9/3/03



Collecting Judgments: First, creditor must obtain court-approved order holding that debtor owes creditor the debt. This is sometimes a complicated process and other times it is straightforward.

a. Means of Collection:

i. Execution: Writ (Fi. Fa.) is sent to Sheriff who both seizes non-exempt property of the judgment debtor and then sells the proceeds to pay the debt. Any excess is returned to debtor.

ii. Turnover Orders: Some states statutorily allow creditors to take property from debtors even if it is not theirs but it can be proven it is under the debtors’ control. OJ Simpson and Ronald Goldman’s taking of the car and grand piano.

iii. Judgment liens by recordation: Obtained by recording a judgment in the county land records where deeds of sale and mortgages are filed. Usually limited to just real property.

iv. Voluntary Liens: Gives the creditor rights in the debtor’s property without any acquiescence or cooperation from the debtor. Generally, this refers to mortgages (real property) and security interests (all other property). Most require a writing in which the debtor grants the lien and describes the property involved and require public notification by recordation in a governmental office to give them legal effect.

b. Order of preference for collection by creditors under state law:

i. General rule is first in time, first in right. This is measured by which creditor “perfects” the lien first. Secured Creditors or Mortgagees have the benefit of having their lien perfected but must insure that they follow all applicable local rules. If they fail to do so, then the lien is not perfected and they can be placed behind an unsecured creditor who has perfected their lien. With respect to buyers, the same general rule applies as well as the public notification component.

c. Structure of the Bankruptcy Code:

i. Chapters 1, 3 & 5 apply to all bankruptcy proceedings. They include definitions, rules of construction, appointment, compensation of trustees and provisions governing the operation of the bankrupt estate and regulation of the claims and distribution process.

ii. Chapter 7 governs the straight bankruptcy, where assets are liquidated to pay debts.

iii. Chapter 9 describes the provisions for the bankruptcy of a municipality or other form of government.

iv. Chapter 11 governs the reorganization bankruptcy – where the business remains in operation while it reorganizes its debt.

v. Chapter 13 is used by most consumers wishing to keep their non-exempt property but also want to try to pay back some of the debts.

vi. Chapter 12 (the only even numbered chapter) is the specialized version of Chapter 13 governing reorganization of bankruptcies filed by family farmers.

I. Fraudulent Conveyances:

a. Twyne’s Case (1601): Deadbeat owes two people money and cannot pay. He secretly deeds over his property to one but retains possession and use of it while the other has a writ pending. The Court held that when gifts are made in satisfaction of a debt, (1) that it be made in a public manner, (2) that they are assigned a value equal to an independent appraisal and (3) that the creditor takes possession of the gift. This case is important because it introduces the concept of badges of fraud and when there is evidence that a creditor and debtor are acting to defraud other creditors, then it becomes a rebuttable presumption. The courts viewed continued possession of the goods by the debtor after the gift was made a sure sign of fraud.

b. ACLI Government Securities, Inc. v. Rhoades: D transferred his 3/5 interest in a parcel of property to his sister, a tenant in common for the other 2/5 interest a day prior to having a judgment signed against him for $1.5 million. Three issues in dispute: (1) was the conveyance fraudulent (thus making is subject to be set aside by creditor) under NYS D&C Law §273-a because it was made by a defendant in a lawsuit who failed to satisfy a final judgment against him and lacked fair consideration; (2) was it made without fair consideration and rendered D insolvent; and, (3) was the conveyance made with the actual intent to defraud.

i. The burden of proof to establish that a debtor’s conveyance was made without fair consideration falls to the creditor. However, where the facts are exclusively within the control of the debtor and if the transfer involves and intrafamily relationship, the burden shifts and is given close scrutiny. D contends that the consideration was an antecedent debt owed to his sister. However, there lacks substantial evidence to support the debt existed because the treasury bonds were at best a bailment rather than a debtor creditor relationship. In addition, there is no relationship to the amount of the bonds (40K to the value of his interest in the property (195k).

ii. With respect to the conveyance making him insolvent, the assets listed by D were at best worth only 212.5k (South Carolina Property’s independent appraisal). The other two (Account receivable at his law firm and a securities account) were worthless. Under NY Law §271(1), a person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and mature. Accordingly, losing this asset made D insolvent.

iii. The burden of proof to establish actual intent to defraud under §276 falls to the creditor, but usually this is circumstantial from certain factors enumerated within the statute such as (1) close relationship among the parties, (2) secrecy and haste of the sale, (3) inadequacy of consideration, (4) transferor’s knowledge of the creditor’s claim and his own inability to pay it. Almost all of these apply here.

c. The point of the fraudulent transfer law is to protect creditors against a debtor’s property in order to secure payment of judgment debts.

d. Why does §273 require insolvency and the debtor receive fair consideration to be a Constructive Fraudulent Transfer?

i. Solvency is in place because as long as the debtor still has assets to pay off the debts, then it is irrelevant what he does with his assets. In other words, his transferring assets do not harm the creditors because there is still enough for him to pay off the debts.

ii. Fair consideration is in place because in the case that liabilities exceed assets, the creditors are harmed only if the debtor transfers an asset for less than it could get in the open market. For example, if an insolvent debtor sells a car worth 100k for 100k, that money still is an asset and available to be spread out across creditors.

II. 9/10/03 – The Estate 175-196; Problem Set 8

a. In re Palmer, 57 B.R. 332 (Bankr.W.D.Va. 1986)(property interests vesting after the filing are not part of the estate): Palmer files for bankruptcy and 6 months later earned a bonus. The trustee argued that since the bonus was dependent upon his performance both before and after the filing and that the company had always paid the bonuses and would be subject to lawsuits if they chose not too, that the bonus became part of the estate. However the Court held that since the decision to award the bonus was discretionary to the CEO of the Company, and contingent upon him being on payroll after the filing of the petition, then the interest did not vest until after the filing. Thus the bonus is not part of the estate. In addition, the Court rejected the balancing of the equities approach of dividing up the proceeds in a manner that reflects his time on payroll pre and post petition because he never had a right to the bonus had he left payroll prior to December.

b. Class Hypos:

i. Debtor does work in January 2003 but does not get paid until January 2004. Filing is in July 2003. The payment becomes part of the estate because the debtor has done everything to get the money.

ii. Debtor consults on a proposal and gets paid only if award is granted in January 2004. Filing is in July 2003. The payment becomes part of the estate because as above, the debtor has done everything to receive the money. It is different than Palmer because the debtor has no further obligation to get the funds; it is simply contingent on award.

iii. Debtor works for a firm that awards 2 months salary after getting laid off. Filing is Jan 11 and debtor gets laid off Feb 11. Probably not because the debtor did not know he was going to get laid off at the time of the filing and had not done everything necessary to receive the severance package.

c. In re Orkin, 170 B.R. 751 (Bankr. D. Mass. 1994)(Restrictions must be enforceable under federal or state law): Orkin is the sole employee and proprietor of a real estate company and transfers a large amount of money into a retirement plan. He then files for bankruptcy two years later. The retirement fund contains a restriction on transferability. The trustee argued that since the restriction was not enforceable under state or federal non-bankruptcy law the retirement plan is part of the estate. The Court agreed with the trustee because it is not ERISA qualified due to the fact that courts have held that an employer cannot be a covered employee. In addition, the restriction is not enforceable under state law because it contained a 60-day cancellation provision allowing him to take full and exclusive control of the funds in the account.

i. However, the way to analyze a similar issue is to review the statute. That is, is there a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title. Orkin had a beneficial interest in the trust because he gets the retirement proceeds. (Retirement Plans will not be on final exam)

d. In re Burgess, 234 B.R. 793 (Bankr. D. Nev. 1999)(Brothel License is property): Legal brothel owner files for bankruptcy and trustee wants the license restored because the county commission rescinded it after the filing. The Court held that the license was property and that it had enormous value. To hold otherwise would be to contravene the broad definition of property meant to further the congressional goal of encouraging reorganizations.

i. The Court acknowledges that Nevada Law holds that this license is not property. However, they hold that federal law dictates whether something is property and part of the estate. The Court says if you can sell the license and it has the traditional traits of transferability, then it is property.

Class Notes:

§541 includes all legal or equitable interests of the debtor in property as of the commencement of the case. But, the two big exclusions are:

1. (a)(6)…earnings from services performed by the individual debtor after the commencement of the case.

2. (c)(2) – restraint on alienation and transferability. Under (c)(1) the code includes most contractual terms that attempt to keep the property out of the bankruptcy. Examples are season tickets to sporting events and country club memberships. They are both included in property notwithstanding any contractual restraints on transferability. Just because it comes into the estate, it does not mean that it can be sold. If the membership or season tickets cannot be sold by the debtor on the open market than the trustee is not given that right either. However, (2) exempts out that property that has a restraint on transfer if it is enforceable under federal non-bankruptcy law or state law. An example of the restraint is the prohibition on an individual from borrowing from a bank against his 401k.

The big questions are whether something is a legal or equitable interest in property (Burgess), whether it was an interest as of the commencement of the case (Palmer) and if there is a restraint on alienation of the property that falls within (c)(2) (Orkin).

When dealing with an estate issue, it is important to keep in mind that only what the debtor owns comes into the estate. If an asset has a lien on it for a value greater than the fair market value then it will come into the estate but likely turned back. Also, the trustee gets no additional rights that the debtor did not have (season tickets and country club membership examples).

The questions to ask (elements) of whether a retirement plan becomes part of the estate:

1. Is it organized as a trust and,

2. Is the debtor a beneficiary of the trust and,

3. Does the trust contain a restriction on transfer and alienability and,

4. Is the restriction enforceable under non-bankruptcy law.

9/15/03 – The Automatic Stay 196-204 Problem Set 9 -- §362.

The Automatic Stay – §362 of the Code prohibits any creditor’s attempt to continue to collect from the debtor or the debtor’s property. Essentially, this gives the Court and the Trustee the time necessary to collect and review all assets and liabilities of the debtor and distribute them among the creditors. §362(b) provides some exceptions that permit certain actions against the debtor to continue.

Andrews University v. Merchant, 958 F.2d 738 (6th Cir. 1992): D, a non-US citizen, defaulted on student loan payments issued while attending an American University. The University, which had guaranteed the loans, paid the lender and took assignment of the note. Soon after graduation, d filed for bankruptcy citing 28k in debts, 23k of which due to the loans owed to the University. In an effort to gain citizenship, she sought a copy of her official transcript and the University refused citing the defaulted loan payments. She filed suit arguing that the University’s action violated the automatic stay provisions of §362(a). The University argued that since §523(a)(8) excepted from discharge student loans they had a right to withhold the transcript. The Court, after summarily holding that the loans are excepted from discharge, held that the University’s actions violated the Automatic Stay provisions. Their holding of the transcript was akin to an act to collect, assess, recover a prepetition debt [see §362(a)(6)]. Think about it, they are saying, no transcript until you pay… that is an action to recover the prepetition debt after the filing. Of course, since this loan is excepted from discharge, the student will be SOL if she does not get the transcript before the stay being lifted. If a creditor treats a debtor differently than other debtors or customers than courts will likely find that a violation of the automatic stay has occurred.

Nissan Motor Acceptance Corp v. Baker, 239 B.R. 484 (Bankr. N.D. Tex. 1999): D was in arrears on his car payments of two months when he filed for bankruptcy on December 30, 1993. P repossessed the automobile on January 4, 1994. P claims they did not know of the bankruptcy filing but there was testimony to indicate that D’s counsel told them and the Bankruptcy Court below found that they knew of it. Still, rather than turn the vehicle over, P retained possession and eventually sold it on March 16. This was while their action for adequate protection, filed February 23, was pending. The lower court held that the continued possession and ultimate selling of the vehicle was a willful violation of the automatic stay and awarded actual and punitive damages totaling 23k and attorney’s fees totaling 5k. P appeals. The Court held that Nissan’s control over the vehicle was a willful violation of the automatic stay and rejected the argument that since they were a secured creditor, they were not required to turn over their collateral. In fact, the Court reinforced the creditors affirmative obligation to return the estate property under §542(a) by holding that “There is nothing in §362(a) that grants a creditor… the authority to engage in self-help.” The sale was a willful violation of the stay as well because they are not allowed to claim their records indicated the stay had been lifted when it actually had not. Finally, the Court ruled that there were actual damages and the punitive damages and attorney fees were appropriate (under the clearly erroneous standard). Note though, that Nissan’s request for adequate protection was granted on June 1. Had they simply awaited that ruling they would have gotten out of this scott free!

Preliminary Procedures:

Note the requirements under §521 that the debtor upon filing to accurately list all debts and assets have strict penalties for both mistakes and fraud. For example, §523(a)(3) provides that failure to list a debt may make it nondischargeable. §727(a)(4) provides that fraudulent statements expose the debtor to having all of the debts listed be denied discharge and criminal perjury proceedings.

Problem Set 9:

(9.1) From the date of the filing, all creditors except those specifically exempted under (b) are prohibited from any action seeking to recover money owed by the debtor. This includes, as provided under §362(a)(2), the garnishment because all judgments made prior to the commencement of the case. §362(b) specifically excepts alimony and child support payments so those will still be due and owing as scheduled pursuant to the order. In addition, any fine issued by the DA is excepted as well. His utilities will not be shut off and the filing gives him some breathing room for the majority of his debts. Of course, any secured creditors can file for adequate protection, but this will not affect Joe unless these creditors violate the stay and maintain possession and/or sell any property of the estate.

