Bankruptcy Outline

Bankruptcy Outline Secured Transactions 1. Scope of Article 9 1. Purpose: to regulate balance between goals of debtor and creditor. - Art. 9 applies to any transaction intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts (9-102(a)(A)). 2. Scope of Security Interests - Definition: an interest in personal property or fixtures which secures payment or performance of an obligation. - Either Debtor or Secured Party may have title. 1. Seller who retains title in goods delivered to Buyer has a reserved security interest. 2. A special property interest under 2-501(1) is not an automatic security interest. 3. Buyer of accounts or chattel paper subject to Article 9 is treated as if security interest. Chattel paper: a writing that contains both a monetary obligation and a security interest in or lease of specific goods. 4. Reservation of title in lease or consignment not intended as security does not create a security interest. 5. Article 9 covers security interests created in any manner except statutory liens. 3. Exclusions (9-104) 1 - Some transactions are excluded from Article 9 because they have nothing to do with commercial financing. General Exclusions 1. Interests in real estate - Except for mortgage assigned as collateral for seperate loan or fixtures (9-313) 2. Interests in timber and minerals - Except timber under contract to be cut and extracted minerals 3. Statutory liens 4. Landlord and artisan liens 5. Transfers of claims for compensation 6. Transfers of interests in insurance policies and tort claims 7. Transfers of interests in bank accounts - Except if account is proceeds of collateral Specific Exclusions (9-104(F)) 1. Sale of accounts or chattel paper as part of sale of business 2. Assignment of accounts or chattel paper for purpose of collection only. 3. Transfer of right to payment under contract to assignee who also must perform under contract. 4. Transfer of single account to assignee in satisfaction of preexisting debt. 4. Definitions 1. Secured party: - Lender, seller, or other person in whose favor there is a security interest, including a person to whom accounts or chattel paper have been sold. 2 - Includes a creditor who creates a security interest and creditor to whom it is assigned (9-302(2)). 2. Debtor - One who owes payment or other performance of the obligation secured. - Seller of accounts or chattel paper - Owner of Article 9 collateral - Obligor under a security agreement. 3. Creditor - Includes general creditor, secured creditor, lien creditor, and any other representative of creditors, including trustee in bankruptcy. - Lien creditor includes trustee in bankruptcy from date of filing of petition 4. Purchase Money Security Interest (PMSI) (9-107) - Taken or retained by Seller of collateral to secure amount due. - Taken by lender of money which is used by Debtor to acquire rights in collateral. - Loan must be in fact used to buy the goods - PMSI has preference over other secured creditors. 5. Consignments, Leases and Pledges Scope: - Any financing transaction may be held subject to Article 9 if purpose was to create security interest in collateral. - Security interests created by contract are covered under 9-102(2) A. Consignment = Bailment for purpose of Sale. 3 - Owner of goods (consignor: eg wholesaler, manufacturer) gives goods to another to sell. - Retailer (consignee) may return goods if unable to sell. - Retailer must pay for goods upon sale. - Retailer has no ownership rights, but has ostensible ownership which must be overcome. For consignor to have priority over secured creditors of consignee, filing and notification must occur! (9-114) B. Pledges - Creditor = pledgee, Debtor = pledgor - Property is kept in creditor’s control until loan is repaid by debtor. - Pledgee/Creditor’s rights in property completed by transfer of pledged collateral - Property still belongs to debtor - No written agreement is required - Widely used as security device C. Leases - True lease is not security interest and not subject to Article 9. - Security interest is created under 1-201(37) - Financing arrangement subject to filing requirements of Article 9 - Except for sales of accounts and chattel paper, the test for whether a transaction comes under Article 9 is: - Is the transaction intended to have effect as security? 4 2. Procedures of Article 9 1. Creating a Security Interest A. Classification of Collateral 1. Goods (Tangible Personal Property of Fixtures - Consumer goods (9-109(1)) - Goods used primarily for personal, family, or household purposes. - A radio is inventory in the hands of a debtor and consumer goods in the hands of a householder. - Equipment - Goods used in business or by a non-profit or government Debtor - Cannot fall within definition of inventory or farm products. - Farm Products - Crops or livestock or supplies used or produced in farming operations, or - Products of crops or livestock in their unmanufactured state, and - If they are in possession of debtor engaged in farming operations. - Inventory - Goods held for sale or lease, raw materials, work in progress, or materials consumed in business. - Fixtures 5 - Goods are fixtures when they become so related to particular real estate that an interest in them arises under real estate law. 2. Intangible Personal Property (Writing) - Instruments (like a promissory note) - Evidences right to payment and not itself a security interest or lease - Documents - Evidences entitlement to receive, hold, and dispose of document and underlying goods (ie negotiable instruments and certified securities) - Includes bill of lading, dock warrant, dock receipt, warehouse receipt, or order for delivery of goods - Requirements: issued by or addressed to bailee covering identified goods in bailee’s possession - Chattel Paper - Writing which evidences monetary obligation and security interest in (or lease of) specific goods. - Contains both security agreement and an instrument, generally a promissory note. - Purchaser of chattel paper has both status of secured party under 9-105(1)(m) and holder of instrument. - Example: - A dealer sells a tractor to a farmer on conditional sales contract. - Dealer transfers the contract to his bank by sale or to secure a loan - The sales contract is chattel paper 3. Intangible Personal Property (Non-writing) 6 - Accounts - Right to payment for goods sold or leased or for services rendered which is not evidenced by instrument or chattel paper whether or not earned by performance. - Example: ordinary commercial account receivable - Article 9 applies to any sale of accounts or chattel paper - General Intangibles (9-106) - Personal property other than goods, accounts, chattel paper, documents, and instruments. - May include goodwill, literary rights, patents, licenses. 7 B. Validating the Forms 1. Security Agreement - Debtor gives secured party security interest in described collateral. - Except as otherwise provided by UCC, a security agreement is effective according to its terms between the parties to control their rights and obligations. - There must be intent by the parties to create a security interest - Also will contain other clauses such as stating when default occurs and when remedies are available to the Secured Party. 2. Attachment (9-203) - Attachment = Creation of security interest in Debtor’s collateral. - Means that it is enforceable against the debtor - Certain requirements must be met before a security interest may be enforced against the debtor or a third party. - Unless collateral is in possession of Creditor pursuant to the agreement, there must be a written, signed security agreement which contains a description of the collateral. - Must be signed by the debtor - Oral agreement is sufficient if collateral is in possession of secured party. - Courts require “reasonable identification” of collateral. - Value must be given before security interest is enforceable - Debtor must have rights in collateral - debtor may have title - may have special property interest - may have claims based on possession as lessee, bailee or creditor 3. Financing Statement 8 - Financing Statement is a statement whose function is to give notice of creditor’s interest in debtor’s property. - Typically used to accomplish “Perfection.” - Required contents: - Names and addresses of both parties - Signature of debtor - Descriptio of collateral - Minor errors in Financing Statement ok as long as errors are not seriously misleading (9-402(8)). - Must have sufficient evidence of the parties’ intention to create a security interest. 