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Bankruptcy Outline 1. What do you want to know before you extend credit? a.

The history of the business Get this through financial statements, and see what their assets and liabilities are b. Look at the credit report and history. Want to see if the person is likely to repay voluntarily? Not only about the balance sheet which shows if they are going to be able to repay. c. Bankruptcies, criminal history d. Want to look at the managers and look for references to see their past history and what happened to those businesses 2. Only the debtor is obligated to pay the creditor, so it is very important to know who the debtor is, unless there is a guaranty a. Corporation only the assets owned by the corporation can be reached by the creditor b. Could be a co-signor [also called a guarantor] where the extension of credit doesnt go to a person c. A person who is in the business of guaranteeing, is a surety 3. What can a bank do if they loan someone money and they are start missing payments? a. Accelerate the Loan As long as they do have a provision in the loan contract 4. Non-Bankruptcy Rights of Unsecured Creditors a. All a creditor has is a right to get paid i. No right to take the borrowers things ii. Is it different if you are a seller? No. So if I sell someone my book, and they say they promise to pay for it in 30 days, but they dont, I cant take your stuff. I would need you to agree that I can take it back if you dont pay iii. Must always go to court and get a judgment iv. If you dont have a security interest, how do you get paid? 1. Try and entice the debtor to pay, such as stop supplying if you are a supplier 2. At some point, the collection methods run up against the line with criminal law and tort law 5. Fair Debt Collection Practices Acts a. Debt collectors are given leeway to try and collect debts i. PFC v. Davis IIED Case Even though debt collectors did many bad things, still no tort against the debtor 1. Policy reasons for difficult tort liability: a. want people to pay debts, b. gives businesses some leeway to conduct activity c. Costly to business and consumers if debts cannot be easily collected b. Only applies to human beings, not corporations, or business debt c. Applies to a debt collector who is attempting to collect a debt

i. Debt Collector any person . . . who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another 1. Does not apply to a creditor who is attempting to collect its own debt ii. Debt Two limitations 1. Debtor must be a consumer meaning a natural person 2. Nature of the debt must be a consumer debt i.e. personal, family, or household purposes a. If the debt is incurred by a natural person for business purposes, FDCPA does NOT apply 6. If the person doesnt pay why not just get the judge to hold them in contempt? a. A judgment simply states that there is a liability, but it is not a court order or injunct. 7. Process of Execution a. 1) Final money judgment is rendered or entered b. 2) Writ of execution is issued (usually by the clerk) c. 3) Writ is delivered to the sheriff i. Creditor must tell the sheriff where to find the debtors assets ii. In IL and minority view, the lien is created at this moment if the sheriff is successful and levies on the property iii. Vitale v. Hotel California 1. Sheriff is required to go and get the assets if the creditor tells them where the assets are and when to go, even if it is late at night and on the weekends a. Sheriff in this case refused to go late at night and on the weekends to go and get cash from the register d. 4) Sheriff levies on the debtors nonexempt property pursuant to the writ i. The sheriff is then going to file a return what he has levied, or he is going to write that he got nothing. If he got nothing he is going to write nulla bona ii. The writ then becomes functus officio, and it has no legal power after he returns the writ nulla bona 1. If the sheriff seized things after he returns the writ, it is an illegal seizure 2. The writ also has a limited time period that it has legal significance, and it would be an illegal seizure if the sheriff seizes things after the time period ends. 60-180 days iii. The creditor can then go get another writ if the judgment has not yet been satisfied, and can get an unlimited number of these writs e. 5) Property levied on is sold at an execution sale

f. 6) After paying the expenses of the sale, proceeds go to the judgment creditor 8. Does the debtor filing an appeal halt the execution process? a. No, unless you get a stay from the court, and you must put down a supersedeas bond [amount of judgment and a little more depending on state law] for the amount of the judgment, because if not then the judgment debtor would just give away all of their assets 9. When do you get a Lien on the Assets? a. 2 Prevailing Views i. 1. Majority - At the time of levy, when property is actually seized ii. 2. Minority and in IL Delivery of Writ to Sheriff 1. Lien dissolves if there is no levy by the sheriff, though 2. Inchoate Lien in this minority, you have an inchoate lien as soon as the writ is delivered to the sheriff that will either be dissolved if the sheriff doesnt levy, or will turn into a consummate lien if the sheriff is successful 10. What are the problems with the execution a. Delay between the time of trial, then judgment, then a delay, and then you have to find out whether the debtor has any assets b. In some cases, the threat may be worth more value then actually taking all the junk and trying to get the resale value for it 11. Illi v. Margolis a. 2 Creditors had a sheriff levy on property, but then worked out an arrangement with the debtor to allow him to keep the property if the debtor made payments b. Court says that this is alright, b/c the creditors were getting their money, but their might be problems if the creditors were related to the debtor, and just letting him keep the property 12. How do we decide distribution if multiple people have liens on the same property? a. First in Time, First in Right First person paid completely, then the 2nd, . . . 13. What needs to occur for a security interest to attach? - UCC 9-203b a. 1) Value has been Given; [this is the amount of the loan] b. 2) debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party c. 3) One of the following conditions is met: debtor has authenticated[signed] a security agreement that provides a description of the collateral, d. These 3 can happen in any order 14. Does a judicial lien creditor or security interest have priority? . UCC 9317(a)(2) a. A judicial lien creditor beats an unperfected security interest b. How do you perfect a security interest? i. Creditor must file a financing statement 1. Must be filed in the right office [normally Sec of State]

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ii. Creditor can file the financing statement first if they have debtors permission c. Exception - UCC 9-317e i. Purchase-money security Interest 1. Basic idea is that the creditor advanced the money that enabled the debtor to purchase the collateral 2. Another kind is where the seller says that they will sell the machine for 10%, and then pay 200 a month, and then the seller keeps a security interest in goods that are sold 3. If a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing Other types of Liens a. Garnishment Lien i. Used to reach property that a 3rd person is holding, but belongs to the debtor ii. So if the neighbor is holding the debtors lawnmower, and you get a garnishment lien, and go to the neighbor and ask if he has any property that belongs to the judgment debtor iii. Also reaches Debts that are owed to the judgment debtor. 1. Wage Garnishments serve on the employer, and ask him do you owe any money to the judgment debtor 2. Banks if you have a bank account, then the bank owes the judgment debtor something, you can reach bank accounts through garnishment b. Judgment Lien i. Lien that applies to real estate, and there is some public notice given of the judgment lien. Priority ranking is when the judgment is docketed, so it is much quicker than an execution lien ii. Applies to all the real estate in the county, and normally have to record it and give notice iii. Applies to all property the debtor owns, and any property that the debtor acquires subsequently iv. Then you normally have to go through the execution process to actually be able to sell the property c. Common Law Liens [As opposed to Statutory Liens] i. If you dont pay for a room at an inn, then the innkeeper has a lien on the property in the room ii. Artisan Lien If you bring something to be repaired, the artisan will be able to have a lien on the property you brought in if you dont pay your bill There are short comings to the collection system [The Race to the Assets]

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a. Costly sheriff costs, court costs, when you sell the property you arent going to get that much money b. Several Creditors you get duplicate costs, of each creditor trying to reach the assets, and you never know when the race is going to start, so there are costs in monitoring other creditors and what they are doing c. Not everyone is equally swift Tort victim[years for a trial] vs. Secured creditor d. Destroys Value enforcement through seizing and selling can destroy value, because if you are a manufacturer, and one creditor seizes one machine that is needed to make the product, but once one creditor seizes one machine i. Function Called Synergy Value of the Whole is greater than the sum of the parts. Think right shoe and left shoe, where each creditor takes either the left or right ii. Also, if you put the business out of business, you lose the going concern value, and that a business is worth more open than closed Solution to the Short Comings of the Race to the Assets a. Collective Proceeding If all the creditors are included, then you only have one set of costs, and you can take the entire asset pool and treat it the way that a single person would treat the assets, and you dont have to destroy the value by separating them if they are worth more together b. We have already seen in the Illi case, that you can give the property to an assignee for the benefit of the creditors Chapters under Bankruptcy a. Chapter 7 - Liquidation i. Petition operates as an order for relief ii. File a Petition along with schedules of the assets and liabilities, pay a filing fee iii. Who is the Trustee In a ch.7 case, an interim trustee is appointed 1. If the creditors dont like the interim trustee, then they can put in their own trustee 2. The creditors will be notified and have a 341 meeting, and the debtor is examined under oath for any assets that he has iv. If you have an individual debtor[human being], he may be free to exempt certain property, and take it out of the bankruptcy and keep it v. 726 Certain unsecured creditors go toward the front of the line, like tax claimants, domestic support obligations, employees vi. Following a Chapter 7, There is a discharge of the debts, and creditors get whatever they get, and then the debtor doesnt

owe them any more, and they are no longer liable to the creditors. Give the Debtor a Fresh Start b. Chapter 11 Reorganization i. Idea is to keep the financial enterprise going, and keep the business going until a plan is approved, and it will say who gets paid what. ii. Ordinarily, No Trustee is appointed, and the management continues to operate the business. iii. This is known as a Debtor in Possession, and the automatic stay kicks in iv. The goal is to propose a plan that will indicate how the business assets are going to be applied, and debts are repaid over a longer period of time v. The Creditors vote on the plan, and if the requisite majority doesnt approve, then the plan doesnt kick in vi. If the Creditors do approve by a requisite majority, the plan will be confirmed and all the creditors are bound by the plan, whether they voted for it or against it vii. How are the votes? 1. There are multiple classes of debts, and you need 50% + 1 in number, and 2/3 in the amount of debt in each class 2. There is a procedure even if one class does not approve it, and it is known as a cram down viii. There is a Discharge Whatever the creditors get under a confirmed plan, is all they get, and then the debt is discharged c. Chapter 13 Adjustment of Debts of an individual with Regular Income i. Only individuals can file for chapter 13, and they will use future earnings to help pay off the debt ii. Debtor will formulate a plan to use post-petition income to pay pre-petition debt iii. Debtor gets to keep property, and there is a trustee but he works as a dispersement agent iv. Does not have to be approved by creditors d. Chapter 9 i. Municipalities that can go into bankruptcy e. Chapter 12 i. For family farmers, and kind of a merge between 11 and 13 19. Who can be a debtor? 109a a. Only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor b. Person includes individual, partnership, and corporation i. Key Words Person and some connection to the US c. What are the requirements to be a debtor under a particular Chapter? i. Chapter 13 Only individuals 1. 109e - Only an individual with regular income with less than $ $360,475 in unsecured, noncontingent (not arising

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out of a contingent event), liquidated debt and less than $1,081,400 in secured, noncontingent, liquidated (liquidated if readily determinable- would you need a simple summary hearing to figure out what was owed or would you need a full adjudication of how much was owed) debt a. Individual with regular income - means individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker i. Includes someone on Social Security ii. United Airlines 7 or 11 iii. Grand Funk Railroad Not incorporated and not a partnership 7 or 11 1. 101(9) Corporation includes unincorporated company or association iv. Physician who is being sued for 160 million, no judgment entered 1. What about 13? It is contingent, not noncontingent. It is not liquidated either. Liquidated means some determined amount. For 13, debt must be liquidated and noncontingent. Even though judgment has not been entered yet, it is a debt d. Cash Currency Exchange i. Issue: Can a currency exchange file for bankruptcy, because of the prohibition in 109b2, stating that a bank may not file under Ch. 7, and therefore not 11? ii. Holding: No, because they are not substantially similar b/c no deposits Where to file? a. Where have they been located for the last 180 days immediately preceding commencement or the longer period of 180 days if they have not stayed in one place for that time b. If you have Enron in TX, and a small affiliate in NY, then the affiliate can file in NY, and then the affiliates can also file Involuntary Cases a. Why do we need involuntary? i. Business could be run into the ground because the debtor thinks that they are going to do better b. Who is eligible to be put into involuntary bankruptcy? i. Can only be filed against a person, but no farmers, family farmers, or a corporation that is not a moneyed, business, or commercial [charity] c. What Chapters may be ordered? i. Chapter 7 and 11 NOT 9, 12, or 13

d. Who can petition? i. Three or more entities 1. Each petitioners claim must be not contingent as to liability a. Time passing is not contingent, so if the debtor has to pay in 1 month, it is not contingent b. It is contingent if the nephew must not smoke or drink c. What about unliquidated damages? There is liability if the goods werent as said in the contract, but we dont know how much d. 101(5) Can have a claim even if it is 1) no judgment, Unmatured, contingent, unliquidated, and there is a dispute. But here there must not be a dispute, and it must not be contingent e. Torts Not contingent. Either the tort occurred or didnt occur, but it might be disputed 2. Surety a guarantor a. Grandma also said she will pay it back, even though she didnt get the loan. Some Guarantees say that Grandma will pay if grandson doesnt, and that sounds contingent. On the other hand, most say grandma will pay grandsons debt, and if they are said that way then it doesnt sound contingent, and she could be a petitioner 3. Each petitioners claim must be not the subject of a bona fide dispute as to liability or amount ii. Dollar Amounts 1. 3 or more entities must hold unsecured claims totaling at least 12.3k 2. In order to find unsecured dollar amount, look at the unsecured claim of each creditor, dont just add up all the collateral and then subtract the debt a. At least one CoA would even allow a petitioner that is entirely secured to be a petitioner, as long as there is 12.3k of unsecured debt amongst the other 2 creditors iii. One creditor can petition if there are less than 12 creditors, and not all creditors are counted including: Employees of the debtor, insiders of the debtor, transferees of a voidable transfer, holders of claims that are contingent as to liability, holders of claims that are the subject of a bona fide dispute as to amount or liability e. What happens when the petition is filed by the creditors? i. 303f Filing of an involuntary petition is NOT an order for relief

