Bankruptcy Law School Outline

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					Bankruptcy Outline


Taxation of a discharge (random class discussion, very not likely on test) a. Your residence, Blackacre, is subject to a million dollars of debt. Blackacre is worth $800,000, and you abandon it to the lender. There is a shortfall of $1m-$800k=$200k, but it is statutory nonrecourse so you don't have to pay it. b. Tax law treats it as a sale at $1 mill, so the sale price cancels the debt and you have no debt forgiveness. c. BUT suppose you bought the house for, say $300,000 (basis). You surrendered property worth $800,000 that you bought at $300,000. Tax law treats this as a taxable gain of $800x-$300k= $500k. Which is taxable. d. BUT tax law gives you an exemption of $250k for a single person, $500k for a married couple. So in this case, if the taxpayer is married, there would be no tax effect.

II. Collection Law: a. Collection Process i. Judgment issued 1. In most cases, payment is simply made. 2. Buying judgments: There’s also a large market where people buy judgments (at discounted value) and take over the job of collecting. ii. Judgment Entered 1. CA requires formal entry of a judgment by the clerk before the judgment can be effectuated/executed for any purpose a. Jackson v. Sears, Roebuck (1957, AZ) i. Judgment creditor gets execution on a judgment b/f judgment is entered. Court holds that the execution and subsequent sale void as AZ law requires entry of judgment b/f judgment (like CA). ii. A judgment with a defect is voidable until cured iii. Odd facts missing: Judgment was only for $600, but were able to foreclose on $200k property. Why couldn’t the debtor come up with that small amount? Why was it able to sell for so little? 2. Federal rules follow the rule of the state in which the district court is located unless a federal statute is applicable and provides otherwise iii. Writ of Execution 1. Must file “writ of execution” form with civil clerk w/ accompanying declaration. Judge approves (or not). Writ tells sheriff (or marshal or levying officer) to levy against (take) some form of property. 2. Must know of good property to levy against— a. Do you know of any property already? b. Search public records (auto, property records) c. Get court order for D to disclose property (Rule 726--still?) 3. Judgment must specify what property is to be levied iv. Court officer (sheriff) levies upon (takes) the property of the debtor Now you have Execution Lien 1. Must give NOTICE of levy. v. Sheriff sells levied property—proceeds go to pay collection cost first and remainder toward judgment. 1. CA requires sale of personal property, unless otherwise ordered 2. If any surplus, goes back to debtor. 3. Likely that some NOTICE of Sale or Public Auction is required. (Prof. not sure what CA law is). vi. Can repeat as often as needed with other property. b. Secured Creditors: Intro i. Follow a difference procedure that bears a family resemblance, but has differences


ii. Creditors w/ Security Interest in Personal Property: Art. 9 of UCC 1. Private right of repossession. Can repo property on own if can do w/o breach of the peace. a. Not available to a judgment creditor. 2. Can also bring a claim if the collateral was insufficient to bring the claim and then go through writ of execution process if needed. iii. Creditors w/ mortgage on Real Estate 1. If own a mortgage, called a “mortgage trustee” in CA. 2. 1st step is Notice from creditor of non-payment. 3. 2nd step is Notice that house will be sold through foreclosure. a. If sale is sufficient to cover assets, creditor is satisfied. i. If sale insufficient, creditor does NOT have option to pursue deficiency in court. Mortgage lender is simply out of luck. b. Do not need judicial approval to foreclose.

III. Balance Sheet Assets Owned Current Cash Accounts Receivable

Liabilities Owed and Equity Debts (Claims): Short and Long Term Notes Payable Accounts Payable Tax

Long Term Land Building Tools/Equip. IP Intangibles (Good will)

Sh. Equity (Interests)

Net worth = assets – liabilities Note: value of assets or liabilities not always certain. Eg. assets valued at “80” might be a reflection of the fact that there’s a 50% chance the Co. will yield 160 and a 50% chance it will yield 0. Or a 50% chance it will yield 81, and 50% at 79. In other words, share value of a company may be vastly different that asset value listed on balance sheet. IV. The Eternal Triangle a. Deals with relationships between creditors when debtor does not have enough to go around b. Fraudulent Transfers and the Eternal Triangle i. Cases where debtor colludes with one creditor at expense of another. ii. Twyne’s Case (1601) 1. Pierce owes Twyne 400 and C 200, so C sues P. P secretly pays goods valued at 300 to T in satisfaction of the debt, but maintains pssn. of the goods to earn money off of them and sold some of them again. Transfer was made while writ of execution pending. Valuation of goods was done b/t parties and not by an objective 3rd party. 2. C sues and court finds the tx was fraudulent for reasons reflected in italics. a. Did the holding rest on the fact that P and or t intended to defraud C? Or simply that C was mislead? Or did both (intent and a misleading) need to be present? Not clear. b. Contrast subjective fraud (intentional by debtor/transferor) w/ objective (aggrieved creditor was misled).


3. Issue not addressed, but now common: Debtors who need to keep their property so that they can continue to make income to pay off their debts. P’s actions may not be so shady, looked at in this light. 4. Can view case as a struggle between commercial law and property law. Commercial law very undeveloped in 1600s, but now common. iii. Badges of Fraud from Twyne’s and elsewhere (not in CA or Fed. Bankruptcy Law, but a version is in some state law). 1. Did the transferor retain possession or control? (Is this really bad or just enabling income earning?) 2. Was the transfer or obligation disclosed or concealed? a. Disclosure negates fraud while concealment evidences fraud 3. Was the transferor recently sued? 4. Was the transfer of substantially all the debtor's assets? 5. Was the transfer to an insider? (i.e. spouse/family member/corporate officer or director) 6. Did the debtor leave the jurisdiction? 7. Did the debtor remove or conceal assets? 8. Was the value of the consideration transferred reasonably equivalent to the obligation? 9. Was the debtor insolvent or did he become insolvent shortly after the transfer was made? 10. Did the transfer occur shortly before or shortly after a substantial debt was incurred? 11. Did the debtor transferred the essential assets of the business to a leinor who transferred the assets to an insider of the debtor? iv. Cal. Civ. Code §3432: A debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another. 1. Is this exactly contrary to Twine’s case? 2. In Bankruptcy, it is contrary to law to prefer one creditor to another. Absent bankruptcy, though, it’s not wrong to prefer one creditor to another. v. 11 USC §548(a)(1) : adopted from the Uniform Fraudulent Transfer Act (UFTA applies outside bankruptcy, UFTA and §548 apply in bankruptcy) Fraudulent Transfers and Obligations 1. (a) (1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily— a. (A) [Intentional Fraud:] made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; OR i. Proving intent usually very difficult. ii. Under §727—you don’t get to discharge your debts in bankruptcy if you are found to have had actual intent—thus in settlement, you’ll want to take the latter route rather than former. iii. What if you make a fraudulent tx, but then undo it? 1. Nothing in statute lets you off the hook for reversing your initial fraudulent tx. 2. In a real case, judge let debtor off the hook. b. (B) [Less than Reasonably Equivalent Value] i. (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and ii. (ii)


1. (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; 2. (II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; 3. (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or 4. (IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. iii. Proving value often difficult, but not as difficult as proving intent. iv. Most common type of LRE fraud: debtor gives big gift to family member while owing $$ to others. c. Intentional Fraud v. Based on Exterior Circumstances (less than rsbly equiv value, secrecy, etc.)—the line gets blurry 2. CA: 4 year SOL for fraud. Doesn’t specifically adopt UFTA, so likely 4 years to bring an action here. But, bankruptcy only requires disclosure for 2 years, so, unless deposed, might get away with a fraud if 2+ years. vi. 11 USC §67, (d (1)(e): Consideration given for the property or obligation of a debtor is 'fair' 1. When, in good faith, in exchange and as a fair equivalent therefor, property is transferred or an antecedent debt is satisfied, or 2. When such property or obligation is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared with the value of the property or obligation obtained." vii. Kindom Uranium Corp v. Vance (10th C 1959) 1. Mortgage Deeds—must be properly recorded for a purchaser to establish rights against a third party (i.e. A sells to B, B doesn’t records; A sells to C, C records; C wins over B) 2. D transfers her house to Kindom Corp, of which she is a Sh and Dir in exchange for some debt relief plus shares. D in auto wreck with P, so P sues. Only then does Kindom records the deed. P still owed 5k, so gets deficiency judgment. D files bankruptcy. 3. Intentional Fraud? Court holds that no evidence of fraudulent intent to hinder, delay or defraud creditors when she made the transfer. No intent by her when perfected b/c that was up to the transferee. a. Court doesn’t find that Corp. and D are one and the same. No veil pierced. 4. Less than Rsbly Equiv Value (No fair consideration)? a. Valuing stock merely at “par value” is too inexact where stock has never been traded, nor dividends paid, and company shows a net operating loss. viii. Other Forms of Fraudulent Transfer 1. Corporation law prohibits directors from distributing dividends to Shs when Corp is insolvent, or the tx would render it insolvent. While not called fraudulent tx law, it it very similar to Less than Reasonable Equiv. Value fraud. 2. UCC Art. 6 “Bulk Tx Act” (§6104(1)(c)). a. Bulk sale = a sale not in ordinary course of biz of more than ½ of seller’s inventory. Seller in a bulk sale must give notice to all unsecured creditors of the sale. If not, transferee may have to pay twice (the buyer and the unsecured creditor). b. (Secured creditor can simply go after buyer.) c. Still law in CA, but not in many states. Policy is to protect against debtors liquidating assets and leaving town. Puts liability on transferee, so they’ll be more careful in buying.


ix. Fees on Fraudulent Tx Cases 1. Defending against a fraud claim is costly, and you often aren’t sure it will be plead against you or not. Bankruptcy judges reluctant to let you renegotiate fees after the fact. If likely to be an issue, better to charge more up front—but don’t breach confidentiality on why when explaining why fees are so high. Tough issue. c. Multi-party sales and the Eternal Triangle: seller sues subsequent BFPV when buyer has not made good on promise and has fled the jx or does not have “enough to go around” i. UFTA § 8 Defenses, Liability, and Protection of Transferee. 1. (a) A transfer or obligation is not voidable under Section 4(a)(1) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee. a. Good faith and REqV are often intertwined: low value is evidence of bad faith. b. Any transferee down the line who can establish bona fide purchaser (good faith and equivalent value) will be able to keep the property c. Nature of bona fide purchaser defense is intensely fact driven d. Exception: Can’t take title from a thief 2. (b) Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor under Section 7(a)(1), the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy the creditor's claim, whichever is less. The judgment may be entered against: a. (1) the first transferee of the asset or the person for whose benefit the transfer was made; or b. (2) any subsequent transferee other than a good-faith transferee or obligee who took for value or from any subsequent transferee or obligee. i. So, a non-BFP transferee may have to pay twice. The seller and the original creditor. 3. (c) If the judgment under subsection (b) is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require. 4. (d) [BFP defenses against creditor suit] Notwithstanding voidability of a transfer or an obligation under this [Act], a good-faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to a. (1) a lien on or a right to retain any interest in the asset transferred; b. (2) enforcement of any obligation incurred; or c. (3) a reduction in the amount of the liability on the judgment. 5. (e) A transfer is not voidable under Section 4(a)(2) or Section 5 if the transfer results from: a. (1) termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law; or b. (2) enforcement of a security interest in compliance with UCC Article 9. 6. (f) [Insider Transactions] A transfer is not voidable under Section 5(b): a. (1) to the extent the insider gave new value to or for the benefit of the debtor after the transfer was made unless the new value was secured by a valid lien; b. (2) if made in the ordinary course of business or financial affairs of the debtor and the insider; or c. (3) if made pursuant to a good-faith effort to rehabilitate the debtor and the transfer secured present value given for that purpose as well as an antecedent debt of the debtor. ii. Nat’l Westminster Bank NJ v. Anders Engineering Inc. 1. E&KAnders (for debt forgiveness of individual debt of E). AndersChaj (for 55k). Creditor of E&K sues A and C—alleged innocent parties.


2. Holding 1: An insolvent pship (E&K) transfer to a corp (Anders) was not for “fair consideration” when the corp. merely forgave the debt of a different pship even though the partners of the insolvent pship were also partners of the different pship. a. Debt forgiveness can be fair consideration, but must directly forgive debtor. b. Prof doesn’t like this holding: general partners have unlimited liability for debts of the other Ps. Forgiving one partners debts outside pship helps partner. 3. Holding 2: Remand. If C purchased in good faith and for REqV from Anders, C has a defense to the claim. a. Question of fact as to whether REqV—that C actually paid 55k for property. 4. Note: 1st purchaser can’t be a BFP (UFTA §8(b)(1). iii. Graves Motos Inc. v. Docar Sales, Inc. (414 F. Supp 717 (1976)) 1. Park (via Shelton pres.) bought a truck from Docar with a NSF check. P owed Graves on 3 NSF checks, so Park executed a bill of sale on the truck to G to satisfy debt, but retained possession of the truck for deliveries on G’s account. a. Truck worth 13.5K (per court) and S gave up the truck to satisfy 9.1K debt. 2. Issue: Can G keep the truck as a BFP? 3. Court suspicious of G’s receipt of truck, as REqV maybe not present (13.5k v. 9.1K), G let P retain possession (similar to Twine’s case) and G accepted 3 NSF checks (indicating he knew P was in financial straits and may not have good title to the truck). a. Fact specific analysis with hallmarks of fraud. But, no smoking gun. How do we know the car was really worth 13.5K? Retention of pssn. could be to allow for rehabilitation. 4. Does UCC Art 9 apply to this situation? iv. UCC 2-403: Alternate BFP argument. 1. When a seller retains interest in property not because he wants the property back but to secure against nonpayment of the debt, it is a secured transaction rather than the retention of title 2. Docar = Transferor1. Park = Purchaser1 and Transferor2. Graves = Purchaser2. 3. UCC 2-403: A purchaser in goods (P2) acquires all title which his transferor (P1/T2) had or had power to transfer except that a purchaser of a ltd. interest acquires rights only to the extent of the interest purchased. A person with voidable title (P1/T2) (“voidable title” never defined in UCC) has power to transfer good title to a good faith purchaser for value, after goods have been delivered, even though a. The transferor (T1) was deceived as to the identity of the purchaser (P1/T2) b. The delivery was in exchange for a NSF check (from P1/T2) i. What if original K, seller retains title to the goods pending check clearing? Protect the original seller or the BFP? ii. If every prospective buyer has to investigate, there will be fewer deals. If you like deals, you like rules that protect BFPs. c. It was agreed that the transaction was to be a cash sale (w/ P1) d. The delivery was procured through fraud punishable as larcenous under criminal law i. Doesn’t include theft—Fraud (even criminal) and NSF checks are part of commerce but theft and burglary are not 4. BFPV must show: BF + PV a. Good faith—didn’t know or didn’t have reason to know b. Purchase—relinquish something of equivalent value to his or her detriment i. Forgiveness of an antecedent debt can be the value relinquished, however, courts don’t treat this the same as giving up cash ii. A good argument for BFPV is reliance to detriment—BFPV may have passed up the chance of getting other property of the buyer if he hadn’t taken the property in issue


