US Bankruptcy Litigation

CEREBRA TECHNOLOGIES BANKRUPTCY LITIGATION IN USA Submitted By Sadanand Naik Legal Assistant 1 CEREBRA TECHNOLOGIES Index 1. Statutes referred 2. Cases referred 3. Introduction 4. Hierarchy of courts 5. Governing laws 6. Bankruptcy judgeships 7. Three chapters on bankruptcy 8. Chapter 7 liquidation 9. Chapter 11: reorganization 10. Chapter 13: adjustment of debt of the persons, having regular income. 17 2 2 4 4 4 5 5 6 13 2 CEREBRA TECHNOLOGIES STATUTES REFERRED 1. Title 11 Federal Rules Of Bankruptcy Procedure 2. Title 18 Crimes 3. Title 26 IRC Implication Of Tax Avoidance 4. Title 28 Judiciary and judicial process 5. Federal Rules Of Appellate Procedure 6. Federal Rules of Evidence. CASES REFERRED  Campbell v. Countrywide Home Loans, Inc., 2008 U.S. App. LEXIS 21405  In re South Star Oil Co., 2008 Bankr. LEXIS 2426  Toibb v. Radloff, 501 U.S. 157 (1991)  Dewsnup v. Timm et al  Roe v. College Access Network , 2008 U.S. App. LEXIS 21362  Fields v. Sallie Mae Servs. Corp. 07a0252n.06; 2007 U.S. App. LEXIS 8127  In re Forletta, 2008 Bankr. LEXIS 2491  Custom Mortg. Solutions, Inc. v. Hood (In re Hood), 2008 Bankr. LEXIS 2474  In re Timmerman, 379 B.R. 838, 2007 Bankr. LEXIS 4055 (In re Fields), 3 CEREBRA TECHNOLOGIES INTRODUCTION A bankruptcy case is a special kind of a civil case, involving people or companies who can no longer pay their debts. Congress has established a special court, called as the bankruptcy court to adjudicate bankruptcy matters. Bankruptcy protects both the debtors 1and creditors2 HIERARCHY OF COURTS  US Supreme Court  The Circuit court of appeals  The district courts or bankruptcy appellate tribunal (BAP )  The bankruptcy courts GOVERNING LAWS  Title 11 Federal rules of bankruptcy procedure  Title 18 Crimes3 (sec.151 through 158 deals with bankruptcy fraud and other bankruptcy crimes). E.g.4 1 An individual or company that owes debt to another individual or company (the creditor), as a result of borrowing or issuing bonds. also called obligor. http://www.investorwords.com/1323/debtor.htmlThis content can be found on the following page: http://www.investorwords.com/1323/debtor.html 2 http://www.investorwords.com/1323/debtor.html A person or organization which extends credit to others. This content can be found on the following page: http://www.investorwords.com/1207/creditor.html 3 http://en.mobile.wikipedia.org/transcode.php?go=Bankruptcy+in+the+United+States&chapter=Bankrupt cy+crimes&PHPSESSID=36c1d3b92f8bf21fb7b13cfd4150541d 4 Bankruptcy fraud includes filing a bankruptcy petition or any other document in a bankruptcy case for the purpose of attempting to execute or conceal a scheme or artifice to defraud, making a false or fraudulent representation, claim or promise in connection with a bankruptcy case, either before or after the commencement of the case, for the purpose of attempting to execute which are punishable by a fine, or by up to five years in prison, or both. Certain offenses regarding fraud in connection with a bankruptcy case may also be classified as "racketeering activity" for purposes of the [Racketeer Influenced and Corrupt Organizations Act] (RICO)4. Bankruptcy crimes are prosecuted by the [United States Attorney] , typically after a reference from the [United States Trustee] , the case trustee, or a bankruptcy judge. Bankruptcy fraud can also sometimes lead to criminal prosecution in state courts, under the charge of 4 CEREBRA TECHNOLOGIES  Title 26 IRC Implication of tax avoidance5  Title 28 Judiciary and judicial process  Federal rules of appellate procedure  Federal rules of Evidence. BANKRUPTCY JUDGESHIPS The judges to the bankruptcy courts are appointed by the judges of US circuit courts for such circuits for the period of 14 years. Currently there are 324 judgeships6 in the US. THREE MAIN CHAPTERS ON BANKRUPTCY There are mainly three chapters under the bankruptcy law in USA. Chapter 7: liquidation Chapter 11: Reorganization Chapter 13: Adjustment of debt of the persons, having regular income. [theft] of the [goods] or [services] obtained by the debtor for which payment, in whole or in part, was evaded by the fraudulent bankruptcy filing. 