1. There is a Gap between filing and order for relief, and during this time the debtor can still operate f. What are the Grounds for Relief for the Petitioners so an order for relief is granted? i. 303h(1) - Debtor is generally not paying its debts as they come due 1. Look for the sensible outcome. So if debtor is paying 27 of 30 creditors, but 3 creditors hold 90% of the debt, then generally not paying 2. Does not include debts that are the subject of a bona fide dispute as to liability or amount to determine generally not paying ii. 303h(2) A custodian has been appointed for substantially all of the debtors assets within the past 120 days g. What if the Court dismisses the petition? [Other than on consent of pet. and debtor] i. 303i Court can award 1) Costs; 2) reasonable attorneys fees; 3) in the case of a bad faith filing damages and punitive damages h. Notes and Cases i. Doesnt require that the debtor be insolvent 22. Dismissal/Conversion under Chapter 11 1112b a. A chapter 11 case may be converted to chapter 7 or dismissed entirely for cause-16 kinds b. Good Faith is not even requirement for Filing, but courts consider it c. In re Johns-Manville Corp. Bad Faith Filing of Chapter 11 i. Abestos liability is great for the debtor, and they did the accounting and realized that they would have had to set aside 450 million now to pay off the claims ii. Petition for Chapter 11, and the Asbestos committee want the petition dismissed iii. There is no for cause shown by the committee, they claim Bad Faith Filing iv. Court says no bad faith filing here - The court finds that debtor did not file in bad faith because it is a real company with real creditors and real debt v. What would be examples of bad faith filing? 1. Abusing the Court system; Filed to forestall tax liability; Filed to frustrate the power of sale; Shams and Hoaxes; Not a real corporation; Legal entity that had never operated legitimately d. Superior Siding i. 2 Part Test to determine whether to convert a 11 to 7 or dismiss - 1112b 1. Show Cause

a. Can have other grounds besides those listed, 1 might be bad faith b. Courts are split on Bad Faith Filing fulfilling Cause i. 1129(a)(3) Court can not confirm a plan unless the plan is in good faith, and some courts will say that it only deals with whether they can accept the plan, and then should the concept of bad faith come up, not at the petition stage c. Bad Faith Filing here court accepts it as cause, but 2 parts i. Subjective Abuse reorganization process by Superior ii. Objective Unrealistic Plan 2. What is in the best interest of the creditors and the estate a. Majority of creditors here wanted dismissal b. Court says it goes with best interest of All the creditors e. Phoenix Piccadilly i. 11th Circuit says that if you file the petition in bad faith, then they will not accept a reorganization even if it is done in good faith ii. Purpose of the debtor here was to delay and frustrate the efforts of the secured creditors from enforcing their property rights iii. How did the Court determine whether the petition is filed in bad faith? 1. Any factors which evidence an intent to abuse the judicial process and the purposes of the reorganization provision; or 2. Factors that evidence that the petition was filed to delay or frustrate the legitimate efforts of secured creditors to enforce their rights iv. Holding: Court will not save a bad faith filing, even with a good faith reorganization plan. 1. Opposite of Superior, where there was a bad faith filing 23. Abstention 305a(1) Applies to Entire Code and all Chapters a. 305a(1) Court may dismiss a case under this title, at any time if the interests of creditors and debtor would be better served by such dismissal or suspension b. Colonial Ford Case i. All creditors have already agreed with Colonial, and they gave them 9 months to sell or refinance the dealership, if not the creditors would foreclose ii. Court says that you can not waive your right to file for bankruptcy, but if you make a deal with all the creditors, and there are not new parties to the picture, you cant pull yourself

into bankruptcy because you already agreed to a deal outside of bankruptcy iii. Court dismisses case because debtor just wanted to avoid its obligation 24. Property of the Estate - 541 a. The commencement of a case under section 301(voluntary), 302(involuntary), creates an estate b. What is in the estate? i. 2 Principal Sources 1. 541a(1) - All legal or equitable interests of the debtor in property as of the commencement of the case 2. Whatever the trustee brings in to augment the estate c. Can the creditors enjoy this property while it is in the estate? i. 541a(6) - Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case. [except for chapter 13] d. What comes from the Debtor? i. All legal or equitable interests If dry cleaner has my clothes, and dry cleaner petitions, then the right to clean my clothes would go in there, but not the clothes e. What do we look to so we can determine what property interests are? i. Property interests are created and defined by state law ii. State law controls as to the attributes of a property interest. iii. But, State law labels are not controlling, whether something is considered property for purposes of a federal bankruptcy case is a matter of federal law f. Butner v. US i. Holding: Property interests are created and defined by state law ii. Resolved the circuit split as to whether the federal rule of equity or the law of the state should determine property interests g. Chicago Board of Trade v. Johnson i. Fight is whether the membership in the Chicago Board of Trade is considered property ii. IL SC said that the seat was not property, and labeled it as such iii. SC said that when the language of Congress indicates a policy requiring a broader construction of the statute than the state decisions would give, federal courts cannot be concluded by them iv. SC said that it was property, but that the attributes of the property interest are still defined from state law, so everyone outside of bankruptcy that could prevent the transfer must be paid before the seat could be sold h. Abele v. Phoenix Suns Limited Partnership (In re Harrell)

i. Debtor owns season tickets for the Suns and trustee asserts that the interest in future season tickets is "property" under federal law ii. Court finds that expectation of renewal of season tickets is NOT property because state law holds that expectation is not sufficient to establish interest in property. Debtor gets to keep it iii. Seems to be in conflict with Chicago Board of Trade i. 541c(1) Property of the Estate Conflicts with Phoenix Suns Tickets i. An interest of the debtor in property becomes property of the estate notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law 1. (A) that restricts or conditions transfer of such interest by the debtor; 2. (B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtors interest in property 25. Secured Creditors and the Turnover of Repossessed Collateral a. Prior to bankruptcy a secured creditor rightfully repossess collateral because the debtor is in default; the debtor then files bankruptcy before the creditor completes a sale of the collateral, and the debtor demands return of the collateral b/c of the automatic stay b. US v. Whiting Pools i. IRS levied on debtors property to satisfy a tax lien ii. Debtor now wants the IRS to return the property iii. 542a Turnover of property to the estate 1. An entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee such property iv. 363 Trustee may use, sell, or lease any property of the estate v. 541a(1) Property of estate is all legal or equitable interest of the debtor 1. 1st type of interest debtor would get the surplus if the value is more than the lien 2. 2nd type of interest right of redemption if debtor pays of the taxes vi. Even though the debtor wouldnt have a right to possession, they do have some right in the seized property, so it must be turned over b/c of 542a 26. Automatic Stay 362a

a. Stay automatically begins when the petition is filed b. 1 The commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title c. 2 The enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title d. 3 Any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate e. 4 Any act to create, perfect, or enforce any lien against property of the estate f. 5 any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title g. 6 Any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title h. 362a(7) Setoffs i. The setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor ii. Outside Bankruptcy there is a right to set-off, where the bank instead of paying the funds from your account can take them to help pay off a loan. Same 2 Peop. iii. The Trustee cant use the money in the bank either 363c(2) 1. The trustee may not use, sell, or lease cash collateral unless: a. Each entity that has an interest in such cash collateral consents; or b. The court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provision of this subsection iv. Therefore bank is prohibited from taking, and trustee is prohibited from using v. Banks started Freezing the Account 1. Strumph Administrative Freezes do not violate the automatic stay i. Violation of the Automatic Stay by keeping the property i. Transouth Financial v. Sharon 1. Creditor seized car prior to bankruptcy, then debtor files and wants his car back. Creditor says that he wont give the car back until he gets adequate protection. 363e 2. Did Transouth Violate the Automatic Stay? Court says yes.

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a. 362a3 Any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate b. Transouth didnt obtain the car during the bankruptcy, but they withheld possession of the car, which was considered by the court to be exercising control over property of the estate 3. Holding: Affirmative duty to turn over a debtors property to the debtor j. 362k(1) Willful Violations of the Automatic Stay i. An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys fees, and, in appropriate circumstances, may recover punitive damages. ii. Willful only means that they knew of the stay iii. Only available to individuals, not corporations iv. 342g(1) Notice for protection of Creditors from Willful Violations 1. Notice must be given in accordance with this section v. 342g(2) - A monetary penalty may not be imposed on a creditor for a violation of a stay unless the creditor has been given notice under this section k. Notes i. Still a violation even if the creditor didnt know about the petition ii. Person can stop selling to the debtor though if he files iii. Insurance with a 30 day cancellation Courts come out both ways if the insurance cancels after the stay. But if they cancel before the stay, alright l. Cases i. Lansdale 1. Supplier owed money, and started charging the debtor more after the petition was filed 2. Books showed that the premium price was being used to decrease the debt, so this is a violation of the automatic stay Exceptions to the Automatic Stay a. 362b(4) The filing of a petition does not operate as a stay of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority to enforce such governmental units or organizations police and regulatory power, including the enforcement of a judgment other than a money judgment b. Where the government acts as a creditor, it should be treated as a normal creditor c. Penn Terra

i. Strip miners in bankruptcy, but before they entered, they agree with the Dep. of Env. Res. that they would clean up the land ii. DER then says that they want an injunction for Penn Terra to clean the land, but Penn Terra has ceased all operations iii. Issue: Can the government go forward and compel performance of this consent order? 1. 362b4 - To enforce such governmental units or organizations police and regulatory power, including the enforcement of a judgment other than a money judgment 2. Since Penn Terra had ceased all operations, this would have to be a money judgment, therefore the government would get ahead of all the creditors, just because it had an exception. But the stay only deals with past harm, not future harm iv. Court says that the DER is preventing future harm to the environment, and therefore it is NOT a money judgment. Looks like using police powers v. 1st Option - Penn Terra is doing nothing during the bankruptcy, therefore the stay should not be lifted to enforce the judgment. Govt could act to prevent future harm but not collect money vi. 2nd Option - Even though the harm was caused pre-petition, the effects are still occurring post-petition, and therefore the government should be able to enforce the judgment. Court focuses on harm rather than the violation vii. 3rd Option - not a problem that is resulting from what Penn Terra did in the past, it is that Penn Terra is in possession of land that does not conform to environmental regulations. Looks like regulatory and police powers d. SEC v. Brennan i. 75 million dollar judgment entered against Brennan, and he holds an offshore bank account ii. Chapter 11 Trustee wants to repatriate the offshore account, but is denied iii. SEC then goes to NY, and gets an order that they can go and get the money iv. Did the SEC violate the automatic stay by getting an order to have Brennan repatriate the offshore account? Court says yes v. How can you tell whether the Government is using its power for regulatory or policing? 1. Test: Whether government is acting for a pecuniary purpose or to protect the publics safety and welfare vi. Once the judgment is entered, then anything past that is enforcement vii. What is behind the majority in saying that this did violate the stay?

