Documenti di Didattica
Documenti di Professioni
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Long Term
Land Sh. Equity (Interests)
Building
Tools/Equip.
IP
Intangibles (Good will)
Net worth = assets – liabilities
Note: value of assets or liabilities not always certain. Eg. assets valued at “80” might be a reflection of the fact that
there’s a 50% chance the Co. will yield 160 and a 50% chance it will yield 0. Or a 50% chance it will yield 81, and 50%
at 79. In other words, share value of a company may be vastly different that asset value listed on balance sheet.
a. (A) [Intentional Fraud:] made such transfer or incurred such obligation with actual
intent to hinder, delay, or defraud any entity to which the debtor was or became, on
or after the date that such transfer was made or such obligation was incurred,
indebted; OR
ii. Under §727—you don’t get to discharge your debts in bankruptcy if you are
found to have had actual intent—thus in settlement, you’ll want to take the
latter route rather than former.
iii. What if you make a fraudulent tx, but then undo it?
1. Nothing in statute lets you off the hook for reversing your initial
fraudulent tx.
2. In a real case, judge let debtor off the hook.
b. (B) [Less than Reasonably Equivalent Value]
i. (i) received less than a reasonably equivalent value in exchange for such
transfer or obligation; and
ii. (ii)
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1. (I) was insolvent on the date that such transfer was made or such
obligation was incurred, or became insolvent as a result of such
transfer or obligation;
2. (II) was engaged in business or a transaction, or was about to
engage in business or a transaction, for which any property
remaining with the debtor was an unreasonably small capital;
3. (III) intended to incur, or believed that the debtor would incur,
debts that would be beyond the debtor’s ability to pay as such
debts matured; or
4. (IV) made such transfer to or for the benefit of an insider, or
incurred such obligation to or for the benefit of an insider, under an
employment contract and not in the ordinary course of business.
iii. Proving value often difficult, but not as difficult as proving intent.
iv. Most common type of LRE fraud: debtor gives big gift to family member
while owing $$ to others.
c. Intentional Fraud v. Based on Exterior Circumstances (less than rsbly equiv value,
secrecy, etc.)—the line gets blurry
2. CA: 4 year SOL for fraud. Doesn’t specifically adopt UFTA, so likely 4 years to bring an action
here. But, bankruptcy only requires disclosure for 2 years, so, unless deposed, might get
away with a fraud if 2+ years.
vi. 11 USC §67, (d (1)(e): Consideration given for the property or obligation of a debtor is 'fair'
1. When, in good faith, in exchange and as a fair equivalent therefor, property is transferred or
an antecedent debt is satisfied, or
2. When such property or obligation is received in good faith to secure a present advance or
antecedent debt in an amount not disproportionately small as compared with the value of
the property or obligation obtained."
vii. Kindom Uranium Corp v. Vance (10th C 1959)
1. Mortgage Deeds—must be properly recorded for a purchaser to establish rights against a
third party (i.e. A sells to B, B doesn’t records; A sells to C, C records; C wins over B)
2. D transfers her house to Kindom Corp, of which she is a Sh and Dir in exchange for some
debt relief plus shares. D in auto wreck with P, so P sues. Only then does Kindom records the
deed. P still owed 5k, so gets deficiency judgment. D files bankruptcy.
3. Intentional Fraud? Court holds that no evidence of fraudulent intent to hinder, delay or
defraud creditors when she made the transfer. No intent by her when perfected b/c that was
up to the transferee.
a. Court doesn’t find that Corp. and D are one and the same. No veil pierced.
4. Less than Rsbly Equiv Value (No fair consideration)?
a. Valuing stock merely at “par value” is too inexact where stock has never been
traded, nor dividends paid, and company shows a net operating loss.
viii. Other Forms of Fraudulent Transfer
1. Corporation law prohibits directors from distributing dividends to Shs when Corp is
insolvent, or the tx would render it insolvent. While not called fraudulent tx law, it it very
similar to Less than Reasonable Equiv. Value fraud.
2. UCC Art. 6 “Bulk Tx Act” (§6104(1)(c)).
a. Bulk sale = a sale not in ordinary course of biz of more than ½ of seller’s inventory.
Seller in a bulk sale must give notice to all unsecured creditors of the sale. If not,
transferee may have to pay twice (the buyer and the unsecured creditor).
b. (Secured creditor can simply go after buyer.)
c. Still law in CA, but not in many states. Policy is to protect against debtors liquidating
assets and leaving town. Puts liability on transferee, so they’ll be more careful in
buying.
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ix. Fees on Fraudulent Tx Cases
1. Defending against a fraud claim is costly, and you often aren’t sure it will be plead against
you or not. Bankruptcy judges reluctant to let you renegotiate fees after the fact. If likely to
be an issue, better to charge more up front—but don’t breach confidentiality on why when
explaining why fees are so high. Tough issue.
c. Multi-party sales and the Eternal Triangle: seller sues subsequent BFPV when buyer has not made good on
promise and has fled the jx or does not have “enough to go around”
i. UFTA § 8 Defenses, Liability, and Protection of Transferee.
1. (a) A transfer or obligation is not voidable under Section 4(a)(1) against a person who took in
good faith and for a reasonably equivalent value or against any subsequent transferee or
obligee.
a. Good faith and REqV are often intertwined: low value is evidence of bad faith.
b. Any transferee down the line who can establish bona fide purchaser (good faith and
equivalent value) will be able to keep the property
c. Nature of bona fide purchaser defense is intensely fact driven
d. Exception: Can’t take title from a thief
2. (b) Except as otherwise provided in this section, to the extent a transfer is voidable in an
action by a creditor under Section 7(a)(1), the creditor may recover judgment for the value
of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy
the creditor's claim, whichever is less. The judgment may be entered against:
a. (1) the first transferee of the asset or the person for whose benefit the transfer was
made; or
b. (2) any subsequent transferee other than a good-faith transferee or obligee who
took for value or from any subsequent transferee or obligee.
i. So, a non-BFP transferee may have to pay twice. The seller and the original
creditor.
3. (c) If the judgment under subsection (b) is based upon the value of the asset transferred, the
judgment must be for an amount equal to the value of the asset at the time of the transfer,
subject to adjustment as the equities may require.
4. (d) [BFP defenses against creditor suit] Notwithstanding voidability of a transfer or an
obligation under this [Act], a good-faith transferee or obligee is entitled, to the extent of the
value given the debtor for the transfer or obligation, to
a. (1) a lien on or a right to retain any interest in the asset transferred;
b. (2) enforcement of any obligation incurred; or
c. (3) a reduction in the amount of the liability on the judgment.
5. (e) A transfer is not voidable under Section 4(a)(2) or Section 5 if the transfer results from:
a. (1) termination of a lease upon default by the debtor when the termination is
pursuant to the lease and applicable law; or
b. (2) enforcement of a security interest in compliance with UCC Article 9.
6. (f) [Insider Transactions] A transfer is not voidable under Section 5(b):
a. (1) to the extent the insider gave new value to or for the benefit of the debtor after
the transfer was made unless the new value was secured by a valid lien;
b. (2) if made in the ordinary course of business or financial affairs of the debtor and
the insider; or
c. (3) if made pursuant to a good-faith effort to rehabilitate the debtor and the transfer
secured present value given for that purpose as well as an antecedent debt of the
debtor.
ii. Nat’l Westminster Bank NJ v. Anders Engineering Inc.
1. E&KAnders (for debt forgiveness of individual debt of E). AndersChaj (for 55k). Creditor
of E&K sues A and C—alleged innocent parties.
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2. Holding 1: An insolvent pship (E&K) transfer to a corp (Anders) was not for “fair
consideration” when the corp. merely forgave the debt of a different pship even though the
partners of the insolvent pship were also partners of the different pship.
a. Debt forgiveness can be fair consideration, but must directly forgive debtor.
b. Prof doesn’t like this holding: general partners have unlimited liability for debts of
the other Ps. Forgiving one partners debts outside pship helps partner.
3. Holding 2: Remand. If C purchased in good faith and for REqV from Anders, C has a defense
to the claim.
a. Question of fact as to whether REqV—that C actually paid 55k for property.
4. Note: 1st purchaser can’t be a BFP (UFTA §8(b)(1).
iii. Graves Motos Inc. v. Docar Sales, Inc. (414 F. Supp 717 (1976))
1. Park (via Shelton pres.) bought a truck from Docar with a NSF check. P owed Graves on 3 NSF
checks, so Park executed a bill of sale on the truck to G to satisfy debt, but retained
possession of the truck for deliveries on G’s account.
a. Truck worth 13.5K (per court) and S gave up the truck to satisfy 9.1K debt.
2. Issue: Can G keep the truck as a BFP?
3. Court suspicious of G’s receipt of truck, as REqV maybe not present (13.5k v. 9.1K), G let P
retain possession (similar to Twine’s case) and G accepted 3 NSF checks (indicating he knew
P was in financial straits and may not have good title to the truck).
a. Fact specific analysis with hallmarks of fraud. But, no smoking gun. How do we know
the car was really worth 13.5K? Retention of pssn. could be to allow for
rehabilitation.
4. Does UCC Art 9 apply to this situation?
iv. UCC 2-403: Alternate BFP argument.
1. When a seller retains interest in property not because he wants the property back but to
secure against nonpayment of the debt, it is a secured transaction rather than the retention
of title
2. Docar = Transferor1. Park = Purchaser1 and Transferor2. Graves = Purchaser2.
3. UCC 2-403: A purchaser in goods (P2) acquires all title which his transferor (P1/T2) had or
had power to transfer except that a purchaser of a ltd. interest acquires rights only to the
extent of the interest purchased. A person with voidable title (P1/T2) (“voidable title”
never defined in UCC) has power to transfer good title to a good faith purchaser for value,
after goods have been delivered, even though
a. The transferor (T1) was deceived as to the identity of the purchaser (P1/T2)
b. The delivery was in exchange for a NSF check (from P1/T2)
i. What if original K, seller retains title to the goods pending check clearing?
Protect the original seller or the BFP?
ii. If every prospective buyer has to investigate, there will be fewer deals. If
you like deals, you like rules that protect BFPs.
c. It was agreed that the transaction was to be a cash sale (w/ P1)
d. The delivery was procured through fraud punishable as larcenous under criminal law
i. Doesn’t include theft—Fraud (even criminal) and NSF checks are part of
commerce but theft and burglary are not
4. BFPV must show: BF + PV
a. Good faith—didn’t know or didn’t have reason to know
b. Purchase—relinquish something of equivalent value to his or her detriment
i. Forgiveness of an antecedent debt can be the value relinquished, however,
courts don’t treat this the same as giving up cash
ii. A good argument for BFPV is reliance to detriment—BFPV may have passed
up the chance of getting other property of the buyer if he hadn’t taken the
property in issue
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5. Thief can’t transfer good title to a BFPV
a. Many art cases where original owner gets a painting back after decades of changing
hands.
b. Exception: You can take good title of money from a thief (thief pays w/ stolen $).
