Bankruptcy (Debtor Creditor Law) Part II Bankruptcy - Table of Contents I. COLLECTION WITHOUT COURTS . . . . . . . . . . . . . . . . 1 A. Nonjudicial Collection Methods . . . . . . . . . . . 1 B.

Restrictions on non-judicial collection. . . . . . . 1 C. Lender Liability . . . . . . . . . . . . . . . . . . 2 II. STATE LAW DEBT COLLECTION . . . . . . . . . . . . . . . . 3 A. 5 Principle ways to collect judgments. . . . . . . . 3 B. Judicial Sales . . . . . . . . . . . . . . . . . . . 3 C. Garnishment. . . . . . . . . . . . . . . . . . . . . 4 D. Pre-Judgement Remedies . . . . . . . . . . . . . . . 4 E. Exemptions . . . . . . . . . . . . . . . . . . . . . 5 F. Fraudulent Conveyances & Shielding Debtor Assets . . 5 III. BANKRUPTCY - GENERALLY. . . . . . . . . . . . . . . . . . 6 A. Introduction . . . . . . . . . . . . . . . . . . . . 6 B. Elements Common to Consumer Bankruptcies . . . . . . 7 1. The Estate (541) . . . . . . . . . . . . . . . 7 2. The Automatic Stay (362) . . . . . . . . . . . 7 C. Chapter 7 vs. Chapter 13: a debtor's choice. . . . . 8 IV. REORGANIZATION FOR FAMILY FARMERS (CHAPTER 12). . . . . . 9 V. LIQUIDATION BANKRUPTCY (CHAPTER 7). . . . . . . . . . . 10 A. Generally. . . . . . . . . . . . . . . . . . . . . 10 B. Exemptions (522). . . . . . . . . . . . . . . . . 10 C. Claims & Distributions . . . . . . . . . . . . . . 10 D. Discharge. . . . . . . . . . . . . . . . . . . . . 11 E. Debtor's Post-Bankruptcy Position. . . . . . . . . 12 VI. CHAPTER 13 BANKRUPTCY - REORGANIZATION FOR INDIVIDUALS. 13 A. Generally. . . . . . . . . . . . . . . . . . . . . 13 B. Elements of an acceptable plan . . . . . . . . . . 13 1. For Secured Creditors . . . . . . . . . . . . 13 2. For "Semi-Secured" Creditors - Lien Stripping 14 3. For Unsecured Creditors . . . . . . . . . . . 15 C. Paying Otherwise Nondischargeable Claims in Chapter 13 15 D. Modification, Conversion and Dismissal of Chapter 13 Plans 16 VII. CHAPTER 11 REORGANIZATION . . . . . . . . . . . . . . . 16 A. In General . . . . . . . . . . . . . . . . . . . . 16 B. Mechanics of Chapter 11. . . . . . . . . . . . . . 17 C. Automatic Stay Revisited . . . . . . . . . . . . . 18 D. Operating in Chapter 11. . . . . . . . . . . . . . 19 E. Avoiding Powers of the TIB/DIP . . . . . . . . . . 21 1. Generally. . . . . . . . . . . . . . . . . . . . . 21 2. Avoiding Powers Analyzed Individually. . . . . . . 21 a. Strong-Arm Provision - 544(a). . . . . . . . 21 b. Power to Avoid Preferences - 547 . . . . . . 22 c. Indirect Preferences. . . . . . . . . . . . . 25 d. Executory Contracts - 365. . . . . . . . . . 25 e. Fraudulent Conveyances - 548 . . . . . . . . 27

