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Features of Chapter 7: Liquidation (no hope, IPC, Voluntary or Involuntary, individuals must pass test)
• Bankruptcy is a privilege not a right
• Two ways a debtor will be discharged from receiving Chapter 7 Liquidation:
o Objections to Discharge: none of the debts will be discharged
▪ Commit fraud and/or bankruptcy crime
▪ Failed to keep books and records: can’t explain what happened
▪ Within the past 8 years have already been discharged
o Nondischargeable Debts: prevents discharge of specific debts
• Trustee will be appointed for Ch 7 & 13
o But certain debts of an individual will never go away (FAT WED)
▪ Fraud, Fines and Penalties
▪ Alimony or child support
▪ Taxes due within 3 years of filling
▪ Willful and Malicious Injury (you hurt someone and they sue you), however if
your accident was negligent then it can be discharged
• Driving While intoxicated
▪ Educational Loans (you would have to show “undue hardship” to get out of it)
▪ Debts Undisclosed in the Bankruptcy Petition: debtor gives court a list of all
their creditors, if you forget them then you still owe them
▪ Luxury goods
• Reaffirm Debts: if the debtor does not want a certain debt discharged before the granting of the
discharge, the court wants to make sure the debtor is not being threatened by that creditor.
Court will question you.
• Revocation of Discharge (Bad faith – dishonest): after the court discharged you of your debt
and then finds out you were dishonest they can come back and make you pay the debt back
• **Distribution of the Debtor’s Estate
o First, Secured Claimants (if not fully secured and you are owed more than the collateral,
then you go to the back of the line = claims of other general creditors)
o Second, Priority Claimants (*9 subcategories SAG WEG CTI)
1. Support: child support and alimony
2. Administrative Expenses: trustee fees, filing fees, attorney and accountant fees
from the bankruptcy
3. Gap Claims: any creditors who come in during the 20 days after the involuntary
petition with the court
4. Wage Claims up to $12,850, if you are owed more then you go to the back of
the line, earned within 180 days prior to filing
5. Employee Benefit Plan up to $12,850 and is reduced by the amt paid to the
Wage #4, earned within 180 days prior to filing (total has to be $12,850 or less)
6. Grain Farmers & Fishermen up to $6,325
7. Consumer Deposits up to $2,850 (put deposit on furniture & never got $ back)
8. Tax Claims
9. Injury claims arising from Intoxicated Driving (Intentional)
o Third, General Unsecured Creditors who filed their claims on time (nonpriority claims)
• If there is not sufficient money to pay all creditors at a particular level, the creditors share pro-
rata
• Payment is made according to the priority rules, any remaining debts are discharged unless they
are an exception to discharge (FAT WED)
Features of Chapter 11: Reorganization (hope, IPC, Voluntary or Involuntary, generally no trustee)
• Creditors Committee: try to get the willing creditors of the 7 largest unsecured claims against
the debtors and, if a corporation, the 7 largest holders of the equity securities (stockholders)
• Trustee is generally not appointed because the debtor usually remains in possession of the
estate’s assets
• Reorganization Plan to be saved:
o Debtor, unless a trustee exists, has 120 days to create a plan
o In the plan, classify all claims (secured, SAG WEG CTI, Unsecured) and their treatment
for full payment
o Only the court can confirm the plan if it is accepted by the stockholders & creditors,
provide for payment in full for administrative expenses & gap claims, and is feasible
o Will discharge the debtor form all pre-confirmation debt except those that are not
dischargeable (FAT WED)
• On exam if they say “partnership” assume it is a general partnership and if they say
“corporation” assume it is a C Corporation
• Every entity is a flow-through except C Corporation where you have double taxation
• Sole Proprietorship:
o Is not considered a separate entity
o No formality, nothing needs filled with the state
o Personal liability = disadvantage
o Duration is limited, when owner dies so does the entity
o Flow-through
o Is free to transfer
• General Partnership:
o 2 or more people who are trying to make a profit
o No formality, but nothing needs filed to the state
o Agreement can be implied from conduct (nothing oral or written)
o Joint Venture (JV): limited duration
▪ Similar to a partnership but a JV is formed for a single transaction or project or a
series of transactions or projects. It is not continuous
o Generally, a writing is not required. However, if you want partnership that you would
like to continue beyond a year should be in writing.
