Chapter 30 Bankruptcy Law

1. Chapter 30Bankruptcy Law

2. Bankruptcy and Reorganization • Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. • Bankruptcy Reform Act of 1978, amended by Reform Act of 1994. • Federal court under U.S. district court, can appeal to district courts. • Federally appointed judges.

3. §1: Types of Bankruptcy Relief [1] • Bankruptcy code has 8 chapters. • 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. • Chapter 7 - liquidation proceedings. • Chapter 9 - adjustment of debts of a municipality.

4. Types of Bankruptcy Relief [2] • Chapter 11 – reorganizations. • Chapter 12 - adjustment of debts of family farmers with regular incomes. • Chapter 13 - adjustment of debts of individuals with regular incomes.

5. §2: Liquidation Proceedings • Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee. • Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged. • Available for any person, individual, corporation, partnership. • Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors.

6. Filing the Chapter 7 Petition • Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. • Voluntary vs. Involuntary bankruptcy.

7. Voluntary Petition [1] • Petitioner must understand there are other chapters available. • Debtor does not have to be insolvent. • List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. • Swear to these and sign. Federal crime to misrepresent.

8. Voluntary Petition [2] • Court issues order of relief. • Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. • Court will deny if “substantial abuse” of Chapter 7.

9. Involuntary Bankruptcy [1] • Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). • If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition.

10. Involuntary Bankruptcy [2] • If there are less than 12 creditors, one or more having a claim of $10,000 may file. • Court will order relief if Debtor is generally not paying debts as they come due.

11. Involuntary Bankruptcy [3] • Court will order relief if: • A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing. • Penalties for frivolous petitions against debtors, including Punitive damages.

12. Automatic Stay • Either voluntary or involuntary. • Creditors cannot commence or continue most legal actions. • Damages for violation of stay. • Creditors can get “adequate protection.” • Periodic or one time cash payments or indubitable equivalent.

13. Property of the Estate [1] • Debtor’s Estate includes: • All Debtor’s legal and equitable interests in property presently held, including community property; • Property transferred in a “voidable” transaction; and • Property which Debtor becomes entitled within 180 days after filing.

14. Property of the Estate [2] • Estate includes (cont’d): • Proceeds and profits from the property of the estate. • After-acquired property such as inheritances, property settlements, and life insurance death proceeds. • Case 30.2: In Re Andrews(1996).

15. Creditor’s Meeting and Claims [1] • Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. • Within 90 days, Creditors must file “proof of claim” with court clerk. • Leases cannot be for more than one year.

16. Creditor’s Meeting and Claims [2] • Allowed unless disputed. • If claim is disputed or unliquidated, court will decide value. • It is a crime to file false claim. • Employment contracts and real estate.

17. Exemptions • See list in text pages 549-550. • States may pass law requiring Debtor use state exemptions. • In some states, Debtor may choose state or federal exemptions.

18. Bankruptcy Trustee • Court-appointed until first meeting of creditors. • Creditors elect permanent trustee • Administers estate. • Collects proceeds, liquidates assets and pay Creditors in order of priority.

19. Trustee’s Powers • Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: • Debtor against the creditors. • Lien creditors against the creditors. • Bona fide purchaser against the creditors. • Trustee still loses to the pmsi creditor who perfects within his “magic” 10-day period.

20. Voidable Rights Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

21. Preferential Transfers [1] • A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. • For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

22. Preferential Transfers [2] • Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. • Creditor gets more than he would in a Chapter 7. • Consumer can transfer up to $600 without constituting a preference.

23. Liens on Debtor’s Property • Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. • Can avoid liens which were unperfected on date of bankruptcy.

24. Fraudulent Transfers • Trustee may avoid fraudulent transfers made within one year of filing of petition. • Trustee may proceed under state law for fraud with a 3 year statute of limitations.

25. Distribution of Property [1] • If Secured property: • Consumer debtors. • Have 30 days from filing petition or before first meeting of creditors. • Debtor must tell what she intends to do with collateral-- keep or surrender. • Trustee must enforce within 45 days. • If surrenders: creditor can keep or sell. • If creditor keeps = full satisfaction of debt. • If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.

