child support
          payments does include such money received by a debtor.)
      (b) In re Dasher (2002) (refusing to exempt a pick up truck purchased
          entirely with money cashed from an exempt retirement account )
      (c) Partially exempt property: if there is a dollar limit on a category,
          property of greater value is partially exempt. It can be levied on and
          sold, and the proceeds are allocated first to the debtor to the full
          amount of the exemption, with the remainder going to Judg Creditor
(6)   Exemption Planning
      (a) Converting non-exempt property to exempt property
          (i) In re Reed (1981) (where debtor, in order to convert his
              homestead into an exempt asset, sold nonexempt personal property
              for approximately 50% of its value and applied the proceeds
              towards liquidation of improvement liens against their resident
              homestead, in Texas, which has historically jealously protected the
              homestead from forced sales except under very limited conditions):
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         Court holds that the transactions by debtor were not fraudulent
         because there is no proof that the debtors had applied the proceeds
         to acquisition of exempt personal property.
    (ii) However, in In re Reed II (1983): Court holds that a debtor who
         converts nonexempt assets to an exempt homestead immediately
         before bankruptcy, with intent to defraud his creditors, must be
         denied discharge in bankruptcy under §727.
    (iii)In trying to negotiate a line that provides protection for a debtor
         but does not give them an undue advantage, the 2005 amendments
         include a provision to reduce the dollar value of the homestead
         protection by any amount that is attributable to otherwise non-
         exempt property that the debtor disposed of with intent to hinder
         delay and defraud a creditor §522(o)
    (iv) Congress also added another provision for an absolute cap on the
         homestead for people convicted of securities law violations, and
         fraud in a fiduciary capacity. §522(q)
(b) Shielding assets by converting them to other types of unlimited
    exemptions:
    (i) Northwest Bank Nebraska v. Tveten (1988) (denying discharge
         to a doctor who sold all his assets and put the money into life
         insurance and annuity contracts, which where exempt without any
         dollar limit, and could not be attached under state law. Dissent
         argues that such exemption planning is allowed under controlling
         law in Circuit and thus not unlawful, and cites House report: “as
         under current law, debtor will be permitted to convert nonexempt
         property into exempt property before filing.”
    (ii) Hanson v. First Natl. Bank in Brookings (1988) (allowing to a
         couple of farmers to discharge their debt after selling all their non-
         exempt property for market value to family members, used the
         money to pay down mortgage and buy exempt life insurance
         policies, and then retained by agreement with purchasers, retained
         possession of the goods sold)
         1. case was decided on the same day as Tveten, and judge from
             Tveten’s dissent noted that the same argument that justified
             conversion for Hanson’s
         2. noted that the only differences between the cases was the
             background of the applicants and the amount of $ at stake
    (iii)In re Johnson (1989): same facts and circuit as Tveten, but drew a
         different judge, and obtained discharge
(c) Squirreling assets in asset protection trusts
    (i) If the self-settled trust is structured correctly, including a
         spendthrift provision and an automatic appointment of a third party
         as a trustee if the trustee-debtor is sued, the debtor will claim that
         the property in such a trust is not property of the estate §541(c)(1)
    (ii) The 2005 Amendments include a 10 year reach-back for
         transactions made with intent to hinder, delay or defraud creditors
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                  but such transferes are fraud when they are “in anticipation of any
                  judgment” or to escape judgments in connection with securities
                  fraud §548(e)
         (d) moving to states with more generous exemptions
              (i) In re Coplan (1993) (where the debtors incurred substantial
                  indebtedness in their home state of Wisconsin, moved to Florida –
                  for its liberal exemption laws – converted non-exempt assets into
                  exempt assets, and filed for bankruptcy): Court holds that the
                  debtors’ relocation to Florida with attendant purchase of home
                  was for purpose of shielding their assets from creditors
iii) Distributing the Estate under §726: TIB is appointed to gather all debtor’s
     property, sell it and distribute proceeds to creditors. He must (1) determine if
     some other person has any interest in that property (secured parties, liens), (2)
     consider valid exemption claimed by debtor in a particular item. Once the
     proceeds from the sales of all property have been obtained and the secured
     parties and other entities with property interests have been paid, the TIB (3)
     distributes the remaining funds among three general creditors:
     (1) Priority creditors: first in line, entitled to payment in full before others are
         paid
     (2) General, unsecured creditors
     (3) Subordinated creditors: last to be paid, likely because of some
         wrongdoing
iv) Claims and Distributions
     (1) A claim is anything the debtor owes or any right to payment, per §101(5)
     (2) Who can file claims? See §501(a)
         (a) A creditor or indenture trustee may file a proof of claim
         (b) Equity security holder (i.e. shareholder) – may file a proof of interest
              (i) Note that if everything is distributed to creditors, shareholders get
                  nothing
         (c) If a creditor does not timely file a proof of claim, an entity liable to
              such creditor – debtor or TIB – may file on behalf, per §501(b)
              (i) Incentive to the debtor to file is that he would like to expunge all
                  debts; also, debtor can be held liable for a crime if he does not file
                  claim he knew about; creditor will be drawn in if he knew and
                  purposefully did not claim
     (3) In Chapter 7 and 13 cases, a claim must be filed within 90 days after the
         first meeting of creditors; a claim is allowed unless a party in interest
         makes an objection, per §502(a) and Bankruptcy Rule 3002
     (4) Once a debtor has filed for bankruptcy, his debts are discharged;
         accordingly, he has very little interest in the validity of claims, so the TIB
         must be very careful in reviewing the claims
         (a) In re Lanza (1985): Court holds that burden of going forward for
              proof is on objecting party
     (5) Unsecured Claims-§501 lays out procedure for filing claim; §502
         explains mechanics of calculating a claim (for both secured & unsecured)
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      (a) Claim-includes any amount to which creditor is entitled by contract
          (e.g., attorney fees, costs of collections).The difference between what
          creditor will be allowed—the same amount as in a nonbankruptcy
          lawsuit—and what it gets—a percentage of what it had coming—is to
          be discharged at the conclusion of the case
      (b) Interest-unsecured creditors can not collect any interest on its
          unsecured claim after the filing and while the bankruptcy is pending.
          §502(b)(2). By treating all unsecured creditors the same, in allowing
          all to collect a pro rata share of whatever remains in the estate,
          bankruptcy reinforces goal of equality among these creditors
      (c) Accelerated Claims-because the debtor’s obligations are about to be
          resolved in a single forum, once and forember all prebankruptcy
          claims must be accelerated whether they’ve matured or not.
(6)   Secured Claims, per §506: To the extent that the an allowed secured
      claim is secured by property, the value of which is greater than the amount
      of the claim (“fully secured”), there shall be allowed to the holder of such
      claim, interest on such claim and reasonable fees, cost or charges provided
      for under the agreement
      (a) E.g. Sears sells to debtor lawnmower and takes security interest on it;
          Sears is still owed $5000 at time of filing
          (i) If TIB sells lawnmower for $6000, Sears gets $5000, $1000 goes
               to general fund for unsecured creditors
          (ii) If the lawnmower only brings $3000 in liquidation sale, then Sears
               gets $3000 in secured claim and $2000 in unsecured claim (this is
               called bifurcating the claim, with $3000 being the allowed secured
               claim and $2000 being the general unsecured claim)
      (b) Note that valid, unavoidable consensual security interests trump
          exemption claims, so that a debtor may claim only an exemption in the
          equity the value remaining after the secured creditor has been paid in
          full
(7)   Interest: both secured and unsecured creditors are entitled to interest
      accrued prior to bankruptcy; but an unsecured creditor cannot claim any
      interest for the period following bankruptcy (§502(b)(2)), unmatured
      interest), while some secured creditors who are oversecured will be able to
      collect post-bankruptcy interest; interest must be specified in contract
(8)   Attorney’s fees: incurred prior to filing of bankruptcy, can be claimed by
      secured and unsecured creditors, provided that they are specified in
      contract
      (a) Secured creditors who are oversecured are entitled to post-petition
          attorney’s fees
      (b) Unsecured creditors should not be entitled to post-petition attorney’s
          fees (as indicated by §502 (b) and §506(b)), though the case law is
          somewhat confused (e.g. In re United Merchants and
          Manufacturers, 1982)
(9)   §502(b) disallows certain unsecured claims, including unmatured interest;
      unreasonable amount charged by debtor’s attorney or insider; unmatured
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       alimony, child support; excessive claim by landlords who lose future
       money on leases (can claim past rent due); late payments on taxes
v) Summary of Process
   (1) Debtor files for bankruptcy
   (2) Automatic stay for all creditors, per §362
   (3) Estate is created, including all property of debtor, per §541
   (4) Secured property is taken out (bifurcated, if needed), per §506
   (5) Exempt property is taken out
   (6) §502 claims, i.e. unsecured claims, are given priorities, per §507
   (7) Unprioritized go into §502 general unsecured pot

vi) Priority Among Unsecured Creditors: after the secured creditors have been
    satisfied by the sale of their collateral, unsecured creditors begin the process
    of dividing the remaining assets
    (1) §507(a). Priorities: claims in the following order:
        (a) Administrative expenses under §503(b) and fees (lawyers’), insurance
            premiums paid on items in the estate, costs of liquidation sale
            §507(a)(1)(C), (1)(a)(2).
        (b) Allowed unsecured claims for domestic support obligations-as owed to
            or recoverable by spouse/ex-spouse, child or child’s parent
            §507(a)(1)(A)
        (c) Unsecured claims allowed under §502(f) – business debt arising after
            filing, before appointment of TIB
        (d) Allowed unsecured claims, to extent of $10k for each individual or
            corp, earned within 180 days of filing, for wages, salaries, or sales
            commission
            (i) Note that service providers are different because there is no
                 security interest available (i.e. nothing available for collateral)
            (ii) Providing incentives for employees to continue working
            (iii)Employees are smaller players and cannot diversify
            (iv) Union lobby
            (v) Note that salesmen fall under §507(3)(b)
        (e) Allowed unsecured claims for contributions to a employee benefit plan
            arising from services within 180 days of filing to extent of number of
            employees covered by plan $10k minus aggregate amount to such
            employees
        (f) Allowed unsecured claims of persons producing/raising grain or
            engaged as a US fisherman, to the extent of $4,925 per person
        (g) Allowed unsecured claims to the extent of $2255 for each individual,
            arising from deposit of money in connection with the purchase, rental
            of property or the purchase of services that were not delivered
        (h) Allowed unsecured claims for taxes – property, income, employment,
            excise
        (i) Allowed unsecured claims to a Federal depository institution
            regulatory agency
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        (j) Allowed claims for death or personal injury resulting from operating
            of motor vehicle or vessel while intoxicated with drub or alcohol
vii) Discharge: the purpose of liquidation bankruptcy is almost always to
    discharge outstanding debt
    (1) Debtor is not entitled to discharge as a matter of right; but it will be
        granted unless challenged by the TIB or creditor
    (2) Creditor can make global objection, per §727, rendering all debts
        nondischargeable for, among others, lying or filing false documents in
        connection with the case, failure to complete a personal finance course,
        lack of financial records unless justified under the circumstances
        (a) §727(a)(2): for transfer of property with intent to hinder, delay or
            defraud creditors (i.e. fraudulent conveyance)
            (i) In re Reed (1983): Court holds that a debtor who converts
                 nonexempt assets to an exempt homestead immediately before
                 bankruptcy, with intent to defraud his creditors, must be denied
                 discharge in bankruptcy
            (ii) In re Robert W. McNamara (denying global discharge to a
                 debtor who claimed a gambling loss in a fictional attempt to hide
                 money that he considered to be his and not his ex-wive’s, where
                 the effort to transfer remove, destroy, mutilate, conceal property of
                 the wife occurred within one year before filing date).
        (b) §727(a)(5): for failing to explain satisfactorily any loss of assets
            (i) In re Robert W. McNamara (denying global discharge to a
                 debtor who claimed a gambling loss in a fictional attempt to hide
                 money that he considered to be his and not his ex-wive’s)
    (3) Creditor can also object to the discharge of a specific debt, per §523
        (a) §523. Exceptions to Discharge: denial to debts obtained by lying on a
            credit application, debts for luxury goods worth more than $500
            obtained within 90 days of filing, fraud by a fiduciary, alimony and
            child support, judgments from drunk driving or boating, tax or customs
            duty; willful, malicious injury; fine to government; student loans;
            (i) In re Dorsey (1990): Despite the debtor’s gross mismanagement
                 of her credit card, court holds that as there is no evidence to
                 establish that the debtor submitted a materially false written
                 statement concerning her financial condition when she originally
                 applied for her first credit card, the complaint is dismissed.
            (ii) In re Gerhardt (2003): Court holds that the student loans of a
                 professional cellist could not be discharged because it would not be
                 an undue hardship under §523(a)(8) for him to repay the loans.
