Creditors' Rights Outline

Document Sample
Creditors' Rights Outline Powered By Docstoc
					                              Creditors’ Rights Outline
                                     Tom Horan
                            Spring 2003 – Professor Cuevas

Important Bankruptcy Concepts:
   1. Debtor Protection - § 362(a) provides for the Automatic Stay immediately upon
       filing the case. It prevents continuation of claims and actions on judgments.
       Individuals get the benefit of § 524 (discharge injunction), which provides for a
       fresh start and clean slate upon completion of the case.
   2. Creditor Protection – a creditor is entitled to a trustee when there is a dishonest
       debtor. If you suspect you are dealing with a dishonest debtor, request a Rule
       2004 examination of the debtor’s “acts, conduct, or property or the liabilities and
       financial condition of the debtor, or to any matter which may affect the
       administration of the debtor’s estate, or to the debtor’s right to the discharge.”
   3. Debtor Rehabilitation - § 365(a) permits the debtor to reject executory contracts
       and unexpired leases. (§ 1113 permits debtors to make modifications to collective
       bargaining agreements. Chapter 11 plan permits you to pay less than full value on
       debts and retain your business.)
   4. Creditor Equality – creditors in same class have to be paid equally. Debtors
       cannot discriminate against debtors within the same class.
   5. Discretion – Congress has delegated an enormous amount of discretion to the
       courts. See, e.g., § 362(d)(1) (providing that court may provide relief from
       Automatic Stay “for cause”)
   6. Equity – related to discretion. See Pepper v. Litton, holding that bankruptcy court
       is a court of equity, but that equitable powers are to be exercised within the
       boundaries of the Code.
   7. Public Policy – certain debts cannot be discharged in a consumer bankruptcy case,
       such as certain taxes, debts incurred by fraud, fiduciary debts, marital obligations,
       intentional torts, government fines, student loans and drunk driving debts. See §
       523 (enumerating nondischargeable debts – exceptions to discharges under §§
       727, 1141, 1228(a), 1228(b) and 1328(b))
   8. Nonbankruptcy law – Butner held that state law determines a debtor’s property
   9. Time is of the essence – average consumer bankruptcy case is concluded in six
   10. Federalism – Bankruptcy is mainly concerned with commercial relationships.
       Federal courts are loath to get involved with state and local governments.
   11. Statutory Interpretation – dominated by Bankruptcy Code
   12. Substance and Procedure – Federal Rules of Civil Procedure provide many of the
       procedural rules.
   13. Jurisdiction – federal courts are courts of limited jurisdiction. 28 U.S.C. §
       157(b)(2)(B) covers jurisdiction of bankruptcy courts over core proceedings.
   14. Due Process – everything is done on the basis of notice and a hearing, which is
       important because property rights are at stake.

Important Terminology:

   Abandonment - § 554(a) provides that the trustee may abandon property
    of debtor that is inconsequential value.
   Adversary Proceeding – lawsuit within a bankruptcy case. Rule 7001
    governs which actions must be brought by Adversary Proceeding:
          i. A proceeding to recover money or property
         ii. A proceeding to determine the validity, priority, or extent of a lien
             or other interest in property
        iii. A proceeding to obtain approval under § 363(h) for the sale of both
             the interest of the estate and a co-owner in property
        iv. A proceeding to revoke or object to a discharge
         v. A proceeding to revoke an order of confirmation of a Chapter 11,
             12 or 13 plan
        vi. A proceeding to determine the dischargeability of a debt
       vii. A proceeding to obtain an injunction or other equitable relief,
             except when a Chapter 9, Chapter , Chapter 12 or Chapter 13 plan
             provides for the relief
      viii. A proceeding to subordinate any allowed claim or interest, except
             when a Chapter 9, Chapter 11, Chapter 12 or Chapter 13 plans
             provides for the subordination
        ix. A proceeding to obtain a declaratory judgment relating to any of
             the foregoing, or,
         x. A proceeding to determine a claim or cause of action removed
             under 28 U.S.C. § 1452.
   Automatic Stay - § 362(a) (but it has exceptions)
   Bad Faith – the commencement of a case to exploit bankruptcy court
   Bankruptcy Court – a unit of the District Court, it adjudicates issues
    arising under Title 11.
   Bankruptcy Court – appointed by the Court of Appeals for the circuit in
    which the bankruptcy court is located. He serves for 14 years.
   Chapter 11 – usually business reorganization, but also for individual
    debtors who do not qualify under Chapter 13. A Chapter 11 debtor will
    stay in business and control. He has 120 days exclusivity to submit plan.
   Chapter 7 – Business or individual can file for liquidation. In consumer
    cases, non-business property is turned over to trustee, liquidates and paid
    out to creditors.
   Chapter 13 – Individual debt adjustment. It is filed with a plan, usually to
    cure arrears on a mortgage. The can last as long as five years. All surplus
    income is turned over to pay off creditors.
   Claim – a right to payment, either liquidates, unliquidated, legal,
    equitable, secured, unsecured, etc.
   Co-debtor – an individual who has guaranteed payment on a claim. §
    1301(a) provides for a stay for the codebtor.
   Consumer debt – debt incurred by an individual for personal, family or
    household purposes. § 707(b) provides that the court may dismiss a case
    if relief would constitute a substantial abuse.

   Core Proceeding – a matter arising under Title 11.
   Creditor – an entity that holds a claim against a debtor, incurred before or
    after entry of relief.
   Debt – liability on a claim
   Debtor – entity that is the subject of a bankruptcy case
   Discharge – voids any judgment obtained prior to commencement of the
    case. Also acts as an injunction against collection of debt on any action
    that was subject to the discharge.
   Dismissal – termination of a bankruptcy case. Bankruptcy court no longer
    has jurisdiction, and the stay is dissolved.
   Disposable income – income that is left after a person has paid all
    necessary expenses
   Executory contract – a contract under which the obligations of both parties
    are unperformed such that failure to perform would lead to a material
   Exempt property – property carved out by bankruptcy or non-bankruptcy
    law that the debtor is entitled to keep. Examples are homesteads and
   Insider – officer or major stockholder of debtor
   Insolvency – when debts are greater than assets
   Involuntary Petition - § 303 provides for a petition to obtain jurisdiction of
    the bankruptcy court over the debtor’s estate. Allegation is nonpayment of
   Judicial Lien – after victory in a legal proceeding, the judgment becomes a
    lien against debtor’s Real Property.
   Motion – a contested matter governed by Rule 9014. Under Rule 9014
    you can get discovery.
   Nondischargeable debts – certain debts cannot be discharged. An
    Adversary Proceeding must be commenced to have a debt declared
    nondischargeable. An Adversary Proceeding must be commenced to have
    a debt declared nondischargeable.
   Preferential transfers – Under § 547, if there is a payment to a creditor
    within 90 days prior to filing, it is a preference. It must be made while
    debtor is insolvent, and in payment of a debt. There is a rebuttable
    presumption of Insolvency during that period. This prevents premature
    dismantling of the estate, and ensures equality for creditors. The trustee
    can recover these payments. This is related to Fraudulent Conveyances,
    which are governed by federal law (one year statute of limitations) and
    state law (six year statute of limitations). Look for no consideration,
    transfer to close relative, transfer when insolvent, or transfer when
    expecting litigation. Constructive fraud occurs when there is a transfer
    from the estate for inadequate consideration.
   Proof of claim – the creditor must file a proof of claim in Chapter 7 to be

   Property of the Estate – pursuant to § 541(a), property of the estate
    consists of “all legal or equitable interests of the debtor in property as of
    the commencement of the case.” Constructive trust property does not
    come into the estate.
   Relief from Automatic Stay - § 362(d) allows a creditor to obtain relief
    from the Automatic Stay.
   Trustee – in Chapter 7, the trustee is elected by the creditors to investigate
    debtor affairs, deal with Fraudulent Conveyances and dissolve assets.
   Turnover Proceedings – Under §§ 541 and 543, the trustee can act to
    recover property of the debtor held by a third party.
   United States Trustee – responsible for case administration.


§ 707(b) permits the court, only on its own motion or that of the United States trustee, to
dismiss a case –
     Filed by an individual
     Whose debts are primarily consumer debs
     If the court finds that granting of relief would be a substantial abuse

Key cases:
In re Waldron – this is the solvent debtor who filed in Chapter 13 for the sole purpose of
rejecting an option contract with Shell Oil. The court held that no policy could be served
by allowing a solvent debtor to use Chapter 13 for such a purpose. This case involved
creditor protection, discretion of the court, equity considerations, and statutory
construction (interpreting the substantial abuse language of § 707(b)).

In re Lemaire – Lemaire shot a man five times, and after a civil judgment, filed in
Chapter 13 to avoid paying the judgment.

In re Zick, 931 F.2d 1124 (6th Cir. 1991) – debtor intentionally breached noncompete
covenant, and was subject to $700,000 judgment. Court dismissed his Chapter 7 case, as
they believed his conduct amounted to bad faith.