9 2. Perfection & Filing Perfection -Purpose is to give notice that secured party has interest in collateral. - Enforceability: - A security interest is perfected when it has “attached” and when all applicable steps required have been taken. - Means: - Filing a financing statement - Secured party taking possession of collateral (pledge) - Automatic perfection (some cases don’t need any steps beyond attachment) - If steps are taken before attachment, then perfection occurs at attachment - Effect: - Perfected security interest may be or may become subordinate to other interests. - In general, after perfection the secured party is protected against subsequent creditors and transferees of the debtor. - If security interest is enforceable but unperfected, secured party may not have priority to the collateral over third parties. Automatic Perfection - In some cases, no additional steps beyond attachment are necessary to perfect security interest. - Exceptions to having to file financing statement: - Collateral is in possession of secured party under 9-305 - Temporarily perfected interest in instruments or documents under 9-304 - Assignment of interest in trust or estate - Non-bulk sale of accounts to someone who does not regularly take such interests 10 - Assignment for benefit of creditors - Purchase Money Security Interest in Consumer Goods (PMSI) is permanently perfected automatically on attachment. - Policy is that filing offices would be cluttered with minimal benefits to record searchers. - Exceptions: - Filing required for motor vehicles - Filing required for fixture filing for priority - Not good against subsequent BFPFV who buys from original consumer unless financing statement is filed. - Creditor must have signed security agreement with Debtor to obtain valid security interest. Temporary Automatic Perfection - Proceeds received on sale or disposition of collateral in which security interest exists. - Security interest continues in collateral of same type (eg debtor trades old tool for new tool.) - Collateral of different type: security interest terminates 10 days after sale or disposition of original collateral and new perfection must be obtained. - 9-304(4) allows perfection for 21 days without possession or filing if security interest arises under new value under a written security agreement. - Extensions: 9-304(5) - Look up this section and above section also because I don’t know what it means. Perfection by Possession (commonly a pledge) 11 - Secured party can perfect security interest by taking possession of collateral but may not be practical as in the case of equipment or inventory. - This is required where security interest is in instruments or money. - Except in certain instances where such collateral may be automatically perfected and where proceeds are involved. - This is permissible where security interest is in chattel paper or negotiable instruments. - Non-negotiable documents must be perfected - Possession of negotiable instrument covering goods perfects in goods also, provided goods are possessed by the issuer of the instrument. - Perfection by possession of collateral lasts as long as possession is retained. - Exception: goods returned to debtor for sale, exchange, or collection. - Creditor has temporary automatic perfection for 21 days - If goods are not returned within 21 days, Creditor must re-file. - Creditor also has 21 days temporary automatic perfection after attachment to take possession or file. - Possession may be by secured party of by agent on his behalf. - Debtor or person controlled by him does not qualify as an agent for secured party. - It is a good idea to file in addition to perfection by possession for added safety. - Secured party must use reasonable care in the custody and preservation of collateral. Perfection by Filing (9-304) - Article 9 uses a system of Notice Filing - puts other creditors on notice - Location of filing office: - Local filing in county of Debtor’s personal or business residence - Central filing in office of Secretary of State 12 - Certain filings covered by Federal statute (9-302(3)) - Type of collateral determines method of perfection - Consumer goods (except vehicles, fixtures, and PMSI in consumer goods): Local filing or Possession - PMSI in consumer goods (except vehicles and fixtures): Automatic or Local filing or Possession. - Farm Equipment and Products: Local filing or Possession - Fixtures: Local filing in real estate records office - Negotiable instruments: Central Filing or Possession or Automatic Perfection for 21 days. - Instruments: Possession or Automatic perfection for 21 days - Money: possession - Chattel Paper: Central filing or possession - Inventory (including vehicles): Central Filing or possession. Time and Duration of Filing: - Effective upon presentation of financing statement and filing fee to filing officer. - Procedures followed by filing officer: 9-403(1) - Security interest protected if error in filing or indexing. - Effective for 5 years from date of filing - Continuation statement must be filed within 6 months of expiration of 5 year period. - Bankruptcy tolls the running of the 5 years - Secured party can release all or part of collateral prior to satisfaction by filing Statement of Release. - If security interest becomes unperfected upon lapse, it is deemed to have been unperfected as against a party who became a secured party before lapse. 13 - To be safe, a party can file before advancing money to ensure his priority. Effectiveness of Filing - Improper filing made in good faith in the wrong place is still effective. - Filing made in proper place continues effective even if debtor moves or collateral moves or its use changes. Filing Protects Rights to Proceeds of Collateral (this is the same as temporary automatic perfection, but the rules below only apply when a financing statement is filed - even though there is overlap). - Proceeds = whatever is received upon the sale, exchange, collection or other disposition of collateral. - Money, checks, and bank accounts are “Cash Proceeds.” - All other types of proceeds are non-cash. - Insurance payments received as a result of loss or destruction of the collateral are proceeds. - Except to the extent that it is payable to a person that is not party to the security agreement. - Proceeds Financing Statement is needed when: - Proceeds are no longer identifiable - Proceeds are of a different type - Proceeds require a different filing place than the original collateral. - Secured party’s interest is temporarily perfected for 10 days from liquidation of old collateral. Security Interests In After Acquired Property - Debtor does not own the collateral at the time of filing but acquires it in the future. - In addition to or as replacement for original collateral 14 - A security agreement may provide that any or all obligations covered by the security agreement are to be secured by after acquired collateral - Courts are strict when interpreting these clauses - Clause covers secured party in inventory turnover - No security interest attaches unless debtor acquires rights in collateral within 10 days f Creditor giving vallue - Purpose is to protect PMSI or Creditor who gives money for the purchase. 15 Rules of Priority Among Creditors Secured Parties and Purchasers of Collateral - Buyers of Tangible Collateral Not In Ordinary Course of Business - Buyer without knowledge: unperfected security interest is subordinated to rights of buyer. - Perfected security interest is not subordinated to rights of Buyer other than in ordinary course of business. - Exception: - Buyer takes free of security interest if purchasing consumer goods for value and for personal use without knowledge of security interest unless secured party files prior to purchase. - must be consumer goods to both buyer and seller - Buyers of Tangible Collateral IN Ordinary Course of Business - Takes free of security interest regardless of it being perfected and regardless of knowledge. - Takes subject to security interest only if buyer knows sale is in violation of Security Agreement. - If security Interest is Perfected: (requirements for taking free of Sec. Int) - Must be buyer in ordinary course - Must buy from one who is in the business of selling those kinds of goods - Must buy in good faith and not know sale is in violation of Security Agreement - Cannot buy in bulk and give new value - Cannot buy farming products or from a farmer. - Seller must be the debtor and have created the security agreement. 16 - Transferees of Intangible Collateral - Instruments, documents, chattel paper - transferee prevails if BFPFV and takes delivery before secured party perfects. - Accounts, general intangibles - Same as above but no delivery requirement - Intangibles when Secured Party has perfected security interest - Transferee who purchases in ordinary course of business takes free of secured party’s interest. Unperfected Security Interests - Inferior to all perfected secured creditors and lien creditors - First to attach has priority among unperfected secured creditors - Unperfected party prevails over general (unsecured?) creditors and those who buy collateral knowing about the security interest and that the sale is in violation. Conflicting Perfected Security Interests - First in time: - Rank according to time of filing or perfection - Priority remains intact as long as filing or perfection is valid. - Inferior to buyers in ordinary course of business Statutory Liens - Article 9 only applies to statutory lien holders when deciding priority. - Statutory Lien holders have priority over perfected security interestsunless state law provides otherwise. - Applies only to possessory statutory liens - Mechanic’s liens have priority so long as goods remain in their possession. 17 Judicial Lien Creditors - Senior to security interest that is unperfected at time of lien creditor’s levy. - Junior to perfected security interest in collateral. - Against PMSI: Lien creditor does not take free during 10 day temporary perfection period for PMSI. - Secured party must file within 10 days grace period in order to have priority over a lien creditor. Special Rules for PMSI - PMSI creditors get special priority - Helps already encumbered debtors to acquire new property and avoid going out of business (like a post-chapter 11 loan) Non-Inventory Collateral - PMSI non-inventory can have priority over conflicting prior interest without notifying other secured party. - Knowledge of prior interest is immaterial - Priority is limited to extent of purchase money used in acquisition of collateral - Must be perfected at time debtor receives possession or within 10 days - Conflicting PMSI’s: see 9-132(5) Inventory Collateral - PMSI must already be perfected at time debtor receives possession - No 10 day grace period - Usually the secured party has filed financing statement before debtor receives inventory - PMSI secured party must give written notice to any other security interest holder who has previously filed as to same type of goods. - Notice must be given prior to date on which debtor takes possession 18 - If PMSI has 21 day temporary perfection period, notice must be given before 21 days start. - Notice must describe inventory by item or type. Security Interests In Accessions (goods affixed to or conmingled with other goods) - If Security interest attaches before goods become affixed, the