6. Entrustment
a. UCC 2-403(2): any entrusting of goods to a merchant who deals in goods of that
kind gives him power to transfer all rights of the entruster to a buyer in ordinary
course of business
i. E.g. a guy who repairs toaster, you entrust it to him and he sells it. BFP gets
to keep it.
ii. A thief can’t be the entruster: see next case (thief can’t “entrust” property
to a pawnbroker.)
b. UCC 2-403(3): Entrusting includes any delivery and any acquiescence in retention of
possession regardless of any condition expressed between the parties to the
delivery of acquiescence and regardless of whether the procurement of the
entrusting or the possessor’s disposition of the goods have been such as to be
larcenous under criminal law
7. Depetris v. Warnock (NY 2000)
a. Thief steals D’s watch and sells to pawnbroker. PB sells to Plaintiff. Plaintiff gives the
watch to police for evidence in thief’s trial. Police give the watch back to D. P sues.
b. UCC §2-403 allows that a person w/ voidable title has power to tx a good title to a
BFP. But, thief had no title to sell, so PB didn’t acquire title, voidable or otherwise.
Thus PB had no title to transfer to P.
c. Court does not address whether P has any claim against PB.
VII. The Market for Contract Claims (aka Negotiable Instruments/Commercial Paper/Bills and Notes)\
a. Assignment of Rights:
i. Seller sells goods in return for buyers promise to pay over time: an installment K. This property right,
the installment K, can be sold to the 3 rd party (bank, finance company, mfg. co., etc.) In the event of
default, the 3rd P brings the suit.
ii. Does the 3rd P have a right against the original seller or just the seller? Recourse or non-recourse?
Governed by the terms of the K—what the parties agree to.
1. If so, typically conditioned on the 3rd P attempting to collected from buyer 1st.
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2. Recourse v. non-recourse isn’t necessarily better than the other. Anything is a bargain at the
right price. If you must pay $9,500 for a $10,000 loan worth only $9,346, you are worse off
than if you can buy a loan worth $9,000 for $8,500.
iii. Discounting: Time value of Money
1. Buyer of K right will want a discount on the future value of the claim.
2. 2 factors influence discounting (that get impounded together).
a. Market interest rate (opportunity cost of money): What I could earn with that
money by investing.
b. Probability of repayment (risk).
i. Buyers will seek means to determine which buyers are more credit-worthy.
iv. Double Selling
1. Seller misleads a 4thP that he still has rights to the loan and sells it to him. Who wins b/t the
3rdP and 4thP?
a. In this situation, how does the original buyer know he’s paying the right party?
Opens the risk buyer may have to pay twice (and then sue the seller).
2. Need a rule of priority b/t 3rd and 4thP.
a. Governed by UCC where personal property.
b. Rule is 1st in time.
c. First to file wins.
i. This system is well established and works well.
ii. Similar to a secured v. secured priority rules
3. Works the same in real estate context. The transfer of the payment right for real property is
not real property itself—it’s personal property.
b. New world: Seller as Broker, Bank as Bulk Buyer
i. Nowadays, more often than not, the seller is not the owner, but a broker. More often than not, the
broker disappears (esp. in a downturn). Broker gets his commission and that’s all he’s interested in.
Broker also has no incentive to make sure that the deal b/t the buyer and the real seller works: his
only interest is the commission.
ii. Nowadays, loans nearly always transferred on the secondary market in bulk (“securitization”). Bank
puts a value on thousands of deals and puts them into a new entity, and then shares in the new
entity. So the deal is owned by the investors of the new entity.
1. Beauty of it is that it diversifies and reduces risk, thus lowering overall price to consumers.
2. Ayer: trouble with current market is that the loans purchased all look too similar: not
diversified enough loan types.
iii. In the old days, the bank and seller would get together to try and work something out. Who does a
buyer work with at this point? New RE market is struggling to do “work-outs” with struggling buyers.
iv. Securitization occurs in all sorts of markets: cars, bankruptcy claims.
c. Negotiable Instruments; Promissory Notes; Holder in Due Course
i. Assignee of a simple contract right (not a NI), stood in the shoes of the contractor and took subject
to any defense that could have been asserted.
1. 3rdP sues buyer for stopping payment. B stopped paying b/c property warrantied to work and
this defense survives. B’s rights against original seller were assigned to 3 rd P.
ii. But, suppose the deal b/t B and S was a promissory note (a negotiable instrument).
iii. Step 1: Negotiable instrument: the instrument is the obligation. Must be able to produce the
instrument to win.
1. This simplifies the conflict b/t 3rd P and 4thP.
iv. Step 2: If the document is a negotiable instrument, then 3 rdP takes free of all the defenses that could
have been brought against him.
1. The 3rd party becomes a holder in due course. (HIDC)
2. 3rdP sues buyer. Buyer says washing machine doesn’t work. 3 rdP can now say: so what? I’m a
HIDC.
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3. HIDC bears a family resemblance to a BFP. Concedes the underlying validity of a deal made
with someone else, but that deal isn’t binding on me.
4. HIDC: takes free of defenses: limited exceptions.
a. Forgery: If buyer can convince the court that he never signed a NI. 3 rd P’s is a forgery.
b. Fraud. If buyer didn’t know he was signing an obligation creating a NI. Cases are
rare, but if can convince court that B was defrauded as to the nature of the paper,
will treat him like the forgery case.
c. Minors
d. Signed under Duress.
e. Rec’d a Discharge in bankruptcy.
v. Definition of NI UCC 3-104(a):
1. "NI" means an unconditional promise or order to pay a fixed amount of money, with or
without interest or other charges described in the promise or order, if it:
a. (1) is payable to bearer or to order
i. Needs these magic words
ii. E.g. a check, a bond (formalized promise to pay)
b. (2) is payable on demand or at a definite time; and
i. E.g. “I promise to pay Jack on order or demand”
c. (3) [no conditions]does not state any other undertaking or instruction by the person
promising or ordering payment to do any act in addition to the payment of money.
2. In other words
a. The NI is a stripped down promise that almost looks like money. A thief could take a
NI and it would be of great value. E.g. signed check.
b. We just want the promise to pay money and that’s all.
i. Signed note stating: “I owe you $75”
ii. Could even be an oral promise, though proof more difficult)
iii. Not a NI: I promise to pay Jack $100 if he mows the lawn.
vi. Definition of a HIDC? UCC § 3-302.
1. First, the instrument must appear authentic. More precisely: the court must find that “the
instrument when issued or negotiated to the holder does not bear such apparent evidence
of forgery or alteration or is not otherwise so irregular or incomplete as to call into question
its authenticity.”
2. Further, the holder must take “for value.”
3. Finally, he must take “in good faith” [similar to “appear authentic”]. Specifically, the court
must find that he took without notice:
a. That the instrument is overdue or has been dishonored or that there is an uncured
default with respect to payment of another instrument issued as part of the same
series,
b. That the instrument contains an unauthorized signature or has been altered,
c. Of any claim to the instrument described in Section 3-306, and
d. That any party has a defense or claim in recoupment.
vii. A.I. Trade
1. Buyer claims he has a defense that should be good against the 3 rd party, claiming he’s not a
HIDC. 3rd P assisted in setting up the financing of the deal.
2. Court goes through a lengthy analysis to find that involvement with financing does not equal
involvement w/ the original deal such to lose HIDC status. Must show involvement w/
original deal.
viii. Consumer Buyer for personal or family household goods: No HIDC
1. If we’re talking about personal or family household goods, the HIDC has been outlawed.
Cites: CA Unruh Act. FTC regs also nationalized this law. 10 CFR §433.2.
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2. B buys widget with an installment K, and is transferred to a 3 rd P. Consumer law now offers
greater protection for consumer buyers from savy sellers. Some is in UCC. Also can’t slip the
language in on the sale where consumer waives interest if transferred.
3. Cal. Civ. Code § 1804.1: No contract or obligation shall contain any provision by which:
a. The buyer agrees not to assert against a seller a claim or defense arising out of the
sale or agrees not to assert against an assignee such a claim or defense other than as
provided in Section 1804.2. The provision is part of the Unruh Act, California’s retail
installment sale act, governing installment sales of consumer goods.
d. Liquidation v. Collection
i. Market value of a right to a future stream of payment = the present value of these future claims,
discounted at the opportunity cost of the capital.
ii. Should a judge order liquidation of the claim (sell it on the open market), or simply collect out of the
cash flows in the future as they arrive?
1. Many creditors want to collect out of the cash flow. Liquidating the claim often results in a
worthless claim on the open market.
iii. CCP ' 701.520 It provides that property "shall be collected rather than sold." It also provides that a
creditor may seek immediate sale; in such a case the court may order either collection or sale
"depending on the equities and circumstances of the particular case."
iv. What sorts of equities and circumstances do you suppose the court should take into account?
v. Receiver: One way to implement such a scheme is to get the court to authorize appointment of a
“receiver” to collect and disburse the money
e. Contingent Remainders/Pending Personal Injury Actions
i. Suppose a mom writes a will giving money to daughter for life, remainder to son, if he is then living
and d is still alive. This is a contingent remainder.
1. CCP 699.720: CRs are not subject to execution—cannot get a lien on it (or levy on it.)
a. But, you can take levy on (or take a security interest) accounts not yet collected.
Why the difference? Not clear.
2. (CCP 708.410)(a)(1). Contrast: Cannot levy on a Pending Personal Injury Action. But may be
able to get a lien on it.
3. Not a clear reason why you can’t get a lien on CRs. CRs may not be worth very much, but
that just means the price will be discounted. Not clear why Personal Injury Actions are
treated differently, as they both look like CRs.
IX. Bankruptcy
a. The Broken Bench: Hx of Bankruptcy
i. Bankruptcy grows up side by side with a commercial economy.
1. Device needed for collecting and liquidating claims.
2. Bankruptcy used to be penal.
ii. Original notion: equitable distribution b/t creditors.
iii. Discharge a late-comer and still only available in UK/USA.
1. Originally used by creditors as a means to coax debtors into paying more. Only in 70s did the
“fresh start” of Wetmore v. Markoe concept arise.
iv. Art. 1 power given to Congress to adopt uniform bankruptcy codes.
1. No real hx. as to what they intended.
2. 1898: main modern code.