f. State Law Avoiding Powers - 544(B) . . . . . 28 g. Statutory Liens - 545. . . . . . . . . . . . 29 h. Equitable Subordination - 510(c) . . . . . . 29 VIII. NEGOTIATING & CONFIRMING THE PLAN. . . . . . . . . 30 A. Generally. . . . . . . . . . . . . . . . . . . . . 30 B. DIP/TIB has 3 Main Objectives. . . . . . . . . . . 30 C. Confirmation. . . . . . . . . . . . . . . . . 30 D. Voting Under the Plan . . . . . . . . . . . . 31 1. 1126 - Voting Provisions. . . . . . . . 31 2. Classification of Claims . . . . . . . . 31 3. Impairment . . . . . . . . . . . . . . . 31 4. Solicitation of Disclosure - 1125 . . . 31 5. Cramdown - 1129(b). . . . . . . . . . . 32 6. New Value Rule . . . . . . . . . . . . . 32 7. Secured Creditor Cramdown - 2 cases. . . 32 I. COLLECTION WITHOUT COURTS A risk inherent in litigation is that one party will net nothing by losing the case entirely. Further, the Creditor has the risk that the Debtor will be judgment-proof or that the Creditor will be adjudged not to own a valid debt. A. Nonjudicial Collection Methods 1. Weighing & Leveraging Process: a. The Debtor-Creditor payment process can best be viewed as a constant balancing - a weighing & leveraging process. The Debtor weighs which bills to pay, if not to pay or if to sue. The Creditor weighs which bills on which to collect, whether to threaten to sue, whether to stop credit or whether to deny access to future credit by filing a negative credit report. b. Note that securing capital equipment serves the functions of providing leverage, collateral control & possible loss reduction. Most leverage factors involve both formal legal rules & informal collection devices. 2. The Credit Information Process One form of leverage Creditors can use is to deny access to future credit. Reporting services provide credit info for potential Creditors. 3. The Fair Credit Reporting Act (FCRA) has two themes: (1) giving the Debtor access to credit report info & (2) prescribing procedures to assure accuracy of info. Willful noncompliance by a Creditor can result in punitive damages. Negligent noncompliance can result only in actual damages, costs & atty fees. a. Giving Debtor access to info: (1) 609 - 610: Intended to give debtor free access to information if negative credit rating is given (2) 612: allows debtor free access to credit information if negative credit report is given (3) 615: requires creditor to inform debtor whenever credit is denied due to negative credit information b. Prescribing procedures to assure accuracy of info in files

Bankruptcy Outline

(1) 605, 606, 613: controls on the use of obsolete info & requirements to verify adverse info (2) 611: consumer can dispute (3) 616 - 617: provides remedies for willful or negligent noncompliance (punitive damages are available for willful noncompliance) Interestingly, to the extent that the statute has enhanced the credibility of the credit reports, Creditors are increasingly likely to rely on them, raising the leverage effect of a negative credit report by a member-Creditor. B. Restrictions on non-judicial collection 1. Common law remedies a. Emotional distress (Public Finance Corp.) (1) Very high burden to meet -- must show conduct constitutes a prolonged course of hounding (2) Requisites for IIMD: (1) extreme, outrageous conduct; (2) Emotional Distress must be severe; (3) actor knows Emotional Distress is certain or substantially certain to result; & (4) conduct is result of abuse of authority or power position. This is difficult, b/c hi b/p. See Public Finance Corp v. Davis. b. Invasion of right of privacy (1) Also a hard case to make -- must show conduct constitutes publicity which is unreasonable regarding a private fact See Vogel v. WT Grant Co. 2. Fair Debt Collection Practices Act (FDCPA) a. Prohibited Practices under FDCPA (1) 805 - communication at an unusual time or place (2) 806 - conduct which harasses, oppresses or abuses a debtor (3) 807 - false & misleading representations (e.g., falsely threatening legal action) b. Available Remedies ( 813) (1) Actual Damages (2) Additional Damages up to $1,000.00 (3) Actual Costs (i.e., Attorney's Fees) c. Who does FDCPA apply to? (see CB p.27 - parties not covered) (1) Debt collectors -- not employees of creditors (2) Debt collector is a party who uses the instrumentalities of interstate commerce to collect debts owed to another (3) See Crossley v. Lieberman: The Act does not apply to Employee's of Creditor, presumably b/c Debtor's & Creditors have a "good" relationship & therefore do not need the FDCPA to protect them; d collectors have no relationship w/ Debtor's (collectors are usually more abusive). Paradoxically, the Act is narrow, but should be broader. Note that the Debtor can get atty fees under the FDCPA, but not under the c.l. torts. d. Advantages/Disadvantages of Debt Collectors (1) The advantages of d collectors is that they're specialized, they treat Debtor's fairly, & they're liable under the Act. (2) The disadvantage is that they keep a good portion of the d's as fees.