creditor takes the priority claim of the person to the whole. Security Interests in Proceeds - Except where Article 9 otherwise provides, security interest in original collateral continues in any identifiable proceeds, including collections received by the debtor. - Security agreement does not have to state proceeds covered. - Generally first to file or perfect has priority - Exceptions: - Parties with PMSI have priority over other parties only in identifiable cash proceeds. - Purchaser of chattel paper in ordinary course of business who takes possession and gives value has priority over security interest in goods as proceeds. Security Interests in Fixtures - A good is a fixture when it becomes so related to particular real estate that an interest in it arises under real estate law. - Fixture filing is performed to inform real estate lenders or purchasers of security interest. - Must have description of real estate - Recital that financing statement is to be filed in real estate records - Recital that goods which are or are to become fixtures are covered - Name of record owner, if debtor has no interest of record - PMSI in fixture has priority to owner of real estate if: 19 - it is perfected by fixture filing before goods become fixtures or within 10 days - Debtor has interest of record in real estate or in his possession - Real estate interest arose before the goods became fixtures - Owner/mortgagee of realty has priority over security interest in fixtures unless security interest is perfected by fixture filing with real estate records. - Owner/mortgagee of realty is generally subordinated to other security interests. 20 Remedies Upon Default - No definition of default in Article 9 - Conditions which constitute default are determined by provisions of security agreement. - Examples of default events: - Non-payment - Non-insurance of collateral - Debtor’s removal of collateral - Loss or destruction of collateral - Debtor’s bankruptcy - If an agreed event of default has occurred, the general duty of good faith of enforcement of agreement is required. - Good faith is considered by subjective standard for this purpose - There is no explicit requirement that the default be substantial - Article 9 regulates the process by which the secured party enforces security interest upon default by debtor. - Options include obtaining judgment, foreclosure, or enforcing security interest by any available judicial procedure. Secured Party May elect to reduce claim - Certain rights of debtor and duties of secured party may not be waived or varied - Limitation of rights under Article 9 and security agreement. - Upon default secured party has right to take possession of collateral without judicial process. - Secured party may elect to dispose of collateral - may sell, lease or otherwise dispose - Disposition must be commercially reasonable - Debtor must be given notice of time and place if sale is public - Debtor must be given any surplus from sale 21 - Sale may be private or public - If resale of collateral does not net enough to cover expenses of repossession and resale plus debtor’s outstanding balance, secured party may obtain a deficiency judgment. Debtor’s Rights - Debtor may compel secured party to dispose of collateral - If security interest involves consumer goods and debtor has paid 60% of the loan, taking of collateral in full satisfaction is not allowed. - Exception: if debtor has signed after default a statement modifying right to insist upon a resale. - Debtor has right to redeem collateral by paying secured party for expenses, plus balance originally owed. - Debtor cannot waive right of redemption prior to default - Once default has occurred, debtor may waive right of redemption in writing. - Debtor may not: - breach peace in repossession - fail to give proper notice of resale - fail to dispose of collateral in commercially reasonable manner - Remedies (may be one or more of the following): - Criminal liability (breach of peace) - Tort Liability (trespass, conversion, battery, etc.) - Denial of deficiency judgment - some courts have held that once secured party violates Article 9 default procedure, it is an automatic denial. 22 Bankruptcy Terms: - Trustee: represents the estate, principally to champion the rights of unsecured creditors. - Creditor’s committee: In a Chapter 11 case, US Trustee appoints committee of unsecured creditors. Usually the parties with the seven largest unsecured claims who are willing to serve. Sometimes unsecured creditors in a Chapter 7 case elect a creditors’ committee consisting of 3-11 unsecured creditors to consult with trustee about administration of estate. - Claim: right to payment. May be unliquidated, unmatured, disputed, or contingent. - Debt: liability on a claim 23 Eligibility for Bankruptcy - Only an individual, partnership, or corporation can be debtor under Bankruptcy code. - Insolvency not required, but petition can be dismissed if filed in bad faith. - Can’t have been a debtor in a bankruptcy case in any chapter that was dismissed within the last 180 days. - Ineligible debtors for Chapter 7 (liquidation - also can conceivably be done with liquidation plan in Chapter 11): - Railroads - Savings institutions and insurance companies - Small business investment companies - Ineligible debtors for Chapter 11 (Reorganization): - Stockbrokers, commodity brokers - Chapter 13 (Adjustment of debts of individual with regular income) - No partnerships or corporations - Must have regular income - sufficiently stable and capable of funding repayment plan - Unsecured debts under $290,525 - Secured debts under $871,550 - These numbers are the same for joint petition - Never involuntary 24 Filing a Voluntary Case - Commenced when debtor files petition under 7, 11, or 13. - Filing constitutes order for relief - Must be legally married to file joint petition - involuntary cases cannot be joint - For all chapters must file schedule of all creditors with addresses, schedule of assets & liabilities, schedule of income & expenses, statement of financial affairs, schedule of executory contracts and unexpired leases. - With chapter 7, debtor must file statement saying he/she is aware can file under other chapters. Attorney must sign statement saying client was advised. - Chapter 11 debtor must file list of names and addresses of 20 creditors with largest unsecured claims, plus list of equity security holders. - Chapter 13 must file proposed plan of repayment w/in 15 days of filing petition. - Time limits for filing things are in Bankruptcy Rule 1007. 25 Filing an Involuntary Case - Chapter 7 or 11. - No farmer, family farmer, non-profit, or charity. - If there are 12 or more creditors with bona fide undisputed claims, excluding insiders, employees, and transferees of voidable transfers, three or more creditors may file a petition if they have at least $11,625 of unsecured claims between them. - One or more creditors may file with same minimum unsecured requirement if there are less than 12. - Court will enter order for relief if debtor does not answer petition within 20 days of service, or if court finds that debtor is regularly failing to pay debts. - Until order for relief is entered, debtor controls all property. - Until order for relief, trustee can’t avoid transfer if it is not to satisfy or secure a prepetition debt. - Court can appoint interim trustee during gap period. 26 Automatic Stay - Effective once any bankruptcy petition is filed, voluntary or involuntary. - Effective against all entities, including government. - Debtors can’t try to collect, sue, foreclose, or do anything. - Creditor cannot setoff claims - Creditor banks can temporarily freeze deposit accounts. Section 341 Meeting of Creditors - Chapter 7 or 11 - 20 to 40 days after order for relief. - 20 to 50 days for Chapter 13 - Notice is sent to creditors about meeting, automatic stay, final date for filing proofs of claims, final dates for complaints to determine dischargeability (523(c)), objection to entire Chapter 7 discharge (727(a)), objection to claim of exempt property (522). - Judge can’t attend meeting, US Trustee or Assistant UST presides - Debtor must attend - Meeting is for creditors & trustee to examine debtor under oath about things like location and condition of collateral, exemptions, facts about alleged non-dischargeable debt, disappearance of assets, operation of business, reasons for filing, goals for reorganization. -May also have other examinations (like depositions) later - In chapter 7, trustee must examine debtor at end of meeting. - Other possible business at meeting: - Elect trustee (chapter 7) - Elect unsecured creditor’s committee (chapter 7) - Discuss reaffirmation of debts 27 Conversion to Different Chapter - Cannot involuntarily convert to chapter 13. - Conversion = order for relief under new chapter, does not alter date of filing, commencement, or order - Claims that arose before conversion but after order for relief are considered pre-petition - Service of trustee or examiner is terminated by conversion - Property of estate in a case converted from chapter 13 is property of estate on date of filing that is in possession or control of debtor on date of conversion. Dismissal - Usually without prejudice, but sometimes the court will find cause to dismiss with prejudice. - Court can dismiss any petition that is abusive or bad faith 28 Trustees - Eligibility: any disinterested person or corporation that is competent. - No creditors, equity shareholders, or insiders - No one that has been a director, officer, or employee within 2 years - No investment bankers for securities of the debtor - No person with a materially adverse interest to the estate, any class of shareholders, or class of creditors. - No one who has been an examiner in the case - US trustee may not serve in a chapter 11 case - Trustee must file a bond - Trustee is fiduciary of the estate, may be held personally liable for breach of duties - Trustee can be removed for