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									                            Bankruptcy Class Notes


Original and Exclusive Jurisdiction for BR is in Fed Dist court. You have automatic
blanket referrals form Fed Dist to BR Ct.

Chapters 1,3, &5 apply except where pre-empted. It’s not substantive material, but is
procedural and applies to the substantive chapters.

Chapters 7, 11, 12, &13 are the Substantive BR chapters
Chapter 9 deals with municipal BR (a city filing)

12 & 13 are very similar. 12 is a special chapter for family farmer

Chapter 7 is straight BR liquidation

Competing function of BR is            fresh start for debtor
                                       Fair treatment of creditors

CH 7:
Basic idea: Discharge Debt & get rid of current possessions
               -Trade away possessions in exchange for discharge of pre-petition debt.
                      (keep exempt property)

               Trade away old stuff to clear up future stuff.

CH 11, 12 & 13:
Basic Idea: Opposite of CH 7, Discharge Debt and Keep current Possessions
              -Planned Chapters
                      (Have a plan, commit future income to fund the plan)

CH 11 (Corporations & Individuals) Individuals can use ch11 but majority who use
      Ch 11 are Corporations and companies

CH 12 (Farmers) Was created for farmers

CH 13 (Individuals) is a planned chapter for individuals
             -Corporations are persons but not individuals

Confirmed Plan: The court confirms and approves of a plan.


A. State non BR collection Law:
       1. very unorganized
       2. not concerned about treating creditors equal or fairly.
                     -Basically whoever collects first gets all the available $
                     -Places a premium on quick action. Act quickly.

B. Steps
      1. File lawsuit
             -an official judgment does not allow you to collect
             the debtors possessions.
      2. Receive a Writ of Execution
             -Writ allows you to collect non exempt property of the
             -Mandatory conveyance of D’s property

Levy- when the sheriff seizes the property
Lien- is an interest in property.

       3. Writ makes the Creditor a lien creditor. He has an interest in D’s property
               -Property is collected and then auctioned. Proceeds go to creditor’s.

       A. Commencement
            1. If eligible, How do you commence

       B. Consequences of commencement
             2 Big consequences:
                    1. BR ESTATE CREATED
                    An estate is created separate and distinct from D. The estate
                    can borrow $.
                        Property of the estate consists of property D had prior to
                        petition of BR.

                      2. AUTOMATIC STAY
                         Stay arises automatically upon commencement of the case.
                         Nationwide stay against creditor collection w/o notice.

                         -this is the largest injunction known to law.
                              (any act to collect on a pre-BR claim is injoined.)
                      Acts in violation of stay are void. Temporary restraining order.

   C. Discharge
         1. Effects on Creditors
                a. secured v. unsecured
                       1. unsecured means they have no property interest on
                          the belongings of D. C has no lien.

                  b. How does each C get paid during BR

   A. Commencement / Eligibility
   CH7 Who is Eligible for Ch 7?

          -only a person domiciled, owns business, or property in U.S.

   109 (b) Defines which persons qualify
           -Railroad, Banks, & Insurance Co’s, do not qualify for CH 7.
           -All other persons qualify for CH 7.
   Individuals, Corporations, and partnerships fit under the definition of person.
   However, BR does not recognize Sole Proprietorship’s as a person. The sole
   proprietor and the proprietorship are one in the same. Thus, you can’t bankrupt
   the firm separate from the owner. The Sole Proprietor could personally file for
   BR which would include his sole proprietorship.

   Spouses act as one individual or person. You have joint filing.

   CH 11 Relief: Who’s eligible for CH 7 but not CH 11? 

   109 (d): All individuals eligible for CH 7, except Stock brokers and a commodity
   brokers, and railroads are eligible for CH 11.

   109 (d): Railroad not eligible for ch 7 but are eligible for CH 11.

   109 (e) CH 13 Relief:
   109 (e) Requirements of 13:
             1. Individual must have regular income
                 -Under Ch 13 the individual pays in installments, so you have to
                 have regular income to fund a plan.
             2. On date of filing, Unsecured debts must be less than $269,250
             3. Secured debts must be less than $807,750

Ch 13 is designed for smaller income individuals. It’s CH 7 for “Folks”.

   A bank, corporation, partnership are not individuals.

Lien on real property = a mortgage

Remember the first question to ask is am I eligible for BR?

303 Involuntary Bankruptcy
  (a) -can only have involuntary BR in ch7 & ch11 cases
      -applies to persons except farmers, family farmers, and not for profit organizations
      -D must meet the requirements of qualification for either ch7 or ch11 in 109(a) &
        (b) and109(a) & (d) respectively.
(b) -Commence by filing petition
      (1)must be brought by at least 3 creditors whose unsecured claims aggregate
      (2)If there are fewer than 12 creditors then 1 single creditor can bring the action
          as long as the debt is at least $10,775.

301 Voluntary Cases When dealing with voluntary cases it’s just like a lawsuit. D files a
                                 petition. It’s voluntary so it’s not contested.
W/ Involuntary the debtor can dispute.

303 (h) If the debtor does not answer then the court will issue relief under the chapter
  which the petition was filed.
  If the debtor does answer and disputes the case then the court must show
            (1) equitable insolvency (debtor not paying debt) or Balance sheet insolvency
                (liabilities exceed assets)
            (2) W/120 days before filing the petition, D’s possessions were transferred to
                someone other than a BR trustee, or receiver.
Receiver-similar to a BR trustee. A receiver is created under state BR. Don’t have a
trustee in State BR.

Secured Creditor v. Unsecured

trade creditor-is an unsecured creditor
    trade credit is short term credit
secured creditor- they have priority upon default.
                  - They are an owner not just a creditor.
                   They have a property right.
                   Have a right to foreclose and sale

Property interests- require due process

Once the creditor gets a property interest they have a secured claim.

Unsecured Creditors cannot reach exempt property.

Purchase Money Mortgage- Using Loan Money to buy the item which then becomes
collateral for the loan.

Voluntary Liens- (State Creditor Law) dealing with secured creditors. It does not matter
if the security interest is exempt under BR law. The creditor has a secured right in the

Unsecured Creditors- Can’t reach exempt property

Property of BR Estate
Property of BR estate is pre petition property
A creditor with a lien has an ownership interest in some property
The property interest has to be recognized in the BR action

Info Creditors should obtain:

 -Debtor’s income
 -outstanding debt
 -creditor history
 -property owned- want to make sure D has non-exempt property which you can get to.
                   Exempt property is beyond the reach of levying creditors

Voluntary Secured Claims
eg: real estate- does not matter if it’s exempt. If you borrow money using property as
collateral, the exempt status is irrelevant.

Purchase Money Interest
eg: Mortgage on a home is a purchase mortgage. The property you’re buying is used as
collateral in case you default.

Why insist on secured loans? Because they have priority to the property and it reduces
risk. It now does not matter if the property is exempt.

Determining factors of Risk
 -look at the business the person is in
 -look at the age of the person
Can reduce risk by having a guarantor (co-signer)
 -health of the debtor affects risk
 -length of the loan. Longer creditor has to pay, the greater the risk of default

Problems p.734

 1) three creditors want to file an involuntary BR against D. They want a prompt
    liquidation of D’s assets. The 3 creditors can file as long as the debt aggregates to
    $10,775 of unsecured debt.

 2) They should file for CH 7 not Ch11 because they want prompt liquidation of D’s
                  assets and under Ch11 D keeps his assets and funds a BR plan.

C. Dismissal

What debts are discharged under Ch 7?
727 (b) All pre-order for relief debts are discharged. So any debts arising before the date
of the order for relief are discharged.

301 Voluntary Cases
       Under voluntary BR, as soon as the petition is filed we begin commencement.
       The petition for BR commences the case & the order for relief arises
       immediately, thus in voluntary cases, pre petition debt is what is discharged.

303 Involuntary Cases

       With involuntary cases the petition does not immediately bring the order for

       ------file involuntary ch7--------debtor has time-------order for relief granted
                                             to respond

During the time which debtor has to respond to the involuntary petition more debt can
Any debt which arises within this time is pre-order for relief debt.

 Voluntary cases do not have this gap, so the filing of petition and order for relief occur
@ the same time, and pre-petition debt is the same as pre-order for relief debt.

This is not true under involuntary cases, under involuntary cases you have the gap, so pre-
order for relief debt, not pre-petition debt, is what is discharged. (Saying pre-order for
relief debt covers both voluntary and involuntary)

So just need to know the distinction and that you can’t say pre petition for involuntary,
must say pre-order relief debt because you can have more debt arise during the gap.

707 dismissal: (a) addresses dismissal of petition in Ch7. Can only dismiss for cause
which includes
           (1)              unreasonable delay by the debtor that is prejudicial to creditors
           (2)              nonpayment of any fees under ch 123
           (3)              failure of the debtor in a voluntary case to file w/15 days the
                requirements of 521 (1). This is done only on motion of the trustee.
707 (a) 1,2,3 all deal with involuntary dismissal

You do however have voluntary and involuntary dismissal

In Re Underwood:
D sought dismissal of Ch 7 petition in order to allow him to re-file and include a liability
which arose post petition. D was claiming that if he were not allowed to do so he would
be denied a fresh start, one of the principles of BR. Ct held dismissal not proper.

1) 707 (a) 1-3 seems to imply that D can’t bring a voluntary motion of dismissal. Ct says
you can but you still have to show cause. Must courts hold this.

2) Ct rejected the argument that policy of fresh start is cause. Ct stated that you must
balance fresh start with the interest of the creditors. It would be unfair to creditors who
extended credit right after petition relying on discharge of other debts-clean slate. Would
be unfair to add new debt to BR.

727 (a) (8) Everyone is granted a discharge(the court shall grant) unless someone objects
            to the discharge. If you’ve been granted a discharge in a case commenced
            (petition) w/in 6 years of the current commencement (petition), then you
            can’t have another discharge when someone objects to the discharge.

   The time span is from petition to petition. It’s irrelevant when the discharge occurs.

Someone must object and enter a discharge. If no one objects to D’s filing, then D can
proceed even if he has had a discharge under 7 w/in the last 6 years. In order to have a
discharge there must have been an objection.

So remember that under CH 7 727 (a) (8) you can’t file for BR if you’ve had a discharge
in a case commenced (petition filed) w/in 6 years of the current petition, however,
someone must object to your filing to invoke this rule. If no one objects, then D can

 2) Ct stated that creditors rely on 727 (a) (8) when extending credit b/c they know debt
    Won’t be discharged for 6 years.

In this case they filed the case in year 1 and had not received a discharge so 727 (a) (8)
does not apply. However, ct held that allowing D to re-file and include new debt would
violate the spirit of 727(a) (8). The court made their decision in light of fairness to
creditors. Creditors would be confused and think that they can’t re-file after filing even
though there wasn’t a discharge and would think it was safe to lend to D.

Majority of BR cases are Ch7 and 90% of these cases are individual filing, not a col and
most are no asset cases. Means there is nothing to distribute to creditors. In no asset
cases the trustee is generally the only one paid. This is a no asset case.

In this case there had not been a discharge hearing yet. CH 7 has a mandatory meeting of
creditors & then a discharge hearing is set. It takes a long time to get a discharge hearing
se because the cts are so overloaded with cases.

362 (a) Automatic Stay An automatic stay arises when BR petition is filed

524 (b) Permanent injunction the discharge replaces 362 and creates a permanent
       injunction ( So in CH.7 case all pre-pet (really pre-order for relief b/c of
     involuntary cases filed under 303) debts are discharged.

The stay ends when you get a discharge. The discharge is a permanent injunction.

305 Dismissal/abstention: (a) Ct may dismiss, or suspend, a case if
                                    1) the interest of the creditors and the debtor
                                    would be better served by dismissal or suspension.

p.738 Problems

1) Why did D use 707 dismissal as opposed to a 305
In seeking the dismissal, the debtors used 707 Dismissal because it seems to be directed
towards involuntary dismissal and D felt that there was a chance that the ct would not
take into account the interests of the creditors. A 305 dismissal specifically requires that
the interest of creditors and the debtor be taken into account before granting a dismissal.

2) Would it make a difference if all Post petition creditors were given notice of the
   motion to dismiss and no creditor objected? 707 (a) requires a showing of cause so it
   would make no difference if the creditors were notified and did not object.

3) After the decision of this case could the Underwood’s file another CH 7 BR case?
   NO can’t get another discharge for another 6 years from the date of the petition.
   Remember it’s from petition to petition. They would have to go to ch 13.

They can dismiss but it would be w/ prejudice , so they can’t file again after dismissal.

If the case is dismissed then the stay ends and there is no discharge so there is no
permanent injunction. Creditors then can collect under state creditor law. There is
nothing that bars the creditors from trying to collect.

4) If D had filed under Ch 13 instead of 7 would the court have granted dismissal?
 1307 Conversion/Dismissal
          (b) D has an absolute right to dismiss, unless the case was converted to Ch 13
              under 706, 1112, or 1208. No cause required. This is subject to 109 (g).

109 Who may be a debtor
         (g) an individual or family farmer may not be a debtor if they were a debtor in a
              case pending w/in the preceding 180 days if
                   1) the case was dismissed by the court for willful failure of the debtor
                       to abide by orders of the court
                   2) debtor was granted a voluntary dismissal of the case following the
                       filing of a request for relief from the auto stay of 362.
So even under Ch 13, where there is an absolute right to dismissal, you can’t re-file for
180 days after being granted the dismissal.

5) Could D convert Ch 7 to Ch 13 and dismiss? No if you convert from 7 to 13 you lose
   your absolute right to dismiss. You have an absolute right to dismiss under Ch13
   unless you converted from another CH to CH 13 {1307 (b)}.

706 Conversion Governs conversion from Ch7 to CH 13

You can have involuntary conversion; However, there is not involuntary conversion to
Ch 12 or Ch 13.


You have -voluntary & involuntary commencement (except for 12 & 13 no involuntary)
        -voluntary & involuntary dismissal
        -voluntary & involuntary conversion ( except to12 & 13 no involuntary)

Because there is no such thing as involuntary commencement under 12 or 13, likewise
you can’t have an involuntary conversion to 12 or 13.

707 dismissal
   (b) a trustee, or the court, on its own motion may dismiss a case if it finds that
          allowing      relief would constitute an abuse of the BR process.

707 (b) would be used when a debtor has a huge income and can fund a Ch 13 plan, has
no assets and chooses to file under ch7. 707 (b) should be used because it’s an abuse of
the BR process. I f they are thrown out of Ch 7 they would have to pursue relief under
CH 13 ( if they want a discharge)

IN Re John-Mansville Corp

Mansville filed for CH11 because of 1000’s of anticipated asbestos suits.
The claimants lawyers want this BR filing dismissed so they can continue with their
lawsuits. Also have unsecured creditors wanting dismissal. Mansville’s co-defendant’s
(other co’s producing asbestos) also want the filing dismissed because of joint and several
liability. They want Mansville to share the responsibility.

1112 Conversion/dismissal
      (b) Requires a showing of cause in order for there to be a dismissal.

The creditors claim that Mansville has overstated their financial position and there fore it
should be dismissed.


109 (a) Must be a person in U.S. (Which they are)
They want Ch 11 so to be eligible look at 109 (d)

109 (d) Except for stockbrokers and commodity brokers, all persons that may be a debtor
under CH7 are eligible for ch 11 in addition to railroads. (Thus they meet this

The fact that Mansville is solvent does not matter. Insolvency is only a pre-req to
involuntary petitions:
303 (h) (1): the debtor is generally not paying such debtor’s debts as they become due.


109 does not have a good faith requirement for filing under CH 11

1112 (b) : There is no explicit good faith filing requirement yet bad faith filing may be
grounds for dismissal. (Cts discretion, its dismissal for cause)

It doesn’t matter what their financial position is. All you have to be is eligible under 109.

Mansville ct said that they can dismiss for bad faith in filing because it’s dismissal for
cause under 1112 (b), but it’s still not a specific requirement under 1112 (b).

Manville is a real corporation with real debt so Manville meets any good faith

EG of bad faith filing:

1 Asset Debtor case            ABC co

Bank mortgage on office equipment for $11 Million
Asset = Office building
ABC does not want to lose the office building. They don’t want to be in BR because they
don’t want the office building and all of their stuff to be in a BR estate. So, they convey
the office building to XYZ , which was created By ABC co for the sole purpose of taking
the office building. XYZ files. They are not a real business w/ real debt. This keeps
ABC co out of the mess. This type of case will be tossed out.

1129 Confirmation of plan
      (a) (3) Plan must be filed in good faith. (However no good faith requirement for
      Planned chapters, the debtor comes up w/ a plan and the plan must be approved
      (must be confirmed by BR court)

In Ch 11 you have a debtor in possession as opposed to a trustee.
Once the Ch11 plan is confirmed the debtor has a discharge. After discharge the property
of the estate re-vests w/the debtor.
After the plan is confirmed the creditors cannot pursue their rights beyond the set amount
of the plan.

Ct says that inability to get a plan confirmed does not mean that some plan isn’t going to
get confirmed so the case should not be dismissed. The debtor has 180 days to come up
with a plan.

Keep the co alive.

-------------(Assets)                       }Firm is balance sheet insolvent

Broken Capital Structure- The co has more liabilities than assets.

Going concern value of assets- this is the concern of keeping the assets going and
generating revenue

Liquidation of assets: it is more economical to try and continue the going concern of
assets ( that is to keep the co producing its product) than to liquidate the assets and sell
whatever the co has as scrap.

CH 11 tries to preserve the going concern value (keep the co going)

Because you are trying to keep the Co going, you want to be able to file for Ch 11 quickly
and have the auto stay arise. This is why ch 11 does not require good faith in filing. If
the cts required good faith in filing this would delay the stay and could cause the co’s
position to deteriorate while the co proves good faith in filing.

109 (g) No individual or family farmer may be a debtor who has been a debtor in a case
pending under this title w/in the preceding 180 days if
              (1) the case was dismissed by the court for willful failure of the debtor to
                  abide by orders of the court
              (2) debtor requested a dismissal after filing a request for auto stay.

109 (g) applies to individuals and family farmers only. It’s not person, it applies to

D. Conversion
706 Conversion from 7
1112 Conversion from 12
1307 conversion from 13

Because there is no involuntary commencement in 12 or 13, you can’t force a debtor to
convert into 12 or 13.
If D dissatisfied with initial choice of form of DR he can change his mind and file motion
to convert case to another CH. Similarly C can request the ct to convert case to another

UNIT 8 legal consequences of the commencement of a BR
541 (a) estate is created upon commencement of case.

The creditors get paid with the property of the estate

A. Property of the estate
704 Duties of a trustee: Trustee gets all assets together

726 Distribution of property of the estate: Trustee liquidates assets and distributes
proceeds to unsecured C’s

1. Why is property of the estate an important concept?

Under the planned chapters it is important to get all the assets together and asses value of
the assets. This is how a plan is formulated. (determines the Payment amount D has to

To get a plan confirmed you have confirmation standards

1325 (a) (4) value of the property to be distributed under the plan is not less than value of
the assets that would have been liquidated if D filed under CH 7
(Best interest of creditors test)

1129 Confirmation of a plan:
      (a) (7) : Best interest of creditors test for ch 11
              ii) the value of the plan may not be less than the amount that C would
                  receive if D had liquidated his assets under CH 7

The test is that you get no less than Present Value under the plan then the creditor would
have gotten under CH 7

(This is the best interest of creditors test for CH 11)

Uses PV, because the value of the property will  and BR takes a long time to implement
You must discount to PV, how much will I have to pay over 3 years to C in order to equal
$1000 of present value.

Must know what property is of the estate so that way you can calculate the amount the
creditor would get under Ch7.

To satisfy the Best interest of creditors and get the plan confirmed we must know value of
property to make sure we meet the best interest of creditors test.

You’re paying in installments so you pay the value of the property plus any extra to meet
present value.

If C gets nothing in Ch7 then you can’t give C less than nothing in 11 & 13. This would
meet the best interest of creditors.

2. What Does Property of the Estate include?

541Property of the Estate (a) (1) property of D is all property held prior to petition.
This becomes property of the estate.

Chicago Board of trade case

Membership in Chicago board of trade became property of the estate. It’s non-
transferable w/o consent of the other traders. D owed members $. T argued that the
claims to other member became void.

SC court held that the seat on the board was in fact Property. And that federal law
controls what is and is not property.
The seat is in fact property of the estate but only what D’s interest in the seat was which
is $10K subject to $60K of claims to other members. The debt to other board members is
not white washed when the seat becomes property of the estate.

Transfer Restrictions

The extent of D’s interest in the property is decided by state law.
What is and is not property is determined by FED law.

In Re Fitz Simmons:

FACTS: Fitz filed for Ch 11 BR. BR plan only allowed Fitz $3,500 per month to keep as
salary. Rest of the earnings went to fund the plan.

ISSUE: Whether the earnings of his law practice are property of the estate or are they

1) Fitz argues that earnings of his law practice are exempt under 541(a) (6)

541Property of the estate
 (a) (6): Provides that the estate includes pre & post petition product, offspring, rents, and
     profits of or from property of the estate subject to one exception, earnings from
     services performed by an individual debtor after the commencement of the case.

Inheritance received within 180 days after filing of petition becomes property of the

Mostly if its not pre petition property it does not become property of the estate, but there
are the above exceptions.

2) Trustee argues that 1107 & 1108 overrides the 541 (a) (6) exception. Argues that the
   authority to operate D’s business overrides the 541 exception and that the estate is to
   receive all proceeds from the operation.

1107 right, powers and duties of debtor in possession
1108 Authorization to operate business
1108 Authorizes the trustee ( or the debtor in possession see 1107) to operate the
debtor’s business during the course of the bankruptcy proceedings. This is the rule not
the exception in CH 11 cases.

HOLDING: Court holds that 1107 & 1108 do not override the 541 (a) (6) exception.
Additionally the court says that the money from the firm is generated by his associates .
Only the money he personally generates Is exempted out. Remanded to determine how
much D Actually generated. IF D were to take all the money there would be no money to
fund the plan.

Remember when something is excepted out then the property was never part of the

Exemptions are creatures of state law. Exempt property starts out as property of the
estate and the D files a list of exempt property to be taken out of the estate. BR
acknowledges this.

Problems P. 755:

1) D files Ch 7. Receiving Royalty payments( $10,000)from publisher for book
   published. $10,000 property of the estate?
        Yes, it is property of the estate. First, D had a right to the royalty payments
           prior to filing his petition. It was earned b/f petition. The right to payment is
           property. The fact that the $ came later does not matter.
        Also the book is property of the estate and the royalty payments are profits
           from the book (profits from property of the estate 541 (a) (6))
        If the royalties are considered individual earnings then you must see when they
           were earned, b/f or after petition. If earned before, then they are not excepted
           out. Only earnings after filing are excepted out.

2) Rentals received from Dave’s Car rental Co?
      -Yes property of the estate
       If the rentals are attributable to Dave’s personal efforts then they are excepted
          out. 541 (a) (6). Remember only the rentals earned by Dave personally,
          AFTER commencement, are excepted out. If prior then it’s property of the

3) Dave’s court reporting corporation earned $14,000 after filing. Excepted out?
      -NO not excepted out

        Earnings by a corporation do not meet the exception of 541 (a) (6). The
         corporation is a person not an individual. The exception only applies to
          individual earnings. Corporation is a separate entity.