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1. Policy The automatic stay provision is intended to allow the bankruptcy court to centralize all disputes concerning property of the debtors estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas. e. AH Robins i. 105a - The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title ii. Debtor filed bankruptcy, and its insurance carrier wants all actions against it stayed also iii. Must be an unusual situation, where the 3rd party is closely related to the debtor Relief from the Stay and Adequate Protection a. 362d - 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 i. with respect to a stay of an act against property under subsection (a) of this section, if 1. for cause, including the lack of adequate protection of an interest in property of such party in interest; 2. With respect to a stay of an act against property, if: a. the debtor does not have an equity in such property; and b. such property is not necessary to an effective reorganization i. Property is necessary to an effective reorganization if there is a Reasonable possibility of a successful reorganization within a reasonable Time ii. Concerns if the creditor is oversecured, the creditor has no incentive to try and get as much money to give the debtor more equity b. What happens if the stay is not lifted? i. The property can be used in the ordinary course of business, and if you are the secured party, that puts risk on you c. The Court decides whether to give the creditor relief from the automatic stay w/o prejudice so the creditor can come back if the debt continues to increase or collateral decreases d. 363e Adequate Protection i. On request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection

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ii. 361 What is adequate protection? 1. 1 - Requiring the trustee to make a cash payment or periodic cash payments to such entity, or any grant of a lien to the extent the stay results in a decrease in the value of such entitys interest in such property 2. 2 - Providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entitys interest in such property e. Does a Creditor receive interest during bankruptcy? i. 506b - To the extent that an allowed secured claim is secured by property the value of which, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim ii. Only a secured creditor receives interest, and interest only goes up to the value of the collateral 1. Normally losing argument to say that you should be able to receive interest up to the original value of the collateral, if it has decreased iii. Alyucan - Equity cushion does not need to be preserved for adequate protection iv. Secured creditor gets interest even if it is not in the contract v. 502b(2) Unmatured Interest that arises post-petition is not included in claim 1. Undersecured and unsecured creditor do NOT receive interest. f. Timbers i. 361(3) - Granting such other relief as will result in the realization by such entity of the indubitable equivalent of such entitys interest in such property 1. Wouldnt the indubitable equivalent be the time-value of the money too? ii. Holding: Adequate Protection is the nominal value of the collateral, not the present value 1. Money is worth less tomorrow than it is today b/c of interest and inflation Claims a. What is a claim? i. 101(5) - right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or ii. right to an equitable remedy for breach of performance if such breach gives rise to a right to payment 1. So if a person is hit by a car pre-petition, it is a claim b. When does a claim arise?

i. Grady v. AH Robins 1. Debtor manufactured IUDs, and the injury of the P occurred on the very day of the petition 2. Why does it matter whether pre or post claim? a. Post P is going to be able to sue the reorganized company for the entire amount of the claim, pre P is going to be a gen. unsec. 3. Is this a prepetition or post petition claim? a. Court says it is prepetition, b/c that is when the conduct of the defendant took place 4. 101(5) - For bankruptcy purposes, the right to payment occurred when the conduct took place and her right to payment is contingent on whether her injuries are manifested ii. Piper (aircraft case) 1. Aircraft manufacturer needs to set aside money for future claimants who have injuries from their planes 2. If you use the conduct test in AH Robins, then everyone in the world is going to have a prepetition claim 3. Piper Test An individual has a 101(5) claim against a debtor manufacturer if (i) events occurring before confirmation create a relationship, such as contact, exposure, impact, or privity, between the claimant and the debtors product; and (ii) the basis for liability is the debtors prepetition conduct in designing, manufacturing and selling the allegedly defective or dangerous product c. Equitable Remedy Claims i. 101(5)(b) Claim means a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured ii. Ohio v. Kovacs 1. Prepetition injunction that was obtained by Ohio, enjoining the defendants from causing further pollution, and from bringing additional industrial wastes onto the site, required the defendants to remove specified wastes from the property, and ordered the payment of 75k to compensate the State for injury to wildlife 2. Ohio got a receiver appointed to cleanup and comply with the injunction 3. Ohio is looking for money here, and Ohio sought to develop a basis for requiring part of Kovacs postbankruptcy income to be applied to the unfinished task of the receivership

4. Court holds that this is a claim because the clean up order had been reduced to a monetary obligation by the state, and going to be discharged iii. Udell 101(5)(b) 1. Covenant not to compete established that breach resulted in injunction AND liquidated damages 2. Court holds that this is NOT a claim that will be discharged 3. COURT holds that a right to an equitable remedy for breach of performance is a claim if the same breach also gives rise to a right to payment with respect to the equitable remedy 4. there has to be some RELATIONSHIP or CORRELATION between the right to payment and the equitable remedy for the equitable remedy to be a CLAIM a. Payment as an alternative would be a claim 5. Concurring Opinion a. Language of the statute is clear in its application so Majority is going beyond the standards of statutory construction by re-defining terms b. Instead concurrence suggests that the plain reading of the statute leads to ABSURD consequences i. A debtor with a restraining order, that also provided for monetary damages if they violated the restraining order could have the injunction discharged 30. Allowance of Claims 502 a. What is the process for allowance? i. First is to file a proof of claim ii. 502a - A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, objects b. Who can file a proof of claim? i. A Creditor 101(10) - Entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor 1. Must be a voluntary petition, because order of relief only granted in vol. c. What are the grounds for objection? i. 502b - If such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that: 1. Such claim is for unmatured interest a. Sometimes unmatured interest is buried in the repayment amount, such as borrow 5k now, pay 6k

later, so built into the obligation to repay 6k is an interest rate. What if the debtor files bankruptcy before the end? Must figure out what the built in interest rate there was, and at what stage and how much interest is still owed past the petition date, and subtract that from the total 2. If such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds a. the greater of one years reserved rent or (2) 15% of the remaining term, not to exceed 3 years rent 1. any lease term of less than 80 months will yield a 1 year cap 2. any lease term of 20 years or more will be capped at 3 years d. What about claims that are unliquidated or contingent? i. 502c - There shall be estimated for purpose of allowance under this section any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case 1. Gives no guidance about estimating 31. Distribution a. 725 Secured Creditors go first i. After the commencement of a case under this chapter, but before final distribution of property of the estate under section 726 of this title, the trustee, after notice and a hearing, shall dispose of any property in which an entity other than the estate has an interest, such as a lien ii. Remember 506a, bifurcation of the claim into secured and unsecured if the creditor is undersecured b. 726 - Property of the estate shall be distributed: i. First, in payment of claims of the kind specified in, and in the order specified in, section 507 1. 507 Priority Claims a. Domestic Support b. 503(b) Administrative Expenses c. Involuntary case after commencement d. Employee Wages; Many more 2. Payment of any allowed unsecured claim Pro Rata 32. Valuation of Secured Claims a. 506a - Such value [of the secured claim] shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property i. Bifurcates the claim into secured and unsecured if the creditor is undersecured

b. Rash Debtor is going to keep Collateral and pay the creditor i. Valuation of a truck that the debtor used the cram down option, and the debtor is going to have to make payments i. Circuit courts went all different ways [fair market value, replacement value, foreclosure price]. Creditor wants fair market, debtor wants foreclosure ii. Court chooses Replacement Value 1. What the debtor would have to pay for comparable property ii. Footnote 6 Creditor should not receive portions of the retail price, if any, that reflect the value of items the debtor does not receive when he retains his vehicle, items such as warranties, inventory storage, and reconditioning c. Rash remains good law except in 506a(2) i. In an individual chapter 7 or chapter 13 case, the value of personal property securing an allowed claim is its replacement value, without deduction for costs of sale or marketing ii. With respect to personal property acquired for personal, family, or household purposes, replacement value is the retail price for property of the same age and condition 1. This sentence wouldnt apply to Rash, b/c the truck was for business d. Dewsnup v. Timm 506d Lien Voiding Provision i. Issue: To what extent is there still a lien on the property? ii. Creditor has a lien of 20 on a piece of land, but the court values the land at 10. The creditors claim is then going to be bifurcated, and have an unsecured claim of 10. Creditor is going to keep the property, because it has been going up in value since the time of the valuation. iii. Debtor wants the lien to be voided past the amount of the valuation, and then he would receive any leftover from the sale iv. 506d - To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void 1. Issue: Is the term in 506d, allowed secured claim going to be read in light of 506a, which bifurcated the claim? NO 2. Court is only going to ask 1) is the claim allowed?, 2) Secured? v. The mortgagee is going to get the benefit of the collateral value increasing vi. Lien is not stripped down to the amount of the allowed secured claim under 506a, it can be enforced for the entire amount of the original claim vii. Are there any liens that are going to be voided? 1. If the claim is disallowed in the first place, or the extent that it is disallowed, you can scale down the lien to the amount of the allowed claim

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Surcharging Secured Creditors a. 506c - The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim i. Example If creditors collateral is being sold, costs directly related to the sale may be paid out of the sales proceeds ii. Prevailing View Limits 506c recovers to cases involving direct and immediate benefits to the creditors collateral, or clear consent b. Problem of Standing i. Hartford Underwriters Insurance Co. 1. Court holds that Harford does NOT have standing to bring a claim under 506(c) because ONLY a trustee may recover under that statute 2. Secured party has an all asset lien, and during the Ch. 11, the debtor obtains workers compensation insurance from Hartford 3. It is undisputed that this is an administrative expense, because it is part of the costs of preserving the estate, so they can continue to operate. 4. Administrative expenses are paid out of the unencumbered assets 5. Hartford here, wanted the secured party to pay. Also have a problem with an all asset lien, b/c the adm. exp. are normally paid by the unsecured creditors, and that the benefit goes to them, but here it would go to the secured party. Court only decides standing issue Administrative Expenses a. The reorganization is for the benefit of the pre-petition creditors, and therefore they will be better off than in a liquidation, and therefore they should have to pay for the administrative expenses of the case b. 503 - the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case c. Test for determining whether a debt should be afforded administrative priority i. Mammoth Mart 1. A claim will be afforded under 503 if the debt both: a. 1) arises from a transaction with the debtor in possession; AND b. 2) is beneficial to the debtor in possession in the operation of the business d. In re Jartran i. Debtor purchased ads prepetition but ads published during the reorganization

ii. No conduct by DIP after they were ordered, but they did meet the 2nd iii. Ads were not an administrative expense e. Reading Chap. 11 i. Receiver was operating the business . . . due to negligence, a fire broke out and the Reading Co. claims damages close to 560k and there are 146 additional claims that are asserting because of the receivers post-petition negligence ii. Issue: How are these claims going to be treated? 1. People with fire claims are arguing that their claims should be treated as an administrative expense 2. Trustee says they are post-petition claims that survive bankruptcy [not paid, not discharged] and are not entitled to any distribution at all in the bankruptcy 3. Dissent says that equality of distribution is what is at stake here, and they should be treated as a general unsecured creditor a. Dont need to make it a admin. exp. b/c you dont need to encourage tort victims to deal with tortfeasors iii. Different than Piper, b/c the negligence here is during the pendency of the case iv. How is this different than running over the dog during the pendency of the case? 1. Reading was still running the warehouse, and operating the business was an actual and necessary costs of operating the property of the estate, to preserve the estate, and also to get more money for the prepetition creditors 2. Here, though, the creditors thought that the reorganization was going to make them more money, but instead it used up all the assets, and Justice Harlan says that the costs of the fire should be borne by the prepetition creditors because the business is running for their benefit v. Look at the incentive effects 1. If you go out and operate your business and not pay the costs of the torts during ch. 11, you have incentives to be sloppy and commit torts 2. Now, though, because during the pendency of a ch. 11, tort victims are going to be paid out before, there is a greater incentive for the business to be operated without negligence vi. This would be different in a Ch. 7, b/c there would be no business being ran for the benefit of the prepetition creditors f. Environmental Obligations

i. The Cleanup obligation is like a lien, and it is going to run with the land, and if you own the land you own the obligation to clean it up ii. iii. 554a Abandonment of Property of the Estate - After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate iv. Midlantic National Bank v. NJ Dept. of Env. Prot. 1. Debtor has land that is severely contaminated by oil waste 2. Trustee wants to abandon the land 3. 28 USC 959b of the judicial code Requires a trustee (including a DIP) to manage and of care for the property in accordance with the relevant local laws 4. Court says that the Trustee can not abandon the property in contravention of a state statute or regulation that is reasonably designed to protect the public health or safety fro identified hazards. 5. The fact that the state places a continuing obligation to clean up the land, the costs of the clean up are treated as administrative expenses 6. If you clean up during the case, you get an administrative expense, but if you clean up before, then you just get a unsecured claim 7. Dissent Rhenquist: Consequence is that since the trustee can not abandon the property, then the estate is going to have to pay to clean up the land, and now it is like the state having a lien on the land and all the other property of the estate on improving the environmental status of the land v. NP Mining Co. Admin. Exp. for operating, but not after it stopped 1. Involves environmental fines, but have nothing to do with the costs of cleaning up, but are penalties 2. Most of the fines, almost 2 million, were assessed postpetition 3. The Court here relies on Reading, and says that typically in order for there to be a administrative expense you need to have a benefit to the estate, but here the decision to call them administrative priorities is to ensure that the trustees operate an estate in compliance with state law 28 USC 959b 4. READING - Whether it is fair to let the unsecured creditors run the business without having to pay the cost a. Here in NP mining it is the same way, that if the creditors are going to get the business and be able

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to run it for their benefit, then shouldnt they also have to pay for the fines associated with running it? i. Here is another problem, though, because the business was being run by a DIP, but then a trustee was appointed, and the entire business stopped running 1. Court says that the fines that were imposed after the business stopped running and a trustee was appointed, should not be given administrative priority vi. Superpriority Claim For a creditor who received adequate protection 1. 507b If the trustee, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under subsection (a)(1) of this section arising from the stay of action against such property under section 362 of this title, from the use, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364 (d) of this title, then such creditors claim under such subsection shall have priority over every other claim allowable under such subsection 2. Creditor gets 1000 for 10 months[adequate protection] of use of its collateral, but at the end of the 10 months it is found that the collateral dropped 400 more for a total of 10,400 [turns out that it wasnt adequate protection] a. The 400 is a superpriority claim that gets paid before the rest of the administrative expenses vii. Trustees Administrative Expenses Carve out 1. 507a(1)(C) - The administrative expenses of the trustee shall be paid before payment of claims under subparagraphs (A) and (B) [both domestic support], to the extent that the trustee administers assets that are otherwise available for the payment of such claims. Subordination a. 510(a) - Subordination agreements made outside of bankruptcy have full effect in the bankruptcy b. Equitable Subordination 510c - The court may under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or (2) order that any lien securing such a subordinated claim be transferred to the estate.