Per se test: If the debtor is able to pay creditors in Chapter 13, but files in Chapter 7, he
faces dismissal. See In re Kelly, 841 F.2d 908 (9th Cir. 1988) (debtor filed to escape

Totality of Circumstances Test: from In re Green, 934 F.2d 568 (4th Cir. 1991) (also
used in 2d Circuit). Factors are:
    Ability to fund Chapter 13 case, AS WELL AS
    Whether petition was field because of calamity, illness, etc.
    Did debtor have cash advances and consumer purchases far in excess of ability to
    Is debtor’s budget excessive or unreasonable?
    Do debtor’s schedules and statement of current income and expenses reasonably
        and accurately reflect his true condition?
    Was the petition filed in good faith?

§ 707(a) permits dismissal for bad faith after notice and a hearing, for cause, including,
    Unreasonable delay be debtor that is prejudicial to creditor
    Failure to pay fees

§ 109(a) – only a person residing in the United States can be a debtor
§ 109(b) – no regular income is required
§ 707(a) – must comply with good faith test
§ 707(b) – must comply with substantial abuse test
§ 523(a) – some debts are nondischargeable
§ 727(a) – must pass through objections to general discharge
§ 524 – debtor received discharge injunction when plan is confirmed
§ 525 – Debtor is protected against discriminatory treatment

§ 109(e) requires:
    Must be an individual
    With a regular stream of income
    Noncontingent, liquidated unsecured debts must amount to less than $260,000,
    Noncontingent, liquidated secured debts must amount to less than $760,000

Frequency of Filing
§ 109(g) – debtor cannot file if the past 180 days he was a debtor in a case that was
dismissed because of willful failure to appear before court or abide by court orders or the
debtor filed for and received a voluntary dismissal.

Chapter 13 plans are voluntary only.
Creditors cannot vote on Chapter 13 plans, but they can object.

Restrictions on abuse of Chapter 13:
    Good Faith Test – court may dismiss case or convert to Chapter 7 for cause,
            o § 1307(c)(1) – unreasonable delay that is prejudicial to creditors
            o § 1307(c)(2) – nonpayment of required fees and charges
            o § 1307(c)(3) – failure to timely file a plan under § 1321
            o § 1307(c)(4) – failure to commence timely payments under § 1326
            o § 1307(c)(5) – denial of confirmation under § 1325 and denial of request
               for additional time to file a new plan or to modify the plan
            o § 1307(c)(6) – material default on a confirmed plan
            o § 1307(c)(7) – revocation of the § 1330 confirmation and denial of a
               modified plan under § 1329
            o § 1307(c)(8) – termination of a confirmed plan because of the occurrence
               of a condition specified in the plan (other than completion of payments
               under the plan)
            o § 1307(c)(9) – Only on request of U.S. Trustee, failing to file list of
               creditors and schedule as required by § 521(1) within 15 days
            o § 1307(c)(10) - Only on request of U.S. Trustee, failure to file schedules
               on secured property, as required by § 521(2)
            o § 1325(a)(3) – the plan must be filed in good faith

In re Love, 957 F.2d 1350 (7th Cir. 1992) – good faith case
     Totality of circumstances test
     Fact intensive, best left to fact finder
     Is the goal of the case fundamentally fair to creditors?
     Has there been an abuse of spirit or provisions of the Chapter?
     Non-exhaustive list of factors:
           o Nature of the debt
           o Would debt be nondischargeable in Chapter 7
           o Timing of filing

            o How the debt arose
            o Debtors motives for filing petition
            o Whether debtor filed to harm creditor
            o Whether debtor has been forthcoming to court and creditors
      Objective inquiry – granting relief would not be fundamentally unfair
      Subjective inquiry – debtor is using the Chapter for a purpose that is consistent
       with the spirit of the Chapter
      Litigation tactic – if debtor files to benefit from the Automatic Stay in a two
       person dispute, this is bad faith
      Solvent debtor – case will usually be dismissed as the debtor is not in need of
       relief, which makes the filing bad faith
      Serial Chapter 13 filings – usually the third filing will be called bad faith
      Chapter 20 case – if there has been a change of circumstances, it may be OK to
       file Chapter 13 after filing Chapter 7.

Mandatory Plan Provisions
§ 1322(a) – A plan must provide for the following:
       Feasibility requirement
   1. Submission of all future income or portion of such income as is necessary for the
       execution of the plan
       Full payment of priority claims
   2. Provide for full payment of priority claims under § 507 - attorney’s fees, wages,
       alimony, maintenance and support claims.
       Equitable treatment within classes
   3. Provide same treatment for each creditor within a class

Permissive Plan Provisions
§ 1322(b) lists permissive plan provisions
   1. Create classes of claims, but cannot discriminate against them unfairly
   2. Modify rights of creditors, except for mortgages on principal residences –
   designed to benefit primary lenders. Secondary mortgage market is more speculative
   and charges higher rates.
   3. Cure or waive defaults on primary residence
   4. Propose payments on unsecured claims concurrent with payments on any secured
   claim or other unsecured claims
   5. Cure any default on any secured or unsecured claim on which the final payment is
   due after the proposed final payment on the plan. Rights of mortgagee of the debtor’s
   principal residence cannot be altered.
   7. Assumption and rejection clause

First mortgages cannot be bifurcated! Any remaining value must be paid in full.
If foreclosure has occurred, debtor cannot use § 1322(b)(2) or (5).

Default on debtor’s principal residence can be cured until foreclosure is completed
§ 1322(c)(1) – debtor can cure default on his principal residence at any time until
foreclosure is completed. After foreclosure sale, there is no opportunity to cure. File in

Chapter 13 right away on the Internet if debtor is unsure if foreclosure has been
completed. When the foreclosure is completed is a matter of state law. It is not defined
in the Code.
Debtor can modify mortgage where last payment is due before plan completion
§ 1322(c)(2) - Debtor can modify mortgage where last payment is due before plan

Plan can be extended up to five years
§ 1322(d) – permits extension of plan from three years to five years

Secured and Unsecured Claims – Nobleman
In re Nobleman, 508 U.S. 24 (1993)
    1. First mortgage - If a claim has a secured portion (even $1) the claim cannot be
       modified under § 1322(b)(2).
    2. Second Mortgage – if there is no residual equity, debtor can strip down the loan.
       The 2d Circuit allows this (see In re Pond, 252 F.3d 122 (2d Cir. 2001).
       Example: if house is worth $25,000 and primary mortgage is a claim for $50,000
       and second mortgage is a claim for $10,000, there is no equity left in the second
       mortgage and it can be stripped down.

Mortgages on income residential property can be modified.

Requirements for Confirmation of the Chapter 13 Plan
§ 1325(a) – requirements for confirmation of the plan, in addition to being eligible under
§ 109
   1. Compliance with Title
   2. Pay all required fees
       Good Faith Requirement
   3. Plan proposed in good faith. Factors to consider are:
           o Acted equitably?
           o Misrepresented plan?
           o Manipulate bankruptcy code?
           o Proposed in inequitable manner?
           o In light of all mitigating circumstances, is debtor’s payment substantial?
           o Percentage to be paid to unsecured creditors
           o Debtor’s financial condition
           o Repayment period
           o Employment history and prospects
           o Nature and amount of unsecured claims
           o Past filing history
           o Honesty in representing facts
           o Unusual problems of debtor
           o Is there surplus in debtor’s budget?
           o Accuracy of plan
           o Statement of debts
           o Expenses as percentage of payments

           o   Extent of preferential treatment between classes
           o   Modification of secured claims
           o   Nondischargeable claims
           o   Motivation and sincerity of debtor
           o   Circumstances giving rise to debt
           o   Bona fide dealing with creditors
           o   Motivation to file in 13
           o   Did debtor act equitably?
               In re Frank, 69 B.R. 129, 132 (Bankr. C.D. Ill. 1986)
               Burden of proof is on debtor to show good faith. In re Lemaire, 898 F.2d
               1346 (8th Cir. 1990)
      Best Interests of Creditors Test
   4. Creditors do as well as they would have in Chapter 7
      Rights of Lienholders
   5. Secured claims creditors have approved the plan, they retain their liens, the value
      to be paid is not less than the lien amount or the debtor surrenders the property to
      the claimant. Chapter 13 has cramdown – secured creditor must get present value
      of its claim plus the applicable rate of interest (usually T-Bill rate plus some
      factor). Secured creditor retains the lien on the collateral. For valuation purposes,
      use replacement value of the collateral. See In re Rash, 520 U.S. 953 (1997)
      Feasibility Requirement
   6. Debtor will be able to make all payments under the plan

Debtor can modify plan before confirmation
§ 1323 – debtor may file a modified plan at any time before confirmation

Confirmation Hearing Required
§ 1324 – court must hold a hearing confirmation of plan

Disposable Income Test
§ 1325(b) – if the debtor doesn’t plan to pay full value to creditors, his disposable income
must be devoted to the plan – income not reasonably necessary to the support and
maintenance of the debtor or a dependent. Excluded items include:
    Second house or home
    Boat
    Tuition for a Master’s degree
    Life Insurance as an investment
    Private School Tuition is OK up to $1,500
    Tithing up to 15% of salary is OK.

Payments on the Chapter 13 plan commence in 30 days
§ 1326(a)(1) – debtor shall commence making the payments proposed by the plan within
thirty days of confirmation

Trustee makes the payments
§ 1326(a)(2) – trustee retains and disburses payments under the Chapter 13 plan

Effect of Confirmation of Chapter 13 Plan is Res Judicata
§ 1327(a) – confirmation of the plan binds the debtors and creditors

Confirmation of Plan Vests Property with Debtor
§ 1327(b) – confirmation of the plan vests all of the property of the estate in the debtor.