4) D retains firm to bring lender liability suit. After suits are filed the C’s file an
   involuntary ch 7 against D. What happens to the lender liability suit?
       the right to sue arose pre-petition and the fact that if D wins the $ would come
           in later does not matter. The interest in litigation is property of the estate. You
           could say that D’s right to payment arose pre-petition and any right to payment
           is property, thus the claim is property of the estate.

5) Trustee argued that the earnings of the law practice were property of the estate
   because he wanted the earnings to fund the plan. If there were no trustee in a ch 11
   case Who would make such an argument?
       -1102 Creditors’ and equity holders’ committees: This is a representative body of
       creditors or shareholders.
       -1103 Powers and duties of Committees
         {c} Allow the committee to hire layers, consult with the debtor Etc…

       So the committee would make the arg that the income is property o the estate if
       there was no trustee

Problems P. 756:

1) Under 541 (a) (1) the Chicago Board case would be decided the same.
2) D, Holder of a liquor license owed taxes to the state. Under Cal State law, state can
   refuse transfer until the taxes are paid. D filed for BR. Is the license property of the
   estate and can they be sold to 3rd party?
       -The restrictions do not prevent the license from becoming property of the estate,
       but the sale of the license is subject to the taxes owed to the state.

554 Abandonment of property of the estate:
(a) Trustee Can abandon any property of the estate that is burdensome to the estate or that
    is of inconsequential value and benefit to the estate.

       So most likely the Trustee will abandon the license because no one is going to buy
       it because the taxes owed on the license are more expensive than the license itself.

363 (g) (h) (I) & (j) Governs sale of property.
(g) Allows the trustee to sell property free and clear of any vested or contingent right
    which may exist in the land.

(h) Trustee may sell the interest of any co-owner of D’s property which D had at the time
    of commencement of the case, an undivided interest as tenant in common, joint
    tenant, or tenant by the entirety, only if (all must be present)
        (1) partition in kind is impracticable;
        (2) Sale of the property’s undivided interest would realize a significantly less
            amount for the estate than sale of the property free of the interests of such co-
        (3) Benefit of sale free of the interests of the co-owners outweighs the detriment
            to the co-owners; AND
        (4) The property is not used for production of electricity, or gas .

(i) Prior to sale of the property, D’s spouse or co-owner may purchase the property at the
    price which the estate would have received.

(g) After sale of the property the proceeds from the sale shall be distributed to the spouse
    of D or the co-owner, and to the estate, according to the interests held by the spouse,
    co-owner and estate.

3. Exempt Property

a. What Property is Exempt

1. 541 Is very broad- captures most property. So exemptions are also broad to off-set
   this. Need this for fresh start. D has to have some property.
2. State laws allow for certain exemptions also. Some exemptions are limited by item or
   value other exemptions are unlimited, such as tools of trade.
3. All property not excepted from the estate is property of the estate. Then the property
   can be exempted out of the estate.
4. Exempt property under sate law means out of reach of creditors. This notion
   is preserved in BR.

522 Exemptions
(b) Only applies to Individual debtors, not persons.
(b)(1): property listed in (d) is exempt
(d) Is a list of federal exemptions

(b)(2) allows for property that is exempt under state law or other federal law not listed
       in (d).

D can choose either (b) (1) or (b) (2).

State can have an opt out provision, in which case D must use the state law of (b) (2) for
exemptions. Can’t use the federal exemptions (b) (1). Almost every state has opted out
so will have to use (b) (2) and don’t get to use the federal exemption. The opt out

provision just prevents D from having the option to use fed law (b) (1) or state law (b)
(2). (with opt out must chose state exemptions)

Once the creditor gets a property interest they have a secured claim.

Unsecured Creditors cannot reach exempt property.

Purchase Money Mortgage- Using Loan Money to buy the item which then becomes
collateral for the loan.

Voluntary Liens- (State Creditor Law) dealing with secured creditors. It does not matter
if the security interest is exempt under BR law. The creditor has a secured right in the

Unsecured Creditors- Can’t reach exempt property

BR code honors the Exemptions under 522

522 (b) Exemptions only apply to individuals not persons.

522 (b) (1) : d is a list of federal exemptions

Problem p. 758

1) Why would the BR trustee challenge D’s claimed exemptions?

   To get more property for the estate

2) Why would D in a ch 13 case file a list of exemptions?

   D wants exemptions in ch. 13 because it would reduce the value of the estate and thus
   would reduce the required payments under the plan. Can’t pay C less then they would
   get in ch7 Best interest of creditors test.

3. 541 (c) (1) (A) transfer restrictions don’t prevent property from being part of the estate.
        (this was the case in the Chicago trade case)
Trusts are protected by law from creditors outside of BR. Thus, for eg, in BR a C could
not get to a spendthrift trust. If protected by law outside of BR then can’t get to in BR.

b. Consequences of Exempt Status

1. What does this mean? Means that creditors can’t get to the exempt property. It’s not
   part of the BR estate.

Three groups of C’s who have recourse after BR to Exempt property
        1) Creditors with tax claims: Excepted from discharge under 523 (a) (1)
        2) Creditors with domestic claims(alimony, maintenance, support, for spouse or
            child) excepted from discharge by 523 (a) (5)
        3) School loans are excepted under 523(a) (8)
        4) Secured creditors with liens on exempt property
Lien- interest in property to secure payment of a debt or performance of an obligation

personal property- Must look at property law outside of the code to determine what’s
personal property.

levy of a lien- have a conveyance when the sheriff executes the levy

Judgment lien- sue and get a judgment for a lien on certain property. Entitles you to a lien
on real estate.

For personal property you get a writ of execution to levy the personal property. It’s a
judicial enforcement of a debt by seizing and selling D’s personal property.

In Ch.7 Secured creditors get paid first
In planned chapters the debtor is a debtor in possession. You appraise personal property
and the secured C’s get 100 cents on the dollar. Plus, because we are dealing with
payments you have to increase the payments to reflect present value.

Can be an oversecured C:
eg loan for $100K and C gets collateral of $150K in inventory. In Br the $50k extra
becomes property of the estate. With an individual debtor it may go to the individual if
it’s exempt.

Fully Secured: $100K debt & $100K security interest.
Under secured: $100K debt & $50K security interest

With the undersecured claim the secured party has a $50k unsecured claim left. In Br, get
the $50k collateral and the other $50k is unsecured and is granted through Br where may
only get 10 cents on the dollar.

Possessory Security Interest- the creditor holds the collateral. Eg is a pawn shop.

Most security interest are non possessory. D is in possession of the collateral

Purchase Money Security Interest-Using credit or money to purchase the stuff which
becomes the collateral for the loan. The credit enables the Debtor to purchase the
2 Types
1) Eg: purchase TV at sight and sound. They extend credit and retain a security interest
in the TV. (Financing Seller)

2) Another eg is when a bank lends money to by a TV and the bank uses the TV as
collateral for the loan. ( 3rd party financer enables the purchase)


Levying creditors can’t reach Exempt property. (outside BR look to state law to
determine what’s exempt)

1) Eg: D defaults on an unsecured loan. C must make it secured to collect on the loan.
   C would have to sue and get judgment, a writ of execution, and then levy the
   A car might be exempt up to $10k. If you have a car worth $90k , then when the car
   is sold 410k is exempt and the other $80k goes to c.

   Br code recognizes exemptions. C’s in br can’t get to exempt property in the same
   way that levying C’s outside of Br wouldn’t get to it.

2) Secured C’s can collect exempt property used as collateral. D traded away his
   exemption when using the property as collateral

C. Avoidance of Certain liens
522 (f) D can avoid certain liens on exempt property (“avoid”- secured claim becomes
unsecured claim in Br)

2. Certain liens avoidable (On exempt property)
522 (f) (1) (A) Must be a judicial lien, other than one for
                (i) alimony, maintenance, or support of spouse or child, or

            (B) Must be a nonpossessory, nonpurchase money security interest in:
               (i) household furnishings, household goods, wearing apparel, appliances,
               (ii) professional tools of trade of the debtor or dependent of the debtor.
               (iii) Health aids of the debtor or dependent of the debtor.

The collateral must be exempt property and must be nonpossessory, nonpurchase money
security interest, listed in 522 (f) (B) (It lists the only exempt property which can be

Eg: C lends $15k to D. C takes a security interest in tools of D. D is a mechanic and the
tools are worth $10k. Thus lien is for $10k.
It’s a nonpossessory, nonpurchase money security interest, and is in tools of trade, so if
the lien impairs an exemption to which D would have been entitled to under 522 (b), then
D can avoid the lien. This would remove the $10k lien and leave C with an unsecured
claim of $15k.

problems p. 760

2) Which of the following are avoidable:
   a) S sells D a TV set and retains SI? This is a PMSI, so can’t avoid under 522 (f)(1)
   b) D gets loan from S to pay hosp. bills and gives S SI in TV set? Yes. This is
       nonpossessory, nonpurchase money security interest in household goods.
   c) D grants SI in car for personal loan? This is nonpossessory non PMSI, but 522
       (f)(1) (B) (I) requires to be household goods. Most cts say car is not. It may be
       exempt under state law.
   d) Use work truck as SI for loan to pay taxes? Yes. 522(f)(1)(b)-nonposs and non-
       PMSI. 522 (f) Only works on exempt property. Under fed law- tools of trade are
       exempt. (522(d)(6))
3) b) New loan pays off original loan on stereo and takes SI in stereo, ski equip, and
   harmonicas. Could you avoid this SI? Yes. Non-PMSI and nonposs under 522
   (f)(1)(b) because old loan securing PMSI paid off and stereo becomes non-PMSI.
   The second loan was not the $ money used to buy the stereo. The lien can now be

4) Can you avoid the following under 522 (f)?
   a)Second mortgage on D’s home? No doesn’t fit into categories listed in 522 (f)
   522(f)(1)(B) does not apply to security interest in real property . It must be a security
   interest in personal property.

   b)Judgment lien on D’s home? Yes. 522(f) (1)(a) doesn’t restrict the property to
   personal property, it can be real property. It’s a judicial lien and it is not for support,
   maintenance, or alimony to spouse or child.

5) Meaning of “ To the extent that a lien impairs an exemption” (522(f)(1)):
   homestead worth$100k
   homestead exemption is $10K
   1st mortgage is $60k
   Judgment lien of $20k

      Can’t avoid 1st mortgage. It’s not a judgement lien required under (f)(1)(A) & it’s not
      a Nonposs, non PMSI (f)(1)(B).

    Is the $20k avoidable?
    No because the judgment lien does not impair the exemption:
               home =         $100K
               1 mort=        $60K
               JL     =       $20K
After the 1 mortgage you have $40k, so the next $20k goes to the Judgment lien. After
the JL you have $20k. $10k goes to fund the exemption and you have $10k left over after
the exemption is funded. Thus, the lien does not impair or prevent the funding of the
allowed exemption so it is not avoidable.

Now assume: home =             $100k
                1 M =          $60k
                JL      =      $50k
                Exemption is still $10k
After the 1 M you have $40K. You must first fund the exemption which is $10K. You
now have $30k left to pay the JL. So you avoided $20 k of the JL. Here you have $40k
after the 1st M and if you were to use the $40k to pay the $50k JL, there would be nothing
to fund the exemption with. Therefore, you avoid the lien to the extent that it impairs the
exemption. Here you avoid $20k of the lien. Now $20k of the lien has become an
unsecured claim.

522 (f)(2)(A): a lien shall be considered to impair an exemption to the extent that the sum
               of the:
                        (i) lien;
                        (ii) all other liens on the property; and
                        (ii) the amount of the exemption allowed;
exceeds the value of D’s interest absent any liens.

Eg:    home           $100k             Allowed homestead exemption of $10k
       M1             $60k
       M2             $20k
       Judicial lien $40K
Remember you can’t avoid the mortgages because they are not Judicial liens
{522(f)(1)(A)}, and because they are not of the type listed in 522(f)(1)(B). 522(f)(1)(B)
does not apply to security interests in real property.

To apply 522 (f)(2)(A) add all of the liens and any allowed exemptions up:
       M1             $60k
       M2             $20k
       Judicial lien $40K = $120k + Homestead exemption of 410K = $130k

The value of D’s interest absent any loans is $100K. In this eg the amount of all the liens
exceeds the value of D’s interest absent any liens.

$130k (amount of liens) - $100K ( value of D’s interest absent any liens) = $30k

Under 522 (f) (2) (A), the $30K represents the amount the judicial lien which can be

The JL was originally $40k. Subtract out the $30k which can be avoided and the JL is for
$10K. The $30k left over, becomes an unsecured claim. So you now have an unsecured
claim for $30k and a secured claim for $10k.

6) Can State opt out of 522 (f). (Remember state can opt out of the Fed exemptions of
   and require D to use the state exemptions.)

   State cannot opt out of 522(f). 522 (b) allows state to opt out of fed exemptions and
   requires D to use state exemptions. 522(f) does not have a similar provision. You
   can’t opt out of D’s ability to avoid liens.

B. Automatic Stay
362 Auto stay becomes effective upon filing of the petition

Stops all collection efforts. Gives a chance to see what property is in the estate and what
the value is. It promotes equal treatment of C’s as opposed to state law where it’s a race
to collect (first come first serve).

1. Scope of Stay

problems p. 764
1) collection litigation
   a. Prepetition Debt- C files collection action after default on debt. D then goes
       bankrupt. How does this affect the collection action?
       Action Stayed 362 (a)(1)
   b. Postpetition Debt- D in Br, then D negligently injures X. Can X bring an action
       for negligence? Yes. Not stayed because stay only applies to prepetition action
       under 362(a)(1). This is a postpetition claim.
       What about enforcing a judgment entered in court?
       Action is stayed per 362 (c) (2). So you can get a judgment you just can’t collect.

2) lien Enforcement
     a. Resale-D defaults on secured debt before Br. C has foreclosure sale scheduled,
        but D files Br a day before the schedule foreclosure proceeding. Will the sale be
        stayed? Yes. Sale stayed under 362 (a) (4)-act to enforce lien. Also (3) and (5).
        could argue D filed Br in bad faith only to stall foreclosure SEE Mansville.

   b. Repossession- D defaults, D in Br, C wants to repossess. Stayed? Yes under 362
      (a) (3) & (4).

3) Informal Collection Efforts
    a. Can D’s creditors continue to demand payment on debts after D files? No. 362 (a)
        (6) stays any act to collect .
    b. What about against the Wife? No, because the stay arises for both husband and
4) What about collecting from a 3rd party guarantor, does the stay apply? No 3rd parties
are not protected by the stay. We protect property of the estate, not of 3rd parties.

1201 & 1301 Stay of Action Against Co-debtor:
Its aimed at protecting individuals, eg; family members acting as guarantors. The auto
stay would apply to them. Eg Mother guarantees a loan. Not protected if the loans are
made in the ordinary course of business. In other words, this can’t be a business loan,
only applies to consumer loans.

Looking at protecting consumer loans guaranteed by family members.
So in Ch 12 and 13 the guarantor is protected by the stay for guaranteeing a consumer

362 (a) (3): forbids collecting property of the estate
362 (a) (4): any attempt to enforce a lien is foreclosed
362(a)(6):prevents collecting from D’s property not property of the estate. Applies to
pre-petition claims only.

   What’s property of D? D has all the exempt property (Property that exempt from Br)
541 (a) (6) Wages of D is property of D, not property of the estate.

So with Post petition claims you can’t collect from property of the estate, but you can
collect from D’s property (the exempt property). Pest petition C’s can collect from D’s
exempt property.

Exempt property can be got at by the IRS, for pre-petition claims.
Property excepted from the estate can also be reached (eg: nondischargeable domestic
claims 523 (a)(5).)
C’s with voluntary liens can also get at exempt property.

In Re Olson:

D in Br and tried to receive medical care. The care provider would not offer assistance
until outstanding debts on past services were paid. The debts were pre-petition debts.

Ct held that refusal to offer services violated the stay of 362. They did not demand
payment, however the purpose of refusing current services was to receive past due. Ct
also held that the care provider did not have to provide services, it just could not decline
services because of past debt. So you can decline services you just can say it’s because of
past debt.

1) Generally acts taken in violation of the stay are void. But for deliberate violation of
   the stay- damages are assessed under 362 (h), which allows for recovery of actual
   damages, , costs, attorneys fees, and punitive damages if applicable.
2) the stay does not mean you have to continue to do business with someone. You just
   can’t refuse to do business with someone on the basis of uncollected past debt.
   Should advise clients to merely say NO, and not mention anything about past debts.


D sought to enjoin Bank from foreclosing on the personal residence of guarantor
(Guarantor was the owner of FTL car wash and guaranteed a loan to FTL)

Guarantors promise to pay starts out unsecured and is contingent on FTL defaulting.
When FTL defaults you sue and get judgment lien , which give you lien on all real estate.
You are now secured and go to foreclose on the property. Owner of FTL wants to
prevent foreclosure of his home and wants the auto stay of FTL to apply to him a 3rd party
The court gave an exception to the general rule that the stay does not reach 3rd parties.
Their basis is that Br court is a court of equity and that the owner is one in the same as
FTL. FTL can not survivor w/o the owner (Identity of interest exception). Here there is
a close identity of interest. We want FTL to survive in BR and to allow for
reorganization. The basis for doing this is 105. 105 is a necessary and proper clause for
Br. It allows for equitable orders.
In order for FTL to survive the owner will need his home to secure loans to pump back
into FTL. W/o the home FTL will not survive.

There is a four prong test to determine if the stay applies to a 3rd party (borrowed from
test for allowing for injunctive relief)

1) Plaintiff is likely to succeed on the merits- Here ch 11 plan is likely to be successful.
   It is a viable plan with the equity in owners home preserved. Also, D has good cash
   flow- currently operating at a profit. So D looks fixable
2) There will be irreparable injury if injunction not allowed- if not able to use equity in
   home to secure additional loans, FTL will seize to exist. This is irreparable harm.
3) Issuing the injunction will not harm other interested parties-Bank is a secured creditor
   under the plan so no injury will occur

4) Public interest best served by the injunction- other C’s will be best served because the
    plan will provide money to other C’s if equity of residence allowed into plan. If not,
    other C’s will be hurt if D can’t reorganize.
This is an exception to the general rule-“Identity of interests Exception”. Party closely
aligned with D that to refuse to extend the stay would hurt reorganization of D.

problems p.776
 1) Could the Plaintiffs in the FTL case stay foreclosure by filing personal Br? Yes.
    362(a) (4).
 2) Are the other creditors of D barred from action to collect from the Plaintiff owner?
    The other creditors are not barred from actions and acts to collect. The court can’t
    modify the br code to provide that the stay would protect anyone. 105 does not
    allow this. 105 allowed an injunction to a specific creditor.

problems p. 777 Exceptions to Stay
1) Can wife bring action to collect child support? She can proceed with the action to
   establish what here rights are but can’t collect from property of the estate.
362 (b)(2)(B) – Can’t stay action to collect on property that is not property of the estate.
So can collect from D personally which in Ch 7 is any postpetition property and earnings,
exempt property etc. Only prepetition property is property of the estate.

2) Criminal litigation by U.S. against D. Does the stay affect the pending litigation? No
   362 (b)(1) commencement of criminal action is not stayed.
   a. What if seeking restitution?
   362 (b) (5): government can enforce judgment but not a money judgment. So
   restitution will be stayed. But could call it penalty-punishment for crime. But if
   amount of restitution matches the amount of the penalty, courts may consider this
   collection of pre-petition debt.
3. EPA action to collect recovery / clean up costs. D the filed for Br. Does the stay
   affect the action? They want $. This is an attempt to realize a money judgment. just a
   preliminary step of trying to get paid
4. EPA wants to get injunction directing D to clean up waste. Stayed?
   a. Minority –Kovacs dicta said forcing D to clean up is same thing as getting money
       The clean up would cost money
   b. Majority-Penn Terra Clean up is Not Stayed. Everything costs money The
       injunction for cleanup does not necessarily act as a collection of $. Adopted a test
       of intent to see if the judgment is really a money judgment. Need to consider the
       nature of the injuries which the remedy is intended to redress. Are you trying to
       prevent future harm or really trying to collect damages for past harm. Here they
       are trying to prevent future harm and couldn’t give certain value to clean up
       Also need to ask if you can establish a sum certain . If not, then it’s probably
       something other than a $ judgment.

2. Termination of the Stay

When does the stay end?
362 (c) Stay terminates if:
   (1) property no longer property of the estate
   (2) (A)case is closed, (B) dismissed, (C) or discharged

524 Discharge creates a permanent stay from collection. It’s the permanent injunction.

554 Allows trustee to abandon property which is of no value to the estate. Eg is the
Chicago Trade Case where D’s board seat was worth $1,000 subject to a $30,000 claim.

Problems p. 780
1)What doe the automatic stay mean to those creditors where the mean time from filing to
confirmation of a plan is a long time? Means C’s hands are tied until the plan is

 2) Under 362 (c)(2), does the automatic stay end when a ch 11 plan is confirmed? Yes
1141 (d) upon confirmation of a plan in CH 11 you have a discharge
362 (c) Stay terminates upon discharge in ch 7, 11, 12, or 13.
So when a ch11 plan in confirmed, the auto stay under 362 (c) (2) terminates.

3) Under 362 (c) (2), will the automatic stay end when a chapter 13 plan is confirmed?
   1328 (a) You are granted a discharge after all payments under the plan are completed.

4) Trustee abandons building to D under 544 in a ch 7 br. Does auto stay terminate?
   Does M have to obtain relief from stay to foreclose on building?
   Stay terminates when the property is no longer property of the estate. But here we are
   dealing with property of D and the stay protects D’s property under 362 (a)(5). So
   since it’s D’s property the stay prevents M from foreclosing on the building.
   (remember it protects against collection of D’s property for pre-petition claims)

   If T abandons the property to C then the stay ends. It’s not property of the estate or of

3. Relief from the Stay

C can seek relief from the stay
362 (d) grounds for relief from the stay :
           (1) For Cause; includes lack of adequate protection of C’s interest in property;
           (2) If      (A) D has no Equity in the property
                               Equity = Value of Property - Liens; and
                       (B) The property is not needed for reorganization; or
           (3) Stay is against a single asset of real estate and C has secured claim in RE.

Problems p. 780
1) D files Br- C’s are A, B and C. If ct grant’s C’s motion for relief, will A and B be
   free to proceed against D and D’s property? NO
   362 (e) relief from stay only applies to the party making the request
2) does the word shall in 362 (d) require a ct to grant relief if one of the grounds for
   relief is met? NO.
   Ct must do something but under (d) it has the option of:
            a) terminating the stay
            b) annulling
            c) modifying
            d) conditioning
3) Difference between terminating the auto stay and annulling the auto stay:

Annulling Auto Stay- you treat the stay as if it were never in place so there wouldn’t be
any violations of the stay. So past judgments and attempts at collection were not void as
a violation of the stay

Terminating the Stay- You terminate the stay, however it is still recognized as existing in
the past, so past violations of the stay are void, and continue to be void. So if you
received a judgment to collect, you would have to re-institute your action.

