By James L.

Gosdin, Copyright reserved

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1.0.

THE CODE AND AMENDMENT ACT 1.1. The Enactment The Bankruptcy Reform Act of 1978, enacted by Congress on November 6, 1978, applies to all cases filed on or after October 1, 1979. Those cases filed prior to and pending at that time are conducted as if the Reform Act had not been enacted. Under the Bankruptcy Reform Act, the person or municipality by or against whom the case is commenced is always called a "debtor," and no longer is called the "bankrupt." The commencement of a voluntary case or the determination that an involuntary case shall proceed constitutes "an order for relief"; no longer is the party adjudged "bankrupt." 1.2 Types of Proceedings There are five types of proceedings by debtors. Those chapters are Chapter 7 (liquidation), Chapter 9 (municipalities), Chapter 11 (reorganizations by individuals, corporations, or partnerships), Chapter 12 (adjustment of debts of a family farmer with regular annual income), and Chapter 13 (adjustment of debts of individuals with regular income). Both Chapter 7 and Chapter 11 proceedings may be voluntary or involuntary. Chapter 9, Chapter 12 and Chapter 13 proceedings may only be voluntary filings. 1.2.1. Chapter 7 - Liquidations Any individual, partnership, or corporation is eligible to file a Chapter 7 petition. Railroads, insurance companies, and certain banking institutions are not eligible for Chapter 7 bankruptcies. If a trustee is not elected at the first meeting of creditors, then the interim trustee shall serve in the case.1 The trustee under a Chapter 7 proceeding has the power to avoid a lien securing a fine, penalty, forfeiture, or punitive or exemplary damages (for example, tax penalties).2 The court may authorize a trustee to operate a business of the debtor for a limited time.3 1.2.2 Chapter 9 - Adjustment of Debts of a Municipality Chapter 9 allows a "financially distressed municipality" (a political subdivision or a public agency or instrumentality of the state) to adjust its debts. An involuntary proceeding is not allowed under Chapter 9. Chapter 9 does not limit the power of a state to control the municipality in the exercise of its governmental powers.4 Section 363 does not apply in a Chapter 9 bankruptcy.5 1.2.3 Chapter 11 - Reorganization Individuals, partnerships, or corporations (including a railroad) which are eligible to file a Chapter 7 petition also are eligible to file a Chapter 11 petition. Stockholder and commodity brokers are not eligible to file a Chapter 11 petition. The court may appoint a trustee or may allow the debtor to "remain in possession." On request of an interested party made not later than 30 days after appointment of a trustee, the United States trustee shall convene a meeting of creditors to elect a trustee.6 The United States trustee (or court where applicable) shall appoint a committee of creditors holding unsecured claims. On request of an interested party, the United States trustee (or court) may order appointment of additional creditor's committees. The creditor's committee shall generally consist of creditors with the seven largest claims of the kind represented on the committee.7 The court, after "notice and a hearing," may appoint a trustee for cause, including fraud or current mismanagement by the debtor. If the court does not appoint a trustee, then upon request of a party in interest, the court, after "notice and a hearing," may order the appointment of an examiner to investigate the debtor for such matters as fraud, incompetence, or mismanagement.8 Subject to court limitations, the debtor-in-possession has all of the powers and duties of a trustee, to manage, collect and protect the estate.9 The Bankruptcy Reform Act of 1994 creates an expedited procedure for reorganizing a small business. A small business is a person engaged in commercial or business activities (not primarily real estate) with noncontingent, liquidated debts of $2,000,000 or less.10
1

11 U.S.C. 702. All Section cites are to the Bankruptcy Reform Act or Code unless otherwise stated. All Rule cites are to the Bankruptcy Rules, unless otherwise stated. 2 Sec. 724 3 Sec. 721 4 Sec. 903 5 Sec. 901 6 Sec. 1104(b) (Bankruptcy Reform Act of 1994). 7 Sec. 1102 8 Sec. 1104 9 Sec. 1107 10 Sec. 101(51C), Sec. 1121(e), Sec. 1125(f)

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The debtor may file a plan with the petition or at any time. Any party in interest may file a plan at any time if a trustee is appointed. Any party may file a plan subsequent to 120 days after the order for relief if the debtor does not file a plan within that time; or subsequent to 180 days after the order for relief if the debtor's plan has not been accepted. Time limitations may be changed by court order.11 The court may confirm a plan only after notice, an opportunity for objection, and an actual hearing.12 Upon request of a party in interest before 180 days after the entry of the order of confirmation, the court may revoke an order procured by fraud. Any order of revocation shall contain provisions necessary to protect an entity acquiring rights in good faith reliance on the confirmation order.13 Company Policy: Do not rely upon the confirmation and plan alone to invalidate preexisting liens. Require a separate adversary proceeding to invalidate liens. The confirmation generally will discharge all dischargeable debts unless the plan or order confirming plan provides otherwise.14 A deed or mortgage executed pursuant to a Chapter 11 confirmed plan will not be subject to a stamp or similar tax, such as New York state and city deed taxes and state and city mortgage taxes.15 1.2.4 Chapter 12 - Adjustment of Debts of a Family Farmer with Regular Annual Income Only persons who receive 80% of their gross income from farming during the taxable year preceding the year of the filing of their case are eligible to file a Chapter 12 petition. The debtor must be an individual, or certain family-owned corporations or partnerships. The aggregate debts must not exceed $1,500,000. At least 80% of the liquidated debts (excluding debts for the principal residence) must arise out of the farming operation.16 A trustee is appointed in each case. The debtor as a "debtor-in-possession" controls, manages, and sells property of the estate unless removed as debtor-in-possession.17 The trustee must join in a sale free and clear of the interest of a third party.18 A debtor may be authorized to make mortgage and real estate tax payment directly to the creditors in order to avoid trustee fees; however, some debts such as short term loans secured by personalty should generally be paid through the trustee. The debtor must file a plan within 90 days of the bankruptcy unless the court extends the time.19 The plan may limit the amount secured by a lien to the value of the land (if the land is worth less than the debt).20 Unless otherwise provided, the confirmation vests the property of the estate in the debtor.21 The plan may not provide for payments (other than secured claims) of more than five years.22 After completion of the plan, the court shall grant a discharge; the court also may grant a discharge to a debtor who did not complete the plan.23 A creditor generally may not proceed with a civil action to collect a consumer debt from a co-debtor of the debtor.24 Chapter 12 will be repealed on October 1, 1997, unless extended. This will prohibit subsequent filings but will not affect previous cases.25

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Sec. 1121 Sec. 1128. 13 Sec. 1144 14 Sec. 1141. 15 In re Amsterdam Avenue Development Associates, 103 B.R. 454 (Bankr. S.D. N.Y. 1989) 16 Sec. 101(17), (19) 17 Secs. 1202, 1203, 1204 18 Sec. 1206 19 Sec. 1221 20 Sec. 1225(a)(5) 21 Sec. 1227 22 Sec. 1222 23 Sec. 1228 24 Sec. 1201 25 Sec. 1221, note

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1.2.5 Chapter 13 - Adjustment of Debts of an Individual with Regular Income Only an individual with regular income, or that individual the individual's spouse, who owe noncontingent, liquidated, unsecured debts totaling less than $250,000, and noncontingent, liquidated, secured debts totaling less than $750,000 may file a Chapter 13 petition.26 A creditor generally may not proceed with a civil action to collect a consumer debt from a codebtor. The United States trustee (or court) shall appoint one or more persons to serve as a standing trustee in Chapter 13 proceedings. If there is a qualified standing trustee, that trustee serves as trustee in the case. Otherwise, the United States trustee (or court) shall appoint a trustee in the case.27 Unless otherwise provided, the confirmation of a plan vests the property of the estate in the debtor.28 Company Policy: Do not rely upon the confirmation and plan to invalidate preexisting liens. Require a separate adversary proceeding to invalidate liens. After the plan payments are completed, the debtor shall be granted a discharge as to all debts, including claims based upon fraud or defalcation, but excluding debts for support, alimony, maintenance of a child or spouse, restitution included in a criminal conviction, certain government guaranteed educational loans, death or injury caused while operating a vehicle when intoxicated, and debts for which future payments will remain due under the terms of the plan.29 If the payments are not completed as provided in the plan, then the debtor may be granted a discharge from all dischargeable debts except long-term debts. 1.2.6 Foreign Bankruptcy A foreign bankruptcy proceeding does not have jurisdiction of U.S. land.30 The owner also must join with any estate representative or ratify and confirm the conveyance on behalf of the owner (in such case a creditors rights execution should be considered). In the alternative an ancillary proceeding may be brought in the U.S.31 1.3 Eligible Debtors Only a person who resides or has a domicile, place of business, or property in the United States, or a municipality, may be a debtor.32 In a Chapter 12 proceeding, only a family farmer with regular annual income may be a debtor.33 The farmer may be an individual (and spouse) or a family-owned partnership or corporation with debts of $1,500,000 or less; 80% of the noncontingent liquidated debts (excluding those related to the principal residence) must arise out of farming.34 In a Chapter 13 proceeding, only an individual with regular income owing noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 may be a debtor.35 A person includes an individual, partnership, or corporation.36 A land trust, as opposed to a business trust, cannot be a debtor.37 A trust created to act as a vehicle to facilitate secured financing is not a business enterprise and is not eligible to be a debtor.38 Application of the appropriate choice of insolvency law for multinational business should depend on the debtor's nerve center, assets, creditors, and debtor's business and reasonable expectations of the parties.39

26 27

Sec. 109(e), (Bankruptcy Reform Act of 1994) Sec. 1302 28 Sec. 1327 29 Sec. 1328 30 Oakey v. Bennett, 52 U.S.33, 13 L. Ed. 593, 11 HOW 33 (1850) 31 11 U.S.C. Section 304 32 Sec. 109(a) 33 Sec. 109(f) 34 Sec. 101(17), (19) 35 Sec. 109(e) 36 Sec. 101(41) 37 In re North Shore National Bank of Chicago, 17 B.R. 867, 6 C.B.C.2d 237 (Bankr. N.D. Ill. 1982); In re Treasure Island Land Trust, 2 B.R. 332, 5 B.C.D. 1246, 1 C.B.C.2d 407 (Bankr. M.D. Fla. 1980). 38 In re Secured Equip. Trust of Eastern Air Lines, 38 F. 3d 86 (2nd Cir. 1994) 39 In re Maxwell Communication Corp. PLC, 170 B.R. 800 (Bankr. S.D. N.Y. 1994); affd, complaint dismissed, by Homan v. Societe Generale PLC (In re Maxwell Commun. Corp. PLC, 186 B.R. 807, 1995 U.S. Dist. LEXIS 13368, (S.D.N.Y. 1995); affd, 93 F.3d 1036, 1996 U.S. App. LEXIS 21388 (2d Cir. N.Y. 1996)

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Commencement of Proceeding 1.4.1 Voluntary Proceeding A voluntary proceeding is commenced by the filing of the petition. The commencement constitutes an order for relief.40 1.4.2 Joint Case A joint case is commenced by the filing of a single petition by both spouses.41 1.4.3 Involuntary Proceeding An involuntary proceeding may be commenced only under Chapter 7 (liquidations) or under Chapter 11 (reorganization). It may not be filed against government units, a farmer, or an eleemosynary institution. It may be commenced on the petition of: (a) three or more entities with noncontingent, unsecured claims totaling at least $5,000; (b) one or more holders of claims whose claims total at least $5,000 if there are fewer than 12 holders; or (c) fewer than all general partners of the partnership in question, or any general partner or holder of a claim or the trustee if all general partners are debtors for whom an order for relief has been granted. The debtor in an involuntary case retains control and possession of his or her property unless the court orders otherwise, or until an order of relief (that the bankruptcy case proceed) is granted, or until the interim trustee is appointed. Company Policy: If the debtor in an involuntary case sells property before the order of relief is granted, require a copy of the notification of the proposed sale, certification by the party mailing the notice that notice was sent to all interested parties, and a final order of the bankruptcy court authorizing sale. The court shall grant an order for relief in a contested, involuntary case only if: (a) the debtor is generally not paying debts as they become due (the "equity insolvency" test not the "balance sheet" insolvency test); or (b) a custodian is appointed or takes possession of the debtor's property within 120 days of the filing of the petition, unless the custodian does not take charge of substantially all of the debtor's assets to enforce a lien.42 The bankruptcy court may authorize a sale by the debtor.43 1.4.4. Conversion Conversion of a case to a proceeding under a different chapter constitutes an order for relief. Conversion terminates the services of a trustee or examiner appointed before the date of conversion.44 According to one view, court orders lifting stays, approving stipulations, rejecting executing contracts and other matters are not negated by an order of conversion.45 According to another view, conversion creates a new order for relief and stay, and compels the creditor to file a new motion for relief from the stay to proceed with its collateral.46 Upon conversion from Chapter 13 to Chapter 7, the exemptions will be reconsidered and the trustee and all interested parties may make objections.47 Company Policy: If a sale, loan or foreclosure after lift of stay has not been consummated prior to the conversion of a case to a different chapter, require a new order. A new entity controls the estate and that entity must comply with the procedures for sale, loans and other matters. 1.5 Reopening Cases A case may be reopened in the same court to administer previously unadministered assets or for other causes as necessary.48 1.6. Trustee Qualification

1.4

40 41

Sec. 301 Sec. 302 42 Sec. 303 43 See In re Southern Star Foods, Inc., 190 B.R. 419 (Bankr. E.D. Okl. 1995) 44 Sec. 348 45 In re Maralak, Ltd., 104 B.R. 446 (Bankr. M.D. Fla. 1989); In re Bystrek, 17 B.R. 894 (Bankr. E.D. Pa. 1982); In re Stanfield, 152 B.R. 528 (Bankr. N.D. Ill. 1993) (stay is not reimposed under drop dead or doomsday provision by conversion) 46 In re Nichols, 134 B.R. 236 (Bankr. S.D. Ohio 1991) 47 In re Alderman, 195 B.R. 106 (9th Cir. B.A.P. 1996); criticized in Lowe v. Sandoval (In re Sandoval), 103 F.3d 20, 1997 U.S App. LEXIS 373 (5th Cir. Tex. 1997), rehg denied 48 Sec. 350

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A person qualifies as trustee, after appointment, by filing a bond in favor of the United States, subject to United States trustee (or court) approval of the surety and amount on the bond.49 1.7 Creditors Initial Meeting There shall be a meeting of creditors after appropriate notice, within a reasonable time after the order for relief. The bankruptcy judge may not attend the meeting.50 The debtor must appear and submit to questions by all interested parties.51 1.8 Death or Insanity of Debtor Once the estate is created, no interests in property of the estate remain in the debtor. Therefore, if the debtor dies or becomes insane after the commencement of the case, then only exempt property, abandoned property, or certain property acquired by the debtor after the case began will be subject to control and administration by the debtor's personal representative. The bankruptcy proceeding will continue in rem as to estate property.52 However, if the sole debtor in possession dies after confirmation of the plan, the court will order dismissal of the case, since no other successor may substitute for the deceased debtor.53 2.0. WHO IS IN CHARGE 2.1 Authority of Judges Under the Act, bankruptcy judges may hear and determine all cases of bankruptcy proceedings and all core proceedings arising under such bankruptcy proceedings. Core proceedings include but are not limited to: 1. matters concerning the administration of the estate, 2. allowance or disallowance of claims or exemptions, 3. counterclaims by the estate, 4. obtaining of credit, 5. turnover of property, 6. preferences, 7. motions to terminate or annul or modify the stay, 8. fraudulent conveyances, 9. dischargeability of debts, 10. objections to discharge, 11. validity or priority of liens, 12. confirmation of plans, 13. use or lease of property, 14. sale of property other than property resulting from claims brought by the estate against persons who have not filed claims, and 15. liquidation of assets. Noncore proceedings are those proceedings entitled "related proceedings" under the prior Emergency Rules. Noncore proceedings include a determination of title to real estate or tort suits. A bankruptcy judge may hear a "related proceeding." The judge shall submit proposed findings of facts and conclusions of law to the district court. The district judge shall enter the final order or judgment after considering the proposed finding and after reviewing de novo those matters to which any party has timely objected.54 Company Policy: Require that any order in a noncore matter (such as a determination of title to real estate or lien priority) be signed by a district judge pursuant to an adversary proceeding. Upon consent of the parties, related matters may be determined (by order) by the bankruptcy judge. This determination is constitutional.55 Several cases have upheld the reference of "core" matters as constitutional; the district court retains sufficient administrative controls to prevent erosion of the Article III power.56
49 50

Sec. 322 Secs. 341, 342 51 Sec. 343 52 See committee report on Section 541; Rule 1016; In re Combs, 166 B.R. 417 (Bankr. N.D. Cal. 1994) (debtor's estate continued to have right to homestead exemption) 53 In re Erickson, 183 B.R. 189 (Bankr. D. Minn. 1995) 54 28 U.S.C. 157 55 Pacemaker Diagnostic Clinic of America, Inc. v. Instromedix, Inc., 725 F.2d 537 (9th Cir. 1984) 56 In re Baldwin-United Corp., 48 B.R. 49, 12 C.B.C.2d 378 (Bankr. S.D. Ohio 1985); In re Tom Carter Enterprises, Inc., 44 B.R. 605, 12 B.C.D. 536, 11 C.B.C.2d 1216 (C.D. Cal. 1984); contra In re Associated Grocers of Nebraska Cooperative, Inc., 46 B.R. 173, 12 B.C.D. 737, 12 C.B.C.2d 1

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By limiting the bankruptcy jurisdiction, the Congress is attempting to avoid the problem of the unconstitutionality of blanket jurisdiction which previously existed in the Code because bankruptcy judges were given broad powers but were not given the lifetime appointment of an Article III judge. If a right to trial by jury applies to a proceeding to be heard by the bankruptcy judge, the bankruptcy judge may conduct a jury trial upon consent of the parties and if instructed to do so by the district judge.57 Certain proceedings remain neither "core" nor "related proceedings." The bankruptcy court has no jurisdiction over these proceedings. An example is lien priority on abandoned property.58 2.2 Appeal To appeal to the district court or three-judge bankruptcy appellate panel (on consent of all parties) from an order of the bankruptcy court, the appellant must file a notice of appeal within 10 days of the date of the entry of the judgment, order, or decree appealed from. Within that time, a party may file a motion for judgment notwithstanding the verdict, a finding of additional facts, an amendment of the judgment, or a new trial. Then the time for appeal runs from the time of the entry of the order. The court may extend the time for filing the notice of appeal for a period of not more than 20 days from expiration of the 10-day deadline. A paper is filed when received by the clerk, not when mailed.59 A request must be made within 10 days if the order authorizes the sale of real estate, the obtaining of credit, confirmation of a plan, dismissal of a case, or certain other stated matters.60 An order is "entered" when entered by the clerk on the civil docket (noting the date of entry). The date of signature of the order is not necessarily the date of entry.61 The entry on the docket must correctly state the substance of the order (e.g., "order/granting..." is not effective where it was "order (a) denying. a part of motion)" to be effective and start the 10 day deadline for notice of appeal.62 The notice of appeal is deemed filed when received by the bankruptcy court clerk.63 Appeals from the appellate panel or district court are made to the circuit court of appeals.64 Company Policy: Determine that the order in the bankruptcy court on which you are relying is not being contested and that the order is final. This can be verified by letter from counsel, review of the file and docket sheet, or a clerk's certificate as to finality (after 10 days following entry of an order of sale, mortgage, lease or confirmation; after 30 days on other orders). If the order is not final and nonappealable, call a senior underwriter for approval. Factors we consider in relying upon the order include: (1) whether anyone objected to the proposed order; (2) whether a notice of appeal or motion objecting to the order has been filed; (3) whether the transaction involves a sale or loan solely to an unrelated third party for new value (contrast a lift of stay and contrast a sale to participants in the debtor); (4) whether the court has determined that the lender or purchaser is acting in good faith; (5) whether all advances will be made at closing (if not, the appellate court may be more likely to fashion other relief); (6) size of the transaction (reinsurance is unlikely if an appeal is pending unless we except); and (7) sufficiency of representation on any appeal. The judicial council of each circuit must establish a bankruptcy appellate panel service to hear and determine, with consent of all parties, appeals from bankruptcy courts, unless the council finds that there are insufficient judicial resources or that establishment of the service would result in undue delay or increased costs.65 Generally, appeal from a district court to a court of appeals must be made by filing a notice of appeal within 30 days after date of entry of the judgment or order appealed from.66 Even if an order is final, it may be later set aside (generally, subject to a one-year time limitation) if there is an extreme case of abuse of discretion, fraud, mistake, or gross inadequacy of the original sales price in comparison to a later substantially higher sales price. The most common infirmity warranting a vacation of an order

(Bankr. D. Neb. 1985) 57 28 U.S.C. 157(e), (Bankruptcy Reform Act of 1994) 58 In re Dickenson Lines, Inc., 47 B.R. 653, 12 C.B.C.2d 587 (Bankr. D. Minn. 1985) 59 In re Maurice, 69 F.3d 830 (7th Cir. 1995); later proceeding, 73 F.3d 124 (7th Cir. 1995), recons. granted 1996 U.S. App. LEXIS 236 (7th Cir. Ill. January 5, 1996) 60 Rule 8002, Bankruptcy Rules 61 Rule 5003; Rule 79(a), Rules of Federal Procedure 62 Gravel and Shea v Vermont Nat. Bank., 162 B.R. 969 (D. Vt. 1993) 63 In re Wiston XXIV Ltd. Partnership, 170 B.R. 453 (D. Kan. 1994); mot. denied, 172 B.R. 647, 1994 U.S. Dist. LEXIS 12417; affd, 45 F.3d 441, 1994 U.S. App. LEXIS 40263 (10th Cir. Kan. 1994); reported in full, 1994 U.S. App. LEXIS 36457 (10th Cir. Kan. December 28, 1994) and cert. denied, 515 U.S. 1144, 1995 U.S. LEXIS 4130 (1995) 64 28 U.S.C. 158 65 28 U.S.C. 158(b) (Bankruptcy Reform Act of 1994) 66 Matter of Topco, Inc., 894 F.2d 727 (5th Cir. 1990)

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of sale is defective notice of the sale to the interested parties.67 Rule 9024 does not allow revocation of the order of confirmation after 180 days after entry.68 2.3 Trustee or Debtor? In a Chapter 7 proceeding, a trustee is in charge of the estate. In a Chapter 11 proceeding, a debtor-in-possession generally controls and manages the estate and sells the property.69 However, a trustee may be appointed.70 Company Policy: In a Chapter 11 proceeding, review the docket sheet to verify whether the debtor controls the estate as a "debtor-in-possession" or whether a trustee has been appointed. If the debtor-in-possession is selling, verify that the debtor retains authority to sell property. The debtor may be deprived of authority to sell by the court. In a Chapter 12 proceeding, the debtor is usually a debtor-in-possession, and has power to sell property in accordance with Section 363.71 One view holds that the trustee must sell real estate, but that the trustee's consent is the functional equivalent of sale by the trustee.72 The debtor's authority may be limited by the court or the debtor may be "removed" as a debtor-in-possession. In that event, the trustee manages the estate. Company Policy: Review the docket sheet to verify that the Chapter 12 debtor's power has not been limited. If a sale is made free and clear of liens, require that the trustee join with the debtor and be authorized to sell. Verify that the liens attach to the proceeds. A trustee is appointed for the estate of a debtor in a Chapter 13 proceeding. However, the debtor is empowered (subject to the requirements of "notice and hearing") to sell property of the estate not in the ordinary course of business or free and clear of a lien or interest of another party.73 2.4 Limit of Filing A debtor is not entitled to a discharge if the debtor was granted a discharge in a case commenced within six years before the date of filing of the current case. This time limit does not apply if the prior case was in a Chapter 12 or Chapter 13 proceeding, and (1) payments totaled 100% of unsecured claims or (2) payments totaled 70% of unsecured claims and the plan was proposed in good faith and was the debtor's best effort.74 This limitation does not restrict the frequency of bankruptcy filings.75 However, no individual or family farmer may refile within 180 days if the case was dismissed for willful failure to abide by court orders, or for failure to appear before the court, or if the debtor requested and obtained a voluntary dismissal following the filing of a request for relief from the stay.76 2.5 Lessened Court Scrutiny The proceedings under the Bankruptcy Reform Act are subject to less court scrutiny in most cases. For example: many acts of a trustee or debtor-in-possession are authorized after the requirement of "notice and a hearing."77 Notice and opportunity for a hearing "as is appropriate in the circumstances" shall be given. If a hearing is not timely requested, no actual hearing or court order approving the action is necessary. In the absence of an objection or request for a hearing, courts will often refuse to sign "comfort orders." As noted by one judge, "a suitable procedure exists, whereby a clerk's certificate for recording purposes may be obtained, which certifies that no objections or requests for a hearing were filed."78 If there is insufficient time for a hearing to be commenced before the proposed act must be done, then the authorization "after notice and a hearing" shall mean authorization of the act without an actual hearing, provided that notice is properly given and provided that the court authorizes the act.

67

In re Chung King, Inc., 753 F.2d 547, 11 C.B.C.2d 1262 (7th Cir. 1985); Matter of Met-L-Wood Corp., 861 F.2d 1012 (7th Cir. 1988) (however, the validity of sale is generally established as to good faith purchaser once the time for appeal has run); see Rule 9024, Bankruptcy Rules 68 In re Errington, 39 B.R. 968, 10 C.B.C.2d 1230 (Bankr. D. Minn. 1984) 69 Sec. 1107 70 Sec. 1104 71 Sec. 1203 72 In re Webb, 932 F.2d 155 (2nd Cir. 1991) 73 Section 1303 74 Sec. 727 75 In re Underwood, 7 B.R. 936, 7 B.C.D. 130, 3 C.B.C.2d 640 (Bankr. S.D. W. Va. 1981), aff'd, 24 B.R. 570 (S.D. W. Va. 1982) 76 Sec. 109(g) 77 Section 102 78 In re Robert L. Hallamore Corp., 40 B.R. 181, 12 B.C.D. 334, 10 C.B.C.2d 1141 (Bankr. D. Mass. 1984)

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A sale not in the ordinary course of business may be made by a trustee (or debtor-in- possession, or debtor in a Chapter 13 proceeding) after notice and a hearing.79 If notice and an opportunity for a hearing are given, and a hearing is not timely requested, then the trustee may sell without a court order. If there is no time for a hearing, then notice must be given and the court must approve the sale. In each case, notice is required if the Bankruptcy Reform Act authorizes an act "after notice and a hearing."80 The court cannot dispense with notice to interested parties.81 For example, the debtor, trustee, and a creditor secured by a lien on the property in question cannot by joint agreement avoid the required notice to all creditors before property can be abandoned.82 One-day notice before the grant of a lien superior to that of a previous creditor violates due process of law if the notice does not clearly show the effect on the previous creditor.83 Two and one-half hour notice to creditor of intent to set aside an agreed order lifting stay was insufficient notice.84 The presumption of receipt of properly mailed notice may be overcome by testimony of non-receipt combined with standardized procedures of processing mail.85 A motion in a contested matter (such as Section 522(f) motion) must be mailed to the attention of a named officer of a corporation; mail to "Attention: President" is not satisfactory.86 Failure of the debtor to give notice of proposed sale free and clear of liens to a party claiming ownership rights in a mortgage will generally not cause the sale to be ineffective if: (1) the creditor had actual knowledge of the sale; (2) the creditor failed to file a proof of claim; (3) the creditor failed to record an assignment of mortgage; and (4) the creditor failed to request notices in the bankruptcy case.87 Service of summons and complaint must be made by first class mail on the debtor and a copy must be mailed to the debtor's attorney if so represented.88 3.0. THE ESTATE 3.1 Land of the Debtor Upon the filing of a bankruptcy, an estate is created. The estate includes all land owned by the debtor or in which the debtor has an interest.89 For example, the estate includes title to land where the debtor had deposited a deed in escrow and the deed had not been delivered by the escrow agent to the grantee at the time of filing of the petition.90 Property of the estate includes the debtors interest as a residuary beneficiary in a probate court proceeding pending in a state court (and, consequently, the automatic stay applies to probate proceedings until relief from the stay is granted).91 3.2 Partnership The partnership and a partner are treated as separate entities and their interests are separate. If a partnership owns property, then the filing of a bankruptcy by an individual partner does not vest the partnership property in the estate. Company Policy: If a partnership is the record owner, require joinder of or consent to the sale by the debtor-partner or debtor's trustee) pursuant to a final court order or after notice to interested parties of the estate.

79

Section 363(b) Sec. 102 81 In re Columbia Motor Express, Inc., 49 B.R. 216 (Bankr. M.D. Tenn. 1985); In re Blumer, 66 B.R. 109, 15 B.C.D. 244, 16 C.B.C.2d 409 (Bankr. 9th Cir. B.A.P. 1986) (exparte order to execute Deed of Trust was void) 82 In re Caron, 50 B.R. 27, 13 C.B.C.2d 1137 (Bankr. N.D. Ga. 1984) 83 In re Center Wholesale, Inc., 759 F.2d 1440, 12 C.B.C.2d 1107 (9th Cir. 1985) 84 Matter of Timely Secretarial Service, Inc., 987 F.2d 1167 (5th Cir. 1993) 85 In re Dodd, 82 B.R. 924 (N.D. ll. 1987) 86 In re Schoon, 153 B.R. 48 (Bankr. N.D. Cal. 1993) 87 In re CLC Corp., 110 B.R. 335 (Bankr. M.D. Tenn. 1990) 88 In re Cossio, 163 B.R. 150 (9th Cir. B.A.P. 1994), affd without opinion, 56 F.3d 70 (9th Cir. 1995), Rule 7004, reported in full, 1995 U.S. App. LEXIS 10302 89 Sec. 541 90 In re Sky Ground International, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989) 91 In re Molitor, 183 B.R. 547 (Bankr. E.D. Ark. 1995)
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The estate of a partner consists only of the partner's personal property interest in the partnership.92 Thus, the automatic stay does not prevent foreclosure of a lien against the partnership property merely because a partner files a bankruptcy.93 Company Policy: Foreclosure on partnership assets is not stayed by a bankruptcy of a partner. There are different views on whether a general partner's bankruptcy dissolves the partnership.94 It is also unclear whether a debtor-in-possession succeeds to management authority formerly held as a general partner.95 According to one view, the debtor-in-possession cannot assume executory partnership agreements as a general partner without consent of all of the partners.96 It has been held that a trustee cannot assume management powers, although the trustee may attempt to scrutinize the transaction.97 Many, however, hold that the agreement can be assumed or rejected.98 It is also unclear as to whether a debtor in possession may assume the right under an operating agreement of a Limited Liability Company to manage the LLC (although it appears that such rights can in no event be assigned).99 3.3 Leases and Contracts The interest of the debtor in a lease or contract (as lessor or lessee or as purchaser or seller) vests in the estate upon the filing of the bankruptcy.100 Company Policy: To insure a purchase money mortgage on the closing of the contract entered by the debtor before the case commenced if the property is not yet exempted or abandoned, you must require a court order authorizing the completion of the contract and execution of mortgage. Prior to revesting of property in the debtor (such as by the plan), you also must except to the effect of the automatic stay on foreclosure of the purchase money mortgage, unless the order allows foreclosure without further review. A letter opinion from the state court judge ruling that the contract by the purchaser-debtors was rescinded is not entered on the docket book and is not effective to terminate the debtor's interest prior to the filing of the bankruptcy.101 3.4 Trustee and Trusts If the debtor has title to property as a trustee (of a private trust), the estate will succeed to the property subject to the interest of the beneficiaries.102 Since the estate receives no benefit from the interest, cause will exist to lift the stay. Mortgages by the debtor at the beneficiary's instruction during the case are in the ordinary course of business in accordance with Section 363. The estate cannot exercise the fiduciary powers of the trustee (of a private trust).103 If the debtor has no equitable interest or beneficial interest in the property, then the debtor should return the
92

In re Minton Group, Inc., 46 B.R. 222, 12 B.C.D. 811, 11 C.B.C.2d 1442 (S.D.N.Y. 1985) (even though bankruptcy causes dissolution of partnership); In re Olszewski, 124 B.R. 743 (Bankr. S.D. Ohio 1991) (bankruptcy causes dissolution of partnership, but it remains a separate entity; the trustee of the partner cannot sell partnership property free and clear of the partnership and other partners); In re Funneman, 155 B.R. 197 (Bankr. S.D. Ill. 1993) (the trustee of a partner's estate cannot sell partnership property); In re Signal Hill-Liberia Ave. Ltd. Partnership, 189 B.R. 648 (Bankr E.D.Va. 1995) (trustee of partners estate may not sell partnership property) 93 In re Aboussie Brothers Construction Co., 8 B.R. 302, 7 B.C.D. 309, 3 C.B.C.2d 684 (E.D. Mo. 1981); In re Cardinal Industries, Inc., 105 B.R. 834 (Bankr. S.D. Ohio 1989) (debtor partner's tenancy rights in land as partner of owner partnership are not property of bankruptcy estate); In re Normandin, 106 B.R. 14 (Bankr. D. Mass. 1989). 94 In re Harms, 10 B.R. 817, 7 B.C.D. 671, 4 C.B.C.2d 691 (Bankr. D. Colo. 1981) (perhaps overruled by 1984 amendments to Section 365(c) with respect to the court's view that dissolution occurs if the debtor is a debtor-in-possession); In re BC&K Cattle Co., 84 B.R. 69 (Bankr. N.D. Tex. 1988) (dissolution does not necessarily result from the filing by a Chapter 11 bankruptcy of a partner); In re Priestley, 93 B.R. 253 (Bankr. D.N.M. 1988) (dissolution occurs when executory contract of general partner is rejected in Chapter 7 proceeding) 95 See Sec. 365(e); In re Fidelity America Mortgage Co., 10 B.R. 781, 7 B.C.D. 778 (Bankr. E.D. Pa. 1981) (the debtor-in-possession retained management authority until removed pursuant to court authorization) 96 In re Harms, 10 B.R. 817, 7 B.C.D. 671, 4 C.B.C.2d 691 (Bankr. D. Colo. 1981) 97 See In re Priestley, 93 B.R. 253 (Bankr. D.N.M. 1988) (debtor's managerial powers as general partner could not be assigned to third party without limited partners' consent) 98 In re Sigel, 923 F.2d 142 (9th Cir. 1991) 99 In re DeLuca, 194 B.R. 65 (Bankr. E.D. Va. 1996) (debtor in possession in Chapter 11 may not continue as manager; the agreement is a personal services contract that is no assumable); In re Daugherty Construction, Inc., 188 B.R. 607 (Bankr. D. Neb. 1995) (debtor in possession is same party and assumption, therefore, is not a prohibited assignment). 100 Sec. 541 101 In re Bunt, 165 B.R. 894 (Bankr. E.D. Ark. 1994) 102 In re Jones, 138 B.R. 289 (Bankr. M.D. Fla. 1992) (bare legal title as trustee is property of the estate); In re Walt Robbins, Inc., 129 B.R. 452 (Bankr. E.D. Va. 1991) ("Property the debtor holds legal title to, but not an equitable interest in, comes into the estate ... to the extent of the debtor's legal title.") 103 Section 541(b)

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property to the true owners where possible. The trustee, in a bankruptcy case, has no authority to sell land held by the debtor as trustee for a partnership.104 However, simply because the debtor has title as "trustee" (of a private trust) does not clearly show that there is a trust. The burden rests upon a claimant to establish the trust relationship.105 If a debtor is a beneficiary under a spendthrift trust, that interest is not part of the estate.106 A spendthrift trust interest is subject to restrictions on transfer of the beneficial interest, which are enforceable under nonbankruptcy law. Profit-sharing and pension plans containing ERISA anti-alienation clauses are not exempt from the estate under Section 522(b)(2)(A).107 A debtor's beneficial interest in a spendthrift trust is neither property of the estate, nor subject to the automatic stay.108 A debtor's contingent interest in a (nonspendthrift) trust is property of the estate, though in the principal could be invaded for the life beneficiary.109 A subcontract by a general contractor may provide that payments by the owner to the general contractor are trust funds; such funds are not property of the estate of the general contractor.110 The trust assets are property of the estate where the trustee (debtor) retains the power to withdraw property or revoke the trust.111 If the debtor owns the equitable interest of the nominee trust res, the stay prevents foreclosure of the mortgage on the land.112 Where an accommodator took title as part of a reverse exchange (to sell property where the grantor had already acquired the target land), the grantor continued to control and maintain the land (it rented). The grantors continued to retain equitable title. The trustee cannot use the strong arm provisions of Section 544 because the grantor's control and management was constructive notice of the claim.113 According to one view, the trustee in bankruptcy cannot use strong-arm powers to avoid a beneficial interest held in trust by the debtor; the avoidance powers extend only to actual voidable transfers by the debtor.114 According to a contrary view, the trustee may avoid unrecorded beneficial interests if the debtor acquires title as trustee without disclosure of the beneficiary or terms of the trust.115

Loan Servicing Agreements If a lender-servicing agent agrees to assign a mortgage to an investor, the investor's rights will be enforceable in a bankruptcy filed by the lender-servicing agent even though no assignment is filed of record and even though the lender-servicing agent retains the original note.116 However, if the servicing company guarantees payments of the interests "assigned" to the participants, the participants are merely creditors.117 It remains unclear whether the trustee or debtor in the servicing agent's bankruptcy can assume the servicing agreement unless the investor consents.118 In addition, many servicing agreements do not allow the servicing agent to accept full prepayment. Factors indicating a loan and not a participation are: (1) guarantee of repayment by the lead lender to the participant; (2) participation for a different term than the loan; (3) different payment arrangements between borrower and lead lender, and lead lender and participant; and

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104 105

In re Signal Hill-Liberia Ave. Ltd. Partnership, 189 B.R. 648 (Bankr. E.D. Va. 1995) 4 Collier on Bankruptcy para. 541.13; (15th ed. 1986), 541(d) 106 Sec. 522(b)(2)(A) 107 In re Daniel, 771 F.2d 1352, 13 C.B.C.2d 793 (9th Cir. 1985); In re Goff, 706 F.2d 574, 10 B.C.D. 986, 8 C.B.C.2d 894 (5th Cir. 1983) 108 In re Leimer, 54 B.R. 587, 13 C.B.C.2d 187 (D. Neb. 1985) 109 In re Knight 164 B.R. 372 (Bankr. S.D. Fla. 1994), mot. denied, 1994 Bankr. LEXIS 193 (Bankr. S.D. Fla. February 22, 1994) 110 In re Marrs-Winn Co., Inc., 103 F.3d 584 (7th Cir. 1996) 111 In re Cowles, 143 B.R. 5 (Bankr. D. Mass. 1992) (even though not a beneficiary); In re Ross, 162 B.R. 863 (Bankr. D. Idaho 1993) (power to revoke the trust is property of the estate) 112 In re Eastmore Development Corp., 150 B.R. 495 (Bankr. D. Mass. 1993) 113 In re Exchanged Titles, Inc., 159 B.R. 303 (Bankr. C.D. Cal. 1993) 114 Brown v. Mills, 182 B.R. 778 (Bankr. E.D. Tenn. 1995) 115 In re Schiavone, 209 B.R. 751 (Bankr. S.D. Fla. 1997) (relying on authority of such trustee to convey under Florida law) 116 Sec. 541(d); In re Mortgage Funding, Inc., 48 B.R. 152, 12 B.C.D. 1128, 12 C.B.C.2d 529 (Bankr. D. Nev. 1985); In re Cambridge Mortg. Corp., 92 B.R. 145 (Bankr. D. S.C. 1988) (investor possessed original note but did not receive mortgage assignment); contra In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363 (5th Cir. 1987) (if note is not delivered to collateral assignee, assignee's rights are avoidable); In re Tleel, 79 B.R. 883 (Bankr. 6th Cir. 1987); In re Plunkett, 89 B.R. 776 (Bankr. E.D. Wis. 1988); In re Granada, Inc., 92 B.R. 501 (Bankr. D. Utah 1988) 117 In re The Woodson Company, 813 F.2d 266, 17 C.B.C.2d 80 (9th Cir. 1987) 118 See Sec. 365(c)

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discrepancy between interest rate on note and on participation.119

(4)

Company Policy: When faced with bankruptcy by the servicing agent, require: 1. written payoff (agreed to) from both the investor and servicing agent; 2. verification by review of the note (or copy front and back) as to the party (or parties) who is (are) the holder; 3. written agreement from the servicing agent and investor as to whom you should pay; and 4. written agreement by both the servicing agent and investor to furnish a release upon payment. Community Property If only one spouse files a bankruptcy petition and the debtor-spouse owns community property, then the community property under the sole or joint management of the debtor and other community property liable for claims against the debtor (to the extent of liability) is part of the estate. According to one view, the estate includes community property of the debtor and debtor's former spouse if the division of the community property had not been made when the case was filed.120 In the event both spouses file separate bankruptcies, such community property is property of the estate of the first spouse to file.121 The nondebtor spouse has a right of first refusal to buy that property.122 The separate property of the nondebtor-spouse and the community property under the sole management of the nondebtor (where there are no claims against the debtor which could extend to the property) is not subject to the bankruptcy proceeding.123 Company Policy: If a nondebtor spouse is conveying community property held only in that person's name, secure joinder by the estate. If the debtor (or trustee) is offering to sell nonexempt community property of the debtor, require joinder of the nondebtor spouse. If joinder by the nondebtor-spouse is not possible, you must be satisfied that the property was under the sole management (where state law so provides) of the debtor and that the nondebtor spouse is not exercising the right of first refusal (such as by calling or notifying the spouse of the scheduled closing or verifying that the debtor makes no tender in the bankruptcy). 3.6

After-Acquired Interests Any property acquired by the debtor by gift, devise, or inheritance, or as a result of a property settlement agreement in a divorce within 180 days after the filing of the bankruptcy is property of the estate. Any property acquired during the bankruptcy as proceeds of property of the estate (e.g., distribution of corporate assets if stock is owned by estate) becomes property of the estate.124 A person becomes entitled to an inheritance or bequest from date of the testator's death, not date of probate of will.125 A codicil to a will which disinherits the debtor if the testator should die within 180 days of the debtors bankruptcy is not void as a violation of federal public policy.126 One view holds that the debtor cannot avoid this provision by disclaiming or renouncing a bequest or devise.127 Contingent or vested remainder interests owned by the debtor at commencement of the case are property of the estate.128 A right of first refusal arising out of a proposed sale under the Agricultural Credit Act of 1987 after the debtor filed a Chapter 7 bankruptcy in connection with land foreclosed before the commencement of the bankruptcy is not property of the estate.129 Property acquired by a deed delivered before the filing of a bankruptcy and recorded after the filing is property of the estate.130 Property that a debtor in a Chapter 12 or Chapter 13 proceeding acquires after the commencement of the case and before the closing or conversion (including earnings) becomes property of the estate (until revested in
119 120

3.7

In re Sprint Mortg. Bankers Corp., 164 B.R. 224 (Bankr. E.D. N.D. 1994), affd, 177 B.R. 4, 1995 U.S. Dist. LEXIS 320 (E.D.N.Y. 1995) In re Miller, 167 B.R. 202 (Bankr. C.D. Cal. 1994) 121 In re Smith, 140 B.R. 904 (Bankr. D. N.M. 1992) 122 Sec. 363(i) 123 Sec. 541(a)(2) 124 Sec. 541(a)(5) 125 In re Chenaueth, 3 F.3d 1111 (7th Cir. 1993) 126 In re McGuire, 209 B.R. 580 (Bankr. D. Mass. 1997) 127 In re Lewis, 45 B.R. 27, 11 C.B.C.2d 975 (Bankr. W.D. Mo. 1984); In re Cornell, 95 B.R. 219 (Bankr. W.D. Okla. 1989) 128 In re Hoblit, 89 B.R. 756 (Bankr. C.D. Ill. 1986) 129 In re Solberg, 125 B.R. 1010 (Bankr. D. Minn. 1991) 130 In re Strotheide, 142 B.R. 850 (Bankr. S.D. Ill. 1992)