3. 1978: major pro-debtor revision
4. 2005: major pro-creditor act. BAPCPA
v. Basic US structure
1. To implement the bankruptcy laws, Congress created a system of bankruptcy courts and a
cadre of bankruptcy judges. In each Federal judicial district, the bankruptcy court operates
as a unit of the district court. Nationwide, there are some 375 bankruptcy judges.
2. The topic of bankruptcy jurisdiction is a complicated science all its own. For the moment,
here are a few basic facts about the mechanism of conducting the case. That is, most cases
begin when the debtor files a petition for bankruptcy relief, BC (Bankruptcy Code) § 301. The
Code also allows creditors to initiate the process by filing a petition to create an involuntary
bankruptcy case, but it doesn’t happen very often.
3. The commencement of the case creates an estate, BC § 541, and operates as a stay of just
about anything a creditor would want to do to liquidate her claim. BC § 362. The debtor
must also file schedules of assets and liabilities and a statement of affairs giving information
on the state of her finances.
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4. After it gets the petition, the court generates a notice of a meeting of creditors. BC § 341.
b. Wiping Out Pre-Bankruptcy Debts
i. Bulk Transfer Law, UCC Article 6 (see above also)
1. Transfer assets from one entity to another before filing bankruptcy
2. Requires that creditors be given proper notice. If not given notice, can sue transferee and
enforce their rights.
3. Some courts have construed this as a fraudulent transfer, even when proper notice has been
given
a. Couldn’t creditors just levy on the assets of the new entity (i.e. the stock of the
corporation)
b. Stock, however, may not be as valuable as the other assets
ii. In Re Woodfield (9th Cir. 1992) (Noonan)
1. Facts:
a. Debtors are partners operating “Wendy’s” franchises, sought discharge in Ch. 7 as
individuals.
b. Prior to filing, they formed a new corp. “QFI” and transferred the franchise operating
rights and inventory from Wendy’s into the new corp. They gave creditors a “Notice
of Bulk Transfer.” They also txed 17k in cash to the new corp, rec’ing stock in
exchange.
i. Debtors attempted to characterize as a payment of wages, so thus not a
preferential transfer.
c. Prior to filing, debtors consulted w/ trustee. Ticked judge off, and seen as evidence
of fraud, but not clear it really helped debtors.
d. B/c restaurant equipment subject to security interests, and b/c other assets
transferred to new corp., trustee filed a no asset report.
2. Appeals court finds it to be an intentional fraud, based on “badges of fraud”
a. How could it be fraud, if they notified creditors via bulk tx notice of what they’re
doing, and let trustee know what they were doing.
b. Also, how could it be fraud if they merely transferred assets that were subject to
security interests? The security interests remain after transfer?
c. Trustee should have required debtors to schedule corporation as an asset of debtors.
Or have abandoned property as worthless as all secured.
c. Discharges and Dischargeability—can get a discharge (727, 1141, 1328) but have some claims excepted from
discharge (523).
i. Basics
1. Secured claims (i.e. liens) survive discharge
2. Creditor has a right to share in the estate whether or not he has a dischargeable claim.
a. In other words, could get a share of the estate (w/ or w/o priority, depending on the
claim), and also have the full claim declared nondischargeable.
3. Some scenarios will give rise to both discharge and dischargeability actions
4. Once you lose a discharge, you lose it forever—you can’t seek to discharge those same debts
in a later discharge
a. Can only get a discharge once every eight years (but you can still file for bankruptcy
without getting the discharge sooner)
ii. § 1141: Discharge under Ch. 11.
1. Corporate Discharge
a. No discharge for individuals under Ch. 11.
b. Corporations don’t get a discharge in Ch7, but they don’t need one either because
they have limited liability.
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i. Owners not liable for corp. debts unless 1)signed for personal liability (often
occurs) and 2)”responsible party” for some wages and taxes.
ii. No state requires a windup of the corporation under state law, but some
states (CA) impose personal liability for a windup that is undertaken and
done incorrectly
1. Therefore, a corporate debtor should just walk away
2. Ds of a wound up corporation are jointly and severally liable up to
the amount of corporate assets fraudulently distributed. Liability is
limited to the amount owed to non consenting creditors. See Cal.
Corp. Code § 316.
3. For procedures governing the windup of a general partnership, see
Cal. Corp. Code '' 15029 15043.
4. On limited partnerships, see Article 8 of the Revised Partnership Act,
Cal. Corp. Code '' 15681 15685.
c. Corporations can get a discharge in chapter 11 reorganization, but not in Ch 11
liquidation.
i. Reorg. discharge is meant to encourage a potential buyer to buy the
defaulting Corp for potentially higher price than the liabilities, leaving
creditors w/ more $$.
iii. § 1328: Discharge under Ch. 13.
1. Can provide a more generous discharge than available under Ch. 7. “Super discharge.”
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a. Rationale: Gov. can diversify losses, but they are the chief example of creditors who
have no choice over who their debtor will be.
b. Note, also entitled to priority in bankruptcy distribution.
c. Note, Gov. can also get a tax lien which, like any security interest, survives the
bankruptcy against any property to support it.
d. Nondischargeable if not filed or filed late.
3. Claims not listed or scheduled in a timely manner, such that creditor is entitled to participate
in the case.
a. Not scheduled=not discharged
b. Every creditor should be scheduled, even if the debtor intends to repay a creditor
4. Student loans
a. Exception for undue hardship on debtor or debtor’s dependents
i. Debtor unable to maintain minimal standard of living
ii. Facts exist that indicate situation will persist in the future
iii. Debtor has made good faith attempts to repay
b. Unlike other dischargeable debts, with student loans you don’t give back the asset
that the loan was used to purchase (i.e. no indentured servitude)
c. Employers and the government can’t discriminate against a person who has
discharged student loans
5. Undischarged debts in prior bankruptcies
a. Once you lose the discharge, you lose it forever.
6. Govt. fines, penalties, and forfeitures payable fbo governmental unit, that is not
compensation for pecuniary loss.
a. So, if client owns SBA loan, if no security interest, it can be discharged.
b. Some litigation over what is a fine claim (non-dischargeable) v. a non-fine claim.
c. Priority: In Ch. 7, these only get paid afer claims of general creditors. So, if gov.
argues debt should be non-dischargeable, it subordinates its claim and may not get
anything, given small estates.
7. Intentional Torts
8. DUI debts
vii. Standing to bring an objection to discharge
1. Both trustee and any creditor can bring objection to discharge (727, 1141, 1328)
2. Only the creditor on a specific claim can bring a dischargeability action (523)
a. Trustee must represent all creditors or none of them
3. Same misbehavior may apply under 727 and 523.
a. Creditors will favor dischargeability (523) over discharge because the creditor keeps
its claim and has no competitors.
b. Very few cases litigate brought to deny discharge as a whole. Mostly where creditor
is so mad at the other.
c. Credit after discharge? A few will lend to such debtors b/c they know there are no
other creditors, and a clean slate.
4. Barber v. Martin
a. Ostrum-Martin Inc (OMI) was a grain dealer and M was on board of Ds. OMI rec’d
grain from producers, but failed to pay for it and went into bankruptcy. Martin also
filed his own bankruptcy case.
b. Trustee of OMI case sued Martin as an individual and as a board member of OMI, on
behalf of producers (and not creditors in general), for violation of 523(a)(2),(4)(6)
(fraud, fid. breach and willful/malicious injury). 523 would except discharge only
w/r/t these creditors, not all.
i. False pretense action fails against Martin b/c failed to prove M received
benefit from the property (one of the elements of FP law).
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ii. Fraud action may have merit as the law may hold directors liable as a
fiduciary w/i meaning of (a)(4), but no standing (below).
iii. Willful/Malicious injury claim fails b/c no allegation that OMI was injured by
M’s actions.
c. If the liability is to all creditors of the corporation without regard to the personal
dealings between such officers and such creditors, it is a general claim. Trustee has
no standing to sue here b/c he brought claim specific to only a few creditors.
i. Rationale: If Trustee could bring the claim on behalf of only a few, all
creditors wouldn’t benefit from proving fraud (more $ for estate), rather
than just the few creditors who were defrauded.
d. Farmers can still bring the action: practical result of the decision is that farmers will
not have to split up proceeds w/ rest of creditors if they succeed on 523(a)(2)(4)(6)
claim.
i. Can also bring underlying claim for fraud (state cause of action) during or
after bankruptcy.
viii. Discharge: Protection against Discriminatory Treatment
1. § 525 (a): …A governmental unit may not deny, revoke, suspend, or refuse to renew a
license, permit, etc. to a person that is or has been a debtor under this title
a. Argument is that if a state can revoke or refuse to renew a license or private
employer can discriminate, then the discharge has no meaning
2. § 525 (b): No private employer may terminate the employment of, or discriminate with
respect to employent against, an individual who is or has been a debtor under this title
solely because such debtor or bankrupt
a. Is or has been a debtor under this title or under the bankruptcy act
b. Has been insolvent before or during the bankruptcy case
c. Has not paid a debt that is dischargeable or that was discharged
3. No disparate impact prohibition: Government and private employers can get around this by
finding out who is bankrupt/debtor and finding alternative plausible reasons for not
renewing license or firing individual
4. Private parties can discriminate with respect to matters other than employment
d. Bankruptcy Jurisdiction
i. §1334: District judges are article III judges, but bankruptcy judges are not (district judges get life
tenure, bk judges have 14 year, renewable term)
1. Bankruptcy judges are analogous to magistrate judges.
2. District court (bankruptcy court) shall have original and exclusive jurisdiction overall cases
under title 11 (bankruptcy)
3. District court (bankruptcy court) shall have original but not exclusive jurisdiction of
proceedings relating to or arising in bankruptcy case
a. Generally recognized that this means: adversary proceeding
i. E.g. need to bring a lawsuit to collect account receivables of a debtor. Can
sue in State court, or in Bankruptcy court.
4. District court in which case is pending has exclusive jurisdiction over all of the property of
the debtor where ever located
ii. 28 U.S.C. 157—District judge may give jurisdiction to the bankruptcy court
1. Blanket order referral to bankruptcy court
2. Two situations where district judge may want to keep bankruptcy case
a. District judge has quibble with bankruptcy judge, finds judge incompetent
b. High profile or high visibility case
iii. §523(c)(1): if you want to adjudicate a dischargeability claim under section 523(a)(2), (4), (6) or (15),
you must do it in the bankruptcy court
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1. Must file not later than 60 days after the first date set for the meeting of creditors under §
341(a)
2. E.g.: If D files for bankruptcy, but C ignores b/c believes a no asset, cannot later assert a non-
dischargeability claim in state court under above-listed sections.
3. Non 2-4-6 claims, you can sue, even after discharge, to see if claim is excepted from
discharge. Can sue in bankruptcy court (re-open case) or bring in non-bankruptcy court.
iv. Which Judge?
