Next Class Ch 12

Class #1
Thursday, January 18, 2011
8:10 PM

Barkasy - partner in a law firm and RU-Camden 1988 Graduate.

Deuteronomy 15 1: “At the end of every seven years you shall grant a release.”

Deuteronomy 15 2: “And this is the manner of the release: every creditor shall release
what he has lent to his neighbor. He shall not exact it of his neighbor, his brother,
because the LORD’s release has been proclaimed.”

US Constitution Article I, Sec 8 – Congress shall have the power to established “uniform
laws on the subject of Bankruptcies throughout the United States.”

I. History
A. Under English Law – Creditor could seize Debtor’s property to satisfy the
debt.

B. Insolvency Laws were voluntary – much like today, but you could turn
over all your possessions to your creditors (to get out of jail)

C. Financial Panic – Modern day Recession which tend to precede changes to

the bankruptcy filings (increase). When the economy was bad the
bankruptcy law was passed that provided affected people some relief, then
after the economy rebounds they were repealed as they were thought too
lenient on the debtor.

D. First Bankruptcy Law – 1898 Bankruptcy Act

i. Title 11 of the US Code is the Bankruptcy Code

ii. 1898 Bankruptcy Act stayed in effect until 1978 when it was
replaced by the Bankruptcy Code

iii. Chandler Act – The Chandler Act was an amendment to the

Bankruptcy Act of 1898, and made a number of substantive
changes in the straight bankruptcy provisions of Chapters I through
Chapter 7. By far its most sweeping changes were in the
rehabilitative provisions for business and consumer debtors set
 forth as Chapters X through Chapter 13 of the amended Act.
Chapter X was an offshoot of § 77B, containing much of the same
language together with new investor protection provisions in
response to some obvious shortcomings of § 77B suggested by
many lawyers. Chapter 10 bankruptcy was restricted to corporate
debtors, was intended for situations where a major restructuring
was necessary, and was not available where Chapter 11 would
suffice.

iv. Bankruptcy is a mainstay of commercial law ever since the Act

was created in 1978

v. There is a ton of negotiation in bankruptcy

vi. Settle when you can, because money in the hand is better than
going through the following.

1. Debtor’s lawyer: Find the smallest granule of a good faith

defense and then delay. The longer the ∆ lawyer can delay
the better the ∆ is, since there is no money coming out of
the ∆'s pocket

E. Latest updates were made in 2005 – most significant is that it is now

harder to file a chapter 7 bankruptcy

II. Title 11
A. Title 11 is broken down into several chapters:
i. Ch. 7 – governs the process of liquidation under the bankruptcy
laws of the United States. (In contrast, Chapters 11 and 13 govern
the process of reorganization of a debtor in bankruptcy.) Chapter 7
is the most common form of bankruptcy in the United States

ii. Ch. 9 – available exclusively to municipalities and assists them in

the restructuring of debts. Most famously, Chapter 9 was used by
Orange County, California in 1994 to adjust its debts

iii. Ch. 11 – permits reorganization under the bankruptcy laws of the

United States. Chapter 11 bankruptcy is available to every
business, whether organized as a corporation or sole
proprietorship, and to individuals (who exceed the limits in Ch.
13), although it is most prominently used by corporate entities. In
 contrast, Chapter 7 governs the process of a liquidation
bankruptcy, while Chapter 13 provides a reorganization process for
the majority of private individuals

iv. Ch. 12 – similar to Chapter 13 in structure, but it offers additional

benefits to farmers and fishermen in certain circumstances, beyond
those available to ordinary wage earners. Chapter 12 is applicable
only to family farmers and fishermen

v. Ch. 13 – allows individuals to undergo a financial reorganization

supervised by a federal bankruptcy court. The Bankruptcy Code
anticipates the goal of Chapter 13 as enabling income-receiving
debtors a debtor rehabilitation provided they fulfill a court-
approved plan. This is in contrast to the goals of Chapter 7 that
offers immediate, complete relief of many oppressive debts.

vi. Ch. 15 – a corporate bankruptcy (insolvency) proceeding outside

the U.S. can obtain access to the United States courts. It allows
cooperation between the United States courts and the foreign
courts, as well as other authorities of foreign countries involved in
cross-border insolvency cases.

B. When looking in the code add 100 to the chapter i.e. chapter 7 is found in
700.
C. There have been no amendments to the code since October 2005. The
only changes to the code are found with the amounts in the debt limits and
one adjustment every 2 -3 years based on some formula. Subject to
change

III. Debt Collection (State Law)

A. Secured Debt
i. Has some sort of collateral: property that the person who owns the
debt posts voluntarily to guarantee payment
1. Real Estate: Debt is created by mortgages or deeds of trust
a. Collection
b. Taking of the collateral, called foreclosure and
varies widely from State to State.
c. ∆ gets some kind of notice of the default, like a
complaint.
d. Date of docketing the judgment that sets the time,
not the date of the judgment itself
 2. Personal Property: anything not real estate (i.e. a watch or
IP), and is created largely through Art. 9 of UCC, execution
of a securities agreement
B. Unsecured Debt
i. An agreement to pay money that was breached, or a tort action?
ii. Collection
1. File a law suit and seek a judgment
2. Rights flow to a creditor who holds a judgment, but it
doesn't mean that you get the money
a. Judgment: an adjudication of the amount due.
b. Filing the judgment will create a lien against all
property owned by the ∆ in that state.
c. Creates a secured debt from an unsecured debt.
d. Then the lien falls behind any other liens already on
the property.
3. For Personal property it is different
a. Writ of execution: provide the sheriff with
instructions upon which property he should levy.
i. Actual Levy: picks up the property and takes
it somewhere to be stored, and does not
happen very often since the creditor has to
pay for storage
ii. Constructive Levy: gives the ∆ a paper that
says the ∆ cannot do anything with the
property until the sheriff sale.
b. From the moment of the service of the levy a lien is
created and the unsecured lien is converted into a
secured lien.
c. This is important for order in which judgments are
dispensed
4. If the property sought is in the possession of 3rd parties
they can get a Writ of Garnishment
a. If the person is entitled to wages
b. If the person is entitled to Account Receivables
c. Garnishment is limited under Federal and State Law
d. How do you know what to levy?
i. Info provided upon the loan application
ii. Checks that show the banking and account
number of the ∆'s bank.
iii. Public records: show property and other
liens of the ∆
 iv. FRCP: post-judgment discovery and post-
judgment depositions
C. Judgment
i. It is good anywhere in the state in which it was obtained.
ii. In Federal Court, the judgment is still good in the state in which it
was obtained if there are multiple federal districts in the state.
iii. Under the Uniform Enforcement Act the other states can recognize
a judgment if the judgment in the original state is filed with the
new state before action is taken against the property residing in
that state.
Class #2
Thursday, January 20, 2011
8:10 PM

I. General Principles of Bankruptcy

A. Fresh Start
i. Concept that involves the debtor
ii. The idea is that someone who has made financial mistakes should
have so way out and should not be burdened by those mistake in
perpetuity.
iii. It encourages people to act as entrepreneurs, and allows people to
take risks in business
iv. Leveling the playing field (btw. Creditors)
1. Treats creditors of a similar type in the same way

B. Battle between the debtors and creditors generally

i. Debtors want to hold on to as many assets as possible.
ii. Creditors want to obtain as much of the debtors property as they
can to settle the debts.
iii. Between creditors as to who is going to obtain what property of the
debtor to satisfy their debts.

C. Rules of Bankruptcy Code are created by USSC and are rules of procedure
that govern bankruptcy cases in all jurisdictions.
i. Can initiate an Adversary proceeding
ii. Resembles a lawsuit within the bankruptcy proceeding
iii. Certain types of debts that can be discharged
iv. Debts incurred as a result of fraud by the debtor are not
dischargeable
v. The debtor is sued in the bankruptcy proceeding challenging the
dischargeability of the debt.
vi. The 700 rules deal with this and essentially follow the FRCP, the
FRE applies and discovery is permitted.

II. Players in Bankruptcy

A. Debtor – the corporation or individual responsible for the debt
B. Creditor – the lender
C. The Bankruptcy Judge
D. Office of the US Trustee - arm of the DOJ, monitoring, oversight (Not the
same as a TIB)
 E. Trustee in Bankruptcy (TIB) - oversees the liquidation or runs a company
while the plan is being developed.
i. The trustee is appointed by the regional office of the United States
Trustee, and is often a bankruptcy attorney, but can be another
person who is experienced in business, such as accountants,
bankers, insurance agents, appraisers, real estate brokers or
investment brokers.
1. The trustee is paid part of the filing fee as partial
compensation for handling a case, and for a no-asset,
Chapter 7 case, in which the debtor has no nonexempt
property to sell, the fee is the only compensation for the
trustee.
ii. Chapter 13 - standing trustee who reviews Ch. 13 plans,
recommend approval by the court, and collects plan payments and
distributes them to the creditors in accordance with the plan

III. Jurisdiction
A. 1978 Code granted jurisdiction to Art I judges appointed to limited terms,
and not Art III judges appointed for life.
B. Article I judges appointed for a set term by the circuit's court of appeal
C. 28 § 1334 - DC have original and exclusive jurisdiction over the
bankruptcy case itself.
i. They also have jurisdiction over the civil cases arising from the
bankruptcy case, but it not exclusive.
ii. "Related to" - means anything that could have an impact on the
bankruptcy case.
iii. An impact on - is very broad.
D. DC is allowed to refer the bankruptcy case to the Bankruptcy court.
E. Every jurisdiction has an automatic reference to the BC for bankruptcy
cases.
i. This can be withdrawn for care shown
F. 1982 Case Northern Pipeline v. Marathon found it unconstitutional to put
this broad power in Art I judges not protected by Art III lifetime
appointments.
i. Congress could have made b.j. into Art III judges.
ii. Senate wanted a two part system, which won and is in place today.
G. 28 USC 1334 - US DC has original jurisdiction over all Title 11 cases
except as provided for cases arising under section b, which states things
related to Title 11.
 H. Related to - (Pacor [pay-core])the outcome of the proceeding could
conceivably have an effect on the estate administered in bankruptcy [743
F.2d at 994]
I. § 1334.c.2 - talks about times when the DC would abstain from exercising
jurisdiction.
i. DC shall abstain if in a non-core proceeding, the action could not
have been brought in a federal court absent the bankruptcy, and it
is a state law claim
1. This is a mandatory abstention
J. § 1334.c.1 is a permissive abstention clause, usually in the interest of
justice
K. 28 USC 157a - US DC has jurisdiction but they are allowed to refer all
bankruptcy cases to bankruptcy judges.
i. In every judicial district, this is done automatically.
ii. The DC can withdraw the reference, and the bankruptcy parties
can request the withdrawal.
L. 28 USC 157b.2 - states that the liquidation or estimation of contingent or
un-liquidated personal injury tort or wrongful death claims are not core
proceedings.
i. Except - personal injury claims are not core matters, but are not
subject to mandatory abstention , but can be removed by
permissive abstention.
M. Bankruptcy judges can hear core proceedings (28 USC 157.b.2) and the
judge can hear and rule on it.
i. If it is not a core proceeding, barring consent of the parties, the
bankruptcy court can provide findings of fact and conclusions of
law to the DC.
N. 28 § 157.b.1 - lists things considered to be core proceedings.
i. Very closely related to the bankruptcy
ii. If it is a CORE issue, the USBJ rendered the decision.
iii. No mandatory abstention, but there can be a permissive abstention
O. Abstention - DC states that is has jurisdiction but it relinquishes
jurisdiction.
i. If it is NON-CORE, the USBJ provides proposed findings to the
managing DC.
P. Can have a mandatory abstention if both parties do not agree to adhere to
the ruling by the USBJ
IV. Appeals
A. District Court is the first leg of a Bankruptcy appeal
 i. Appeals of the District Court follow the normal course of a appeals
i.e. the Court of Appeals then the upon cerci the US Supreme
Court.
1. Appeals Court can create the Bankruptcy Appellate Panel,
which can take the first appeal.
a. Both parties must agree to adjudication by the BAP.
b. 3rd circuit does not have a BAP, they decided
against creating one
B. The DC reviews core matters under "error" standard and non-core matters
are reviewed de novo.
Class #3
Tuesday, January 25, 2010
6:10 PM