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the debtor in accordance with the confirmation and plan if the plan or order does not provide otherwise).131 However, according to one view, upon conversion of a Chapter 12 or Chapter 13 bankruptcy proceeding to a Chapter 7 proceeding, real estate or other property acquired by the debtor subsequent to the filing of the Chapter 12 or Chapter 13 case but prior to conversion is not property of the Chapter 7 estate.132 If a Chapter 13 case is converted, the property of the estate of the converted case consists of property of the estate as of the date of the filing of the Chapter 13 petition. If the debtor converts a case under Chapter 13 in bad faith to another chapter, the property in the converted case includes property of the estate as of the conversion.133 There are differing views as to whether the bankruptcy estate in a Chapter 7 case after conversion from a confirmed Chapter 11 case will include property revested in the debtor pursuant to the plan. According to one view, if a Chapter 11 case is converted after confirmation and revesting of assets in the debtor, those assets do not become part of the estate; conversion will only affect assets still clearly in the bankruptcy court jurisdiction.134 According to the contrary view, the Chapter 7 estate will include such property that had revested in the debtor pursuant to the Chapter 11 plan.135 These sections (1207, 1306) subject the earnings of the debtor to the Chapter 12 or Chapter 13 plan. Consequently, extensions of credit subsequent to confirmation may be subject to court review and approval.136 Company Policy: We do not require court orders on purchase money mortgages executed on property acquired by the debtor by contract entered after the confirmation of a Chapter 12 or Chapter 13 plan, or after the commencement of a Chapter 7 or Chapter 11 proceeding. We simply require a consent letter by the trustee where applicable. If a debtor acquires property and executes a purchase money mortgage in a Chapter 12 or Chapter 13 proceeding before the plan is confirmed, then the court must approve the transaction (since this property is arguably property of the estate) and any mortgagee's policy must except to the automatic stay in the bankruptcy proceeding (which extends to all property of the estate). If the debtor enters a contract after the commencement of a Chapter 12 or Chapter 13 proceeding and before the plan is confirmed and thereafter executes a purchase money mortgage after the plan is confirmed, you must review the plan to verify that the property is revested in the debtor in order to insure the purchase money mortgage. Verify (by letter) that the trustee does not object to the mortgage. If vested in the debtor you do not need to then except to the stay. If it is clear that the mortgagor is the debtor, make a disclosure of a pending bankruptcy to the lender in any case where the debtor is acquiring property. If the debtor enters a contract to purchase property before the bankruptcy commences, and the property is not yet abandoned or revested in the debtor (pursuant to a confirmed plan) then, to insure a purchase money mortgage on the closing of the contract, require a court order authorizing the completion of the contract and execution of the mortgage. Except to the effect of the automatic stay on foreclosure of the purchase money mortgage unless the order allows foreclosure without further review or the property is revested in the debtor. Unscheduled Property The property of the debtor vests in the estate and is subject to the bankruptcy proceeding regardless of whether it is listed on the schedules and regardless of whether schedules are actually filed. If the property is not scheduled, the case is closed, and the property is not otherwise administered or abandoned, then it remains subject to the jurisdiction of the bankruptcy court.137 It is possible to have the case reopened (Section 350) to administer or abandon the property.138 Section 727(e) allows a revocation of discharge within 1 year after discharge (for fraud) or 1 year after the later of discharge or closing of case (for fraudulent concealment of property). These time limits do not
131

3.8

Secs. 1207, 1306; Education Assistance Corp. v. Zellner, 827 F.2d 1222, 16 B.C.D. 802, 17 C.B.C.2d 867 (8th Cir. 1987); Matter of Brownlee, 93 B.R. 662 (Bankr. S.D. Iowa 1988); In re Burke, 99 B.R. 431 (Bankr. W.D. Mo. 1989); In re Hudson, 103 B.R. 781 (Bankr. N.D. Miss. 1989) (later acquired real estate); In re Burke, 147 B.R. 955 (Bankr. W.D. Mo. 1992) (house acquired after filing of Chapter 13 bankruptcy was property of the estate that was subject to stay and, upon conversion to a Chapter 7, the house remained property of the estate); In re Calder, 973 F.2d 862 (10th Cir. 1992) 132 In re Hudson, 103 B.R. 781 (Bankr. N.D. Miss. 1989); In re Plata, 958 F.2d 918 (9th Cir. 1992) (noting a contrary view that post-confirmation Chapter 12 or 13 property goes to creditors as held in Resendez v. Lindquist, 691 F.2d 397 (8th Cir. 1982)); In re Figgers, 121 B.R. 772 (Bankr. S.D. Ohio 1990); contra Matter of Tvorek, 107 B.R. 666 (Bankr. D. Neb. 1989) 133 Sec. 348(f) (Bankruptcy Reform Act of 1994) 134 In re BNW, Inc., 201 B.R. 838 (Bankr. S.D. Ala. 1996); In re K&M Printing, Inc., 210 B.R. 583 (Bankr. Ariz. 1997) (absent express provision in plan, property revested in debtor by plan will not be in Chapter 7 estate upon conversion) 135 In re Smith, 201 B.R. 267 (D. Nev. 1996), affd, 1998 U.S. App. LEXIS 5759 (9th Cir. Nev. March 20, 1998); In re Calania Corp., 188 B.R. 41 (Bankr. M.D. Fla. 1995); Local Rule 4001-3, S.D. Ohio, requires written approval of trustee or order of court for consumer debt, including refinancing real property debt; Local Rules may require court approval of a sale or refinance of a Chapter 13 debtors principal residence after confirmation (Local Rule 180(27), (33) C.D. Cal.) 136 In re Brown, 170 B.R. 362 (Bankr. S.D. Ohio 1994) (local rules require court approval of credit) 137 Sec. 554(c), (d) 138 Section 554, Rule 6007

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prevent the trustee from later reopening a case to administer assets that were fraudulently concealed.139 If a note and deed of trust to a debtor are not scheduled and the bankruptcy is closed, the note and deed of trust remain property of the estate; the bankruptcy case must be reopened to receive payment for the note.140 Company Policy: Require a court order reopening the case and authorizing sale or abandonment of the property, after notice to interested parties if (1) the property was acquired by the debtor before the proceeding was filed or was otherwise property of the estate of the debtor, (2) the case has been closed, (3) the property was not formally abandoned or dealt with, and (4) the property was not scheduled. Escrowed Funds If the debtor has placed funds in escrow prior to the filing of a bankruptcy in order to satisfy certain claims at a later date, the estate may claim the funds by turnover order.141 Money placed in an escrow or for an undertaking or deposit into court is transferred on the date of deposit in order to calculate the time for a preference.142 Funds were held with a title company agent to insure a lien without exception to prior mortgages.143 The court, while stating that perhaps bare legal title to the funds was held by the debtors (indemnitors), imposed a constructive trust on the funds. The court directed the debtors "to set aside and eventually pay over the sums necessary to fully satisfy" the mortgages. If the agreement had expressly provided that legal title to the funds was transferred to the agent (or underwriter) with any excess to be retained to the indemnitors, then the insurer might have been better protected.144 If the debtor has bare legal title to an escrow account, the account is not property of the estate.145 An escrow account is not property of the estate and the trustee is not entitled to a turnover order since the debtor has only a contingent interest in the account due to a pending appeal.146 A cash deposit with the state is property of the estate, since the debtor has a residual right to return, subject to a constructive trust or equitable interest in favor of creditors who may claim rights to the deposit under state law.147 The debtor has an equitable interest in a reserve account (and the account is property of the estate) since the balance would be remitted to it after paying bond issues and issuer of letter of credit (for reimbursement agreement). The issuer of the letter of credit had a perfected security interest in the account when the agreement granted it, trustee held the funds, and the agreement acknowledged that the agent took possession on behalf of the pledgee and perfected the security interest.148 A surety may recover funds claimed by the debtor, pursuant to an indemnity agreement, if the funds are held in trust. Four elements of a trust are: (1) an intent by the settlor to create a trust; (2) a trust res; (3) an identifiable beneficiary; and (4) a trustee.149 Company Policy: Consult with our underwriting personnel before accepting indemnities and related escrows of funds to secure the indemnities. The agreement must grant us an adequate security interest. The funds also should be deposited in a separate escrow account (in order to reduce any argument of a preference). 3.9

139 140

In re Frank, 146 B.R. 851 (Bankr. N.D. Okla. 1992) In re Jennings, 206 B.R. 954 (Bankr. W.D. Mo. 1997) 141 Section 542(a) (where subject to use, sale or lease under Section 363) 142 In re Anthony Sicaii, Inc., 144 B.R. 656 (Bankr. S.D. N.Y. 1992) 143 In re N.S. Garrott & Sons, 772 F.2d 462 (8th Cir. 1985) 144 See also In re Newcomb, 744 F.2d 621 (8th Cir. 1984) (in dictum stating that, after funds were placed in escrow regarding a pending appeal, there was an unavoidable transfer and the debtor only had a contingent right); In re Rosensheim, 136 B.R. 368 (Bankr. S.D. N.Y. 1992) (funds escrowed with title company were property of estate; there was no executed escrow agreement); T&B Scottdale Contractors, Inc. v. U.S., 866 F.2d 1372 (11th Cir. 1989) (funds deposited in joint account of debtor subcontractor for benefit of debtor's materialmen were not part of debtor's bankruptcy estate); In re Leeling, 129 B.R. 637 (Bankr. D. Colo. 1991) (promissory note pledged to creditor is subject to turnover order under Section 542(a); the court declines to follow the Whiting Pool footnote on note turnovers) 145 Matter of TTS Inc, 158 B.R. 583 (N. Del. 1993) 146 In re Royal Business School, Inc., 157 B.R. 932 (Bankr. E.D. N.Y. 1993) 147 In re Hammon, 180 B.R. 220 (9th Cir. BAP 1995) 148 In re Creekstone Apts. Assoc. L.P., 165 B.R. 851 (Bankr. M.D. Tenn 1984) 149 In re Alcon Demolition, Inc., 204 B.R. 440 (Bankr. D. N.J. 1997)

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Conversion According to one view, property acquired after the filing of a bankruptcy petition and owned by the debtor or debtor's estate at time of conversion of a Chapter 12 or Chapter 13 bankruptcy case to a Chapter 7 bankruptcy case becomes property of the estate.150 There are differing views as to whether the bankruptcy estate in a Chapter 7 case after conversion from a confirmed Chapter 11 case will include property revested in the debtor pursuant to the plan.151 If a Chapter 13 case is converted, the property of the estate of the converted case consists of property of the estate as of the date of the filing of the Chapter 13 petition. If the debtor converts a case under Chapter 13 in bad faith to another chapter, the property in the converted case includes property of the estate as of the conversion.152 3.11 Forfeitures Property seized by the U.S. under 21 U.S.C. sec. 853(f) (money laundering; criminal forfeiture) is not property of the bankruptcy estate if the bankruptcy petition was filed after the seizure and before criminal charges are filed. The debtors do not have equitable control over the land at the commencement of the bankruptcy. The debtor may use judicial process to contest the seizure warrant and to seek mitigation or remission if a conviction is secured.153 Pursuant to Section 362(b)(4), a forfeiture action that is an exercise of the governments police power and is not stayed by the bankruptcy (and pre-empts state homestead exemptions).154 3.12 Administrative Claim If a debtor or trustee expends money to protect or dispose of collateral subject to the lien and the expenditure benefits the lienholder, the debtor or trustee may recover expenses from the lienholder.155 4.0 INJUNCTION 4.1 Discretionary Injunctions The court may enter a discretionary injunction whenever advisable.156 4.2 The Automatic Stay The automatic stay begins at the filing of the bankruptcy proceeding.157 4.2.1. Termination of Agreements The stay prohibits termination of leases or contracts. 4.2.2. Foreclosure and Filing of Documents The stay prohibits foreclosure of liens against property of the estate or preexisting liens or claims against property of the debtor. The stay also may prohibit acts in connection with the foreclosure, such as recordation of the sheriff's deed after foreclosure. The majority view is that the stay prohibits acts such as filing a foreclosure deed after the bankruptcy commences.158 According to one view, the rights of a purchaser at foreclosure are avoidable under Section 544 if the foreclosure deed is filed after the bankruptcy.159 According to another view, the foreclosure
150 151

3.10

Matter of Tvorek, 107 B.R. 666 (Bankr. D. Neb. 1989); contra In re Hudson, 103 B.R. 781 (Bankr. N.D. Miss. 1989) In re Smith, 201 B.R. 267 (D. Nev. 1996) (holds that Chapter 7 estate will include such property); contra In re K&M Printing, Inc., 210 B.R. 583 (Bankr. Ariz. 1997) (absent express provision in plan, property revested in debtor by plan will not be in Chapter 7 estate upon conversion) 152 Sec. 348(f) (Bankruptcy Reform Act of 1994) 153 In re Thena, Inc., 190 B.R. 407 (D. Or. 1995) 154 In re Brewer, 209 B.R. 575 (Bankr. S.D. Fla. 1996) 155 In re Guterl Special Steel Corp., 198 B.R. 128 (Bankr. W.D. Pa., 1996); 11 U.S.C. sec. 506 156 Sec. 105; In re Cardinal Industries, Inc., 105 B.R. 834 (Bankr. S.D. Ohio 1989) (discretionary injunction may be available in debtor partner's bankruptcy case to enjoin foreclosure of lien on partnership land) 157 Sec. 362 158 In re Penfil, 40 B.R. 474, 11 C.B.C.2d 178 (Bankr. E.D. Mich. 1984); In re Munsey Corp., 10 B.R. 864, 7 B.C.D. 674 (Bankr. E.D. Pa. 1981); In re Flowers, 94 B.R. 3 (Bankr. D.D.C. 1988) (stay enjoins delivery of trustee's deed and recordation of deed; appropriate remedy is motion to lift stay); In re Engles, 193 B.R. 23 (Bankr. S.D. Cal. 1996) (stay prevented execution and recording of trustees deed pursuant to foreclosure sale conducted four minutes before the bankruptcy; however, under current state law the unrecorded sale is not avoidable by an innocent purchaser, so that the interest of the estate in the land was of no value and a lift of stay is appropriate), criticized in In re Garner, 208 B.R. 698, 1997 Bankr. LEXIS 709, 30 Bankr. Ct. Dec. (CRR) 1101 (Bankr. N.D. Cal. 1997), and criticized in In re Stork, 212 B.R. 970, 1997 Bankr. LEXI00S 1507; In re DeSouza, 135 B.R. 793 (Bankr. D. Md. 1992) (court ordered lifting of stay to obtain and record foreclosure deed); In re Smith, 155 B.R. 145 (Bankr. S.D. W.Va. 1993); In re Jewett, 146 B.R. 250 (B.A.P. 9th Cir. 1992) (recordation of trustee's deed after filing of bankruptcy reflecting a prebankruptcy sale violates the stay; the debtor could have recorded a deed that had priority over the unrecorded trustee's deed); In re Southern Oregon Mortgage, Inc., 143 B.R. 569 (Bankr. D. Or. 1992) (stay prevents execution of tax collector's deed where right of redemption will continue until the deed is executed); contra, In re Upham, 48 B.R. 695 (W.D.N.Y. 1985) (filing of Deed concerning pre-bankruptcy foreclosure); In re Okla. Assoc., 93 B.R. 424 (Bankr. W.D. Pa. 1988) (sheriff's sale confirmed pre-petition divested debtor of all interest in land though Sheriff's Deed was not filed until after petition filed); In re Sienkiewicz, 95 B.R. 139 (Bankr. 9th Cir. 1988) reversed on other grounds 900 F.2d 206 (9th Cir. 1990) (filing of tax deed after commencement of bankruptcy proceeding did not violate stay where sale occurred before petition was filed and no right of redemption continued); Ferrell v Southern Financial, 179 B.R. 530 (W.D.Tenn. 1994) (The foreclosure was completed by auction, not by recording of deed, so that debtor had no rights in land); criticized In re Johnson, 213 B.R. 134, 1997 Bankr. LEXIS 1509 (Bankr. W.D. Tenn. 1997), rehg granted, 215 B.R. 988, 1997 Bankr. LEXIS 1944 (Bankr. W.D. Tenn. 1997)); In re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997) (under California law, recordation of trustees deed within 15 days relates back to time of sale; such recordation is thus allowed under Section 546(b) as a matter that may be perfected post-petition)

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sale is not voidable because of the post-petition recordation of a trustee's deed, since the public records reflected a default and reschedule of sale. These facts were sufficient notice of the prebankruptcy sale.160 Refiling of a mortgage executed by the debtor to correct the legal description violates the automatic stay.161 Recordation of a mortgage assignment from the debtor violates the automatic stay, even though a state law does not require recordation of the assignment.162 According to one view, the stay will not prevent a foreclosure proceeding against a landlord of the debtor-tenant if the foreclosure will not extinguish the lease and if the debtor is not joined in the foreclosure action.163 The stay involving a lessee's estate will not prevent foreclosure of a mortgage if the lender subordinates to the lease.164 The stay will not prevent foreclosure of a mortgage granted by the debtor to secure obligations of the debtor if the debtor conveyed the land prior to the bankruptcy case.165 Company Policy: Require lift of stay to authorize the filing during the bankruptcy of a sheriff's or trustee's deed executed before the bankruptcy. 4.2.3. Notice of Default or Postponement Letters of default on leases sent by landlords to debtors after the filing of the bankruptcy are violations of the automatic stay. Arguably, the stay extends to foreclosure notices sent to the debtor in accordance with the law where the debtor no longer owns the land.166 At least one case holds (in language which is arguably dictum) that the automatic stay prevents any attempt to collect a debt which is the debt of a debtor even if the attempt to collect is by foreclosure of real property not owned by the debtor (who remains in possession of the property).167 However, the better view is that the automatic stay does not prevent foreclosure of a deed of trust where the land is not owned by the debtor, but the debtor is liable on the debt.168 A foreclosure after dismissal of the bankruptcy case does not violate the stay if the sale proceeds on the date scheduled prior to the bankruptcy.169 Posting of notices of postponement of a foreclosure sale, including date of the new sale, does not violate the stay if the original notice is posted prior to the bankruptcy, even though the notices of postponement are posted during the bankruptcy.170 A postponement of foreclosure after confirmation of a plan dealing with the mortgage does not violate the automatic stay; the confirmed plan does not remove the creditors ability to rely on prepetition default for a possible post confirmation foreclosure.171 However, if the foreclosure sale has been orally continued, due process may require that the debtor be given actual notice prior to a trustee sale scheduled after stay relief or dismissal of the bankruptcy case.172 4.2.4. Tolling of Redemption The majority of cases state that the automatic stay (Section 362) does not toll the redemption period except as provided in Section 108(b). Section 108(b) tolls redemption for the longer of the redemption period or 60 days after the filing of the bankruptcy.173 However, there are differing views on whether Section 108(b) applies to redemptions:
159

In re Glenwood Associates, 134 B.R. 1012 (Bankr. D.R.I. 1991); In re Williams, 124 B.R. 311 (Bankr. C.D. Cal. 1991) (a foreclosure sale not perfected by recordation of the trustee's deed prior to filing of bankruptcy and related bankruptcy notice may be set aside as a voidable post-petition transaction under Section 549); In re Konowitz, 905 F.2d 55 (4th Cir. 1990) (foreclosure sale not perfected by ratification of sale and recordation of deed may be avoided under Section 549). 160 In re Young, 156 B.R. 282 (Bankr. D. Idaho 1993); See also In re Engles, 193 B.R. 23 (Bankr. S.D. Cal. 1996) (foreclosure sale is not avoidable); criticized in In re Garner, 208 B.R. 698, 1997 Bankr. LEXIS 709, (Bankr. N.D. Cal. 1997) and criticized in In re Stork, 212 B.R. 970, 1997 Bankr. LEXIS 1507 (Bankr. N.D. Cal. 1997) 161 James v. Washington Mut. Sav. Bank, 871 F.2d 89 (9th Cir. 1989) 162 In re Stockbridge Funding Corp., 145 B.R. 797 (Bankr. S.D. N.Y. 1992) 163 In re Juneau's Builders Center, Inc., 57 B.R. 254, 14 C.B.C.2d 540 (Bankr. M.D. La. 1986); contra Valley Transit Mix of Ruidoso, Inc. v. Miller, 928 F.2d 354 (10th Cir. 1991) 164 In re Farb Investments Interest, Ltd., 155 B.R. 442 (Bankr. S.D. Tex. 1993) (subordination by lender may be unilateral) 165 Matter of Pestritto, 108 B.R. 850 (Bankr. S.D. Ga. 1989) 166 In re The Hub of Military Circle, Inc., 13 B.R. 288, 4 C.B.C.2d 1368 (Bankr. E.D. Va. 1981) 167 In re Barksdale, 15 B.R. 731, 5 C.B.C.2d 1163 (Bankr. W.D. Va. 1981) 168 In re Geris, 973 F.2d 318 (4th Cir. 1992) 169 In re Anderson, 195 B.R. 87 (9th Cir. B.A.P. 1996) 170 In re Roach, 660 F.2d 1316, 8 B.C.D. 489, 5 C.B.C.2d 680 (9th Cir. 1981); Zeoli v. RIHT Mortgage Corp., 148 B.R. 698 (D. NH 1993) (postponement is not prohibited act in continuation of an action against the debtor); BAM Investments, Inc. v. Roberts, 172 Ariz. 602, 838 P.2d 1363 (1992) 171 In re Peters, 101 F.3d 618 (9th Cir. 1996); In re Barry, 201 B.R. 820 (C.D. Cal. 1996); contra In re Willman, 192 B.R. 207 (Bankr. D. Ariz. 1996); criticized in Barry v. BA Properties (In re Barry), 201 B.R. 820, 1996 U.S. Dist. LEXIS 15923 (C.D. Cal 1996) 172 In re Duncan, 211 B.R. 42 (Bankr. D. Ariz. 1997) 173 In re Murphy, 22 B.R. 663, 9 B.C.D. 718, 7 C.B.C.2d 74 (Bankr. D. Colo. 1982)

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a. b.

The Majority View: Section 108(b) applies:174 The Minority View: Section 362 applies:175

Company Policy: Assume that the preforeclosure and post-foreclosure redemption and reinstatement time limits are tolled by section 362 during the period of the stay. Do not waive requirements of continued notice or redemption rights at an earlier time until the latter of (a) 30 days after the stay is lifter or (b) the time limits of state law. 4.2.5. Mechanic's Liens and Relation Back The automatic stay does not prevent a mechanic's lien claimant from filing a lien claim after the filing of the bankruptcy if the lien claim and priority relate back prior to the bankruptcy.176 If the lien claimant must file suit to perfect the lien, the claimant can file a notice in accordance with Section 546(b).177 The filing of a bankruptcy by a general contractor stays enforcement of a mechanic's lien foreclosure, even though the contractor is not the owner.178 An environmental superlien filed after the commencement of a bankruptcy case relates back to a time prior to the filing; consequently, the filing did not violate the automatic stay.179 Company Policy: Do not rely on a filing of a bankruptcy to ignore possible unfiled mechanic's liens for recent construction. 4.2.6.
174

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In re Murphy, 22 B.R. 663, 9 B.C.D. 718, 7 C.B.C.2d 74 (Bankr. D. Colo. 1982) (The court holds that the Section 362 stay does not toll Colorado statutory right of redemption period after foreclosure.); In re Eagles, 36 B.R. 97 (Bankr. 9th Cir. 1984) (Section 362 does not extend or toll California reinstatement period at least as to a junior nondebtor encumbrancer.); Johnson v. First National Bank of Montevideo, Minnesota, 719 F.2d 270, 11 B.C.D. 290, 9 C.B.C.2d 579 (8th Cir. 1983), cert. denied, 104 S. Ct. 1015 (holding that the only stay or tolling of statutory redemption period after foreclosure is under Section 108(b), extending redemption up to 60 days, and that the court could not issue an injunction to further extend the redemption, and that Section 362 only prevents affirmative action); accord In re Cucumber Creek Development Inc., 33 B.R. 820, 9 C.B.C.2d 639 (D. Colo. 1983) (Colorado post-foreclosure redemption involved; court noted that required time for preforeclosure notice is not tolled); In re Rutterbush, 34 B.R. 101, 9 C.B.C.2d 1272 (E.D. Mich. 1982) (holding that Section 362 and the discretionary Section 105 injunction are not applicable to extend postforeclosure redemption period in Michigan, and that only Section 108(b) tolling period applies); In re Young, 48 B.R. 678, 12 B.C.D. 1263, 12 C.B.C.2d 983 (Bankr. E.D. Mich. 1985); In re Markee, 31 B.R. 429, 8 C.B.C.2d 1331 (Bankr. D. Idaho 1983) (holding that Section 362 did not extend redemption period in Idaho and that only 60-day tolling period of Section 108(b) applied); In re Smith, 43 B.R. 313, 11 C.B.C.2d 1051 (Bankr. N.D. Ill. 1984) (holding that Section 362 stay did not extend redemption period in Illinois and concluding that a court has power to confirm a plan before the redemption period has ended, with the plan providing for redemption within the term of the plan and within a reasonable time); In re Flores, 55 B.R. 210 (D.N.J. 1985) (10-day opportunity to cure and redeem from a sheriff's sale under New Jersey law tolled only by Section 108(b)); In re Kjeldahl, 52 B.R. 916 (D. Minn. 1985) (Minnesota redemption period on judicial foreclosure only tolled by Section 108(b); automatic stay and discretionary injunction (Section 105) are not applicable); In re Benge Corp., 54 B.R. 226 (Bankr. D. Haw. 1985) (option extended only by section 108(b) for 60 days, at which time the Hawaii option terminates); In re Tynan, 773 F.2d 177, 13 C.B.C. 655 (7th Cir. 1985) (the redemption period in Illinois was extended only by Section 108(b) for up to 60 days where filed on the last day for redemption; the automatic stay is irrelevant and the debtor cannot cure as part of the plan under Section 1322(b)(5)); In re Dulan, 52 B.R. 739, 13 C.B.C.2d 737 (Bankr. C.D. Cal. 1985) (option to extend California lease is extended only by section 108(b)); In re Santa Fe Development Mortgage Corp., 16 B.R. 165, 8 B.C.D. 704, 5 C.B.C.2d 1186 (Bankr. 9th Cir. 1981) (holds that Section 108(b) extends time for escrow and contract closing); In re Pridham, 31 B.R. 497 (Bankr. E.D. Cal. 1983) (holding that Section 362 stay does not toll the running of three-month reinstatement period following recordation of notice of default in California, and that only the tolling provisions of Section 108(b) apply); In re Maanum, 828 F.2d 459 (8th Cir. 1987) (only Section 108 applies to period to cure cancellation of a contract for deed); In re Carver, 17 C.B.C.2d 771, 828 F.2d 463 (8th Cir. 1987) (Section 362 does not toll a judicially decreed redemption period in South Dakota where the only subsequent affirmative act required was a clerk's certification); In re DiCello, 16 B.C.D. 1203, 80 B.R. 769 (Bankr. E.D.N.C. 1987) (the court held that 60-day period of Section 108 was not controlling since the 10-day upset bid period in North Carolina was stayed); In re Farmer, 81 B.R. 857, 17 B.C.D. 127 (E.D. Pa. 1988) (Pennsylvania redemption period not tolled); DeMers v. Federal Land Bank of Omaha, 89 B.R. 48 (D.S.D. 1987) (Section 108 provides the only applicable tolling provision for redemption period on prebankruptcy foreclosure sale in South Dakota). In re Glenn, 760 F.2d 1428 (6th Cir. 1985); In re Cooke, 127 B.R. 784 (Bankr. W.D. N.C. 1991) (Section 362 does not toll redemption under federal tax lien sale); Matter of Delex Management, 155 B.R. 161 (Bankr. W.D. Mich. 1993); FDIC v. Howard Shoreline Assoc., 183 B.R. 33 (D. Conn. 1995) affd without opinion, approved, adopted, 1995 U.S. Dist. LEXIS 16139 (D. Conn. May 25, 1995) (sec. 362 does not toll debtors period of redemption) 175 In re St. Amant, 41 B.R. 156, 11 B.C.D. 1285, 10 C.B.C.2d 1268 (Bankr. D. Conn. 1984) (holding that Section 362 does toll post-foreclosure redemption in Connecticut and Section 108 is not applicable); In re Sapphire Investments, 19 B.R. 492, 9 B.C.D. 217, 6 C.B.C.2d 639 (Bankr. D. Ariz. 1982) (holding that Section 362 stay tolls post-foreclosure redemption in Arizona); In re G-N Partners, 48 B.R. 462, 12 B.C.D. 1258 (Bankr. D. Minn. 1985) (bankruptcy court can extend an option for a period in excess of the 60 days provided under Section 108(b); it extends the option for a period of 60 days after its order in the Minnesota transactions); In re Carr, 52 B.R. 250, 13 C.B.C.2d 640 (Bankr. E.D. Mich. 1985) (automatic stay prevents expiration of the Michigan redemption period after land contract forfeiture since equitable title has not yet passed); In re McCallen, 49 B.R. 948, 13 C.B.C.2d 39 (Bankr. D. Or. 1985) (108(b) does not apply to redemption of land sale contracts; only 365 applies) 176 Secs. 546(b), 362(b)(3); In re Fiorillo & Co., 19 B.R. 21, 8 B.C.D. 1169, 6 C.B.C.2d 607 (Bankr. S.D.N.Y. 1982); In re WWG Industries, Inc., 772 F.2d 810, 13 C.B.C.2d 1053 (11th Cir. 1985), In re KDR Building Specialties, Inc., 76 B.R. 778 (Bankr. S.D. Cal. 1987) (stop notices); In re Poloron Products of Bloomsburg, Inc., 76 B.R. 383 (Bankr. M.D. Pa. 1987); In re Brittain, 106 B.R. 665 (Bankr. D. Mont. 1989); In re APC Construction, Inc., 112 B.R. 89 (Bankr. D. Vt. 1990) 177 In re Coated Sales, Inc., 124 B.R. 17 (Bankr. S.D. N.Y. 1991); rev'd, 147 B.R. 842 (S.D. N.Y. 1992) (filing of a secured claim with the bankruptcy court provides sufficient notice to perfect such lien where state law requires commencement of an action) 178 In re Richardson Builders, Inc., 123 B.R. 736 (Bankr. W.D. Va. 1990) (Section 108 then tolls any action) 179 Matter of Perona Bros., Inc., 186 B.R. 833 (D. N.J. 1995)

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The stay continues as to property of the estate until the case is closed, or the stay is lifted, or the property is no longer in the estate (but stay then possibly continues as to property of debtor, if land exempted or abandoned). Property of the estate may include a claim that the conveyance was a fraudulent transfer.180 4.2.7. Lack of Notice The stay is effective regardless of whether notice of the bankruptcy is given to the creditors.181 4.2.8. Innocent Purchasers If the debtor transfers property by sale or if a foreclosure occurs and a good faith purchaser (not the creditor) buys at the foreclosure, then the trustee or debtor-in-possession may not avoid the sale or foreclosure if made to the bona fide purchaser without knowledge of the case for present fair equivalent value unless a copy or notice of the petition is filed in the office of the county where the land is located before the transfer is perfected by recording.182 Company Policy: Do not rely upon this innocent purchaser protection if we are aware of a bankruptcy. Require a determination that the transfer was effective by adversary proceeding or by other satisfactory settlement. 4.2.9. Subordinate Liens A judicial or nonjudicial foreclosure by a senior lienholder without court permission is prohibited due to the stay if a junior lienholder has filed a bankruptcy.183 Many do not agree with this view; another view is that the automatic stay does not prohibit a senior lienholder from nonjudicially foreclosing if the junior lienholder has filed a bankruptcy. A judicial foreclosure that joined the junior lienholder would clearly be prohibited by the stay.184 One pre-Bankruptcy Code case said that a debtor's lien was property of the estate; arguably this principle would extend the stay to any foreclosure extinguishing the lien.185 Company Policy: If a nonjudicial foreclosure would extinguish a junior lien of a debtor or redemption right of the debtor-junior lienholder, require a lifting of the stay in the junior lienholder's bankruptcy. 4.2.10. Partner The bankruptcy of a general partner does not stay a foreclosure of property owned by the However, the partner could possibly secure a discretionary injunction under Section 105. 4.2.11. Property of Debtor

partnership.186

180 181

In re Ciccone, 171 B.R. 4 (Bankr. D.R.I. 1994) (foreclosure of fraudulently transferred land was stayed) In re Holman, 92 B.R. 764 (Bankr. S.D. Ohio 1988) 182 Section 549(c); In re Penfil, 40 B.R. 474, 11 C.B.C.2d 178 (Bankr. E.D. Mich. 1984) (a mortgagee buying at its own foreclosure will not be protected under Section 549(c) as a good faith purchaser for present fair equivalent value since it simply satisfied antecedent debt) 183 In re Capital Mortgage & Loan, Inc., 35 B.R. 967, 9 C.B.C.2d 1287 (Bankr. E.D. Cal. 1983); In re Golden Plan of California, Inc., 39 B.R. 551 (Bankr. E.D. Cal. 1984); In re Cardinal Industries, Inc., 105 B.R. 834 (Bankr. S.D. Ohio 1989) (stay applied even though debtor's mortgage was unrecorded where the unrecorded mortgage was effective under state law between mortgagor and mortgagee); In re Ramirez, 183 B.R. 583 (9th Cir. B.A.P. 1995) (at page 587: The automatic stay of Section 362 protects property of the estate in which the debtor has a legal, equitable, or possessory interest ... Legislative history indicates that property of the estate includes charges on property, such as liens held by the debtor on property of a third party, or beneficial rights and interest that the debtor may have in property of another.); In re Bibo, Inc., 200 B.R. 348 (9th Cir. BAP 1996) (stay prevents nonjudicial foreclosure by senior lienholder) 184 2 Collier on Bankruptcy 362.04(3) (15th Ed. 1986); In re Burgess, 163 B.R. 726 (Bankr. M.D. Pa. 1993) (stay applies to property of the debtor after confirmation of Chapter 13 plan and before closing, dismissal, or discharge as to lien securing prior claim). 185 Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47 (2d Cir. 1976), cert. denied, 429 U.S. 1093, 97 S.Ct. 1107, 51 L. Ed. 2d 540 (1977) 186 In re Minton Group, Inc., 46 B.R. 222, 12 B.C.D. 811, 11 C.B.C.2d 1442 (S.D.N.Y. 1985); In re Aboussie Brothers Construction Co., 8 B.R. 302, 7 B.C.D. 309, 3 C.B.C.2d 684 (E.D. Mo. 1981); In re Cardinal Industries, Inc., 105 B.R. 834 (Bankr. S.D. Ohio 1989); In re Normandin, 106 B.R. 14 (Bankr. D. Mass. 1989) (same result obtained if stockholder is debtor and foreclosure of corporate asset occurs)

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The stay does not prevent foreclosure of a preexisting lien against property of the debtor (which is not property of the estate as for example where exempted or abandoned) after a discharge is granted or denied.187 Section 524(a)(2) was amended by the Amendment Act in 1984 to delete the language "or from property of the debtor" which previously raised questions as to whether a lien could be foreclosed on any property of the debtor after the discharge. It is now clear that, even if personal liability is discharged, the lien remains effective unless otherwise cancelled in the bankruptcy.188 The automatic stay prevents a foreclosure of a preexisting lien or claim against property of the debtor (including exempt or abandoned property) until the case is closed or dismissed, or until the discharge is granted or denied.189 Therefore, the creditor should secure relief from the stay by court order authorizing foreclosure on property of the debtor prior to the discharge.190 For example, according to one view (not universally accepted) where the property was abandoned without a lifting of the stay, the second lienholder could attack the foreclosure by the first lienholder prior to discharge as being violative of the stay; the junior lienholder has standing to attack the foreclosure.191 The stay applies to property of the debtor in connection with prebankruptcy mortgage debt in a Chapter 12 or Chapter 13 proceeding after plan confirmation until the discharge is granted or denied.192 The automatic stay no longer applies to debt for support collected from property of the debtor once the debt is found to be nondischargeable.193 However, the stay does not extend to a post-petition claim (e.g., condominium assessment and lien) against property revested in the Chapter 13 debtor by confirmation of a plan.194 There is no automatic stay preventing foreclosure of a mortgage executed on property acquired by a Chapter 13 debtor after confirmation of the plan and with approval of the trustee, since the property was not estate property. Although some cases hold that the property remains subject to the stay after confirmation of the plan, the competing policy focuses upon enabling the debtor to perform throughout the term of the plan without post-petition creditors depriving the debtor of the ability to perform by seizing property or wages. That competing policy, however, is implemented by the requirement that debtors obtain permission of the Chapter 13 trustee before any credit or loan is obtained... Additionally, if debtor wishes the ... protection of the automatic stay following confirmation, that protection may be obtained by ... so providing in the plan or confirmation order ...195 Transfer of property to a spouse pursuant to a divorce decree violated the stay.196 4.2.12. Motion to Lift or Annul Stay It is possible for a creditor to file a motion in accordance with Section 362(d) to lift or annul the automatic stay. The creditor need not file an adversary proceeding. The Code and Bankruptcy Rules do not require notice to unsecured creditors of a motion to lift stay.197 Local rules often require that parties with inferior liens on the property be given notice but the Code and Bankruptcy Rules promulgated by the Supreme Court do not require notice to inferior lienholders.198 If the court does not act within 30 days after the request for relief is filed, then the stay is terminated with respect to the movant unless the court extends the time for a hearing and orders the stay continued in the interim. The final hearing on a motion to lift stay must be concluded not later than 30 days after the conclusion of the preliminary hearing.199 The Bankruptcy Reform Act of 1994 provides expedited lift of the stay in a single asset real estate case. Such case involves land having noncontingent liquidated secured debt of not more than $4,000,000.200 A
187

Secs. 362(c)(2)(C), 524(a)(2) See Section 506(d); In re Landmark, 48 B.R. 626 (Bankr. D. Minn. 1985) 189 Sec. 362(a)(5), 362(c)(2); 2 Collier on Bankruptcy 362.04(5) (15th ed. 1986); In re Burgess, 163 B.R. 726 (Bankr. M.D. Pa. 1993) (stay applies to property of the debtor after confirmation of the Chapter 13 plan and before closing, dismissal, or discharge as to lien securing prior claim) 190 Sec. 362(a)(5) 191 In re Motley, 10 B.R. 141, 7 B.C.D. 477, 4 C.B.C.2d 36 (Bankr. M.D. Ga. 1981); see also In re Green, 15 B.R. 75, 8 B.C.D. 770, 5 C.B.C.2d 733 (Bankr. S.D. Ohio 1981) (involving an abandoned car); In re King, 15 B.R. 548, 5 C.B.C.2d 754 (Bankr. M.D. Pa. 1981) (involving exempted property, wherein the court held that the stay as to foreclosure ended on the discharge); In re Gassaway, 28 B.R. 842 (Bankr. N.D. Minn. 1983) (foreclosure of lien after abandonment of land violated stay); but see In re D'Annies Restaurant, Inc., 15 B.R. 828, 5 C.B.C.2d 992 (Bankr. D. Minn. 1981) (holding that stay did not extend to property "abandoned to creditor" and was intended to apply only to exempt property or rights of redemption); In re Watson, 78 B.R. 232, 17 C.B.C.2d 840 (Bankr. 9th Cir. 1987) (enforcement of debt held to be nondischargeable against debtor's property prior to general discharge does not violate stay) 192 In re Vanasen, 81 B.R. 59, 18 C.B.C.2d 530 (Bankr. D. Or. 1987); In re Littre, 105 B.R. 905 (Bankr. N.D. Ind. 1989) 193 In re Newman, 196 B.R. 700 (Bankr. S.D. NY 1996) 194 In re Walker, 84 B.R. 888, 18 C.B.C.2d 950 (Bankr. D.D.C. 1988); Shell Oil Co. v Capital Financial Services, 170 B.R. 903 (S.D. Tex. 1994) (stay did not extend to I.R.S. lien notice for later assessments after the plan confirmation and revesting in the debtor of property) 195 In re Toth, 193 B.R. 992, 997 (Bankr. N.D. Ga. 1996) 196 Briglevich v. Anderson, 147 B.R. 1015 (Bankr. N.D. Ga. 1992) 197 In re Chancellor, 78 B.R. 529, 17 C.B.C.2d 1013 (Bankr. N.D. Ill. 1987) 198 In re Markowitz Building Co., 84 B.R. 484 (Bank. N.D. Ohio 1988) 199 Sec. 362(e) (Bankruptcy Reform Act of 1994) 200 Sec. 101(51B) (Bankruptcy Reform Act of 1994)
188

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creditor may secure relief from the stay unless the debtor files a plan with a reasonable possibility of confirmation within 90 days after the case commences or commences monthly payments to secured creditors.201 Although local rules may require that an objection and request for hearing be filed within a much shorter deadline (e.g., 10 days), you should verify that no objection or request for hearing is filed within 30 days. The stay continues for at least 30 days unless ordered otherwise, and the court may have authority under the local rules to extend the deadline for objections. Company Policy: If more than 30 days have passed since the filing or delivery of notice of the motion for relief from the stay, you may rely upon a certified copy of the motion, a current docket sheet, a certificate of service and a clerk's certificate (or credible counsel's letter) that no objection or request for hearing was filed. If the trustee or debtor-in-possession agrees to lift the stay, Rule 4001(d) provides that objections may be filed within 15 days of the mailing of notice. If no objection is filed, the court may enter an order approving or disapproving the agreement without conducting a hearing. It is possible to annul a stay so that a prior foreclosure in violation of the stay can be ratified.202 The order annulling stay must be explicit; a lift of stay does not validate prior acts in violation of the stay.203 Company Policy: Do not rely upon a motion annulling the stay unless you secure a court order. One case (not universally accepted) has held that once relief from the stay has been granted, the mortgagee is entitled to foreclose. The stay is not reimposed by filing a new petition, the effect of the relief is res judicata even if granted by default.204 It is the view of some that relief from the stay after confirmation of the Chapter 13 plan is inappropriate, and that the only relief available for substantial default to a creditor is dismissal of the case.205 We will rely upon a lifting of the stay if the appropriate procedure is followed and the order to lift stay is no longer appealable. Lifting of the stay does not remove property from the estate. The property remains in the estate until removed by judicial process or abandonment. 206 A lift of the stay to foreclose does not lift the stay to confirm a foreclosure.207 4.2.13. Types of Creditors (Governmental Charges and Taxes) The stay provided by Section 362 applies to an "entity." The term "entity" includes a governmental unit. Sec. 101(14).208 The limited exemptions to the stay include commencement or continuation of criminal proceedings against a debtor and proceedings by a governmental unit to enforce its regulatory power.209 The stay will prohibit a levy upon property of the estate for state taxes if no leave of the bankruptcy court has been given.210 According to one view, under prior law, post-petition real estate taxes, as to which prior liens are automatically perfected, were secured by a priority lien on estate property, and the stay did not prevent the attachment of the lien.211 According to a second view, real estate tax liens which attached after the filing were ineffective.212 Even
201 202