1. 28 USC § 157(a): Each district court may provide that any or all cases under title 11 and any
or all proceedings under title 11 be referred to the bankruptcy judge.
2. 28 USC § 157(b) and (c) go on to distinguish between matters that are at the core of the
bankruptcy case from proceedings that are merely related to the bankruptcy case.
a. BC may hear and decide core matters.
i. Tough line to draw, but now seldom litigated.
ii. BC almost always declines to exercise judgment over complex areas of law
(patent law).
b. BC may propose a disposition on merely related matters, but final disposition is up
to the district judge.
v. Venue
1. Proper venue is where debtor is located
2. If controversy is over less than $1000 in property or less than $5000 in consumer debt,
venue is proper where the defendant resides
3. Venue can be transferred in interest of justice and convenience of parties
e. Automatic Stay §362: Filing the bankruptcy petition acts as an automatic stay
i. Two purposes of the stay
1. Give debtor the relief that a discharge is meant to provide
a. Reason 2.5—give debtor some “breathing room”
b. Classic bankruptcy case occurs when the debtor is holding property subject to a
security interest and needs more time and therefore files to get the automatic stay
2. Protect property of the estate (from cherry picking)
ii. Stay ends when:
1. Case terminated
2. Discharge entered (§524)
a. Entry of discharge acts as an injunction to stay collection of any undischarged debts.
So, the stay passes the baton off to the discharge.
3. Relief Granted
iii. §362 :
1. (a)(1) Stays the commencement or continuation . . . of a judicial . . . proceeding against the
debtor (stays pending litigation)
a. Does the debtor need relief to pursue an appeal? Splits
i. Farley v. Henson: When a debtor has appealed an adverse judgment, the
appeal is stayed as well. Court looks to the underlying action (the lower
court action) to view as an action “against the debtor” even though debtor
brought the appeal. (Circuit split? Case not clear).
ii. This can lead to odd results: what if the debtor wants the appeal to go
forward to settle the matter? The stay acts against the debtor’s interest
here.
2. (a)(2) Stays the enforcement of a judgment
a. E.g. the enforcement of a pre-petition judgment (i.e. levying, foreclosure)
3. (a)(3) Any act to obtain possession or exercise control over the property of the estate.
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4. (a)(4)Stays any act to create, perfect, or enforce any lien against the property of the estate,
including against secured property
a. (a)(5) Same rule applies against the property of the debtor
b. Pecuniary interest test: the deciding factor is whether the action threatens estate
assets
5. (a)(6) any act to collect, assess, or recover a claim against the debtor that arose before the
commencement of the case under this title
a. This section is so broad it basically subsumes 1-2
iv. § 362(b) Exceptions to stay
1. (1) Criminal actions
a. “Obligation to obey general laws”
b. NSF check example—collection of a claim or criminal action?
i. Some states treat as criminal. Once check is paid, charge will be abandoned.
Why should NSF creditor get a priority over other creditors?
ii. It’s a form over substance argument: will the judge go w/ form or
substance? Most judges recognize as criminal.
2. (4) Government unit has power to exercise its police/regulatory power, including the
enforcement of a judgment other than a money judgment
a. In Re Nat’l Cattle Congress
i. Dog racing park seeks bankruptcy protection, believing granting of slot
machining license will help achieve viability.
ii. County revokes license citing failure to demonstrate financial responsibility
and long term viability, citing fact that slot referendum failed twice.
iii. Court holds that the license is property of the estate under 541. Property is
protected by362(a)(1), and § 362(b)(4) doesn’t apply.
1. Pecuniary Interest Test: If the gov. action is one which directly
conflicts with the BC’s control of the property of the estate, the
action is outside the (b)(4) exception. Stay remains.
2. Problem with gov. args. is that they pretty quickly morph into
pecuniary claims. Need a fire permit: but requires $$.
3. Court held revoking license amounted to “control.”
iv. Under 362(a)(3), Gov. action was also “control” over the property (and again
(b)(4) doesn’t apply).
v. Court also holds not discriminatory intent under 525(a). Evidence shows
license revoked based on financial responsibility and not bankruptcy filing.
vi. Ayer: case could have come out the other way: people should be bound by
general laws, even if it’s just about paying $$.
b. Seminole Tribe case—is bankruptcy an interference with sovereign immunity
c. Government unit can do everything leading up to the enforcement of a money
judgment, i.e. seize property, etc)
3. Domestic obligations/actions: alimony, support, maintenance
4. Commercial Real Estate leases: can retake possession when lease expires, notwithstanding
the stay
v. Relief from the Stay§362(d): On request of a party in interest, and after notice and a hearing, the
court shall grant relief from the stay:
a. “Notice and hrg.” requirements spelled out in Rules. Must file a motion for relief.
b. After notice and hearing only means in Code: “after such notice as is appropriate in
the particular circumstances, and after such opportunity as is appropriate under the
circumstance.”
c. Don’t actually have to have a hearing: unless you ask for a hearing, we’re going to go
ahead and do it.
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2. (1)For cause, including lack of adequate protection in creditor’s interest in property of the
estate OR
a. I.e. secured property is declining in value
i. Eg. Auto loan worth more than car and dropping value
b. Lack of adequate protection not the only “cause:”
i. Elliot v. Hardinson (VA 1982)
ii. Ordinary tort claims don’t receive special treatment in Bankruptcy (must be
intentional or drunk driving)
iii. The tort creditor is seeking relief from the stay so that he can establish
debtor’s negligence and recover from his own insurance (creditor usually
gets relief in such a case, provided that the pleading is sufficiently tailored to
this situation). Tortfeasor filing bankruptcy remains protected—ins. co loses
subrogation rights.
3. (2) If debtor doesn’t have equity in property AND such property is not necessary for
effective reorganization OR (more specific rule, (1) being more general)
a. Equity: negative balance sheet equity w/ biz.
b. “Boiler in basement problem”—taking the property deflates the going concern of
the business
c. Homes? Does this phrase have any meaning w/r/t residential homes?
i. Many filed Ch. 11s in the 80’s to claim this protection. CA gives 110 (or 120
days) and bankruptcy gave you more.
ii. Now fees so high that trumps other advantages.
iii. Also, language added below…
4. (3) With respect to a single asset real estate case, creditor who has a security interest in the
asset, can get relief from the stay unless, not later than 90 days after the entry of the order
for relief, debtor has filed a plan that is reasonably confirmable OR has made payments
a. This is a fight about time rather than going concern value
5. Filing ch.13 also stays actions against co-signers
6. Exception for perfection of security interests
a. If lien is created 90 days before the filing, it must be perfected within 10 days of
attachment
b. If debtor files during that 10 day period, creditor is excepted from the stay to perfect
a security interest within those 10 days
vi. Hypo: Corp bankrupt and principal personally guaranteed the loan. He wants to make sure that loan
is paid out first, as it survives bankruptcy if not paid?
1. §105: grant of general court powers and make an equitable arg. Last ditch effort, usu. a
signal you have no good arg.
2. §1301: protects guarantors in ch. 13 plan: 3 rd party protection (e.g. parents co-sign a loan).
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a. Wright vs. Union Central—creditor has the right to the money from the property but
not the property itself
i. If property is worth less than the claim, trustee is likely to abandon his
interest in the property to the creditor. Typical result.
b. Trustee sells property worth more than collateral. Can superintend the sale himself,
or let the property be sold by whomever else, w/ understanding that estate will get
surplus.
2. Domestic obligations: this is phony in practice because in the situations where it matters,
there are usually no assets anyway
3. Administrative Expenses (defined in §503(b): actual and necessary costs of preserving the
estate, including
a. Wages, salaries, and commissions for services rendered after the commencement of
the case
b. Any tax incurred by the estate, whether secured or unsecured, including property
taxes for which liability is in rem, in personam, or both except a tax of the kind
specified in section 507(a)(8) of this title
c. Examples: cost of preserving the estate, trustee pay, and attorney/professional
compensation
i. This is the provision under which the attorney gets paid
ii. Judges have the power to determine the value of administrative expenses
iii. E.g if trustee pays company’s accountant to keep books.
1. If wages owed, 503(b) also requires that you pay taxes that are
attributable to those wages.
2. So, if deemed administrative, you could have a wage and tax claim
climb the priority ladder to here.
iv. Might also have a tax priority for taxes owed post petition, in order to
maintain estate.
v. Debtors atty doesn’t usually get paid under this section. Typically paid pre-
petiton. Common exception is the lawyer for a debtor-in-possession.
1. So long as don’t charge more than typical fees for jdx, pre-petition
fees usu. upheld.
d. In re Palau: Court has broad power to decide if an expense was “actual and
necessary.”
i. Cook, through NLRB, sued for wages won as the result of a NLRB lawsuit
against debtor. NLRB argues it was a post-petition admin expense deserving
priority.
1. Admin services must be “rendered after commencement of the
case” (503(b)(1)(A), and must benefit the estate
a. Here, post-petition services not “rendered” and don’t
“benefit” the estate.
ii. Court has power, for instance, to rewrite a rental contract and pay less rent
than due pre-bankruptcy.
4. (minor priority)
5. Wages, salaries, commissions, including vacation, severance, and sick pay leave earned by an
individual arising from services rendered within 180 days of filing for bankruptcy and up to
$10,000 per individual (or corp)
a. Wages usually get paid because wage law is so highly regulated.
i. CA statute makes it a misdemeanor not to pay somebody’s wages
ii. Requires payment every 2 weeks.
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iii. What if wages owed from more than 180 days? E.g. Ees agree to forego
payment to help out company. Gets relegated to general unsecured claims
—no priority.
1. Exception if DA brings charges and attempts to collect under 362(b).
Again, split on whether court will treat as gov. action or mere
attempt to gain priority.
b. Pro-rate between pre and post bankruptcy claims for priority purposes
i. Post bankruptcy claims become administrative expenses and get higher
priority
c. Employer share of the social security payment ? Probably qualifies under the gov.
tax claim.
6. Contributions to an employee benefit plan (w/i 180 days and 10k/individual)
a. Major issue in the 80s/90s: what to do when Er can’t pay pension plan? Gov.
typically takes over (or pension plan simply discharged). Many corp. bankruptcies
were filed to dump plans on Gov. (Pension Benefit Ee Comp. law). Less seldom now
b/c plans less used.