26. Distribution of Property [2] • Unsecured property • Paid according to bankruptcy law. • All of one class must be paid before moving to next. • Creditor within last class receive proportionately if not enough. • See Priority List in text. • All creditors paid, trustee gives extra back to debtor.

27. Discharge • Exemptions. • Objections to Discharge. • Effect of Discharge. • Revocation of Discharge. • Reaffirmation of a Debt.

28. Exceptions to Discharge(List on p.604) • Claims for back taxes. • Claims for amounts borrowed by Debtor to pay federal taxes. • Claims against property/money obtained by Debtor under false pretenses. • Claims by Creditors who did not know about bankruptcy.

29. Reaffirmation of Debt • Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. • Agreement is filed with court. • Debtor can rescind agreement at any time.

30. § 3: Reorganizations • Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. • Same debtors as are eligible under Chapter 7.

31. Reorganizations [2] • “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. • “Workouts”.

32. Reorganizations [3] • Debtor in Possession (DIP). • Trustee may be appointed. • DIP has same powers as trustee in Chapter 7. • Strong-arm clause. • Collective Bargaining Agreements. • Creditors Committees. • The Reorganization Plan.

33. §4: Additional Forms of Bankruptcy Relief • Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750. • Not for partnerships, corporations.

34. Additional Forms of Bankruptcy Relief [2] • Chapter 12: Family Farmer Plans • “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. • Procedure for filing. • Content of plan. • Court confirmation.

35. Case 30.1: In Re Lamana(Voluntary Bankruptcy) • FACTS: • Lamanna lived with his parents and had no plans to move out. His monthly expenses were $580. His monthly income was $1,350.96, leaving a difference of $770.96. • During a four-week period, he charged $9,994.45 on credit cards. Three months latter, when his total unsecured debt was $15,911.96, he filed a Chapter 7 petition in a federal bankruptcy court. • The court dismissed Lamanna’s case because he was capable of paying all of his debts under a Chapter 13 repayment plan and dismissed the case.

36. Case 30.1: In Re Lamana(Voluntary Bankruptcy) • HELD: AFFIRMED • Lamanna argued that he was being penalized for living with his parents. • Granting Lamanna’s petition would constitute substantial abuse. Under a “totality of the circumstances” test, Lamanna “has sufficient disposable income to repay his debts under a Chapter 13 repayment plan in three to five years.”

37. Case 30.2: In Re Andrews(Property of the Estate) • FACTS: • Tarmac Acquisition, Inc., bought AMAX Corp. The AMAX owners, including John Andrews, signed agreements not to compete with Tarmac. • Andrews was to receive $1 million, payable in quarterly installments over a five-year period. • Three years later, Andrews filed a bankruptcy petition. He asked the court not to include, in the property of his estate, any future installments. The court refused. Andrews appealed.

38. Case 30.2: In Re Andrews(Property of the Estate) • HELD: • The Fourth Circuit affirmed. • “Pre-petition assets, like the NCA [noncompetition agreement] payments, are those assets rooted in the debtor’s pre-petition activities, including any proceeds that may flow from those assets in the future.” • The payments “are plainly rooted in, and grow out of, Andrews’s pre-petition activities.”

39. Case 30.3: In Re Jercich(Discharge) • FACTS: • In 1981, Petralia began to work for Jercich, Inc., a mortgage company wholly owned and operated by George Jercich. • Petralia’s primary duty was to obtain investors to fund the home loans. Jercich agreed to pay Petralia a salary plus monthly commissions for loans that were funded through his efforts. • When Jercich failed to pay the commissions, Petralia quit and sued Jercich. Jercich filed bankruptcy. The bankruptcy court held the debt was dischargeable. Petralia appealed.

40. Case 30.3: In Re Jercich(Discharge) • HELD: REVERSED. FOR PETRALIA. • Jercich’s debt to Petralia was not dischargeable. • “An intentional breach of contract generally will not give rise to a nondischargeable debt.” • The court held, however, that “where an intentional breach of contract is accompanied by tortious conduct which results in willful and malicious injury, the resulting debt is excepted from discharge.”