Sec. 362(d)(3) (Bankruptcy Reform Act of 1994) Algeran, Inc. v. Advance Ross Corp., 759 F.2d 1421, 13 C.B.C.2d 50 (9th Cir. 1985); In re Clark, 79 B.R. 723, 16 B.C.D. 963 (Bankr. E.D. Ohio 1987); In re Behr, 78 B.R. 447 (Bankr. D.S.C. 1987) 203 Schulz v. Holmes Transportation, Inc., 149 B.R. 251 (D. Mass. 1993), related proceeding, Schultz v. Liberty Mut. Ins. Co., 940 F. Supp. 27, 1996 U.S. Dist. LEXIS 14355 (d. Mass. 1996) 204 In re Bystrek, 17 B.R. 894, 6 C.B.C.2d 1 (Bankr. E.D. Pa. 1982); In re Maralak, Ltd., 104 B.R. 446 (Bankr. M.D. Fla. 1989); contra In re Nichols, 134 B.R. 236 (Bankr. S.D. Ohio 1991) 205 In re Broman, 82 B.R. 581, 18 C.B.C.2d 307 (Bankr. D. Colo. 1988) 206 In re San Felipe Voss, Ltd., 115 B.R. 526 (S.D. Tex. 1990) 207 Matter of Russell Corp., 156 B.R. 347 (Bankr. N.D. Ga. 1993) 208 In re Sandmar Corp., 12 B.R. 910, 7 B.C.D. 1327, 4 C.B.C.2d 1263 (Bankr. D.N.M. 1981) 209 Sec. 362(b)(1), (4), (5) 210 In re Nashville White Trucks, Inc., 731 F.2d 376, 11 B.C.D. 1090, 10 C.B.C.2d 547 (6th Cir. 1984) 211 Maryland National Bank v. Mayor and City Council of Baltimore, 723 F.2d 1138, 11 B.C.D. 899, 9 C.B.C.2d 1114 (4th Cir. 1983); In re Klefstad, 95 B.R. 622 (Bankr. W.D. Wis. 1988); In re Martin, 106 B.R. 334 (Bankr. D. Me. 1989); In re Thurman, 163 B.R. 95 (Bankr. W.D. Tex. 1994); In re D. Papagni Fruit Co., 132 B.R. 42 (Bankr. E.D. Cal. 1991) (as "ever present", the liens are not stayed) 212 Makoroff v. City of Lockport, 916 F.2d 890 (3d Cir. 1990) cert. den. 111 S.Ct. 1640 (1991); In re Carlisle Court, Inc., 36 B.R. 209, 10 C.B.C.2d 77 (Bankr. D.C. 1983); In re Parr Meadows Racing Assoc., 880 F.2d 1540 (2nd Cir. 1989) cert. den. 110 S.Ct. 869 (1990) (stay prevents attachment of tax liens for years subsequent to filing of bankruptcy); Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp., 884 F.2d 80 (3d Cir. 1989); Matter of Isley, 104 B.R. 673 (Bankr. D.N.J. 1989); In re Erie Hilton Joint Venture, 125 B.R. 140 (Bankr. W.D. Pa. 1991) (however, once the stay was terminated when the property was no longer property of the estate, the lien for taxes automatically attached); In re Glasply Marine Industries, Inc., 971 F.2d 391 (9th Cir. 1992) (stay prevents attachment of post petition tax liens); In re Building Technologies Corp., 167 B.R. 853 (Bankr. S.D. Ohio 1994); In re Carolina Triangle Ltd. Partnership, 166 B.R. 411 (Bankr. 9th Cir. B.A.P. 1994) (automatic stay prevents tax lien from attaching to property prior to abandonment)

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if the stay prevented attachment of the tax lien during a bankruptcy, the tax lien automatically attached upon termination of the stay.213 Pursuant to the Bankruptcy Reform Act of 1994, the stay does not prevent the creation or perfection of an ad valorem property tax lien by the District of Columbia or a political subdivision of a state, if the tax comes due after the filing of the bankruptcy.214 The stay does not apply to a tax assessment or to a tax lien by reason of the assessment if the tax is not discharged and the property is transferred out of the estate to, or otherwise revests in, the debtor.215 The post-petition filing of a municipal tax lien notice violates the stay.216 The Internal Revenue Service must seek relief from the stay before it can sell estate property upon which it had previously levied.217 According to one case, the automatic stay does not prevent recordation of a state environmental "superlien" claim under Mass. Gen. Laws. Ann. Ch. 21E, 13 (West Supp. 1994) in Massachusetts, because of the provisions of 546(b): state law is generally applicable to cleanup and does not single out bankruptcy debtors; state law permits perfection by recording the claim; perfection is effective under state law against entities acquiring rights in the land before date of perfection; and 546(b) does not require that the lien "relate back" to a date before the bankruptcy, only that the lien be effective against third parties with prior rights in the land.218 Fraudulent transfer actions brought in another court by the FDIC under the Comprehensive Crime Control Act of 1990 violate the automatic stay.219 4.2.14. Police Powers Section 362(b)(4) excepts from the stay actions by a governmental unit to enforce its police or regulatory power. This exception is applicable to a receivership brought by the state to protect the welfare of a nursing home's residents from debtor's improvident financial practices and not merely to protect the state's pecuniary interest.220 An action by a state agency to require the debtor to perform cleanup of an environmentally hazardous coal mining site is properly brought to prevent future harm and is not stayed even though it requires expenditure of money.221 The state may seek and secure an injunction against environmental violations and an entry, but not enforcement, of a money judgment for damages from the violation.222 Likewise, the United States may seek a money judgment for recovery of costs expended in cleanup of a hazardous waste site, but may not enforce the judgment.223 Furthermore, the trustee may not abandon burdensome contaminated property without adequate protection of the public health and safety.224 The stay does not apply to a civil forfeiture action; the forfeiture action is excepted from the stay as an enforcement of police power.225 Company Policy: Do not insure a forfeiture if an owner has filed a bankruptcy proceeding unless you secure approval from our underwriting personnel. 4.2.15. Tolling of Claims by Debtor The Section 362 stay will not toll the statute of limitations on a mechanic's lien claim held by the debtor; rather, the debtor will have the longer of the applicable state limitation period, or (if the claim was not barred at time the bankruptcy was filed) two years after the voluntary bankruptcy was filed to sue.226 Actions, such as foreclosure of liens against a debtor, may be filed within the period allowed by state law, or within 30 days after notice of termination of the stay as to the debtor, whichever is later.227
213

In re McConnaughey, 147 B.R. 433 (Bankr. S.D. Ohio 1992) (lien attached upon dismissal); Shell Oil Co. v Capital Financial Services, 170 B.R. 903 (S.D. Tex. 1994) (dismissal voids stay from its inception) 214 Sec. 362(b)(18). (Bankruptcy Reform Act of 1994) 215 Sec. 362(b)(9) (Bankruptcy Reform Act of 1994) 216 In re Wallingford's Fruit House, 30 B.R. 654, 8 C.B.C.2d 1138 (Bankr. D. Me. 1983) 217 In re Avery Health Center, Inc., 8 B.R. 1016, 7 B.C.D. 210, 3 C.B.C.2d 728 (W.D.N.Y. 1981) 218 In re Microfab, Inc., 105 B.R. 152 (Bankr. D. Mass. 1989) 219 Matter of Colonial Realty Co., 134 B.R. 1017 (Bankr. D. Conn. 1991), aff'd, In re Colonial Realty Co., 980 F.2d 125 (2nd Cir. 1992) 220 In re Lawson Burich Associates, Inc., 31 B.R. 604, 9 C.B.C.2d 676 (S.D.N.Y. 1982) 221 Penn Terra Ltd. v. Department of Environmental Resources, 733 F.2d 267, 11 B.C.D. 1202, 10 C.B.C.2d 949 (3d Cir. 1984). See also Ohio v. Kovaks, 469 U.S. 274, 105 S. Ct. 705, 83 L. Ed. 2d 649, 11 C.B.C.2d 1067 (1985) (allowing discharge of cleanup debt, involving only issue of discharge of cleanup debt, the debtor did not possess the land) 222 Illinois v. Electrical Utilities, 41 B.R. 874, 12 B.C.D. 411, 11 C.B.C.2d 1046 (N.D. Ill. 1984) 223 United States v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988) 224 Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494, 106 S. Ct. 755, 88 L. Ed. 2d 859, 13 B.C.D. 1355 (1986) 225 In re James, 940 F.2d 46 (3d Cir. 1991); Boricua Motors v. Commonwealth of Puerto Rico, 154 B.R. 834 (D. Puerto Rico 1993); contra In re Ryan, 15 B.R. 514 (Bankr. D. Md. 1981) 226 Section 108(a); In re T.C.I., Ltd., 21 B.R. 876, 9 B.C.D. 305, 6 C.B.C.2d 1316 (Bankr. N.D. Ill. 1982) 227 Section 108(c); In re Chemisphere Partners, 90 B.R. 380 (Bankr. N.D. Ill. 1988)

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4.2.16. Tolling of Action Against Debtor If the time limit for commencement of a civil action on a claim against a debtor (or codebtor under Section 1301 or Section 1201) had not expired prior to the commencement of a case, then the period will expire on the later of the end of such period as originally calculated, or 30 days after the notice of the end of the stay order with respect to the claim.228 If a mechanics lien law requires that suit be commenced within a specified time in order to protect the lien (a statute of duration as opposed to a statute of limitation), then Section 108 provisions are inapplicable: the creditor must file a suit (after lifting of the stay) or file a notice pursuant to Section 546(b). According to one view, Section 108(c) does not distinguish between statutes of duration and statutes of limitation: time for enforcement of liens subject to either statute is extended by Section 108(c).229 Company Policy: Do not waive statutory or contractual liens on the basis of limitations statutes or passage of time during a bankruptcy of the landowner if the liens are effective at the time of the filing of the bankruptcy. of the debtor.230 Neither Section 108 nor Section 362 tolls the term of a subordination agreement between creditors

The I.R.S. is granted an additional sixty (60) days after the discharge, together with the time remaining at the filing of the bankruptcy, to make its tax assessments.231 4.2.17. Post-Bankruptcy Filings The stay prevents the filing of liens after the bankruptcy commences (with exceptions such as mechanics' liens which could be valid against prior bona fide purchasers).232 There are conflicting views on whether the stay prevents the post-bankruptcy filing of a sheriff's or trustee's deed based on a foreclosure conducted before the bankruptcy. It has been held by the minority of cases that the stay does not prevent the post-bankruptcy filing of a sheriff's or trustee's deed concerning a foreclosure conducted before the bankruptcy.233 However, the majority and better view is that the stay does prevent the filing of a sheriff's or trustee's foreclosure deed.234 Consistent with this latter view, the execution of a foreclosure deed after the commencement of the bankruptcy case pursuant to a sale conducted before the bankruptcy violates the automatic stay.235 According to one view, the rights of a purchaser at foreclosure are avoidable under Section 544 if the foreclosure deed is filed after the bankruptcy.236 Company Policy: Require a lifting of stay to file during the bankruptcy a sheriff's or trustee's deed executed before the bankruptcy.
228 229

Sec. 108(c) In re Hunters Run Ltd. Partnership, 875 F.2d 1425 (9th Cir. 1989) (the court noted that statutes requiring commencement of suits concern enforcement, not perfection of liens); In re Morton, 866 F.2d 561 (2nd Cir. 1989) (Section 108(c) extended the life of a statutory judgment lien beyond the 10-year period of state law); contra In re Birdview Satellite Communications, Inc., 90 B.R. 465 (Bankr. D. Kan. 1988) (mechanic's lien suit or notice must be filed in the stated time limit under the applicable "statute of duration"); In re Decker, 199 B.R. 684 (9th Cir. B.A.P. 1996) (section 108(c) applies to statutes of limitations and to durational periods; 10-year estate tax lien of U.S. is tolled or stayed by bankruptcy); adversary proceeding, remanded, 1996 Bankr. LEXIS 1487, (B.A.P. 9th Cir. Cal. 1996) 230 Hazen State Bank v. Speight, 888 F.2d 574 (8th Cir. 1989) 231 In re Fingers, 170 B.R. 419 (S.D. Cal. 1994) 232 In re Computer Management, Inc., 40 B.R. 201 (Bankr. N.D. Ga. 1984) 233 In re Upham, 48 B.R. 695 (Bankr. W.D. N.Y. 1985), Abdelhaq v. Pflug, 82 B.R. 807 (Bankr. E.D. Va. 1988) (foreclosure sale extinguished mortgagors' rights and no automatic stay applied to later settlement on the foreclosure sale); In re Cole, 88 B.R. 763, 18 B.C.D. 46 (Bankr. E.D. Va. 1988). (Stay was inapplicable where sale occurred approximately 10 minutes before filing of petition. Sale was complete when the trustee knocked down the land.); In re Okla. Assoc., 93 B.R. 424 (Bankr. W.D. Pa. 1988) (sheriff's sale confirmed pre-petition divested debtor of all interest in land though Sheriff's Deed not filed until after petition filed); In re Sienkiewicz, 95 B.R. 139 (Bankr. 9th Cir. B.A.P. 1988) rev'd on other grounds, 900 F.2d 206 (9th Cir. 1990) (filing of tax deed after commencement of bankruptcy proceeding did not violate stay where sale occurred before petition filed and no right of redemption continued); In re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997) (under California law, recordation of trustees deed within 15 days of sale relates back to time of sale, such recordation is thus allowed under Subsection 546(b) as a matter that may be perfected post-petition) 234 In re Penfil, 40 B.R. 474, 11 C.B.C.2d 178 (Bankr. E.D. Mich. 1984); In re Flowers, 94 B.R. 3 (Bankr. D.D.C. 1988) (stay enjoins delivery of trustee's deed and recordation of deed; appropriate remedy is motion to lift stay); In re DeSouza, 135 B.R. 793 (Bankr. D. Md. 1992) (court ordered lifting of stay to obtain and record foreclosure deed); In re Engles, 193 B.R. 23 (Bankr. S.D. Cal 1996) (lift of stay is granted to execute and file trustees deed), criticized in In re Garner, 208 B.R. 698, 1997 Bankr. LEXIS 709 (Bankr. N.D. Cal. 1997) and criticized in In re Stork, 212 B.R. 970, 1997 Bankr. LEXIS 1507 (Bankr. N.D. Cal. 1997); In re Golden, 190 B.R. 52 (Bankr W.D. Pa. 1995) (lift of stay granted to record tax deeds) 235 In re Burns, 183 B.R. 670 (Bankr. D. R.I. 1995); In re Elam, 194 B.R. 194 B.R. 412 (Bankr. E.D. Tex. 1996) 236 In re Glenwood Associates, 134 B.R. 1012 (Bankr. D.R.I. 1991); In re Williams, 124 B.R. 311 (Bankr. C.D. Cal. 1991) (a foreclosure sale not perfected by recordation of the trustee's deed prior to filing of bankruptcy and related bankruptcy notice may be set aside as a voidable post-petition transaction under Section 549); In re Konowitz, 905 F.2d 55 (4th Cir. 1990) (foreclosure sale not perfected by ratification of sale and recordation of deed may be avoided under Section 549); In re Duncombe, 143 B.R. 243 (Bankr. C.D. Cal. 1992); In re MacDonald, 164 B.R. 325 (Bankr. C.D. Cal. 1994) (execution sale avoidable where marshall's execution deed had not been recorded as of commencement of case); In re Elam, 194 B.R. 412 (Bankr. E.D. Tex. 1996) (Trustees Deed could be set aside under Section 544 because the Deed had not been properly filed although the sale occurred before the bankruptcy case); contra, In re Engles, 193 B.R. 23 (Bankr. S.D. Cal. 1996) (sale not avoidable); criticized in In re Garner, 208 B.R. 698, 1997 Bankr. LEXIS 709 (Bankr. N.D. Cal. 1997); and criticized in In re Stork, 212 B.R. 970, 1997 Bankr. LEXIS 1507 (Bankr. N.D. Cal. 1997)

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A subordination to a lease by a lienholder will not violate the stay after the stay is lifted to allow foreclosure of the lien on the lessors title.237 4.2.18. Suits Against Third Parties The stay against suing a debtor will not prevent a plaintiff from taking action against the surety of the debtor on a supersedeas bond.238 Similarly, the stay created by an original contractor's bankruptcy will not prevent a subcontractor from proceeding against an owner to foreclose its mechanic's lien.239 The stay against codebtors under Sections 1201 and 1301 is irrelevant because the debts were incurred in the ordinary course of business. (The stay will not then apply to a codebtor.) The stay against codebtors will enjoin a foreclosure against the spouse of the debtor who joined in a deed of trust; a motion under Section 362 as to the debtor will not operate to lift this separate stay.240 4.2.19. Suits by Debtor There are conflicting cases as to whether the stay extends to actions brought by the debtor.241 4.2.20 Partition The automatic stay prevents partition suits against the debtor.242 4.2.21. Effect of Dismissal The majority view is that the automatic stay terminates immediately upon dismissal of the bankruptcy case.243 4.2.22. Mootness of Appeal from Order Lifting Stay Where the debtor fails to secure a stay pending appeal of a bankruptcy court order lifting stay, the appeal is moot if the creditor (or third party) acquires title by foreclosure unless (1) the purchaser at foreclosure is not a good faith purchaser because the purchaser engages in fraud, collusion, or gross attempt to obtain an unfair advantage, or (2) [according to the Ninth Circuit] the property is sold to a creditor who is a party to the appeal if the sale is subject to statutory rights of redemption.244 Company Policy: Do not rely upon a lift of stay that is being appealed. 4.2.23. Agreements to Lift Stay and Other Bankruptcy Clauses According to one view, a stipulation in a settlement, workout, or forbearance contract agreeing not to oppose relief from the stay is enforceable; enforcement of the settlement agreement encourages out-of-court restructurings.245 According to a second view, pre-petition agreements to waive the automatic stay are not "per se" binding on the debtor.246 If the debtor signs a prepetition waiver, the debtor has the burden to demonstrate that the waiver should not be enforced.247 According to a third view, a prepetition waiver of automatic stay is unenforceable, per se.248
237 238

In re 240 North Brand Partners, Ltd., 200 B.R. 653 (9th Cir. BAP 1996) Carter Real Estate & Development, Inc. v. Builder's Service Co., 718 S.W.2d 828 (Tex. App. -- Austin 1986, no writ) 239 Weaver v. Jock, 717 S.W.2d 654 (Tex. App. -- Waco 1986, writ ref'd n.r.e.) 240 In re Harris, 203 B.R. 46 (Bankr. E.D. Va 1994) (stay as to codebtor applied to purchase money lien on home; court grants lift of stay under Section 1301 as to codebtor but refuses to annul stay under particular facts) 241 Dyer v. Weedon, 769 S.W.2d 711 (Tex. App. -- Waco 1989, no writ); In re Bensfield, 102 B.R. 157 (Bankr. E.D. Ark. 1989) (lease by Chapter 7 debtor violated automatic stay); Farley v Henson, 2 F.3d 273, remanded (8th Cir. 1993) (stay does not apply to suit brought by debtor inuring to debtor's estate; stay does apply to appeal by debtor in suit brought by third party); criticized by Chausee v. Lyngholm, 24 F.3d 89, 1994 U.S. App. LEXIS 10551 (10th Cir. Colo. 1994); and criticized in Parker v. Bain (In re Parker), 68 F.3d 1131, 1995 U.S. App. LEXIS 27576 (9th Cir. Cal. 1995); In re Lyngholm, 24 F.3d 89 (10th Cir. 1994) (stay does not prevent trustee debtor in possession from filing an action or continuing an action or appeal without court relief from stay; however, the court notes other circuits have held that the stay prevents appeal by the debtor) 242 In re Scipio, 203 B.R. 237 (Bankr. D. Md. 1996) 243 In re Weston, 110 B.R. 452 (E.D. Cal. 1989); In re Franklin Mortgage & Investment Co., 144 B.R. 194 (Bankr. D.C. 1992) (foreclosure within 10 days after dismissal does not violate 10-day stay rule); Fish Market Nominee Corp. v. Pelofsky, 72 F.3d 4 (1st Cir. 1995) (automatic stay terminates immediately upon dismissal and is not extended for 10 days by Fed. R. Civ. P.62(a)) 244 In re Olive Street Investments, Inc., 106 B.R. 183 (E.D. Mo. 1989); See also In re Club Candlewood Associates L.P., 106 B.R. 758 (N.D. Ga. 1989) (similarly, appeal is moot as to foreclosure where there was no stay pending appeal); In re K. Simpson Enterprises, Inc., 139 B.R. 161 (E.D. Va. 1991), aff'd, 989 F.2d 493 (4th Cir. 1993) (appeal of lifting of stay is moot if there is no stay of the ruling, due to foreclosure sale to good faith purchaser who knows of the appeal); West End Assoc., L.P. v Sea Green Equities, 166 B.R. 572 (D.N.J. 1994) (a de minimis bid of $100 does not impinge on mootness); recons. denied, application denied, appeal dismissed, 1994 U.S. dist. LEXIS 10655 (D.N.J. July 30, 1994) In re Country Squire Asso. of Carle Place, 203 B.R. 182 (2nd Cir. B.A.P. 1996) 245 In re Club Tower, L.P., 138 B.R. 307 (Bankr. N.D. Ga. 1991) (the court also cited the factors of a "bad faith" petition: only one asset in estate; few unsecured creditors; few employees; prior foreclosure action; problems involve dispute with secured creditor); In re Cheeks, 167 B.R. 817 (Bankr. D.S.C. 1994) (agreement by debtor in forbearance agreement not to oppose relief from stay was binding) 246 Farm Credit of Cent. Fla. ACA v Polk, 160 B.R. 870 (M.D. Fla. 1993) 247 In re Powers, 170 B.R. 480 (Bankr. D. Mass. 1994); 248 Matter of Pease, 195 B.R. 431 (Bankr. D. Neb. 1996)

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A waiver of the stay is not self-executing under the Bankruptcy Code; relief from the stay must be authorized by the bankruptcy court.249 Perhaps the appropriate conclusion is that prepetition waivers of the stay may be enforceable in the bankruptcy court if the court finds other grounds to modify the stay. The agreement of the debtor cannot bind nonparty creditors or a later trustee. No court has ever recognized a waiver of bankruptcy eligibility. The code provides that a waiver of a right to convert a Chapter 7 case to a Chapter 9, 12, or 13 case is unenforceable.250 The legislative history stated that the explicit reference in title 11 forbidding the waiver of certain rights is not intended to imply that other rights, such as the right to waive a voluntary bankruptcy case under Section 301, may be waived.251 Consequently, courts have assumed that agreements to waive the right to file a bankruptcy are unenforceable.252 Alternatives adopted by creditors have included: waiver of stay or agreement not to oppose relief from stay (most likely enforceable as to debtor in a workout with involvement of many creditors); creation of entity ineligible for relief under the Bankruptcy Code (rarely used, since such entity might be construed as an eligible business trust anyway); requirement of unanimous or super majority vote of shareholders or directors (which does not prevent an involuntary filing); stipulation that a voluntary bankruptcy filing would be in bad faith and that such bad faith is cause for dismissal (probably enforceable only in a workout); waiver of right to seek extension of exclusivity period or period to assume or reject a lease; springing guarantees or standby letters of credit; and prepackaged bankruptcy plan (with pre-bankruptcy votes from creditors to the plan of reorganization).253 A last opportunity order with a conditional drop-dead or lift of stay and with a prohibition on refiling for 180 days is not binding in a later bankruptcy filing.254 A court may enter a drop-dead order in the same bankruptcy proceeding.255 According to some cases, the Bankruptcy Code prohibition against enforcement of default upon filing clauses applies only during the bankruptcy proceeding and no longer applies once the proceeding is concluded.256 4.2.24. Voidness v. Voidability of Stay Violation There is no universally recognized rule as to whether a violation of the stay is a void or voidable action. One view is that an action by a creditor in violation of the stay is void and is not validated upon dismissal of the bankruptcy.257 Another view is that actions in violation of the stay are voidable during the bankruptcy proceeding.258 If a state court order is void because it violates the stay, a subsequent nunc pro tunc will not validate the order.259 According to one view, a lienholder does not have standing to challenge acts, such as a trustee's sale conducted in violation of the automatic stay.260 A third party (other than the debtor or trustee) may have standing to seek damages under 362(h) for violation of a stay (the court does not resolve this issue), but has no statutory standing to sue to invalidate a violation of the stay.261
249 250

In re Sky Group Intermational, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989) Sec. 706(a) 251 124 Cong. Rec. 32,401 (1978) 252 Contractual Bankruptcy Waivers: Reconciling Theory, Practice and Law, 82 Cornell Law Review 301 (Jan. 1997) 253 Contractual Bankruptcy Waivers: Reconciling Theory, Practice and Law, 82 Cornell Law Review 301 (Jan. 1997); The Case for Limited Enforceability of a Pre-PetitionWaiver of the Automatic Stay, 32 San Diego Law Review 1133 (Fall 1995) 254 In re Friend, 191 B.R. 391 (Bankr. W.D. Tenn. 1996) 255 In re Mendozo 111 F.3d 1264 (5th Cir. 1997) 256 Farlini v. Northeast Savings, F.A., 200 B.R. 9 (D. R.I. 1996) (also citing cases that ruled different) 257 In re Schwartz, 954 F.2d 569 (9th Cir. 1992) (citing cases for the majority position and distinguishing Section 549 post-petition transactions by the debtor that are voidable) 258 Sikes v. Global Marine, Inc., 881 F.2d 176 (5th Cir. 1989); Bronson v. U.S., 46 F.3d 1573 (Fed. Cir. 1995); Easley v. Pettibone Michigan Corp., 990 F.2d 905 (6th Cir. 1993), criticized in Winters by & Through McMahon v. George Mason Bank, 94 F.3d 130, 1996 U.S. App. LEXIS 21775(4th Cir. Va. 1996) 259 Matter of Cappadonna, 154 B.R. 639 (Bankr. D.N.J. 1993) 260 In re Pecan Groves of Arizona, 951 F.2d 242 (9th Cir. 1991); contra In re Motley, 10 B.R. 141 (Bankr. M.D. Ga. 1981); Matter of Ring, 178 B.R. 570 (Bankr. S.D. Ga. 1995) (subordinate lien holder does not have standing to recover damages for violation of stay, but has standing to seek declaration that foreclosure was void; however, the court notes contrary authority) 261 In re Pointer, 952 F.2d 82 (5th Cir. 1992), cert. denied, 112 S.Ct. 3035 (1992) (the court may authorize the creditor to act on behalf of the debtor or trustee to seek avoidance in some cases)

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Company Policy: If any filing (such as a statutory lien perfection) violates the stay, require a release of the claim or an order invalidating the filing. 4.2.25. Conversion According to one view, conversion of a bankruptcy creates a new order for relief and stay, and compels the creditor to file a new motion for relief from the stay to proceed with its collateral.262 According to another view, court orders are not negated by the order of conversion.263 This latter approach, ruling that conversion does not operate as a new automatic stay, appears to be the more common approach.264 4.2.26. Extension The stay does not prevent the filing of an extension of a statutory lien, according to one view.265 The Bankruptcy Reform Act of 1994 permits a filing during the bankruptcy to maintain or continue perfection of an interest (such as an extension or continuation by refiling of a lien) if the rights of a trustee are subject to such perfection.266 4.2.27. Assignability A stipulation granting relief from stay was assignable (under California law) in the absence of prohibition on assignment.267 If a mortgagee is granted relief from the stay, the subsequent assignee of the mortgage may foreclose without securing a separate order.268 5.0 SALE OF PROPERTY 5.1 Abandoned Property If property has been properly abandoned by the estate, then you may rely upon a deed from the debtor (with any necessary corporate resolutions) without motion, notice, or order of sale. Company Policy: If the debtor sells abandoned property while the bankruptcy is pending and receives cash proceeds (in excess of lien payoffs and closing costs), require joinder or consent by the trustee (after notice), or notice to the estate creditors (if the debtor is a debtor-in-possession), unless you secure approval from our underwriting personnel. The abandonment may otherwise be attacked. Exempt Property Rule 4003 specifies a 30-day limit after conclusion of the creditor's meetings to file objections to the scheduling of property as exempt. If no objections are made and the time to object is not extended, the property (or equity) which is scheduled as exempt is no longer part of the estate. A debtor generally does not need a court order to sell property once it is exempted in a Chapter 13 case.269 However, local rules may require court approval of the sale or refinance of a principal residence, even after confirmation.270 Company Policy: If property has been fully exempted (not simply an equity interest) and set aside to the debtor, you may rely upon the evidence (schedule as exemption without objection for 30 days after meeting of creditors as adjourned) that it is exempted and you may insure a deed from the debtor without further court order in a Chapter 7 or Chapter 11 case. In a Chapter 12 or Chapter 13 case also secure court approval unless you determine that the local rules do not require such approval. Also obtain approval of the trustee in a Chapter 12 or 13 case. If only an equity interest is exempted (e.g., portion of gross value), require that the remaining interest be abandoned. If only an equity is exempted and the remaining interest is abandoned, you may not insure the sale if the net proceeds to the debtor exceed the equity exemption unless you secure approval from our underwriting personnel. 5.2

262

In re Nichols, 134 B.R. 236 (Bankr. S.D. Ohio 1991) (even though relief was granted in the prior Chapter 7 before conversion to a Chapter 13) In re Maralak, Ltd., 104 B.R. 446 (Bankr. M.D. Fla. 1989); In re Standfield, 152 B.R. 528 (Bankr. N.D. Ill. 1993) (conversion does not affect previous drop-dead order), appeal dismissed, 1993 U.S. Dist. LEXIS 7356 (N.D. Ill. May 27, 1993) 264 In re Voron, 157 B.R. 251 (Bankr. E.D. Va. 1993) (court may reinstate the stay pursuant to 105); In re Masterson, 189 B.R. 250 (Bankr. D. RI 1995) (conversion of Chapter 7 case to Chapter 13 case does not create a new stay or vacate a prior lift of stay; the debtor can seek an injunction to obtain relief) 265 In re Stuber, 142 B.R. 435 (Bankr. D. Kan. 1992) (Federal tax lien) 266 Sec. 362(b)(3), Sec. 546(b)(1)(B) (Bankruptcy Reform Act of 1994) 267 In re Marin Town Center, 142 B.R. 374 (N.D. Cal. 1992) 268 In re Noone, 188 B.R. 710 (Bankr. D. Mass. 1995) 269 In re Penniston, 206 B.R. 948 (Bankr. D. Minn. 1997) 270 Local Rule 180(27), (33), C.D. Cal.
263

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Exempted property may not be sold by the trustee.271 However, the court may order sale of property if only a portion is exempt and the property cannot be divided.272 Company Policy: If the trustee is offering to sell property in the estate of an individual debtor, verify that the property is not scheduled as exempt. If a debtor in a Chapter 12 proceeding schedules farmland as exempt, you should require court approval of the sale with notice to interested parties. The farmland is essential to the plan in most cases. Procedure on Sale of Property in the Estate The trustee will sell property of the estate in a Chapter 7 proceeding or, if qualified and appointed, in a Chapter 11 proceeding. A debtor-in-possession in a Chapter 11 proceeding will sell property of the estate, subject to limitations by court order. The debtor-in-possession will sell property of the estate in a Chapter 12 proceeding, subject to any limitations by court order, and subject to joinder by the trustee on sales free and clear of liens under Section 1206. The debtor will sell property other than in the ordinary course of business in a Chapter 13 proceeding. 5.3.1. Ordinary Course of Business The debtor in a Chapter 13 proceeding (Section 1304), the debtor-in-possession (Section 1203) subject to any court limitations in a Chapter 12 proceeding, the trustee in a Chapter 7 proceeding (Section 721) if authorized, and the debtor-in-possession (Section 1107) (or trustee if appointed) subject to any court limitations in a Chapter 11 proceeding can sell real property in the ordinary course of business without notice or court order. An ordinary course of business sale of real estate is not plausible in a Chapter 12 or Chapter 13 proceeding. Company Policy: Do not rely upon the provision authorizing sales in the ordinary course of business in a Chapter 12 or Chapter 13 proceeding without underwriter approval. It is possible in a Chapter 11 or a Chapter 7 proceeding to have a sale in the ordinary course of business. On a case-by-case basis, we will rely on a deed from the debtor-inpossession or trustee in a Chapter 11 or Chapter 7 proceeding if the schedules reflect a large inventory of real estate, if the transaction involves only a transfer of isolated lots or tracts of relatively small value, and if we secure an opinion of counsel for the debtor or a credible affidavit by the trustee or debtor that the particular transaction is in the ordinary course of business. In a Chapter 7 proceeding, the court must authorize a trustee to continue the business of the debtor in order for this provision to apply. 5.3.2. Not Ordinary Course of Business Most sales of real estate will not be in the ordinary course of business. There may be sales where property is free and clear of liens. Sometimes, there are other co-tenants. There may be an adverse claim or claim to an equitable interest in the property, reflected by a suit and lis pendens. The trustee in a Chapter 7 proceeding, debtorin-possession (or trustee if appointed) in a Chapter 11 proceeding subject to any court limitation, debtor-in-possession in a Chapter 12 proceeding subject to any court limitations, and the debtor in a Chapter 13 proceeding may sell real estate other than in the ordinary course of business. If the sale is to be made free and clear of liens and payment will not fully satisfy the liens, then the trustee (not simply the debtor) in a Chapter 12 proceeding should sell the property with the liens to attach to the proceeds.273 The sale must be "after notice and a hearing."274 The phrase "after notice and hearing" means that the trustee or debtor is to give notice in accordance with the Bankruptcy Rules and that no actual hearing or order is needed unless there is an objection and request for hearing.275 However, if the sale is made free and clear of liens, the rules appear to require that a hearing shall be held.276 According to one view, a trustee need not file a motion to sell free and clear of liens if the trustee provided proper notice of a proposed sale under Section 363(f) and no objections have been filed, notwithstanding rule 6004(c).277 Where "notice and a hearing" are required, then the court may refuse to sign a "comfort order"; instead "a suitable procedure exists whereby a clerk's certificate for recording purposes may be obtained, which certifies that no objections or requests for hearing were filed."278 The trustee or debtor is not required to file a time-consuming adversary proceeding, except where the interest of a co-owner (such as a tenant by the entireties, if the land is not exempt) is also sold. In that case, an
271 272

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In re Duncan, 107 B.R. 754 (Bankr. W.D. Okla. 1989) In re Englander, 95 F.3d 1028 (11th Cir. 1996) cert. denied, 117 S. Ct. 1469 (1997) 273 Sec. 1206; contra In re Brilega, 108 B.R. 444 (Bankr. D. Vt. 1989) (debtor is authorized to sell pursuant to Section 363 or Section 1206 of the Code) 274 Sec. 363(b) 275 Sec. 102 276 Rule 6004 277 In re Burd, 202 B.R. 590 (Bankr. N.D. Ohio 1996) 278 In re Robert L. Hallamore Corp., 40 B.R. 181, 12 B.C.D. 334, 10 C.B.C.2d 1141 (Bankr. D. Mass. 1984)

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adversary proceeding must be filed against the co-owner.279 If the cotenant actually consents to the sale, an adversary proceeding is not required.280 Section 363(h), which authorizes a sale free of the rights of a co-owner, does not apply retroactively to rights that had vested prior to the Code enactment (on November 6, 1978).281 Company Policy: If the sale is free and clear of rights of a co-owner, require (1) proof of personal service to the coowner, (2) a specific final order requiring and determining necessity of partition by sale, (3) a notice to other interested parties of proposed sale. The complaint and notice of sale to all interested parties may be combined in the adversary proceeding. The right to sell free and clear of other interests does not allow the estate of a partner to sell partnership assets.282 A perfected security interest in a debtor's option to purchase real estate does not attach to the title upon exercise of that option by the debtor and simultaneous resale by the debtor.283 A settlement of claims can be resolved by sale of the estate claims pursuant to section 363, avoiding any required findings and conclusions of law.284 The court may decline to authorize a sale free and clear of rights of a cotenant because economic, emotional, or psychological detriment to the cotenant outweighs benefit to the estate.285 The trustee or debtor must, in a sale not in the ordinary course of business, give notice of the proposed sale. The notice must reflect the terms and conditions of the sale and the time fixed for filing objections. In lieu of the notice, the trustee or debtor may send a copy of the actual motion in accordance with local rules. The trustee or debtor must give notice of the proposed sale (in accordance with the local rules) not less than 20 days by mail to interested parties unless the court shortens the time for notice. The court also may order that the notices be mailed only to committees and to interested parties filing a request for notices.286 The court may not dispense with notice in connection with a sale not in the ordinary course of business.287 The debtor may sell all or substantially all of assets of the estate under Section 363(b) if there are articulated business reasons. The notice to parties in interest should disclose that the sale will terminate the business, the terms of sale, name of Buyer, why the price is reasonable, and why a sale before confirmation is in the best interest of the estate. The court should also consider the good faith of the buyer.288 According to one view, to sell free and clear of liens the sale must have reasonable promise of realizing excess value over the existing liens.289 At best this "rule" is ambiguous; it can be argued that the "value" of the liens cannot exceed the value of the property.290 The contrary view is that the sale must exceed the amount secured by the liens.291

279

See Rule 7001 et seq Veltman v. Whetzal, 93 F.3d 517 (8th Cir. 1996) 281 In re Persky, 134 B.R. 81 (Bankr. E.D. N.Y. 1991) 282 In re Manning, 37 B.R.755, 11 B.C.D. 771, 10 C.B.C.2d 408 (Bankr. D. Colo. 1984) 283 In re Merten, 164 B.R. 641 (Bankr. S.D. Cal. 1994) (no deed of trust was recorded; that might have changed the result) 284 In re VIII South Michigan Assoc., 167 B.R. 877 (N.D. Ill. 1994) 285 In re Trout, 146 B.R. 823 (Bankr. D. N.D. 1992) (ex-spouse was 77 years old and probably retired; the right of first refusal would not overcome this detriment) 286 Rules 2002, 6004 287 In re Columbia Motor Express, Inc., 49 B.R. 216 (Bankr. M.D. Tenn. 1985) 288 In re Coastal Industries, Inc., 63 B.R. 361, 14 C.B.C.2d 435 (Bankr. N.D. Ohio 1986); Stephens Industries, Inc. v McClung, 789 F.2d 386 14 C.B.C.2d 1298 (6th Cir. 1986); In re Naron & Wagner, Chartered, 88 B.R. 85, 18 B.C.D. 18 (Bankr. D. Md. 1988) 289 In re Rouse, 54 B.R. 31 (Bankr. W.D. Mo. 1985) 290 See In re Beker Industries Corp., 63 B.R. 474, 15 C.B.C.2d 52 (Bankr. S.D.N.Y. 1986) (indicating that there can be a valuation hearing of the value of the secured claims, but noting a contrary view; as indicated in In re Bobroff, 40 B.R. 526, 11 C.B.C.2d 40 (Bankr. E.D. Pa. 1984); In re Oneida Lake Development, Inc., 114 B.R. 352 (Bankr. N.D. N.Y. 1990) (the sale must be for the value, not the amount, of the liens); In re Milford Group, Inc., 150 B.R. 904 (Bankr. M.D. Pa. 1992) ("value of all liens" means value of collateral); Matter of WPRV-TV, Inc., 143 B.R. 315 (D. Puerto Rico 1991), aff'd in part and rev'd in part, 983 F.2d 336 (1st Cir. 1993) (follows Beker) 291 In re Terrace Chalet Apartments, Ltd., 159 B.R. 821 (N.D. Ill. 1993) (Congress intended Section 363(f) to protect the amount of secured debt, not economic value of the lien; however, a sale pursuant to section 363(f)(5) may be a cramdown sale); In re General Bearing Corp., 136 B.R. 361 (Bankr. S.D. N.Y. 1992) (sales prices must exceed aggregate value of all liens in absence of consent, dispute, or obligation of lender to accept a lesser payment); see also In re Terrace Gardens Park Partnership, 96 B.R. 707 (Bankr. W.D. Tex. 1989) (concluding that the sale need only equal or exceed the value of the land and noting that a creditor may bid in its lien under 363[k]); In re Grand Slam U.S.A., Inc., 178 B.R. 460 (E.D. Mich. 1995). (The requirement of "money satisfaction" does not mean that the lienholder must be paid the full amount of the obligation); In re Collins, 180 B.R. 447 (Bankr. E.D. Va. 1995) (The creditors must be given adequate protection such as by provision that lien attaches to proceeds); In re James, 203 B.R. 449 (Bankr. W.D. Mo. 1997) (by failing to object to the sale, the creditor implicitly conveys its consent to the sale)
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Notice of a sale free and clear of liens must be given in accordance with Rule 9014. For example, to sell free of an IRS lien, notice must be given to the United States Attorney for the district where the action is brought, the Attorney General, and the IRS, pursuant to Rule 7004(b)(5).292 A sale free and clear of liens, claims and encumbrances does not sell free of non-monetary restrictions since the sale contract was subject to restrictions of record.293 A court may not authorize a sale free and clear of restrictive covenants.294 Service on an insured depository institution in a contested matter (such as a sale free and clear of liens) or adversary proceeding must be made by certified mail addressed to an officer of the institution unless (1) the institution appeared by its attorney, in which case the attorney shall be served by first class mail; or (2) the court orders otherwise after service by certified mail of notice of an application to permit service on the institution by first class mail on an officer; or (3) the institution waives in writing its entitlement to service by certified mail by designating an officer to receive service.295 Those liens as to which a sale can lawfully be made free and clear include federal tax liens.296 If the bankruptcy court orders a sale free and clear of ad valorem taxes, the title company may secure reimbursement from the taxing authority for taxes paid to avoid forfeiture of the land.297 A trustee may sell land free and clear of a HUD lien; however, Section 363 does not authorize a sale free and clear of the HUD regulatory agreement or HUD's related statutory interests relating to low income housing (restrictions on low-income use, limitation on prepayment unless a notice of intent and plan of action is filed allowing HUD to approve the buyer or approve removal of the land from the low-income housing project, as enacted in 1987).298 The debtor may not sell free and clear of the interest of a lessee that remains in possession of the land after rejection by the debtor of the lease.299 The debtor may sell free and clear of a lease if it is in bona fide dispute (Section 363(f)(4)), according to one case.300 A debtor may not sell free and clear of an easement.301 A sale free and clear of liens and other interests does not affect recorded restrictions that run with the land or easements that run with the land.302 A debtor may not sell exempted property free and clear of liens or interest.303 The sale free and clear of a tax lien may provide that payment of the tax lien will be made after payment of administrative expenses.304 The ad valorem tax lien may be subordinate to payment of administrative expenses and deeds of trust in distribution of proceeds after a sale free and clear of liens.305 If a lien creditor fails to object to the sale after notice, it may be deemed to "consent" to a sale free and clear of liens under Section 363(f).306 Although Rule 6004 requires a hearing on a sale free and clear of liens, one view is that no hearing is required in the absence of objection to the sale.307 Notice of a proposed sale is presumed received if mailed to the correct address.308 However, the presumption of receipt of properly mailed notice may be overcome by testimony of nonreceipt combined with standardized procedures of processing mail.309 Another view is that a certificate of or proof of custom of mailing raises a presumption that notice was properly mailed and received; that presumption can be overcome only by clear
292

