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Bankruptcy Notes

- The Nature of Debt and the Meaning of Life - Non-judicial Collection methods
Debt: Obligation to pay money a court of competent jurisdiction will enforce Classification of Debt: (1) Legal Status: - Contractual (voluntary) - Implied at law (torts) - Statutory Obligation (tax) (2) Purpose: - Consumer (personal, family, household) - Business (trying to make profit) Constitution: Art.1 8 c.4 The right for Congress to establish uniform laws of bankruptcies throughout the U.S. United States v. Kras Holding: No constitutional or fundamental right to discharge bankruptcy. Bankruptcy legislation is in area of legislation What lawsuit does/doesnt do Does: money judgment (liability + judgment amount) Doesnt: make debtor pay (not self-executory) Peaceful Repo is lawful (as long as doesnt break peace) possible liability for conversion want to document (video and witnesses) Religious Notions (Moral Obligation): Owe to God, The wicked borrow and do not repay. Let no debt stand outstanding except to love others. Why people repay debts (MEPRS): (1) Moral Duty (obligation: right thing to do) (2) Fear of Public Enforcement (3) Peer Group Pressure/Disapproval (4) Reward when Promise kept (5) Social Expectation Leverage: Can get leverage against debtor if know what button to push. similar to possessing nukes Notions of Punishment: (1) Retribution (sanctions) notion of proportionality (2) Utilitarian (appropriate when overall consequences are better) Look at Hostess Articles Chapter 22? (When a corporate files for Chapter 11 for 2


- Priorities Among Creditors - Other Collection Issues

What is debt? Good debt/bad debt? Mortgage Classification of debt by legal status? (1) voluntary (2) implied in law (3) statutory by purpose? (1) consumer (2) business All debts incur danger of default. Constitution Art.1 8 c.4 < Questions > (1) Why have Americans taken on so much debt? (greed? Excess? Credit?) Default judgment: doesnt respond Consent judgment: both parties agree (not-uncommon) Judgment (expedites legal process) by confession (illegal in many states): if someone defaults, someone can gain judgment on that person automatically (debtor is in default by default) see Overmeyer v. Frick Co. JbC ok in business setting, not in consumer Leverage who has it? Question 1.2 (pg 29) - What is strategy going to be? - What order will Talis put priority on? - How could we improve legal position? - We want to know full picture more information needed

- Collection Remedies
Why people repay debts? (5) 3 kinds of judgments? (1) consent judgment: both parties agree to stipulations/may reduce (2) default judgment: didnt respond according to rules of civil procedure caveat) has to prove damages (3) judgment by confession: must be included in original document Most states prohibit (class D misdemeanor) consumer or business? Fair Credit Reporting Act (FCRA) - Gives debtor opportunity to fix monster inaccurate information - Asked to enter own view regarding disputable information - Entitled to copy of credit report Fair Debt Collection Practices Act Are attorneys bound by FDCPA? Yes, if engaged in collection practices. - Cant harass consumer debtor to gain info on them - Cant call at unusual hours - Cant call if you know debtor is represented by attorney - Cant call debtor at work if you know that employer prohibits - Caller must stop communicating if debtor requests cessation - Collection Agency cant use threatening language - Cant impersonate someone else Judgment Creditors Objectives (ILKE) (IMPORTANT!! conceptual framework for all cases) (1) Identify property available to satisfy judgment - unencumbered assets (assets with no security interest) - non-exempt assets (2) Locate assets (physical) (3) Keep assets in place (prevent transfer, sale, disposition) (4) Realizing (execute) assets (levying, liquidating) Beneficial to client ** Dont get fixed on one asset!! Multiple assets!! Should always have backup plan!! Workout: Non-bankruptcy negotiated settlement that consensually modifies contractual rights of creditors, in order to resolve the financial difficulties of debtors Readjustment in creditors expectations! (possible in both consumer/business) Examples) may give an extra day, change in interest rate, change in issuance of dividend, allow debtor some security interest status Why workout? - can avoid bankruptcy, avoid costs - can influence business - found out security interest doesnt exist Problems? - Not feasible - General economic situation - Problem with complexity of claims (unions, environmental, products liability, tax) Aging judgments (law rewards the diligent) (1) Dormancy: Lack of effort to collect still valid but unenforceable (mostly procedural and so could probably revive) Some creditors may attempt to collect once a year to keep it alive (2) Limitations: Judgment no longer (good, valid, enforceable) ways around file new claim based on old judgment before limitations and get new judgment and extend another 10 years.