                 Court suggests that the debtors should get another job in another
                 field. Applies the Bruner three part test for showing undue
                 hardship is:
                 1. that the debtor cannot maintain, based on his current income
                     and expenses, a “minimal” standard of living if forced to repay;
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                 2. additional circumstances exist indicating that this state of
                     affairs is likely to persist for a significant portion of the
                     repayment period
                 3. that debtor made a good faith effort to repay the loan
            (iii)In re Miller(2004): Court may grant debtor a partial discharge of
                 her student loan obligations, by relying on §105(a), allowing court
                 to “issue any order, process, or judgment that is necessary or
                 appropriate to carry out the provisions of this title,” but such court
                 must make a finding of undue hardship. §523(a)(8) always applies
                 to the discharge of student loans in bankruptcy, regardless of
                 whether discharge is full or partial. 2005 Amendments from a
                 Congress fervent in protecting creditors did not attack this line of
                 cases.
            (iv) In re Milbank (1979): Court holds that the loans made by father-
                 in-law and wife to debtor are nondischargeable as they were
                 obtained by false pretences deliberately created by the debtor
    (4) Tax Priorities and Discharge
            (i) The kinds of taxes in section 507(a)(8)(A)-(G) are not only given
                 priority in payment, but any unpaid portion of those taxes is
                 exempted from discharge
            (ii) Pre-petition interest on a(8) shares the priority of the claims
                 themselves and enjoys their nondischargeable status.
            (iii)Penalties on nondischargeable taxes are also nondischargeables
                 §523(a)(7), although such penalties do not get priority in payment
                 under (a)(8)
            (iv) IRS can satisfy nondischeargable tax debts by seizing property that
                 is otherwise exempt under state law.
    (5) Bankruptcy Crimes: United States v. Cluck (1998): The Court holds
        that where the debtor has conveyed his property pre-petition for less than a
        reasonable price and with a right to reacquire (in order to shield them from
        creditors), he is guilty of bankruptcy fraud under 18 U.S.C. §152(1)&(3)
        (intentional concealment of assets)
viii) Reaffirmation, per §524(c)
    (1) At the moment of an individual debtor’s Chapter 7 discharge, the §362
        automatic stay lifts ((c)(2)(C)), and the §524 discharge injunction slams
        into its place (§524(c))
        (a) Per §524(c), a debtor may have his debt become legally enforceable
            again, if the debtor signs a reaffirmation agreement subject to the
            procedures and terms specified.
            (i) A reaffirmation agreement revives the debt and makes the debt
                 (and any future penalties and interest provided in the agreement)
                 fully enforceable in court.
            (ii) §524(c): reaffirmation agreements are enforceable only if, among
                 others, it is stated not to be required, has been filed in court, is
                 fully informed and voluntary by debtor, does not impose hardship
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             on the debtor, the attorney has fully advised the debtor, is in the
             interest of the debtor (where unrepresented)
(2) Secured Debt
    (a) Debts are discharged, but liens are not (§506(d)); a secured debt
        remains attached to its collateral and be enforced against the collateral
        after bankruptcy
    (b) Three alternatives to avoid surrendering collateral:
        (i) Redemption: requires debtor to pay the creditor the full loan or the
             full value of the collateral in cash, whichever is less (§722)
        (ii) Reaffirmation: requires a cooperative creditor willing to agree to
             let the debtor keep so long as the debtor continues to make
             satisfactory payments on the loan §524(c)
        (iii)Retention or “ride through”: requires maintenance of the
             contractual payments. Debtor keeps collateral by continuing to
             make pre-bankruptcy payments without redeeming or reaffirming,
             while discharging personal liability on debt. If collateral is
             damaged/destroyed, debtor can abandon it without liability. If
             debtor keeps paying, creditor is repaid in full.
             1. 521(a)(2) removes collateral from the estate and lifts the stay
                  unless the debtor complies with the commands in section
                  521(a)(2) to state an intention and follow thorough on one of
                  three things: surrender property, reaffirm contract with secured
                  party, or redeem pursuant to §722.
             2. 521(a)(6) is similar in overall intent, but has a savings clause
                  for the debtor is the creditor demands more than original terms
             3. unclear whether this solves the problems—state-law collection
                  issues that persuaded courts that ride-through is permissible
                  might have survived the 2005 amendments.
    (c) In re Pendlebury (1988): Court declines to intervene, at request of
        debtors, in the negotiation of their respective reaffirmation agreements
        for the purpose of limiting the terms of those agreements
(3) Unsecured Debt: Debtors may reaffirm unsecured debt because of (1)
    gratitude, (2) protection of a codebtor, or (3) threat of objection to
    discharge or offer of credit
    (a) In re Paglia (2003): Debtor reaffirms debt to protect co-debtor,
        agreeing to pay off the loan that mom had cosigned. Creditor did not
        violate the automatic stay by undertaking an act to collect a pre-
        petition claim against debtor when it threatened to take legal action
        against the annuity belonging to debtors mom, and then permitted
        debtor to execute a second promissory note as an alternative.
    (b) In re Latanowich (1997): Court holds that in order for this
        reaffirmation to have been enforceable, the agreement must have been
        filed with the bankruptcy court (§524(c)(3)) and where debtor is
        unrepresented in course of negotiation, the court must approve the
        agreement as (i) not imposing undue hardship on the debtor and (ii) in
        the best interest of the debtor (§524(c)(6)(A))
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            (c) 524(c) includes elaborate series of disclosures to debtors, reminiscent
                 of Truth in Lending Act disclosures, but the effectiveness on this may
                 be undermined by the addition of this boilerplate to help consumers
                 understand better the requirements of the reaff, and force them to focus
                 on actual ability to make those payments. §521(c)(2), (k)(6)(A)
            (d) 524(1)(3) gives creditors a safe harbor against any failure to abide by
                 the rules by requiring only a good faith attempt to do so.
        (4) Debts to Sovereign States: where the creditor is a state, the federal courts
            have very limited powers of enforcement, whatever the theoretical rights
            of the parties might be under the Bankruptcy Code because of the
            principle of sovereign immunity..
            (a) Tennessee Student Assistance Corporation v. Hood (2004) (holder
                 of a state-administered student sought to discharge her indebtedness).
                 Court held that Congress had not unconstitutionally infringed state
                 sovereignty by making requiring debtors to file an adversary
                 proceeding against the state in order to discharge student loan debt,. In
                 adjudicating the undue hardship determination sought by the debtor
                 the bankruptcy court, was properly exercising its in rem jurisdiction,
                 and not in personam jurisdiction over the State.
        (5) Nondiscrimination: §525 forbids employers or government agencies
            from discriminating against discharged debtors
c) Chapter 13 Bankruptcy: Payout Plans (§301), known as Adjustment of Debt or
   Wage Earners’ Plan. I
   i) What is the estate? Per §1306, everything in §531 + future income (3-5 years)
   ii) Debtor always has a trustee in Chapter 13; trustee recommends approval or
        denial of plan confirmation (§1302(b)(2)(B)), ensures payments are
        commenced wthin 30 days after filing, and that payments are properly
        distributed (§1302(b(5), 1326), moves to have debtor kicked out of
        bankruptcy when he stops paying, modifies plan.
   iii) What is the difference between Chapter 7 and Chapter 13?
        (1) Focuses on future earnings, rather than accumulated assets, to pay
            creditors; debtors keep all assets and agrees to turn over a portion of all
            future income for a minimum of three years
        (2) Paying over time; no discharge until all payments are made, with court
            supervision that lasts from the last day of filing until plan payments are
            completed, as compared to Ch 7 debtor, who is under jurisdiction of the
            court only from filing to discharge hearing, usually held within 6 months;
            2/3 never make it to the end of Chapter 13 (either liquidate or drop out
            altogether)
        (3) And getting to keep all property (exempt and non-exempt) §1302(b)(1),
            subject to trustee supervision
   iv) How does it work?
        (1) TIB takes a percentage of the debtor’s income for each pay period, applies
            it to the administrative expenses, and then distributes the remainder to the
            creditors according to a court-approved plan, which details the amounts to
                              BANKRUPTCY OUTLINE



       be repaid and the terms of repayment in accord with certain statutory
       requirements
   (2) When the debtor has completed the agreed payout, the debtor’s remaining
       obligations are discharged
   (3) TIB’s responsibilities include objecting to improper creditor claims,
       asserting objections to debtor’s discharge, confirming the plan
       (§1302(b)(2)(B)), and distributing payments
   (4) Confirmation of the plan vests all of the property of the estate in the debtor
       (§1327(b))
   (5) Automatic stay provisions remain in effect, as in a Chapter 7 filing
v) Payments to Secured Creditors: one reason to choose a Chapter 13 filing is
   to keep property that is subject to a valid security interest; i.e. holding
   collateral over time while payments can be made
   (1) Secured creditor is naturally concerned about the risk that the collateral
       will lose its value, either bec of loss or neglect or depreciation
       (a) Hence, a creditor can move to have the automatic stay lifted under
           §362(d), claiming that its interest is not adequately protected OR that
           both the debtor retains no equity in the asset AND the asset is not
           necessary to effective reorganization
       (b) Per §361, adequate protection may be provided by:
           (i) Requiring TIB to make a cash payment or periodic cash payments
                to such entity, to the extent that the stay results in a decrease in
                value of such entity’s property
           (ii) Providing such entity an additional lien to the extent that the stay
                results in value decrease
           (iii)Insurance, to be used in event of destruction or loss of collateral
                1. In re Radden (1983): Court holds that if the debtor (1)
                    procures adequate insurance on the property at the time of
                    recovering possession and (2) makes monthly payments under
                    contract until the time that a plan is confirmed, the creditor’s
                    interest in the subject property will be adequately protected
   (2) Modifying the Secured Creditor’s Contract through Cramdown, per
       §1325 (a)(5): A debtor may modify the terms of a undersecured debt in
       Chapter 13 plan, as long as the debtor paying debt off over time pays (1)
       the allowed secured claim (debt or value of collateral, whichever is less)
       plus (2) interest, i.e. paying present value of collateral over time.
       (a) Value of Collateral: Associates Commercial Corp. v. Rash (1997):
           Court holds that when a debtor seeks to retain and use the creditor’s
           collateral in a Chapter 13 plan, the value of the collateral will be the
           replacement standard (what the debtor would have to pay for the
           comparable property). Codified in §506(a)(2).
       (b) Once court determines that the security interest in asset, it has to make
           two factual determinations to establish the correct amt for debtor to
           pay under Ch. 13 plan:
           (i) The amount of the allowed secured claim under 506(a)
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            (ii) The present value of the allowed secured claim under
                 1325(a)(5)(B)(ii) (“value as of the effective date of the plan”
        (c) Capping Interest Rates: Till v. SCS Credit Corporation (2004):
            Sup Ct. finds that the adequate interest rate in computing present value
            under §1325(a)(5)(B) is the formula rate, which looks to the national
            prime rate, as reported in the press, adjusted for risk (does not decide
            the proper scale for risk adjustment)
        (d) Payments to a Home Mortgage: lienstripping is not available on a
            home mortgage; the only relief in Chapter 13 is to “cure and maintain”
            – to catch up on the past-due arrearage while making current payments
            as they come due
            (i) Problems arise involving (1) saving the home from foreclosure and
                 (2) proposing a plan to comply with the strict limitations imposed
                 by the provisions of Chapter 13 to protect the rights of mortgage
                 lenders
            (ii) In re Taddeo (1982): Court holds that the debtor’s power to
                 “cure” in §1322(b)(5) contains the power to de-accelerate, despite
                 accelerating payment by declaring the entire balance due
                 immediately after default in mortgage payment
                 1. Congress intervenes with the 1994 amendments, giving
                     homeowners right to de-accelerate by statute at any time prior
                     to the foreclosure sale (§1322(c))
vi) Payments to Unsecured Creditors
    (1) General unsecured creditors can best enhance their position by arguing
        that the debtor should be required to make larger payments under the plan,
        per §1325:
        (a) Best Interests Test, per §1325(a)(4): requires that each creditor,
            secured or unsecured, receive at east as much as that creditor would
            have received if the debtor had gone into Chapter 7
        (b) Debtor must devote all disposable income to make payments during
            the life of plan, per §1325(b)(1)(B)
            (i) Disposable Income: income minus expenses that are reasonably
                 necessary
                 1. In re Carter (1996)(where debtor’s plan did not include her
                     husband’s income): Court holds that the debtor has not
                     satisfied the burden of demonstrating that all of her projected
                     disposable income is being committed to the plan, given that
                     her husband’s income will certainly satisfy some of her
                     expenses
                 2. In the Matter of Wyant (1998)(where the Court must decide
                     what expenses are reasonably necessary): Court holds that the
                     debtor’s increased expenditures upon not having to pay
                     alimony and his allocated expenses for the care of his farm
                     animals are not reasonable, and the plan must be reconfigured
                     to include larger payments
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           (c) Additionally, a plan must be proposed in good faith and not by any
                means forbidden in law, per §1325(a)(3)
                (i) Good Faith: whether the debtors acted equitably in proposing the
                     plan
                     1. In re Greer (1986)(where debtors propose a plan that would
                         pay approximately 1% of outstanding unsecured debt): Court
                         holds that the plan was entered in good faith and that a zero-
                         payout to unsecured creditors is not sufficient cause to extend a
                         payout plan beyond 3 years, per §1322(c)
                     2. In the Matter of Strauss (1995)(where debtors were not
                         permitted to file a Chapter 7 liquidation because they had filed
                         one fours prior): Court holds that a plan will not be confirmed
                         where (1) debtor received Chapter 7 within 6 years; (2) §727
                         would bar the debtor from obtaining a Chapter 7 liquidation;
                         and (3) proposed Chapter 13 plan amounts to no more than a
                         disguised Chapter 7 liquidation
                (ii) Such factors to be considered in determining whether the debtor
                     files plan in good faith:
                     1. Amount of proposed payments
                     2. Debtor’s employment history and earning capacity
                     3. Duration of plan
                     4. Accuracy of information on plan
                     5. Whether there is preferential treatment between creditors
                     6. Whether plan modifies secured claims
                     7. Type of debt sought to be discharged
                     8. Whether debtor filed bankruptcy before
d) Consumer Bankruptcy System: An Overview: policies oscillate in tension
   between the traditional idea of a fresh start and a pervasive fear of abuse
   i) Theories
       (1) Scholarly interest focuses primarily on the ex-ante problem, arguing that
           the cost of credit may be greater because creditors must account for the
           risk of the bankruptcy discharge at the time the credit is extended.