e. Alternatives to d collectors is using own Employee's, but the disadvantages are that they may hurt the Debtor-Creditor relationship & they may be liable in tort. A third option is using an atty, but attorneys fall w/in the scope of FDCPA. C. Lender Liability (the exception -- not the rule) 1. Applies to COMMERCIAL debt, not CONSUMER debt 2. State Nat'l Bank El Paso v. Farah: origin of LL. Lender threatened to call laons with no intention of doing so in order to force president of company out of office so lender could grab control. 3. Typically, debtor claims the lender acted improperly during the course of a loan; Lender liability involves lawsuits in which a Debtor claims the lender (L) acted improperly, i.e., causing the Debtor loss or destruction of bus through misrepresentations, breaches of K or bad-faith conduct, during the course of a transaction, usually during the period in which the borrower (B) was in financial trouble. Lender-liability puts limitations on the collection of commercial d's. The effect is that the Lender often owes the B $. a. Debtor seeks damages for loss or destruction of business which allegedly was caused by lender's misrepresentations, breach of contract, or bad faith conduct. b. Effect of a successful lender liability suit is a reversal of debtor/creditor positions! (1) K.M.C. Co. v. Irving Trust Co - the prototypical case. The B had a blocked acct set up, where it could not touch the $, rather the $ was for the Lender. It was a sec interest. The K said the Lender was to lend $1.7 M, but up to $3.5 M in its discretion. (2) Held: the Lender has an obligation to act in good faith under the UCC. That is, the Lender has to give the B notice or an opportunity to obtain alternative financing BEFORE REFUSING TO ADVANCE FUNDS. (3) This case can be read narrowly as a technicalities case or read broadly as a comment on the Debtor-Creditor relationship whereby the Creditor has an affirmative obligation to assist the Debtor. The latter reading leads to slippery slope problems. Courts have read this case fairly narrowly. Lender-liability suits are the exception, not the rule. c. Some states say that KMC will not apply, i.e., no UCC good faith provision, in cases of demand notes. d. LL does not apply to repossession . . . Repossession is governed by Art 9) e. Advantages to Lender-liability: is that it protects Debtor's from zealous Creditors, permits businesses to cont to run, & may even protect other Creditors. f. Disadvantages: Lenders apprehensive to lend, removes "discretion" in K's & thus transaction costs rise, hurts business in general, & hurts consumers by increasing interest rates. THE 10 COMMANDMENTS OF AVOIDING LENDER LIABILITY 1. Thou shall not make a sudden move (which could violate duty of good faith) 2. Thou shall not tell a lie or fudge the truth: 1. with respect to credit inquiries (and if a 3rd party makes an inquiry, the bank must be honest); and

2. during workout negotiations, a bank cannot make threats it does not intend to carry out 3. Thou shall honor thy commitments to the letter 4. Thou shall not run thy borrower's business 5. Thou shall not bail thyself out with thy brother's money (bank cannot injure others in the process of working out a loan 6. Thou shall keep thine own files clean (bank should write objective, non-emotional memos re: lenders) 7. Thou shall transfer a troubled loan to a workout officer (to avoid conflicting loyalties) 8. Thou shall confer with thy workout counsel 9. Thou shall think carefully before suing on a deficiency 10. Thou shall not be arrogant (make sure your actions are fair)II. STATE LAW DEBT COLLECTION A. 5 Principle ways to collect judgments: 1. Judgment Lien a. Only creates a lien on the debtor's real estate b. Arises by force of statute from the judgment itself (i.e., it arises as a result of recordation of the judgment) c. Usually only applies to liens on Debtor's real estate. (1) The advantages are that for a small fee, a Creditor can tie up the Debtor's prop & that the Creditor gets ahead of other Creditors. (2) Recordation procedures make it easier to obtain a lien w/o going through execution by encumbering the Debtor's real prop. Creditor is now in line before other Creditors & provides protection if the Debtor goes Bankrupt. 2. Writ of Execution a. Deals generally with personal property b. Court issues writ which authorizes sheriff to seize & sell property of the debtor to then give the proceeds to the creditor c. The collection process begins w/ a writ (a ct order). The Creditor has the court issue a writ after the judgment. A writ of attachment orders the sheriff to levy (seize) the Debtor's non-exempt prop, sell it & pay the proceeds to the C. The Creditor then becomes a judgement lien Creditor. The entire process is called execution. A writ of execution deals w/ personal prop only. Real prop is seized by posting notice. 3. Writ of Garnishment (see below) a. reaches debts owed to the debtor by 3rd parties (garnishees) b. A writ of garnishment, an ancillary suit against the 3rd-party garnishee, is used to attach debts owed to the Debtor for the benefit of the C. The garnishment writ asks the garnishee if she owes a debt & orders her to w/hold prop pending further order of ct. As a procedural matter, a garnishment is an ancillary lawsuit against the 3rd-party garnishee. (see below) 4. Other State Writs - vary from state to state 5. Art. 9 - Voluntary Consensual Agreements a. Voluntary Liens are usually called security interests. (1) Usually perfected by recording so as to give public notice. (2) Examples are home mortgages (sometimes called deeds of trust) & car loans. (3) Seizure of the realty collateral is foreclosure; seizure of personalty is repossession. B. Judicial Sales 1. Next step after judgment and collection of property 1. Judicial sales bring low prices, as a result of the prop being distressed & having no warranty of title for buyer in most states, and a "buyer's market" exists. Often the Debtor has other Creditors who stand to gain for higher prices, either b/c they will yield assets for them to attach or simply b/c a more financially secure Debtor is more likely to be in a position to pay.