5 http://www.law.cornell.edu/uscode/26/1398.html http://www.law.cornell.edu/uscode/26/1399.html 6 The office of a judge. http://www.en.thinkexist.com/dictionary/meaning/judgeship/ 5 CEREBRA TECHNOLOGIES CHAPTER 7: LIQUIDATION Bankruptcy under this chapter offers a fresh start for the individuals. In this chapter, most of the debtor’s property will be sold to raise the amount of the creditor. If the value of the asset is more than the debt owed, the remaining amount will be paid to the debtor. After, 2005 enactment by the congress, it is mandatory to pass the Means test7 in order to qualify for the filing bankruptcy under chapter 7. How the case move through under chapter 7 1. Petition The case begins with the filing of voluntary petition with the clerk of the bankruptcy court. Debtor must also file the following documents shortly after filing the petition, they are 1. the list if creditors 2. the schedule of assets 3. the statement of financial affairs If the debtor is not in position to pay the fees at once, he can request for payment in installments. It is not necessary that always the creditor must file the petition. Even the creditors can initiate the bankruptcy proceedings; these are called 7 refers to an investigative process undertaken to determine whether or not an individual or family is eligible to receive certain types of benefits from the government. The "test" can consist of quantifying the party's income, or assets, or a combination of both. (10A) The term “current monthly income”— (A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on— (i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521 (a)(1)(B)(ii); or (ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521 (a)(1)(B)(ii); and (B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism. http://www.law.cornell.edu/uscode/11/101(10A).html 6 CEREBRA TECHNOLOGIES as the involuntary petitions. If the debtor has not more than 11 creditors, then the one creditor can file an involuntary petition. If it is more than 12 creditors, three creditors must join together to file a petition. 2. Automatic stay Once the petition filed before the bankruptcy court, there will be an automatic stay. It stays the suits, claims, appeals filed against one another before or after 3. Trustee selection After filing a voluntary petition in the bankruptcy court, a notice will be sent to all the creditors. The creditors are required to be present at the trustee selection. Then the case will be assigned to bankruptcy judge and added to the docket of the US Trustee8. US trustees maintains the list of case trustees 9 .These case trustees will liquidate the debtor property at the auction or at the private transactions and collect the money, deposit it in the account maintained for that purpose. 4. Creditors meeting It is also called as the Sec.341 meeting. Interim trustee10 will preside over this meeting. After a notice issued to the creditors, creditors have to come before the court and attend the meeting. If the creditor is not 8 a person who supervises the administration of bankruptcy cases and trustees and relieves bankruptcy judges of routine administrative matters, such as appointing case trustees, naming creditors’ committee members, and conducting meetings of creditors. U.S. trustees are appointed by the Attorney General of the United States for a five-year term. 9 in bankruptcy, a person, often a lawyer or accountant, hired to preside over liquidation of the debtor’s estate. The case trustee collects and sells the debtor’s nonexempt property and distributes the proceeds to creditors, and he or she pursues legal claims on behalf of the debtor for purposes of getting as much money for the estate as possible. 10 -- in bankruptcy liquidations, a person who takes "possession of, preserves, and protects" the debtor’s nonexempt property (the property that will be divided among creditors) until the creditors elect a case trustee 7 CEREBRA TECHNOLOGIES found, it will be published in the newspapers on which date the creditors have to attend the court. It is compulsory that the debtor must be present at the meeting. The debtor will be put under oath and he will be asked several questions by the creditors. The purpose of this meeting is get to know hidden assets or undervalued assets of the debtor. And finding out is there any claim by the debtor which would yield more money if pursued. And the goal is to accumulate more money for the bankruptcy estate. 5. Liquidation11 of assets After the creditors meeting, the case trustees will sell the asset of the debtor either at the auction or at he private transactions. If the debtor is the business, it will cease to exist. If it is an individual he will be discharged. However certain debts are not dischargeable such as the alimony, taxes etc. 6. Collection of the bankruptcy estate Once the assets are liquidated, case trustee will deposits the amount in the bank account, along with any other amount accumulated from the legal suits. 7. Distribution of the bankruptcy estate After the deposit of amount in the account, the amount deposited will be distributed among the creditors. Majority of the cases are no asset cases. If there are no assets to distribute then the case trustee will simply file before the court a report no assets to distribute. 