Elements of Bankruptcy, 6th
Author:
Baird, Douglas G.
Edition:
6th
Copyright Date:
2014
16 chapters
have results for bankruptcy
Chapter One. A Road Map to Bankruptcy Law 85 results (showing 5 best matches)
- Bankruptcy courts are adjuncts of the district courts, and §1334 must be read in conjunction with §157(a) of Title 28. Section 157 allows the district court to “refer” any or all bankruptcy cases to bankruptcy judges. It also provides that the district court may refer any or all proceedings arising under the Bankruptcy Code, or arising in or related to a bankruptcy case, to bankruptcy judges. In all district courts this practice is firmly institutionalized. Bankruptcy petitions are, as a practical matter, filed in the bankruptcy courts. The purpose of this circumlocution is to ensure that the dictates of Article III are satisfied. The bankruptcy judge is not acting autonomously and is not exercising judicial power because the bankruptcy judge is merely an adjunct to the district court. Just as a court of equity can appoint a special master, the reasoning goes, the district court can choose to delegate bankruptcy cases to bankruptcy judges.
- The Bankruptcy Code is embodied in Title 11 of the United States Code. Although easily located, bankruptcy law remains a common law discipline in which a lawyer must reason by analogy and constantly be aware of general principles. Bankruptcy law is neither mechanical in its application nor narrow in the range of problems it confronts. A client in bankruptcy can face every legal problem that a person can face outside of bankruptcy.
- This task is not as formidable as it might seem. Bankruptcy law changes nonbankruptcy law only when the purposes of bankruptcy require it. Ensuring flesh-and-blood individuals a fresh start requires such a change, but surprisingly little else does. In the absence of a specific bankruptcy provision to the contrary, bankruptcy takes non-bankruptcy rights as it finds them. Only the procedures change, and these change only to solve the particular problems bankruptcy is designed to address. The Bankruptcy Code thus works against the background of nonbankruptcy law. A general mandate, reinforced by 28 U.S.C. §959, requires that the trustee act in accordance with applicable nonbankruptcy law. A trustee enjoys the right to use property under §363, but the trustee must act consistently with applicable non-bankruptcy law. The trustee cannot use the debtor’s chemistry laboratory to manufacture cocaine, nor may the trustee dump toxic waste on the debtor’s property, not because of anything in the
- thus allows us to draw from a complicated statute a single organizing principle. Knowing the outcome under nonbankruptcy law can go a long way toward understanding the problem in bankruptcy. When a litigant seeks an outcome different from the one that would hold outside of bankruptcy, the bankruptcy judge will likely ask the litigant to identify the part of the Bankruptcy Code that compels the departure.
- We can begin with a sketch of the basic structure of the Bankruptcy Code. The 1978 Bankruptcy Reform Act restructured the bankruptcy courts and bankruptcy procedure. The substantive provisions of the 1978 Act put in place the Bankruptcy Code, which constitutes Title 11 of the United States Code. It has been amended periodically. The most sweeping change, enacted in 2005, added considerable complexity to the Bankruptcy Code, but its basic structure and principles remain intact. Like other titles of the United States Code, Title 11 is divided into chapters. Chapters 1, 3, and 5 contain provisions that generally apply to all bankruptcy cases. The remaining chapters set out different procedures for distinct kinds of bankruptcy cases. Chapter 15 sets out the principles needed to facilitate cross-border insolvencies, the rules needed when a debtor in the United States has assets in another country, or when a foreign debtor has assets here.
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Chapter Eight. Preferences 36 results (showing 5 best matches)
- The descent of a healthy business into insolvency and then bankruptcy is usually a long, slow process. Bankruptcy law has a set of rules to prevent creditors from trying to grab assets when bankruptcy is on the horizon. The rules that prevent creditors from receiving —eve-of-bankruptcy transfers to creditors that distort bankruptcy’s pro rata sharing rule—are embodied in §547 of the Bankruptcy Code.
- A creditor would much rather be paid off in full than work things out with everyone else and ultimately take fewer than 100 cents on the dollar. If we allowed creditors to keep payments they extracted when they knew bankruptcy was imminent, bankruptcy might do more harm than good. The prospect of a bankruptcy proceeding might have the effect of accelerating and exacerbating the creditors’ race to the assets. To guard against this prospect, we need a bankruptcy rule that has the effect of turning back the clock and returning people to the positions they were in before bankruptcy was on the horizon.