(9.2) The merchants should not do anything to attempt to collect the debts. Since the filing has been made and the stay is in place, they are prohibited from any further action. In fact, those that have collected any money should either return it to the debtor or transfer it to the trustee. The trustee is responsible for distributing the assets among all of the creditors. The merchants who have transferred the debts to the collection agency should provide notification that a bankruptcy filing has occurred. However, if the relationship is such that the merchants still “own” these accounts and there were not assigned to the collection agencies, then they should be returned to the merchants. By not adhering to the provisions of the automatic stay, the merchants are liable for any actual damages suffered by the debtor as a result of their actions, punitive damages for the most egregious actions and reimbursement for the debtor’s attorney’s fees.

Individual Chapter 7

9/17/03 – Exemptions 104-105; 111-120; NYCPLR §§5205, 5206; Ins Law §3212.

Exemptions to specific components of the debtor’s property from becoming part of the estate (it actually goes there and then is released) are in place in order to protect the debtor’s fresh start. An automobile, clothing, tools of the trade and basic furnishings are necessary for anyone to be able to have a meaningful chance at starting anew.

In re Johnson, 14 B.R. 14 (Bankr. W.D. Ky. 1981)(Classification of exempt property): Debtor attempts to claim a 60 passenger bus as exempt property under Kentucky Revenue Statute allowing one motor vehicle not to exceed $2,500. Trustee argued that motor vehicle means automobile and not bus because even though the legislature used the term motor vehicle, they meant car. The Court disagreed and held that since the statute was silent on the size of the motor vehicle and only provided for a monetary ceiling, the bus is an automobile and exempt property.

In Buffalo, a debtor attempted to exempt his snowmobile. Judge Bucki held that it was not because a motor vehicle is exempt because it helps the debtor gain a fresh start by giving him the implements necessary to work and live his life. A snowmobile is more for recreation purposes.

In re Pizzi, 153 B.R. 357 (Bankr. S.D. Fla. 1993)(Classification of Exempt Property): Debtor won the Connecticut lottery and then spends herself into bankruptcy. She attempts to claim that since the payouts were annuitized that they qualified as exempt under Florida Statute, which protects annuity contracts from creditors. The Court rejected the analogy to a similar case where the victim of a personal injury accident received an annuity as settlement of the claim. Since Connecticut never refers to lottery winnings as annuity contracts then they are not such. In addition, the Court held it to be inequitable to allow a debtor to obtain loans in reliance upon the lottery winnings and then discharge these obligations in bankruptcy without having to turn over the winnings.

The judge took what was a clear statute and broad precedent strongly favoring the debtor’s position and set them aside for purely policy reasons. Note that this is possible for bankruptcy judges to do (keep in mind the equities and apply the principles in a manner that treats all parties fairly) and is done often.

** The issue with these two cases is that when a state statute exempts property by classification rather than dollar amount, many questions will arise.

In re Williams, 171 B.R. 451 (Bankr. D.N.H. 1994) (Tracing the proceeds of property): New Hampshire law exempts workers compensation proceeds from bankruptcy proceedings. Debtor received a lump sum settlement and used the proceeds to pay an antecedent debt to his father and buy a corvette. Trustee wanted the car to be included as property of the estate but the Court disagreed. The workmen’s compensation law was framed to supply an injured workman with a substitute for wages during the whole or at least a part of the disability… he was to have enough to sustain him in a fashion measurably consistent with his former habits of life during the readjustment. The purchase of the car falls within that definition and thus it is exempt from becoming part of the estate.

The NY form requires the debtor to list all assets and then if seeking an exemption, provide the authority for the exemption claim.

Problem Set 6:

(6.1) Use NY Law:

Debt to the IRS is not exempt.

Household Furniture and Appliances: Under 5205, there are a number of listings that could exempt this from becoming property of the estate. Need a better definition of the specific items within this group.

Clothing: Under §5205(a)(5) exempts that clothing that is necessary for the family. So, if there are luxury items, then they may not be exempt.

Law Books: Depends if she is a student or a lawyer. No dollar limit on schoolbooks but other books are limited to 50 in value. However if she is practicing, they may be covered under §5205(7) tools of the trade.

Moped: Is this a motor vehicle?

MGA on Blocks:

Cash Value on life Insurance:

Lois’s Wedding Ring:

Lois’s Computer:

Disney Stock:

Joint Checking Account:

Harv’s Computer:

Boat:

Harv’s Motorized Wheelchair:

Cat:

Soccer Ball:

(6.3) Assumptions: use NY Law, outstanding mortgage debt of 40k, FMV is 60k, foreclosure sale value 29k, and judgment creditor owed 25k. Until the equity is above the allowable homestead exemption (in this case it is), the judgment creditor cannot force the house to be sold. The order of payment after a sale follows: (1) Expenses of Sale, (2) Secured Creditor/Mortgagee, (3) Debtor’s exemption, (4) judgment creditor(s), (5) remainder to homeowner/debtor. Payments are made until the proceeds are exhausted so those down on the list may be sol. However, in the real world, valuation issues are prevalent. For this problem, if the judge allows the sale to go forward, it is likely that Kim and the JC will make a deal because neither will get anything in a foreclosure sale.

§522(b) – A debtor filing for bankruptcy in most states now has a choice whether to opt out of the federal exemption scheme and avail themselves of the state exemption laws. However, note the classification and tracing problems described above still exist no matter which laws are used.

A bankruptcy does not extinguish a lien. The personal obligation to pay the debt is discharged but the lien is still attached to the property. So the secured creditor still has a property interest in the collateral to insure that payment is made. See Long v. Fullard 117 US 617.

Taylor v. Freeland & Kronz, 503 U.S. 638 (1992): Debtor (Davis) filed for bankruptcy amid her employment discrimination proceedings. She included the full amount of any potential award as exempt property from the bankruptcy estate. The TIB did not object in a timely manner (30 days under Rule 4003) because he did not think the case had much merit. Eventually she settled for 110k and the TIB wants the money. He argues that the Court has the authority to waive the deadline in cases where the debtor has no colorable basis to claim an exemption. In this case, both parties agree that Davis would have only been able to exempt a small amount of the award. This would act as a disincentive for filers to make bad-faith exemption claims in the hopes that the TIB and the creditors will not object in a timely manner. However, the Court rejected this analysis because the Code contains provisions that penalize debtors for fraudulent claims by denying discharge of all claims or imposing criminal sanctions. The dissent argued that the doctrine of equitable tolling applies to the 30-day window because the only people harmed by the TIB’s failure to act diligently are innocent creditors.

Secured Creditors and Exempt Property (Examples):

1. Federal law allows for 1,200 exemption for automobile. Debtor owns a car worth 1k with a valid 2k lien. Secured Creditor takes the car, debtor gets nothing and no exemption.

2. Federal law allows for 1,200 exemption for automobile. Debtor owns a car worth 3k with a valid 2k lien. Secured party gets the 2k after TIB sells the car, debtor gets the remaining amount up to federal exemption (in this case, 1k).

§522(f) – permits avoidance of judicial liens (though, alimony and child support are not covered) and those that are non-possessory (when secured creditor does not have the property and it is held by the debtor), non-purchase money consensual security interests (interests in property where the creditor did not loan the money necessary to purchase the item in question) when the collateral is exempt property. The effect is that these secured creditors were treated as unsecured and put in the distribution pool. The reason this is important is because Judicial Liens may survive bankruptcy and a judgment creditor could end up forcing the sale of the house (or other exempt property) years after the bankruptcy proceeding.

To the extent at means: A lien impairs an exemption to the extent that the sum of the lien all other liens, and the amount of the exemption the debtor could claim if there were no liens on the property exceeds the value of the debtor’s interest if there were no liens on the property.

Lien + other liens + amount debtor could exempt exceeds the value of debtor’s interest

Lien + other liens + amount exempt – value of debtor’s interest > 0

Lien + other liens + amount exempt > value of debtor’s interest

Ex:

Mortgage = 40k; Judgment Lien = 25k; Exemption = 10k. To the extent that this figure (75k) exceeds the value of the debtor’s interest, the debtor may avoid the lien.

• If the house is worth 50k then subtract that from the 75k to yield 25k. The debtor may avoid the entire lien.

• If the house was worth 75k, the result yields a 0 figure preventing the debtor from avoiding anything. This is so because the mortgage holder can get paid in full, the debtor can get his whole exemption and the lien can be repaid in full from the proceeds of the sale of the house.

• If the house is worth 80k, the same logic applies in the second example. But, the 5k may be taken by the trustee to distribute among unsecured creditors.

• Suppose the house is worth 47k. 75k-47k yields 28k. The debtor’s exemption is impaired to the extent of 28k and he may avoid the entire lien.

• Suppose the value of the property is 57k. 75k-57k yields 18k, which is the amount the debtor may avoid. Or, the judgment lien holder will get 7k (25k-18k). Procedurally, the lien is wiped out and the lien holder is given a secured interest of 7k in the house, payable after sale.

Problem (10.1): They will only be able to retain 10k of the 23k of equity in their home [5206(a)(1)]. His violin is exempt under 5205(a)(7). Their household goods are exempt because there is no dollar value. However, there are some restrictions like the number of refrigerators, TV sets etc…

11 U.S.C. §522(f)(1)(A) Problem: Pete can avoid First Bison’s entire lien because the amount of all of the outstanding liens and his 10k exemption = 35.5k. The judgment lien impairs Pete’s exemption to the extent of 35.5k. The entire lien of 17.5k can thus be avoided. In the second scenario, the math works out differently. 127.5k (Liens + Exemption) – 130k (Value) yields (2.5k). So there is no impairment and none of the judgment lien may be avoided. Note that Pete wants to do something about this lien because if he does not, then it survives bankruptcy and the creditor can go after Pete after the proceeding ends.

11 U.S.C. §522 (f)(1)(B) Problem: Pete may void the entire lien on his tools thus removing Ajax’s ability to enjoy secured creditor status and placing them in the unsecured creditor pool. 2k (Liens + Exemption – here only 500 of 600 allowed) – 500 value of tools yields 1.5k. The lien impairs his interest to the extent of 1.5 k allowing him to avoid the entire lien. Suppose the tools are worth 1,100. 2.1k-1.1k yields 1k. He can avoid 1k of the lien leaving 500 worth of lien. Property is worth 1,100 so he gets his 600 exemption and Ajax will be a secured creditor of 500. For the valuable antique hammer, the issue is whether he can successfully argue that it a tool of the trade or part of his household goods or furnishings. Unlikely, but an argument can be made.

9/22/03 – Claims and Distributions; 231-243 Problem Sets 11 & 12.

In Ch. 7 & 13 cases, creditors are required to file proof of claim forms within 90 days after the first meeting of the creditors. All claims based on a writing must include a copy of the writing to the proof of claim form. Note that in many Ch. 7 cases, creditors do not file proof of claim forms because there usually are no non-exempt assets available for distribution.

The TIB (or the debtor – see Lanza) may dispute a claim §502(a). Usually disputes focus on whether the debt is valid under state law or whether the amount claimed is accurate.

In re Lanza, 51 B.R. 125 (Bankr. E.D. Pa. 1985): Bank files three proofs of claim for mortgages given to debtors however, does not have the appropriate records necessary to substantiate the claim. The first was a 350k mortgage, which consolidated a 125k construction loan (orig. 200k), a series of unsecured loans totaling 170k. The second was based on a demand note totaling 40k and the final was a 27k unsecured loan. The parties agree in agreement for the latter two amounts. The first is the only one in question. While Bankruptcy rules require the creditor to provide proof of its claim, once done, it constitutes prima facie evidence of the validity and amount of the claim and the burden shifts to the debtor or trustee to dispute it. This is true notwithstanding the difficulty or hardship placed on that party in doing so. That is why the latter two claims are allowed as requested. However, with respect to the first mortgage, the bank offered conflicting testimony regarding the outstanding amount and thus the court adopted the lowest figure, 300k.

Interest charges accruing after the filing of the claim: For unsecured claims, the only interest allowed in the claim is that that accrued prior to the filing [§502(b)(2)]. However, for secured claims, a creditor is allowed to collect up to the value of its collateral. As such, if the value of the collateral allows for the collection of interest accrued after the filing date, then it is granted.

Problem Set 11:

(11.1) $19,400. Depending on whether the court follows United Merchants, the attorney fees may add another 100 bucks to the total.

(11.2) In the first example, the bank should file a proof of claim form and ask the trustee to sell the stock as quickly as possible in order to get the price that it is at currently. That way the bank will be able to receive the full amount of its outstanding indebtedness, 195k, post-petition attorney fees and any interest that accrues after the filing. In the second situation, since the bank has a secured loan, it will be able to collect its claim up to the value of its collateral. In this case, that would be the entire amount yielded from the sale, $162,250. The remaining amount owed is converted to an unsecured claim. The amount depends on whether the court follows United Merchants and whether the attorney fees are included.

(11.3) Assuming that since there is collateral the claim is secured, the bank may recover the 385k, 22.5k and 7.5k. However, with respect to the 5k in extra time the loan officer spent trying to collect this loan, recovery depends on whether the court determines this to be a reasonable fee since it is unlikely that the contract included a specific provision allowing this expense.

(11.4) CF has a 24.6k total claim. After sale, the 23.8 is secured and .8k is unsecured. The 300k post-petition interest in not allowed under §506(b) and §502(b)(2) because they are undersecured. Generally, attorneys’ fees are not allowed, but under United Merchants, it might be allowed. They could have asked the trustee to abandon the property under §554 or move for the stay to be lifted under §363(d)(2). This is because if they are able to sell the car for more money than the trustee, then their claim raises to 25.2k (includes attorney fees and post-petition interest).