4) 362(e) The Br court is required to rule on a motion requesting relief from the stay
within 30 days from the date of the motion. If no hearing is held, the stay is automatically
terminated as to the party requesting the stay.

5. Consequences of Violating the Stay
362 (h) for willful violation of a stay , the injured party shall recover actual damages,
including costs and attorneys’ fees, and , in appropriate circumstances, may recover
punitive damages.


A. Which D’s receive a discharge?

1. Chapter 7
727 objections to discharge. Not self executing. They must be raise. They are
objections on the grounds of bad faith
Problems p. 789

1) Policy of granting the discharge is providing D with a fresh start.

2) *D corp files for ch 7. Can D corp receive a discharge? NO
   727 Objections to discharge(a)(1): The debtor must be an individual to receive a
   727 objections must be raised. If not raised then they will not apply.
   A corporation is a person not an individual for Br law, so they can’t get a discharge in
   Corporation would seize to exist after selling of it’s assets(corp won’t survive Br
   anyway), so there is no need for ch 7 for corps. You don’t need the protections in 7
   such as the stay, because you can’t go after shareholders because of their limited
   liability. It’s limited to what they invest. Purpose of 7 is to give up what you have
   today to free up future property. If corps free up what they have today, they would
   seize to exist.
   After a ch 7 C’s could go after the corp, but all the corp is now is a piece of paper.
   All of their assets were liquidated. No reason for a discharge
3) The court shall grant a discharge unless
   727(a)(5): D fails to explain satisfactorily his loss of assets and failure to pay debts.
   Were D explains that he spent all of his $ on 900 calls, this is an explanation. It may
   not be a good reason for loss of assets, but the court will grant the discharge because
   the code does not require it to be a good reason why D can’t meet debt.
   Policy- concerned with D hiding assets.
4) RICO charges brought against D. D files Ch7. At 341 creditor’s meeting, D refuses to
   answer any questions or to prepare a list of assets claiming protection against self
   incrimination. Can D still receive a discharge? Yes D can claim protection against
   self incrimination. However, {727(a)(6)(B)}: if D was granted immunity with respect
   to the matter for which the privilege against self incrimination was invoked, then D
   can’t get a discharge.
5) 727(a)(8) Can’t get a discharge in 7 if D was granted a discharge in a case
   commenced within 6 years of filing the current case.
6) The Br trustee or a C must file a 727 objection to discharge. Why would C file a 727
   objection to discharge? Without the discharge you wouldn’t have the permanent stay.
   C would be free to go after the property of D and may get more $ outside of BR.
7) Can the court withhold discharge if D converts nonexempt property to exempt
   property on the eve of BR? YES
727 (a)(2) – This is an attempt to delay, hinder or defraud creditors. So no discharge.
   Some courts hold that the conversion to exempt property is OK. Cts are split. Others
   merely disregard the transfer and consider the property non-exempt and include it as
   property of the estate and then grants the discharge.

   548 Fraudulent Transfers and obligations: Some courts, very few, have treated
   conveyance of assets as a fraudulent transfer.

2. Chapters 12 and 13

In Re Ciotta

D had a discharge in ch7. D is now filing for ch 13. An objection was entered on the
grounds of 727(a)(8) ( Can’t have a discharge when D was granted a discharge in a
chapter 7 case commenced within 6 years of current petition.)
727 objections only apply to ch 7 cases not to ch13 cases. There aren’t any objections to
a discharge under ch13. As long as all of the payments of the plan are paid then D will
get a discharge.
There isn’t a bar to multiple 13 filings. Same is true with Ch 11. Why? Congress likes
ch13 more. Feel that C’s may get more $. You have a plan where you pay a certain $
amount per month. C’s may get all of their money back. C’s can’t get less then they
would if they were in 7. Congress probably intended for C’s to get more under 13, but the
problem is that most cases are no asset cases and C’s may not get more in 13 and usually
Congress could have limited the number of discharges in ch13 and chose not to.

Problems p.791

1) did the court grant D a discharge? NO. The ct just confirmed the plan. But in ch13
   there is no discharge until the plan is complete-1328(a)
2) If D received a Ch. 13 discharge on 12/82, when are the next eligible for ch7
   discharge? Ch 13 discharge?
   With Ch 7, have to wait 6 years. 727(a) (8) (9) You can’t get a chapter 7 discharge if
   you’ve had a discharge in ch7, 11, or13, commenced within 6 years of current
   D would be eligible for another ch13 case anytime after completion of last 13 case.
3) What if D can’t complete plan payments under ch 13?
   1328(b) Hardship discharge: Ct may grant a discharge to a debtor who filed to
   complete payments under the plan only if
               (1)failure to complete due to circumstances for which D should not be held
                  accountable for;
               (2)met best interest of creditor test; and
               (3)modification of the plan under 1329 is not practicable
   With a regular 1328(a) discharge only 3 of the 523 exceptions to discharge apply.
   (523 (5),(8), &(9). So 1328(a) discharge is more comprehensive.
   When using the hardship discharge, all of the exceptions to discharge in 523 apply.
   So the hardship discharge is less comprehensive since all of the 523 exceptions apply.
4) Can D use1329 to modify a plan, thus reducing the payment obligations to C’s,
   complete payments under the modified plan, and receive the more comprehensive
   1328(a) discharge. YES
   1329 Modification of plan after confirmation
       (a) (1) Ct can increase or reduce payments;
           (2) tend or reduce the time for such payments; or
           (4) Alter the amount of the distribution to a creditor
       (b) The modification becomes plan

In chapter 13 no objections to discharge exist
3. Chapter 11

problems p. 792

1. D corp files ch 11. The plan provides for sale of all assets in order to fund the plan.
   Will D corp receive a chapter 11 discharge?
   Under plan, as opposed to Ch 7, the debtor sales the assets. Also, in 11, you ;have
   more time to sell. It’s not a fireside sale as in ch7. Because you have more time to
   sell the assets, you will get more $.
   1141 Effect of confirmation
   1141(d) (3) Confirmation of a plan does not discharge D if
                (A) The plan calls for liquidation of most or all assets;
                (B) Completion of the plan would cause D to go out of business; AND
                (C) D would be denied a discharge under 727(a) if the case was brought
                     under ch7.
   All three elements must be present to deny the discharge.
            In this problem all three are met so D would not be granted a discharge: 1)
            they are liquidating most to all of the assets 2) The business will not continue
            upon completion of the plan. 3) A corporation is not an individual as required
            under 727 (a).
2) D Inc. plan provides for sale of 6 of 11 stores. Will they get a ch11 discharge? YES
   1141 (d) (3) Objections not all met:
                (A) Sell all assets- NO
                (B) Corp will go out of business- NO
                (C) D would be denied discharge in 727(a)- YES
   Not all met so D will get a discharge.

3) D an individual, operates several sole proprietorships and has a prior ch 7 discharge.
   D files for ch 11 and the plan calls for continued operation of the businesses. Under
   ch 7 , D would be denied a discharged under 727 (a) (8). Will D get a discharge in
   the current ch 11 case?
   Yes because not all of the elements of 1141 (d) (3) are present. Only 1141 (d) (3) (C)
   is met, that D would not receive a discharge under 727(8)if the case were brought in

B. Which Obligations are affected by Discharge?

1. Is the Obligation A Debt?

Exceptions: Debts not discharged for various reasons.

Kovacs Case:

State brought an action to enforce an injunction ordered against D. The injunction
required D to clean up and to prevent more toxic waste. D did not comply. Before state
receiver could began process of collecting on the assets of D & use them to finance the
clean up, D filed for Br.
State claimed that the $ owed for the clean up is not a debt and thus is not dischargeable.
So the state is not arguing that a debt should be excepted from discharge, arguing that
there is no valid debt to discharge.
101 (12) Debt is a liability on claim.
101 (5) A claim is any right to payment

Ct held that the state was merely seeking a monetary payment and that such a required
payment was liability on a claim (a debt per 101[12]) that was dischargeable in Br.
Failure to clean up (Breach of the injunction) created a right to payment for the cleanup,
and the right to payment was a liability on a claim
523 (a) (7) does not allow for a discharge from any debt; to the extent that such debt is a
fine or penalty owed to a governmental unit, and such debt is not mere compensation for
actual losses, other than a tax penalty.

This case is not dealing with a fine or penalty. It’s compensation for actual losses
(damage/cleanup costs caused by the toxic waste). The state wants to be reimbursed for
the clean up. They aren’t imposing a fine or penalty. Thus ct concluded that the state was
seeking a monetary payment on a claim against D, and that such is dischargeable under Br

If you have a breach to an equitable remedy and that breach gives rise to a right to
payment, then it will be a claim

Problems p. 798

1) The definition of claim requires a right to payment. In Kovac’s the court was asking
   Kovac’s to pay up not clean up.
2) EPA has an injunction against D requiring D to clean up gasoline tanks stored in the
   ground. D files for Ch 11. Is the injunction against D a claim which can be
   discharged in Br? NO
   Under 101 (5)(B) a claim must give rise to a right of payment. Here there is no right
   of payment. EPA is merely requiring D to clean up. If EPA cleaned up the mess and
   then sought payment for clean up fees, this would constitute a claim dischargeable in
3) This case is Different than the Penn Terra Case. Kovac’s says that the auto stay
   applies to the states equitable powers. Penn Terra said that equitable powers of the
   state were not stayed.

2. When did the obligation become a debt?

problems p. 799

1) D has post petition debt entered into after filing ch 7 and before discharge. Will the
   discharge effect the debt? no
   727 (b)-only pre-order for relief claims get discharged in 7. Use the term pre-order
   for relief because of involuntary filings. With involuntary filings, the order for relief
   occurs later, as opposed to at the time of filing as in a voluntary case. This was post-
   order for relief, so no discharge.
2) What if D has a debt entered into after filing ch 11, and before confirmation of a plan.
   Will the debt be affected by the discharge? Yes
   In ch 11 cases all pre-confirmation debts are discharged. Here the debt was entered
   into before confirmation of a plans, thus the debt will be discharged.
3) C files malpractice action against Dr. D on 3/3 seeking $300K. D files for ch 7 on 4/5
   and gets a discharge. The malpractice action is still pending. Does C have a claim?
   Will the discharge affect Dr. D’s liability to C? The claim gets discharged in Br. This
   is a claim, any right to payment, disputed or undisputed is discharged in Br. this is a
   pre-order for relief debt so it’s discharged.
4) Same facts as 3, but action filed after petition. Discharged? This is a pre-petition
   claim. You look at when the injury occurred. The claim arises when the injury
   causing conduct occurred.
   The Br court will treat C as a creditor. If waiting on trial to determine liability would
   stall the Br process, then under 502 (c) the Br court estimates of the claim. The ct
   holds a summary proceeding to determine liability and then treats C as a creditor.
   The ct can estimate the claim to be 0 if the ct feels that C does not have a claim
   It would be a due process violation to ignore claimants claim and not allow for
   compensation under claim merely because D files for Br.
5) Assume C is not aware of Dr. D’s malpractice until after Dr. D’s ch 7 filing.
   Doesn’t matter because the right to payment arose when the injury causing conduct
   occurred, therefore the case is pre-petition and should be discharged under Br.

problems p. 800

1) Income taxes of ’91 & ’92 owed. D files for ch 7 in ’94. Will the discharge affect tax
   debts? No

523(a) (1) Certain taxes are Excepted from discharge. Sends to 507 to determine which
tax claims have priority and will be excepted under 523- certain taxes have special
priority in distribution. Taxes listed in 507 are excepted from discharge in 523.
507 Priorities
claim for income tax for taxable year ending on or before the date of filing the petition.

                year ends prior                               petition filed

                 to petition

The return will have priority in Br as long as the tax claim was due within 3 years of

3years >          1999

So income taxes which arose 3 years back do not have priority and will be discharged. If
the tax claim is within 3 years of filing the petition, then it is a priority claim under 507
(a)(8). Must now go to 523 (a) (1) (A&B) to determine whether the tax claim will be
excepted out from the discharge. B(ii) just says for claims filed after the due date, if such
claim is filed within 2 years of petition, it will be excepted from Br.

2) D buys $1500 of suits day before petition is filed. Knew he was going to file. Advise
   523 Exceptions to Discharge
       (a)(2) no discharge for $, property, services, or an extension, renewal, or
       refinancing of credit obtained by:
              (A) false pretenses, false representation , or actual fraud. This applies to
                  statements made, other than D’s financial position. So statements not
                  regarding D’s financial position.
              (B) Statements made in writing which addresses D’s financial position-
                      (i) that are materially false
                      (ii) respecting D’s financial position
                      (iii) on which the creditor reasonably relied
                      (iv) and which D used with intent to deceive.
              (C) Raises a presumption of fraud for purposes of (A). It shifts the burden
                  of proving no fraud onto to D when D has consumer debts aggregating
                  more than $1,075, owed to one creditor, for luxury goods or services,
                  incurred on or within 60 days before the order for relief.

Under A, there is no presumption of fraud. When the debt is for less than $1,075, then
creditor has the burden of proving actual fraud. Under C you have a presumption of
actual fraud. creditor does not have to prove it.

The suits meet the $ amount of C, but the suits may be necessary for work so they may
not be luxury goods. If can’t meet the requirements of C, you may be able to prove actual
fraud under A.

3) Can D avoid parking tickets to university? NO
   523 (a)(7): fines imposed by governmental authority are excepted from discharge.
4) Education loan to student by OU. S files for ch 12, will the loan be excepted from
   discharge? YES.
   523 (a)(8) Educational loans not discharged.

   523 Exceptions all apply in ch7. In ch 13 it’s different.
   1328 (a): Only certain 523 exceptions apply in ch 13. Includes (a)(5), (a)(8), and
   (a)(9). So not discharged under ch 13.
5) D drove car into University dining hall when drunk and injured C. C sued D in state
   court. D filed for Br. Is C’s claim excepted from discharge? NO 523(a)(9)
523 (a) for transactions occurring no more than 3 years before the date of filing, will be
       excepted from discharge when they are
                       (9): claims for death or personal injury caused by D’s operation of
                       vehicle while intoxicated.
could also use 523 (a) (6): willful and malicious injury by D to another entity or to
                            property of another entity.
Harder to prove because it’s an intent crime, Willful and Malicious. So (9) applies to
DWI cases where maliciousness is hard to prove.

6) D borrowed $60k from C using false financial statements. D now filed for ch 11.
   Will C’s $60k claim be excepted for discharge? YES
   523(a)(2)(B)-applies to fraud in writing.
Requires           (i) materially false writing- to prove this you can use the schedules of
                           D. D is required to fill out all debts on a schedule in order to
                           have them discharged. Can compare the financial statement to
                           the schedule of debts. D is very likely to be honest on the
                           schedule in order to get a discharge.
                       (ii) respecting D’s financial condition
                       (iii) C reasonably relies on the writing- no clear cut rule on what
                             is reasonable. Cts are more likely to find reasonable reliance.
                       (iv) with intent to deceive C. Can prove this indirectly by what D
                       did and said.

Matter of Allison:

$100K property. Seller finances 80% for buyer and keeps a secured claim. The
agreement stipulated that the seller would finance 80% and buyer was not to borrow more
than 20% to pay for the property. Under this arrangement Bank gets the first mortgage on
the 20% which is $20k, the seller has a 2nd lien and would get $80k.
Here, however, D goes against the agreement and borrows $80k from the bank. Bank has
1st lien for $80k and is oversecured by $20k. (property worth $100k)

D files for Br and Seller claims exception to discharge under 523 (a)(2)(A) debts are not
dischargeable because of a misrepresentation or fraud that does not go to D’s financial

Ct uses 3 part test to determine if (a)(2)(A) applies:
                         1) Knowing and fraudulent falsehoods- D knew he lied

                       2) describing past or current events- Does not apply to a promise
                           to perform acts in the future. However, if D has no intention
                           of performing at the time he makes the promise, then this
                           would fall under the current events requirement even though
                           its relating to an act in the future. (So if D promises to perform
                           and intends on performing in the future, 2 would not apply)
                           Must show that D never had intent to perform. Here D had no
                           intent to comply so it’s a misrep of current fact.

                       3) that were relied upon by the other party- Does not require
                           reliance to be reasonable. Just have to rely on the fraud.
                           Under 523 (a)(2)(B), you have to have reasonable reliance. In
                           B, creditor must reasonable rely.

                           So under A, you could dumbly rely, does not have to be

                           (B) requires reasonable reliance because we don’t want
                           creditors inducing misrepresentations and then later arguing
                           that there was a misrepresentation and the debt can’t be
                           discharged and should be excepted out of Br. It prevents C
                           from allowing D to submit inaccurate writings. An eg would
                           be someone at sight and sound saying “Oh, just guess what
                           your debts are and estimate your income”

In case at bar, C actually relied on the misrepresentation and thus 523 (a)(2)(A) applies
and the debt is not dischargeable. Ct said that the concept of a fresh start should not be
considered because here we are dealing with D committing fraud. So there is not a real
interest in protecting D’s who commit fraud.

problems p.805

1) The 3 requirements in Matter of Allison were not statutory requirements, they were
   imposed by the court.
2) 523 (a)(2) (A) deals with misrepresentations other than D’s financial position, and
   requires mere reliance.
   523 (a)(2)(B) deals with misrepresentations of D’s financial position in writing, and
   requires reasonable reliance by C.

In Re Harrel

At issue is the dischargeability of past due payments required under a divorce decree.

D argues that the alimony arrearages are dischargeable because the agreement required D
to pay more than spouse needed for support and it required him to pay past the child’s age
of 18. So his argument is that the payments are not for support and are merely K
agreements dischargeable in Br. Also argued state law does not require him to pay once
child 18.


523 (a)(5) makes no mention of state law. The only test is, are the payments in the nature
of support/alimony. In determining that alimony is not dischargeable, the spouse does
not have to prove a current need for the money. Just need to find if it’s in the nature of
support, which these payments are, thus they are not dischargeable.

523 (a) (5), if the spouse assigns away the claim then the assignee is not the spouse, and
the exception to discharge would not apply.

Problems p. 809

2) D and X are divorced. The divorce decree requires D to pay X alimony. D later files a
ch 7 petition and obtains a discharge. Neither D nor X file a complaint in bankruptcy
court to determine dischargeability. After receiving his Br discharge, D stops paying
alimony. If X brings state action against D to enforce the divorce decree, does D have a
bankruptcy discharge defense?
523 (c) (1): If C does not raise 523 (a) (2), (4), (6), & (15) then C loses the exception to
discharge. So they are not self executing, to prevent a discharge must raise. If you don’t
raise in the Br court you will lose the exception to discharge and cannot raise the
exception in a later state court proceeding.

However, for the other exceptions you can raise them later in state court, they are not lost
if you don’t raise in Br court. So if D, in state ct, defends action for claim other than 523
(a) (2), (4), (6) or (15), by claiming that the debt was discharged in Br, C can raise the
exceptions to discharge found in 523.

3) Could the D in Harrel receive a discharge if it was a ch 11 case? Ch 13? NO
   1141 (2): For individuals, all of the 523 exceptions apply in a ch 11 case
   1328 (a) (2): Only certain 523 exceptions apply 523 (a) (5),(8),& (9). Since a (5)is
   included, there would be no discharge.

   In re Hudson:


   D was overpaid through public assistance because of failure to report income. D filed
   Ch13 and plan was confirmed. Plan provided for 20% repayment to unsecured
   payments including the public assistance.
   State argues that there claim should not be discharged because 523 (a) (2):
   However under 1328 (a)(2): only 523 (a) (5),(8),& (9) apply in Ch13.

    523 (a)(2) does not apply in a ch 13 case.
   Upon completion of the Ch 13 plan D is granted a discharge. Only 3 of the 523
   exceptions will apply in ch 13:
                       (a) (5): Alimony and support debts
                           (8) Educational loans
                           (9)Death or injury claim caused by drunk driver

In the above case C argued that they were not treated fairly under 13 because if the case
was brought under 7, the 523 exception would apply and c would get more $. 1307 was
not in place at the time of this case.
Today under 1307 the best interest of creditors test applies and you could force D into
Ch7. (C can’t get less than he would get under ch7) IN ch 7 all 523 exception to
discharge apply.

problems p. 812

2) If plan call for 20% payment, if D completes the plan will the state’s claim for
overpayment of public assistance be discharged? YES 1328 (a)

However, with a hardship discharge 1328 (b), under 1328 (c) all of the 523 exceptions

3) If D loses job so he pays 55% of a plan that calls for 60% repayment.
    a) Could D qualify for hardship discharge under 1328 (b)?
                         Hardship discharge requires:
                           1)failure to complete payments are beyond the control of D
                           2) Best interest of C’s test is still met; and
                           3) Modification of the plan under 1329 is not practicable.
         If D receives the hardship discharge all of the 523 exceptions will apply.

   b) if Hudson gets the hardship discharge the Gov’s claim for overpayment will not
      be discharged because all of the 523 exceptions would apply.
   c) Can Hudson qualify for a 1328 (a) regular discharge if he gets a modification
      under 1329? YES
      Can modify plan under 1329(a)(1) to reduce or increase payments. If after
      modification D completes the plan he will receive the regular discharge (so only
      certain 523 exceptions would apply)

4) Could D discharge a tax debt under a chapter 13 plan? 523 (a) (1) says tax debts are
   non dischargeable, however 1328 (a) says only (5)(8)&(9) exceptions of 523 apply to
   ch 13.

   Under 1322 (a)(2) in order to get plan confirmed it requires full payment of all 507
   priority claims.

   507(a)(8) gives recent tax claims priority. So even though they are not excepted
   through 523, D won’t get the plan confirmed unless he pays 100% of 507 taxes.

5) What about the dischargeability of post petition claims in ch 13. Assume, for eg, that
    C installed a rebuilt engine in Hudsons car after she filed for ch 13.
                         a) can Hudson add C to the list of unsecured creditors receiving
                             20% under her ch 13 plan? YES
1305 (a) (2): post petition proof of claim may be filed by any entity that holds a claim
against D for consumer debt which is for property or services necessary for D’s
performance under the plan.

1322(b)(6): Allows you to add any claim under 1305

                       b) Is C required to obtain the permission of the Ch 13 trustee
                          before beginning work on Hudson’s car? YES

1305 (c) (knowledge element) Claims filed under 1305(a)(2) will not be allowed if C
knew or should have known that approval by trustee, prior to D incurring the debt, was
practicable yet was not obtained.

                      1) Why would C want to do this? Because outside the plan you’ll
                         get nothing, may get something in the plan.
                         Also if C did not know he should get permission and did not
                         get cash up front he would want to be included in Br.

                      2) Should Hudson get ch 13 trustees permission before incurring
                          the debt to C? YES
1328(d) : discharge granted under this § does not discharge debt based on an allowed
claim under 1305(a)(2) if prior approval by the trustee of D incurring the debt was
practicable and was not obtained.
An eg of allowed would be if D was in a remote area and repair was required (approval
would not be practicable)

If neither got permission then the mechanic (C) can not file claim in Br, and D would not
be able to get a discharge on the debt.
Remember it’s when C knew or should of known that he should get permission.


