Unit 3. Core Concepts of Federal Bankruptcy Law 66 results (showing 5 best matches)
- The Bankruptcy Reform Act of 1978, for the first time, incorporated into the substantive law governing bankruptcy cases an express provision (section 510(c)) recognizing the courts’ power to subordinate particular claims on equitable as well as contractual grounds. The roots of court-ordered subordination, however, are found much earlier in bankruptcy jurisprudence. The doctrine was first articulated and developed in series of Supreme Court cases in the 1930’s and 1940’s arising under the former Bankruptcy Act, and recognizing the inherent power of the bankruptcy courts to subordinate a claim when equity demanded.
- There are four basic concepts you need to know to analyze any bankruptcy problem. They are are what creditors have against the debtor and what the debtor wishes to get rid of. They come in all flavors and types, but bankruptcy law categorizes them broadly to afford the debtor the greatest possible relief. Property of the estate is what the debtor has before filing that will pay or provide for the claims after the bankruptcy. The automatic stay protects property of the estate (and some other property) after filing and before the bankruptcy case is over. The automatic stay also and incorporates the important bankruptcy concept of adequate protection of third party rights. Finally, the discharge is the mechanism by that the debtor obtains financial relief and which limits his or her creditors’ ability to collect on any pre-petition debt.
- So, if Markell batters Ponoroff (assaults him, not turn him into a human corn dog) and then files bankruptcy before Ponoroff can sue for his injuries, Ponoroff’s unliquidated tort cause of action is a claim in Markell’s bankruptcy case. Likewise, if Ponoroff had guaranteed Markell’s debt to Harry’s Adult Videos, LLC, Ponoroff would have a claim in Markell’s bankruptcy case, even though the obligation was contingent—would only arise should Markell default to Harry’s. Finally, if Markell owes Ponoroff $1,000 under a promissory note due in two years, Ponoroff has a claim now against Markell’s bankruptcy estate for that debt. The point is that all claims relating to Markell’s prefiling life will be dealt with in his bankruptcy case.
- “Property of the estate” is another key concept you need to know. Property of the estate is what is protected in bankruptcy, and what forms the basis of any bankruptcy dividend. Creditors cannot unilaterally seize property of the estate during the case, and will only get paid their bankruptcy dividends from property of the estate.
- against the creditor if the creditor fails to do so. The reason to do so is that whatever distribution the creditor receives from the bankruptcy estate will reduce the balance for which the jointly liable party remains responsible. So, assume Markell and Ponoroff are jointly and severally liable on a promissory note to Bank for $50,000. Markell files bankruptcy, but Bank doesn’t bother filing a proof of claim in the case because it figures it will just collect from Ponoroff. Assuming there will be at least some distribution to unsecured creditors in Markell’s bankruptcy, Ponoroff should file a proof of claim on Bank’s behalf, since every dollar Bank receives from Markell’s bankruptcy estate is a dollar less that Ponoroff will have to pay.
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Introduction 5 results
- Bankruptcy is not our legal system’s only response to financial distress. Bankruptcy operates alongside, and as an alternative to state debt collection law. The two systems, however, are based on very different premises, and, for this reason, we believe an awful lot about bankruptcy can be understood right up front by contrasting the operation and goals of the bankruptcy system with the state collection law system.
- Bankruptcy is a subject, but this is a short (and happy) guide. So we’re not going to chase down every doctrinal nuance or try to fill you up with minutia. Rather, our main goal is to introduce you to the core concepts and major themes underlying bankruptcy law. Oh sure, we’ll cover a lot of the “rules” of bankruptcy law; that’s unavoidable. But the real value of this guide will be (we hope) to give you the tools you need to think about, understand, and find the answer to almost any bankruptcy problem. In other words, we want to help you become a bankruptcy
- It’s just a fact of life that sometimes people do not or cannot pay their debts, and sometimes businesses fail. A sophisticated credit economy like ours needs a mechanism to deal with these problems. Bankruptcy is an important part of that solution, and bankruptcy cases run the gambit from cases involving individuals like all of us who fall upon hard times to cases involving Fortune 500 companies like General Motors, and everything in-between. Therefore, although their practices may be very different, you will find bankruptcy lawyers on Main Street and on Wall Street, and while their cases may have very little in common, they are all using the same statute—the Federal Bankruptcy Code.