Chapter 12

Order for distribution for unsecured claims for assets that are not exempt and unencumbered under §726(a) is (1) priority unsecured claims, (2) eligible non-priority unsecured claims (this is the category where most unsecured creditors fall).

Priority unsecured claims are divided into classes under §507 and each is paid in full before the one following on the list. Examples, (a)(1) administrative expenses, (a)(3) wages earned within 90 days preceding filing or when the debtor went out of business. Note that under (a)(7), the court has the obligation to insure that something called alimony, maintenance or support is in fact that.

12.1 (See Slides for total breakout)

John Harry – Private Duty Nurse: Depending on when the money was earned, it could be a priority under (a)(3) up to 4,650. The remaining money becomes non-priority unsecured.

SSA: Priority claim under (a)(8)(c) because it is a tax required to be withheld in whatever capacity. Also, (a)(8)(d) applies. But for only 267 (1/2).

Property Taxes: Need to work out the math to figure out the last day each year’s tax could be paid without penalty. Obviously, the earlier two years would not qualify as priority but the last year might. However, the penalty for the final year, which might qualify as priority, since it is not in compensation for a pecuniary loss it, would not qualify. So, all of the penalties fall below the non-priority claims under §726 (a)(4) [behind 1-3].

Nartowski – Down Payment for Lawn Mower: Priority under (a)(6).

Income Taxes: Again, the math needs to be done under (a)(i).

Phone, Utility and Reg bills: Post-petition liability not claimable

TIB & Counsel: Admin expense taken from the top.

Insurance: Admin expense

Cost of selling prop and re: Admin expense taken from the top.

Harold’s attorney’s fees wrt filing: non-priority general expense. Some circuits will allow the attorney fees for bankruptcy filing.

Ex-Wife’s negotiable note: Depends on if it is in lieu of alimony, maintenance and support (a)(7).

Unsecured General Claims:

9/24/03 – Discharge; 243-284, Problem Set 13.

Under §727(b) the effect of a discharge discharges the debtor of any claim under §502. §524(a) voids a judgment that is a personal liability of the debtor.

There are sections of the Code that disallow discharge of a debtors debts: §523 (Rifle Shot) allows for the trustee or creditors to object to discharge for particular debts (again, see the list in the section and the slides) and §727 (Global Denial) allows for objection to all debts (review the requirements under this section and listed in the slides). Note that under §523(c) some claims are automatically non-dischargeable and others need a court determination. Further note that some debts that are non-dischargeable in a chapter 7 are dischargeable under a chapter 13.

In re Harron, 31 B.R. 466 (Bankr. D. Conn. 1983)(Better keep good records): The fundamental premise of bankruptcy is to allow a debtor to be relieved of all dischargeable debts. However, this is balanced by the requirement that the debtor deal with creditors in a fair and honest manner. Here, debtor argued that his failure to keep adequate records establishing the loss of certain assets should not deny him the right to discharge. The Court disagreed and held that accountability is required in order to allow creditors to trace a debtor’s cash flow and assets. In this case, evidence showed that the debtor had a net worth of 434k in Jan. 1980, which had dropped to a negative 594k upon filing in September. In order to establish the genuineness of this precipitous drop in net worth, debtor is required to produce records.

In re Reed, 700 F.2d 986 (5th Cir. 1983)(converting assets fraudulently can prevent discharge): Reed operated a failing men’s wear shop. As part of the agreement with his bank, the shop was to be operated by a consulting firm. This did not work and the shop closed. Reed filed for bankruptcy. During the period before the bankruptcy, Reed purchased a large amount of items and later sold them either at or below value and then used the proceeds to pay down the balance of the loan on his house. In Texas, his entire homestead is exempt. Reed argued that his acceptance of less than fair market value for some of the items did not harm his creditors because he would have simply applied the larger proceeds to his mortgage. Both lower courts held that Reed effected transfers that converted non-exempt assets to exempt assets with the intent to hinder, delay or defraud his creditors under §727(a)(2) and (a)(5) [failure to explain the loss of assets] and denied him discharge. The 5th Circuit affirmed.

In re Dorsey, 120 B.R. 592 (Bankr. M.D. Fla. 1990): Dorsey ran up more than 23k of credit card debt even though she had no income and she knew that she would be unable to repay. Over the course of her relationship with American Express, they issued her new cards and extended her line of credit. Dorsey claims that a male friend of hers paid off her previous debts but he has since left the picture. Accordingly, she argues that she incurred the debt in good faith and expected JJ to furnish the necessary funds to pay the obligation. While the court took American Express to task for issuing so much credit to an individual obviously incapable of handling that amount of debt load, it held that by virtue of 523(a)(2)(A) Dorsey obtained the funds fraudulently and the debt is non-dischargeable under bankruptcy.

In re D’Ettore, 106 B.R. 715 (Bankr. M.D. Fla. 1989): Debtor seeks to discharge student loan debts, which under §523(a)(8) are excepted from discharge unless excepting them would impose an undue burden on the debtor. This debt makes up the lions share of her overall indebtedness. Debtor’s argument is that she obtained a degree in computer programming but could not obtain employment in that field and had to take a clerical job for less money than expected. Her job yields 780 a month from which she estimates 660 are necessary for expenses (including a car payment and jewelry payments). Courts generally apply the undue hardship rule very narrowly thus the mere fact that repayment of the student loan imposes a hardship is not enough. The court considered the following factors in holding that the debt is non-dischargeable; (1) total incapacity now and into the future to pay one’s debts, (2) whether the debtor has made a good faith effort to negotiate with the lender, (3) whether the hardship is long-term, (4) whether any payments have been made on the loan, (5) whether the debtor suffers from a permanent disability, (6) the ability of the debtor to obtain gainful employment in the field of study, (7) whether the debtor has made a good faith effort to maximize income and minimize expenses, (8) whether the dominant purpose of the petition is to discharge the student loans, (9) the ratio of the student loan to total indebtedness. On balance, the debtor has the ability to repay the loan.

In re Hill, 184 B.R. 750 (Bankr. N.D. Ill. 1995): Debtor was a party to a divorce agreement requiring him to repay certain obligations incurred during the marriage. Plaintiff is the ex-wife and is seeking to have these debts non-dischargeable (presumably because she then would have to pay them). Plaintiff brings the complaint under §523(a)(5) & 523(a)(15), only the latter is discussed in this opinion. §523(a)(15) addresses the treatment of hold harmless agreements or property settlements that are often used to reduce alimony or support payments. That is what happened in this case. In order for the debtor to succeed, he must prove his inability to repay or that the benefit of the discharge outweighs the detriment to the non-debtor former spouse from their non-repayment. The court first notes the absence of “undue hardship” language means that those standards do not apply. In order to prove inability to repay, the debtor must establish that paying the debt will reduce the debtor’s income below the level necessary to support the debtor and his dependants. In this case, debtor has shown expenses of 2k a month and income of only 1.7k a month. Since the non-debtor spouse may also file for bankruptcy, the second part of the test is proven as well. The benefit of discharge outweighs the detriment to the ex-wife.

In re Milbank, 1 B.R. 150 (Bankr. S.D.N.Y. 1979): Debtor is ex-husband and son-in-law of plaintiffs seeking the courts determination that debts owed to them are non-dischargeable under the bankruptcy proceeding. The debtor and wife were having marital problems but attempted to work them out. In the meantime, both the wife and her father lent him money to support his furniture business. Both loans were made because the debtor indicated he wanted to resolve the marital issues. However, debtor was having an affair with his neighbor’s wife and has since moved out of the house to live with her. While not every loan granted by a family member while the debtor was having an adulterous affair can be characterized as being done so as a result of fraud, in this case, the loans were made in reliance on the debtor’s representation that he and his wife would make a good faith effort to strengthen their marriage. Indeed, this was not the case because of the adulterous activity. In addition, the plaintiffs would not have made the loans had they known of the adulterous activities. Neither loan is dischargeable under bankruptcy.

United States v. Cluck, 143 F.3d 174 (5th Cir. 1998) (If you think non-discharge is bad, how about getting sent to jail): Cluck was a successful lawyer who ended up getting hit with a huge verdict against him by one of his clients. While the decision was reversed on appeal, he needed to come up with money to stave off execution of the order of the court. He knew bankruptcy was his only option but he did not want to lose all of his wonderful things. Before filing, he executed transactions, which returned payment for previous services and deferred repayment into the future as well as transferring his plane and luxury automobiles with a reacquisition clause. He reported none of these transactions in his bankruptcy filing. The bankruptcy court found an intentional concealment had taken place and the US Attorney filed charges and secured a conviction under 18 USC §152(1) & (3). Cluck appeals arguing that he simply forgot to list these transactions in his filing through carelessness and not intentional fraud. Here though, the transactions immediately prior to the bankruptcy, his failure to list them in the filing and then reacquisition after his debts were discharged is conclusive proof of intentional fraud.

Problem Set 13:

(13.1) §727(a)(3) applies and the debtor may face a global discharge because of his lack of keeping adequate records to allow the creditors to establish the debtor’s financial position. But the Court’s apply a sliding scale and hold corporations to a higher standard. They might let him off the hook and grant discharge if there is no appearance that the lack of record keeping was designed to hinder collection.

(13.2) Under §523(a)(2)(A) false pretenses applies. The debtor’s statement with respect to the stock directly relates to his financial condition so it falls within the exception. But, he did promise to deliver the stock and since he never intended to do so, that is a false representation and is grounds for denial of discharge. Also, need to consider whether the creditor’s acts amounted to an extension, renewal or refinancing of credit (Field v. Mans, 516 U.S. 59 left this open). If you read these terms narrowly, then it would not apply, but courts generally read them broadly. §523(a)(2)(B) may apply as well. Assuming that the financial statement was in writing it was materially false, referred to his financial condition upon which the creditor reasonably relied and the debtor intended to deceive. With respect to the transfer of the Chalet, §727(a)(2) applies because all of the elements are met. She would choose, if given the choice, the rifle approach because that leaves her to go after the assets outside of bankruptcy.

(13.3) This problem wants you to deal with the §523(a)(5) issue of the bankruptcy court making an independent affirmation that the payment is in fact alimony, maintenance or support. (a)(15) deals with property settlements and they may be dischargeable (depending on the two criteria of whether the debtor can repay it and if there is greater hardship placed on the non-debtor spouse by discharge).

What factors make a debt look like support?

• Are there minor children?

• Imbalance in the parties income?

• Obligation terminates upon death or remarriage?

• Character and duration of obligation.

• Does the creditor have special job related skills?

• What does the decree say?

10k payment to Beth looks like a property settlement and falls outside of (a)(5). Under (a)(15), first perform the test whether he could support himself and pay the debt. If he is a wealthy vet, then he could, if he were broke, then not.

Monthly payments all look like support.

(13.4) §523(a)(6) applies, which exempts all debts arising from a willful and malicious injury from discharge.

(13.5) §523(a)(2)(C) applies, which exempts luxury purchases made within 60 days before the filing. However, you need to establish what is a luxury good or service. Was the wallpaper, just because it was expensive, luxury? Did they use the airline tix to fly to a funeral or vacation? Were the suits necessary for work. Ultimately, the court decides this issue. The effect is that the debts are presumed to be non-dischargeable and the burden of rebutting the presumption of fraud shifts to the debtor.

(13.6) §523(a)(7) applies, which exempts penalties and fines not in compensation for actual pecuniary loss within the three-year window.

9/29/03 – Debtor’s Post-Bankruptcy Position; 284-316, Problem Set 14.

§521 – Debtor’s Duties: provides that the debtor has 30 days to file a notice of intent as to which option (defined below and also includes surrender) will be used for consumer debts secured by property of the estate. (b) requires the intention to be carried out within 45 days.

Redemption -- §722. Only applies to exempt property under §522 or abandoned under §554. In addition, it must be tangible personal (not real) property securing a dischargeable consumer debt. Essentially, the buyer may buy it free and clear for the lesser value of the loan amount or value of the collateral. If there is additional loan amount versus the value of the car and a redemption takes place, then the balance funnels down to unsecured general creditors.

Reaffirmation -- §524(c). Provides that the debt can become legally enforceable notwithstanding the discharge if a properly completed reaffirmation agreement. The requirements are that it is made prior to discharge, clearly states the debtors right to rescind within 60 days and that reaffirmation is not required and it is filed with the court. For all debtors represented by attorneys, the lawyer must file an affidavit stating that the agreement was voluntary and informed, not an undue hardship and the lawyer explained the agreement to the debtor. For those debtors not represented by an attorney, the court must approve the agreement and performs the function that a lawyer would.

Retention – Court made option. If a debtor has kept up with payments on a particular piece of encumbered property and may wish to continue doing so. The debt is discharged but the bank retains the lien on the property. If the debtor defaults after discharge then the creditor may only take the property because the loan has been converted to a non-recourse loan and the debtor no longer has a personal obligation to repay. If the debtor is current with payments, when the stay is lifted, there may be no default and thus preventing the creditor for repossessing the property. Note that in the second circuit, a debtor is not required to choose either to redeem or reaffirm and can continue to make payments if current.

In re: Pendlebury, 94 B.R. 120 (Bankr. E.D. Pa. 1988): Debtors filed suit seeking the court’s intervention in striking a provision in the reaffirmation agreement calling for the reimbursement of the creditors attorneys fees. The Court held that since the parties were represented by attorneys and that the reaffirmation agreement was the result of negotiation and a free-market activity where either the debtor or creditor could demand certain terms, that is was improper to strike the clause.