Property vests free and clear of all interests
§ 1327(c) – property of debtor vests free and clear of all interests provided for in the plan.
Majority position is that § 1327(c) does not affect the validity of liens.

§ 1328 – when payment under the plan is completed the debtor receives a discharge from
all prepetition debts covered under the plan, except:
      Claims for support and maintenance
      Student Loans
      Drunk driving obligations
      Restitution as part of a criminal sentence.

Discharge is granted upon completion of plan
§ 1328(a) – after debtor has completed all payments promised under the plan, he receives
a discharge, subject to the exceptions.

Hardship Discharge – very difficult to obtain
§ 1328(b) – After confirmation, if a debtor can show change of circumstances, he may
obtain a hardship discharge. He must prove that:
    Failure to pay is because of circumstances beyond the debtor’s control,
    Creditors received as much as they would have under Chapter 7, and
    Modification of the plan is impractical

Second Mortgages
    If there is a second mortgage and no residual equity, the debtor can value the
    If it is completely unsecured, it can be dealt with as an unsecured claim, paying
      less than full value.

Dischargeability Under Chapter 13
    Dischargeability provisions are more liberal than Chapter 7. In Chapter 13, the
      debtor can discharge:
         o Debts incurred by written or oral fraud (§ 523(a)(2))
         o Fraud or defalcation arising from embezzlement, larceny or breach of
             fiduciary duties (§ 523(a)(4))
         o Intentional torts (§ 523(a)(6))

Codebtor Stay

§ 1301 – the automatic stay is extended in Chapter 13 to individuals who have guaranteed
consumer debt for another – codebtor stay. The codebtor stay applies only to consumer
debts. Exceptions to codebtor stay:
    If the guarantor became liable on the debt in the ordinary course of business
    Where the case is closed, dismissed or converted to Chapter 7 or Chapter 11

Relief from the Codebtor Stay
§ 1301(c) – a creditor may seek relief from the codebtor stay if:
      The guarantor actually received the consideration for the debt (e.g., coguarantor
        actually has the car), or,
      If the plan filed by the debtor proposes not to pay such claim, or
      If the creditor can show that the continuation of the stay would cause irreparable
        harm, or
      If the plan does not propose to pay the guaranteed debt in full.
File a Rule 9014 motion for relief from the automatic stay.
Waiting for payment is not irreparable harm. See Harris, 721 F.2d 1052 (6th Cir. 1983).

Chapter 13 Trustee
§ 1302 enumerates the duties of the Chapter 13 Trustee:
    Investigates the financial affairs of the debtor
    Make recommendations to the court concerning feasibility
    Examine and object to improper proofs of claim
    Furnish information regarding the estate.
    He is heard on hearing concerning confirmation modification
    If he says to confirm the plan, it will be confirmed.
    He can object to the plan.
    He supervises the debtor on performance of the plan.
    He has standing to dismiss the plan if the debtor does not make timely payments.
    He is the disbursing agent for all plan payments.

Rights and Duties of Chapter 13 Debtor
§ 1303 enumerates rights and duties of the Chapter 13 debtor:
    Exclusive right to manage the estate
    Enter into transactions outside the normal course of business, after notice and a
    Use property based on adequate protection (§ 363(e))
    Sell property free and clear of liens if certain conditions are satisfied (§ 363(f))

Self-Employed Debtor Can Remain in Business
§ 1304 – a self-employed debtor can remain in business, unless the court directs

Conversion or dismissal of Chapter 13 Case
   Waiver of right to convert to Chapter 7 is unenforceable

      Debtor has mandatory right to dismiss his case, as long as it has not been
       converted from another Chapter.

Limitations on Rights of Debtor
Cash Collateral
§ 363(c) – Debtor needs to file a first day order to use cash collateral – or he can get back

Postpetition Lending
§ 364 – debtor is allowed to incur unsecured debt in the ordinary course of business. If
he wants large debt, it is a contested matter

Rejection and Assumption of Executory Contracts and Unexpired Leases
§ 365 – it is a contested matter when debtor wants to reject or assume executory contracts
or unexpired leases

Property of the estate include prepetition and postpetition property
§ 1306(a) – property of the estate includes prepetition and postpetition property. See In
re Mack, 46 B.R. 652. But postpetition wages cannot be garnished.

Court Can Dismiss A Chapter 13 Case
§ 1307(c) – allows the court to dismiss a case
Unreasonable delay that is prejudicial to creditors
§ 1307(c)(1) – unreasonable delay that is prejudicial to creditors is grounds for the court
to dismiss the case

Debtor Fails to Pay Filing Fees
§ 1307(c)(2) – failure to pay filing fees is grounds for dismissal

Debtor Fails Timely to File His Plan
§ 1307(c)(3) – if debtor fails to file his Chapter 13 plan within fifteen days, the case can
be dismissed.

Failure to begin timely payments under the plan
§ 1307(c)(4) – failure to begin timely payments under the plan is grounds for dismissal

Denial of confirmation and denial of time to modify or file new plan
§ 1307(c)(5) - Denial of confirmation and denial of time to modify or file new plan is
grounds for dismissal

Material Default on the Plan
§ 1307(c)(6) – material default by the debtor with respect to a term of a confirmed plan

Revocation of a confirmed plan and denial of confirmation of modified plan
§ 1307(c)(7) - Revocation of a confirmed plan and denial of confirmation of modified

Involuntary Petition

§ 303 – provides for filing of involuntary petition in Chapter 7 or 11. A trustee can be
appointed to liquidate the estate and causes of action.
    11 or fewer creditors and one petitioning creditor
    12 or more creditors and three petitioning creditors holding liquidates claims in
       excess of $12,000 that are not subject to a bona fide dispute. One of the creditors
       can be secured as long as the amount in controversy requirement is satisfied.
    Debtor is not generally paying debts as they come due
    There are penalties for a bad faith involuntary petition – consequential and bad
       faith damages.
    If case is dismissed, debtor receives costs and mandatory attorney’s fees.

Ways to augment the estate:
   Preference law – avoid 90 day transactions, and one year transactions involving
   Fraudulent Conveyance law
   Turnover statutes
   § 544(a)(1) and (3) – avoid unperfected security interests in Personal Property,
      and avoid transfers that would be subject to bona fide purchaser.
   Equitable Subordination - § 510(c)


Actions taken in violation of the Automatic Stay are void ab initio.
If the debtor hasn’t notified you of his Chapter 13 case, and you foreclose on the debt,
apply for nun pro tunc relief to backdate the foreclosure; if you don’t it is void.

Cannot commence or maintain prepetition claims against debtor
§ 362(a)(1) – Automatic Stay prohibits the maintenance or commencement of prepetition
claims against the debtor. It does not apply to a third party. If you have a nexus of facts
that creates a claim, it is a claim – there does not have to be a judgment or mature cause
of action for there to be a claim. See Johns Manville case (asbestos manufacturer
disposed of all potential claims, rather than having to file every five years to deal with
claims as they matured).

Cannot collect prepetition judgment or claim against the estate
§ 362(a)(2) – prohibits collection of prepetition claims or judgments against the estate,
preventing race to the courthouse.

Entities cannot gain control over property of the estate
§ 362(a)(3) – prohibits entities from gaining control over property of the estate – this
includes state law Article 9 repossessions.

No liens against property of the estate
§ 362(a)(4) – no act to create, perfect or enforce any lien against property of the estate

Postpetition property cannot be seized
§ 362(a)(5) – prohibits creditor from seizing postpetition property

No collection calls
§ 362(a)(6) – prohibits acts to collect, assess or recover a claim arising before the
commencement of the case.

Ban cannot freeze debtor’s account
§ 362(a)(7) – prevents bank from freezing debtor’s account. But see U.S. Citizen’s Ban,
516 U.S. 60 (1995) (holding that bank has limited time to freeze account).

No Tax Court proceedings
§ 362(a)(8) – prohibits the enforcement or continuation of tax court proceedings


Criminal proceedings are not stayed
§ 362(b)(1) – criminal proceedings are not stayed. If there is a bad faith criminal
prosecution, debtor has to obtain a Younger v, Harris injunction against pending state
court criminal prosecution.

Domestic Relations Exception
§ 362(b)(2) – Modifications and collection of alimony, maintenance and support are not
stayed for pre or post petition property.

Administrative or Regulatory Proceedings
§ 362(b)(4) – Administrative or regulatory proceedings can continue, except for
collection on money judgments. For instance, the SEC can acquire a judgment, but
cannot enforce it.

Lack of Adequate Protection for Creditor
§ 362(d)(1) – “for cause” – lack of adequate protection. Is creditor harmed by impact of
Automatic Stay? For instance, a tort creditor can pursue an insurance policy of the
debtor, as it does not deplete the estate. They may get relief to complete a state court
action, but not to enforce any judgment.

Ministerial v. Judicial Functions
In re Soares, 107 F.3d 969 (1st Cir. 1997) – If a judicial proceeding is completed before
the plan is filed, any ministerial acts that follow do not violate Automatic Stay. State
court acts that violate the Automatic Stay are void ab initio.


§ 541(a) – the bankruptcy estate consists of “all legal or equitable interests of the debtor
in property at the commencement of the case.”

Butner v. United States – property interests are created by non-bankruptcy law. Property
interests will be treated the same both in and out of bankruptcy.