I. Venue
A. Governed by 28 USC 1408
i. Individual: where the person lives or has principle assets
ii. Business: incorporated, headquartered or has principle
assets or operations.
1. Also, if there is a filing already occurring with a
general partnership, affiliate or subsidiary. (28 USC
1408.2)
2. Most large (>50%) Ch. 11 filings are filed in
Wilmington, DE or Southern District of NY.
a. DE - since the bankruptcy laws and
procedural benefits are favorable to businesses
b. SDNY - many large bankruptcy firms are
there and the laws have changed to be almost
identical to DE's.
II. United State Bankruptcy Court Decisions
A. Appealed to the District court
i. Findings of fact are reviewed on "clearly erroneous"
standard.
ii. Finding of law are reviewed on the "de novo" standard.
(Latin for "anew," which means starting over)
B. BAP (Bankruptcy Appellate Panel) - panel of bankruptcy judges in the
circuit.
i. Not mandatory, and 3rd circuit does not have one.
ii. Jurisdiction of the BAP is at the consent of the parties, and
replaces the District Court level of appeal from the USBJ
iii. DCs hate getting bankruptcy appeals.

III. Property of the Estate

A. Estate is created automatically at the moment of bankruptcy
petition filing, thus creating a new entity called the estate.
i. §541 - all property of the estate goes into this new estate.
ii. §541.a.1 - all legal, or equitable interests of the debtor at
the commencement of the case goes into the estate.
iii. §541.a.6 - post-petition earning of the debtor after the filing
are exempt
 B. In re Burgess [p. 125] – Appellant debtor sought review of the
bankruptcy court's order denying appellant's motion for an order to
show cause why the county commission's revocation of appellant's
brothel license was not a violation of the automatic stay. The court
held that appellant's brothel license was property, at least for the
purposes of 11 U.S.C.S. § 362(a)(3). The fact that state law did not
consider the brothel license to be property was not dispositive because
federal law determined whether a state created privilege fell within the
category of bankruptcy property. Appellant's brothel license had
enormous value to the bankruptcy estate because, without the license,
there would be no business left to reorganize.
i. The court reversed the order of the bankruptcy court and
remanded. Appellant debtor's brothel license was property for
purposes of the bankruptcy code. The license was critical to the
value of the bankruptcy estate and ability to reorganize appellant's
business. County's action in revoking the license was an act to
exercise control over the estate, for which there was no
governmental exception to protection afforded under the automatic
stay.
ii. Sharp v. Dery [p. 117] – Plaintiff bankruptcy debtor
received a bonus from his employer in the year after the year when
plaintiff filed a petition in bankruptcy. Granting of the bonus was
declared post-petition, post-petition employment was required to
be eligible for the bonus, and as of the date the petition was filed,
plaintiff would not have been eligible, or have had any enforceable
claim to, the bonus. Plaintiff appealed the bankruptcy court's
determination that the bonus was property of the bankruptcy estate.
The court reversed, holding that under the circumstances, plaintiff
did not have an enforceable right to receive the bonus when he
filed his petition, so that it was not part of the estate. Though the
employer had no discretion over the amount of the bonus, it did
have discretion whether to pay any bonus at all. Apportionment of
the bonus between pre-petition and post-petition was inappropriate.
IV. Problem 5.2 [p. 130]
A. The ticket was bought before the filing, so he had a legal and equitable
interest in the ticket prior to filing, therefore the earnings from the
ticket, even though they came after, are part of the estate.
B. If the debtor had a legal and equitable interest in a property before the
bankruptcy petition was filed, any resulting income from those
interests are part of the estate.
 C. 11 USC 541.c.1 - an interest of the debtor in property becomes
property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this
section notwithstanding any provision in an agreement, transfer
instrument, or applicable non-bankruptcy law
Automatic Stay
Consumer Bankruptcy
Class #4
Thursday, January 21, 2010
8:18 PM

[p. 130] Problem Set 5

5.1
a.Property of the Estate
b. Property of the Estate - can be subject to a lien and still
c.Property of the Estate
d. Property of the Estate
e.Property of the Estate
f. Property of the Estate
g. Property of the Estate
h. Property of the Estate
i. Property of the Estate - has an interest in the item
j. Property of the Estate - §541.d includes any item the debtor holds in legal, but not
equitable, title
k. Property of the Estate

Eggs are from the parakeets and like the dividends are property of the estate
(§541.a.6)
Post-petition wages are not property of the estate
5.5 Did he receive a letter prior to March 1, detailing the award? Is it coming from the
school, or a 3rd party? Did he have a legal or equitable right to the money prior to March
1st?

Automatic Stay [p. 131]

I. This prohibits any creditor from pursuing the debtor in efforts to collect from him
or his property (11 USC 362)
II. Supports the notion of a fresh start by providing the debtor with breathing room.
A. Usually at the time of bankruptcy the situation is dire as the debtor slowly
misses more payments to more and more companies.
B. Individuals: Collection agencies must stop calling and foreclosure
proceedings are stopped
C. Corporations:
1. gives Chapter 11 filers the space to normalize operations
III. Leveling the playing field among creditors
A. Creditors are vying for places in line to be first at the trough to get
recompensed with the swiftly diminishing assets of the person/company
B. All creditors of a similar type will be treated the same.
1. Secured,
 2. Unsecured
a. Administrative
b. Priority Unsecured
c. Unsecured
3. Equity
IV. The stay remains active until:
A. The case is closed
B. The case is dismissed
C. A discharge is granted or denied.
V. Actual notice of the bankruptcy is enough to give rise to sufficient knowledge of
the stay.
A. With no knowledge of the bankruptcy, there would be no damages or
lawyer's fees, but the action taken by the creditor is voided.
B. Acting with knowledge of the bankruptcy brings §362.k.1 actions.
VI. 11 USC 342 - new section - a creditor with regard to all cases can file generally
with a bankruptcy court in a jurisdiction notifying them where to send notices
regarding Chapter 11 or 13 notices.
A. Why? Because in large corporations the addresses the debtor lists will
probably be the address where they send their payments and no one at that
location would know what to do with a bankruptcy notice. The company may
not then protect itself from violating the stay since it was not made aware.
B. 342.e.1, 342.f, 342.g
Class #5
Tuesday, January 26, 2010
6:12 PM

Problem 6-1 [p. 138]

• Wages have been garnished
• 68k in unsecured debt
• 4.5k in secured Car debt
• 750 for auto repair
• Alimony and Child support
• Doctor threatening legal action
• The garnishment is removed when the bankruptcy is filed (§362.a.1), and he will
get the full paycheck every week moving forward
• Post petition wages are not property of the bankruptcy estate.
• Eviction actions are stayed under §362.b.2 if no eviction action has been filed
• If an eviction is filed, but no judgment has been entered, then the action is
stayed
• If the eviction judgment is entered (an order of possession), the landlord is
not stayed from enforcing the judgment (i.e. they get the sheriff to evict you.)
• Landlord can apply for relief from the stay under §362.d
• Bad check charge is not stayed because it is a criminal proceeding §362.b.1
• Alimony and Child support that is not paid from property of the estate
§362.b.2.B/C is not stayed
• Utilities are stayed under §366
• Cannot refuse or discontinue service after 20 days the utility can alter
service if the debtor refuses to pay a deposit.

Problem 6-3 [p. 139]

• If they knew about the bankruptcy they aren't allowed to cash the check, and they
should probably return the car
• Taking the check and cashing it when they knew of the bankruptcy even though
they got it before the filing probably violates the automatic stay.

Chapter 5 [p. 141]

• Sale Price/ Market Value - Amount of secured Claims/Liens - Exemptions - Cost
of Sale (inc. Trustee Fees) = Amount to Distribute to Unsecured Creditor
• If this amount is +, the Trustee will sell the property
• If the amount is 0 or -, he will give it back and people will have to exert
their state court rights upon it (the ownership right, and creditor rights)
• Sale Price: how much would I get for this
• Secured Claims: mortgages etc.
 • Exemptions: applicable exemptions on the property
• Cost of Sale: real estate costs, auction costs, trustee fees, etc.

• §507 - gives an order of payouts for creditors

• Administrative Creditors (paying for the bankruptcy)
• Priority Claims (wages owed w/in 90days of the filing for a business)
• General Unsecured creditors
 If the money left is $50k and the total amount of debt for the
unsecured is 100k then each creditor gets 50% of their debt paid.

• Trustee holds a meeting of creditors §341

• Evaluates the amount of debt and will indicate whether it is too high.

• Chapter 13 incentives
• Mortgage arrears were forgiven
• Certain debts were dischargeable under 13 that was not under 7

• Substantial Abuse (Shaw [p. 145]): debtors that had substantial amounts that
could be made under Chapt 13 if they managed their money better.
• Applies to Chapter 7 filings
• Substantial abuse to allow these people to discharge their unsecured credit
if their lifestyle was responsible for their high debt and it took time over the
years.