cause: misconduct, incompetence, conflict of interest - Notice and hearing required Powers of Trustee - File a proof of claim on behalf of a creditor if they have not done so on time - Operate debtor’s business - Chapter 11: unless ordered otherwise - Chapter 7: sometimes for a short period prior to liquidation if court permits - Deposit or invest money in the estate - Employ professional persons (attorneys, accountants, auctioneers, appraisers, etc) - Must be disinterested - Court approval required beforehand or they might not get paid - Avoid certain transfers and liens - Use, sell, or lease property of estate - Obtain credit - Assume or reject executory contracts and unexpired leases - Demand utility services for the estate 29 - Abandon property of the estate - Waive a debtor corporation’s attorney-client privilege - to question pre-petition attorney about fraud Chapter 7 - Trustee is required - US trustee appoints interim private trustee when order for relief is entered until 341 meeting. At the meeting, he/she becomes permanent trustee unless another is elected. Duties: - Locate and take possession of property of estate - Account for all property received - Convert the property to cash - Make distribution to claimants - Monitor what debtor does with collateral - Investigate debtor’s financial affairs - Examine proofs of claims, object to improper claims - Object to discharge if circumstances warrant - Provide information to parties in interest - File periodic financial reports - Prepare and file final report and account - Close the estate expeditiously Chapter 11 - Usually trustee doesn’t need to be appointed - Court may order trustee if there is cause, can’t be UST - fraud, dishonesty, incompetence, gross mismanagement Duties: 30 - Operate debtor’s business - Account for property received - Examine proofs of claims, object to improper claims - Provide information to parties in interest - File periodic financial reports - Prepare and file final report and account - File any document required under 521 if debtor hasn’t (schedules, etc) - Investigate debtor’s conduct & advisability of continuing business - File report of the investigation - File chapter 11 plan or recommend conversion - File required reports once plan has been confirmed - Provide information to taxing authorities if debtor has missed a return Chapter 13 - Sometimes there is a standing trustee for the region - Debtor usually remains in possession of property - UST can serve as trustee or appoint someone Duties: - Account for all property received - Monitor collateral - Investigate debtor’s financial affairs - Examine proofs of claims, object to improper claims - Object to discharge if circumstances warrant - Provide information to parties in interest - Prepare and file final report and account - Testify at hearings re: - valuation of property that has liens - confirmation of Chapter 13 plan - post-confirmation modification of plan - Give non-legal advice to debtor and help implement plan 31 - Ensure that debtor begins making payments w/in 30 days - If debtor is engaged in business, investigate conduct and advisability of continuing the business, file report of the investigation - Disburse payments to creditors under plan. 32 Trustee’s Avoiding Powers Statutory Liens - Statutory liens are not consented to by debtor, they are created by statute. - Trustee may avoid any statutory lien triggered by the following events: - Filing of bankruptcy petition - Filing of insolvency proceeding outside bankruptcy - Appointment of a custodian - Debtor’s insolvency - Failure of debtor’s financial condition to satisfy a certain standard - Execution against debtor’s property by non-statutory lien holder - Trustee may avoid statutory liens if at the time of petition it is not perfected or enforceable against any BFP. - Such as federal tax lien if notice has not been filed - Subject to retroactive perfection permitted by law - Trustee may avoid statutory liens for rent or distress of rent Liens that a Judicial Lien Creditor, Creditor with unsatisfied Execution, or BFP of real Property could avoid - Trustee can avoid any transfer of debtor’s property that any one of the above entities, real or hypothetical, could avoid. A. Judicial Lien Creditor: trustee is deemed to have a judicial lien at the time of filing on as much of debtor’s property permitted by law. Therefore it gets prority against any other liens or interests it trumps. - subject to retroactive perfection permitted by law 33 B. Unsatisfied Execution: trustee can avoid anything that a creditor who extended credit to debtor at time of petition and acquired an unsatisfied execution concerning the debt. C. BFP of Real Property: Trustee can avoid any transfer of real property that is avoidable by a BFP who has perfected the transfer at time of bankruptcy. - Exception: not when there is constructive notice, such as open possession by the other party. Avoiding Powers on Behalf of Actual Unsecured Creditors - Trustee can avoid any transfer if it is for the benefit of the estate and if an actual unsecured creditor has the right to avoid it under state law. - Trustee can avoid whole transfer even if it exceeds creditor’s claim - Generally it would be a fraudulent transfer, bulk sale, consignment, etc that gives the right to avoid. - Not for legitimate charitable contributions Power to Avoid Preferences Trustee can avoid pre-petition preferential transfers. - Like when debtor paid butcher in full, but not baker & candlestick maker before petition and none had priority. - Trustee will recover payment, pay priority claims & admin. expenses and split whatever is left among unsecured creditors. - must be pre-existing debt, while debtor is insolvent (presumed for 90 days), w/in 90 days before petition (or 1 year if insider), and creditor gets larger share than it would post-liquidation (based on hypo calc. as of petition date. - No secured creditors - the transfer can be involuntary, like a foreclosure sale. - Not if debt was incurred in ordinary course of business & transfer was made in ordinary course. 34 - Not if it’s a statutory lien that cannot be avoided under 545 - Bona fide alimony & child support not avoidable - Trustee cannot avoid transfers under $600 if debtor has mostly consumer debts - Some courts will take the aggregate value of multiple transfers to the same creditor to determine the $600 limit Rules for determination of preference - transfers of real property deemed perfected when superior under state law to interest of BFPFV - superior to subsequent judicial lien creditor if fixtures/personal prop. - Date of transfer is considered to be the date it became effective between parties if perfection occurs w/in next 10 days (20 days for PMSI) - If more than 10 days, transfer date = perfection date 35 Power to Avoid Fraudulent Transfers - Trustee can avoid any fraudulent transfer of debtor’s interests, voluntary or involuntary, if made w/in one year before petition. - Transfer = disposition of property or interest in property - Deemed to occur when perfected to preclude subsequent BFP from acquiring superior interest OR immediately prior to bankruptcy if not perfected - Fraudulent = actual intent to hinder, delay or defraud creditors - Actual intent may be inferred: (insolvency not required) - if inadequate or no consideration received - transferee is relative or close friend - debtor continues to use property - debtor was having financial problems - assets transferred to corp. that debtor controls - or Constructive: No reasonably equivalent value received - debtor was insolvent or rendered insolvent, or - was undercapitalized after transfer, or - intended to incur debts without ability to pay - BFPFV can retain or have lien on any property to extent of value given. - Ok if transfer voidable under 548 - Not if voidable under 544, 545, 547. - May be a longer reachback period than one year if there is actual unsecured creditor that can avoid the transfer under state law. 36 Avoidance of Post-Petition Transactions - Trustee may avoid transfer of estate property occurring after filing of petition unless approved by court, authorized by Bankruptcy code, or Exception - Bank honoring checks in good faith won’t be liable - Exceptions: - Post-petition debts incurred during gap period in involuntary case - Post-petition sale to BFPFV (w/no notice of BK filed) - to extent of fair value given Limitations On Trustee’s Avoiding Powers - Statute of limitations: Can be equitably tolled if there is wrongful conduct trustee couldn’t know about Trustee must file action to avoid before the earlier of: - The later of - Two years after order for relief or - One year after appointment or election of first trustee - Time of closing or dismissal of case - Covers Actions to avoid - Setoffs - statutory lien - transfer avoidable under 544(a) - transfer avoidable by trustee as successor to certain actual creditors (544(b)) - preference - fraudulent transfer - Post petition transfers avoidance SOL = earlier of - two years after transfer was made or closing/dismissal of case 37 Reclamation of Goods by Seller - Seller has right to reclaim goods from insolvent buyer - Prevails over trustee’s avoiding powers for: - transfer under strongarm clause (544(a)) - Statutory lien - Preference - Post petition transfer - Seller must meet requirements to reclaim goods: - Must be goods not proceeds - Sale must be in ordinary course of business - Debtor must have received goods while insolvent - Receipt = physical possession - Seller must make written demand for reclamation no later than 10 days after receipt of goods (20 days if 10 days aren’t up by commencement of case). - Demand must be for reclamation, not payment - Must be written for bankruptcy cases - Demand is deemed made when dispatched as long as method is reasonable - Court may still deny reclamation - Court must grant seller lien or admin. expense priority - Chapter 11 debtor may return goods: - with creditor’s consent - shipped by creditor before bankruptcy - creditor can offset purchase price against pre-petition claim - Requires motion by trustee/DIP within 120 days after order for relief, notice, & hearing - Court must determine the return is in best interests of estate 38 Transferee’s Liability to Estate for Avoided Transfer - By avoiding a transfer, the trustee is entitled to recover either the property or value if ordered by the court - From whom? Trustee may recover from: - initial transferee - entity the transfer was designed to benefit - Future transferees after first transfer - not if future transferee didn’t know transfer was voidable, - took in good faith, and - gave value. (Subsequent transferees are sheltered too). - Trustee can only recover once - Recovering from good faith transferee under 550(a) gives transferee lien on property recovered for purpose of securing cost of any improvements transferee made, or amount by which improvements enhanced value, whichever is less. Post-Petition Effect of Security Interest - An after acquired property clause in security agreement is not effective to create security interest in property acquired by debtor or estate after petition. - Security interest is valid as to proceeds and similar property acquired by estate postpetition if agreement includes collateral acquired by debtor pre-bankruptcy plus proceeds, products, & offspring of collateral. - Court can cancel if equitable 39 The Bankruptcy Estate - Creation of estate occurs automatically upon the filing of a petition. The estate consists of a comprehensive range of rights and interests in property, and various causes of action and claims held by debtor. - Property that may be used, sold, or leased by trustee under 363 or property that may be exempted by debtor under 522 must be delivered to trustee and accounted for by any entity that is in possession or control. Legal & Equitable Interests of Debtor Estate includes all of debtor’s legal & equitable interests in property: real, personal, tangible, intangible at the time petition is filed. Plus proceeds of estate property. - Post petition earnings of individual are not part of estate (except Ch. 13) - Estate may acquire property for itself after petition (contracts, etc) Legal Interests - Bank deposits - Stocks, bonds, instruments - Product liability insurance - Rights to compensation for pre-petition employment services - Executory contracts - Personal injury claims by debtor - causes of action for damage to property - Shareholder derivative actions against corporate officers & directors for breach of fiduciary duty - Income tax refunds for pre-petition earnings/losses - Net operating loss carryovers - Earned income credit prorated to date of petition - Licenses, copyrights, patents - Remainder interest in real property 40 - Right to possession of property under unexpired lease - Partner’s interest in law firm (pre-petition) Equitable Interests - Equitable right to redeem foreclosed property - Beneficial interest in corpus of non-spendthrift trust Other Kinds of Estate Property - Community property at time of petition - Property recovered by trustee for benefit of estate - Property that debtor obtains or becomes entitled to within 180 days after date of bankruptcy from bequest, devise, inheritance, property settlements with spouse, divorce decree, or beneficial interest in life insurance policy or death benefit plan. Bankruptcy Law trumps other clauses! - Property in the estate is not limited by clauses in their contracts, deeds, or other non-bankruptcy law that restricts the way the debtor can transfer the property. - Clauses that change or divest a person’s interest in property due to anything to do with financial condition or bankruptcy are unenforceable under bankruptcy code. The property still has to become party of the bankruptcy estate. - Certain trusts are excluded (but income from trusts w/in 180 days is part of estate.) Property Excluded From Estate - Post Petition Earnings of Individual Chapter 7/11 debtor - Spendthrift trusts enforceable under applicable non-bankruptcy law - Powers debtor can exercise solely for the benefit of others - Commercial leases of real property cease being part of the estate when they expire - Debtor’s eligibility to participate in programs under Higher Education Act 41 - Debtor’s accreditation status or state licensure as educational institution - Proceeds of money orders sold within 14 days of bankruptcy - must be agreement between debtor and money order issuer not to commingle proceeds with property of debtor - issuer must have taken action to require debtor’s compliance with the prohibition before bankruptcy - Exemptions are only determined once property of estate has been determined. 42 Creditor’s Right of Setoff - State law gives creditor’s the right to setoff debts owed to the debtor against what the debtor owes. - Creditors can do this in bankruptcy with their claims if the claims both arose prior to the filing of the bankruptcy case. - Exceptions to right of setoff: - If court has disallowed the claim against debtor - If the creditor received the claim from a third party after petition or 90 days prior to petition if debtor was insolvent. (debtor is presumed to have been insolvent) - If creditor assumes the debt to debtor for the purpose of set off. - If a creditor (usually bank) has set off a debt and improved its position within 90 days before petition, trustee may avoid and recover it. Abandonment of Estate Property By Trustee - Trustee may abandon property that is burdensome or has inconsequential value - Property is abandoned from the estate to the debtor - Notice & opportunity for hearing are required. - Secured creditor’s lien on abandoned property continues - Creditor must obtain relief from automatic stay to repossess property - A party in interest may make motion for abandonment - All property scheduled that is not administered before case closes is deemed abandoned to debtor unless court rules differently. 43 Claims of Creditors - Claim = any potential right to payment - Majority rule: equitable remedy for breach of covenant not to compete is not a claim and not dischargeable. - Sometimes courts approve Chapter 11 plans that provide for future tort claimants - like asbestos - Unsecured creditors must file proof of claim for proof to be allowed - Equity security holders must file proof of interest - Proof of claim may be filed on behalf of creditor by debtor, co-debtor, surety, guarantor, or trustee. - Class of creditors similarly situated may file a claim. - Secured creditors don’t lose lien if they don’t file proof of claim Time to file: Chapter 7 or 13 - within 90 days after first date set for 341 meeting. Chapter 11 - Court fixes and sends notice of a bar date (deadline). - Chapter 11 creditors don’t have to file if debtor schedules the claim - Creditor may file after bar date if there is excusable neglect. - must consider all circumstances and consequences - debtor will usually get reasonable time after bar date to file proof of claim for creditor that didn’t file. 44 Allowance of Claims - Claims will be allowed by the court and serve as the basis for distribution unless a party in interest objects. - If claim is objected to, there will be notice + hearing and court will determine amount of claim as of filing date and allow claim unless it is an exception: - Excepted items are not allowed in bankruptcy case: - Debtor has a valid defense to the claim - Post-petition interest on an unsecured claim - Unless estate is solvent - Property tax in excess of debtor’s equity - Unreasonable claim for services of insider or attorney - Unmatured spousal or child support - Claim for excessive damages for early lease termination - Excessive damages for early termination of employment - Claims by entities still in possession of estate property - Late claims - nonpriority unsecured claims may be allowed if creditor had insufficient notice but filed in time for distribution, or there is sufficient surplus in the estate. - Late priority claims may be allowed if before distribution 45 Secured Claims - Secured claim = claim that has been allowed, and is secured by lien on property of estate or is subject to setoff. - Claims are treated as secure only to extent of collateral or amount of setoff - Undersecured claims are bifurcated into secured and unsecured - Court determines value of collateral - to provide adequate protection - for distribution in Chapter 7 case - for redemption of collateral - For confirmation of Chapter 11 or 13 plan - for ascertaining amount of exemptions - Replacement value is used when debtor wants to keep collateral - Creditor is allowed post-petition interest on oversecured claims - In a Chapter 7 case, a debtor may strip down a lien on real property to the FMV. - In Chapter 7, secured creditors usually get the property or the value of claim before distribution to unsecured creditors - Secured creditors have right to adequate protection of interest in collateral. Failure to provide constitutes grounds for relief from automatic stay. - Also entitled to adequate protection if collateral is used, sold, or leased by trustee or DIP, or if lien is primed for post-petition credit. 