Property may be tangible or non-tangible. Causes of action may be valuable property of
the estate, as can be lawsuits, patents, liquor licenses, etc.

Important Exclusions:
§ 541(c)(2) – ERISA pension plans are not part of the estate. See Patterson, 504 U.S. 752
§ 541(d) – if debtor has only legal, but not equitable, interest in property, then the legal
interest is all that becomes property of the estate.

Sections that Augment the Estate:
Turnover provision
§ 542 – trustee or DIP can sue for Turnover of property of estate held by third party. All
Turnover actions require an Adversary Proceeding. You have to plead the parties,
jurisdiction and venue.
Whiting Pools, 462 U.S. 198 (1983) – property seized by IRS to satisfy tax lien is subject
to Turnover as long as the IRS has not consummated a sale of the property. Debtor
retained enough legal interest in the property.

Turnover of property of the estate held by a third party
§ 542(a) – permits Turnover of property of the estate from a third party to the trustee.

Turnover of money owed to the estate
§ 542(b) – if someone owes money to the estate, trustee can get Turnover of the debt.

Turnover of Professional’s Records
§ 542(e) – permits Turnover of legal and accounting files if they are being held by
someone as a creditor

Turnover of Property held by Custodian
§ 543(b) – Turnover of property held by custodian; for instance where there are had been
a state foreclosure proceeding, trustee or DIP can start Adversary Proceeding for
Turnover and an accounting.

Avoidance of Unperfected Security Interests – Strong Arm Powers (§ 544)
Personal Property

§ 544(a)(1) – grants the trustee status of hypothetical lien creditor without knowledge,
enabling a Chapter 7 trustee or DIP to avoid unperfected security interests in Personal

Real Property
§ 544(a)(3) – grants trustee status of bona fide purchaser, so he can avoid unrecorded or
defective instruments involving Real Property. If the bank fails to record, trustee gets

Constructive Trust Theory – Sanyo Electric, 874 F.2d 88 (2d Cir. 1988) – a constructive
trust can trump trustee’s strong arm powers.

Trustee gets status of unsecured creditor – uses state Statute of Limitations
§ 544(b) – grants trustee status of unsecured creditor to commence actions on behalf of
the estate. This is crucial because then the trustee can use the state Fraudulent
Conveyance statute, which has a six-year statute of limitations.
Relevant New York Statutory Provisions (All cites to New York Debtor Creditor
Law) – brought in by § 544(b)

Insolvency is liabilities greater than assets
NY DCL § 271 – Insolvency is determined by value of debtor’s assets as against his
liabilities. A forensic accountant can determine Insolvency

Fair consideration is the gauge for Fraudulent Conveyances
NY DCL § 273 – Every conveyance made, and any obligation by an insolvent, is
fraudulent as to creditors, regardless of intent, if the conveyance is made without fair
consideration. That is constructive fraud.

Plaintiff can rescind a Fraudulent Conveyance
NY DCL § 273-a – Every Fraudulent Conveyance makes the conveyor a defendant in a
constructive fraud action. Use § 273-a to get the transaction rescinded. Must show that:
    No equivalent value was conveyed
    The judgment remains unsatisfied.
    Example: Drunk driver causes accident and transfers his assets to his spouse
        during litigation. Use § 273-a if the judgment remains unsatisfied.

Fraudulent Conveyances by Persons in Business
NY DCL § 274 – every conveyance made without fair consideration by a person in
business, and there are insufficient assets, is fraudulent as to creditors and other who
became creditors during the business or transaction, regardless of intent.

Fraudulent Conveyances by one about to incur debts
NY DCL § 275 – every conveyance made an every obligation incurred without fair
consideration, where the person making the conveyance believes he will incur debts her
cannot pay back, is fraudulent.

Intentional Fraud
NY DCL § 276 – Every conveyance made with fraudulent intent is fraudulent as to both
present and future creditors. You have to prove intent – you usually cannot get a
statement of intent, so you would have to use Badges of Fraud.

Attorney’s Fees to Creditor in Actual Fraud Case
NY DCL § 276-a – A victorious plaintiff in a fraudulent intent action can recover
reasonable attorney’s fees from the debtor. This is not so in a constructive fraud action.

Preference statute - § 547
Trustee may avoid a transfer of an interest of the debtor in property
§ 547(b) – this is uniquely federal law. If creditors are being paid outside the ordinary
course of business within 90 days of filing, trustee can bring these payments back into the
estate. For an insider (officer, director or controlling shareholder), he can go back one
year. Requirements of § 547(b) – transfer of debtor’s property:
(1) To or for benefit of creditor
(2) An account of Antecedent Debt
(3) Made while debtor was insolvent
(4) Made
        (A) On or within 90 days prior to the filing of the petition
        (B) Between 90 days and one year before filing if creditor was an insider
(5) The transfer must enable the creditor to receive more than he would if-
        (A) This were a Chapter 7 case
        (B) The transfer had not been made, and
        (C) The creditor received the payment of such debt to the extent provided by
        bankruptcy law.

Exceptions to preference statute
Contemporaneous exchange
§ 547(c)(1) an exchange intended by the debtor and creditor to be a contemporaneous
exchange, and was substantially contemporaneous cannot be avoided. An example might
be a homebuyer who signs a note and mortgage. Because of backlog at clerk’s office, it
is recorded a month later. An example of an exchange that is not contemporaneous is a
bank and borrower who enter into an unsecured loan transaction. A few weeks later the
bank hears the borrower is in trouble and asks for a security interest in debtor’s property.
This is not a contemporaneous exchange. The statute seeks to protect the lender who lent
on the basis of securing the loan.

Payments in ordinary course of business
§ 547(c)(2) – payments must be in ordinary course of business, made in then ordinary
course of business, and made according to ordinary business terms. Altering payment
terms means that it is not ordinary terms anymore. Look at:
     What were the customs between the parties?
     What were the practices in the industry?
     Was pressure applied?

Purchase Money Security Interest
§ 547(c)(3) – of there is a purchase money security interest, the estate is not being
depleted. Requirements are:
    There must be a security interest of Personal Property involved
    Interest given under the agreement and describing the collateral
    Given to enable the debtor to acquire the property (money must be used to buy the
    In fact used by the debtor to acquire the property
    Perfection (recording) must be within 20 days after debtor takes possession of the

Questions to ask:
    Did the debtor use the money to purchase collateral?
    Was the security interest perfected within twenty days after receipt of the

Subsequent Advances
§ 547(c)(4) – the creditor gave value after the preference occurred, and should be able to
use the new value as a deduction against any preference. The purpose is to not penalize
the creditor for any subsequent unsecured advances made to the creditor. Criteria:
     Creditor extends unsecured credit during the preference period, and
     It remains unpaid, then
     The creditor can use the unsecured credit as an offset against preferences

Improvement in Position Test
§ 547(c)(5) – Use for a creditor with security interests in accounts receivable or
    The creditor has interests in account receivable or inventory
    If the secured deficiency decreased within the 90 day period prior to the filing of
       the case, the trustee can avoid as a preference
    If the deficiency has increased or remained constant, there is no preference to

Fraudulent Conveyance Statute - § 548
§ 548 – if someone makes a payment with intent to halt, hinder or delay creditors, there is
actual fraud. Transfers for inadequate consideration constitute constructive fraud.

Stock repurchases during Insolvency are Fraudulent Conveyances
Robinson v. Wangemann, 75 F.2d 756 (5th Cir. 1935) – a company that redeems stock
during Insolvency violates the absolute priority rule – this is a Fraudulent Conveyance.

Actual Fraud
§ 548(a)(1)(A) – the trustee can avoid any transfer that was made on or within one year
of the date of filing (BUT REMEMBER ABOUT STATE LAW – 6 YEARS), if the
debtor made the transfer WITH INTENT to actually hinder, delay or defraud a creditor.

Constructive Fraud
§ 548(a)(1)(B) - the trustee can avoid any transfer that was made on or within one year of
the date of filing (BUT REMEMBER ABOUT STATE LAW – 6 YEARS), if the debtor
made the transfer and
(i) Received inadequate consideration
(ii)(I) – Was insolvent when the transfer was made (remember 90 day presumption) or
became insolvent as a result of the transfer
(ii)(II) – Was engaged in business, and the property remaining with debtor was
unreasonably small capital, or
(ii)(III) – Intended to incur, or believed that the debtor would incur, debts beyond ability
to pay as the debts matured.

Exemptions of property of the estate are created by state law. In New York, pensions and
IRAs are leading exemptions. New York has a homestead exemption of $10,000
(single)/$20,000(married couples)

New York exemptions:
   DCL § 283 - $2,500 exemption for bank account
   CPLR § 5205 – blanket $5,000 exemption for Personal Property (necessities)
   CPLR § 5206 – homestead exemption of $10,000 (single)/$20,000(married
     couples). It must be debtor’s personal residence, and may be house, coop,
     condominium or mobile home.
   Alimony, support and maintenance are exempt to extent necessary to debtor and
     his dependents
   Tort claims - $7,500 exemption, except for losses from future earnings, which are
     totally exempt
   Crime Compensation awards – exempt
   Disability Awards – exempt
   Annuities – exempt, unless court finds it is not necessary for debtor’s financial
   Pensions & Retirement Benefits – exempt
   Motor Vehicle – exempt up to $2,400
   Unemployment compensation – exempt
   Workman’s Compensation – exempt
   Veteran’s Benefits – exempt

When you file a petition, you have to know all debtor’s assets. You need to get
appraisals, and search for liens.