       1. On Efforts to Collect From the Debtor

524 Effect of discharge

problems p.813

1) Efforts to collect from D personally
   a) Can C bring Action after discharge, to collect discharged judgment? No.
   524(a)(2): The discharge is a permanent injunction (stay) against acts to collect D’s
   inpersonam liabilities.

2) Efforts to collect from 3rd parties
   a) Can C collect from guarantor of D’s debt? Yes 524(a)-Only D’s gets the
       discharge and the permanent Stay. 524(e) Can recover from guarantor b/c
       discharge does not get rid of debt, it only prevents collection from D.
   b) Can C sue D’s insurer for auto accident negligence claim which was discharged?
       Yes. 524(e) discharge of debt doe not affect liability of any other entity for the
3) Efforts to collect from encumbered property of the debtor.
   a) The discharge only effects inpersonam claims. You cannot affect C’s property
   rights. If C’s debt is secured by property (through a lien) this is in rem and is not

C---- $100k to D
D--- mortgage in BA to C

Say property decreases to $25K
C either now has a secured claim of $25k and unsecured of $75K.

So if D wants to keep the property he would have to borrow the $ to pay the loan. This
would be a safe loan in ch7 because it’s post petition and your debt can’t be discharged.

C could take the mortgage on the property , you know that the value of the property can
only increase since the value has bottomed out.

Johnson v. State Bank

C--$470K to D
D- mortgage on farm to C

Farm has decreased in value and is now only worth $200K. D files for Br ch 7. Under

506 (a) secured claim is defined as the value of the property interest. So under 506 the
claims are bifurcated between secured and unsecured.
So C has a $200k secured claim and a $270K unsecured claim.

D receives a discharge of her inpersonam debt, so $270K was discharged in Ch7. The
Lien (mortgage) survives Br and C implements forclosure proceedings.

D then files ch 13 to stop the forclosure proceeding. Under the Ch 13 plan D sets up a
plan that would pay $200k to C in four installments. D wants to keep the farm because it
has botomed out in value and can only appreciate in value.

C argues that D can’t do this because the mortgage is a mortgage which is not a claim in
Ch 13. The claim was the unsecured portion discharged in Br.

Ct held that the claim is for $470K. C has two ways to collect.
    1)Sue and get a judgment (in personam liability, this was discharged in the ch 7)
    2) Pursue claim in rem, create lien/mortgage (C here has mortgage)
So the whole amount is a claim. There are just two methods of collection.

A) the banks right to foreclose on property survives ch 7 even though personal liability
B) D can include the mortgage lien in ch 13 plan even though obligation is a secured
   claim, plan just has to pay 100% to C. Must pay present value of the property. So
   court allows Ch “20”.

So now under 13, the $200K is paid in full through the plan. If the property later
increases in value to $520K, the bank can’t say the lien survived because it was satisfied
through the ch 13 payments. So all the appreciation belongs to D.

This is Lien Stripping It’s a ch 20 plan.

You’re stripping down the value of the lien to the value of the collateral.

Dewsnup case said you can’t lien strip in ch7.

 Here D was able to lien strip using ch7 and then filing ch13. But you can’t lien strip in
ch7 alone.

Problems p 817

2) 109 (e) Only individuals with unsecured debts of less than $269,250 and secured debts
of $807,750 may be a debtor under Ch 13.
Johnson met the secured debt limit of 109(e). Johnson owed $200k secured and all of his
unsecured was discharged in ch 7.

3) The state court entered an in rem judgment of $200k for the bank. What was the
amount of the banks Lien?

Prior to Dewsnup v. Timm 112 S.Ct 773, some Br courts would have stripped the banks
lien to $200K, the current value of the property. Such lien stripping was based on the
language of 506(d) and 506(a).

506 states
(a)You have an allowed secured claim up to the value of the propety & (d) states, where
the lien secures a claim against the debtor that is not an allowed secured claim, such lien
is void. (In otherwords cts interpreted (d) to say that where the amount debt exceeds the
value of the lien, the lien is void as to that extra amount) This is how courts interpreted
506(d) prior to the Dewsnup case.

Assume loan for $100k secured by property worth $40K. So C has a secured claim for
$40K and unsecured for $60K.

In Dewsnup, the Supreme cout held that a chapter 7 debtor may not inoke 506(d) to strip
down an undersecured lien to the value of the collateral. In Ch 7 D may not dicharge
unsecured portion ($60K), pay secured portion($40K) and keep the property. (So in ch 7
would you have to 1. give up the property, or 2. Pay the full amount owed to keep the

Or you could merely file a chapter 13 petition which allows you to adjust the rights of
secured creditors. Thus, under a chapter 13 case D can discharge the unsecured porition
of the loan, pay 100% of the secured portion and keep the property. This is lien stripping.

Why not just file a ch 13 and lien strip instead of going through the trouble of filing a ch
20 to lien strip?

Some creditors don’t meet the unsecured debt ceiling requirement for ch 13. (for ch 13
you can only have a $269,250 of unsecured debt. The limit is found in 109 (e)). What
the D can do is first file a chapter 7, discharge all of the unsecured debt. Then D will
meet the ceiling requirement of 109(e) for ch 13 case, and he can file a ch 13, pay off the
secured debt and keep the property. It allows D to lien strip. This is a chapter 20.

Assume D does meet the Ceiling requirements of 109(e) for Ch 13 and wants to lien strip.
Why would he want to file a Ch 20 as opposed to only filing a ch 13?

D would want to file a chapter 20, first file a ch7to discharge unsecured debt and then file
a ch 13, this way there would be no unsecured C’s to object to the ch 13 plan. D would
want to do this if he did not have any non exempt assets to be liquidated under ch 7. He
could discharge all of the unsecured claims in ch 7, w/o paying the C’s anything because
he has no assets, then he could file a ch 13 and not have to worry about an unsecured C
objecting to the ch 13 plan. Because remember if any C objects to the plan then D will
have to provide all of his disposible income to the plan and the plan must last 3 years. If
he discharges the unsecured C’s and does not have to pay them anything in ch7, then he
doesn’t have to worry about an objection in 13, and thus he could avoid having to
contribute disposible income to the plan. (If he already isn’t).

Up until sale, D can redeem the property by paying the full amount. Redemption under
Article 9.

Under 722: redemption requires you to pay the lesser of the debt owed or the value of the

Eg C--- $4000 to buy Couch to D
   D- Security interest in couch to C

Say in a year D owes $3000 and defaults. The couch is now only worth $600. Under
722, for D to redeem the couch he would only have to pay $600. This is lien stripping
which is allowed under 722. Only for individual debtors. 722 allows lien stripping for
tangible personal property which is intend for personal, family, or householod use, from a
lien securing a dischargeable debt, as long as the property is exempted under 522.

So to lien strip under 722: Must be 1) Consumer debt (for individuals only) for tangible
                                      personal property
                                      2) intended primarily for personal, family or
                                      household use; and
                                      3) the property must be exempt under 522.
(this is the only area where D may lien strip in ch 7)

Under Art 9, D would have to pay the amount of the debt owed, $3,000, to redeem the

So the court in the Dewsnup v. Timm 112 S.Ct 773 said you can’t lien strip the mortgage
of the farm because it’s realestate and not personal property. 722 lists the only things for
which you can lien strip in ch 7. Dewsnup also said that you may no longer use 506 (d) to
void the unsecured portion of a loan irregardless of what chapter you’re in (treat the
unsecured portion as $0, or void).

506 (a) the lien is equal to the value of the property

506(d) You have an allowed secured claim up to the value of the propety and where the
lien exceeds the value of the property, you don’t have a secured claim, the lien is void as
to the extra amount. This was the courts interepretation prior to Dewsnup.

This would mean that any later appreciation in the property would go to the debtor.

Dewsnup held that no the lien is not void. Must analyze the term allowed in 506 (d).

506(d) applies to disallowed claims under 502. If disallowed under 502, then 506(d)
ensures that the lien on this disallowed claim is also disallowed. That is what is meant by
“allowed”. So you can’t lien strip by using 506 (d) after the Dewsnup decision. After
Dewsnup, no lien stripping allowed in ch 7 unless you use a Ch 20 cases(ch 7+ch 13) Or
a chapter 13 by itself. (Because 13 allows lien stripping)

1325 confirmation
       (a)(5)(B)       (i): Holder of secured claim retains the lien securing the claim;
                            (this insures that D pays the claim)
                      (ii): where a secured claim is included in the plan, D must pay the
                      full amount of the secured claim; or
             (C): D must surrender the property securing the claim to the holder of such
                 claim (C).

Can accomplish lien stripping through ch 20 with 1 exception: 1322 (b)(2)

1322 (b)(2): Plan can modify rights of holders of secured claims unless the claim is
secured by the Debtor’s principle residence.
So under principle residence you can’t lien strip. C can have in addition to a lien on the
principle residence, liens on other property which D is allowed to lien strip on. Just can’t
lien strip on the lien for the principle residence.

Notes on Contracts:

A new promise to pay debt after Br (re-affirmation) does not require consideration. If you
re-affirm after Br this is binding even without consideration. Covered in 524 (c).
524(f): Nothing prevents D from paying discharged debt w/o re-affirming the debt. this
would not bind D and D could quit paying at anytime.

Acceleration Clause for loans – When you miss a payment the full debt is due

4) Criminal prosecution on bad check allowed after discharge of bad check debt? YES

   a) 362 –excepts criminal prosecution from stay. 523(a)(7): discharge does not effect
      fine, penalty, based on prosecution. They are excepted out of permanent
      injunction. So you can prosecute
   b) But if you are seeking restitution, (repayment of debt) if it looks like you are
      trying to collect debt you will not be allowed because permanent injunction is in

problems p 818

1) Reasons for Reaffirmation
   a) why would D agree to reaffirm the following debts before a Ch 7 discharge?
      (1) Debt to Dr.? Yes. Because will need services
      (2) Debt co-signed by sister? Yes if you want to keep family relations & keep C’s
          off of sister.
      (3) Debt excepted from discharge? No. Don’t need to re-affirm because you have
          to pay it anyway.
      (4) Debt secured by security interest in car? Yes to keep your car. § 722
          Redemption, allows D to redeem personal property (see requirements of
          section 722) by paying claim or value of collateral (whichever is less). This is
          an alternative to re-affirmation.

   b) Should a d who files for one of the planned chapters ever reaffirm a debt? In
      planned chapters you are paying in installments 100% of secured claims. So if
      you can’t pay the secured debt off in 3 years (in ch13), then to prevent your
      collateral which is securing the debt from being collected you would want to
      reaffirm the debt.
      Otherwise there would be no reason to reaffirm.

Discriminatory treatment by D’s Employer

525(a)&(b) Employers can’t discriminate against D because he filed for Br.
Eg: D works for a bank and the bank puts him at a desk job instead of a teller job because
they feel he does not handle $ well based on the fact that he filed for Br.

Must show the sole reason for the discrimination was Br. Hard to prove and you don’t
see it very often.

(a) deals with governmental units. Can’t discriminate and not give license or similar
    item based on br filing.

                UNIT 10


Order of payment/ How unsecured C’s get paid:

Ch 7

726 tells you the order of distribution of property of the estate

In the planned chapters the plan tells you who gets how much and what. No list like in

726 (a)(1): Must pay off C’s in the order listed in 507(Priority claims)
       (2): Once C’s in 507 are paid you now go to 726 (2)

507 (1): 503(b), administrative expenses are paid first. There is a list in 503 but it is not
a priority list, they are paid pro-rata)

Must pay all 503 expenses before moving down the priority list of 507 and going to
507(2). These C’s must be paid in full before paying other unsecured C’s. If there is not
enough to pay in full the $ is divided pro rata. If there is enough to satisfy the claims you
then proceed to 507(2).

ch 12 &13:

In 12 & 13 the plan tells you who to pay.
1222 & 1322 Contents of a plan:
              (a)Tells you what a plan MUST provide
              (b) Tells you what a plan MAY provide
Under (a)(2) of both chapters, D must pay 100% of 507 priority claims. Apart from this
the plan controls.

In Re Greer


Under D’s Ch 13 plan he only proposes to pay unsecured C’s 1% which left a $75
cushion after payments under plan and budget. T sought to extend plan beyond 3 years
to increase payments to unsecured C’s.
ct held that where a ch 13 plan provides for $0 to unsecured creditors, this is ok. If
congress required unsecured creditors to get a certain amount they would have included
this in the code as they did for secured claims.

A holder of an unsecured claim may object to the plan under 1325b(1): and upon
objection under (b)(1)(B): the plan must provide for all of D’s disposable income for the
next three years in order to be approved by Br court.(If plan didn’t already)

So C can object to the plan and D would have to show that he is providing all of his
disposable income to fund the plan.

1325 (b)(1)(B)(2) defines disposable income as income not needed by D for support of D
or a dependent of D, including charitable contributions.

Must look at D’s budget to determine if all disposable income is going to fund the plan.
In Greer there was a surplus in the budget of $75. Ct held that this $ should be used as a
contingency reserve and should not go into plan to pay unsecured C’s.

So the ct determined that a contingency reserve is necessary for support and is not part of
disposable income which should go into funding the plan.

1322 (d): (1222 (c) in ch12)
Plan can’t be longer than 3 years unless it is approved, only for cause, by the cts for up to
5 years.

The ct has discretion in determining what a reasonable amount for a contingency fund is.

Problems p. 830

1) 1225 and 1325 require all disposable income be used to make payments under the
   plan. 1225(b)(2) 1325(b)(2);Disposable income is income which is not reasonably
   required for support of D. In determining what expenses are reasonably necessary,
   this is left up to the judge and is determined on a case by case basis.

2) If most of the debts would be Excepted in ch 7 would the judge in the previous case
   have confirmed the plan?
   Only a few of the 523 exceptions to discharge apply in ch 13. In ch 13 you must
   propose the plan in good faith. Thus if most of the debts would have been excepted
   from discharge if the case was brought in ch7, but would not in 13, this implies bad
   faith proposal.
   for eg 523 (a)(2) debts acquired by fraud, they would be excepted from discharge in
   ch 7, but not in ch 13.

   What property is Distributed to Holders of Unsecured Claims in chapter 11

1) In ch 11, the plan does not require that all of D’s disposable income go towards
   funding the plan. In Ch 11 C’s vote on the plan.
2) D classifies the claims and each class votes on the plan. D must disclose his
   intentions of the plan in a disclosure statement.
3) Within each class you must have a majority of each class vote yes for the plan and
   each majority must hold 2/3 of the claims owed within that class.
4) If all of the classes do not agree then the plan will not be confirmed unless you do a
   cram down.
So ch 13 does not need the 132;5 requirement requiring all disposable income to be
provided toward the plan.

D has the exclusive right to file a plan within the first 180 days. After this time anyone
may submit a plan. So fact that C’s vote on the plan and can approve or disapprove, and
the fact that after 180 days any C can submit a plan is the reason that ch 11 does not
require all disposable income to go towards a plan.


726(A)(2)A,B,C: Holders of allowed unsecured claims share in the distribution of the

Problems p. 832

1) Filing Proof Of Claim:
a)      Any reason to forego filing proof of claim? There is no reason for a C not to file a
        proof of claim because by failing to file his claim will still be discharged; however
        he want get to participate in the distribution of the plan.
        521 (1) D files a list of C’s
        342(a) Notice of order for relief is given to all C’s
        501(a) C may file a proof of claim
        502 filed claim is allowed unless objected to
        727(b) all prepet debts will be discharged whether C filed a proof of claim or not.
Filing a proof of claim and having an allowed claim means you get to share in the

b) what creditors might not file? Secured C’s, excepted debts, etc. won’t get
   c) Why would D file a proof of claim under 510 (c) if it would get discharged
       anyway? You must have file a proof of claim to have an allowed claim and get to
       share in the distribution. So D would want to file a proof of claim for a debt
       which is nondischargeable in br. This way the D will be able to pay some of the
       nondischargeable debt off by including that C in the distribution. After Br, D
       would owe the C less since C got some $ through the distribution.

   eg: C’s are A,B&E. E’s claim in non dischargeable and D owes E $2000.

   If you have $3k to distribute, then if A&B are the only ones they would each get
   D would want to include E in this distribution in order to reduce the amount owed to
   E at A&B’s expense. If you include E the they would each get $1,000. After Br, D
   would now only owe E $1K.

3) Actions against D which would be unenforceable outside of Br:

   Eg: D orally agreed to buy $700 worth of goods. SOF requires this transaction to be
   in writing, therefore it would not be enforceable outside of Br. If not enforceable
   outside of Br, it’s not enforceable in Br. 502(b)(1).

4) Unmatured interest
   a) Can C get interest for time between Br petition and Br distribution? D owes $20K
      and $250 per month in interest. NO
      502 (b)(2): This is unmatured interest and C will not have a claim. Only the
      interest earned up to filing the petition is what is a claim, not after the filing of the
      After filing it’s unmatured interest.

       506 (b): Creditors can’t collect post petition interest; however for oversecured
       creditors they can collect post petition interest which ends when the debt is
       equal to the security interest.
       |               |       Interest will continue to accrue post petition up until the C
       |               |       is no longer oversecured but becomes fully secured.
   Security          Debt      So Debt will continue to rise up to line

   In Re Baldwin

D is jointly liable for some claim against a group of brokers. The brokers brought action
to indemnify and sought contribution from D for potential liability which may be imposed
against the brokers. The suit for liability has not yet begun. The brokers filed a claim for
indemnity /contribution in case the brokers are found to be liable against whoever is suing

502 (c)(1): If a claim is disputed or if your unsure as to liability, then the Br court shall
estimate the claim and treat claimant as an unsecured C, if waiting on the suit would
delay the Br process.

This is a contingent unliquidated claim which is estimated under 502 (c).

The brokers argued that there is no fair way to estimate there claim. Brokers feel that the
Br court is incapable of fairly estimating this claim. They also argued that it was a
violation of fifth amendment, right to due process.

502 (j) Allows a Br courts estimation of a claim to be reconsidered for cause. This gives
you some recourse, so the process does not violate against due process.

Problems p.842

1) The procedures for estimation of a claim under 502(c) are not laid out in the Br code.
   Generally, there is a summary proceeding to determine liability and estimate claims.

2) What are the differences in having your claim disallowed in Br and estimating a claim
   to be $0? In the last case, if the court estimated the claim to be $0, this would be
   different from disallowing the claim under 502(b). In Ch 11 if claim is disallowed,
   you’re out and can’t vote. If you claim is $O then you are considered a creditor and
   have the ability to vote for the plan. You could vote against the plan if your claim is
   estimated to be $0.

3) Say a ct determines that claimant has a 40% chance of prevailing on $500k tort
   action. How does the court estimate the claim? There are 2 ways.
       a) Present value approach- A 40% chance of getting $500K is $200K.
       b) If over 50% probability you would win-then get 100%. If less than a 50%
           probability, you get $0. (most courts would do this)

                OF UNSECURED CLAIMS?

State law-each creditor v. the debtor. Focuses on indiv., not collective. First to sue, etc..
Fed- Basic rules-fresh start and equal treatment of creditors. Collective proceeding.
Avoids waste of multiple proceedings and ensures equal treatment of unsecured creditors.

1. Priorities

In reality some creditors are more equal than others.

1. In Ch 7 case certain allowed unsecured claims are entitled to priority in distribution.
726(a) gives the order of distribution of unsecured C’s. Order is as follows:
    (1) § 507 priority claims paid first. 507 says go to 503.
               507(a)(1): first pay administrative expenses under 503(b).
                      (2): second pay unsecured claims under 502(f)…..(9)etc..
All C’s under726(1) must be paid under before going to 726(2).

   (2) Second in priority are payments of all general unsecured claims. All treated the
       same. Get pro-rata share of distribution Must be:
       (A) timely filed under § 501(a) or
       (B) timely filed under § 501(b) or (c)or
       (C) tardy under § 501(a) where C did not have notice of Br.

   (3) 3rd in payment are late filed claims where C had no excuse, had knowledge of Br.

EG: Say D’s assets = $100K for distribution under ch 7
                                                           Pay              Balance
§ 726(a)(1)    § 507 claims- say are $55K                  $55K             $45K
§ 726(a)(2)    A has timely filed claim of $24K            $18K             $27K
               B has late claim but no notice-$36K         $27K             $0
               (pro-rata-each get 75%)
§ 726(a)(3)    C has lat claim but with notice-$15K
               (C would only get paid if claims under § 726(a)(2) are paid in full)

In Re Epstein:

Attorneys argue that their fees should not be discharged under false pretenses. Attorneys
represented D in a discharge proceeding.
Attorney then argues that fees should be given first priority under 726(a)(1) which is for
507 claims. 507(a)(1) give administrative expenses found in 503(b) first priority.
503(b) includes administrative costs to preserve the estate (330(a) is included in 503(b)
which allows for priority payment of attorneys/professional fees arising from preserving
the estate. These are generally attorneys/professionals hired by trustee).

 T argues that defending D in a dischargeablility action is not related to preserving the

Issue: whether the attorneys fees which arose from defending D in a dischargeability
action are payable from the estate?

Ct held that the estate should not bear the cost of D defending against allegation of
dishonesty/fraud. The attorneys were representing D not the estate. This is an expense

which must be paid by D. Ct held it’s a post petition debt not entitled to be paid out of
the estate. So the attorneys will have to go against D outside of Br after the stay is lifted.

Problems p.846

1) Could the attorneys for D have avoided this problem by getting a retainer before D’s
filed for Br? YES 329(a) requires the attorney to file with the court the amount agreed to
be paid or paid a year before the filing of the petition. (b) Requires that the fees be

2) In corporate Br are the following professional fees and expenses given first priority of
   administration expenses under 503?
       a) Accountant fees and expenses for D. No it’s not an administrative expense for
          D. This is however a priority administrative expense for C’s under 503(b)(3).

       b) Accountant fees and expenses employed by the various creditors committees?
          Yes 503(b)(3)(F); includes fees of C committees. Must be reasonable
          compensation under 503(b)(4).

       c) Financial adviser fees and expenses for D? NO 503(b)(3) does not allow fees
          incurred by D.

       d) Financial adviser fees and expenses for C committees. Maybe if actual and
          Necessary to perform duties-503(b)(3)

       f) Fees and expenses of attorney employed by the various creditors’
          committees? Yes 503(b)(3)(F) includes committees and (4) includes
          reasonable attorney fees.

3) Section 503’s description of administrative expenses include actual and necessary
   costs and expenses of preserving the estate. What are examples of such costs and
   expenses in a ch 7case and ch11 case? Maintenance of property before sale (ch7). In
   ch 11, upkeep of property.

Reading Co. v Brown

State receiver took over D’s only asset a building. A fire was caused by the receiver’s
negligence. The fire destroyed D’s building and Reading Co’s adjacent buildings. After
fire, D filed for ch 11 and state receiver became ch 11 trustee. Reading Co, Owner of
Adjacent building, filed a claim in Br based on the negligence of the receiver. Reading
filed the claim as an “administrative expense to be given priority payment in Br”.