- Collection Remedies
Lender Liability: Popular back in the 1980s, Borrower sues lender claiming that lender put borrower in bad situation. Lawsuit (3): (1) Liabilities, (2) Damages, (3) Legal foundation for judgment creditor for any future collection activities. Collection Remedies (Comprehensive multi-collection efforts is best!) (1) Liens, judgment liens (a) recordation: takes abstract/memorandum of judgment and record it in county clerks office Why engage in recordation give notice to world of debt (establishes priority) Important because has effect on property acquired in future until debt is settled. (Very powerful!) (2) Turnover orders (citation to deliver assets): combination of collection tool and discovery device/ way of identifying assets (a) file from pleading: require debtor to come to court with documents (information) (3) Consensual lien: debtor voluntarily gives lien (4) Levy, writ of execution (utilizing sheriff system) Writ of execution: writ that authorizes sheriff to find, seize, liquidate, sell as the law requires based upon priorities Levy: procedure, seizure and sale of property (to obtain) (assumption: unencumbered & non-exempt) Seizure of real-estate and unmoveable/hard to move items. Tag effectively puts property in sheriffs control. When is lien created? (1) Writ of execution is issued (2) Upon delivery of writ to sheriff (more common) * What helps one creditor hurts other creditors (1) individual remedies (2) collective remedies (5) Garnishment: court order requiring 3 party to turnover something of value to judgment creditor upside is that you can collect quickly? Types: (1) Wage garnishment: powerful weapon, but Downside: could make judgment debtor file for bankruptcy that effectively wipes out judgment debtors debt think twice before! Law: cant get fired for having one wage garnishment (2) Asset garnishment: same general concept but asking for assets * Family support garnishment usually trumps other types of garnishment Limits to garnishment: ordinarily 25% of paycheck (disposable income)

- Collection Remedies
If judgment debtor is at edge (tilting) of bankruptcy Prof: monitor the judgment debtor, put burden of reporting changes to judgment debtor (file tax, new employment, etc.) Levy, writ of execution (exempted items vary by States, heavily controlled) Sheriff look, identify property (specific) nd Priority (1) personal property (debtor can choose/claim exempt), (2) real estate (2 priority because we dont want to boot out of home) (a) non-homestead property (b) residence is always last Appraisement statutes (what property will be sold for how much?): Property disposed is done properly, IN 2/3 of appraisal value JD, JC each appoint one appraiser each and third is selected by both appraisers Sheriff can look for specific property, also sheriff can go look multiple times Problem Set 2 (pg. 53)

Judgment liens: On judgment creditor to report satisfactory payment (burden) file satisfaction Writ of body attachment (writ of attachment: court order) - Judgment debtor is ordered to pay x/month - Judgment debtor doesnt pay - Petition for show of cause no show contempt - Writ of body attachment works on any random stop (can get picked up during speeding violation) not because failing to pay but failing to appear in court

- Exemptions
Writ of body attachment Levy of execution (priority) Appraisal of property Pre-judgment (provisional) Remedies (pg. 52): Looking to preserve status-quo Back in the days creditor friendly Get clerk of court to sign-off collection Basis: (1) Statutory: establish (a) out of State defendant (b) defendant is risk of flight (c) decamping (hiding and going out back door) (d) liquidate risk (2) Constitutional: due process issue Read: North Georgia Finishing v. Di-Chem (a) have to allege with specificity of entitlement (b) requires judicial officer to order (c) order has to provide (timely hearing post seizure) Read: Grupo Mexicano de Desarrollo Limits placed on federal equity jurisdiction Contracts case workout failed injunction BUTA US CT cant enter injunction judgment on foreign jurisdiction ** Get the judgment!!! (No judgment No collection) Exemptions (for individuals only, corporations cant claim): property not subject to levy, sale, or any other final process and thus not available to satisfy judgment To be liberally construed in favor of debtor (differs by State constitutions, State statutes, federal statutes, case law $ amounts and categories) Application: In all proceedings except in consensual settings such as mortgage Exempt by: (1) category (2) dollar amount Sources of exemptions: (1) State constitution (2) Implemented by state statute (3) 11 USC 522 Bankruptcy code (federal) (4) Other sprinkles (social security, veterans benefits) Public Policy Reasons: Debtor should not be left to absolute destitution. (liberally construed in favor of debtor) (1) Safety net (social fabric) (2) Debtor & dependants shouldnt have to become ward or charges of States (3) Concept of fresh start (something to start with) (4) Some personal items have little intrinsic value but significant value to family (family pet, bible)