       (2) Other scholars assert that bankruptcy is a form of social safety nest,
           supplementing unemployment insurance, public medical care, etc.
       (3) Reason that the focus is on the ex-ante stage is: research shoes that most
           debtors who file simply can’t pay-once debt incurred, little to be done
   ii) Policy debates: Is bankruptcy the result of irresponsibility or misfortune?
       Some argue that credit irresponsibility, whether of the debtors who incur the
       bills or the irresponsibility of the lenders who extend it, is the leading cause of
       bankruptcy, while others say that bankruptcies are more often the
       consequences of economic forces beyond an individual’s control (layoffs,
       illness). Both theories have support in empirical data
       (1) Aggressive marketing of credit and default rates of interests and penalty
           fees make it impossible for debtor to catch up
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     (2) Increasing economic volatility of modern America put larger share of
         middle class at risk for economic collapse due to layoffs, serious medical
         problems, and divorce.
iii) The Consumer Bankruptcy System Before and After the 2005 Amendments
     (1) Abuses: New amendments deny a Chapter 13 discharge for a debtor who
         has gotten a Ch 7 discharge within prior 4 yrs §1328(f), eliminating the
         filing of so-called “Chapter 20” cases, in which debtor filed 7 & 13 in
         close succession, to discharge debt under §523, and then put the
         nondischargeable debts into payment plan and pay them over time in 13
     (2) Recoveries for Creditors: Tries to steer debtors into Ch 13 to generate
         greater recoveries for creditors. BUT lots of ch 7 reaffirm and Ch 13 don’t
         complete plans, and unsecured creditors may do worse with amendments
         bec of the new ch 13 rules requiring many secured debts to be paid in full,
         regardless of the value of the collateral, leaving less for unsec.
         (a) 524(l) gives more safe harbor
         (b) provisions such as tightening of presumption of fraud and eve-of-
              bankruptcy transactions in 523(2)(C) may provide creditors with more
              occasions for plausible objections to discharge, to be settled with reaff
     (3) Domestic Support-domestic support obligations are given top priority in
         ch 7, and they must be current for debtor to confirm or maintain ch. 13
     (4) Bankruptcy rates-number of bankruptcies filed might be lower bec of
         cost and delay (more paper work, pre-bankruptcy debt counseling, post-
         bankruptcy financial counseling), which might cause some debtors to lose
         property without filing, and thus lose incentive to file
     (5) Chapter choice-on ch. 7 side, the means test means applies only to 10-15
         of debtors, but on ch 13 side, almost 90% of those who now file in Ch. 13
         are below-median debtors who could’ve filed in 7 despite means test.
         choosing which chapter to file is still a completely free choice(p. 229-230)
         (a) Choice might be affected by whether courts will permit zero payment
              or low-payment plans for debtors who are essentially restructuring
              secured debt only
         (b) Bec most potential ch 13 filers will be below-median debtors, lowering
              the disposable income bar might encourage more 13 filings
         (c) IRS budget for 5 years might be unattractive for above-median filers
              who are not barred from 7 by means test
         (d) Cost of failure in 13 has risen substantially, and anecdote and data
              suggest that most ch 13 plans fail.
     (6) Lawyers-must call themselves “debt relief agencies” in any bankruptcy
         ads, higher sanctions that can be imposed for any mistake (professional
         sanctions, court fines, damage suits by trustee or client) 527-28, 707(b),
         such as failing to confirm the accuracy of debtor’s valuation of assets, and
         to predict interpretation of ambiguous term such as “replacement value” of
         an asset. Many lawyers, especially nonspecialist, may exit practice, and
         those who remain may raise fees.
         (a) Using Chapter 13 to Pay Fees: In re San Miguel (1984): Court holds
              that where the only reason debtors chose a Chapter 13 plan over a
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                   Chapter 7 is to disseminate payment of attorney’s fees (where
                   requested upfront in Chapter 7) and that because the Chapter 13 plan
                   as presented will pay creditors $1, the purpose of the Chapter 13 plan
                   is frustrated

                                CORPORATE BANKRUPTCY

7) Corporate Liquidation, Chapter 7
   a) Main differences between personal and corporate liquidation: no discharge for
       corporation, which instead expires under state corporate law; no exemptions for
       corporations, so that all property is available for repaying creditors.
       i) Because negotiations in Ch. 11 take place wth Ch. 7 as the alternative, and bec
            the analysis of the hypothetical Ch 11 position requires an analysis of the
            hypothetical ch 7 position, in any workout situation (in or out of bankruptcy,
            ch. 7 or 11), each of the parties in the business negotiation will do a
            liquidation analysis which shows the likely result for the party in ch. 7
       ii) Ch. 7 a better place to liquidate than state law proceedings, since state law
            encourages a grab rule instead of an orderly sale of assets
   (b) Involuntary Bankruptcy: because it always leads to a debtor’s loss of control,
       partial or complete, over company, and may hurt business itself through loss of
       credit and general reputational damage, combined with the natural optimism of an
       entrepreneur, debtors have strong incentive to resist filing. Ideal solution is for
       the debtor to initiate
       iii) §303 of the Code reflects the decision in the U.S. to protect debtors by making
            involuntary bankruptcy relatively difficult. Traditionally for ch 7 but also
            available in ch 11.
       iv) Involuntary petition can only be filed against a person, except a farmer, family
            farmer, or corporate that is not a moneyed, business, or commercial
            corporation, per §303(a)
       v) Person, per §101(41), includes individual, partnership, and corporation, but
            does not include governmental unit
       vi) Corporation, per §101(9)(iv), includes unincorporated company or association
   b) §303(a)(3)(A): An involuntary filing is commenced against a person if such a
       person is a partnership by fewer than all of the general partners in such
       partnership
   c) §303(h): If it is not timely objected to by debtor, an involuntary bankruptcy will
       be filed (followed by automatic stay and property of the estate), same as debtor
       himself files, or, if it is contested, after trial, if (1) the debtor is generally not
       paying such debts as they become due unless such debts are the subject of a bona
       fide dispute, or (2) within 120 days before the date of the filing, a custodian, etc.
       was appointed or took possession
       i) Note varying definitions of insolvency
            (1) Bankruptcy insolvency: liabilities outweigh assets
            (2) Equity insolvency: debtor is unable to pay his debts as they mature
            (3) Generally not paying standard, as employed in statute
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      ii) In re Faberge Restaurant of Florida, Inc. (1997): Court holds that creditors
           filing involuntary bankruptcy cannot be involved in bona fide dispute over
           whether the debt is owed and that
   d) Additionally, the court requires that, where there are at least 12 creditors, 3 of
      those creditors must join in most involuntary petitions, per §303(b)(1) (only one
      to file if less than 12, excluding insiders); also creditors filing must hold at least
      $12,300
      i) In re Gibraltor Amusements (1961): Court holds that creditor and its
           subsidiaries are two distinct creditors for the purposes of §303
   e) Involuntary bankruptcy can be used a bullying tactic by creditors, so §303(i)
      imposes attorney’s fees and costs (and sometimes punitive damages) against
      unsuccessful petitioners
      i) In re Silverman (1998): Court holds that where petitioner persisted in filing
           of involuntary bankruptcy against Silverman after the court adjudged that the
           petitioner was a subject of a bona fide dispute, the petitioner is responsible for
           paying attorney’s fees, and since he acted in bad faith, punitive damages
8) Corporate Bankruptcy: Chapter 11
   a) Introduction
      i) Resembles in broad conceptual outline the other rehabilitation chapter,
           Chapter 13; reorganizing the debt by extending the time in which to pay it and
           reducing the total amount to be paid
      ii) Companies choose Chapter 11 because Chapter 7 means corporation “death”
      iii) Purely financial reorganizations occur when a business is operationally sound
           but has acquired loads of debt; here, old equity is wiped out, while unsecured
           creditors become new stockholders; this is called a balance sheet
           reorganization because it takes place on paper and does not shift the
           operations
      iv) Wholesale reshuffling occurs when the operations need revamping; DIB will
           sell money-losing divisions, trim excess staff, cut back on number of company
           car
   b) Mechanics of Chapter 11
      i) When a debtor files a petition, the automatic stay is imposed (§362(a)); the
           business continues to operate in the ordinary course (§363(b)), under the
           control of the debtor in possession (“DIP”)
      ii) DIP is limited in the use of its secured assets (§363(c), (e)); also faces
           prospect that secured creditors will seek court approval for lifting the
           automatic stay as to their collateral, unless the DIP can provide adequate
           protection of their interests (§§361, 362(d))
      iii) DIP may obtain financing and other credit with court approval (§364)
      iv) DIP had avoiding powers:
           (1) Power to recover preferences (payments of transfer of property to favored
                creditors within 90 days of bankruptcy), §547
           (2) Power to assume or breach outstanding executory contracts, §365
           (3) Power to void fraudulent conveyances, §§548, 544(b)
           (4) Power to set aside unperfected or late-perfected security interests in
                debtor’s property, §§544(a), 547
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        (5) Power to require turnover of property of the debtor being held by another
            entity, §§542, 543
   v) Creditors’ Committee is appointed to scrutinize the debtor’s activities on
        behalf of all creditors and to negotiate with the debtor, per §1102
   vi) To conclude, debtor will propose Plan of Reorganization, in which it will
        offer to pay each class of creditors a certain percentage of their claims over a
        stated period of time. Payment can be in cash, property, or securities issued by
        reorganized debtor
   vii) The Plan must be accepted by the majority of creditors in each class; those
        creditors that have not accepted must be paid at least as much as it would have
        gotten in a liquidation (§§1126(c), 1129(a)(7), analog to “best interests” test)
   viii) Upon confirmation, debtor is discharged from all pre-petition debt, except
        as provided in the Plan, per §1141(d); contrast to Chapter 13, giving discharge
        only after plan has been completed and Chapter 7, giving no discharge at all to
        a corporate debtor
c) The Automatic Stay and Adequate Protection
   i) Automatic stay is immediate, nationwide (or even worldwide) and strictly
        enforced even against a large number of people who had no prior notice or
        opportunity to contest it, and in action taken in innocent violation of stay by
        people without notice of filing.
   ii) Repossession immediately preceding bankruptcy (within 90 days) will not
        improve the creditor’s position; the DIP can force return of the property to the
        debtor (i.e. voidable preference)
   iii) Court must act on a request to lift the stay within 30 days or it will
        automatically be lifted as to the requesting creditor’s collateral (§362(e));
        burden will be on DIP to show the existence of adequate protection of the
        secured party’s interest in the collateral (§362(g))
        (1) Farm Credit of Central Florida, ACA v. Polk (1993): Court holds that
            pre-petition agreement by appellee to waive right to contest appellant’s
            relief from stay is not valid because the purpose of stay is to protect all
            creditors and put them on even footing with one another and therefore
            cannot be waived
   iv) Exceptions to the Automatic Stay: Government Claims, §105
        (1) For determining when a stay for government is excepted:
            (a) Pecuniary purpose test: whether the government’s proceeding relates
                primarily to the protection of the government’s pecuniary interest in
                the debtor’s property or to matters of public safety
            (b) Public policy test: distinguishes between proceedings that adjudicate
                private rights and those that effectuate public policy
        (2) United States v. Seitles (1989): Court holds that where the harm caused
            by defendant is neither continuing nor public health-related and where the
            case is primarily an adjudication of private rights, there is no exception to
            the automatic stay for governmental claims; also, though non-debtors
            (even non-debtor codefendants, as Seitles) are not entitled to §362 relief,
            §105 enables an exception where (1) there is irreparable harm or (2)
            sufficiently serious questions and a balance of hardships
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           (a) The test for non-debtors applying the stay is met when the action
               against the non-debtor codefendant is so inextricably woven with the
               affairs of the debtor that it would substantially hinder the debtor’s
               reorganization effort
   v) Lifting the Stay
       (1) Lack of Adequate Protection (§362(d)(1), (2)): creditor must make a
           motion to lift stay if the value is slipping below cushion; ex post complaint
           will not help
           (a) In re Rogers Development Corp. (1980): Court holds that plaintiffs
               are adequately protected by equity cushion that exists between the
               amount of debtors’ obligation and the value of property (under
               §361(3)), where such property is increasing in value; further, even if
               the plaintiff has no equity in the property, stay will not be lifted if such
               property is essential to the debtor’s reorganization
               (i) Value is determined to be the average of the FMV estimates
                    offered by the two competent appraisers
               (ii) The lack of an equity cushion is not indicative of whether the stay
                    will be lifted; but the less the equity cushion, the more compelling
                    the argument that the decline will hurt; a fully secured creditor will
                    have to show a steeper decline
               (iii)Note that the secured creditor can only be paid for interest to the
                    extent by which he is oversecured
           (b) §362(d)(3) forces small single-asset cases to propose workable plans
               promptly or to immediately start paying interest on value of collateral
       (2) Recall §362(d)(2):
           (a) Does the debtor have equity in the property?