Trustee moved to dismiss the claims stating that they were not priority administrative
expense claims. Trustee argues that the negligence claim was not a claim necessary to

preserve the estate. Argues only priority admin expenses are given to those claims which
were necessary to keep the business solvent/ preserve the estate. The policy behind
keeping the business going is to fund the plan.

Ct held that the negligence claim of Reading should be treated as a necessary cost and
expense of preserving the business, and thus is an administrative expense. Ct held that
trustee forgot the element of fairness and that actual and necessary costs should include
costs which are incident to operation of a business and should not be limited to those
expenses necessary to keep company solvent. The company is being kept solvent for the
benefit of the creditors. Creditors are paid through income of the business. In all
fairness, if the business is being kept solvent for benefit of C’s, then the C’s should bear
the risks associated with running the business.

Ct held that the damages caused from the negligence of the receiver in running the
business gives rise to actual and necessary costs. Equitable decision.

Problems p.851

4) B corp owns and operates a trailer park. July 1, files for ch 7. The Br court appoints
   trustee to maintain and operate the business pending the liquidation. Apply section
   507(a) and 503 to the following claims against B corp to determine whether they will
   be given priority.
               a) $2000 salary claim by W, a B corp employee who did maintenance
                  work during the month of June:

                Yes this is found under 507(a)(3)(A), third priority given to wages
               earned within 90 days before petition filed.

               b) Salary by corporation employee for maintenance performed during the
                  Months of July and August:

                   Yes this is given first priority under 507 which sends to 503. It’s a
                   post petition administrative expense. 503 (b)(1)(A) first priority for
                   actual necessary costs and expenses of preserving the estate including
                   wages rendered after the commencement of the case.

               c) claim for negligence by tenant arising in June?:

                   No. this is a pre petition claim; 726(a)(1) which refers to 507 which
                   refers to 503 for first priority administrative expenses. This is not an
                   administrative expense because it’s a pre Br claim. Administrative
                   expenses are post petition expenses which are necessary costs
                   associated with preserving the estate. This is treated as a general
                   unsecured claim under 726(a)(2).

               d) Negligence claim by tenant, arising in July:

                   Yes see Reading case. It arose post petition and is a priority claim.
                   726(a)(1) which refers to 507 which sends you to 503. Under 503
                   (b)(1)(A), this is considered an actual and necessary expense of
                   preserving the estate. It’s cost associated with preserving the
                   estate/running the business (Reading case).


-   Subordinating Claim- opposite of priority. Claim that might have had priority is
    demoted to lesser priority. Can be moved down to any level.
-   510(a) deals with contractual subordination and 510(b) deals with subordination of
    securities fraud claims, while 510(c) deals with the possibility of equitable

Problems p.852

1) There was an agreement between C’s outside of Br such that C1 agreed to subordinate
   claim to C2. D goes BR. Is the subordination agreement enforceable? Yes.
   510(a) Subordination agreement is enforceable outside of Br is enforceable inside Br.

2) C bought stock from D. C then gets judgment against D for securities fraud.
   510(b) Claim arising from securities fraud will be subordinated to all claims which
   are senior to or equal to the claim.

Matter of Clark Pipe and Supply

C and D entered into a contractual agreement which provided that D would deposit all of
its accounts receivable in C’s account and C would then provide $ to D based on a
formula such as a certain percentage of the amount in the account plus cost of inventory.
C had discretion to reduce the loan amounts at anytime. After D’s business slowed
substantially, C reduced the rates to a point where it was giving D just enough to keep its
doors open. D filed for Br.
The trustee sued to have the court equitably subordinate C’s claims based on the control
C exerted over D. Trustee was basically claiming that by lowering the % provided under
the loan agreement, C had total control over D and was using D as a mere instrumentality
to liquidate the unpaid portions of the loan because of D’s desperate financial condition.
This would prevent C from having to collect only a portion in Br. Essentially C was
keeping the accounts receivable and only giving D enough to stay in business, thus
reducing the amount owed to C. Trustee claimed that this was using D as instrumentality
to lower debt owed.

C argued it was merely adjusting the loan percentages which it had a right to do based on
the contract. C also argues it never had total control and never dictated which C’s to pay.

This Cts test for equitable subordination is:

 a. Inequitable conduct
    1) fraud, illegality or breach of fiduciary duty by C
    2) undercapitalization (corp does not have enough $ to pay bills) or
    3) use of D as instrumentality ( having total control over D, thus forcing D to
        payback loan at expense of other C’s. D is really alter ego of C because of C’s
        total control over D )
b. Result in injury to other creditors or unfair advantage
 c. Equitable subordination of the claim is not inconsistent with provision of Br code.

Here court held that C did not assert control over D to consider D a mere instrumentality
of C for purposes of equitable subordination. The contract allowed C to lower the loan
formula at anytime, thus it was not unconscionable conduct for C to do exactly that.
510(c) does not give test for equitable subordination it just permits courts to impose it.

Generally equitable subordination is allowed for bad acts by C which injures other C’s.

Problems p. 859

1) D corp is under capitalized. P the president and principal shareholder of D corp
makes a $300k unsecured loan to D corp. D corp later files for Br. Does the trustee have
to establish wrongdoing in order to subordinate P’s unsecured claim?
This is funding the corp with debt. Debt gets paid before equity so P would get paid first.
Under the first prong employed by the Clark court, you need undercapitalization and
frequently the lender must be an insider .
Here, P is an insider. So since P is an insider and since the corp is under capitalized this
is enough to meet the first prong. (remember must also meet other 2 prongs) If other 2
are met you can equitably subordinate the claim.

So courts have not held that mere undercapitalization sufficient to meet the first prong.

In Re Harris

 Under plan D want to pay 100% of consumer debt and 0% of business debt. Both are
unsecured claims.

In D’s petition he lists the unsecured C’s in 2 categories. One for consumer debt and one
for business debt.

1322 (b)(1): The plan may designate a class or classes of unsecured claims as provided in
section 1122, but may not discriminate unfairly against a class; however, such plan may
treat claims for consumer debt guaranteed by a co-obligor differently than other
unsecured claims.

§ 1122 Classification of Claims or interests
   (a): a plan may place a claim in a particular class of claims only if it is substantially
   similar to the claims in such class.

Here the last clause of 1322 which allows D to treat unsecured consumer debt that is
secured by a 3rd party obligor differently than other unsecured debt does not apply
because D’s consumer debt is not guaranteed by a 3rd party. Can treat consumer debt
guaranteed by a third party differently because of C’s ability to collect on the debt from
the 3rd party. C has more remedies for collecting the debt. It’s almost as if it’s a secured

Here the consumer debt and the business debt are the same in the respect that they are
both unsecured claims. Neither have more rights or remedies to collect. The only
distinction between the 2 is what the $ was lent for.

Ct holds that 1322, which is based on 1122, allows classifying C’s in different groups
based on C’s rights and abilities to collect. You don’t classify claims based on what the $
was lent for. You classify claims as “similar”, based on remedies available for collecting
on the debt eg: whether it’s a secured claim, claim guaranteed by 3rd party, general
unsecured, etc... It would be irrelevant for eg that one claim is an unsecured tort claim
and another is a unsecured business debt. Claimants remedies of collection are the same,
thus they are put in the same class. HOWEVER,

   1122 does not say that you must group similar claims, it says you may group similar
   claims together. This court holds that the claims are the same but you don’t have to
   group them together.

Ultimately the Ct holds that the separate classification of consumer and business debt
fails under 1322 because you can’t unfairly discriminate amongst similar claims/classes.

The basis for similarity of claims is not based on how the claim arose, it’s based on
remedies and rights available to the C’s in collecting on the claim. Here the business
creditors and the Consumer creditors have the same rights and remedies for collecting,
both are unsecured claims and must be treated equally.

Test used to guide courts in determining whether treating similar claims differently
should be allowed:
    1)whether there is a rational basis for discrimination?
D says he is no longer going to be in business but is going to be a consumer and this is
why he is treating the C’s differently. Ct holds that this is an irrational reason for
treating the C’s differently.

   2)Whether D’s could consummate a plan w/o the proposed classification?
Yes, here they could formulate a plan without the proposed classification.

  3) Whether the discrimination is proposed in good faith?

   4) Look @ treatment of the discriminated class.
The business creditors are worse off then they would be if the case were brought under ch
7. In chapter 7 the 523 fraud exception would apply, but not in13. It’s as if the
consumer debt is brought under 7 and the business debt under 13. They are not treated
equally, yet they are similar claims.

In 1122 (ch 11) can you treat debts differently? For eg you can treat consumer debt
differently then business debts as long as all the business debts are treated the same?
No not really because they are all similar claims. Some courts will allow this because of
the extra protections found in ch 11 as opposed to ch 13. For example C’s can vote for
the plan in ch 11.
Even though 1122 does not specifically prohibit discrimination caused by grouping of
claims, whereas 1322 expressly prohibits discrimination, if similar claims are treated
differently, C could argue bad faith and prevent confirmation of the plan.

Problems P. 864

1) Section 1324(a) requires that a ch 13 plan pay C’s as much as they would receive in a
   ch 7 plan. (best interest of C’s test). Should a C who will be receiving at least as
   much as it would receive in a ch 7 case be able to prevent the D from proposing to
   pay other C’s more in his ch 13 plan?
   If C does not like the proposed plan he should object under 1325(b).

1325confirmation of plan
(b): If C objects to the confirmation of the plan, then the court may not approve the plan
        (A) Pay unsecured C’s in full; or

       (B) the plan provides that all of D’s disposable income is to be received under
           the plan and the plan lasts for three years.

    3) Under 1322 (b)(1); you may treat a claim for which there is a guarantor differently
then other unsecured claims. Assume that Vern borrows $4k from C. Ernest guarantees
payment of the loan. Vern files for ch 13 and under his plan commits all of his
disposable income to the plan. The plan allocates most of the repayment of claims to the
debt which Ernest guaranteed, that debt will be paid in full. Other C’s will only get .15
cents on the dollar. Should the plan be confirmed? If there is an objection by a C, then to
confirm the plan under 1325 b, D must commit all of his disposable income to fund the
plan. D has submitted all of his disposable income to the plan. So now must deal with
the issue of treating C’s differently. Here the debt which Ernest guaranteed may be
treated differently than the other unsecured claims. You look a the collection rights of the
C’s to determine whether the claims are dissimilar. With a guaranteed debt the C has
more remedies for collection, thus he is dissimilar from other C’s. He can be treated
differently then the other unsecured claims. This means that either he can be treated
worse, or as in this case he can be treated better.

   4) Would the court confirm a plan that proposes to pay debt for educational loans
   100% (a Claim exceptable from discharge) and other general unsecured creditors

   D would want to do this because after Br he is still going to have to pay educational
   loans, they are non-dischargeable. So here he could pay off education debt in Br at
   the expense of other C’s. You could argue Bad faith.
   Here D is not discriminating amongst similar claims which 1322 expressly disallows.

In Re US Truck

Teamsters claimed that US truck is libel to employers for failing to except a bargaining

1129 Confirmation of plan
    (a)(1) plan must be proposed in good faith
US truck claims that they were placed in a separate class of claims/creditors and should
not have been.

2 ways you can get a plan confirmed in ch 11:

   1) Under 1129 (a) you must meet all 9 requirements.
   2) Under 1129(b) CRAM DOWN, you must meet all 11 requirements except for
      8(a) which requires all impaired classes of claims to vote yes for the plan. Under
      the cram down you only need 1 class of impaired claims to vote yet.
1126 Acceptance of a plan

       (c)Acceptance of a plan by a class It takes a majority of C’s within a class to
       approve the plan, and the majority must hold at least 2/3 of the claims of that
So there is a lot of opportunity for gerrymandering the various classes. If you have a
group of C’s which you know will vote no, you would want to group them in the same
You could also make a class unimpaired to keep them from voting no.

Impaired claim holder- if the contractual rights of the claimant are disturbed in any
manner, then the C is impaired.
So you can make a C unimpaired by not altering their contract rights.

1126(f): unimpaired creditors automatically vote yes to a plan. “They are conclusively
       presumed to have accepted the plan, and acceptance from unimpaired C’s is not

     They are in the same position they would be in had D not filed for Br. Their contract
rights have not been disturbed.

1126 (g): if a class of claims are to be paid $0, then we deem that class to have
        automatically voted no for the plan.

Remember under 1129(b) Cram down: Only need one class of impaired claims to vote
yes for the plan.
Teamsters are arguing that D grouped them in a separate class and that they should have
been grouped with the class that voted yes. Arguing that they were purposely stuck in a
class which D knew was going to vote no and that D also knew Teamsters would vote no.

If the Teamsters were grouped with the yes class, the Teamsters would have voted no and
would have prevented approval of the plan under a Cram down.
Remember you can’t discriminate against like claims so you may have to group like
claims together when separating them causes discrimination.

You can’t discriminate like claims, so you may in fact have to group claims together
when separating similar claims causes discrimination.

Here it’s Ok to put the teamsters in their own class. The teamsters claim is unique from
the other claims. The teamsters want to reject the plan because of non-creditor interests.
They are dissimilar from the other claims.

Congress did not intend to require similar claims to be grouped together; however, if
placing claims in separate groups causes discrimination, you will have to group the
similar claims together.

you can discriminate in ch 11. If you do, then the C who is discriminated against by
treating him differently than the other similar claims can object to the plan on the basis of
bad faith.

Here the teamsters claims are not similar to other creditors so there is no discrimination
caused by placing them in their own group.

1122 Says you can not group dissimilar claims. Requires separation of dissimilar claims
so the teamsters must be placed in their own group because their claim is dissimilar from
the other C’s.

1129 (b)(1): In addition to meeting the 11 requirements of 1129(a){with the exception of
(8)}, 1129(b) also requires that each impaired class who votes no for the plan be treated
fairly and equitably.

How do you treat the impaired classes who voted no for the plan fairly and equitably?
This is found in 1129(b)(2)(A)

   (b)(2)(A) (I): The impaired class must retain their lien and remain
                          secured (for the portion of their claim which is secured); and
             (II): They must receive 100% for the portion of their claim
                            that is a secured claim.

The actual language in (II) says that they must receive payment totaling at least the
allowed amount of such claim, of a value, as of the effective date of the plan, of at least
the value of such holders interest in the estates interest in such property.

The words of a value mean that C must receive present value payments for the portion of
his claim which is secured.

1129(b)(2)(B)(i): ;The unsecured Creditors gets property “of a value” equal to the
                   allowed amount of such claim. This means that
                   the creditor may get property instead of cash to pay for the claim. C
                   would get shares of the re-organized corporation. Can get property of
                   a value instead of cash of a value. With secured claims you can only
                   get cash.; or

With unsecured C’s, they must get property equal to the amount they would get in Ch 7.

            (B)(ii): Absolute Priority Rule: {It’s a ch 11 equivalent of 1325(b)(2)}.
                       Want to keep any excess funds out of the hands of the D. The
                       debtor is Junior to the other creditors and should not be able to
                       keep any extra $. Any C which is junior does not get paid unless
                       the senior creditor received 100% of his unsecured claim. D is
                       junior to all C’s.

So under (B) (1) &(2): C must get the full amount of his claim; or D must not receive any
extra funds. (all funds must go to C’s)

Under (B)(1), in treatment of unsecured claims you must give property equal to 100% of
the claim. If you can’t do this then you must meet the absolute priority rule under (B)(2).

(B)(2) requires that no Junior C’s get paid before the senior C’s are paid 100%. Some
creditors are junior to other C’s. There is a priority. Eg: equity owners are junior to
other creditors. Unless other C’s are paid in full, equity owner gets $0.

Problems p. 869

1) Confirmation in ch 11 requires compliance with the standards of section 1129. What
   language in section 1129 calls for the bankruptcy judge to review the classification of
   claims in the ch11 plan?
   Under 1129 (a) (1) states that “the plan must comply with the following provisions”

2) Chapter 13 and Ch11 do not have the same standards.
   Ch 13 1325
a)    - C can object to the plan and if do then the plan is extended to 3 years and all
      disposable income must go to the plan.
   - only D can file a plan
   - C’s don’t vote on the plan

b) Ch11 1121
   -D or C (after exclusivity period) can file a plan
   -So C’s can make own proposals for class designations etc. to be treated better
   -C’s vote on plan or D can use cram down
Point is that they do not have the same standards.

3) single asset case-D is a partnership that owns a building. M has a $4m mortgage on
   the building. The value of the building is no more than $1M so that M has an
   unsecured deficiency claim. D’s only other unsecured C’s are miscellaneous
   suppliers who are owed a total of $20,000. D files a ch 11 that classifies M’s claim
   separately from the others. This type of case usually gets dismissed for filing in plan
   in bad faith.



1. Determination of secured status
506 Determination of secured status
       (a) a secured claim is debt secured by collateral. You have a secured claim up to
       the value of the interest in property.

Secured claim also includes setoffs:
        eg, you have folks who are both debtors and creditors
                x (D) owes y (c) $10K
                y(D) owes x (c) $5K
with a right to set off, x now only owes y $5K.

In Br a right to set off is treated as a security interest.

Problems p. 872

1) Value of collateral
      a) Judgment for $100K and judicial lien on real property by D worth $60k. C
          has $60k secured claim and $40k unsecured claim.
      b) F has the first mortgage on the farm for $300k. M has second mortgage of
          $200k. Farm has a value of $450k. F has a secured claim of $300k and M has
          a secured claim of $150k as well as an unsecured claim of $50k.
2) Postpetition Interest
      a)Will F’s secured claim increase as interest accrues? YES
    506(b) If it’s an oversecured claim then the oversecured C’s interest on the claim
    will continue to accrue post petition.

      Here D is owed $300k and the security interest is $450k.
      The post petition interest will cease to accrue once the creditor is fully secured. So
      in above eg, the interest will continue to accrue p until the debt owed equals $450k

      502 objections to claim:
        (b) This is a claim for post petition interest and D can object to it.

      M is under secured so post petition interest will not accrue. If an undersecured C
      gets post petition accruing interest, then D should object under 502(b).

      b) F’s claim increases while M’s secured claim decreases. What can M do about

       362 (d) Lack of Adequate Protection; M can request relief from stay so he can
       foreclose, sell property and get $, rather than waiting for stay to end while his
       secured claim continues to dwindle. D must show under (d)(1) cause,
       which includes lack of adequate protection of his interest in property.

       361 Adequate Protection
       Adequate protection is defined in this section. If stay results in decrease in value
       of interest then adequate protection may be provided by:
               (1) cash payments- requiring the trustee to pay F’s interest through cash
               payments as it accrues. This will protect M from any decline in his
secured                       claim. Or the trustee could merely make cash payments to
M to make up                          for M’s loss.
               (2) provide an additional or replacement lien- give M lien on property of
               equivalent value.
               (3) Other Relief- provide M the “indubitable equivalent”. This is a
                       nonexclusive list of ways to protect a creditor’s lien.

     If one of the above 3 are not met then D can get relief from the stay under 362(d).

2. Going Concern value v. Liquidation value:

In the planned chapters D gets to keep his property. So appraisers value the collateral to
determine the secured amount of the claim.

Going concern value is generally higher. It is the value generated by the assets when you
keep the business alive and going. The assets continue to be employed and generate a

Liquidation value- $ received from selling the assets.

Inventory is usually worth more when sold through the normal course of business as
opposed to being sold in a fire sale (liquidation).

2 Scenarios where Liquidation value is higher than the Going Concern Value.
a) When company is doing very poorly:
     If a company is doing very poorly and not making any profit. Then in this case the
     liquidation value will be worth more than the going concern value.
b) When Company has surplus assets:
     If a company has surplus assets, assets they aren’t using, then in this case the assets
     are worth more in liquidation than in going concern since you aren’t using the asset.

You value the collateral in a way appropriate for the purpose you have in mind. So you
can have multiple valuation in a single case (liquidation and going concern values)

Courts determine the value of the property based on it’s current use. Cts do not speculate
on what the value could be if the property is used in a different manner.

In planned chapters D wants the lowest valuation method possible. This way his secured
claim is lowered; whereas the secured party wants the highest valuation method to be
used to increase his secured portion of the debt.

1. Postpetition Foreclosure and § 362(d) (Lifting Stay)

In Re Club Tower

D entered into K with TRST which stated that if D defaulted and went into Br he would
waive the stay . The loan is a secured loan. D breached K agreements and then filed for
Ch 11.
C argues that this is a bad faith filing and that the stay should be lifted pursuant to
362(d)(1), which allows lifting the stay for “cause”.

There is not a specific requirement for filing in good faith; however, 1112(b) allows a
dismissal for cause and courts have held that bad faith filing is cause for dismissing a

The court listed 6 factors used to determine if it’s a bad faith filing:
       1) the d has only one asset, the property
       2) the D has few unsecured C’s whose claims are small in relation to the claims of
          the secured C.
       3) The D has few employees
       4) the property is the subject of a foreclosure action as a result of arrearages on the
       5) The D’s financial problems involve essentially a dispute between the D and
          secured C which can be solved in a state court action
       6) the timing of the D’s filing evidences an intent to delay or frustrate the
          legitimate efforts of D’s secured C’s to enforce their rights.
Ct found that almost all of the elements are present. Here D has one asset and this is
really an isolated dispute between 2 parties, and state creditor law is set up for this. Br is
to apply where there are several C’s and you need to treat all the C’s equally. Whereas in
state law it’s a race to collect. Here however there is only 1 C.

Really D’s only reason for filing was to stall foreclosure proceedings. Since majority of
the 6 factors were met court held that D did in fact file in bad faith and ordered that C is
entitled to relief form the stay, thus allowing C to enforce his rights as a secured C.

As to the second issue, whether D can waive, in K, his right to the automatic stay of Br;
the court held that the K agreement does not prevent d form filing for Br, thus it is not
against public policy.

If the K prevented D from entering into Br this would be against public policy and would
not be enforceable. This is an ipso facto clause which is void in Br. You cannot waive all
your rights in Br. Here D only waived one right pertaining to one C.

Under 1112 bad faith is cause for justifying dismissal
Under 362(d) bad faith is cause for lifting the stay.

Single Asset debtors will be dismissed from Br.

Problems pl. 880

1) Why did TRST move for relief from the stay under § 362(d) rather than a dismissal
   under § 1112 ?
     Bad faith filing is “cause” for both, so they both have the same cause requirement:
       a) By requesting relief from the stay as opposed to dismissal the stay would still
            Be in place as to other C’s and TRST would not have to compete against other
       b)Also in this cause the D entered into a forbearance agreement with C, stating
     that if he filed for Br the stay would not apply to him. Thus, C can make ore
     arguments for the lifting the stay in light of the forbearance agreement and cause
     based on bad faith filing.
2) So based on this case there are 2 forms of cause for lifting the stay
     1. Filing in bad faith
     2. The forbearance agreement.

IN re Alyucan:

This case deals with an equity cushion. C is an oversecured creditor. The value of the
property securing the debt of C exceeds the debt by ½ Million $. This half million is an
equity cushion.
If there are no other C’s then the creditors oversecured portion is an equity cushion.
Equity is what is left over after all liens are satisfied.