2005 Amendments
• 1st Screen: Means Test [p. 150]
• §707 - there is a presumption of abuse regarding filings under Chapter 7
• If the income of the debtor is greater than the median income for similar
sized families in the state in which the bankruptcy is filed.
 Using US Census data which is available online, and this is
Statewide, not local.
 In NJ for family of 4: $103k
• Look at the:
 Size of the family
 The family income - look at the income of both spouses to make
the determination
• Compare the income with the median income in the state,
and if the family income is larger, then you cannot file Chapter 7.
 Average income over 6 month period
• 2nd Screen: Income/Expense test
• Income side
  Over the last 6 months (wages, interest earned, unemployment, etc.
[p. 152])
• Expenses
 Amount owed on a monthly basis for cars and mortgages
 Other expenses (i.e. food, clothing, life insurance) - 23 categories
of expenses
• Uses IRS National standards - guidelines that the IRS
employs when figuring out settlements.
• Expenses - Income [p. 161]
 Abuse is presumed if the difference is less than $110/month
Class #6
Thursday, February 03, 2011
6:11 PM

I. Fraudulent Conveyances: transfer of an asset made to avoid an obligation to a

creditor.
a. Two Types
i. Actual Intent to Hinder, Delay or Defraud Creditors
ii. Element of an actual intent
b. A Transfer for Less than fair consideration while insolvent
i. The element of intent is missing, and the person made the transfer
while unable to meet debts or obligations.
c. Balance sheet test or unable to pay debts regularly when they come due.

II. Eligibility to file Ch. 7

a. Means test 11 USC §707
1. Presumption of abuse if your income is greater than the mean income
of your state
2. You may still be eligible for Ch. 7 if you pass the income/expense test.
i. After you complete the income/expense test [p. 161] you must
fall below certain dollar amounts to be eligible for Chapter 7 -
else the presumption of abuse applies.
3. If you fall below the income test line, the presumption of abuse does
not exist and the debtor is allowed to file under Ch. 7.
4. The presumption of abuse is rebuttable for items under 11 USC
707.B.2.b.i
b. Substantial abuse was amended in 2005, and was replaced by the
means test, which looks at the income for 6 months.
1. If you make less, there is no presumption of abuse
2. If you make more you must pass the income/expense test.
3. If you make enough the presumption of abuse applies.
4. If you make less than the amount no presumption applies.
5. The case can still be dismissed based on the court's discretion if it
finds that debts were made in bad faith or "totality of the
circumstances". 11 USC §707.b.3
6. US Trustees office is required to look at every filing to see if the
presumption exists [p. 162]
c. There are more hurdles places in front of consumer bankruptcies.
 d. Fees for the filing of the bankruptcy have gone up due to the changes to the
process by the 2005 Amendments.
e. Mandatory credit counseling before filing
f. Increase in the complexity of the forms to file
g. 2005 Amendments were there to ensure that more people would put money
towards their unsecured debt instead of discharging all of their unsecured debt
through Chapter 7
1. Prior to the 2005 Amendments, Judges could prevent Chapter 7 if they
found substantial abuse.
2. Only 8% of Chapter 7 debtors had incomes above their state's median
income.
III. ReCap
a. Know that there is a means test
b. Know that the means test is the gateway to Chapter 7
1st : income greater than the median of the state
2nd: income/expense test is require only if you have greater income
3rd: Trustee is required to investigate all chapt 7 filings
4th: Presumption of abuse is rebuttable
5th: Even if the consumer passes means & income/expense the case
can be dismissed through bad faith & "totality of circumstances.

Exemptions [p. 167]

Example 1

100,00 property
0
-50,000 1st lien
-10,000 2nd lien
-10,000 Cost of sale
-10,000 Exemption
20,000 left
In this case, the trustee will sell the property and the debtor will be paid the
exemption from the proceeds of the sale.
If the property comes into the estate, and without the exemption, the property
would return money the trustee would sell it.
However, if the exemption would make the value negative, the Trustee
abandons his interest in the property.
IV. All states have exemption Laws
 a. Certain types of property, or up to certain dollar amounts, there will be
exempted from collection attempts.
b. Those exemptions apply outside of bankruptcy as well.
c. State law apply to only State law collection efforts.

V. Bankruptcy Exemptions
a. 1898 - Bankruptcy law followed the state laws.
i. 1978 - Should create a uniform bankruptcy policy
ii. Some states though they weren't generous enough
iii. Other states thought they were too generous.
iv. A compromise was created where states could opt out of the
Federal Code
v. If the state did not opt out of the Federal exemptions, the debtor
can select to use either the Federal or State exemptions as a whole,
not parts
vi. If the state opted out, you have only the choice of the State
exemptions
b. Exemptions vary widely from state to state.
i. TX provides a homestead exemption of 10 acres in the city/200
acres in rural
ii. WY allows a married couple $20k exemption for the homestead
c. List of Exemptions can be found at 11 USC § 522.d
i. 10k in household stuff, but limited to $500/item.
ii. $40k for a married couple's home property
iii. 1350 for jewelry
iv. 1075 and 10k from the homestead exemption if it is left over.
Class #7
Thursday, February 04, 2010
8:13 PM

Valuation - is one of the most contested issues in bankruptcy litigation.

• In re Walsh [p. 184]: Fair market value must be considered to be
liquidation value in a Chapter 7 case.
• Mitchell court [p. 186]: you don't look at liquidation value only, but also
consider the value of the exposure of the item on the open market for a time.
• This is not a fast forced sherrif's sale, the trustee will have time to
market the item, but buyer's will be aware that the sale is for a bankruptcy

Form 4003a - debtor must list all items he wants to declare as exempt

The laws governing bankruptcy require that you be domiciled 730 days (2 years)in
that location to take advantage of the exemption laws of that state (i.e. the homestead
protections of Texas, of FL's annuity contract protections)

§522.f - debtor can avoid 2 kinds of liens if they impair an exemption.

• Judicial lien - a lien created by a judgment.
• Exception: a liens secured for a domestic support obligaton
• Nonpossessory Nonpurchase Money Security Interest (PMSI) in
household goods.
• Non-possessory: Creditor doesn't have it
• Non-purchase Money: the loan was on incurred to buy the specific
thing.
• Household goods are listed under 522.f.4

• Remember the Lien is taken before the Exemption so if the exemption is

impaired because of the lien, the liens in these two cases are ignored.
• Policy reasons: judicial liens are viewed as unsecured creditors
who got levies quickly.
• PMSI - to prevent consumer financiers that would take liens
against things they would never repossess like pillow cases and crockery.

Problem 8.1 [p. 196]

• §522.d - Federal Exemptions - the values of the exemptions are doubled
since the pair are filing jointly, giving them 21550 for household expenses.
• §522.d.5 - Wildcard exemption - since they don't have to use the
Homestead exemption they can use that to cover the rest of their stuff. This is
also doubled since they are filing jointly.
 •

Household Furniture 8000 Household 10775-8000=2775

exemptions
Clothing 2000 Household 2775-2000=775
Exemptions
Lois' Law Books 2400 Tools of the Trade 2775-2400=375
Lois' Moped 800 Auto Credit (1 time)
Cash Value of Lois' 2000 §522.d.7
Insurance
Lois' Wedding Ring 1000 Jewelry
Lois' Computer 1200
100 Shares of Stock 5000
Joint Checking 400
Harv's Computer 7500
Friendship Sloop 6000
Harv's Wheelchair 18000 §522.d.9 Health Aids
Fluffy the Cat 200 Household Good 775-200=575
Soccer Ball 2 Household Good 575-2=573
• §522.d.11: sets an exemption for personal injury, but not for pain
and suffering.

Claims
• A creditor in a 7 or 13 case must file a proof of claim form to be eligible for a
distribution.
• Claim form must be filed within 90 days of the first meeting of creditors
• Claim is allowed, unless it is objected to
• Trustee has a fiduciary duty to object to claims that are deemed
improper.
• If an objection is raised it becomes a contested matter under
9.0.14? Which is a "mini-lawsuit"
• Pp. 221 - mini-trial tends to be shorter and involve less litigation,
though FRCP are mostly relevant.
  These are fast because there are limited fund available from
the debtor, and their fees are paid by the estates, so the longer the
trial the more funds that are used in contesting the fees.
• In an 11 claim, if the debtor lists you on their schedule as a creditor, the creditor
does not have to file the claim form, but will be limited to the amount the debtor lists
on their schedule.
• There is not statutory deadline, the judge sets it.
• The bar order is issued by the court, stating that the proofs of claim must
be filed by the date set or they are barred.
• Unsecured Claim
• Amount that is due, is the amount owed as of the petition date. This
would include all components of the claim, which is everything in the contract
between the debit/creditor (interest, counsel fees, etc.)
• The amount on the filing is everything owed pre-petition date, the
accelerated amount
• Debt acceleration: creditor declares the entire lent amount due.
• There is no post-petition interest on unsecured claims
• Secured Claim
• For secured claims the value owed is not to be more than the amount of
the collateral used to secure the loan.
• Over secured - the collateral is worth more than the amount owed
• Under secured - the collateral is worth less
 Here the secured part would be the value of the collateral,
and the remainder is unsecured.
• You can run post-petition interest up until the value of the collateral is
met.
• Collateral is $4 mil but you owe $2 mil, the difference is called the
"Equity Cushion"
Class #8
Tuesday, February 09, 2010
6:03 PM

Claims (con't)
§507 - Priority list for those that are uninsured.
The order in which claims will be paid after exemptions and secured creditors.
Domestic support obligations
Administrative expenses
Those incurred by the trustee after the bankruptcy is filed.
Auctioneer
Lawyers
Other administrative expenses (?)
Tax obligations
Late filed claims - those that missed the filing deadline will be paid after all
other claim levels are satisfied and the claims are valid.
Each claim, at each level, is satisfied in full before the next level is paid.
Whenever there is not enough money to fulfill the obligations of a priority level,
those creditors are paid on a pro-rata basis.
Example: If one creditor has $50k, and 5 other creditors have $10k and there
is only $50k left for their level, that first creditor will get $25k, or half the
available pool and the other creditors will get $5k each for 10% of the pool.