Be careful about converting nonexempt assets to exempt on the eve of bankruptcy – you
can lose the discharge if you are loading up. See Tveten, where physician had
$16,000,000 in debt and transferred $800,000 for nonexempt to exempt holdings in the
year leading up to filing. He was denied his discharge. But see Hanson, where farmer

transferred $30,000 in property to son for fair market value and retained control of
property after transfer. Their discharge was allowed. It’s about policy.

New York is an opt out state – never claim federal exemptions when filing in New York.

Objections to Exemptions:
   Have to be made within thirty days of first creditor’s meeting – no exceptions
   Grounds for objection to exemptions:
          o Lack of statutory basis for exemption
          o Failure to properly detail property claimed as exempt
          o Wrong choice of law
          o Claimed exemption exceeds value allowed by statute
          o Debtor concealed asset
          o Debtor transferred the asset prepetition and failed to disclose the transfer
              in petition and schedules

      § 522(f) – you can avoid judicial liens that impair the use of an exemption


§ 544 – debtor gets benefit of discharge injunction, which prohibits forever enforcement
of a discharged debt.

Objections to Discharge
§ 727(a)(2)(A) – a debtor who with intent to hinder, delay or defraud creditors, transfers
or removes property within one year of filing petition, shall not receive a discharge. You
must prove that:
    1. A transfer has occurred
    2. That the property transferred was the property of the debtor
    3. That the transfer was made within one year of the petition
    4. That, at the time of the transfer, the debtor possessed the requisite intent to hinder,
        delay or defraud. Actual intent is proved through circumstantial evidence. Look
        at entire pattern of conduct – who benefited from the transfer and entire
        circumstances surrounding the transfer? Prove it using the § of fraud:
Badges of Fraud (Bank of Chester Cty. v. Cohen (In Re Cohen), 142 B.R. 720, 728 (E.D.
Pa. 1992):
    1. Lack or inadequacy of consideration (was reasonably equivalent value
        exchanged?). There was a detrimental impact to the creditors because the transfer
        decreased the value of the estate.
    2. Family, friendships, or close relationships between the parties to the transfer.
    3. The retention or possession, benefit or use, of the property in question, although
        title exists in another entity. (The debtor is using the property, but shielding it
        from debtors.)
    4. The financial condition of the party to be discharged, both before and after, the
        transaction. What was the impact of the transfer of the estate? Did it deplete its
        resources to pay the creditors?
    5. Conveyance of all the debtor’s property. Did this transfer effect the stripping of
        the entire estate? (This is also about pure creditor protection.)
    6. Secrecy of the conveyance. Are there trust documents involved that were never
    7. Existence of a trust or trust relationship between the debtor and the person to
        whom the property was conveyed. (Example: debtor conveyed house to brother
        week before filing.)
    8. The existence or cumulative effect of a pattern or series of transactions, or course
        of conduct after the appearance of a debt, or onset of financial difficulties,
        pendency of litigation, or enforcement of a judgment (what was debtor’s financial
    9. The instrument effecting the transfer suspiciously states, “it is in fact a bona fide
    10. The debtor makes a voluntary gift to a family member.
    11. The general chronology of events and transactions under inquiry.

Debtor must preserve financial records or lose discharge

§ 727(a)(3) – If debtor does bad acts to records of financial condition or business
transactions, unless such acts were justified under all the circumstances of the case, he
will lose the discharge. He must preserve enough records to allow creditors to ascertain
his financial condition (tax, bank, credit card paper, deeds, titles, etc.)
Creditor must show:
    1. Debtor failed to maintain adequate books and records
    2. Such failure made it impossible to ascertain debtor’s financial condition and
        business transactions. See Meriden Bank v. Alton, 958 F.2d 1226 (3d Cir. 1993))
    3. Intent does not have to proved!

False Oath
§ 727(a)(4)(A) – False Oath will result in loss of discharge. Must prove:
   1. False Oath or statement by debtor (e.g., incorrect social security number, incorrect
       name, failure to disclose prior filing, failure to list assets, undervaluing assets,
       failure to disclose pending litigation, failure to disclose safe deposit box or
       financial account)
   2. Made knowingly or fraudulently
   3. It was material to the course of the bankruptcy statement

§ 727(a)(4)(C) – gave, offered, or attempted to receive money or advantage

Withholding Records
§ 727(a)(4)(D) – withheld books, documents or papers relating to debtor’s property or
business affairs

Substantial Errors create presumption of fraudulent intent!

Unexplained dissipation of assets
§ 727(a)(5) – discharge will be denied where debtor fails adequately to explain loss or
deficiency of assets to pay liabilities. This will only occur when debtor makes a lot of
money. There is no need to prove fraud. The explanation must pass the smell test.

Failure to obey lawful order of the court
§ 727(a)(6)(A) – debtor failed to obey a lawful order of the court – other than an order to
reply to a material question, so the discharge will be denied.

Failure to answer question while immune
§ 727(a)(6)(B) – debtor has invoked right against self-incrimination, been granted
immunity, and then fails to answer a question. He will be denied a discharge.

Committed § 727 violations as an insider, then files a personal case
§ 727(a)(7) – if an insider in another case violated § 727(a)(2)-(6) within six months of
filing a personal case, he will be denied a discharge.

Recipient of Chapter 7 discharge in last six years
§ 727(a)(8) – the discharge will be denied where the debtor has received a Chapter 7
discharge within six years before the filing of the petition.

Recipient of Chapter 13 discharge within past six years without completing
§ 727(a)(9) – if a debtor received a Chapter 13 discharge within six years of the filing of
the petition, he may not receive a discharge unless:
     Payments under the plan totaled at least 100% of the allowed unsecured claims, or
     70% of such claims, and
     The plan was proposed in good faith and was the debtor’s best efforts

Debtor can waive his discharge
§ 727(a)(10) – a debtor is entitled to waive his discharge after the commencement of the
bankruptcy case

§ 727(b) - Discharge under § 727(a) discharges all prepetition debts, subject to
exceptions at § 523.

Trustee or creditor has standing to object to the discharge - § 727(c)
§ 727(c) – Chapter 7 trustee, United States trustee or creditor has standing to object to the
discharge. Requirements:
      File complaint no later than 60 days after first meeting of creditors
      If you can’t make it, obtain a court-ordered extension before day 60, or
      File a bare boned complaint and then amend
      This is an Adversary Proceeding
      There is usually 90 days for discovery
      Get a Rule 2004 motion to ask for anything in discovery that may seem relevant
      Party objecting to discharge has burden of proof
Revoking a Discharge - § 727(d)
It is very difficult to revoke a discharge
     1. Establish under § 727(d)(1) that discharge was obtained by fraud, and the moving
         party did not know about the fraud until after the grant of the discharge, or
     2. The debtor acquired property of the estate or an entitlement to such property, and
         failed to report the acquisition of or entitlement to such property, or failed to
         surrender the property to the trustee, or
     3. The debtor failed to comply with a court order (§ 727(a)(6)

Revoking a Discharge Because of Fraud - § 727(d)(1)
Plaintiff must establish:
    1. Debtor procure discharge by fraud
    2. Plaintiff was not aware of the fraud when the discharge was granted
    3. The fraud would have resulted in a denial of discharge
    4. The plaintiff diligently investigated the facts
    5. The plaintiff could not have known the facts at the time of the discharge (plays
        into the fraud requirement)

A plaintiff with actual knowledge of the debtor’s fraud is barred from prosecuting the

Debtor acquired property of the estate and failed to deliver or report to trustee - §
§ 727(d)(2) – plaintiff must demonstrate the acquisition of property and knowing failure
to deliver the property or report it to the trustee of the estate. How to prove the fraud:
    1. Produce evidence debtor knew of the omission, and that he knew the omission
        would mislead the trustee
    2. Establish fraudulent course of conduct on the part of the debtor
    3. Debtor’s fraudulent intent can be inferred from totality of circumstances
        (circumstantial evidence)
    4. Can be established by showing debtor acted recklessly

Debtor willfully violated court order after receiving the discharge - § 727(d)(3)
§ 727(d)(3) – debtor violated § 727(a)(6) (failed to comply with court order after
receiving discharge)


§ 523(a)(1)(A) – exempts discharges for income taxes under § 507(a)(8) – if a tax return
could have been filed within three years of date of filing of petition, those taxes are not
dischargeable. If you file successive petitions, statute of limitations is tolled. If there has
been an assessment within 240 days, those taxes are also nondischargeable.

§ 523(a)(1)(B)(i) – where no tax return was filed at all (this is willful evasion and a
criminal offense)

A tax return is a document that purports to be a return, has sufficient data to calculate the
tax, must be a genuine effort to comply with the IRC, and must be sworn to. A substitute
return filed by the IRS is a not a return.

§ 523(a)(1)(B)(ii) – exempts from discharge taxes filed late, and within two years of
petition date.