- Exemptions
Pg. 168 Texas Exemption Statutes (liberal = generous) foundation was based on people fleeing to west Homestead unlimited dollar amount Category: (1) Urban (10 acres), (2) Rural (200 acres) 41.001(c) The homestead claimants proceeds of a sale of a homestead are not subject to seizure for a creditors claim for six months after the date of sale. debtors can move! After claiming bankruptcy. Personal property - $60,000 (1) current wages no wage garnishment (2) professionally prescribed health aids diamond encrusted wheel chair? (3) alimony 42.003 Designation of exempt property Burden is on debtor to tell sheriff what he could take Pg. 196 Problem set 8 Make $250,000 structured settlement (annuity benefits)

- Fraudulent Transfers
Read Matter of Agnew, 818 F.2d 1284 (7 Cir. 1987) Exemptions: look at from State standpoint (Constitution, statutes, etc.) (1) Equity in property ex) only when equity exists in property (2) Exempt categories ex) funky categories guns, livestock, church pew, tools of trade Code 522 exempt for bankruptcy purposes If State opted out (30 something States) must use State law Supreme Court case Uniformity of exemptions laws passed on uniformity must be uniform throughout the state but not by State geographical in nature but not personal U.S. Trustee Program (48 States) Bankruptcy Administrators (Alabama, N. Carolina?) BUT, how can you have uniform if two systems? O.K. as long as uniform within State Tenancy by the entireties (only between spouses) C/L doctrine that has become codified Concept: husband and wife is one unit if one party dies first, other party gets real-estate in entirety without judgment. Ex) Prof incurs debt and dies collectors cant collect from real-estate Ways around: (1) Joint debt, (2) Divorce can sever entirety, (3) One spouse can convey to other, (4) Consensual lien - If property is sold, if money is traceable, exempt - Tenancy by the entirety is applicable to multi-real-estate property Fraudulent Conveyance (Transfer) Subject to execution as if still being held by transferor (debtor). Twynes Case (6) (see handout) Statute of Elizabeth (Fraudulent Conveyance) relied on badges of fraud = circumstantial evidence (1) signs and marks of fraud badge test (smells of fraud) (2) donor continued in possession used them as his own (retained ownership) (3) made in secret (4) made pending writ (5) trust (agreement) between parties (6) transfer said to be gift Issues: (1) moral, (2) creditor expectations Twyne distinguishes: (1) good/bad faith, (2) agreements Classic Fraudulent Conveyance Actual Fraudulent Intent easy rd but, when (1) innocent 3 party and (2) sales price similar to market value Fraudulent? Focus on timing (view from reasonable creditors perspective)

- Fraudulent Transfers
Gives unsecured creditors leverage Grupo Mexicano: Secured/Judgment creditors can get protection by getting security/judgment Creditor obtains judgment tries to execute no property doesnt pass badges of fraud (smell test) files suit against transferee (because is actual owner of property) (1) Looking for assets (a) not exempt and (b) not encumbered (prior valid security interest) (2) Fraudulent conveyance: any creditor at any time can bring action within statute of limitations (a) Actual fraud (dishonest deliberate motive - intent) So so baddishonest intent is so so bad Badges of Fraud: simple inferences if x, then y (not legal presumption) just look at facts and make factual determination (b) Constructive fraud: dont have to show fraud fraud is established as a matter of law. Have to prove: (i) Debtor didnt receive reasonably equivalent value (ii) Debtor was involved/engaged in business with/leaving him with insufficient capital (iii) Debtor is about to incur debts with actual/imputed intention not to pay back Normally brings both suits!!! (Actual fraud and constructive fraud)

(3) Debtor is insolvent At time of transaction was debtor insolvent? Or did transaction cause insolvency? Reasonably equivalent value SCT: support to transferee cases (1) BFB v. Resolution Very important to have stability in real-estate market (if follows State law, foreclosure sale is presumptively valid) (2) Transaction recognized in industry ex) auto sales auction Remedy - File suitwhy? (1) move property back to debtor, (2) move money in lieu back to debtor Ex) (1) Good faith transferee (2) Reasonably good equivalent value transferee keeps property (not going to punish because innocent) ex) (1) Good faith transferee, (2) paid too little less protection ex) (!) Bad faith transferee no protection Badges of Fraud (Modern day): (1) Transfer is not in the ordinary course of debtors business (2) Asset change due to transaction: transaction caused insolvency? (3) Threat or existence of litigation (4) Receive or benefit less than reasonably equivalent value (5) Secrecy or deviation of transaction (6) Retention of transferor/debtor of ownership (7) Transfer to family members/insiders (8) Retention of assets with highly questionable value

(9) Hurried set of contemporaneous transfers (10) Transfer results in transferors insolvency Bay Plastics Inc. LBO reasonable expectation of creditors changed Courts will see whether (1) actual fraud? (2) constructive fraud?