Taxes

Problem 12.5 [p. 258]

523.a.2.C: consumer debts owed to a single creditor that aggregate over $550 for
luxury goods are presumed to be non-dischargeable if done within 90 days
Debtor must show that it is not a fraud.
Wallpaper is not a luxury item.
Clothes are for work, or for looking for a new position/job.
If the filing of bankruptcy was unforeseen the presumption can be rebutted.
Problem 12.6
523.A.7: for fine or penalty to a governmental unit then it is non-dischargeable
Fraud, Willful and Malicious Injury, Debt incurred while DUI, Student Loans, Taxes,
Fines owed the government are not generally dischargeable under §523.
Class #9
Tuesday, February 8, 2011
6:20 PM

I. Discharge - §727 and §523 There is some overlap between 727/523 since
debts incurred due to fraudulent conduct are not dischargeable. Prefiling suit
was filed against the debtor
A. Requires : Preponderance of the evidence or higher and is there a
finding of actual fraud (collateral estoppel or res judicata applies)
B. ∏ lawyer should seek to have the special findings sheet contain the
terms found in §523 to use collateral estoppel
i. Example: willful and malicious injury
C. The creditor does not file a fraud claim before the bankruptcy filing
II. This could be tried in a bankruptcy adjudication and those findings used to
prevent discharge.
A. §524.a.2: Discharge is a permanent injunction
i. Trustee or creditor gets 90 days to file a dischargeability
complaint.
ii. If no complaint is filed the claim is discharged automatically.
B. §523.a.2/4/6: require the filing of a complaint to obtain a judgment
that the debts are non-dischargeable. The rest of the sections do not
require a lawsuit
i. §523(a)4 are fraud fiduciary capacity claims – this includes
theft and or larceny – Exam Question
ii. §523(a)6 are intentional torts – must file a complaint
1. It will be binding if the underlining judgment if there
was a specific finding of willful malicious
2. The finding must be based on a abundance of the
evidence
iii. §523(a)2 are debts obtained by false pretenses
1. The use of a statement that is materially false which
states the debtor financial status
2. Cash advances of $870 within 70 days of filing or
charged $600 on Credit cards within 90 days (which are
not in support of the debtor) – Exam Question – a
question like this – rebut the presumption – put on
 evidence that the client needed the items and argue that
they are not luxury items
iv. §523(a)7 fines to a government – i.e. tickets
v. §523(a)8 student loans unless it causes undue hardship to the
debtor or dependents – Exam Question
C. §523.c.1: says that the above issues require a complaint to avoid a
discharge. If you have done something fraudulent or illegal the
discharge can be denied, such as:
i. False oath, or account
ii. Submitting false documents
iii. Failing to explain to the trustee what happened to assets.
D. Grounds for a Discharge in total is listed in §727
i. There is a list of reason why charges are not dischargeable
ii. Such as fraudulent conveyances within one year or move
property in an attempt to hide it then it may be non-
dischargeable
E. Corporations do not get a discharge in a chapter 7 case.
i. This is because the corporation is liquidated as ceases to exist.
F. §523 list the types of debts that are non-dischargeable
i. If an individual creditor believes that his debt is not
dischargeable and the request is granted that only applies to
that debt and not all other debts
ii. §523 - deals with particular debts, and for public policy reasons
Congress determined at the debts contained within are non-
dischargeable.
G. 19 different types of non-dischargeable debts
i. Domestic Support Obligations
1. Child support
2. Alimony
H. §523(a)1(A) taken from §507 – Exam Question difference beteen
priority and nondischargable
 i. Taxes
1. §523.a.1.A: exempts all taxes listed in 507.a.8
2. If the tax credit is paid in full, then 523 does not apply.
3. However, if the taxes are not paid, then the balance in
non-dischargeable §523 – The balance also accrues
interest.
I. Damages from DUIs – Exam Question
J. Other stuff does not require the filing of a complaint, i.e. §523(a)15
equitable distribution in a divorce proceedings – Exam Question
K. Debts are discharged, but liens are not.
III. Discharge Problems
A. In re McNamara [p. 230]
i. Debtor had trouble explaining how $130k was lost in a winner
take all Stud Poker game.
ii. Debtor stated that he did not have good recall because he was
under the influence of alcohol and anti-depressants.
iii. Debtor was denied discharge because he could not provide any
information/evidence to the Trustee concerning the loss of the
money.
iv. Under §727.a.5 the debt was denied.
B. In re Sharpe [p. 233]
i. 523.a.2.a & b - debts incurred as a result of fraud are non-
dischargeable
ii. Oral statements misrepresenting the debtor’s financial
condition are an exception
iii. Statements must be in writing and not merely spoken to satisfy
non-dischargeability. Look at the bottom of [235]
C. In re Hill [p. 237]
i. Bought the home for 200k, and refinanced several times for
683k
 ii. Despite the debtors not making more than 65k they were able
to secure loans by claiming they made 145k
iii. Debtors filed bankruptcy and the bank filed a non-
dischargeability action
iv. The court found that the debtors did make deliberate
misrepresentations
v. However, the Court found that the bank did not reasonably rely
upon those fraudulent income statements
vi. Bank ignored the red flags, and changes, on the two
applications the debtors made, the Court denied the
dischargeability claim
vii. Bank did not verify the income and was making the
determination upon the value of the asset, the debtor's home.
viii. Statements regarding the debtor’s financial condition were
made in writing, but the lenders must have relied upon the
misrepresentations.
D. In re Miller [p. 242]
i. Undue hardship, 2nd circuit test in Brunner [p. 245]
1. That the debtor cannot maintain based on current
income and expenses a "minimal" standard of living for
herself and her dependents if forced to repay the loans
2. That additional circumstances exist indicating that this
state of affairs is likely to persist for a significant
portion of the repayment period of the student loans,
AND
3. That the debtor has made good faith efforts to repay the
loans
ii. It was found that discharging 55k of the 89k the debtor owed
leaving 34k
iii. §105 of the bankruptcy code provide the Bankruptcy court with
the authority to make any ruling in pursuance of their mandate.
 iv. However, it was remanded by the Circuit Court because they
said the Bankruptcy court did not actually make a finding of
undue hardship.
v. Found that debtor did not meet items 2 & 3 prongs of the test.
vi. The debtor only made 398 in payments while maintaining non
essentials
vii. Did not show that her financial situation is more than
temporary
viii. There was not authority under §523 for the bankruptcy court to
do the partial discharge.

IV. Abandon Property

A. When the Trustee abandons a property 1 of 3 things can happen
Redeem (§722)- using post-petition earnings or other non-property of
the estate.
Redeem and keep - buy the property from the Trustee for fair
market value
Give back the secured credit to the creditor and the deficiency
claim is discharged (if the amount owed is less than the value
of the property)
EX: closely held businesses where the stock in the
Reaffirm (§524)- enter into an agreement with the lender to reaffirm
the debt. Through contract notwithstanding the bankruptcy to repay
the debt.
Agreement must be reached before the discharge is granted.
Agreement must be filed with the court.
Debtor has 60 days to rescind the agreement
If the debtor was represented by counsel, the attorney must file
an affidavit claiming that the agreement was voluntarily
entered into by the debtor, and the agreement is fair and not
burdensome.
Without counsel, the court must approve the agreement in the
best interest of the debtor.
Ride through - debtor needs to file a statement of intention within 30
days. Keep making the payments on certain debts, and the lien rides
 through the bankruptcy since the bankruptcy court will not allow the
creditor to repossess a car that the debtor has not defaulted on. (p. 267)
§525: deals with the protections of the debtor against discrimination for filing for
bankruptcy
§525.a - deals with governmental discrimination
§525.b - concerns itself with private sector
Creditors can make choices based on their assessment of the debtors credit
score, including the bankruptcy judgment.
Class #10
Tuesday, February 15, 2011
6:10 PM

Chapter 13 Bankruptcy
Individual debt adjustment case, or wage earners plans
Focus on potential future earnings
Debtor remains in possession of their assets.
Debtor commits to turning over a portion of their income for 3-5 years in a plan that
they file shortly after the bankruptcy filing.
Standing Trustee is present in a Chapt. 13 case (no estate Trustee)
Collects plan payments and distributes payments in accordance with the plan.
Objects to payments and discharges.
Assists Debtor in performing his duty.
Chapt 7 the discharge is granted by the court if no one complains before the closing
of the time to file such grievences.
Chapt 13: the discharge occurs after paying all of the payments under the plan.
The creditors cannot be left in a worse place that they would have been left in
under a Chapt 7
Essentially, the debtor is buying back the equity in the property they would
have lost if they files a Chapt 7.

Chapter 13 - get a discharge if you make your payments for the 3-5 years of the payment
plan. Debts are discharged – liens are not – the creditor is allowed to redeem the
property or reaffirm the debt
o Secured Claims [p. 225]
o Creditor bargained for that collateral
o 1325.a two requirements for a secured claim.
 Secured creditor must be paid the entire amount of its secured
claim
 Secured creditor has to receive interest to compensate it for the
time/value of its money.
 Under 506 – Secured Claim is limited to the value of the collateral
• Ex. If the loan is for 150k, but the collateral is worth 100k,
the creditor must be paid $100k, but the remaining 50k is
then unsecured.
o Surrendering the collateral is always sufficient to satisfy the secured claim
to the value of the collateral.
o Pay the full amount of the secured claim + interest
o Cure and maintain - if payment is over 5 years - arrearages are cured
through the plan and resume and maintain regular payments under the loan
agreement after you emerge from the plan.
 You can cure up until the Sherriff's sale.
 Arrearages do not accrue interest.
 If the last payment is within the 5 year period then you can't do a
cure and maintain for a home loan.
o Cram Down (term of art) plan (§1325.a.5)- propose the secured creditor
take the lesser of the loan balance for the secured debt and the difference
be made unsecured.
 The creditor may not accept that plan insisting that the value of the
property is the full amount owed. The creditor may not like this
and that is what it is called a cram down. See Rash pg 285 –
506(a)(2) the value shall be determined upon the replacement
value of such property as of the date of the filing of the petition
without deduction for costs of sale or marketing. Why? Because
having the unsecured debt portion removed reduces the amount
owed on the secured debt substantially.
 §1325.a.4: Best Interest Test - you have to pay the unsecured
creditors under your plan at least the same amount, as they would
get under a Chapter 7. See the Till case pg 292 – which said the
interest rate begins with the prime rate the adjust the rate for the
secured risk to the creditor because the borrow is not credit worthy
– the adjustment (not the contract rate – the SC rejected the
contract rate)
 The debtor will do a liquidation analysis to determine what this
amount should be:
• Look at the assets
• The exemptions
• Then the bottom line number - an unsecured creditor will
receive at least the amount in a 13 as if it was a 7