5. Thief can’t transfer good title to a BFPV a. Many art cases where original owner gets a painting back after decades of changing hands. b. Exception: You can take good title of money from a thief (thief pays w/ stolen $). 6. Entrustment a. UCC 2-403(2): any entrusting of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business i. E.g. a guy who repairs toaster, you entrust it to him and he sells it. BFP gets to keep it. ii. A thief can’t be the entruster: see next case (thief can’t “entrust” property to a pawnbroker.) b. UCC 2-403(3): Entrusting includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery of acquiescence and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods have been such as to be larcenous under criminal law 7. Depetris v. Warnock (NY 2000) a. Thief steals D’s watch and sells to pawnbroker. PB sells to Plaintiff. Plaintiff gives the watch to police for evidence in thief’s trial. Police give the watch back to D. P sues. b. UCC §2-403 allows that a person w/ voidable title has power to tx a good title to a BFP. But, thief had no title to sell, so PB didn’t acquire title, voidable or otherwise. Thus PB had no title to transfer to P. c. Court does not address whether P has any claim against PB. d. Establishing Priority—priority claims are also charted on eternal triangle i. First in time is first in right--But the question is first WHAT? ii. Priority goes to the first to get a LEVY on the property iii. Execution lien is created by levying on property 1. What counts as levying? Depends on the type of property. a. Levy on personal property that is movable by taking it into possession. i. Keeper: Credit law also permits creditor sue to impose a “keeper” to stand by the cash machine and take it out at the end of the day. Allows the biz to continue, but assures creditor gets paid. Procedure: keepership. b. Levy on real property by filing notice i. If you levy on property that has already been levied on, you can give notice of second dibs on the priority. ii. Receiver: court appoints to manage property during the foreclosure pendency. May be in everyone’s interest to make sure the property is wellcared for. 2. When property goes to sale, first levying creditor gets claim paid off and second creditor gets leftovers—2nd creditor can continue to levy against other property a. If nobody else levies on the property, the balance goes back to the debtor iv. Judgment (Judicial) Lien—better than execution lien because you can file immediately after judgment and thus establish priority 1. Real Property (CCP §697.310, .340): A judgment lien on real property is created by recording an abstract of a money judgment with the county recorder. A judgment lien on real property attaches to all interests in real property in the county where the lien is created. If any real property is subsequently acquired, the judgment lien also attaches to it.


a. File the lien whether or not the debtor has property. Often don’t know if debtor has property or not. b. File in multiple counties, if it makes sense. (Only attaches in county where recorded.) c. Sit back and wait for a phone call: if debtor tries to sell the property, a rational buyer will find out about the lien and will not buy until the lien is cleared d. If the judgment lien is on record and remains on record, then we’ll date first in time from the judgment lien (CCP § 697.020(b)) i. Tack back to the original judgment lien e. If debtor buys property in the future, lien still attaches. CA statute doesn’t spell out, but the judgment lien likely loses to future purchase liens (i.e. mortgagors), but not much more. 2. Personal Property—applies to business property on which you have a perfected security interest, and NOT consumer personal property a. 697.510. (a) A judgment lien on personal property … is created by filing a notice of judgment lien in the office of the Secretary of State... b. Different than writ of execution because you don’t need to say exactly what property is being levied on c. Exception: Judgment liens don’t attach to vehicles, boats or mobile homes. Also doesn’t attach to retail goods held for sale worth less than $500 retail value. v. Sale Pursuant to Lien 1. The lien of the creditor at whose instance the sale is held is wiped out. All junior liens are wiped out, but the property remains encumbered by any senior liens. a. If sold and encumbered by 2 liens, 1st lienholder gets paid 1st, if pursues payment. If doesn’t pursue payment, property remains encumbered by the 1st creditor’s lien. 2. Suppose assets of 125 and creditors 1, 2, and 3 with claims of 100, 75, and 120, respectively, priority of lien consistent with order. Further assume FMV of property is 125. a. If sale is at the instance of 2nd creditor, a rational buyer will pay $25 only because the property remains encumbered by C1’s $100 lien. i. C2 gets $25, C3 gets 0 and both liens wiped out. b. If sale is at the instance of 1st creditor, rational buyer will pay up to $125 because that is what the property is worth. Any excess will go to other creditors in the order of lien priority, assuming they’ve asserted their rights. (FMV minus total of senior liens) i. C2 would get $25 if asserted rights. C3 gets 0, unless C2 doesn’t assert interest and C3 does. c. If sale is at the instance of C3, rational buyer will not purchase property because it will remain encumbered by C1 and C2’s senior liens of $100 and $75 3. Suppose assets of 125 and liabilities of 100 (C1) and 50 (C2). If sale is made at the behest of the C2 and the C2 doesn’t assert rights, then the first $50 of proceeds goes to C2 and the remaining $75 returns to the debtor. a. Property remains encumbered by the lien. 4. 1st lien holder has an incentive to make sure bidding goes over the amount of his lien, but has no motivation to see that it goes above that. 2nd lien holder has motivation to bid up to value of 1st lien holder and his lien, but no more. 3rd lien holder…(etc.) Debtor has an incentive to see that all liens are wiped out—if can afford. a. The first lien holder has no motive to get above the price of his claim b. People at top of food chain: .9x0=0; .1x100=10 c. Bottom of food chain: .9x0=0; .1(900-800)=80 d. Value goes up for people at the bottom of food chain and goes down for people at the top of food chain



vii. viii. ix.



5. Unsecured Creditors: obligation only to give notice to secured creditors. Notice may not be required for unsecured creditors, even though they may have strong incentive to bid up the price as well (at least not below FMV). (Exception: bulk transfer sale act—above) 6. “Debtor always benefits from delaying payment” Attachment Liens: file a “writ of attachment” with court.; 1. Not used often because it has been constitutionalized—due process a. Didn’t outlaw attachment lien, but put due process restrictions on it b. CA has given up on formulating a pre-judgment attachment remedy 2. Requirements for use of attachment lien a. Must show that debtor has assets that he is “hiding” b. Must show probability of success in a suit 3. CA attachment lien statute a. Must be based on a contract (express or implied) where the claim value is fixed or readily ascertainable b. Claim amount can’t be less than $500 c. Can’t get attachment lien on a claim secured by an interest in real property d. If claim is against natural person, can only get attachment lien for conduct arising out of a trade, business, or profession 4. Reasons for attachment lien a. Establish priority i. Levying on property pursuant to attachment lien “tacks back” to the date of the attachment lien to establish priority b. Prevent dissipation of collateral i. Temporary restraining order (TRO) c. Submerging of otherwise valid claims Statutory Liens (construction, mechanic/repair) Tax Liens Lis Pendens 1. A special before-judgment remedy for a creditor with a “real property claim,” defined as a claim in a lawsuit affecting title or possession of real property, or the use of an easement; See CCP § 405.4. 2. The statute specifies that a party with a real property claim may file “ a notice of pendency of action in which that real property claim is alleged.” CCP § 405.20. 3. The statute provides that the filing of the notice provides “constructive notice” to purchasers and encumbrancers, and that “the rights and interest of the claimant in the property, as ultimately determined in the pending action, shall relate back to the date of the recording of then notice.” CCP § 405.24. Redemption: 1. Law sometimes permits debtors to redeem property w/i 6 mos after forced sale (a call option, in effect.) 2. Puts a cloud on the title for 6 period. This dampens prospective bidding b/c can’t do anything with the property. 3. Much less favored now: Still operate in CA real estate cases in some instances. Non Recourse Debt: Call Option 1. When buying a house, you are in effect buying a call option, since the debt is non-recourse. You buy the house with the expectation that it will rise in value. If it doesn’t, you have the option to walk away.

V. Secured Transactions (right to seize collateral upon default) a. Security interest: interest in property to secure against nonpayment of an obligation—comes from UCC article 9


i. Mortgage—same thing for real estate—tends to be state law bound ii. Big bankruptcy issue is, what are the rights of the secured creditor in bankruptcy? 1. Secured creditor and trustee are the natural enemies of one another b. History of UCC Article 9 i. Chattel mortgage—effort to use real estate law in the personal property dimension ii. Pledge law— presented a problem in the context of operating a business because if you pledge inventory, you have nothing to sell 1. Jewelry 2. Securities iii. Conditional sales statutes: “I’ll sell to you on condition that”, i.e. installment sale--50 bucks a month for 2 years 1. Agreements that seller retains title until the full purchase price has been paid is a security interest rather than a retention of title iv. Problem with these alternatives was that they didn’t address the issue/rights of the 3rd party v. Virtually every state has adopted a version. Some variation state to state. vi. Article 9 covers farm cases, but it doesn’t cover real estate (except for fixtures) and various other ostensible ownership problems c. UCC Article 9—is about priority, NOT property. i. In the event of default on a secured loan, the creditor has remedies available under state law, but also without judicial intervention, a secured creditor may repossess the property if he can do so without breach of the peace (UCC 9-615) 1. As a practical matter, creditor can’t reach property of debtor without breaching the peace unless its outside (i.e. car on the street) ii. UCC 9-201 (a): Except as otherwise provided, a security agreement is effective according to its terms between the parties, against purchasers of collateral, and against other creditors 1. Comes close to saying a security agreement is bulletproof. This is the starting point. But there are exceptions. a. E.g.: Limitations on Contracting: K says Debtor agrees to give Creditor a security interest to secure non-payment. In the event of non-payment, C can kick door down and take 1st born child. iii. **UCC 9-317**—A security interest …is subordinate to the rights of,,, (2) a person who becomes a lien creditor before the security interest is perfected 1. Code doesn’t specifically state perfected security interest trumps later lien—says it in the negative, but still says it. 2. Governs the conflict between creditor who claims security interest and the lien creditor (this must mean unsecured creditor because of 9-322) (i.e. consensual lienholder vs. judicial lienholder) 3. A lien is any claim against property for satisfaction of a debt a. Security interest is a consensual or contractual lien b. Attachment, judgment, or execution liens are judicial liens c. Liens can also be created by statute or common law i. Mechanics lien 4. So, To establish priority over a lien creditor, a secured creditor file a UCC-1, must give value, and the debtor must have rights in the collateral and sign a security agreement before the lien creditor becomes a lien creditor (levies on the property) a. Attached/Perfected? i. 9-308(a) [A] security interest is perfected if it is attached and all of the applicable requirements for perfection in Sections 9-310 through 9-316 have been satisfied.


ii. 9-203 [A] security interest attaches to collateral (e.g harpsichord above) when it becomes enforceable against the debtor with respect to the collateral. 1. A security interest is enforceable against the debtor and third parties only if (9-203 simplified): a. Value has been given b. The debtor has rights in the collateral; and c. The debtor has signed a security agreement iii. 9-310: Except as provided in subsection (b) and Section 9-312(b) (e.g. pledge cases), a financing statement must be filed to perfect all security interests … b. If lien creditor has priority and levies, the secured creditor lien is wiped out because it is junior i. Secured creditor still has the claim—the claim and the lien are two separate things 5. Hypos: a. Debtor owns a harpsichord.. He wants to borrow $10,000 from Sedley. S agrees if he can get a first-priority security interest in the harpsichord. Debtor agrees, and the parties sign loan and security agreement embodying those terms. Debtor also signs a UCC-1, which S duly files. Later Theo, effects a levy on the harpsichord pursuant to a judgment for $8,000. Pursuant to Theo’s levy, the sheriff advertises a sale of “all of Debtor’s interest in the harpsichord.” Security interest is valid. b. Same facts, but D doesn’t have the harpsichord at signing. They stipulate that S will loan once D takes physical possession of the harpsichord (facts make it clear this isn’t a PMSI). Files UCC-1. Before taking pssn, lien creditor levies on harpsichord. D lies to S to obtain loan, claiming he has pssn of harpsichord. i. Under 9-317(a): S loses: security interest not perfected b/c hadn’t given value prior to levy. BUT SEE 9-317(b)… iv. 9-317(b): UCC Alternative to perfected security interest (new in 1999) 1. Can either perfect a security interest or 2. (b) File a UCC-1 + a. Debtor has authenticated a security agreement (a financing statement.) Must be signed and in writing. b. Or Secured creditor takes possession of the collateral. c. Value and rights not needed. d. (2 more means, but aren’t applicable here.) e. Very common to file a UCC-1 on record before a deal begins. Often step 1: banks require b/f going further. 3. Part (a) is basically a tougher test than Part(b). Part(a) requires everything part(b) does. a. Except, this doesn’t work for every situation. Part(b) doesn’t talk about situations where you’re taking possession. Must pass part(a) here. b. For most situations though, once you prove Part(b), you don’t need to prove Part(a). c. Also see 9-322, where public notice trumps all b/t competing secured interests. 4. Knowledge irrelevant under 9-317(a) and (b). It’s a pure race statute: BFP irrelevant. So, even if creditor does have notice (apart from a UCC-1 filing), if they win the race, they win. v. .Other Creditor options to filing UCC-1 1. Pledge: you get a loan by handing over property to the lender. Possession of the property may be good enough even on an oral contract for creditor to win in court. 2. Autos are perfected by having the security interested listed on the title. Pink slip. Ownership tied up in paper. Notice not needed b/c on paper. 3. Can also get priority in a few small instances (covered later).


vi. What about an earlier judgment lien that attaches to all after-acquired property? Can a subsequent seller sell a good, subject to a security interest that will trump the earlier judgment lien? 1. Yes. Security agreement that is perfected w/i 20 days after judgment debtor receives the personal property trumps a judgment lien that attaches to after-acquired property. CCP 697.590(d). vii. Secured vs. Secured 9-322: (D gives C1 and C2 security interests in same property) 1. If both perfected, First to file OR perfect wins 2. So, could file 1st and perfect 2nd, but you still win b/c filed 1st 3. Of course, perfected trumps an unperfected agreement or a lien creditor viii. Bankruptcy Creditor is a Lien Creditor 1. UCC 9-102(52). 2. BC says the same (which trumps UCC, if UCC said differently). 3. There aren’t that many lien creditors out there in the world asserting rights apart from bankruptcy. ix. Protections for Buyers 1. Buyer in the ordinary course (BIOC) of business, buying inventory: takes free of even perfected security interest a. Applies to wholesale and retail inventory. b. Excludes end of the year liquidation sales 2. BFP Buyer who receives delivery b/f perfection a. UCC 9-317(b) Buyers that receive delivery b. CA Civ. Code 9317(b): A buyer takes free of a security interest, if the buyer gives value and receives delivery of the collateral w/o knowledge of the security interest and before it is perfected. 3. Consumer, Non-Inventory Goods: not protected. a. Bought for personal or family household uses. Rakes, lawnmower, blender, etc. b. One who buys in an ordinary, non-inventory sale (i.e. garage sale) is subject to a security interest, even if not filed. i. Tough rule, but prof. knows of no case where it has been enforced. Costco highly unlikely to sue someone who bought a secured lawn mower from a defaulting debtor. x. PMSI—buyer uses lender’s money to make purchase and gives lender immediate security interest (rights, value and signed security agreement) 1. If you file UCC-1 within 20 days of completion of deal then you win 2. NOTE: PMSI in consumer goods is automatically perfected xi. Real Property: 20th C. Plumbing v. Sfregola 1. (1) Sfregola obtains a deed of trust (aka mortgage or security interest) in his favor on real property (but court later calls it unrecorded) Debtor leaves town. (2) 20th C. obtained and recorded a money judgment against debtor (judgment lien). (3) S records his deed of trust. (4) 20th C levies and prop. is sold, and deed recorded. (5) Then S purchases it at a foreclosure sale he forces. (Holds another sale b/c he thinks C’s had no effect.) 2. Court finds 20th C not a BFP, so can’t take. a. Normally, BFP can take if unperfected security interest (i.e. S didn’t record). b. But, BFP does not include lien creditors who purchase real property at own execution sale by not giving cash but merely crediting the amount of the bid against the judgment c. Different rule than in UCC, where BFP doesn’t matter. (pure race statute) d. Lien creditor (20th C) isn’t any worse off 3. Case smells of fraudulent transfer, but not addressed. Debtor may likely have txed to S, knowing he’d lose the judgment, hoping for a tx back. Why else would S have recorded?