11 the more traditional type of bankruptcy filing, in which the debtor gives up most of its assets in return for not having to pay most of its debts. 8 CEREBRA TECHNOLOGIES Even if there is money to distribute, sometimes the creditors would not get the whole amount which is due to him by the debtors. Sometimes some creditor will get less, some creditors will get more. The question arises in our mind is that, who will be paid first. At the stage of distribution, the administration of the estate such as the professional fees of the trustee, attorney or accountant appointed by the bankruptcy estate will be paid first. 8. Claims There are two kinds of the claim and creditors in the bankruptcy. One is the Secured claims and other one is an unsecured claims. Secured claims are one that gives the creditor an interest in property as assurance of payment. For example people will mortgage house in secure of loans. If the loan is not paid there will be foreclosure and sale of the house. Holder of unsecured claims cannot look into any such payments. Under unsecured claims are again divided into two: Unsecured priority claims and unsecured non priority claims. Unsecured creditors who have priority must be paid first before paying to unsecured non priority claims. In Campbell v. Countrywide Home Loans, Inc., 2008 U.S. App. LEXIS 21405 (5th Cir. October 13, 2008, Filed)12 It was held that an automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy court forum, not legal actions taken within the bankruptcy court. 9. Conversion A chapter 7 debtor has right to convert13 the chapter 7 case to one under chapter 11 or 13 at any time during the proceedings. 12 http://www.lexis.com/research/home?_m=69dbc35fc5174b356cc22cdf90a7a3f2&wchp=dGLzVlzzSkAB&_md5=a016b05abe7b0e8537a26317d17ad3dd 9 CEREBRA TECHNOLOGIES In re South Star Oil Co.,2008 Bankr. LEXIS 2426 (Bankr. D.Or., September 15, 2008, Decided) Held that a cause for conversion or the dismissal includes a number of criteria, including substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation In Toibb v. Radloff, 501 U.S. 157 (1991)14 In this case the voluntary petitioner, after discovering stock in an electronic power company, has substantial value, decided to avoid its liquidation by seeking conversion to chapter 11. His motion was granted and he was allowed to file a reorganization plan. But the court dismissed his petition finding that he did not qualify for relief under Chapter 11 because he was not engaged in an ongoing business. The District Court and the Court of Appeals affirmed. 10. Dispute resolution The petition may be contested after filing the bankruptcy petition through the adversary proceedings. for example one party may initiate proceeding against the other by filing the complaint and questioning the validity of the petition such will be adjudicated if the parties are willing to adjudicate. There may even be motions objecting to the discharge of the debtor, objections to the sale of debtor’s property. In Dewsnup v. Timm et al15. Petitioner Dewsnup, the debtor in a case under Chapter 7 of the Bankruptcy Code, filed an adversary proceeding, contending that the debt of approximately $120,000 that she owed to respondents exceeded the fair market value of the land securing the debt and that, 13 in bankruptcy, to change a case to another type of proceeding; for example, if creditors initiate a filing under Chapter 7, the debtor may convert the case to Chapter 11. 14 http://supreme.justia.com/us/501/157/case.html 15 http://supreme.justia.com/us/502/410/case.html 10 CEREBRA TECHNOLOGIES therefore, the Bankruptcy Court should reduce respondents' lien on the land to the land's fair market value pursuant to 11 U. S. C. § 506(d), The court determined that the then value of the land in question was $39,000, but refused to grant the requested relief and entered a judgment of dismissal with prejudice. The District Court and the Court of Appeals affirmed. Held: Section 506(d) does not allow Dewsnup to "strip down" respondents' lien to the judicially determined value of the collateral, because respondents' claim is secured by a lien and has been fully allowed pursuant to § 502 and, therefore, cannot be classified as "not an allowed secured claim" for purposes of the lien-voiding provision of § 506(d). Pp.414-420. 