           (b) Is such property necessary to effective reorganization?
       (3) Why don’t we allow secured creditors to go after their assets immediately
           upon bankruptcy filing? Value-enhancing, i.e. preventing one secured
           creditor from single-handedly destroying the business by taking his one,
           but consequential, asset
d) The Plan
   i) Creditors may file plan, per §1121(b)(2) or (3), if and only if the debtor has
       not filed a plan before 120 days after the date of the filing or the debtor has
       not had his plan accepted by the majority in each class of creditors within 180
       days of filing, respectively; hence, if the debtor has filed but has failed for 4
       months to provide a plan, the creditor may himself file a plan
       (1) The court may increase or reduce the number of days (120 or 180) on
           request by party in interest after notice and a hearing
   ii) What do creditors get under the plan?
       (1) Oversecured creditors get full amount of claims, including post-petition,
           pre-confirmation interest (up to the value of the collateral) and they will
           then earn interest post-confirmation on the amount that has accrued up to
           confirmation
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        (2) Undersecured creditors get the value of their collateral at time of filing,
            plus post-confirmation interest on that amount, plus pro rata payment for
            bifurcated general unsecured portion
        (3) Unsecured get at least the amount they would have gotten in Chapter 7
            liquidation, plus interest (present value)
e) Appointment of a Trustee or Examiner: in some circumstances, creditors
   complain because the DIP is making business choices that are hostile to creditor
   interest; note that estate is run for creditors, not shareholders (debt before equity,
   absolute priority rule); disputes can be resolved by the appointment of a TIB to
   run the business or an examiner
   i) §1104: Appointment of Trustee or Examiner
        (1) Trustee to run business/estate:
            (a) (a)(1) for cause, including fraud, dishonesty, incompetence, or gross
                 mismanagement of the affairs of the debtor by current management; or
            (b) (a)(2) if such appointment is in the interest of creditors, any equity
                 security holders, and other interests of the estate, without regard to the
                 number of holders of securities of the debtor or the amount of assets or
                 liabilities of the debtor
        (2) Examiner to conduct an investigation of debtor as is appropriate, including
            allegations of fraud, dishonesty, incompetence, misconduct,
            mismanagement, irregularity of management:
            (a) (c)(1) such appointment is in interests of creditors, any security
                 holders, and other interests of the estate; or
            (b) (c)(2) the debtor’s fixed, liquidated, unsecured debts, other than debts
                 for goods, services, or taxes, or owing to an insider, exceed $5,000,000
   ii) Only if estate does not have a trustee can creditors move to have an examiner
        appointed
   iii) In re Sharon Steel Corp. (1989): Court affirms the bankruptcy court’s use of
        a totality of circumstances standard to show §1104 cause for appointment of
        TIB where DIP’s actions threatened payment to creditors
   iv) In re Geneva Steel Co. (1999): Court denies Geneva’s motion to implement
        an employee retention plan during Chapter 11 reorganization, as an attempt to
        keep the current managers from fleeing to a more successful business, which
        Geneva claimed (1) would stabilize the company during reorganization and
        (2) would be based on the board’s sound business judgment
        (1) Note that it is ordinarily in the creditors’ best interest to have the debtor
            continue to run the business
f) Cash Collateral: §363
   i) Congress has placed few restraints on DIP’s use of cash that is not subject to a
        lien, so long as it is used in the ordinary course of business, per §363(c)(1);
        anything spent post-petition will be subject to a §507(a)(1) administrative
        expense
   ii) Debtor is much more constrained in its use of cash that is subject to a lien,
        which is usually cash derived from the sale of inventory or collection of
        accounts subject to an Article 9 proceeds claim by a lender secured by
        inventory or accounts, called cash collateral
                               BANKRUPTCY OUTLINE



     (1) Per §363(e), cash from the sale of inventory subject to an Article 9
         proceeds claim by a lender secured by inventory cannot be encumbered in
         some other way without the permission of the bankruptcy court (notice
         and hearing to determine whether there is adequate protection) or consent
         of the creditor
         (a) UCC §9-315(a)(1): A security interest continues in collateral
             notwithstanding sale, lease, license, or exchange unless the secured
             party authorized the disposition free of security interest; per (a)(2), a
             security interest attaches to any identifiable proceeds of collateral
             (i) Note that interest continues in goods, not is cash received for them
             (ii) Note further that security interest in inventory acquired filing
                  disappears because liens do not extend post-petition to after-
                  acquired property, though proceeds do (because new property can
                  be traced back to proceeds)
iii) Lock box arrangement: instructing those who owe debtor to send their
     payments to a certain P.O. Box, which is under control of the creditor or a
     third party; parties have agreement as to how much of the money is in the lock
     box and how much goes to the creditor
     (1) In re Earth Lite (1981): Court is satisfied that Sun Bank is more than
         adequately protected if the Debtor is required to cure and maintain and
         that debtor may dip into lockbox
iv) Setoff: right of any creditor to offset a debt its owes the debtor against a
     debtor owed to the creditor by the debtor (if I have $1k in my bank account, I
     have technically made the bank a loan for that amount. If I hold a loan from
     the same bank for $1k, the bank can use the $1k in the account to offset the
     full loan), per §553; treated as a security interest for most purposes under the
     code; subject to automatic stay to be lifted only by the court under §363(c)
     (1) §553(a)(3): Setoff is permitted except to the extent that the debt owed to
         the debtor by such creditor was incurred by such creditor (A) after 90 days
         before filing; (B) while debtor was insolvent; AND (C) for the purpose of
         obtaining a right of setoff against the debtor
         (a) Bank of Maryland v. Strumpf (1995): Creditor could not set off
             without violating the stay, but the creditor could protect itself with an
             administrative freeze by holding the money in the checking account
             pending its application to the bankruptcy court for a stay motion.
         (b) In re Hal, Inc. (1996) (where government argues that it should be
             entitled to setoff where the IRS owed the debtor a refund, while 4
             other federal agencies were owed money by debtor): Court holds that
             the 5 federal government agencies, except those acting in a distinctly
             private capacity, are a single entity for purposes of setoff; and that the
             court’s allowing of setoff was not an abuse of discretion
     (2) Setoff may be denied at the discretion of the court if:
         (a) Creditor has acted inequitably
         (b) Setoff would jeopardize a debtor’s ability to reorganize
         (c) In liquidation context, resulting in preference or priority over other
             unsecured creditors
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   (3) Note on compensating balance: banks may contrive a minimum balance so
       as to allow them to setoff in the event of bankruptcy
v) Post-Petition Financing: §§ 364, 507, 726
   (1) Filing for bankruptcy will not alone produce any cash, so the debtor must
       find someone willing to make a new infusion; debtor’s current lenders,
       who have the most at stake, are often the most likely source of new funds
   (2) Options for Obtaining Financing
       (a) §364(a): May obtain unsecured credit and incur unsecured debt in the
           ordinary course of business allowable under §503(b)(1) as an
           administrative expense
       (b) §364(b): May obtain unsecured credit and incur unsecured debt not in
           the ordinary course of business pursuant to notice and hearing and
           allowable as an administrative expense under §503(b)(1)
       (c) §364(c): If trustee is unable to obtain unsecured credit allowable as an
           administrative expense, Court, after notice and hearing, may authorize
           obtaining of credit:
           (i) With priority over any or all administrative expenses
           (ii) Secured by a lien on property of the estate that is not otherwise
                subject to a lien
                1. In re Garland Corp. (1980): Court permits the use of
                     unencumbered assets as collateral to secure post-petition
                     indebtedness upon compliance with §364(c)(2)
           (iii)Secured by a junior lien on property of the estate subject to a lien
       (d) §364(d)(1): May incur debt secured by a senior or equal lien on
           property of the estate that is subject to a lien only if: (A) trustee is
           unable to obtain such credit otherwise; and (B) there is adequate
           protection of the interest of the original lien holder whose claim has
           been subordinated to the senior lien
   (3) Security interest in property
       (a) Note that pre-petition security interests in after-acquired property
           cease to operate immediately when bankruptcy is filed, per §552(a)
           (i) Secured creditor can claim a security interest in post-petition
                property by way of a proceeds argument under UCC §9-315; e.g.
                if secured creditor can trace the purchase of the new, post-petition
                inventory back to the sale of the old, pre-petition inventory in
                which it held an interest, the secured creditor could claim a
                continuing security interest
           (ii) In re Hubbard Power & Light, Inc. (1996): County has a $1m
                lien against debtor’s priority, to secure reimbursement of the $1m
                spent fighting a fire at debtor’s real property. In Ch. 11, County
                objected to having its lien subordinated to a post-petition financer
                willing to lend the debtor the money for clean up and start up after
                fire. Because any improvement to the debtor’s real property via
                clean-up to allow operating, will greatly improve the value of the
                collateral, the court granted the debtor’s post-petition senior
                priority financing under §364(d)
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       (4) Cross-Collateralization and Mootness
           (a) Cross-collateralization: securing a pre-petition obligation with new or
               additional collateral post-petition in connection with a new post-
               petition loan; not specifically addressed in code; question is whether a
               creditor’s pre-petition position (often under-secured) get promoted in
               exchange for post-petition financing?
               (i) Shapiro v. Saybrook Manufacturing Co., Inc. (1992): Court
                    holds that cross-collateralization is not authorized under the
                    bankruptcy code because (1) it is not authorized as a method of
                    post-petition finance per §364 and (2) it is directly contrary to the
                    fundamental priority scheme of the code under §507
           (b) Mootness: refers to the assumption that any challenge to cross-
               collateralization is moot under §364(e), to encourage the extension of
               credit to debtors in bankruptcy by eliminating risk that lien securing
               the loan will be modified on appeal.
               (i) Several key reorganization issues are difficult for appellate review
                    because a stay of the bankruptcy court order will often sink the
                    company, but absent a stay, it is hard for the appellate court to
                    resolve
               (ii) §364(e): Reversal or modification on appeal of an authorization to
                    obtain credit or incur debt, or of a grant of a priority on a lien, does
                    not affect the validity of any debt so incurred or priority granted
                    that extended the credit in good faith, unless such authorization or
                    priority were stayed pending appeal
               (iii)Designed to encourage post-petition lenders by assuring them that
                    their rights will not be upset by an appeal of the order that gives
                    them security or a priority, leaving them with a very high-risk loan
       (5) Owner Financing: some debtors turn to the old equity holders as another
           source of funds in return for continued ownership of the post-bankruptcy
           business
           (a) Equity cannot retain value unless all the creditors have been paid in
               full (“Absolute Priority Rule”); some courts allow equity to retain
               value when the it provides value that cannot be obtained elsewhere
           (b) Bank of America National Trust and Savings Assoc. v. 203 N.
               LaSalle St. Partnership: Court holds that the partnership cannot buy
               the equity in the business as part of plan confirmation without giving
               others the opportunity to bid
g) Reshaping the Estate: avoiding powers allow TIB to undo pre-bankruptcy
   transactions between the debtor and certain creditors, to the benefit of all
   unsecured creditors; bringing an avoidance action gives the TIB or DIP much
   greater leverage in negotiating with creditors, DIP is trying to save the business as
   going concern on behalf of all creditors, as well as other constituencies
   (employees, shareholders, community). Thus, DIP’s rights are not just rights of
   old debtors, but also the collective rights of creditors to preserve business assets
   i) Strong Arm Clause §544(a): power to “knock off” unperfected interests
       (1) Relevant Code Provisions
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    (a) §544(a) avoidable liens:
        (i) (1) Creditor that extends credit to debtor at time of commencement
             of case and obtains at that time a judicial lien on property
        (ii) (2) Creditor that extends credit to debtor at time of commencement
             of case and obtains at that time an execution against the debtor that
             is returned unsatisfied at such time
        (iii)(3) Bona fide purchaser of real property from the debtor against
             whom applicable law permits such transfer to be perfected
    (b) §362(a)(4): any act to create, perfect, or enforce any lien against
        property of estate once bankruptcy has been filed is prohibited
    (c) UCC §9-317(a)(2): Security interest is subordinate to the rights of a
        person that becomes a lien creditor before the security interest is
        perfected
    (d) UCC §9-317(e): If a purchase-money security interest is perfected by
        filing no later than 20 days after the debtor receives delivery of
        collateral, the security interest takes priority over the rights of a buyer,
        lessee, or lien creditor that arise between the time the security interest
        attaches and the time of the filing
        (i) What happens if filing of security interest is done right as
             bankruptcy is filed?