VI. Duties to the Debtor a. Debtor creditor relationships: sometimes a relationship in tort, sometimes in contract. i. We as society have decided that we’re not going to let free contract reign: you can’t write a contract that waives these protective remedies. b. There is usually a time between default and sale to get up to speed on payments and prevent foreclosure (90 days) i. CA: Debtor has another 20 days notice after levy than initial 90 to pay off the entire mortgage ii. Hypo: 1. Owe 100 on property. 50% chance it’s worth 0 (0) and 50% chance it’s worth 110 (55) if we liquidate today. This probability effectively lowers the value of the property to 55. 2. The debtor always gains from more time. Something may turn up (some other sort of windfall.) Reasons for waiting is to protect debtor and allow for this windfall. c. Appraisal Value of property i. Some jx require that property is appraised before sale and will not allow the property to be sold for less than the appraisal value ii. CA CP—creditor may advertise property for sale and charge the advertising as the cost of sale iii. CA—no deficiency claim on PMSI for real estate when bank forecloses and property sells for less than the amount owed d. Agency Problem: Is the purchaser of the property an agent of the debtor or creditor? i. If so, purchaser has a duty to notify principal of conflict of interest because agency law doesn’t permit an agent to otherwise profit at the expense of the principal e. Wiesel v. Ashcraft i. Wiesel (debtor) filed complaint to set aside sheriff’s sale of his home. Court affirms granting of SJ in favor of purchasers. Bank=Western American and their collection manager = Ashcraft. 1. Wiesel gets behind on payments. WA sent REAgent Ewing to discuss sale of the prop, w/ Wiesel’s consent. W owes 20k and they agree it’s worth about 40k. 2. Mortgage forclosure complaint filed, W served, but didn’t respond, so default entered. 3. Sheriff’s sale $20k. Bought by Ashcraft (collection manager.) ii. W sues, arguing price was so low, and parties buying were related to foreclosing Bank that fraud present. iii. Court disagrees. Perfectly ok for Realtors related to the bank to buy a property at a foreclosure sale where it is foreclosing. No evidence that realtor coming to house allowed them to gain an unfair advantage, and thus no evidence of fraud. 1. Tough part of the case: Debtor may have mistakenly believed that the bank would sell his house for 40k and give him the 20k difference. 2. W argued that Realtor, by coming out, became his agent and breached his FD. 3. Can’t Buy a. Lawyer, he clearly would have breached duty of confidentiality by purchasing a client’s property for profit. i. CA goes further and bans a lawyer (or family) from purchasing RE at a foreclosure sale where lawyers is involved. Rule of Prof. Conduct 4-300. ii. Can buy from other people’s clients though. b. Bankruptcy trustee: felony to buy property from his own estate. c. Sheriff and Levying officer can’t buy. 4. Adopting that rule w/r/t bank realtors, however, would mean banks wouldn’t do anything to help out debtors. They would simply foreclose. VII. The Market for Contract Claims (aka Negotiable Instruments/Commercial Paper/Bills and Notes)\ a. Assignment of Rights:


i. Seller sells goods in return for buyers promise to pay over time: an installment K. This property right, the installment K, can be sold to the 3rd party (bank, finance company, mfg. co., etc.) In the event of default, the 3rd P brings the suit. ii. Does the 3rd P have a right against the original seller or just the seller? Recourse or non-recourse? Governed by the terms of the K—what the parties agree to. 1. If so, typically conditioned on the 3rd P attempting to collected from buyer 1st. 2. Recourse v. non-recourse isn’t necessarily better than the other. Anything is a bargain at the right price. If you must pay $9,500 for a $10,000 loan worth only $9,346, you are worse off than if you can buy a loan worth $9,000 for $8,500. iii. Discounting: Time value of Money 1. Buyer of K right will want a discount on the future value of the claim. 2. 2 factors influence discounting (that get impounded together). a. Market interest rate (opportunity cost of money): What I could earn with that money by investing. b. Probability of repayment (risk). i. Buyers will seek means to determine which buyers are more credit-worthy. iv. Double Selling 1. Seller misleads a 4thP that he still has rights to the loan and sells it to him. Who wins b/t the 3rdP and 4thP? a. In this situation, how does the original buyer know he’s paying the right party? Opens the risk buyer may have to pay twice (and then sue the seller). 2. Need a rule of priority b/t 3rd and 4thP. a. Governed by UCC where personal property. b. Rule is 1st in time. c. First to file wins. i. This system is well established and works well. ii. Similar to a secured v. secured priority rules 3. Works the same in real estate context. The transfer of the payment right for real property is not real property itself—it’s personal property. b. New world: Seller as Broker, Bank as Bulk Buyer i. Nowadays, more often than not, the seller is not the owner, but a broker. More often than not, the broker disappears (esp. in a downturn). Broker gets his commission and that’s all he’s interested in. Broker also has no incentive to make sure that the deal b/t the buyer and the real seller works: his only interest is the commission. ii. Nowadays, loans nearly always transferred on the secondary market in bulk (“securitization”). Bank puts a value on thousands of deals and puts them into a new entity, and then shares in the new entity. So the deal is owned by the investors of the new entity. 1. Beauty of it is that it diversifies and reduces risk, thus lowering overall price to consumers. 2. Ayer: trouble with current market is that the loans purchased all look too similar: not diversified enough loan types. iii. In the old days, the bank and seller would get together to try and work something out. Who does a buyer work with at this point? New RE market is struggling to do “work-outs” with struggling buyers. iv. Securitization occurs in all sorts of markets: cars, bankruptcy claims. c. Negotiable Instruments; Promissory Notes; Holder in Due Course i. Assignee of a simple contract right (not a NI), stood in the shoes of the contractor and took subject to any defense that could have been asserted. 1. 3rdP sues buyer for stopping payment. B stopped paying b/c property warrantied to work and this defense survives. B’s rights against original seller were assigned to 3rd P. ii. But, suppose the deal b/t B and S was a promissory note (a negotiable instrument).


iii. Step 1: Negotiable instrument: the instrument is the obligation. Must be able to produce the instrument to win. 1. This simplifies the conflict b/t 3rd P and 4thP. iv. Step 2: If the document is a negotiable instrument, then 3rdP takes free of all the defenses that could have been brought against him. 1. The 3rd party becomes a holder in due course. (HIDC) 2. 3rdP sues buyer. Buyer says washing machine doesn’t work. 3rdP can now say: so what? I’m a HIDC. 3. HIDC bears a family resemblance to a BFP. Concedes the underlying validity of a deal made with someone else, but that deal isn’t binding on me. 4. HIDC: takes free of defenses: limited exceptions. a. Forgery: If buyer can convince the court that he never signed a NI. 3rd P’s is a forgery. b. Fraud. If buyer didn’t know he was signing an obligation creating a NI. Cases are rare, but if can convince court that B was defrauded as to the nature of the paper, will treat him like the forgery case. c. Minors d. Signed under Duress. e. Rec’d a Discharge in bankruptcy. v. Definition of NI UCC 3-104(a): 1. "NI" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: a. (1) is payable to bearer or to order i. Needs these magic words ii. E.g. a check, a bond (formalized promise to pay) b. (2) is payable on demand or at a definite time; and i. E.g. “I promise to pay Jack on order or demand” c. (3) [no conditions]does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money. 2. In other words a. The NI is a stripped down promise that almost looks like money. A thief could take a NI and it would be of great value. E.g. signed check. b. We just want the promise to pay money and that’s all. i. Signed note stating: “I owe you $75” ii. Could even be an oral promise, though proof more difficult) iii. Not a NI: I promise to pay Jack $100 if he mows the lawn. vi. Definition of a HIDC? UCC § 3-302. 1. First, the instrument must appear authentic. More precisely: the court must find that “the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity.” 2. Further, the holder must take “for value.” 3. Finally, he must take “in good faith” *similar to “appear authentic”+. Specifically, the court must find that he took without notice: a. That the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, b. That the instrument contains an unauthorized signature or has been altered, c. Of any claim to the instrument described in Section 3-306, and d. That any party has a defense or claim in recoupment. vii. A.I. Trade


1. Buyer claims he has a defense that should be good against the 3rd party, claiming he’s not a HIDC. 3rd P assisted in setting up the financing of the deal. 2. Court goes through a lengthy analysis to find that involvement with financing does not equal involvement w/ the original deal such to lose HIDC status. Must show involvement w/ original deal. viii. Consumer Buyer for personal or family household goods: No HIDC 1. If we’re talking about personal or family household goods, the HIDC has been outlawed. Cites: CA Unruh Act. FTC regs also nationalized this law. 10 CFR §433.2. 2. B buys widget with an installment K, and is transferred to a 3rd P. Consumer law now offers greater protection for consumer buyers from savy sellers. Some is in UCC. Also can’t slip the language in on the sale where consumer waives interest if transferred. 3. Cal. Civ. Code § 1804.1: No contract or obligation shall contain any provision by which: a. The buyer agrees not to assert against a seller a claim or defense arising out of the sale or agrees not to assert against an assignee such a claim or defense other than as provided in Section 1804.2. The provision is part of the Unruh Act, California’s retail installment sale act, governing installment sales of consumer goods. d. Liquidation v. Collection i. Market value of a right to a future stream of payment = the present value of these future claims, discounted at the opportunity cost of the capital. ii. Should a judge order liquidation of the claim (sell it on the open market), or simply collect out of the cash flows in the future as they arrive? 1. Many creditors want to collect out of the cash flow. Liquidating the claim often results in a worthless claim on the open market. iii. CCP ' 701.520 It provides that property "shall be collected rather than sold." It also provides that a creditor may seek immediate sale; in such a case the court may order either collection or sale "depending on the equities and circumstances of the particular case." iv. What sorts of equities and circumstances do you suppose the court should take into account? v. Receiver: One way to implement such a scheme is to get the court to authorize appointment of a “receiver” to collect and disburse the money e. Contingent Remainders/Pending Personal Injury Actions i. Suppose a mom writes a will giving money to daughter for life, remainder to son, if he is then living and d is still alive. This is a contingent remainder. 1. CCP 699.720: CRs are not subject to execution—cannot get a lien on it (or levy on it.) a. But, you can take levy on (or take a security interest) accounts not yet collected. Why the difference? Not clear. 2. (CCP 708.410)(a)(1). Contrast: Cannot levy on a Pending Personal Injury Action. But may be able to get a lien on it. 3. Not a clear reason why you can’t get a lien on CRs. CRs may not be worth very much, but that just means the price will be discounted. Not clear why Personal Injury Actions are treated differently, as they both look like CRs. VIII. Scope of Article 9 a. Remedies are different in Art. 9 and outside state law (not necessarily more or less protective of creditors). This makes it important to know what Art. 9 covers. b. Art. 9 covers Sale + Security Interest. Why should Art. 9 only cover consensual secured transactions? Prof can’t think of a good reason. i. Tax Collector Liens: whole set of rules cover fed tax liens. Any principled objection to lumping such statutory liens in with one code section? Prof can’t think of one. Esp. now that we recognize statutory Ag. liens. c. Lease of Goods Not Covered by Art. 9; covered by Art. 2A. (Code is counterintuitively narrow here) i. Lease as just a subset of a sale?


1. Is a lease really that different from a sale? Consider, e.g. the right to a payment for a widget that will yield $100 a year for infinity (at 8% interest, is worth a discounted $1250) v. the sale of 5 years use of the widget (worth $399). a. Both are just a sale of part of all of the timeline. And it seems that transferor has a right to get it back for default. Looks like a sale + security interest (which Art. 9 covers). Argument strengthens if lease amount over 5 years is worth today’s FMV. b. Prof. advocates treating leases the same: requiring notice to protect BFPs like a security sale. Only Sasquatechewan does it, as far as he knows. i. Acknowledges that requiring notice for very short term leases (5 day car rental) would impose too much. ii. Lease as a security interest? 1. Consider, the widget for lease for 5 years for full FMV, and at the end a payment of a peppercorn (something symbolic) leading to the full transfer of the widget to the lessee. a. A default would seem to give the seller the right to repossess: a security interest. 2. UCC 1-203 a. (b) Whether a transaction creates a lease or security interest is determined by the facts of each case. However, a transaction creates a security interest if the consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease, and any of the following conditions applies:… b. (iv) The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement. i. This code suggests the example above is a security interest and not a lease. Treats it more like an installment sale. 3. But see: UCC 1-203(c) a. (c) A transaction does not create a security interest merely because it provides one or more of the following: b. (i) That the present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or greater than FMV of the goods at the time the lease is entered into. c. Taking the example above, but getting rid of the peppercorn makes it a lease and not a security interest. Odd. (Prof thinks this is the likely interpretation.) 4. What if the transferee is required to pay 5 years of 100/yr payments and then a sum equal to make up the FMV at the end? It’s a lease. a. UCC 1-203(d) For purposes of this subdivision (36) … : b. (i) Additional consideration is not nominal [which is a lease and not a security interest] if i. (A) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed, or ii. (B) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed. Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. 5. What if the transferee is required to pay $313/yr for 5 and then becomes owner. Also, he can return at any point w/i 5 yrs w/o liability. a. Not a security interest. For a lease to count as a SI, it must include an obligation for the term of the lease not subject to termination by the lessee. (If you can walk away, it’s a lease).


b. But, how does this apply to non-recourse debts, which in effect, gives the transferee an option to take or not take? Art. 9 explicitly recognizes this kind of transaction, but then seems to bar it when couched in terms of “lease”. 6. Dominant reason for treating leases differently from security interests? a. No filing rule for leases, so less room for lawyers to make mistakes and get in trouble. iii. Sale of Accounts (Code is counterintuitively broad) 1. UCC 9-109(3) UCC 9 applies to “sale of accounts.” 2. Eg. : M sells most widgets on credit—mostly on an open account. To raise working capital, M transfers these accounts to NewBank, for cash. In some cases, the K provides that NB is lending money and taking a security interest in the accounts, in others that NB is buying the accounts outright. a. If M wrongly sells the accounts again, the security interest, if perfected, protects NB. M also protected if the “owner of the accounts” b. So, does it really matter to distinguish sale of accounts from security interests? i. Consider: Eg.1: NB takes the accounts and agrees to collect. If buyers don’t pay, M must cover any shortfall. Eg.2: M not liable for non-payment by buyers. c. But see Art. 9-608(b): If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus, and the obligor is not liable for any deficiency. i. Drafters seem to have it backward: if you have a sale, then you have the risk of loss. Makes more sense to if you bear the risk of loss, you have a sale. iv. Consignment 1. When a transferor txs goods to another, but bears the responsibility for taking back any unsold goods. Seller didn’t “sell” the goods to the retailer, but “consigned” them. 2. Like secured lending, we have to deal with the case of buyers who buy goods from sellers who are supposed to pay money to transferors further up the line. 3. Consignment of Goods covered by Art. 9—though Art. 9 makes it clear that consignment is not a security interest (9-102(20).

IX. Bankruptcy a. The Broken Bench: Hx of Bankruptcy i. Bankruptcy grows up side by side with a commercial economy. 1. Device needed for collecting and liquidating claims. 2. Bankruptcy used to be penal. ii. Original notion: equitable distribution b/t creditors. iii. Discharge a late-comer and still only available in UK/USA. 1. Originally used by creditors as a means to coax debtors into paying more. Only in 70s did the “fresh start” of Wetmore v. Markoe concept arise. iv. Art. 1 power given to Congress to adopt uniform bankruptcy codes. 1. No real hx. as to what they intended. 2. 1898: main modern code. 3. 1978: major pro-debtor revision 4. 2005: major pro-creditor act. BAPCPA v. Basic US structure 1. To implement the bankruptcy laws, Congress created a system of bankruptcy courts and a cadre of bankruptcy judges. In each Federal judicial district, the bankruptcy court operates as a unit of the district court. Nationwide, there are some 375 bankruptcy judges.