 §1325.b - debtor must devote all disposable income to plan

payments during the life of the plan
• Above Median debtors (No discretion from Court) fill out
the form B22C
o Above the median in the means test requires a
proposal for a 5-year plan (cannot do a 3 or 4 year
plan, unless the debtor does not have disposable
 income and will not have to pay anything to
unsecured creditors – see In re Kagenveama pf 313)
o Disposable income = §707 Means Test Amount =
whatever the surplus is after they do that calculation
that is the disposable income
o Includes spouse income – even if only one spouse is
filing Br.
• Below median debtors (Court has discretion)
o Propose a 3 to 5 year plan
o Disposable income is whatever is not reasonably
necessary for the support of one's dependents.
Income of both spouses considered
• Above median debtors are subject to a formula, while
below median debtors get a "reasonableness" standard.
• What is considered "disposable"? see Disposible income
test under §707
• Cases - In the Matter of Wyant 217 BR 585
• Cannot do a Cram Down (§1325.a.5) if
1. PMSI w/in 1 year of bankruptcy
2. PMSI in motor vehicle w/in 2.5 years of bankruptcy filing
• Congress' concern with the 2005 amendments was curtailing the abuse of
bankruptcy

o They did not want people purchasing expensive secured items and
then being able to cram down the debt shortly thereafter.

o §1322(b)(5) Cannot do a cram down on the mortgage of your

principle residence – unless it is a second mort and it is higher than
the value of the home less the principle mort – this is called
stripping of the subsequest mort.

o Can do what is called a cure and maintain under § 1322(b)(5) –

e.g. six months behind in mort payments but want to keep the
house – cannot do a cram down but you can take the six months of
arrears and term them out over the 3 to 5 years aspect of the plan.
At the same time resume the monthly mort payments.

o See Taddeo pg 302 – to see how long one may wait to do a cure
and maintain in a Br claim – the cut off is in the foreclosure sale –
see §1322(b)(5)
 • Chapter 13 is generally used by people who want to keep their homes.

Assoc. Commercial Corp. v. Rash [p. 285]

• Replacement value standard.
• 2005 Amendments § 506.a.2 essential codified the Rash decision, but
codified it a little more.
• §506.a.2: determines how to valuate the cost of the property, you look to
the replacement value for the actual thing.
 Replace a 5 year old TV with a similar 5 year old TV and not a
brand new TV to perform the same function.

Contested Matter (§9014) - the filing of an objection and the rules of discovery
apply.

Till v. SCS Credit Corp [p. 292]

• decided by the SCoTUS in a plurality what interest rate should apply in a
Cram Down: the contract rate or a different rate.
• ScoTUS decided that it was national prime rate plus an adjustment for a
bankruptcy debtor.
 Prime rate is what a commercial bank would lend money to a
credit worthy debtor.
 A bankrupt debtor is not creditworthy, therefore the enhancement
is for an increased risk of lending to such a debtor.
• People are going to litigate over how much the adjustment over the prime
rate would be.
 Creditor would argue about interest on sub-prime loans.
 Debtor would state that they aren't the usual debtor. The item that
led to bankruptcy was sudden and unexpected.

If the primary residence is underwater, you have to be 100% undersecured to get

out of exception for Cram Down on the primary residence.
• The value to the debtor is 0, since there is no value that attaches to the
property the debtor really doesn't have a mortgage.

In re Kagenveama [p. 313]

• Trustee states that an above median debtor must file a plan for 5 years.
• Kagenveama said that their calculated surplus was 0 and they shouldn't
have to propose a 5 year plan.
 • The court agrees stating that Congress got exactly what it was looking for
with the formula in Chapter 13.

In re Farrar-Johnson [p. 321]

Class #11
Tuesday, February 22, 2011
6:10 PM

§507 - Chapter 13
• Priority Claims
• Entitled to be paid in full under 1303.a.2
• Interest need not be paid on the claim, but the claim needs to be paid in
full.
• Disposable income standard is the floor, not the ceiling on the Chapt 13
plan.
• If you file a Ch 13, and you have 0 disposable income in either test
• Priority claims may eat up all of your disposable income. Non-secured
non-priority creditors may receive nothing under the Chapt 13 payment plan.
• Chapt 13 allows one to satisfy tax debt over the life of a plan because
TAX debt is non-dischargeable. [p. 320]
 The benefit is that, even though you must pay off the balance
within the 3-5 years, there is no interest or penalties that accrue.
 Further, Tax debt is not dischargeable under Chapt 7 bankruptcy.
• Chapt 13 plan must be proposed in good faith, conduct of the debtor
during the bankruptcy case is usually the reason for objections.
• In re Farrar-Johnson [p. 321]
• Lived on a military base for free, but was allowed an 1100 deduction for
living expenses
• Court found that it was not bad faith to follow the plain language of the
code.
• §1329: seek to modify the plan after confirmation [p. 323]
• Usually made if the debtor lost his job, or got a new job where he makes
less money the debtor may seek to reduce his payments over the plan.
• Likewise a creditor who discovers that the debtor is making more money,
can request a modification to get more money.

• Problem 15.1 [p. 324]

• Means test: is she above the median income or below the median
 Below median - use the reasonable and necessary test
  Above Median - straight mathematical formula [§707.b.2]

• Automatic Stay for Chapt 13.

• §1301: Stay of claims against co-debtors on consumer debts.
 For example: stay extends to the spouse of the debtor whose
income is used in the calculation for disposable income.
• §362.c: stay exists until the closing of the case or the discharge or
dismissal of the case, whichever is earlier.
 For Chapt. 7 this makes sense.
 For Chapt. 13 the discharge does not happen until the end of the
plan payments (3-5 years)
• The stay exists through confirmation of the payment plan at
least, but does it exist longer?
 §350: when the estate is fully administered
 How long the stay exists for is an open issue.

Eligibility: Not everyone can file a Chapt. 13 – see the last paragraph on page 334
• §109.e
• Limited to natural persons, Cannot be a business entity
• With regular income – you have to be able to fund the plan – see In re
Murphy 226 BR 601 on page 326
• Non-contingent, liquidated, unsecured Debt < $366,475
• Non-contingent: All of the conditions that have to happen for the debtor to
become liable has happened.
• Non-contingent means all events related to liability has occurred – i.e. co-signing
for a car not and the borrow has not defaulted then it is a contingent debt – if they
defaulted then it is a non-contingent debt
• A claim that is being paid by someone who has guaranteed the payment, even
though they are not the primary debtor, that claim is contingent. Meaning it
requires the guarantor to stop payment for the debtor to be liable.
• Liquidated: the claim is subject to ready determination and precision in
computation
 Invoices: absolutely qualified and are considered liquidated
 Pain and suffering: are not liquidated because it is tough to assign a
dollar amount to something that is not easily quantifiable.
 Take a look at page 330 to help identify types of claims e.g. In re
Huelbig 299 BR 721
• Non-contingent, liquidated, secured debts < $1,081,400
• Failing to qualify for Chapter 7 or 13, you need to file an individual Chapter 11.
• §1129 - Individual filers of Chapter 11
  Much like a Chapt. 13 plan must contribute all disposable income
 Must file a 5 year plan

In re Murphy [p. 326]

• A person with no income of their own, but lives in a house with someone who did
have regular income was found to have an income.
• A note points to the Duval case [p. 330] finding the exact opposite outcome with
similar facts

Business Bankruptcy (Chapter 11)

• No discharge under a Chapter 7 for a business since the business folds after the
assets are liquidated.
• Easier and faster to shutdown a business since the trustee handles the
administration
• Chapt 7 is essentially handled like a personal Chapt 7.

Class #12
Thursday, March 04, 2010
8:13 PM

Guest Lecturer: Strong-Arm Clause

• Nick LaFleur: Temple Grad
• Represents Creditors in Bankruptcy Cases.
• 30 years from 4 year evening program

• DIP stands in the shoes of a bonafide purchaser

• A purchaser of property would prevail over an unperfected lien like a
mortgage.

In re Bowling [p. 472]

• It didn't matter about the bankruptcy, the TIB is a bonafide purchaser and
the mortgage is ineffective

Preferences (§547) : Bring money back into the estate to share among the general
unsecured creditors
• Transfer of a debtors property
• §547.e.3: a transfer is not made until the debtor has acquired rights in the
property transferred.
• To, or for the benefit of, the creditor
 • For satisfying an antecedent debt
• Antecedent from the moment it is incurred.
• While the debtor is insolvent
• §101.32: definition of insolvent
• There is a presumption of insolvency, unless the debtor proves otherwise
 Usually by producing a balance sheet, but then there is litigation
surrounding the actual value of the items listed.
• Within 90 days of the filing or 1 year if the filer is an insider (§101.31)
• Creditor received more than they would have received under the Chapt 7.
• If you are unsecured and you receive anything outside of the bankruptcy
you are considered to have received more than you would have received under
Chapt. 7.

• Intent to prefer one creditor over the other was required, but Congress has since
changed from Intent to Effect upon the bankruptcy.
• Defenses: appear in the statute
• Contemporaneous exchange (§547.c.1)
 The timing is important. The payment must be relatively
proximate to the delivery of goods.
• New Value Defense
 Encourages creditor to do business with the debtor.
 It gives the debtor the value of the new product they had supplied
 New value must come after the transfer.
 If the debtor pays 20k of a 50k bill, then the creditor sells the
debtor another 5k within the 90 days before the bankruptcy, the new
value of 5k protects 5k of the prior 20k the debtor paid. The creditor
would only be exposed the 15k instead of the entire 20k that the debtor
originally paid.
• Ordinary Course of business (§547.c.2)
 Facts that showed intent would be used to prove it was done in the
course of business
 Whether the exchange is ordinary in the industry.
 Only need to show that the transfer was made either in the ordinary
course of business, or the ordinary course in the industry.
 Anything that is out of the ordinary invalidates this defense.
 Trends within the particular business can create the "ordinary
course of business"
• Earmark Adoption (non-statutory)

Chase Manhattan [p. 481]

• Earmarking does not apply in the circumstances listed.
 In re Denochick [p. 487]
• The guarantors are contingent creditors of Susan.
• The transfer of the money to NBOC was viewed as a benefit to the
guarantors
• The Trustee was able to recover from the guarantors the monies that Susan
paid to NBOC because it was seen as a preference.

Problem Set 23 [p. 490]

1. Voided because the payment is more than they would get under Chapt 7.
2. Voided, because it is the transfer of debtor's property w/in 90 days that
allows them to get more than they would get under the liquidation
3. Voided because it is a conversion of an unsecured interest to a secured
interest w/in the 90 days
4. Voided because the perfection, which is its own transfer, of the security
interest was within the 90 days.
5. Commercial would not get their money taken because they were over-
secured, while Magic Chef was under-secured. The transfer to Magic Chef would
be labeled a preference and would lose the money.
6. The floating lien held by First Richmond Bank is still considered a
preferential transfer during the 90 day window. The transfer is voidable as a
preference.
7. Voidable since the value of the equipment is taken at liquidation. Since
the equipment was destroyed at the time of the filing, the 20k is a preference.
8.