- State Collective Remedies

Fraudulent Conveyance Law is mainly for unsecured - Did LBO render company insolvent? - Did transaction leave company with little operating cash? - What did company gain (get in return?) State Collective Remedies (alternative to bankruptcy) insolvency - Shift focus to whats good for all creditors - Composition: creditor accepts lesser sum to satisfy debt - Extension: original amount is in place but agreed to push back - If too many issues at hand o ABC (Assignment for the Benefit of Creditors) Out of court assignment where debtor assigns (transfers) all of nonexempt property to assignee, who holds, liquidates, and distributes to creditors (pro-rata unsecured) Difference from bankruptcy is that ABC doesnt get discharge of debt only federal system can get you discharge Non-rehabilitative Not reorganization Just State collective remedy Positive law doesnt change often (predictability) Based on contract law States duty to help out? ABC (1) (2) maximize value for creditors (3) facilitate acquisition of assets out of bankruptcy context (4) quick, nimble, less expensive, less embarrassing Different types of ABC (1) Statutory (ex. NY has comprehensive ABC) - distinguish ABC (property law) from composition/extension (mainly contractual) - cost/time efficient - more/less court involvement - allows debtor to choose assignee (panel of trustees in bankruptcy) Assignment Agreement (1) has to be right? (2) has to be recorded (3) full/complete description of property (play by the rules) (4) assignment must be under oath Assignee - usually person that is used to dealing with this type of situation - bond required - files full/complete schedule assets & liabilities (full disclosure) - oath (fiduciary duty) Assignees duties (1) give notice of appointment to creditors (2) file complete inventory (3) get appraisals of property (4) collect assets (5) solicits claims of creditors

(6) some states require reports (IN 6 month status report) ABC is not like Chapter 11 (not rehabilitative) - possible for assignee to keep business open for limited time and has to let creditors know of intent Although not discharge per se, can result in de facto discharge Overall open/transparent process Creditors options: (1) dont participate in assignment process (2) threaten/actually file involuntary bankruptcy (3) possibility of State court receivership appointment

- State Collective Remedies

How to define insolvency: (1) Bankruptcy code (liability exceeds assets) (2) Unable to pay bills Workout: consensual arrangement to readjust creditor expectations Methods: (1) extension: same amount but extending payment date (2) composition: changing essential term of agreement ABC: assigning all non-exempt property to assignee Two types of assignments: (1) Statutory: all of debtors assets (2) C/L ABC: convey less than all of assets (relay 80% to assignee, keep 20% to continue operations) ABC pros: (1) Cheaper (2) Quicker (3) Easy to follow (4) Debtor gets to choose assignee Drawback: have to convince creditors (full disclosure tax returns, financial statements, inventory, customer list, documentation, etc.) Assignee will require creditors to file claims screen out valid claims ABC has less publicity, less stigma, advantageous to confer company to 3 party purchaser can keep company open for limited time (since assignee is fulfilling fiduciary duty) Bankruptcy process is well known by creditors. ABC might need sales-pitch. What assignee (trustee) must do: (1) Give notice to world (2) Post bond (3) File complete inventory (full disclosure) (4) Get appraisal (full disclosure) (5) Collect debts owed to debtor (6) Solicit/receive claims (7) Reporting requirements (8) Take control of assets creditor can claim contrary ex) 3 days may be o.k. while 27 may not look at State court law & good faith, etc. Representing Creditor (1) Attack procedural (statutory) defect what is creditor trying to achieve? (2) Take no action (3) Threat of filing involuntary bankruptcy Jackup to another level may delay process (debtor has to file response) (4) State court receivership appointment Bankruptcy code 547 preferences California once said they could dictate preferences but preferences is bankruptcy domain See Receivership handout