2. If the procedures in the sale are unfair, the sale might be set aside. a. At beginning of century, courts would set aside if low sale price a. The mere inadequacy of price, w/o technical difficulties, will not in itself suffice to vacate a sale. See Guardian Loan Co v. Early. Cf. Corbitt v. Burkette (holding wife's failure to appear & bid on property resulted from husband's illegal threats of violence if wife appeared to bid, leading to grossly inadequate price). 3. Advantages/Disadvantages: a. The advantage to making sales easier is that sale prices will increase. b. The disadvantages: We want to protect the D, to encourage the Debtor to pay & these sales get sophisticated bidders anyway. C. Garnishment 1. The Creditor attempts to reach money, goods or obligations owed to the Debtor through a suit against the garnishee, i.e., the party holding it. 2. Most states provide the garnishing Creditor with a temporal "net," in which the Creditor gets to catch obligations arising in favor of the Debtor in the time between service of the garnishment & the garnishee's answer. 3. Garnishee has 2 duties a. answer the garnishment summons (liability for failure to answer may be full value of judgment against debtor -see below) b. impound property hled or owed by garnishee (note: liability for failure to impound is the amound of the property transfered) 4. In most states a judgement can be entered against a defaulting garnishee for the full amount of the judgement against the . Thus, garnishee may be liable for a debt that is significantly greated than the debt owed by the garnishee to the Debtor) 5. Extraordinary Circ's: Webb v. Erickson held that in extraordinary circ's, a defaulting garnishee may be relieved from a default judgement against her. The extraordinary circ's here was that the defaulting garnishee was experiencing lengthy hospital stays & a troubled marriage. 6. DEFENSES TO GARNISHMENT: The garnishee may defend garnishment by: a. arguing that no obligation is owed, b. attacking the validity of the garnishee's claim directly or by c. arguing that any obligation owed is offset by an obligation of the judgement Debtor to the garnishee. Valley National Bank v. Hasper held that a garnishor cannot obtain rights against a garnishee superior to the rights held by the judgement Debtor against the garnishee at the time of garnishment. 3. Restrictions on Wage Garnishment: Restrictions on Garnishment Act restricts the extent the Debtor's wages may be garnished, so as not to reduce the Debtor's incentive to work & not give the Creditor excess leverage against a defaulting D. Some states have additional limitations. a. The max amount which may be garnished from the earnings of an individual for any work wk, set out in 303 of the Restrictions on Garnishment Act, is (1) 25% of her disposable earning, i.e., those after tax. See GMAC v. Met Opera; or (2) amount by which disposable earnings exceed 30 times the fed min hourly wage for a wk, whichever is less. 304 of the Act prevents Employer's from firing Employee's whose wages have been garnished. b. Advantages/Disadvantages (1) The advantages of wage garnishing is that it is effective. (2) The disadvantages are that it discourages people from working & that it really affects low-income people. D. Pre-Judgement Remedies