In re: Burr, 160 F.3d (1st Cir. 1998): Debtors owed 8k on a car loan at the time of filing. All payments on the loan to date were current but the loan agreement defined filing for bankruptcy constituted a default. The bank filed a motion to compel the debtors to elect one of the options under the code… redemption or reaffirmation. The Court agreed.

In re: Latanowich, 207 B.R. 326 (Bankr D. Mass. 1997): Pro Se debtor listed total assets of 375 versus liabilities of 12k. Sears, which held some of the consumer debt had secured its note against some of the property purchased on its credit card, negotiated a reaffirmation agreement with the debtor but never filed it with the court. While they knew that it was unenforceable, they never told the debtor of this. Debtor is seeking to nullify the reaffirmation agreement and the court agreed. Sears conduct was reprehensible and predatory. The purpose behind requiring pro se debtors reaffirmation agreements to have court approval is to make sure the agreement does not present an undue hardship. Here, with assets that are dwarfed by liabilities and an insufficient future income stream to pay the Sears debt, this agreement was an undue hardship. Turns out Sears did this often and ended up paying a huge price.

Eleventh Amendment: “The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects or any Foreign State.”

In re: Collins, 173 F.3d 924 (4th Cir. 1999): Debtors seek to reopen bankruptcy proceeding in order to have their bail bond debt owed to the state of Virginia discharged because the state had attempted to collect the debt after the bankruptcy had become final. State argues that under the Eleventh Amendment is enjoys immunity from lawsuits. The Court held that since the suit did not name the state as a party, the Eleventh Amendment does not come into play and bail bonds debt is dischargeable.

Schlossberg: the trustee filed an adversary proceeding against the state thus the allowing it to stand violated the 11th Amendment.

Antonelli: State of Maryland opposed a reorganization plan that eliminated the requirement to pay recording taxes on the transfer of some real property. Since the state was not named, no Eleventh Amendment immunity problem was present.

In re: Neary, 220 B.R. 864 (Bankr. E.D. Penn. 1998): Debtors filed seeking to have their joint debt to the Commonwealth of Pa’s department of revenue discharged. The complaint named the state as a party and the court dismissed the claim because of the Eleventh Amendment. However, it noted that if the complaint could be refiled in a manner that names a state official whose actions constituted a violation of a federal law then it could proceed (Ex Parte Young Doctrine). Interestingly the court thought the argument that since there was no available state forum for the dispute to be heard (PA had not waived sovereign immunity for actions involved here) held some promise.

Problem Set 14:

1) Unless the refusal to let him join is an attempt to collect the two months of bills that were discharged under the bankruptcy, MM’s behavior comports with the bankruptcy code. The code does not require past debtors to enter into future agreements it simply eliminates the personal obligation of a debtor to pay past debts.

2) The agreement is not enforceable because it was not filed with the court and it was obtained after discharge. In addition, the store manager violated the permanent injunction provisions of §524(a)(2).

3) Under §722, redeeming debt does not require an attorney affidavit or court approval. However, if the debtor wanted to reaffirm his obligation and intended to sell his house and use the proceeds to pay off the motorcycle, I would consider that an undue hardship.

4) Leslie has three options but only two are realistic. Redemption under §722 requires her to come up with 5,900 to get the car. That is her best option if she wanted to car free and clear going forward without having to pay the difference between the loan and the value. If she can get the money together, that is what I would recommend. If not, then a reaffirmation agreement is possible or we can negotiate a ride through retention agreement. The undue hardship analysis must be completed for a reaffirmation agreement so it may prove to be impossible to get done. Retention would allow her to maintain the payments and if she were to default in the future, the creditor could repossess the car but not go after her personally. With the difference in value and collateral the lender may not like this idea.

5) Proceed with the bankruptcy without seeking an affirmative declaration unless you can prove that a state official is allegedly acting in a way that violates federal law. In reality that will only be proven when the attempt to collect the debt after discharge. So, move forward and deal with the issue in a responsive manner.

6) Go through the requirements in the statute necessary to obtain a reaffirmation agreement.

7) The bank can get the car now if it wanted, however, it would have to get the trustee to abandon the property and also accept a loss. Allowing the retention or ride-through provision seems like a good idea because the value of the loan balance will decrease quicker than the value of the car thus giving them greater protection in the near future. However, it will lose its rights to go after the debtor personally and this might cause him to fall behind or stop payments. Overall advice on how to handle this problem is to do the math on a case-by-case basis to determine which option is the best financially for the bank.

8) §525 prohibits discrimination but the effect of this provision are minimal. It requires the discriminatory act to be solely caused by the bankruptcy. However, unless there is enough other material in the employees personnel file to justify termination, I would advice Carlos not to terminate and risk a lengthy and potentially costly lawsuit. Note too that the debtor would be forced to find an employment lawyer willing to take his case on a contingency basis because it is unlikely that he/she can afford to up-front the costs.

Chapter 13 – Consumer Reorganization, Adjustment of debt “wage earners plan”

10/01 – Chapter 6 Elements of an acceptable plan 317-48; 15.1-4, 6

Debtors often choose a chapter 13 in order to retain property subject to a security interest. However, the court must balance the debtors rights against the creditors. Two issues often come up: Adequate Protection (§362(d) Creditor is worried about a loss or decline in value of the collateral while the plan is being implemented) and Adequate Payment (§1325(a)(5) provides that a secured Creditor must receive at least the present value of its secured claim). Often, when the value of property falls below the value of the amount owed to the creditor, the courts will require the debtor to make payments to adequately protect the creditor. Note that the court can only confirm the plan as long as it does not go beyond five years (§1322(d) – three and another two for cause), among other things listed in §1325,

Payments to Secured Creditors: Te prevent repossession of the property subject to a security interest, a Chapter 13 debtor must make payments that satisfy the statutory requirements for the present value of the allowed secured claim.

In re Radden, 35 B.R. 821 (Bankr. E.D. Va. 1983) (Adequate Protection): Debtor defaults on his car loan and the vehicle is repossessed by GMAC. Shortly thereafter, debtor files a Chapter 13 plan, which proposed the pay GMAC to full value of its collateral plus interest. The deficit between the value of the collateral and the loan obligation will be treated as an unsecured claim, which would receive 70 cents on the dollar. GMAC, due to the automatic stay, was prevented from selling the vehicle and sought the courts approval to lift the stay. It argued under §362(d)(1), that it is not adequately protected and under §362(d)(2) that the debtor has no equity interest in the property and it is not necessary for an effective reorganization. The Court summarily rejected the second argument holding that an automobile is necessary for an effective reorganization because it allows the debtor to get to and from employment and receive medical and other services. In rejecting the second argument, the Court noted that since the vehicle was in GMAC’s possession, the first concern of creditors that the property will be lost or destroyed is moot. Secondly, since the Ch. 13 plan calls for paying GMAC the full amount of its secured claim plus interest, it is protected and does not require relief from the automatic stay. One final note about this case is that the debtor filed a turnover complaint seeking to gain possession of the vehicle. Under §1303, a debtor has the same rights of a trustee so he properly filed this claim. In addition, having held the car was necessary for effective reorganization, the court granted the request subject to the debtor obtaining the necessary insurance and maintaining the payment schedule under the plan.

Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) (Payment Requirement): Rash owes 41k on a term loan for a truck bought for use in his business. He files a chapter 13 plan seeking to retain possession of the truck and adopt the “cram down” provisions of §1325(a)(5)(B). However, he argues the value of the truck (necessary to determine the payment schedule) should be established by determining the net the creditor would receive under a foreclosure sale. In this case, that would be 31k. The creditor argues that the value equals the amount the debtor would have to pay to purchase a like vehicle, 41k. The bankruptcy, district and circuit courts all agreed with the debtor relying in the first sentence of §506(a), which required that the collateral be valued from the creditors perspective. Other circuits took the opposite approach and still others split the baby. The Supreme Court resolved this conflict holding that adequate payment under the cram down approach equaled the replacement value of the property. In reaching this decision, the Court relied on the second sentence of §506(a), which provides that “such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.” If a debtor opts to use the property then the value is what it would cost to obtain similar property. If the debtor opts to surrender the property then it value it just that. Note though that the valuation issue may be decided with respect to process but determining the replacement value is still tricky and creative attorneys can be successful in protecting their clients, whether they be debtors or creditors.

Class Notes:

Secured Creditor is entitled to adequate payment, which is defined as not less than the value of the allowed secured claim. However, the time value of money comes into play and the creditor’s claim is establishes by the present value. How do you first determine the value? Rash Court says it is the amount the debtor would have to pay t purchase like property (replacement value) and not liquidation value.

But footnote six in the case insures that there will always be disputes on determining replacement value.

Hypo: Suppose Rash’s annual income after taxes is 40k and needs 31k to live. Under a chapter 13 plan, the debtor can be required to pay all of his income over above what is required to live to pay off the debts. Meaning, he has 9k to pay off debts. Suppose the 31k a year to live does not include the value of the truck, which is valued at 28k and his plan has a term of five years. That means he will have to pay 5.6k a year to keep the truck and the unsecured creditors will get 3.4k. If the value of the truck is 41k, then the amount he has to pay rises to 8.2k and the unsecured creditors only get to divvy up .8k. So, the unsecured creditors have an interest in making sure the value of the truck is lower.

In re Hollins, 185 B.R. 523 (Bankr. N.D. Texas 1995) (Payment Requirement): Debtor owes to a oversecured creditor for an automobile loaned at 11.5%. The plan proposed to pay the secured claim at a rate of 6%. The creditor objects and seeks to have the discount rate established as the contract interest rate. The Court disagrees and holds that the discount rate will equal the market rate for similar loans.

Class Notes:

In the second circuit, the amount of interest allowed during the pendency period is equal to the interest rate on similar loans and not the contract interest rate. See §506b and the comma case that holds that creditors are not entitled to interest as a matter of law and that any interest should be at a fair rate.

Payments to a Home Mortgagee

§1322(b)(2) specifically exempts home mortgages (for principal residences) from the cram down provisions thus the only remedy for a Ch 13 debtor who wants to stay in the home is the cure and maintain the original payment schedule. Note that curing (paying the arrearage) can be done within a reasonable period of time (§1322 (b)(5)) and maintenance must occur immediately after the plan is filed and during the pendency period. This holds even when the value of the house is less than the outstanding mortgage (in that case the value of the secured claim would be the lesser of the two). Ch 13 litigation involving homes usually addresses two issues; (1) saving the home from foreclosure and (2) establishing a loan that complies with the strict protections the code affords mortgage lenders.

In re Taddeo, 685 F.2d 24 (2d Cir. 1982) (Adequate Payment in Mortgage Cases): Debtors defaulted on second mortgage payments to the seller of their house. Seller accelerated the loan and called it due. She won summary judgment in state court and sought to foreclose on the property. Debtors filed a chapter 13 action proposing to cure the default at a rate of 100 per month and restore the original mortgage. Seller objected and sought to have the automatic stay lifted by arguing that since the loan had been accelerated under the terms of the contract, the only curable method is to pay the full amount due. The Court disagreed holding that curing involved de-accelerating the loan.

Problem Set 15:

(15.1) Not a whole lot. The debtor has an equity interest in the computer to the extent that the amount she owes is less than the value of the computer. So §362(d)(2) cannot be invoked (in fact it is irrelevant if the computer is necessary for the reorg because it requires no equity). However, a 362(d)(1) argument can be made that the value of the computer will drop quickly because of the arrival of the newer model thus the loan will turn upside down and the creditor will lose its adequate protection. This will turn on a factual determination and there had better be some good proof to back up this claim. In addition, they made the loan knowing full well that the value of the computer would reduce quicker than their loan amount would diminish.

(15.2) This is not the debtors primary residence so the plan may modify the rights of LeisureLand. However, they can demand the present value (replacement value) based on the current market rate for similar loans. Principal balance is 19,980, and the past due interest and penalties is 6,300. Assuming that 21k is the value of the property so 21k is secured an 5,280 is unsecured. So LL can demand (if the property is not surrendered) that they retain the lien and be paid the present value of its secured claim.

(15.3) Jewel will have to pay the amount it would cost for her to obtain a similar piece of property. The discount rate will be the market rate for the loans, 15%. She would want to point out the chipping and peeling because it may lower the value of the replacement cost. Principal balance is 13k, and there is 275k in accrued interest between filing and confirmation. However, the interest is paid only if the value of the car is higher than 13k to secure the claim to a higher amount. So Jewel would want to claim the value of the car is lower.

(15.6) Once the residence is sold in a foreclosure sale then the debtor no longer has an interest in the house and is out of luck. But, if the date in the notice referenced a different act, then I would advise to cure and maintain. I would advise working something out with the bank and chapter 7 the unsecured debt. On the exam, make sure you walk through all options and explain the costs and benefits of each choice.

10/8/03 – Chapter 6 Elements of an Acceptable plan 349-370 Problem Set 16:

Payments to Unsecured Creditors: §1322(2) provides that all priority claimants under §507 (unsecured priority) are entitled to payment in full, but general unsecured creditors do not have such protection in a chapter 13 proceeding. §1325 is where unsecured creditors are given the authority to argue for requiring the debtor to increase the amount available to all creditors. First, the Best Interests Test, requires that all creditors (secured and unsecured) receive at least as much as that creditor would have received in a liquidation proceeding (Chapter 7) in terms of present value. Second, §1325(b) provides that IF A TRUSTEE OR UNSECURED CREDITOR OBJECTS TO THE COURTS CONFIRMING THE PLAN, the debtor is required to devote all disposable income (defined in §1325(b)(2) as all income not reasonably necessary for the support of the debtor and his dependants) to plan payments during the life of the plan. Finally, §1325(a)(3) requires that the plan be proposed in good faith and not by means forbidden by law. Note the conflict between the Trustee, who wants to get as much money for the unsecured creditors, and the Secured Creditors. The Trustee may argue to reduce the allowable secured creditor claims in order to get more money to the unsecured creditors.