o Not a taxable entity, it is a flow-through entity, but besides tax purposes a partnership is
treated as an entity (ex. Being sued)
o All partners have equal rights, it is not based on the amount contributed
o If in ordinary course of business, you need a majority vote
o Every partner is an agent
o Personal creditors cannot come after the partnership
o *Every partner is personally liable for partnership obligations (this is how a general
partnership is not the same as a LLP)
▪ Partnership is joint and several
▪ Even though you are only a 20% partner, you are 100% liable for the partnership
obligations. But exhaust the partnership first.
o All partners have equal rights to share in the profits and losses of the partnership
regardless of money or services contributed unless the specify otherwise (General
Partnership = LLP)
o Unless agreed otherwise, no partner is entitled to compensation/distribution
o Dissociation = a change in partners (added or lost)
▪ Agency Law: They have to give notice to old customers. If not, then they have
apparent authority to bind the partnership. Until notice is given, they could be
held liable for debts for up to 2 years after dissociation.
▪ A partner still remains liable for the debts incurred by the partnership unless the
creditors release them.
o Dissolution: only need one partner to give notice of withdrawal and the other partners
agree or a court order
▪ Meaning the partnership has a limited duration
▪ A partnership exists after a dissolution until its business is wound up, then it is
terminated
o Dissolution of Assets: when you terminate the operations
• Limited Liability Partnership (similar to General Partnership)
o To limit liabilities, you must file with the state
o The difference is personal liability. You are not personally liable for other partners,
employees, or agents (major advantage)
o But you are personally liable for your own negligence and those under your direct
control
o Not personally liable for debts and contractual obligations of the LLP
o You have to file with the state (a state fee and this is why people choose a general
partnership although they should just pay it and then you can limit your liability)
▪ Certificate of Limited Liability Partnership
• Limited Partnership:
o You have at least one general partner and at least one limited partner
▪ General partner: (agent) they have unlimited personal liability for all the debts
of the business but get to run the business
• A general partner can be a limited partner too
▪ Limited Partner: (not an agent) liability is limited to their investment
• Limited partners are similar to shareholders
• You don’t run day to day management, they do have partnership
interest with the right to vote on fundamental changes
• Can review financial information and tax returns
• If your conduct appears to be a general partner then you can be liable
to any creditor who believes you are a general partner
o Have to file with the state → Certificate of Limited Partnership
o Management is responsible for the general partners
o If there is a loss only the general partner is held liable, not the limited partners
• Limited Liability Company:
o A hybrid between a corporation and partnership
o Owners are called members
o Limited liability, not personally liable for the obligations of the business
o Members may, but don’t need to, adopt operating agreement. If not follow the state
default rules
o File Articles of Organization with your state (no stock information)
o *Management is to be vested in managers
o You could have only one member to form an LLC
o Generally all members may participate in management = Member-Management state
in articles of organization
▪ Can be Manager-Managed. Members are not agents, but managers are agents
(spelled out)
▪ If you are a not an agent you don’t owe a fiduciary duty
• C Corporations: (Inc)
o Distinct Legal Entity: distinct from its shareholders
o Corporation is owned by shareholders but managed by directors
o Formation: File Articles of Incorporation or Corporate Charter with state
▪ Corporations are governed by statute
▪ *Will have:
• Name of corporations
• Registered Agent (have legal documents served on it on behalf of the
corporation, if the corporation is sued)
• Name and address of each of the incorporators
• Stock information
o One or more classes must have unlimited voting rights (unlike S
corp)
• Purpose Clause: they could state why they are forming the business
(don’t have to)
o Bylaws: rules for running the corporation, not fundamental
▪ Not a part of the articles of incorporation
▪ Not required to be filled with the state
o Liability: everyone has limited liability, shareholders not generally liable beyond their
investment
▪ Usually the corporation is only liable for corporate obligations