Just because there is an equity cushion, this does not mean that D will have equity. For
eg, if there is a second mortgagee whose claim will be satisfied by the 1st mortgagee’s
equity cushion, then the equity cushion goes to pay the 2nd mortgagee’s claim, and D is
left with no equity. So equity is the amount of value left after all liens are satisfied.

In case at bar, D filed ch 11. C has an over secured claim, however because of the large
amount of interest accruing on his claim daily, C seeks relief from the stay under 362(d)

claiming inadequate protection. C claims his is not adequately protected based on the
declining equity cushion.

C’s debt = $1.2 million Value of the property = $1.4 million
Ct holds that D is not inadequately protected. Here the court is concerned with the value
of the collateral. Is the value of the collateral declining, thus causing C’s secured claim to
decrease? Here the value of the collateral remains constant, and C is adequately
protected. Adequate protection has nothing to do with protecting an equity cushion.. The
equity cushion is merely an additional safety for C.

If for eg the value of the property is depreciating, this impairs the lien and would require

The court is not concerned with the amount of the debt or the margin of equity cushion.
Only concerned with the value of the collateral . the property interest what gets adequate

The lien is protected not the equity cushion.
Due process protects C’s interest: Under the 5th amendment, C should receive the value
of the interest in the property and beyond this amount, there is no constitutional claim of a
creditor to receive more.

Here the debt is increasing but the value of the property is remaining the same.

Adequate protection is designed to prevent loss of the ability to collect what is owed
through the collateral.

What is the method of protection? § 361 has a nonexclusive list of way sot adequately
protect the value of a lien, such as cash payments.

Why is C so concerned with the equity cushion? C may feel that the Br court overvalued
the property and upon foreclosure of the property, C may not have actually had an equity
cushion. Say Br court valued the property to be $2.5 million. C’s claim is $2 million.
Interest is accruing so C’s oversecured portion is declining. Assume that after the stay is
over interest of $500K accrued. Thus C is fully secured. After stay ends C forecloses
property and the actual value realized from the sale is $2 million. Now, C has an
unsecured claim of $500K because the Br court overvalued the property. C could avoid
the risk that the Br court overvalued the property by lifting the stay, selling the property
and receiving $ now.

Just remember that the value of the property need to decrease in order to have inadequate

C loans D $100K C-----$100k---D

D gives C interest in property worth $80K

361(1) Cash Payments Say the value of the property declines to $75K during Br. D can
provide payments to insure that C is adequately protected. D would need to pay C $5K in
this eg. Now C is adequately protected.

361(2) Replacement lien:
If D doesn’t have cash to prop up value of the lien, then D can give an additional lien.
Provide another piece of property to be used as a lien to substitute the decline in value of
the initial property interest.

361(3) Other relief: D can provide other relief which will provide the indubitable

The language indubitable is just an invitation for D to look for other methods to provide
for adequate protection. Just means that methods found in 361 (1)&(2) are not exclusive,
and that you can look for other means of providing adequate protection.

In Re BBT:

D is in the business of renting out Boxcars. C gave D $6 million loan to purchase the
boxcars which D was renting out. D files for Ch 11. The boxcars have a value of about
$4 million. So C is an undersecured creditor. The market for boxcars is at an all time
C brought action to lift the stay pursuant to 362 (d)(1) claiming lack of adequate
C also argued that under 362(d)(2) that the property is not necessary for re-organization.

The lien is what’s protected. C is entitled to a $4 million claim. Since the filing of the Br
petition the value of the cars have not declined, so the lien is remaining stable. The value
of the cars are not declining.
So inadequate protection argument of 362 (d) (1) fails.

C then tries to argue that 362 (d)(2) applies, however the second prong of 362(d)(2) is not
362(d)(2) (A) the D does not have an equity in such property; and
            (B) such property is not necessary to an effective reorganization

The no equity requirement was met based on the fact that the boxcars are worth $4million
and the debt is $4.5 million; however, the box cars are necessary for the business to
continue, so they are necessary for a reorganization of the company. Renting Box cars is
the only business that D is in. Without the box cars D would have no business.

The words “effective reorganization” means that the business would continue to exist.

To determine whether an effective reorganization is feasible courts look at:
       1)The condition of the economy: Here the conditions are expected to improve
       2) The quality of management: Mgmt here is good.
       3) “Sources of capital necessary to the production of income. They will get $.
       4) Resiliency of the business to weather cycles of change. Business is expected to

There must be a reasonable possibility of reorganization. Here the economy of box cars
is expected to improve. Since there is a reasonable possibility of reorganization, the stay
will not be lifted.

Recognize the burden of proof issues under 362(d):
362(g): The party requesting relief from the stay has the burden of proving that the D
does not have equity in the property. The party opposing the lifting of the stay has burden
on all other issues. So for eg, if C argues lack of adequate protection, D must prove that
C is adequately protected.


Problems p. 893

1) § 362 (d)(1) &(d)(2) are 2 distinct ways of lifting the stay. Under 362(d)(2), both A &
   B must be met to lift the stay.
2) How can the court determine whether the D does not have an equity in such property?
   Did BBT have an equity in the boxcars?

   All liens – value of collateral = equity

   Now assume that D owes $500K to X and $400K to Y and that both have mortgages
   in BA. If BA has a value of $600K , does D have any equity in BA?
   NO, X has an equity cushion, and Y is paid out of that equity cushion. After all liens
   are paid there is no $ left over, thus D has no equity.

3) Under Chapter 7, you are not concerned with reorganization only liquidation. Thus if
   C is trying to lift the stay in Ch7, under 362(d)(2), C would only have to show that D
   has no equity in the property. Whether the property is needed for reorganization is
   irrelevant because in Ch 7 you are not reorganizing you are liquidating.

   Under ch 13 your concerned with rehabilitation, not reorganization, because it applies
   to individuals; however, so in 13 the property must not be necessary for
   “rehabilitation” as opposed to reorganization.
   Just know that the second element, not necessary for reorg applies to ch 13 as well.

2. Prepetition Foreclosure and § 542

In Re Attinello

C repossessed tractor prior to D’s filing of Ch 13. C has tractor in his possession. There
is the question as to whether the tractor is property of the estate. Before C could sell the
tractor, D filed for ch 13. Sale is stayed. C wants relief from the stay so he can sell the
tractor. D sought turnover of the tractor under § 542 &543.

§ 542 Turnover of property to the estate
       (a) The trustee may order the turnover of property which may be used, sold or

§363 Use, sale or lease
      (b) defines what the trustee may use, sale or lease. The trustee may use, sell, or
           lease, property of the estate.

§ 541 Property of the estate
       (a)(1) defines what is property of the estate. All property held prior to petition is
               property of the estate.

If something is property of the estate then it is something which the trustee may use, sell
or lease, and thus the trustee may order turnover of.

Right of redemption:
Article 9-506- You have a right of redemption under state law. To redeem the property
D must pay 100% of the debt.
Under article 9 the right of redemption lasts up until the property is sold. So d has the
right to pay off the whole debt and get the property back under article 9-506 up to the
point of sale.

Here however we are in Br, and in Br pre petition property which has been repossessed is
property of the estate and the trustee may require a turnover of such property pursuant to
§ 542.

The trustee/D do not need to have a possessory interest in the property for the property to
be property of the estate. In other words, it is irrelevant that C repossessed the property
prior to Br petition.

Court held that the property if part of the estate and is subject to turnover pursuant to §
542. C has to show that there is no adequate protection and thus the stay should be
lifted under 362(d).


To have a turnover pursuant to 542, D must show that C’s interest in the property is
adequately protected. So you can’t order turnover if there is no adequate protection.

Here the court held that because C had an equity cushion in the property that he is
adequately protected. So according to this decision, an equity cushion is evidence of
adequate protection; however, remember that a decline of an equity cushion does not
show a lack of adequate protection. (kind of hypocritical)

Problems p. 898

1) why does P want relief from the stay even though he already repossessed the truck? P
    wants to sell the truck and a sale is stayed under 362 (a) (4) “any act to create, perfect,
    or enforce any lien against property of the estate” is forbidden.
3) If P would have sold the truck prior to D’s filing of Br, could the trustee force a
turnover of the proceeds? NO You only have a turnover of property. Proceeds form a
sale are is not property and can’t be property of the estate.

4) a) D pledges stock to C. D files Ch 13. Can D force turnover of stock? YES.
   Section 542- trustee can require turnover of property which the trustee could use, sell,
   or lease. §363 D may use dell or lease property of the estate. § 541(a)(1) property of
   the estate is any pre-petition interest held by D.
   b) should c repossess mobile home before D files for Br? D should repossess and sell
   it as quickly as possible to prevent turnover by the trustee. This way C will not have
   to wait until after the stay to enforce his rights. So you must first make sure that you
   are able to sell the asset very quickly.

6) The Br trustee may require turnover in a ch 7 case where a C repossesses prior to D’s
filing of Br.

C. Payments to Holders of Secured Claims

1. Chapter 7

In re bell

D filed for ch 7. Their van became property of the estate. The van was worth a $1,000
more than what was owed. So GMAC, the C, had a security interest in the van and the
value of the van exceeded the debt, thus they are an oversecured C.

The trustee abandoned the van a gave it back to D. So the van was no longer property of
the estate.

722 Redemption
       D can redeem tangible personal property if such property is exempt under § 522 or
has been abandoned under §554, by paying C the value of the property or the amount of
the debt, whichever is less.

GMAC, the C, wants to repossess the van. D has not defaulted on any payments of the
van and wants to keep the van and continue making payments. So D is arguing that since
he is current on payments, he should be able to keep the van and continue making the

Some courts buy this argument and allow D to keep the property, as long as D is not in
default and plans to continue making payments.

Issue: Can D redeem the secured collateral by continuing to make his payments.

This court says that D has 2 options for redemption:
       a) § 524(c) Re-affirm: D can re-affirm the debt and continue making payments.
           C must agree to terms of reaffirmation. C is under no obligation to accept re-
       b) § 722 Cash Out: D can pay C the value of the property or the full amount of
           the debt, whichever is less.

Here however since D is not in default, he wants to continue making payments and keep
the van. 722 does not allow this. Can do this under 524(c) only if C agrees to accept re-
affirmation. Here GMAC does not want to re-affirm, but wants to repossess; therefore,
D’s only option (722) is to pay off the debt or pay the value of the collateral, whichever is
If D were allowed to simply continue making payments under §722, C would have no
say, and §524 would be pointless. It would be a forced re-affirmation agreement.
So under §722 you cannot redeem by making installment payments.

1) Why did GMAC want to repossess the ban? Oversecured so if they sell the van they
   will get a surplus. Here the C probable thinks the Br court overvalued the van and
   that in fact they aren’t oversecured.

What gives C the right to repossess the van if D is current in their payments?
         It’s the Br code which gives C the right to repossess the van.
         Some courts hold that D has 3 options
                  1) 722 pay the full amount of the debt or the value of the property ,
                      whichever is less.
                  2) Reaffirm the debt with C’s approval 522
                  3) Give up the property.
Other courts merely hold that if your current then you just keep on making the payments,
and it’s business as usual.
So it all depends on what the BR court decides to do. The courts are split and there is no
majority view.

Dewsnup Case:

D defaulted on loan and filed for ch 7. C is under secured. The value of the collateral
(land) is worth less than the debt owed. D wants to avoid the unsecured portion of the
lien. D owes $119K and the property is worth $75K.
So C has a secured loan of $75K and an unsecured loan of $44K.
D wants to pay the secured loan ($75K) and then drop the $44K unsecured portion. D’s
argument is that 506(a) &(d) compliment each other & that they must be read together.

506(a) an allowed claim of a C secured by a lien on property in which the estate has an
interest is a secured claim to the extent of the value of such creditors interest in the estates
interest in such property.

506(d) To the extent that a lien secures a claim against the debtor that is not an allowed
secured claim, such lien is void.

D is arguing that the $44K is not part of an allowed secured claim under (a) and thus
under (d) it is void. Saying that the unsecured debt is disallowed.


Ct held that D’s interpretation of 506(a) & (d) is incorrect. Here we are dealing with an
allowed claim and 506(a) is merely saying that the secured portion of the allowed secured
claim is equal to the value of the collateral. It just separates the secured portion and the
unsecured portion, but this does not mean that the unsecured portion is a disallowed claim
and avoidable under (d).

A claim gets disallowed by objection under 502(b). As to a claim disallowed under
502(b), the Br code does not want the lien of a disallowed claim to survive in Br. We not
only want to disallow the claim but also the lien. So what (d) is saying that a lien
securing a disallowed claim does not survive Br and is void.

D also cannot use 722 to lien strip because 722 is limited and applies to exempt consumer
goods. Real estate is not listed as property which may be lien stripped in 722. So here D
can’t use 506(a) & (d) or 722 to lien strip.

However, remember D can lien strip using ch 7 by filing a ch 20. (ch 7 followed by a ch

Also remember that under ch 13, 1322 (b) You can modify the rights of holders of
secured claims, so you can lien strip with the exception of where the property interest is
secured solely by D’s principle residence, see below.
1322 (b) (2) : you can’t lien strip where the loan is secured solely by a mortgage on D’s
principle residence.

In RE Klein:

Klein had a car financed by GMAC. GMAC has a security interest in the car. D(Klein)
filed for ch 13. This was a valuation hearing to determine the value of the car. So we are
determining which valuation method should be used. The valuation method used is up to
the Br judge. Must look at 506(a) to decide how to value the car, ant it’s left to the ct to
506 (a): Basically says that value shall be determined by court.

There are different approaches
       1. Retail price granted if C is in the business of selling cars.
       2. Wholesale price (auction price) derived form UCC. The sale must be
           commercially reasonable
GMAC is not in the business of selling cars, so they do not get retail value, they would
only be entitled to wholesale value. This is a fair valuation measure because this is what
they would get if they were to repossess the car and sell it.

The second issue to deal with is when is the property valued?
Should the property be valued on the effective date of the plan (which is the date of
petition) or should it be valued as of the date of the valuation hearing.

As mentioned GMAC is only entitled to wholesale. As far as when the car should be
valued, the court held it should be valued at the time of the valuation hearing because the
valuation hearing is close to the confirmation of the plan.

IF the car were valued at the time of petition, there could be fluctuations in value from the
time of filing the petition to the time of confirmation of the plan.

There are different approaches:
       1)Date of petition; Some cts value the property on the date the petition is filed.
       2)Valuation hearing; which is what this court used. Ct said that valuation at the

         time of the valuation hearing should be used when the confirmation hearing is
         to follow shortly thereafter.
       3)Confirmation hearing; Where there is a lapse of time between the valuation
         hearing and the time of confirmation, the property should be valued at the time
         of the confirmation hearing.

Lastly the court held that under 1325(a) (4), “the value” means present value.

1325 (a)(4): C must not get less then he would get if the case were brought in ch 7 and
the plan must provide for present value for the unsecured claim. So for the unsecured
portion, the plan must at least equal today’s value of what C would receive in ch 7.

1325(a)(5)(B)(ii): requires that payments for the secured portion of the loan account or
present value. Payments under the plan must not only account for present value but must
also equal 100% of the secured portion of the claim.
The above 2 provision require application of a discount rate.
So the plan must account for the time value of money. Must determine how much per
month must be paid in order to equal today’s value.

The discount rate is not designed to protect C against depreciation, it’s just designed to
take into account the time value of money. A dollar today is worth more than a dollar
tomorrow because of the TVM.

In determining the discount rate, the court averaged the K rate of the loan with the legal
interest rate. This was a very arbitrary calculation. No explanation as to why the court
did this.

Problems p. 912

1) The court valued the Kleins Chevy at $1,650.       On what evidence did the Br court
    base this valuation? The valuation came from expert testimony (appraisers)
2) What is the practical significance of the $1,650 valuation?
        a. Are the Kleins legally obligated to pay GMAC $1,650? D’s are obligated to
            pay $1,650 under 1325 (a)(5)(B)(ii).
1325(a)(5)(B)(ii):Confirmation of plan; D must pay the full amount of the secured claim
or give up the property.
             The remaining $1,500 owed on the car is an unsecured debt and will be
             discharged in Br.
        b.What if GMAC is not satisfied with the Kleins promising to pay $1,650 ad 18%
          on unsecured portion? If the plan is approved by GMAC then they can’t do
          anything. GMAC can object at the confirmation hearing. Remember if there is
          an objection in ch 13 then the plan must provide for all of D’s disposable
          income and must last for 3 years.

3) The significance of the discount rate is that it provides for present value figures. The
    court here just made up there own discount rate.
4) The discount rate embodied in section 1325(a)(5)(B)(ii) should not be confuse with a
   C’s right to interest on its secured claim under section 506(b).
506(b): oversecured claims continue to accrue post petition interest up to confirmation. If
C becomes fully secured then interest will stop accruing.
(Discount rate and interest rates are not the same thing)

       b) 1325(a)(5)(B)(ii): deals with present value, all secured claims receive present
                              value payments.
       c) Does section 506(b) interest accrue from the time of the filing of the petition?
       The interest accrues from the date the K was entered into and continues through
       petition up to confirmation of ch 13 plan.
5) In ch 13 you modify the rights of holders of secured claims, thus you can strip down
   the lien. You may strip the lien down to the value of the collateral. The exception is
   that you may not lien strip when the debt is secured solely by the principle residence
   of D.
6) D’s mortgage contract has an acceleration clause (where the full amount is due upon
   default). D lost job, missed payments and has defaulted. She now has a job but is not
   able to cure the 3 months missed immediately. M the mortgagor is instituting
   foreclosure proceedings. Should D file for relief under ch 13?
    Yes D should file for ch 13 relief. The stay of ch 13 will stop the foreclosure
    proceeding. Then under 1322 (b)(5), D can cure default as long as it’s done within a
    reasonable time.



Executory contract- where K is unperformed on both sides that failure of one of the
parties to perform would justify non performance of the other party.

When there is substantial performance under the K, then a breach is immaterial.
Under an executory contract, neither side has substantially performed so the other party
would not have to perform when there is a breach of the K because the breach is a
material breach.

Trustee has three options under 365:
        1. Assume the contract & K becomes property of the estate;
        2. Can assume and assign. Assign contract to someone else;
        3. the trustee may reject an unexpired lease and executory contract.
Or the trustee may do nothing.

Problems p. 917

1) D leases a building form L. the lease provides for a 5 year term and monthly rent of
   $10K. D files Br and rejects the lease.
       a) Does L have an allowable claim?
365 Executory contract and unexpired leases
       (g): States that rejection of a lease is breach of the lease. The breach of lease is
       treated as though it occurred Prepetition. (so it’s treated as Prepetition claim)

502 Allowance of claims or interests
       (g)claim for breach of lease arising from § 365 is an allowed claim
C would file a proof of claim under § 501 and the claim will be deemed allowable under
§ 502(g).

         If there was no breach prior to filing of Br, then once D files and the trustee
rejects the lease then it is treated as a prepetition breach and L has an unsecured claim.

       b) Amount of the claim?
502(b)(6): limits the amount of the lease to the greater of 1years rent or 15% of the entire
remaining term, but not to exceed three years. It’s measured from the earlier of ;
               (i) the date of the petition, and
               (ii) the date the Land lord kicks you out. (whichever earlier)

So it’s the greater of 1 year rent or 15% of up to 3 years of lease.

Note that if L rents the property to someone else then his damages will be reduced based
on the mitigation of damages.

       c) Can D co continue to use the building? No because he rejected the lease. The
          estate has no obligation to retain the lease. When the lease is rejected, all
          rights are gone, it’s a breach.

2) D is the landlord of building leased to T. D files for Br and Trustee rejects the lease.
       a) Can D evict T and release? No
365 (h) (1)(A): IF the trustee rejects an unexpired lease of real property where D is the
               Landlord, then:
               (i) The lessee may treat the lease terminated by the rejection; or
               (ii) The lessee may retain its rights under the lease.

The term reject has been a problem. Some courts say that rejection is more than a breach
and treat it like a recission. So if D was the lessor and rescinded, you treat it as though
the lease was never entered into and you can dispossess the tenant of any property rights.

This is incorrect, a rejection is merely a breach of the lease.

365 h, j & n, says no it’s not a recission of the contract it’s just a breach and you can’t
take away non debtors interest in the K. You can treat rejection as a breach.

You can’t dispossess the tenant and kick him out when the debtor is the landlord. If the
trustee rejects the lease then the LL does not have to provide heat maintenance.

365 (h) (1) (B): If the tenant exercises his right to stay, he has the right to offset against
the rent any damages based on failure to provide heat, maintenance. If the tenant does
exercise this right he may not also sue for damages under breach of K. The only remedy
he would have is the offset against rent of actual damages.

3) Now dealing with assuming the lease: D leases farm from L for $2k per month. D
   files for ch 12 and at the time he owes $6k in back rent.
       a) If D assumes the lease, can his chapter 12 plan modify the rental terms?

When assuming the lease, the estate now becomes a party to the K. The estate assumes
all the obligations and the benefits. The estate is bound by the K.

§ 365 (b)(1) Requirements for assumption: To assume a lease or executory contract the
trustee must
               (A) Cure default or provide adequate assurance the trustee will promptly
                   Cure defaults;
               (B) compensate, or provide adequate assurance that trustee will promptly
                   compensate, a party to K other than D, for pecuniary losses caused by
                   default (damages other then loss of rents, attorneys fees etc..
                   consequential damages); and
               (C) provide adequate assurance of future performance under the contract.

1222 (b)(2): The plan can modify the rights of unsecured claims.

 But if the trustee assumes the lease this is not a claim in br. The trustee is assuming all
obligations under the lease. The estate assumes the contract as is and cannot modify it,
and the LL does not have any claim because when assuming the default is cured and the
lease continues.

4) Assignment:

365(f)(2) Requirements for assignment The trustee may assign an executory contract or
unexpired lease of the D only if:
              (A) the trustee has assumed the contract under § 365(b)(1); and
              (B) adequate assurance of future performance by the assignee is provided.

After assignment you look only to the assignee if there is a breach, not the estate. The
estate is no longer a party to the contract.


1) D want to reject lease of grocery store in shopping center. Should court allow?
   There is nothing in 365 dealing with rejection cts use a business judgment rule to
   determine whether the lease should be rejected. Ct’s grant considerable leeway in this
   area. As long as sound business judgment courts will approve.

2) D has lease form L for apartment. D files for Br. D pays rent but doesn’t reject or
   assume the lease. D continues to pay rent through the clo9se of BR. Can L evict D?

              Lease or K for Residential property or Personal Property:

365 (d)(1): In a case of ch 7, if the trustee does not assume or reject an executory contract
or lease of residential real property or of personal property within 60 days after the order
for relief then such contract or lease is deemed rejected.

You don’t have to pay on the lease or K for residential or personal property
 during the 60 days prior to assuming or rejecting the lease or K in ch 7. In other words
you are not required to pay gap rents in 60 day period.

    (d)(2) For the planned chapters you have up until confirmation of the plan to reject or
assume the executory contract or lease for residential or personal property, but on the
request of any party to the lease or contract, the court may order the trustee to determine
within a specified time whether to assume or reject the K or lease.