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i. Subordinates claims of creditors who are insiders [managers or shareholders of the debtors] and have used corporate assets for their own benefit to the detriment of the corporation or the other shareholders c. In re Mobile Steel Co. Test for Equitable Subordination i. 1) The claimant must have engaged in some type of inequitable conduct ii. 2) The misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant iii. 3) Equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Act d. 3 General categories of inequitable conduct to satisfy the first prong i. Fraud, illegality, or breach of fiduciary duties; ii. Undercapitalization; and iii. A claimants use of the debtor as a mere instrumentality or alter ego e. In re Clark Pipe and Supply i. Creditor steadily reduced its lending to the debtor and pursued a course of conduct that led to the payment of much of its own claim, as the debtors financial deteriorated ii. Court held that it was inequitable, because the creditor did not exercise such total control over the debtors operations as to make the debtor its own instrumentality iii. It is very difficult to get equitable subordination, against a non-insider Executory Contracts a. Countryman Definition (walters likes this) material breach test Executory Contract is a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other i. Contract is no executory if either party had substantially performed. All that remains of the contract in the debtors bankruptcy case is an asset or liability b. Trustee or DIP in 11, has 4 choices for any executory contract i. Reject the Contract 1. Nondebtor gets a general unsecured claim for damages, because it is treated as a prepetition breach 2. 554 - trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate ii. Assume the Contract 1. Estate becomes obligated on the contract 2. Nondebtor receives an administrative expense priority 3. What must the Trustee or DIP do to assume the contract?

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5. 6. 7.

a. 365b - If there has been a default, you must cure the pre-petition default or provide adequate assurance that DIP will promptly sure these defaults b. Some defaults you dont have to cure (impossible, ipso facto) c. (b)(1)(B) Compensates for any actual pecuniary loss to such party resulting from such default d. (b)(1)(C) - provides adequate assurance of future performance under such contract or lease Is there anything the nondebtor can do to stop assumption or assignment? a. Lessor can argue that filing bankruptcy, or preparing petition is what terminates the lease or contract. b. Doesnt Work! 541c - An interest of the debtor in property becomes property of the estate notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law 1) that restricts or conditions transfer of such interest by the debtor; 2) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title c. Also 365e - makes clear that, notwithstanding a provision in applicable non-bankruptcy law, the contract cannot be modified at any time after the petition date i. These clauses that strip DIP of rights on account that it entered bankruptcy will not work ii. 365e1b: ipso factor clause, prevention. Any clause in a contract will make a contract void or default because of BKR filing is invalid (unenforceable) (in UK this is not the case). Assumption is cum onere [Must assume all the burdens] Assumption requires express assumption, no implied In re Klein Sleep Products Assumption then Rejection a. Debtor assumed a long term lease under ch. 11 b. Business goes south, and trustee then rejected the lease that was assumed c. The rejection constitutes a breach in the lease d. After rejection, Trustee argues that claims for future obligations are general unsecured claims, and only the rent between prior to the rejection is an administrative expense e. Trustee argues that the estate receives NO BENEFIT after the rejection of the lease so the future

damages should not be entitled to administrative expense status i. BUT this court finds that the relevant time for establishing BENEFIT is the time of assumption f. Court holds that damages arising from future rent under an assumed lease must be treated as an administrative expense, even those after rejection g. Next question, is the claim capped by the one year provision or 15% found in 502b6 ? i. Cap does not apply because 502 deals with pre-petition claims under 501 (this is a 503 claim) h. Congress responded to this with respect to nonresidential real property 503b(7) i. Admin expense is limited in the case of nonresidential real property to two years after rejection or if the property is turned over before rejection, then two years after the premises are returned to the landlord 8. Limits on Assumption 365c a. Personal Service Contracts - applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession. See Catapult below b. Contract is a contract to make a loan, or extend other debt financing or financial accommodations i. 3rd party agrees to deliver goods and dip or trustee says that they promise to repay IS ASSUMABLE c. Such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief 9. Perlman v. Catapult a. Debtor is a licensee of a patent from non-debtor and patent law excuses performance by anyone other than the parties to the license b. Non-debtor wants to prevent assumption of the contract under 365(c)(1) because the contract is non-assignable c. Debtor argues that b/c it is not planning on assigning the contract, it should be able to assume it d. Two Tests i. Actual Test

1. Is the party actually going to assign the license? ii. Hypothetical Test Court chooses this 1. Does applicable law excuse the nondebtor from accepting performance or rendering performance to an entity other than the Debtor or DIP? 2. If it does, then debtor can not assume the contract unless the nondebtor consents under 365c1 iii. Assume and then assign the contract 1. First, Trustee must assume the contract 2. Second, the assignee must provide adequate assurance of future performance 3. iv. Do nothing 1. Trustee has a strong inventive to delay making an election, thereby preserving the possibility of reaping the benefits, but also rejecting 2. Other party is still bound during the limbo period 3. Data-Link Systems v. Whitcomb & Keller Mortgage a. Debtor is receiving computer services from creditor and creditor is owed money pre-petition b. DL did not like providing the services, and they stopped providing the services, and their business came to a screeching halt, and W&K got an injunction requiring them to continue providing services i. If the decision is to reject, what DL is owed from prepetition debt is just a general unsecured claim ii. If the decision is to assume, the prepetition debt to DL is going to get paid, because W&K is going to have to cure the default from prepetition c. For all the work during the case, there is going to be an administrative expense for it d. If contract assumed, the entire contract is assumed, and the estate is going to be on the hook for the entire thing. [Klein Sleep Idea] e. If the contract is assumed, how much are damages going to be will be looked to in the contract, whereas if rejected, it will be looked at from the petition date f. Why is DL forced to continue to provide services? i. The Automatic Stay

1. Courts are not all in agreement, but some courts read the automatic stay prevents any act to take control over the estate, and if you have a contractual right to perform, then not performing is taking control over some aspect of the stay, and some courts will say that it is a stay violation for the DL not to perform g. DL wants the court to say that the debtor assumed the contract because they received an injunction requiring them to perform h. No Implied Assumption, must seek a ruling that the contract is assumed and it be subject to the courts approval i. Asking for benefits, receiving benefits, or even getting an injunction is not an Assumption c. What standard does the court use when deciding to permit or not to permit the assumption or rejection of a contract? i. 365 - The trustee[or DIP in 11], subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor 1. Use Business Judgment Rule very broad discretion d. In Re Enron How are damages calculated for a rejected contract? i. Prepetition contract between Buyer of electricity and Debtor agreed to sell electricity ii. One year later, debtor entered into Ch. 11, and the K price is greater than the market price, so the debtor is making lots of profit iii. Then, the market changes, and the Debtor rejects the contract once the price drops, and the Buyer then wants their damages, for the market price the K price iv. The issue here, is when to figure damages v. 502g(1) - A claim arising from the rejection of an executory contract shall be allowed the same as if such claim had arisen before the date of the filing of the petition vi. A rejection of a contract, that has not been assumed, will have the damages determined at the petition date, and not the damages at the time of the repudiation 1. If you do this, and there was a repudiation as of the petition date, the damages for the non-debtor would be 0, so what is the buyer supposed to do? Lose Lose for the buyer a. They cant breach, because then they would be liable, and the buyer probably cant get another buyer, because then they might have two contracts if the Estate Assumes the contract.

e. Non-debtor can seek a court order requiring the DIP to make a decision under 365d(2) i. 365d(2) - In a case under chapter 9, 11, 12, or 13 the trustee may assume or reject an executory contract at any time before the confirmation of a plan but the court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease. 1. Factors whether court should order In re Enron a. The damage the non-debtor will suffer beyond the compensation available under the Bankruptcy Code b. The importance of the contract to the debtors business and reorganization c. Whether the debtor has had sufficient time to appraise its financial situation and the potential value of its assets in formulating a plan d. Whether exclusivity has terminated f. How long does the DIP or Trustee have to assume or reject a contract? i. Chapter 7 60 days after the order for relief, the executory contract is deemed rejected ii. Chapters 9, 11, 12, or 13 Until the confirmation of a plan g. What about options? i. Debtor receives an option to buy widgets for 50 dollars that expires ii. Within expiration, debtor files for bankruptcy iii. Is the failure of either to perform, would it constitute a material breach? 1. person who has the option, does not have obligation to do anything, and they have an asset 2. Some courts may treat this as an executory contract, while others may not. Professor says that this will probably be treated as an asset, that is the option h. In re Sudbury Not an executory contract i. Insurer provided insurance pre-petition with retrospective payments to be made by the debtor 1. The debtor filed for bankruptcy AFTER the term of insurance policies expired, but BEFORE all retrospective premiums have been paid 2. The insurer is still OBLIGATED to cover any claims that arose during the claim of the policy a. The insurer args that the debtor is still obligated to make the retrospective payments and that it is therefore an Executory Contract i. IF an executory contract, then ACCEPTING makes the unpaid premiums administrative

expenses and REJECTING relieves the insurer of obligations for claims 3. HOWEVER the court finds that the insurer is obligated to cover claims regardless of the debtor's payment of the premiums a. The contract provides that entering bankruptcy will NOT relieve the insurer of obligation to cover b. Because the insurer is obligated to cover regardless of payment, the debtor's failure to pay would not constitute a MATERIAL BREACH under the Countryman definition 4. The insurer also args that the "Cooperation Clause" of the contract creates an additional obligation for the debtor to cooperate in defending claims a. Court says the failure to cooperate only gives the insurer the right to defend against coverage of the claim. It wouldnt excuse the insurer from performance. i. Similar to an option contract because the cooperation is a condition that creates an asset to the debtor but does not result in an obligation for failure cooperate i. Lease of Real Property i. 365h - If the lessor is the debtor and rejects the contract, the lessee may: 1. may treat such lease as terminated by the rejection (and go get another lease) + lodge the unsecured claim OR 2. the lessee may retain its rights under such lease that are in or appurtenant to the real property for the balance of the term of such lease and for any renewal or extension of such rights to the extent that such rights are enforceable under applicable nonbankruptcy law. (i.e. lessee can continue to occupy for the term of the lease but must then continue to pay the rent. Plus the lessor (bkr) is no longer under the obligation to perform its obligations under the rejected lease (e.g. no obligation to supply trash service or water) But NB 365h1B offset value of damage of nonperformance by Lessor vs. rent but cannot claim vs. estate for additional money of costs for supply those obligation to oneself.) j. Lubrizol Intellectual Property i. Licensor of IP goes into bankruptcy, and says that he is licensing this IP and he would like to strip the licensee of his rights, so it argues that this is an executory contract and then will reject it, thereby stripping the licensee of its rights

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ii. Court holds that license of IP is similar to the lease of real property, BUT because congress did not expressly provide a right to retain possession by a licensee it cannot hold on to the property as in 365h iii. Congress added 365n to address this situation, so it is now dealt with the same way as real property. iv. The better cases say that rejection is a breach, not a rescission, and whatever follows from breaching in non-bankruptcy follows in bankruptcy except for what has been codified. This is not what was done in Lubrizol Trustees Avoiding Powers a. Powers that are given to the trustee, that in a Ch. 11 can be exercised by DIP, to undo prepetition transfers b. 550a - Liability of transferee of avoided transfer i. To the extent that a transfer is avoided the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from 1. the initial transferee of such transfer or the entity for whose benefit such transfer was made 2. any immediate or mediate transferee of such initial transferee ii. What happens to the defendant in the avoiding proceeding? If you lose the case, and you are obligated to return the property or its value to the estate, you can not have a claim in the case if you do not turn in any avoided transfers to the estate c. 550b - There is an absolute right to avoid the transfer if the person is the initial transferee, but anyone the initial transferee then transfers to, if they received it in good faith, and without knowledge of the transfers voidability, the trustee can not avoid it i. Schafer v. Las Vegas Hilton (In re Video Depot) 1. Funds make their way from the debtor to Hilton [creditor], and the president actually made the cashiers check from the Video Depot to Hilton 2. Video Depot goes bankrupt, and wants to avoid the transfer to Hilton 3. Issue here is whether Hilton is the initial or subsequent transferee, because if he is a subsequent transferee, then he has the good faith defense 4. Test to see if you were a Transferee: dominion over the money or other asset, the right to put the money to ones own purpose 5. Here the President is not going to be considered a transferee though, because the funds went directly in a cashiers check from Video Depot to Hilton