How do you establish the amount of a debtor’s Disposable Income?

In re Carter, 205 B.R. 733 (Bankr. E.D. Pa. 1996)(Does DI include the non-debtor spouse’s income and expenses?): Married woman files Chapter 13 plan in which she claims $600 in monthly income and $500 in monthly expenses. An unsecured creditor files and objection to the Court’s confirming the plan on the grounds that the debtor has not made available all of her disposable income, as required under §1325. Unsecured creditor argues that the income and expenses of the non-debtor spouse should be included. The Court agreed holding that “consideration of the non-debtor spouse’s income is seen as necessary because a portion of that spouse’s income is likely to be applied to the basic needs of the debtor, potentially increasing the share of the debtor’s own income that is not reasonably necessary for support.” In addition, the forms require that the debtor report income and expenses of non-filing spouse. The Court gave the debtor the benefit of the doubt and suggested this was not a willful omission of material information and simply based on a misunderstanding of her obligations.

In the Matter of Wyant, 217 B.R. 585 (Bankr. D. Neb. 1998)(What expenses are reasonable?): Debtor was recently divorced and filed a chapter 13 plan in which he claimed $300 of disposable income was available for payments under the plan. However, debtor filed an amended schedule when his former wife died and his $1100 monthly alimony payment was no longer necessary. Rather than devote the entire amount toward disposable income debtor sought to increase certain expenses and only reported half as being available for plan payments. The Court did not confirm the amended plan and required another amendment within 21 days. While the Court allowed some of the increases (increase withholding taxes, and proper reflection of mortgage obligation), it held that an additional $450 per month was available. In reaching this conclusion, the Court reduced the amount of debtor claimed expenses for the care and feeding of his animals (elderly horses and dogs), arguing that in a bankruptcy proceeding, creditors come before animals.

Good Faith:

In re Greer, 60 B.R. 547 (Bankr. C.D. Cal. 1986)(Zero Payments to Unsecured Creditors does not, alone, mean bad faith): Debtors were a married couple with both secured and unsecured debts. They reported $3,200 of monthly income on their schedule and $2,417 in expenses. This left $783 for plan payments, with all by five bucks going to the secured creditors and Trustee fees. The Trustee objected to the plan on the grounds that the plan payments should be larger and that the 36-month duration should be extended because it would allow for greater payments to the unsecured creditors. Two issues presented in this case are (1) whether a three-year Chapter 13 plan can be confirmed where all of the payments go to priority and secured creditors and trustee fees, and (2) whether there is cause for a Chapter 13 plan to extend more that three years if the unsecured creditors would other receive nothing. The Court held that the minimum payment required under §1325 is the amount the unsecured creditor would have received in a chapter 7 liquidation. In addition, the statute requires that all disposable income be applied to the plan. Here, the debtors plan was austere and included a 75 monthly contingency reserve, which the court held was reasonable. Further, the Court held that there are three accepted examples of cause necessitating a plan to extend beyond 36 months: (1) when the unsecured creditors would receive 100% of their claims (this helps credit rating and does not disqualify the debtor from filing a ch 7 within 6 years), (2) payment of 70% of the unsecured claims (again, does not disqualify the debtor from filing a ch 7) and (3) after confirmation, the debtor may request a suspension and then extension if he is having trouble making the payments. The Court held that simply increasing the amount distributed to unsecured creditors was not sufficient cause. This would contradict Congressional intent in establishing the 36-month timeframe and would always yield a result that required longer plans. It seems odd that the Court would not have adopted as a fourth cause when the unsecured were going to get nothing… this is not a case of just more, it is a case of getting something.

In the Matter of Strauss, 184 B.R. 349 (Bankr. D. Neb. 1995)(Ch. 7 disqualified debtor acts in bad faith in filing a Ch. 13 that amounts to more than a Ch. 7 Liquidation): Debtors obtained a chapter 7 discharge four years prior to filing this Chapter 13 plan. They had a total of 168k in debt against 82k of assets. Of the debt, 62k was secured, 21k was priority non-secured and 85k was non-priority unsecured. The plan proposed a five-year duration with full payment of all secured and priority unsecured claims (which included a tax liability not subject to discharge) and nothing to the non-priority unsecured creditors. The general rule is that a debtor is not prohibited from filing a chapter 13 reorganization plan simply because he obtained a chapter 7 discharge within 6 years prior. However, if the debtor is disqualified under §727 from filing a chapter 7 and the chapter 13 is no more than a disguised liquidation plan, then it violates the good faith requirement under §1325(a)(3). The Court held that this was the case here (the only payments being made were to secured and priority non-secured, some of which would not have been dischargeable under §523(a)(1)) and that a Chapter 13 plan amounts to no more than a Chapter 7 liquidation if the plan does not provide to pay unsecured creditors significantly more that they would receive in a chapter 7. Following are the factors courts use to determine if the good faith elements of §1325 are met:

1. the amount of the proposed payments to creditors

2. the debtor’s employment history and earning capability

3. the duration of the plan

4. the accuracy of the information in the plan

5. whether there is preferential treatment between creditors

6. whether the plan modifies secured claims

7. type of debt sought to be discharged

8. whether the debtor had filed bankruptcy before.

Problem Set 16:

(16.1) In establishing the amount of disposable income available for contribution to the plan, the tithing expenses are allowed under §1325(b)(2)(A). However, the piano lessons and needed orthodontic treatment are not clear-cut. In addition, there is nothing in the budget for clothing and a contingency is not there either. Regarding the piano lessons, the general consensus is that the lessons are not necessary for the support and maintenance of the dependents. The orthodontic treatment is a stronger argument and there is a precedent for a contingency fund and clothing is an automatic.

(16.2-A) §1325(a)(4) – Best Interests test is inapplicable. You would have to challenge the plan on the grounds that it does not apply all available disposable income. More specifically, the private school, lavish encumbered property and expenses on secured debt must be reviewed. In addition, should the court require Todd to trade in the Mercedes for a Toyota because the level of support is determined in a unrelated manner to the former lifestyle of the debtor?

(16.3) The creditors can argue that the time value of money requires that they get paid their lost costs. The creditors can argue that the plan should be extended to guarantee the payments allowable under chapter 7. That means they are entitled to the present value of their claim and this plan does not do that.

(16.4) Does the overtime earnings amount to disposable income. Probably not since she has indicated she would not be doing it in during the plan. Also, it is speculative as to its value. If she decided to work the overtime during the plan, §1306 considers those earnings as property of the estate and she would have to make it available.

(16.5) §1325(B)(2) includes in disposable income contributions to religious organizations as long as they do not exceed 15% in the year they are given. So he complies with that provision. However, he has an obligation to do what his plan asserts. An argument could be made that §1325(a)(3) applies and that this tithing expense was not included in the plan in good faith. However, since Congress has already made this decision for us and included the (B)(2), then he is ok. Interestingly, if there is one piece of property that is non-exempt and unencumbered, then the plan would fail the best interests test because the unsecured creditors would have received something under the chapter 7 – even if it is only a small amount.

10/22/03 – Chapter 6 Elements of an Acceptable plan 370 - 390 Problem Set 17:

Taxes and Other Priority Claims in Chapter 13

4 Sections are important here:

• §507(a)(8) – lists the tax claims that are entitled to priority status

• §523(a)(1) – lists the tax claims that generally may not be discharged. Note that some tax claims are non-dischargeable and non-priority.

• §1322(a)(2) – priority claims must be paid in full (nominal value not present value).

• §1328(a) – unpaid non-priority tax claims are discharged. (§ 1328(a) does not mention §523(a)(1).

a) Priority Payments in General: Under §1322(a)(2), all creditors who receive a priority under §507(a) are entitled to payment in full under a chapter 13. This provision requires the few debtors who have these priority debts to reorganize their plans to account for these obligations. Confirmation of the plan is prohibited unless it provides for full payment of all allowable secured claims and priority unsecured claims. Note that the requirement to use all disposable income for plan payments is a floor and not a ceiling.

b) Tax Claims:

a. Because taxes are non-dischargeable, they must be paid in full in either a chapter 7 or chapter 13 proceeding. The benefit though, is the stopping of interest accruals under §502(b)(2), which locks the tax claim at it value as of the date of the filing.

b. Those debtors who recognize their financial problems and act quickly can minimize the amount of interest they have to remit (because pre-petition interest is always included under §502(a)) and gain some additional time to make the payments.

c. If the taxing authority has obtained a lien on property before the debtor files for bankruptcy, then it is treated like a secured creditor. If the tax lien exceeds the value of the property, then the claim is secured to that point and the remainder is treated as an unsecured claim. If the taxing authority has not perfected a lien before the filing, then the taxing authority is treated like an unsecured creditor.

d. §507(a)(8) then determines which taxes receive priority payment.

e. Priority claims, unlike secured claims, only receive the nominal value of the claim. Present value calculations do not come into play.

f. In re Baker, (Unlikely to get tax payments discharged): Debtors discharged all debts, except their income tax liabilities, in a Chapter 7 proceeding the year before filing their Chapter 13 plan. This proceeding started with a filing in April of 1995 and covered income tax liabilities from 1990 (26.5k), 1991 (24.7k) and 1993 (21.5k). IRS argues that the entire amount is secured and the plan must account for payments in full, plus interest. Debtors claim the taxes associated with 1990 and 1991 fall outside of the allowable window and should be treated as general unsecured claims (and thus available for discharge). In addition, the debtors argued that the total amount of the secured claim was 18.3k, the value of the property secured by liens perfected by the IRS. The Court valued the property at 60k and established that as its allowable secured claim with the remaining 12k being unsecured. However, it accepted the IRS’s argument that it should be allowed to allocate payments as it sees fit (they wanted to apply payments to the earlier liens) and declined to confirm the plan. The general rule is that the bankruptcy court can order the IRS to apply tax payments contrary to IRS policy if the risk of non-payment of the total debt is outweighed by the increased likelihood of payments to other creditors who would otherwise lose their money. However, here, the plan does not pay the IRS the full amount due and owing and there are no other creditors who would benefit.

g. In re Zieg, (fraudulent or willful attempts to evade taxes are dischargeable under a Chapter 13 but not a Chapter 7): Taxpayers willfully evaded income taxes on embezzlement income gained four years prior to filing their chapter 13 plan. They argue that the taxes are not entitled to priority under §507(a)(8)(a) because they were due more than three years before the filing. The IRS argued that it was entitled to priority under §507(a)(8)(A)(iii) since §523(a)(1)(C) excepted from discharge all fraudulent filings. However, the Court held that §507(a)(8)(A)(iii) identifies a type of tax that is not entitled to priority notwithstanding the inequity between what would happen under a chapter 7 and what would happen under a chapter 13.

c) Differential Payments among General Unsecured Creditors: §1322(b)(1) allows for a chapter 13 payment plan to classify unsecured creditors as long as it does not unfairly discriminate against one class so designated. There is an exception to an unfairness claim covering all debts in which the debtor is liable along with a co-debtor. The unfairness limitation is strict in all other cases though and will cause a plan to fail to gain confirmation. Essentially, if a plan cannot pay a classified general unsecured creditor more without taking a single dollar away from those falling in the other classes, then it is unfair.

a. In re Bentley, (Unfair discrimination against a class of unsecured creditors): Debtors filed a chapter 13 plan in which they classified their student loans differently than the other general unsecured creditor (taxing authority). The plan called for payment in full of the tax claim that was fully secured in addition to the student loans (non-dischargeable) but only a 40% payment toward the unsecured tax claim. The court declined to confirm the plan because it unfairly discriminated against the unsecured tax claim creditors. The Court relied on a precedent that announced four relevant considerations to determine if a classification unfairly discriminates against a designated class of general unsecured creditors. They are, (1) whether the discrimination has a reasonable basis, (2) whether the debtor can complete the plan without the discrimination, (3) whether the discrimination is proposed in good faith, and (4) whether the degree of discrimination is directly related to the rationale for the discrimination. However, establishing a class of general unsecured creditors simply because they hold debts that are non-dischargeable is unfair and does not qualify as a rational basis. Note that in some jurisdictions, student loan debts have been allowed to be classified and paid differently so it really matters where you file.

d) Problem Set 17:

a. The debts owed to Jessie as part of the divorce settlement are most likely going to be viewed by the court as non-dischargeable and entitled to priority. This is because while they are not labeled alimony or support, they amount to a property settlement in lieu of same. Jessie can petition to court to deny confirmation of the plan requiring that it account for payments to her (actually the consumer debts) in full. The payments for the medical bills are not directly tied to the property settlement and thus is a more difficult question. But, Jessie could argue that it is a form of child support. One final option is to see if Darrell will file a chapter 7. This way, his obligations to Jessie remain intact but for the previous medical bills.

b. The tax claims, since they fall within the three-year window, are priority unsecured debt, which must be paid in full (nominal value). She could file a chapter 7 but would lose any property not covered under the exemption provisions. She should file a Chapter 13 plan that extends for the full five years and apply all of the 250 toward the tax liability. She could obtain a discharge for the 10k in unsecured debt without having to pay anything toward it if the value of her exemption in the house is enough to guarantee that the creditor are paid at least as much in the chapter 13. For the tax claim, suppose she had 8k in exempt property, than the present value of the 15k in payments must equal 8k. Since under the chapter 7 the unsecured would get nothing (as it would go to all of the secured tax claims) they get nothing under the 7 so the plan, as proposed passes. Note that if Allison had more exempt property, she may not pass the §1324(a)(4) test because the tax claim would be paid in full upon discharge.

c. The withholding taxes are trust taxes and cannot be discharged no matter how long the elapsed period from accrual to filing. The income taxes due in the final year of operation are also ineligible for discharge. However, if the IRS has not perfected a lien on the income taxes due five years ago, they are ineligible for priority status and may be discharged. I would suggest taking a loan out against the house and using the proceeds to pay the first two obligations under a chapter 13 plan immediately. This is because the interest and penalties on those two obligations will continue to accrue up to the value of the house. The income taxes from the first year will be discharged if the plan is confirmed.

i. Class answer: Matt has 50k of tax debt that is nonpriority and 95k debt that is priority. If the IRS gets a tax lien secured on the house the whole 145k is secured, meaning he will have to pay interest and penalties. If no lien, then the IRS would get nothing in the Chapter 7 proceeding but after the bankruptcy could still go after the 95k. In a Chapter 13, the IRS would get the 95k (nominal value but compared against what they would have received in a Chapter 7) priority tax. If they get a lien, the whole amount is secured the IRS gets to keep its lien and receive payments that have a present value of 145k over the life of the plan. So the bottom line is to hurry and file a chapter 13 before the IRS files its lien.