- The last point bears emphasis, as our bankruptcy law is simultaneously about two very different interests: debtor protection and creditor rights. There is no perfect balance between these interests and, inevitably, where the fulcrum is placed by Congress at any point in time is a function of a variety of largely non-legal considerations, not the least of which are political in nature. Senator Charles Grassley (R. Iowa) thinks bankruptcy goes too far in providing debtor relief; Senator Elizabeth Warren (D. Mass.) thinks it doesn’t go far enough. We suggest
- , much lower than would be attained if the property could be sold in an orderly, market transaction. Finally, federal bankruptcy law offers a form of debtor relief—the discharge from prepetition debts—that the states do not and, because of the “impairment of contracts” clause in Article 1 of the Constitution, cannot provide.
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Unit 1. Overview of Bankruptcy 23 results (showing 5 best matches)
- A bankruptcy “case” under any chapter of the Code involves the administration of an come back to in detail later in Section B of Unit 3. Under the umbrella of the administration of that estate may be several discrete pieces of litigation over a variety of issues, such as the discharge of a debt or the confirmation of a plan. Even though bankruptcy law is federal law and bankruptcy litigation is federal litigation, the procedure within a bankruptcy case is governed not by the Federal Rules of Civil Procedure, but by the Federal Rules of Bankruptcy Procedure, what we will refer to in this book as “Bankr. R. 7001.” The bankruptcy rules govern not only litigation in the case, but also the procedure governing the administration of the case, such as who gets notice of what and by when, etc. It’s really not as complicated as it sounds, because most of the Federal Rules of Bankruptcy Procedure simply incorporate the Federal Rules of Civil Procedure (summary judgment in bankruptcy...
- Congress exercised its authority under the Bankruptcy Clause several times during the Nineteenth Century, passing national bankruptcy legislation in 1800, 1841, and 1867. Each of these bills, however, was a short-term response to economic upheavals (“panics”), and was repealed as soon as the crisis passed. The first enduring bankruptcy law was the Bankruptcy Act of 1898, the need for which not coincidentally coincided with the latter stages of the Industrial Revolution. The 1898 Act remained in place until it was replaced by our current law of bankruptcy, which became effective in 1979.
- Based on the probably accurate view that the 1898 Act had become irretrievably out-of-date, in 1973 Congress began to explore a new bankruptcy law. The result was the Bankruptcy Reform Act of 1978 (11 U.S.C. §§ 101 et seq.), which is the basis for our current bankruptcy law. The 1978 Act has been amended on numerous occasions, most dramatically with the Bankruptcy Abuse Prevention and Reform Act of 2005 (hereinafter referred to as either “the 2005 Amendments” or “BAPCPA.”) Most people agree that the 2005 Amendments were a lot more about abuse prevention than they were about consumer protection. The Bankruptcy Reform 1978 Act as amended is generally referred to throughout this book as the “Bankruptcy Code” or just the “Code.”
- Bankruptcy law can be traced all the way back through the medieval Italian city-states to Roman law. England adopted specific bankruptcy statutes in the sixteenth century, and amended those statutes from time to time thereafter. U.S. bankruptcy law was initially based on English law as it existed in the late eighteenth and mid-nineteenth centuries. What is most notable about early bankruptcy law is that it was not much (or really any) about debtor relief. Rather, it was seen purely as a mechanism for creditors to hold accountable debtors who were attempting to evade responsibility for their debts, and to maximize returns (payouts) for those creditors.
- The structure underlying the Bankruptcy Code is relatively straightforward. Chapters 1 through 5 apply in all types of bankruptcy cases. Chapters 1 through 3 deal, respectively, with “definitions,” “administration” and “claims and creditors.”
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Unit 4. Avoiding Powers 53 results (showing 5 best matches)
- Second, because of section 362(a)(7), a creditor that did not exercise its setoff right prior to the debtor’s filing for bankruptcy cannot exercise the right of setoff after the bankruptcy filing without first obtaining relief from the stay from the bankruptcy court. That requires cause under section 362(d)(1), remember?
- • The avoiding powers are exercised to achieve certain key objectives in a bankruptcy case, most notably the goal of equitable treatment among creditors. In bankruptcy, it is frequently said that “equality equals equity” (or “equity equals equality,” we can never remember which way it goes, but we don’t think it matters).