2. The topic of bankruptcy jurisdiction is a complicated science all its own. For the moment, here are a few basic facts about the mechanism of conducting the case. That is, most cases begin when the debtor files a petition for bankruptcy relief, BC (Bankruptcy Code) § 301. The Code also allows creditors to initiate the process by filing a petition to create an involuntary bankruptcy case, but it doesn’t happen very often. 3. The commencement of the case creates an estate, BC § 541, and operates as a stay of just about anything a creditor would want to do to liquidate her claim. BC § 362. The debtor must also file schedules of assets and liabilities and a statement of affairs giving information on the state of her finances. 4. After it gets the petition, the court generates a notice of a meeting of creditors. BC § 341. b. Wiping Out Pre-Bankruptcy Debts i. Bulk Transfer Law, UCC Article 6 (see above also) 1. Transfer assets from one entity to another before filing bankruptcy 2. Requires that creditors be given proper notice. If not given notice, can sue transferee and enforce their rights. 3. Some courts have construed this as a fraudulent transfer, even when proper notice has been given a. Couldn’t creditors just levy on the assets of the new entity (i.e. the stock of the corporation) b. Stock, however, may not be as valuable as the other assets ii. In Re Woodfield (9th Cir. 1992) (Noonan) 1. Facts: a. Debtors are partners operating “Wendy’s” franchises, sought discharge in Ch. 7 as individuals. b. Prior to filing, they formed a new corp. “QFI” and transferred the franchise operating rights and inventory from Wendy’s into the new corp. They gave creditors a “Notice of Bulk Transfer.” They also txed 17k in cash to the new corp, rec’ing stock in exchange. i. Debtors attempted to characterize as a payment of wages, so thus not a preferential transfer. c. Prior to filing, debtors consulted w/ trustee. Ticked judge off, and seen as evidence of fraud, but not clear it really helped debtors. d. B/c restaurant equipment subject to security interests, and b/c other assets transferred to new corp., trustee filed a no asset report. 2. Appeals court finds it to be an intentional fraud, based on “badges of fraud” a. How could it be fraud, if they notified creditors via bulk tx notice of what they’re doing, and let trustee know what they were doing. b. Also, how could it be fraud if they merely transferred assets that were subject to security interests? The security interests remain after transfer? c. Trustee should have required debtors to schedule corporation as an asset of debtors. Or have abandoned property as worthless as all secured. c. Discharges and Dischargeability—can get a discharge (727, 1141, 1328) but have some claims excepted from discharge (523). i. Basics 1. Secured claims (i.e. liens) survive discharge 2. Creditor has a right to share in the estate whether or not he has a dischargeable claim. a. In other words, could get a share of the estate (w/ or w/o priority, depending on the claim), and also have the full claim declared nondischargeable. 3. Some scenarios will give rise to both discharge and dischargeability actions


4. Once you lose a discharge, you lose it forever—you can’t seek to discharge those same debts in a later discharge a. Can only get a discharge once every eight years (but you can still file for bankruptcy without getting the discharge sooner) ii. § 1141: Discharge under Ch. 11. 1. Corporate Discharge a. No discharge for individuals under Ch. 11. b. Corporations don’t get a discharge in Ch7, but they don’t need one either because they have limited liability. i. Owners not liable for corp. debts unless 1)signed for personal liability (often occurs) and 2)”responsible party” for some wages and taxes. ii. No state requires a windup of the corporation under state law, but some states (CA) impose personal liability for a windup that is undertaken and done incorrectly 1. Therefore, a corporate debtor should just walk away 2. Ds of a wound up corporation are jointly and severally liable up to the amount of corporate assets fraudulently distributed. Liability is limited to the amount owed to non consenting creditors. See Cal. Corp. Code § 316. 3. For procedures governing the windup of a general partnership, see Cal. Corp. Code '' 15029 15043. 4. On limited partnerships, see Article 8 of the Revised Partnership Act, Cal. Corp. Code '' 15681 15685. c. Corporations can get a discharge in chapter 11 reorganization, but not in Ch 11 liquidation. i. Reorg. discharge is meant to encourage a potential buyer to buy the defaulting Corp for potentially higher price than the liabilities, leaving creditors w/ more $$. iii. § 1328: Discharge under Ch. 13. 1. Can provide a more generous discharge than available under Ch. 7. “Super discharge.” iv. § 727 Discharge is lost if (otherwise discharge is automatic) 1. Have received a discharge w/i the last 8 years. 2. Must be individual—not corporation, partnership, or other legal entity 3. Discharge is lost if there is an intentional fraudulent transfer (and lawyer can go to jail.) 4. Misconduct in current or prior proceeding a. Privilege against self-incrimination—invoking the privilege no longer is grounds for denying discharge b. Conceal, falsifying or destroy records relating to financial condition i. Unless such act or failure to act was justified under the circumstances of the case. ii. Most debtors have lousy records—doesn’t usu. qualify as concealment. c. Debtor knowingly and fraudulently makes a false statement or falsifies records d. Debtor commits acts above concerning an insider. 5. Debtor fails to satisfactorily explain loss of assets or deficiency of assets 6. Waiver: must be in writing, executed by debtor, and approved by court 7. New requirements a. Consumer credit counselor b. Means test c. Debt management course post filing


v. §523(a)(2)(4)(6) Exceptions to discharge (Dischargeability) A Discharge of this title does not discharge an individual debtor from any debt 1. (2) [Fraud/False Statements] For money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by a. (A) i. False pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition 1. To meet the requirements of this section, the debtor needs to receive some benefit from the property, but not necessarily the property itself 2. “False” carries with it the connotation of intentional lying b. (B) i. Use of a statement in writing (e.g. bringing in a false balance sheet) 1. That is materially false a. If debtor would have made the loan even w/ all info, not a material falsity. 2. Respecting the debtor’s or insider’s financial condition 3. On which the creditor to whom the debtor is liable for such money, property, or services, or credit reasonably relied; and 4. That the debtor caused to be made or published with intent to deceive c. (C) i. Consumer debts owed to a single creditor in excess of $500 for luxury goods and services within 90 days before the order for relief under bankruptcy are presumed to be nondischargeable 1. Same rule for cash advances greater than $750 within 70 days of bankruptcy ii. Cash advances aggregating more than $750 that are extension of consumer credit under an open ended credit plan obtained by an individual debtor on or w/I 70 days b/f the order for relief under this title are presumed to be non-dischargeable. 2. (4) For fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny a. Fiduciary capacity—person who takes money with responsibility to use it/spend it in a certain way i. Generally, managers owe fiduciary duty to shareholders and not to creditors ii. But in bankruptcy, a manager may own FD to creditors. When a biz is upside down, the creditors basically own (are the SHs of) the company. b. Fiduciary capacity is narrower than fiduciary relationship. Two views: i. In order to be acting in a fiduciary capacity under the Bankruptcy Code, the fiduciary duties must not rise out of the relationship between the parties but out of an express or statutory trust ii. Another view finds a fiduciary capacity in the relationship between director and creditor at the moment of insolvency 3. (6) For willful and malicious injury by the debtor to another entity or to the property of another entity a. Hypo: Fuel lender retains security interest in proceeds of sales from gasoline at gas station. Store owner uses some proceeds of fuel sales to make it through a tough winter and pay snack shop creditors. Things don’t get better though and file for bankruptcy. Does fuel lender have an (a)(6) action? b. Drunk driving debt the result of “willful and malicious injury”? Courts used to say no, so Congress added (a)(9) as another exception (see next section: DUI debts)


4. Litigation of a dischargeability action a. Under § 523, cause of action under subsections 2, 4, 6, or 15 must be brought in the bankruptcy court during the bankruptcy case i. Any other dischargeability action can be brought in any court at any time vi. Other § 523(a) Exceptions to Discharge 1. Domestic obligations (spousal and child support obligations) a. Rationale: Not in a position to diversify its losses 2. Tax or Customs Duty—3 year time limit to enforce a. Rationale: Gov. can diversify losses, but they are the chief example of creditors who have no choice over who their debtor will be. b. Note, also entitled to priority in bankruptcy distribution. c. Note, Gov. can also get a tax lien which, like any security interest, survives the bankruptcy against any property to support it. d. Nondischargeable if not filed or filed late. 3. Claims not listed or scheduled in a timely manner, such that creditor is entitled to participate in the case. a. Not scheduled=not discharged b. Every creditor should be scheduled, even if the debtor intends to repay a creditor 4. Student loans a. Exception for undue hardship on debtor or debtor’s dependents i. Debtor unable to maintain minimal standard of living ii. Facts exist that indicate situation will persist in the future iii. Debtor has made good faith attempts to repay b. Unlike other dischargeable debts, with student loans you don’t give back the asset that the loan was used to purchase (i.e. no indentured servitude) c. Employers and the government can’t discriminate against a person who has discharged student loans 5. Undischarged debts in prior bankruptcies a. Once you lose the discharge, you lose it forever. 6. Govt. fines, penalties, and forfeitures payable fbo governmental unit, that is not compensation for pecuniary loss. a. So, if client owns SBA loan, if no security interest, it can be discharged. b. Some litigation over what is a fine claim (non-dischargeable) v. a non-fine claim. c. Priority: In Ch. 7, these only get paid after claims of general creditors. So, if gov. argues debt should be non-dischargeable, it subordinates its claim and may not get anything, given small estates. 7. Intentional Torts 8. DUI debts vii. Standing to bring an objection to discharge 1. Both trustee and any creditor can bring objection to discharge (727, 1141, 1328) 2. Only the creditor on a specific claim can bring a dischargeability action (523) a. Trustee must represent all creditors or none of them 3. Same misbehavior may apply under 727 and 523. a. Creditors will favor dischargeability (523) over discharge because the creditor keeps its claim and has no competitors. b. Very few cases litigate brought to deny discharge as a whole. Mostly where creditor is so mad at the other. c. Credit after discharge? A few will lend to such debtors b/c they know there are no other creditors, and a clean slate. 4. Barber v. Martin


a. Ostrum-Martin Inc (OMI) was a grain dealer and M was on board of Ds. OMI rec’d grain from producers, but failed to pay for it and went into bankruptcy. Martin also filed his own bankruptcy case. b. Trustee of OMI case sued Martin as an individual and as a board member of OMI, on behalf of producers (and not creditors in general), for violation of 523(a)(2),(4)(6) (fraud, fid. breach and willful/malicious injury). 523 would except discharge only w/r/t these creditors, not all. i. False pretense action fails against Martin b/c failed to prove M received benefit from the property (one of the elements of FP law). ii. Fraud action may have merit as the law may hold directors liable as a fiduciary w/i meaning of (a)(4), but no standing (below). iii. Willful/Malicious injury claim fails b/c no allegation that OMI was injured by M’s actions. c. If the liability is to all creditors of the corporation without regard to the personal dealings between such officers and such creditors, it is a general claim. Trustee has no standing to sue here b/c he brought claim specific to only a few creditors. i. Rationale: If Trustee could bring the claim on behalf of only a few, all creditors wouldn’t benefit from proving fraud (more $ for estate), rather than just the few creditors who were defrauded. d. Farmers can still bring the action: practical result of the decision is that farmers will not have to split up proceeds w/ rest of creditors if they succeed on 523(a)(2)(4)(6) claim. i. Can also bring underlying claim for fraud (state cause of action) during or after bankruptcy. viii. Discharge: Protection against Discriminatory Treatment 1. § 525 (a): …A governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, etc. to a person that is or has been a debtor under this title a. Argument is that if a state can revoke or refuse to renew a license or private employer can discriminate, then the discharge has no meaning 2. § 525 (b): No private employer may terminate the employment of, or discriminate with respect to employent against, an individual who is or has been a debtor under this title solely because such debtor or bankrupt a. Is or has been a debtor under this title or under the bankruptcy act b. Has been insolvent before or during the bankruptcy case c. Has not paid a debt that is dischargeable or that was discharged 3. No disparate impact prohibition: Government and private employers can get around this by finding out who is bankrupt/debtor and finding alternative plausible reasons for not renewing license or firing individual 4. Private parties can discriminate with respect to matters other than employment d. Bankruptcy Jurisdiction i. §1334: District judges are article III judges, but bankruptcy judges are not (district judges get life tenure, bk judges have 14 year, renewable term) 1. Bankruptcy judges are analogous to magistrate judges. 2. District court (bankruptcy court) shall have original and exclusive jurisdiction overall cases under title 11 (bankruptcy) 3. District court (bankruptcy court) shall have original but not exclusive jurisdiction of proceedings relating to or arising in bankruptcy case a. Generally recognized that this means: adversary proceeding i. E.g. need to bring a lawsuit to collect account receivables of a debtor. Can sue in State court, or in Bankruptcy court.






4. District court in which case is pending has exclusive jurisdiction over all of the property of the debtor where ever located 28 U.S.C. 157—District judge may give jurisdiction to the bankruptcy court 1. Blanket order referral to bankruptcy court 2. Two situations where district judge may want to keep bankruptcy case a. District judge has quibble with bankruptcy judge, finds judge incompetent b. High profile or high visibility case §523(c)(1): if you want to adjudicate a dischargeability claim under section 523(a)(2), (4), (6) or (15), you must do it in the bankruptcy court 1. Must file not later than 60 days after the first date set for the meeting of creditors under § 341(a) 2. E.g.: If D files for bankruptcy, but C ignores b/c believes a no asset, cannot later assert a nondischargeability claim in state court under above-listed sections. 3. Non 2-4-6 claims, you can sue, even after discharge, to see if claim is excepted from discharge. Can sue in bankruptcy court (re-open case) or bring in non-bankruptcy court. Which Judge? 1. 28 USC § 157(a): Each district court may provide that any or all cases under title 11 and any or all proceedings under title 11 be referred to the bankruptcy judge. 2. 28 USC § 157(b) and (c) go on to distinguish between matters that are at the core of the bankruptcy case from proceedings that are merely related to the bankruptcy case. a. BC may hear and decide core matters. i. Tough line to draw, but now seldom litigated. ii. BC almost always declines to exercise judgment over complex areas of law (patent law). b. BC may propose a disposition on merely related matters, but final disposition is up to the district judge. Venue 1. Proper venue is where debtor is located 2. If controversy is over less than $1000 in property or less than $5000 in consumer debt, venue is proper where the defendant resides 3. Venue can be transferred in interest of justice and convenience of parties

e. Automatic Stay §362: Filing the bankruptcy petition acts as an automatic stay i. Two purposes of the stay 1. Give debtor the relief that a discharge is meant to provide a. Reason 2.5—give debtor some “breathing room” b. Classic bankruptcy case occurs when the debtor is holding property subject to a security interest and needs more time and therefore files to get the automatic stay 2. Protect property of the estate (from cherry picking) ii. Stay ends when: 1. Case terminated 2. Discharge entered (§524) a. Entry of discharge acts as an injunction to stay collection of any undischarged debts. So, the stay passes the baton off to the discharge. 3. Relief Granted iii. §362 : 1. (a)(1) Stays the commencement or continuation . . . of a judicial . . . proceeding against the debtor (stays pending litigation) a. Does the debtor need relief to pursue an appeal? Splits i. Farley v. Henson: When a debtor has appealed an adverse judgment, the appeal is stayed as well. Court looks to the underlying action (the lower