- You lend Jones $1,000. Jones’s fortunes take a turn for the worse. You come to Jones and ask to be paid ahead of everyone else before Jones goes into bankruptcy. Jones does not have the money and so turns you down. Besides, if Jones granted your request and then entered bankruptcy, any cash you received would be on account of an antecedent debt and would thus be a voidable preference. Suppose Jones offers instead to give you a security interest. Can you take him up on it and not worry about the impending bankruptcy?
- The Bankruptcy Code does not engage in such a case-by-case inquiry, however. Instead, it provides for a limited exception to floating liens in inventory or accounts and the proceeds of either. Section 547(b) starts by striking down all new acquisitions of inventory within the preference period, but then §547(c)(5) provides a partial safe harbor. A creditor’s security interest is recognized in bankruptcy, but only to the extent that the creditor does not improve its position during the 90 days before the filing of the bankruptcy petition. In our case, the bank was undersecured to the extent of $7,000 at the start of the preference period. Section 547(c)(5) tells us that the bank is going to be an unsecured creditor to that extent, even if the value of the inventory happens to increase during the 90-day period. The bank will therefore have a secured claim in bankruptcy for only $5,000. The bank should be no better off than it would have been before it knew that bankruptcy was on the...
- debt. In every case involving a potential preference, we must ask two questions: when was the debt incurred and when was the transfer made? We do not have a voidable preference unless the first event took place before the second. A lender who makes a loan just before the filing of the bankruptcy petition and simultaneously takes and perfects a security interest in the debtor’s property does not receive a preference. The transfer of the security interest to the creditor is on account of a debt, but it is not on account of an debt. Consider another example. You are about to file a bankruptcy petition. You go to a lawyer and ask her to handle your bankruptcy. The lawyer asks for a retainer of $10,000. There are rules in the Bankruptcy Code (such as §329) dealing with compensation of a debtor’s lawyer, but is this transaction objectionable so far as preference law is concerned? Isn’t the lawyer grabbing assets while bankruptcy is on the horizon? The lawyer is, but this does not matter...
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Introduction 8 results (showing 5 best matches)
- The first three chapters chart the landscape. Chapter 1 explores both the substantive provisions of the Bankruptcy Code and the procedural rules that govern bankruptcy cases. Chapter 2 looks at the rights of the individual debtor in bankruptcy. Bankruptcy law gives the individual a fresh start: the “honest but unfortunate” debtor over-whelmed by debt can file a bankruptcy petition and walk away with the right to enjoy future income free from past debt. Ensuring that such individuals enjoy a fresh start while preventing those able to repay their debts from abusing the system introduces considerable complexity into the law.
- Chapter 4 examines how rights originating outside of bankruptcy are treated inside of bankruptcy. For the most part, a creditor’s claim in bankruptcy turns on what the creditor had outside bankruptcy. Chapter 5 shows how the Bankruptcy Code ensures that the debtor’s assets available to creditors outside of bankruptcy are available to them inside of bankruptcy as well. Chapter 6 completes our examination of the basic rights and obligations of the debtor and those with whom it has dealt by examining
- Modern bankruptcy law is a domain with identifiable and coherent boundaries. In
- Chapter 3 examines the absolute priority rule, the basic principle of corporate reorganizations. Corporations enter into bankruptcy for reasons different from those of individuals. Corporations already have limited liability under state law: when a corporation fails, its share-holders are not liable to the corporation or its creditors. By reorganizing under Chapter 11 of the Bankruptcy Code, an ailing but otherwise strong business replaces its existing capital structure with a sensible one that better reflects the condition in which it finds itself. The corporation, like the individual, discharges old debts through bankruptcy, but the reasons for doing so have nothing to do with protecting flesh-and-blood human beings from their creditors.
- When a bankruptcy petition is filed, creditors must cease their efforts to collect payment, but the debtor must continue to deal with the rest of the world as before. The Bankruptcy Code tries to achieve both ends through the automatic stay, which is the subject of chapter 9. Chapter 10 explores the dynamics of small and large Chapter 11 cases. Most Chapter 11 petitions are filed by small corporations; the challenge in these cases is not to preserve an ongoing business but to facilitate an entrepreneur’s transition from one business to another. The corporation is the entity that formally files the petition, but the entrepreneur who owns it is the central focus. Large Chapter 11 cases, in contrast, are few in number but contain the vast bulk of the total assets in bankruptcy. In these cases, the business has an identity distinct from those who run it, and Chapter 11 allows the financially distressed company to obtain a new capital structure in a process akin to a merger or...