7. (wheat, fisherman priority)
8. (security deposits for real or personal property)
9. Government claims for taxes measured by gross income or receipts, property taxes incurred
before commencement of the bankruptcy, and wage and withholding taxes
a. IRC §6672—trust fund taxes:
i. State sales tax, soc. Sec. tax, etc. When Er holds this tax over for future
payment.
ii. Any person in a position to know that employee withholding taxes are being
misused can be held liable for 100% of the tax. (IRS only collects once,
though seems to have authority to collect from all.)
iii. Very important for debtor to try to pay these asap (pre-bankruptcy).
b. Pro-rate between pre and post bankruptcy claims for priority purposes
i. Post bankruptcy claims become administrative expenses and get higher
priority
c. Taxes that are excepted from discharge are likely to be given priority
10. Unsecured Creditors
a. Chances of anything being left are slim. Often don’t make it past the secured claims.
iii. Section 726 (if money still left after § 507)
1. Lists some additional priorities
2. Ultimately, surplus (if any) goes back to debtor
3. Does it apply outside ch. 7? Recall that court will not confirm Ch 11 and 13 plans unless
creditors are not getting less than under Ch 7. Passing this will require some sort of analysis
of what (if anything) the creditors would get via § 726
iv. Section 510(c): Equitable Subordination
1. Court may subordinate a claim or interest under principles of equitable subordination.
2. E.g. equity owner of a biz furnishes new money as a loan, instead of capital, to get a priority
of payout. Courts often treat as a capital contribution (subordinate to equity status).
v. Ch. 11 priorities
1. Section 507 applies, but Ch. 11 distribution is also governed by the Plan.
a. Typically you designate § 507 claims in classes according to their §507 priority.
b. But, for other claims, you have some leeway.
c. Can subdivide general unsecured creditors into more than one class unless
substantially similar.(§ 1122)
2. In re US Truck Co, Inc. battle about whether classes substantially similar. Courts vary on
treatment of “substantially similar.
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g. Chapter 11: “Reorganization” (tension between paying creditors and providing debtor relief)
i. Preserving the going concern value (nothing in chapter 11 requires that a business continue to run; trustee
can petition to continue running a business)
1. If GC is greater than liabilities, than equity owner has an interest in trying to preserve GC
2. If GC is less than liabilities but greater than liquidation value and equity owner is vital to the
business, equity owner should try to convince creditors to reduce the amount of liabilities so that
the company can continue running
a. In practice, shareholders tend to be wiped out in these situations
ii. Compare Chapter 13
1. Chapter 13 only applies to wage earners and sole proprietorships
iii. Compare to Chapter 7
1. Chapter 11 DIP, Chapter 7 Trustee
a. Having DIP act as trustee can be more efficient and cost effective for creditors
2. Operating a business
a. Chapter 11—can operate until court says otherwise
i. Want to continue operating where going concern value worth more than
liquidation value.
b. Chapter 7—can’t operate until court approval given; can do for only a short time.
i. Almost never happens.
3. The Plan
a. §1120—in the early days of bankruptcy, only the debtor may propose a plan
i. The debtor, however, is unlikely to do so if the debtor is an equity owner because
the equity owner always benefits from more time
ii. This section thus gives the debtor “another bite at the apple”
iv. Restructuring outside of bankruptcy—common occurrence when financial trouble is inevitable
1. Reasons to file bankruptcy instead of restructuring outside
a. Get discharge
b. Bind dissenting creditors
i. Each individual creditor has an incentive to holdout when others are thinking of
restructuring in the hopes of getting paid off
c. Keep creditors from taking “boiler in basement” and destroying GC value—automatic stay
2. Health Food Store example—force business into involuntary bankruptcy when equity owners have
abandoned a business and the creditors want to preserve the going concern value
v. The Plan
1. §1124: What may be in a plan. Never a dispute here: always over 1129…
2. TEST 1: A creditor is bound to the plan if unimpaired by the plan; or
a. §1124(1): the plan leaves unaltered the legal, equitable, and contractual rights of each claim
holder in the class, or
b. §1124(2): the plan cures, reinstates, and compensates for damages
c. Essentially, the creditor is paid in full
d. Don’t get to vote and likely don’t even have standing to object to the plan.
e. Customary to create a class with the small claims for administrative purposes and to
prevent litigation and save $.
3. TEST 2: He belongs to a class that votes to accept the plan (1129(a); or
a. Even if a class of claims is impaired by the plan, it may nonetheless be bound if the class has
accepted the plan
i. A class has accepted if the plan has been accepted by a majority in number and 2/3
in amount of those accepting or rejecting (§1126)
ii. Those who don’t vote don’t count in the majority or 2/3 test.
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iii. Could have situation where 1M owed total in class by 100 creditors, but only
2 creditors w/ claims of $1K show up to vote. They can approve and impose
on the remaining class.
iv. Here Ch. 11 takes on critical importance. Can solve the boiler in the basement
problem here. Can impose plan on a dissenting creditor.
b. Best Interests Test: A dissenting creditor can successfully defeat the plan, if he can show that
he is receiving less than he would under liquidation in chapter 7 (1129(a)(7)(a)
i. Even if the dollar amount is the same, creditor may be receiving less based on the
structure of the payment (time value of money).
ii. How do you set the interest rate? FMV or the interest rate the creditor
wants?
iii. Same issue arises where a debtor seeks to keep the interest rate the same,
but spread over more years.
c. What if one class of unsecured creditors receives 20c on the dollar and one receives 30c?
c. Can a dissenting creditors appeal to this? Often happens with personal injury cases,
where they receive less on the dollar than trade creditor. Creditors can appeal,
though standards not entirely clear.
d. NJ Medical. 3rd Cir. let plan stand even though differential treatment. Personal
injury and trade creditors.
4. Test 3: The debtor can effect a cramdown
a. §1129(b): the court shall confirm, even without a favorable vote, if the plan does not
discriminate unfairly, and is fair and equitable, with respect to each class of claims or
interests that is impaired under, and has not accepted the plan
i. Restructuring the deal so that the creditor receives an income stream with a present
value equal to the value of their claim.
1. Creditor will argue that the longer the payment period, the higher the
interest rate should be
b. In order to cramdown, at least one creditor class must have voted in favor of the
plan—for planning purposes, this gives the incentive to create a new class, impair
them, and then get their vote (1129(a)(10)
i. Cramdown only supplants voting requirement of 1129(a), not other
requirements.
ii. Courts not always willing to justify treating unsecured creditors differently
(Ayer wouldn’t like to).
1. No principled reason to treat tort creditors different than trade
(contract) creditors.
2. But, small number of cases have allowed.
c. To cram down on an unsecured class, must either
i. Pay in full (never happens) OR
ii. The junior class (old equity owners) doesn’t get anything until the senior
class is paid in full (known as FAIR and EQUITABLE Test)
1. Who are the junior class? The former owners and proponents of the
plan (the old equity owners).
a. So, if you cram down, you have no equity left for yourself.
Removes main reason to cram down for old equity owner.
b. Only case where it happens is when someone else proposes
plan (e.g. bank).
c. Note: Probability of distributions favors old equity owners
(they always benefit from more time) and harms creditors
(new equity owners).
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i. Creditor never gets to collect more than value of his
claim, while old equity owners stand to gain more if
biz turns around.
ii. Creditor can be compensated w/ great interest rate
—depends on what is ‘fair and equitable.’
2. Secured creditor of property worth less than security has 2 claims: 1
priority for the security and 1 unsecured for the shortfall. §506.
iii. Don’t confuse fair and equitable test w/ best interests. Plan may not be ‘fair
and equitable’ even if you’re receiving more than you would in liquidation.
1. One case held that 40c on the dollar not best interest where
evidence showed that creditors could have received 60c.
2. Dalkon Shield case, court approved plan on showing that tort
creditors would receive much less in liquidation. Subsequent
scholars sharply criticize liquidation valuation though.
5. Analysis
a. Was creditor impaired (received less than full value)?
i. Yes
1. Was creditor member of an accepting class?
a. Yes
i. Did creditor receive less than in Chapter 7?
ii. Yes—plan defeated
iii. No—plan accepted
b. No (class votes against)
i. Was there a cramdown?
ii. Yes—plan accepted if cramdown fair and equitable
iii. No—plan not accepted if cramdown not fair and equitable
ii. No—plan accepted
vi. In Re US Truck Co. Example of a plan.
1. Identifies classes of claims
a. 2 admin classes.
i. One paid in full, or can’t get out of bankruptcy.
ii. Other not paid in full, but will eventually get paid in ordinary course of biz.
b. Wage claims (entitled to priority)
c. Class for benefits (entitled to priority)
d. Tax class
e. 2 secured claims class. Typically, secured claims have own class.
f. Worker’s Comp (entitled to priority)
g. Unsecured claims class: disputed claim for breach of competitive bargaining class.
Teamsters lawsuit.
h. Less than $200 class: nuisance class (cheaper for everyone if paid in full—avoid
disputes).
i. Unsecured claims class in excess of $200.
i. 1st 4 versions of the plan treated this class differently from the Teamster’s
lawsuit claim. This 5th version finally treats them the same.
ii. Class given the option of taking 70% now or 100% via installments w/o
interest.
j. Class for old equity owners
2. Provides for retention of Jdx by bankruptcy court. Most plans now include. Lets court settle
the dispute.
3. Signed by debtor himself: it’s a contract not a pleading.
vii. Cases in mind of drafters of Ch. 11.
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1. Alladin Hotel (1953)
a. Hotel issues bonds. Bondholder contract permitted 70% of bondholders to rewrite K
if all bonds treated equally. Jones’ owner of 72% bond and owner of hotel, votes to
reduce bond issue on all bonds. Increases Jones’ equity as a whole since bond debt
of hotel reduced. Minority bondholders sue, arguing failure to exercise honest
discretion, since they didn’t see the corresponding benefit rec’d by the hotel.
b. Court approved bond contract rewrite: Jones complied with the 70% voting
requirement and all bonds were treated equally.
i. Court likely would not have approved if re-write done 20 minutes after K
written. Passage of time and the fact that hotel in trouble helped it justify
the decision.
c. Case difficult b/c Jones benefitted greatly from re-write as equity owners of the
company and minority hurt. Was court right to simply look at them as bondholders
and not their whole equity stake?
d. BC writers not comfortable with idea of this type of situation. Could argue that
Jones’ voting as an insider.
i. Bond Indenture Act (BIA) now requires that 100% of owners consent.
ii. But doesn’t apply in Bankruptcy. Only need 2/3 and ½ or cramdown. More
protection than Alladin, but less than BIA.
2. Los Angeles Lumber Co.
a. Docking Co. owes 3.8M against an 830k asset. They’re deeply insolvent. Write a
plan retaining some equity for themselves, arguing that they’re giving knowledge
and skill.
b. Court rejects and holds that it’s not “fair and equitable.” Fair and equitable means
no class can receive anything under the plan unless every senior class is paid in full.
c. Plaintiff in the case was a bond buyer who bought at a deep discount. He only had
about a 6k claim against 3.8M debt and was able to stop the plan.
d. Rule here makes it virtually impossible to confirm a coherent plan in a reorganization
case.
e. BC voting section meant to address this case.
