Chapter 39
Bankruptcy
Objectives:
1. Explain (a) voluntary vs. involuntary bk petition; (b) priorities of creditor claims; (c) debtor's exemptions; (d) debts that are not dischargeable in bk
2. Duties of trustee, rights as lien creditor, right to avoid preferences, right to avoid fraudulent transfers, right to avoid statutory liens
3. Explain the procedure following distributing estate
4. Compare chapter 11 and chapter 13
5. Identify non-bk compromises
I. Federal Bankruptcy Law
A. Purposes
1. Stop the race to the assets
2. Bring about quick, equitable distribution of debtor's assets
3. Discharge debtor's debts for a new start
B. Chapter 7 Bankruptcy
1. Liquidation
2. Both individuals and corporations
C. Chapter 11 Bankruptcy
1. Reorganization
2. Usually companies
D. Chapter 13 Bankruptcy
1. Reorganization
2. Most individuals
II. Case Administration, Chapter 3
A. Commencement of the case
1. Voluntary petition
2. Involuntary petition (creditors force into bankruptcy)
B. Dismissal
C. Automatic stay
D. Trustee
a. Collects property
b. Challenges certain transfers
c. May use, sell, lease property
d. Invests money of the estate
e. Employs attorneys, accountants, etc.
f. Assumes or rejects executory contracts or unexpired lease of debtor
g. Object to improper creditor claims
h. Oppose debtor's discharge, if advisable
E. Meetings of creditors
III. Creditors, the Debtor, and the Estate
A. Creditors
1. Proofs of claims
2. Secured claims
3. Priority of claims (see list of priorities on p. 808)
4. Subordination of claims
B. Debtor
1. Debtor's duties (must file list of creditors, schedule of assets of liabilities, statement of financial affairs)
2. Debtor's exemptions (see list on p. 809)
3. Discharge (see list of non-dischargeable debts, p. 810)
C. Estate
1. All assets of debtor (except exempt property)
2. Trustee as lien creditor (ability to void any security interest that a judicial lien creditor would be able to avoid)
3. Voidable preferences (power to bring back in certain payments made within 90 days of the bk filing)
4. Fraudulent transfers
5. Statutory liens
IV. Liquidation-Chapter 7
A. Proceedings
B. Distribution of the estate (see priorities on p. 812)
C. Discharge
Archer v. Warner, p. 814.
Facts: W sold company to A. A sues W for fraud. A and W settle for $300k, $200k payable immediately, $100k payable on promissory note. No evidence shows fraud in connection with settlement agreement. W defaults, and seeks to discharge settlement agreement.
Issue: Does the settlement agreement arise from fraud, and therefore may not be discharged?
Holding: Yes. The settlement agreement arises from the fraudulent transaction, and therefore may not be discharged.
V. Reorganization-Chapter 11
A. Proceedings
B. Plan of reorganization
C. Acceptance of plan
D. Confirmation of plan
E. Effect of confirmation
Johns Mansville, p. 818.
Facts: Johns Mansville faced 16,000 asbestos claims. Estimated liability was $500m to $1.4b. They also had a lot of commercial debt. However, it was not clear if Johns Mansville was insolvent at the time of filing.
Issue: Is there cause to dismiss the petition?
Holding: No. There is no insolvency requirement for Chapter 11. Purpose of Chapter 11 is to keep the company going, and treat creditors in an organized way.
VI. Chapter 12 (expired)
VII. Chapter 13 (adjustment of debts for individuals)
A. Proceedings
B. Plan
C. Confirmation
Associates Commerical Corp. v. Rash, p. 821
Facts: R bought a truck for $73,700. 60 payments, truck was collateral. R made payments for three years, then filed BK.
Balance owing: $41,171
Replacement value: $41,000
Foreclosure value: $31,875
Under Chapter 13, debtor can (1) keep secured property if creditor agrees; (2) give secured property back to creditor; (3) use the cram down power, meaning debtor keeps property and pays over time the present value of collateral.
Issue: Which value is the correct value for cram down power purposes?
Holding: Replacement value is the proper value, based on court's construction of the statute.
Criticism: Statute says value should be determined by "proposed disposition or use of such property." It does not say who is doing the proposing or using. If creditor's disposition is what is referred to, then foreclosure value makes more sense. Creditor, in theory, gets more if replacement value is used than if creditor just foreclosed now. (only Stevens took that view).
D. Effect of confirmation
E. Discharge (if debtor completes plan)
1. Note 6 year rule (chapter 7 debtor may not get another discharge for six years)
2. Chapter 13 debtor not subject to that rule, if D completes plan or makes best efforts and pays 70% to unsecured creditors
VIII. Creditor's Rights Outside Bankruptcy
A. Creditor's Rights
1. Prejudgment remedies (attachment, garnishment)
2. Postjudgment remedies (writ of execution)
IX. Debtor's Relief
A. Compositions (bankruptcy by agreement)
B. Assignments for benefit of creditors (assign assets to trustee, who then pays creditors)
C. Statutory assignments
D. Receivership