1. Three pre-judgement remedies: a. Attachment: is like a writ of execution. The sheriff seizes prop, holds it until the judgement, & sells after a successful judgement (under writ of execution, sheriff does not hold the property until judgment b/c judgment already exists). b. Replevin: is an action similar to attachment for specific personal prop, not a general action. c. Lis Pendis Action: file a notice of pending litigation of rights in prop; no taking of prop. 2. State Law Procedural Safeguards (Will be governed by statute) a. Just indebtedness must be shown. b. Attachment must not be for harassment. c. Generally, other specific grounds must be shown relating to urgency or risk. Include things like the is a non-resident of the state, the is in hiding, the is hiding her prop or about to remove it from the state, & the owes the for prop obtained by false pretenses. NOTE: debt must not be exempt 3. Constitutional Safeguards a. Federal Constitution: The 14th Amend says no state can deprive any person of life, liberty or prop without Due Process of law. The test is (1) when is there state action; & (2) if there is state action, what Due Process is required? (1) Three tests for state action: (a) Symbiotic Relationship Test: actions of private party attributable to govt when they act as joint participants. (b) Nexus Test: nexus when govt & private parties actions may be fairly treated as that of the other (for ex, when the govt requires the party to act in a certain way). (c) Public-Function Test: if the private party performs a traditional pub function (ex, collecting taxes). (2) Due Process Analysis: (a) In Sniadach v. Family Finance Corp, 1969, the US S.Ct. held that as a general rule, a seizure of prop must be preceded by (1) notice to Debtor of impending seizure; & (2) the opportunity for Debtor to be heard in opposition to seizure. (b) Fuentes v. Shevin, 1972, laid out two exceptions to the Sniadach rule: (1) where the Debtor waives her rights voluntarily, knowingly & intelligibly; & (2)(a) if seizure is necessary for an important governmental interest; & (b) there's a special need for prompt action; & (c) the state strictly controls the process for initiating the action. (3) The Debtor can sue under 18 USC 1983 if she feels her rights have been violated "under color of state law." (Fuentes) b. CWT: State Constitution: Due Process claim under various state constitutions are also possible. In some states, due process is broader under state constitution than under federal

constitution. c. Thus, there are 4 rules: (1) (2) (3) (4) Pre-judgment remedies are not unconstitutional per se. Use of pre-judgment remedies are subject to DP. DP requires notice & opportunity to be heard in adversary hearing. In at least some situations, a pre-seizure hearing coupled w/ a prompt post adversary hearing will satisfy DP.

E. Exemptions (see Handout re MN exemptions and see p. ___ of outline) 1. Policy reasons for exemptions include (1) the desire to avoid results so draconian so as to threaten the social fabric of the community; (2) the state's concern that the Debtor or the Debtor's family not become a drain on the community; (3) that every Debtor have the chance to make a fresh start; & (4) that some items of personal property have little resale value to the C, but are crucial to the Debtor (e.g., clothing) 2. Classification a. Commonly classified by dollar amount and type of property b. Classifications may be ambiguous. Many legal battles hinge on classific - always argue it c. In In re Johnson, it was held that a bus is classified as a car for KY exemption purposes. d. In re England held a screw machine constituted "equipment for trade or profession." 3. Proceeds from Exempt property a. Secured Cs can force sale of exempt property b/c secured creditors have higher priority than exemptions on distribution list) b. Distribution: Following a judicial sale of exempt prop, the proceeds are allocated first to the sec Creditors, then to the Debtor to the full amount of the exemption, w/ the remainder going to the Creditors. Thus, if property is valued greater than the exemption, property is levied and sold, proceedings go to secured Cs, D (up to exemption), then to unsecured Cs. 4. Exemption of Property already received: a. Havelock Bank v. Hog Confinement Systems held that money paid by the SS Administration under the SS Act & on deposit in a bank is wholly exempt from state garnishment. b. Holmes v. Blazer Fin Svc's held that a state exemption stat exempting from garnishment wages due the head of a household do not apply to wages already received. 5. Homesteads a. This is the most important exemption. b. Household exempt; mortgage is not: If one buys a house w/ a mortgage, the house is exempt, but the mortgage is not. c. Tenancy by entirety: In jurisdictions where there is no exemption for the homestead, the homestead of married persons is often protected by tenancy by the entirety. The doctrine protects the homestead from a Creditor of only one spouse, & thus, Creditors often attempt to obligate both husband & wife on substantial d's. F. Fraudulent Conveyances & Shielding Debtor Assets 1. Fraudulent Conveyances: a. Definition: Fraudulent conveyance occurs when D conveys property to another for little or no consideration in order to avoid attachment by C, with understanding that property will