3. Reorganization used to be split into Ch. X (governing public companies under SEC rules) and
Ch. XI (bankruptcy).
a. Ch. X: built on principle of disclosure, following Great Depression, giving public more
info and power to control company. (Like SEC disclosure rules adopted during the
era). Trustee automatically appointed and automatically kicked out management
and conducted a full-scale investigation (high cost) = no incentive for anyone to do it.
b. Ch. XI came out of garment industry of lower east-side NY. Allowed DIP and chance
for reorg. Public companies wanted to take advantage of this in the 70’s: attempted
to argue they fit the small-biz model of Ch XI. Eventually Congress adds Ch. 11. (Old
system used Roman numerals, new doesn’t).
viii. Ch. 13 Plan
1. No voting requirement.
2. May provide for reinstatement, or rewrite (if stream of payments equal to present
discounted value of claim.)
3. Main reason for Ch. 13: save home. Use cash to take care of other problems and use plan to
save home—reinstate mortgage.
4. §1322(b)(2): Plan may modify rights of holder of secured claims, other than a claim on
personal residence. So, no cramdown on personal residence, only a rewrite.
a. Same limitation applies in Ch. 11.
b. So, the one claim most debtors would like to rewrite cannot be rewritten.
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c. Proposed legislation might modify this to deal with housing crunch—letting
bankruptcy judge (or other judge) to modify terms of a loan.
ix. Ch. 7 Plan: No cramdown.
1. Famous case where USSC said no to debtor w/ property worth 60, secured by claim of 100,
who argued should be able to keep his prop. b/c debtor was receiving “fair and equitable”
interest.
h. Disclosure
i. Plan proponents may not solicit consents unless the court approves a disclosure statement
containing “adequate information”
1. Adequate info: information of a kind, and in sufficient detail, as far as is reasonably
practicable in light of the nature and history of the debtor and the condition of the debtor's
books and records …that would enable such a hypothetical reasonable investor typical of
holders of claims or interests of the relevant class to make an informed judgment about the
plan, …
2. ...and in determining whether a disclosure statement provides adequate information, the
court shall consider the complexity of the case, the benefit of additional information to
creditors and other parties in interest, and the cost of providing additional information; …
a. Disclosure requirement like SEC disclosure requirements of old, but lets court limit it
from being too burdensome. Generally though, it is an expensive process and a
major bar to filing in the first place.
b. Soliciting consents under BC §1125 means a public co. doesn’t need to conform to
SEC proxy solicitation rules.
3. Don’t have to provide this info if not soliciting that creditor’s consent.
ii. How it works in practice
1. The proponent presents his disclosure statement.
2. The objector alleges that it isn’t sufficient -- and in the process of objecting, specifies the
sort of information he wants the statement to include.
3. The judge finds it hard to rule unless he is fairly fully informed on the nature and substance
of the absent information.
4. By this time, the cat is out of the bag and the proponent, in order to gain approval, finds that
he might just as well agree to include the contested information.
a. Explains reason why there are no good cases on Disclosure to explain how it works.
iii. Pre-Packaged Bankruptcy Plan (PRE-PACK)
1. § 1126(b): provides for a quick in-and-out bankruptcy where creditors and debtor with a
plan merely want to bind dissenters.
2. Eg. Southland, Inc., aka 7-11. Majority owners used a leveraged-buy-out (LBO) to prevent a
hostile take-over, trusting future cash flow to keep creditors happy.
a. Ito-Yokada offered to buyout, leaving majority only 15% ownership. Vulture investors
began picking up claims, so owners decided to accept ITO.
b. ITO wanted debt reduced, but needed 95% bond creditor approval and this wasn’t
going to happens. So, ITO and owners attempted bankruptcy.
c. But the plan never made it past the disclosure phase.
i. Judge’s decision to require more info added cost and delay and probably
queered the deal.
ii. Did this protect unwilling creditors? Or queer a good deal? Is it just an
artificial obstacle that enriches lawyers?
i. Trustee, DIP and Atty duties
j. Section 323(a) of the Code states that a trustee in a bankruptcy case "is the representative of the
estate."
i. Trustee appointed by US Trustee, but creditors can also elect.
k. Section 1107(a) of the Code gives a debtor in possession the same rights and duties as a trustee.
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i. Duty to maximize the value of the estate extends to equity owners as well as creditors
1. If the liabilities far outweigh the assets, the equity owners are completely wiped out and the
trustee must maximize estate with respect to creditors
2. Central Ice Cream: Rare case.
a. Central gets a judgment worth $52M subject to appeal, creditors owed $11M.
Trustee agrees to accept settlement at $15M, so old equity owners sue. They want
to take the chance to appeal.
b. When liabilities and assets are more equal and the value of the assets are uncertain,
trustee can’t ignore equity owners and must maximize with respect to equity owners
if that doesn’t harm trustees. Simpler: Trustee duty is to maximize the estate.
i. This mirrors the DE auction doctrine under Revlon: manager’s duty to
maximize value of company.
c. Most trustees, if they have a means to pay off outside creditors, they’ll take it, rather
than risk losing the deal just to get higher value for old equity owners. Not paying
off means they’ll be sued by creditors if they take the risk.
d. Judge recommended putting Co. up for public auction as a means of maximizing
value. Novel idea when the opinion is written, but now recognized as best means of
valuation.
ii. Weintraub
1. Under general atty/client privilege law, new managers have authority to reveal confidential
info and outgoing managers lose privilege.
2. Court holds that trustee in bankruptcy has authority to reveal confidential info w/o breach of
atty/client privilege.
a. What happens when DIP is the trustee? Does he have duty to reveal confidential
info? In principle, no way to distinguish DIP from Trustee (w/ a few exceptions), but
in practice, everyone knows it won’t work this way. We know Ch. 11 is to provide a
breather and to save the enterprise, so more deference given to DIP.
l. DIP--Schipper case: does the DIP have the same duties as the trustee?
i. Issue: Does DIP have affirmative duty to reveal damaging info? Upper and lower courts
disagree…
1. Farm has numerous debts. DIP proposes selling to mother, but sale not enough to satisfy
all claims.
2. Generally, DIP selling to mom would smack of fraud. A corporate officer would never get
away with it, 77but bankruptcy is a bit different.
3. But, in this case the judge allowed DIP self-dealing after a finding that there was no
secret, profit sharing plan (result probably would be different if this was a trustee).
a. Subsequently, bank found out that debtor had trying to sell at a higher price to a
neighbor, but no evidence this buyer still interested. After case, mom tried to
turn for a profit to the same neighbor.
b. Ayer faults DIP for not revealing deal almost went through: shows DIP may have
had another buyer.
ii. Where there’s a DIP there are bound to be adverse interests, even among creditors.
m. Role of the Attorney—
i. The debtor in possession: may employ one or more attorneys . . . that do not hold or represent
an interest adverse to the estate, and that are disinterested persons, to represent or assist the
trustee in carrying out the trustee's duties under this title.
ii. Fees
1. Ch 7. Debtor comes to you to file Ch. 7. You take a fee and must file w/ court the fees
you received. Typically a set fee in the community and must justify going above.
2. Ch. 11. Representing DIP. §327. Trustee (DIP) may appoint counsel on approval of court.
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a. Must have no interest adverse to the estate.
b. Atty must be a disinterested person.
i. §101 Not disinterested if you are an officer or a director of the Co and
are not owed any $ by the debtor.
ii. So, if Debtor paid you b/f bankruptcy, or still owes you, may not be
disinterested.
iii. DN Assoc. Case:
1. Balance sheet: some possibility that there will be equity for debtors.
2. Debtor’s attorney keeps proposing plans that get rejected; creditors eventually propose
a plan that is immediately accepted; debtor’s attorney seeks administrative expense
priority for his fees
3. If there is no possibility of residual value for the old equity owners, it is professionally
irresponsible to continue proposing plan
4. If there is possibility of residual value, the continued proposal of plans may add value to
the estate, and administrative priority is appropriate
a. Court here found that filing of plans was fbo estate and that attys were
disinterested. Proposing the plans helped eventually lead to creditors plan, even
though there’s was so different.
iv. Kendavis:
1. Court found that atty’s were simply trying to make the creditors suffer, so ordered a
disgorgement of the fees atty’s had rec’d.
2. So, you can favor the old equity owners somewhat, but not too much.
3. Most judges don’t take the opinion too seriously. Rarely applied.
v. Federated
1. Federated was a chain of dept. stores, bought by a Canadian with borrowed money, with
the obligation added to the new company. W/I 2 years, couldn’t make debt payments
and filed Ch. 11.
2. W/i 2 years, they came out w/ a Ch. 11 plan: warp speed for a major Ch. 11. Many were
happy—relatively cheap legal fees. Much credit goes to lawyer David Heiman.
3. Managers of Federated cleaned up the biz and made profitable.
4. Heiman represented DIP. Who is the DIP?
a. Normally assume old Shs are DIP? But in this case, it’s Campo, who got basically
wiped out by the negotiations. Heiman wiped out his client.
vi. Everett v. Perez (Kozinski opinion)
1. Perez owned a couple franchise taco joints. Everett hired to remodel one. P couldn’t pay,
so filed bankruptcy.
2. Got a plan confirmed via cramdown. Claim was for 40k, but aggrieved creditor would
get 30k over 5 years.
3. Kozinski reverses, holding plan cannot be confirmed as a matter of law.
a. Can’t do a cramdown on a non-consenting class unless a junior class receives
nothing.
b. Lower court probably confirmed knowing litigation would go on for years and
completely drain all equity.
4. Atty probably should have filed a Ch. 13
n. Getting into Bankruptcy/Jurisdiction
i. §109
1. (a) Only a person that resides or has a domicile, a place of business, or property in the
United States, or a municipality, may be a debtor
a. Applies to all chapters
2. (b) §101 (41) person includes individual, corporation or pship but not governmental unit
(with limited exceptions) (i.e. municipality as defined in §101(40))
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a. Corporation is any business association having the power or privileges of a private
corporation, whether or not incorporated, but does not include limited partnership
b. Non-profit corps can be debtors.
c. Denver Avalanche soccer club? It’s a corp of ltd pship, the it can file.
d. Edmonton Oilers? Not residing, domiciled or place of biz in US, but what if they
have some property here?
i. Not uncommon for multinational corps to file bankruptcy here to get control
over assets in States. Rules governing jdx over company property not in US
get more complex.
e. Bankruptcy court lacks jdx over estates of decedents. Probate court has jdx over
estates. Where assets are less than liabilities, probate court deals w/ division of the
estate. They mimic the work of bankruptcy and bankruptcy court is not given jdx to
hear such cases.
i. If debtor dies while estate is pending? Bankruptcy estate is in existence, so it
continues.