46 Administrative Expenses - Admin claims get highest priority from distribution except for claims secured by collateral. - Requests for admin. Expenses must be timely filed. - If late, must get court approval for cause - The following are allowed as admin expenses after notice and hearing: - Post-petition costs of preserving estate - rent, attorney’s fees, etc - Post-Petition taxes (& interest and fines from taxes) - Compensation & reimbursement for trustees, examiners, attorneys for Chatper 13, DIP, creditor’s committee. - Expenses for filing involuntary petition - Expenses of creditors who recover property for the benefit of the estate that debtor has concealed or transferred. - Expenses of criminal prosecution of creditor - Actual & Necessary Interested parties or their employees who make substantial contribution in Chapter 11 case. - Actual & Necessary expenses of creditor’s committee - Witness fees & mileage expenses 47 Priority Claims - Allowed Priority unsecured claims get paid after Secured claims. - There are nine tiers (507(a)) - In Chapter 7 case, each tier must be paid in full before moving down - After all tiers are paid, non-priority unsecured claims get paid if there’s nothing left - In Chapter 7, Claims are split pro rata if there is not enough to pay the whole tier 1. Administrative Expenses - If case is converted to chapter 7 from another chapter, the pre-conversion claims have priority 2. Involuntary case gap claims - ordinary business expenses of debtor in involuntary case before appointment of trustee or order for relief. 3. Wages and Commissions - Each claim limited to $4650 - Earned within 90 days before bankruptcy or before cessation of business if earlier 4. Employee benefit plans - contributions for services rendered within 180 days before bankruptcy or cessation, whichever is earlier 5. Grain farmers and United States fishermen - Limited to $4650 6. Consumer claims - Claims of individuals arising from pre-petition deposits of money for purchase, lease, or rental of property or purchase of services not delivered or provided. Must have been for consumer use. 7. Alimony and child support. 8. Pre-Petition Taxes 9. Unsecured claims of federal depository institutions regulatory agency for amount of deficiency under debtor’s agreement to maintain capital 48 Chapter 7 - States can opt out of Federal Exemptions and have their own. Most states do. - In a non-opted out state, debtor chooses state or Fed. Exemptions - Exemptions must be scheduled along with debts Federal Exemptions - $17,425 for residence - $2,775 for one car - $450 for each household item up to $9,300 total. - $1150 for personal jewelry - $925 for any property plus up to $8725 of unused homestead exemption - $1750 for professional books, tools - Unmatured life insurance contracts owned by debtor are exempt - Up to $9300 for loan value or accrued interest for unmatured life insurance - Health aids prescribed by professsional - Government benefits - Alimony & support (but not excessive) - Pension plans - Crime victim awards - Wrongful death awards - Personal injury awards up to $17,425 - Compensation for loss of future earnings - Exempted Property May Be used to Satisfy Certain Debts: - Nondischargeable taxes - Nondischargeable alimony or support - Debt secured by lien not void under 506(d) and has not been avoided under another provision of the code. - Debt secured by tax lien if notice was properly filed 49 Non-Dischargeable Debts - Individual debts for debtors in 7, 11, and 13 may be non-dischargeable - 523(a) says which debts are non-dischargeable - Taxes - Debts for property obtained by fraud - Debts not scheduled - Alimony, maintenance, support - Property settlements from divorce - Except if debtor can’t pay or it’s appropriate - Debts for willful and malicious injury - Debts for fines, penalties, and court costs - Restitution for federal crimes - Student loans - Liability for DUI - Debt for failure to maintain capital of insured depository institution - Condominium fees after order for relief - Court costs - Debts that were or could have been listed in a prior bankruptcy case - Chapter 13 is different. The only non-dischargeable debts are: (1328(a)) - alimony - support - student loans - liability for DUI - Criminal fines/restitution - Certain kinds of long term indebtedness - certain post-petition claims for necessary consumer debts 50 Effect of Discharge - Debtor is relieved from personal liability - Liens may still be enforced, but creditor can’t go after debtor for deficiency - Judgments previously obtained against debtor for the debt are void - Creditors are permanently enjoined from taking action to recover or collect Reaffirmation - Debtor makes voluntary contract with dischargeable creditor to repay all or part of debt after bankruptcy - Generally this is because there is collateral debtor wants to keep. - Must meet conditions to be enforceable - Valid under contract law - Agreement made before discharge - Agreement has to say that reaffirmation is not mandatory & that debtor can rescind reaffirmation any time before discharge or within 60 days after reaffirmation agreement is filed, whichever is later. - Must be filed with court - Must be approved by court if debtor has no attorney - There must have been a valid discharge hearing - Court informs debtor whether discharge has been granted - Explains grounds for denial - If court schedules a discharge hearing, debtor could lose discharge for not showing up - Creditors cannot attempt to coerce debtor to reaffirm - violates automatic stay - Debtor can’t force reaffirmation if creditor doesn’t want - Creditor may prefer return of collateral 51 Redemption - Chapter 7 Only - Must be consumer equipment/debt - Property must have been exempted by debtor or abandoned by trustee - Debtor can keep collateral by paying amount of allowed secured claim, determined by collateral’s FMV. - Must be paid in lump sum - Right of redemption under Bankruptcy code cannot be waived Protection Against Discrimination - Government can’t discriminate against a person just because they were bankrupt. - Fire employees - Hiring - Deny, revoke, suspend, or decline to renew license or franchise - Credit applications are different - Private Employers may not discriminate solely because of bankruptcy - Lenders may not deny Guaranteed Student Loans to people just because of bankruptcy. 52 Administrative Powers Adequate Protection - Adequate protection of an entity’s interest in property is required when: - Interest is subject to auto. stay & court has not granted relief - Interest is used, sold, or leased by trustee or DIP - Court authorizes trustee or DIP to incur debt or obtain credit secured by an equal or senior lien on the property the entity has a lien on - Adequate protection cannot be satisfied by granting Admin. Priority - Three non-exclusive methods of adequate protection: - Periodic Cash payments to the extent the interest has decreased in value - Additional or replacement lien to extent of decrease in value of entity’s interest - Indubitable Equivalent - ex: guarantee of 3rd person who agrees to compensate for decrease - Value of collateral can be different for going concern or liquidation value - Court considers intended use or disposition - If adequate protection is given but eventually is shown to have been deficient, creditor gets Admin. expense claim w/priority over other Admins 53 Automatic Stay - Takes effect when petition is filed - Same for voluntary and involuntary - Even if property has been abandoned by trustee and debtor consents to relinquish collateral, creditor cannot proceed against property under non-bankruptcy law without getting relief from automatic stay from court. - Automatic Stay Enjoins Acts By Creditors - Proceedings against debtor to recover pre-petition claim - Purely post-petition claims, like suits for fraud are not barred - Enforcement of pre-petition judgments - Any action to obtain possession of estate property - Regardless of whether claim arose pre or post-petition - Any act intended to create, perfect, or enforce a lien for pre-petition claim - Any act to collect pre-petition debt - Tax court proceedings cannot happen. - Bankruptcy court has JX over tax issues - Setoffs of debts - But not administrative freeze by bank - Exceptions to Automatic Stay - Criminal proceedings against debtor - Collection of alimony and support when paid by property that is exempt, not part of estate, or acquired post-petition. - Paternity actions or modification of support - Perfection of an interest in property occurring within the 10 day grace period or outside trustee’s avoiding powers (like retroactive perfection). - Filing of continuation Statement (for financing statement on file) - Police and regulatory actions by government 54 - Recovery of non-residential real property where lease has naturally ended prepetition - Presentment of negotiable instrument, sending notice of or protesting dishonor Expiration of Stay - Stay of acts against property of estate is effective until property no longer constitutes property of the estate. - Like if trustee sells it to a third party - If it is abandoned and becomes debtor’s property, it is still covered - Stay of any other act enjoined under 362(a) continues until granting or denial of discharge or dismissal of case - Confirmation of Chapter 11 plan terminates automatic stay Relief From Stay - Requires notice and hearing - Stay can be terminated, annulled, modified, or conditioned - There must be cause - Lack of adequate protection - Bad faith of debtor in filing petition - Debtor has insurance and tort victim wants to sue - Stay of acts against property can be lifted if debtor lacks equity and property is not needed for effective reorganization. - Relief from stay for acts against property is often not needed because there are alternate grounds for relief, such as adequate protection. - If a creditor violates stay, debtor can recover damages 55 Use, Sale or Lease of Property - In Chapter 13 there are special provisions allowing debtor to control property - Trustee or DIP can use, sell, or lease property not in ordinary course after notice + opportunity for hearing - Hearing determines if there is good faith and value received - May not circumvent reorganization process in Chapter 11 - Secured creditor has right to bid on property and offset claim - No notice or hearing is needed for ordinary course of business unless court orders - Is it something the debtor usually does in the business? (vertical) - Is it something similar businesses do? (horizontal) - Must obtain court authorization after notice + hearing or consent of all interested parties to use, sell, or lease cash collateral in course of business - Such as paying