- The bankruptcy law does not create a right of setoff. Rather, section 553(a) preserves a creditor’s right outside of bankruptcy to set off mutual
- Fraudulent transfers, unlike the trustee’s other avoiding powers, can be set aside outside of bankruptcy as well as in a bankruptcy case. Most states (although not New York) have adopted the Uniform Fraudulent Transfers Act (“UFTA”), which is likely in your statute book, and is similar, but not identical, to the Code’s fraudulent transfer statute: section 548. As we’ll see, both state law and federal bankruptcy law talk not only about fraudulent
- As we mentioned at the beginning of this section, fraudulent transfers are also avoidable under state law. So what does that have to do with bankruptcy? As it happens, quite a bit due to section 544(b) of the Code, which confers on the trustee the powers of an actual unsecured creditor to avoid transfers under nonbankruptcy law. This means that a transaction that could have been avoided by a creditor under (usually state law) can be avoided by the bankruptcy trustee. Because the trustee succeeds to the rights of an creditor, section 544(b)(1) requires that a creditor that had the power to avoid a transfer actually be in existence at the time of the filing. In addition, the creditor whose rights form the basis for the trustee’s power under section 544(b) must be the holder of an allowed unsecured claim in the bankruptcy case.
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Unit 2. Initiating (and “Uninitiating”) the Case 10 results (showing 5 best matches)
- Given that for most of its history bankruptcy was conceived as purely a creditors’ remedy, and that voluntary bankruptcy is a relatively speaking late arrival of the scene, it’s perhaps somewhat ironic that today the overwhelming (and we mean like 99 percent) of bankruptcy filings are initiated by the debtor filing a petition under section 301, or by joint (spousal) debtors filing under section 302. Bankruptcy relief is available in one form or another for virtually every debtor, but each debtor relief chapter of the Code has its own rules and limitations on who is eligible for relief under such chapter. These rules and limitations are found in Code section 109, the application of which requires frequent reference to the definitions in section 101.
- When a debtor files a bankruptcy petition, that petition becomes the “order for relief” in the bankruptcy case. That means that all of the provisions of the Code now apply to the type of debtor who filed. There are no mandatory hearings on whether the debtor
- A party who has standing to be heard by the court in a matter to be decided in the bankruptcy case is a “party in interest.” For most matters, parties in interest will include the debtor, the U.S. trustee or bankruptcy administrator, the case trustee, creditors, equity security holders, and various committees. The term is sort of defined in section 1109 for Chapter 11 cases.
- In Chapter 7 cases, an individual consumer debtor’s filing could, prior to 2005, be dismissed if the bankruptcy judge found that granting relief would constitute a “substantial abuse.” Most typically, this provision would be employed when the court found that the debtor had the ability to pay some portion of her debts under Chapter 13. Based on the belief that abuse of Chapter 7 by so-called “can pay” debtors was rampant, and that bankruptcy judges were not being sufficiently vigilant in policing these abuses, Congress amended section 707(b) to add a formulaic “means test” for determining if abuse should be presumed for purposes of section 707(b)(1). This means test in section 707(b)(2) is complicated and controversial. We will wait until Unit 6 to take it up in greater detail. In addition, even where the presumption of abuse does not arise under the means test, the bankruptcy courts retain the authority under section 707(b)(3) to dismiss if the debtor is found to have filed her...
- We say “currently” in the parenthetical before the amount—as we do in a number of other places throughout the book—because this is one of several dollar amount numbers in the Bankruptcy Code that adjusts every three years based on the Consumer Price Index.
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Unit 8. Special Problems in Chapter 11 35 results (showing 5 best matches)
- The other confirmation standards are important in bankruptcy cases, but tend not to be heavily tested in bankruptcy classes. Paragraphs (1) and (2) of section 1129(a) require that the plan and the plan proponent comply with title 11. This essentially means that the plan process be complied with, that the plan proponent has obtained court approval of its disclosure statement, and that the cash collateral provisions of section 363 have been followed.
- One thing to keep in mind. Although Chapter 11 looms large in bankruptcy lore, it is small in terms of its footprint. Less than 1% of all bankruptcy filings (actually, about .8%) are Chapter 11 cases. Of course, if the amount of assets affected is looked at instead of the number of cases, Chapter 11 regains its prominence. The Lehman Brothers Chapter 11 case, for example, dealt with over $639 billion in assets, while the Washington Mutual cases dealt with almost $330 billion. That’s a trillion dollars of assets in just two cases.