3. Chapter 7—a person may be a debtor if the person is not a
a. Railroad (can only file under ch.11)
b. Domestic insurance company or bank
i. What is a bank or insurance company?
1. Boutique Medical Practice that doesn’t accept insurance. Offer basic
protection for 8k a year. They look like an insurance company.
ii. Practically speaking the answer depend on whether or not it is regulated
outside of the bankruptcy framework. Judge wants to make sure someone is
regulating it (state or bankruptcy court). No principled means to tell if its an
insurance Co or not.
c. Foreign insurance company or bank that operates in the US
d. Debtor doesn’t have to show insolvency to file under chapter 7
4. Chapter 11 –
a. Needn’t show insolvency.
5. (c) Chapter 9—an entity may be a debtor under chapter 9 if it is
a. A municipality
b. Specifically authorized to be such a debtor under state law
c. Is insolvent
d. Has obtained the agreement of creditors holding at least a majority in amount of
claims of each class that such entity intends to impair under a plan in a case under
chapter 7
6. (e) Chapter 13—debt limitation (109(e))
a. Debtor must have less than $336K of noncontingent, liquidated unsecured debt;
AND
b. Debtor must have less than $1.01M of noncontingent, liquidated, secured debt
i. Huge tort liabilities pending? E.g, assets equal liabilities, but have a pending
lawsuit against you for $100M, can still get in Ch. 13 b/c it’s a contingent
debt. Must file b/f judgment or settlement.
c. Do not need to prove insolvency here. Only need prove insolvency under Ch. 9.
d. Ch. 13
i. Still get a type of discharge
ii. Stays creditor action
iii. Most common use is to prevent losing one’s house
1. Can’t cramdown first mortgage on home in ch. 13, but you can stay
foreclosure and spread arrearage (late payments) over the life of the
loan
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7. Chapter 12: Family farmers (cross b/t Ch. 11 and 13)
8. Chapter 15: Cross-border insolvency
ii. Involuntary Bankruptcy §303(a)
1. Only applies to ch. 7 and 11
a. Only applies to individuals, except farmers
2. May have to pay punitive damages if you fail to force someone into involuntary bankruptcy
iii. Must complete pre-bankruptcy Counseling
1. Purpose is to steer debtors who can avoid bankruptcy away from bankruptcy.
2. Data suggests that vast majority still need bankruptcy, so it’s largely a waste of time and
money.
3. Involuntary bankruptcy requires counseling? Face of the law requires they complete as well.
iv. Also a requirement of Consumer Education after filing.
v. MEANS TEST
1. Used to be the case that best time to file was just before starting a new job.
2. New forms to file: income and expense forms for 60 days b/f bankruptcy, tax return, budget
analysis and a statement of reasonably anticipated income. §521.
a. Atty may be liable for errors in filing, if could have reasonably discovered errors. Be
very careful that debtor is making representations and not you. US Trustee can sue
for disgorgement.
3. 707(b) the court may dismiss a case filed by an individual debtor under Ch. 7, or convert to
Ch. 13 with debtor’s consent, whose debts are primarily consumer debts if it finds that
granting relief would be an abuse of ch. 7, unless court finds that it would be an undue
hardship.
a. Abuse is presumed if
i. Determine debtor’s current net income for 1 month (gross-expenses)
1. What counts as expenses? Defined by IRS regs. Not always clear.
ii. Multiply by 60 (5 years)
iii. If the amount is less than $6,000, than there is no abuse and debtor stays in
ch. 7
iv. If the amount is greater than $10,000, than there is abuse.
v. If the amount is between $6,000 and $10,000, then abuse is presumed if the
debtor can pay more than 25% of his unsecured debts.
b. This means test only applies to debtor’s who have income above the median for the
state
i. Income calculation
1. Average monthly income over preceding six months=current
monthly income
2. Current monthly income x 12=Income
3. If income is > median income, apply means test
ii. Spreading over 6 mos can cause odd results.
1. Suppose D makes enough in certain months, but then gets fired. Or
a student gets a high salary for the summer, but then makes 0 all
school year. Leads to situation where D holds off filing for several
months.
c. Consumer; Debts incurred for personal or household expenses, not for biz reasons.
i. So, means test does not apply to biz debts.
d. Student Loans? Assuming can show a substantial hardship, are they consumer?
i. Could argue that school is to help make money. Flip side is that it’s for
personal enhancement. Open question now.
vi. § 526 Restrictions on Debt Relief Agencies
1. May apply to attorneys
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2. §526(a)(4)—can’t advise client to incur more debt on the eve of bankruptcy filing
a. Not illegal to actually incur more debt, just can’t advise client to do it
b. Has been challenged as a 1st amendment violation
c. Doesn’t apply to non-profit debt relief agencies
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2. Dispute b/t United Mine Workers (labor) and Bituminous Coal Operators Ass. (management).
Health and pension benefits, so Congress passes Coal Act which requires existing companies
to share load of “orphaned” workers whose companies are out of biz.
a. 2 Coal companies want to sell companies free and clear of Coal Act obligations
under a Ch. 11. Plan. Court approves.
3. Fund appeals, arguing they didn’t have a “claim”. Court disagrees: Even unmatured and
contingent rights to payment are to be regarded as “claims.”
4. The Fund also had an “Interest” in the claim
5. So, court held that trustee (and bankruptcy court) had authority to extinguish Coal Act
successor liability under 363(f)(5). Permitted sale free and clear.
a. Court relied on the fact that selling the company would allow a new one to arise that
would also have to pay Coal Act claims (though not the existing claims of the
bankrupting Cos). Disallowing the sale means the bankrupt Coal cos. had little
chance to continue operating and loss of jobs.
viii. Asbestos Cases
1. Very difficult to decide whether to permit Corp. to sell all assets free and clear. Leaves many
to be determined claimants w/o recourse. One court required set payouts from Corp to
protect future claimants, but AC reversed, holding that nothing in BC permitted.
r. Secured Creditors
i. Take 1st priority even though its not listed in the code (implied through sections 506, 1129)
ii. Meter stops running on interest at the time bankruptcy is filed
1. Exception: if secured creditor’s claim is worth less than collateral, interest can accrue up to
the value of the collateral
2. Not quite interests: If secured creditor has security in Acct. receivable and inventory and the
proceeds of such, can get periodic payments as money comes in. Same can happen in real
estate case where receiver appointed to collect rents.
iii. If value of collateral is less than debt, debtor can file for bankruptcy and get a discharge on the
unsecured portion of the debt
1. Gives debtor a bargaining position with creditor
iv. If collateral and debt are equal, debtor must declare intention of what he will do with collateral
(collateral is otherwise surrendered)
1. Continue to pay
2. Surrender
v. Debtor can reaffirm debt if (not covered this year)
1. It is before discharge
2. He has right to rescind (within 60 days)
3. Filed with court
a. If not represented, judge must conduct hearing to find if reaffirmation is in debtor’s
best interest
b. If represented, debtor’s attorney must certify that reaffirmation is in debtor’s best
interest
vi. Rewriting contracts in chapter 13
1. Doesn’t apply to home mortgages
2. Might apply to second mortgage if value of home is less than first mortgage anyway
3. 1325(a)—can’t discharge unsecured portion of PMSI in personal property if loan was made a
year before bankruptcy or in auto if loan made 910 days before bankruptcy
a. Can still rewrite contract
vii. US v. Whiting Pools (USSC)
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1. IRS seized property to satisfy tax lien. Bankruptcy court ordered IRS to turnover (DC
reversed, AC reinstated BC, USSC affirms AC.). DIP intended to use property in reorganized
biz.
a. §542(a)Turnover Except as provided in subsection (c) or (d) of this section, an entity,
other than a custodian, in possession, custody, or control, during the case, of
property that the trustee may use, sell, or lease under section 363 of this title, or
that the debtor may exempt under section 522 of this title, shall deliver to the
trustee, and account for, such property or the value of such property, unless such
property is of inconsequential value or benefit to the estate.
b. Liquidation value = 35k. Going concern = 162k.
2. USSC holds that secured property does become property of the bankruptcy estate. Secured
creditors must appeal to “adequate protection” provision of §363 for protection.
a. Congress intended to facilitate reorganization and preserving going concern if
possible.
b. Seized property doesn’t belong to IRS simply b/c IRS is in possession. Debtor retains
some interest. Must put up for sale and apply proceeds to claim, giving any excess
to debtor.
3. Fn 17in the case suggests Liquidation case might come out differently, possibly leaving IRS
(secured creditor) lien enforcement powers outside bankruptcy.
a. Statute comes from §506, which applies to all statutes alike. How could it have a
different meaning in Ch. 7 and Ch. 11.
viii. Constitution
1. Secured creditors argue that bankruptcy code alteration of secured claims is
unconstitutional.
2. Congress has power to enact bankruptcy laws for nation. Phrase not much litigated
3. Due Process Clause much more litigated. Courts/Congress can’t take property w/o due
process of law.
4. 5th A’s prohibition of taking private property w/o compensation
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i. Suppose creditor has secured claim for $6,000 (e.g. PMSI) and unsecured
claim for the remaining $4,000.
ii. Creditor has priority on 6k claim.
iii. Trustee can rewrite K to spread out payment and cramdown, if creditor gets
full value.
1. Can’t do on 1st mortgage on residence.
c. Executory Contract or Lease
i. Assume—reinstate contract subject to all of its terms. Creditor gets 100%
payment.
ii. Reject—repudiate contract and return property to creditor, and has
unsecured claim for $4000. (Just like secured creditor).
2. Ayer sees no principled reason for upholding these distinctions.
vi. What is an executory contract?
1. Prof. Vern Countryman: K where so much remains to be performed on both sides that
nonperformance by either side would be a material breach of the whole K
a. Outside bankruptcy, “executory” simply means any obligation still outstanding.
Can’t mean that in bankruptcy or trustee/DIP would be free to pick and choose
which Ks he will assume or reject as it would violate pro rata requirement.
b. Classic Ex: multiple payment/ multiple delivery installment K: K to deliver X number
of widgets for 12 mos and receive payment for 12 mos. 3 months have passed and
debtor files. D has remaining obligation to take and pay, and C to deliver.
c. Countryman wanted his definition to exclude conditional sales contracts because
once the creditor has delivered the goods, there is only an obligation on one side of
the contract.
i. Conditional Sales Ks are not executory Ks then. This holding is pro-debtor
and Countryman was notoriously pro-debtor. Creditor only has a secured
claim (if intent to create a security interest sufficient) or unsecured claim,
but no right to full K rights (including cure).
ii. Some state courts treat conditional sales contracts of real property as
executory contracts.
iii. Ayer argues that any warranty obligation on the part of the debtor creates
obligations on both sides and therefore is an executory contract
vii. A security interest is not a lease or an executory K. How do you distinguish them? (stream of
payments example)
1. Hypo. Installment sale w/ payments spread over 99 years for 4M v. a lease for 99 years w/
4M due at the end of 99 years. In other words, worth virtually the same today. Why draw a
strong distinction b/t secured sale and lease?
a. Some courts have held that a lease that is too long (how long?) is really a sale.