court action) to view as an action “against the debtor” even though debtor brought the appeal. (Circuit split? Case not clear). ii. This can lead to odd results: what if the debtor wants the appeal to go forward to settle the matter? The stay acts against the debtor’s interest here. 2. (a)(2) Stays the enforcement of a judgment a. E.g. the enforcement of a pre-petition judgment (i.e. levying, foreclosure) 3. (a)(3) Any act to obtain possession or exercise control over the property of the estate. 4. (a)(4)Stays any act to create, perfect, or enforce any lien against the property of the estate, including against secured property a. (a)(5) Same rule applies against the property of the debtor b. Pecuniary interest test: the deciding factor is whether the action threatens estate assets 5. (a)(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title a. This section is so broad it basically subsumes 1-2 iv. § 362(b) Exceptions to stay 1. (1) Criminal actions a. “Obligation to obey general laws” b. NSF check example—collection of a claim or criminal action? i. Some states treat as criminal. Once check is paid, charge will be abandoned. Why should NSF creditor get a priority over other creditors? ii. It’s a form over substance argument: will the judge go w/ form or substance? Most judges recognize as criminal. 2. (4) Government unit has power to exercise its police/regulatory power, including the enforcement of a judgment other than a money judgment a. In Re Nat’l Cattle Congress i. Dog racing park seeks bankruptcy protection, believing granting of slot machining license will help achieve viability. ii. County revokes license citing failure to demonstrate financial responsibility and long term viability, citing fact that slot referendum failed twice. iii. Court holds that the license is property of the estate under 541. Property is protected by362(a)(1), and § 362(b)(4) doesn’t apply. 1. Pecuniary Interest Test: If the gov. action is one which directly conflicts with the BC’s control of the property of the estate, the action is outside the (b)(4) exception. Stay remains. 2. Problem with gov. args. is that they pretty quickly morph into pecuniary claims. Need a fire permit: but requires $$. 3. Court held revoking license amounted to “control.” iv. Under 362(a)(3), Gov. action was also “control” over the property (and again (b)(4) doesn’t apply). v. Court also holds not discriminatory intent under 525(a). Evidence shows license revoked based on financial responsibility and not bankruptcy filing. vi. Ayer: case could have come out the other way: people should be bound by general laws, even if it’s just about paying $$. b. Seminole Tribe case—is bankruptcy an interference with sovereign immunity c. Government unit can do everything leading up to the enforcement of a money judgment, i.e. seize property, etc) 3. Domestic obligations/actions: alimony, support, maintenance 4. Commercial Real Estate leases: can retake possession when lease expires, notwithstanding the stay


v. Relief from the Stay§362(d): On request of a party in interest, and after notice and a hearing, the court shall grant relief from the stay: a. “Notice and hrg.” requirements spelled out in Rules. Must file a motion for relief. b. After notice and hearing only means in Code: “after such notice as is appropriate in the particular circumstances, and after such opportunity as is appropriate under the circumstance.” c. Don’t actually have to have a hearing: unless you ask for a hearing, we’re going to go ahead and do it. 2. (1)For cause, including lack of adequate protection in creditor’s interest in property of the estate OR a. I.e. secured property is declining in value i. Eg. Auto loan worth more than car and dropping value b. Lack of adequate protection not the only “cause:” i. Elliot v. Hardinson (VA 1982) ii. Ordinary tort claims don’t receive special treatment in Bankruptcy (must be intentional or drunk driving) iii. The tort creditor is seeking relief from the stay so that he can establish debtor’s negligence and recover from his own insurance (creditor usually gets relief in such a case, provided that the pleading is sufficiently tailored to this situation). Tortfeasor filing bankruptcy remains protected—ins. co loses subrogation rights. 3. (2) If debtor doesn’t have equity in property AND such property is not necessary for effective reorganization OR (more specific rule, (1) being more general) a. Equity: negative balance sheet equity w/ biz. b. “Boiler in basement problem”—taking the property deflates the going concern of the business c. Homes? Does this phrase have any meaning w/r/t residential homes? i. Many filed Ch. 11s in the 80’s to claim this protection. CA gives 110 (or 120 days) and bankruptcy gave you more. ii. Now fees so high that trumps other advantages. iii. Also, language added below… 4. (3) With respect to a single asset real estate case, creditor who has a security interest in the asset, can get relief from the stay unless, not later than 90 days after the entry of the order for relief, debtor has filed a plan that is reasonably confirmable OR has made payments a. This is a fight about time rather than going concern value 5. Filing ch.13 also stays actions against co-signers 6. Exception for perfection of security interests a. If lien is created 90 days before the filing, it must be perfected within 10 days of attachment b. If debtor files during that 10 day period, creditor is excepted from the stay to perfect a security interest within those 10 days vi. Hypo: Corp bankrupt and principal personally guaranteed the loan. He wants to make sure that loan is paid out first, as it survives bankruptcy if not paid? 1. §105: grant of general court powers and make an equitable arg. Last ditch effort, usu. a signal you have no good arg. 2. §1301: protects guarantors in ch. 13 plan: 3rd party protection (e.g. parents co-sign a loan).



Priorities—each class must be paid in full before a lower class takes i. In the absence of a priority claim, assets are distributed pro-rata 1. If there’s enough money to pay x % of all claims, then x% of each claim will be paid ii. §507 (priorities in order of priority) 1. Secured Creditor (not in §507, but at top of list)—creditor with some form of interest in particular property--takes priority in the proceeds from the property in which there is a security interest a. Wright vs. Union Central—creditor has the right to the money from the property but not the property itself i. If property is worth less than the claim, trustee is likely to abandon his interest in the property to the creditor. Typical result. b. Trustee sells property worth more than collateral. Can superintend the sale himself, or let the property be sold by whomever else, w/ understanding that estate will get surplus. 2. Domestic obligations: this is phony in practice because in the situations where it matters, there are usually no assets anyway 3. Administrative Expenses (defined in §503(b): actual and necessary costs of preserving the estate, including a. Wages, salaries, and commissions for services rendered after the commencement of the case b. Any tax incurred by the estate, whether secured or unsecured, including property taxes for which liability is in rem, in personam, or both except a tax of the kind specified in section 507(a)(8) of this title c. Examples: cost of preserving the estate, trustee pay, and attorney/professional compensation i. This is the provision under which the attorney gets paid ii. Judges have the power to determine the value of administrative expenses iii. E.g if trustee pays company’s accountant to keep books. 1. If wages owed, 503(b) also requires that you pay taxes that are attributable to those wages. 2. So, if deemed administrative, you could have a wage and tax claim climb the priority ladder to here. iv. Might also have a tax priority for taxes owed post petition, in order to maintain estate. v. Debtors atty doesn’t usually get paid under this section. Typically paid prepetiton. Common exception is the lawyer for a debtor-in-possession. 1. So long as don’t charge more than typical fees for jdx, pre-petition fees usu. upheld. d. In re Palau: Court has broad power to decide if an expense was “actual and necessary.” i. Cook, through NLRB, sued for wages won as the result of a NLRB lawsuit against debtor. NLRB argues it was a post-petition admin expense deserving priority. 1. Admin services must be “rendered after commencement of the case” (503(b)(1)(A), and must benefit the estate a. Here, post-petition services not “rendered” and don’t “benefit” the estate. ii. Court has power, for instance, to rewrite a rental contract and pay less rent than due pre-bankruptcy. 4. (minor priority)


5. Wages, salaries, commissions, including vacation, severance, and sick pay leave earned by an individual arising from services rendered within 180 days of filing for bankruptcy and up to $10,000 per individual (or corp) a. Wages usually get paid because wage law is so highly regulated. i. CA statute makes it a misdemeanor not to pay somebody’s wages ii. Requires payment every 2 weeks. iii. What if wages owed from more than 180 days? E.g. Ees agree to forego payment to help out company. Gets relegated to general unsecured claims—no priority. 1. Exception if DA brings charges and attempts to collect under 362(b). Again, split on whether court will treat as gov. action or mere attempt to gain priority. b. Pro-rate between pre and post bankruptcy claims for priority purposes i. Post bankruptcy claims become administrative expenses and get higher priority c. Employer share of the social security payment ? Probably qualifies under the gov. tax claim. 6. Contributions to an employee benefit plan (w/i 180 days and 10k/individual) a. Major issue in the 80s/90s: what to do when Er can’t pay pension plan? Gov. typically takes over (or pension plan simply discharged). Many corp. bankruptcies were filed to dump plans on Gov. (Pension Benefit Ee Comp. law). Less seldom now b/c plans less used. 7. (wheat, fisherman priority) 8. (security deposits for real or personal property) 9. Government claims for taxes measured by gross income or receipts, property taxes incurred before commencement of the bankruptcy, and wage and withholding taxes a. IRC §6672—trust fund taxes: i. State sales tax, soc. Sec. tax, etc. When Er holds this tax over for future payment. ii. Any person in a position to know that employee withholding taxes are being misused can be held liable for 100% of the tax. (IRS only collects once, though seems to have authority to collect from all.) iii. Very important for debtor to try to pay these asap (pre-bankruptcy). b. Pro-rate between pre and post bankruptcy claims for priority purposes i. Post bankruptcy claims become administrative expenses and get higher priority c. Taxes that are excepted from discharge are likely to be given priority 10. Unsecured Creditors a. Chances of anything being left are slim. Often don’t make it past the secured claims. iii. Section 726 (if money still left after § 507) 1. Lists some additional priorities 2. Ultimately, surplus (if any) goes back to debtor 3. Does it apply outside ch. 7? Recall that court will not confirm Ch 11 and 13 plans unless creditors are not getting less than under Ch 7. Passing this will require some sort of analysis of what (if anything) the creditors would get via § 726 iv. Section 510(c): Equitable Subordination 1. Court may subordinate a claim or interest under principles of equitable subordination. 2. E.g. equity owner of a biz furnishes new money as a loan, instead of capital, to get a priority of payout. Courts often treat as a capital contribution (subordinate to equity status). v. Ch. 11 priorities


1. Section 507 applies, but Ch. 11 distribution is also governed by the Plan. a. Typically you designate § 507 claims in classes according to their §507 priority. b. But, for other claims, you have some leeway. c. Can subdivide general unsecured creditors into more than one class unless substantially similar.(§ 1122) 2. In re US Truck Co, Inc. battle about whether classes substantially similar. Courts vary on treatment of “substantially similar. g. Chapter 11: “Reorganization” (tension between paying creditors and providing debtor relief) i. Preserving the going concern value (nothing in chapter 11 requires that a business continue to run; trustee can petition to continue running a business) 1. If GC is greater than liabilities, than equity owner has an interest in trying to preserve GC 2. If GC is less than liabilities but greater than liquidation value and equity owner is vital to the business, equity owner should try to convince creditors to reduce the amount of liabilities so that the company can continue running a. In practice, shareholders tend to be wiped out in these situations ii. Compare Chapter 13 1. Chapter 13 only applies to wage earners and sole proprietorships iii. Compare to Chapter 7 1. Chapter 11 DIP, Chapter 7 Trustee a. Having DIP act as trustee can be more efficient and cost effective for creditors 2. Operating a business a. Chapter 11—can operate until court says otherwise i. Want to continue operating where going concern value worth more than liquidation value. b. Chapter 7—can’t operate until court approval given; can do for only a short time. i. Almost never happens. 3. The Plan a. §1120—in the early days of bankruptcy, only the debtor may propose a plan i. The debtor, however, is unlikely to do so if the debtor is an equity owner because the equity owner always benefits from more time ii. This section thus gives the debtor “another bite at the apple” iv. Restructuring outside of bankruptcy—common occurrence when financial trouble is inevitable 1. Reasons to file bankruptcy instead of restructuring outside a. Get discharge b. Bind dissenting creditors i. Each individual creditor has an incentive to holdout when others are thinking of restructuring in the hopes of getting paid off c. Keep creditors from taking “boiler in basement” and destroying GC value—automatic stay 2. Health Food Store example—force business into involuntary bankruptcy when equity owners have abandoned a business and the creditors want to preserve the going concern value v. The Plan 1. §1124: What may be in a plan. Never a dispute here: always over 1129… 2. TEST 1: A creditor is bound to the plan if unimpaired by the plan; or a. §1124(1): the plan leaves unaltered the legal, equitable, and contractual rights of each claim holder in the class, or b. §1124(2): the plan cures, reinstates, and compensates for damages c. Essentially, the creditor is paid in full d. Don’t get to vote and likely don’t even have standing to object to the plan. e. Customary to create a class with the small claims for administrative purposes and to prevent litigation and save $.


3. TEST 2: He belongs to a class that votes to accept the plan (1129(a); or a. Even if a class of claims is impaired by the plan, it may nonetheless be bound if the class has accepted the plan i. A class has accepted if the plan has been accepted by a majority in number and 2/3 in amount of those accepting or rejecting (§1126) ii. Those who don’t vote don’t count in the majority or 2/3 test. iii. Could have situation where 1M owed total in class by 100 creditors, but only 2 creditors w/ claims of $1K show up to vote. They can approve and impose on the remaining class. iv. Here Ch. 11 takes on critical importance. Can solve the boiler in the basement problem here. Can impose plan on a dissenting creditor. b. Best Interests Test: A dissenting creditor can successfully defeat the plan, if he can show that he is receiving less than he would under liquidation in chapter 7 (1129(a)(7)(a) i. Even if the dollar amount is the same, creditor may be receiving less based on the structure of the payment (time value of money). ii. How do you set the interest rate? FMV or the interest rate the creditor wants? iii. Same issue arises where a debtor seeks to keep the interest rate the same, but spread over more years. c. What if one class of unsecured creditors receives 20c on the dollar and one receives 30c? c. Can a dissenting creditors appeal to this? Often happens with personal injury cases, where they receive less on the dollar than trade creditor. Creditors can appeal, though standards not entirely clear. d. NJ Medical. 3rd Cir. let plan stand even though differential treatment. Personal injury and trade creditors. 4. Test 3: The debtor can effect a cramdown a. §1129(b): the court shall confirm, even without a favorable vote, if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted the plan i. Restructuring the deal so that the creditor receives an income stream with a present value equal to the value of their claim. 1. Creditor will argue that the longer the payment period, the higher the interest rate should be b. In order to cramdown, at least one creditor class must have voted in favor of the plan—for planning purposes, this gives the incentive to create a new class, impair them, and then get their vote (1129(a)(10) i. Cramdown only supplants voting requirement of 1129(a), not other requirements. ii. Courts not always willing to justify treating unsecured creditors differently (Ayer wouldn’t like to). 1. No principled reason to treat tort creditors different than trade (contract) creditors. 2. But, small number of cases have allowed. c. To cram down on an unsecured class, must either i. Pay in full (never happens) OR ii. The junior class (old equity owners) doesn’t get anything until the senior class is paid in full (known as FAIR and EQUITABLE Test) 1. Who are the junior class? The former owners and proponents of the plan (the old equity owners). a. So, if you cram down, you have no equity left for yourself. Removes main reason to cram down for old equity owner.


b. Only case where it happens is when someone else proposes plan (e.g. bank). c. Note: Probability of distributions favors old equity owners (they always benefit from more time) and harms creditors (new equity owners). i. Creditor never gets to collect more than value of his claim, while old equity owners stand to gain more if biz turns around. ii. Creditor can be compensated w/ great interest rate—depends on what is ‘fair and equitable.’ 2. Secured creditor of property worth less than security has 2 claims: 1 priority for the security and 1 unsecured for the shortfall. §506. iii. Don’t confuse fair and equitable test w/ best interests. Plan may not be ‘fair and equitable’ even if you’re receiving more than you would in liquidation. 1. One case held that 40c on the dollar not best interest where evidence showed that creditors could have received 60c. 2. Dalkon Shield case, court approved plan on showing that tort creditors would receive much less in liquidation. Subsequent scholars sharply criticize liquidation valuation though. 5. Analysis a. Was creditor impaired (received less than full value)? i. Yes 1. Was creditor member of an accepting class? a. Yes i. Did creditor receive less than in Chapter 7? ii. Yes—plan defeated iii. No—plan accepted b. No (class votes against) i. Was there a cramdown? ii. Yes—plan accepted if cramdown fair and equitable iii. No—plan not accepted if cramdown not fair and equitable ii. No—plan accepted vi. In Re US Truck Co. Example of a plan. 1. Identifies classes of claims a. 2 admin classes. i. One paid in full, or can’t get out of bankruptcy. ii. Other not paid in full, but will eventually get paid in ordinary course of biz. b. Wage claims (entitled to priority) c. Class for benefits (entitled to priority) d. Tax class e. 2 secured claims class. Typically, secured claims have own class. f. Worker’s Comp (entitled to priority) g. Unsecured claims class: disputed claim for breach of competitive bargaining class. Teamsters lawsuit. h. Less than $200 class: nuisance class (cheaper for everyone if paid in full—avoid disputes). i. Unsecured claims class in excess of $200. i. 1st 4 versions of the plan treated this class differently from the Teamster’s lawsuit claim. This 5th version finally treats them the same. ii. Class given the option of taking 70% now or 100% via installments w/o interest.