§ 523(a)(1)(C) – where the debtor filed a fraudulent return or willfully attempted to evade
or defeat the tax. Requirements:
    1. Duty to pay the tax
    2. Knowledge of the duty to pay the tax
    3. Voluntarily and intentionally violated the duty to pay the tax
    4. Circumstantial evidence can create presumption of willful violation

§ 523(a)(2) – most major litigation in bankruptcy concerns § 523(a)(2)

Non-Written Fraud - § 523(a)(2)(A)
   Fraud other than a statement respecting debtor’s or insider’s financial condition
   Debtor has made false representations without intent to deceive
   Creditor relied on the false representations
         o Creditor must prove actual reliance
         o Creditor must prove justifiable reliance (justified under the circumstances
            – subjective standard)
   Creditor sustained loss because of the reliance

      Compensatory and punitive damages are not dischargeable (Cohen, 118 Sup. Ct.
       1212 (1998))
      False pretense – an implied misrepresentation or conduct intended to create or
       foster a false impression.
      Fraud must involve fraud of moral turpitude or intentional wrong, knowing and
       fraudulent regarding past or current facts relied upon by the other party.
      False representation is an expressed representation
      Under this section it can be spoken or written, other than statement regarding
       debtor’s financial condition
      This is a positive fraud – there must be an intentional act to deceive the other
      If creditor fails to establish false pretence or representation with relation to
       extension of credit, debt is dischargeable. Debtor must intend to defraud.
      Implied representation theory is now inconsistent with the current law, except
       involving use of credit card. Must show an express representation!
      Must establish fraudulent intent – can be established by circumstantial evidence.
       Look at the totality of the circumstances. Trend is to look at subjective intent –
       did debtor actually intend to repay the debt. This is common with gambling debt.
       See Rembert, 141 F.3d 277 (6th Cir. 1998) and American Sav. Bank, 94 F.3d
       1280 (9th Cir. 1996).
      Justifiable reliance - see Field, 116 Sup.Ct. 437 (1995). This is lower standard
       than reasonable reliance. He may be justified even if he might have ascertained
       the falsity of the facts had he investigated them. There must be actual reliance as
       well though! If the reliance was justified, but there was no actual reliance, the
       debt is dischargeable.

Use of credit cards is most frequently litigated aspect of § 523(a)(2)(A). These are the
factors that help identify fraudulent use of a credit card:
    1. Length of time between charges and filing bankruptcy – advise a client not to file
        if he has used them in preceding 90 days.
    2. Whether an attorney was consulted about filing in bankruptcy before cards were
        used. Stop using the cards if you speak to an attorney (debtor knows he is in
        trouble, and lacks the ability to repay).
    3. Number of charges incurred in the relevant period. In the event of job loss, if
        debtor used card for necessities, they may be nondischargeable.
    4. The amount of the charges.

   5. Financial condition of debtor when the charges were made. Did the debtor have
       ability repay the charges?
   6. Did the charges exceed the credit limit?
   7. Were there multiple charges on the same day?
   8. Whether the debtor was employed.
   9. What was the financial sophistication of debtor (usually irrelevant)
   10. Did spending habits suddenly change - Spending spree on eve of filing
   11. Charges for luxuries or necessities.

Use of these factors is the Totality of the Circumstances approach. The more factors that
are present, the better the case for no discharge. They all speak to the debtor’s intent.

Implied Representation Theory (Majority Approach): The use of a credit card is an
implied representation that the debtor has the ability and intention to pay for the goods
and services. If the credit card can establish by a preponderance that debtor should have
known he would be unable to repay, it constitutes false pretence, false representation or
actual fraud.

Fraud with a written financial statement
§ 523(a)(2)(B) – fraud with a false written statement. Creditor must prove the following
by a preponderance of the evidence:
     Debtor obtained money, goods or services by use of a financial statement
        (pertinent omissions apply)
     The statement was in writing
     Concerning the debtor’s financial condition.
     The statement was materially false. The question is whether the creditor would
        have granted credit had he known the debtor’s true financial condition. The
        falsehood must be significant in amount and effect. See In re Furio, 77 F.3d 622
        (2d Cir. 1996).
     The debtor made the false statement with intent to deceive.
     The creditor actually relied on the false statement.
     The creditor’s reliance was reasonable (would a reasonably prudent person have
        relied on it? Look at degree of care. This is very case-by-case.)
     The creditor’s loss was the proximate result of the making of the false statement.

Courts use totality of circumstances approach:
    Circumstances at time of transaction
    Creditor’s standard business practices
    Duty to investigate.
    Standard is less rigorous if debtor and creditor had long-standing relationship.
Fraudulent intent:
    Often proven by circumstantial evidence
    Reckless disregard for accuracy of facts leads to an inference of requisite intent
    Debtor knew or should have known of falsity of statement

Fraud against credit card issuers on eve of bankruptcy
§ 523(a)(2)(C) – there is a presumption of fraud against credit card issuer if the following
conditions are met:
   1. It is a consumer debt
   2. Owed to a single creditor
   3. Aggregating more than $1,075
   4. Incurred by an individual debtor
   5. For luxury goods or services (for luxury – they are not essential to the debtor’s
       existence, and are beyond his disposable income; extravagant goods and services)
   6. On or within sixty days of the entry of the order for relief.

         Cash Advances
    1.   Cash advances aggregate more than $1,075
    2.   Cash advances were made pursuant to an open end credit plan
    3.   To an individual debtor
    4.   On or within sixty days of the entry of the order for relief.

Important! If the debtor is victorious in an Adversary Proceeding commenced
under § 523(a)(2), and if the complaint is not substantially justified, the debtor is
entitled to reimbursement for his legal fees. It must involve consumer debt.

Fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny
§ 523(a)(4) – if you commit fraud or defalcation while a fiduciary, or commit
embezzlement or larceny, debts are nondischargeable. You need to prove fiduciary
     Express trust, or
     Technical trust, or
     Statutorily imposed trust.
     Common law, or constructive, trust is inadequate
     Fiduciary relationship must exist from beginning of relationship

Defalcation – this is strict liability. If the debtor fails properly to account for funds
entrusted to him, it is nondischargeable. Intent is irrelevant.

Embezzlement – it is the fraudulent appropriation of property by a person to whom such
property has been entrusted, or into whose hands it has lawfully come.

Larceny – demonstrated by showing that debtor took property with fraudulent intent. It is
the fraudulent and wrongful taking and carrying away of property of another with intent
to convert such property to the taker’s use without consent of the owner. Sending false
billing for Medicare is an example of larceny.

Matrimonial Obligations

§ 523(a)(5) – support obligations relating to maintenance, alimony or child support are
nondischargeable. Complaining spouse has burden of proof. Factors to look at to see if it
such a debt:
   1. whether the settlement agreement includes payment for the ex spouse
   2. whether it was intended to balance the income of the parties
   3. the position of the assumption to pay the debt in the agreement, and the method
       and character of the assumption
   4. the nature of the obligation
   5. whether children resulted from the marriage
   6. the future relative earning power of the spouse
   7. the parties’ understanding of the provisions
   8. the label of the obligations
   9. the age of the parties
   10. the health of the parties
   11. the existence of “hold harmless” or assumption terminology
   12. whether the assumption terminates upon death or remarriage
   13. whether the parties had counsel
   14. the length of the marriage
   15. the employment of the parties
   16. the demeanor and credibility of the parties
   17. other special or unique circumstances of the parties
Dalton v. Dalton, 139 BR 708, 710 (Bankr. C.D. Ill. 1992)

Always look at § 523(a)(15) when you have § 523(a)(5)

Intentional Torts are Nondischargeable
§ 523(a)(6) – debts arising from intentional torts are nondischargeable.
   1. Willful and malicious injury
   2. To the person or property of another
   3. Must be intentional (Geiger case) – there has to be specific harm intended as to
       victim (innocent bystander at drag race probably isn’t enough)
Examples are:
    Misappropriation of trade secrets
    Arson
    Wrongful disposition of collateral
    Conversion
    Sanctions imposed in judicial proceedings
    Restitution obligations
    Sexual harassment judgments
    Transmission of VD
    Copyright infringement
    Assault
    Battery
    Intentional violation of a court order
    Failure to protect or maintain collateral

      Willful breach of a covenant not to compete
      Intentional interfere4nce with an advantageous business relationship
      Sexual assault
      Wrongful death
      Malicious prosecution and abuse of process

Government Fines and Penalties are Nondischargeable
§ 523(a)(7) – to the extent that a debt is a government fine, paid to a government agency,
not for actual pecuniary loss, it is nondischargeable. Classic example is parking tickets.
Other examples of nondischargeable government fines and penalties are:
     Criminal Restitution obligation as part of a sentence (Kelly v. Robinson, 479 U.S.
        36 (1986))
     Court imposed sanctions
     Civil contempt judgments
     Costs and charges on state bar disciplinary proceedings
     Civil forfeiture judgment
     Compensation paid directly to victim is dischargeable.

Student Loans are Nondischargeable
§ 523(a)(8) – It is very hard to discharge student loans. To do so you must establish:
   1. Undue hardship
   2. Good faith efforts to repay have been made
   3. Inability to repay is likely to continue
   4. Debt was actually a student loan

The Brunner Test (Brunner, 831 F.2d 395, 396 (2d Cir. 1987) for hardship discharge of
student loans requirements – debtor has burden of proof:
    1. Debtor cannot maintain, based upon current income and expenses, a minimal
       standard of living for self and dependants if forced to repay the loan. Requires
       more than tight finances, but does not have to be below poverty line, and
    2. Additional circumstances exist to shoe the current conditions are likely to persist
       for a significant portion of repayment period of student loans. The debtor must
       have chronic health condition, have received no benefit from the education and
       cannot improve himself.
    3. The debtor has made good faith efforts to repay the loans. He has to maximize
       employment and minimize expenses. He must prove he did negligently cause the
       default (circumstances causing it were beyond his control). Look at attempts to
       repay, length of time after debt became due, percentage of student loan to total
       indebtedness, and ability to secure suitable employment.