2. Accounting point: leases don’t go on balance sheet but sales do
3. If a transferor doesn’t properly perfect a security interest, he will argue that the transaction
is a lease or executory K in order to get the property back (rather than have an unsecured
claim)
4. UCC 1-203. Recall discussion from earlier on the difficulty of distinguishing secured sale from
lease.
viii. §365(a)—exceptions
1. Ch. 7—if contract not assumed within 60 days, it is presumed to be rejected
2. Ch. 11—if lease on nonresidential real estate not assumed within 120 days, it is deemed
rejected
3. During the period in which trustee decides to assume or reject, the nondebtor party is not
excused from performance of the contract
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a. §365(d)(3)—regarding nonresidential real estate, debtor must make timely
performance of all obligations within 60 days during pendency period
b. §365(d)(5)—regarding equipment leases, debtor must make timely performance
after 60 days
ix. Assume and Assign
1. §365(f)(2)(b). Trustee can also assume, then assign an executory K, notwithstanding a clause
to the contrary.
a. When assigned, only assignee liable on the K. Trustee or DIP released from liability
(even if K states differently.) §365(k)
b. Requirement of cure and assure still present.
c. Most common example: most leases prohibit assignment of the lease, but §365
permits rewriting, even where the value of the lease has skyrocketed and LL wants T
out. T can file bankruptcy as DIP and assign fbo estate.
d. Whole purpose of filing bankruptcy might be to force assignment of lease where not
possible under K terms or state law.
e. BC specifies that a lease termination clause on filing of bankruptcy is non-
enforceable.
2. 365(c) Exceptions. T/DIP may not assume OR assign an executory K or lease if:
a. Contract to loan new money can not be assumed
b. Personal service contracts can’t be assumed and assigned
i. DIP under Ch. 11 may be able to assume and assign a personal service
contract, but the language of the code seems to prohibit it.
1. What if actor as DIP wants to assume his own personal service K?
th
c. Catapult (9 C).
i. Federal patent law makes non-exclusive patent licenses personal and non-
delegable.
ii. If the contract prohibits assignment, then there is no assumption permitted.
Tends to screw over IP companies as can’t assume own IP rights.
iii. Ch. 11 is going nowhere—must go to another circuit.
x. Rejection issues
1. If K not accepted w/i 60 days, the K is assumed rejected.
2. Must reject whole K
a. If in 10 year K and 3 years gone, only rejecting going forward. Don’t have to correct 3
years spent.
3. If debtor is landlord and creditor is tenant, the tenant can’t be kicked out even if the contract
is rejected
a. Same rule applies if instead of tenant it is a person with a timeshare interest or
intellectual property rights
4. In Re Udell
a. Prior to Udell, people were filing bankruptcy to get out of non-monetary portions of
an executory K.
i. E.g. entertainer signs K w/ minor promoter which includes a non-compete
clause. Entertainer gets popular and wants to switch promoters. Files
bankruptcy to get out of non-compete clause—rejecting as executory K.
ii. Creates potential for abuse—people will file bankruptcy to get out of
contracts
iii. If debtor can prove injunction/other remedy has a dollar value, does that
mean it becomes part of what can be rejected in an executory contract
b. D signed a noncompete clause with Carpetland. Violation = injunction and liquidated
damages.
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c. To what extent does state law affect the ability to reject non-monetary portions of
an executory contract (ex: convenant not to compete, eviction for nonpayment of
condo fees, prohibition on erecting Donald Duck statue)
d. Modern Trend: Udell Court held that a right to an equitable remedy for breach of
performance is a "claim" if the same breach also gives rise to a right to payment
"with respect to" the equitable remedy.
i. In this case, the right to the equitable remedy and the claim for monetary
damages were distinct. The equitable remedy was not a “claim” then, and
non-dischargeable. Non-compete clause could be enforced.
e. Concurrence: Difficulty w/ majority holding is that §101(5)(B) defines a claim as “a
right to an equitable remedy for breach of performance if such breach gives rise to a
right to payment.” Looks like that occurred here. Likes the result, but wouldn’t twist
the statutory language—would simply ignore it and rule contrary to the statute.
5. Ayer. What about specific performance w/ unique personal property? E.g. D buys a
diamond and can’t pay. Under state law, C may have a right to return of the collateral—
specific performance.
a. But, this looks more like a typical creditor claim that should only be eligible for tiny
bankruptcy dollars.
b. Under Udell, all a state has to do is provide that every creditor has a right to specific
performance to move that class of creditors to the head of the priorities.
xi. Damages
1. Upon rejection, nondebtor has ordinary bankruptcy claim (gets property back, if any)
2. §502 limit on real property and personal services damages
a. Real property: Greater of one year’s rent or 15% of all rent, but in any case, not to
exceed three year’s rent
b. Personal services damages: ?
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a. Property in which the debtor holds, as of the commencement of the case, only a
legal title and not an equitable interest…
b. …Such as a mortgage secured by real property, or an interest in such a mortgage,
sold by the debtor but as to which the debtor retains legal title to service or
supervise the servicing of such mortgage or interest,…
i. Common occurrence with the NY mortgage market.
c. …Becomes property of the estate under subsection (a)(1) or (2) of this section only
to the extent of the debtor's legal title to such property, …
d. …But not to the extent of any equitable interest in property that the debtor does not
hold.
2. Purpose of 541(d) was to leave the equity only owner untouched.
3. Problem is that this says nothing about trustee avoiding powers. Trustee has power to
recapture the transferred interest of the equity owner under avoidance powers.
c. Preferences §547
i. (b)(1)The trustee may avoid any:
1. Transfer of an interest of the debtor inn property of the debtor
a. Need not be voluntary. Could be a creditor levy on the Chevy.
b. Could also be simply giving a security interest to the creditor.
2. To or for the benefit of a creditor
3. For or on account of an antecedent debt owed by the debtor before such transfer was made
4. While the debtor was insolvent (or that renders him so)
a. Proving insolvency often difficult.
b. § 547(f) gives trustee an evidentiary presumption of insolvency.
i. If transferee puts up any evidence, burden of proof is Trustee’s.
c. Note: could be solvent on a payment 85 days out and then become insolvent 15
days before filing.
5. Made
a. On or within 90 days before the date of the filing of the petition
b. Between 90 days and one year before the date of the filing of the petition if such
creditor at the time of such transfer was an insider
c. (e)(2) Note: if Creditor transferred 2 years ago and took security interest, but failed
to perfect (file) security interest until 45 days b/f bankruptcy, creditor is out of luck.
Transfer deemed to occur when the security interest is perfected.
i. (This simplifies the law. Technically only true where UCC 9-301(b) or
equivalent is state law.)
6. Transfer enabled creditor to receive more than such creditor would receive if
a. The case were a case under Ch. 7 of this title
b. The transfer had not been made: and
c. Such creditor received payment of such debt to the extent provided by the
provisions of this title
d. Granting a security interest qualifies as a preference: it’s very valuable to the
creditor.
e. But, what about statutorty or judicial liens? They qualify as preferences as well.
Creditor is receiving value at the expense of other creditors.
7. Note: No need to show that transferee had knowledge of transferor’s insolvency.
ii. (c)(1) Trustee may not avoid under this section a transfer
1. To the extent that such was intended to be a contemporaneous exchange and was in fact a
contemporaneous exchange. In other words, a transfer of value for value. (E.g. buy a watch
at FMV for $500.)
a. Paying off a security interest is not a preference. It’s a transfer of value for value.
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2. To the extent that such transfer was in payment of a debt incurred by the debtor in the
ordinary course of business or financial affairs of the debtor and the transferee and such
transfer was made in the ordinary course of business and according to ordinary business
terms
a. PG&E bill.
3. Of mere collateral appreciation
a. Giving increased collateral to a secured creditor is likely a preferential transfer
4. That creates a perfected security interest in inventory or receivable…
5. De Minimus exception: In a case filed by an individual debtor whose debts are primarily
consumer debts, the aggregate value of all property that constitutes or is affected by such
transfer is less than $600
a. Cuts out a lot of litigation.
6. If the transfer was made as part of an alternative payment schedule b/t the debtor and
creditor set up by a non-profit credit counseling agency.
d. Debtor avoiding power
i. §522(f) Debtor may avoid a lien to the extent that it impairs an exemption to which the debtor
would have been entitled.
1. E.g. C placed lien on bank account. D, after filing, could claim exemption under 522(d)(5), so
can avoid the lien.
XI. Chapter 13
a. Cannot be involuntary. Looks too much like involuntary servitude.
b. Offers some advantages
i. Automatic stay
ii. Plan is confirmable if C gets more than would get in Ch. 7 (so advantage to Cs)
iii. D has a nice heirloom that doesn’t qualify for an exemption—may be able to trade post-petition
earnings and keep heirloom.
iv. Dominant reason: gives D time to work out debts, esp. re. mortgage real estate.
c. Basics
i. File a plan. Creditors get to object, but not vote.
ii. If confirmed, must submit post petition earnings for 3-5 years (shorter if Cs paid in full).
iii. Can do some cramdown: might be able to rewrite secured claims, except personal residence.
1. Although cannot rewrite, might be able to decelerate it foreclosure.
2. Might be able to string out arrearages.
3. Taxes now nondischargeable. (Can’t get discharge unless taxes all paid.)
4. Not so much of a superdischarge—now only slightly better.
iv. Divorce (different result in Ch. 13 and 7, but I missed it.)
1. Alimony and support: awarded according to support needs.
a. Always non-dischargeable.
2. Property settlement: must divide 50/50 not according to support needs.
a. May be dischargeable unless showing of need.
v. Fraud
1. Used to be able to discharge under 13, but now can only discharge willful and misconduct
claims. (likely a mistake in drafing.)
d. Famous hanging paragraph.
i. Most cars worth less than is owed on the loan. Used to be prime candidates for cramdowns.
ii. Hanging paragraph in 1325(a) (paragraph not numbered): If PMSI and bought 910 days, cannot
discharge.
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Email q/a: What about the guy who "has a judgment lien" against "real property of the debtor"--and the debtor goes into
BK NOT OWNING ANY PROPERTY. The answer is that the lien is wiped out.
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