During the period up to confirmation (time period in which the trustee has to decide
whether to accept or reject the lease or K) you do not have to pay gap rents.

Note: You cannot place a clause in a lease which states that if you file for Br you are in
default under the lease. This is an ipso facto clause which is not allowed in Br.

       Lease or K for Non Residential Real Property (Commercial Property):

3) D leases building form L. D files for ch 11.
       a) How long does D have to reject or assume?

365(d) (4): For nonresidential real property (commercial property), D has 60 days after
order for relief to assume or reject the lease.

       b) Will D have to pay gap rents (rents while deciding to reject or assume)? YES
365(d)(3): Under any unexpired lease of nonresidential real property (commercial
property), the trustee must perform all obligations under the lease. So must pay gap rents.

4) D leases machinery (personal property) form L. D files for ch 11. How long can D
   delay to decide if he will assume or reject the lease? Under 365(d)(2), D can delay
   until the plan is confirmed.. So unlimited until the pan is confirmed, unless the ct sets
   a time limit.

PROPERTY. How long does D have to assume/ reject and does D have to pay gap rents.
Where are these provisions in the code?

365 (d)(1) &(2) both deal with personal property and residential real property. In (1) this
is for ch 7 cases and the trustee has 60 after the order for relief to assume or reject the
lease or executory contract. Trustee does not have to pay gap rents during the 60 day
period In (2), which deals with the planned chapters, the trustee has up until confirmation
of the plan to assume or reject an executory contract or lease. Again, trustee does not
have to pay gap rents for the time period up to confirmation. Only pay gap rents for
commercial property.

365(d)(4) this section deals with commercial property for all chapters (ch7 and planned
chapters). The trustee has 60 days after the order for relief to assume or reject a lease for
non residential real property. Trustee must pay gap rents during this 60day period.

For (d)(1) &(4) you have 60 days after the order for relief. 301 voluntary cases; the
order for relief arises at the time of filing the petition (applies to all cases); 303
involuntary cases; the order for relief arises after the D controverts the filing and is
denied or if the petition is not controverted, the court will order relief.

Matter of UL Radio:

UL filed for ch 11 liquidation plan so D in possession moved for assumption and
assignment of lease to a restaurant. The use clause of the lease limits use of the space to a
television store. The landlord claims that D cannot assign the lease to a restaurant w/o his
consent, which he will not give.
IF the assignment were allowed D would be able to pay his unsecured C’s 100% under
the plan because the restaurant is going to pay D a premium for the assignment of the

Before you can assign under 365(f), you must first assume the lease under 365(b)(1).
And secondly you must provide adequate assurance of future performance by the

There is no definition in code as to what adequate assurance is. Adequate assurance
requires that the other party to the contract receives the “full benefit of the bargain”. Ct
held that the main focus of adequate assurance is the assignee’s ability to meet the
financial obligations under the lease, but must also show that other problems won’t be
incurred by assignment; such as smells from restaurant, high traffic etc... Here the
assignee has $, and gave personal guarantee. Ct held thus that there was adequate

LL argued that the requirement of adequate assurance (receiving the benefit of the
bargain) requires compliance with the use clause in the lease. Ct held that adequate
assurance (benefit of the bargain) does not mean literal fulfillment of every term found in
the lease, thus the use clause does not have to be met.

The landlord must establish/show that failure to follow use clause would cause a
substantial detriment. Must show that assignment would result in detriment to prevent
assignment. No substantial harm was shown by the LL so the use clause is ignored.

If the lease had a clause which said the lease is not assignable, this would be void under

365(f)(1): Notwithstanding a clause in the lease, or in applicable law, that prohibits,
restricts, or conditions the assignment of the lease, the trustee may assign the lease or K.
So anti-assignment clauses are void in Br.

There is a split amongst the courts. Here the clause is not an anti-assignment clause it is a
clause restricting use, thus it restricts assignment:
        1) Under UL Radio, the use clause will not be enforced unless LL can show that
            assigning the lease will cause a substantial detriment (no benefit of
            bargains/aka adequate assurance).
        2) Other courts say that if it’s not an anti-assignment clause, the clause will be

Problems p.932

1) Under section 365(b) it states that “if there has been a default trustee may assume
   if….” In the Ul Radio case the D was not in default, so why did the court require
   adequate assurance of future performance?
      All assumptions and assignments require adequate assurance even if D is not in
2) Would the case have been decided differently if the lease had prohibited assignment?
   NO 365(f) say that you ignore restrictive clauses.
3) What if the building in the above case was a shopping center?
      365(b)(3) has special provisions for shopping centers; under

365(b)(3)(C): assumption and assignment of such leases is subject to all use provisions.
So restriction clauses are enforced when dealing with shopping centers.
          (D) The assignment may not disrupt the tenant mix in the shopping center.
B(3) was added to protect against any adverse effects which may be experienced by other
businesses in the shopping center as a result of assignment.


1. What is an executory contract?
A K is executory if something remaining on both sides could be material breach and
would justify the other party form performing. If substantial performance on either side,
then it is not an executory contract. This is the countryman definition and most courts use
this definition.

Problems P.933

1) D contract to pay $25 million for 100 tons of sulfuric acid form T. D files for Br
   before either party performs.
      a) Executory? Yes
      b) Does D have to assume the K to obtain the acid? Yes
              365(b) requires assumption of the K to get the benefit of the K.
      c) What is T’s claim if D assumes the K? This would be an administrative
          expense and T would have a priority claim because it is a necessary expense of
      d) What if D rejects?

365(g) rejection of an executory contract or unexpired lease constitutes a breach

502(g) a claim arising from rejection of an executory K or unexpired lease under section
365 is treated as a pre petition breach and is an allowed unsecured claim

2) T delivers acid to D prior to D filing for Br.
       a) is this an exec contract? No because it is not unperformed on both sides, the
           K is partially executed by one of the parties.
       b) Does D have to assume the K to retain the acid? NO section 365 is not
           applicable. The acid will be property of the estate and T will have an
           unsecured claim in Br for the amount due on the acid delivered.
3) D files After he paid C but before the acid is delivered.
       a) executory contract? NO its partially performed.
       b) Does D have to assume the K to keep acid? No section 365 is inapplicable
           because this is not an exec contract.

       c) Does C have a claim? NO because he has already been paid.

5) D entered into K with C which granted C a 10year nonexclusive license to patent. D
    files br a year later and rejects the K. Can C use the patent? YES
365(n)(1) If trustee rejects an executory contract under which D is a licensor of a right to
intellectual property, the licensee under such contract may elect to:
                 (A) Treat the contract as terminated by such rejection; or
                 (B) retain its rights under the contract.
The above section parallels with (h) where the landlord is the debtor, the lessee may
either treat the lease as terminated or he may retain his rights under the breach.

       a) Assume that D files for Br and decide to reject a hotel franchise agreement
          which he granted to C. Can C continue to operate the hotel under the
          franchise agreement? There is nothing in 365 similar to intellectual property,
          which applies to franchise agreements. So C can’t continue to use the
          franchise agreement. Most courts will properly say it’s a rejection of K not a
       b) Aunt sells vet practice to C which includes a covenant not to compete with C
          and requires 4 annual payments to Aunt. A year after entering into the
          agreement the Aunt files for BR. Can she reject the covenant not to compete
          with C a resume vet practice? The covenant not to compete cannot be
          discharged and Aunt must comply with the covenant. The reason it can’t be
          discharged is because it is not a claim. Br discharges all pre-petition claims.
          A claim is defined in 101 as any right to payment. A claim is something
          which give right to payment. The remedy for breach of a covenant is
          injunctive relief, it’s not a right to payment
       What really happens when you have a rejection of K with a covenant in Br is
       unclear because some cts mistakenly treat rejection as a rescission of K.

2. What are the limitations on rejection of an executory contract?

In re Pioneer Ford;

Ford dealer sought approval for assignment of dealership to a Toyota dealer. The Toyota
dealer would pay for franchise and would by all parts at FMV. Ford motor corporation
wants to prevent assignment.

365(f)(1) Allows assignment not withstanding a restriction in the K
365(c)(1)(A): does not allow assignment if non Br law (state law) does not allow

So the issue is whether non br law would allow the Ford corporation to prevent
assignment of the franchise by the Ford dealer to the Toyota Dealer.

(c)(1)(A) deals with state law that prohibits assignment whereas, (f)(1) deals with terms
found in a K which prohibits assignment. So there is no conflict between the 2.

In the case at bar the applicable state law said: No dealer shall have the right to assign a
franchise without the consent of the manufacturer, as long as refusal is reasonable. So
here there is applicable state law which prohibits assignment. So court held that state law
prohibits assignment and the court must now determine, as defined by the state law,
whether preventing the assignment was reasonable. The court held that preventing
assignment was reasonable based on the fact that the Toyota was consistently loosing
money at a time when Toyota sales where high and the dealer was in a poor financial
position. So it was reasonable for Ford Motor corporation to withhold consent.



       a) Absolute transfers
D-- X $10k
D- X Black acre These are absolute transfers

When Trustee avoid absolute transfers the property becomes property of the estate 541

       b) Less than absolute transfers (Security transfers)
Now assume: D--- X mortgage in BA. D still holds tittle to BA, so this is less than an
absolute transfer, because D still owns BA.
Both a & b were voluntary transfers.

An execution / judgment lien is a security transfer which is an involuntary transfer.

If trustee avoids security transfer the party who used to have a lien now has an unsecured
claim in Br for amount of the lien.

Any security transfer may be avoidable under the avoiding powers.
Any way of parting with property whether it is a voluntary or involuntary transfer is
subject to the avoiding powers. To avoid a transfer is to undo the transfer.

Eg: D- X Black acre
IF trustee can avoid the transfer X must give up the property and the property is now
property; of the estate.


Section 550 is best thought of as a remedies section. IF a transfer is a avoided section
550 tells you the consequences.

The avoiding powers are found in sections 544, 545, 547, 548, 549, 553(b), & 724(a).

550 (a)(1) For transfers avoided under section 544, 545, 547, 548, 549,553(b),&724(a),
the trustee may recover , for the benefit of the estate, the property transferred, or the value
of the property from-
        (1) the initial transferee of such transfer or the entity for whose benefit the transfer
            was made; OR
EG D--- A A is the initial transferee. Trustee may void the transfer and take back
whatever was transferred. The property interest becomes property of the estate.

C--loan $5k to D
G guarantees the loan
If D pays C $5k while insolvent 90 days prior to Br, the transfer is a preferential transfer
and may be avoided (will address this later). The trustee could go after C to get the $5k
back or under (a)(1) the trustee can go after G because the transfer benefited G. “trustee
may collect from the entity for whose benefit the transfer was made”

        (2) the trustee may recover from any immediate or mediate transferee of such
            initial transferee.

Eg: D---BA A----BA B---BA- C A is the initial transferee. B is the immediate
transferee. C is the mediate transferee.
A mediate transferee is someone further down the line for which you didn’t directly
transfer the interest.

  (b) the trustee may not recover under section (a)(2) (the above provision) from people
      who are good faith purchasers, took for value, and did not know the initial transfer
      was avoidable.

In the case of (b), if you can’t collect from the immediate or mediate transferee you would
collect from the initial transferee.

Remember that section 550 just tells you who you can get the property back from for
transfers avoided under section 544, 545, 547, 548, 549,553(b),&724(a).

Problems p. 946

1) “Or, if the court so orders the value of such property”
      a) D transfers equipment to C. The equip is destroyed and C collects $100, form
            insurance company. D file for BR. What can the Br trustee recover from C if
            she is able to avoid the transfer of the equipment.? If the transfer of property

          to C is avoided, T can recover the value of the equipment section 550(a)
       b) Transfer of property valued at $200K. The value decreases to $30K. What
          can trustee recover if the transfer is avoided? Trustee can recover the property
          or the value under section 550(a). The issue is when do you value the
          property, at the time of the transfer or now. There is some ambiguity in the
          courts, most courts hold that it’s the value at the time of the transfer.

2) “Or the entity for whose benefit such transfer was made”.
C transfers$200k to D. G guarantees the loan. D pay C back. D then files for Br. Who
is benefited? Remember under 550(a)(1) you can recover from the initial transferee or
from the entity for whose benefit the transfer was made.
        a. The initial transferee is C so can recover from him
        b. the entity for whose benefit the transfer was made is G. So you can also
            recover from G.
3) “Initial transferee”, “Immediate transferee”.
        a) D transfers BA to C who transfers it to X who transfers it to W.
                1. the initial transferee is C
                2. the immediate transferee- X. First taken form initial transferee
                3. Mediate transferee. W
        b) C (bank)loans X $655K D an affiliate of X remits a $200k check to C with
            instructions to deposit the check in X’s account which it does. X then
            instructs C to debit $200K from the account to pay down the loan. D files for
            Br and the trustee avoids the $200K transfer.
                The initial transferee is X The bank is just an intermediary . The transfer
                is really to X. So X is the initial transferee and C, after X has C debit his
                account, is the immediate transferee.

Unless the bank had knowledge that the transfer was voidable the trustee may not recover
from the bank. 550(b). The trustee may recover from X, the initial transferee.

1. Fraudulent Transfers and obligations

548 Fraudulent transfers and obligations
        (a)(1): Trustee may avoid any transfer of an interest of the Debtor in property, or
any obligation incurred by the D, that was made or incurred on or within one year before
the date of filing the petition, if the debtor voluntarily or involuntarily-
                 (A) made the transfer with the actual intent to hinder delay or defraud any
                     entity; or
                 (B) (i) if the D received less than a reasonably equivalent value in
                     exchange for the transfer or obligation; and
                     (ii) (I) D was insolvent on the date that such transfer was made or
                              obligation incurred, or became insolvent as a result of such

                       transfer or obligation;
                       (II) The transfer left D with an unreasonably small amount of
                           capital (property)
                       (III) D makes the transfer and after transfer will be unable to meet
                           debts as they come due.

In (A), we require actual fraud; In (B), it’s constructive fraud, so there may or may not be
fraudulent intent.

(B)(ii)(II)&(III) are variation of the insolvency requirement. Must meet either I, II,or III
of the insolvency requirement.

Problems p. 947

1) D, while insolvent give his boat to his dad within 1 year of BR.
      a) Meets 548(a)(1) transfer made within 1 year of filing the petition and under
           (B)(i) he received less than equivalent value in exchange for the transfer, and
           it meets (ii) D was insolvent at the time of the transfer thus the transfer will be
      b) Section 550-Dad is the initial transferee and trustee can recover the value or
           the property.
2) D while insolvent sells his boat to F for $3k, but the value of the boat is $5k.
   voidable? YES Meets requirements of 548(B)(same as above) less than reasonably
   equivalent value{under the Durett rule a transfer for less than 70% of the value of the
   property if not a transfer for adequate value. Not all courts apply the Durett Rule}
   and D was insolvent at the time of the transfer and the transfer was made within 1
   year of filing the petition.
      a) in the above scenario F is the initial transferee. Under section 550(a)(1)
           trustee can recover from initial transferee F.
      502(h) the initial transferee (or party who gave up the property) now has an
      unsecured claim in Br. It’s treated as a pre petition claim.
      548(c) For a good faith purchaser who takes for value and did not have knowledge
      that the transfer was subject to being avoided, he will have a lien (secured claim)
      in Br for the amount paid by the good faith purchaser.

        So in the above eg if F is a good faith purchaser he will have a secured claim of
        $3k in Br, the estate will get the boat from F, sell it for the FMV of $5k, and give
        F $3k, the rest goes to the estate.
3) D defaulted on his mortgage payments. The bank foreclosed the home and S bought
    the house for the $30k debt owed on the mortgage. Within a year of the foreclosure
    sale, D filed for BR. Can the Br trustee avoid the foreclosure transfer if can prove
    that the homes value was $50k at the time of the transfer?
        The question is did the bank provide reasonably equivalent value for the home
through its foreclosure sale? CTS are split

               a) the Durett rule is that anything less than 70% is not reasonably
                  equivalent value.
               b) Some courts say that as long as the bank complies with the foreclosure
                  procedures and laws, then the transfer will be allowed. As long as you
                  comply with the procedural safeguards, then there is an irrebutable
                  presumption that what was received was reasonably equivalent value.

In Re Young

1 year prior to filing Br petition, D made a transfer of $13 K to their church.
The trustee sought to avoid the transfer under 548(a)(1)(B)(i) Claiming that D received
less than reasonably equivalent value for the transfer and that D was insolvent at time of
the transfer.
Need to look at whether they received something tangible.

The court held that D must receive a tangible item not just a sense of well being from
their transfer, this is not a tangible item. It must be something you can measure.
D argued that he was able to attend church services, however this fails because D was
able to attend irregardless of whether he made the donation.
D’s final argument is that the contribution was tax deductible; However he court held that
charitable contributions are tax deductible only if there is inadequate consideration. Thus
if this is a tax deductible contribution this means that it was provided for inadequate
consideration and could never be an exchange for reasonably equivalent value. So this
argument fails as well.

Here were are talking about constructive fraud 548(B), not actual fraud (A).

If the church spent the $, then the trustee can collect form the church and the church
would have an unsecured claim against the estate. 548(c) which gives a good faith
purchaser a secured claim would not apply because the church did not take something for
value, they were given a donation.

Commerce Bank:

Bank gave $7M loan to -- KBDC corporation

George an John majority owners guaranteed the loan if KBDC were to default.

Sure enough KBDC defaults and John and George file for Br. The trustee tries to avoid
the guarantee which G&J gave claiming it’s a fraudulent transfer under 548. Under 548
you can avoid property transfers as well as obligations incurred. Here were dealing with
an obligation incurred, a guarantee on a loan.

G &J’s promise to pay is an obligation which can be avoided if tit’s found to be a
fraudulent transfer. There is an identity of interest between G, J and KBDC. They are the
majority owners. (wholly owned by the 2 of them)

The general rule: if that obligations incurred for the benefit of 3rd parties are
presumptively not supported by reasonable equivalent value. (for eg if you guaranteed a
loan for Shannon, this would not be a transfer reasonably equivalent value because I
wouldn’t get anything out of it).

Exception to the General rule: The general rule does not necessarily apply If D and the
3rd party are so related that they share a close identity of interest such that what benefits
the 3rd party benefits D.

An identity of interest alone is not enough to show that D received reasonably equivalent
value. Must also analyze whether D did in fact receive a benefit from the obligation.

Here D was insolvent at the time of incurring the obligation and the loan did not improve
the position of the insolvent corporation. The only thing the loan did was stall default
and Br proceedings. Thus guaranteeing the loan provided no benefit to D. In fact the
loan made D worse off and harmed innocent C’s of D. Therefore, G&J did not receive
reasonably equivalent value for their guarantee. Since all the other requirements of 548
were stipulated to, this transfer (the guarantee) is avoided as a fraudulent transfer under
548(a)(1) (B).

There are three types of intercorporate loans:
         1. Downstream- when the parent corp guarantees loans for its subsidiary
         2. Cross stream- where the subsidiary guarantees a loan for another subsidiary
         3. Upstream- The subsidiary guarantees a loan for the parent.
In this case it’s downstream, the owners are guaranteeing a loan for the corporation. They
guarantee loan downstream to the corp which is the same as a parent corp guaranteeing
loan to sub.

Courts look at the position of the corporation at the time of the transfer. If the
corporation is insolvent at the time of the loan/guarantee then most courts will hold that
the $ will be going directly into the hands of the C’s, not into the corp, and that there is no
way that G could receive a benefit. Thus, when the corp is insolvent at the time of the
transfer G will not receive reasonable equivalent value from his transfer.

Here the corporation was so insolvent that the loan would not have helped the
corporation therefore there is no way that D would have received a benefit from
guaranteeing the loan. The corporation was going to fail anyway.

Problems p. 953

4) As the new lawyer for Commerce Bank, you are asked to review the following loan
    proposal to P corp. The bank will loan $4m to P corp, and obtain a guarantee From S
    inc., one of P corps subsidiaries. What are the fraudulent conveyance risks if;
        a) both P and S are solvent? No fraudulent transfer because neither are insolvent
        b) P corp is solvent, and S corp is insolvent; Here 548(a)(1)(B)(ii) applies
            because S is insolvent at the time of the transfer. However under (B)(i), there
            are not enough facts given to determine whether S received reasonable
            equivalent value for the transfer. IF there was enough in the loan to pay of C’s
            and to help P corp generate a profit, then S corp received reasonably
            equivalent value for the transfer. Here because P is solvent it is more likely
            that S received a benefit from the transfer and thus received reasonably
            equivalent value.
6) LBO- may be example of fraudulent conveyance. This is where the takeover corp has
    no $, so they want to borrow $ from bank and secure the loan through the assets of the
    corp they are going to buy. They purchase the corporation by purchasing all the
    shares of outstanding stock.
Assume the target corporation goes Br. Can you avoid the conveyance of the SI in the
target corps assets?
Here the target corporation got nothing out of the transfer and has now, as a result of the
transfer, incurred a liability. The shareholders got the $ and the target corporation
incurred the liability . Thus the target corporation does not receive reasonably equivalent
value and the trustee can avoid the security interest if all the other requirements of 548 are
Or could try to get the $ back from the shareholders, but this is very hard to do unless the
shareholders are insiders.

548 (b)(1):If there exists an actual unsecured C who, under state law, could have avoided
a transfer, then the trustee can step into the unsecured C’s shoes and avoid the
transferring Br.

548 is modeled on state fraudulent transfer laws. It has a 1 year limit. Can only avoid
transfers occurring within one year of filing petition.

state fraudulent transfer law
D- C1 for $10K
Say that the payment to C 1 is a fraudulent transfer under state law.
C 2 is owed $3k by D

C2 could avoid the transfer of D to C1 toe the extent that it injures C2. In this scenario
C2 could avoid the transfer by $3k

544(b) allows the trustee to step into C’s shoes and apply state law. There must actually
be C who could have avoided a transfer under state law. If you can find an actual
unsecured C who could have avoided the transfer, then the trustee can step into C’s shoes

and avoid the transfer. The trustee can not only void the transfer to the extent it injures
C, the trustee in Br may avoid the entire transfer. So in the above eg the trustee could
void the entire $10K transfer, not just the $3K.
Under 544(b) the state law time limits apply, so if the state law allow an avoidance of
fraudulent transfers occurring 2 years prior to Br, this applies as opposed to the 1 year
time limit found in 548 fraudulent transfers section.

2. Improvements of Position Before Bankruptcy (know this for exam)

a. Preferences
      eg you pay a C prior to filing for Br. This may be an avoidable transfer.

       i. Elements of a preference

547 preferences (b)(sets out the five elements of a preference) A trustee may void any
transfer of property of the debtor if he can establish:
        (1) the transfer was to or for the benefit of a C; and
        (2) the transfer was made for or on account of an antecedent debt; and
        (3) the D was insolvent at the time of the transfer; and
        (4) the transfer was made
                (A)w/in 90 days of filing petition; or
                    (B) was made 1 year before the filing of the petition if the transfer was
                    to an insider; and
        (1) the transfer has the effect of increasing the amount the transferee would
            receive in a ch 7 case.