j. Class for old equity owners 2. Provides for retention of Jdx by bankruptcy court. Most plans now include. Lets court settle the dispute. 3. Signed by debtor himself: it’s a contract not a pleading. vii. Cases in mind of drafters of Ch. 11. 1. Alladin Hotel (1953) a. Hotel issues bonds. Bondholder contract permitted 70% of bondholders to rewrite K if all bonds treated equally. Jones’ owner of 72% bond and owner of hotel, votes to reduce bond issue on all bonds. Increases Jones’ equity as a whole since bond debt of hotel reduced. Minority bondholders sue, arguing failure to exercise honest discretion, since they didn’t see the corresponding benefit rec’d by the hotel. b. Court approved bond contract rewrite: Jones complied with the 70% voting requirement and all bonds were treated equally. i. Court likely would not have approved if re-write done 20 minutes after K written. Passage of time and the fact that hotel in trouble helped it justify the decision. c. Case difficult b/c Jones benefitted greatly from re-write as equity owners of the company and minority hurt. Was court right to simply look at them as bondholders and not their whole equity stake? d. BC writers not comfortable with idea of this type of situation. Could argue that Jones’ voting as an insider. i. Bond Indenture Act (BIA) now requires that 100% of owners consent. ii. But doesn’t apply in Bankruptcy. Only need 2/3 and ½ or cramdown. More protection than Alladin, but less than BIA. 2. Los Angeles Lumber Co. a. Docking Co. owes 3.8M against an 830k asset. They’re deeply insolvent. Write a plan retaining some equity for themselves, arguing that they’re giving knowledge and skill. b. Court rejects and holds that it’s not “fair and equitable.” Fair and equitable means no class can receive anything under the plan unless every senior class is paid in full. c. Plaintiff in the case was a bond buyer who bought at a deep discount. He only had about a 6k claim against 3.8M debt and was able to stop the plan. d. Rule here makes it virtually impossible to confirm a coherent plan in a reorganization case. e. BC voting section meant to address this case. 3. Reorganization used to be split into Ch. X (governing public companies under SEC rules) and Ch. XI (bankruptcy). a. Ch. X: built on principle of disclosure, following Great Depression, giving public more info and power to control company. (Like SEC disclosure rules adopted during the era). Trustee automatically appointed and automatically kicked out management and conducted a full-scale investigation (high cost) = no incentive for anyone to do it. b. Ch. XI came out of garment industry of lower east-side NY. Allowed DIP and chance for reorg. Public companies wanted to take advantage of this in the 70’s: attempted to argue they fit the small-biz model of Ch XI. Eventually Congress adds Ch. 11. (Old system used Roman numerals, new doesn’t). viii. Ch. 13 Plan 1. No voting requirement. 2. May provide for reinstatement, or rewrite (if stream of payments equal to present discounted value of claim.)


3. Main reason for Ch. 13: save home. Use cash to take care of other problems and use plan to save home—reinstate mortgage. 4. §1322(b)(2): Plan may modify rights of holder of secured claims, other than a claim on personal residence. So, no cramdown on personal residence, only a rewrite. a. Same limitation applies in Ch. 11. b. So, the one claim most debtors would like to rewrite cannot be rewritten. c. Proposed legislation might modify this to deal with housing crunch—letting bankruptcy judge (or other judge) to modify terms of a loan. ix. Ch. 7 Plan: No cramdown. 1. Famous case where USSC said no to debtor w/ property worth 60, secured by claim of 100, who argued should be able to keep his prop. b/c debtor was receiving “fair and equitable” interest. h. Disclosure i. Plan proponents may not solicit consents unless the court approves a disclosure statement containing “adequate information” 1. Adequate info: information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records …that would enable such a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan, … 2. ...and in determining whether a disclosure statement provides adequate information, the court shall consider the complexity of the case, the benefit of additional information to creditors and other parties in interest, and the cost of providing additional information; … a. Disclosure requirement like SEC disclosure requirements of old, but lets court limit it from being too burdensome. Generally though, it is an expensive process and a major bar to filing in the first place. b. Soliciting consents under BC §1125 means a public co. doesn’t need to conform to SEC proxy solicitation rules. 3. Don’t have to provide this info if not soliciting that creditor’s consent. ii. How it works in practice 1. The proponent presents his disclosure statement. 2. The objector alleges that it isn’t sufficient -- and in the process of objecting, specifies the sort of information he wants the statement to include. 3. The judge finds it hard to rule unless he is fairly fully informed on the nature and substance of the absent information. 4. By this time, the cat is out of the bag and the proponent, in order to gain approval, finds that he might just as well agree to include the contested information. a. Explains reason why there are no good cases on Disclosure to explain how it works. iii. Pre-Packaged Bankruptcy Plan (PRE-PACK) 1. § 1126(b): provides for a quick in-and-out bankruptcy where creditors and debtor with a plan merely want to bind dissenters. 2. Eg. Southland, Inc., aka 7-11. Majority owners used a leveraged-buy-out (LBO) to prevent a hostile take-over, trusting future cash flow to keep creditors happy. a. Ito-Yokada offered to buyout, leaving majority only 15% ownership. Vulture investors began picking up claims, so owners decided to accept ITO. b. ITO wanted debt reduced, but needed 95% bond creditor approval and this wasn’t going to happens. So, ITO and owners attempted bankruptcy. c. But the plan never made it past the disclosure phase. i. Judge’s decision to require more info added cost and delay and probably queered the deal.



ii. Did this protect unwilling creditors? Or queer a good deal? Is it just an artificial obstacle that enriches lawyers? Trustee, DIP and Atty duties j. Section 323(a) of the Code states that a trustee in a bankruptcy case "is the representative of the estate." i. Trustee appointed by US Trustee, but creditors can also elect. k. Section 1107(a) of the Code gives a debtor in possession the same rights and duties as a trustee. i. Duty to maximize the value of the estate extends to equity owners as well as creditors 1. If the liabilities far outweigh the assets, the equity owners are completely wiped out and the trustee must maximize estate with respect to creditors 2. Central Ice Cream: Rare case. a. Central gets a judgment worth $52M subject to appeal, creditors owed $11M. Trustee agrees to accept settlement at $15M, so old equity owners sue. They want to take the chance to appeal. b. When liabilities and assets are more equal and the value of the assets are uncertain, trustee can’t ignore equity owners and must maximize with respect to equity owners if that doesn’t harm trustees. Simpler: Trustee duty is to maximize the estate. i. This mirrors the DE auction doctrine under Revlon: manager’s duty to maximize value of company. c. Most trustees, if they have a means to pay off outside creditors, they’ll take it, rather than risk losing the deal just to get higher value for old equity owners. Not paying off means they’ll be sued by creditors if they take the risk. d. Judge recommended putting Co. up for public auction as a means of maximizing value. Novel idea when the opinion is written, but now recognized as best means of valuation. ii. Weintraub 1. Under general atty/client privilege law, new managers have authority to reveal confidential info and outgoing managers lose privilege. 2. Court holds that trustee in bankruptcy has authority to reveal confidential info w/o breach of atty/client privilege. a. What happens when DIP is the trustee? Does he have duty to reveal confidential info? In principle, no way to distinguish DIP from Trustee (w/ a few exceptions), but in practice, everyone knows it won’t work this way. We know Ch. 11 is to provide a breather and to save the enterprise, so more deference given to DIP. DIP--Schipper case: does the DIP have the same duties as the trustee? i. Issue: Does DIP have affirmative duty to reveal damaging info? Upper and lower courts disagree… 1. Farm has numerous debts. DIP proposes selling to mother, but sale not enough to satisfy all claims. 2. Generally, DIP selling to mom would smack of fraud. A corporate officer would never get away with it, 77but bankruptcy is a bit different. 3. But, in this case the judge allowed DIP self-dealing after a finding that there was no secret, profit sharing plan (result probably would be different if this was a trustee). a. Subsequently, bank found out that debtor had trying to sell at a higher price to a neighbor, but no evidence this buyer still interested. After case, mom tried to turn for a profit to the same neighbor. b. Ayer faults DIP for not revealing deal almost went through: shows DIP may have had another buyer. ii. Where there’s a DIP there are bound to be adverse interests, even among creditors.



m. Role of the Attorney— i. The debtor in possession: may employ one or more attorneys . . . that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title. ii. Fees 1. Ch 7. Debtor comes to you to file Ch. 7. You take a fee and must file w/ court the fees you received. Typically a set fee in the community and must justify going above. 2. Ch. 11. Representing DIP. §327. Trustee (DIP) may appoint counsel on approval of court. a. Must have no interest adverse to the estate. b. Atty must be a disinterested person. i. §101 Not disinterested if you are an officer or a director of the Co and are not owed any $ by the debtor. ii. So, if Debtor paid you b/f bankruptcy, or still owes you, may not be disinterested. iii. DN Assoc. Case: 1. Balance sheet: some possibility that there will be equity for debtors. 2. Debtor’s attorney keeps proposing plans that get rejected; creditors eventually propose a plan that is immediately accepted; debtor’s attorney seeks administrative expense priority for his fees 3. If there is no possibility of residual value for the old equity owners, it is professionally irresponsible to continue proposing plan 4. If there is possibility of residual value, the continued proposal of plans may add value to the estate, and administrative priority is appropriate a. Court here found that filing of plans was fbo estate and that attys were disinterested. Proposing the plans helped eventually lead to creditors plan, even though there’s was so different. iv. Kendavis: 1. Court found that atty’s were simply trying to make the creditors suffer, so ordered a disgorgement of the fees atty’s had rec’d. 2. So, you can favor the old equity owners somewhat, but not too much. 3. Most judges don’t take the opinion too seriously. Rarely applied. v. Federated 1. Federated was a chain of dept. stores, bought by a Canadian with borrowed money, with the obligation added to the new company. W/I 2 years, couldn’t make debt payments and filed Ch. 11. 2. W/i 2 years, they came out w/ a Ch. 11 plan: warp speed for a major Ch. 11. Many were happy—relatively cheap legal fees. Much credit goes to lawyer David Heiman. 3. Managers of Federated cleaned up the biz and made profitable. 4. Heiman represented DIP. Who is the DIP? a. Normally assume old Shs are DIP? But in this case, it’s Campo, who got basically wiped out by the negotiations. Heiman wiped out his client. vi. Everett v. Perez (Kozinski opinion) 1. Perez owned a couple franchise taco joints. Everett hired to remodel one. P couldn’t pay, so filed bankruptcy. 2. Got a plan confirmed via cramdown. Claim was for 40k, but aggrieved creditor would get 30k over 5 years. 3. Kozinski reverses, holding plan cannot be confirmed as a matter of law. a. Can’t do a cramdown on a non-consenting class unless a junior class receives nothing. b. Lower court probably confirmed knowing litigation would go on for years and completely drain all equity.


4. Atty probably should have filed a Ch. 13 n. Getting into Bankruptcy/Jurisdiction i. §109 1. (a) Only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor a. Applies to all chapters 2. (b) §101 (41) person includes individual, corporation or pship but not governmental unit (with limited exceptions) (i.e. municipality as defined in §101(40)) a. Corporation is any business association having the power or privileges of a private corporation, whether or not incorporated, but does not include limited partnership b. Non-profit corps can be debtors. c. Denver Avalanche soccer club? It’s a corp of ltd pship, the it can file. d. Edmonton Oilers? Not residing, domiciled or place of biz in US, but what if they have some property here? i. Not uncommon for multinational corps to file bankruptcy here to get control over assets in States. Rules governing jdx over company property not in US get more complex. e. Bankruptcy court lacks jdx over estates of decedents. Probate court has jdx over estates. Where assets are less than liabilities, probate court deals w/ division of the estate. They mimic the work of bankruptcy and bankruptcy court is not given jdx to hear such cases. i. If debtor dies while estate is pending? Bankruptcy estate is in existence, so it continues. 3. Chapter 7—a person may be a debtor if the person is not a a. Railroad (can only file under ch.11) b. Domestic insurance company or bank i. What is a bank or insurance company? 1. Boutique Medical Practice that doesn’t accept insurance. Offer basic protection for 8k a year. They look like an insurance company. ii. Practically speaking the answer depend on whether or not it is regulated outside of the bankruptcy framework. Judge wants to make sure someone is regulating it (state or bankruptcy court). No principled means to tell if its an insurance Co or not. c. Foreign insurance company or bank that operates in the US d. Debtor doesn’t have to show insolvency to file under chapter 7 4. Chapter 11 – a. Needn’t show insolvency. 5. (c) Chapter 9—an entity may be a debtor under chapter 9 if it is a. A municipality b. Specifically authorized to be such a debtor under state law c. Is insolvent d. Has obtained the agreement of creditors holding at least a majority in amount of claims of each class that such entity intends to impair under a plan in a case under chapter 7 6. (e) Chapter 13—debt limitation (109(e)) a. Debtor must have less than $336K of noncontingent, liquidated unsecured debt; AND b. Debtor must have less than $1.01M of noncontingent, liquidated, secured debt i. Huge tort liabilities pending? E.g, assets equal liabilities, but have a pending lawsuit against you for $100M, can still get in Ch. 13 b/c it’s a contingent debt. Must file b/f judgment or settlement.




iv. v.