Class #13
Tuesday, March 09, 2010
6:06 PM

http://gizmodo.com/5487928/new-iron-man-2-trailer-soooo-worth-it-just-for-the-last-10-
seconds

Two ways to start a Bankruptcy

• Debtor goes and files a petition
• Involuntary Bankruptcy: A creditor files the bankruptcy for the debtor
• Cannot put someone into an Involuntary Chapter 13, only 7 and 11.
• Governed by §303
 Creditor wants to ensure that it gets paid (debtor is preferring other
creditors)
  Level the playing field
 More valuable to liquidate a business than to have it keep on
operating.
• Must establish under §303.h
 §303.h.1: Need to establish that the debtor is not paying bills as
they come due.
• Petition is served to the debtor
• If the debtor does not timely answer and order for relief is
entered
• If the debtor does answer, or the creditor does not meet the
requirements for filing an involuntary, there is a trial
• If the basis is found the court enters an order for
relief.
• Must find an insolvency because you don't want to
find someone in bankruptcy unless they are NOT paying their
bills.
 Petitioners must have aggregate claims of at least 13,475
unsecured debt
• This excludes claims that are contingent, or subject to a
bonafide dispute
 If there are 12 or more creditors, 3 or more creditors must join in
the petition.
• These creditors must meet the non-contingent, non-
bonafide dispute requirement.
• 1-11 creditors only a single creditor is necessary
 A solo petitioner must make a good faith investigation to
determine if there are 12 or more creditors.
• At least look at the public record to see if there are more
than 12 creditors
• In re Faberge Restaurant of Florida [p. 377]
 Debtor does not want to be in involuntary, so he pays off two of
the three creditors which reduces the number of necessary creditors.
 Ruling: post-petition payments does not affect the jurisdiction of
the court to rule on the bankruptcy of the debtor
• In re Silverman [p. 378]
 Involuntary filing by a creditor who sued the debtor
 Creditor filed for summ.j. and lost then filed for an involuntary
bankruptcy
 Judge found that the debt was in dispute since the creditor was
denied summ.j
  Judge entered ruling against creditor for lawyer fees, damages and
punitive damages
 Judge found that it was in bad faith.
 Damages are the money lost when it is found that the debtor is in
bankruptcy.

Chapter 11
• Missing a bunch due to work that had to be done 6:30-7:20.
• This is expensive
• Have to deal with the debtor, the creditors, the equity committee, the US Trustee
• Trustee objects to fee applications by professional
• § 1106: idf the DiP (Debtor in Possession) does something bad, or the case is not
moving swiftly to resolution, a trustee can be provided. Not a US Trustee, but a
Trustee as in a Chapt. 7.
• Trustee takes over the running of the business and ultimately proposed a
plan.
• It is considered an extreme step to have a trustee appointed.
• Submitted Plan
• Formulate a Plan: this can take a while
 This can take time because the debtor has to restructure its
infrastructure since it is losing money and that is why the debtor is in
bankruptcy
 The plan must be feasible.
 There must be some months of improvement
 You want as the plan to be adopted as unanimously as possible,
and this requires negotiating with the creditors.
• File Disclosure statement
• Confirmation Hearing

• Farm Credit of Central FL v. Polk [p. 407]

• The stay not only benefits the debtor, but it benefits all the bankruptcy.
• The debtor cannot bargain away the stay for a pre-bankruptcy benefit.

• US v. Seitles [p. 409]

• A bankruptcy court can use §105 of the Code to extend the stay

• In re Rogers Development Corp. [p. 415]

• §362.d: relief from the stay
 For cause - including lack of adequate protection (means: the
collateral is properly preserved i.e. needs to be stored from winter
elements, properly insured, diminution of value, etc., or
  No equity in the property AND property not necessary for an
effective reorganization – meaning the collateral is underwater and it is
not need for reorganization
• If the creditor establishes that there is no equity and it is not
necessary for the reorganization the creditor can get relief from the
stay
• The debtor needs to prove that it is necessary for the
reorganization
• Think factory in default, it is necessary for the reorg
since the debtor needs it to continue operation even if there is
no equity in the property.

Class #14
Tuesday, March 23, 2010
5:25 PM

Automatic Stay
§362.d : On request of a party in interest and after notice and a hearing, the court
shall grant relief from the stay provided under subsection (a) of this section, such as
by terminating, annulling, modifying, or conditioning such stay
1. for cause, including the lack of adequate protection of an interest in
property of such party in interest;
1. What is adequate protection?
a. Interest in collateral. The secured creditor deserves to be protected
against the decline in value of the property.
b. Since the debtor has the property in his protection, the creditor's
interest in the property must be protected from decline.
c. §361: Adequate Protection - periodic payments which represent of
the decrease in value of the property while the property is in
possession of the debtor
i. Additional/Replacement Lien: A lien on something else
with equity
ii. Equity cushion: the difference between the FMV and the
Lien where if the FMV drops during the bankruptcy, the lien
by the secured creditor is still protected.
a. The protection is for the lien, not the FMV to lien
ration.
 b. The debtor would have to do nothing until the FMV
dropped to the value of the lien. Then the debtor would
have to do something else to protect the debtor.
2. What is for cause?
a. Ex. There is no reason to delay a creditor from recovering from
insurance since there is no damage to the estate since the insurance
carrier will handle defense and payment.
b. Permit the case to go to judgment
c. Recover the amount from insurance proceeds.
d. the court will always require proof of insurance.
§362.g: DIP has burden of proof on all other issues save, proof of equity in property
which falls to the creditor.

§364: Credit [~p. 462]

I. Allows the business to operate as it would outside of bankruptcy
A. If the debtor obtains credit in the ordinary course of its business it
does not need court approval to do that.
a. Purchase items/materials on invoice which is unsecured credit.
B. If the debtor sells inventory in the ordinary course of business it
does not require court approval to do that.
II. Outside of the ordinary course of business it requires court approval.
A. Obtaining credit in a non unsecured basis.
a. If the debtor acquires unsecured credit and does not pay the
creditor gets an administrative claim
i. Administrative claim is a priority claim over all other
unsecured debtors
a. Professional fees for estate professionals (debtor or
Committee)
b. Confer a benefit on the estate post-petition.
(suppliers operating under regular invoice terms)
1. Incentivizes people/companies to continue
to deal with the debtor
2. Creditors get more than they would in a
Chapt. 7
c. Upon approval of the plan all Administrative claims
are paid in full ahead of all general unsecured creditors,
unless the Administrative claimant agree otherwise.
d. §503.b.9: for providers of goods, not service
providers- the value of any goods received by the
debtor within 20 days before the date of
commencement of a case under this title in which the
 goods have been sold to the debtor in the ordinary
course of such debtor’s business are treated as an
Administrative Claim.
e. Critical vendor order: authorize the debtor, on his
motion, to make payments to the creditors that the
debtor contends are vital to the operation of his
business. (§105.a - equitable power to carry out their
orders, not used in all districts, but used in DE and
SDNY which are the 2 most influential districts)
1. These guys get paid immediately.
2. Administrative Claims get paid on approval
of the reorganization plan and are paid next
3. General unsecured creditors come last, and
no one wants to be here.
III. Need credit outside of the normal course of business to keep the business
going.
A. You can offer three things to the creditor to gaurantee the loan
a. Superpriority: the highest level of Administrative Claim, where
this lender gets paid before all other ACs.
b. Lien on unencumbered property
c. Priming lien: jumps up in front of existing liens
B. Must meet certain criteria to receive the authorization
a. Debtor cannot otherwise obtain the credit through normal
administrative channels
i. In the case of the priming lien, it must be shown that the
other options are not available.
b. Credit transaction is necessary to preserver the assets of the estate
c. Terms of the agreement are fair and reasonable
i. The lenders are wary of lending to corps in bankruptcy so
the terms of a loan while in chapter 11 can be more onerous
than a loan agreement while outside of bankruptcy.
d. If it is a priming lien, the debtor must show that there is adequate
protection for the existing lien holder.
i. This is generally not a problem if an existing lender
extending a loan on the property they already have a lien on
since they are priming themselves.
ii. If the lender is new to a piece of property, the original lien
holder may object
iii. Unsecured creditors may object to even a lender self-
priming a loan since more debt lowers the amount of money
coming to them on a liquidation.
 §363.c.2 Cash Collateral [p. 464]
I. If there is a lien on receivables or a lien on cash there is no cash capital
usage unless there is approval by the court or all entities with an interest
consent
A. Lender does have the ability to essentially shut the business down
if the lender feels that their assets are not adequately protected and
prevent the debtor from spending cash.
B. Must get court approval to spend cash.
C. Must do it at the beginning of the case to be able to spend cash.
D. Debtor must show creditor's interests are protected.
E. Spending controls are a way in which the court ensures that the
creditors interests are protected by mandating what the debtor can spend
the cash on, and how much.

Class #15
Thursday, March 25, 2010
8:16 PM

§365 Executory Contracts and Unexpired Leases

I. Executory Contract: there is performance required on both sides. Such
that a failure to complete the performance would be considered a material breach.
A. If all that is left for the debtor to do is pay money, it is not an
executory contract even if the non-payment would be a material breach.
B. Countryman's definition of an executory K
C. If a K was terminated before the bankruptcy it cannot be assumed
1. There is no K to assume after the bankruptcy.
D. Unexpired leases
E. Cannot assume, or reject, a K to loan money because the code says
you can't.
II. §365.d.2: u-leases and executory k's can be done at anytime before the
activation of the plan.
A. The contractee can request, from the court, a shorter deadline for
the decision on their, or all, contracts. The contractee must show cause for
the court to rule in its favor.
III. §365.d.4: Non-residential lease of real property where the debtor is the
leaser
A. 120 days to assume or reject non-residential leases.
B. Court can extend the time once, for 90, with proper cause.
C. The order must be entered BEFORE the expiration of the original
120 day period.
 D. After that 120 days it can only be extended with the consent of the
landlord.
IV. Reasoning
A. §365 is used to help restructure the business by removing the
poorly performing locations, by letting the leases terminate.
V. You must assume or reject the entire contract or lease.
A. The assumption or rejection must be approved by the bankruptcy
court.
B. Creditors may have a disagreement with the decision, so it allows
the parties in interest to be heard and stop the debtor from making a bad
decision, for them.
VI. Test for assumption/rejection is the Business Judgment test.
A. There is some discretion in this standard, where the debtor's
decision is given quite a bit of weight.
B. Debtor has to cure any default.
1. If the debtor is behind in his payments in the contract/lease
he must come current.
C. Provide adequate assurance of future performance.
1. Demonstrate that the debtor is able to continue to fulfill the
contract.
VII. Assuming/Assigning Contracts
A. A contract that is assumed, can be assigned EVEN IF there is
language in the contract that prevent assignment.
B. Adequate assurance by the assignee, must be shown for the
assignment to be validated
C. If it is a lease, the lessor can require a new security deposit as part
of the assignment.
D. The other party to the K is usually very happy when there is a
motion for their K to be assumed since
1. All back payments need to be cured.
2. They will get what they bargained for
3. Most of the time, the only objection is a dispute over the
amount to cure the default.
E. If the contract is rejected, the other party must total up the cost of
the arrears and the damages and join the pool of general unsecured creditors.
A bad thing.
VIII. Special rules for leases
A. Pre-bankruptcy rent (Unsecured Claim)
1. Total up the amount owed up to the day before the petition
B. Administrative Rent (Administrative)
 1. Administrative claim of the rent from the petition date to
the date of the filing.
2. The landlord has conferred a benefit upon the estate,
during the bankruptcy and therefore they are allowed a beneficial
recovery.
C. Full Lease expectancy (Unsecured)
1. Limited to the greater of 1 year of rent or 15% not to
exceed 3 years.
2. If there are more than 3 years left on the lease, the landlord
only gets 15% of 3 years.
3. Should there be 2 years, then the landlord can only get a
max of 15% of 2 years of rent.