             1. §362(b): does not operate as a stay of any act to perfect an
                  interest in property to extent that trustee’s rights and powers
                  are subject to such perfection under §546(b), i.e. when Article
                  9 gives 20-day window, and debtor files for bankruptcy within
                  20 days, you still have rest of 20 days to file; still entitled to
                  automatic reach-back
(2) Wonder-Bowl Properties v. Hi Ja Kim d/b/a Laura’s French Baking
    Co. & Laura’s Bakery (1993) (where debtor seeks to avoid lien on
    grounds that initial filing was void because it lacked certain information
    required by state civil procedure): Against a holder of a real property
    interest, the TIB has the status of a bona fide purchaser of a real property.
    The mistakes in the initial failing were such that a hypothetical bona fide
    purchaser on the date of the bankruptcy would had have neither actual,
    constructive, nor inquiry notice of the judgment, and thus the lien was
    avoidable under §544(a)(3).
    (a) Only secured parties and buyers are protected against misinformation
        of certain types in a filed financing statement, while unsecured
        creditors represented by the TIB are bound by a defective and
        misleading filing
(3) Federal Tax Liens: before the lien is filed, the strong arm provisions
    permit TIB to exercise rights of a judgment lien creditor or bona fide
    purchaser of real estate on the date of filing, which gives the TIB priority
    over the unfiled tax lien; after the tax lien is filed, however, the TIB must
    recognize the lien in bankruptcy and treat the government as it does other
    perfected secured parties
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ii) Preferences: powers of TIB include ability to dismantle transactions between
    debtor and creditors that took place within 90 days immediately preceding
    filing
    (1) §547(b): Trustee may avoid any transfer of an interest of the debtor in
         property:
         (a) To or for the benefit of a creditor;
         (b) For an antecedent debt owed by the debtor before such transfer was
             made;
         (c) Made while the debtor was insolvent;
         (d) Made:
             (i) on or within 90 days before the date of the filing of the petition; or
             (ii) between ninety days and one year before the date of the filing of
                  the petition, if such creditor at the time of such transfer was an
                  insider; AND
         (e) that enables such creditor to receive more than such creditor would
             receive if –
             (i) The case were a case under chapter 7 of this title;
             (ii) The transfer had not been made; and
             (iii)Such creditor received payment of such debt to the extent provided
                  by the provisions of this title
    (2) Under §547(e)(2)(A), a transfer is made at the time such transfer is takes
         effect, if such transfer is perfected after 10 days
    (3) In re Calvert (1998) (where debtor borrows $12,000 from parents to pay
         settlement secured by a mortgage note and a lien on pickup truck): Since
         there was no evidence of a written security agreement and the notation on
         the certificate of title did not create a presumption that one existed, Court
         holds that the settlement payment was never property of the debtor’s estate
         and thus was not a voidable preference under §547(b)
    (4) Earmarking doctrine holds that a voidable preference must involve a
         transfer of an interest of the debtor in property. It allows preference
         payments, if there is:
         (a) Existence of an agreement between new lender and debtor that the new
             funds will be used to pay specified antecedent debt
         (b) Performance of agreement according to terms
         (c) Transaction viewed as a whole does not result in any diminution of the
             estate
    (5) Fidelity Financial Services, Inc. v. Fink (1998): Court holds that where
         the security interest is perfected more than 20 days after the debtor
         receives the property but within a relation-back or grace period provided
         by otherwise applicable state law, the transfer is avoidable, despite the
         state granted grace period
         (a) A transfer of a security interest is “perfected” under §547(c)(3)(B) on
             the date that the secured party has completed the steps necessary to
             perfect its interest, so that a creditor may invoke the enabling loan
             exception only by satisfying state law perfection requirements within
             the 20-day period provided by the federal statute
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(6) General rules about preferences:
    (a) Any payment made to the unsecured creditor (at moment of
        bankruptcy) within 90 days will be voidable because he will still to get
        pro rata distribution + previous payment
    (b) For secured creditors (at moment of bankruptcy):
        (i) If oversecured, no payment is voidable preference
        (ii) If undersecured, all payment (or any improvement in position –) is
             voidable because it makes creditor better off than he would be in
             Chapter 7
    (c) Any improvement in position, e.g. security interest, cash, property,
        increase in value of collateral due to debtor’s transaction, can be
        voidable
    (d) Pulling out one voidable preference may create another that precedes it
        (e.g. where a secured creditor is paid and an undersecured creditor is
        secured by same piece of property as paid secured, i.e. undersecured
        creditor will have higher value of collateral)
    (e) If one creditor buys out another creditor, no voidable preference
(7) Recall Fraudulent Transfers: Insiders should not be paid ahead of other
    creditors; UFTA §5(a) governs voidable preferences regarding such
    transfers
(8) Note: when DIP does not want to void a preference, creditors’ committee
    may initiate action
(9) Voidable Preferences at State Law
    (a) UFTA §§ 4, 5: an insolvent debtor’s repayment of debt to an insider
        can be set aside by other creditors without the need to file an
        involuntary bankruptcy, i.e. in or out of bankruptcy, insiders should
        not be paid ahead of other creditors.
    (b) The provisions of UFTA § 5(a) are not entirely coextensive with §
        547(b); the UFTA only restricts transfers to insiders
    (c) The UFTA has a four-year statute of limitations, while the Code
        reaches back only one year to review transfers to insiders
(10)         Exceptions to Voidable Preferences: §547(c)
    (a) Most common include:
        (i) Contemporaneous exchange (c)(1)
             1. Trustee may not avoid a transfer to the extent that such transfer
                 was:
                 a. Intended by debtor and creditor to be contemporaneous
                      exchange for new value given to debtor; and
                 b. In fact a substantially contemporaneous exchange
             2. In re Alexander (1998): Court did not allow a debtor to avoid
                 the transfer of a mortgage. The mortgage was an enabling loan
                 transaction under §547(c)(3)(A), since the parties had agreed
                 that the mortgage was a purchase money security interest given
                 to secure the new mortgage funds, that such funds were given
                 at the time the mortgage was signed, that such funds enabled
                 the debtors to acquire the property, and that the mortgage was
                   BANKRUPTCY OUTLINE



         perfected within 20 days. §547(c)(1), concerning
         contemporaneous exchanges for new value, did not apply,
         because an exchange involving a security transaction could not
         be substantially contemporaneous unless perfection, here
         recording the mortgage, occurred within the 10-day grace
         period of §547(e)(2).
(ii) Ordinary course payments (c)(2): ordinary between parties and
     within industry
     1. In re Roblin Industries, Inc. (1996) (where creditor contests
         (1) that trustee proved the debtor was insolvent and (2) the
         payments were specified in the ordinary course of business):
         Court holds that §547(c)(2)(C) requires creditor to show that
         the terms of payment fall within the bounds of ordinary
         practice of others similarly situated; otherwise it is a voidable
         preference
(iii)Purchase Money Exception (c)(3): purchase-money creditors will
     receive special protection in bankruptcy (i.e. 20 days to file)
     because the transactions that bring new property into the estate are
     regarded as the most beneficial
(iv) New Value Exception (c)(4): only shelters preference payments
     that come before a particular extension of new value, payment-by-
     payment basis
     1. We should not extract repayment of preferences from a helpful
         creditor who, after the preferential payment, extended new,
         unsecured credit to the debtor and who will suffer in
         bankruptcy as an unsecured creditor to the extent of the new
         credit
     2. Any advance of unsecured credit after the preference will work
         to trigger §547(c)(4), but the dollars of each advance can be
         counted only once
     3. Mechanics of (c)(4):
         a. Identify payment/transfer that is preferential under 547(b)
         b. See if the avoidable amount of later advances new value
              qualifies under (c)(4)
              i. Qualifies “to the extent that, after such transfer, such
                  creditor gave new value to or for the benefit of the
                  debtor not secured by an otherwise avoidable security
                  interest; and on account of which new value the debtor
                  did not make an otherwise unavoidable transfer to or
                  for the benefit of such creditor” 547(c)(4)(A)-(B)
              ii. For ex, if creditor receives $1k preferential payment,
                  then made $700 delivery of new supplies on credit, the
                  $1k preference is reduced by the $700 new value)
         c. Test new value for qualification under (c)(4) by
              determining whether under (c)(4)(A) and (B),it was
                   BANKRUPTCY OUTLINE



             accompanied by a payment (or transfer or was secured)
             which payment was itself unavoidable.
             i. For ex: creditor receives $1k preference, and then
                  delivers $700 in new supplies that were paid for in cash
                  on delivery
             ii. When the debtor files for bankruptcy, new value would
                  not qualify since it was accompanied by the full $700 in
                  time of delivery
             iii. Second payment not avoidable as a preference because
                  it was made at the moment the debt was created and
                  therefore not paid on an antecedent debt under §547(b)
             iv. Since payment is unavoidable, $700 of new value is
                  disqualified under (c)(4)(B)
(4) ALTERNATE APPROACH to (c)(4)
        a. Work forward chronologically from 90th day to filing,
             identifying each payment that qualifies as preferential
        b. Work backwards from each grant of new value to
             determine whether it is subsequent to a given preference
             with the same creditor having advanced unsecured credit to
             the debtor
        c. Any advance of unsecured credit after the preference will
             work to trigger section (c)(4), but the dollars of each
             advance can only be counted ounce.
        d. EX: two preferences of $1k each, followed by extention of
             $1.5k will permit creditor to keep $1.5k of the two
             preferences, not the full $2k
(v) Floating lien (c)(5): trustee may not avoid a transfer that creates a
    perfected security interested in inventory or a receivable or the
    proceeds of either, except to the extent that the aggregate of all
    such transfers to the transferee cause a reduction, as of the date of
    the filing, of any amount by which the debt secured by such
    security interest exceeded the value of all security interests for
    such debt on the later of 90 days or one year
    1. Whether creditors improve their position, i.e. look at amount of
        under-secured at time of bankruptcy and then look at amount
        undersecured when transfer is made; difference is voidable
        preference
    2. In re Nivens (1982) (where TIB contends that the Bank had
        benefited from an improvement in position from the increase in
        the crop’s value during the 90 days before bankruptcy, so that
        part of its interest in crop and support check was voidable as a
        preference): Court holds that the increase in crop value that is
        attributable to good fortune and sunshine does not involve a
        transfer and so can be kept by the creditor with a security
        interest in the crop
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             (vi) Setoff Preferences (§553(b)): empowers trustee to recover from
                  an offsetting creditor the amount by which the creditor’s setoff
                  position improved during the 90 days before bankruptcy; creditor
                  who waits and exercises right of setoff post-bankruptcy, with
                  permission of court, does not have to surrender any improvement
                  in setoff position obtained during the 90-day period
iii) Executory Contracts, per §365: firm examines ongoing contracts, those
     negotiated before the filing for which performance is continuing or is due in
     the future
                         Debtor has not paid           Debtor has paid

      Creditor         Executory contract –          Buyer’s estate has §541
       has not          debtor can assume,            claim against seller
      delivered            reject, assign
                                                    Assuming no voidable
      Creditor          Debtor breach with           preference, delivery is
         has            creditor §502 claim             part of the estate;
      delivered                                       bankruptcy does not
                                                    change any legal rights
   (1)   In determining whether there is an executory contract, most courts look to
         see if there is substantial performance to be done by both the debtor and
         the creditor
   (2)   §365(a): Subject to court’s approval (notice and hearing, alerting all
         creditors), DIP may assume or reject any executory contract or unexpired
         lease of the debtor
   (3)   Agreements Not Assignable: per §365(c), trustee may not assume or
         assign any executory contract, whether or not such contract prohibits or
         restricts assignment of rights or delegation of duties, if applicable law
         excuses party to contract from accepting performance by an entity other
         than the debtor AND such party does not consent
         (a) §365(c)(1): if there is some other reason, besides the nonassignment
             clause in contract, in state law, then it will not be assignable
         (b) §365(c)(2): cannot assume or assign a contract for financing
             (i) Part that says can lend money in future is not assumable; part that
                  gives credit is assumable; at common law, contracts are never
                  severable, but if you do not let parties sever out, parties can opt out
                  of bankruptcy
         (c) §365(c)(3): Trustee may not assume or assign any unexpired lease if
             such lease is of nonresidential real property and has been terminated
             under applicable nonbankruptcy law prior to filing
   (4)   Bankruptcy Termination Clause: per §365(e)(1)(A), an executory
         contract may not be terminated at any time after commencement of case
         solely because of provision in contract conditioned on insolvency or
         financial condition of debtor, commencement of filing, or appointment of
         trustee, unless applicable law allows termination
   (5)   When may a debtor assume or reject an executory contract? §365(d)
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    (a) Under §365(d)(1), in a Chapter 7, trustee has 60 days to assume or
        reject contracts or get additional time for cause before court;
        otherwise, contract is rejected
    (b) Under §365(d)(2), trustee may assume or reject an executory contract
        at any time before confirmation of plan, but the court may, on request
        of any party, order trustee to determine within a specified period of
        time whether to assume or reject such contract
    (c) Under §365(d)(3), trustee shall perform all obligations of debtor
        arising from and after the order for relief under any unexpired lease of
        nonresidential property, until such lease is assumed or rejected; court
        may extend for cause the time for performance of any such obligation
        arising within 60 days after date of order for relief
    (d) Contract MAY NOT be assumed if it was terminated prior to
        bankruptcy under no-bankruptcy law. The counterparty to contract
        with debtor often argues that its contract was history before debtor
        filed and may therefore not be assumed.