In re J.B. Winchells, Inc., 106 B.R. 384 (Bankr. E.D. Pa. 1989) In re Oyster Bay Cove, Ltd., 161 B.R. 338 (Bankr. E.D. N.Y. 1993), affd, 196 B.R. 251 (E.D. N.Y 1996) (sale may not affect restrictions or easements) 294 Gouveia v. Tazbir, 37 F.3d 295 (7th Cir. 1994) 295 Rule 7004(h) (applicable to cases filed on or after October 22, 1994) (Bankruptcy Reform Act of 1994); Rule 6004(c); Rule 9014 296 In re Terrell, 27 B.R. 130, 8 C.B.C.2d 1329 (Bankr. W.D. La. 1983) 297 Stewart Title Insurance Company v. County of Orange, 1997 N.Y. App. Div. LEXIS 10216 (Case No. 96-08425, Oct. 22, 1997) 298 In re Welker, 163 B.R. 488 (Bankr. N.D. Tex. 1994) 299 In re Churchill Properties Ill Ltd. Partnership, 197 B.R. 283 (Bankr. N.D. Ill. 1996) 300 In re Taylor, 198 B.R. 142 (Bankr. D. S.C. 1996) 301 In re Pintlar Corp., 187 B.R. 680 (Bankr. D. Idaho 1995) 302 In re Oyster Bay Cove, Ltd, 196 B.R. 251 (E.D. N.Y. 1996) 303 In re Penniston, 206 B.R. 948 (Bankr. D. Minn. 1997) 304 In re A.G. Von Metre, Jr., Inc., 155 B.R. 118 (Bankr. E.D. Va. 1993), affd, without op., 16 F.3d 414 (4th Cir. 1994) (payment of mortgage was also made before the tax lien was paid) 305 In re Oglesby, 196 B.R. 938 (Bankr. E.D. Va. 1996) 306 In re Gabel, 61 B.R. 661, 14 C.B.C.2d 1427 (Bankr. W.D. La. 1985) 307 In re Stogsdill, 102 B.R. 587 (Bankr. W.D. Tex. 1989) 308 In re Gabel, 61 B.R. 661, 14 C.B.C.2d 1427 (Bankr. W.D. La. 1985) 309 In re Dodd, 82 B.R. 924 (Bankr. N.D. Ill. 1987)
293

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and convincing evidence that the mailing was not accomplished.310 Denial of receipt of mail does not rebut the presumption of proper notice; however, evidence that other creditors did not receive notice or that notice was not mailed will rebut the presumption.311 A bankruptcy court may order a sale free and clear of a state right to recapture depreciation on sale of a nursing facility.312 Notice of a bankruptcy case is not sufficient notice of the determination of dischargeability to satisfy due process of law.313 According to one view, if the lienholder is not notified of a sale free and clear of its lien, it may proceed with its foreclosure.314 According to another view, if a lienholder does not receive notice of a sale free and clear of its lien, a bona fide purchaser of a judicially approved sale takes title free and clear of all liens, at least where more than one (1) year has passed since the order.315 If a secured creditor (taxing authority) is not notified of a sale free and clear of liens where proceeds were paid to the mortgagee, the court may remedy the defective sale by invoking 105a) to require the mortgagee to disgorge sufficient proceeds to pay the taxes.316 Failure of the debtor to give notice of proposed sale free and clear of liens to a party claiming ownership rights in a mortgage will not cause the sale to be ineffective if: (1) the creditor had actual knowledge of the sale; (2) the creditor failed to file a proof of claim; (3) the creditor failed to record an assignment of mortgage; and (4) the creditor failed to request notices in the bankruptcy case.317 A sale free and clear of a lien to a bona fide purchaser will not be set aside where the lienholder did not receive notice of the sale since the creditor knew of the case for two years and did not seek to set aside the sale until 3-1/2 months after it knew of the sale.318 A notice of sale does not comply with due process requirements or with Rule 2002(c)(1) (requiring notice of the terms and conditions of the sale) if it does not disclose that the creditor's lien will be divested. A notice stating that the "terms and conditions announced at time and place of sale shall supersede any inconsistent provisions of this notice or the motion filed" is not notice that a lien will be divested. A motion attaching a list of lienholders whose interests were to be divested that did not include the creditor is not sufficient notice.319 A notice sent to an attorney who represented the lienholder in another proceeding, but not in the bankruptcy proceeding sale, was not sufficient notice; the order of sale is void because of such notice.320 If notice is not given to creditors, the order may be set aside within a reasonable time. The time to set aside is then not limited to one year.321 Company Policy: If the sale is not made free and clear of liens, require a certified copy of the notice of sale, a recordable certificate evidencing notice to all interested parties, and a bankruptcy court clerk's certificate or letter of attorney of the debtor that no objection or request for hearing has been filed on or before the date of the certificate (which should be dated at least 21 days after notice of the proposed sale, subject to any reasonable order shortening notice). If the sale involves all or substantially all of the assets of the estate in a Chapter 7, 11 or 12 proceeding, require notice of sale, a certificate of service, and a final court order approving the transfer. If the sale is to be made free and clear of liens, require: (i) the notice by the trustee or debtor-in-possession and order specifically describing the liens as to which the sale is free and clear; (ii) recitation in the order that the lien(s) (which must be specifically described) attach(es) to the proceeds; (iii) determination that the lienholder received notice (for example, by appearance of the creditor at the hearing, satisfactory determination of mailing, or conference with the creditor); (iv) a recited justification under section 363(f) in the court order to allow the sale free and clear, except in a Chapter 12 proceeding where the trustee joins. For example, search for recitation that the lien is in dispute (if so, the dispute must be specified) or that the lienholder consents, or that the sales
310 311

In re Bucknum, 951 F.2d 204 (9th Cir. 1991) In re Eagle Bus Mfg, Inc., 62 F.3d 730 (5th Cir. 1995) 312 In re P.R.R. Convalescent Centers, Inc., 189 B.R. 90 (Bankr. E.D. Va. 1995) 313 In re Rogowski, 115 B.R. 409 (Bankr. D. Conn. 1990) 314 In re Landy, 110 B.R. 300 (Bankr. N.D. Ohio 1990) 315 In re Edwards, 962 F.2d 641 (7th Cir. 1992); In re Oyster Bay Cove Ltd., 161 B.R. 338 (Bankr. E.D. N.Y. 1993), affd, 196 B.R. 251 (E.D. N.Y. 1996) (lienholders only have claim against proceeds) (lienholder's recourse lies solely against proceeds of debtor and not purchaser) 316 In re Harold & Williams Develop. Co. Inc., 163 B.R. 77 (Bankr. E.D. Va. 1994) 317 In re CLC Corp., 110 B.R. 335 (Bankr. M.D. Tenn. 1990) 318 In re Edwards, 962 F.2d 641 (7th Cir. 1992) 319 In re Marcus Hook Development Park, Inc., 143 B.R. 648 (Bankr. W.D. Pa. 1992) 320 In re Ex-cel Concrete Co., 178 B.R. 198 (9th Cir. BAP 1995) 321 In re Tek-AIDS Industries, Inc., 145 B.R. 253 (Bankr. N.D. Ill. 1992)

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price exceeds (the value of) all liens or that the sale involves only a portion of land covered by the lien; (v) a court order authorizing the sale that is final as evidenced by a clerk's or attorney's certificate and review of docket sheet; (vi) verify the liens as to which the sale is free and clear are not ad valorem tax liens, or hazardous waste clean-up liens or other governmental assessments or charges; (vii) determine that the sale is not to a party related to the debtor; and (viii) verify that the property was not scheduled as exempt. If you cannot secure these requirements, call our underwriting personnel. A lien is in "dispute" if it is claimed that the lien is a preferential transfer.322 Bankruptcy Rule 7062 explicitly provides that Federal Rule 62(a) (imposing a 10-day stay on execution sales) does not apply to court-authorized sales.323 It is generally stated that the sale becomes final and cannot be reversed on appeal if an order confirming the sale has been entered and the stay of the sale is not obtained.324 Two exceptions to the mootness rule are: (1) where real property is sold subject to a statutory right of redemption, and (2) where state law permits the transaction to be set aside.325 A court may reconsider a sale on appeal if (1) the buyer is not a good faith purchaser; (2) the contract makes finality a contingency; or (3) the buyer is also a creditor. The court must determine whether a buyer gave "value" to determine if the buyer acted in good faith.326 An appeal is not moot due to the lack of a stay if the trial court had not found that the purchaser acted in "good faith" or paid "value."327 A bidder that does not secure a stay of the sale may appeal on the issue of whether the successful bidder was a good-faith purchaser.328 A finding in the order approving sale that the sale is being made in good faith is not a finding that the buyers behavior during the sale was in good faith; there was no inquiry as to whether the sale involved fraud or an attempt to take advantage of the other bidder.329 A trustee or debtor is not required to wait ten days before completion of a sale, if no stay is secured.330 However, if a sale is consummated immediately on the heels of the order of sale, this court leaves open the possibility that a subsequent stay may be sufficient to prevent the sale. Rule 7062 provides that Federal Rules of Civil
322

In re Millerburg, 61 B.R. 125, 14 C.B.C.2d 1405 (Bankr. E.D.N.C. 1986) In re Ewell, 958 F.2d 276 (9th Cir. 1992) 324 In re Saco Local Development Corp., 19 B.R. 119, 8 B.C.D. 1252, 6 C.B.C.2d 262 (Bankr. 1st Cir. Appellate Panel 1982) 325 In re Ewell, 958 F.2d 276 (9th Cir. 1992) 326 Plotner v. AT&T, 172 B.R. 337 (W.D. Okla. 1994) (value is at least 75% of the appraised value) 327 In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 14 B.C.D. 606, 14 C.B.C.2d 811, (3d Cir. 1986), Miami Center Ltd. Partnership v Bank of New York, 838 F.2d 1547 (11th Cir. 1988) cert. den. 109 S.Ct. 69 (1988) (the court, in stating that attack on the order was moot, emphasized that a lower court had specifically entered a finding that the purchaser was a good faith purchaser; the court stated that no factual argument was advanced on appeal as to why the purchaser was not entitled to be treated as a good faith purchaser, except for arguments previously rejected); In re Bell Air Associates, Ltd., 706 F.2d 301, 10 B.C.D. 868 (10th Cir. 1983) (a good faith purchaser is one who is not involved in fraud, collusion or attempts to take grossly unfair advantage of other bidders; "value" would be at least 75% of the appraised value; factual findings of the Bankruptcy Court would be accepted unless clearly erroneous); In re Vanguard Oil & Service Co., 88 B.R. 576 (E.D.N.Y. 1988) (The 75% guideline is rejected where there is no corresponding actual purchase); In re Tudor Assoc. Ltd. II, 20 F.3d 115 (4th Cir. 1994); objection sustained, claim disallowed, In re Tudor Assoc., 1997 Bankr. LEXIS 119 (Bankr. E.D.N.C. January 17, 1997) (generally, value is payment of 75% of the appraised value of the asset; good faith is in issue where an attorney of the owners knew of the fraud, and of undisclosed investment interest of debtor's principal); In re Adams Apple, Inc., 829 F.2d 1484, 17 C.B.C. 1132 (9th Cir. 1987) (appeal involving Section 364 grant of lien and involving cross-collateralization did not affect the good faith of the lender; the court analyzes whether the lender acted in good faith and concludes there is not sufficient evidence that the lender acted in bad faith); In re Swedeland Development Group, Inc., 16 F.3d 552 (3d Cir. 1994) (appeal of grant of superpriority of lien is not moot in absence of stay if loan is not fully disbursed); In re Onouli-Kona Land Co., 846 F.2d 1170, 17 B.C.D. 1371 (9th Cir. 1988) (the Circuit Court finds no basis for the allegation that the buyer took grossly unfair advantage at the auction, and holds the appeal moot); In re Wieboldt Stores, Inc., 92 B.R. 309 (N.D. Ill. 1988) (the case is remanded for a determination of whether the buyer qualifies as a good faith purchaser); Matter of Gilchrist, 891 F.2d 559 (5th Cir. 1990) (issue of good faith of purchaser generally cannot be raised for first time in appeal); In re Southwest Products, Inc., 144 B.R. 100 (9th Cir. B.A.P. 1992) (appeal was moot where bankruptcy court determined that purchaser was good faith purchaser: fact that corporate counsel and officer of debtor would be part owner of purchase did not prevent good faith purchaser status since his relationship was disclosed in motion to sell and he was not bankruptcy counsel of debtor); In re Cahle One CATV, 169 B.R. 488 (Bankr. D.N.H. 1994) (case was remanded to make a finding of good faith status of the purchaser because no explicit finding had been made at the sale hearing; issues may include collusion and value. The good faith rule also will not protect a third party if there was denial of procedural due process due to failure to give notice to unsecured creditors); In re Blumer, 66 B.R. 109, 15 B.C.D. 244 (Bankr. 9th Cir. 1986) (order entered on exparte basis authorizing Deed of Trust under Section 364); In re Mober Trucking, Inc., 112 B.R. 362 (Bankr. 9th Cir. 1990) (Section 363(m) is not applicable if notice was not given); In re Saybrook Manufacturing Co., Inc., 963 F.2d 1490 (11th Cir. 1992) (appeal from cross-collateralization in order not moot though no stay of order since not authorized by Code); In re Gucci, 105 F.3d 837 (2nd Cir. 1997) (court has no jurisdiction to review unstayed order once sale occurs, exception limited issue of whether sale made to good faith purchases); In re Glickman, Berkovitz, Levinson, & Weiner, 204 B.R. 450 (E.D. Pa. 1997) (since there was no finding of good faith by the court, the appeal is not moot and the case is remanded for such finding; the appeal also is not moot because the court could undo the sale) 328 In re Colony Hill Associates, 111 F.3d 269 (2nd Cir. 1997); In re Tempo Technology Corp., 202 B.R. 363 (D. Del. 1996) (subject to the clearly eroneous standard if the lower court entered a finding), affd without op., 1998 u.s. App. LEXIS 2541 (3d Cir. Del. January 22, 1998) 329 Matter of Perona Bros., Inc., 186 B.R. 833 (D. N.J. 1995) 330 In re CGI Industries, 27 F.3d 296 (7th Cir. 1994)
323

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Procedure Rule 62(a) (automatic ten-day stay on enforcement of judgment) is applicable to adversary proceedings and Rule 9014 provides that Rule 7062 (and thus F.R.C.P. rule 62(a)) applies to contested matters. Even if Rule 62 language relating to a stay on execution and enforcement of a judgment applied to a sale, Rule 7062, as amended, exempts from the automatic stay of F.R.C.P. 62(a): (1) sales under section 363; (2) relief from automatic stay under Section 362; (3) an order authorizing credit under Section 364; or (4) an order allowing assumption and assignment of a contract under Section 365. The ten-day stay under Rule 7062 does not apply to provisions in a Chapter 11 plan vesting title.331 A sale may be set aside within one year if the sales price was arrived at through bid rigging (or other fraud, error, or similar defects in equity affecting the validity of private transactions).332 Another type of mootness is equitable mootness, now recognized by some courts. Equitable mootness holds that an appeal should be dismissed as moot if effective relief could be rendered, but implementation would be inequitable.333 Determining whether an appeal of a confirmation order is moot requires a "fact-specific inquiry into the nature of the relief sought, and the effects that relief could have on the overall reorganization plan." Although the fact that a court can undo prior actions taken will not necessarily avoid mootness, it is relevant.334 An appeal from a confirmation order is moot if significant steps have been taken since entry of the order to implement the plan (such as transfer of funds).335 Substantial consummation of a plan does not moot an appeal if (a) the court can order some effective relief; (b) relief will not affect reemergence of the debtor as a revitalized corporate entity; (c) relief will not unravel intricate transactions and create an unmanageable situation; (d) the parties adversely affected by a modification have notice of the appeal and an opportunity to participate in the proceedings; (e) the appellant pursued all available remedies to obtain a stay of the order.336 An appeal from an order confirming plan is not moot due to lack of a stay if the debtor has transferred land to a creditor pursuant to the plan. Only that transaction had been carried out; it was possible to fashion effective judicial relief and the parties to the transfer were also parties to the appeal so that the court could order the creditor to return the land.337 Substantial consummation of a plan will not necessarily moot an appeal if (1) the court can still order effective relief; (2) the relief will not affect the reemergence of a revitalized debtor; (3) the relief will not unravel complicated transactions; (4) the parties who would be adversely affected by a modification have notice of the appeal and an opportunity to participate; and (5) the appellant diligently pursued available remedies to secure a stay of the judgment. Since the asset sales already occurred and the proceeds had been distributed, effective relief could not be granted.338 Company Policy: Unless you secure underwriting approval, do not rely upon section 363(m) which provides that the reversal or modification on appeal on a sale does not affect the validity of the sale to a purchaser in good faith even if the entity knew of the pending appeal unless the sale was stayed pending appeal. Do not issue where there is a contest and pending appeal of the sale since the issue of "good faith" could be litigated. You can verify the order is final or is not being contested by reviewing the file, and by securing a clerk's or attorney's certificate as to the finality of the order. After an order authorizing sale is final, it will not be set aside because of a substantially higher price unless the original price is so grossly inadequate so as to shock the conscience of the court. A final order may be set aside because of an extreme abuse of discretion, fraud, mistake, or like infirmity.339 Usually, the failure timely to

331 332

In re Pero Bros. Farms, Inc., 91 B.R. 1000 (Bankr. S.D. Fla. 1988) In re Intl. Nutronics, Inc., 28 F.3d 965 (9th Cir. 1994), cert. denied, 130 L. Ed.2d 493, 115 S. Ct. 577, 63 U.S. L.W. 3420 (1994) 333 In re Box Bros Holding Co., 194 B.R. 32 (D. Del. 1996); In re Grand Union Co., 200 B.R. 101 (D. Del. 1996) 334 In re Andreucceiti, 975 F.2d 413 (7th Cir. 1992) 335 In re Public Service Company of New Hampshire, 963 F.2d 469 (1st Cir. 1992) cert. denied 113 S. Ct. 304 (1992) (appeal moot where performance beyond point of any practicable appellate annulment and no stay had been secured); In re Hotel Assoc. of Tucson, 165 B.R. 470 (Bankr. 9th Cir. B.A.P. 1994) (appeal of confirmation order is moot if the plan is so substantially consummated that effective judicial relief is no longer available; substantial implies more than halfway); In re Specialty Equipment Companies, Inc., 3 F.3d 1043 (7th Cir. 1993) (substantial consummation renders appeal moot as to matters essential to the plan), summ. judgement granted, 159 B.R. 236, 1993 Bankr. LEXIS (Bankr. N.D. Ill. 1993) 336 In re Chateaugay Corp., 10 F.3d 944 (2d Cir. 1993); later proceeding, LTV Corp. v. Aetna Casualty & Sur. Co. (In re Chateaugay Corp.), 1993 Bankr. LEXIS 2027 (Bankr. S.D.N.Y. December 23, 1993); subsequent appeal, 177 B.R. 176, 1995 U.S. Dist. LEXIS 313 (S.D.N.Y 1995); and affd, Aetna Cas. & Sur. Co. v. Clerk, United States Bankruptcy Court (In re Chateagay Corp.), 89 F.3d 942, 1996 U. S. App. LEXIS 17532 (2d Cir. N.Y. 1996) 337 In re Arnold & Baker Farms, 85 F.3d 1415 (9th Cir. 1996), cert. denied, 136 L.Ed. 2d 607, 117 S. Ct. 681 (1997) 338 Bartel v. Bar Harbour Airways, Inc., 196 B.R. 268 (S.D. N.Y. 1996) 339 In re Chung King, Inc., 753 F.2d 547, 12 B.C.D. 937, 11 C.B.C.2d 1262 (7th Cir. 1985) (later sale at 12.5% increased price was not sufficiently higher to set aside earlier sale); In re Silver Bros. Co., Inc., 179 B.R. 986 (Bankr. D.N.H. 1995) (compelling equities must be found, examples include fraud, unfairness or mistake)

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appeal an order of sale prevents an attack in a collateral proceeding, but in light of cases allowing vacations of judgment, this rule is not unqualified.340 Section 363(n) allows the trustee to avoid a sale if the price was contracted by agreement among potential bidders. This provision applies to bidders at public auction or private sale.341 Company Policy: Do not insure a bankruptcy sale if you know the land will be transferred immediately at a higher price unless the debtor-in-possession or trustee consents to the transfer. If a sale is made free and clear of a lien or liens, the lien creditor may bid at the sale (and offset its debt) unless the court orders otherwise.342 If a sale of community property or of a co-owner's interest or free of dower or courtesy rights occurs, the debtor's nondebtor spouse (provided there is no joint filing) and any co-owner have a right of first refusal.343 Company Policy: Review the docket sheet to verify that the right of first refusal of the non-debtor spouse or other co-owner was not exercised. If the sale is made free of a co-owner's interest, the order may specify the time and manner of exercise of the right.344 It remains unclear whether the court can order a sale free and clear of liens of a co-tenant.345 Company Policy: Require releases of all liens if the court orders a sale free and clear of liens against co-tenants. Exempted property may not be sold free of interests pursuant to Section 363(f) since it is not property of the estate.346 5.3.3. Involuntary Case In an involuntary case, the debtor may continue to operate the business and use, acquire, or dispose of property as if the involuntary case had not been filed, unless the court orders otherwise and until an order for relief is granted.347 Company Policy: Because of concern over possible fraudulent conveyances, we will require a final order of the bankruptcy court authorizing a sale after an involuntary proceeding is commenced and before the order for relief is granted. 6.0 CONTRACTS AND ASSIGNMENTS OF LEASES 6.1 Assumption or Rejection In a Chapter 7 proceeding, if the trustee does not assume or reject an executory contract or lease within 60 days as extended by the court, the contract or lease is deemed rejected. An approval of a "sale" of the lease within the required time will comply with the requirement of assumption of the lease.348 In a Chapter 11, 12, or 13 proceeding, the trustee or debtor may assume or reject the contract or lease as to residential realty before confirmation of the plan unless the court shortens or lengthens the time. In a Chapter 11, 12, or 13 proceeding, the trustee or debtor must assume or reject an unexpired lease of other property within 60 days as extended by the court or the lease is deemed rejected.349 A lessor can waive the time limit and protection of Section 365 on assumption times.350 The trustee or debtor may assign an executory contract or unexpired lease of the estate if the trustee or debtor assumes the

340 341

Lindsey v Ipock, 732 F.2d 619, 24 B.R. 930, 11 B.C.D. 1170, 10 C.B.C.2d 890 (8th Cir. 1984), cert. denied, 469 U.S. 881, 105 S. Ct. 247 (1984) Ramsay v. Vogel, 970 F.2d 471 (8th Cir. 1992) (the buyer agreed to flip the contract to a third party for additional consideration) 342 Sec. 363(k) 343 Sec. 363(i); See In re Kent Terminal Corp., 166 B.R. 555 (Bankr. S.D. N.Y. 1994) (plan may not deny mortgagee a right to credit bid its lien on sale free and clear of liens) 344 In re Fehl, 19 B.R. 310, 9 B.C.D. 56, 6 C.B.C.2d 533 (Bankr. N.D. Cal. 1982) 345 See In re Benyola, 136 B.R. 646 (Bankr. E.D. Va. 1992) (authorizing sale free and clear of liens of debtor and co-tenant spouse) 346 In re Penniston, 206 B.R. 948 (Bankr. D. Minn. 1997) 347 Sec. 303(f) 348 In re Tulp, 108 B.R. 214 (Bankr. N.D. Iowa 1989) 349 Sec. 365(d) 350 In re Car-Gill, Inc., 125 B.R. 133 (Bankr. E.D. Pa. 1991); In re Morning Star Enters, Inc., 128 B.R. 102 (Bankr. E.D. Pa. 1991)

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contract or lease and provides adequate assurances of the performance of the contract or lease. The proposed assignment is offered by motion practice.351 Company Policy: Always require a specific court order authorizing the assignment, proof of receipt of notice by the lessor, a clerk's certificate or letter from counsel and review of docket sheet evidencing that the order is final (30 days since entry), and a letter by the lessor consenting to the transaction and certifying that there is no default. Bankruptcy termination lease clauses (types of "ipso facto" clauses) are not enforceable in a bankruptcy.352 Leases may be assigned in a bankruptcy though the lease and applicable state or local law prohibit same, since the prohibitions or assignment under Section 365 prohibit assignment only of nondelegable personal services contracts.353 If a contract to sell land is rejected by the seller (as debtor) in the bankruptcy proceeding, then a purchaser in possession may remain in possession and continue to pay under the contract. If a purchaser is not in possession under an executory contract, then the purchaser shall have a lien on the property for the amount of the price paid.354 According to some cases, an installment land contract is not an executory contract if the vendor retains legal title as security for the amounts owed and if the vendor has placed the deed in escrow prior to the bankruptcy.355 An installment sale contract is not an executory contract if the only remaining obligation of the vendor is to deliver legal title upon completion of payments.356 Once a lessee has exercised a purchase option, the lessee is a purchaser in possession who may remain in possession and pay the purchase price.357 Of course, if the contract is not of record, then it can be avoided entirely as a secured claim, since the trustee is treated as a bona fide purchaser. An option to purchase real estate can be an executory contract subject to rejection.358 Rejection of a lease does not constitute rejection of an option to purchase in the lease, at least where the option has been previously exercised.359 An issue under prior law involving rejection by a debtor landlord is whether the tenant in possession continues to retain a leasehold estate (that can be assigned, sublet, or mortgaged) or whether the tenant's right of possession after rejection is a personal right that cannot be assigned. One case held that the tenant's right is then a nonassignable personal right of possession.360 According to one view under prior law, a lessee remained in constructive possession through a sublessee so that the lessee retained its rights after rejection by the debtor-lessor.361 If a trustee or debtor in possession as lessor rejects a lease and the term of the lease has commenced, the lessee may retain its rights under the lease (including rights of subletting, assignment, or mortgaging). The rejection of the lease in a shopping center does not reflect provisions relating to radius, use, exclusivity, tenant mix or balance. The "lessee" rights extend to a successor, assign, or mortgagee permitted under the lease.362 If the lessee remains in possession after rejection by the debtor of the executory lease, the debtor may not sell free and clear of the lease under Section 363.363 According to one view, if a lessee (as debtor) rejects the contract or if the lease is deemed rejected by failure to assume the lease, then the lease is terminated as of the date of the Bankruptcy filing as to all parties,
351 352

Rule 9014, Rule 6006 Sec. 365; In re Sapolin Paints, Inc., 5 B.R. 412, 6 B.C.D. 776, 2 C.B.C.2d 854 (Bankr. E.D.N.Y. 1980); In re 127 Second Avenue Restaurant, 1 C.B.C.2d 20 (Bankr. S.D.N.Y. 1979) 353 Matter of Federated Dep't Stores, Inc., 126 B.R. 516 (Bankr. S.D. Ohio 1990); In re Fulton Air Service, Inc., 34 B.R. 568, 9 C.B.C.2d 1019 (Bankr. N.D. Ga. 1983); In re Raby, 139 B.R. 833 (Bankr. N.D. Ohio 1991) (prohibition on assignment in installment contract did not prevent trustee from assuming); but see In re Nitec Paper Corp., 43 B.R. 492, 11 C.B.C.2d 959 (S.D.N.Y. 1984) (concerning statute of nondelegability); In re Pioneer Ford Sales, Inc., 729 F.2d 27, 11 B.C.D. 1303, 10 C.B.C. 2d. 524 (1st Cir. 1984) 354 Sec. 365(i), (j) 355 In re Rehbein, 60 B.R. 436, 15 C.B.C.2d 46 (Bankr. 9th Cir. B.A.P. 1986) 356 In re Streets & Beard Farm Partnership, 882 F.2d 233 (7th Cir. 1989) 357 In re Maier, 127 B.R. 325 (Bankr. W.D. N.Y. 1991) 358 In re Carlisle Homes, Inc., 103 B.R. 524 (Bankr. D.N.J. 1988); In re A.J. Lane & Co., Inc., 107 B.R. 435 (Bankr. D. Mass. 1989) 359 In re Leslie Fay Companies, Inc., 166 B.R. 802 (Bankr. S.D. N.Y. 1994) 360 In re Carlton Restaurant, Inc., 151 B.R. 353 (Bankr. E.D. Pa. 1993). This view has been rejected (in some fashion) by other courts. In re Chestnut Ridge Plaza Associated, L.P., 156 B.R. 477 (Bankr. W.D. Pa. 1993) (court then held a restrictive covenant in the lease enforceable against the debtorlessor; the court stated that such rejection does not terminate the lease); In re Sok Jun Kong and K. Hwa Kong, 162 B.R. 86 (Bankr. E.D. N.Y. 1993) (where debtor is lessor, rejection of lease only terminates covenants requiring future performance by debtor-lessor; rejection does not divest the lessee of its estate); In re Lee Road Partners, Ltd., 155 B.R. 55 (Bankr. E.D. N.Y. 1993) aff'd,169 B.R. 507 (E.D.N.Y. 1994) (distinguished Carlton Restaurant and emphasized lessee sought to stay in possession through subleases) 361 In re Lee Road Partners, Ltd., 155 B.R. 55 (Bankr. E.D. N.Y. 1993); aff'd, 169 B.R. 507 (E.D. N.Y. 1994); In re Sok Jun Kong & K. Hwa Kong, 162 B.R. 86 (Bankr. E.D. N.Y. 1993) contra, In re Harborview Development 1986 Ltd. Partnership, 152 B.R. 897 (D. S.C. 1993) (debtor leased to insider corporation that in turn subleased to restaurant) 362 Sec. 365(h) (Bankruptcy Reform Act of 1994) (applicable to cases commenced on or after October 22, 1994) 363 In re Churchill Properties Ill, Ltd. Partnership, 197 B.R. 283 (Bankr. N.D. Ill. 1996)

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including Leasehold mortgagees. The fact that the lease requires notice of breach or allows the debtor or leasehold mortgagee to cure defaults is irrelevant; no default has occurred by the Bankruptcy rejection of lease.364 However, the more persuasive view is that rejection does not cause the lease to terminate. While it means that the estate will not perform the obligations, the lease does not then automatically cancel or dissolve.365 This view is consistent with the interpretation that rejection of an executory contract does not invalidate, rejudicate, repeal, or avoid an executory contract.366 According to this more widely accepted view, rejection of a lease or contract does not terminate the agreement; it results in a deemed breach. It does not result in an implied forfeiture of the rights of a third party to the lease.367 Because of the uncertainty of the effect of rejection by a debtor-lessor or debtor-lessee, a mortgagee of a leasehold estate may pursue several approaches; (1) to address a possible rejection by a debtor-lessor, the leasehold mortgagee may require a mortgage of the lessor's fee interest to secure performance of the lessor's obligations under the lease; (2) to anticipate a possible rejection by a debtor-lessee (mortgagor), the mortgagee may require an option from the lessor to enter a new lease (subject to issues relating to title companies if the option is insured, such as rejection by the lessor, separate option consideration, the prior lease, defense or litigation costs, and rule against perpetuities. A lease may not be subject to rejection if it is in substance closer to a sale.368 The condominium declaration and covenants, such as assessment obligations, may not be rejected as executory contracts by a condominium unit owner. Rejection would effect a severance of ownership interests prohibited by state law. A severance would be impossible as long as the owner retained the unit, since by such ownership the owner would receive the benefits of maintenance provided by the Association.369 Restrictive land covenants are not subject to rejection as an executory contract.370 The assessment fee for a membership association relating to the debtor's unit that is due and payable after the order for relief is not dischargeable if the debtor physically occupies the unit or rents to a tenant.371 A right of first refusal in a Declaration of Restrictions was held to be an executory contract. It was deemed rejected 60 days after the conversion to a Chapter 7 proceeding, since time to assume or reject was not extended. The sale was free of the right of first refusal since it was rejected; there was no lien for damages due to the rejection since no consideration was paid for the right.372 It has been previously held that time share rights which did not specify a certain period for occupancy were not leases entitled to protection. The owners of these rights interests were not treated as lessees in possession. As a result, they were unsecured creditors if the declarant filed a bankruptcy.373 These rights also did not amount to a sale contract allowing the purchaser protection. The Bankruptcy Code was amended in 1984 to allow parties who have received a time share interest (minimum of three years) for a specific period of time less than a full year but not necessarily for consecutive years to remain in possession of their interest.374 6.2 Recharacterization Among the dangers of a recharacterization of a sale-leaseback as mortgage financing are: lengthened time for recovery of the land, lack of waiver of right or redemption, usury claims, and lack of other covenants regarding default. The dangers of recharacterization as a joint venture would include: subordination to other creditors, liability for the lessee's business debts, and reduction of claim to unsecured status. If a sale-leaseback has sufficient unusual features, it may be treated as a joint venture or subordinated financing in a bankruptcy and the "Lessor" may not be entitled to receive rent during such proceeding.
364

In re Giles Associates, Ltd.; 92 B.R. 695 (Bankr. W.D. Tex. 1988) (noting disagreement of other cases); In re Gillis, 92 B.R. 461 (Bankr. D. Haw. 1988); In re Chris-Kay Foods East, Inc., 118 B.R. 70 (Bankr. E.D. Mich. 1990) 365 Texaco v Louisiana Land and Exploration, 136 B.R. 658 (M.D. La. 1992); In re Raymond, 129 B.R. 354 (Bankr. S.D. N.Y. 1991); In re Locke, 180 B.R. 245 (Bankr. C.D. Cal. 1995) (lessor is entitled to order directing turnover) 366 In re Walnut Associates, 145 B.R. 489 (Bankr. E.D. Pa. 1992) (the effect of rejection is that the nondebtor is limited in its claim for breach to treatment given the debtor's unsecured creditors; however, if state law allows specific performance, the nondebtor should be able to enforce the contract) 367 In re Austin Development Co., 19 F.3d 1077 (5th Cir. 1994) cert. denied; 30 L. Ed. 2d 132, 115 S. Ct. 201, (1994) (mortgagee of lessee retained rights in lease after deemed rejection by debtor-tenant; it was a third party beneficiary of the lease, which gave it the right upon termination to enter a new lease upon the same terms) 368 In re International Trade Administration, 936 F.2d 744 (2nd Cir. 1991). (Lease had a term of 99 years, rent was prepaid in initial three years, and lease required tenant to pay various other costs related to the land. However, the "superficial shifting of costs in a triple net lease, taken alone, should not be interpreted to mean that an agreement is not a lease for purposes of 365(d)(4).") 369 In re Case, 91 B.R. 102 (Bankr. D. Colo. 1988); In re Raymond, 129 B.R. 354 (Bankr. S.D. N.Y. 1991); In re Anderson, 129 B.R. 44 (Bankr. E.D. Pa. 1991) (rejection effects an abandonment of the estate in the lease) 370 Gouveia v. Tazbir, 37 F.3d 295 (7th Cir. 1994) 371 Sec. 523(a)(16) (specific language relates to condominium, although legislative history concerns other residences as well) (Bankruptcy Reform Act of 1994) 372 In re Fleishman, 138 B.R. 641 (Bankr. D. Mass. 1992) 373 In re Sombrero Reef Club, Inc., 18 B.R. 612, 8 B.C.D. 1277, 6 C.B.C.2d 506 (Bankr. S.D. Fla. 1982) 374 Sec. 365(h).

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Unusual features to be considered include prior negotiations for a partnership interest as opposed to a sale, purchase price not related to the value of the land (but related to other costs such as renovation costs and working capital needs), unusually long lease terms or renewal term (e.g., 165 years), no fixed rent during the term of the agreement (except for percentage rentals based on gross revenue increases), a right to prepay the Landlord's "investment" (at which time the Lessor would share solely in profits), agreement to subordinate to all future mortgages, condemnation awards in some ratio other than the relative value of the land and building or other than the unexpired portion of lease term, an option to become an equity partner, a right of Lessor to share in proceeds of Lessee financing, and rights of first refusal to purchase.375 On later appeal, In re PCH Associates, 949 F.2d 585 (2nd Cir. 1991) held that the transaction shall be recharacterized as a loan and equitable mortgage: it provided a fixed rate of return on funds advanced; the amount advanced was subject to reduction or payoff; and there was a right to acquire the land upon default. The court held that the following controls were consistent with a loan: access to books and required accounting procedures; cooperation in disposition of insurance proceeds; veto power over architect, engineer and contractor if costs exceeded $500,000; consent required to sale and right of first refusal; right to step in and perform acts the borrower failed to do. The "lender" could not make policy decisions or control operational management. Of key importance in analyzing whether a lease with an option to purchase may be recharacterized as a loan are whether the option price is the fair market value (or, in the alternative, nominal) and whether the Lessor may take control of the property at the end of the lease (or, in the alternative, whether the Lessee may control or force a sale).376 A synthetic (structured) lease is a financing vehicle that provides off-balance sheet financing for a sponsor. Credit support for the debt is issued by a special purpose entity or multiproperty substantive lessor. The financing is structured to treat the payment obligations of the sponsor as operating lease rental (instead of debt), while giving the lessee the tax benefits of owning the project and the potential appreciation. The synthetic lease provides off-balance sheet treatment for the sponsor to (1) show less debt on the balance sheet (although the footnotes will disclose lease obligations), (2) avoid covenants in credit agreements (limiting amount of debt, etc.), and (3) show less total assets on the balance sheet, thus increasing return on assets and equity.377 The lease will often indicate that it is intended to provide a financing mechanism. Typically a bank establishes an SPE (special purpose entity) with the stated purpose of acquiring property to be leased by the corporation. The SPE, which uses what is essentially a mortgage loan from the bank to buy the property, has no economic independence or control over the real estate it owns. Under certain circumstances, it may even be a passive trust. The SPE signs an operating lease with the corporation that will be using the property and the lease payments go to pay off the loan to the bank which books the transaction as a corporate loan to the lessee, not as a mortgage to the SPE. Result: one real estate loan fewer on the banks books.... These transactions employ a broad variety of financing, bearing such colorful names as synthetic leases, full benefit leases, and TROLs (tax retention operating leases). Regardless of the name, the objective is to park assets off the banks and lessees books while letting income flow back to the lender.... Upon completion of the lease, the tenant must purchase the real estate at a set price or find another buyer. If the buyer wont pay as much as stipulated, the tenant makes deficiency payments to raise the amount to the agreed upon level. The loan and the lease are both relatively short-term--three to five years....But the banks and the tenants burden of responsibility for the real estate is as great off the balance sheet as it would be on the balance sheet.378 A significant factor in determining whether the sale-leasehold is in reality a loan is whether the rent reflects fair rental value or simply amortizes the investment and provides a rate of return on the investment.379 In the case of Fox v. Peck Iron and Metal Co. Inc., 25 B.R. 674, 9 B.C.D. 1154 (Bankr. S.D. Cal. 1982), certain key factors led to recharacterization: (1) the assets transferred were worth at least twice as much as the purchase price; and (2) the repurchase terms allowed resale to the lessee for the original price (not later value); and (3) the term of the Lease was unrealistically short in duration (three years); and (4) the original purchase price was substantially less than fair market value; and (5) the lessor-purchaser had the right to force the seller to repurchase. The court did recognize the Deed to be sufficient as a mortgage. In the case of Matters of Kassuba, 562 F.2d 511 (7th Cir. 1977), the transaction was held to be a bona fide sale and leaseback with option to repurchase. Key factors in the court analysis were: the lessee's acknowledgment that it was sophisticated in real estate, the parties' intentional structure of the transaction to avoid foreclosure, and the expressed intent to have a sale.
375

In re PCH Associates, 804 F.2d 193 (2nd Cir. 1986) In re P.W.L. Investments, 92 B.R. 680 (Bankr. W.D. Tex. 1987) 377 Introduction to Synthetic Lease Financing, 31st Annual Mortgage Lending Institute, University of Texas, September 1997, by Sanford A Weiner and Philip D. Weller. 378 Barrons v. State, 1996 Tex. App. LEXIS 2982 (Tex. App. San Antonio, July 17, 1995); pet. for discretionary review refd (December 4, 1996) 379 In re Nite Lite Inns, 13 B.R. 900, 7 B.C.D. 1388, 5 C.B.C.2d 1 (Bankr. S.D. Cal. 1981)
376

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The case of In re 207 Montgomery Street, Inc., 160 B.R. 181 (Bankr. M.D. Ala. 1993) analyzed the debtor-lessee's claim that its lease was a disguised security arrangement that should be construed as a sale and mortgage (in order to propose a plan inconsistent with the lease). The historical preservation authority had purchased the land, leased to the debtor whose rent equaled monthly payments, given the debtor an option to purchase for $1,000 and rent due, and required the debtor to pay maintenance and other costs. The court held the transaction was a lease, recognizing the adverse impact on similar transactions if it ruled differently. Factors in determining whether a conveyance created an equitable mortgage include (1) intentions of the parties; (2) adequacy of consideration; (3) retention of possession by the grantor; and (4) satisfaction or survival of the debt.380 A lease which provides for installment payments and reflects amortization of the purchase price over 18 years at 8% interest, and states that installments will be applied to the purchase until a deed is executed, will be treated as a mortgage.381 The court in the case of In re Omne Partners II, 67 B.R. 793 (Bankr. D.N.H. 1986), upheld the lease. It stressed the refusal of the purchaser to make a loan and the sophistication of the parties who understood the transaction. Since the intent was not disputed, the economic substance of the transaction was irrelevant. The intent, for example, was evidenced by an opinion of counsel for the seller that the buyer would receive good title from the seller. A sale-leaseback is a financing scheme if the lease payments are calculated to retire bond debt, the lessee must pay rental even if the property is destroyed, and the lessee has the option to repurchase at the end of the lease for a nominal sum.382 A transaction would not be subordinated to other creditors where the lender acquired the land from the borrower and leased it back, received a conversion option to convert to an equity ownership in the project, received a shared appreciation mortgage, received 50% of cash flow, gave an option to the borrower to repurchase the land at fair market value, and received the option to convert the loan to a 60% interest in the borrower. The lender actually did not overreach: it consented to all leases, it did not select management, it did not exercise its conversion option, and it did not otherwise virtually control the borrower. The fact that the loan provided "Kickers" to the lender does not itself amount to inequitable conduct that amount to fraud or overreaching. Its access to records, annual financial statements, approval of rental leases and additional financing are simply prudent acts.383 A loan may be recharacterized as a capital contribution. Under the doctrine of equitable subordination, if the borrower is undercapitalized and if the lender exercises control (directly or through tiers of ownership) of the borrower. A lender may exercise control de facto (actual exercise of managerial discretion) or de jure (structural analysis of the borrower).384 Company Policy: If you are asked to insure on a sale-leaseback, call our underwriting personnel. Key factors in whether the transaction could possibly be recharacterized as a loan or joint venture include: (1) the lease should recite that the relationship is not a loan or joint venture. (2) review of documents reflecting no excessive control of the lessee by the purchaser (e.g,. Control of annual budgets and leases; at worst any controls should be passive review); (3) the term of the lease should not be excessive (e.g., 165 years) or oppressively short (e.g., 3 years); (4) the original purchase price for the land and the rental payments should approximate fair market value (not be the original sales price) (evidence by estoppel letter and appraisals if possible); (5) any repurchase price should approximate fair market value upon exercise (not be nominal or approximate required rental payments); (6) the purchaser lessor cannot have the power to force or "put" a repurchase; (7) the lease must not contain "loan terms" or words, such as "amortize," "interest," "loan," "debt," or "debt service." Rental should not be based solely on profitability; (8) the seller may not have originally applied to the purchaser - lessor for a loan;
380 381