Plans
I. Reorganizations under Chapt 11
A. Debtor files bankruptcy, restructures its business, files a plan of its
business to settle the debts, pays administrative claims with cash on hand,
and agrees to pay unsecured creditors a set amount going forward.
1. Ownership remains the same
2. Debtor may reduce secured claims down to the principle
amount (Cram down)
3. Unsecured claims are paid out of future earnings.
B. Another company buys up the debts of the debtor company when it
is in trouble. When the company goes into insolvency, the debt owner agrees
to accept equity in the company in exchange for forgiveness of the debt.
1. The debt owner becomes the new owner
2. The balance sheet is cleared since the debts have been
forgiven.
C. The company is sold, and the proceeds of the sale are paid out to
the creditors according to a plan. This can be done with a sale pursuant to the
plan, or sold before the plan (§363) and the money doled out in accordance to
the agreed future plan.
1. Sales of substantially all assets to provide money to pay the
creditors.
II. Excusivity [1121.b]
A. Debtor has the exclusive right to present a plan for the first 120
days
B. Court can extend the exclusivity period for not more than 14
months past the initial 120 day period (18 month maximum exclusivity
period) [§1121.d.2]
C. After that period the parties in interest may file a competing plan
 D. The plan proponent must have a disclosure statement approved.
1. Disclosure statement is supposed to provide a reasonable
vote enough reasonable information for a vote to cast an informed
ballot.
2. Creditors should only object on informational, not
substantial grounds.
a. If the complaint is on substantial matters, the
objection raised: Dispute on Confirmational grounds
III. Confirm a plan [§1129]
A. A plan is confirmed if all the impaired classes vote yes on the plan.
1. Must meet just the general requirements
2. Judge is more than happy to approve the plan
B. A non-unanimous number of the impaired classes vote yet. (Cram
down)
1. At least 1 impaired class must vote yes
2. Must meet all the general requirements
3. The plan must be shown to be "fair and equitable "
C. General Requirements (two easiest ones)
1. §1129.a.7: Best Interests test
a. Debtor must show that each of the creditors will
receive at least as must under the Chapt. 11 plan as they would
under a Chapt. 7 liquidation.
b. A liquidation analysis must be prepared and is
usually supplied with the disclosure statement.
c. The complexity of liquidation analysis depends
upon the size of the company
d. Dispute is usually a valuation dispute of the assets.
2. 1129.a.11: Feasibility
a. Debtor has to show that confirmation of the plan
will not result in liquidation of the debtor unless the plan is the
liquidation.
b. The standard just depends
c. In re Malkus Inc. [p. 617]
i. Analysis of the performance of the debtor
during the bankruptcy. Did they lose/make money? The
performance of the company over the course of the
bankruptcy?
ii. The debtor plan was not feasible because of
the general failure of the debtor to improve the financials of
the business.
 iii. See [p. 618-9] for language concerning
feasibility.
d. In re Made in Detroit [p. 620]
i. A plan submitted on a conditional basis is
not considered feasible and confirmation of such a plan must
be denied.

Class #16
Tuesday, April 06, 2010
6:05 PM

Exam:
• Downloadable
• For the whole exam period
• 6 hours to complete it
• Format
• Fact patterns
• Questions
• Check online exams
• Understand different issues and discuss those issues.
• If the answer is a close call, describe what the issue is and support it.
• Likes us to get to the point, and analyze it in a clear concise way
• Cite cases when they meet the fact pattern.
• Set for 6 hours, but it is expected to only take about 4.

Chapter 11 Plan Confirmation

Consensual Plan: 16 different requirements in section 1129.a
• All impaired classes must vote in favor of the plan.

Cram Down: 1129.b

• At least 1 impaired class must vote in favor
• Plan must be fair and equitable.
• Not unfairly discriminatory
• Must meet all other 1129 requirements
• Can be raised by ANY affected Creditor
 1129.a.11 - Feasibility (will not see "feasibility" in the rule
 1129.a.7 - Best Interests test (will not see "Best interests" in the
rule): requires that the debtor show that the creditors will get as much
under the plan as they would under the Plan.
  1129.a.9 - Administrative claims will be paid in full on the
effective date of the plan, unless the administrative creditor agrees
otherwise
• Effective date: is the closing date
• Can be raise by DISSENTING creditors only
 Fair and equitable
 Unfair discrimination
 Does not meet other 1129 requirements
• 1129.a.9.c - Unsecured Tax Claims: must be paid in full within interest
within 5 years
• 1129.a.3 - Good Faith: the plan must be proposed in good faith.

In re Coram Healthcare (271 B.R. 228)

• Various corporations decide to exchange the debt for the ownership of the
company and all shareholders would lose their interest and the unsecured
creditors will get a little payment.
• The largest public shareholder (Sam Zell) doesn't like the plan because it
wipes out the interest and they believe that the company is worth more than
the debt.
• In discover the committee learns that Crowley has a $1mil year fee with
Cerberus, the original owner of Coram.
• Sam Zell states that the offer was in bad faith because of the undisclosed
agreement.
• Judge agrees because of the conflict of interest between Crowley who was
being paid by the largest creditor and was also the CEO of Coram, and it was
not disclosed.
• After this decision a trustee was appointed.
• A serious conflict cannot put forth a Chapt.11 plan in good faith.

§1122
o 1/2 in number of debtors
o 2/3 affirmative vote in amount of the debt

Classification
• To be placed in the same class, the claims must be substantially similar
 Insider claims are separate general unsecured claims though they
are all GUC.
• Separate classification of similar claims are permitted for "good business
reasons"
  Cannot classify for the sole reason of getting one affected class to
vote in favor.
• Administrative convenience classes allowed.

§1124 - What is an impaired claim?

• Any alteration of the legal, contractual rights are impaired.
• Any creditor getting 100% of their credit are not impaired.
• Secured creditors where their payment under the contract is changed, is impaired.
• If the creditor is unimpaired it is deemed to have accepted the plan. [1124.f]

In re PPI Enterprises [p. 638] (are you impaired by a cap in the bankruptcy code?)
• Debtor rejected the lease and the creditor had a rejected lease clause
• The landlord said that he was impaired because he was not getting everything
under his lease.
• The debtor argued that the landlord was not impaired since he was getting
everything that he was guaranteed under the bankruptcy code
• The 3rd circuit found that the landlord was not impaired because it was not the
plan that was impairing the landlord, but a mandatory clause in the Bankruptcy
Code.

"Fair and Equitable"

• Absolute priority rule [1129.b.2.b]
• A lower class in the priority scheme cannot be paid anything until a
member of a higher class is paid everything (100%).
 Unsecured creditor come before equity holders (stockholders,
owners, etc.), so equity owners cannot receive anything until unsecured
creditors get 100% under the plan.
 Owners retain ownership interest in the debtor company, and the
unsecured creditors are not getting 100%, so the owners are getting
something before the USC are not 100%
 Only an issue if the impaired classes dissent, voting against the
plan
 New Value Exception
• USC not paid in full, and debtor is retaining ownership
interest, If the owners are contributing new value they are not
blocked by the Absolute Value Exception
 In 1978 rules, the new value exception was taken out.
• BoA v. 203 N. LaSalle St. Partnership [p. 664], the USSC
was confronted with a case where they could have decided the
New value Exception
• BoA voted against the plan.
 • BoA was going to get 16%, and the new owners
would get the company for $6mil of new value.
• USSC reversed the plan's approval.
• New owners claimed the new Value Rule
existed.
• Bank said no New Value exception
• USSC stated that if the NV existed it would
have been violated by the plan, since it gave the current
owners the rights to repurchase an ownership interest
for $10mil.
• This was prohibited by §1129.b.2.B.ii,
which required that previous owners compete with the
open market.
 Requirements for New Value Exception
• Contribution must be new, it cannot have been made before
the company filed for bankruptcy
• Must be money, or money's worth and not work/effort
invested into the company
• Reasonable equivalent to value of new interest in the
reorganized company
• Must pay into the company the value of the interest
you are going to keep in the company
• Necessary for implementation of the plan: money comes in
and goes out to the creditors
• Exposed to the market, not exclusive to the debtor owners:
but must be available to the rest of the market.
 Get to the NVE IF
• Current owners are to retain their ownership interest
• USC are not getting 100% of their debt
• The impaired class votes against the plan.