- Introduction to Bankruptcy, the Code, and the Rules

Receivership: If owner can/thinks he can turnaround company File chapter 11 and regain possession State remedies might not be adequate Must try to enhance both (1) creditors remedy and (2) debtors protection Goals & Purposes of Bankruptcy (5) (1) Fresh start for individuals exceptions discharge can be denied bankruptcy could become sole creditor remedy - certain debts as public policy arent dischargeable (bad boy) - no discharges for corporations (2) Interested in rehabilitation/reorganization of businesses (3) Maximizing value of recovery for creditors (avoid fire sales) (4) Preservation of estate (enhancing value) make sure asset doesnt dissipate but goes to creditor (5) Efficient administration - 11 U.S.C. 704 Duties of trustee - Minimize non-bankruptcy rights - Must be aware of other rights BUT, (1) and (3) are contradicting (tension) Bankruptcy underpinnings in Constitution Supremacy Clause Federal law trumps State law Bankruptcy: allocation of assets and losses Uniformity of bankruptcy code doesnt mean uniformity over all States Accept State law. Uniformity within State (exemptions, property, etc.) 11 U.S.C. 522 Exemptions Bankruptcy code lets States use 522 or opt out. Relieve the honest debtor from the oppressive indebtedness and start afresh...(honest but unfortunate debtor) Bankruptcy General - Bankruptcy Code o Read 101, 102 (rules of construction) - Correct term is debtors, not bankrupts - Debtor in possession is Chapter 11 case - Bankruptcy judge, not referee! - Bankruptcy judges Art.1 judge (limited jurisdiction)

- Debtor Eligibility and Forms of Bankruptcy Relief

11 U.S.C. 105 Power of court Bankruptcy superpowers Cases restraining 105 Chronological: (1) (2) U.S. Energy equitable (3) K-Mart equitable (4) Morama good faith/bad faith? Can use 105 when power is not directly in code Purpose of Bankruptcy (1) Creditors remedy (2) Debtors right - Fresh start (SCT calls fundamental concept) Hierarchy of Bankruptcy Law (1) Bankruptcy Code (2) Bankruptcy Rules (3) Local Rules Exists to implement federal code & rules Code (9 Chapters) Chapter 1 Definitions & Eligibility (General Provisions) Applies in all bankruptcy filings Chapter 3 Administration (commencement, officers, administration, administrative powers) Applies to all bankruptcies Chapter 5 Creditors, debtors, and the estate (Creditors and claims (important if you are creditor), Debtors duties and benefits) Applies to all bankruptcy filings Chapters 1,3, 5 apply across the board Chapter 7 Liquidation (most cases) Consumer & straight liquidation Chapter 9 Limited to municipality (not used as much as 7 or 11) Must be permitted by State Constitution Chapter 11 Reorganization (typically corporations but SCT held individual can also file) can act as own trustee vs Chapter 7 Chapter 12 Family farmer and family fisherman Chapter 13 Similar to Chapter 11 but for little guys Rehabilitate individual = wage earners) Chapter 15 Cross-border bankruptcy (ancillary) Ex) bankruptcy filed in foreign country but may have assets or suit pending in U.S. Bankruptcy is focused on motion practice (not adversary) Rule 7001 states all situations that require adversary proceedings to litigate (filed separately from bankruptcy) Eligibility 109 not jurisdictional, person filing must establish eligibility 109(a) Person (41), Debtor (13) When looking at code, see what it tells you ex) Debtor may be illegal alien since not prohibited

When checking code for debtor eligibility

109 and then 101 for definition

109(b) broad (almost anyone can file) 109(c) municipality 101 109(e) individual with regular income 101 dollar amount 104 (can get thrown out of 13 and sent to 11) 109(f) family farmer 101 109(g) bad faith filing 109(h) some judges can require prior mandatory credit counseling

- Exemptions, exemption planning, asset protection and ethics issues

Trustee Gary D. Boyn Claim right to payment (broad definition on purpose) filed through proof of claim (voucher, etc) Majority are no asset cases (exempt) 90% of cases Debtors might claim disputed (most creditors will not go through trouble) burden shifts to creditors to prove otherwise Discharge is the goal! (trumps State law) Proof of claim pre-printed form (fairly simple) attorney doesnt have to file necessarily Informal proof of claim weak but should ask client if anything was done to put trustee on notice Reaffirmation long, cumbersome process (basically real contract) - attorney has to sign off (good idea) affidavit Creditor priority (1) Domestic support obligation Redemption allow debtors fresh start along with (1) reaffirmation (2) exemption pay redemption amount (only possible in lump sum, if creditor insists according to statute) Creditors can simply say no to (1) reaffirmation (2) redemption 523 1:1 (debtor:creditor) issue, normally doesnt impact all Cr. (protects single Cr.) 727 Adversary debtor behaved in bad conduct, they shouldnt get a discharge on anything (basically fraud claim) 727 boom!, 523 debtor still owes to singled out Cr. But other debts gone !!! 14 days to appeal to bankruptcy !!! 525 Debtor will enjoy some protection from discriminatory treatment if debtor filed bankruptcy ex) 525(a) Gov, unit may not revoke, deny renewal of licenseetc. 525(b) no private employer may terminate employment of or discriminate against 526, 527, 528 Debt relief agency (consumer protection) Any person that provides bankruptcy advice for payment or any other consideration Passed by Congress because Congress was skeptical that bankruptcy attorneys were doing good for clients Criminal Aspect of Bankruptcy 18 U.S.C. 551 152 laundry list (knowingly, fraudulently, concealing) Bust out schemes Prof. likes smell test Any trial judge will inevitably come to a decision that a case smells, doesnt pass the smell test.