6. If however, the President wrote a check payable to himself, and then paid Hilton, he would probably be the initial transferee 7. Why make a difference between putting the funds in the Presidents account, and drawing a check on the debtors corporation account directly to Hilton? a. Hilton can more easily monitor the funds, if they are receiving checks directly from the Corporation, then some bells should ring that the funds might not be completely legit, but if they come directly from the Presidents personal account, it just looks like a guy is paying off his debt rather than the corporation paying off a gambling debt, which they should know could not be legit 1st Reason President is not the initial transferee b. Even though as a practical matter the President can drain the corporate bank account, it doesnt have LEGAL DOMINION AND CONTROL over the money 2nd Reason President is not the initial transferee ii. Normally commercial intermediaries are not liable, and banks are not going to be considered transferees d. 550d Single Satisfaction i. The trustee is entitled to only a single satisfaction under subsection (a) of this section ii. What about the President in In re Video Depot? iii. 550a1 The initial transferee of such transfer or the entity for whose benefit such transfer was made 1. OR means and/or 2. Here the President is the person who the transfer for whose benefit was made, but they cant recover more than a single satisfaction e. 551 - Automatic preservation of avoided transfer i. Any transfer avoided or any lien void under section 506(d) is preserved for the benefit of the estate but only with respect to property of the estate f. 544a Strongarm Power i. 544a(1) - Gives the trustee in bankruptcy or DIP rights in powers of a judicial lien creditor as of the commencement of the case ii. 544a(1) Power of a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists

iii. This is a hypothetical lien creditor, if there were a lien creditor, what would their powers be? And you have to look to nonbankruptcy law iv. Consequence: Whatever can be reached by the hypothetical lien creditor is going to be brought into the estate v. Chief place this comes into play is with the unperfected security interest 1. What about out secured party? a. They are now left with an unsecured claim, even though outside of bankruptcy they would have a security interest in the claim vi. One important Exception: 1. Exception PMSI - 546b(1) - The rights and powers of a trustee under sections 544, 545, and 549 are subject to any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection a. Article 9 does have a rule, where if the secured party perfects, even if there is an intervening claim, the perfected party wins b. Purchase Money Security Interest i. You have a period of time in which to file, and if you file within 20 days of the debtor receiving the property, you will prevail over a lien creditor who comes in the middle. 546b1 permits this vii. Timing is everything. Secured creditor perfects day before petition, he wins, perfects day after, he loses his security interest viii. 544a(3) Trustee has power of - a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists 1. Always ask what is the non-bankruptcy rule is and a. As a hypothetical Bona Fide purchaser of real property No knowledge of the transfer, and also records at the same instant at the commencement of the case i. Look outside bankruptcy, so if the trustee or DIP is a BFP without knowledge would beat a unrecorded mortgage, then the trustee can avoid the unrecorded mortgage ix. XL/Datacomp (In re Omegas Group)

1. Creditor claims that debtor committed fraud that created a "constructive trust" for creditor's payments to debtor that should be returned to Creditor free of bankruptcy interference 2. Court holds that unless the "constructive trust" is judicially decreed BEFORE the bankruptcy case, the Creditor has no equitable interest in the money obtained by fraud 3. Datacomp has no equitable interest in those funds, and therefore Datacomp can not use sec. 541d a. If the debtor is a real trustee, but the equitable interest is in the beneficiary of the trust, the trust does not go into the estate 4. What is wrong with the court's interpretation? a. Creditor does not seem like it should have the status of a general creditor i. The $ kept by debtor was NOT payment for services, it was meant to be held by debtor and paid to another ii. OUTSIDE bankruptcy, creditor would clearly have a better right to these funds b. Court should have asked whether, outside bankruptcy, a judicial lien creditor would have priority over the claim of Creditor (544(a)(1)) g. Fraudulent Transfers i. Outside of bankruptcy there is the Uniform Fraudulent Transfer Act (UFTA) ii. UFTA Section 4 Applies to Present and Future Creditors 1. 4a A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditors claim arose before or after the transfer was made or the obligation incurred, if the debtor made the transfer or incurred the obligation: a. (1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or i. Most people arent going to admit this, so have to use circumstantial evidence. Badges of Fraud 1. Transfer or obligation was to an insider 2. debtor retained possession or control of the property transferred after the transfer 3. transfer was disclosed or concealed 4. before the transfer, debtor had been sued or threatened with suit 5. transfer was of substantially all of the debtors assets

iii. UFTA 1.

2.

iv. UFTA 1.

v. UFTA 1.

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ii. Creditor A has a remedy even if debtor was trying to hurt Creditor B because of the word any b. (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: i. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; OR ii. Intended to incur, or believed or reasonably should have believed that he would incur, debts beyond hi ability to pay as they became due Section 5 Only Present Creditors A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without without receiving reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent Section 7 Remedies of Creditors A creditor may obtain: a. Avoidance of the transfer or obligation to the extent necessary to satisfy the creditors claim; b. An attachment or other provisional remedy against the asset transferred or other property of the transferee Section 8 Defenses of Transferee A transfer or obligation is not voidable under Section 4a(1) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee. Complete Defense Alan Drey v. Generation a. Insolvent debtor had one asset left that it sold and put the money in a secret account

b. Court concludes that there is enough evidence that this is a voidable transfer, and then it comes down to the defense of the buyer c. Court says that the transferee must be a participant in the fraud rather than a bona fide purchaser i. Bona Fide Purchaser Purchased the property for valuable consideration, without notice of the fraud, and he must be innocent of any purpose to further the fraud ii. Participator in the Fraud Not necessary that the purchaser have actual knowledge of the debtors fraudulent intent, but merely a knowledge of facts and circumstances sufficient to excite the suspicions of a prudent man and be put on inquiry, or to lead a person of ordinary perception to infer fraud iii. vi. 548 Bankruptcy Codes Fraudulent Transfer law 1. Trustee can exercise this bankruptcy power without regard to whether there was a creditor who was present at the time, like would be needed in some sections of the UFTA 2. The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily: a. made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity; b. received less than a reasonably equivalent value in exchange for such transfer or obligation; and i. was insolvent on the date of the transfer or became insolvent as a result of the transfer; OR ii. was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital iii. intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured

vii. 544b Fraudulent Transfer Law Trustee standing in shoes of Creditor 1. Trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim 2. So you need to have an actual creditor that could bring the claim. So under the UFTA some are present only and some are for future creditors, so to use the present ones, there would have needed to be a present creditor at the time of the transfer 3. Why might you need to rely on 544b as well as 548? a. There is a two year reach back in 548, and you might need to find applicable non bankruptcy law, and the UFTA is normally 4 years to be able to avoid the transfer 4. If it is within two years, trustee will normally use both 544b and 548 5. Moore v. Bay 544b a. Is the Trustees avoidance limited in amount to the size of claims of those creditors with standing to avoid the transfer, or may the transfer be avoided in its entirety? Entire Transfer will be avoided, no matter how small the claims of the creditors whose standing the trustee assumes b. Whatever the amount of the avoidance, are the fruits of recovery to be enjoyed by all unsecured creditors of the bankruptcy estate, or only by those creditors with standing to avoid? Distribution is that all creditors of the state share in the recovery, even those who could not have avoided the transfer viii. What about the Good Faith Defense in the Bankruptcy Code? a. 548c - A transferee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred to the extent that such transferee or oblige gave value to the debtor in exchange for such transfer b. If you buy in good faith, and it is avoided, the good faith purchaser has a lien or may retain any interest only to the extent that such transferee gave value to the debtor c. Give 80 dollars for a car, get to keep your 80 and return the car ix. What is Reasonably Equivalent Value for Constructive Fraud? 1. Allard v. Flamingo Hilton (In re Chomakos)

a. Husband and wife gambled while they were insolvent, and they lost thousands, so the trustee says that they were basically giving the money away to the casino, so the trustee wants to avoid the transfer b. Court says that the debtors received reasonably equivalent value for the gambling, and therefore the transfer is not voidable 2. Kupetz v. Wolf a. Court grapples with state fraudulent transfer law, and whether it should be used to deal with a leveraged buyout b. Court finds that LBO is not fraudulent absent INTENT to defraud c. Wolf and Vine the corporation, and you have two shareholders Marmon and Wolf d. Adashek wants to buy the company, and he sets up a corporation and puts 100 dollars in it, and Red Riding is going to acquire the shares in the company, and then Adashek will own red riding hood that owns Wolf and Vine e. Red Riding goes out to the lenders, and borrows money against Wolf and Vine, and for 100 dollars Adashek bought himself Wolf and Vine f. Now there is a lender with a 1.1 million secured loan, so what did Wolf and Vine get for the 1.1 million dollar obligation? i. Corp. only got a new owner g. There might be a fraudulent transfer if the company just did a stock redemption on the stock that Marmon and Wolfe owned h. Not all courts are uniform on this though, and that there is a chance that the court is going to say that Wolfe & Vine took on all of this new debt, and all it got was a new shareholder, and that it might not be reasonably equivalent value, so it was fraudulent. [Note that Kupetz came out differently] i. Solvency Opinion Now lawyers get solvency opinions, that state that after the transfer, the business will still be solvent and have sufficient assets to continue business. This form of opinion would then get rid of all claims of constructive Fraud 38. Avoiding Preferences 3rd Avoiding Power 547 a. 547b - The trustee may avoid any transfer of an interest of the debtor in property i. to or for the benefit of a creditor

b. c. d. e. f. g.

h. i.

ii. for or on account of an antecedent debt owed by the debtor before such transfer was made iii. made while the debtor was insolvent 1. 547f - For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition iv. made 1. on or within 90 days before the date of the filing of the petition; or 2. between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and v. that enables such creditor to receive more than such creditor would receive if the case were a case under Chapter 7 Does the creditor have to know that the debtor is insolvent? No. These are hard elements What if the creditor gets a judgment lien? i. Transfer is broadly defined, so it is going to be avoided if done w/in 90 days If you have a loan of money, the debt arises when the money is loaned, not when you have to pay the money. So even if you pay early or at the time it is due, still antecedent Paying a fully secured debt is not going to be a preference, because of 5th element What about securing an unsecured debt? i. This is going to be a preference, b/c the creditor is going to get more than under 7 UFTA Section 5 i. 5b A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent ii. Preference to an Insider is a Fraudulent Transfer in most states 1. Who are insiders? Relatives, partners, etc iii. Think of the Trustee using this under 544b if there was a present unsecured creditor at the time Who is going to be liable for the avoided preference? i. 550 Go back to this Insiders i. Deprizio Case ii. Creditor lends 5k to debtor, and loan is guaranteed by the CEO, On april 1, debtor pays creditor 5k. On may 1 debtor files bankruptcy.

1. Is the payment to Creditor a voidable preference as to Creditor?Yes. a. Now the question is, who has to give the money back? Look to 550 Go after the initial transferee of such transfer or go after the person for whose benefit such transfer was made i. Could be argued that this was made to the Presidents Benefit, so it can be recovered from the creditor or the president, or both Or means and/or 2. What happens if this payment is not made within 90 days, but the debtor files bankruptcy on September 1? a. More than 90 days has passed b. Is the payment to creditor a voidable preference as to CEO? i. At the time the transfer in April, the CEO was a creditor of the debtor, and had a contingent claim. ii. This is Going to be avoidable, because 550(1) says to or for the benefit of a creditor [Prez, who is also a creditor, and an insider]. Benefits the Prez c. Now the question is who has to pay it back? i. 550a1 Deprizio permitted the trustee to recover from the noninsider, even though it was only avoidable as to the insider guarantor. So if the Creditor has a debtor whose guarantor is an insider and they are paid, they have up to a year of liability to have to pay the money back ii. Congress responded with 550c, and now you can only go after the INSIDER for recovery. Not the non-insider iii. Then there was a problem, because when a lien is voided, you dont go to 550, and the lien would be voided as to non-insider during the 90 day to a year period. iv. Congress responded with 547i, and it only avoids the transfer of the security with respect to the insider, so the insider must pay the amount of the security interest j. Earmarking Doctrine i. In re Superior Stamp & Coin Collecting 1. Earmarking: where a third party loans money to debtor to pay off a specific creditor's debt 2. WHY isn't this a preference?