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Chapter Two. The Individual Debtor and the Fresh Start 50 results (showing 5 best matches)
- The law that governs the bankruptcy of individuals is complicated not because of the typical case, which again is quite simple and consumes no judicial time, but rather because one must have some way of distinguishing honest but unlucky debtors from those who would abuse the system. When bad behavior is brought to their attention, bankruptcy judges take action. Section 707(b) of the Bankruptcy Code allows the bankruptcy judge to deny debtors a fresh start if the fresh start would work an abuse of the bankruptcy process. To ensure that unscrupulous individuals do not hide assets, we require those who seek the protection of bankruptcy law to disclose the whereabouts of all assets and submit to questioning from creditors. Debtors who are not forthcoming lose, among other things, their right to a fresh start. See §727. Many creditors will stop pursuing the debtor once they are satisfied that the debtor cannot repay them, independent of whether bankruptcy formally discharged the debt....
- A debtor who files a bankruptcy petition is entitled to a discharge of prepetition claims. The debtor is not free of obligations incurred after the filing of the petition. Moreover, some prepetition burdens remain notwithstanding the discharge because they are not “claims” as defined in the Bankruptcy Code. For example, criminal sanctions, such as imprisonment, survive bankruptcy. A felon enjoys a discharge, but the discharge does not secure release from prison because the state’s right to imprison someone is not a claim. Nor can a debtor use a bankruptcy filing to evade a child-custody order.
- Section 303 sets out the process for commencing an involuntary case. While involuntary petitions are uncommon today, they were originally the only type of bankruptcy petition that could be filed, and they still serve a purpose. An involuntary bankruptcy provides creditors with a single forum to assemble the debtor’s assets and scrutinize financial and other records. It also allows a creditor to unwind a transfer—such as a large payment to another creditor—that would be permissible under nonbankruptcy law but that violates bankruptcy’s norm of pro rata distribution.
- Other provisions try to ensure that individuals do not use bankruptcy as a delaying tactic. If within 45 days of filing the petition the debtor fails to supply the information needed to determine whether means testing applies, the case is automatically dismissed. §521(i). Rules designed to curb abuse by limiting judicial discretion, however, do not always work as planned. The drafters of §521(i) may not have realized that it is sometimes not creditors, but debtors who want to exit the bankruptcy process. If they want to terminate the bankruptcy over their creditors’ objection, they may point to their own failure to provide information as grounds for automatic dismissal. The judge may find that she must dismiss the bankruptcy case.
- The bankruptcy of Victor Ortiz raised the same problem as Ortiz, a boxer, wanted to escape from a long-term contract with his promoter. The court had to ask if bankruptcy freed him from the unfavorable contract. If Ortiz had foolishly borrowed money from his promoter and lost it all, he would have been able to file a bankruptcy petition and keep his earnings from whatever job he happened to take. Similarly, if a creditor of Ortiz’s had garnished his wages, the garnishment would not survive bankruptcy. Conceptually, Ortiz’s promise not to fight for any other promoter or indeed any covenant not to compete is the same. The promoter has what amounts to an ownership interest in Ortiz’s future income stream. establishes that such interests do not survive bankruptcy.
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Chapter Nine. The Automatic Stay 39 results (showing 5 best matches)
- A somewhat more complicated issue arises when a third party seeks to terminate an ongoing relationship after the debtor files for bankruptcy. If the right to terminate exists only because the debtor has filed a bankruptcy petition or has become insolvent, then the termination violates the automatic stay. Section 363( ) parallels other provisions of the Bankruptcy Code, such as those in §541, §545, and §365, that refuse to give effect to ipso facto clauses. Bankruptcy does not respect rights that are effective in bankruptcy but not outside.
- A harder case arises when the third party has a general right to terminate, but exercises it only because of the bankruptcy petition. Consider whether an insurance company can cancel a prepaid fire insurance policy that is cancellable at will once it finds that its debtor has filed a bankruptcy petition. The termination and the bankruptcy filing may not be independent events. The insurance company may have canceled the policy only because the bankruptcy petition alerted it to the poor condition of the debtor and the heightened risk of fire.
- Rather than having a single magic bullet that has the effect of keeping a particular entity outside of bankruptcy, investors can take a number of steps, each one of which makes the filing of a bankruptcy petition less likely. For example, the principal who would most likely control any decision to file for bankruptcy can be asked to sign a personal guarantee that is triggered only if the entity were to file for bankruptcy. The guarantee is valued not because the bank ever expects to call upon it, but rather because the potential liability on the guarantee will keep the principal from ever putting the entity into bankruptcy. The dynamic is captured in the name commonly used to describe it: the “bad boy” guarantee. The principal is liable on the guarantee only if he is a “bad boy.”