be returned at later date b. Twyne's Case stood for the proposition that a secret transfer in trust, made solely to defeat the rights of other Creditors, was fraudulent. c The Uniform Fraudulent Transfer Act: (1) History: The Uniform Fraudulent Conveyances Act, based on the Stat of Fraudulent Conveyances (1571), was adopted in 1918. The UFTA was adopted in 1984 retains the basic principles of its predecessors, prohibiting "constructive fraud" or "presumptive fraud," intent being irrelevant. (2) Prohibits Intentional Fraud: Like the Stat of Elizabeth, the UFTA condemns the transfer of prop that is intentionally fraudulent. 4(a)(1). Section 4(b) lists circumstantial indicators, i.e., "badges of fraud." This section shifts the presumption from the Creditor to the D. (a) 4(b)(1): transfer to insider. (b) 4(b)(2): Debtor retains possession after transfer, not title. (c) 4(b)(3): After threatened w/ suit, Debtor transfers. (d) 4(b)(4): transfer of all Debtor's assets. (3) Prohibits Constructive Fraud: The UFTA extends the Stat of Elizabeth by codifying the concept of constructive fraud. The Creditor does not have to show actual intent. Must show the 5(a) requirements: (1) conveyance; (2) w/o receiving reasonably equivalent value; (3) Debtor was then or as a result of transfer insolvent. Insolvent means Debtor d's > assets (4) Remedy: If transfer is voidable, C can recover judgment for value of asset transferred or amount necessary to satisfy C's claim, whichever is less. (Note: Under 544(b) (state avoidance power under Bkrtcy Code), TIB/DIP can recover the entire value of the transfer and return property to common pool) (5) Innocent Parties: If the transferee was an innocent party & paid fair csn, she keeps the prop. 8(a). If she was innocent but did not pay fair csn, she gets a lien on the prop for amount paid, but C gets property back. 8(d)(1). If she was guilty (not innocent and did not pay fair consideration), she keeps nothing. (6) Caselaw: A fraudulent conveyance is one made w/ the actual intent to hinder, delay or defraud present or future Creditors or made w/o receipt of fair csn & which has the effect of rendering the conveyor insolvent. See ACLI Govt Securities v. Rhoades (holding that Rhoades' conveyance of 60% interest in his interest in 68 acres worth $325M to his sister for one dollar one day b/f a judgement of $1.5 M against him was fraudulent). (7) Transaction leaving business with unreasonably small capital: a. Rule: A conveyance of a bus will be deemed to be fraudulent as to current & subsequent Creditors when it is made w/o fair csn & the bus has been left after the conveyance w/ unreasonably small capital. b. Application to Leveraged Buy-Outs: 1. Buyer Financing: Usual scenario involves buyer financing lender gives buyer money in return for security interest in all company assets. Buyer takes money and pays shareholders. Shareholders transfer stock to buyers.

2. Seller-Financing: Optional scenario involves seller financing - shareholders sell stock for cash and note from buyer. Buyer then issues a company bond as collateral for note which is secured by all the assets of the company. 3. Fraudulent Conveyance Attack on LBO: Prior to LBO, company usually has large amount of unencumbered assets. After LBO, all assets are subject to security interest. Unsecured Cs are how behind the secured C in priority. So unsecured Cs attack LBO as fraudulent conveyance under theory that company granted a security interest in all its assets but received nothing in return. 4. Sharrer v. Sandlas (Unsecured Cs attacked seller-financed LBO on the grounds of fraudulent conveyance. Ct found that transfer was fraudulent conveyance because fair consideration was not paid and business was left with unreasonably small capital. 2. Other Ways to Hide Assets from Creditors Apply Proceeds of non-exempt property to exempt property: In In re Reed, Reed sold non-exempt prop to friends & applied the proceeds to liens on exempt prop (his homestead). The ct held his activities valid, even though he did it w/ the intent to keep the non-exempt prop from his Creditors.III. BANKRUPTCY - GENERALLY A. Introduction 1. History: 1705 Statute of Ann provided that Ds could discharge debts but a D who was not forthcoming was subject to the death penalty. 1898 Bankruptcy Act was first act of significance because it addressed both C and D rights but it only applied to individuals. 1938 Chandler Act provided coverage to insolvent corps. 2. Structure of Bankruptcy Code: Ch 1 - definitions Ch 3 - case administration Ch 5 - trustee powers Ch 7 - liquidation bankruptcy (individuals and businesses) Ch 9 - municipality bankruptcy Ch 11 - Business reorganization Ch 12 - family farmer reorganization Ch 13 - individual reorganization 3. Why Bankruptcy? a. Prime Advantages for Creditor (1) There is no "race" to get to the assets (2) Pools all of debtor's assets (3) Debtor must "schedule" all of his assets (4) easier, uniform, more predictable for Cs b. Prime Advantages for Debtor (1) Gives Debtor a "fresh start" by discharging debts (Chapter 7) (2) Gives temporary Stay of harassment from creditors / temporary reprieve