11. Discharge16 and closing of case After the property of debtor is sold and distributed among its creditors, the debtor will get discharged. However the debts like alimony, child support and certain taxes which are due to the government cannot be get discharged. In Roe v. College Access Network , 2008 U.S. App. LEXIS 21362 (10th Cir., October 9, 2008, Filed) It was held that a permanent medical condition will certainly contribute to the unlikelihood of a debtor earning enough money to repay her student loan debt, but such a condition is not a prerequisite to discharging the debt. In re Hlavin, 2008 Bankr. LEXIS 2397 (Bankr. D. Ohio, September 30, 2008, Decided) 16 (1) the payment of a debt or satisfaction of some other obligation; (2) in bankruptcy, a legal device that releases a debtor from monetary obligations; it prevents creditors from trying to collect prebankruptcy debts from a debtor after a bankruptcy proceeding is over. 11 CEREBRA TECHNOLOGIES It was held that under 11 U.S.C.S. § 707(b)(1), the court may dismiss a case filed by an individual debtor under Chapter 7 whose debts are primarily consumer debts if it finds that the granting of relief would be an abuse of the provisions of Chapter 7. 12. Appeal When there is a discharge of the debt or dismissal of the bankruptcy petition, there may be an appeal. If the petition dismissed, the debtor may go an appeal. If there is discharge without any payment to the creditors, the creditors may go an appeal. Appeal may be preferred either to the district court or to the bankruptcy appellate panel17.Where there is no bankruptcy appellate panel, appeal is always preferred to the district court. 17 -- in the circuits that have them, a panel of three bankruptcy judges that shares the appellate role of the district court in bankruptcy filings. 12 CEREBRA TECHNOLOGIES CHAPTER 11: REORGANIZATION This chapter is known as the business reorganization chapter. Sometimes individuals may also seek remedy under this chapter. Once the petition is filed under this chapter the debtor shall also file plan of reorganization. Debtor is also required to file following documents along with the voluntary petition.  Schedules A through J  Summary of Schedules  Statement of Financial Affairs  Matrix  Statement of No Prior Filing  List of Equity Security Holders  Corporate Resolution (when applicable)  Pro Se Debtor's Statement How the proceedings takes place under chapter 11 1. Petition There will be a voluntary or involuntary petition 2. Automatic stay There will be an automatic stay after the petition is filed. In re Forletta, 2008 Bankr. LEXIS 2491 (Bankr. D.N.Y., October 10, 2008, Decided) Held: debtor could not extend the automatic stay under 11 U.S.C.S. § 362(c)(3)(B) because the debtor's earlier Chapter 7 proceeding was closed on a final decree and discharge under 11 U.S.C.S. § 727 and § 362(c)(3)(B) did not apply unless the case had been dismissed under 11 U.S.C.S. § 707. Extension of stay was warranted under § 362(c) 13 CEREBRA TECHNOLOGIES (3)(C). 3. Continued control by management As in chapter 7 case, the US trustee doesn’t appoint a case trustee; instead the US trustee monitors the progress of the case. He reviews the financial reports of the debtor, who continued to operate the business and adequacy of the disclosure statement and reorganization plan. 4. Role of the creditors committee There will be an unsecured creditors committee appointed by the US trustee who is willing to serve monitor the case. Unsecured creditors cannot look at he specific property of the debtor. Difference secured claim and unsecured claim A secured claim is one that gives the creditor an interest in property as assurance of payment, such as a mortgage on the house to secure a home loan; the holder of an unsecured claim can’t look to any specific property of the debtor for payment. The committee negotiates with the debtor to develop a plan that will protect the interests of unsecured creditors. Because there is no case trustee in a Chapter 11 case, the committee has the authority to perform investigative functions, such as reviewing the debtor’s assets, liabilities, and financial conduct to determine its ability to continue in business. 5. Creditors meeting It is also called as the 341 meeting. It may take place within 20 to 40 days of filing the bankruptcy petition. Debtor takes an oath in this. Usually US trustee or the assistant presides at the 341 meeting. 14 CEREBRA TECHNOLOGIES 6. Plan of reorganization It is a Debtor’s proposal to repay the amount in certain period. Debtor files it in the court for its approval. 