- Courts are sometimes reluctant to allow third parties to take advantage of the informational signal that bankruptcy conveys. While the debtor has no right to have a contract renewed, a third-party may be unable to terminate if it acts only because of the bankruptcy petition. Courts, however, tend to allow parties to terminate when they are able to show that they would exercise the right apart from the bankruptcy filing.
- Before filing for bankruptcy, MCorp caused two of its subsidiary banks to extend credit to an affiliate and engaged in other transactions that may have violated federal banking law. The Board of the Federal Reserve commenced one administrative proceeding before the bankruptcy began and then another after MCorp entered bankruptcy. The Supreme Court rejected MCorp’s argument that the board was trying to enforce a prepetition claim and therefore violated the automatic stay. In the Court’s view, the board’s actions fell under §362(b)(4). The proceedings might culminate in a final order that would interfere with the bankruptcy court’s exclusive jurisdiction over property of the estate under 28 U.S.C. §1334(d), but until that time, the board’s actions did not violate the automatic stay. The Court was not persuaded that “the automatic stay provisions of the Bankruptcy Code have any application to ongoing, nonfinal administrative proceedings.”
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Chapter Ten. The Dynamics of Chapter 11 50 results (showing 5 best matches)
- Even though the Bankruptcy Code is built around the premise that general creditors are the residual claimants, there is nothing in the Bankruptcy Code that prevents a bankruptcy from going forward that benefits only secured creditors. Indeed, the nineteenth century equity receiverships from which Chapter 11 evolved typically involved firms with chiefly secured debt in their capital structure.
- Bankruptcy judges are most comfortable approving quick sales when those pushing for the sale can show that the business has been thoroughly shopped before the bankruptcy petition and that all the administrative fees will be paid. Bankruptcy judges are likely to balk if the debtor has conducted its search for potential buyers narrowly and proposes bidding procedures that require buyers to assume exactly the same obligations as its chosen stalking horse. If buyers are forced to accept particular obligations, one needs to worry that bids that take , the bankruptcy judge approved a going-concern sale only after uncontested testimony that a liquidating sale would yield less. In the bankruptcy, the judge insisted on broadening sale procedures to allow for liquidating bids.
- In addition, in some instances the ability to buy claims allows strategic investors to gain control of the business. Claims trading plays the same role as a conventional take-over contest outside of bankruptcy, differing only in that the outsider buys debt rather than equity. Indeed, it is easy to identify bankruptcy cases where the fight for control was front and center.
- The Bankruptcy Code has no formal prohibitions against trading by investors who gain access to information about the debtor and insiders, but none are necessary. The equitable powers of the bankruptcy judge suffice.
- In bankruptcy, courts must take care to ensure the absence of selfdealing and a process that is likely to “obtain the highest price or greatest overall benefit possible for the estate.” The diverse interests that require the bankruptcy proceeding in the first place also require the court to ensure that they have not colored the decision at hand. At the same time, the bankruptcy judge must take advantage of market mechanisms when available. Hence, it should come as no surprise that bankruptcy courts are less likely to accept doctrines such as the business judgment rule when the debtor’s actions have circumvented the marketplace.
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Chapter Six. Executory Contracts 68 results (showing 5 best matches)
- Section 541 tells us that states cannot dictate distributions in bankruptcy. Any priority scheme they create has to be one that applies generally inside of bankruptcy and out. The same principle applies to contracts that the debtor makes with others. Third parties should not be able to change their relationship with the debtor merely because of the happenstance of bankruptcy. A clause that makes the fact of bankruptcy a default (an ipso facto clause) is unenforceable. As in the case of §541, this prohibition extends beyond termination clauses tied to the start of a bankruptcy case and applies to clauses tied to the insolvency or financial condition of the debtor as well. The net must be cast wide enough so that parties cannot do indirectly what they are forbidden from doing directly.