10/27/03 – Elements of an Acceptable Plan pp 390-415 Problem Set 18 & 19.1, 3 & 4:

Modification and Dismissal of Chapter 13 Plans: In contrast to a Chapter 7 proceeding, the Chapter 13 plan requires a forecast of future income necessary to make the payments due under the plan. However, many times those assumptions are wrong and a debtor or creditor may petition the court the convert the plan to a chapter 7, modify the plan or dismiss the plan due to a default. Because of the delay between a filing and dismissal, Congress added §109(g) to the Code, which provides that any debtor whose bankruptcy filing has been dismissed within the last six months (for specified reasons) is prohibited from filing for bankruptcy protection. §1307 provides for conversion or dismissal, §1323 provides for modification of the plan before confirmation and §1329 provides for modification of the plan after confirmation.

In re Faaland, (Debtor’s 2 missed payments do not constitute a material default under §1307(c)(6)): Debtors missed two monthly payments to the trustee caused by unseasonable weather having a negative effect on their income. Debtors had paid 38k of 71k of the plan and the Court had no information regarding plan payments since the trustees filing. The Court dismissed the trustees request to dismiss the plan holding that the missed payments had a reasonable explanation and that since the debtors had complied with the plan payments up to that point, it would be inequitable to dismiss the plan. The Court, in addressing the question of whether a material default had occurred (thus making the plan eligible for dismissal) referred to the mutuality of interests of the debtor and the creditor to cure any overdue payments and continue the plan. Also, it held that it had an obligation to look beyond the default to determine if the cause was intentional or beyond the debtor’s control. Here the bad weather was beyond their control.

In re Meeks, (Modification under §1329 does not apply to secured claims): Debtors obtained approval to modify their chapter 13 plan after having a baby. The modification changed the secured claim owed to GMAC for a Cadillac by surrendering the vehicle and allocating the remaining sum as unsecured. The debtors were allowed to use the 174 bucks a month they had been paying for this secured claim to offset the increased costs due to the baby. GMAC moved to vacate the order and the Court agreed. The Court held that res judicata did not prevent modification of a chapter 13 plan nor did it require the debtors demonstrate a substantial, unanticipated change in circumstances because the language of §1329 is clear and allows for modification for three specifically enumerated circumstances. However, §1329 does not allow for the modification of a secured debt being reclassified as unsecured. This has the effect of passing on the depreciation costs to the creditor. The amount of the secured claim is fixed as of the effective date of the plan. The Court did allow for a reduced payment to GMAC (because this is authorized under §1329) but required the full payment to resurrect at month 36 of the plan and continue until the full amount of the claim is paid.

In re Delmonte, (Paying Plan off Early does not Fulfill Discharge Requirements): Debtors made a lump sum payment covering all of their scheduled payments two months after the plan was confirmed. A secured creditor had sold the property it sold to the debtor and filed an amended proof of an unsecured claim for 26k (presumably for the balance between what it received in the sale and what it was owed). The trustee objected arguing that since the debtors made all payments required under the plan, they were entitled to discharge and that the amended proof of claim was not timely. However, the court disagreed holding that the claim was timely because it was filed within the plan period and that the debtor is required to use all disposable income during the plan to pay off all debts (up to and including in full). The debtors did not do that here because they clearly have additional disposable income available during the plan to pay off creditors. In other words, the rule is that the unsecured creditors are entitled to full payment or all of the debtor’s disposable income during the duration of the plan under a chapter 13. Note the footnote where the court held that with sufficient indicia of good faith prepayment of a plan using funds derived from the sale of exempt property or taking a second job working overtime is appropriate and allowable. Interestingly, §1306 requires all overtime to become property of the estate and used to develop a plan, but the courts have interpreted this flexibly by allowing debtors to pay the plan off earlier as long as everything was done in good faith.

Problem Set 18:

(18.1) Since Leona has been assured she will be called back in a few weeks, it would not make much sense to convert the Chapter 13 proceeding the a Chapter 7 proceeding. However, she will not be able to begin making the necessary payments under the plan until she is called back to work. Accordingly, the creditors could argue that she does not qualify as a debtor under 109(e) because she does not have regular income. But, that is not a very strong argument because she has worked in the past and will likely be working in the future. (Note that Wooten thinks that this debtor does not have regular income and will have he plan dismissed if requested by the creditors or the trustee) If the plan is dismissed voluntarily at the request of Leona, she will be precluded from refilling within 6 months, so that is not an option. The best idea would be to seek a modification under §1323 calling for little or no payments for the first 2 months of the plan and then ramping payments up to pay the creditors in full. If necessary, the plan can be extended a couple of months as well.

(18.2) If I wanted to keep my job I would not advise that without noting that the trustee has not performed his statutory duties. However, an argument can be made that the letters he sends out meet his duty, since he has not sought dismissal for plans that have defaulted over a year ago, it does not look good. Why isn’t Del Toro pushing harder to make collections. Ideally, the trustee should invest in collections up to the point at which $1 in collections effort brings in $1 of additional payments. However, Del Toro only gets 10 cents of each dollar he brings in… so his incentive is to invest in collection up to the point at which 10 cents of collection effort brings in a dollar of collection. The issue here is simply that the incentive system is such that might make collections lax in a bankruptcy proceeding.

(18.3) She could keep quiet about her new job and potential compensation because a trustee or unsecured creditor has the right to seek an amendment for more pay under the requirement that all disposable income is to be applied during compliance with the plan. In addition, she can seek to write the employment contract to defer the majority of her income until after she has obtained a discharge under the plan. But, her best solution is to seek to modify the plan herself, after she begins to earn some additional money and apply those increases toward paying a higher percentage to the unsecured creditors.

(18.4) Secure its claims.

Threshold Eligibility for Chapter 13:

§109 limits access to bankruptcy proceedings to those that meet certain conditions (regular income and debts below a certain threshold that are both non-contingent and unliquidated).

In re Murphy, (Live-In’s Payments to Debtor Constitute Regular Income): Debtor did not have a regular job but received 800 a month from her live-in partner in addition to all amenities of the house. Debtor filed a chapter 13 plan shortly after seizure of her car due to a judgment against her. She sought to avoid the lien up to her 4k exemption, pay the difference plus interest, pay the noteholder in full plus interest, and her unsecured creditors 20%. Judgment holder objects arguing that the debtor is not qualified under §109(e) of the Code requiring regular income. However, the Court rejected that argument (and the one where the debtor must have a legal right to the income in order to qualify) holding that the money she received from her live in, in addition to his promise to pay qualified her under the code and confirmed the plan.

In re Mazzeo, (Meaning of Non-Contingent and Liquidated under §109(e)): Debtor filed for bankruptcy and had some serious debts to the state and federal governments with respect to income taxes and withholding taxes. Government objected to the plan’s confirmation because these debts amounted to higher than the statutory maximum under that section. The debtor argued that these debts were contingent and unliquidated because he disputed liability. The Court held that the definition of contingent was limited to those debts that did not become an obligation until some trigger event. And, it does not mean for debts where liability was disputed. Further, the Court held that the terms unliquidated and liquidated generally refers to the claim’s value and the ease with which it value can be ascertained. Thus, if the value of the claim is easily ascertainable, it is generally liquidated. Or if it is determinable by reference to an agreement of simple computation. Here, debt to the government for taxes is easily determined by reviewing quarterly returns and the applicable codes and statutes. Thus, it is liquidated an since the total exceeds 381k, it is beyond that allowable under §109(e).

Note that the only debts that count toward the eligibility cap in §109(e) are those that are BOTH contingent and unliquidated.

Some examples of contingent debts are where a bet on a future sporting event or the indorser of a note (he only pays if the maker of the note does not).

Some examples of unliquidated debts include those where a driver admits responsibility for an accident but disputes the amount of damage or when a court determines a company has violated the antitrust laws but has not yet determined damages.

Problem Set 19:

(19.1) Since the debt is both non-contingent and liquidated, the total amount of the debt, as it currently stands, acts as a bar to filing a chapter 13 plan. However, he could pay some of the judgment to reduce the amount of the claim to less than 290k and then file a chapter 13 plan attempting to pay as much as possible over the term (maybe even the full five years). The debt is dischargeable so if he gets his plan confirmed, he would protect his non-exempt house and other property.

(19.3)

(19.4)

10/29/03 – The Consumer Bankruptcy System pp 417-446 Problem Set 20:

Chapter 13 versus Chapter 7:

Statutory Incentives in place for debtors to choose Chapter 13

1. Property Incentives

a. Debtor is given the opportunity to retain property subject to a security interest, often by making lower monthly payments.

b. Debtors are not forced to sell their homes in which they have substantial equity, however, they must cure any default within a reasonable amount of time under the plan and cannot use the cram down provisions to modify the terms of the loan agreement.

c. Congress has severely limited the amount of property a debtor may keep under a Chapter 7 proceeding.

2. Discharge Incentives

a. Chapter 13 proceedings provide much broader discharge from debt than under a Chapter 7. §727 limitations on discharge do not apply to Chapter 13 and only a few of the §523 limitations (support obligations, student loans, and drunk driving expenses) are incorporated through §1328(a).

3. Denying Access to Chapter 7

a. Debtors may only obtain a chapter 7 discharge only if they had not received a previous discharge within the preceding six years.

b. §707(b) provides that the court, on its own motion, can deny access to a debtor filing a chapter 7 if the court finds that the filing is a “substantial abuse.”

In re Walton, (Meaning of Substantial Abuse under §707(b)): Debtor appeals dismissal of chapter 7 filing due to the Court’s belief that it represented a substantial abuse under the Code. Court affirmed the lower court ruling. Debtor had previously filed a chapter 7 proceeding and obtained a discharge 15 years prior to the filing of the Chapter 13 proceeding. District Court findings were that debtor had 26k in unsecured debt and approximately 500 a month in surplus income. This would allow debtor to pay 2/3 of the unsecured debt under a three-year Chapter 13 plan and all of it under a five-year Chapter 13 plan. The debtor argued that §707(b) does not include a requirement that the court determine the future income of the debtor in order to rule that a Chapter 7 filing complies with the Code. The Court disagreed and prohibited the debtor from obtaining a chapter 7discharge.

Strategic and Systemic Incentives

In re San Miguel, (Lawyer cannot file a Chapter 13 plan simply to get his payments over time): Attorney attempted to file a number of Chapter 13 plans for debtors in which very little was paid to unsecured non-priority creditors, but allowed for his fees to be paid over the life of the plan. Many of the plans were shorter than three years. Attorney argued that these debtors were denied access to Chapter 7 discharge because they did not have the money up front to pay the attorney to take the case. The Court rejected this attempt because it was so blatant, however, in practice this does happen frequently. Essentially, just because the plans called for paying the creditors what they would receive under a Chapter 7 proceeding does not mean they automatically meet the good faith requirement. Also, no good reason was provided by the debtors to end the plans well before three years (note that today, submitting a plan with a duration less than 3 years would not be permitted). Since these plans are supposed to repay creditors, and this one simply is a Chapter 7 with a time payment plan for the attorney’s fees, it fails to meet the good faith standard.

In re Saylors, (Debtor may file a chapter 13 plan immediately after Chapter 7 discharge and need not wait for the final trustee report): Mortgagee creditor sought to lift the automatic stay after debtors obtained a chapter 7 discharge. However, debtors immediately filed a chapter 13 plan calling for payments to cure the default and making regular monthly payments on the mortgage as they come due. Creditor argued that the filing was in bad faith and the Court should reject the plan. However, debtor argued that the standard of review for a district courts finding that a chapter 13 plan was filed in good faith is “clearly erroneous.” Accordingly, since they met the test there where the court considered all of the relevant factors, this Court can only affirm that ruling. The Court agreed.

Problem Set 20:

(20.1) Alice’s claim is unliquidated so as a threshold matter, Frank may file a chapter 13 plan. If Frank proposes a 5 year plan that pays all of his disposable income it looks like he is off the hook (this would include Alice’s claim). Note, under §523(a)(6), this debt would not be dischargeable so he does not want to go that route. But, is he filing in good faith? An argument could be made that he is filing simply to avoid this debt because his income from the trust is large compared to his unsecured debts. But, it is a spendthrift trust, which is immune from having a creditor attach to it.

(20.2) Student loan debt is nondischargeable so he is shit out of luck. So the code allows Frank off the hook for clawing Alice with a hammer but Edwin is forced to pay his debts.