Debts incurred because of drunk driving
§ 523(a)(9) – drunk driving obligations cannot be discharged

Debts Incurred in Course of Separation or Divorce Agreement
§ 523(a)(15) – a debt is nondischargeable if it arises out of divorce or separation, or in
connection with a divorce decree or separation agreement – unless

Exception because of inability to pay (hardship), or
§ 523(a)(15)(A) – debtor is unable to pay the debt from income or property not
reasonably necessary for the maintenance or support of the debtor or his dependents.
     If there is a hardship issue it is determined at trial
     If he can pay some of the debt, there should be a partial discharge
     Majority position is to use disposable income test at § 1325(b)
     Use totality of circumstances test:
           o Income as of date of trial
           o Presence or absence of more lucrative employment opportunities
           o Extent to which burden of debt will be reduced in the future
           o Extent to which the debtor has made a good faith effort to repay the debt
           o Whether income will increase incrementally in coming years
     If debtor has remarried, consider the new spouse’s income

Cost-Benefit Analysis Test
§ 523(a)(15)(B) – balances the burdens and equities to determine whether the debtor will
suffer more by not receiving a discharge of the marital obligation than the former spouse
would suffer if the debt is discharged. If the detriment is greater to the debtor, the debt
should be discharged. The court can give a partial discharge based upon ability to pay.
Factors to examine:
     Changes in financial condition of the parties from the time of the divorce or
        separation to the filing of the bankruptcy petition.
     The relative income and worth of the parties and their spouses.
     A comparison of their post-bankruptcy obligations.
     The amount and nature of the debt involved, and whether the nondebtor spouse is
        jointly liable on the debt.
     The health, job skills, training, age and education of the parties and their
        respective spouses.
     Number of dependents, their ages and any special needs they may have
     Whether the nondebtor spouse is eligible to file for bankruptcy.


§ 524(a) – it bars any action regarding a debt that has been discharged.

Pre-discharge judgments are voided
§ 524(a)(1) – voids any judgment obtained at any times prior to the discharge being

Permanent Injunction against collecting discharged debt
§ 524(a)(2) – Acts as a permanent injunction to preclude commencement or maintenance
of action to enforce a debt that has been discharged

Liens pass through bankruptcy

Unless a lien is avoided, it passes through bankruptcy. The claim underlying the lien is

Debtor May Reaffirm Debts, Even Though They Are Dischargeable
§ 524(c)&(d) – the debt is dischargeable, but the debtor may agree to pay it. In the 2d
circuit you don’t have to reaffirm the debt; just let it pass through. Requirements:
     Enter into a reaffirmation agreement before the entry of the discharge – it must
        allow the debtor to rescind the reaffirmation within sixty days. It also must state
        that reaffirmation is not required.
     It must be filed with a declaration that the agreement represents the voluntary,
        fully informed consent of the debtor
     Debtor has not rescinded the debt prior to the discharge
     § 524(d) has been complied with
     If the debtor is pro se, court has to approve the agreement as not causing a
        hardship, and in the best interest of the debtor

Government cannot discriminate against one who has been a debtor
§ 525(a) – it is illegal for government to discriminate against one who has been a debtor

Employer cannot retaliate against debtor/employee
§ 525(b) – employer cannot retaliate against employee who filed of bankruptcy.
Prospective employer can review that though.


Debtor can assume or reject executory contracts and unexpired leases
§ 365(a) – permits assumption or rejection of executory contracts and unexpired leases.
This is express authority to abrogate an executory contract.

Debtor can assume even though in default
§ 365(b)(1) – even though the debtor is in default of executory contract or unexpired
lease, he can assume. Requirements:
     Adequate assurances of future performance
     Must cure default or offer adequate assurance of prompt cure – usually outside
        funding is needed

Restrictions on § 365(a)
Applicable law excuses nondebtor
§ 365(c)(1) – if applicable law excuses nondebtor party from accepting performance from
or rendering performance to another party, debtor cannot assume and assign, if there is no
consent from such party.
Contract involves making a loan
§ 365(c)(2) – if the contract involved making a loan debtor cannot assume and assign
A nonresidential lease that has terminated prior to the case
§ 365(c)(3) – if there is a nonresidential lease that has been terminated prior to the case, it
cannot be assumed and assigned

Time Frame for Assuming and Rejecting
§ 365(d):
    In Chapter 7, trustee gets sixty days to assume or reject
    In Chapter 13 or 11, residential property leases can be assumed or rejected any
       time before confirmation (this time frame can be reduced upon request of either

Trustee must perform all duties of debtor
§ 365(d)(3) – trustee must perform all duties of debtor in lease of nonresidential Real
Property until assumption or rejection

Nonresidential Real Property leases must be dealt with within 60 days
§ 365(d)(4) – trustee must assume or reject nonresidential Real Property leases within 60
days of order of entry for relief. Failure to do so results in automatic termination of lease
as a matter of law. SDNY and EDNY require making a motion within 60 days; others
require complete adjudication.

Nullifies ipso facto clauses (termination upon Insolvency provisions)
§ 365(e)(1) – if a lease says that it terminates (or can be terminated) upon Insolvency,
that provision is inoperative.

Trustee may assign assumed lease

§ 365(f)(1) – trustee may assign if there is assumption in accordance with § 365(a) and
adequate assurance of future performance.

Executory Contracts – Countryman definition is a contract in which if either party failed
to perform, there would be a material breach.

Standard for rejection – Business Judgment Rule: Will the rejection of the contract be
advantageous to the unsecured creditors. Rejection is supposed to increase the
profitability of the debtor. There also has to be a balancing of the equities – what is the
benefit to the debtor and harm to the creditor?

Exceptions – there may be exceptions for local laws with which debtors and trustees have
to comply. For instance, debtor landlord cannot reject rent-controlled leases (See


Equitable Subordination Provision
§ 510(c) – the court may subordinate claims and interests “under principles of Equitable
Subordination.” It is rarely used because it changes a priority.

Criteria for Equitable Subordination
In re Mobile Steel Co., 563 F.2d 692 (5th Cir. 1977) – Equitable Subordination is
appropriate if the creditor:
    1. Has engaged in inequitable conduct,
    2. The conduct has resulted in injury to the creditors of the bankrupt or conferred
       unfair advantage on the claimant, and
    3. The subordination is not inconsistent with the provisions of the Bankruptcy Act.

Criteria for Inequitable Conduct
In re Clark Pipe & Supply Co., 893 F.2d 693 (5th Cir. 1990) – inequitable conduct
    1. Fraud, illegality and breach of fiduciary duties
    2. Undercapitalization
    3. Claimants use of the debtor corporation as a mere instrumentality or alter ego.

Substantive Consolidation
Substantive consolidation is the merger of two bankruptcy estates.

Test for Substantive Consolidation
In re Augie/Restivo – the criteria for substantive consolidation are:
     Whether the creditors dealt with the entities as a single economic unit (creditor
       expectations – what did they expect to receive?)
     Whether the affairs of the two are so entangled that consolidation will benefit all
       the creditors (but today it is easier to unentangle with computer)

                                                  547, 3, 20, 21
 §                                                554, 2
§ 362, 2, 4, 16, 17
§ 365, 35, 36                                      7
§ 524, 33, 34                                     7001, 2
                                                  707, 2, 5, 6
 1                                                727, 1, 6, 24, 25, 26, 27
109, 6, 7
1141, 1                                            9
1228, 1                                           9014, 3
1301, 2, 12
1302, 12                                           A
1303, 12                                          absolute priority, 21
1307, 7, 13                                       actual reliance, 28
1321, 7                                           Adequate, 17, 35
1323, 10                                          adequate protection, 12, 17
1324, 10                                          advances, 5, 21, 30
1325, 7, 33                                       Adversary Proceeding, 2, 3, 18, 26, 30
1327, 11                                          alimony, 17, 31
1328, 1, 11                                       Alimony, 22
1329, 7                                           Annuities, 22
1330, 7                                           Article 9, 16
                                                  assign, 35, 36
 2                                                assigned, 35
2004, 1, 26                                       assume, 35
                                                  assumed, 35
 3                                                assumption, 31, 35, 36
303, 3, 15                                        ASSUMPTION, 35
362, 1                                            assurances, 35
363, 2, 12                                        Augie/Restivo, 37
365, 1                                            Automatic Stay, 1, 2, 4, 8, 16, 17
                                                  avoid, 5, 15, 19, 20, 21, 22, 23
 5                                                Awards, 22
507, 8, 27                                         B
510, 15, 37
521, 7                                            Bad Faith, 2, 5
523, 1, 6, 11, 26, 27, 28, 29, 30, 31, 32,        Badges, 20, 24
  33                                              Benefits, 22
524, 1, 6                                         best, 7, 26, 34
525, 6, 34                                        best efforts, 26
541, 4, 18                                        Best Interests of Creditors Test, 10
542, 18                                           bifurcated, 8
543, 4, 18                                        Boat, 10
544, 15, 18, 19, 24                               bona fide, 15, 19, 24

