Bankruptcy I

Question 1

Goals of BK

Answer 1

Appropriate relief for those in trouble and equitable treatment for their creditors.

Question 2

Executory Contract

Answer 2

One in which substantial performance is left on both sides (other than payment of $) and if breach by one party would excuse performance.

Question 3

Insolvent

Answer 3

Occurs when debts are great than assets, at a fair valuation, exclusive of property exempted or fraudulently transferred.

Question 3

Ipso Facto Clause

Answer 3

One that states that by filing BK, the contract is terminated. These are typically not allowed.

Question 4

Creditor’s Interest In Debtor’s Assets

Answer 4

A creditor may have a contractual and/or property interest in the debtor’s assets.

Question 5

What are creditors’ remedies if nonjudicial collection efforts are unsuccessful?

Answer 5

Can resort to debt collection remedies provided by

1. law of creditors’ remedies
   2 issues:
   a. when and how a creditor gets a lien on property of the debtor (or property itself)
   b. the lien’s priority in relation to third parties’ rights to the property, including other creditors’ liens and the claims of transferees.
2. the creditors’ contract w/ the debtor to seize and sell the debtor’s assets to satisfy the debt.

Question 6

Lien

Answer 6

Creditor cannot seize and sell its debtor’s property unless it has some property interest in the debtor’s property, and the principal way to obtain such interest is to obtain a “lien” on the property.

Creditor must reduce claim to judgment and enforce the judgment through the appropriate post-judgment process, execution.

Judgment includes a judgment lien which attaches by force of law to the debtor’s real property once the judgment is properly recorded and a willingness by the State to use its coercive power to enforce the lien and otherwise collect the amount of the judgment in the debtor does not voluntarily pay.

To execute, the creditor applies for a writ of execution which orders the sheriff to seize property, sell it, and apply proceeds to judgment.

Question 7

Garnishment

Answer 7

A special form of execution - designed for reaching property of the debtor held by a third party.

Question 8

Consensual Liens

Answer 8

Property rights that creditors obtain by contract.

1. Creditors can obtain these rights by contract, in addition to rights available to a creditor under creditors’ remedies law
2. These rights, consensual liens, limit the rights of other creditors under creditors’ remedies law
3. Consensual liens are property rights and so enjoy the constitutional protection afforded to property rights.

Controlled by state law and typically categorized into real property and personal property.

Real property: mortgage, deed of trust, land-sale contract.
Courts will enforce consensual liens if contract law is not violated.

Question 9

Security Interest

Answer 9

UCC Article 9’s term for a consensual lien on personal property.

The property subject to the secured party’s security interest is the “collateral”.

Secured creditors are paid first in that the collateral is sold to pay the secured creditor. All unsecured creditors and the remaining secured creditors after collateral is sold and dispersed are paid pursuant to the rules of priorities, etc.

Question 10

Chapter 7

Answer 10

Liquidation: The forced sale of the assets of the debtor and distribution of the sale proceeds pro rata to creditors in accordance w/ statutory guidelines and priorities.

Debtors whose debts are primarily consumer debtors are subject to a “means test” designed to determine whether the case should be permitted to proceed under Ch 7.

Businesses and Individuals can file Ch. 7 but only individuals can obtain a discharge under Ch. 7 (sec. 727)

Question 11

Non-dischargeable Debts

Answer 11

.

Question 12

Chapter 7 Trustee

Answer 12

Trustee - The representative of the estate charged with administering the case.

Ch. 7 trustee - represents estate, collects and liquidates the debtor’s assets, and distributes the proceeds to creditors.

• Interim trustee appointed first and then creditors can vote for a permanent trustee at the first meeting of creditors.
• Ch. 7 trustees often drawn from a “panel” of qualified individuals.

1. Trustees required in all Ch 7 cases
2. Ch. 7 trustees work for the debtor’s unsecured creditors
3. Ch. 7 trustees do most of the “work” in Ch 7 cases.

Question 13

Notice and Hearing

Answer 13

11 USC 102(1)

All creditors receive notice of the case based on a list filed initially by the debtor. Code conditions many actions upon the court giving a notice and a hearing meaning:

A. After such notice as is appropriate in the particular circumstances and such opportunity for a hearing as is appropriate in the particular circumstances; but:
B. authorizes an act w/out an actual hearing if such notice is given properly and if:
i. such hearing is not requested timely by a party in interest; or
ii. there is insufficient time for a hearing to be commenced before such act must be done, and the ct. authorizes such act.

Question 14

Discharge

Answer 14

Relieves the debtor of personal liability on the debt. It does not eliminate the debt. Therefore, guaranties are still in effect and can be pursued; mortgages are still in effect and the debtor can be foreclosed upon, etc.

Question 15

Claim

Answer 15

11 USC 101(5)

a. Right to payment… or
b. Right to an equitable remedy for breach of performance if such breach gives rise to a right of payment… Ex - Kovacs case. His breach resulting in having to pay a receiver to clean up the property. This is a claim that can be discharged under 727(a).