7. Disclosure and disclosure statement The debtor must file the disclosure statement which must be approved by the court. Once this filed there will be a disclosure hearing. Sometimes the creditors may oppose to it. Once the disclosure statement is approved he or she will also set a time limit on voting for or against the reorganization plan. 8. Voting and confirmation Once the debtor has the reorganization plan the court must approve or confirm the plan. Before confirmation hearing, each class of creditors votes separately by mail on whether to accept the plan. If a majority of the voters in each class and holders of two-thirds of the amount of claims in each class approve the plan, the court will generally confirm the plan. The plan then becomes binding on all of the pre confirmation creditors, whether they voted for or against it. If majority of the creditors did not approve the plan, then the debtor may attempt a cram down18. 9. Discharge After the reorganization plan is confirmed the debtor gets a discharge. Most claims for pre confirmation debts are wiped out. The debtor only has to pay the debts spelled in the plan. Custom Mortg. Solutions, Inc. v. Hood (In re Hood), 18 cram down -- in bankruptcy, court confirmation of a Chapter 11 plan despite the opposition of certain creditors 15 CEREBRA TECHNOLOGIES 2008 Bankr. LEXIS 2474 (Bankr. D. Ill., October 2, 2008, Decided) A plaintiff has the burden of proof by preponderance of the evidence to show that the debt in question is non-dischargeable under 11 U.S.C.S. § 523(a)(6). In re Timmerman, 379 B.R. 838, 2007 Bankr. LEXIS 4055 (Bankr. D. Iowa, December 10, 2007, Decided) Debtors were estopped from seeking dismissal of their bankruptcy action under 11 U.S.C.S. § 707(a) because they falsely stated that they had obtained credit counseling and had taken advantage of the bankruptcy laws for 21 months, and granting their motion would have prejudiced their creditors and impaired the integrity of the bankruptcy system. 10. Paying creditors The debtor has to make payments according to the reorganization plan. If not met accordingly, the creditors can seek the liquidation of the debtor by moving to convert the cases to chapter 7, or they may sue to force the debtor to make the plan payments. 11. Dispute resolution Suits, contesting matters will be resolved if any. 12. Appeal Appeal is preferred either to the bankruptcy appellate tribunal or to the district courts. 16 CEREBRA TECHNOLOGIES CHAPTER 13:ADJUSTMENT OF DEBT OF THE PERSONS, HAVING REGULAR INCOME Under this chapter debtor develops a plan, how he or she proposes to repay creditors. By agreeing to use future income for plan payments, the debtor is able to keep his or her property. Difference chapter 7 and chapter 13 In chapter 7 the debtor property is liquidated but it does not include future income. But in the chapter 13 debtors is allowed to keep his property and the debtors have only 15 days to propose a plan, in contrast to the 120 days of chapter 11 debtors. How the proceedings takes place 1. Petition Debtor files a voluntary petition before the court. He is required also to file following documents:  Schedules A through J  Statement of Financial Affairs  Matrix  Statement of No Prior Filing  Plan  Disclosure of Compensation - FRBP 2016(b)  Pro Se Debtor's Statement  Filing fee 2. Automatic stay Once the petition is filed before the court, every suit concerning the debt recovery will be stayed. . 17 CEREBRA TECHNOLOGIES 3. Creditors meeting It is also called as the 341 meeting. It may take place after the 15 to forty days after the petition is filed. Both creditors and the debtor attend it. Chapter 13 trustees or Standing trustee19 presides over the 341 meeting. 4. Confirmation Before the debtors plan takes effect, the court must approve the plan. It is the standing trustee’s job to review the plan and advice the court whether it seems workable or but they can oppose the plan. 5. Paying creditors Within thirty days after filing the plan, the debtor must start paying the creditors. Debtor pays it to the trustee who then pays it to the creditors as provided for in the plan. The debtor has up to five years to pay of his debts. 6. Dispute resolution Adversary proceedings if any contested matters will be resolved at this stage. 7. Discharge legal. Standing trustee has to recommend the plan. Creditors have no right to propose a new plan 19 a private citizen appointed by the U.S. trustee to handle the administration of a large block of Chapter 13 cases. Often a lawyer.http://www.fjc.gov/federal/courts.nsf/autoframe!openform&nav=menu1&page=/federal/courts.nsf /page/800 18 CEREBRA TECHNOLOGIES After completion of plan payments, the debtor will receive a discharge. It discharges all debts except the long term home mortgage debts, alimony, child support obligations, and certain education loans. 8. Appeal Appeal may preferred either to the district court or to the BAP. 19