- This need for credit presents a potential problem. Start first with the proposition that administrative expense creditors obtain first priority on the estate’s assets. Add to that the fact that prepetition creditors only get paid from the estate. So if the estate’s value decreases after the filing, prepetition creditors are hurt; there’s less to pay them with. Put another way, if an operating bankruptcy estate loses money—its receipts from sales don’t cover its expenses—prepetition creditors stand to receive a smaller bankruptcy dividend.
- In many circumstances, the debtor and its creditor body are in general agreement about what should be done without the need for extensive court proceedings. However, there may be holdouts or minority interests that could block a plan outside of bankruptcy, but could be outvoted in bankruptcy. In such cases, the debtor can prepare, circulate and solicit votes before ever filing a case. If the debtor does this, it files what is known as a “pre-packaged plan,” one in which all the requirements for confirmation can be summarily shown.
- One thing that non-recourse lenders take into account is their ability to time a foreclosure. After all, it that is their sole source of recovery, so they should be able to orchestrate when the hammer falls. Bankruptcy and its sale rules upset this balance. The choices are reversed. In bankruptcy, the debtor determines when to sell, not the lender. If it chooses to sell at the bottom of the market, that harms the lender.
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Unit 5. Executory Contracts 22 results (showing 5 best matches)
- Executory contracts are the subject of section 365 of the Bankruptcy Code. They are a part of every bankruptcy case.
- It does this in two ways. First, section 365(b)(2) states that the presence of such clauses cannot be used to block assumption. Thus, even if a contract says that filing bankruptcy terminates the contract, the estate can still assume the contract because section 365(b)(2) will invalidate it. Second, section 365(e) takes away the ability of the nondebtor party to use such clauses to terminate or modify the contract during bankruptcy.
- But this is bankruptcy. If a PPI was honoring all of its contracts, it likely would not have to file bankruptcy. Could PPI, as estate representative, assume the lease if it were two months behind in its rent (that is, in default under the lease)? The answer is not obvious initially. Recall that the test for whether a contract is executory is whether the nonperformance of unperformed terms would constitute a material breach under non-bankruptcy law. Under nonbankruptcy law, one consequence of material breach is that the non-breaching party can terminate the contract. So if the prepetition breach was material, can the non-debtor now terminate the contract? Despite the right to terminate under nonbankruptcy law, the answer is clearly that PPI
- The first restriction is Congress’ invalidation of so-called “ipso facto” clauses. These clauses seek to terminate a contract simply because the debtor filed bankruptcy. party can terminate if the other’s net worth drops below a certain level) or the debtor’s use of (or subjection to) some other collective debt relief remedy such as a receivership. So long as the debtor is current and not otherwise in default under the contract, the Bankruptcy Code deems ipso facto clauses invalid in bankruptcy.
- for $2,500 is not executory if the seller has delivered the goods and all that remains to be done is for the buyer to pay. A promissory note under which a bank lent money and is merely expecting to be repaid by the debtor is not executory. The bank has no further duties. In each of these cases, the nondebtor party has a claim, and nothing more, in the bankruptcy. It will simply file a proof of claim, and wait for its bankruptcy dividend, if any.
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Unit 6. Special Issues in Chapter 7 52 results (showing 5 best matches)
- Section 522(f) is a special provision that augments the debtor’s exemptions by providing debtors with another vehicle for improving their post-bankruptcy economic position and, thereby, promoting the fresh start. It operates as an exception to the basic rule that perfected liens survive bankruptcy and take priority over exemption claims. Specifically, to the extent it impairs an exemption, 522(f)(1) permits a debtor to avoid:
- The Office of the United States Trustee (“OUST”) and the U.S Trustees who are appointed by the Attorney General to serve in 21 local regions (each comprised of one or more federal judicial districts) should not be confused with the “trustee” appointed to represent the bankruptcy estate. The OUST is a branch of the Department of Justice charged with responsibility to carry out sundry administrative duties in bankruptcy cases, such as to appoint a panel of private trustees to serve in bankruptcy cases, monitor the debtor’s filings of required reports, monitor plans in rehabilitation proceedings, etc. The activities of the U.S. Trustees around the country are overseen by an Executive Director. Alabama and North Carolina are not part of the OUST system. Instead, the duties of the U.S. Trustee in the six federal judicial districts of those states are carried out by Bankruptcy Administrators appointed under the Bankruptcy Administrator Program, which is a judicial rather than an...