In re Seven Springs, Inc., 159 B.R. 752 (Bankr. E.D. Va. 1993) In re Wilcox, 201 B.R. 334 (Bankr. S.D. N.Y. 1996) 382 In re Kar Development Associates, L.P., 180 B.R. 597 (Bankr. D.Kan. 1994); stay denied, In re KAR Deve. Assocs., L.P., 180 B.R. 624, 1994 Bankr. LEXIS 2217 (Bankr. D. Kan 1994); and affd, 180 B.R. 629, 1995 U.S. Dist. LEXIS 4454 (D. Kan. 1995); stay denied, 182 B.R. 870, 1995 U.S. Dist. LEXIS 8000 (D. Kan. 1995), (the claim is not for rent but is a secured claim subject to restructuring, and the hotel is property of the estate; on appeal the court stated that factors to be considered include (1) whether amount of rent compensated for value of use of land, (2) whether land was bought by lessor specifically for lessee's use, (3) whether the transaction was called a lease for tax purposes, (4) whether the lessee assumed any obligations of the lessor; and (5) whether the lessee could purchase the land for a nominal sum at the end of the term) 383 Matter of Pinetree Partners, Ltd., 87 B.R. 481 (Bankr. N.D. Ohio 1988) 384 In re Kids Creek Partners, L.P., 200 B.R. 996 (Bankr. N.D. Ill. 1996), amended, motion to strike denied, 1997 Bankr. LEXIS 215 (Bankr. N.D. Ill., Feb. 28, 1997), judg. entered, 1997 Bankr. LEXIS 1504 (Bankr. N.D. Ill., Sept. 23, 1997)

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if the lessee has no personal liability for rent and if rent is based on a portion of net profits, this may evidence a partnership; (10) agreement to subordinate to all mortgages may evidence a partnership; (11) nominal or below fair market value rent indicates financing; (12) expressions of intent that the transaction is not a finance transaction indicate a true lease. Some cases emphasize intent. [S]o long as the lessor retains significant and genuine attributes of the traditional lessor status, the form of the transaction adopted by the parties governs for tax purposes.;385 (13) prior negotiations of the parties for a loan (for example, a loan default may have precipitated the transaction); (14) right of tenant to sell fee indicates financing; and (15) short-term lease generally indicate financing. Consequences of recharacterizations as financing include no deduction of depreciation by lessor, no business deduction by lessor, seller cannot deduct rent-just interest, seller cannot recognize loss on sale, less stringent cure obligations in bankruptcy, payments to lessor may be usurious, and lessor must foreclose judicially. Equity kicker loans also may be recharacterized as joint ventures or partnerships. Factors considered include the following: (1) control. The right to direct daily operations, to approve all tenants, to join in execution or negotiations, to exercise operating control if key individuals leave the borrower, power to approve operating budget, veto over a sale or refinance, and approval of change in operations may evidence a partner's control. Review of annual operating statements, (veto) right to disapprove tenants, approval of standard form lease, and approval of management company do not evidence excessive control. Where possible, approval should be passive (veto). Examples of matters that should not be excessive controls are periodic access to the borrowers records, cooperation in disposition of insurance proceeds, reasonable veto powers over selection of contractors, right to approve lease standards, required consent before the borrower can sell its interest, right of the lender to cure covenant violations by the borrower. The lender should not exercise control of daily operations and management. Such control may be evidenced by a requirement of approval by the lender [other that passive (e.g., veto)], review of operating budgets or change in operations, by approval of all leases, by lender member on board or in management, or by right of the lender to set salaries or prices or costs, absent a default by the borrower. Lender selection of design plans and contractors may be viewed as indicative of a joint venture, but review and waiver should be acceptable. Veto, consultation or disapproval powers should be viewed more favorably than affirmative approval requirements.386 (2) liability. While lack of personal liability may evidence lack of a loan, this is a common loan attribute. However, the loan must be repayable regardless of profitability. (3) share of profits. An excessive share of profits (e.g. over 50%) may indicate an ownership position. A share of gross proceeds, rather than net profits, is more indicative of a loan. Sharing in net profits as interest on a loan without control will not constitute a partnership under state partnership law.387 (4) disclaimer. The loan agreement should disclaim a joint venture. (5) state law. State laws (e.g., Cal. Civil code 1917 et. Seq.) Must be reviewed. (6) term of loan. If excessive or if only due on sale, it may indicate a joint venture. (7) profits after repayment. A right to profits after payment of the loan may evidence a partnership interest. (8) open ended subordination clause. This may evidence a joint venture. (9) option to purchase. The option itself may be considered a clogging of the equity of redemption, particularly if exercisable on default. (10) share in losses by lessor. This indicates a joint venture. If payments to a lessor are contingent on profit, this indicates sharing in losses. (11) maturity date. The transaction should have a fixed and ascertainable maturity date (acceleration provisions should be okay). If not, the transaction may be viewed as a joint venture. (12) unwind. A right by the borrower (an unwind mechanism) to defeat or repurchase an option indicates a financing transaction.
385

(9)

Frank Lyon Co. v. U.S., 435 U.S. 561, 98 S. Ct. 1291, 55 L. Ed.2d 550 (1978) Colorado Law Review vol. 54 No. 3, at 315 387 See Carefree Carolina Communities v. Cilley, 79 N.C. App. 742, 340 S.E.2d 529 (1986), writ denied, 316 N.C. 374, 342 S.E.2d 891 (1976) (receipt of profits does not create partnership)
386

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(13) (14)

extended payment. Substantial and extended periods provided in the documents for nonpayment and deferral may indicate a joint venture. undercapitalization. Undercapitalization may indicate a joint venture, such as where the lender finances all costs, but the lender then has a conversion option to convert the loan to equity in the borrower. Possible issues in options (or first refusals) for the benefit of the lender [Once a mortgage, always a

mortgage]:

(1) Is separate and independent consideration paid for the option? If so, it is less likely to be viewed as a clog, particularly if the option is not tied to fair market value. (2) Is the option price based upon fair market value? If so, it is less likely to be viewed as a clog. (3) Is the option exercisable upon default? If so, it is likely a clog. (4) Can the borrower defeat the option (by buyout)? If so, it is unlikely to be a clog.388 A waiver of redemption at the time of the mortgage is a clog.389 Examples of statutes: (1) Va. Code Ann. Section 55-57.2. Notwithstanding any rule of fettering or clogging the equity of redemption or claiming a collateral advantage, a mortgagee may acquire a direct or indirect present or future ownership interest in collateral (except one-to-four family loans to individuals), including income, proceeds, or increase in value. An option granted to a mortgagee is effective and takes priority from recording of the option or memorandum if the right to exercise is not dependent upon occurrence of a default. (2) Cal. Civ. Code Section 2906. An option granted to a secured party to acquire an interest in collateral takes priority from recording and is effective if the right to exercise the option is not contingent upon the occurrence of a default under the security agrement and if the land is not one-to-four family residential land. (3) 42 Okla. St. Section 11. All contracts in restraint of the right of redemption from a lien are void. (4) Cal. Civ. Code Section 1917 et. seq. (relating to shared appreciation loans, not one-to-four family). At section 1917.001, the relationship is not as partners or joint venturers. (5) Tenn. Code Section 47-24-101 to 102 (relating to equity participation over $500,000). At Section 47-24-102 the lender is not deemed a partner or joint venturer. (6) N.Y. Gen. Obligations Law Section 5-334. Option by mortgagee to acquire an interest in the borrower or land is not invalid if the exercise is not dependent on default under the loan and the loan is $2.5 million or more. (7) Revised Limited Partnership Act. Except as otherwise provided by the partnership agreement, a partner may lend money to and transact other business with the limited partnership and, subject to other applicable law, has the same rights and obligations with respect to those matters as a person who is not a partner (Section 1.10) (8) Section 40 UPA. Distribution first to creditors and other than partners. According to one view, an escrow of a deed in lieu of foreclosure made after default in the loans and pursuant to an agreement to deliver the deed to the lender after subsequent default is not viewed as a clog, since it is secured subsequent to the creation of the mortgage.390 According to another view, an escrow of a deed in lieu of foreclosure made after default in loans and pursuant to an agreement to deliver the deed to a lender upon subsequent default is a mortgage and must be foreclosed.391 A deed in lieu of foreclosure may be an equitable mortgage if the parties intend for it to secure a continuing debt.392 Deeds in escrow as provided in a confirmed plan have been upheld in subsequent bankruptcies.393 A mortgage with an "equity sweetener" (e.g., transfer of some stock in borrower) will not be a basis for treating the transaction as an equity participation rather than a secured loan (and then subordinated to other

388

Humble Oil and Refining Co. v. Doerr, 123 N.J. Super. 530, 303 A.2d 898 (1973) (an option to buy for a fixed sum cannot be taken contemporaneously by the mortgagee, it is a clog; however, an option or right of first refusal at market value might have had a different result.) 389 Russo v. Wolbers, 116 Mich. App. 327, 323 N.W.2d 385 (1982). See also MacArthur v. North Palm Beach Utilities, 202 So.2d 181 (Fla. 1967) (clog did not apply if borrower acquired land subject to lien and option in favor of the vendor). 390 Ringling Joint Venture II v. The Huntington National Bank, 595 So.2d 180 (Fla. App. 1992), review denied, 601 So.2d 553 (1992) 391 Weil v. Colo. Livestock Prod. Credit Corp., 30 Colo. App. 301, 494 P.2d 134 (1971) 392 See Blick v. Nickel Savings, 216 S.W.2d 509 (Mo. 1948) 393 In re Hagen, 95 B.R. 708 (Bankr. D. N.D. 1989); In re Larsen, 122 B.R. 733 (Bankr. D. S.D. 1990) (but court allows equitable adjustment claim by debtor against lender)

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creditors) if most loan participants had no prior contact with the borrower and were not insiders and if the equity given is not overreaching (in case at hand corporation had negative net worth).394 An equity participation option agreement (to acquire a 1/3 interest in the building instead of principal payment) granted as part of a loan cannot separately be rejected as an executory contract while the remaining benefits of the loan are retained. In any case, the option granted as part of a loan apparently is not an executory contract that can be rejected.395 A deed absolute coupled with a repurchase option will be recharacterized as a mortgage when so intended by the parties. Intent that the transaction be a mortgage is lacking if the "purchaser" never discussed the prospect of making a loan and if the purchaser paid fair market value.396 7.0 LIENS BY ESTATE The debtor or trustee can obtain credit and execute a mortgage or lien on property which is either an inferior mortgage or a new mortgage prior to any outstanding liens after notice and a hearing.397 In order to secure first lien financing on encumbered land, the debtor must establish that: (1) the prior lender whose lien is subordinated to the new financing is adequately protected and (2) the debtor has made every effort to seek financial assistance by other means.398 Adequate protection may be shown by an equity cushion, a third party guaranty, or substitute collateral. Not every available lending institution need be contacted but several attempts apparently must be made to establish unavailability of other financing. The court cannot dispense with notice; some notice and opportunity for hearing must be furnished.399 Cross-collaterization (securing of prepetition and post-petition debts) is viewed with disfavor, since it is not expressly permitted under Section 364. According to one view, cross-collaterization of prepetition debt on additional collateral may be reviewed on appeal, even in the absence of a stay since not authorized by the Code.400 An appeal from an order to create a superpriority lien is not moot due to lack of stay pending appeal, if the new loan has not been fully disbursed.401 If the court order so provides, a super priority lien granted by the bankruptcy court does not have to be perfected under state law.402 Company Policy: Review the docket sheet, where possible, if the debtor is selling or mortgaging land, to verify no other order created a lien on the land. Unless otherwise provided, the grant of a mortgage in a bankruptcy proceeding remains subject to the automatic stay until later lifted.403 Company Policy: Require a certified copy of the notice and motion, order, certificate of service and evidence of receipt of notice (such as by contacting said parties, by verifying that the creditors appeared in the proceeding, or by return receipt) by the creditors secured by current liens on the property if the new lien is to have priority. The order from the bankruptcy court must be final. It must authorize the execution of the mortgage, and must contain specific provision for adequate protection of the current lienholders (due to other collateral, or pay-down of loan) if the new lien is to have priority over current liens. The lien must secure only new advances and will not be insurable to the extent it is to have priority over tax liens or government assessments. Except to the effect of the automatic stay on enforcement or foreclosure of the mortgage unless the order allows foreclosure without conditions. Local Rules also may require a debtor in a Chapter 13 case to obtain court order or trustee approval of consumer debt, including a refinance of real property debt.404 Local Rules may require a modification of plan to
394 395

In re Pacific Express, Inc., 69 B.R. 112, 15 B.C.D. 629, 16 C.B.C.2d 286 (Bankr. 9th Cir. B.A.P. 1986) In re The Texstone Venture Ltd., 54 B.R. 54 (Bankr. S.D. Tex. 1985) 396 In re Corey, 892 F.2d 829 (9th Cir. 1989) cert. denied, 498 U.S. 815, 111 S. Ct. 56 (1990) 397 Sec. 364 398 In re Reading Tube Industries, 72 B.R. 329, 15 B.C.D. 927, 16 C.B.C.2d 815 (Bankr. E.D. Pa. 1987) 399 In re Columbia Motor Express, Inc., 49 B.R. 216 (Bankr. M.D. Tenn. 1985); In re Blumer, 66 B.R. 109, 15 B.C.D. 244, 16 C.B.C.2d 409 (Bankr. 9th Cir. B.A.P. 1986) (exparte order was void and good faith lender was not protected by Section 364(e)) 400 In re Saybrook Mfg. Co., Inc., 963 F.2d 1490 (11th Cir. 1992) (citing differing views) 401 In re Swedeland Develop. Group Inc., 16 F.3d 552 (3d Cir. 1994) 402 Small v Beverly Bank, 936 F.2d 945 (7th Cir. 1991) 403 Gibraltar Sav. v Commonwealth Land Title Insurance Co., 905 F.2d 1203 (8th Cir. 1990) 404 Local Rule 4001-3, S.D. Ohio

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incur debt in a Chapter 13 case.405 Local Rules may require court approval of a sale or refinancing of the debtors principal residence, even after confirmation.406 8.0 ABANDONMENT The trustee, or the debtor-in-possession (under Chapter 11 or Chapter 12) may abandon property after giving notice to all interested parties of the proposed abandonment. All interested parties, not simply the secured party, must be notified of the proposed abandonment.407 An objection must be filed within 15 days of the mailing of the notice or within the time fixed by the court. If objection is made by a party in interest to the proposed abandonment of the property, the court shall set a hearing and an order shall be entered; otherwise, no order is necessary.408 Any other interested party may move that property be abandoned, but must secure an order compelling the trustee or debtor to abandon. 409 Company Policy: If a motion or notice is filed by the debtor-in-possession or trustee, require: (1) a certified copy of the notice of intent to abandon, (2) a certificate that interested parties were notified, and (3) a clerk's certificate, review of docket or attorney's letter evidencing that no objections or requests for hearing were filed within 15 days after notice. However, if any other party files a motion to abandon property, an order is required under rule 6007 and section 554. In that case, also secure a certified copy of the motion, certificate of service, order of abandonment, and evidence that no notice of appeal or motion extending time for appeal was filed within 30 days after entry of the order. An abandonment of estate property does not automatically vest the property in a creditor; it simply revests the property in the debtor.410 The Court, in a Chapter 7 proceeding, though, may order property conveyed to a party in interest such as a creditor, or the Environmental Protection Agency pursuant to Section 725.411 If property is scheduled but is not administered before the case is closed, then it is deemed abandoned upon the closing of the case.412 However, the case is not closed simply by the filing of a no asset report of the Trustee; the case is closed when the court enters an order closing the estate.413 A Chapter 7 trustee's no asset report does not result in abandonment of real estate.414 According to one view, notice by the trustee that the trustee may announce intent to abandon property at the creditors' meeting is not sufficient notice of abandonment. 415 According to a contrary view, Section 341 notice of the meeting of creditors disclosing intent to abandon burdensome or inconsequential property by notice at the meeting of creditors is sufficient notice; the rules do not require specific identification of the property.416 Although property scheduled in the Schedule of Assets and Liabilities is abandoned by the closing of the case, a cause of action solely listed in the Statement of Financial Affairs (a fraudulent transfer claim) is not abandoned since not properly scheduled.417 An abandonment by the Trustee may be undone if information concerning the property value was not properly disclosed so that the Trustee could make an informed decision.418 However, absent unusual and compelling circumstances, or a particularly egregious fact situation, the court should not vacate an abandonment (pursuant to Section 105).419
405

Local Rule 13.11 M.D. Tenn. Local Rule 180(27), C.D. Cal. 407 In re Caron, 50 B.R. 27, 13 C.B.C.2d 1137 (Bankr. N.D. Ga. 1985). 408 Rule 6007, Sec. 554 409 In re Wideman, 84 B.R. 97, 18 C.B.C.2d 650 (Bankr. W.D. Tex. 1988) 410 See In re McGowan, 95 B.R. 104 (Bankr. N.D. Iowa 1988); In re Manchester Heights Associates, L.P., 165 B.R. 42 (Bankr. W.D. Mo. 1994) (Once property is abandoned, it vests in the debtor; if cannot be abandoned to a creditor. Thus a fraudulent transfer claim cannot be abandoned to the creditor whose claim was in issue. 411 In re 82 Milbar Blvd. Inc., 91 B.R. 213, 18 B.C.D. 325 (Bankr. E.D.N.Y. 1988). 412 Sec. 554(c). 413 In re Reed, 89 B.R. 100 (Bankr. C.D. Cal. 1988) aff'd. 940 F.2d 1317 (9th Cir. 1991); Rule 5009 (presumption of full administration of estate 30 days after final report) 414 In re Reed, 940 F.2d 1317 (9th Cir. 1991); In re Figlio, 193 B.R. 420 (Bankr. D. N.J. 1996) (Filing of no asset report does not effectuate an abandonment; the asset is not deemed abandoned otherwise unless the case is closed. That means properly and finally closed, which the clerical closing may not constitute, so that a case may be reopened to administer.); In re Beaton, 211 B.R. 755 (Bankr. N.D. Ala. 1997) 415 In re Heil, 141 B.R. 112 (Bankr. N.D. Tx. 1992; In re Killebrew, 888 F.2d 1516 (5th Cir. 1989) 416 In re Southern Intern. Co., L.P., 165 B.R. 815 (Bankr. E.D. Va. 1994) 417 In re Fossey, 119 B.R. 268 (D. Utah 1990) 418 In re Reed, 89 B.R. 100 (Bankr. C.D. Cal. 1988) aff'd 940 F.2d 1317 (9th Cir. 1991) 419 In re Gracyk, 103 B.R. 865 (Bankr. N.D. Ohio 1989); In re Ozer, 208 B.R. 630 (Bankr. E.D. NY 1997) (abandonment may be set aside if trustee is given incomplete or false information of the asset; otherwise, some cases hold that abandonment may be avoided if abandonment is result of mistakes or inadvertence, and no undue prejudice will result)
406

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If property is not scheduled or specifically abandoned and is not administered in the case, then it is not abandoned by the closing of the case. Instead, it remains subject to the estate.420 The abandonment of property does not lift the stay prohibiting an action against the property of the debtor. 9.0 EXEMPT PROPERTY 9.1 Federal and State Exemptions Debtors are given the choice of using state exemptions or, if the state does not prohibit the federal exemptions, federal exemptions of $15,000 (plus wildcard of $800) of equity.421 The amount of the federal exemption shall be adjusted every three years.422 Joint debtors must choose only state or federal exemptions. If they cannot agree, they will be deemed to have chosen the federal exemptions if the state has not opted out.423 There is conflict as to whether spouses in a joint filing can separately claim the exemptions of state law or are entitled only to one set of exemptions.424 State law can explicitly prohibit election by the debtor to select the federal exemptions. States prohibiting use of federal exemptions include Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. If a state (such as Tennessee) does not explicitly permit exemptions for tenancies by the entirety in its statutes, but regards such interests as immune from process as a matter of law, the debtor may claim the tenancy as an exemption under state law. If creditors can execute on the right of survivorship of such tenant, then the right of survivorship may not be exempted under state law and may be sold by the trustee.425 If property is held by debtors as tenants by entireties and can be reached by judgment against both of them, it cannot be claimed as exempt to the extent there are joint creditors.426 The case of In re Lambert, 34 B.R. 41, 9 C.B.C.2d 805 (Bankr. D. Colo. 1983), held that a bankruptcy effected a severance of a joint tenancy property in Colorado and distinguished entireties property as not being severed by the bankruptcy. If exemptions under state law are selected, the debtor may schedule as exempt land located only in that state.427 A claim of state exemption must apply the state law in effect on the date the bankruptcy petition was filed.428 A general claim of a state exemption can be no greater than that actually allowed by state law.429 Proceeds and change in character of exempted property after the filing of the bankruptcy will not be property of the estate; once property is exempt, it remains exempt. 430 9.2 Proceeds Selection If the comparable state exemptions apply only to an equity interest or value or if the federal exemption is used, then the encumbered portion of the property (being that portion equal to the secured debt) remains subject to the bankruptcy until abandoned or until the case is closed. That interest will not be exempted merely by approval of the exemptions or by court order setting aside the exemptions.431 According to one view, post-petition appreciation of land with exempt and non-exempt equity will inure to the estate.432 Thus, further court approval or notice and opportunity for hearing must be secured to abandon the encumbered portion of the property or to allow sale of the property.
420 421

Sec. 554(d) Sec. 522(d) (Bankruptcy Reform Act of 1994) 422 Sec. 104 (Bankruptcy Reform Act of 1994) 423 Sec. 522(b) 424 See, e.g., in California: In re Talmadge, 55 B.R. 649, 13 C.B.C.2d 1107 (Bankr. N.D. Cal. 1985) (allowed separate set); In re Nygard, 55 B.R. 623, 13 C.B.C.2d 1101 (Bankr. E.D. Cal. 1985) (permitting only one set of exemptions); see also 3 Collier on Bankruptcy, 522.05 (15th ed. 1986). In re Granger, 754 F.2d 1490, 13 B.C.D. 837, 12 C.B.C.2d 194 (9th Cir. 1985) 425 In re Redmond, 15 B.R. 437, 5 C.B.C.2d 742 (Bankr. E.D. Tenn. 1981) 426 Ragsdale v Genesco, Inc., 8 B.C.D. 1330, 6 C.B.C.2d 1170 (Bankr. 4th Cir. 1982); see also In re Grosslight, 757 F.2d 773, 12 C.B.C.2d 525 (Bankr. 6th Cir. 1985); Sumy v Schlossberg, 777 F.2d 921, 13 B.C.D. 1237, 13 C.B.C.2d 1213 (Bankr. 4th Cir. 1985); In re Gibbons, 52 B.R. 861, 13 B.C.D. 750, 13 C.B.C.2d 759 (Bankr. D.R.I. 1985); In re Zella, 196 B.R. 752 (Bankr. E.D. Va. 1996), affd, 202 B.R. 712 (E.D. Va. 1986) 427 In re Peters, 91 B.R. 401 (Bankr. W. D. Tex. 1988) 428 In re Styrtveit, 105 B.R. 599 (Bankr. D. Mont. 1989) 429 In re Hyman, 967 F.2d 1316 (9th Cir. 1992) (California $45,000 equity interest, not entire land, was exempt where scheduled with greater equity than allowed exemption and simply claimed as homestead) 430 In re Reed, 184 B.R. 733 (Bankr W.D. Tex. 1995) 431 In re Wittenwyler, 62 B.R. 479, 15 C.B.C.2d 162 (Bankr. W.D. Wis. 1986) 432 In re Hyman, 123 B.R. 342 (Bankr. 9th Cir. 1991), aff'd, 967 F.2d. 1316 (9th Cir. 1992)

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Company Policy: If an equity interest is scheduled as exempt, verify the exemptions are applicable due to lack of objections more than 30 days after conclusion of creditor's meeting by clerk's certificate, attorney's letter, or file and docket sheet review. Also (1) require the trustee to abandon the encumbered portion of the property by notice, (2) secure a certificate of notice to all interested parties, and (3) require a certificate or letter to verify that no objection was made within 15 days. If only an equity is exempted and the remaining interest is abandoned, you may not insure the sale if the net proceeds to debtor exceed the equity exemption. If the debtor is selling exempted land in a Chapter 12 or 13 proceeding, secure a letter from the trustee evidencing lack of objection to the sale and, if Local Rules require court approval, secure a court order. Procedure The debtor shall list the property claimed as exempt on the schedules. An amendment of the schedules to revise the claimed exemptions may be filed at any time before the case is closed, unless delay in doing so causes prejudice (creditors may object within 30 days of such amendment).433 A debtor may amend the plan or schedules to change from federal to state exemptions if creditors are not prejudiced.434 The trustee or creditor may object to the property claimed exempt within 30 days after the meeting of creditors concludes (which meeting may be adjourned and extended) or within 30 days of the filing of any amendment to the scheduled exemptions, unless the court within the 30 day period grants further time. The 30-day provision does not begin to run until the full detail of the exemption is disclosed by (any) amendment.435 Otherwise, the exemptions are deemed allowed without court order. An objection can be evidenced by assertions in a complaint in an adversary proceeding or by a motion to lift stay filed within the time for objections.436 A response to a debtor's motion to avoid the claimant's judicial lien that states the debtor is not entitled to an exemption in the residence sufficiently manifests an objection to the exemption within the 30-day period.437 In the absence of objection within 30 days after the creditors' meeting or after the amendment to exemptions, the property claimed as exempt is exempted even though the claim is invalid.438 Conversion of a bankruptcy from a Chapter 11 case does not enlarge the 30-day time limit for objection.439 Conversion of a bankruptcy from a chapter 13 case triggers a new 30-day time limit for objections following the subsequent sec. 341 meeting.440 A right to a homestead exemption is determined at the time of commencement of the original case, rather than the date of conversion to a case under Chapter 7.441 Company Policy: Secure a certified copy of the listed exemptions together with verification of passage of 30 days beyond the meeting of creditors as adjourned with no objection having been filed. Verification can be reflected by a clerk's certificate, attorneys letter, or file and docket sheet review. Unless a party in interest objects, the claimed property or equity interest is exempted. If an equity interest is exempted require the remaining interest of the estate to be abandoned or sold by the trustee or debtor-in-possession. Chapters 12 and 13 Exemptions It has been stated that, until confirmation of the proposed plan, property claimed as exempt may not be divested from the estate. This language appears to be overly broad dictum, and inconsistent with the applicable rules and code provisions. It has been noted that the debtor can waive exemptions and use the exempt property in paying the debts under the plan.442 This right is irrelevant if the debtor has sold the exempt property prior to filing the plan. Unless the plan and confirmation provide otherwise, the debtor's property is revested in the debtor by the confirmation.443 If property is exempted in a Chapter 13 case, the debtor does not need a court order to sell and may 9.4 9.3

433 434

Rules 1009, 4003; In re Vaught, 36 B.R. 790, 11 B.C.D. 697, 10 C.B.C.2d 286 (Bankr. D. Idaho 1984) In re Strasma, 26 B.R. 449, 8 C.B.C.2d 265 (Bankr. W.D. Wis. 1983); In re Buck, 17 B.R. 168, 5 C.B.C.2d 1349 (Bankr. D. Haw. 1982) 435 In re Styrveit, 105 B.R. 599 (Bankr. D. Mont. 1989) 436 In re Starns, 52 B.R. 405, 13 C.B.C.2d 853 (Bankr. S.D. Tex. 1985). 437 In re Brown, 138 B.R. 327 (Bankr. D. Me. 1992) 438 Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 208, 60 U.S.L.W. 4333 (1992) (in a Chapter 7 case, the court declined to consider whether the validity of the objection may be considered under Section 105(a)); In re Granzaw, 210 B.R. 989 (E.D. Mich. 1997) (Taylor also applies to Chapter 13 exemption) 439 In re Robertson, 105 B.R. 440 (Bankr. N.D. Ill. 1989) (the court notes that the result of a conversion of a Chapter 13 case would be different); cert. denied, 513 U.S. 1016, 1994 U.S. LEXIS 8364, 115 S. Ct. 577 (1994) 440 In re Jenkins, 162 B.R. 579 (Bankr. M.D. Fla. 1993); In re Alderanon, 195 B.R. 106 (9th Cir. B.A.P. 1996) 441 In re Sandoval, 103 F.3d 20 (5th Cir. 1997) (conversion of Chapter 13 to Chapter 7, noting case to contrary); rehg denied, 1997 U.S. App. LEXIS 3256 (5th Cir. Tex. February 7, 1997) 442 In re Adams, 12 B.R. 540, 4 C.B.C.2d 1054 (Bankr. D. Utah 1981) 443 In re Walker, 84 B.R. 888, 18 C.B.C.2d 950 (Bankr. D. D.C. 1988)

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not sell free and clear of liens or interests.444 However, Local Rules may require court approval of a sale or refinancing of the debtors residence in a Chapter 13 case (even after confirmation).445 Company Policy: If the property is scheduled as exempt and time for objections to be filed has passed, verify that the proposed (or confirmed) plan, if any, does not treat the property inconsistently by providing that it will be conveyed to a creditor, remain part of the estate, or be sold to pay debts. Request a letter from the trustee evidencing no objection to a sale or refinance after plan confirmation and before the case is closed. Judicial Liens A debtor may avoid a judicial lien on exempt property to the extent the lien impairs the exemption.446 A lien impairs an exemption to the extent the lien and all other liens on the property and the amount of the exemption available if there were no liens exceeds the value that the debtor's interest would have in the absence of any liens.447 This provision does not apply to a judgment arising out of a foreclosure. An avoided lien shall not be considered in the calculation of the amount of liens on the property. This new provision allows avoidance if (1) the debtor has no equity in the property above a lien superior to the judgment lien; (2) the judgment lien is partially secured; and (3) the judgment lien is superior to an unavoidable mortgage which is greater than the value of the land. The proceeding is by motion and notice (not adversary proceeding). No order is necessary if no objection is made.448 Company Policy: In all cases involving lien avoidance, we will require a final court order. Do not insure if the court dispenses with notice. Wait until the order is final (30 days after entry) which finality should be evidenced by a certificate of the clerk or counsel and docket sheet review. Since the order will be rendered void if the case is dismissed, do not rely upon the order until the discharge or completion of the plan (if a Chapter 11 proceeding). This section cannot be used as to a judicial lien attaching before the enactment date of the Bankruptcy Code of 1978 (November 6, 1978).449 The lien does not attach, however, until the land is acquired.450 This section can be used as to judicial liens even if the state exemptions are used and even if state statutes or other law creating the exemptions specifically provide that the exempt property is subject to the judicial liens. Therefore, even if state law allows a judgment lien to attach to property owned by the debtor if it attaches before the property acquires exempt status, the lien may be avoided. However, if the lien attached before the debtor acquired the land or simultaneously with the acquisition of title by the debtor, the lien may not be avoided if it would attach under state law.451 A lien that affixes before or at the time the debtor acquires the interest, such as a judicial lien fixed at the time the debtor receives the property in a divorce, is not avoidable under Section 522(f); the debtor must have owned the property before the lien attached in order to avoid the lien.452 According to one view, Section 522(f) could not be used to avoid a judicial lien to the extent of future appreciation in excess of a state exemption of a fixed dollar amount (e.g., $45,000).453 This view was abrogated by amendment of Section 522 in 1994.454
444 445

9.5

In re Penniston, 206 B.R. 948 (Bankr. D. Minn. 1997) Local Rule 180(27), (33) C.D. Cal. 446 Sec. 522(f) 447 Sec. 522(f)(2) (Bankruptcy Reform Act of 1994) 448 Rule 4003(d); In re Galvan, 110 B.R. 446 (Bankr. 9th Cir. 1990) 449 United States v. Security Industrial Bank, 459 U.S. 70, 103 S. Ct. 407, 74 L. Ed. 2d 235, 7 C.B.C.2d 629 (1982); In re Maddox, 713 F.2d 1526, 9 C.B.C.2d 568 (11th Cir. 1983) 450 In re Jacobs, 154 B.R. 359 (Bankr. S.D. Fla. 1992). A state cannot opt out of the lien avoidance provisions of Section 522(f). In re Hill, 4 B.R. 310, 6 B.C.D. 307, 2 C.B.C.2d 123 (Bankr. N.D. Ohio 1980); In re Jackson, 55 B.R. 343, 13 C.B.C.2d 1194 (Bankr. M.D.N.C. 1985) (noting conflicting opinions); In re Hall, 752 F. 2d 582, 12 B.C.D. 949, 11 C.B.C.2d 1367 (11th Cir. 1985); contra In re McManus, 681 F.2d 353 (5th Cir. 1982) 451 Owen v. Owen, 111 S.Ct. 1833, 114 L.Ed. 2d 350 (1991) 452 Farrey v. Sanderfoot, 111 S.Ct. 1825, 114 L.Ed. 2d 337 (1991); In re Worth, 100 B.R. 834 (Bankr. N.D. Tex. 1988) (divorce decree granted lien to former spouse for purchase); In re Keenan, 106 B.R. 239 (Bankr. D. Colo. 1989) (debtors must have acquired property interest before creditor attached lien to land); In re Warfield, 157 B.R. 651 (Bankr. S.D. Ind. 1993). The state may not expressly opt out of Section 522(f). In re Hatcher, 131 B.R. 430 (Bankr. S.D. Ind. 1990) 453 In re Chabot, 992 F.2d 891 (9th Cir. 1993), superseded by statute as stated in In re Mulch, 182 B.R. 569 1995 Bankr. LEXIS 720 (Bankr. N.D. Cal. 1995); superseded by statute as stated in Hastings v. Holmes (In re Hastings), 185 B.R. 811, 1995 Bankr. LEXIS 1253 (B.A.P. 9th Cir. Cal. 1995); superseded by statute as stated in Wiget v. Nielsen (In re Nielsen), 197 B.R. 665, 1996 Bankr. LEXIS 802 (B.A.P. 9th Cir. Cal. 1996); superseded by statute as stated in Bentley v. El Dorado Props. (In re Bentley), 1997 U.S. App. LEXIS 1917 (9th Cir. February 5, 1997); superseded by statute as stated in Jones v. Heskett (In re Jones), 106 F.3d 923, 1997 U.S. App. LEXIS 2186 (9th Cir. Cal. 1997); criticized in Smith v. James A. Merrill, Inc. 1998 Cal. App. LEXIS 455 (Cal. App. 4th Dist. May 22, 1998); superseded by statute as stated in In re Kerbs, 207 B.R. 211, 1997 Bankr. LEXIS 715 (Bankr. D. Mont. 1997); superseded by statute as stated in Bank of Am. Natil Trust & Sav. Assn v. Hanger (In re Hanger), 217 B.R. 592, 1997 Bankr. LEXIS 2176 (B.A.P. 9th Cir. Cal. 1997); In re Sanglier, 124 B.R. 511 (Bankr. E.D. Mich. 1991) (under this view, the lien is extinguished only to extent of the state exemption, and is not limited to the then non-exempt equity in the land) 454 In re Mulch, 182 B.R. 569 (Bankr. N.D. Cal. 1995)

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At the court's discretion, a proceeding under Section 522(f) may be brought by reopening the case after the discharge is granted and the case is closed.455 The local rule time limitations may be ignored.456 Local districts may impose a time limit to file a motion for lien avoidance motions.457 The court in its discretion may refuse to reopen the case.458 One case has held that a lien may not be avoided under Section 522(f) after the case is closed due to the limitations of Section 550(e)(2) (concerning avoidance of transfers under 544, 545, 547, 548, 549, 553, and 714); however, this case does not appear to be correct.459 A debtor may not resort to Section 522(f) to avoid judicial liens on homestead sold before the commencement of the bankruptcy or sold after the case is commenced but before the motion to avoid the lien is filed.460 The majority view (consistent with Section 522 as amended) is that the procedure can be used even if the exemption of the debtor under state law extends to equity (e.g., $10,000 maximum in Colorado) in the property where there is no equity in the case at hand.461 If the debtor is a tenant by the entireties, one-half of the equity in the property will be allocated to her or him to determine whether the judgment lien can attach to excess equity or whether, in the alternative, the lien can be avoided.462 The scheduling of property as exempt without timely objection is only determinative of the issue of whether the property remains in the estate: it is not a binding determination of the homestead claim in connection with a motion to avoid a judicial lien as interfering with the homestead rights either under Section 522(f) or as ineffective under any state law exemption from attachment of judicial liens.463 It also is not determinative as to whether a mortgage (which would be invalid against exempt property) is invalid because of claimed homestead rights.464 Company Policy: Do not rely on the scheduling of property as exempt (without objection) as determinative of whether a judgment lien attaches to the land. Company Policy: Because a dismissal under section 349 reinstates any judicial lien avoided under section 522(f), do not rely upon a lien avoidance order unless the discharge has been granted in Chapter 7, 12, or 13, or unless the plan has been completed in a Chapter 11 or unless the order recites that, in accordance with state law, the lien never attached to the property.

455

In re Palmquist, 54 B.R. 24 (Bankr. D. Colo. 1985); In re Barnett, 30 B.R. 119 (Bankr. N.D. Ala. 1983); In re Gortmaker, 14 B.R. 66, 8 B.C.D. 67, 5 C.B.C.2d 127 (Bankr. D.S.D. Ohio 1981); In re Swanson, 13 B.R. 851, 8 B.C.D. 13, 5 C.B.C.2d 52 (Bankr. D. Idaho 1981); Rheinbolt v. Credit Thrift of America Inc., 24 B.R. 167, 7 C.B.C.2d 739 (Bankr. S.D. Ohio 1982) (subject only to laches where a creditor has relied to his detriment upon debtor's failure to file a motion while the case was open); In re Guinther, 40 B.R. 945, 10 C.B.C.2d 1337 (Bankr. M.D. Pa. 1984) (granted after discharge and before closing); In re Grube, 54 B.R. 655 (Bankr. D.N.J. 1985) (after discharge) 456 In re Newton, 15 B.R. 640, 8 B.C.D. 514, 5 C.B.C.2d 843 (Bankr. W.D.N.Y. 1981); In re Hall, 22 B.R. 701, 9 B.C.D. 588, 7 C.B.C.2d 69 (Bankr. E.D. Pa. 1982); In re Hope, 77 B.R. 470, 17 C.B.C.2d 795 (Bankr. E.D. Pa. 1987) 457 In re Hunter, 164 B.R. 738 (Bankr. W.D. Ky. 1994) (lien avoidance motion must be filed no later than 60 days after first date for 341(a) meeting of creditors) 458 Hawkins v. Landmark Finance Co., 727 F.2d 324 (4th Cir. 1984); In re Carilli, 65 B.R. 280, 14 B.C.D. 1281, 15 C.B.C.2d 798 (Bankr. E.D.N.Y. 1986) (debtor had already sold homestead and proceeds were not exempt; as a result, the court refused to apply 522(f) on request five years after case closed); In re Dodge, 138 B.R. 602 (Bankr. E.D. Cal. 1992) (there is no time limit to file a Section 522(f) motion; the case may be reopened to consider the motion) 459 Beneficial Finance Co. of Virginia v. Franklin, 26 B.R. 636, 8 C.B.C.2d 388 (W.D. Va. 1983). Section 522(f) applies to Chapter 13 proceedings. In re Canady, 9 B.R. 428, 7 B.C.D. 749, 4 C.B.C.2d 113 (Bankr. D. Conn. 1981); In re Berrong, 53 B.R. 640, 13 C.B.C.2d 669 (Bankr. D. Colo. 1985); In re Jackson, 55 B.R. 343, 13 C.B.C.2d 1194 (Bankr. M.D.N.C. 1985) 460 In re Vitullo, 60 B.R. 822 (D.N.J. 1986); In re Trammel, 63 B.R. 878, 15 C.B.C.2d 998 (Bankr. E.D. Va. 1986); Matter of Riddell, 96 B.R. 816 (Bankr. S.D. Ohio 1989) 461 In re Henninger, 53 B.R. 60, 13 C.B.C.2d 609 (Bankr. W.D.N.Y. 1985); In re Richardson, 55 B.R. 526, 13 C.B.C.2d 1415 (Bankr. N.D. Ohio 1985); In re Berrong, 53 B.R. 640, 13 C.B.C.2d 669 (Bankr. D. Colo. 1985); Matter of LaPointe, 150 B.R. 92 (Bankr. D. Conn. 1993); Matter of Ganakes, 81 B.R. 518 (Bankr. S.D. Iowa 1988) (noting that other cases disagree with this view); In re Galvan, 110 B.R. 446 (Bankr. 9th Cir. 1990) (noting that some courts require reliance on Section 506(d) to avoid the "unsecured" portion of the judgment lien); contra In re Simonson, 758 F.2d 103, 12 B.C.D. 1308, 12 C.B.C.2d 777 (3d Cir. 1985); In re Luby, 89 B.R. 120 (Bankr. D. Or. 1988) (but the debtor may avoid such lien under Section 506(a) and (d)); In re Baldwin, 84 B.R. 394, 18 C.B.C.2d 1442 (Bankr. W.D. Pa. 1988) (a judgment lien may not be avoided unless there is equity and unless the lien is the last record entry against the debtor before the bankruptcy, and not if the lien intervenes between mortgages) 462 In re Dionne, 40 B.R. 137, 10 C.B.C.2d 1178 (Bankr. D.R.I. 1984) 463 In re Montgomery, 80 B.R. 385, 16 B.C.D. 1351 Bankr. W.D. Tex. 1987); In re Mitchell, 80 B.R. 372, 17 C.B.C.2d 1379 (Bankr. W.D. Tex. 1987); In re Frazier, 104 B.R. 255 (Bankr. N.D. Cal. 1989) (noting that the majority of cases, however, hold that a creditor may not attack an exemption in opposition to a Section 522(f) motion if the creditor did not timely object to the schedule of exemptions) 464 McSpadden v. Moore, 728 S.W.2d 439 (Tex. App. -- Beaumont 1987, writ ref'd n.r.e.)