a. The court finds that there is no "transfer of an interest in property of the debtor" because the debtor did not have control of the money i. The estate never had control of the money because it had to be used to pay a specific debt; AND ii. The bank was basically substituted for the original creditor 3. If however, the unsecured creditor is being paid by the bank, and the bank has a security interest on the money it is loaning to the debtor, this insults Preference Law 4. Court will not apply this doctrine if the money loaned by the bank is not for a specific creditor k. Defenses to Preferences i. 547c(1) - The trustee may not avoid under this section a transfer to the extent that such transfer was 1. intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and 2. in fact a substantially contemporaneous exchange ii. 547c(2) - The trustee may not avoid under this section a transfer to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was 1. made in the ordinary course of business or financial affairs of the debtor and the transferee; or 2. made according to ordinary business terms; a. Assuming the debt was incurred in the ordinary course of business, Creditor can prevail by proving either that the transfer was subjectively ordinary, as between the debtor and that transferee, or that the transfer was objectively ordinary, measured against the industry 3. In re Tolona Pizza Products a. Payment of debt was made during preference period in the course of business, BUT the payment was paid late, PREFERENCE? b. Payment made in ordinary course of business=the norm for the parties (happened to be a significant grace period for payment) c. Payment made in according to ordinary business terms=the norm for the "industry" (also had a grace period) i. The "industry" is defined as the businesses that are generally similar

d. According to definition of "industry," the payments made in this case were made according to ordinary business terms e. BUT the payments were made significantly EARLIER than the norm for the parties so should have been suspicious f. No longer have to show both of the last two, one or other 4. In re Kaypro a. Restructuring of debt with various creditors is argued to be a preference and not in the ordinary course of business b. Court defines the "industry" standard for restructuring as "similarly situated debtor IN FINANCIAL DISTRESS" c. Now encompasses any debt payment that an insolvent makes, unless the payment is extraordinary for those that are in financial distress d. Frustrates the purpose of preference law, because the exception is going to swallow all situations where debtors are in financial distress iii. 547c(4) - The trustee may not avoid under this section a transfer to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor 1. not secured by an otherwise unavoidable security interest; AND 2. on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor a. 547c(9) Trustee may not avoid under this section a transfer if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $ 5,475 b. 547c(8) Primarily consumer debts, then less than $ 600 c. Question to Ask: For each of the subsequent new Value, has there been a subsequent transfer that the creditor gets to keep, and if that is the case you need to reduce the new value credit[such as less than a 5k payment] 3. Problem: a. On April 1, Debtor pays Creditor 8500 on outstanding debts. On April 15, Creditor ships 4k in

goods to debtor on Credit. On may 1, debtor petitions b. Congress says that this is a case where someone put money back into the estate, so since they put 4k into the state, the recovery should be 8500-4000 so 4500 c. Different if the delivery is made before the payment d. For each payment, was there a subsequent new value not secured by an otherwise unavoidable security interest or transfer 4. Problem 2 a. On April 1 Debtor pays Creditor 8500 on outstanding debts. On April 15, Creditor ships 4k in goods to debtor on credit. On April 20, Debtor pays Creditor 3k. On may 1, Debtor files bankruptcy. b. The 3k payment, can not be avoided, b/c of c9. But if the payment of the 3k was on account of the 4k goods, then the 4k must be reduced by 3k, and c4 only insulates 1k of the 4k payment l. Security Interests and Preference Exceptions i. The Transfer occurred when the financing statement was filed, if the interest is secured more than 30 days after the transfer ii. 547e(2) - For the purposes of this section a transfer is made 1. at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after a. Financing statement filed on day 19, then the transfer is said to have occurred on day 1, and then this is not on account of an antecedent debt 2. at the time such transfer is perfected, if such transfer is perfected after such 30 days a. Creates a transfer at the time of perfection on account of an antecedent debt, and that May fall within the preference period iii. Preference Law gives you a 30 day grace period. Suppose the security interest attaches on day 1, then security interest is perfected on day 20. For preference purposes, the transfer is day 1, but what if the bankruptcy petition is filed on day 19? It is avoidable under the strong arm clause under 544a, and the hypothetical judicial lien creditor wins. So the trustee can choose to avoid under 547 or 544, or avoid under both. So even though you dont have a preference, you can still lose because the bankruptcy case commenced before you perfected your security interest iv. How can you file the financing statement after the petition, and isnt that a violation of the automatic stay?

1. 362b3 The stay didnt apply, because it does not operate as a state of any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustees rights and powers are subject to such perfection under 546b or 547e2a a. So you can file, and you would beat preference law, but you still lose to the strong arm power v. 547e3 After Acquired Property 1. For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred 2. Exception to 547e2 3. Creditor who has a security interest in all after acquired property, if the property is acquired within the preference period, it will be perfected the instant the debtor purchases it, but the transfer will be on that date on account of an antecedent debt, so it will be avoidable as a preference, but would not be avoidable under the strongarm power vi. 547c5 Addresses problem of After Acquired Property in Inventory 1. If the collateral is inventory, the normal notion is that the debtor has a pool of inventory for sale, and whatever is held is going to change over time. Doesnt make sense for it always to be voided as preference 2. Trustee may not avoid under this section a transfer that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interest for such debt on the later of i. 90 days prior or for an insider 1 year b. Suppose that 90 days, the debt is 125 and collateral 100, and at the time of the filing the debt is 105, and the collateral is 100. Debt went down because there was a payment. Trustee is going to try and argue that the payment is avoidable, and also under c5, the collateral should be stripped down. i. Either the payment is avoidable or it is not, either way, the reduction in the unsecured claim was caused by the payment, and not by the collateral

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ii. Here there is a problem though, because there is double dipping here, avoiding the payment and then also dropping the collateral iii. Maybe this is a payment in the ordinary course of business, and if it is payment, and the collateral stays the same, even though the unsecured claim goes down, you dont have to drop the collateral to drop the unsecured claim vii. 547c(3) PMSI Exception 1. Trustee can not avoid a transfer that creates a security interest in property acquired by the debtor a. To the extent such security interest secures new value that was i. Given at or after the signing of a security agreement b. That is perfected on or before 30 days after the debtor receives possession of such property Debtors Fresh Start a. 524a(2) - A discharge in a case bars any attempt to collect discharged debts a personal liability of the debtor b. 541a(6) - Property of the estate does not include earnings by an individual debtor for services that are performed after the commencement of the case i. If the earnings are attributable before the petition, then those should go into the estate, but if the services are performed after the petition the debtor gets to keep them c. 552a - After Acquired Property - Security interest does not extend to property acquired by the debtor after the commencement of the case, if the security agreement was entered into before the case i. This underscores local loan as well as the purpose of bankruptcy d. Local Loan i. Debtor made a pre-petition wage assignment, but bankruptcy discharge is ordered ii. Creditor tries to continue to collect on wage assignment because state law allows a LIEN on wages to survive bankruptcy discharge iii. Why is this any different than the lien just surviving? 1. This is an exception, because the wages are unique, and if this is a piece of personal property then the lien survives, but because it is wages it doesnt iv. Court holds that the lien on future earnings is discharged, even though IL law said it survived v. Where does the court find it in the statute? 1. Clear and unmistakable policy of the bankruptcy act, and they cant find where it says that, but the whole policy of the bankruptcy act

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2. This is a purposive look at the bankruptcy act 3. One of the primary purposes of the bankruptcy act is to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes vi. What justifies this policy? We dont like pauperism, and dependents involved e. We let people waive constitutional rights, but we dont allow people the right to waive a bankruptcy discharge, like before they get a credit card or loan i. Pre-bankruptcy waiver is not valid f. Chapters 11 and 13 The Fresh Start is a Ch 7 idea i. The very idea of ch. 13 is that post-petition income will be used to fund a plan under which the pre-petition debts are going to get paid 1. Same thing is now true in ch. 11 a. In ch. 11, post-petition earnings/income from services performed by an individual debtor become property of the estate g. What are post-petition earnings? i. Andrews v. Riggs National Bank 1. Debtor is selling his business, and as part of the deal, the buyer of the business enters into an agreement with the debtor to the effect that Mr. Andrews will not compete with the buyer of the business assets 2. Debtor was to receive 250,000 post petition for his covenant not to compete 3. Do payments from a covenant not to compete constitute earning from services performed if the payments are received after the commencement? 4. Payments after the commencement of the case from a covenant not to compete do not constitute earnings from services performed in 541a6 a. This is a prebankruptcy deal, but if they are going to treat the noncompete as services performed after the commencement, the Court is afraid that everyone is going to start to structure their deals with noncompetes so the person can keep the money if they go into bankruptcy ii. What if a lawyer takes a case prepetition on a contingent fee, and files for bankruptcy during the case? 1. Courts normally look at time records, and allocate the portion of the total fee between pre and post petition time Nondischargeable debts

a. 3 Main Types of Nondischargeable debt Fraud, Fraud, and Wilful and Malicious Injury b. 523a(2) - A discharge does not discharge an individual debtor from any debt i. for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by 1. A - false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition [Intent to pay as per Stearns] 2. B - use of a statement in writing[For ability to pay as per Stearns] (i) that is materially false; (ii) respecting the debtor's or an insider's financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive ii. In re Stearns 1. How could there ever be fraud in credit card debt? Because the credit was extended on the lies on the application 2. Stearns told the truth about her financial situation, and she wound up with some debts that she could not pay 3. Credit Card says that Stearns use of the credit card was actual fraud under 523a(2)(A) a. Court says that Credit Card must prove up the common law elements of Fraud: 5 Elements i. Debtor made a false representation of fact 1. This is the disputed element, and that the credit says that the misrepresentation was 1) she had no intent to pay, and 2) she misrepresented that that she had the ability to pay 2. Creditor alleges that by borrowing the money, the debtor has represented that you have the intent and ability to pay it back 3. Merely by using the card, you have the intent to pay, and have the ability to pay. Some Courts say this 4. Some Courts say that use of the card does not represent anything. Some Courts say this

5. Court says that the debtor represents when they use their card that they have the intent to pay, but nothing about their ability to pay ii. Debtor knew the representation to be false at the time the debtor made it iii. Debtor made the representation with the intent and purpose of deceiving the creditor iv. Creditor justifiably relied on the debtors representation v. Creditor sustained the alleged injury as the proximate result of the making of the representation b. Court here takes the middle approach, and says that by using the card, the debtor represents they have the intent to pay, but they do not represent they have the ability to pay i. Ability to pay leads to 523a(2)(B), concerning the debtors financial condition, and there would you need a writing, here there is no writing, and slip that you sign for the receipt doesnt say anything about the ability to pay 4. How do you find out what someones intent was on whether to pay? a. Ask them, look to see if they ran the debt up to the limit then filed, sudden changes in the debtors buying habits, etc 5. How would show reliance? Factor 4 a. Maybe just look and see if the credit card would extend the credit if it had known the truth iii. In re Johannsen Luxury Goods within 90 days 1. 523a(C) - Consumer debts owed to a single creditor and aggregating more than $ 550 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable 2. Debtor bought a bunch of expensive Barbies from Sears and then filed bankruptcy 3. Sears claims that the barbie dolls are luxury goods, but Court doesnt even get to whether they are luxury, because they find that the debtor had the intent to repay sears, and therefore did not defraud Sears 4. What evidence is here to show her lack of intent not to pay:

a. She testified and said that she was going to make monthly payments b. She bought some right before the bankruptcy and paid in cash c. She was collecting them to make money iv. Archer v. Warner 1. Debtor and creditor entered into a settlement agreement concerning a fraud claim BEFORE bankruptcy 2. When debtor failed to make payments in accordance with the agreement, and entered bankruptcy, the creditor filed to have SETTLEMENT claim held non-dischargeable because the settlement was based on fraud claim 3. Court says Brown v. Felsen controls here a. Settled by a stipulated judgment, and the parties agreed that judgment would be entered, but there was no finding of fraud in the judgment. The debtor argued that then he didnt have an obligation for fraud, whatever tort liability he had for fraud, has now been replaced by his obligation under the judgment, and the judgment was not procured through fraud, so therefore the judgment should be discharged b. Court said that they are still going to determine whether fraud was underlying the judgment, even though the consent decree replaced it 4. Bankruptcy court should look behind the private settlement agreement to determine whether it reflected settlement of a valid claim of fraud 5. Dissent a. Should be different than Brown because the sweeping language of the general release, it is inaccurate for the Court to say that the parties did not resolve the issue of fraud. b. The parties did not admit any liability or wrongdoing, and the payment was not to be construed as an admission of liability v. Should be different because the sweeping language of the general release, it is inaccurate for the Court to say that the parties did not resolve the issue of fraud. vi. The parties did not admit any liability or wrongdoing, and the payment was not to be construed as an admission of liability c. 523a(6) Discharge does not discharge a debt by the debtor for willful and malicious injury by the debtor to another entity or to the property of another entity i. Kawaauhau v. Geiger

1. Doctor provides sub-standard care to Patient that eventually results in amputation of Patient's leg 2. Patient sues dr., and then dr. goes into bankruptcy 3. Court says the willful and malicious injury exception are only acts done with the actual intent to cause injury Also need some malice a. Intentional Torts 4. Does the Plaintiff have a problem, because they only proved negligence, and now that they are in bankruptcy, they should have tried to prove an intentional tort? a. No, because of Archer v. Warner, and they are permitted to look at the underlying facts, just not change the amount 5. Since the Geiger case, courts are reluctant to find nondischargeability in conversion cases as well a. Because what if you sell property to just get the money, without the intent to injure the other party? d. 523a(1) Taxes i. If the taxes have priority in 507a3 or 507a8, then they are also nondischargeable ii. If the IRS has not had a fair chance to collect, such as when a return was not filed or there was a fraudulent return, these are going to be nondischargeable iii. 507a(8) - tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition [Three Year Window] 4-15 for most returns 1. Debtor owed 5k for taxes in 1995. Debtor filed for Ch. 7 on May 1, 1999. So debtor would have owed on 4-15-96, which is outside the three year window, but if debtor would have received an extension . . . e. Injunctions are Not Dischargeable i. In re Carrere 1. Worked for ABC and entered bankruptcy solely for the purpose of REJECTING her contract (as an executory contract) with ABC to work elsewhere 2. Initial problem with her theory is that her personal services contract may not be assumed in some cases if applicable law would not allow assignment 3. Even though she is the person specified in the contract, the Court says that she still may not assume or reject the contract because she is now a debtor-in-possession, who is the same as the trustee, and has not greater powers than a trustee