        (i) In re Krystal Cadillac-Oldsmobile-GMC Truck, Inc. (1998)
             where parties had been involved in litigation to allow the
             dealership to terminate the agreement, and the final determination
             by the court was rendered a few weeks before petitioner filed for
             bankruptcy, court held that a franchise agreement involving a
             vehicle dealership was still in effect when petition was filed and
             that the franchise was thus an asset of the estate.
(6) Assignment: per §365(f), except as provided in (c), trustee may assign an
    executory contract of debtor, notwithstanding provision restricting
    assignment, only if:
    (a) Trustee assumes such contract in accordance with this section and
    (b) Adequate assurance of future performance by assignee of such
        contract or lease is provided
    (c) Note: Where future assignment changes expectations of contract, it
        will likely be disallowed
    (d) In re Jamesway Corp (1996) court allowed a debtor to assign a real
        estate lease and nullified a lease provision which required the lessor to
        pay the landlord 50% of the profit received from an assignee or
        sublessee, because §365(f) allows assignment on an unexpired lease
        despite clauses in the lease prohibiting, conditioning, or restricting
        assignemnt
(7) Default of Contract Pre-Petition: §365(b)(1)
    (a) If there has been a default in an executory contract, the trustee may not
        assume such contract or less unless at the time of assumption of such
        contract, the trustee
        (i) Cures, or provides adequate assurance that he will promptly cure;
        (ii) Compensates, or provides adequate assurance that he will promptly
             compensate for pecuniary loss; AND
        (iii)Provides adequate assurance of future performance under such
             contract or lease
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(8) Shopping Center Leases: §365(b)(3): adequate assurance of future
    performance of a lease of real property in a shopping center includes
    adequate assurance:
    (a) Of the source of rent
    (b) That any percentage rent due under such lease will not decline
        substantially
    (c) That assumption or assignment of such lease is subject to all
        provisions of lease
    (d) That assumption or assignment of such lease will not disrupt any
        tenant mix in shopping center
(9) §365(h): If DIP rejects unexpired lease of real property under which
    debtor is lessor:
    (a) Under §365(h)(1)(A)(i), lessee can treat contract as terminated, giving
        §502 claim against the estate, i.e. pro rata payment for expectation
        damages
    (b) Under §365(h)(1)(A)(ii), lessee can reject rejection, i.e. retain rights
        and stay on land
    (c) Under §365(h)(1)(B), lessee can offset damages against rent, though
        when rent is insufficient to cover damages, he loses the amount not
        covered (so it may be in best interest simply to take §502 pro rata
        payment)
        (i) Also note §502(b)(6): cap on amount of damages resulting from
             termination of lease of real property
(10)         Rejection: per §365(g), rejection of executory contract or
    unexpired lease constitutes a breach of such contract or lease if such
    contract is not assumed
    (a) There will be a §502 claim on the damages from breach (contract
        market differential)
    (b) Note that there would have been no advantage to breach out of
        bankruptcy, but there is an asymmetry in bankruptcy, where the debtor
        pays $.30 on the dollar (but consider that if contract is assumed and
        subsequently breached, it is a §507(a)(1) administrative claim)
    (c) Concerns about abuse in filing petition only to reject contracts
        (i) In re Watkins, Lopes, Thomas (1997): Court holds that where the
             debtors are financially distressed, insolvent, and likely to
             reorganize successful and there is not evidence that they filed only
             to allow rejection of a contract, there is no abuse of the bankruptcy
             filing
        (ii) §1112: nonexclusive list for conversion or dismissal of a case;
             though bad faith is not specifically mentioned; can throw out cases
             on general equitable powers
(11)         Summary: What happens to executory contracts after filing?
    (a) If rejected, outstanding payments are §502 claims, i.e. pro rata
        distribution
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        (b) If assumed, then defaulted, outstanding payments become §507(a)(1)
            administrative claim; if defaulted prior to bankruptcy, must cure (i.e.
            paid in full)
            (i) Note that where there is pre-petition breach, creditor will argue
                 that lease was terminated pre-bankruptcy and as such will not go
                 into the estate
            (ii) But note §108(b): guaranteed window of 60 days to cure a default
iv) Statutory Lien: 2 disfavored liens
    (1) Landlord liens: DIP can void landlords’ liens because it gives to much of
        debtor’s estate to landlord to the detriment of other creditors §545(3)-(4)
    (2) Bankruptcy priority liens: liens created by state law that Congress
        believes to be phony in the sense that the states do not intend to creat real
        liens for all purposes, but rather to use the device of liens to impose
        special priority advantages for certain creditors in bankruptcy §545(1)(2)
        (a) Merchant’s Grain v. Adkins: court upheld a state law which created
            a lien, arising on the date of delivery of the grain, on all the
            agricultural commodity assets of a failed agricultural community
            handler, because it was not triggered by bankruptcy or insolvency.
            Because it was not really an effort to distribute the assets of an
            insolvent grain dealer to farmer creditors, it was not superseded by
            federal bankruptcy law
v) Fraudulent Conveyance
    (1) Recall §544(b), which gives TIB or DIP rights to set aside transfers of
        assets by an insolvent debtor for less than reasonably fair equivalent value
    (2) §548 provides fraudulent conveyance provisions
        (a) §548(a)(1): Trustee may avoid any transfer of an interest of the debtor
            in property that was made or incurred on or within one year before the
            date of the filing of petition, if the debtor voluntarily or involuntarily –
            (i) (A) made such transfer with actual intent to hinder or defraud
                 creditors; or
            (ii) (B) received less than a reasonably equivalent value in exchange
                 for such transfer; and
                 1. was insolvent on date of transfer;
                 2. was engaged in business for which property remaining with the
                     debtor was unreasonably small; or
                 3. intended to incur debts that would be beyond debtor’s ability to
                     pay
    (3) §550 addresses liability of transferee of avoided transfer
        (a) Trustee may recover, for the benefit of the estate, the property
            transferred, or, if the court so orders, the value of the property from –
            (i) The initial transferee of such transfer or the entity for whose
                 benefit such transfer was made
            (ii) Any immediate or mediate transferee of such initial transferee
        (b) Trustee may not recover from (1) immediate or mediate transferee of
            initial transferee that takes value in good faith, or (2) any immediate or
            mediate good faith transferee of initial transferee
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           (c) So creditor must argue that he is not the first transferee; if he is first,
               he has no argument, per §550(a); i.e. only immediate or mediate
               transferee of initial transfer may make a good faith argument
               (i) In re Video Depot, Ltd. (1997): Gambler gives casino a check
                    made by the company of which he was president. Casino argues
                    that the company transferred check to gambler, and that they then
                    took the check in good faith. Court holds that because creditor was
                    determined to be initial transferee under §550(a), the transfer was
                    fraudulent and voidable
       (4) Guarantees and Fraudulent Conveyance
           (a) Types of guarantees
               (i) Downstream guarantee: parent guarantees debt for subsidiary;
                    likely not fraudulent conveyance
               (ii) Upstream guarantee: Subsidiary guarantees debt for parent;
                    presumptively fraudulent conveyance
               (iii)Sidestream guarantee: affiliate guarantees debt
           (b) Even when there has been no direct economic benefit to a guarantor,
               courts performing a fraudulent transfer analysis have been increasingly
               willing to look at whether a guarantor received indirect benefits from
               the guarantee,
           (c) In re Image Worldwide, Inc. (1998) The guarantees paid by the
               debtor to an affiliate corporation were fraudulent transfers because
               there was no consideration for the guarantee of debtor's loan. Both
               corporations were owned by the same person, but only the affiliate
               corporation received funds from the loan. Suffered consequences to
               dealing in separate corporate shells: the individual companies cannot
               be run entirely for benefit of common owner. Creditors of each entity
               can insist that each transaction be made only for reasonably equivalent
               value for that entity
h) Equitable Subordination (§510(c)): may result from finding that purported loans
   should be treated as if the money had been used to purchase stock in the
   company; such loans are treated as equity investments and accordingly receive
   nothing until all creditors have been paid in full.
   i) In re Carolee’s Combine (1980): Court finds that structure of loan between
       debtor and defendant involves repayment from equity, giving rise to equitable
       subordination
       (1) In order for equitable subordination to be appropriate, three standards
           must be met:
           (a) Subordinated creditor must have engaged in some type of inequitable
               conduct;
           (b) Such conduct must have resulted in injury to other creditors and
               conferred unfair advantage to himself; and
           (c) Equitable subordination must not be inconsistent with Bankruptcy Act
   ii) Grounds for equitable subordination could be that creditor is acting as an
       equity holder (per Carolee’s) or that creditor is acting as an insider in ways
       that hurt other creditors
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        (1) Generally applied when there is an allegation of wrongdoing and
            wrongdoer is in some sense an insider, such as officer or principal
            stockholder; could also be applied where wrongdoer exercised control
            over debtor; i.e. creditor takes advantage of debtor
   iii) Per §510(c), after notice and hearing, court may:
        (1) (1) under principles of equitable subordination, subordinate for purposes
            of distribution all or part of an allowed claim to all or part of another
            allowed claim or all or part of an allowed interest to all or part of another
            allowed interest; or
        (2) (2) order that any lien securing such a subordinated claim be transferred to
            the estate
   iv) Note on contractual subordination (§510(a)): a creditor typically makes an
        agreement with another creditor that it will take payment from the debtor only
        after the other creditor has been paid in full first
        (1) Subordination agreements that are effective under state law are also
            effective once the debtor files for bankruptcy
i) Lender Liability: lawsuits in which a debtor claims that the lender acted
   improperly in the course of the loan transaction, usually during the period when
   the debtor was in financial trouble and the lender was trying to protect its
   position; based on allegations that a creditor has exercised control over the debtor,
   ultimately to the debtor’s detriment
   i) K.M.C. Co., Inc. v. Irving Trust Co. (1985): Court holds that the lender
        acted in bad faith, despite engaging in conduct that was expressly permitted
        by its loan agreement
j) Review: Assume creditor has a §506 claim – how can he be hurt?
   i) Claim is under-secured: do not get post-petition interest or penalties
   ii) Claim is just slightly undersecured: if value increases and creditor then
        become oversecured after filing, it is a voidable preference
   iii) Collateral value depreciates during bankruptcy
   iv) If in bankruptcy with unperfected security interest, creditor now becomes an
        unsecured, per strong arm clause of §544(a))
   v) Post petition financing could bump creditor from first place
   vi) Could be equitably subordinated
   vii) Security interests stop in after-acquired property at moment of bankruptcy
k) Negotiating the Plan
   i) Tax Implications of Bankruptcy
        (1) Cancellation of debt (COD) by the creditors under a plan may be treated
            as income to the debtor and therefore taxable
        (2) In general, under IRC §§108 and 1017, income arising from the discharge
            of debts in bankruptcy is excluded from gross income, but an amount
            equal to the exclusion must be offset against other tax advantages, such as
            net operating loss carryovers or tax credits, or it may reduce its basis in its
            assets the value of which can be deducted over the years via depreciation
            (a) Effect is to have debtor avoid immediate taxation on COD income at
                 risk of increased taxation in later years
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            (b) It increases the taxes that the debtor may have to pay in future years by
                reducing credits or deductions the debtor would otherwise have been
                able to use to reduce taxes on its future income
l) Plan Confirmation
   i) Reorganization structures
        (1) Debtor may wish to issue stock to some of its creditors because it does not
            foresee a cash flow large enough to allow sufficient cash payments to
            them
            (a) May be issuance of new stock or warrants to purchase more stock in
                the future
            (b) Old common shareholders may retain an interest, but their interest may
                be diluted by the issuance of additional common stock to some or all
                classes of creditors; such an issuance is often a “sweetener” to these
                creditors, promising them not only partial payment but also some hope
                of profit if the debtor eventually does well
        (2) Alternatively, the best return for creditors may be found in the sale of the
            debtor as an operating unit, i.e. on a going concern
            (a) Can be sale of company of sale of assets, such as copyrights,
                trademarks, and goodwill
            (b) Can be sale of stock
            (c) Can be sale of part of the debtor’s business or assets
        (3) Leveraged Buyout: company or division is sold, with purchase price being
            provided largely by bank loans or commercial paper secured by assets
            being purchased; purchasers are often management and employees of the
            business or division being sold; recall possibility of fraudulent conveyance
   ii) Two ways of confirming a plan:
        a. Meet all 11 requirements of §1129(a), including (a)(8), which requires all
            impaired interests to accept the plan (consensual), or
        b. Meet the requirements of §1129(b), which includes all requirements of
            (a) except (a)(8) and imposes two additional requirements (cramdown,
            see below)
   iii) Consensual Plans
        (1) §1129(a) requirements for consensual plan (every impaired vote in
            favor)
            (a) (a)(3): Proposed in good faith and not by illegal means
            (b) (a)(4): No money can be leaked out without court knowing about it
            (c) (a)(5): Nobody can be sneaked in without disclosure
            (d) (a)(6): Governmental regulatory commission governs rates (for
                regulated industry)
            (e) (a)(7): Each claim holder will approve or will receive at least as much
                as he would have received in Chapter 7
            (f) (a)(8): Each class has accepted the plan, or such class is not impaired
                under the plan
            (g) (a)(9)(A): §507(a)(1) claims get 100 cents on dollar at confirmation
            (h) (a)(9)(B),(C): Taxes as only priority creditors that can be strung out
                over six years; all others get deferred cash payments on effective date
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            (if accepted by class) or cash on effective date (if not accepted by
            class)
        (i) (a)(10): One class that is impaired must approve plan
        (j) (a)(11): Business must be feasible, i.e. not likely to liquidate right after
            confirmation
        (k) (a)(12): U.S. Trustee fees must be paid
        (l) (a)(13): Retiree benefits are continued
    (2) §1129: two flat legal requirements to plan acceptance:
        (a) (a)(7): Must be in the best interests of each individual creditor who
            does not agree to it (requires finding that each creditor will receive at
            least as much under the plan as that creditor would receive in
            liquidation, i.e. liquidation analysis)
        (b) (a)(11): Must be found feasible even if every creditor does agree to it
            (how likely the plan will succeed, reflecting best business judgment of
            the bankruptcy judge)
            (i) In re Merrimack Valley Oil Co. (1983): as to feasibility of plan,
                 court should look to adequacy of capital structure, earning power
                 of business, economic conditions, and ability of management; see
                 also In re Landmark at Plaza Park (1980) (substituting the
                 debtors’ projections of income and expense with its own judgment
                 as to the real amount required to get the project back to working
                 condition and the potential income for the project, and finding that
                 the debtor cannot fulfill its plan under 1129(a)(11)
            (ii) The individual creditor is protected by the best interest and
                 feasibility tests, but otherwise it is the will of the majority of each
                 class that binds all. this rule is important because it addresses a
                 fundamental problem of debt restructuring, eliminating the
                 incentive to hold out.