c. Do not need to prove insolvency here. Only need prove insolvency under Ch. 9. d. Ch. 13 i. Still get a type of discharge ii. Stays creditor action iii. Most common use is to prevent losing one’s house 1. Can’t cramdown first mortgage on home in ch. 13, but you can stay foreclosure and spread arrearage (late payments) over the life of the loan 7. Chapter 12: Family farmers (cross b/t Ch. 11 and 13) 8. Chapter 15: Cross-border insolvency Involuntary Bankruptcy §303(a) 1. Only applies to ch. 7 and 11 a. Only applies to individuals, except farmers 2. May have to pay punitive damages if you fail to force someone into involuntary bankruptcy Must complete pre-bankruptcy Counseling 1. Purpose is to steer debtors who can avoid bankruptcy away from bankruptcy. 2. Data suggests that vast majority still need bankruptcy, so it’s largely a waste of time and money. 3. Involuntary bankruptcy requires counseling? Face of the law requires they complete as well. Also a requirement of Consumer Education after filing. MEANS TEST 1. Used to be the case that best time to file was just before starting a new job. 2. New forms to file: income and expense forms for 60 days b/f bankruptcy, tax return, budget analysis and a statement of reasonably anticipated income. §521. a. Atty may be liable for errors in filing, if could have reasonably discovered errors. Be very careful that debtor is making representations and not you. US Trustee can sue for disgorgement. 3. 707(b) the court may dismiss a case filed by an individual debtor under Ch. 7, or convert to Ch. 13 with debtor’s consent, whose debts are primarily consumer debts if it finds that granting relief would be an abuse of ch. 7, unless court finds that it would be an undue hardship. a. Abuse is presumed if i. Determine debtor’s current net income for 1 month (gross-expenses) 1. What counts as expenses? Defined by IRS regs. Not always clear. ii. Multiply by 60 (5 years) iii. If the amount is less than $6,000, than there is no abuse and debtor stays in ch. 7 iv. If the amount is greater than $10,000, than there is abuse. v. If the amount is between $6,000 and $10,000, then abuse is presumed if the debtor can pay more than 25% of his unsecured debts. b. This means test only applies to debtor’s who have income above the median for the state i. Income calculation 1. Average monthly income over preceding six months=current monthly income 2. Current monthly income x 12=Income 3. If income is > median income, apply means test ii. Spreading over 6 mos can cause odd results. 1. Suppose D makes enough in certain months, but then gets fired. Or a student gets a high salary for the summer, but then makes 0 all


school year. Leads to situation where D holds off filing for several months. c. Consumer; Debts incurred for personal or household expenses, not for biz reasons. i. So, means test does not apply to biz debts. d. Student Loans? Assuming can show a substantial hardship, are they consumer? i. Could argue that school is to help make money. Flip side is that it’s for personal enhancement. Open question now. vi. § 526 Restrictions on Debt Relief Agencies 1. May apply to attorneys 2. §526(a)(4)—can’t advise client to incur more debt on the eve of bankruptcy filing a. Not illegal to actually incur more debt, just can’t advise client to do it b. Has been challenged as a 1st amendment violation c. Doesn’t apply to non-profit debt relief agencies o. § 541 Property of the estate i. Commencement of case creates an estate comprised of all of the following property, wherever located and by whomever held 1. All legal or equitable interests of the debtor in property as of the commencement of the case a. “Property” of the debtor depends on what state law counts as property. 2. Property acquired within 180 days after filing a. By bequest, devise, or inheritance b. Pursuant to property settlement with spouse or divorce decree c. As beneficiary of life insurance plan or death benefit plan 3. Proceeds, product, offspring, rents, or profits from property of the estate 4. Property recovered by trustee through avoiding powers 5. Community property unless entirely controlled by spouse and not subject to any of debtor’s debts ii. How do you define property? 1. Medomak a. Underwood and Medomak enter agreement to can pork and beans for Underwood. M files for bankruptcy. Are the beans U’s and not part of the estate, or M’s, available to all unsecured creditors pro rata? b. Was it a bailment or a sale? (Bailment, one who rightfully holds goods of another.) c. Court holds it was a bailment and not a sale. M just took delivery to can and then return, so beans not property of M’s bankruptcy estate. 2. Abstract Rights— a. 2nd mortgage cases, where Co. gets money from lenders and then lends to debtors. Co. goes out of biz. Some mortgages being paid, some not and some fraud. Lender who’s getting paid wants his mortgage back. i. Trustee will argue that you only have a claim for payments and give pro rata payments. Opposite result from Medomak. C will argue he owns it not D. ii. Can transferees sue Co? Recourse or non-recourse? iii. Does the person who bears the risk of loss and the opportunity to gain own property? (pork and beans case) 1. Non-recourse mortgages would fall outside of this framework because banks own the property but bear the risk of loss 2. Major component of ownership: who bears the risk of loss and gain. Risk of loss settles it much of the time. a. Problem is that you can disaggregate risks of gain and loss among multiple parties. E.g. one can bear risk of non-


payment of claims, while another bears the risk of market change. b. Call options, derivatives, etc. c. No good answer on what “ownership” is, though courts do often hang hats on recourse/nonrecourse distinction. d. Recall lease discussion above, from Art. 9. Who owns? e. Another problem, consider owning a house in CA. We typically think of the person living in it as the owner, but the loan is non-recourse. Lender bears the risk of loss. 3. Bear v. CoBen. (9th C). Since loan brokerage firm transferred loans w/o recourse, they no longer bore the risk of loss and no longer “owned” the mortgages, even though they collected monthly payments and handled foreclosure paperwork. The transfer was unconditional and absolute. b. Contracts, accounts receivable, etc. Governed by UCC Art 9—whether security interest or outright sale. i. Many cases where sell goods and person retains an IOU. Then, right to IOU is txed to a 3rd party and fraudulently to a 4th party. ii. UCC—first to file wins iii. Different rule in bankruptcy—who owns it? 1. Can distinguish b/t an outright transfer and a mere claim to payment on a claim. Not always easy to do. 2. If Debtor txed for security purposes and still owns, then bankruptcy estate owns, even if 3rd party was first to file. c. Valuation Problems 3. Wheeler case— a. Debtor gets discharge, but later charged for bankruptcy fraud. For not including all assets. D sues atty who represented him. b. Malpractice claim becomes property of the estate because the actions giving rise to malpractice claim occurred before bankruptcy petition and there was a sufficient prepetition relationship. c. Split as to when claim arises: (broadest to narrowest) i. When the actions giving rise to the alleged liability occur. ii. This case: Claim arises only at time of conduct only if the negligent actor had some specific type of relationship w/ the debtor. iii. Claim does not arise in bankruptcy until a cause of action has accrued under non-bankruptcy lawyer. iv. Also this case: When a debtor discovers or should have discovered the injury 1. D here should have known his assets were underreported—he owned them after all. p. Exemptions i. What property does the debtor get to keep? 1. Exemptions are statutory 2. Exemption must be claimed or it is lost 3. There are no exemptions against secured creditors 4. Only individuals (not corps) get exemptions ii. CA State exemptions 1. Homestead exemption—equity in home up $75,000 (value less secured loan up to $75k). a. Home worth 575k, subject to mortgage of 500k. Other unsecured debts = $1M. He can keep paying mortgage or pay unsecured creditors, but can’t do both. Pay the mortgage, to avoid foreclosure. Unsecured creditors can’t get the 75k equity. If you


have the exemption (CA—you can file or it arises automatically in some instances), creditors can’t reach the equity, even though their lien is secured. b. If surplus over 75k exemption, trustee can sell fbo unsecured creditors. 2. Equity in motor vehicles up to $2300. a. So, keep the secured creditor happy 1st, just like a house. 3. Household furnishings, appliances, provisions, wearing apparel, and other personal effects if used at debtor’s principal place of residence, if ordinarily and reasonably necessary for and personally used by debtor and family. 4. Jewelry, heirlooms, and works of art up to $6075 5. Implements of the trade, business, or profession up to $6075 a. Twice that amount if also used by spouse 6. Unmatured life insurance policies (automatically exempt) a. Loan value is exempt only up to $9700 i. Can be claimed by each spouse 7. Pensions plans/retirement benefits 8. Cause of action for personal injury a. Settlement arising out of such cause of action is exempt to extent necessary to support debtor or spouse/dependents of debtor b. Can generally get a lien on proceeds of the cause of action, but can’t execute on it. 9. Family plot 10. Wages are not completely exempt a. Garnish up to the lesser of 25% of disposable income (gross paycheck) or the amount by which disposable income exceeds 30 times the minimum wage. ($8/hr. 30x = 240.) b. Disp. Income = $300. .25 x = 75. i. Disp. is your take home paycheck (after SS). c. Excess of 300 over 240 = 60. d. Lesser of 75 and 60 is 60. So, can garnish up to 25% of the $300 wage or $60. i. Not much money for creditors, and usually not worth the expense. iii. §522 Federal Exemptions—only 1 set of exemptions can be used per household 1. States can either opt out of federal exemptions or allow debtor to choose between federal and state. (30 have opted out—most states offer fewer opt outs). a. CA opted out of Fed system, but created its own alternate system. So, debtors have a choice of 2 schemes. 2. Federal Wildcard exemption: interest in any property up to $975 plus $9250 of unused homestead exemption ($18,450) 3. CA’s alternative scheme has wild card exemption: $925 plus any unused portion of $17,425 homestead exemption in any property a. Pick exemption based on amount of equity in homestead b. Would only want to use the wild card where the debtor doesn’t have a home. Using wildcard means you can’t use homestead. Use wildcard if a rent and own expensive mandolins. 4. Exemptions caps—some states used to have unlimited homestead exemptions a. FL has an unlimited homestead exemption and many debtors purchased million dollar homes, knowing they would be protected. b. §522--$125k cap on homestead exemption if property was acquired 1215 days before filing or debtor is found culpable of certain wrongdoings c. Limit doesn’t apply if property is necessary for support of debtor or his dependents iv. Pre-Bankruptcy Planning 1. Old Rule: it was malpractice to not advise client to transfer assets from non-exempt to exempt property before filing bankruptcy.


2. New Rule: transfer from non-exempt to exempt is a fraudulent transfer in some jx; transfer may be undone by court or worse, discharge may be denied v. Asset Protection Trusts & Fraudulent Transfers 1. Unsettled area of law 2. Cook Islands: Fraudulent transfer law very tough against creditors. Lawsuit must occur there, high burden of proof, incapacity rule. If endanger of losing case, trust dissolves and new trust automatically created in another island. a. Some courts have sanctioned debtors who were unable to bring control of trust property back to US. At least 2 debtors imprisoned. b. Money laundering statutes. Much harder to hide $ than it was 20-30 years ago. 3. Some states have allowed this, i.e. Alaska a. Easier to get judgment in a state because of Constitution’s Full Faith & Credit Clause

q. § 363: Trustee authority to sell, lease, etc, property of the estate. i. §363 (b) (1) The Trustee (and DIP), after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate, … 1. §363 (c) (1) If the business of the debtor is authorized to be operated under section 721, 1108, 1203, 1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing. ii. §363(c) (2) The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection unless— 1. (A) each entity that has an interest in such cash collateral consents; or 2. (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section. 3. § 363(a) “Cash collateral” means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest… a. Cash or accounts receivables are cash collateral under §363. 4. Practically speaking, need to get consent if selling cash collateral. Lead creditor will have tied up security interests in cash collateral. Court will almost never approve an order against consent of creditor. iii. Problem: DIP wants to sell left over property at the end of every season: moving out extra inventory. Can selling out inventory at the end of a quarter in the ordinary course of biz? iv. §1126: Makes it clear that you can sell property in Ch. 11. v. But, you don’t get Ch.11 Discharge if selling everything you have. 1. §1141(d)(3) The confirmation of a plan does not discharge a debtor if— a. (A) the plan provides for the liquidation of all or substantially all of the property of the estate; b. (B) the debtor does not engage in business after consummation of the plan; and c. (C) the debtor would be denied a discharge under section 727 (a) of this title if the case were a case under chapter 7 of this title. (Discharge denied to corp. in 727) vi. Using 363 in Lieu of a Plan. Companies attempt to use § 363 to cut of successor liabilities altogether, when selling all assets, since §1141 plan will not lead to discharge. A few courts have allowed, including United Mine Workers… 1. Generally, successor corp buying is liable for continuing debts under state law. 2. Selling debtor typically argue they have a buyer and need approval fast. Pressure judge to sell and sidestep fancy protections of Ch. 11. 3. Not an uncommon practice.


4. Courts typically put high bars on notice for §363 to protect creditors. 5. Trustee wants to do b/c buyers willing to pay a higher price and more money for estate as a whole. Cuts off certain creditors though. vii. United Mine Workers v. Leckie Benefit Fund (4th Cir.) 1. Case stands for: If clearing out the corporate shell to sell to another, corp can’t get a discharge under §1141, but can use § 363 to avoid successor liability. a. Creditors only have access to the purchase price. 2. Dispute b/t United Mine Workers (labor) and Bituminous Coal Operators Ass. (management). Health and pension benefits, so Congress passes Coal Act which requires existing companies to share load of “orphaned” workers whose companies are out of biz. a. 2 Coal companies want to sell companies free and clear of Coal Act obligations under a Ch. 11. Plan. Court approves. 3. Fund appeals, arguing they didn’t have a “claim”. Court disagrees: Even unmatured and contingent rights to payment are to be regarded as “claims.” 4. The Fund also had an “Interest” in the claim 5. So, court held that trustee (and bankruptcy court) had authority to extinguish Coal Act successor liability under 363(f)(5). Permitted sale free and clear. a. Court relied on the fact that selling the company would allow a new one to arise that would also have to pay Coal Act claims (though not the existing claims of the bankrupting Cos). Disallowing the sale means the bankrupt Coal cos. had little chance to continue operating and loss of jobs. viii. Asbestos Cases 1. Very difficult to decide whether to permit Corp. to sell all assets free and clear. Leaves many to be determined claimants w/o recourse. One court required set payouts from Corp to protect future claimants, but AC reversed, holding that nothing in BC permitted. r. Secured Creditors i. Take 1st priority even though its not listed in the code (implied through sections 506, 1129) ii. Meter stops running on interest at the time bankruptcy is filed 1. Exception: if secured creditor’s claim is worth less than collateral, interest can accrue up to the value of the collateral 2. Not quite interests: If secured creditor has security in Acct. receivable and inventory and the proceeds of such, can get periodic payments as money comes in. Same can happen in real estate case where receiver appointed to collect rents. iii. If value of collateral is less than debt, debtor can file for bankruptcy and get a discharge on the unsecured portion of the debt 1. Gives debtor a bargaining position with creditor iv. If collateral and debt are equal, debtor must declare intention of what he will do with collateral (collateral is otherwise surrendered) 1. Continue to pay 2. Surrender v. Debtor can reaffirm debt if (not covered this year) 1. It is before discharge 2. He has right to rescind (within 60 days) 3. Filed with court a. If not represented, judge must conduct hearing to find if reaffirmation is in debtor’s best interest b. If represented, debtor’s attorney must certify that reaffirmation is in debtor’s best interest vi. Rewriting contracts in chapter 13 1. Doesn’t apply to home mortgages


2. Might apply to second mortgage if value of home is less than first mortgage anyway 3. 1325(a)—can’t discharge unsecured portion of PMSI in personal property if loan was made a year before bankruptcy or in auto if loan made 910 days before bankruptcy a. Can still rewrite contract vii. US v. Whiting Pools (USSC) 1. IRS seized property to satisfy tax lien. Bankruptcy court ordered IRS to turnover (DC reversed, AC reinstated BC, USSC affirms AC.). DIP intended to use property in reorganized biz. a. §542(a)Turnover Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate. b. Liquidation value = 35k. Going concern = 162k. 2. USSC holds that secured property does become property of the bankruptcy estate. Secured creditors must appeal to “adequate protection” provision of §363 for protection. a. Congress intended to facilitate reorganization and preserving going concern if possible. b. Seized property doesn’t belong to IRS simply b/c IRS is in possession. Debtor retains some interest. Must put up for sale and apply proceeds to claim, giving any excess to debtor. 3. Fn 17in the case suggests Liquidation case might come out differently, possibly leaving IRS (secured creditor) lien enforcement powers outside bankruptcy. a. Statute comes from §506, which applies to all statutes alike. How could it have a different meaning in Ch. 7 and Ch. 11. viii. Constitution 1. Secured creditors argue that bankruptcy code alteration of secured claims is unconstitutional. 2. Congress has power to enact bankruptcy laws for nation. Phrase not much litigated 3. Due Process Clause much more litigated. Courts/Congress can’t take property w/o due process of law. 4. 5th A’s prohibition of taking private property w/o compensation s. Executory Contracts and Leases i. §365(a) Except as provided …the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor. ii. §365(b) Cure and Assure: To assume, trustee must cure defaults and give adequate assurance of future performance. Must assume in toto. iii. Monroe Tire Services v. Wall Tire Dist. 1. MTS asked court to require assumption of K w/ WTD. Debtor WTS (DIP) argues that the agreement is a disguised security agreement in the form of a conditional sales K and can be modified inn nthe Ch. 11 plan. 2. MTS’s interest in MTS was to be transferred to WTD in stages under an “Asset and Lease Purchase Agreement”. Some property sold, some leased. 3. MTS argues it was all 1 K, to be assumed or rejected in toto. 4. Court agrees w/ MTS. Under GA law, a contract for the sale of real property is executory until the buyer pays all the purchase price. iv. Next day, judge in this case held that a transfer of personal property was NOT an executory K. 1. Ayer can’t see any reason why he would make such a distinction. v. Why is the distinction important?