Class #17
Thursday, April 08, 2010
8:16 PM

Cramdown review
• One impaired class must vote in favor
• Plan must be "fair and equitable" to dissenting classes
• Absolute priority rule: all members of a higher priority class must be
paid before a lower priority class can get a cent
  This comes into play most often when the debtor owners are
keeping an ownership interest and the USC are not getting 100% of their
investment back.
 New Value Exception exists for this circumstance
• Contribution must be new, it cannot have been made before
the company filed for bankruptcy
• Must be money, or money's worth and not work/effort
invested into the company
• Reasonable equivalent to value of new interest in the
reorganized company
• Exposed to the market, not exclusive to the debtor owners:
but must be available to the rest of the market.
• Secured claimant
 The secured creditor must receive the entirety of the value of their
collateral with interest
 Sale of the collateral with the lien of the secured creditor to attach
to the proceeds.
 Realization of the indubitable equivalent
• i.e. The secured creditor will receive some property that is
equal to its secured claim
• i.e. The secured creditor reclaims its collateral.
• 1111.b Claims and interests
 A secured creditor who is under-secured, has two options
• Secured claim up to the value of the collateral, and an
unsecured deficiency claim for the balance to be mixed in with the
other unsecured claims.
• Under 1111.b the secured creditor can choose to treat its
entire loan amount as secured.
i. SC must make the decision before the
ii. If this is done the secured creditor must pay the
entire loan over the course of the plan, where the secured
amount is paid with interest and the otherwise unsecured
amount is paid without interest
a. Depends upon the payout amount to
unsecured creditors
b. The unsecured claim is waived and the
creditor loses the ability to vote the unsecured rules.
c. This constitutes the loss of leverage to
dissent and control the creditor class, and the loss of the
ability to force compliance to the Absolute Priority
Rule and/or the New Value Exception.
 • 1111.b also changes non-recourse loan into standard
recourse loans
i. Non-recourse loan - A loan where the debtor is not
personally liable, f the borrower defaults, the lender can take
the property used to secure the loan, but no other property of
the borrower.
• If the plan calls for the sale of the collateral and the creditor
is to be paid out of the sale the creditor cannot claim 1111.b
i. Can only make an 1111.b claim if the secured
creditor is to be paid out over time in the plan.
• Plan does not unfairly discriminate against dissenting classes
• This almost always applies to USC only. SC are not usually substantially
similar and are classified differently since there are wide variations between
either the collateral and the situation of the creditor in relation to their
collateral.
• USC [§507: Priorities] are all the same priority level.
 It is possible to separate unsecured claims into different classes,
where their relation is similar, by providing a good business
justification. [1122.a]
• i.e. Trade creditors, Deficient Secured Creditors,
Manufacturing creditors, etc.
 Still need to provide One impaired class to vote for the plan.
Separating the creditors out can get one impaired class to vote for the
plan by separating the fors from the againsts.
• What is unfair discrimination?
 Generally:
• Can't pay insiders more than other creditors
• If the difference is close then it may not matter.
 Cranbury - can treat trade creditors differently than deficient
creditors, if there is proof that the trade creditors would not deal with the
debtor unless they received 100% under the plan.
 Buick - did not ratify the plan because it was shown that the trade
creditors looked to make a deal with the debtor.
 In re Aztec
 In Re Great Bay - a difference of 76% and 80% recovery between
the USC classes is not unfair, the 4% difference was immaterial.
 In re Century operating Co. of TX - confirmation was denied 100%
of USCs in one class received 100% and the other class 1%.
• 1129.a
• Administrative Claim: paid in full when the plan is confirmed, unless they
agree otherwise.
 • Unsecured Tax - paid in full over 5 years with interest.
 Tax Lien is a secured debt
• Secured creditors - 3 options listed above:
 The secured creditor can be paid in full up to the entirety of the
value of their collateral with interest (Till Rule)
 Sale of the collateral with the lien of the secured creditor to attach
to the proceeds. (i.e. they are paid out of the proceeds of the sale)
 Realization of the indubitable equivalent of its secured claim (i.e.
give the collateral back)
• This is the least used.
• Unsecured Creditors
 Best interest Test: at least as much as they would get in a chapter 7
 Absolute Priority Rule
• New Value Exception

• Doctrine of Equitable Mootness

• Objecting Creditor where the plan is confirmed can appeal to the District
Court.
• If you appeal the confirmation of a plan and things have happened as a
result of the plan, too many things have happened, the appeal is equitably
moot.
• Things done under the plan, cannot be undone.
• Have to get a stay pending appeal.
 To do so, a bond must be placed to cover injury to the people who
would be harmed by the delay.
Till?

Class #18
Tuesday, April 13, 2010
6:12 PM

When would equity be entitled to get something under a plan, if there was to be an
exchange fro debt?
• When the unsecured creditors get paid in full.

§1141: Discharge
• Most pre-confirmation debts are discharged by plan confirmation
• Post-petition fees are usually Administrative fees
 What happens to creditors that did not receive adequate notice of the bankruptcy
proceedings?
• To discharge under 1141, assumes adequate notice to creditors.
• Notice must be reasonably calculated to reach all interested parties.
• For known creditors, actual notice is required.
 Debtor has actual knowledge, or the identity is reasonably
ascertainable by the debtor.
• Publication is sufficient for Unknown creditors
 Debtor does not know the creditor, or the creditor is not
ascertainable by the debtor
Ascertainable - requires a reasonably diligent effort by the debtor to discover the
identity of the creditor.
• Failing to provide adequate notice to the creditors results in no discharge of the
debt.

Litigation Trust : where the company's assets are sold to distribute under the plan, and all
that is left is the shell of a debtor
• Creation of a private trust for the benefit of USCs
• Has someone act as a trustee, usually from the panel of trustees, and completes
the litigation claims and uses the money left in the company after the sale of the
assets to pay out the remaining claims.

1123.b.4 - Authorizes a plan that provides for the sale of a substantial amount of a
debtor's estate.
• Why would Congress allow, what is essentially a Chapt 7, in a Chapter 11?
• The business ceases to exist in a chapt 7. A business that is still in
operation and functioning is worth more than a closed, non-functional
business.
• The most common form of a Chapt 7 case is the sale of all of the debtors
assets.

§363.b.1: ordinarily, code provides for sale of assets outside of the ordinary course of
business by the debtor, through the approval of the interested parties.
• If the debtor contemplates a sale free of liens, etc, then it has to be on motion, and
the court must approve the sale.
• This is a much faster way to go since there is no need for balloting and
such through the other method.
• Approving a §363 Request
• Sale supported by a sound business judgment of the debtor
• Sale price is fair and reasonable
• Buyer must be acting in good faith.
• "Stalking horse" bidder/offer: enters into an buying agreement with the debtor,
and the debtor files a motion to approve the sale
• Debtor files a motion to have an auction sale with the stalking horse bid
being the floor bid.
• Debtor files a motion to have the court approve the auction bid.
• If the Stalking horse bidder is not the winner at the auction he is entitled to
 Usually entitled to reimbursement of expenses
 Break-up fee
 The reason is because they created value for the estate, by setting a
floor for the value of the property at auction, and as such they are
entitled to reimbursement of the money they expended.
• To bid at one of the auctions, a bidder usually has to agree to the same
terms as those set forth by the Stalking Horse, so that the bids are all based on
the same premises (apples-to-apples)
• Unsecured creditors are going to be concerned with price, since they get
paid last, so they have an incentive to make sure that top price is received for
everything.
• So say that §363 sales should receive more scrutiny because it removes decisions
from the plan and places them into motions.
• "Sub Rosa Plan": you can't do a sale that is a plan in disguise
 The more that the rights of a party in interest are dealt with in a
§363 the more likely it is a "sub rosa".
 You know it when you see it.
• §363.f: Two important parts.
• Trustee = debtor
• The trustee may sell property under subsection (b) or (c) of this section
free and clear of any interest in such property of an entity other than the
estate, only if—
1. applicable nonbankruptcy law permits sale of such property free
and clear of such interest;
2. such entity (lien holder) consents;
3. such interest is a lien and the price at which such property is to be
sold is greater than the aggregate value of all liens on such property;
4. such interest is in bona fide dispute; or
5. such entity could be compelled, in a legal or equitable proceeding,
to accept a money satisfaction of such interest.
• Lien holder will be paid first out of the sale of the property
• "In bona fide dispute": the bankruptcy will settle the dispute and the lien
attaches to the proceeds of the sale
• "Free and clear": the buyer receives the property without any
encumbrances (clear title), and they get a nice court order saying so.
 • Interests: has been a subject of debate primarily under tort law.
 Free and clear of any previous legal claims against the original
owners? This is the subject of some debate.

Exam: Not on state law.

Represented an ad hoc committee of people with claims against Chrysler
•

Class #19
Tuesday, April 20, 2010
6:19 PM

Chrysler - Spring 2009

• Was asked by the government for a plan to structure outside of bankruptcy
• Look for an alliance partner, but was unsuccessful
• April 30, 2009 Chrysler filed for bankruptcy (Chapt. 11)
• Dissolution of the old Chrysler, and a new corp to be owned by US/Canada
governments, Fiat and a fund for unemployed workers.
• Assets of oldCo were to be transferred to NewCo free and clear of liens
• Also, 3bil was to be paid to NewCo from OldCo
• NewCo would also assume only certain debt responsibilities.
• Gov't provided 10bil in additional financing to get OldCo through the bankruptcy.
• 2bil of that would go to OldCo.
• Secured creditors for OldCo were owed 6bil.
• They agreed to accept 2bil in cash in order to agree to the sale to NewCo.
• 800mil was the liquidation value and 2bil was more attractive than
liquidation.
• State of Indiana for the Pension tried to block the sale, but were prevented
from doing so because they were bound by the terms of the agreement in
bankruptcy that was accepted by the majority of secured creditors.
• The previous tort claims against OldCo were not allowed to proceed against the
newCo.
• Successor liability laws allow people to sue a company that looks like the
old company, sells the same products, and takes the place of the old company
when it is dissolved.
 This is stronger in product liability claims.
• OldCo was self-insured up to $25mil of initial liability.
• Tort claimants were not able to recover damages from OldCo, and
insurance would not pay unless your claim was more than 25mil.
 • They could not sue OldCo since it was bankrupt, and were blocked against
bringing a claim against NewCo.

Objections to the 363 Sale

• Purchaser had acted in good faith.
• Sound business judgment
• Fair market value
• 363 has less disclosure than a plan under Chapter 11.
 Is it less fair than a sale under a plan?
 It does not give you the same ability to challenge a sale under 363
than under a Chapt 11. plan.
• "Melting Ice cube" Theory
 The collateral is being devalued so the sale needs to be expedited.
 Government said that they would not fund OldCo any longer and
the OldCo was burning through cash quickly.
• Argue that the sale was not fair, and the purchaser was not acting in good
faith.
 US gov't owned the oldCo and also was the NewCo
 The people harmed we US citizens
 And their right to sue was being extinguished to correct the
balance sheet.
• Argued what interest meant under 363.f
 Said that it was different than claims under 11.
 So, Congress did not say "claims" they said "interest" so the two
are different.
 TWA case stated that interest encompassed claims.
• NewCo agreed to accept liability to people who were injured after
bankruptcy went through by OldCo products, not just products
developed/produced by NewCo.
 OldCo claims were still extinguished.

Object to a sale transaction and the transaction is approved, and you cannot get a
stay, your appeal will be equitably moot.