iv) Classification and Voting: most important check on a debtor is the
    requirement that the plan be approved by a majority of the creditors, who are
    divided into classes for purposes of voting and distribution, with those in a
    class sharing similar legal status and pro rata distribution
    (1) §1126(c) requires class approval by both a simple majority in number of
        creditors in class and a 2/3 majority in amount of debt in class
    (2) Code gives debtor some discretion in designating the classes, and in some
        cases debtors may classify creditors in part with an eye to creating
        favorable majorities in each class
        (a) In re U.S. Truck Co., Inc. (1986) (where U.S. Truck is using its
            classification power to segregate dissenting and assenting creditors in
            order to ensure that at least one class of impaired creditors will vote
            for the plan and make it eligible for cram down): Court holds that a
            creditor may be classified separately, despite that it has the same legal
            status, where it has a different stake in the future viability of the
            reorganized company and has alternative means at its disposal for
            protecting its claim
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    (3) A creditor only gets a vote if its interest is impaired; a creditor is impaired
        if there is any alteration of his rights, no matter how minor and even if the
        creditor’s rights are improved
        (a) In re Obt Partners (1997): Court holds that the disputed claim is
             impaired because a portion of it is accrued pre-petition and the legal
             rights of the creditor are altered
    (4) Single Asset Real Estate (SARE): ability to group together small claimants
        to create separate, accepting class is crucial to reorganization in this case;
        if there can be an accepting class of impaired creditors, only then the plan
        is eligible for cram-down
    (5) Note that every secured creditor is in its own class
v) Claims Trading
    (1) Outside investors may want to buy the claims (a) at a fraction of their face
        value, knowing they can make substantial returns, (b) to get a seat at the
        negotiating table to enhance repayment to class of claims, or (c) as a way
        to buy companies
    (2) The purchasing of claims by an affiliate or insider of the debtor for the
        sole or principal purpose of blocking a competitor from purchasing such
        claims is an obstructionist tactic done in contemplation of gaining an
        unfair advantage over other creditors (1126(e);
        (a) In re Figter Ltd. (1997): Court holds that (a) bad faith occurs only
             when the purchaser of claims does so out of selfish purpose to obstruct
             fair and feasible reorganization in the hope that someone would pay
             them more than the ratable portion and (b) each creditor in entitled to
             one vote for each of his unsecured claims
        (b) In re Applegate Property, Ltd. (1991)(disallowing creditor votes
             where the sole purpose of purchasing claim was to ensure
             confirmability of their own plan, by locking in an impaired class and
             by blocking acceptance of that plan, the creditor does not withstand the
             “good faith hurdle imposed by 1126 (e))
        (c) Bad faith does not occur when a creditor acts to preserve what he
             reasonably perceives as his fair share of the debtor’s estate;
             distinguishing a creditor’s self interest and a motive which is ulterior
             to the purpose of protecting a creditor’s interest
    (3) How can an individual shrink the amount of claims?
        (a) §1122(a): organizing creditors into classes of substantially similar
             claims
        (b) §1122(b): permits debtor to separate big debt from trivial debt; this is
             called a convenience or administrative class (de minimis level)
    (4) Vote buying is forbidden, per §1126(e); could be criminal offense if
        constituting fraud
vi) Solicitation and Disclosure §1125(a)(1)
    (1) Required disclosures: In re Malek (1983): Court requires disclosure
        statement to include description of business, history of debtor prior to
        filing, financial information, description of plan, how the plan is to be
        executed, liquidation analysis, management to be retained and
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         compensation, projection of operations, litigation, transactions with
         insiders, tax consequences
         (a) Creditors are free to complain if they believe the debtor has not
              provided enough information
     (2) Safe Harbor Rule: §1125(e) states that no person connected with the
         solicitation of plan acceptances and rejections is liable for a violation of
         the securities laws, so long as that person acts in good faith and in
         compliance with Title 11; i.e. bankruptcy laws displace securities laws and
         provide a safe harbor for anyone relying on the accuracy of a court-
         approved plan
         (a) Effect is to block SEC injunctive actions, in which the SEC seeks to
              enjoin a defendant from further violations of the securities laws
         (b) Securities laws generally provide for absolutely liability of a person
              that offers or sells securities if there was a failure to state a material
              fact in connection with the offer or sale, but these rules do not extend
              to good faith, though negligent, omissions or misstatements in
              connection with a bankruptcy reorganization
vii) Pre-packaged Bankruptcies: debtor and key creditors work out refinancing
     structure for debtor (involving forgiveness of debt, infusion of new capital,
     promise of future credit, etc.) before it takes the company through Chapter 11;
     when the company does go through Chapter 11, court and attorney fees as
     well as time are saved in the negotiating of the plan
     (1) §1126(c) deems pre-petition votes to be effective in bankruptcy
         proceedings so long as pre-petition solicitation complied with applicable
         disclosure laws. If there are no applicable SEC or similar laws, then
         solicitations will be effective if they comply with §1125 solicitation
         requirements in the Bankruptcy Code.
     (2) §1125(b) can be used to get around §1125(e) safe harbor
viii) §1144. Revocation of an Order of Confirmation: at any time before 180
     days after the date of the entry of order of confirmation, and after notice and a
     hearing, the court may revoke such order if an only if such order was procured
     by fraud; a revocation order shall (1) protect any entity acquiring rights in
     good faith reliance on the order of confirmation; and (2) revoke discharge of
     the debtor
     (1) At instant plan is confirmed in Chapter 11, debt agreed not to be paid in
         plan is discharged; if this is not paid, action can be brought in state court,
         but only for the amount that is not discharged by plan (i.e. discharge
         sticks)
     (2) Is there a right to sue for voidable preference after confirmation? Must be
         an authorization to recover preferences in the plan post confirmation;
         otherwise it is res judicata as to the parties because the court has entered
         an order for confirmation
ix) Cramdown: even if a plan satisfies the best interests test of §1129(a)(7) as to
     every nonaccepting creditor and meets the test of feasibility, it still must be
     accepted by the statutory majority of creditors in each impaired class under
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§1129(a)(8); if any class rejects the plan, then the plan can be confirmed only
if it satisfies the further tests set forth in §1129(b), i.e. cramdown
(1) To qualify for cramdown, the plan must attract at least one consenting
     class of impaired creditors so that the debtor will have the opportunity to
     cram down the plan against the dissenting class(es); without at least one
     consenting creditor, a plan cannot be confirmed, §1129(a)(10)
(2) §1129(b)(1) permits cramdown of the rejecting class only if the plan does
     not discriminate unfairly between classes and is fair and equitable, set
     forth in §1129(b)(2)
     (a) Liens of secured creditors must be preserved by plan and creditors
          must be paid the present value of their allowed secured claims (i.e. full
          value of collateral to extent to claim + market interest rate), per
          §1129(b)(2)(A)
     (b) If class of unsecured creditors votes against plan, it must be paid in full
          or the plan must provide that any parties junior to the class will get
          nothing, per §1129(b)(2)(B)
     (c) Preferred stockholders must receive full value of their preferred
          position or they cannot be crammed down unless the common
          stockholders get nothing, per §1129(b)(2)(C)
     (d) (B) and (C) are referred to as the absolute priority rule, meaning that
          the higher priority takers must be paid in full before the lower priority
          takers get anything, if the higher priority class has not consented to the
          plan
(3) Absolute Priority Rule: secured creditor is always entitled to present
     value of allowed secured claim, while unsecured creditor is entitled to full
     value of claim or junior holders receive nothing (if the class has dissented)
     (a) Bank of American National Trust & Savings Assn. v. 203 North
          LaSalle Street Partnership (1999) (where question is whether a
          debtor’s prebankruptcy equity holders may, over impaired creditors’
          objection, contribute new capital and receive ownership interests in
          reorganized entity, when the opportunity is given exclusively to old
          equity holders under a plan adopted without alternatives): Court holds
          old equity holders are disqualified from participating in such a new
          value transaction per §1129(b)(2)(B)(ii)), which in such circumstances
          bars a junior interest holder’s receipt of any property on account of his
          prior interest
          (i) I.e. plans providing junior interest holders with exclusive
              opportunities free from competition and without benefit of market
              valuation fall within prohibition of §1129(b)(2)(B)(ii)
(4) Small Business Reorganization: shareholders may be essential to
     keeping business afloat
     (a) Sweat Equity: promise of future labor as contribution to purchase
          equity ownership; Supreme Court has disallowed, per In re Ahlers,
          claiming that promise of future services cannot be exchanged in any
          market for something of value to creditors today; Court also claims
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        that there is always some value in control of an enterprise and in
        possibility that enterprise will rebound
    (b) Creditors often recognize that unless the manager stays on, the
        business is worthless; they can vote for confirmation despite their
        impairment if they believe they will do better in the reorganization
        than they will do trying to liquidate or sell the business
(5) Big Business Reorganization: management may be needed for expertise,
    but shareholders are not usually necessary for future operation of business
    (a) Absolute priority rule is modified to permit equity participation in
        reorganization if creditor consent is obtained
    (b) Key to retained ownership is often §1126, which controls voting
        process by which creditors approve a plan; absolute priority rule
        comes into plan only if there is a cramdown
(6) Cramdown against the Secured Creditor: Election: secured creditor
    receives present value of allowed secured claim, per §1129(b)(2)(A)(i)(I);
    for undersecured creditors, creditor can vote its unsecured portion of its
    claim and can object to cramdown on basis of absolute priority rule; or
    (a) Undersecured recourse creditor can use §1111(b) election under
        which an undersecured creditor can waive any deficiency or unsecured
        claim that would result from creditor’s undersecurity in exchange for
        debtor paying secured creditor over time the full number of dollars the
        creditor is owed; but the debtor is not required to pay the present value
        of the portion of the claim above the value of the collateral; i.e. debtor
        can cash out creditor for just collateral value, discharging rest against
        small payment to unsecureds
        (i) I.e. Creditor gets unsecured portion turned into secured portion,
            paid over time – catch is that he only will be paid in nominal
            dollars (not present value) to extent that claim is unsecured
            1. Suppose $1M claim, half secured and 10 cents on dollar for
                 unsecured – will be paid $500,000 +$50,000
            2. If plan is 25 years long, election is not a good option because
                 the present value is not being paid; if plan is short, it is good
                 option
            3. Besides length of plan, also want to know what distribution to
                 general unsecureds is (i.e. if it is 100%, no point in doing
                 election)
    (b) Undersecured nonrecourse creditor will be allowed a full recourse
        claim under §1111(b), saying, in effect, that if debtor wants to keep
        property for a payout over time, the creditor can at least claim full
        balance of loan, i.e. same treatment as undersecured creditor above
            1. If property is sold under §363, creditor cannot use §1111(b)
                 election – an undersecured creditor cannot turn its
                 undersecurity into a demand for full payment at sale by using
                 the election
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                        2. Note that sometimes participation as an unsecured creditor is
                            more valuable than the payment over time without an
                            allowance for present value
                        3. Can do two flips, i.e. first to recourse, then to completely
                            secured
   m) Regulatory Agencies and Bankruptcy: Nextwave
      i) Facts
           (1) FCC issues licenses in the public interest; decided to use an auction to
                distribute these licenses, assuming that people who will pay the most are
                the people who put it to best use (i.e. highest value user); FCC agrees to
                sell on credit (to favor startups); at the end of the auction, winners agree to
                pay in full or lose it
           (2) Nextwave bids $4.74 billion, then price goes down because FCC sells
                more; value of each spectrum goes down, market plummets, so FCC
                allows firms to pay later; NextWave does not take option, but instead
                declares bankruptcy and gives FCC secured claim
           (3) Market rises again, Nextwave says that it will pay the full amount then,
                and FCC says no because market price is still climbing and can reauction;
                FCC re-auctions for $15.85 billion
      ii) Question: Was FCC bound by §525, and not permitted to re-auction licenses?