1. Suppose contract transferring widget, now worth $6000, for IOU of $10,000 a. Unsecured. Simple sale of goods on unsecured credit—creditor has unsecured claim for $10,000 and will get only tiny bankruptcy dollars b. Secured. i. Suppose creditor has secured claim for $6,000 (e.g. PMSI) and unsecured claim for the remaining $4,000. ii. Creditor has priority on 6k claim. iii. Trustee can rewrite K to spread out payment and cramdown, if creditor gets full value. 1. Can’t do on 1st mortgage on residence. c. Executory Contract or Lease i. Assume—reinstate contract subject to all of its terms. Creditor gets 100% payment. ii. Reject—repudiate contract and return property to creditor, and has unsecured claim for $4000. (Just like secured creditor). 2. Ayer sees no principled reason for upholding these distinctions. vi. What is an executory contract? 1. Prof. Vern Countryman: K where so much remains to be performed on both sides that nonperformance by either side would be a material breach of the whole K a. Outside bankruptcy, “executory” simply means any obligation still outstanding. Can’t mean that in bankruptcy or trustee/DIP would be free to pick and choose which Ks he will assume or reject as it would violate pro rata requirement. b. Classic Ex: multiple payment/ multiple delivery installment K: K to deliver X number of widgets for 12 mos and receive payment for 12 mos. 3 months have passed and debtor files. D has remaining obligation to take and pay, and C to deliver. c. Countryman wanted his definition to exclude conditional sales contracts because once the creditor has delivered the goods, there is only an obligation on one side of the contract. i. Conditional Sales Ks are not executory Ks then. This holding is pro-debtor and Countryman was notoriously pro-debtor. Creditor only has a secured claim (if intent to create a security interest sufficient) or unsecured claim, but no right to full K rights (including cure). ii. Some state courts treat conditional sales contracts of real property as executory contracts. iii. Ayer argues that any warranty obligation on the part of the debtor creates obligations on both sides and therefore is an executory contract vii. A security interest is not a lease or an executory K. How do you distinguish them? (stream of payments example) 1. Hypo. Installment sale w/ payments spread over 99 years for 4M v. a lease for 99 years w/ 4M due at the end of 99 years. In other words, worth virtually the same today. Why draw a strong distinction b/t secured sale and lease? a. Some courts have held that a lease that is too long (how long?) is really a sale. 2. Accounting point: leases don’t go on balance sheet but sales do 3. If a transferor doesn’t properly perfect a security interest, he will argue that the transaction is a lease or executory K in order to get the property back (rather than have an unsecured claim) 4. UCC 1-203. Recall discussion from earlier on the difficulty of distinguishing secured sale from lease. viii. §365(a)—exceptions 1. Ch. 7—if contract not assumed within 60 days, it is presumed to be rejected


2. Ch. 11—if lease on nonresidential real estate not assumed within 120 days, it is deemed rejected 3. During the period in which trustee decides to assume or reject, the nondebtor party is not excused from performance of the contract a. §365(d)(3)—regarding nonresidential real estate, debtor must make timely performance of all obligations within 60 days during pendency period b. §365(d)(5)—regarding equipment leases, debtor must make timely performance after 60 days ix. Assume and Assign 1. §365(f)(2)(b). Trustee can also assume, then assign an executory K, notwithstanding a clause to the contrary. a. When assigned, only assignee liable on the K. Trustee or DIP released from liability (even if K states differently.) §365(k) b. Requirement of cure and assure still present. c. Most common example: most leases prohibit assignment of the lease, but §365 permits rewriting, even where the value of the lease has skyrocketed and LL wants T out. T can file bankruptcy as DIP and assign fbo estate. d. Whole purpose of filing bankruptcy might be to force assignment of lease where not possible under K terms or state law. e. BC specifies that a lease termination clause on filing of bankruptcy is nonenforceable. 2. 365(c) Exceptions. T/DIP may not assume OR assign an executory K or lease if: a. Contract to loan new money can not be assumed b. Personal service contracts can’t be assumed and assigned i. DIP under Ch. 11 may be able to assume and assign a personal service contract, but the language of the code seems to prohibit it. 1. What if actor as DIP wants to assume his own personal service K? th c. Catapult (9 C). i. Federal patent law makes non-exclusive patent licenses personal and nondelegable. ii. If the contract prohibits assignment, then there is no assumption permitted. Tends to screw over IP companies as can’t assume own IP rights. iii. Ch. 11 is going nowhere—must go to another circuit. x. Rejection issues 1. If K not accepted w/i 60 days, the K is assumed rejected. 2. Must reject whole K a. If in 10 year K and 3 years gone, only rejecting going forward. Don’t have to correct 3 years spent. 3. If debtor is landlord and creditor is tenant, the tenant can’t be kicked out even if the contract is rejected a. Same rule applies if instead of tenant it is a person with a timeshare interest or intellectual property rights 4. In Re Udell a. Prior to Udell, people were filing bankruptcy to get out of non-monetary portions of an executory K. i. E.g. entertainer signs K w/ minor promoter which includes a non-compete clause. Entertainer gets popular and wants to switch promoters. Files bankruptcy to get out of non-compete clause—rejecting as executory K. ii. Creates potential for abuse—people will file bankruptcy to get out of contracts


iii. If debtor can prove injunction/other remedy has a dollar value, does that mean it becomes part of what can be rejected in an executory contract b. D signed a noncompete clause with Carpetland. Violation = injunction and liquidated damages. c. To what extent does state law affect the ability to reject non-monetary portions of an executory contract (ex: convenant not to compete, eviction for nonpayment of condo fees, prohibition on erecting Donald Duck statue) d. Modern Trend: Udell Court held that a right to an equitable remedy for breach of performance is a "claim" if the same breach also gives rise to a right to payment "with respect to" the equitable remedy. i. In this case, the right to the equitable remedy and the claim for monetary damages were distinct. The equitable remedy was not a “claim” then, and non-dischargeable. Non-compete clause could be enforced. e. Concurrence: Difficulty w/ majority holding is that §101(5)(B) defines a claim as “a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” Looks like that occurred here. Likes the result, but wouldn’t twist the statutory language—would simply ignore it and rule contrary to the statute. 5. Ayer. What about specific performance w/ unique personal property? E.g. D buys a diamond and can’t pay. Under state law, C may have a right to return of the collateral— specific performance. a. But, this looks more like a typical creditor claim that should only be eligible for tiny bankruptcy dollars. b. Under Udell, all a state has to do is provide that every creditor has a right to specific performance to move that class of creditors to the head of the priorities. xi. Damages 1. Upon rejection, nondebtor has ordinary bankruptcy claim (gets property back, if any) 2. §502 limit on real property and personal services damages a. Real property: Greater of one year’s rent or 15% of all rent, but in any case, not to exceed three year’s rent b. Personal services damages: ? X. Trustee’s Avoiding Powers—Brings property back into the estate a. Trustee is both the successor to the debtor and the representative of creditors i. Review: § 541(a) Trustee gets “all legal or equitable interests of the debtor in property.” ii. But under 544(a)(1) Trustee also gets the rights and powers of a creditor (called “hypothetical creditor” power). 1. So, not correct to say that if the debtor didn’t have it, then the trustee doesn’t get it. 2. Trustee gets what a creditor would have had at state law. b. Trustee (DIP) as Lien Creditor and BFP. i. Debtor buys widget and Creditor has an unperfected security interest. Who getsit? 1. §544(a)(1)—Trustee/DIP has status of hypothetical lienholder, i.e. the rights of a person who obtained a judicial lien as of the commencement of the case, whether or not a lienholder exists. a. Judicial liens take priority over unperfected security interest. Unperfected interest relegate to status of general unsecured creditor. b. E.g. D buys a widget w/ a secured loan, but C doesn’t file. T/DIP as lienholder w/ priority brings widget into the estate for pro rata distribution. ii. Debtor buys real estate and Creditor fails to record deed of trust in BA. 1. Different result? Under law of many states, an unrecorded mortgage is not subordinate to a mere lien creditor. BC trumps this by…




v. vi.


2. § 544(a)(3): Trustee/DIP has the rights of a BFP of real estate—can avoid transfer of realty if deed is not recorded. a. Some BFPs must take freely under the state law for this to apply §544(b) Trustee also steps into the shoes of an actual creditor who can avoid the transfer. Exists to deal with fraudulent transfers. 1. Different than 544(a)(1) because there must be an actual creditor under this section 2. E.g. H fraudulently transfers widget to W right b/f bankruptcy. Could avoid as a fraudulent tx, or under 544(b), but not under 544(a)(1) unless a creditor also had an interest in the widget. Great Plains 1. Company marketed tax shelters. Company transferred real estate to 2 limited partners. Conflict arose b/t transferor and transferee as to rightful owner. 2. No creditors committee. Ltd Ps argue not property of the bankruptcy estate under §541 of bankruptcy estate. 3. Court holds that real estate is property of the state, since DIP has rights of BFP of real estate and avoiding powers. Deeds were never recorded. Octagon Gas Systems, Inc. v. Rimmer In re Sassard &Kimball, Inc. (1930) (Moore overrules) 1. D executed and recorded about 1 month later a chattel mortgage (over cars and equipment) to secure a $10k promissory note. 2. 3 creditors a. Those existing at the date of the mortgage b. Those becoming so b/t the mortgage date and its recording. i. Cal. Law invalidates creditors interest unless recorded w/i 7 days. Both a. and b. Cs out of luck here. c. Those becoming so after recording. i. Receiver argues this should be voidable as well. 3. Court holds that trustee only has voiding powers of the trustee. In this case, only the 1st 2 classes could have contested the mortgage had not bankruptcy occurred. 4. Court approvingly cites proposition that each class of creditors is placed on same level of superiority. Moore v. Bay (1931) (reversing Sassard) 1. Ayer Hypo explaining Sassard. a. Bulk Transfer Act. Must notify creditors if tx inventory to cash out of ordinary course of biz. Suppose statute required mail notice and D misses one. Voidable by a C with a $10 claim who did not get notice. b. Then D runs up new debts. 2. Is the mortgage void as against those who gave the bankrupt credit at a later date (3rd class). 3. 3 issues a. Does T have rights at all? b. If so, what rights? i. If T has rights of $10 creditor, then what happens to the $10. Does C get it in full, or does it come into the estate for pro rata distribution? 1. Moore seems to suggest that T gets $10, FBO estate as a whole (unless claim is secured). ii. Others argue T should be able to avoid the transaction altogether 1. CASE has been read to say that you can set aside the whole deal if only 1 of many creditors still has a claim. c. 544(b) legislative hx states that it is adopting the rule in Moore. d. Recall though: Cases have held (Caplan) trustee does not step into shoes of a creditor where only 1 individual is harmed. Creditor must assert the claim. Trustee


can only assert if fbo the estate as a whole. Does this overrule Moore? Maybe, but no case has held this. viii. Note on §541(d) 1. Text a. Property in which the debtor holds, as of the commencement of the case, only a legal title and not an equitable interest… b. …Such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest,… i. Common occurrence with the NY mortgage market. c. …Becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor's legal title to such property, … d. …But not to the extent of any equitable interest in property that the debtor does not hold. 2. Purpose of 541(d) was to leave the equity only owner untouched. 3. Problem is that this says nothing about trustee avoiding powers. Trustee has power to recapture the transferred interest of the equity owner under avoidance powers. c. Preferences §547 i. (b)(1)The trustee may avoid any: 1. Transfer of an interest of the debtor inn property of the debtor a. Need not be voluntary. Could be a creditor levy on the Chevy. b. Could also be simply giving a security interest to the creditor. 2. To or for the benefit of a creditor 3. For or on account of an antecedent debt owed by the debtor before such transfer was made 4. While the debtor was insolvent (or that renders him so) a. Proving insolvency often difficult. b. § 547(f) gives trustee an evidentiary presumption of insolvency. i. If transferee puts up any evidence, burden of proof is Trustee’s. c. Note: could be solvent on a payment 85 days out and then become insolvent 15 days before filing. 5. Made a. On or within 90 days before the date of the filing of the petition b. Between 90 days and one year before the date of the filing of the petition if such creditor at the time of such transfer was an insider c. (e)(2) Note: if Creditor transferred 2 years ago and took security interest, but failed to perfect (file) security interest until 45 days b/f bankruptcy, creditor is out of luck. Transfer deemed to occur when the security interest is perfected. i. (This simplifies the law. Technically only true where UCC 9-301(b) or equivalent is state law.) 6. Transfer enabled creditor to receive more than such creditor would receive if a. The case were a case under Ch. 7 of this title b. The transfer had not been made: and c. Such creditor received payment of such debt to the extent provided by the provisions of this title d. Granting a security interest qualifies as a preference: it’s very valuable to the creditor. e. But, what about statutorty or judicial liens? They qualify as preferences as well. Creditor is receiving value at the expense of other creditors. 7. Note: No need to show that transferee had knowledge of transferor’s insolvency. ii. (c)(1) Trustee may not avoid under this section a transfer


1. To the extent that such was intended to be a contemporaneous exchange and was in fact a contemporaneous exchange. In other words, a transfer of value for value. (E.g. buy a watch at FMV for $500.) a. Paying off a security interest is not a preference. It’s a transfer of value for value. 2. To the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee and such transfer was made in the ordinary course of business and according to ordinary business terms a. PG&E bill. 3. Of mere collateral appreciation a. Giving increased collateral to a secured creditor is likely a preferential transfer 4. That creates a perfected security interest in inventory or receivable… 5. De Minimus exception: In a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600 a. Cuts out a lot of litigation. 6. If the transfer was made as part of an alternative payment schedule b/t the debtor and creditor set up by a non-profit credit counseling agency. d. Debtor avoiding power i. §522(f) Debtor may avoid a lien to the extent that it impairs an exemption to which the debtor would have been entitled. 1. E.g. C placed lien on bank account. D, after filing, could claim exemption under 522(d)(5), so can avoid the lien. XI. Chapter 13 a. Cannot be involuntary. Looks too much like involuntary servitude. b. Offers some advantages i. Automatic stay ii. Plan is confirmable if C gets more than would get in Ch. 7 (so advantage to Cs) iii. D has a nice heirloom that doesn’t qualify for an exemption—may be able to trade post-petition earnings and keep heirloom. iv. Dominant reason: gives D time to work out debts, esp. re. mortgage real estate. c. Basics i. File a plan. Creditors get to object, but not vote. ii. If confirmed, must submit post petition earnings for 3-5 years (shorter if Cs paid in full). iii. Can do some cramdown: might be able to rewrite secured claims, except personal residence. 1. Although cannot rewrite, might be able to decelerate it foreclosure. 2. Might be able to string out arrearages. 3. Taxes now nondischargeable. (Can’t get discharge unless taxes all paid.) 4. Not so much of a superdischarge—now only slightly better. iv. Divorce (different result in Ch. 13 and 7, but I missed it.) 1. Alimony and support: awarded according to support needs. a. Always non-dischargeable. 2. Property settlement: must divide 50/50 not according to support needs. a. May be dischargeable unless showing of need. v. Fraud 1. Used to be able to discharge under 13, but now can only discharge willful and misconduct claims. (likely a mistake in drafing.) d. Famous hanging paragraph. i. Most cars worth less than is owed on the loan. Used to be prime candidates for cramdowns. ii. Hanging paragraph in 1325(a) (paragraph not numbered): If PMSI and bought 910 days, cannot discharge.


Email q/a: What about the guy who "has a judgment lien" against "real property of the debtor"--and the debtor goes into BK NOT OWNING ANY PROPERTY. The answer is that the lien is wiped out.


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