(20.3) Since she could not have filed a chapter 13 prior to filing the chapter 7 because she had too much debt. But, some circuits allow chapter 20’s and will not have a problem with this. On the other hand, some courts will look very closely to §1325(a)(3) and insure that her plan was filed in good faith. Is it in bad faith to file a chapter 7 first because she had to reduce her debt to qualify for a chapter 13 – there is no universal answer and it depends on the Court.

(20.4) Under the Walton Ability to Pay test, this does not look like a substantial abuse to filing a chapter 7. She does not make a lot of money and would not be able to pay much, if any, under a chapter 13. Since the Code does not distinguish between debts to person and property, and allows for discharge under certain conditions so she should be able to file notwithstanding.

(20.5) Mark needs to quit the old job and start the new one before filing a chapter 7. Since in his old job, he would have an additional 1k a month and a judge would likely find this to be a substantial abuse under §707(b). He could pay off his debts under a chapter 13 plan. However, in his new job, he would only have $25 a month and since additional payments would be unlikely to pay his debts… thus not amounting to a substantial abuse.

11/05/03 – Chapter 7 Liquidation – PP 469-495, Problem Set 22:

Involuntary Bankruptcy §303:

In re Gibraltor Amusements, (Wholly owned but distinct subsidiary of a corporation counts as an additional creditor §303(b)(2)): Debtor, Gibraltor, owed $1 million to Wurlitzer, who filed an involuntary bankruptcy petition alleging insolvency, numerous acts of bankruptcy and that the debtor had less than 12 creditors. Gibraltor answered by arguing that it had more than 12 creditors, which required Wurlitzer be joined by two other creditors to initiate the proceeding. One of the three was Wurlitzer Acceptance Corp, a wholly owned subsidiary of Wurlitzer. Debtor argued that they cannot be counted as an additional creditor and rather should be counted along with Wurlitzer. The Court held that they were an additional creditor because Congress, while amending federal tax laws to address the issue of wholly owned subsidiaries, did not do so in the bankruptcy act. Since there was no evidence that the creation of the subsidiary was simply to create a sufficient number of creditors, WAC is an allowable creditor.

In re Faberge Restaurant of Florida, (Three Creditor Requirement Applies at the time of filing – a debtor may not subsequently pay off debts to reduce the number of creditors): Three original petitioners filed an involuntary petition against debtor. Debtor filed a motion to dismiss arguing that two of the three debts were in dispute, thus disqualifying them under §303(b)(1). Three additional creditors joined the suit. Subsequent to joinder and prior to the hearing, Debtor made payments to two of the new creditors and one of the disputed ones. The first test under §303(h)(1) that the debtor is not paying his bills as they come due is met by stipulation. However, in dispute is if the requisite number of creditors have joined in the petition. The court held that there were enough bona fide claims because the marking point is the time of filing and a debtor cannot subsequently eliminate the debt after the filing in an effort to reduce the number of creditors.

In re Silverman, (§303(i) sanctions for filing in bad faith): Debtor, Silverman, was the soured business partner with petitioner, Cantor. Cantor filed an involuntary petition against debtor for failure to pay on a 200k promissory note. Cantor had sued in State Court for payment of the note and was rejected in his attempt to obtain both summary and partial summary judgment. Silverman answered by arguing he had more than 12 creditors, so three were required before a petition could be filed, and that he was paying his debts as they became due. A credit report confirmed his arguments. In addition, the Court held that Cantor could not have filed the petition in any instance because the debt was a bona fide dispute because his suit was still in dispute in State Court. The bankruptcy court awarded attorneys fees and costs pursuant to §303(i)(1) but Silverman wanted punitive damages for a bad faith filing under (i)(2). The Court agreed because Cantor knew the debt was both contingent and unliquidated and his argument that his attorney failed to properly advise him falls flat (they can fight it out amongst themselves in another setting). 50k in punitive damages were awarded.

Problem Set 22:

(22.1) The question is what amount of the debtors outstanding debts remain unpaid and for how long. Generally unpaying debts as they come due suggests that one day late payments meet that threshold, but more than one outstanding debt is necessary. I would recommend getting a credit report to see if anything pops out there. In addition, once other creditors are identified, additional information can be gained by having informal conversations with them. Of course, this may tip them off to your potential course of action, causing them to take steps to protect their credit at the expense of Ramsco.

(22.2) How many creditors does Gerald have? If it is more than 12, then SSB would have to get others to join before an involuntary petition may be filed (unlikely considering the facts). If there is less than 12, then Gerald has two options, the first of which is the better and more successful. Raise enough money by selling assets or borrowing funds to pay SSB. This risk is that other creditors may resent Gerald paying one of them in front of the others but since Gerald has a good relationship with them and he has assets that exceed his liabilities on paper, this should not present too much of a problem. The other option available is for Gerald to do nothing and challenge the involuntary filing on §303(i)(2) bad faith grounds. This is difficult, but the President’s feelings about Gerald in an unrelated matter allow the argument to receive serious consideration, and may in fact help (if threatened) prevent SSB from filing.

(22.3) The Trustee is allowed under §363(b)(1) to sell the assets of the estate after notice and a hearing. The Code constructs that phrase to mean as is appropriate in the particular circumstances. We could argue that as an unsecured creditor we should have been noticed of the potential sale of the assets, then if given the opportunity of a hearing, the more profitable avenue could have been offered. Of course, the TIB represents the unsecured creditors in toto so as long as the plan insures everyone gets a bigger cut, then the current sale may be prevented in favor of our option.

(22.5) This looks like they are creating the subsidiaries to simply create a sufficient number of creditors, something that was not in the Gibraltor holding but discouraged in the dicta. Also, a closer review of the creditors is necessary to establish if any of them are disqualified as insiders. Insider is defined in §101(31)(A)(i)-(iv) and provides that any relatives, general partners, or corporations in which the debtor is a director, officer or person in control are insiders.

(22.6) Harry is SOL. A Political Campaign Committee is not a corporation or eligble to be a debtor under a chapter 7 proceeding. He should seek payment under state law and hope he beats out any other creditors.

(22.7)

11/10/03 – Chapter 8 Introduction to Reorganization, The Automatic Stay and Adequate Protection; PP 497-538 and Problems 23.1-4, .6:

“Textbook Sequence of Chapter 11:

1. Corporation files petition and schedules.

2. Stay takes effect. §362(a).

3. Scheduled creditors receive notice of filing.

4. Debtor in Possession (§1107) continues to run business and proposes a plan of reorganization. §§1121, 1123, 1125.

5. Court Considers Plan. Code includes protections for creditors.

a. Creditors vote on plan. §1126(c).

b. Best-Interests Test. §1129(a)(7).

6. Court approves plan, and debtor receives discharge. §1141(a) and (d).

Automatic Stay and Adequate Protection under Chapter 11:

Farm Credit of Central Florida v. Polk, (Debtor may not waive his right to object to lifting an automatic stay by pre-petition agreement): Debtor, through a pre-petition agreement, waived his right to object to creditor’s (Farm Credit) motion to lift an automatic stay as consideration for an extension of time prior to the foreclosure sale. Bankruptcy Court ruled that this agreement was unenforceable and creditor appeals. District Court held that the automatic stay is designed to preclude the opportunity of bankruptcy creditor to pursue a remedy against the debtor to the disadvantage of other bankruptcy creditors. Since this deal was executed pre-petition, the other creditors had no input and in effect, this becomes a preference.

United States v. Seitles, (§362(b) exemptions from the Automatic Stay): Government sought an exemption from the automatic stay preventing them from collecting a judgment against defendant and the Westbrook Corporation, which defendant is the president and remaining executive officer. The Corporation filed for bankruptcy and not the defendant. The Court suggested that the purpose of the automatic stay was to give debtors a breathing spell from their creditors and the protect creditors by providing for the orderly distribution of the debtor’s assets. §364(b)(4) and (5) provide exemptions to the automatic stay for governmental actions in pursuit of protecting the public health and safety. The question then is whether the governmental action in question (a claim under the False Claims Act) is a necessary governmental function geared toward the protection of the public health and safety or is it a proprietary governmental function aimed at the protection of pecuniary interests. Two tests were employed: Pecuniary Purpose Test and Public Policy Test. The Pecuniary Purpose test examines whether the government’s proceeding relates to the protection of the government’s pecuniary interest in the debtor’s property and to matters of public safety – the later receive an exemption from the automatic stay. The Public Policy test distinguishes between proceedings that adjudicate private rights and those that effectuate public policy – the later receiving an exemption from the automatic stay. The present case involves no threat to the public health and safety (illegal government printing contracts) and defendants no longer supply services to the government, thus no additional harm is in need of prevention so the pecuniary test is not met. Similarly, the public policy test is not met because the government’s primary motivation is to collect its fines and penalties. With respect to the request to exempt from the automatic stay Seitles fine, since he has not filed for bankruptcy, the court can only issue an automatic stay through its equitable powers under §105, which is not to be done lightly. In cases, however, where the non-bankrupt debtor’s are so inexorably woven with those of the bankrupt debtor so as to hinder an effective reorganization, then the court may grant an automatic stay. That is the case here. D is the remaining executive officer of the corporation and his defense in his personal actions is identical to the corporation’s defense. Thus, it is efficient to hear the two together.

In re Rogers Development Corp, (Attempts to Lift the Stay under §362(d)(1) and (2)): Debtor, a residential real estate development company, defaulted on two loans issued by creditor and stipulated the amount in default was 550k, which accrued 63k a year in interest. Creditor sought protection from the automatic stay under §362(d)(1) lack of adequate protection grounds, and (d)(2) the debtor had no equity in the property and the property was not essential to an effective reorganization. The court fist took up the adequate protection issue and noted that each side had appraisal experts estimate the value of the property to be between 704k and 801k. It then looked to congressional reports to determine what valuation method, liquidation or going concern, should be used. It held that the method was somewhere in between and in this case, the commercially reasonable method (expert appraisals) was appropriate. Since the value of the property fell between 700k and 800k, there exists a large enough equity cushion to adequately protect the creditor, and the request for protection is denied. But, in the future, if the numbers change, it is free to refile. The Court summarily concluded that since there were over $1 million in claims, it is obvious there is no equity in the property. With respect to the claim that the parcel is necessary for the effective reorganization of the debtor, the burden falls to the creditor. The debtor argues that without this property, no reorganization is possible. Since it is too early in the process to rebut that assertion and the creditor has not offered any other evidence to suggest otherwise, this request is denied as well.

Problem Set 23:

(23.1) Debtor has no equity but the property may, or may not be essential to an effective reorganization. But, the §362(d)(1) argument about lack of adequate protection is the strongest. The sale of the tools will bring a minimum of 140k but there is a buyer who is willing to pay 160k, which represents the maximum value. This amount is less than the amount outstanding and entitles the creditor to relief.

(23.2) First, I would argue that the jet is necessary for the reorganization of the business, maybe not so much for its actual use but for its value. That is a weak argument. Next, I would use the fact that the loan was made with the knowledge of the plane’s value, so the creditor is in no worse position than he was in when he made the loan or even just before filing. And, since the value is likely to remain constant, the creditors position will not get any worse. Finally, if necessary, we can offer to make periodic adequate protection payments but this will require additional information.

(23.3) What side am I on? If I am on the bank’s side, I would argue that the equipment is worth less than the outstanding loan, but the court is likely to be unpersuaded by that argument because the loan was an interest free only loan, thus the creditor knew and assumed the risks of a decrease in the value of the principle over the term. If I am on her side, I would argue that the equipment is necessary to the effective reorganization of the business, because without it, there is no business and thus the remaining creditors would get screwed. This makes the fact that she has no equity irrelevant. Note that you could argue that the payment agreement to lift the stay were designed to reduce the amount of the principle (adequate protection payments). So if they are for adequate protection then the claim is oversecured and there is an equity cushion. A Court would likely consider the payments a little bit of both.

(23.4) Heathe is adequately protected so §362(d)(1) does not help them (Heathe is owed 35k on a machine that is worth 50k; the other creditor is the one facing the shortfall). Again , it appears as if this issue will revolve around whether the property is necessary for the effective reorganization of the business. The creditor can argue that since she is moving the company into a different direction it is not for reorganization purposes and thus ineligible for a chapter 11. However, this would act as a prohibitive restraint to debtors seeking help to a chapter 11. It is a given that the debtor has no equity because she owes 55k on an asset with a value of 50k.

11/12/03 – The Strong Arm Clause PP 589-97; Problem Set 26:

Reshaping the Estate – Avoidance Powers

§544(a) – The Strong Arm Clause: Provides that the TIB is given the rights and powers of a judicial lien creditor, an execution creditor, or for real estate a bona fide purchaser as of the time of the filing. Essentially, this means that the TIB can knock off unperfected interests to general unsecured creditor status.

Wonder Bowl Properties v. Hi Ja Kim, (DIP, like TIB has bona fide purchase rights): Debtor (Kim), was debtor-in-possession in a chapter 11 case and filed an adversary proceeding against creditor seeking to set aside a 300k judgment lien against certain real property owned by the debtor. Wonder-Bowl had received the judgment against the debtor prior to the Chapter 11 filing but failed to properly record the abstract judgment. When it realized its error, it amended the abstract after the Chapter 11 filing. The DIP attempted to avoid the lien under §545(2), which authorized avoidance for unperfected liens against bona fide purchasers of property of the debtor. The DIP, under §544(a)(3) has the avoidance powers of a hypothetical purchaser who purchased as of the date of the order for relief. The issue in this case is whether the state law regarding notice of the defective abstract (the DIP is the original debtor and knew of the existence of the lien) negated this authority. If they do not, and that is what the Court held, then the lien is avoidable. First, §544 provides that the trustee may avoid a transfer as a bona fide purchaser “without regard to any knowledge of the trustee or any creditor…”

Problem Set 26:

(26.1) Straightforward application of the strong-arm clause and the trustee will likely be able to avoid this lien. §544(a)(1) applies and the trustee has the rights of a lien creditor. The general rule in Art 9 is that a judicial lien creditor trumps a creditor with an unperfected security interest. Recommend nothing because if the MA attempts to perfect its security interest, it will be a violation of the automatic stay.