547(c) contains the exception to (b). Even if all elements are met in (b), if (c) is
applicable then the transfer will not be avoided.

547(f)raises a rebutable presumption of insolvency for transfers occurring 90 days prior to
filling petition.

Problems p. 957

1) D buys goods on 1/10. %/5 D pays C. D filed for Br on 6/6. Preference? Yes.
   Transfer, benefits C, for antecedent debt (debt occurs prior to transfer), while D is
   insolvent (547(f) raises rebutable presumption of insolvency for transfers occurring 90
   prior to Br), and C is better off by the transfer then he would be in ch 7 w/o the
2) 5/5 D buys goods on credit from C and makes a $20K down payment. ON 6/6, D
   files for Br. Is the 5/5 payment voidable transfer under 547(b)? No. It is not a
   payment for an antecedent debt. The payment and the debt were made at the same
   time. The transfer occurred at the same time D entered into the K. NO preference.

3) D borrows 3/3. D repays on 4/5. D files for Br 12/7. Not a preference because not
   within 90 days of filing for Br. However, if the transfer insider then you have a year
   look back period as opposed to 90 days.
4) D borrows $40K from partner L on 3/3. 4/5 D pays L $10K. 12/7 D files petition for
   Br. Preference? Yes the transfer is for an antecedent debt, assume that D was
   insolvent at time of transfer(no rebutable presumption so you must prove insolvency),
   L is an insider so the look back period is a year. So if all the other requirements are
   met there is a preference.

   5/5                               7/6                                   12/7
5) I---------------------------------I-------------------------------------I
$50K Debt incurred                 d corp pays C $6k            D corp becomes insolvent
D-Corp borrows                                                 and files petition for Br.
from C

P guarantees
loan to D corp

        a) Is the 7/6 transfer a preference? Not within in 90 days and there is nothing
            which states C is an insider so no
        b) What about P the president of the corp?
        547(b) (1)Here it’s a transfer for the benefit of P. The payment benefits P because
        it gets him off the hook for a portion of the guarantee. We must also determine
        whether P is a creditor because 547(b)(1) requires that the transfer be made for the
        benefit of a creditor. So is P a creditor?
        IF P pays C he can later file a proof a proof of claim in Br against D corp.

        P’s liability is contingent on D corp’s default on the loan, however this is
        irrelevant. If C gets $ from P then P would file proof of claim against D corp, so
        guarantors are considered creditors.

                 (2) The transfer is on account of an antecedent debt.
                 (3) There is no presumption of insolvency since the transfer was not made
                     90 days prior to filing for Br, so must prove insolvency
                 (4) The transfer was not made w/in 90 days of filing for Br so must be
                     dealing with an insider to have the 1 year look back period. Here P is
                     an insider so look back period if for 1 year prior to filing for Br. The
                     transfer occurred 1 year prior to filing petition so within time limit.
                 (5) P is better off with the transfer then he would be if he was in ch 7 w/o
                     the transfer. (the transfer reduced the amount of $ he had to pay C, so
                     say for eg he is going to get .10cents on the dollar from D corp in Br.
                     IF the transfer reduced the amount he had to pay C from $50K to $40k,
                     now in Br he has a claim for $40k so he gets $4,000, so he is out a
                     total $36K. {$40k paid to C - $4k received in Br} W/o the transfer, P
                     would have a claim for $50k and would receive $5,000. So he is out a

                    total of $45K {$50k paid to C - $5K received in Br} So P is better off
                    with the transfer)
All the elements are met and the transfer to P is preferential and can be avoided. Now
must deal with the issue of who the trustee can void the transfer and collect from. We
know that under 550 we can collect from the initial transferee or the entity for whose
benefit the transfer was made. Here there is no preference against C (did not meet
elements of 547(b)) so we cannot collect from the initial transferee because there is no
preference to C. We can collect from P. So P pays the estate $10k, and then C comes
after P for the remaining $40K. P is now out $50K and can file a claim for $50k against
P corp in Br.

   6/6                               7/6                              8/8
6) I--------------------------------I-------------------------------I
Debt incurred F friend of D pays C $6k                D files for Br
D borrows $6k
from C

        a) Is the 7/6 payment voidable transfer under 547(b)?
                547(b) This is not a transfer of an interest of debtors property so there will
                be no avoidable preference. It’s the friends property.

7) Same fact as above except now F gives D a check for $6k payable to D to pay the
      Here D is the one who makes the transfer to C. C should argue the earmarking
      doctrine. If the check is marked to D for the payment of debt to C, then the check
      is never really the property of D. D is just a conduit for the transfer and the funds
      are never property of D. Where the check is truly earmarked courts will accept
      this argument and will not avoid the transfer.

        Where it’s not earmarked, the check becomes property of D and he can do
        whatever he wants with the $. If he pays C, it’s a preferential transfer because it’s
        a transfer of an interest in property of D. {provided that all of the other elements
        are met, some courts will avoid the transfer}

        Other courts hold that even if the check does not say to D for C, then as long as D
        uses the funds to pay C then this is sufficient to invoke the earmark doctrine.

Zachmam homes:

This is a security transfer. Here C got a judgement lien on back rent. After the judgment
lien was entered, D filed for Br. D sought to have the judgment liens avoided as a
preference. Here we are looking at the 5th element. Did C get more from the transfer
then he would have gotten in ch 7 w/o the transfer.

Assume the case is a chapter 7 case, and assume for eg that D gets .10cents on the dollar.
If the prior transfer is not avoided, then C would get the .10 cents on the dollar as well as
the amount of the transfer. So he would be better off with the transfer then w/o it in ch7.
Remember that transfers include involuntary transfers, such as here (judgment lien).

Unless your paying C’s 100% in ch 7 then the unsecured C’s will always be made better
off by receiving the transfer prior to being included in the ch 7 distribution.

Here it’s an avoidable transfer, all other elements were met as well as the 5th element
discussed here.


1) Did the D make any payments to C? Did the D make any transfer to C? What
   transfer did the court avoid?
       No there was not any payments, it was an involuntary lien. The transferred
       interests was the lien. Want to avoid the lien not payments.

        1/15             4/5                             6/6
2) I-----------------I--------------------------------I
D borrows        4/5 D grants C a                    D files petition
$10k             security interest
                 in D’s equipment

        a) Can trustee avoid the transfer of SI as a preference? Yes. Elements of 547(b)
           are met. The transfer of D’s property interest benefits C, it’s an antecedent
           debt, D is insolvent (547(f) presumption), the transfer is 90 days prior to br,
           and C received more than he would have w/o the transfer in ch 7.
        b) What is the significance of the avoidance? C becomes unsecured C under
           502(h)- turns into unsecured claim.

   1/15                                       4/5
3) I-----------------------------------------I--------------------
  D borrows                                 D file for Br
$20k. The loan
agreement grants
C a security interest
in Ds equipment worth

       a) No preference here because we are not dealing with an antecedent debt. The
          debt and the security interest arose at the same time so this is not an avoidable
  1/15                4/5                         6/6

4) I------------------------I----------------------------I
 d Borrows                D defaults and             D files for Br
$200k form C              C repossesses
Loan gives C              equipment
SI in equip worth

        a) Can Trustee avoid the repossession as a preference?
        First must determine whether the repossession is a transfer. Section 101
        definition of transfer- any parting with property. So it is a transfer
        Here all the elements of 547(b) are met as to the repossession except for 5. C is
        not made better off by the repossession.

        b) As to the SI, the trustee may not avoid the SI, because there is no antecedent
           debt. The SI was created at the time the debt was incurred.

       If C took the equipment and sold it for $80k, C is not better off because he is
going to receive 100% of the secured portion of his claim ($80k) in Br. He has a secured
claim. So even if he didn’t repossess the equipment he is still going to have a secured
claim of $80k. And the unsecured claim ($120K) will be an unsecured claim. The
unsecured portion is not effected by the repossession, the repossession merely reduces the
amount of the secured claim, and C is not better off.

Note: no courts have held that filing in bad faith is cause for lifting the stay under
362(d)(1). Filing plan in bad faith is cause for dismissal of the case. (SEE THIS ISSUE

Barash Case:

Case is dealing with the issue of whether payments to undersecured C's are preferential.

C's must be better off by the transfer. To be better off the transfer must apply to the
unsecured portion of the debt.
If the transfer is applied to the secured portion, thus decreasing the secured portion of the
debt then C is not better off by the transfer in ch 7, because C will et 100% of secured
debt anyway. If the payments were applied to the unsecured portion then this would meet
the requirement that C was made better off by the transfer then he would have been in ch
7 w/o the transfer (this applies as long as C's are not going to get 100% of claims in ch 7).

Problems p.965

1) Here D granted C a security interest when the debt was incurred. Also the transfer of
   a cash payment is also a transfer of an interest of the D in property. However the
   transfer of the cash payment may not be avoided because, as stated in the brief, it did

   not make C better off. The trustee did not try and avoid the transfer of the security
   interest because it was made at the time the debt was incurred thus it was not a
   transfer made for an antecedent debt.

2)D owes C $20K. C ahs a security interest in property owned by D that has a value of
$33K. 90 day prior to filing petition D pays C $4k. Can the trustee avoid the $4,000
transfer? NO
C is an oversecured C. He is going to get 100% of his claim, thus C was not made better
off by the $4K transfer.
So a payment to a fully secured C will never be given preferential treatment.

3) D owes C $30k. G has guaranteed repayment and gave C mortgage on property worth
$50k. 90 days prior to filing petition, D pays C $30k. Can trustee avoid the $30k
Yes all the elements of 547(b) are met: 1) you have a transfer 2) on account of a
preexisting debt 3) made while D is insolvent (assume the presumption is not rebutted for
this problem 4) which was made 90 days prior to filing the petition; and ; 5) C is made
better off by the transfer then he would have been in ch 7 w/o the transfer.

Remember, the debt as to D was unsecured. Thus if D did not make the payment to C
then C could only collect against D in br. By D paying C $30k, he is better off then he
would have been had he just collected under ch 7 w/o the transfer because he would only
get br dollars. So the $30k transfer can be avoided.

Who can Trustee collect the $30k from.
550(1): The trustee may collect form the initial transferee (here C), or form the entity who
benefits from the transfer (here G).

So in the above eg, the trustee could collect the $30k from either C or G. IF the trustee
were to collect from C, then C could collect from G, and G would then have an unsecured
claim in Br against D.
If the trustee collect from G, then G could file an unsecured claim in Br against D.

4) Look at the date the payment was made in determining whether there is a preference.

547 c is the exception to 547 b. You don't look at 547c unless there is a preference under
547 b.

Matter of Tolana Pizza:

This case deals with the exception to 547 b.

547 (c)(2) The trustee may not avoid a transfer under 547(b) if:
                       (A) C can show that the debt had been incurred in the ordinary

                           course of business affairs of both D & C,
                       (B) the payment is also made and received in the ordinary course
                           course of business affairs for both D & C, and
                       (C) The payment had been made according to ordinary business
                           (deals with ordinary terms found in the industry, not between D
                           & C)

The focus in A is whether the debt was incurred in the ordinary course of business for
both C & D. In case at bar is it usual for Tolano pizza to incur a debt for sausage and in
the normal course of business for C is it normal to sell sausage on credit?

In B: The focus is on the payment. Was the payment made in the usual method. Is this
how C & D usual pay/accept payment.
For eg if D usually pays in check, yet under this transaction C is demanding payment in
cash. This would not be the method normally used in the ordinary course of business.

In C: Focusing on whether the payment complies with the ordinary business terms of the
industry, not the ordinary terms between C & D.

This case is focusing on the last of the three elements 547(c)(2)(C).

Under A & B you look at what the 2 parties do in the ordinary course of business, it's
Under C, you focus on whether the industry follows how C & D conduct business, it's

In case at bar C & D did not adhere to the terms in the K which required payment within
30 days, however this was normal business conduct for C & D. C always allows D to go
beyond the due date of payment. So elements A & B were met.

If the usual business conduct of creditor and debtor under A & B are very different then
what the industry normally does (which is analyzed under C) then the exception would
not apply because it would fail under C.

 So creditor and debtor's conduct may not be very different then what the industry
normally does, if it is then 547(c) exception for transactions made in the ordinary course
of business does not apply and the transfer may be avoided as a preferential transfer under

In determining industry standards, courts look to firms who are engaged in similar

Here the industry for meat suppliers generally allows payments beyond the 30 day due
date, thus Talano and C's actions were not against normal industry business transactions.

So the 547(c) exception to 547(b) applies and the transfer may not be avoided.

If the industry norm was very different then the conduct of creditor and debtor found in A
& B, then C would prevent the exception from applying. I think the courts look at this
like a balancing test.

Inventory liens:
      547(c)(5): The trustee may not avoid a transfer that creates a security interest in
      inventory or a receivable, or the proceeds of either, except to the extent that the
      aggregate of all transfers caused a reduction, as of the date of filing petition, of the
      insufficiency in the collateral securing the debt.

Eg C gets a security interest in D's inventory to secure a loan of $100k.

D is in the business of selling inventory and will receive cash or promises to pay(accounts
receivable) from the buyers.

SI in inventory            3 months later lots 1-99
Created. The                        were sold and now the
warehouse contains                  co has lots 100-199
lots 1-99                           in their warehouse.

The code allows for a floating lien. This means that the lien against lots 1-99 now applies
to the new inventory of lots 100-199. This way C does not have to perfect a new lien
each time the inventory is sold and new inventory is bought. The security interest
attaches to the new inventory.

547 (e) (3): a transfer is not made until the debtor has acquired the new property (here the
new inventory)

So the transfer of the security interest in the new inventory does not occur until D
acquires the new inventory.
The security interest in the new inventory is a preferential transfer of a security interest.
They are a security interest transfer for an antecedent debt. C's would never enter into
this kind of arrangement if their security interest could later be voided, thus under 547
(c)(5), the transfer is only avoided to "the extent that transfers causes a reduction, as of
the date of filing petition, of the insufficiency in the collateral securing the debt."

What does "the extent that transfers causes a reduction, as of the date of filing petition, of
the insufficiency in the collateral securing the debt", mean?

$100k debt                          new inventory           new inventory         D files for BR

SI in inventory       SI attaches                SI attaches          Inventory currently
Lots 1-99 currently                                                          worth $80K. Thus
in inventory is worth                                                        C has a secured debt
$50K.                                                                        of $80k, and un-
So secured debt of $50K,                                                     secured debt of $20K.
Unsecured debt of $50K

If all the lien transfers entered into prior to Br result in a decrease of the unsecured
portion of the debt (the "insufficiency of the debt") this is a reduction in the insufficiency
of the collateral securing the debt (reduction of unsecured portion of debt).

The initial insufficiency was $50K. (had an unsecured debt of $50K). At the time of
filing the petition the insufficiency was only $20K. (unsecured debt was only $20k at the
time of filing petition).

547(c)(5) allows the trustee to avoid the transfer only to the extent of the decrease in the
insufficiency of the debt. So the trustee may only avoid the amount of the decrease in the
unsecured portion of the debt.

Here the initial unsecured portion was $50K. At the time of filing for Br the unsecured
portion was $20K. Thus the unsecured debt, or insufficiency of the debt, was reduced by
$30K ($50K - $20K). So the trustee may avoid $30k as a preferential transfer under

Problems p.986

1)90 days before Br D owes C $100K. C has SI in inventory worth $60k. 20days before
br D owes C $100k and inventory subject to SI is worth $5k. On date of filing petition, D
owes $100k and inventory is worth $60k. What is the result under 547(c)(5)?

        90 days prior              20 days b/f                          Filed petition
        debt $100k                 $100k                                $100k
        SI $ 60K                   $ 5K                                 $ 60k
Insufficiency $40k                 $95K                                 $40k

We do have a preference because the transfer occurred when D acquired new inventory.
Here however, there is not change in unsecured portion ( no change in the insufficiency of
the debt) from 90 day prior to br to the date of filing the petition.
What happens in the day prior to the petition is irrelevant. So the e20 days prior is
irrelevant. Merely look at 90 days prior to the day of petition, if debt incurred less then
90 days back then look at the date the debt incurred, and look at the day of filing the

When D’s acquire new inventory that’s a transfer.

2)Now assume that C gets an SI in a coin collection. The value of the inventory
appreciates, although no new coins were purchased. Apply 547c5

20days b/f Br                                 D files petition
D borrows $200k                               debt = $200k
Si in coins $180k          Si value in coins incr $200k
Insufficiency $20k                                    $00

Here there is no preference under 547b so that we would apply an exception. The reason
there is no preference is that there is no antecedent debt and the fact that there are no later
transfers. Here were dealing with an appreciation in value of the coins which is not a

3)i's = new inventory
                          I-----i----i-----i-------i---i---------I petition
Debt 90 days b/f          $100k                                $150k
SI in inv                 $40k                                 $60k
Insufficiency             $60k                                 $80k

Here the amount of the unsecured portion, or the insufficiency increased so 547 c 5 would
not apply because its not a decrease in the insufficiency.

90 days prior                                                                    Petition filed
Debt            $200k                                                            $140k
Si              $90K                                                             $60k
Insufficiency $110                                                               $80k
Here there is a decrease in the insufficiency (unsecured portion) so you have an avoidable
preference. 110k-80k= $30k improvement, thus you decrease the Secured debt on the day
of filing by $30k improvement ($60k Si on date of filing - $30k avoidable preference =
$30k security interest after the avoidable preference is taken out. )

So $30k preference and $30k secured claim.

In re Ebbler Furniture:

Bank had a SI in inventory and accounts of D. D filed for ch 7 &. The issue of the case
is how to value the inventory under 547(c)(5). The court held value should be base on
       1. Bank argued that the value should be cost plus the markup- so retail value

               a) Ct rejected- Majority view is that the value should be cost because the
                  parties themselves operate on this basis. If the bank were to repossess,
                  they credit acct for wholesale not retail
               b) Concurring Easterbrook judge said that the court should consider the
                  wholesale value because considering markup which includes
                  reputation and marketing of the store is not what the bank had an SI in.
                  Only had an SI in goods not the going concern.
               c) Another argument is that the SI follows the goods. SI attaches to the
                  proceeds received by D from its account receivable. So SI attaches to
                  cash which includes the markup marketing etc, so this is why the
                  bank’s SI in the inventory should be valued at retail and not
                  wholesale. So this is an argument against Easterbrooks theory.

In re Ladera Heights Case:

D was a hospital who continued to get medical supplies from medical supplier C. D
made payments on past due debt and the supplier continued to ship new supplies.
The trustee wants to avoid the payment as a preference under 547b. All of the elements
of 547b were met so it was a preference payment to C. C here has 2 defenses:
1) The payments were made in the ordinary course of business and should not be
    avoided pursuant to 547(c)(2).
2) C’s second defense is that 547(c)(4) applies and that his continuing shipments
    constitute new value sufficient to preclude recovery by the trustee.

The Creditors first argument fails based on the fact that C was excepting payments well
beyond the due date which is an indication that the transfer is not in the ordinary course
of business. Also the industry does not regularly accept late payments. Thus 547(c)(2)
does not apply

547(c)(4); the trustee may not avoid a transfer to or for the benefit of a creditor, to the
extent that, after such transfer, such creditor gave new value to or for the benefit of the
                 (A) no secured by an otherwise unavoidable security interest; and
                 (B) on account of which new value th3e debtor did not make an otherwise
                     unavoidable transfer to or for the benefit of such creditor

How does the new value exception work?

Net out new value of shipments given to D. The result is no preference.
This court applies the subsequent advance rule found in the Garland case. Under the old
Br act, you could net out or offset any preference payments by the value of shipments
made during the 90 day preference period, the exchanges are netted out. Under the code

congress changed this. Now the code specifies that the new value provided by the
creditor must come after the transfer by the debtor.
Under 547(c)(4)’s subsequent advance rule, this makes preferential transfers avoidable
until they are offset by subsequent advances of new value by C.

If the new value by C exceeds the amount of a preferential transfer, then the defense is
complete as to that transfer. Preference payments not netted out by new value are carried
forward. Surplus of new value is not carried forward and only applies back to the
previous preferential payment.

In Case at bar 547(c)(4) does apply . Here is the courts application:

Check date             Check amount                 Goods shipped by C Preference
(payment date)                                (New Value)
11/15                  $12,318.81                                        $12,318.81
                                                    $21,416.10                  0.00
11/30/1999             $21,813.79                                        $21,813.79
                                                    $9,752.18            $12,061.61
12/15                  $11,644.11                                        $23,705.72
                                                    $12,190.38           $11,515.34
12/29                  $21,416.10                                        $32,931.44
                                                    $14,821.70           $18,109.74
1/15                   $9,752.12                                         $27,861.86
                                                    $17,529.88           $10,331.98
                                                    $ 748.80             $ 9,583.18
TOTAL                  $76,944.93                   $76,459.04           $9,583.18
                                                                   avoidable preference

*Can’t carry forward new value but can carry backward. Reason-new value must go
Use the new value to net out preference. But can’t carry excess value forward.
Apply new value back to preceding transfer to reduce preference to extent of new value.
But the preference balance is carried forward.
Final preference balance is $9,583.18. This is how much is avoided as a preference.

a) What if C got another payment after 1/15 of new value? Then the preference balance
   would go up-but there are several approaches:
      1) Restrictive approach- creditor unfriendly approach. If the new value is paid
          off by the payment, then you can’t apply the new value to decrease the
          preference balance. For eg in the 11/15 new value shipment and the 11/30
          payment. The 11/30 payment completely paid off the 11/15 new value
          shipment. Thus some courts hold that the new value of 11/15 cannot be used
          to decrease the preference balance of $12,318.81 for 11/15. So under this
          approach the new value must go unpaid.

       2) This court rejects this approach. If C got a payment for only $100 after a new
          value transfer of $22k he would not be able to use the $22k new value
          shipment to reduce the preference balance. This court, which is the majority
          view, states that new value applies backwards to past preference balance, but
          the surplus of new value is not carried forward. However, the preference
          balance is carried forward.

By making the shipments of new value, C is putting something back into the estate after a
preferential payment, thus the estate is replenished by the new value and the estate is no
worse off. Thus the preferential payment does not need to be avoided to the extent that
new value is placed into the estate by subsequent shipment.

544 a “Strong Arm Power”

Remember that under 544b the trustee has the power of an actual unsecured C and can
step in his shoes and avoid the claim if the C could have avoided the claim under
applicable state law.

544 a:
1) It gives the trustee states as a hypothetical lien creditor. There does not need to be an
   actual lien creditor as 544b does require that there be an actual unsecured C who
   could have avoided the transfer in Br. It’s as though the trustee sued and got a lien.
   This power arises at the time of filing the petition.

Under article 9 D borrows $ and C gets an SI in equipment of D. C will file a financing
statement which says you have an SI in the equipment. This is how you perfect the lien in
article 9.
Now the issue becomes whether or not the C files the financing statement before D filed
the petition causing the trustee to automatically become a lien C. If the C did file the
financing statement before the petition, thus perfecting the lien, then the secured party
wins and still holds his security interest. If C perfects after the filing then the secured
party looses to the trustee. The trustee now has the lien rights.


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