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For purposes of Section 522(f) avoidance, judicial liens obtained pursuant to agreement of the parties are not avoidable judicial liens: The Courts distinguish consensual ("security interest") liens which are nonavoidable, and involuntary judgment liens which are avoidable under Section 522(f).465 A mechanic's lien created by state law is a statutory lien, not a judicial lien, and is not avoidable under Section 522(f).466 According to one view, a divorce decree creating an equitable lien for the purchase price to be paid to one spouse or other court order creating an equitable lien (such as one creating a constructive trust) and later reflected by a judgment lien for such amount is not a judicial lien avoidable under Section 522(f).467 A statutory federal tax lien is not a judicial lien avoidable under Section 522(f).468 According to one view, a judgment lien cannot be avoided under Section 522(f) if the debt is not dischargeable.469 A debtor may not avoid a judicial lien that secures a debt to a spouse, former spouse or child for alimony, maintenance, or support unless the debt is assigned to another entity.470 Property exempted under state law pursuant to Section 522 is subject to nondischargable debts for alimony, maintenance, or child support, nondischargable debts for fraud and willful injury to federal depository institutions, a regulatory agency acting as conservator, receiver, or liquidating agent, notwithstanding contrary state law on execution.471 10.0 AVOIDING POWERS 10.1 Party Bringing Actions Avoidance actions are brought by the trustee or by a debtor-in-possession under Chapter 11 or Chapter 12. A debtor may generally bring avoidance actions in connection with exempt property.472 The debtor may avoid the transfer if (1) it is avoidable by the trustee under Sections 544 or 548, (2) the trustee does not seek to avoid the transfer, (3) the debtor could exempt the property, (4) the transfer was involuntary, and (5) the debtor did not conceal the property.473 Any avoidance action is an adversary proceeding under Rule 7001 et seq. Some cases recognize the authority of a Chapter 13 debtor to exercise avoidance powers.474 The trustee cannot avoid the lien simply by noting "intent" to avoid the lien by reference in the proposed plan and disclosure.475 As a rule, only the trustee or debtor-in-possession may bring the action; however, a creditor committee or creditor may initiate a proceeding if it requests the debtor-in-possession or trustee to prosecute the action, the debtor or trustee refuses, and the committee or creditor demonstrates a colorable claim of benefit to the estate and an unjustifiable refusal by the trustee or debtor to act.476 A subsequent owner does not have adequate standing to invoke the avoidance powers of Section 549.477 The creditor may, with court permission, bring a derivative action in the name of the debtor.478 Company Policy: Do not rely on an avoidance proceeding (sections 544, 545, 547, 548, 549) as to exempt property being sold unless the discharge has been granted or denied in Chapter 7, 12, or 13, or the Chapter 11 plan is completed. If nonexempt property is being sold where a lien was avoided and the discharge is not yet granted (in Chapter 7, 12 or 13) or plan (Chapter 11) is not completed, require a sale free and clear of the previously avoided interest. Require that any sale free and clear of a lien made pursuant to the procedural requirements for the sale.
465

In re Bland, 91 B.R. 421 (Bankr. N. D. Ohio 1988) (involving condominium assessment liens created by the Declaration, which are nonavoidable) In re Ramsey, 89 B. R. 680 (Bankr. S.D. Ohio 1988) 467 Boyd v. Robinson, 741 F.2d 1112 (8th Cir. 1984); In re Hart, 50 B.R. 956, 13 C.B.C.2d 190 (Bankr. D. Nev. 1985); In re Lodek, 61 B.R. 66, 14 C.B.C.2d 1320 (Bankr. W.D. Tex. 1986); In re Worth, 100 B.R. 834 (Bankr. N.D. Tex. 1988); contra, In re Pederson, 875 F.2d 781 (9th Cir. 1989) 468 In re Rench, 129 B.R. 649 (Bankr. D. Kan. 1991) 469 In re Coffman, 52 B.R. 667, 13 C.B.C.2d 553 (Bankr. D. Md. 1985); contra, In re Ewiak, 75 B.R. 211, 17 C.B.C.2d 117 (Bankr. W.D. Pa. 1987); In re Hampton, 104 B.R. 527 (Bankr. M.D. Ga. 1989) 470 Sec. 522(f)(1)(A) (Bankruptcy Reform Act of 1994) 471 In re Davis, 105 F.3d 1017 (5th Cir. 1997), corrected, 1997 U.S. App. LEXIS 12770 (5th Cir. Feb. 5, 1997); rehg, en banc, granted, 131 F.3d 1120, 1997 U.S. App. LEXIS 39311 (5th Cir. Tex. 1997); adversary proceeding, mot. denied, 170 B.R. 892, 1994 Bankr. LEXIS 1299 (Bankr. N.D. Tex 1994) 472 Sec. 522(h); cf. In re Bruce, 96 B.R. 717 (Bankr. W.D. Tex. 1989) (Section 522[h] is not available to the debtor if the transfer was voluntary) 473 In re Davis, 148 B.R. 165 (Bankr. E.D. N.Y. 1992) aff'd, 169 B.R. 285 (E.D. N.Y. 1994) 474 In re Fitak, 93 B.R. 589 (Bankr. S.D. Ohio 1987) 475 In re Commercial Western Finance Corp., 761 F.2d 1329, 13 B.C.D. 352, 12 C.B.C.2d 1177. (9th Cir. 1985) 476 In re Storage Technology Corp., 55 B.R. 479, 13 C.B.C.2d 1241 (Bankr. D. Colo. 1985); see also In re Curry & Sorensen, Inc., 57 B.R. 824, 14 B.C.D. 103, 14 C.B.C.2d 606 (Bankr. 9th Cir. 1986); In re v. Savino Oil & Heating Co. Inc., 91 B.R.655 (Bankr. E.D.N.Y. 1988)(authorization for a creditor would occur only upon a showing of extraordinary circumstances); James v. Washington Mut. Sav. Bank, 871 F.2d 89 (9th Cir. 1989) (coowner of debtor may not assert violation of stay by refiling of mortgage); In re Electrical Materials Co., 160 B.R. 1016 (Bank. W.D. Mo. 1993); application denied, 160 B.R. 1018, 1993 Bankr. LEXIS 1706 (Bankr. W.D. Mo. 1993); criticized by Harstad v. Egan & Sons Co. (In re Harstad), 170 B.R. 666, 1994 U.S. Dist. LEXIS 11299 (D. Minn. 1994); not followed by Stoebner v. Franco (In re T.G. Morgan, Inc.), 175 B.R. 702, 1994 Bankr. LEXIS 2001 (8th Cir. Minn. August 7, 1995); cf. In re Strom, 97 B.R. 532 (Bankr. D. Minn. 1989) (an individual creditor may not pursue a fraudulent conveyance action) 477 In re New York Inter. Hostel, Inc., 157 B.R. 748 (S.D. N.Y. 1993) (parties were not creditors acting on behalf of estate) 478 In re Xonics Photochemical, Inc., 841 F.2d 198, 18 C.B.C.2d 711 (7th Cir. 1988)
466

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Require that the sale order provide that it is made free of the lien in question (with adequate verification that the lender received notice of the proposed sale). Powers as Purchaser or Creditor The trustee or debtor-in-possession is treated as a bona fide purchaser and lien creditor in order to set aside various transfers; thus, the trustee can set aside unrecorded liens, deeds, contracts, and suits for which no lis pendens has been filed. These suits or transactions are not void but are simply voidable in an adversary proceeding. Therefore, it is extremely important to file all documents quickly.479 If a mortgage is improperly attested and not eligible for recordation, the recordation is ineffective to give notice and the bankruptcy trustee can avoid the lien.480 A mortgage erroneously released and subsequently reflected by the mortgagee's affidavit may be avoidable as a voidable preference or as an unperfected interest voidable by the trustee as a bona fide purchaser.481 A mortgagor-debtor or trustee of the debtor cannot avoid an unrecorded assignment of mortgage; only the assignor can attack such transfer.482 A mechanic's lien is not avoidable where the claimant failed to file a notice of lis pendens of the foreclosure, but the lien was properly and timely recorded.483 If a debtor collaterally assigns its note secured by a mortgage but does not deliver possession of the note, the collateral assignee's rights are avoidable.484 Actual knowledge of the debtor-inpossession is not imputed to the debtor as a bona fide purchaser for avoidance under Section 544.485 The debtor may rely on this section as to exempt property.486 According to one view, the provisions of Section 544 will authorize the avoidance of unrecorded beneficial interests in the land, notwithstanding Section 541(d) recognizing beneficial interests in third parties, since the sections must be construed together.487 Under this view, the trustee may avoid unrecorded beneficial interests if the debtor acquires title as trustee without disclosure of the beneficiaries or terms of the trust.488 A trustee does not have the right as a hypothetical bona fide purchaser of personal, as opposed to real, property.489 Perfection of a deed of trust after filing of the petition and within 10 days after execution is avoidable under Section 544; the provisions of Section 547(e)(2)A are irrelevant.490 The avoidance power under Section 544 applies only to prepetition transfers, and not to post-petition transfers.491 10.3 Statutory Liens
479

10.2

In re Hastings, 4 B.R. 292, 6 B.C.D. 401, 2 C.B.C.2d 88 (Bankr. D. Minn. 1980) (unrecorded mortgage set aside and the mortgage thereafter treated as an asset of the estate); In re Boyette, 33 B.R. 10, 9 C.B.C.2d 349 (Bankr. N.D. Tex. 1983) (trustee's foreclosure deed recorded after bankruptcy filed is set aside); In re Glenwood Associates, 134 B.R. 1012 (Bankr. D. R.I. 1991) (rights of purchaser at foreclosure avoidable under Section 544 since foreclosure deed filed after bankruptcy); In re Burns, 183 B.R. 670 (Bankr. D. R.I. 1995)(a foreclosure sale may be avoided under Rhode Island law if the foreclosure deed was not recorded before the commencement of the bankruptcy); In re Duncombe, 143 B.R. 243 (Bankr. C.D. Cal. 1992) (rights of purchaser at foreclosure sale voidable since not recorded at time of petition and of filing of notice of case); In re S.O.A.W. Enterprises, Inc., 32 B.R. 279, 11 B.C.D. 16 (Bankr. W.D. Tex. 1983) (security interest in contract for deed requires Article 9 central filing since general intangible; if not perfected, it can be avoided); In re Landmark, 48 B.R. 626 (Bankr. D. Minn. 1985) (mortgage recorded after bankruptcy filed merely voidable and since not avoided in bankruptcy could be foreclosed after discharge); In re Cortez, 191 B.R. 174 (9th Cir. B.A.P. 1995) (an unrecorded deed of trust may survive the bankruptcy and is enforceable unless avoided in the bankruptcy case); In re Murphy, 5 B.R. 596, 2 C.B.C.2d 919 (Bankr. N.D. Ga. 1980) (security interest filed in wrong county set aside); In re White Beauty View, Inc., 81 B.R. 290 (Bankr. M.D. Pa. 1988) (no reform of mortgage allowed to include erroneously omitted land); In re Estate of Williams, 238 Kan. 651, 714 P.2d 948 (1986) (powers of Section 544 apply only to prior transfers by debtor, not to statutory provisions for reliance on a hypothetical conveyance by debtor) 480 In re Fleeman, 81 B.R. 160 (Bankr. M.D. Ga. 1987) (the post-petition recordation of an affidavit to correct the attestation did not correct the defect since the filing of the affidavit violated the automatic stay); In accord In re Morgan, 96 B.R. 615 (Bankr. N.D. W.Va. 1989) (improperly acknowledged deed is avoidable) 481 In re Water Valley Finishing, Inc. 170 B.R. 831 (Bankr. S.D. N.Y. 1994) 482 In re Halabi, 196 B.R. 631 (Bankr. S.D. Fla. 1996) 483 In re Michigan Lithographing Co., 140 B.R. 161 (Bankr. W.D. Mich. 1992) aff'd 997 F.2d 1158 (6th Cir. 1993) (the law provided that suit, not a lis pendens, continued to toll the lien) 484 In re Timbers of Inwood Forest Associates Ltd., 808 F.2d 363, 16 C.B.C.2d 1 (5th Cir. 1987); In re Investors & Lenders, Ltd., 156 B.R. 145 (Bankr. D.N.J. 1993) (recordation of assignment without transfer of possession of note does not perfect security interest in note); but see Sec. 541(d) 485 In re Ryan, 70 B.R. 509, 16 C.B.C.2d 870 (Bankr. D. Mass. 1987) (actual knowledge of trustee and debtor is irrelevant), rev'd on other grounds, 80 B.R. 264 (D. Mass. 1987); In re Matos, 50 B.R. 742 13 C.B.C.2d 527 (N.D. Ala. 1985); In re Sandy Ridge Oil Co., 807 F.2d 1332, 15 C.B.C.2d 1234 (7th Cir. 1986); see also McCannon v. Marston, 679 F.2d 13 (3d Cir. 1982); McEvoy v. Ron Watkins, Inc. 105 B.R. 362 (N.D. Tex. 1987); In re Probasco, 839 F.2d 1352 (9th Cir. 1988) (actual knowledge of trustee or any creditor is irrelevant); In re Arnol & Mildred Shafer Farms, Inc., 102 B.R. 712 (Bankr. N.D. Ind. 1989) rev'd. on other grounds 107 B.R. 605 (N.D. Ind. 1989) (trustee and debtor-in-possession cannot be deemed to have actual notice); contra In re Hartman Paving, Inc., 745 F.2d 307, 11 C.B.C.2d 648 (4th Cir. 1984) 486 In re Herr, 79 B.R. 793 (Bankr. N.D. Ind. 1987) 487 In re Tleel, 79 B.R. 883 (Bankr. 9th Cir. 1987); In re Plunkett, 89 B.R. 776 (Bankr. E.D. Wis. 1988); In re Granada, Inc., 92 B.R. 501 (Bankr. D. Utah 1988); see also Crabtree v. Craig, 871 F.2d 36 (6th Cir. 1989) (discussing different views on this issue); contra Mills v. Brown, 182 B.R. 778 (Bankr. E.D. Tenn. 1995) (trustee in bankruptcy cannot use strong-arm powers to avoid a beneficial interest held in trust by the debtor; the avoidance powers extend only to actual voidable transfers by the debtor) 488 In re Schiavone, 209 B.R. 751 (Bankr. S.D. Fla. 1997) (relying on authority of such trustee to convey under Florida law) 489 In re Morceca, 129 B.R. 369 (Bankr. S.D. N.Y. 1991) 490 In re Planned Protective Services, Inc., 130 B.R. 94 (Bankr. C.D. Cal. 1991) 491 In re Metro Cosmetic Reconstructive Surgery, P.A., 125 B.R. 556 (Bankr. D. Minn. 1991)

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Certain statutory liens may be avoided under Section 545 of the Bankruptcy Code. However, mechanic's liens cannot be set aside if they relate back to a time prior to the filing of the bankruptcy even though they are recorded after the bankruptcy.492 Judgment liens are not subject to avoidance under Section 545 (but may be voidable preferences).493 Statutory governmental liens which are not perfected by filing a notice in the property records may be avoided under Section 545(2).494 Tax liens may be avoided (if not perfected at filing of the case) by a trustee, but not by a Chapter 13 debtor.495 According to one view, under prior law, if state law provides that the right to collect real estate taxes was automatically perfected as a lien, the trustee could not avoid the lien for prepetition and post-petition taxes on the property.496 In a Chapter 13 Bankruptcy, the city is entitled to interest on both prepetition and post-petition taxes.497 Pursuant to the Bankruptcy Reform Act of 1994, the stay does not prevent the creation or perfection of an ad valorem tax lien by the District of Columbia or a political subdivision of a state, if the tax comes due after the filing of the bankruptcy.498 10.4 Limitations on Avoidance

492

Sec. 546(b); In re Saberman, 3 B.R. 316, 6 B.C.D. 146, 1 C.B.C.2d 671 (Bankr. N.D. Ill. 1980) In re Veteran Plate Glass Co., 71 B.R. 74, 16 C.B.C.2d 574 (Bankr. N.D. Ohio. 1987) 494 In re Brent Explorations, Inc., 91 B.R. 104 (Bankr. D. Colo. 1988); Aikens v. City of Philadelphia, 100 B.R. 729 (E.D. Pa. 1989) aff'd 891 F.2d 474 (3d Cir. 1989); In re J. B. Wincells, Inc., 106 B.R. 384 (Bankr. E.D. Pa. 1989) (unrecorded federal tax lien) 495 In re Driscoll, 57 B.R. 322, 14 C.B.C.2d 146 (Bankr. W.D. Wis. 1986) 496 In re Maryland National Bank v. Mayor and City Council of Baltimore 723 F. 2d 1138, 11 B.C.D. 899, 9 C.B.C.2d 1114 (4th Cir. 1983); contra In re Carlisle Court, Inc., 36 B.R. 209, 10 C.B.C.2d 77 (Bankr. D.C. 1983) (as to post-petition taxes); see also In re Parr Meadows Racing Assoc, 880 F.2d 1540 (2nd Cir. 1990) (stay prevents attachment of tax liens for years subsequent to filing of bankruptcy) 497 In re Venable, 48 B.R. 853, 12 B.C.D. 1207, 12 C.B.C.2d 968 (S.D.N.Y. 1985) 498 Sec. 362(b)(18) (Bankruptcy Reform Act of 1994)
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Under Section 546, actions to set aside transfers or liens under Section 544, 545, 547, 548, or 553 must be commenced within two years after the earlier of the entry of the order for relief or 1 year after the appointment or election of the first trustee if the appointment or election occurs before 2 years after the entry of the order for relief.499 The running begins from the date of signing of the Order confirming the appointment of the trustee; not from the date of docketing of the Order.500 According to one view, the date of the questioned event is omitted in calculating the limitations.501 The limitation period may be irrelevant if the lien is avoided pursuant to Section 506 because it is a preference, fraudulent transfer or other voidable transfer.502 However, if a cause of action exists under state law, longer state time limits (for example, fraudulent conveyances) may control. (Indeed there may be no time limit if an applicable creditor is a governmental unit).503 According to one view, an action under Section 549 to recover a post-petition transfer by a debtor is governed by a two year limit after the transfer, regardless of whether there is a trustee and regardless of whether the Bankruptcy in converted to a different chapter.504 According to one view, if state limits have not run, the two-year limitation of Section 546 will control, if shorter.505 Even if the time limit has passed to set aside a voidable lien or other transfer, the court may reject the claim and void the lien or other transfer.506 Confirmation of a plan does not bar a subsequent avoidance action, particularly where the possibility of action was disclosed in the Disclosure Statement and Plan.507 There is no express time limit for assertion of equitable subordination. 10.5 Preferences A preference occurs if a transfer was made when the debtor was insolvent and if the transfer is made for or on the account of an antecedent debt (such as a deed in lieu of foreclosure). The transfer must be made within 90 days of the bankruptcy. If the recipient of the deed or transfer is an insider (such as a partner), the time limit is one year. A creditor who has a stranglehold over the debtor is an insider with control. Actual management is control: it includes control of personnel or contract decisions, protection schedules, and accounts payable.508 Where the debtor pays or satisfies debt which is guaranteed by an insider third party (e.g., stockholder), the payment of debt may be a transfer benefiting an insider of the debtor as a creditor of the debtor. In that event, the transfer may be voidable under prior bankruptcy law as a preference if a bankruptcy is filed within a year (e.g., after a deed in lieu of foreclosure).509 A transfer to an unrelated third party does not "benefit" an insider partner simply by reduction of its liability for the debt as a matter of law as a partner (and thus the one-year time was inapplicable).510 As to cases commenced on or after October 22, 1994, the trustee or debtor in possession may not recover a voidable preference from a creditor that is not an insider if the transfer was made between 90 days and one year before the bankruptcy filing.511 This amendment overrules the Deprizio line of cases.

499 500

Sec. 546(a) (Bankruptcy Reform Act of 1994) In re Schraiber, 141 B.R. 1008 (Bankr. N.D. Ill. 1992) 501 In re Stuber, 142 B.R. 435 (Bankr. D. Kan. 1992). The limitation period may be tolled due to concealment. In re Moody, 77 B.R. 566 S.D. Tex. 1987). Service of Process does not have to be completed before the expiration of the period. In re Kaelin Associates Electrical Construction, Inc., 70 B.R. 412, 16 C.B.C.2d 425 (Bankr. E.D. Pa. 1987) 502 In re Mid Atlantic Fund, Inc., 60 B.R. 604, 14 C.B.C.2d 1435 (Bankr. S.D.N.Y. 1986) 503 Sec. 544 504 In re H.I.A. of Mt. Vernon, 80 B.R. 944 (Bankr. S.D. Ill. 1987) 505 In re Lyons, 130 B.R. 272 (Bankr. N.D. Ill. 1991) 506 In re Mid Atlantic Fund, Inc., 60 B.R. 604, 14 C.B.C.2d 1435 (Bankr. S.D.N.Y. 1986) 507 In re Fonda Group, Inc., 108 B.R. 962 (Bankr. D.N.J. 1989); In re Acequia, Inc., 34 F.3d 800 (9th Cir. 1994) (Section 1123(b) authorizes post confirmation pursuit of a debtor's bankruptcy causes of action); related proceeding, 94 F.3d 568, 1996 U.S. App. LEXIS 22013 (9th Cir. Idaho 1996); Harstad v. First American Bank, 39 F.3d 898 (8th Cir. 1994) (the plan must provide for the action or the action must benefit creditors); In re Almacs, Inc. 202 B.R. 648 (D. R.I. 1996), mot. denied, stay vacated, Zhan v. Yucaipa Capital Fund, 1998 U.S. Dist. LEXIS 2266 (D.R. I. February 24, 1998); and criticized in In re Newport Offshore, 1998 Bankr. LEXIS 195 (Bankr. D.R. I. 1998) 508 In re Charles P. Young Co., 145 B.R. 131 (Bankr. S.D. N.Y. 1992) 509 Levit v. Ingersoll Rand Financial Corp., (In re V.N. Deprizio Construction Company), 874 F.2d 1186 (7th Cir. 1989); In re C-L Cartage Co., Inc., 899 F.2d 1490 (6th Cir. 1990); In re Robinson Bros. Drilling, Inc., 892 F.2d 850 (10th Cir. 1989); In re Suffola, Inc., 2 F.3d 977 (9th Cir. 1993); In re T.B. Westex Foods, Inc., 950 F.2d 1187 (5th Cir. 1992); In re Coastal Petroleum Corp., 91 B.R. 35, 18 B.C.D. 377 (Bankr. N. D. Ohio 1988) (however, if the guarantor had previously obtained a bankruptcy discharge, this generally would not be true); Matter of Installation Services, Inc., 101 B.R. 282 (Bankr. M.D. Ala. 1989); In re Robinson Bros. Drilling, Inc., 97 B.R. 77 (W.D. Okla. 1988) (noting the contrary majority view but emphasizing the phrase "or for the benefit of a creditor...if such creditor...was an insider"); In re Robinson Bros. Drilling, Inc., 9 F.3d 871 (10th Cir. 1993) (distinction is made between a surety with subrogation/reimbursement claim and a mere co-maker); contra Matter of Midwestern Companies, Inc., 96 B.R. 224 (Bankr. W.D. Mo. 1988), aff'd, 102 B.R. 169 (W.D. Mo. 1989); In re Performance Communications, 126 B.R. 473 (Bankr. W.D. Pa. 1991); In re J.T.L. Supermarket Corp., 145 B.R. 3 (Bankr. N.D. N.Y. 1992) 510 In re XTI Xonix Technologies, Inc., 156 B.R. 821 (Bankr. D. Or. 1993) (because of anti-Deprezio waiver by guarantor of subrogation rights, guarantor is not a creditor and there is no transfer for the benefit of a guarantor); In re Seasons Properties, 141 B.R. 631 (Bankr. E.D. Tenn. 1992) (different result if partner was a guarantor) 511 Sec. 550(c) (Bankruptcy Reform Act of 1994)

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The preference must enable the recipient to receive more than it could in a Chapter 7 liquidation proceeding. Insolvency is presumed within 90 days of the bankruptcy. The debtor who is not a debtor-in-possession may avoid a voidable preference if it involves an exemption.512 A judgment lien may be a voidable preference.513 A mechanic's lien claim is not a voidable 514 preference. The recording of a lis pendens may be an avoidable preference.515 A transfer of a mortgage to a title company that had advanced funds based on the assignor's dishonored check may be a voidable preference.516 Prior to the case of BFP v Resolution Trust Corp., 511 U.S. 531, 128 L. Ed.2d 556, 114 S. Ct. 1757 (1994), it appeared that a foreclosure sale could be an avoidable preference if occurring within 90 days of the debtor's bankruptcy (or one year if the lender is an insider or if a guarantor of the debtor is an insider of debtor) if the bidder received property valued in excess of the amount bid. Under that reasoning a bid in excess of 70% of fair market value could be a voidable preference.517 Under this reasoning a foreclosure sale bid in by the creditor could be a voidable preference; a foreclosure sale bid in by a third person could not be a voidable preference. Since the BFP case held that a regularly conducted noncollusive mortgage foreclosure is not a fraudulent transfer (because the bid is "reasonably" equivalent value), it is reasonable to assume that a mortgage foreclosure will not be avoidable as a voidable preference. This policy should not be adopted for foreclosures of other liens or for deeds in lieu of foreclosure. The cancellation of a note and replacement with a new note within 90 check days prior to the bankruptcy is not a preference.518 The payment in exchange for a release of a perfected lien is not a preference; it represents a contemporaneous exchange for new value.519 A substitution of collateral is not a voidable preference, at least where the value of the collateral is approximately the same.520 The payment prior to a bankruptcy of a lien that would be voidable in the bankruptcy is a preference.521 A Deed in cancellation of existing indebtedness may constitute a voidable preference.522 Transfers to post-confirmation creditors of post-confirmation property of a Chapter 11 debtor may be voidable preferences if the debtor's bankruptcy is then converted to a Chapter 7 proceeding.523 Forbearance by a creditor from exercise of its rights does not constitute new value.524 The substitution of a new obligation for an existing obligation is not new value under Section 547(a)(2). Substitution of a new lease for a prior lease is not new value.525 Substitution of a new lien for a prior unenforceable lien on land subject to a prior mortgage securing an amount greater than the land value may be a preference.526 Generally, the transfer by a third party to the credit of the debtor is not a voidable preference, but if a creditor initiates the transfer for eventual repayment to itself, the transfer is a voidable preference. As a result, if the creditor loans money to a debtor and takes a lien on the debtor's property knowing that the loan will be used to pay off an unsecured creditor (such as the creditor, who is owed by an affiliate of debtor), then the lien is a voidable preference.527 According to a different view, payment by a creditor to a debtor's other creditors qualifies as new value for the benefit of the debtor and is not a voidable preference.528
512 513

Sec. 522(h); Deel Rent-A-Car, Inc. v. Levine, 721 F.2d 750, 11 B.C.D. 1264, 9 C.B.C.2d 1261 (11th Cir. 1983). In re Camp Rockhill, Inc., 12 B.R. 829, 7 B.C.D. 1134, 4 C.B.C.2d 1059 (Bankr. E.D. Pa. 1981); In re Veteran Plate Glass Co., 71 B.R. 74, 16 C.B.C.2d 574 (Bankr. N.D. Ohio 1987). In re Ashley, 79 B.R. 390 (Bankr. S.D. Ill. 1987) 514 In re Lionel Corp, 29 F.3d 88 (2nd Cir. 1994) 515 In re Rising Fast Rentals, Inc., 162 B.R. 203 (Bankr. E. D. Ark. 1993) 516 In re Union Sec. Mortgage Co., 25 F.3d 338 (6th Cir. 1994) 517 In re Winters, 119 B.R. 283 (Bankr. M.D. Fla. 1990); In re Park North Partners, Ltd., 80 B.R. 551 (Bankr. N.D. Ga. 1987); In re Park North Partners, Ltd., 85 B.R. 916 (Bankr. N.D. Ga. 1988) (a preference occurred by foreclosure sale where the secured debt was less than the property value); contra First Fed. Savings & Loan v. Standard Building Association, 87 B.R. 221 (N.D. Ga. 1988) (disagreeing with Park North and stating that a foreclosure cannot be a preference); In re Ehring, 900 F.2d 184 (9th Cir. 1990) (a "creditor who purchases at a regularly conducted foreclosure sale has not received more than it would have under a Chapter 7 liquidation sale") 518 In re All-Brite Sign Service Co., Inc., 11 B.R. 409, 7 B.C.D. 844, 4 C.B.C.2d 711 (Bankr. W.D. Ky. 1981) 519 In re George Rodman, Inc., 792 F.2d 125, 14 C.B.C.2d 1230 (10th Cir. 1986), contra In re Air Florida Systems, Inc., 50 B.R. 653, 12 C.B.C.2d 1438 (Bankr. S.D. Fla. 1985) (as to an unperfected lien) 520 See In re Quade, 108 B.R. 674 (Bankr. N.D. Iowa 1989) 521 In re Washkowiak, 62 B.R. 884, 15 C.B.C.2d 206 (Bankr. N.D. Ill. 1986) 522 In re Olson, 66 B.R. 687, 15 C.B.C.2d 1118 (Bankr. D. Minn. 1986) 523 In re Hoggarth, 78 B.R. 1000, 16 B.C.D. 931, 17 C.B.C.2d 933 (Bankr. D.N.D. 1985) 524 In re Allegheny Intern, Inc., 136 B.R. 396 (Bankr. W.D. Pa. 1991), aff'd 145 B.R. 823 (W.D. Pa. 1992) (lease); In re Riggs, 129 B.R. 494 (Bankr. S.D. Ohio 1991) (security interest; new value could include new credit on a release of property) 525 In re White River Corp., 50 B.R. 403 (Bankr. D. Colo. 1987) 526 In re Rexplore Drilling, Inc., 971 F.2d 1219 (6th Cir. 1992) 527 In re American Properties, Inc., 14 B.R. 637, 8 B.C.D. 776, 5 C.B.C.2d 410 (Bankr. D. Kan. 1981) 528 In re Bellanca Aircraft Corp., 850 F.2d 1275 (8th Cir. 1988)

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Company Policy: If you are asked to insure a loan modification made by the same lender where the lender receives more advantageous interest rate or other benefits (such as contingent interest), add the following creditors ' rights exception: Any claim by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws. Upon request you may limit the exception to any claim arising out of the modification or substitute the 1992 policy creditor's rights exclusion. You do not need to add this exception if the policy issued to the lender is the ALTA 4-6-90 policy or ALTA 10-17-92 policy (with the creditors' rights exclusion retained) or if the loan is made by an institutional lender on a single-family residence. If the loan is refinanced by a different lender, you do not need to add the exception in the absence of other creditors' rights issues. The consolidation of three unsecured loans into one new loan secured by a mortgage was a partial preference: the only new value was a lower interest rate and favorable payment terms.529 A purchase money mortgage is not avoidable as a preference where the deed and mortgage were effective and recorded on the same day. The mortgage had been executed more than 10 days before the deed, pursuant to a prior contract. The mortgage was not effective until the deed was delivered.530 A transfer by a predecessor of the debtor is not avoidable in the bankruptcy proceeding of the debtor as a preference.531 A transfer by a partnership is not avoidable in a partner's bankruptcy.532 A transfer of a security interest in property is not an avoidable preference made to secure debt of a third party.533 In calculating the 90-day period for a preference (since the preference normally must occur on or within 90 days of bankruptcy), the first day of the time period (date of transfer) is included and the last day (date of filing of bankruptcy) is excluded.534 The period is calculated by counting backward from the date of the petition to the date of the transfer (relevant if the last day is a weekend or holiday).535 A voidable preference has not occurred if the creditor receives no more than it would in a Chapter 7 liquidation. For example, if the secured debt exceeds the value of the property at the time of the foreclosure or deed in lieu of foreclosure, there is no preference.536 A transfer is not a voidable preference if it is made for substantially contemporaneous consideration. However, a delay of two months in recording the security document will prevent it from being substantially contemporaneous.537 Where the security documents are not recorded contemporaneously with the loan, then the encumbrance may be a preference.538 Untimely perfection may be protected following inquiry into the reason for the delay, intent of parties, and contemporaneous nature of the exchange. If the loan is made to enable the purchase of the collateral described in the security document, one line of cases holds that the documents must be perfected within 10 days to be contemporaneous; another line holds that the former 10-day limit of 547(c)(3) is not controlling and that other factors can be considered.539 There is a split of authority among federal courts regarding whether a nonpurchase money security interest that is perfected more than 10 days after the date of transfer can be considered substantially contemporaneous in fact. One line of cases requires perfection within 10 days to avoid a claim of
529

In re Spada, 903 F.2d 971 (3d Cir. 1990) In re Pitman, 843 F.2d 235 (6th Cir. 1988) 531 In re Stanley-Southwest Investments, Inc., 96 B.R. 701 (Bankr. W.D. Tex. 1988) (transfer by partnership to which debtor later succeeded by acquisition of all partnership interests was not avoidable since the transfer was not a transfer of estate property) 532 In re Cardinal Industries, Inc., 142 B.R. 807 (Bankr. S.D. Ohio 1992) 533 In re Minnesota Utility Contracting, Inc., 101 B.R. 72, 21 C.B.C.2d 445 (Bankr. D. Minn. 1989) (however, the transfer may be a fraudulent conveyance) 534 In re Grimaldi, 3 B.R. 533, 6 B.C.D. 241, 1 C.B.C.2d 901 (Bankr. D. Conn. 1980); In re Fabmet Corp., 31 B.R. 414, 8 C.B.C.2d 1220 (Bankr. W.D.N.Y. 1983); see Rule 9006 535 Matter of Nelson Co., 959 F.2d 1260 (3d Cir. 1992) 536 In re Lucasa International, Ltd., 13 B.R. 600, 4 C.B.C.2d 1515 (Bankr. S.D.N.Y. 1981) 537 In re Independence Land Title Corp. of Illinois, 9 B.R. 394, 4 C.B.C.2d 118 (Bankr. N.D. Ill. 1981) 538 In re Jones, 37 B.R. 969, 10 C.B.C.2d 1016 (Bankr. N.D. Tex. 1984) (three and one-half months were not substantially contemporaneous); In re Arnett, 731 F.2d 358, 11 B.C.D. 1097, 10 C.B.C.2d 533 (6th Cir. 1984), (33 days is not substantially contemporaneous); In re Brown Family Farms, Inc., 80 B.R. 404 (N.D. Ohio 1987) (a gap of 2-1/2 months and perhaps even one month, is not substantially contemporaneous); In re Chicora Group, 99 B.R. 715 (Bankr. D.S.C. 1988) (perfection of mortgage more than 10 days after creation is not substantially contemporaneous); In re Quade, 108 B.R. 681 (Bankr. N.D. Iowa 1989) (six-day period between grant of mortgage and agreement to release was substantially contemporaneous); In re Strom, 46 B.R. 144 (Bankr. E.D. N.C. 1985) (perfection more than 10 days after the deeds of trust "took effect" was not contemporaneous; the transfer must be both subjectively and objectively contemporaneous); In re Lyon, 35 B.R. 759 (Bankr. D. Kan. 1982)) (20-day gap between loan and mortgage transfer is substantially contemporaneous); In re Cohee, 178 B.R. 154 (Bankr. M.D. Tenn. 1995) (delivery; but not disbursement, was more than 10 days before recording to refinance an existing mortgage; consequently the new mortgage was not substantially contemporaneous) 539 In re Davis, 734 F.2d 604, 12 B.C.D. 859, 10 C.B.C.2d 1328 (11th Cir. 1984); In re Chicora Group, 99 B.R. 715 (Bankr. D.S.C. 1988)
530

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preference. The second line applies a more flexible standard and allows a delay in perfection beyond 10 days where there are circumstances beyond the control of the lender.540 Pursuant to the Bankruptcy Reform Act of 1994, a security interest is substantially contemporaneous if the security interest secure new value to enable the debtor to acquire the property and if the security interest is perfected on or before 20 days after the debtor receives possession of the property.541 In other circumstances the transfer is made at the time the transfer takes effect, if the transfer is perfected within 10 days.542 A mortgage is a voidable preference if it is executed and delivered more than 10 days before the filing of the bankruptcy, even though the mortgage is recorded within 10 days after disbursement of loan proceeds.543 To determine a partnership's solvency, the court must consider nonpartnership assets of general partners.544 A mortgage granted on the eve of Bankruptcy to secure previously unsecured debt may, in addition to characterization as a preference, be considered a fraudulent transfer since it hinders, delays, or defrauds creditors.545 Deeds not recorded in timely fashion may constitute voidable preferences.546 A transfer by a tax deferred exchange company (accommodator) that is not made simultaneously with the receipt by the company of the funds may be a voidable preference.547 Company Policy: If you are insuring a mortgage securing previously outstanding unsecured debt, or if you are insuring a deed in lieu of foreclosure, place the following exception in the policy: Any claim by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws. Upon request you may substitute the 1992 creditor's rights exclusion. This exception will not be necessary if the insured transaction (such as a current loan to finance prior unsecured debt) creates the "creditors' rights" issue and if the 4-6-90 or 10-17-92 ALTA policy is issued. The 4-6-90 ALTA policy and 10-17-92 ALTA policy contain a similar "creditors' rights" exclusion. However, if the "creditors' rights" issue arises out of a prior transaction within one year (such as prior mortgage financing unsecured debt and now being refinanced), add this creditors' rights exception to the 4-6-90 or 10-17-92 policy. The creditors' rights exclusion in the 4-6-90 or 10-17-92 ALTA policies may be irrelevant since it extends only to a claim arising out of the insured transaction. Fraudulent Conveyances Under Section 548, a transfer made within one year before bankruptcy may be set aside as a fraudulent conveyance if the debtor was insolvent or had insufficient capital at the time and if the debtor received less than reasonably equivalent value. The one-year period commences from the recordation of the deed which evidences the fraudulent conveyance.548 The preponderance of evidence (instead of clear and convincing evidence) standard applied in bankruptcy proceedings grounded in allegations of fraud.549 To determine solvency, contingent liability is valued at its present, or expected, value (not the total liability).550 A timely disclaimer of an interest in inheritance is likely not a fraudulent conveyance.551 10.6

540

In re Marino, 193 B.R. 907, 913 (9th Cir. B.A.P. 1996), affd, 117 F.3d 1425 (9th Cir. 1997); reported in full, Dye v. Rivera (In re Marino), 1997 U.S. App. LEXIS 16334 (9th Cir. July 1, 1997); and criticized in Pongetti v. GMAC (In re Locklin), 101 F. 3d 435, 1996 U.S. App. LEXIS 33119 (5th Cir. Miss. 1996) 541 Sec. 547(c)(3) (Bankruptcy Reform Act or 1994) 542 Sec. 547(e)(2) 543 In re Cohee, 178 B.R. 154 (Bankr. M.D. Tenn. 1995) 544 In re Union Meeting Partners, 163 B.R. 229 (Bankr. E.D. Pa. 1994) 545 In re Craig, 92 B.R. 394 (Bankr. D. Neb. 1988) 546 In re Chenich, 100 B.R. 512 (Bankr. 9th Cir. B.A.P. 1987) (grant deeds to lender of equity interest in land not recorded for over one year after delivery) 547 In re San Diego Realty Exchange, Inc., 132 B.R. 424 (Bankr. S.D. Cal. 1991) (the funds of client were commingled with funds of the other parties) 548 In re Roy, 42 B.R. 102 (Bankr. S.D. Fla. 1984); contra Butter v. Lomas and Nettleton Company, 862 F.2d 1015 (3d Cir. 1988) (date of transfer by sheriff's sale is date of sale rather than date of recordation of Sheriff's Deed since mortgage causes sale to be discoverable) 549 In re Sullivan, 161 B.R. 776 (Bankr. N.D. Tex. 1993) 550 In re Xonics Photochemical, Inc., 841 F.2d 198, 17 B.C.D. 606, 18 C.B.C.2d 711 (7th Cir. 1988) 551 In re Betz, 84 B.R. 470 (Bankr. N.D. Ohio 1987) (held a fraudulent transfer); In re Stevens, 112 B.R. 175 (Bankr. S.D. Tex. 1989); contra In re Atchison, 925 F.2d 209 (7th Cir. 1991) cert. den. 112 S.Ct. 178 (1991) (disclaimer is not a transfer and is not avoidable under Section 548); In the Matter of Simpson, 36 F.3d 450 (5th Cir. 1994) (since the debtor does not possess the property under state law, the disclaimer is not avoidable under Section 548; a valid disclaimer relates back to the decedents death and is not a transfer under state law)

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The estate may, instead of recovering property fraudulently transferred, recover the value of the property.552 A deed in lieu of foreclosure may be a voidable preference or fraudulent transfer.553 A deed to a lender is for reasonably equivalent value if the total of prior liens, secured lenders mortgage and closing costs (such as brokers commission) on resale total 87% of fair market value.554 A voluntary transfer by a debtor within one year of bankruptcy while insolvent and for less than reasonably equivalent value is a fraudulent transfer.555 A friendly foreclosure allowing sale to another entity controlled by debtor's principals may be a fraudulent transfer.556 A termination of a lease or other contract may be a fraudulent transfer.557 According to one view a prepetition, ordinary course of commercial business, non-collusive termination of an executory contract in accordance with the contract because of material default is not a fraudulent transfer.558 According to one view, a termination of a real estate contract can be a fraudulent transfer that is perfected at time of recordation of the buyer's deed to the seller.559 A cancellation of debt owed by the general partner in consideration of a transfer of the partnership's note is not reasonably equivalent value.560 A grant of an encumbrance and new guaranty in substitution for a prior guaranty may not be made for reasonably equivalent value if the prior debt was adequately secured by adequate collateral of the primary obligor.561 An award of property in a divorce decree may be a fraudulent transfer if the debtor does not receive reasonably equivalent value.562 A modification of mortgage is a transfer to the extent of increased secured debt; consequently, the modification may be a fraudulent transfer.563 Hotel casino bets may constitute reasonably equivalent value; under the particular facts the bets are not fraudulent transfers.564 A title to a church may be recovered as a fraudulent transfer because any value from the church was not in exchange for contributions. Value means property, not spiritual commitment. 565 A civil in rem forfeiture under 21 U.S.C. sec. 881 is not avoidable under Section 548; the title vested in the U.S. no later than the date the government seizes the property and thus occurred more than one year before the bankruptcy filing (and more accurately, at the time of the illegal action).566 If a portion of the advances are retained by the mortgagor and the remainder are upstreamed, a good faith creditor may retain a lien for the amount retained by the borrower; the lien will be subordinated for the funds upstreamed.567 Use of loan proceeds to pay off antecedent debts to the debtor's principal shareholder were fraudulent conveyances under state law. The scheme for use of the proceeds would be collapsed if the lender knew of the circumstances that would lead it to inquire further into the transaction.568 A guarantee secured by a deed of trust will not be a fraudulent transfer if the party receives benefits (direct or indirect) from the loan and the benefits are reasonably equivalent to the obligation.569 The basic issue
552

Sec. 550(a) 209 In re Main, 75 B.R. 322 (Bankr. D. Ariz. 1987) 554 In re Jones 284 B.R. 380 (Bankr. E.D. Va 1997) 555 In re Morris Communications NC, Inc., 75 B.R. 619, 16 B.C.D. 373, 17 C.B.C.2d 270 (Bankr. W.D.N.C. 1987) (sale of stock for 10% of value) 556 Voers-Alpine Trading U.S.A. v Village Street Corp., 919 F.2d 206 (3d Cir. 1990) 557 In re Edward Harvey Co., 68 B.R. 851, 16 C.B.C.2d 131 (Bankr. D. Mass. 1987) 558 In re Metro Water and Coffee Services, Inc., 157 B.R. 742 (Bankr. W.D. N.Y. 1993) (concession agreement) 559 In re Veretto, 131 B.R. 732 (Bankr. D. N.M. 1991); contra McCanna v. Burke, 197 B.R. 333 (D. N.M. 1996) (BFP should apply so that the value of the land may be less than fair market value, consistent with BFP); adversary proceeding, on remand, Burke v. McCanna (In re Czel), 202 B.R. 778, 1996 Bankr. LEXIS 1493 (Bankr. D.N.M. 1996) 560 In re St. George Island Ltd., 131 B.R. 197 (Bankr. N.D. Fla. 1991) 561 In re Sullivan, 161 B.R. 776 (Bankr. N.D. Tex. 1993) 562 In re Riso, 102 B.R. 280 (Bankr. D.N.H. 1989) 563 See In re Venice Western Motel Ltd., 67 B.R. 777 (Bankr. M.D. Fla. 1986) (in particular case the debtor was not insolvent) 564 In re Chomakos, 170 B.R. 585 (Bankr. E.D. Mich. 1993); affd, 69 F.3d 769 (6th Cir. 1995), rehg en banc, denied 1995 U.S. App. LEXIS 37524 (6th Cir. December 20, 1995); cert. denied, 116 S. Ct. 1568 (1996) 565 In re Newman, 203 B.R. 468 (D. Kan. 1996) 566 In re Douglas, 190 B.R. 831 (Bankr. S.D. Ohio 1995) 567 In re Pajaro Dunes Rental Agency, Inc., 174 B.R. 557 (Bankr. N.D. Cal. 1994) 568 HBE Leasing Corp v. Frank, 48 F.3d 623 (2nd Cir. 1995); mot. granted, 882 F. Supp. 60, 1995 U.S. Dist. LEXIS 3683 (S.D.N.Y 1995) 569 In re Jones, 37 B.R. 969, 10 C.B.C.2d 1016 (Bankr. N.D. Tex. 1984) (the guarantor did use proceeds of loan for drilling)
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involving guarantees usually is whether the consideration flows downstream (e.g., a stockholder mortgages its property to secure a loan to its wholly owned corporation) or upstream (a corporation mortgages its assets to secure a loan made to its parent stockholders). If the proceeds flow downstream, the mortgagor generally has received the benefits of the loan by advances to its owned entity and no fraudulent transfer has occurred.570 This position is not conclusive; it may be only a rebuttable presumption. If the subsidiary is insolvent at the time of the parent's guaranty, the net effect may not benefit the parent's creditors.571 However, if the proceeds flow upstream, a possible fraudulent transfer has occurred.572 Similarly, a guarantee by an affiliate may, in appropriate circumstances, constitute a fraudulent transfer.573 Where the sole stockholder of the debtor corporation had the corporation guarantee his personal loans and pledge corporate property as security for a $135,000 loan of which the corporation received a benefit of only $8,000 for payment of its taxes, the guarantee and pledge could be avoided under Section 548.574 Similarly, a fraudulent conveyance may occur if a subsidiary transfers assets to a creditor of its parent and receives no benefit from the creditor.575 If a corporation pays a line of credit, on which its stockholder was the maker, a fraudulent transfer has not occurred if it received all advances on the line.576 If the identity of interests of affiliated corporations is sufficiently close, payment of affiliate debts will not be a fraudulent conveyance.577 A cross-collateralization transaction by several affiliates will not be avoidable as a fraudulent transfer if the affiliates are a single business enterprise: one corporate office pays the bills for affiliates; each affiliate pays its share of office expenses; the same principals have overlapping ownership among the entities; operation occurs from the same office; there is use of same telephone number and post office box; there is centralized accounting; and the companies are referred to by a single name.578 Financing of a leveraged buyout of a corporation or partnership (by mortgaging of the target corporation's assets to fund a loan to buy out its owners or by sale of the target corporation's assets or stock) may be a fraudulent transfer.579 The court may collapse various LBO transactions and treat them as one transaction.580 "Regardless of the number of steps taken to complete a transfer of debtor's property, such as in a leveraged buyout transaction, if they reasonably collapse into a single integrated plan and either defraud creditors or leave the debtor with less than equivalent value post-exchange, the transaction will not be exempt from the Code's avoidance sections."581 However,
570