- When applied in bankruptcy, however, the state law protecting automobile franchisees takes on a different meaning. All other franchisees are able to transfer their franchises freely once in bankruptcy because state law is silent and the contractual limits are made irrelevant. Automobile franchisees—the ones who were the most able to transfer their franchises out of bankruptcy—are not so lucky. The nonbankruptcy law that gave them the ability to transfer provided certain conditions were made is transformed in bankruptcy into a law that deprives them of the ability to make the transfer unless these conditions are met. The automobile dealers are more able to transfer their franchises outside of bankruptcy, but are less able inside. This shift in relative rights cannot be defended. More importantly, it shows how §365 lacks an internal coherence that we see in other parts of the Bankruptcy Code. We should not be surprised that some parts of the Bankruptcy Code do not make perfect sense....
- But what happens if the price of wheat plummets? Now I could buy wheat for $1, and any wheat you have you will be able to sell for only $1. The deal does not look so great. I promised to pay $5 for something that is now worth only $1. It is making deals like this that drove me into bankruptcy. Ridding oneself of a burdensome contract and exposing oneself to a damage action is a power that everyone enjoys. We live in a Holmesian world. a contract if it is in the interests of the estate. The trustee’s ability to breach an executory contract (and trigger the third party’s claim for damages) is, in the language of the Bankruptcy Code, the ability to . Rejection of an executory contract is not quite the same as breach of a contract outside of bankruptcy. Rejecting an unfavorable executory contract is akin to abandoning an asset. ...this distinction, however. For most purposes, you can safely assume that rejection of an executory contract in bankruptcy has the same consequences as breach of...
- Rodeo Drive collapses. The rental value of the store is now much lower. I file a bankruptcy petition. My trustee can break this lease, just as I was free to break the lease outside of bankruptcy. Outside of bankruptcy, you would have an action for the damages you have suffered as a result of my breach. In bankruptcy, the trustee can reject the lease and you are left with an action for damages.
- But consider a different case. Suppose you want to stay in the hotel business. The idea may have been bad, but given the investment you have already made, you are better off using the building as a hotel. Everyone would lose even more if the building were torn down and the land used as a parking lot. The hotel is generating a positive cash flow and cannot generate more in a different configuration. You decide to stay in the hotel business but restructure the debt by filing for Chapter 11. In this case, you should be able to continue to call yourself a Holiday Inn. At most, the filing of a bankruptcy petition brings about a change in management, but because you continue as the debtor in possession, even this change is small. The financial structure of the business changes when it is in Chapter 11, but its operations need not. Unless the guests of the hotel hang around bankruptcy court, they will not notice the slightest change. As far as the franchise is concerned, the bankruptcy...
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Chapter Eleven. Forming the Plan of Reorganization 25 results (showing 5 best matches)
- Like other provisions of the Bankruptcy Code, §1124 does not recognize ipso facto clauses. The debtor is entitled to reinstate a loan even if the bankruptcy filing triggered a default under an ipso facto clause. Even though this default is not curable, the Bankruptcy Code ignores it for the same reason it ignores ipso facto clauses as a general matter.
- involves a plan support agreement that was negotiated after the bankruptcy had started. It illustrates how modern practice evolves in ways that are different from what the Bankruptcy Code on its face seems to require. Because Residential Capital’s plan support agreement was forged after the petition was filed, it would appear to run up against §1125. By its terms, §1125 seems to limit the ability of parties to commit to a plan of reorganization once bankruptcy starts until the court has approved a disclosure statement.
- In many instances, the creditors who negotiate a plan of reorganization will be comfortable using the Chapter 11 process to put the elements of their deal in place only if they can be reasonably confident that the debtor will support it. To this end, they seek the debtor’s commitment to support in bankruptcy the deal they have reached. The Bankruptcy Code encourages parties to negotiate outside of bankruptcy. As a general matter, the agreements parties reach there are enforceable. Nevertheless, there are limits on the ability of the debtor to enter such “plan support agreements” or “reorganization support agreements.”
- The effect of this prohibition on ipso facto clauses is not always clear when a corporate group enters bankruptcy. Consider the following hypothetical. Bank makes loans to each of the subsidiaries of a common parent. Each loan may provide for the termination of the loan if one of the other subsidiaries files for bankruptcy. If the plan calls for reinstating Bank’s loan, Bank will argue that the default of each subsidiary is not curable and that the prohibition of ipso facto clauses does not apply. In the case of each subsidiary, it is the bankruptcy
- This provision governing the priority of tax claims is clear and gives rise to few reported decisions. Nor does it loom large in large cases. Nevertheless, tax claims may dominate the landscape of many debtor corporations. A debtor in bankruptcy may not have been earning enough before bankruptcy to become liable for significant corporate income tax, but even an unprofitable business owes or must withhold taxes related to the business’s role as an employer. Small businesses often fail to meet these obligations when they encounter trouble, notwithstanding the risk of criminal liability to the businesses’ managers.