employees - which is important because if employees quit, the Chapter 11 case might abort. - Court has to grant adequate protection - Use, sale, lease may be conditioned on procurement of insurance - Sale of property is not subject to lien or other interest if: - State law allows free and clear sale - Entity holding the interest consents - For liens, if the selling price is greater than the total of all liens - Bona Fide dispute about the entity’s interest 56 Obtaining Credit - Chapter 13 debtor engaged in business usually has same rights as trustee - No notice or hearing required for unsecured credit or debt in ordinary course - Allowable as administrative expense - Need notice and hearing for unsecured debt out of ordinary course - If no court approval, may be general unsecured and not admin - If offering admin priority doesn’t work, there may be notice and hearing and court can authorize the following: (debtor must show reasonable attempt) - Super-Superpriority: ahead of any admin or superpriority admin expense - Grant lien on unencumbered property of estate - Grant junior lien on property already enbumbered - Grant senior or equal lien on property + adequate protection to other 57 Executory Leases and Unexpired Contracts - Executory contracts: substantial performance left to be done by both parties - Courts are divided on whether a paid for but unexercised option is EXC - Must be true lease, not one intended as secured transaction - May be assumed or rejected by trustee or DIP with court approval - or by permissive provision in confirmed Chapter 11 or 13 plan - court will approve unless bad faith or gross abuse of discretion - Can only assume or reject entirety of agreement - If the unexpired lease or contract is in default there are three requirements for assuming - Default must be cured - Damages must be compensated - Must be adequate assurance of future performance - capability of paying debts from expected income - overall economic prognosis for the industry - existence of a guaranty - Time limitations for assumption or rejection - Chapter 7: 60 days after order for relief - for personal property or residential real property - deemed rejected if not assumed by that date - court may extend period for cause - Chapter 11 & 13 - Anytime prior to confirmation of the plan - for personal property or residential real property - Creditor may move for expedited decision - Leases of Nonresidential real property: trustee or DIP has 60 days after order for relief to assume or reject. Court approval is required for assumption 58 Chapter 7 - Trustee collects property of estate, reduces it to cash, and pays claimants in order. - Secured creditors are ordinarily paid out of their collateral - Some unsecured creditors have priority over other unsecured credtors - If there isn’t enough to pay a whole level of creditors, they get pro rata - Trustee can avoid certain liens - Tax liens are subject to subordination - 10 grounds for denial of discharge. Must be granted otherwise, but can be revoked - One year SOL - Order of Payment - Secured creditors - Priority unsecured claims - Administrative expenses - Gap claims in involuntary case - Wages, salaries, commissions - Contributions to employee benefit plans - Grain farmers and United States fishermen - Consumer layaway claims - Alimony and support - Unsecured pre-petition taxes - Capital for insured depository institutions - General unsecured claims - Unexcused tardy claims - Unsecured or secured claims for punitive damages and fines - Post-petition interest if the estate is solvent - The rest goes to debtor 59 Liens in Chapter 7 case - Trustee may avoid liens securing claims for non-pecuniary losses Discharge - Entire discharge may be denied under 727 - All creditors may pursue their claims post bankruptcy - Objection to discharge may be filed by creditor, trustee, or US Trustee - If debtor is not an individual (but non-individuals can still get liquidation) - Fraudulent transfer in the last year - Bad faith destruction or concealment of records - Perjury, bribery, extortion, or other fraud - Failure to account for loss of assets - Violation of court order or refusal to respond to material question - Prior discharge under Chapter 7 or 11 within 6 years - Discharge under Chapter 13 within 6 years unless: - All allowed unsecured claims were paid in full - Or payments under the plan totaled at least 70% of allowed unsecured claims, and plan was in good faith and was best effort - Discharge has been waived by debtor - Specific debt may be nondischargeable under 523 - Only these debtors may pursue claims post-bankruptcy if discharge is granted 60 Conversion - Debtor may convert voluntarily to another chapter at any time - Court may convert to Chapter 11 upon request of a party in interest - Notice and hearing required Dismissal - Court may dismiss for Cause after notice and hearing: - Debtor causes unreasonable delay that prejudices creditors - Debtor has not paid fees or charges - Debtor in voluntary case hasn’t filed schedules and statements - Other appropriate cause such as bad faith or bad motives - If debtor has primarily consumer debts and petition = substantial abuse - such as debtor has ability to pay with future income - debtor made very extravagant or irresponsible purchases - Misrepresentations on income statement - Only court or UST can make such a motion 61 Chapter 11 - Only the debtor can file a plan in the first 120 days, unless a trustee is appointed - If no trustee, an examiner may be appointed to investigate debtor and advise if business should be continued - Judge may giver certain DIP powers to examiner in lieu of trustee - Under Code 1111, partially secured creditors can elect to have entire claim treated as secured, but they forfeit their unsecured claim for deficiency. This may or may not be a good idea. It can be done before the end of the hearing on disclosure statement. - will collateral appreciate or depreciate in the future? - will there be a cram down? - does plan cash out secured creditors at value of collateral? - what are unsecured creditors being offered under the plan? - Court must approve disclosure statement before plan is voted on - Powers and Duties of creditor’s committees and Equity Holders Committees - Consultation with DIP or trustee - Investigation of debtor & other matters pertinent to case and plan - Participate in the preparation of a reorganization plan - Advising the people it represents - Collection and filing of acceptances or rejections - Requesting appointment of trustee or examiner - court considers total costs and benefits of appointing trustee - mismanagement by DIP may not be enough - Rendering services for benefit of creditors - Must get court approval to hire professionals 62 Duties of Chapter 11 Trustee - Account for all property received - Examine proofs of claims, object to allowance if improper - Provide information requested by parties in interest about estate - File periodic financial reports if operating debtor’s business - Prepare and file final report and account - File schedules and documents not filed by debtor - Investigate debtor and business - File report of investigation, report mismanagement, fraud, etc - File chapter 11 plan or recommend conversion ASAP - Provide info to taxing authorities about missed returns - File required reports after plan confirmation 63 Conversion to Chapter 7 - Debtor may convert to chapter 7 if - trustee has not been appointed under Chapter 11 - Chapter 11 filing was not involuntary - Case not involuntarily converted to Chapter 11 - Court may dismiss or convert to Chapter 7 for cause. Notice and hearing required. Court will do whatever is best for creditors and estate. - Lack of good faith - Continual losses and no reasonable probability of rehabilitation - Inability to effectuate Chapter 11 plan - Unreasonable and prejudicial delay by debtor - Failure to file plan before deadline set by court - Denial of confirmation of all plans - Material default by debtor on confirmed plan - Failure to pay fees and charges - Failure to file 521(1) information (larges unsecured claims & amounts) Conversion to Chapter 13 - Debtor must request the conversion - Debtor must not have received a Chapter 11 discharge 64 Chapter 11 Plan - Debtor may file plan with petition or at any time - Debtor has exclusive right for first 120 days after order for relief - Any other party in interest can file (except court or UST) when: - Trustee has been appointed, or - Debtor hasn’t filed plan in 120 days, or - Every impaired class hasn’t accepted plan 180 days after order for relief - 120/180 day periods may be shortened for cause+notice+hearing - Plan must specify classes of claims and equity interests - claim/interest placed in class only if substantially similar to others in class - Must be valid reason for making more groups (over-differentiating) - No gerrymandering to get votes for plan - Different classes should be used for different priorities in same property - same for liens on different property - Plans must provide for admin expenses, involuntary gap claims, and eighth priority tax claims individually, so they don’t need classes 65 Contents of Chapter 11 Plan Mandatory Provisions - Classify all claims and interests - Specify any class that is not impaired - Describe treatment to be accorded any impaired class - Treat every claim or interest within particular class identically - Unless a holder consents to less favorable treatment - Establish adequate ways to implement the plan, such as: - debtor’s retention of estate property - transfer of estate property - merger or consolidation - sale of estate property free and clear of liens - distribution of estate property to holders of interests in it - satisfaction or modification of liens - cancellation or modification of indentures - curing or waiving a default - Extending maturity date or altering interest rate/terms of securities - Amending debtor’s charter - Issuing securities of the