           Who really controls in debtor-creditor relationship that is deeply regulated? Is
           it the Bankruptcy Code? Is it really different than non-regulated industry?
           This is a clash of two federal policies
9) Attorney Ethics
   a) Compensation and Disclosure
      i) Requirements
           (1) Counsel can only serve with court approval (§327(a)) – must not represent
                an interest adverse to the estate and must be disinterested,
           (2) Counsel’s fees must be approved by the court (§§328(a), 239(b), 330(a))
           (3) Only disinterested persons may serve as counsel (§327(a)), and
           (4) Representation and fee arrangements must be disclosed to the court and
                creditors (§329(a))
      ii) In re Lee (1989): Court holds that disqualification is allowable based on
           failure to disclose retainer, failure to disclose parallel employment
           applications to represent both debtors and their company, and attempt to
           represent debtors with interests in conflict
           (1) Rule 2014(a) requires the disclosure in an application for any proposed
                arrangement for compensation (e.g. retainers) and all of applicant’s
                connections with parties in interest
      iii) Disinterested person, per §101(14), is not a creditor, an equity security holder,
           or an insider; is not investment banker for outstanding security (within 3
           years) or affiliated with such; and does not have interest materially adverse to
           interest of estate or any class of creditors or equity holders, directly or
           indirectly
           (1) Adverse interest, per In re Lee:
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                (a) To possess or assert any economic interest that would tend to lessen
                     the value of the bankrupt estate or that would create either an actual or
                     potential dispute in which the estate is a rival claimant; or
                (b) To possess predisposition under circumstances that render such a bias
                     against the estate
       iv) In re Filene’s Basement, Inc. (1999): Court holds that attorney firm has
           failed to fully disclose its connections with parties in interest as required by
           Rule 2014 and that it lacks disinterestedness in this case either because of an
           actual present adverse interest or the appearance of one, citing that the firm
           was also general counsel for the creditor and claiming conflict of interest. The
           creditor had a state court lawsuit against the debtors at the time, for which the
           firm was representing neither party. The court held that while the firm was
           technically aloof from the proceedings at bar, the proceedings would have
           involved related contracts on both sides. The court found that there was an
           actual adverse interest in the firm's continued representation of creditor while
           it sought to represent debtors; therefore, disqualification was mandatory.
           (1) §327: even if there is not an actual competing interest, if there is a
                reasonable perception of such an interest, the applicant should be
                disqualified
       v) In re Martin (1987): Court holds that fundamental objectives of Chapter 11
           may be thwarted if property essential to reorganization is tied up in attorney’s
           lien, or if a particular security arrangement impairs fair treatment either of
           creditors or of administrative expense claimants
           (1) Can attorneys waive conflict in order to maintain disinterestedness? No
           (2) Can attorneys waive past attorney’s fees? Yes, but they cannot be assigned
           (3) Note that Code does not prevent two attorneys at the same firm, in
                different departments, from representing two different interests, per
                §327(c)
    b) Attorney-Client Privilege and Conflict of Interest
       i) Commodity Futures Trading Commission v. Weintraub (1985): Court
           holds that the trustee of a corporation in bankruptcy has power to waive the
           debtor corporation’s attorney-client privilege with respect to communications
           that took place before the filing of the petition
           (1) In light of Code’s allocation of responsibilities, it is clear that the trustee’s
                role is most analogous to that of a solvent corporation’s management (or
                has the right to waive attorney-client privilege); vesting in the trustee
                control of the corporation’s attorney-client privilege most closely
                comports with the allocation of the waiver power to management outside
                of bankruptcy without in any way obstructing careful design of the Code;
                i.e. trustee in role of successor management
10) Jurisdiction
    a) Domestic Jurisdiction
       i) 1978 Code: Federal bankruptcy jurisdiction should be expanded to include all
           disputes “related to” the bankruptcy in order to eliminate the costly, time-
           consuming litigation over summary (bankruptcy jurisdiction) and plenary
           (matters outside summary jurisdiction) matters
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ii) Reform Act gives big jurisdiction over plenary matters but keeping as Article
     I judges
iii) 1982: Marathon (where debtor is suing someone outside bankruptcy on
     contract action) holding that there is something constitutionally wrong about
     jurisdictional aspects of way Congress structured bankruptcy system, i.e.
     Article I judges with Article III power
     (1) Burger suggests that the problem could be solved by making judges
         adjuncts to district court (doing all work but still Article I) elected for 14-
         year terms
iv) 1984 Amendments (in response to Bill Disco)
     (1) Bankruptcy judges would become Article III judges with curtailed
         jurisdiction
     (2) Consumer credit amendment (easier for Chapter 13, affirmations)
     (3) §1113: regarding collective bargaining agreement (rejection only upon
         court approval)
     (4) Required abstention by federal courts in matters involving state law claims
         and limited the matters that bankruptcy judges could decide on a clearly
         erroneous basis; new provision designated certain matters as core
         proceedings that may be heard by bankruptcy judges, subject to unlimited
         discretion of the district judges to withdraw any matter from the
         bankruptcy court at any time, per §157
v) 1994 Amendments: Congress authorizes jury trials in bankruptcy court, but
     only if (a) matter is otherwise within bankruptcy court’s jurisdiction; (b)
     district court expressly authorizes it; and (c) the court has consent of all
     parties, per §157(e)
     (1) §1334(b), (c)(1) and (2): Vests very broad related to bankruptcy
         jurisdiction, but limits the actual operation of jurisdiction for discretionary
         or mandatory abstention in favor of state courts
     (2) §157 defines matters that a bankruptcy judges may hear for review on a
         clearly erroneous basis and those concerning which bankruptcy judges can
         only act as masters recommending findings of fact and conclusions of law
         to district judges
         (a) Divides bankruptcy matters into 3 categories:
              (i) Proceedings that arise under Title 11 (may be clearly erroneous
                   standard, depending on further categorization as a core
                   proceedings, per §157(b))
              (ii) Proceedings that arise in Title 11 (may be clearly erroneous
                   standard, depending on further categorization as a core
                   proceedings, per §157(b))
              (iii)Proceedings that are related to Title 11 cases
     (3) What limits this?
         (a) 1334(c): mandatory abstention (DC must abstain) and discretionary
              abstention (DC can decide to abstain if it thinks it can better be treated
              in state court)
         (b) Personal injury and wrongful death are related to a bankruptcy case
              and tried by district judge, unless parties consent to bankruptcy
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                     jurisdiction, or district court abstains on discretionary basis and
                     permits state court to try case
                 (c) District Court can always withdraw reference
    b) Transnational Bankruptcies
       i) Two theoretical approaches
            (1) Territorialism: justifying “grab rule” (multinational in financial trouble,
                 country where assets are located seizes local assets and distributes them to
                 local claimants in local proceeding) on grounds that local creditors had
                 legitimate expectations that any financial crisis would be resolved
                 applying local policies and preferences
            (2) Universalism: a bankruptcy resolution must be symmetric to a debtor’s
                 market; requiring globalizing bankruptcy regime, though not a world
                 government imposing same standard on everybody; one country resolves
                 the entire bankruptcy, i.e. “one law to all creditors”
       ii) Protocols are agreements among major stakeholder groups as to how a
            multinational bankruptcy will be managed
       iii) Ancillary proceedings, per §304, are domestic proceedings that are designed
            to assist the home court
       iv) Foreign Systems: In re Treco (1999): Court holds that because petitioner is a
            secured creditor does not prevent turnover, despite that the country conducting
            the proceedings has a different priority of security holders (namely, after
            administrative expenses) and there is no requirement that the petitioner be
            given adequate protection; further, turnover may be granted regardless of
            whether petitioner has valid set-off right
       v) Comity: Roberts v. Picture Butte Municipal Hospital (1999): Court holds
            that the matters before the court would be best dealt with by one court, and in
            interest of promoting international comity the appropriate forum for this case
            is the U.S. Bankruptcy Court
       vi) Choice of Law: In re Maxwell Communication Corp. PLC (1996)
            (1) Every international bankruptcy case requires both a choice-of-forum and
                 choice-of-law analysis, unlike most litigation in which only a choice-of-
                 law problem is presented
            (2) Protocols of cooperation in administration of international case are crucial
                 to achievement of satisfactory result in absence of effective legal rules
11) Bankruptcy Theory
    a) Exclusions from Bankruptcy
       i) Banks and insurance companies have their own specialized systems
            insolvency systems; a key difference is that they provide government
            guarantees or complete distributional priority to one preferred class of
            creditors – depositors and policyholders; other ordinary creditors and
            shareholders may lose everything in the event of insolvency
       ii) Brokers in securities industry is covered by Securities Investors Protection
            Act; similar treatment as with banks (§§744-766)
       iii) Railroads are given special treatment – forbidden from filing Chapter 7
            (§109(b))
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   iv) All the excluded have in common: highly regulated (at all times) financial
       institution that takes deposits of money or valuables from the public
   v) Consider treatment of hedge funds: not excluded technically, but effectively
       excluded because liquidation would be result in nothing for distribution, as all
       assets would be effectively seized by counterparties
b) Alternative Approaches to Bankruptcy
   i) Automated bankruptcy (Bebchuk): debtor goes to each layer of debt to see if
       it would like to purchase the debt above it and becomes the holder of the
       equity
       (1) Courts would enforce absolute contractual priority in both liquidation and
           reorganization, and the control over the deployment of the assets of a firm
           in general default would be determined by a sort of reverse bidding-in by
           existing creditors or equity holders
       (2) What are the benefits?
           (a) Solves the delay aspect (reminiscent of pre-packaged bankruptcy)
           (b) Takes away part of the negotiation; problem still exists across classes
                (some will want to buy and others will not) – only a horizontal
                negotiation though
           (c) Switches the control from debtor to creditor
       (3) What are the disadvantages?
           (a) Huge liquidation possibility with small businesses – why would owner
                stay?
           (b) Equity is not easily transferable in small business
           (c) Suppose big publicly-traded cases
           (d) Lower priority creditors are very unprotected (unless they have the
                sources to buy out upper layers) – uneven distributional aspects for
                trade creditors
           (e) How do we know where creditors are located? How are the classes
                formed? Can only do automatic bankruptcy if there is a lot of certainty
                about who is owed what and where each belongs
   ii) Contractualism: begins with Coase theorem, proposes that eliminating or
       narrowing bankruptcy law to contain an minimum of mandatory rules and
       permits economic actors to construct their own rules to manage general
       default (ranging from menu options to waiver proposals)
       (1) Rasmussen: bankruptcy menu from which firm chooses most beneficial
           bankruptcy provisions; choice made at inception of firm, and creditors can
           rely upon company’s choice
       (2) Alan Schwartz: proposing rolling readjustment in bankruptcy regime to
           reflect changes in circumstances of debtor over time; permitting
           renegotiation as you go along
       (3) Tracht: parties would be free to waive the default bankruptcy rules; value
           is maximized through private bargaining
       (4) Steven Schwarcz: enforcement of certain kinds of waivers would promote
           economic efficiency without serious prejudice to important prebankruptcy
           policies
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(5) Douglas Baird/Thomas Jackson’s Common Pool Problem (also Tragedy of
    the Commons): because actions by each creditor to collect tend to harm the
    value of the debtor’s assets, bankruptcy law should have very few rules,
    i.e. only time that federal law should supercede state law is when there is
    common pool problem (e.g. automatic stay, NO distributional outcomes in
    bankruptcy law)
(6) Warren: bankruptcy is about distribution; everything else learned in
    substantive law has solvent parties on both sides; bankruptcy creates
    something much different – question to be resolved is distribution of the
    less-than-sufficient money to go around
    (a) Competing goals of Chapter 11 system:
         (i) Enhance value
         (ii) Establish orderly distribution scheme
         (iii)Internalize costs of default
         (iv) Establish a privately monitored system
    (b) Markets affected by bankruptcy are imperfect; many features of
         bankruptcy system are intended to deal with creditors’ inadequate
         information and high costs of gathering information needed to make
         collective decisions

								
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