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Chapter Seven. Fraudulent Conveyances and Related Doctrines 27 results (showing 5 best matches)
- from bringing fraudulent conveyance actions. Fraudulent conveyance actions live outside of bankruptcy in state law. Although bankruptcy suspends their ability to bring these actions, creditors can argue that they can reawaken them when the bankruptcy is over. Section 546(e) applies only to the trustee, not to them. It does not extinguish whatever rights they have. Although their state-law actions are stayed during the bankruptcy, they can be asserted after it is over.
- In this chapter, we examine the protections enjoyed by creditors both inside and outside of bankruptcy. These protections, embodied in fraudulent conveyance law and related doctrines, are best understood as protections that most creditors would bargain for when making their loans. In chapter 8, we look at voidable preferences. This bankruptcy-specific policy ensures that when bankruptcy is on the horizon, no creditor engages in gun-jumping.
- Those subject to these fraudulent conveyance actions argue that §546(e) does more than suspend the individual rights of creditors. It exists to protect the integrity of the securities markets and can serve this purpose only if it preempts both the trustee during bankruptcy and creditors after bankruptcy from using fraudulent conveyance law to unsettle such transactions.
- Bankruptcy courts confronting two of the largest failed leverage buyouts ever (Lyondell and Tribune) have allowed the creditors to proceed after bankruptcy.
- Substantive consolidation emerged through a series of judicial opinions under the Bankruptcy Act. In the view of some, such substantive powers continue under the Bankruptcy Code only to the extent that they grow out of particular provisions of the Bankruptcy Code. Substantive consolidation is, as the words suggest, a power. Courts have told us again and again that we cannot derive substantive powers from §105. Whatever powers exist must come from substantive provisions of the Bankruptcy Code itself.
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Chapter Four. Claims Against the Estate 41 results (showing 5 best matches)
- Stripping down a lien in bankruptcy has the effect after the fact of benefiting debtors at the expense of creditors. If the bankruptcy judge places too high a value on the land, the debtor can surrender the land to the secured creditor. If the bankruptcy judge errs on the low side, the debtor can pay the bank this amount and keep the land. In other words, debtors can systematically take advantage of judicial valuations that are too low but not be stuck with valuations that are too high. Lien stripping runs contrary to established practice in bankruptcy before the 1978 Bankruptcy Act. It also runs contrary to the notion in real estate law that when a debtor defaults, the value of the land is set through a foreclosure sale rather than through a judicial valuation.
- A creditor often first learns of a bankruptcy filing when it receives notice of it from the bankruptcy clerk. Rule 2002. When a debtor files for bankruptcy, it must fill out schedules that list its liabilities and the names and addresses of its creditors. If you are a creditor and are included on this list, you will be sent notice of the bankruptcy and you will be given a chance to take the appropriate procedural steps to vindicate your rights. Your first step would be to file a form known as a proof of claim. Once that is filed, the claim is “allowed” in the absence of objection. The consequences of failing to file a proof of claim depend on whether your debtor is an individual or a corporation, whether your debtor is in Chapter 7 or Chapter 11, and whether you are listed on the debtor’s schedules.
- about the bankruptcy, §523(a)(3) prevents your claim against the debtor from being discharged. You can pursue the debtor after the bankruptcy is over.
- Under §101, the software producer is viewed as a creditor who holds a claim against the debtor. The claim, however, is both disputed and unliquidated. After the producer files its proof of claim and the debtor files its objection, the bankruptcy judge may conduct a streamlined trial and decide the merits of the dispute. §502(b). The shortened process makes sense. Even if the producer wins, it is not going to be paid in full. In most Chapter 11 bankruptcies, general creditors are lucky to receive more than 20 cents on the dollar. In deciding the merits of the producer’s claim, the bankruptcy judge follows nonbankruptcy substantive rules and bankruptcy’s procedural rules. The judge turns to state law to find out what conduct constitutes unfair competition, but the judge may decide factual questions rather than leaving them to a jury. A bankruptcy court is entitled to use chancery methods in putting a value on a claim.
- In the wake of the Manville bankruptcy, §524(g) of the Bankruptcy Code was amended to allow the bankruptcy court to enjoin subsequent actions against reorganized corporations and even third parties such as insurers, but this provision by its terms applies only to mass torts involving asbestos. In other cases, the law is less settled. Moreover, even when a debtor attempts to sell assets free and clear of claims against it, the bankruptcy court cannot insulate buyers from potential successor liability under state law.