Must exist on the date of the petition in order to be discharged.
Claim is allowed until it is disallowed. Allowed b/c it is timely filed. Someone has to object and ct. disallow. Filed w/in 90 days of 1st meeting of creditors. Timely claims have higher priority than untimely claims.

Grounds to challenge a claim: Statute of Frauds; Statute of Limitations; not truly and justly owed (ex. ID theft); Landlord’s claim on future rent limited to 1 year or 15% of time not to exceed 3 years.

No future domestic support can be considered, only arrears.

Question 16

Distribution of Assets

Answer 16

Assets are to be divided pro rata between every creditor belonging to the same class based on priority or the types of their claims.

Question 17

Piper Test

Answer 17

Future claims shall only be allowed into the bankruptcy proceeding to be considered if they are claims of an identifiable claimant or group of claimants arising from some relationships existing prior to the filing of the petition for the BK proceeding (prepetition relationship). This relationship arises from some contact, exposure, privity, or impact btw. the debtor and creditor prior to the petition for BK being filed.

Question 18

Automatic Stay

Answer 18

Filing of a voluntary petition under Ch 7, 11, 12, 13 or involuntary under Ch. 7 or 11 automatically stays (restrains) creditors from taking further action against the debtor, the property of the debtor, or the property of the estate to collect their claims or enforce their liens.

Action in violation of the stay has no legal effect against the debtor and bankruptcy estate.
Automatic stay of 362 only covers the debtor, not 3rd parties and the creditor can still seek repayment from a guarantor or other interested 3rd party.

Begins the date of the filing, not the date the creditor becomes aware of the petition.

Creditor can ask for termination of the stay for “cause”. Vague and courts don’t like to do this.

Question 19

Priorities

Answer 19

Priorities - unsecured allowable claims and administrative expenses. 1st is domestic support then administrative expenses.

Question 20

Subordination

Answer 20

Some creditors get paid before others.

1. Contractual Subordination - typically seen in financing deal, creditors sometimes agree that some creditors will be paid before other creditors.
2. Equitable Subordination - In BK, court can subordinate creditors. Related parties or insiders are put to the bottom of the list by the court.

Question 21

Preferences - 547

Answer 21

Trustee may avoid a transfer of property of the debtor if she can establish:

1. transfer was to or for the benefit of a creditor
2. transfer was made for or on account of an “antecedent debt” (debt owed prior to the transfer)
3. debtor was insolvent at the time of the transfer *Debtor presumed to be insolvent
4. transfer made w/in 90 days preceding the petition to non-insider or within 1 yr. preceding petition to insider; and
5. the transfer hd the effect of increasing the amount the transferee would receive in Ch. 7 case (ex. gets that payment plus pro-rata share when would have only received pro-rata share).

Exceptions - new value and ordinary course of business. Also look for earmarking.

Question 22

Fraudulent Transfers and Obligations

Answer 22

A transfer may be avoided when it is made in the presence of actual fraud w/in 2 years before the BK proceeding. Actual fraud exists when the court finds the transfer was made with an actual intent to delay, hinder or defraud the creditors or the BK process.

A transfer may be avoided when it was made in the presence of constructive fraud w/in 2 years before the BK proceeding. Constructive fraud occurs when the transfer is made without valuable consideration and when the debtor was insolvent.

Debtor presumed to be insolvent 90 days prior to BK proceeding.

Look for good faith transferee. Trustee has to pay value of good faith transfer. (Car example)

Question 23

Exemptions - 522

Answer 23

Exemptions - 522

Ch. 7 BK liquidates the property of the estate to cover the debts owed to the creditors and this liquidation may be subject to exemptions. If some property is exempt, it shall not be considered property of the estate and thus it cannot be claimed against by the creditors. Does not apply to secured creditors, only unsecured creditors.

If the equity held in the property by the debtor exceeds the exemption in that property, the exemption still applies, but the property will likely be sold and the equity in the property up to the exemption amount will be given to the debtor and the remainder to the creditors.

Question 24

Homestead Exemption

Answer 24

Single Individual - $75k exemption
A family Unit of 2 or more related people who live together - $100k
If one is 65 or older, disabled, btw. 62-65 and earns less than $15k, then $175k exemption. The person that gets the exemption doesn’t have to be the one that owes the $, just has to be part of the ownership.

Question 25

Exceptions to Discharge - 523

Answer 25

Certain kinds of debt should not be discharged. This only deals with a particular creditor’s debt. No complaint needed to be filed for these: Domestic Support, Student Loans, Certain Tax Obligations..

Others a complaint is required. Ex. - most complaints under 523 deal fraud. This particular creditor’s debt should not be discharged because of some form of fraud. Have to prove the common law elements of fraud. Look for detrimental reliance.

Question 26

Discharge 727

Answer 26

No discharge of anything under 727 as opposed to 523 under which a particular creditor’s debt is not discharged.
727 is an objection to discharge. A complaint under 727 cannot be dismissed without a hearing and a notice to all creditors. “Debtor can’t buy a discharge”. Also, don’t want creditors to file these things just to squeeze the debtor.

Complaint under 727 must be filed within 60 days after the date first set for the meeting of creditors.