(26.2) The Code includes a protection for purchase money secured creditors, generally 10 days. §362(b)(3) allows for perfection to take place within 10 (or 20) days after the execution of the debt agreement As long as the perfection occurs within the applicable time period, it is treated as though it perfected immediately pursuant to relate back. Note that this applies only to the extent that the security interest relates to the aero plane and does not include the original plane purchased from MA in problem 1.

(26.3) Cochran is out of luck because the security interest was never perfected. TIB is treated as a bona fide purchaser and has stronger rights that a lien creditor. So if the person who bought the house is a bona fide purchaser, they will almost always win.

(26.4) If the air conditioner was considered real property, it is necessary to file a copy of the security interest with the County Department of Land Records. However, this is a fixture or personal property and governed by the UCC. As such, the filing is appropriate and the creditor will be a secured creditor throughout the bankruptcy proceeding.

11/17/03 – Chapter 8 Preferences [§547(b),(c) & (e)]– PP 597-612 Problem Set 27.1-27.8:

§547 – Generally provides to the Trustee or DIP the ability to dismantle certain transactions between the debtor and creditors that took place within the 90 days immediately preceding the bankruptcy filing. This section is designed to permit the TIB to review the activities of the debtor in the period leading up to bankruptcy and to determine if some received favorable (preferential) treatment at the expense of others. Note that if a transfer meets the elements of §547(b) then it is avoidable. However, the Code includes exceptions under §547(c) and a separate analysis is necessary prior to concluding that the transfer should be voided.

§547(b) – determines what constitutes a preference. The trustee may avoid any transfer of an interest of the debtor in property:

1) to or for the benefit of a creditor;

2) for or on an account of an antecedent debt owed by the debtor before such transfer was made;

3) made while the debtor was insolvent;

4) made,

a. on or within 90 days before the date of the filing of the petition; or

b. between 90 days and 1 year before the filing of the petition, if such creditor at the time of such transfer was an insider; and

5) that enables such creditor to receive more than such creditor would receive if

a. the case were a case under Chapter 7;

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.

Gilbert v. Gem City Savings Association, (§547(b) Payment to an oversecured creditor within the 90 days preceding bankruptcy is not a preference as long as the payment does not give such creditor more than it would have received in a liquidation): Debtor filed a bankruptcy petition and within the 90 days preceding the filing made a $1079.64 payment to the holder of its mortgage. The amount reflected $823.64 in arrearage and $256 of current payment due. Debtor was insolvent at the time of the payment and the creditor was oversecured (balance of 24k on a home worth 38k). Trustee filed complaint against bank to seek recovery of the payment. The Court held that all of the elements of §547(b) were met but for (b)(5), that the creditor receive more than it would have under a Chapter 7 proceeding. To determine this, a court must conduct a hypothetical liquidation. Here, since the creditor is oversecured, if the transfer to the creditor is left undisturbed, then it would get the full 24k in outstanding loan balance plus the 1k payment, which amounts to $25,239.81. Had the payment not been made, the allowable claim is the same amount (because of its oversecured status).

Note that if there is more than one lien on the property, any payment to the first lien holder could be a preference to a junior lien holder because the value of its security interest would be increased by the amount of the payment.

Hypo 1 – property is worth 1k and first lien holder is owed 600 and second is owed 800. A 100 payment to the first lien holder reduces its debt to 500 and increases the second lien holders security interest to 500 (from 400).

In re Calvert, (Earmarking Doctrine – transfer of an interest in property of the debtor): Debtor settled a lawsuit with a creditor for approximately 12k. To finance the settlement, debtor obtained a loan from his parents and gave them in return a mortgage on his house and a security interest in his pick-up truck. The house had no equity so the additional mortgage really was worthless. This series of transactions were completed within 90 days of the debtor (Calvert) filing for bankruptcy protection. The issue in this case is whether the debtor effected a transfer of his interest in property under §547(b) because the transactions simply brought new funds into his estate which were then sent out to pay this debt. The earmarking doctrine is used to establish whether a transfer of an interest of the debtor in property has occurred. This doctrine has three elements: (1) the existence of an agreement between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt; (2) performance of the agreement according to its terms; and, (3) the transaction viewed as a whole does not result in any diminution of the estate. A limitation to the application of this doctrine is that the new and old creditor must enjoy the same priority; that is, a debtor cannot give a security interest in property to pay off unsecured debts. If the earmarking doctrine’s elements are met, then no avoidable transfer has occurred. The debtor here has met all of the necessary elements, but the case focuses on the security interest limitation because the debtor gave a security interest to pay off unsecured debt. The Trustee has the burden of proven the existence of a security interest and the Court overturned the lower court’s ruling because under state law, the proof of such an interest was insufficient (just a notation on the title of the truck and no existence of a written agreement).

Class Notes:

Hypo – Debtor owes to three creditors, 120 to A, 150 to B and 200 to C. Suppose E pays 200 to C to buy the debt. There is no preferential treatment because it was not a transfer of an interest in the property of the debtor. Suppose E pays the money directly to the debtor who uses the money to pay C. Absent a written agreement, then the payment to C amounts to a voidable preference.

If the security interest is not valid, the trustee could have used the strong-arm clause to void the transfer.

Fidelity Financial Services v. Fink, (The relate back period to establish when a transfer takes place or when a security interest is perfected is established by the Code and not state law):

Problem Set 27:

(27.1) All of the elements of §547(b) are met so this would be a preferential treatment. The payment was to a creditor, for an antecedent debt, within 90 days of the filing while the debtor was insolvent. The last element, whether the payment gave this creditor more than it would have received under a Chapter 7 is met as well because under the scheme as it now sits, it would receive the 1400 plus 1260 (10% of the unsecured claim) while under Chapter 7 it would have only received 1400.

(27.2) For the same reasons above, even though no dollar values are given of the claim or the equipment, intuitively, as long as the payout is less than 100 cents on the dollar, this is a preferential transfer under §547(b). The only issue could be whether or not Underdown is in fact insolvent and not just feared to be insolvent. The Code has a presumption of insolvency in the 90 day period immediately preceding bankruptcy, so it is up to the creditor to provide proof rebutting this presumption.

(27.3) The Bank’s action being transformed into a secured creditor from an unsecured creditor within 90 days of the bankruptcy filing violates the last element of §547(b) because it would receive more under this scheme than it would have absent the transfer and under a Chapter 7 proceeding.

(27.4) The issues here are whether the transfer was for an antecedent debt. Because the perfection took place 19 days after the exchange, it is not contemporaneous and thus meets the antecedent debt test and falls within the 90 day window. Under §547(e)(2)(B), the transfer occurs at the time of perfection because it was not perfected within 10 days of the agreement. If it was perfected within ten days, then the transfer would be deemed to have occurred on June 1. This is a non-purchase money debt so it does not fall in any of the exceptions and clearly, the creditor would receive more than it would under a Chapter 7 proceeding absent this transfer because it will be paid up to the value of its secured claim and then a pro rata on any remaining unsecured claim.

(27.5) No preferential transfer. Both creditors would receive the same amount they would under Chapter 7 had the transfer not been made.

(27.6) The issues here are when the security interest is perfected by the bank in the after acquired equipment because it is clear that if they are given a security interest in this equipment they are made better off at the expense of other creditors (the value of its collateral is significantly greater, thus increasing the value of its claim). §547(e)(3) provides that the bank does not obtain an interest until Virginian does, thus the April 15 becomes the threshold date making the transfer fall within the 90 day window.

(27.7) Whether this is a preferential transfer depends on how the destruction of the property affects the security interest. If it is makes the claim unsecured, then the last provision of §547(b) is met because they received a hell of a lot more than they would have if just treated as an unsecured creditor. If the lapse of insurance protects the bank in some way and they maintain secured creditor status, then it is not a preferential transfer.

(28.8) Whether this is a voidable transfer depends on whether the security interest transfers to the new (used) machine. If the interest transfers than no preferential transfer has occurred, if it does not, then they it has.

11/19/03 – Exceptions; PP 612-633 Problem Set 28:

§547(c) – provides 8 exceptions to the preferential rules contained in §547(b). The five most commonly used are (a) contemporaneous exchange (2) ordinary course payments, (3) purchase money, (4) new value rule, and (5) floating lien.

In re Alexander, (Perfecting a mortgage beyond the 10 day period is not a contemporaneous exchange for new value): Debtors bought a house and gave a note and mortgage to Fidelity. Fidelity perfected the lien 14 days after the exchange. Within 90 days, debtors filed for Chapter 13, which was converted to a Chapter 7 and the trustee sought to avoid the mortgage as a preferential transfer under §547. The parties stipulate that all of the elements of §547(b) are met but fidelity claims that its exchange with the debtor falls under two of the exceptions in §547(c), (1) Purchase Money security interests and (3) an enabling loan perfected within 20 days from the date the debtors possessed the property. First, the Court held that §547(e)(2)(A) requires perfection of the mortgage within 10 days of its delivery to have it relate back to the original delivery date. Fidelity’s failure to do so makes the mortgage the payment on an antecedent debt. Next, the Court held that §547(c)(3) does apply to real estate transactions and that Fidelity was entitled to judgment pursuant to this exception. Finally, the Court discussed the contemporaneous exchange for new value, even though it was unnecessary to decide this case. There, the Court accepted the Sixth Circuit holding that if a mortgage is not filed within the 10 day period provided for in §547(e)(2)(A), then the exchange is not a contemporaneous one for new value because it fails to meet the “substantially contemporaneous” test. Thus, the perfection of a transfer beyond ten days after the date of a contemporaneous exchange turns the new value received by the debtor into an antecedent debt.

In re Roblin Industries, (Ordinary Course Payment Exception is an objective analysis of the industry norms): Debtor (Roblin) defaulted on payments owed to Ford for scrap metal necessary to produce its product. As a means of maintaining its relationship with Ford, it voluntarily entered into an agreement to cure the default and pay for new deliveries upon shipment. Debtor files for bankruptcy sometime later and Trustee attempts to avoid those payments that were made within the 90 days preceding filing. Trustee is successful in bankruptcy court and district court, Ford appeals and argues that these payments fell under the ordinary course payments (and that the debtor was insolvent, but that was irrelevant) exception under §547(c)(3). The Court affirmed the District Court’s ruling holding that ordinary course analysis required an objective rather than subjective approach. That is, ordinary business terms refers to the general practices of similar industry members, and that only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary and therefore outside of the scope of this exception. Under this standard, a creditor must show that the business terms of the transaction in question were within the outer limits of normal industry practices. Rather than adopt a rule holding that all debt refinancing fell outside of the exception in §547(c)(3), the Court held that Ford did not meet its burden because it presented no evidence of the practices of similarly situated firms in the industry.

§547(c)(4) – New Value Exception: This provision protects a creditor that receives a preferential transfer from the debtor if the creditor later advances new credit to the debtor and does not receive an unavoidable payment for the later advance. The mechanics of this section are:

1. Establish that the payment or transfer is a voidable preference under §547(b). No reason to look to the exceptions if no voidable preference has occurred in the first instance.

2. See if the voidable amount of the preference can be reduced by the amount of the later-advanced new value that qualifies under (c)(4).

a. Example: If a creditor received a 1k preferential payment, then made a 700 delivery of new supplies to the debtor on credit, if the debtor files for bankruptcy within 90 days, then a 1k preference would exist. Under (c)(4), the 1k preference should be reduced by the 700 later payment, leaving only 300 to be avoided.

3. Test new value for qualification under (c)(4) by determining whether under (c)(4)(A) and (B) it was accompanied by a payment (or other transfer or was secured), which payment itself unavoidable.

a. Example: A creditor received a 1k preference and then delivered 700 of new supplies that were paid for in cash on delivery. When the debtor filed for bankruptcy the new value would not qualify since it was accompanied by the full 700 payment at time of delivery. The second payment was not avoidable as a preference because it was made at the moment the debt was created and therefore was not paid on an antecedent debt under §547(b). Since the payment is unavoidable, it disqualifies the 700 of new value under (c)(4)(B).

Problem Set 28:

(28.1) The cash payments that were paid on the follow up deliveries will likely be voidable preferences. All of the elements of §547(b) are met. The exception in (c)(1), where the trustee may not void transfers intended by the debtor and creditor to be a contemporaneous exchange for new value is likely not going to save the day. These payments took place well after the debt became due and as such are neither contemporaneous nor substantially contemporaneous.

(28.2) The transfer of the trucks falls within §547(b) because the transfer was not a contemporaneous exchange (security interest not filed within 10 days under §547(e)(2)(B)). However, the exception in (c)(3) applies and protects GMAC. The security interest secured new value that was (1) given at or after the signing of a security agreement that contained a description of the property, (2) given by the secured party, (3) given to enable the debtor to purchase the trucks, (4) used by the debtor to purchase the trucks, and (5) perfected within 20 days after the debtor received the trucks.

(28.3)

(28.4)

11/24/03 – Executory Contracts; PP 646-659, Problem Sets 30 & 31:

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