- Chapter 11 Reorganization Overview

Chapter 13 success rates arent that high many are transferred to Chapter 7 Chapter 13 is good for debtors (save a lot of assets) repayment plan to creditors (no requirement % on recovery) Chapter 11 Usually another set (group) of attorneys from CH 7,9, & 13 109 Who may be a debtor? - No eligibility $ amount, mandatory credit counseling exempt since corporation 1101 (1) Debtor in Possession (DIP) SCT: sensible to view as same entity as before filing of bankruptcy but empowered by virtue of the bankruptcy code to deal with its contracts and property in ways it would not have been able to prior to filing of bankruptcy (2) Plan Consummation 1102: Creditors committee - Trustee has in all Chapter 11s responsibility to for creditors (unsecured usually) committee that will represent rights - Duty of a committee: Consult debtor, investigate debtor, participate in formation of plan 1104: Appointment of trustee or examiner (a)(1) Fraud, dishonesty, gross mismanagement 1107 DIP has broad powers (Can run company as usual) but cannot be compensated as other officers would under the bankruptcy code 1114 Payment of insurance benefits to retired employees 1115 Property of Estate (Chapter 11 is chapter 13 on steroids) 1121 Who may file a plan: Only DIP until 120 days 1123 Contents of Plan (a) shall (b) may 1124 Impairment of claims or interests 1125 Solicitation on the plan 1126 Acceptance of plan Impaired parties get to vote 1127 Modification 1128 Confirmation hearing 1129 Confirmation of plan * Chapter 11 filing is an invitation to negotiation!

- Chapter 11 Reorganization
Venue (What is the proper venue?) Debtor in possession. New entity? SCOTUS...said not new entity. Same entity empowered by bankruptcy code to take care of assets... Who can be a debtor? See 109... Chapter 11 (what's needed? Cash, Friends, and a Plan!) (1) Cash is important in Chapter 11 because... (a) Need cash to keep business going...(Chapter 11 is reorganization) pay employees, pay bills, etc. (b) Necessary to fund the plan. (ex) will pay 20 on the dollar) make the plan feasible. Debtor stops paying bills to accumulate cash. (2) Friends are important because... (a) Need the support of friends during the pendency of the case (want to continue operating business and therefore need clients) (b) Need friends to vote for your plan (Secured creditors, unsecured creditors, taxing authority...) need impaired voting for your plan. (ex) gerrymandering a category, pay more to a certain category...?) (3) Need a plan to sell because... (a) Plan to continue operating (b) Persuade constituencies that you know what the problem was and have formalized a plan (new contract). Two General approaches to Chapter 11 (1) Realistic Approach Bankruptcy is all about the allocation of losses amongst disappointed parties (2) Positive Approach Participatory process leading to confirmation of a consensual plan Good thing about Chapter 11 and why it has become more acceptable (5) (1) Companies are more used to Chapter 11 process (2) Lenders are more willing to work with distressed debtors because they know what the downside is and the only plausible option is to work with Chapter 11 debtors (3) Market encourages filing of Chapter 11 bankruptcy. Market is not as super negative when a company files since they are used to the venue. (4) Employees and unions 1113 and 1114. Unions hate the notion of Chapter 11 due to the 1113 and 1114. Although unions will never admit that they like bankruptcy filing, there could be a situation where they might not have liked the previous CEO and the bankruptcy filing brought in new management. (5) Bankruptcy practitioners are more sophisticated and are better at what they do. Terminology! (1) Burn-rate: Administrative expenses will be incurred by Chapter 11 debtors. Rate at which cash is expended in a Chapter 11. -> Crater (2) Administrative Insolvency: Administrative costs will eat up the case. Can't pay the administrators. (3) Hair-cut: Client will take a 50% haircut means that if they were owed 10mn, they will only get 5mn. (4) Drop-dead: If entered into drop-dead provision and debtor doesn't comply, deal is droppeddead. (5) Fresh start: Although not a running start, debtor gets a new start. (6) Good faith/Bad faith: Did the debtor file the bankruptcy/plan in good faith? Are the debtors complying with the bankruptcy code? If not in good faith, want to tell the judge.