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4. Real problem is that even if she does reject the contract, it is only going to discharge the monetary claims against her, and not the right of ABC to get a negative injunction against her 5. What is another argument that she might make as respect to the negative injunction? a. Fresh Start Argument This is the local lawn argument, that this is an encumbrance on earning power b. She is only able to work at ABC, and so they are stopping her from getting her fresh start 6. Also a problem with bad faith here, because she filed bankruptcy just so she could get a better job ii. 3rd Circuit 1. Takes a completely different notion, and whatever the debtors rights are, go into the estate, so they say that the DIP could reject, because even the trustee could reject the personal services contract, it could not assume though without the consent of the parties 2. Without consent, could a DIP assume the contract? Check Catapult, which uses the hypothetical test, so the DIP could not even assume the contract even though it is a contract involving her Reaffirmation a. Debtor may not waive discharge in advance, but the debtor may waive discharge post-petition, then the debtor will not get a discharge b. 524c Reaffirmation has become a highly regulated process: in order to get a legally binding reaffirmation: i. Agreement was made before the granting of the discharge ii. Debtor received the disclosures iii. Agreement must be filed with the court, and accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement iv. Even if the debtor signs the agreement and files it, the debtor can still rescind within 60 days c. Sears In re Latanowich i. Did not file the reaffirmation agreement, because did not want the debtor to know that they could discharge the debt, and didnt want them to know all of their rights ii. They were trying to circumvent the bankruptcy process, and got hit with a 400 million dollar fine Chapter 7 Eligibility a. 109h - An individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency individual or group

briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis i. Exceptions 1. US Trustee makes a determination that it is not available, and not reasonably available to provide adequate services 2. Court determines that a debtor is unable b/c of incapacity, disability, or military service in a combat zone 3. Debtor who submits to the court a certification that: a. describes exigent circumstances that merit a waiver b. states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 5-day period beginning on the date on which the debtor made that request; and c. is satisfactory to the court b. Who is going to get bit by 109h? i. Those who go into bankruptcy without a lawyer, and file pro se ii. Procrastinators who are looking to get the automatic stay so the foreclosure doesnt go through the next day like in the Dixon case iii. Counseling requirement applies to all individuals, even if the primary debts are business debts, and of course if they are consumer debts c. In re Dixon i. Dixon is advised by counsel, but the foreclosure was the next day, and the lawyer told him that he had to do the credit counseling before filing ii. Could he obtain credit counseling within 5 days? 1. He tried, but he could only get counseling in the internet for 24 hours, but phone counseling was 2 weeks a. He said that he didnt have the internet iii. Court says that even though there were exigent circumstances, they did not merit the waiver because he had at least 20 days notice iv. Why do we care whether it is a dismissal of the petition, or the case, or striking the petition 1. 362c3 if the debtor wants to go into bankruptcy again, he may have problems if an earlier case was dismissed a. If the debtor goes into bankruptcy within a year, the stay lasts only 30 days, unless the debtor can show there was a good faith filing, in the second filing

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b. Some courts then just dismiss the petition, so that this extra burden isnt placed on them if they file again once they get the credit counseling Dismissal of a Ch. 7 case a. 707a - Dismissal of a Ch. 7 for cause i. In re Tamecki 1. Only had one asset, and he held property with his spouse by means of a tenancy in the entirety, so the creditor for Tamecki couldnt reach the house 2. Trustee argues that Tamecki is filing in bad faith b/c the divorce is about to go through, and then the creditors could reach his interest in the house 3. Court dismisses because of lack of good faith a. Reasonableness of accrual of debt 35k while only earning 3k b. Timing Divorce is right around the corner ii. Dissents Argument 1. Is an insolvent individual barred from filing for bankruptcy if his wealthy parent is ill, absent any evidence that he is timing his filing so as to deprive creditors of his potential inheritance? iii. 541(a)(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date 1. By bequest, devise, or inheritance; 2. Property settlement agreement with the debtors spouse or final divorce decree 3. Beneficiary of a life insurance policy iv. If he gets divorced within 6 months it is going to go into the estate anyway b. 707b - Only applies where an individuals debts are primarily consumer debts i. 707b(1) Court may dismiss a case, or convert the case to a ch. 11 or ch 13, if the court finds that the granting of relief would be an abuse of the provisions of chapter 7 i. 707(b)(3) How do you know if it would be an abuse? 1. Whether the debtor filed the petition in bad faith; or 2. the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as ought by the debtor) of the debtors financial situation demonstrates abuse a. Think In Re Carrere contract didnt come into the estate ii. 707b(2) Means Test

1. statutory test that tells us whether a presumption of abuse arises, and if it does then someone can move to dismiss because of the presumption of abuse a. Abuse is presumed by looking at the net income of the debtor and comparing it to a trigger number i. If the debtor has enough net income, compared to the trigger number, abuse is presumed ii. How do we know the numbers? 1. Debtor is obligated to file a calculation under 707b2c as part of the schedules b. 704b US Trustee has to review these schedules and not later than 10 days after the meeting of creditors, file with the court whether there will be a presumption of abuse, and he has to file a motion to dismiss, or convert it, or state why he does not think that the motion is appropriate 2. What is the idea behind the means test? a. Take the debtors monthly income, and deduct a variety of expenses[including payments on secured debts], and get some net monthly income b. And then we are going to multiply it by 60[5 years] i. Why 5 years? The longest chapter 13 case you can have is 5 years, and you are going to get a total of what the debtor can afford to pay over the life of a 5 year chapter 13 plan ii. Then you are going to compare that to the trigger, and the trigger is 707(2) 3. 707b(7) No person may file a motion dismiss on account of the means test if the current monthly income of debtor, and the debtors spouse combined, multiplied by 12 is less than the MEDIAN yearly income for a family of the same size 4. Current Monthly Income 6 months prior to the petition date, so take how much they earned 6 months prior, and divide by 6 to get the current monthly income 5. 707b(2) - The court shall presume abuse exists if the debtor's current monthly income reduced by the allowed amounts determined and multiplied by 60 is not less than the lesser of-(I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $ 6,575, whichever is greater; or (II) $ 10,950. i. If debtors current monthly income multiplied by 60 is 10950 or greater, it is always going to be presumed

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6. 707b(7) - If the debtors and spouses income falls below the median income, no one is able to file a motion under 707b2 7. If the debtors and spouses income falls below the median income, only the Judge or US Trustee can file a motion under 707b a. This might leave open b1, which still talks about abuse i. Lying, cheating, and stealing, fall into filing in bad faith, under 707b3, which applies to 707b1 ii. The job in the future, might be considered in some cases as part of the totality of the circumstances in 707b3 8. If 707b isnt available, can still bring a charge for cause under 707a 9. 707b(4) - The court may order the attorney for the debtor to reimburse the trustee for all reasonable costs in prosecuting a motion filed under section 707b, including reasonable attorneys fees if debtors case is dismissed a. If the court finds that the attorney for the debtor violated rule 9011 of the FRBP, the court on its own initiative may order the assessment of an appropriate civil penalty against the attorney for the debtor 10. If debtor does get hit by the presumption, could always tell him to go buy a car, which would have a secured payment of 500 a month, and then it would get rid of the presumption 11. Rebutting the Presumption of Abuse 707b(2)(B) a. Presumption may only be rebutted by demonstrating special circumstances to the extent these justify additional expenses or adjustments to current monthly income for which there is no reasonable alternative Eligibility for a Chapter 7 Discharge a. Worst situation of all, because the debtor has to turn over all their non-exempt property, but then they still have the debt and it is not discharged b. 727 No Discharge if you fall into 727a i. The court shall grant the debtor a discharge, unless-(1) the debtor is not an individual; [Partnerships, Corporations, do not receive a discharge ii. (2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated,

or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed-(A) property of the debtor, within one year before the date of the filing of the petition; or (B) property of the estate, after the date of the filing of the petition; 1. 3 months before bankruptcy he transferred blackacre to his son, but then found out that would be fraudulent and block the discharge from the attorney, so he had his son transfer it back to him, and then entered a. Constructive Frauds do not BAR the discharge, only if there is an intent to hinder, delay or defraud b. So if he just loved his son and got tired of working the ranch it would not bar it c. But if the transfer was made with an intent to defraud, then once he got the property back, the argument would be, who is hurt, because the property is back in the estate d. Courts go both ways, and sometimes they say that property must stay transferred, because who is hurt if he gets the property back iii. (3)Debtor has concealed or destroyed or failed to keep or preserve any recorded information from which the debtors financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case 1. In re Cox a. Question was whether she was justified in failing to maintain adequate adequate records? b. Bankruptcy court says that she was unjustified, but the CoA said that she was justified because she was relying on her husband c. Key here for her not to have the records, was that there was a marital relationship. If she had been partners with the neighbor, would she still be justified in keeping the business records? Probably not, because the trust wouldnt be there without the marital relationship. iv. (4) the debtor knowingly and fraudulently, in or in connection with the case-(A) made a false oath or account v. In re Tripp 1. Tripps failed to disclose 15 pounds of marijuana on their schedule of assets and liabilities 2. Trustee asserts discharge should be denied under 727a2A and a4A

3. 727a2A Trustee must establish that Debtors 1) concealed property, 2) which was property of debtors, 3) during one year prior to filing of the bankruptcy petition, 4) with intent to defraud the Trustee or Creditors 4. 727a4A Trustee must prove that 1) Debtor made a statement under oath, 2) statement was false, 3) debtor knew the statement was false, 4) statement was made with a fraudulent intent, and 5) statement related materially to the bankruptcy case 5. Both of these, though, only arise when there is an intent to defraud so an honest mistake would not trigger these two provisions 6. How do we know that they intended to defraud? a. Because they lied to avoid criminal liability b. But the marijuana is worthless to the creditors, but the court has other concerns, maybe such as telling the truth for the sanctity of the proceedings 7. 727a6 but if they would have taken the 5th, they would have also been denied a discharge, so it might have been the hard choice of going to jail or getting a discharge in this case vi. Norwest Bank Nebraska v. Tveten - Exemption Planning 1. Debtor converted nearly all of his non-exempt property into exempt property 2. Converted it very close to the day of the filing, and the argument is that he should not get a discharge under fraud in 727a2 a. He is concealing and hiding all of his non-exempt property into exempt property, so that the creditors cant reach it, and that is an intent to the defraud the creditors 3. Choice of Exemptions a. 522d You get the bankruptcy code exemptions; OR b. You get the state and federal law exemptions i. Many states though say that you can only take the state and federal exemptions 4. Tveten chose the state exemptions, and there was no limit on the amount he could put in the Lutheran Brotherhood 5. General rule is that if change your assets from non exempt to exempt, which has the consequence of insulating your assets from the reach of the creditors, is not fraudulent such that you lose your discharge 6. Court says that the conversion of non-exempt to exempt is qualified, by denial of discharge if there

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was EXTRINSIC evidence of the debtors intent to defraud creditors 7. What does the Court look to see whether this wasnt your conversion into non-exempt that is ok, and that there is extrinsic evidence? a. No limit on the conversion b. Converted his entire net worth 8. Dissent would say change MN law, or the bankruptcy code vii. How soon can a person who received a chapter 7 discharge receive another Chapter 7 discharge? 1. 8 years Filing to Filing 2. What about a 7 then 13? 4 year filing to filing to get the 13 3. What about 13 then 13? 2 year filing 4. What about a 13 then 7? 6 years, unless paid off 100% of unsecured, or 70 % and good faith plan and debtors best effort Post-Bankruptcy Discrimination a. If you are discriminating by trying to get your discharged credit, then you are going to be in violation of 524 the discharge b. Normally people are free to say they dont want deal with people who are deadbeats c. 525 i. a - a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title, solely because such bankrupt or debtor is or has been a debtor under this 1. Toth v. Michigan State Housing Development Authority a. Creditor wont give former debtor an improvement loan because she was in bankruptcy b. Normally ok, but wrinkle here is that it is a governmental unit c. Court says a Loan is not a license, permit, charter, franchise, or the like i. Court is concerned with the debtors ability to earn income in the future, and whether she does or doesnt get a home improvement loan is not like a license, permit.. . . . something that might have a bearing on her future income 2. Perez

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a. State law said that if you committed a tort while driving, you couldnt get your license back until you paid it, but the debtor had received a discharge b. Court said they you couldnt refuse the license, and was a violation b/c of the Supremacy Clause c. Congress saw this and put in 525 3. FCC v. Next Wave a. Debtor went into bankruptcy, and the FCC says that you must keep payments to FCC current, so they terminated the license b. Court says this is a situation where we have a dischargeable debt and because it wasnt paid, the FCC terminated the license, that goes against 525 c. Policy of FCC was that if you dont pay, you lose the license. That is enough for solely because ii. b - No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title iii. c Debtor may not be denied a student loan Treatment of Property Subject to Security Interests a. Chapter 7 i. 521a(2) - if an individual debtor's schedule of assets and liabilities includes debts which are secured by property of the estate 1. within thirty days after the date of the filing of a petition under chapter 7 or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, the debtor shall file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property b. Debtor can only exempt his interest in the property, not the secured partys interest i. 521a(6) - Debtor shall in a case under chapter 7 in which the debtor is an individual, not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors EITHER (A) enters into an agreement with the creditor pursuant to section 524(c) [Reaffirmation Agreement]; or (B) redeems such property from the security interest pursuant to section 722