- Before 2005, section 707(b) provided that the bankruptcy court could dismiss a Chapter 7 filing if it found that the granting of relief would constitute a “substantial abuse.” An important factor in this analysis was the debtor’s ability to repay his debts under Chapter 13. But Congress believed that the bankruptcy courts weren’t doing enough to steer debtors who could pay some reasonable portion of their debts away from Chapter 7 and into Chapter 13. So Congress decided to take matters into its own hands (and out of the hands of the bankruptcy judges) by coming up with the “means test,” now codified in section 707(b)(2), as one way in which the granting of relief would constitute an “abuse” of Chapter 7 for purposes of section 707(b)(1), and, as such, grounds for dismissal or conversion.
- Exemptions vary pretty wildly from state to state both in scope and amount. While some states offer relatively miserly exemptions to their judgment debtors, the state exemptions that draw the most attention are exemptions that are unlimited in amount and, in particular, unlimited homestead exemptions, such as in Texas, Florida, and Kansas. When an unlimited homestead exemption applies in a bankruptcy case, it is important to appreciate that this is more significant than assertion of the same exemption under state law. That’s because under state law, the value is only exempt so long as it’s held in exempt form. But, in bankruptcy, once the discharge is granted, the value is forever free from creditors, even once the homestead is sold and the proceeds used to acquire other assets. section 522(c). But, why would a state’s homestead exemption apply in bankruptcy? Read on, brothers and sisters.
- Section 522(d) of the Code contains a list of federal bankruptcy exemptions. Surprisingly, however, they apply in relatively few actual bankruptcy cases. This is because of section 522(b) contains two elections. Under section 522(b)(1), a debtor may elect to have her exemptions determined either under section 522(d) (and thus get the federal exemptions) or under applicable state and nonbankruptcy federal law (whatever the debtor’s state provides), together with certain retirement funds defined in section 522(b)(3)(C)). In the case of a joint filing by spouses, the debtors must both elect to have their exemptions determined under state or federal law, and, if they can’t agree, the federal bankruptcy exemptions will apply.
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Unit 7. Special Problems in Chapter 13 12 results (showing 5 best matches)
- There, the Court held that a bankruptcy court must value the collateral at the cost the debtor would incur to obtain a like asset for the same proposed use. This is a valuation measure usually called “replacement value.” Although the Court left the determination of replacement value to the bankruptcy courts on a case by case basis, the Court made clear that it was not holding that replacement value was the retail value of the property.
- Chapter 13 filings account for about 30% of all bankruptcies. The alternative it presents also presents instructors with fodder for exams. Given the differences in treatment, chapter choice can be a key part of a final exam. So let’s look at the Chapter 13 in detail.
- Chapter 13 moves fast. The debtor has to file his or her plan with the bankruptcy petition, or within 15 days thereafter. Moreover, under section 1326, he or she has to start making payments under the plan immediately, even before it is confirmed.
- But all this happens in a plan. And a court has to approve—confirm in bankruptcy lingo—all plans before they are effective. What does it take to obtain confirmation?
- So when will you be able to use cram down? On older cars—ones for which the loan was made more than 910 days before bankruptcy. Also, for non-residential mortgages, as when the debtor has a rental house or a vacation house. Beyond that, there are pretty slim pickins.
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- Publication Date: January 12th, 2016
- ISBN: 9781634594936
- Subject: Bankruptcy/Creditors' Rights
- Series: Short & Happy Guides
- Type: Overviews
- Description: Bankruptcy is a complicated subject that covers a lot of ground. Bankruptcy lawyers can be found on Main Street and Wall Street. This efficient and effective guide to Bankruptcy will help you see the big picture. The authors focus on explaining the key concepts or building blocks that apply in any type of bankruptcy case, and then help you see those concepts in action in cases under the different chapters of the Bankruptcy Code, in proceedings ranging from individual consumer debtors in Chapter 7 or 13 to Fortune 500 Corporations in Chapter 11. To make the learning process more bearable, the authors have also infused the book with humor. Each of the authors is nationally-renowned law teacher who has practiced and taught Bankruptcy for many years. One of them is even a former bankruptcy judge. Based on that experience, in this book they have set forth understandable techniques for mastering the law governing bankruptcy law, procedure, and real-world practice (in an exceedingly attractive manner).