(7) Loading up: Context of consumer case (Chapter 7 and 13). Excessive spending on the eve of filing bankruptcy. (8) Abusive serial filing: Nothing wrong with serial filing. However, when it becomes abusive and somebody tries to use the system or gain an automatic stay. No good faith intent with complying with the Bankruptcy code. (9) Turnaround management: Higher guys that will come in and turnaround the company. (10) Deepening insolvency: Lender starts to manage and the financial situation gets worse. (deepening loss of money) shareholders might file an action against lender. (11) Pre-pack Chapter 11: Debtor has worked out a deal before filing for bankruptcy. Everyone knows whats going to happen before filing. Filing is completed on fast-track (expedited). (12) First-day motions/first-day orders: Things that need to be done on the first day. Lot have to do with findings... (13) Creditor fatigue/Borrower fatigue/Lender fatigue: May or may not work to debtors advantage. Filing a Chapter 11 Bankruptcy is "an invitation to negotiation."

- Chapter 11 Reorganization
How many days to file a bankruptcy appeal? 14 days Rule 8002(c)(2) - 14 days to appeal exception (as long as within 21 days and excusable excuse) BUT, focus on 14 days! Hard to get exception...) Chapter 11 bankruptcy All about three things... (1) Money: to operate while pending (2) Friends: to continue to do business with (3) Plans Competing goals of Chapter 11 bankruptcy (1) Enhance value of business: organization sense (2) Establish orderly distribution scheme: distribution to the creditors in a single form (3) Attempt to internalize cost of bankruptcy and default (4) Establish privately monitored system: Trustee will try to establish a creditors' committee, consultation of parties with interest, negotiation behind the scene, ultimately creditors get to vote (5) Protecting third parties

Preserve (Maximize) value (amongst many different parties), Readjust expectations 363 Sales, Use, and Lease of property (If in the 300s, section applies to all chapters of bankruptcy!) Court must authorize debtor unless in the ordinary course of business. If not in the ordinary course, debtor must apply for special permission. Have to check what business the debtor is in. Different tests to determine the business. Test ex. - (1) Does it subject creditors to new risk? (ex. used car salesman selling cars is what creditors want) If unusual deal, debtor has to file motion beforehand (good faith argument why deal will be beneficial) - give notice to everybody - people have opportunity to object Cash collateral: 363(a) cash collateral means cash, negotiable instruments, documents of title, securities... -> In order to continue to operate, you will need cash. The problem is that their is a restriction on what the debtor can do with cash collateral... Can't use cash collateral unless... (1) Non-debtor entity (whoever has security interest) consents. But usually there are conditions attached. (2) Court order allows you to use (usually conditions attached also) 361 Adequate protection (1) Cash payment or periodic cash payments When no cash (2) Provide additional or replacement lien When no unencumbered assets (3) indubitable equivalent (ex. equity cushion) For adequate protection debtor will probably have to provide budget. Insurance. Cosigners. 364 Obtaining Credit (1) Debtor in Possession (DIP) Financing (2) Bridge Financing

- Chapter 11 Reorganization
Debtor in Possession (DIP): Has to know business to know whether ordinary course of business. Are the creditors in greater risk? ex) Car Dealer tries to sell entire lot...(kinda fishy) If someone enters into non-ordinary course of business - Court will ask debtor why he is doing particular act. Is debtor in good faith? Cash Collateral 363(a): Cash that someone has a security interest in. What are the restrictions in which DIP can use CC? (1) Creditor consent (2) Court order Have to provide "Adequate Protection" ex) Rolling stock "truck and trailers" - Necessity for business. What can you use for adequate protection? (1) Cash payment or periodic cash payments (cash is king!) When no cash (2) Provide additional or replacement lien When no unencumbered assets (3) indubitable equivalent (ex. equity cushion) For adequate protection debtor will probably have to provide budget. Insurance. Cosigners. * Thing that you can't do: Can't give administrative expense (ex. expense critical to ongoing of business because if business fails there is risk of losing all administrative expenses) as adequate protection. Recent phenomena 363 - Sales (stalking horse not, etc...can buy...) Buyers are buying assets of company rather than reorganization efforts. Stalking Horse: Buyer who signs a purchase agreement (subject to (1) court approval and (2) competitive bidding) agreeing to buy certain assets Other protections for SH: (1) breakup fees, (2) earnest money deposit, (3) union concessions Financing for 363 Interim financing. Lot of lenders that will lend bridge loans between filing and execution. There will be exit costs. (needs exit financing). Problem: if sale is specific (buys only certain assets) Contracts: buyer can assume certain contracts but don't need to assume all. Purchase agreement: contingency withholdings, final disposition of the breakup fee money Bottom line: Seeing a lot more of 363 sales of good assets and then motion to chapter 7 than reorganization within chapter 11. Pre-Bankruptcy Exemption Planning (Read Smiley? case) Purpose: Maximize exemptions (1) (2) move assets into exemption friendly states (Florida, Texas, Kansas...) Smiley (1) Nothing inherently wrong with pre-bankruptcy exemption planning (Congress said its ok) (2) Can't deceive (must be in good faith), can't mislead, can't defraud (3) Don't have to prove all bad faith but just hindrance --> Although you can engage in planning, you can't go outside of the rules (motivation of intent was to hinder and delay. (Shows you the extent of what you can do) 548(e)(1) and (2) - The trustee may void (reach back, claw back) any transfer of an interest of the debtor in property that was made within 10 years of filing of bankruptcy.