1. Notes a. If the debtor does nothing, and just says that they are going to keep current on the payments, the stay will be lifted and the creditor can take any nonbankruptcy action they wish ii. 362h - In a case in which the debtor is an individual, the stay provided by subsection (a) is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim, and such personal property shall no longer be property of the estate if the debtor fails within the applicable time set by section 521(a)(2) -(A) to file timely any statement of intention required under section 521(a)(2) with respect to such personal property or to indicate in such statement that the debtor will either surrender such personal property or retain it and, if retaining such personal property, either redeem such personal property pursuant to section 722, enter into an agreement of the kind specified in section 524(c) applicable to the debt secured by such personal property 1. Broader than 521a6, because it isnt only for Chapter 7, and not just for debts that are for the purchase price iii. 521d - If the debtor fails timely to take the action specified in subsection (a)(6) of this section, or in paragraphs (1) and (2) of section 362(h)with respect to property as to which a creditor holds a security interest not otherwise voidable, nothing in this title shall prevent or limit the operation of a provision in the underlying lease or agreement that has the effect of placing the debtor in default under such lease or agreement by reason of the occurrence, pendency, or existence of a proceeding under this title or the insolvency of the debtor. 1. No protection to the debtor from ipso facto clauses, if they dont file a statement of intentions c. Options for the Debtor i. Surrender the collateral ii. Retain it by reaffirming the debt 524(c) iii. Or Retain it by redeem 722 iv. No 4th option to just keep on paying and not default, and just have the security interest float through. Statement of intention must say that you are either going to redeem it or reaffirm. And if the stay gets lifted because you didnt file, it doesnt matter if you didnt miss a payment, the fact that you filed bankruptcy, then you are in default[if ipso fact] and the secured party can enforce the security interest. 1. Will the secured party actually come and take the collateral? That is a different matter, but as long as there

is an ipso facto, you need to choose one of the available options d. Redemption - 722 i. An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 or has been abandoned under section 554, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption. ii. Exercising this option, though, brings about how much is the allowable secured claim, and what Valuation do you use? 1. Rash opinion Replacement value iii. Must pay the full amount upon redemption, but only for the amount of the allowed secured claim e. Reaffirmation 524c i. A contractual arrangement, whereby they agree that the debt will survive the discharge, and they agree to the terms of the debt ii. A reaffirmation of the debt, requires that such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that 1. Such agreement represents a fully informed and voluntary agreement by the debtor; 2. Such agreement does not impose an undue hardship on the debtor or a dependent of the debtor iii. There is a Presumption of when an Undue Hardship is created by an agreement 1. 524m(1) it is presumed to be an undue hardship on the debtor if the debtors monthly income less the debtors monthly expenses is less than the scheduled payments on the reaffirmed debt iv. 524c(6)(A) In a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as 1. Not imposing an undue hardship on the debtor or a dependent of the debtor; 2. In the best interest of the debtor v. Husain 1. Debtor said that he would reaffirm the debt of 15k, to keep the car worth 8k

2. Problem here, b/c attorney doesnt want to sign the affidavit stating that it would not be an undue hardship, but the attorney was negotiating the agreement for the client, so he just goes to court and says that he didnt sign it, and the court could take it for what it is worth 3. Court said no to reaffirmation, but then the Court said that the stay is not going to lifted with regard to the cars, because they filed a statement of intention to reaffirm, and under 521 that is what you have to do, as well as take steps to do what you intended to do. And debtor took the step of entering into a reaffirmation agreement, it just wasnt approved 4. What happens when the stay lifts at the end of the case? a. Court says that once the discharge is granted, creditor may not repossess the vehicles without violating the discharge injunction unless there is a subsequent payment or insurance default b. Court says that in this case 521d, does not apply, because the debtor took the action under either 521a6 or 362h, so the ipso facto clause provision in the underlying lease under 521d, would not apply 5. This would be the 4th option, make an unenforceable reaffirmation agreement, and everything will pass through, as long as you subscribe to the notion that the IPSO FACTO provision doesnt survive bankruptcy 6. Similar situation if the creditor refuses to reaffirm the debt and wont enter into the agreement a. 362h1B says that if the debtor files a statement specifying the debtors intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms, then the stay doesnt lift f. Chapter 13 g. Chapter 13 - 1325 Confirmation of plan, which is going to make it binding on all creditors i. Court shall confirm a plan if ii. 1325a5 with respect to each allowed secured claim provided for by the plan [must have one of 3 possible treatments for the secured creditors, or it can not be confirmed] 1. C debtor surrenders the property securing such claim to such holder 2. A holder of such claim has accepted the plan [voluntary] 3. B [imposes on secured party the terms of a plan that the party doesnt like] [CRAM DOWN] Plan provides that:

a. The holder of such claim retain the lien securing such claim until the earlier of: the discharge or the payment of the debt b. The value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim i. Rash deals with the amount of the allowed claim, and it adopted the replacement value standard, of 1325 [how much would it be for the debtor to replace the exact same object, so if a new one would come with a warranty, deduct the warranty] ii. 506a was amended after Rash was decided, by adding a2 1. If the debtor is an individual in a case under 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of filing of the petition without deduction for costs of sale or marketing 2. With respect to property acquired for personal, family or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined c. Value of the Collateral, as of the effective date of the plan, in order to determine under 1325a5 Figure up value of collateral, and value of the claim i. If property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts 1. Need to figure up the present value, and how much money do we need today, to get the payments in the future d. Real Estate Exceptions for the Cram Down i. b5 may modify the mortgagee by curing defaults within a reasonable time, and maintaining payments while the case is pending on which the last payment is due

after the date on which the final payment under the plan is due ii. If you have a mortgage that is not long term, where the last payment is when the plan is still in effect, c2, can modify and cram down like any other secured claim. So if there is 3 years left in mortgage, then you can pay it off in 5 and use cram down method iii. Why do you need to give an interest rate through the cram down method? 1. Opportunity Costs; Inflation; Risk, says present value iv. Till How much Interest for to get the Present Value? 1. What are the different rates? a. Prime + - plus is to take account of the risk, and prime is for person with good credit b. Contract Rate It is going to be the presumptive rate. It will change whether the market rate shifts, or the risk has shifted c. Risk Free rate d. Coerced Loan If we forced the secured party to make the loan on these terms, what would the interest rate be, by looking at comparable loans e. Cost of Funds How much would this lender have to pay, to get a loan for the funds that they are not getting 2. Where do the judges line up? a. 4 for the formula rate (prime plus) b. 4 for the contract rate c. Thomas for the risk free rate (prime) 3. Formulate Wins b/c Thomas concurs with Formula, he thinks the contract rate is going to be too high 4. Thomas says that secured creditors are already compensated in part for the risk of nonpayment through the valuation of the secured claim, we utilized a securedcreditor-friendly replacement value standard rather than the lower foreclosure value standard for valuing secured claims when a debtor has exercised Chapter 13s cram down option a. Thomas says that the risk is already built in to the valuation, and if you use an interest rate that includes risk, then you are double counting, risk in the valuation and risk in the interest rate v. Similar analysis needs to be in a Chapter 11 1. In Chapter 11, you are only going to be dealing with the Rash decision, and not 506a2, because it only applies to 7 or 13

vi. 1325 after 9 Unnumbered Paragraph 1. For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910 day preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle, acquired for the personal use of he debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during 1 year period preceding a. People thinks this means, that the bifurcation in 506a, that says if you have a bifurcated claim (part secured and part unsecured), then there would be no bifurcation b. Allowed secured claim, is your allowed claim, if 506a doesnt apply, and the bifurcation doesnt happen c. There is a 4894 balance, and the truck is 4k, the normal allowed secured claim is 4k, but if 506 doesnt apply, then the allowed secured claim would be the 4894 balance, and that is the amount that needs to be paid out d. This paragraph says vehicle for personal, so maybe could argue that it is for household use e. It does say though, any other thing of value, with a 1 year reach back, so then they might have to pay off the entire amount of the debt, even if they bought dishes within 1 year, and dishes have depreciated h. What about unsecured creditors in a Chapter 13 Plan? i. 1325a4 Best interests of creditors test ii. Court shall confirm a plan if value of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title 1. Problem here, though, because if the debtor doesnt have any assets that are unencumbered, then the unsecured creditors would get nothing, and so the debtor could make a plan that gives them 1 dollar a. 1325b1 Court may not approve the plan unless, as of the effective date of the plan i. B - plan provides that all of the debtors projected disposable income to be received in the applicable commitment period will be applied to make payments to unsecured creditors under the plan

1. This is a bit goofy, though, because projected disposable income is b2 (means current monthly income), but that means it is 6 months backwards looking, but b1B also says projected which would be forward looking a. Some courts say that Projected, means that you should look to the forward, and not look at the word current, which actually means 6 months in the past i. What about the plan length in a Chapter 13? i. 3 or 5 years, depending on whether the family income is above or below the median family income 1322d 1. If you are below the income median, it will be a 3 year plan, but a max of 5 years if over 47. Exemption Provisions i. 522d d1 homestead exemption up to 18450 d2 2950 in motor vehicle, 9850 in aggregate value of household goods, apparel, books, animals 1. In each case, it talks about the debtor exempting their interest, but this goes to recognize that if there is a LIEN on exempt property, that merely exempting it, and filing the claim of exemption does not shake off or avoid that lien 2. Have to Avoid the lien under some bankruptcy power 1. Choosing your exemptions can be fun b/c the law is not all that developed, as to what does and does not fit. Same thing is true in federal law a. In re Johnson i. Debtor wants to exempt a bus, claiming that it is a motor vehicle, and the court concludes that a motor vehicle is a motor vehicle. And that a bus is a motor vehicle ii. We allow debtors to keep a motor vehicle to get to work, but what if they dont use it to get to work? b. In re Laube i. Debtor lives in his truck, and claims that it is his homestead ii. Court says that this is a home, and it has a motor, but not a motor home, so they dont take the approach of Johnson 3. Is this this guys dwelling? This is where he wakes up in the morning 48. One big issue has been what states laws apply, if you are going to wind up in the federal and state law exemption a. Which state is going to be the state whose opt out rules apply, and which states exemption rules are you going to use

i. 523a Filing of the petition at the place in which the debtors domicile has been located for the 730 days immediately preceding the date of the filing of the petition of the petition or if the debtors domicile has not been located at a single state for such 730 day period, the place in which the debtors domicile was located for 180 days immediately preceding the 730 day period, or for a longer portion of such 180 days period than in any other place 1. Might have to construe what domicile means Domicile might have have a mental [intent to make home] and physical [where were you]

1. What do we do with Torts? a. Allowed Claim i. Can the victim proceed to litigate the liability. No. It has to go to the bankruptcy b. What happens if you have an unliquidated claim in bankruptcy? Such as a prepetition tort. i. Two Ways that you can do it 1. Value of the Claim x Likelihood percentage of winning a. Bankruptcy judge is going to decide how much the value of the claim is, the bankruptcy judge might have a little mini trial 2. Or, tort victim can ask for the stay to be lifted, so the victim can litigate it outside, and then come back into bankruptcy with a non-contingent liquidated claim c. What happens if there is not enough money to pay the tort victim? The rest of the debt is discharged d. What happens if you run over another dog during the pendency of the bankruptcy? i. The stay doesnt apply, so this tort victim can go sue the insolvent in a judicial forum ii. 362a Much of the prohibition is against creditors who are trying to recover for prepetition claims. A lot of the automatic stay doesnt apply though, but it does apply to any act to get property from the estate, or exercise control. Doesnt matter the nature of the claim, so the second dead dog owner can go litigate and get a judgment outside of bankruptcy, but the property of the estate is still insulated, and the tort winner wont be able to seize assets, because the stay does prohibit that iii. It is not an allowed claim, so the 2nd dead dog wont get a share of the bankruptcy, but the claim will also not be discharged

1. Red Riding Hood bought all the shares of Wolf & Vine, and RR owed all the money, and then there was a merger, and Wolf & Vine took on all of their debt a. What would have happened if W&V had issued a guaranty? You have someone incurring an obligation by issuing a guaranty, but what value do you get for issuing a guaranty? i. This is known as an upstream guaranty and it could be a good thing, where the sub guarantees the parent, and there might be a benefit to the sub 1. Suppose there is a 300k guaranty, is this a 300k liability? a. Or do you take into account that the subsidiary may never have to pay? Take into Account that you might not have to pay i. Courts usually get this right and say that if you incur an obligation that you might not have to pay, then the courts will reduce this obligation. So 10 % chance of paying 300k, then there is only going to have 30k put down as a liability ii. If you are a guarantor and you pay, then you have a right to recover from the person that you are a surety for 1. Entitled to a right of reimbursement 2. So if a person gives a guaranty, then you have to take into account whether there is a reasonably equivalent value (hard to find, What did the lender give you for the obligation?, but does the parent provide some great benefit to the sub that?), then solvency (put a dollar value on the guarantee, as a function of the chances that they are going to have to pay and the amount), but also take into account the reimbursement right, for the right that the surety has a right against the person they are the surety for 3. When do you test the solvency? 6(5) Measure this at the time you enter into the guaranty, and then it doesnt matter if it becomes insolvent later 4. Even if you pay what you owe or grant the security interest, then these can be avoided later on by the trustee