debtor Permissive Provisions - Plan may provide for: - Any class of claims or interests to be impaired or unimpaired - Assumption, rejection, or assignment of unexpired leases & Ex K’s - Settlement of any claim or interest held by debtor or estate - or retention and enforcement - Liquidation of estate property and distribution of proceeds - Modification of rights of creditors - But not creditor with claim secured solely by debtor’s residence (so debtor can’t strip down the mortgage to house’s value) 66 Rules of Plan - If debtor is an individual, plan by another entity can’t mess w/exempt property - unless debtor consents - Classes that are not impaired by plan and the holders of the claims within the class are conclusively presumed to accept the plan. - Unimpaired Class = plan does not alter legal, equitable or contractual rights of creditors, even in favorable way. Solicitation and Disclosure - Plan and a written court-approved disclosure statement must be sent to all holders of claims who are to vote. - Disclosure statement must have enough information to enable a hypothetical reasonable investor typical of the voting ones to make an informed decision about the plan. - Most important factors: - Events leading to filing of BK - Description of assets and value - Anticipated future of company - Source of information in disclosure - Disclaimer - Present condition of debtor - Scheduled claims - Estimated return to creditors under chapter 7 liquidation - Accounting methods and names of accountants - Future management of the debtor - Chapter 11 plan - Estimated administrative expenses - Collectibility of accounts receivable - Financial data and projections - Risks - Actual or projected realizable value from recovery of voidable transfers 67 - Litigation likely to arise (non-bankruptcy) - Tax attributes of debtor - Relationship of debtor with affiliates Acceptance of Plan - Acceptance by a class requires 2/3 of amount and 51% of number - Court can discount votes not made or solicited in good faith - Classes that do not receive or retain property under the plan are deemed to reject it Confirmation of Plan - Notice and confirmation hearing. Parties in interest may file objections - Requirements for confirmation: - Complies with Bankruptcy code - Proper disclosure and solicitation - Plan proposed in good faith - Admin. expenses approved by court as reasonable - Discloses names and affiliation of all officers, directors, and insiders of debtor - and proposed compensation - Each creditor must have accepted the plan or receive at least as much money or property value as in a Chapter 7 liquidation (Best interests of creditors test) - If creditor has made 1111(b) election, plan must provide property with at least the value of collateral securing claim. - Every class must accept plan or be unimpaired - If this is the only element not satisfied, there may be confirmation by cram down - If there are impaired classes, at least one must accept the plan or no cram down - Every admin or involuntary gap claim must be paid completely in cash on effective date of plan. 68 - 3-7th tiers (wages, benefits, grain/fishermen, layaway, support) - Each holder must get the following treatment unless consents otherwise - If class has accepted plan: each claimant gets deferred cash payments equal to present value of claim - If class has rejected plan: Each claimant must get total payment in cash on effective date of plan - Plan must be feasible - reasonable probability of success - unlikely need for liquidation or further reorganization - All Bankruptcy fees paid by effective date of plan - Protects retiree insurance benefits 69 Cram Down - Proponent of plan may request cram down - Court will confirm plan despite rejection of impaired classes - At least one impaired class must accept the plan - Plan must not be unfairly discriminatory - reasonable basis for any discriminatory treatment - Can be implemented without the discrimination? - Good faith - Manner in which class is treated under plan - Must be fair and equitable to impaired classes - Must deal with secured claims in one of three ways: - Creditor retains liens and receives deferred cash payments - Creditor gets indubitable equivalent of secured claim - Collateral is sold and creditor gets lien on proceeds - creditor may bid and offset - Must deal with Unsecured claims in one of two ways: - Each creditor receives property equal to allowed claim - Senior classes fully paid before junior classes - Must deal with equity interests in one of two ways: - Holder receives or retains property equal to the greatest of allowed amount of fixed liquidation preference, fixed redemption price, or value of equity interest - Senior classes fully paid before junior classes 70 Effects of Confirmation - Unless stated otherwise, confirmation causes all estate property to vest in debtor - Some authorities say secured creditors don’t lose liens if they failed to file claims and lien wasn’t avoided. - Unless stated otherwise, confirmation discharges all pre-confirmation debts, plus debts from rejection of exec. K’s and unexpired leases - Individuals, corps, and partnerships all get the discharge - Exceptions to discharge: - Any non-dischargeable debt under 523 (taxes, alimony, support) - No discharge if - all or nearly all estate property is liquidated under plan - business does not continue, and - debtor not eligible for Chapter 7 discharge (ie corp) - No personal debts of officers and directors - Not scheduled, not discharged - Confirmation of plan usually terminates automatic stay 71 Chapter 13 - Debtor has exclusive right to propose plan - Designed for individual debtors who have regular income and desire to pay debts - There is trustee, but debtor usually remains in possession of property and makes payments to creditors through trustee based on anticipated income over life of plan - Chapter 13 estate includes post-petition property and earnings Issues: - Eligibility - Stability and regularity of income - Unsecured debts not more than $290,525 - Secured debts not more than $871,550 - Case must be voluntary - Mandatory & permissive plan provisions - Requirements for confirmation - Dischargeability of debts 72 Eligibility - Stockbrokers and commodity brokers not eligible - Not eligible if there was a BK case dismissed in last 180 days Administration of Case - UST appoints trustee or serves personally - Duties of Trustee: - Account for property received - Monitor debtor’s actions with collateral - Investigate debtor’s finances - Examine proofs of claims, object to improper ones - Object to discharge if appropriate - Provide information about estate to parties in interest - Prepare and file final report and account - Appear and be heard at hearings regarding value of secured property, confirmation or modification of plan - Assist debtor with implementing plan and give non-legal advice - Ensure debtor begins making payments w/in 30 days after filing of plan - Investigate business and report on conduct - Disburse payments to creditors under plan Conversion to Chapter 7 - Voluntarily - Court may dismiss or convert for cause, whichever is best - Unreasonable and prejudicial delay by debtor - Failure to pay fees or charges - Failure to file plan within 15 days - Failure to make payments to creditors - Plan can’t get confirmed - Default on confirmed plan 73 - Revocation of confirmation procured by fraud - Condition stated in plan - Failure to file schedules and lists - Lack of good faith in filing petition Conversion to Chapter 11 - A party in interest may request. Notice and hearing required. Chapter 13 Plan - Only debtor may file plan - Mandatory Provisions: - Sufficient income will be turned over to trustee - Priority claims will be paid fully in deferred cash payments - Identical treatment of claims within a class - Permissive Provisions: - Classification of unsecured claims - No unfair discrimination: see Chapter 11 - May modify rights of creditors, but no stripping down lien on residence - If that is the sole claim of the creditor - Cure or waive defaults - Specify any Order in which payments will be made - Assumption or rejection of you know what - Specify property used to pay claims - Payments under plan may not extend beyond three years unless court approves - Up to five years on approval 74 Confirmation of Chapter 13 Plan - Hearing, parties may file objections - Requirements: - Complies with code - Fees must be paid - Good faith - debts and expenses stated accurately? - fraudulent misrepresentations? - unfair manipulation of process? - Each unsecured creditor with allowed claim will receive property with same value as in Chapter 7 liquidation - Secured creditors must accept plan, or debtor must surrender the collateral, or liens will be preserved with periodic cash payments. - Plan must be feasible - If an unsecured creditor objects to the plan, the court may not confirm unless: - Plan proposes to pay creditor total amount of claim, or - All disposable income for next three years will go to paying claims - Confirmation does not discharge debts in Chapter 13! - Discharge happens when all payments under plan have been made - Non-Dischargeable Chapter 13 Debts: - Debts with payment schedule beyond length of plan - If plan provides for curing defaults w/in reasonable time and maintaining payments while case is pending. - Alimony and support - Student loans - DUI liability - Criminal fines - Post-petition consumer debts for property/services necessary for plan - If trustee’s approval was not obtained 75 - Court may grant hardship discharge if debtor can’t make all payments - Must be notice and hearing - Holding debtor accountable wouldn’t be fair - Unsecured creditors have been paid same as in Chapter 7 - Modification of plan is not practicable - Not for non-dischargeable debts - Court may revoke discharge if it later discovers that debtor committed fraud - If debtor fails to make payments, case may be dismissed or converted to Chapter 7 76