Johnson v. First National Bank, 81 B.R. 87 (Bankr. N.D. Fla. 1987) (mortgage executed by stockholders on their personal assets to secure a loan to their corporation was not fraudulent transfer) 571 "The Lenders' Scylla v. Charybdis: Accepting Insider Guarantees in the 1990s," 4 Bankruptcy Law Review, at p. 16 (Spring 1992); In re Rodriguez, 895 F.2d 725 (11th Cir. 1990) (parent did not guarantee debt at time of purchase by subsidiary of collateral, collateral was worth less than debt, and parent did not use collateral) 572 In re Fox Hill Office Investors Ltd., 101 B.R. 1007 (Bankr. W.D. Mo. 1987) (mortgage for loan to reimburse general partners of partnership debtor for past advances was fraudulent transfer; In re Osage Crude Oil Purchasing, Inc., 103 B.R. 256 (Bankr. N.D. Okla. 1989) (security interest to secure debt of parent corporation was fraudulent under state law); In re Marquis Products, Inc., 150 B.R. 487 (Bankr. D. Me. 1993) (mortgage by subsidiary to secure parent's line of credit was fraudulent conveyance) 573 In re Xonics Photochemical, Inc., 841 F.2d 198 17 B.C.D. 606, 18 C.B.C.2d 711 (7th Cir. 1988); Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 8 B.C.D. 297 (2d Cir. 1981) (the transfers were deemed made when advances on the guaranteed line of credit were made); In re Minnesota Utility Contracting, Inc., 110 B.R. 414 (D. Minn. 1990) (granting of security interest by partnership debtor to secure debt owed by corporate owner where corporation was debtor's principal customer was not a transfer for reasonably equivalent value); In re Octagon Roofing, 124 B.R. 522 (Bankr. N.D. Ill. 1991) (mortgage secured guaranty of affiliated corporation under common control with debtor partnership) 574 In re Ear, Nose & Throat Surgeons of Worcester, Inc., 49 B.R. 316 (Bankr. D. Mass. 1985) 575 In re Computer Universe Inc., 58 B.R. 28, 14 C.B.C.2d 403 (Bankr. M.D. Fla. 1986) 576 In re Jeffrey Bigelow Design Group, Inc., 956 F.2d 479 (4th Cir. 1992) (corporation executed a note to its stockholder in the amount of the loan) 577 In re Miami General Hospital, Inc., 124 B.R. 383 (Bankr. S.D. Fla. 1991) 578 In re Tryit Enterprises, 121 B.R. 217 (Bankr. S.D. Tex. 1990) 579 United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986), cert. den. McClellan Realty Co. v. United States, 483 U.S. 1005, 107 S.Ct. 3229, 97 L. Ed. 2d 735 (1987); In re Ohio Corrugating Company, 70 B.R. 920, 16 C.B.C.2d 821 (Bankr. N.D. Ohio 1987); In re Anderson Industries, Inc., 55 B.R. 922 (Bankr. W.D. Mich. 1985); In re Kaiser Steel Corp., 87 B.R. 154 (Bankr. D. Colo. 1988); In re Aluminum Mills Corp., 132 B.R. 869 (Bankr. N.D. Ill. 1991) (it was alleged that lender knew or should have known of LBO structure and that debtor would not retain proceeds); Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635 (3d Cir. 1991) cert. den. 112 S.Ct. 1476 (1992) (in analyzing reasonably equivalent value, indirect benefits such as effect of restructuring must be considered; in considering debt incurred, guarantees of other parties must be considered); In re O'Day Corp., 126 B.R. 370 (Bankr. D. Mass. 1991); In re Buckhead America Corp., 178 B.R. 956 (D. Del. 1994); In re Oxford Homes, Inc., 180 B.R. 1 (Bankr. D. Me. 1995) (although funds passed through debtors, the debtor never had "dominion or control"; payment to stockholder may be voidable) 580 United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986), cert. den. McClellan Realty Co. v. United States, 483 U.S. 1005, 107 S.Ct. 3229, 97 L.Ed 2d 735 (1987) (loan to target corporation which, in turn, made unsecured loan to acquisition company); Weiboldt Stores, Inc. v. Schottenstein, 94 B.R. 488 (N.D. Ill. 1988); Crowthers McCall Pattern, Inc. v. Lewis, 129 B.R. 992 (S.D. N.Y. 1991) (target and acquisition companies merged); In re Jeannette Corp., 127 B.R. 958 (D. Pa. 1991), aff'd, 971 F.2d 1056 (3d Cir. 1992); Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056 (3d Cir. 1992) 581 In re Charles P. Young Co., 145 B.R. 131, 137 (Bankr. S.D. N.Y. 1992)

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LBO transactions should not be a fraudulent transfer as to the seller of the corporation if the seller is not aware that the corporation's assets will be mortgaged to fund the purchase.582 If a transferee from a purchaser in a leveraged buyout is a bona fide purchaser for value without notice, then the transfer is not subject to avoidance.583 The transaction will not be avoidable if the target continues to have sufficient capital and is not rendered insolvent by the leveraged buyout. If the target is able to pay its bills as they mature for several months after the leveraged buyout, this will evidence solvency, particularly where the evidence of balance sheet insolvency is inconclusive.584 Courts may have a variety of perspectives on the nature of complicated leveraged buyouts: one case analyzed a spinoff to a newly formed subsidiary of assets followed by a sale of stock of the new subsidiary and encumbrance of its assets. It concluded this was not truly a finance of stock sale of an existing corporation, but, rather, was a sale and finance of an asset purchase by a newly formed corporation. Consequently, the court concluded that fair value was given for the purchase (and finance).585 A leveraged buyout may constitute settlement payment exempted by Section 546(e) from advance where paid in the securities or commodities market.586 Actual intent to defraud creditors may be evidenced by a mortgage to an insider (including a "close friend") to secure pre-existing debt when the mortgagor was insolvent.587 Actual intent to defraud creditors was found where substantially all of the assets of the debtor were transferred to a successor corporation but one of the significant debts of the debtor was not assumed by the successor.588 Indicia of fraudulent intent also include corporate transfers to directors and transfers for inadequate consideration between closely related entities.589 A transfer may be a fraudulent transfer if the debtor did not receive reasonably equivalent value and if the debtor retained unreasonably small capital to continue its business. Unreasonably small capital has been variously interpreted as (1) insolvency, (2) the encumbrance of all assets (as unreasonably small capital per se), or (3) insufficient cash flow.590 A leveraged buyout may not be avoidable unless a creditor is unpaid and is prejudiced. A trade creditor may be prejudiced if the relationship arose before the leveraged buyout and the debt is owed for a period after the leveraged buyout.591 A lien granted to a new lender refinancing a prior loan may be avoidable as a fraudulent transfer.592 Redemption of corporate stock when a corporation is insolvent may constitute a violation by state corporation law and therefore may be voidable.593 A claim of the United States government shall be paid first if the person indebted to the U.S. is insolvent and the debtor makes a voluntary assignment of property, property is attached, or an act of bankruptcy is committed.594 Company Policy: In any case of upstream or downstream guarantees, leveraged buyouts or gift deeds in your transaction, even though no bankruptcy is pending, the following "creditor's rights" exceptions should appear: Any claim by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws. Upon request you may substitute the 1992 creditor's rights exclusion. This exception will not be necessary if the insured transaction (such as a current loan to finance a leveraged buyout) creates the "creditors' rights" issue and if the 4-6-90 or 10-17-92 ALTA policies are issued. The 4-6-90 and 10-17-92 ALTA policies contain a similar "creditors' rights" exclusion. However, if the "creditors' rights" issue possibly arises out of a prior transaction (such as a leveraged buyout now being refinanced), add this creditors' rights
582

Kupetz v. Continental Illinois National Bank & Trust Co., 77 B.R. 754 (Bankr. C.D. Cal. 1987); aff'd, 845 F.2d 842 (9th Cir. 1988); see also Credit Managers Association of Southern California v. Federal Company, 629 F. Supp. 175 (C.D. Cal. 1985 (general discussion of leveraged buyouts)) 583 In re Ohio Corrugating Co., 91 B.R. 430 (Bankr. N.D. Ohio 1988) 584 In re Ohio Corrugating Co., 91 B. R. 430 (Bankr. N.D. Ohio 1988) 585 In re Morse Tools, Inc., 148 B.R. 97 (Bankr. D. Mass. 1992) 586 Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913 F.2d 846 (10th Cir. 1990) 587 Matter of Kucharek, 79 B.R. 393 (Bankr. E.D. Wis. 1987) 588 In re Jenkins Landscaping & Excavating, Inc., 93 B.R. 84 (W.D. Va. 1988) 589 In re Anchorage Marina, Inc., 93 B.R. 686 (Bankr. D.N.D. 1988) 590 In re Structurlite Plastics Corp., 193 B.R. 451 (Bankr. S.D. Ohio 1995); summ judgment denied, 1995 Bankr. LEXIS 2154 (Bankr. S.D. Ohio November 21, 1995; partial summ. judgment granted, 214 B.R. 316, 1997 Bankr. LEXIS 1746 (Bankr. S.D. Ohio 1997) 591 In re Structurlite Plastics Corp., 193 B.R. 451 (Bankr. S.D. Ohio 1995) 592 See Weiboldt Stores v. Schottenstein, 94 B.R. 488 (N.D. Ill. 1988) 593 In re Joshua Slocum, Ltd., 103 B.R. 610 (Bankr. E.D. Pa. 1989) aff'd, 121 B.R. 442 (E.D. Pa. 1989); Lippi v. City Bank, 955 F.2d 599 (9th Cir. 1992) (if the lender had knowledge, then the related loan facilitating the illegal indirect purchase of corporate stock would also appear to violate the "direct and indirect" prohibition of purchase by a corporation of its stock); In re Jeanette Corp., 127 B.R. 958 (D. Pa. 1991), aff'd, 971 F.2d 1056 (3d Cir. 1992) (unlawful distribution); Crowthers McCall Pattern, Inc. v. Lewis, 129 B.R. 992 (S.D. N.Y. 1991); In re Vadnais Lumber Supply, Inc., 100 B.R. 127 (Bankr. D. Mass. 1989) (purchase by corporation of stock in LBO violates corporate law) 594 31 U.S.C. Section 3713

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exception to the 4-6-90 or 10-17-92 policy. The creditors' rights exclusion in the 4-6-90 or 10-17-92 ALTA policies may then be irrelevant since it extends to a claim arising out of the insured transaction. If we are asked to delete the creditor's rights exclusion (from the 1990 or 1992 policy) or to issue the 1970 policy without a creditor's rights exception, you may do so (where lawful): 1. On a loan policy if the property is a 1-4 family residence, and on purchase money loan by an institutional lender. 2. If our underwriting personnel approve such issuance in other cases. See our checklist of questions. We will consider on a case-by-case basis, such issuance where cross guarantees by affiliates will occur. Factors include: (1) debt to equity ratios; (2) adequacy of case flow to service debt; (3) relationship of affiliates (e.g., are they related partnerships with common partners; or sister corporations; do they engage in same type of business); (4) type of business of mortgagors (e.g., are they single asset real estate related entities, or do they engage in industrial mining or other business); (5) unsecured creditors of the mortgagors (do they have many; how much; current?; Do they owe income taxes); (6) any pending suits against the mortgagors (these may reflect debts and potential claimants); (7) do the mortgage documents have a savings clause (e.g., not secure more than 95% of new worth; no more than maximum amount that would not cause insolvency, etc.); (8) will each mortgagor receive some loan benefits, or will some mortgagors simply guaranty debt of affiliates?; (9) will we have a "deductible" (e.g., lender may assume initial loss or initial defense cost, for example, up to $1,000,000); (10) are all improvements complete; (11) is the land fully leased? If a prior loan transaction is subject to a creditor's rights issue (e.g., leveraged buyout financing), the refinance also may be tainted and should be subject to the broad creditor's rights exception. A cross default clause alone does not appear to affect the validity of the mortgage. A creditor loaning money to a debtor and taking a security interest with knowledge that the loan will be used to pay off an unsecured creditor has made a fraudulent transfer since it hinders collection of other debts.595 Benefits to affiliates may be sufficient value if they are so closely connected to be an economic unit or to have identity of interest.596 Value can be present or antecedent debt. There are different views on whether an exchange involving security from a antecedent debt is receipt of less than reasonably equivalent value.597 The case of BFP v. Resolution Trust Corp., 511 U.S. 531, 128 L. Ed.2d 556, 114 S. Ct. 1757 (1994) held that reasonably equivalent value at a nonjudicial or judicial mortgage sale is the price bid at the noncollusive sale conducted in accordance with state foreclosure law. The sweep of this case does not extend to statutory lien foreclosure or deeds in lieu of foreclosure.598 Under the 1984 amendments to this Section, a fraudulent transfer expressly included a transfer which is either voluntary or involuntary. The term "transfer" includes foreclosure of debtor's equity of redemption. In the concurring opinion of Madrid v. Lawyers Title Insurance Corp., 725 F.2d 1197, 11 B.C.D. 945, 10 C.B.C. 2d 347 (9th Cir. 1984) cert. denied, 469 U.S. 833, 105 S. Ct. 125, 83 L.Ed. 2066 the judge stressed that the Act did not expressly apply to transactions that were involuntary conveyances. The majority opinion in the Madrid case said that the transfer of relevance where there has been a foreclosure is the initial deed of trust and not the trustee deed. That case may also have been rejected by the 1984 amendments. The case of In re Alsop, 14 B.R. 982, 8 B.C.D. 335, 5 C.B.C.2d 797 (Bankr. D. Alaska 1981), aff'd, 22 B.R. 1017, 6 C.B.C.2d 669 (D. Alaska 1982), agreed with the reasoning of Madrid in holding that the time of perfection under Section 548 in connection with the foreclosure is the

595

In re American Properties, Inc., 14 B.R. 637, 8 B.C.D. 776, 5 C.B.C.2d 410 (Bankr. D. Kan. 1981) In re Miami General Hospital, Inc., 124 B.R. 383 (Bankr. S.D. Fla. 1991); In re Tryit Enterprises, 121 B.R. 217 (Bankr. S.D. Tex. 1990) (crosscollateralization) 597 In re Anand, 210 B.R. 456 (Bankr. N.D. Ill. 1997) (holds that collateralizing an antecedent debt cannot constitute less that reasonably equivalent value, regardless of the value of the collateral; the case contrasts taking on additional debt which might be a fraudulent transfer) 598 See In re CF Realty Trust, 160 B.R. 461 (Bankr. D. N. H. 1993) (tax foreclosure may be fraudulent transfer); In re Lord, 179 B.R. 429 (Bankr. E.D. Pa. 1995) (based on sufficiency of protections in the state's tax foreclosure law, which are similar to those in a mortgage foreclosure, the tax sale is deemed conclusive evidence of equivalent value)
596

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recordation date of the deed of trust, as did the case of In re Ehring, 91 B.R. 897 (Bankr. 9th Cir. 1988) on appeal 900 F.2d 184 (9th Cir. 1990) (acknowledging that the Code definition of "transfer" had been amended). The case of Durrett v. Washington National Insurance Co., 621 F.2d 201, 6 B.C.D. 954 (5th Cir. 1980) held that actual foreclosure itself was a fraudulent conveyance if fair (reasonably equivalent) consideration was not given. It held that the 57.7% of fair market value was not fair consideration and that 70% probably would be so. A transfer arguably for 68.5% of fair market value was not for reasonably equivalent value.599 A transfer for 62% of fair market value was not reasonably equivalent value.600 The case of In re Hulm, 738 F.2d 323, 11 C.B.C.2d 154 (8th Cir. 1984), cert. denied, 469 U.S. 919, 105 S. Ct. 398 (1984) agreed with Durrett that a foreclosure following the statutory redemption period was a transfer under Section 548. However, in a second approach the case of In re Winshall Settlor's Trust, 758 F.2d 1136 13 B.C.D. 839, 12 C.B.C.2d 605 (6th Cir. 1985) held that (in accordance with state law), there must be a showing of some element of fraud, unfairness, or oppression accounting for the inadequacy of price. The case of In re Strauser, 40 B.R. 868, 12 B.C.D. 171, 10 C.B.C.2d 1323 (Bankr. N.D. Ohio 1984), held that consideration received at a noncollusive and regularly conducted judicial foreclosure in Ohio is reasonably equivalent value, although less than 70% of fair market value.601 Similarly, In re Madrid, 21 B.R. 424 (Bankr. 9th Cir. 1982), aff'd on other grounds, 725 F.2d 1197 (9th Cir. 1984), cert. denied, 469 U.S. 833, 105 S. Ct. 125 (1984), and In re BFP, 974 F.2d 1144 (9th Cir. 1992), aff'd, BFP v RTC, 511 U.S. 531, 128 L. Ed.2d 556, 114 S. Ct. 1757 (1994), held that, in accordance with state foreclosure law, a price obtained at a non-collusive foreclosure sale properly conducted under state law was irrebuttably presumed to be reasonably equivalent value. A third approach stated that the value equivalent is too uncertain, and instead requires that a commercially reasonable sale occur in order for reasonably equivalent value to be considered to have been bid. Factors involved in such analysis include advertising in real estate sections of newspapers and mailings to various brokers as well as the amount bid at sale.602 Some cases, in a fourth approach analogous to the third approach, provided no absolute guideline as to what reasonably equivalent value was, and stated that reasonably equivalent value must be determined in an evidentiary hearing. In analyzing whether the foreclosure on a senior lien was made for reasonably equivalent value, the balance owing on junior liens was irrelevant.603 If the lien foreclosed was a subordinate lien, one analysis compared the value of the equity in the property to the amount bid.604 Another method compares the amount of prior liens and bid to the fair market value.605 As noted in the case of In re Richardson, 23 B.R. 434, 9 B.C.D. 895 (Bankr. D. Utah 1982), there were several ways to analyze whether a fraudulent transfer has occurred: bid on second lien plus amount of first lien owed compared to fair market value; bid compared to fair market value; bid compared to fair market value less post-sale liens; and bid compared to fair market value less presale liens. There was conflicting thought on whether the debt cancelled must be added to the amount bid at sale to determine whether reasonably equivalent value was bid. The amount of debt cancelled also must be considered.606 The rulings in these cases no longer apply to mortgage foreclosure sales, although the reasoning is still relevant in the context of a tax foreclosure or other involuntary sale. Deeds in lieu of foreclosures may still be vulnerable as fraudulent transfers or voidable preferences. Some cases have extended the reasoning of BFP v RTC to tax foreclosure sales (holding that the bid price is reasonably equivalent value).607

599

In re Berge, 33 B.R. 642, 9 C.B.C.2d 530 (Bankr. W.D. Wis. 1983) In re Corbett, 80 B.R. 32 (Bankr. E.D. Pa. 1987) 601 Accord In re Verna, 58 B.R. 246, 14 B.C.D. 7, 14 C.B.C.2d 170 (Bankr. C.D. Cal. 1986) (if a third party buys) 602 In re General Industries, Inc., 79 B.R.124 16 B.C.D. 775, 17 C.B.C.2d 1042 (Bankr. D. Mass. 1987); In re Ruebeck, 55 B.R. 163 (Bankr. D. Mass. 1985); In re Henry-Luqueer Properties, Inc., 145 B.R. 771 (Bankr. E.D. N.Y. 1992) 603 In re McClintock, 75 B.R. 612 (Bankr. W.D. Mo. 1987) 604 In re Kjeldahl, 52 B.R. 916 (D. Minn. 1985); In re Cole, 81 B.R. 326 (Bankr. E.D. Pa. 1988) 605 In re IPI Liberty Village Associates, 92 B.R. 882 (Bankr. W.D. Mo. 1987); In re Brasby, 109 B.R. 113 (Bankr. E.D. Pa. 1990) 606 Roy v. Federal National Mortgage Association, 76 B.R. 188 (Bankr. N.D. Fla. 1987); In re Brunell, 76 B.R. 64 (E.D. Pa. 1985) (this decision had troubling language implying that the excess bid over the debt owed might be compared to the equity to determine reasonably equivalent value in some cases); contra, In re Corbett, 80 B.R.32 (Bankr. E.D. Pa. 1987) 607 See In re T.F. Stone Co., Inc., 72 F.3d 466 (5th Cir. 1995) (bid at tax sale is present fair equivalent value for post petition transfer and is not avoidable; the price bid at a regularly conducted noncollisive tax foreclosure sale is reasonably equivalent value and present fair equivalent value.); In re Golden, 190 B.R. 52 (Bankr. W.D. Pa. 1995) (BFP applies to Pennsylvania tax sale); In re McGrath, 170 B.R. 78 (Bankr. D.N.J. 1994) (reasoning of BFP applies to New Jersey tax sale); In re Lord, 179 B.R. 429 (Bankr. E.D. Pa. 1995);In re Russell-Polk, 200 B.R. 218 (Bankr. E.D. Mo. 1996) (BFP applies to forced tax sale in Missouri); contra In re DAlfonso, 211 B.R. 508 (Bankr. E.D. Pa. 1997)
600

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The transfer of property sold at a tax sale occurs upon expiration of the redemption period (for calculation of the time to attack a transfer under Section 548).608 According to one case, BFP will apply to executory contract forfeitures so that the courts should consider the effect that the distressed contract has on the lands worth on date of transfer; therefore, the propertys value is likely less than the fair market value.609 According to another case, BFP applies to contract forfeitures. This view applied under state law because the forfeiture of contract did not shock the courts conscience so as to make the contract forfeiture unenforceable under state law; the transfer is for reasonably equivalent value and is not a fraudulent transfer.610 According to another view, a contract forfeiture may be a fraudulent transfer.611 State fraudulent conveyance statutes with language similar to Section 548 may apply under Section 544. Those laws may provide longer limitation statutes.612 Some state fraudulent transfer acts (such as in Texas) provide that the amount bid at a regularly conducted noncollusive foreclosure is reasonably equivalent value. This risk, however, is minimal, in light of the BFP case in other states that do not exempt foreclosures sales. If several states have contact with the transaction, the sale of the conveyed property will often, but not always, be the state with the most significant relationship to a fraudulent conveyance action in order to determine applicable state law.613 Company Policy: (1) You do not need to use a Durrett or creditor's rights exception in connection with a judicial or nonjudicial foreclosure of a mortgage or resale after that foreclosure. (2) If there has been recordation of a deed in lieu of foreclosure of a mortgage, a deed pursuant to foreclosure of taxes or involuntary liens, sheriff's deed or other deed in connection with a tax sale or involuntary lien foreclosure within the year prior to your examination or if the right of redemption from a tax sale or other involuntary lien foreclosure under state law ended within the year prior to your examination, you should place the following exception in your commitment and/or policy to be issued to the grantee of the deed in lieu or (foreclosure) deed: "any claim by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws." If this exception is to be placed in a policy covering single-family residential property, you may add the following language to the exception: "as adjudicated or claimed in any present or future bankruptcy proceeding by or against ___________ (here place names of parties whose interests were foreclosed) provided that the bankruptcy petition is filed within one (1) year after __________________ (here place date on which redemption rights end or deed is recorded)." (3) You do not need to use this exception in connection with a resale after the foreclosure of a tax lien or other involuntary lien or deed in lieu of foreclosure (if that transaction is otherwise satisfactory) provided that: (1) the party whose interest was foreclosed is not in possession of the property; (2) that party has not filed a bankruptcy according to your records; and (3) (a) the property constitutes a single-family residence and (not a sale of multiple residences); or (b) the party who acquired by foreclosure is conveying by sale an unrelated third party and the amount of indebtedness either bid in or cancelled pursuant to the foreclosure (in some states, the full amount owing at time of foreclosure is deemed to be cancelled or not subject to collection after foreclosure) is at least 70% of the amount of the resale price; or (c) you are issuing on an arms length sale only to unrelated persons (not to the party that acquired by foreclosure) and the sales price does not exceed $1,000,000; or

608

In re Moureau, 147 B.R. 441 (Bankr. N.D. Ill. 1992) (the court notes another view: the transfer occurs at the tax sale); in re Butler, 171 B. R. 321 (Bankr. N.D. Ill. 1994) 609 McCanna v. Burke, 197 B.R. 333 (D. N.M. 1996); adversary proceeding, on remand, Burke v. McCanna (In re Czel), 202 B.R. 778, 1996 Bankr. LEXIS 1493 (Bankr. D.N.M 1996) 610 In re Czel, 202 B.R. 778 (Bankr. D. NM 1996) 611 In re Grady, 202 B.R. 120 (Bankr. N.D. Iowa 1996) 612 In re Morse Tool, Inc., 108 B.R. 389 (Bankr. D. Mass. 1989) (under state law trustee could attack transfer if there was a "future creditor" after the transfer in question); In re O.P.M. Leasing Services, Inc., 40 B.R. 380 (Bankr. S.D.N.Y. 1984), aff'd, 44 B.R. 1023 (S.D.N.Y. 1984); In re Kaiser Steel Corporation, 87 B.R. 154 (Bankr. D. Colo. 1988) (California Uniform Fraudulent Conveyance Act in connection with Leveraged Buyout) 613 In re Morse Tool, Inc., 108 B.R. 384 (Bankr. D. Mass. 1989)

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(4)

(5)

(6) (7)

you otherwise secure express underwriter approval for issuance without exception (for example, in some cases we will rely upon indemnities or, if there is no current sale, we will rely upon appraisals to determine current value). If more than one (1) year has passed since the recordation of the deed pursuant to the involuntary lien foreclosure or deed in lieu of foreclosure and if more than one (1) year also has passed since all redemption rights have ended, then you will not need to make an exception under any circumstances where insuring a resale. The party whose interest was foreclosed or conveyed by deed in lieu of foreclosure must no longer be in possession of the property and that party must not have filed a bankruptcy after the recordation of the deed or end or redemption rights. If the party whose interest was foreclosed in a tax or involuntary lien foreclosure or conveyed by deed in lieu of foreclosure subsequently filed a bankruptcy after foreclosure (of an involuntary lien or end of redemption rights), then you will need to place the above exception in the policy. You should secure express underwriter approval before deleting the exception. If the foreclosure occurred during the bankruptcy proceeding of the owner pursuant to proper lifting of the stay, you will not need to make any exception. If the rights of a purchaser under a contract for deed were forfeited within the year prior to your examination, then you will not need to make an exception, provided that the purchaser has not filed a bankruptcy proceeding according to your records, the purchaser is not in possession of the property, and the amount owed on the contract was at least 70% of the amount of the resale price. If more than one (1) year has passed since the forfeiture, and if the purchaser did not file a bankruptcy thereafter, no exception is necessary. If the purchaser did file a bankruptcy after the forfeiture, you should place the exception in the policy.

(d)

Company Policy: If you reasonably suspect that a seller in a voluntary transfer may file a bankruptcy shortly, do not insure unless you are satisfied that the sale approximates fair market value. Company Policy: Do not rely on this section (protecting innocent purchasers) if you are aware of the bankruptcy: e.g., the purchaser may have knowledge or may not have bought in good faith. A foreclosure (after the stay is lifted) during the pendency of a bankruptcy proceeding is not avoidable in that bankruptcy proceeding as a fraudulent transfer.614 If a debtor is dissatisfied with the lift of stay, the debtor may appeal (and secure a stay pending appeal) or secure a dismissal and wait 180 days to refile. A foreclosure during a Chapter 11 proceeding pursuant to a lift of stay is not subject to attack as a fraudulent conveyance when the proceeding is converted to Chapter 7, since the foreclosure still occurred after the date of filing of petition.615 10.7 Post-Filing Transfer A post-filing foreclosure or sale to a good faith purchaser without knowledge for present fair equivalent consideration will not be set aside if no copy or notice of the petition has been filed in the real property records prior to the filing of the good faith purchaser's deed.616 Company Policy: Do not rely on this section (protecting innocent purchasers) if you are aware of the bankruptcy: e.g., the purchaser may have knowledge or may not have bought in good faith. A mortgagee buying in at its foreclosure is not protected under Section 549(c) since by bidding in its preexisting debt it has not paid present consideration.617 The purchaser at a foreclosure sale must perfect the foreclosure by recordation of the foreclosure deed before a notice of bankruptcy is recorded. In the event the purchaser fails to do so, the post-bankruptcy foreclosure is avoidable under Section 549, even if the sale is effective against any bona fide purchaser.618

614

In re Frank, 80 B.R. 19 (Bankr. E.D. N.Y. 1987); In re Matheson, 84 B.R. 435 (Bankr. N.D. Tex. 1987); In re Hood, 92 B.R. 648 (Bankr. E.D. Va. 1988) 615 In re Meltzer, 84 B.R. 312 (Bankr. D. Conn. 1988), appeal denied, 90 B.R. 21 (D. Conn. 1988) 616 Sec. 549(c) 617 In re Penfil, 40 B.R. 474, 11 C.B.C.2d 178 (Bankr. E.D. Mich. 1984); In re Purnell, 92 B.R. 625 (Bankr. E.D. Pa. 1988); In re Williams, 100 B.R. 726 (Bankr. M.D. Pa. 1989) 618 In re Konowitz, 905 F.2d 55 (4th Cir. 1990); In re Williams, 124 B.R. 311 (Bankr. C.D. Cal. 1991)

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A post-petition third-party purchaser at a foreclosure sale must record its deed to rely upon Section 549.619 A post-petition transfer by the debtor (or perfection of transfer by recordation), as opposed to an involuntary foreclosure in violation of the automatic stay, is not void, but is merely voidable during the bankruptcy proceeding.620 An action to set aside the transfer must be filed within two years of the transfer, and is not tolled by conversion of the bankruptcy.621 The time to set aside the transfer may be tolled until the trustee knows or should know of the transfer.622 It will be tolled by inequitable conduct of the debtor (e.g., deceit and nondisclosure).623 A third party, such as a creditor, lacks standing to attack a post-petition transaction as a violation of Section 549 (in the absence of court authorization to act on behalf of the trustee of debtor-in-possession) and may only seek damages for violation of Section 362.624 Company Policy: Do not rely upon a violation of section 362 or section 549 to waive a lien perfected after the filing of a bankruptcy. The assignment of a note secured by a mortgage during a bankruptcy proceeding is not protected by Section 549(c); this provision extends only to a purchaser of real estate and not to an assignee of a note secured by a lien.625 A post-petition deed of trust by the debtor is avoidable as a violation of Section 364 if it is not approved by the court (and cannot be protected under Section 549(a)). However, since the loan was a purchase money lien, the lender, as a matter of equity, may recover the principal but will not be protected under section 549(c) because a deed of trust is not a protected transfer.626 A third-party purchaser at a post-petition foreclosure sale could not qualify as a good faith purchaser where the foreclosure trustee knew of the bankruptcy and the trustee also acted as attorney for a third-party agent of the purchaser. The trustee's knowledge was imputed to the agent and, through the agent, the knowledge was imputed to the purchaser.627 If the third-party buyer at the post-petition foreclosure sale has no other relationship with the trustee, the knowledge of a trustee under a Deed of Trust of the bankruptcy of the mortgagor will not be imputed to the buyer at the foreclosure sale.628 Good faith depends on (1) whether the transaction was an arms length bargain and (2) whether the transferee possess sufficient facts to cause a reasonable person to investigate whether the debtor was in bankruptcy or whether bankruptcy was imminent.629 A third-party purchase at a post-petition foreclosure sale is conclusively deemed to be made for present fair equivalent value if the sale is conducted in compliance with state law.630 Present "fair equivalent" value may require payment of a higher percentage of fair market value than "reasonably equivalent" value.631 According to another case, "present fair equivalent value" implies a more exacting standard than "reasonably equivalent value": it contemplates fair market value or "something very close to it."632 However, this view is not universally accepted.633 According to one case, the protection afforded a post-petition purchaser will not apply to a transfer that violates the automatic stay (such as a tax sale). It will be limited to transfers by the debtor not in the ordinary course of business.634
619 620

In re Ward, 837 F.2d 124, 18 C.B.C.2d 133 (3d Cir. 1988) In re Brooks, 79 B.R. 479 (Bankr. 9th Cir. 1987) (mortgagee rerecorded Deed of Trust during bankruptcy); In re Schwartz, 954 F.2d 569 (9th Cir. 1992) (citing the minority view that a violation of the stay is voidable, not void) 621 In re H.I.A. of Mt. Vernon, 80 B.R. 944 (Bankr. S.D. Ill. 1987) 622 In re Dakota Drilling, Inc., 135 B.R. 878 (Bankr. D.N.D. 1991); In re Olsen, 36 F.3d 71 (9th Cir. 1994); mot. denied, 1994 U.S. App. LEXIS 26385 (9th cir. Alaska, September 19, 1994); and subsequent appeal, 1994 U.S. App. LEXIS 34567 (9th Cir. Alaska, November 22, 1994) 623 In re Fan, 132 B.R. 430 (Bankr. D. Haw. 1991) 624 Matter of Pointer, 952 F.2d 82, (5th Cir. 1992), cert. denied, 112 S. Ct. 3035, 120 L. Ed. 2d 904, 60 USCW 3016 (1992) (concerned post-petition ad valorem tax lien) 625 In re Rice, 83 B.R. 8, 17 B.C.D. 279 (Bankr. 9th Cir. 1987) 626 In re McConville, 110 F.3d 47 (9th Cir. 1996) (petition for cert. filed 8-12-97 and 9-11-97); cert denied, 1997 U.S. LEXIS 6723, 118 S. Ct. 412 (U.S. 1997) 627 In re Adams, 86 B.R. 867 (Bankr. E.D.N.C. 1988) 628 In re Wingo, 89 B.R. 54 (Bankr. 9th Cir. 1988) 629 In re Auxano, Inc., 96 B.R. 957 (Bankr. W.D. Mo. 1989) 630 In re McDonald, 210 B.R. 648 (Bankr. S.D. Fla. 1997) 631 In re Powers, 88 B.R. 294 (Bankr. D. Nev. 1988) 632 In re Auxano, Inc., 96 B.R. 957 (Bankr. W.D. Mo. 1989) 633 In Abdul-Hasan, 104 B.R. 263 (Bankr. C.D. Cal. 1989) (a bid in excess of or equal to 70% of fair market value is sufficient); In re Bago, 149 B.R. 610 (Bankr. C.D. Cal. 1993) (price at a noncollusive, regularly conducted foreclosure establishes present fair equivalent value); disapproved by Shaw v. County of San Bernandino In re Shaw), 157 B.r. 151, 1993 Bankr. LEXIS 1187, (B.A.P. 9th Cir. Cal. 1993); and criticized in In re T.F. Stone Co., Inc., 72 F.3d 466 (5th Cir. 1995) (bid at regularly conducted noncollusive tax sale is present fair equivalent value) 634 In re Service, inc., 144 B.R. 933 (Bankr. S.D. Fla. 1992)

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Innocent Transferees Innocent transferees from parties to a fraudulent conveyance or a voidable preference or other voidable transfer, will not have their transfer set aside if they pay value without knowledge of the voidability of the transfer.635 It has been said that "knowledge" means actual knowledge of the voidability of the transfer and not constructive notice by matters of record.636 Otherwise, good faith transferees may be given a lien to secure the amounts they paid and the amount spent in good faith for improvements.637 A party may not take in good faith if aware of a foreclosure which is the transfer in issue, since this may be sufficient evidence of a debtor's financial difficulties.638 "Value" has been construed by one case as denoting fair market value.639 According to one case, if a secured party acquired title to the property in a voidable transaction, it is entitled to have its lien reinstated if the transfer of title is voided, even if it did not acquire title in good faith.640 Company Policy: Do not rely on the innocent transferee provisions to issue without exception to fraudulent transfer or voidable preference issues except as provided in our guidelines of fraudulent transfers. Preservation Any transfer avoided under these sections shall be preserved for the benefit of the estate. Any avoidance of a transfer or lien will not allow any parties, such as an inferior lienholder, to step up in priority.641 10.10 Equitable Subordination A lien or claim can be equitably subordinated to other claims against a corporation (i.e., recharacterized as capital) formerly controlled by the creditor if the creditor dominated the corporation at the time and had knowledge that might render the loan unrepayable, the payment depended on a business turn around, and the transaction was made due to inside information giving an unfair advantage.642 Three categories of conduct sufficient to warrant equitable subordination are (1) fraud, illegality, or breach of fiduciary duty; (2) undercapitalization; and (3) use of the debtor as a mere instrumentality or alter ego.643 In deciding that equitable subordination would not lie, one court cited several factors: the lender did not own controlling stock in the borrower; the lender did not make management decisions for the borrower (e.g., which creditors to pay); the lender did not place its employees as directors or officers of the borrower; the lender did not influence the removal of borrower personnel; the lender did not request particular action at any shareholders meeting; the lender did not direct the borrower not to pay vendors; the lender did not coerce the borrower to execute security agreements after the borrower became insolvent; the control over finances and reduction in loan advances was based on the prior loan agreement.644 Subordination has been allowed where a lender also was in substance the owner
635

10.8

10.9

Sec. 550 Smith v. Mixon, 788 F.2d 229, 14 B.C.D. 688, 14 C.B.C.2d 704 (4th Cir. 1986); In re Queen City Grain, Inc., 51 B.R. 722 (Bankr. S.D. Ohio 1985) (actual knowledge of insolvency of transferor and of transfer for less than reasonably equivalent value is necessary); In re Instrument Sales & Service, Inc., 99 B.R. 742 (Bankr. W.D. Tex. 1987) (actual knowledge does not exist where an examination of the bank records should have put the FDIC on notice of voidable preference due to delayed perfection of security interest, but knowledge was not shown; the FDIC in its corporate capacity is protected as a good faith purchaser); In re Linen Warehouse, Inc., 100 B.R. 856 (Bankr. W.D. Tex. 1989) (FDIC as receiver is a transferee for value from a failed bank; the FDIC did not have actual knowledge simply because the adversary proceeding attacking a transfer as a fraudulent transfer was filed and in the bank records since constructive notice is not equivalent to acknowledge); In re Kanterman, 108 B.R. 432 (S.D.N.Y. 1989) (FDIC as receiver of bank cannot avoid attack on mortgage as fraudulent transfer by reliance on 12 U.S.C. 1823(e) (Supp. 1994)); In re Perrie Bailey Drilling Co., Inc., 111 B.R. 565 (Bankr. W.D. La. 1990) (FDIC as receiver is not transferee for value); In re Still, 124 B.R. 24 (N.D. Tex. 1991), aff'd, 963 F.2d 75 (5th Cir. 1992), (FDIC cannot assert position as good faith transferee as it did not pay value in acquiring assets as receiver); contra In re Auxano, 96 B.R. 957 (Bankr. W.D. Mo. 1989) (Section 550(b) implies a broad inquiry as to what the transferee knew or had reason to know about the transfer and the status of debtor's financial condition); In re Goodwin, 115 B.R. 674 (Bankr. C.D. Cal. 1990) ("The transferee must have knowledge of sufficient facts that (i) puts the transferee on notice that the transfer might be avoidable or (ii) requires further inquiry into the situation and such inquiry is likely to lead to the conclusion that the transfer might be avoidable."); In re Hickey, 168 B.R. 840 (Bankr. W.D. N.Y. 1994) (good faith is not limited to lack of actual knowledge of actual fraud; there must be a lack of knowledge of circumstances requiring investigation of whether the transfer is avoidable) 637 Secs. 548, 550. 638 In re Littleton, 82 B.R. 640 (Bankr. S.D. Ga. 1988); rev'd on other grounds, 888 F.2d 90 (11th Cir. 1989); but see In re Queen City Grain, Inc., 51 B.R. 722 (Bankr. S.D. Ohio 1985) (Good faith is not negated by knowledge of unfavorable financial condition of transferor or where initial transferee was insider of transferor.) In re Practical Inv. Corp., 95 B.R. 935 (Bankr. E.D. Va. 1989) (good faith under Section 548(c) is not negated by knowledge that the transferor is having financial difficulties or by constructive notice by matters of record) 639 In re Auxano, Inc., 96 B.R. 957 (Bankr. W.D. Mo. 1989); Cf., In re Laguna Beach Motors, inc., 159 B.R. 562 (Bankr. C.D. Cal. 1993) (value is reasonably equivalent value, not fair market value) 640 In re Cole, 81 B.R. 326 (Bankr. E.D. Pa. 1988) 641 Sec. 551; In re Price, 97 B.R. 264 (Bankr. E.D.N.C. 1989) 642 In re A.F. Walker & Son, Inc., 46 B.R. 186, 12 C.B.C.2d 35 (Bankr. D.N.H. 1985) 643 In re Missionary Baptist Foundation of America, Inc., 712 F.2d 206, 11 B.C.D. 144, 9 C.B.C.2d 160 (5th Cir. 1983) 644 In re Clark Pipe and Supply Co., Inc., 893 F.2d 693 (5th Cir. 1990). See also In re Aluminum Mills Corporation, 132 B.R. 869 (Bankr. N.D. Ill. 1991) (subordination may be granted if the lender exerts "dominion and control" over the debtor: termination and replacement of officers; payment of consulting and management fees; release of claims against the lender; filing the bankruptcy; keeping the debtor in business to frustrate fraudulent conveyance claims against the lender; ability of debtor's shareholders to sell stock; ability of debtor to make investments, enter contracts, borrow
636