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Chapter Five. Property of the Estate and the Strong-Arm Powers 46 results (showing 5 best matches)
- Let us look at one more possibility. Suppose the seat on the Board is freely saleable, but the Board’s rules provide that the seat is forfeited when the debtor files a bankruptcy petition. Is this rule permissible? Although we generally respect rights as defined outside of bankruptcy, we do not allow anyone to opt out of bankruptcy altogether. Bankruptcy law respects restrictions that apply both inside of bankruptcy and out, but those that apply only in bankruptcy are ignored. This “ipso facto” principle is reflected in §541(c)(1) and in §545 with respect to statutory liens and in §365 with respect to executory contracts.
- principle ensures that debtors in bankruptcy enjoy the license on the same terms and subject to the same conditions as they did outside of bankruptcy. Suppose a failing airline files a Chapter 7 petition. It has a right to landing slots at a major airport, and another airline would pay a lot to have them. The airline’s landing slots are, of course, property of the estate. The airline, however, needs to shut down its operations for a time, and FAA rules provide that an airline loses its slots once it stops using them. Bankruptcy law does nothing to prevent the loss of the slots. This limitation on the debtor’s property is one that applies outside of bankruptcy, and hence it applies inside of bankruptcy as well. A debtor’s property does not shrink by happenstance of bankruptcy, but it does not expand, either.
- claim. Thus, the trustee must find an actual unsecured creditor of the debtor who, on the date of bankruptcy, is able to assert an interest in property that the debtor has transferred to a third party. If this creditor can reach that asset outside of bankruptcy, notwithstanding the transfer (or, to use the language of the Bankruptcy Code, can avoid the debtor’s transfer of that asset), the trustee can use §544(b) to step into the shoes of that creditor. The trustee recovers the asset from the third party. The trustee does not then turn over the asset to the creditor who would have reached it outside of bankruptcy. Instead, the asset is placed in the pile of assets that is divided pro rata among all the general creditors. This part of §544(b) is difficult to justify. One must explain why the creditor who had this right outside of bankruptcy must share it with other creditors inside bankruptcy.
- The logic here is straightforward. If a state legislature has decided that your right as the person who unwittingly was defrauded of particular property primes the rights of ordinary creditors, no bankruptcy policy justifies a different outcome. If general creditors have no way of reaching an asset outside of bankruptcy, they should not be able to reach it inside of bankruptcy.
- In this chapter and the one before it, we have seen how the Bankruptcy Code sensibly translates the rights and obligations of a debtor to the bankruptcy forum. In the next chapter, we examine how the Bankruptcy Code handles situations in which the rights and obligations are fused together. These issues—those associated with executory contracts—present a special set of challenges.
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Chapter Twelve. Confirming the Plan of Reorganization 31 results (showing 5 best matches)
- When multiple plans on the table satisfy §1129, the Bankruptcy Code charges the bankruptcy judge with choosing a plan after considering “the preferences of creditors and equity security holders.” This provision is not helpful, as such preferences will likely go in opposite directions in cases of any moment.
- The owner of a large rental apartment development enters bankruptcy. It has one secured creditor owed many millions and a handful of unsecured creditors. The largest unsecured claim, which amounts to just more than a third of all those outstanding, belongs to a 12-yearold who was not paid $20 for mowing the lawn the Saturday before the bankruptcy petition was filed.
- Understanding the rights of a secured creditor under §1129(b) requires a close examination of the special rights the secured creditor is given under §1111(b). Nonrecourse claims are made recourse, and a secured creditor can waive its unsecured claim and have its entire claim treated as secured. Much is unknown about the consequences of making the §1111(b) election, but identifying what is at stake is not difficult. Consider a bank that lends a debtor $1 million. The loan is secured by Blackacre. The loan is nonrecourse. Outside of bankruptcy, the bank can look only to Blackacre for satisfaction of its claim. If Blackacre sells at a foreclosure sale for only $600,000, the bank is out of luck on the remaining $400,000. What would happen in bankruptcy if §1111(b) did not exist? The bankruptcy judge would put a value on the bank’s claim. If the judge valued it at $600,000, the bank could be crammed down with a package of rights having a present value of $600,000. The bank would have no...