▪ Shareholders, directors, and officers are generally not personally liable unless
you committed the tort
▪ **Piercing the Corporate Veil: courts will sometimes hold the shareholders,
officers, or directors of a corporation personally liable because the privilege of
conducting business in corporate form is being abused
• Shareholders commingle personal funds with corporate funds
• If the corporation was under/inadequately, thinly capitalized
• Formed the business with the intent to commit fraud on existing
creditors
o Transferability: shareholders are free to transfer ownership interest unless they agree
otherwise (don’t need unanimous consent)
o Taxation: double taxation
▪ Income tax at corporate level and taxed again to shareholders when dividends
are distributed
o Perpetual life, every other organization has limited life
o They remain liable until there is a Novation: an agreement that a 3rd party will release
the promoter and substitute the corporation
o Shareholders:
▪ *Not entitled to a distribution/dividend unless it is declared by the board of
directors. If it is declared, shareholders are both unsecured creditors and
owners
▪ Preferred Shareholders: (not allowed for S corp)
• *Can be cumulative (if there is no dividend distribution, then the
dividend carries over to be dividend in arrears. In later years, no
dividend can be paid to common shareholders until all cumulative
dividends are paid.) or noncumulative (if there is no distribution then
you don’t get a dividend)
o Cumulative: once a dividend is declared, a shareholder becomes
an unsecured creditor of the corporation for the amount of the
unpaid dividend
o Preemptive Right: a corporation proposes to issue additional shares of stock, the right
to purchase new issuances of additional stock in order to maintain current proportional
ownership, does not exist by state law
o Derivative Actions: the corporation has the right to sue somebody but for some reason
the officers or directors are not issuing a lawsuit on the behalf of the corporation. If you
demand a lawsuit and they don’t bring it, then the shareholders can bring a lawsuit on
behalf of the corporation
o Direct Action: shareholder is suing on their own behalf. They are suing the corporation.
o Directors: are not individual agents but do owe a fiduciary duty to the corporation
▪ Imitate fundamental changes “DAMS”
o Officers: individual agents and fiduciaries and an employee of the company
▪ Manage and run day to day business
o Fundamental change needs board and shareholder approval (not unanimous and unlike
a partnership)
▪ *DAMS: Fundamental Corporate Changes that often require shareholder and
board (not unanimous) approval for a Corporation
• Dissolution (terminating the corporation)
o After a dissolution, you end the business, and then liquidate
(creditors, preferred stockholders, then common stockholders)
• Amendments: to the articles of Incorporation that materially and
adversely affect the shareholder’s rights
o Bylaws need board or shareholders approval
• Mergers, consolidations, and compulsory share exchanges (exception)
o Merger: one corporation survives the merger (A+B=A)
▪ Exception: if it is a short-form merger then neither
entity has to go through fundamental change procedure
(already own 90% or more of your stock) so we only
need the board of the parent company has to approve
and the subsidiary corporation’s dissenting stockholders
must be given an appraisal remedy
o Consolidation: form a new corporation (A+B=C)
▪ Notice: Summary of plan of consolidation is given to
shareholders
o Share Exchange: one company buys all the stock of the other
company but both companies continue to exist, except it is a
wholly owned entity.
• Sale: of substantially all the corporation’s assets outside the regular
course of business (basically going out of business)
▪ Right to Dissent: vote against the fundamental change you have the right to
dissent. You get an appraisal remedy. I want you to buy me out at the FMV of
the stock before the fundamental change. You have to ask for the appraisal
remedy and vote against the fundamental change
o Foreign Corporation: corporate within a specific state. Any state you did not corporate
you are considered foreign. You don’t need to corporate again but you do need a
certificate of authority to do business in that state.
• S Corporations:
o A flow-through, no double taxation
o More restrictions on S-Corp
▪ No more than 100 persons
▪ Shareholders can only be individuals, estates, and certain trusts
▪ Only one class of stock
▪ Foreign shareholders are generally prohibited
• Business Judgement Rule: principle that protects corporate directors from personal liability for
acts performed in good faith on behalf of the corporation