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of the corporation by holding (as collateral security) over 90% of the stock and controlling the income.645 Subordination has been denied where the creditor was a shareholder-principal; the capitalization of the debtor was sufficient; and the loan preserved valuable debtor property rights.646 Subordination has also been denied where the creditor had a pledge of stock of the debtor without exercise of control over the business.647 Subordination has been allowed where the lender acquired a mortgage pursuant to a guaranty on which the guarantor was obligated to the third-party lender.648An insider loan is subjected to rigorous scrutiny, however, and the burden is on the director or stockholder not only to prove the good faith of the transaction but also its inherent fairness. Factors of relevance include: whether the corporation is grossly undercapitalized; where corporate formalities are observed; whether dividends are later paid; whether the insider siphons funds; whether other officers or directors function; whether corporate records exist; whether the corporation is a mere facade or has independent existence; whether the consideration for the corporation's mortgage is "debt" owed by it to its insider.649 Situations that must be carefully scrutinized include mortgages by subsidiaries to their parents and mortgages by a joint venture to a lender which is a parent of one of the venturers. The doctrine of equitable subordination may be employed for recharacterization of secured loans as unsecured capital contributions by insiders bound by their fiduciary duty to the mortgagor.650 Company Policy: If the lender is one of the joint venturers or general partners in the mortgagor, we generally add the following exception in the loan policy (although the exclusions already exclude liability): "any loss, claim, or damage because the insured mortgage is attacked, set aside, or subordinated by reason of the fact that the insured is a partner or venturer in the mortgagor." A transaction would not be subordinated to other creditors where the lender acquired the land from the borrower and leased it back, received a conversion option to convert to an equity ownership in the project, received a shared appreciation mortgage, received 50% of cash flow, gave an option to the borrower to repurchase the land at fair market value, and received the option to convert the loan to a 60% interest in the borrower. The lender actually did not overreach: it consented to all leases, it did not select management, it did not exercise its conversion option, and it did not otherwise virtually control the borrower. The fact that the loan provided "Kickers" to the lender does not itself amount to inequitable conduct that amount to fraud or overreaching. Its access to records, annual financial statements, approval of rental leases and additional financing are simply prudent acts of a lender.651 Company Policy: If you are asked to issue an endorsement concerning shared appreciation or contingent interest, call our underwriting personnel. We will analyze the extent of control by the lender, amount of appreciation shared, continuation of contingent interest feature after payment, and applicable law in deciding whether to offer the endorsement. Section 510 may not be employed to avoid a transfer.652 "When an insider makes a loan to an undercapitalized corporation, a court may recast the loans as contributions to capital."653 A loan in connection with a leveraged buyout may be treated as a redemption of the debtors block interests and claims on equity interests. Such claims may be subordinated to claims of unsecured creditors.654 There is no limitation period for equitable subordination. According to some cases, recharacterization of loans as contributions to capital is a subset of the court's equitable subordination powers; however, others view the doctrine (of recharacterization and subordination) as
money, lease property, and compensate employees) 645 In re Process-Manz Press, Inc., 236 F. Supp. 333 (N.D. Ill. 1964), rev'd. on other grounds, 369 F.2d 513 (7th Cir. 1966), cert. denied, 386 U.S. 957 (the lender funded a leveraged buyout) 646 In re Medical Equities, Inc., 83 B.R. 954 (Bankr. S.D. Oh. 1987) 647 In re Shelter Enterprises, Inc., 98 B.R. 224 (Bankr. W.D. Pa. 1989) 648 In re Psychiatic Hospital of Hernando, Inc., 207 B.R. 276 (Bankr. M.D. Fla. 1997) 649 In re Elsinore Shore Associates, 91 B.R. 238 (Bankr. N.D.N.J. 1988) 650 Stratton v. Equitable Bank, N.A., 104 B.R. 713 (D. Md. 1989) aff'd, 912 F.2d 464 (4th Cir. 1990); In re Herby's Foods, Inc., 134 B.R. 207 (Bankr. N.D. Tex. 1991), aff'd, 2 F.3d 128 (5th Cir. 1993) (loan by insider who directly or indirectly owned the debtor may be subordinated if the debtor was undercapitalized) 651 In re Pinetree Partners, Ltd., 87 B.R. 481 (Bankr. N.D. Ohio 1988) 652 Max Sugarman Funeral Home, Inc. v. ADB Inventors, 926 F.2d 1248 (1st Cir. 1991) 653 Matter of Fabricators, Inc., 926 F.2d 1458, 1469 (5th Cir. 1991); Matter of Herby's Foods, Inc., 2 F.3d 128 (5th Cir. 1993) 654 In re Structurlite Plastics Corp., 193 B.R. 451 (Bankr. S.D. Ohio 1995); summ. judgment denied, 1995 Bankr. LEXIS 2154 (Bankr. S.D. Ohio, November 21, 1995); and partial summ. judgment granted, 214 B.R. 316, 1997 Bankr. LEXIS 1746 (Bankr. S.D. Ohio 1997)

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serving different purposes. Factors considered in reviewing recharacterization include: "(1) The adequacy of capital contributions; (2) The ratio of shareholder loans to capital; (3) The amount or degree of shareholder control; (4) The availability of similar loans from outside lenders; and (5) Certain relevant questions, such as (a) whether the ultimate financial failure was under-capitalization; (b) whether the note included payment provisions and a fixed maturity date; (c) whether a note or other debt document was executed; (d) whether advances were used to acquire capital assets; and (e) how the debt was treated in the business records."655 A noninsider lender adhering to terms of a loan agreement is not vulnerable to equitable subordination.656 10.11 Liquidated Damages A liquidated damage provision in a mortgage (such as prepayment penalty) will be enforced if (1) the provision is not a penalty but is reasonable, and (2) the damages are difficult to ascertain, and (3) there is an attempt to calculate the amount of damages at the time of contracting, with a discount for present value.657 Even if a clause, such as a prepayment penalty, is enforceable under state law, it may not represent an allowed claim under Section 506(b) if it does not provide an appropriate discount based upon conditions when applicable; if it fails to provide only for actual costs, charges, and fees; or if it provides post-petition interest beyond time of principal repayment.658 10.12 Secured Claim In a Chapter 7 proceeding, the lien cannot be "stripped down" to the judicially-determined value of the claim under Section 506(d) since the claim was fully allowed under.659 A Chapter 13 debtor cannot bifurcate a mortgage lien claim only on the debtor's principal residence into secured and unsecured claims.660 10.13 Interest Rate Swaps Public Law 101-311 enacted Section 560. This section authorizes exercise of any contractual rights created in swap agreements. Sections 546(g) and 548(d)(2)(1) insulate swaps from avoidance actions, absent actual fraud. Company Policy: If you are asked to issue an endorsement concerning an interest rate swap or hedge agreement, call our underwriting personnel. Although we are willing to provide an endorsement in some cases, we do not insure the enforceability of any specified amounts as set forth in the agreement. 11.0 DISMISSAL A dismissal occurs only upon court order, not simply by notice of the trustee or debtor and lack of objection.661 A dismissal serves to reinstate all transfers avoided under most sections of the Bankruptcy Code, including fraudulent conveyances and voidable preferences. The dismissal vests the property of the estate in the entity in which the property was vested immediately before the case. However, the court for cause can order otherwise. The legislative history indicates that "[t]his does not necessarily encompass undoing sales of property from the estate to a good faith purchaser." It should be possible under Section 349 to secure an order protecting any purchaser. It has been held, for example, that a judgment avoiding a preference can be preserved after dismissal of the voluntary bankruptcy and in connection with a new filing of an involuntary bankruptcy. The court noted that there is no provision in the code limiting the time within which the discretion to preserve the bankruptcy order may be exercised, other than a reasonable time.662 There may also be estoppel by deed if the debtor-in-possession actually executes the deed. Company Policy: Because of the possibility of a dismissal prior to discharge in Chapter 7, 12, or 13, and prior to completion of the plan in Chapter 11, we require a deed or release by the claimant of the adverse avoided interest prior to discharge in a Chapter 7, 12, or 13 proceeding, or prior to completion of any Chapter 11 plan, if the property has
655

In re Hyperion Enterprises, Inc., 158 B.R. 555, 561 (D.R.I. 1993); In re Union Meeting Partners, 160 B.R. 757 (Bankr. E.D. Pa. 1993) In re Paolella., 161 B.R. 107 (E.D. Pa. 1993) affd without op., 37 F.3d 1487 (3rd Cir. 1994) (lender did not participate in debtor's management, determine operating decision, or have a presence on the Board) 657 In re Skyler Ridge, 80 B.R. 500, 16 B.C.D. 1122 (Bankr. C.D. Cal. 1987) 658 In re Kroh Bros. Development Co., 88 B.R. 997 (Bankr. W.D. Mo. 1988) 659 Section 502. Dewsnup v. Timm, 112 S.Ct. 773 (1992) 660 Nobleman v. American Sav. Bank, 508 U.S. 324, 124 L. Ed.2d 228, 113 S. Ct. 2106 (1993) (claim cannot be "stripped down"); superseded by statute as stated in In re Escue, 184 B.R. 287, 1995 Bankr. LEXIS 911 (Bankr. M.D. Tenn 1995); superseded by statute as stated in In re Sarkese, 189 B.R. 531, 1995 Bankr. LEXIS 1750 (Bankr. M.D. Fla. 1995); superseded by statute as stated in In re Young, 199 B.R. 643, 1996 Bankr. LEXIS 1034 (Bankr. E.D. Tenn. 1996); and criticized in In re Kirchner, 216 B.R. 417, 1997 Bankr. LEXIS 2149 (Bankr. W.D. Wis. 1997) 661 Secs. 707, 1112, 1208, 1307 662 In re Professional Success Seminars International, Inc., 22 B.R. 554, 7 C.B.C.2d 36 (Bankr. S.D. Fla. 1982)
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been exempted. Otherwise, in all cases of nonexempt property, we require an order to sell the property free of the adverse interest (whether such interest was "avoided" or otherwise) while the case is pending. 12.0. DISCHARGE A mortgagee's lien survives a discharge even though no claim is filed in a Chapter 7 proceeding. The mortgagee may proceed to foreclose as to properties of the debtor (not remaining in the estate) without violating the automatic stay after the discharge. The lien is enforceable even though no claim was filed. Section 506(d) provides that a lien is not void due to a discharge merely because of a failure to file a proof of claim.663 The scheduling of the debt as unsecured is not res judicata and will not of itself void the lien.664 The schedule of a secured claim as "disputed" where the claim was not filed, allowed, or treated or classified inconsistent under the plan has no effect on the creditor's lien.665 An adversary proceeding may not be brought in a Chapter 7 proceeding pursuant to Section 506(d) to avoid a lien to the extent it exceeds the value of the property.666 Some cases have stressed the former language of Section 524(a)(2) which prohibited acts to collect from property of the debtor after a discharge if the creditor did not affirmatively seek to enforce or protect his rights in the bankruptcy proceedings.667 However, this language was deleted from Section 524 by the 1984 amendments. Apparently, this language was intended to apply only to later acquired property of the debtor.668 After a discharge, a creditor retains its perfected lien unless the lien has been avoided by an adversary proceeding, judgment, or other court order.669 Under Texas law, the debtor may, after one year elapses following the bankruptcy discharge, proceed to secure an order that extinguishes a prior judgment lien in the same state court that rendered the judgment. The judgment must have been a debt discharged in the bankruptcy. The property involved generally must be the homestead of the debtor. As to judgment liens perfected at on or after September 1, 1993, no additional state court order is necessary.670 You should verify that the debt was scheduled in the bankruptcy, that the debtor was not exempted from discharge in the bankruptcy (by a court order in an adversary proceedings, or possibly because it secured taxes, spousal alimony or maintenance or child support, fines, educational loans, or judgment involving DWI's) and that the property was scheduled as homestead in the Bankruptcy. In a Chapter 11 proceeding (See 1141(c)), a Chapter 12 proceeding (see 1227(c)), and a Chapter 13 proceeding (See 1327(c)), if the property is dealt with in the plan or vested in the debtor thereby, a lien is arguably divested except as therein provided; in a Chapter 12 or 13 proceeding, the debt also must be provided for. However, we do not rely on the confirmation to waive preexisting liens. It has been held that the plan and confirmation cannot divest a lien without creditor approval or an additional adversary proceeding.671 If a lien is cancelled by a Chapter 13 plan, the lien remains in place until the debtors complete payments under the plan; if the case is dismissed the lien will be reinstated.672 Company Policy: Do not rely on a discharge or plan confirmation to waive liens.
663

Matter of Folendore, 862 F.2d 1537 (11th Cir. 1989); In re Weathers, 15 B.R. 945, 8 B.C.D. 524, 5 C.B.C.2d 935 (Bankr. D. Kan. 1981); In re Work, 58 B.R. 868, 14 C.B.C.2d 935 (Bankr. D. Ore. 1986) 664 Wilson v. Ripley County Bank, 462 N.E.2d 263 (Ind. Ct. App. 1984); In re McNeil, 128 B.R. 603 (Bankr. E.D. Pa. 1991) 665 In re Electronics & Metals Industries, Inc., 153 B.R. 36 (Bankr. W.D. Tex. 1992) 666 Dewsnup v. Timm, 112 S.Ct. 773 (1992) 667 In re Williams, 9 B.R. 228, 7 B.C.D. 388, 4 C.B.C.2d 95 (Bankr. D. Kan. 1981) 668 See 3 Collier on Bankruptcy, para. 524.01 (15th ed. 1986); In re Cassi, 24 B.R. 619, 9 B.C.D. 1022, 7 C.B.C.2d 383 (Bankr. N.D. Ind. 1982) 669 In re Perry, 25 B.R. 817, 7 C.B.C.2d 1266 (Bankr. D. Md. 1982); see also In re Nason, 22 B.R. 690, 9 B.C.D. 599, 7 C.B.C.2d 77 (Bankr. D. Me. 1982); United Presidential Life Insurance Co. v. Barker, 31 B.R. 145 (N.D. Tex. 1983); In re Landmark, 48 B.R. 626 (Bankr. D. Minn. 1985); Everidge v. American Security Corp., 464 N.E.2d 374 (Ind. Ct. App. 1984); Ducker v. Standard Supply Co., 280 S.C. 157, 311 S.E.2d 728 (1984) (state law providing notation of discharge after one year after discharge does not void a prior judgment lien); In re Work, 58 B.R. 868, 14 C.B.C.2d 935 (Bankr. D. Ore. 1986); Farmington Bldg. Supply Co. v. Courtois, 752 S.W.2d 477 (Mo. Ct. App. 1988) (mechanic's lien); In re Hagemann, 86 B.R. 125 (Bankr. N.D. Ohio 1988) (mortgage); In re Packer, 101 B.R. 651 (Bankr. D. Colo. 1989); In re Spore, 105 B.R. 476 (W.D. Wis. 1989) (construing the effect of discharge on judgment lien because of particular Wisconsin law); In re Street, 165 B.R. 408 (Bankr. D. Md. 1994) (relating to federal tax lien and stating that a federal tax lien against one spouse does not attach to entireties land.) 670 Tex. Prop. Code Ann. 52.021, et seq. (West Supp. 1994) 671 In re Simmons, 765 F.2d 547 (5th Cir. 1985); In re Thomas, 883 F.2d 991 (11th Cir. 1989) (Chapter 13 confirmation does not invalidate prior lien where no proof of claim was filed; language of Section 1327(c) vesting free of any "claim or interest" is distinct from a lien); In re Duplechain, 111 B.R. 576 (Bankr. W.D. La. 1990) (confirmation of Chapter 12 plan does not extinguish prepetition lien not mentioned); In re Junes, 99 B.R. 978 (Bankr. 9th Cir. 1989) (federal tax lien is unimpaired by Chapter 13 bankruptcy since the plan did not expressly provide for the lien); contra In re Nardulli & Sons Co. Inc., 66 B.R. 882 (Bankr. W.D. Pa. 1986); In re Nardulli & Sons Co., 66 B.R. 871 (Bankr. W.D. Pa. 1986) (creditor also failed to file continuation of UCC after plan confirmed and before conversion to Chapter 7) 672 In re Wolf, 162 B.R. 98 (Bankr. D.N.J. 1993)

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If the debtor can establish that an omitted creditor had notice or knowledge of the bankruptcy proceeding in sufficient time to file a proof of claim, the debt may be discharged. According to one view, if the case has been closed, the court can reopen the case to allow an action to determine dischargeability of the debt.673 Another view is that the case may be reopened to schedule and discharge omitted creditors, subject to the discretion of the court.674 The creditor who challenges dischargeability under Section 523(a) may satisfy its burden by a preponderance of the evidence.675 A new note and mortgage for valuable consideration (e.g. refinance given after discharge to forego foreclosure) is a new contract; it is separate from the initial discharged note and is not subject to reaffirmation. 676 A claim by a title company arising out of concealment of a lien by the debtor in a closing is nondischargeable in a Chapter 7 proceeding.677 13.0. EFFECT OF CONFIRMATION 13.1 Chapter 11 Proceeding A Chapter 11 proceeding may provide for a sale of all, or substantially all of the assets of the estate.678 However, except as otherwise provided in the plan or in the order confirming plan, confirmation vests all the property of the estate in the debtor.679 Several courts have concluded that, since the specific plans revested title in the debtor and since no express provisions prohibited sales, sales of (or substantially all of) assets did not constitute modifications of the plans.680 However, a transfer by the debtor that is inconsistent with the Plan may be avoidable in a later converted case, even though the asset was revested in the debtor by the Plan.681 Company Policy: You do not need to require an order of the court to sell property if the property is vested in the debtor and if the plan and order do not preclude a sale. The plan and confirmation should be carefully reviewed to verify this fact. However, in any sale of all or substantially all of the assets of the debtor after confirmation of the plan but during the case, we should secure court approval. The sale may be considered a liquidation or modification of plan. Upon the confirmation of the plan, the automatic stay of Section 362 generally ceases as to preexisting liens on debtor's property: the confirmation usually revests title in the debtor and grants a discharge; at this time, the automatic stay ceases as to property of the debtor.682 However, if the plan provides that business will be under court supervision by the trustee and that a discharge is not yet granted, the stay is not lifted.683 On the other hand, a discharge is not granted in a Chapter 12 or Chapter 13 until completion of the plan. Unless an express plan provision postpones revesting upon confirmation (e.g. "the property of the estate will vest in the reorganized debtor on or when..."), the court will not imply it.684 There are differing views on whether a subsequent post-confirmation conversion to Chapter 7 will revest such title in the Chapter 7 estate.685
673 674

In re Ford, 87 B.R. 641 (Bankr. D. Nev. 1988) In re Minniear, 88 B.R. 1005 (Bankr. W.D. Mo. 1988) (noting that some courts hold that the case cannot be reopened) 675 Groyan v. Garner, 111 S.Ct. 654 (1991) 676 In re Heirholzer, 170 B.R. 938 (Bankr. N.D. Ohio 1994) 677 In re Demarest, 176 B.R. 917 (Bankr. W.D. Wash. 1997); but see In re Kisich, 28 B.R. 401 (9th Cir. B.A.P. 1983) (buyer did not rely on sellers misrepresentation; buyer relied on title search and title company rights were by subrogation); In re Granolino, 183 B.R. 565 (Bankr. E.D. Mo. 1995) (owner did not intentionally deceive title company as to mechanics liens; owner relied on general contractor) 678 Sec. 1123 679 Sec. 1141(b) 680 In re Water Gap Village, 99 B.R. 226 (Bankr. D.N.J. 1989) 681 In re Hiller, 143 B.R. 263 (Bankr. D. Colo. 1992) 682 In re Ernst & R.C.E. Corp., 45 B.R. 700, 12 B.C.D. 893, 12 C.B.C.2d 305 (Bankr. D. Minn. 1985); In re Crawford, 95 B.R. 491 (Bankr. W.D. Mich. 1988) (upon confirmation of the plan and revesting of the property in the debtor, land contract vendors were not prohibited by stay from actions for violations of plan payment requirements); In re BNW, Inc., 201 B.R. 838 (Bankr. S.D. Ala. 1996) 683 Hollis Motors, Inc. v. Hawaii Auto Dealers' Assoc., 997 F.2d 581 (9th Cir. 1993); cirticized in Bronson v. United States, 46 F.3d 1573, 1995 U.S. App. LEXIS 1714, (Fed. Cir. 1995); criticized in Janves v. City of Hazel Park (In re Javens), 107 F.3d 359, 1997 U.S. App. LEXIS 2800 (6TH Cir. Mich. 1997); and criticized in Yellow Cab Coop. Assn v. Metro Taxi (In re Yellow Cab Coop. Assn, 132 F.3d 591, 1997 U.S. App. LEXIS 35983 (10th Cir. Colo. 1997) 684 In re Pauling Auto Supply Inc., 158 B.R. 789 (Bankr. N.D. Iowa 1993) 685 In re BNW, Inc., 201 B.R. 838 (Bankr. S.D. Ala. 1996) (property previously revested in debtor by plan will not be part of Chapter 7 estate); In re K & M Printing, Inc., 210 B.R. 583 (Bankr. D. Ariz. 1997) (absent express provision in a plan, property revested in debtor by plan will not be in Chapter

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A plan cannot revest title in a debtor if the lien was foreclosed before the case was filed.686 Even though the stay ceases as to property of a debtor in a Chapter 11 proceeding upon confirmation, provisions in the plan or confirmation decree stating that the bankruptcy court retains exclusive jurisdiction of the proceedings to determine controversies and disputes, and to effectuate payments may be construed as requiring authorization of the court before foreclosure.687 Company Policy: If a mortgagee seeks to foreclose on a Chapter 11 debtor after confirmation of the plan without a lifting of the stay, please call our underwriting personnel. We must verify by review of the plan and confirmation that the court has not retained jurisdiction over claims or the property. Real estate transfer taxes are prohibited on transfers under a Chapter 11 plan of reorganization.688 This prohibition extends to state and city deed and mortgage taxes.689 A liquidating trust created by a Chapter 11 plan receives the same exemption from taxation of stamp taxes, recording taxes, or similar taxes.690 A Chapter 11 plan may provide for the cure of default under a mortgage and de-acceleration of same, even after a foreclosure judgment.691 The plan can also modify due-on-sale clauses in deeds of trust.692 The plan may not modify the rights of a holder of a secured claim secured only in real property that is the debtor's principal residence.693 According to one view, the Chapter 11 plan extinguishes liens (such as an attachment lien) not preserved in the plan if the lien is "dealt with" by stating that all property of the estate vests in the debtor subject only to other stated liens.694 According to one view, a lien is extinguished unless preserved in the plan if the lienholder participated in the reorganization and the plan calls for payment to the creditor.695 If the creditor does not participate in the reorganization (for voting and distribution) the plan may not extinguish its lien; since the creditor could only vote and receive distribution as an unsecured creditor, its lien was never brought into the bankruptcy case and could not be extinguished by the plan.696 A Chapter 13 confirmation does not extinguish an ad valorem tax lien if the plan provides that holders of allowed secured claims retain the liens securing claims.697 According to an advisory opinion that was remanded, a lien is not dealt with by the plan in a Chapter 11 case where the proof of claim and confirmed plan addressed only arrearages and not the entire secured debt. Thus, the creditors participated in the bankruptcy but did not attempt to collect the entire debt through the bankruptcy. Furthermore, if the lien has not been disallowed or avoided, it survives the bankruptcy.698 The plan becomes a binding contract between the debtor and the creditors upon confirmation.699 One case states that the general rule is that upon confirmation, the property dealt with in the plan is free and clear of all claims and interests of creditors, including liens. Although the creditor did not file a claim and the plan was silent as to its lien, the (tax) creditors lien was extinguished by the plan because the plan was an exception to the general provisions of Section 1141(c) (except as otherwise provided in the plan or in the order confirming the plan...), since this plan provides that the property of the estate was to be free of liens and thereby included all property, not simply property (or liens) dealt with by the plan.700 If a lien is cancelled by a Chapter 13
7 estate upon conversion); contra, In re Smith, 201 B.R. 267 (D. Nev. 1996); affd, 1998 U.S. Ap. LEXIS 5759 (9th Cir. Nev. March 20, 1998) 686 In re Boyd, 11 F.3d 59 (5th Cir. 1994), cert. denied, 114 S. Ct. 2103 (1994) 687 See In re 12th & N Joint Venture, 63 B.R. 36, 15 C.B.C.2d 466 (Bankr. D.C. 1986), disagreeing with, In re Ernst & R.C.E. Corp., 45 B.R. 700, 12 B.C.D. 893, 12 C.B.C.2d 305 (Bankr. D. Minn. 1985) 688 Sec. 1146; In re Cantrup, 53 B.R. 104, 13 C.B.C.2d 682 (Bankr. D. Colo. 1985); In re Jacoby-Bender, Inc., 40 B.R. 10, 10 C.B.C.2d 626 (Bankr. E.D.N.Y. 1984), aff'd, 758 F.2d 840 (2d Cir. 1985) 689 In re Amsterdam Avenue Development Associates, 103 B.R. 454 (Bankr. S.D. N.Y. 1989) 690 State of Md. v. Antonelli Creditors Liquidating Trust, 191 B.R. 642 (D. Md. 1996); affd, 123 F.3d 777, 1997 U.S. LEXIS 22547 (4th Cir. Md. 1997) 691 Valente v. Savings Bank of Rockville, 34 B.R. 362, 9 C.B.C.2d 1004 (D. Conn. 1983) 692 In re Coastal Equities, Inc., 33 B.R. 898, 11 B.C.D. 62, 10 C.B.C.2d 614 (Bankr. S.D. Cal. 1983) (modified to provide assumability for six years or until sale) 693 Sec. 1123(b)(5) (Bankruptcy Reform Act of 1994) 694 In re Northeast Office & Commercial Properties, 178 B.R. 915 (Bankr. D. Mass. 1995) 695 Matter of Penrod, 50 F.3d 459 (7th Cir. 1995) (noting contrary cases); criticized in McRoberts v. Transouth Fin. (In re Bell), 194 B.R. 192, 1996 Bankr. LEXIS 323 (Bankr. S.D. Ill. 1996) 696 In re Be-Mac Transport Company, Inc., 83 F.3d 1020 (8th Cir. 1996) (to disallow the creditors claim, the debtor should have objected to the claim and requested a determination of the liens validity) 697 In re McKissick, 197 B.R. 206 (Bankr. M.D. Pa. 1996) 698 Coffin v. Nalvern Fed. Savings Bank, 189 B.R. 323 (E.D. Pa. 1995), remanded, 90 F.3d 851 (3rd Cir. 1996); rehg, en banc, denied, 1996 U.S. LEXIS 27367 (3rd Cir. October 7, 1996) 699 In re Vandy, Inc., 189 B.R. 342 (Bankr. E.D. Pa. 1995) 700 In re Winchell, 200 B.R. 734, 736 (Bankr. D. Mass. 1996)

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plan, the lien remains in place until the debtors complete payments under the plan; if the case is dismissed the lien will be reinstated.701 The plan cannot delete portions of a HUD Regulatory Agreement.702 A lien extinguished by the Chapter 13 plan is reinstated by a dismissal prior to discharge.703 The validity of a lien may be affected by a Chapter 11 plan if the creditor actively participates in the plan confirmation process and actually consents to receiving unsecured treatment; otherwise, an adversary proceeding is normally required to affect the validity of a lien.704 A plan cannot restructure a first lien (if the bankruptcy estate has only a lien under state law) on the land at the filing of the Chapter 11 case, although the Chapter 11 trustee was to receive the title post-confirmation.705 In order to determine the value of collateral and of the security interest at a confirmation hearing, the court must provide specific notice that it will value collateral at the hearing.706 According to one view, the debtor must specifically and expressly retain any preference claims under the plan.707 A dismissal of the Chapter 11 bankruptcy case does not affect the finality of the plan or discharge; any order revoking the plan must be made pursuant to a Section 1144 order made within 180 days after the order of confirmation.708 A dismissal of a Chapter 11 Bankruptcy will reinstate a lien avoided pre-confirmation, unless the court orders otherwise.709 A plan may not be modified after "substantially consummated."710 13.2 Chapter 12 Proceeding Unless otherwise provided, the confirmation vests all of the estate in the debtor.711 Thereafter, it would not be necessary to secure an order of the court to sell some assets vested in the debtor. However, a significant transfer such as a sale of a negative (conservation) easement is accomplished by a modification of the Chapter 12 plan.712 According to one view, a confirmed Chapter 12 plan avoids liens of participating secured creditors provided for by the plan, unless the plan provides otherwise.713 Company Policy: In any sale of all or substantially all of the assets of the debtor after confirmation of the plan but during the case, we require court approval. The sale may be considered a liquidation or modification of the plan. In other sales during the bankruptcy and after revesting under the plan, we prefer to secure a letter from the trustee reflecting no objection to the sale. Chapter 13 Proceeding Section 1303 provides that the debtor has the right to sell property of the estate other than in the ordinary course of business. The plan may provide for the vesting of property of the estate in the debtor or any other entity upon confirmation or at a later time.714 Property of the estate vests in the debtor upon the confirmation unless the plan or the order confirming plan states otherwise.715 13.3

701 702

In re Wolf, 162 B.R. 98 (Bankr. D.N.J. 1993) In re Capital West Investors, 186 B.R. 497 (N.D. Cal. 1995) 703 In re Bell, 194 B.R. 192 (Bankr. S.D. Ill. 1996) 704 In re Vandy, Inc., 189 B.R. 342 (Bankr. E.D. Pa. 1995) 705 In re Cogar, 210 B.R. 803 (9th Cir. BAP 1997) 706 In re Britt, 199 B.R. 1000 (Bankr. N.D. Ala. 1996) 707 In re Harstad, 155 B.R. 500 (Bankr. D. Minn. 1993); Harstad v. First American Bank, 39 F.3d 898 (8th Cir. 1994); affd, (the debtor must retain the authority in the plan to bring the action or the action must benefit its creditors) 708 See In re Space Bldg. Corp., 206 B.R 269 (D. Mass. 1996) 709 In re Derrick, 190 B.R. 346 (Bankr. D. Wis. 1995) 710 In re Antiquities of Nevada, Inc., 173 B.R. 926 (9th Cir. BAP 1994) (Section 1127(b) prevents such modification) 711 Sec. 1227(b) 712 In re Webb, 932 F.2d 155 (2d Cir. 1991) 713 Harmon v. U.S., 101 F.3d 574 (8th Cir. 1996) 714 Sec. 1322(b)(9) 715 Sec. 1327(b). In re Adams, 12 B.R. 540, 4 C.B.C.2d 1054 (Bankr. D. Utah 1981) (upon confirmation, the property vests in the debtor and is not part of the estate); contra In re Aneiro, 72 B.R. 424, 16 C.B.C.2d 1070 (Bankr. S.D. Cal. 1987) (Upon Chapter 13 confirmation, property remains part of the estate and subject to court jurisdiction for lease approval)

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Local Rules may require the debtor to secure trustee approval or a court order to authorize consumer debt.716 Local Rules may require a modification of plan to incur debt.717 Local Rules may require court approval of a sale or refinancing of the debtors principal residence (even after confirmation).718 Company Policy: If the debtor offers to sell, we do not require an order of sale or court proceeding if the property has vested in the debtor and is not subject to the plan in a Chapter 13 proceeding. Verify that the court has not provided that the property shall remain subject to the court jurisdiction until the discharge. We also prefer to secure a letter from the trustee reflecting no objection to the sale. A balloon payment, due prior to the Chapter 13 proceeding is not curable in a Chapter 13 plan and payment cannot be extended.719 The court can, as part of the plan in a Chapter 13 proceeding, reinstate a loan on the residence of the debtor which had been accelerated.720 If the debtor defaults in payments on a residential mortgage to be paid outside the plan, the appropriate relief of the lender is a lifting of the stay even though no default has occurred under the plan.721 It has been held that the Chapter 13 plan can modify the interest rate and payment on a loan if it is a loan secured by the debtor's residence and farm.722 Post-confirmation loan proceeds do not have to be submitted to the trustee, since they are not future earnings or income.723 Confirmation of Chapter 13 plan which dealt with creditors negates a lift of stay granted to the creditor before the confirmation.724 If a lien is cancelled by a Chapter 13 plan, the lien remains in place until the debtors complete payments under the plan; if the case is dismissed the lien will be reinstated.725 13.4 Effect of Plan on Liens There are conflicting cases on whether a plan can avoid a lien on land.726 Although a confirmed Chapter 11 bankruptcy plan may extinguish a lien, the notice to the creditor must specify the treatment of that claim and allow the creditor to make an informed judgment; otherwise, a notice is not sufficient if the plan and disclosure statement sent did not disclose treatment (and a separate agreement did affect the lien).727 If a Chapter 13 plan treats a purchaser after the foreclosure of the debtors property as a lienholder rather that the owner, the plan will not be sufficient to revest title in the debtor. The debtor had no existing right to regain title (such as a right of redemption) and the notice of plan did not clearly warn the owner of the effect of a failure to object to the plan.728 If a plan does not provide for a secured claim, the property may not vest free and clear and the creditors lien will survive the bankruptcy. The lender is not provided for by the plan if it receives no payment on the
716 717

Local Rule 4001-3, S.D. Ohio Local Rule 13.11, M.D. Tenn. 718 Local Rule 180(27), (33), C.D. Cal. 719 In re Fontaine, 27 B.R. 614, 10 B.C.D. 204, 8 C.B.C.2d 1293 (Bankr. 9th Cir. 1982); In re Seidel, 752 F.2d 1382, 12 B.C.D. 1016, 12 C.B.C.2d 106 (9th Cir. 1985) 720 Grubbs v. Houston First American Savings Association, 730 F.2d 236 (5th Cir. 1984) 721 In re Harlan, 783 F.2d 839, 14 C.B.C.2d 415 (9th Cir. 1985); see also In re McCollum, 17 C.B.C.2d 431 (Bankr. D. Or. 1987) (stay does not end on confirmation); In re Littke, 105 B.R. 905 (Bankr. N.D. Ind. 1989) (stay prevents foreclosure of prefiling mortgage against property revested in the debtor by plan confirmation until grant or denial of the discharge) 722 In re Hines, 64 B.R. 684, 15 C.B.C.2d 1333 (Bankr. D. Colo. 1986) 723 In re Harris, 200 B.R. 745 (Bankr. D. Mass. 1996) (in dictum) 724 Matter of Garrett, 185 B.R. 620 (Bankr. N.D. Ala. 1995) 725 In re Wolf, 162 B.R. 98 (Bankr. D.N.J. 1993) 726 In re Simmons, 765 F.2d 547 (5th Cir. 1985) (plan cannot remove a lien); Matter of Pence, 905 F.2d 1107 (7th Cir. 1990) (plan can avoid lien on residence in exchange for lien on other land or if the plan otherwise treats the lien in a fair and equitable manner); In re Bloch, 159 B.R. 546 (Bankr. 9th Cir. B.A.P. 1993) (Chapter 13 plan failing to provide for federal tax lien does not extinguish lien); In re Williams, 166 B.R. 615 (Bankr. E.D. Va. 1994) (distinguishes Simmons and holds judgment lien can be avoided by plan); In re Nicewonger, 192 B.R. 886 (Bankr. N.D. Ohio 1996) (A debtor in Chapter 13 case may require an undersecured creditor to release its lien prior to completion of the plan but after payment in full of its secured claim as provided in the plan. On the conversion of a Chapter 13 case to Chapter 7 prior to full payment of the secured portion of the unsecured claim, and absent unusual circumstances, the creditor may receive only one full payment of the secured debt. Upon dismissal of the Chapter 13 case, the rights of the Chapter 13 debtor to a release will not be diminished) 727 In re Barton Industries, Inc., 104 F.3d 1241 (10th Cir. 1997) 728 In re Jauregui 197 B.R. 673 (Bankr. E.D. Cal. 1996)

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value of its lien.729 As a general matter, a plan provides for a claim or interest when it acknowledges the claim or interest and makes explicit provision for its treatment. If a Chapter 13 plan does not address a creditors lien (for instance, by expressly providing for payment of an allowed secured claim and cancellation of the lien), that lien passes through the bankruptcy process intact, absent the initiation of an adversary proceeding. Several courts have held that a plan provides for the lien held by the secured creditor only when it provides for payment to the creditor in an amount equal to its security.730 [W]here a debtors plan does not expressly preserve a secured creditors lien, the confirmation of the plan acts to extinguish the lien provided that (1) the lien holder participated in the debtors bankruptcy case by filing a proof of claim and (2) the property is either dealt from or provided for by the plan.731 14.0 POST-PETITION PROPERTY AND PREFILING STATUTORY LIENS The majority view is that a prebankruptcy judicial lien or tax lien does not attach to property acquired by the debtor after the filing of the bankruptcy if a discharge occurs, unless the debt is not dischargeable (e.g., income taxes assessed within three (3) years, credit card bill to pay taxes, false pretenses if so determined at hearing, a creditor not listed in time and no notice, child support and spouse maintenance, malicious tort if so determined as a hearing, government fines, educational loans, fraud or defalcation or failed depositor institutions, damages as result of D.W.I).732 Company Policy: In order to waive a prebankruptcy judicial lien in connection with property acquired after the filing of a bankruptcy, verify that (1) the discharge was granted, (2) the debt is not nondischargeable and (3) the debt is listed in the schedules with an address of the creditor evidencing notice. 15.0 LETTERS OF CREDIT The prevalent view is that cashing of a letter of credit during a bankruptcy secured by a debtor as a customer prior to the bankruptcy does not violate the automatic stay. It also is not a matter which should be subject to an injunction under Section 105.733 A mortgage securing reimbursement under a letter of credit is deemed to be a transfer made when delivered and recorded, not when the credit is cashed.734

729

In re Lee, 182 B.R. 354 (Bankr. S.D. Ga. 1995) Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995); (plan treated debt as unsecured and creditor did no object to plan or file a claim; court held lien survives plan) 731 In re Siemers, 205 B.R. 583 (Bankr. D. Minn. 1997) (confirmation of a Chapter 13 plan, like a Chapter 11 or 12 plan, avoids liens of participating secured creditors provided for in the plan, unless the plan provides otherwise; the plan provided for the claim by avoiding the lien and the creditor participated by filing a claim.) 732 Secs. 523, 524, 727, 1141, 1228, 1328; In re Braund, 423 F.2d 718 (9th Cir. 1970) cert. denied, 400 U.S. 823, 91 S.Ct. 44, 27 L.Ed. 2d 51 (1970); In re Fuller, 134 B.R. 945 (Bankr. 9th Cir. 1992) (federal tax lien for dischargeable taxes does not attach to post-petition property); In re Leavell, 124 B.R. 535 (Bankr. S.D. Ill. 1991) (tax liens securing dischargeable debt do not attach to debtor's post-petition after-acquired property; liens securing nondischargeable debts attach to debtor's post-petition after-acquired property); In re Wessel, 161 B.R. 155 (Bankr. D. S.C. 1993) (lien of discharged federal taxes does not attach to property acquired by the debtor post-petition); In re Dillard, 118 B.R. 89 (Bankr. N.D. Ill. 1990) (federal tax lien survives bankruptcy even though tax liability was dischargeable); see also In re May reporting Services, Inc., 115 B.R. 652 (Bankr. D.S.D. 1990) (to the extent that the IRS tax lien is not voided under Section 506(d), it attaches to property obtained by the debtor after commencement of the case); Hayden v. American Honda Motor Co., 835 S.W.2d 652 (Tex. App.--Tyler 1992, no writ). (Texas procedure to cancel judgment lien after passage of one year after discharge was not available as to land on which judgment lien had been foreclosed); Matter of Paeplow, 972 F.2d 730 (7th Cir. 1992) (the court, at page 735, states: "creditors are not prohibited from executing a judgment lien against a discharged debtor's property, as long as the judgment was obtained before discharge."); In re Dishong, 188 B.R. 51 (Bankr. M.D. Fla. 1995) (if taxes are nondischargeable, the lien attaches to later acquired land; if the debt is discharged, the lien does not attach to property acquired post petition); criticized in Van Eaton v. United States, IRS (In re Van Eaton), 1996 Bankr. LEXIS 1039, (Bankr. M.D. Fla. 1996); In re Pansier, 208 B.R. 41 (Bankr. E.D. Wis. 1997) (prepetition IRS lien did not attach to property acquired after petition, since debt discharged) 733 Matter of Compton, 831 F.2d 586 (5th Cir. 1987); In re Page, 18 B.R. 713, 6 C.B.C.2d 776 (D. D.C. 1982); In re Illinois-California Express, Inc., 50 B.R. 232, 13 B.C.D. 153, 13 C.B.C.2d 324 (Bankr. D. Colo. 1985); In re Zenith Laboratories, Inc., 104 B.R. 667 (Bankr. D.N.J. 1989); contra In re Twist Cap Inc., 1 B.R. 284 (Bankr. D. Fla. 1979) 734 Kupetz v. Continental Illinois National Bank & Trust Co., 77 B.R. 754 (C.D. Cal. 1987); see also, In re M.J. Sales & Distributing Co., Inc., 25 B.R. 605, 7 C.B.C.2d 884 (Bankr. S.D.N.Y. 1982); In re W.L. Mead, Inc., 42 B.R. 57 (Bankr. N.D. Ohio 1984); In re Page, 18 B.R. 713, 6 C.B.C.2d 776 (D.D.C. 1982); In re Compton Corp., 831 F.2d 586, 17 C.B.C.2d 987 (5th Cir. 1987) (but the beneficiary of the Letter of Credit may thereby receive a preference), reh. gr., 835 F.2d 584, 18 C.B.C.2d 273 (1988); In re Air Conditioning Inc. of Stuart, 845 F.2d 293 (11th Cir. 1988); Matter of Lockard, 884 F.2d 1171 (9th Cir. 1989) (mortgage secured reimbursement for bond issued by surety); see also In re Alwan Bros. Co., Inc., 105 B.R. 886 (Bankr. C.D. Ill. 1989) (a deposit in custodia legis or pursuant to a supersedeas bond is not property of the debtor's estate), modified, 112 B.R. 294 (Bankr. C.D. Ill. 1990); In re Southmark Corp., 138 B.R. 831 (Bankr. N.D. Tex. 1992), aff'd, 993 F.2d 117 (5th Cir. 1993) (grant of security as pledge for supersedeas bond is neither a preference nor fraudulent transfer; the court in citing the Compton case refuses to collapse the transfer to the judgment creditor); In re Lease-A-Fleet, Inc., 141 B.R. 853 (Bankr. E.D. Pa. 1992). A draw on a letter of credit (for which mortgages secured the reimbursement agreements) does not violate Section 541. In re Prime Motor Inns, Inc., 130 B.R. 610 (S.D. Fla. 1991)
730

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It is perhaps possible that the security granted to the issuer of the letter of credit may be a voidable preference if the beneficiary is a prior unsecured creditor.735 Company Policy: If you are asked to provide title insurance in connection with a mortgage securing a reimbursement agreement on a letter of credit, call our underwriting personnel. We will, in appropriate cases, issue an affirmative endorsement where allowed by law. 16.0 DISCRIMINATION Third parties are prohibited from discriminating against an individual who is or has been a debtor because it filed a bankruptcy, was insolvent, or has not paid a dischargeable debt.736 The prohibition or discrimination applies to governmental units and the debtors employer, not a third-party lender.737 Conditioning approval of a plat upon payment of taxes (inconsistent with installment payment allowed by the plan) is prohibited.738

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In re Security Services, Inc., 132 B.R. 411 (Bankr. W.D. Mo. 1991) (see footnote 1, page 415, in raising doubt of the Compton result) Sec. 525 737 In re Merriweather, 185 B.R. 235 (Bankr. S.D. Tex. 1995) 738 In re General Development Corp., 163 B.R. 216 (S.D. Fla. 1994)
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