- The local businessmen soon found themselves in much the same position as Hilton. They did not have to pay rent, but they did have to make the mortgage payments, and soon they could not even do this. They filed a bankruptcy petition. Hilton, still mightily irritated that the local businessmen used local courts to take back the hotel and displace him as manager, bought a blocking position in one of the impaired classes and voted against the plan. Hilton did not regain control of the hotel, but the Fifth Circuit upheld Hilton’s right to cast his vote as he had. The legislative history of the Bankruptcy Code suggests that giving the bankruptcy judge the power to designate votes was intended to overrule this case.
- In understanding this problem, as with any other that lacks an easy answer, we must return to first principles. In doing this, we should understand both bankruptcy law and its limits. Legal rules cannot cure nonlegal problems. Legal rules cannot make the imprudent wise and the unlucky fortunate. Nor can they insulate a poorly run business from the realities of the marketplace. The goals of bankruptcy are necessarily modest. Honest but unfortunate individuals should be given a fresh start. Corporations that have value as going concerns should be able to acquire a new capital structure, and those that cannot survive should be able to wrap up their affairs expeditiously. Bankruptcy law cannot work miracles, and more harm than good comes from seeking that which cannot be had. We should, in our efforts to make the bankruptcy system work, recall what my late colleague and mentor Walter Blum often observed: in law, 95 percent is perfection.
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Chapter Three. Corporate Reorganizations and the Absolute Priority Rule 15 results (showing 5 best matches)
- under nonbankruptcy law receive interests in the reorganized corporation according to the priority they enjoyed under nonbankruptcy law. A creditor who is entitled to be paid before another creditor outside of bankruptcy (by virtue, say, of a security interest) is entitled to be paid first in bankruptcy as well.
- Our bankruptcy law is squarely focused on vindicating legal rights established outside of bankruptcy. Conflating the problem of how to vindicate the bargain among investors in different parts of the capital structure with the idea of the fresh start for flesh-and-blood individuals is a major conceptual mistake that invariably leads to muddled thinking. Ensuring that a viable business continues is a tough task, and the procedures needed to bring it about are correspondingly complicated. The easiest way to understand the ones we have chosen is to understand their origins. Hence, we look first to history.
- A corporation in Chapter 11, like an individual in Chapter 7, receives a discharge at the end of the bankruptcy proceeding, but the discharge has radically different consequences in the two cases. In the case of the individual debtor, the discharge works in conjunction with other parts of the Bankruptcy Code to ensure a fresh start. Discharging old debt does not itself keep creditors from reaching the debtor’s future income. What matters in the case of an individual is not simply that debts are discharged under §727, but also that future earnings do not become property of the estate under §541. In contrast, a corporation’s future earnings
- Ensuring assets are put to their best use requires recognizing that some parties are not going to be paid in full, and a coherent bankruptcy law has to identify them. The basic distributional rule of Chapter 11—the one as central to it as the fresh start policy is to individuals—that emerged was the absolute priority rule. The substantive idea behind the absolute priority rule can be put simply: the filing of the bankruptcy petition brings about a day of reckoning. The assets are assembled and the liabilities are tallied. Senior creditors are paid before junior creditors, and creditors are paid before shareholders. The rhetoric of the fresh start often creeps into discussions of Chapter 11, but one should not be misled by the notion of “rehabilitating” a corporate debtor.
- The 1978 Bankruptcy Code replaced this way of protecting dissenters in a class of creditors. Congress folded into the corporate reorganization a procedure that had been used in plans under the 1898 Bankruptcy Act. Under the 1898 Act, the debtor would meet with creditors, fill out schedules of assets and liabilities, and subject itself to examination. At this point, the debtor would propose a plan, or
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- Publication Date: July 14th, 2014
- ISBN: 9781609303549
- Subject: Bankruptcy/Creditors' Rights
- Series: Concepts and Insights
- Type: Hornbook Treatises
- Description: Widely cited and authoritative, Elements of Bankruptcy provides a comprehensive introduction to the basic principles of bankruptcy law. In addition to covering foundational questions such as the fresh start for individuals, property of the estate, executory contracts, adequate protection, preferences, and fraudulent conveyances, this book also covers such cutting-edge issues such as debtor-in-possession financing, plan support agreements, carve-outs, credit-bidding, and first-day orders. The sixth edition also takes stock of the developments in bankruptcy in the wake of the 2008 financial crisis, including the rise of municipal bankruptcies in Detroit and elsewhere, as well as developments from the Supreme Court, including the fallout from Stern v. Marshall and Executive Benefits Insurance Agency v. Arkison.