Bribery, 25                                         credit, 21, 25, 28, 29, 30
Brunner, 32                                         Crime, 22
Business Judgment, 36                               Custodian
Butner, 1, 18                                          custodian, 18

 C                                                   D
card, 25, 28, 29, 30                                Dalton, 31
cards, 28                                           declaratory, 2
Cash, 30                                            defalcation, 30
Cash Advances, 30                                   Defalcation, 30
Chapter 11, 1, 2                                    defraud, 21, 24, 28
Chapter 13, 2, 5, 7, 8, 16, 26, 35                  delay, 5, 7, 21, 24
Chapter 13 Trustee, 12                              dependents, 22, 33
Chapter 20, 8                                       DIP, 18, 19
Chapter 7, 2, 3, 4, 5, 7, 8, 15, 19, 20, 26,        Disability, 22
   35                                               discharge, 1, 2, 3, 22, 24, 25, 26, 27, 29,
child, 31                                              32, 33, 34
children, 31                                        Discharge, 3, 24, 26, 27, 33
Circumstantial, 27                                  dischargeability, 2
circumstantial evidence, 24, 27, 28, 29             DISCHARGEABILITY, 24
codebtor, 2, 12                                     Dischargeability Under Chapter 13, 11
Codebtor Stay, 12                                   dischargeable, 27, 28, 32, 34
coguarantor, 12                                     Dischargeable, 34
collateral, 21, 31                                  discharged, 1, 3, 24, 32, 33, 34
Compensatory, 28                                    disciplinary, 32
concealed, 23                                       Discretion, 1
condition, 1, 5, 7, 24, 25, 28, 29, 32, 33          discriminate, 1, 34
confirmation, 7, 9, 35                              dismiss, 2, 5, 7, 12, 13
Confirmation, 9                                     disposable, 30, 33
Confirmation Hearing, 10                            Disposable income, 3
consideration, 3, 19, 21, 22, 24                    Disposable Income, 10
consolidation, 37                                   disposable income test, 33
constructive, 19, 20, 21, 30                        divorce, 32, 33
Constructive, 3, 4, 19, 22                          Divorce, 32
consumer, 1, 2, 5, 30                               driving, 1, 32
contemporaneous, 20                                 drunk, 1, 32
Contemporaneous, 20
contempt, 32                                         E
conveyance, 19, 20, 24                              Effect of Confirmation, 11
Conveyance, 24                                      embezzlement, 30
Conveyances, 3, 4, 19, 21                           Embezzlement, 30
conveyor, 19                                        employment, 31, 32, 33
co-owner, 2                                         enforcement, 16, 24
Core Proceeding, 3                                  equitable, 1, 2, 4, 18
Countryman, 36                                      Equitable Subordination, 15, 37
court order, 26, 27, 31                             ERISA, 18

eve, 22, 29, 30                                      H
executory, 1, 35                                    Hanson, 22
Executory, 3, 35, 36                                hardship, 32, 33, 34
Executory contract, 3                               hinder, 21, 24
exempt, 22, 23                                      home, 10, 22
Exempt, 3                                           homestead, 22
exemption, 22, 23                                   house, 9, 10, 22, 24
exemptions, 22, 23
Exemptions, 22, 23                                   I
 F                                                  immunity, 25
                                                    implied representation, 29
fair market value, 23                               Implied Representation, 29
False Oath, 25                                      Implied representation theory, 28
False pretense, 28                                  Improvement in Position, 21
Family, 24                                          inadequacy, 24
Feasibility, 8                                      inadequate, 3, 21, 22, 30
Feasibility Requirement, 10                         income residential property, 9
fees, 5, 7, 15, 20, 30                              inequitable, 37
fiduciary, 1, 30, 37                                Inequitable, 37
Fiduciary, 30                                       injunction, 1, 2, 3, 17, 24, 33
financial, 1, 22, 24, 25, 28, 29, 33                insider, 20, 25, 28
Financial, 29                                       Insolvency, 3, 19, 21, 35
financial condition, 24, 25                         insolvent, 3, 19, 20, 22
fine, 32                                            insufficient, 19
fines, 1, 32                                        intent, 19, 20, 21, 24, 25, 27, 28, 29, 30
for cause, 1, 5, 7, 17                              Intentional, 20, 31, 32
forfeiture, 32                                      Involuntary, 3, 15
fraud, 1, 3, 19, 20, 21, 24, 25, 26, 27, 28,        IRAs, 22
   29, 30                                           IRS, 18, 27
Fraud, 20, 21, 22, 24, 26, 27, 28, 29, 30,
   37                                                J
fraudulent, 19, 20, 25, 27, 28, 30
Fraudulent, 3, 4, 15, 19, 21, 29                    justifiable, 28
Fraudulent Conveyance, 15, 19, 21                   Justifiable, 28
fraudulently, 25
Frequency of Filing, 7                               K
                                                    knowingly, 25
good faith, 5, 7, 26, 32, 33                         L
Good faith, 32                                      larceny, 30
Good Faith, 7                                       Larceny, 30
Good Faith Requirement, 9                           lawful order, 25
government, 1, 32, 34                               lease, 35
guarantor, 12                                       leases, 1, 35, 36
                                                    legal, 2, 3, 4, 18, 30
                                                    Lemaire, 5

lien, 2, 3, 16, 18, 19, 34                        perfected, 21
Lien, 3                                           Perfection, 21
liens, 10, 12, 16, 22, 23                         Personal Property, 15, 18, 19, 21, 22
Liens, 33                                         Postpetition Lending, 13
Life Insurance, 10                                postpetition property, 16
litigation, 3, 19, 24, 25, 27                     Postpetition property, 16
Loans, 32                                         preference, 3, 20, 21
luxuries, 29                                      Preference, 15, 20
luxury, 30                                        prejudicial to creditors, 7, 13
                                                  prepetition, 16, 23, 26
 M                                                priority, 2, 19, 21, 37
maintenance, 16, 17, 22, 31, 33                   Private School Tuition, 10
malicious, 31                                     Professional
marriage, 31                                         professional, 18
Master’s, 10                                      property of the estate, 4, 16, 18, 22, 26,
Material Default, 13                                 27
Matrimonial, 30                                   punitive, 28
Medicare, 30                                      purchase money, 21
ministerial acts, 17
modify, 7, 9, 10, 13                               R
mortgage, 2, 9, 11, 20                            reaffirm, 34
mortgages, 8                                      Reaffirm, 34
                                                  reaffirmation, 34
 N                                                Real Property, 3, 19, 35
Nobleman, 9                                       reasonable, 20, 28, 29
nondischargeable, 1, 3, 7, 27, 28, 30, 31,        reasonably necessary, 33
  32                                              records, 24, 25
Nondischargeable, 3, 31, 32                       reject, 1, 35, 36
nonexempt, 22                                     rejected, 35
nonresidential, 35                                rejection, 35, 36
normal course of business, 12                     Rejection, 36
                                                  reliance, 28, 29
 O                                                representation, 28, 29
                                                  Restitution, 31, 32
object, 2, 7, 26                                  retaliate, 34
order of confirmation, 2                          Retirement, 22
ordinary course of business, 20                   return, 27
                                                  revoke, 2, 26
                                                  Rights and Duties of Chapter 13
Patterson, 18                                        Debtor, 12
Payments on the Chapter 13 plan, 10               Rights of Lienholders, 10
penalties, 15, 32
pension, 18                                        S
pensions, 3, 22                                   safe deposit box, 25
Pensions, 22                                      sanctions, 32
perfect, 16                                       schedules, 5, 7, 23

SEC, 17                                  transfer, 3, 20, 21, 22, 23, 24
Second Mortgages, 11                     transferred, 22, 23, 24
security, 15, 19, 20, 21, 25             trust, 4, 19, 24, 30
Self-Employed Debtor, 12                 trustee, 1, 2, 3, 4, 5, 15, 18, 19, 20, 21,
self-incrimination, 25                      22, 26, 27, 35, 36
separation, 32, 33                       Tuition, 10
Separation, 32                           Turnover, 4, 15, 18
Serial, 8                                Tveten, 22
settlement, 31
Soares                                    U
   Soares, 17                            Undercapitalization, 37
spouse, 19, 31, 33                       Unemployment, 22
spree, 29                                unexpired, 1, 35
standing, 26, 29                         Unexplained, 25
stock, 21                                unperfected, 15, 19
student, 1, 32                           unreasonable delay, 13
Student, 32                              unsecured, 2, 7, 19, 20, 21, 26, 36
subordinate, 2, 37
subordination, 2, 37                      V
Subsequent Advances, 21
Substantive Consolidation, 37            validity of liens, 11
Superdischarge, 11                       Veteran’s, 22
support, 17, 22, 31, 33                  victim, 31, 32
                                         voluntary, 7, 24, 34
tax, 16, 18, 25, 27
Taxes, 27                                waive, 26
Tithing, 10                              Waldron, 5
tort, 17                                 Whiting Pools, 18
Tort, 22                                 Willful, 31, 32
Torts, 31
totality, 27, 28, 29, 33
Totality of circumstances, 7             Zick, 5
Totality of Circumstances, 5
Totality of the Circumstances, 29