- Chapter 11 Reorganization
Someone (usually debtor), can be 3rd party, plan gets submitted to creditor. At least 1 class of unsecured creditors votes against plan. (because interests were not jeopardized - unimpaired) Not end of world for DIP... Cram down provisions are available to enforce plan on everyone, including unimpaired creditors that voted against. (kind of safe harbor) (1) lobby constituents to vote for plan (2) cram down which includes the absolute priority rule * but must have at least one consenting class of creditors to have the plan confirmed (even by cram down) What is judge going to do... (1) look at code 1129 - confirmation of the plan 1129(b)(1) and (2) 1129(b)(1) - plan does not discriminate unfairly, is fair and equitable with respect to each class of the claims... Hypo) If junior unsecured claim doesn't approve of plan and judge effects cram down... (junior unsecured claim cannot be paid until every other creditor is paid) Absolute Priority Rule: Junior Unsecured Creditors get paid before equity shareholders! < CRAM DOWN > Impaired class that is unsecured --> votes against the plan Debtor can vote 1129 cram down --> must satisfy judge that he did everything under 1129 As long as not discriminate unfairly (can discriminate some), and is fair and equitable, CT will have to approve the plan despite being voted down by a class < ABSOLUTE PRIORITY > Equity shareholders can receive nothing under the plan until all the junior unsecured creditors get payed. Forces shareholders to contribute new capital (new value - cash) before they can retain shareholder interest in corporation. *************************************************************************************************************** Core Issues of Bankruptcy (1) Jurisdiction: Historically had bankruptcy referees handle bankruptcy cases. Decades ago, SCT said need bankruptcy CTs (not article III). Although not article III judges, a part of the district CT. Congress comes up with 28 USC 157 - various things that bankruptcy judges can do regarding "core" proceedings. There was no problem until Stern v. Marshall. *************************************************************************************************************** Pre-bankruptcy exemption planning in Re Smiley, 864 F.2d 562, (1989) Moved all assets to Kansas... 548(e) Debtor made such transfer with actual intent to hinder delay for fraud to which the debtor was or became... Duress provision: you got my trust...

- Chapter 12 Family Farmer Fisherman and Chapter 15 Transnational Bankruptcies

363 - doesn't require a stalking horse to buy (anyone else can also buy) Absolute priority rule: Have to have at lease one impaired class voting for the plan (another reason you should have friends...) But if everyone votes against plan, 1129(b)(2)(B) - absolute priority rule - all classes in front of equity shareholders must be paid in full. --> Before equity shareholders can retain their interest, must pay the creditors in full Nix v. Whiteside (1986) Options available to attorney (1) Should try to dissuade client (2) Can withdraw from representation when the client threatens to commit perjury (Noisy withdrawal - when more than economics is involved) Chapter 12 109(f) - Only a family farmer or family fisherman with regular annual income may be a debtor under chapter 12 of this title. Hybrid 11 and 13. Extended every 2 years and recently made permanent. Chapter 15 Totally different from other chapters. (newest chapter added in 2005) Need for a good interface between American bankruptcy law and foreign bankruptcy law. Three general parts (1) ancillary to a primary proceeding brought in another country (2) debtor or creditor may file a full blown bankruptcy in the United States if the structure of the bankruptcy is very complex (3) A US court may authorize a trustee or examiner or some other entity created by the court to act on behalf of the US party EXAM) What kind of bankruptcy system do we have? 707(b)(3) 2/3 of 13 filers don't make it