(3) Allow reorganization (Chapters 11 & 13) without liquidating assets c. Disadvantages of Bankruptcy (1) Provides an out for debtors (moral hazard problem - recognizing bankruptcy provides social insurance for risky financial behavior) (2) Impugns reputation of Debtor 4. You cannot waive your right to Bankruptcy a. if you could, people would always do so (Cs would compel Ds to waive bankruptcy rights; individual D may be unrealistically optomistic and therefore willing to agree) b. this could adversely affect debtor's dependents 5. 2 Types of Bankruptcy Filing a. Voluntary (1) Debtor files a voluntary petition for Bankruptcy under 301 (2) Debtor need not be insolvent; he need only be unable to "service his debt" b. Involuntary: Creditors force debtor into bankruptcy by filing a petition under 303 (1) Creditor may only force debtor into Bankruptcy under Chapters 7 & 11 (2) Certain debtors are protected from involuntary Bankruptcy (eg. banks, farmers, and not for profit associations/charities). Corporations are not protected. (3) Petition (303) must be filed by the requisite number of creditors: (a) 3 creditors of unsecured claims totaling $5,000 must join; or (b) a single creditor with an unsecured claim of $5,000, if debtor has less than 12 total unsecured creditors (c) Definition of "Creditor" (1) Insiders are not creditors (303(b)(2)) (2) Wholly-owned subsidiaries of same corporation are treated as separate creditors absent showing of abuse or fraud. In Gibraltar Amusements, court held that wholly owned subsidiary can be counted as a separate C along with the parent corp absent abuse or fraud. (4) Debtor has right to file answer under 303(b). Under 303(h), court will grant relief under petition if D fails to file anwer. (5) Elements Necessary for Court to grant petition: If D files answer, court wil grant petition only if Cs prove (a) Equitable insolvency (i.e., debtor is not paying debts as they come due). (1) C don't usually have access to D's financial records, so C usually must rely on credit reports (2) Majority Rule: HIJR Properties To determine whether D is equitably insolvent, court looks at four factors: (1) number of debts, (2) amount of delinquency, (3) materiality of nonpayment, (4) general nature of D's conduct regarding financial affairs. Nonpayment of one particular C does not establish that D is equitably insolvent unless there are

exceptional circumstances. Exceptional circ's can be shown if (1) creditor does not have remedy under state law unless relief is granted or (2) D commits fraud. (3) Minority Rules: (a) D is equitably insolvent if D fails to pay largest debts, (b) D is equitably insolvent only if not paying all debts, (3) D is equitably insolvent if D is not paying certain percentage of debts. (b) OR a receiver has taken control of D's property within 120 days before petition filed. (6) Advantages of Involuntary Proceedings (a) protects Cs from actions of D and other Cs (protects the common pool) (b) provides significant leverage to C over D (7) Disadvantages of Involuntary Proceedings (a) can be used by C to harass D (b) may force D off the market even though unnecessary c. Safeguards against unjustified involuntary filings 303(i) provides that if C files an unfounded petition, D can receive atty's fees and costs plus punitive damages B. Elements Common to Consumer Bankruptcies 1. The Estate (541) a. Composition of Estate: At the moment the Bankruptcy petition is filed, a Bankruptcy Estate is created pursuant to 541(a). Under 541(a) - Bankruptcy Estate includes all property of the debtor at the time of filing petition b. Limitations of Estate (1) Property is limited to the interest of the debtor (i.e., creditor gets no more rights in the property than the debtor) (2) After-Acquired Property generally excluded: Estate Property is limited to the debtors property as of commencement of the filing (i.e., property acquired subsequent to filing is not part of the estate) 541(a)(7). (3) Some After-Acquired Property included: (a) 3 exceptions (if within 180 days of filing) 541(a)(5) (1) Any Bequest of Devise of Property (2) Property settlement or divorce decree (3) Property acquired as a beneficiary of a life insurance policy (b) Other exceptions (not necessarily within 180 days of filing) 541(a)(6) (1) Proceeds of property, even if received post petition (e.g., rent) (2) Proceeds from sale of property (3) Payment of Services Performed pre-petition: In re Ryerson expands definition of estate: D was terminated from employment and received settlement payment post-petition. Court held that the payment was part of estate because it represented payment for services rendered pre-petition. c. Specific Application:

(1) 541(a)(6) Wages earned after filing are not part of estate (2) Garnished wages are generally not part of estate (although, in a controversial move, 7th Circuit has allowed creditors to continue garnishing wages after Stay) (3) ERISA Funds are not part of estate. In In re Graham, court held that trust funds in ERISA plan were part of estate. Case was overruled by Sup Ct in Patterson v. Shumate, which held that ERISA/Keough plans are not part of estate (4) Spend Thrift Trusts are not part of estate: Under 542(c)(2), proceeds from trust received before filing are part of estate, but corpus of trust is exempt (5) Puppies are considered proceeds of property of the estate under 541(a)(6) (6) Dividends from stock are part of estate [under 541(a)(6)???] (7) Money Market Account is considered earnings of property of the estate (8) Lottery Ticket: If purchased prior to filing, is considered proceeds of property of the estate 2. The Automatic Stay (362) a. Generally (1) Creditors are prohibited from collecting on debtors's property (2) This prevents creditor from "fishing out the pond" and improving their position (3) Assures that unsecured creditors will get something (4) Gives the debtor some "peace & quiet" (5) Stays creditor's actions, but not government actions (e.g., criminal prosecutions) b. 362 in detail (1) 362 only Stays action against the debtor & property of the debtor (a) Stay doesn't apply to 3rd parties such as guarantors. Thus, if someone promises to pay debts of debtor they can still be reached (b) 105(a) - the Court's "Wildcard" (1) Allows Court to use any power to move the Bankruptcy along. (2) Often used to Stay actions against officers of debtor's company. For instance, in In re Seitles, court uses this provision to protect the officer of a corporation, where the officer is necessary for effective reorganization. Test for whether non-debtor co-defendant may be granted a stay under sec 105: irreparable harm and either likelihood of success on the merits or sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting relief. (2) 362(a)(1),(2),(8): Operate to stay most litigation efforts of creditors directed at collecting pre-Bankruptcy debts; seeks to Stay creditors from filing post-petition suits (3) 362(a)(3-5),(7) Stays actions by secured creditors attempting to collect (4) 362(a)(6) Stays informal collection practices (a) See In re Sechuan City, Inc., holding creditor's attempt to coerce payment from debtor by erecting embarrassing signs violated 362(a)(6) (b) permitted activities are very limited, but mere "annoyance" is not prohibited (5) 362(a)(3) C cannot "exercise control over estate property". Eg, cancelling fire insurance policy may constitute violation of the Stay

(6) 2 Principle exceptions to Stay - 362(b): (generally governmental actions) (a) 362(b)(1) - Debtor cannot use Bankruptcy Stay to avoid criminal prosecution (b) 362(b)(4) - Stay does not apply to the commencement or continuation of an action or proceeding by a governments police or regulatory power E.g., D cannot pollute a lake just because D has been granted Stay (2) Test for police power: In In re Seitles, the issue was whether the automatic stay applies to governmental action brought under the false claims act. Court applies two tests: (a) Pecuniary Purpose Test: Whether the governmental action relates to a pecuniary interest in the D's property or to public safety. If action relates to public safety, it is excepted from the stay. (b) Public Policy Test: Whether the governmental action adjudicates private rights or those that effectuate public policy. If action effectuates public policy, it is excepted from the stay. (7) 362(c)(1) - Auto Stay ends when the property is no longer part of the estate (8) Damages for Violation of the Stay: 362(h) - The violation of a Stay will allow the estate (?) to collect actual damages & possibly punitive damages against the creditor (a) Notice of Stay Irrelevent: See In re Holman, holding actions in violation of a Stay invalid even if creditor has no knowledge of the claim; creditor who violates Stay must reinstate status quo to avoid actual damages. [If C would have returned property upon notice, however, there would have been no liability (?)] See Fidelity Mortgage, holding that creditor violates the automatic Stay if he knows of the Stay & refuses to release DIP's property; formal notice is not necessary if there is actual knowledge (b) Standard for Punitive Damages: In re Krauss: punitive damages proper only wher C's conduct is "egregious, intentional misconduct." c. Statutes of Limitations: 108(c) extends statute of limitations until 30 days past the ending of Automatic Stay d. Declaratory Judgments to determine whether action will violate stay: Creditors can get declaratory judgments to find out if their actions will violate the Stay e. Lifting the Stay (1) Methods of Lifting the Stay (a) Lack of Adequate Protection: (for secured parties only??)

(1) 362(d)(1) Creditor can lift stay for lack of adequate protection (2) 3 methods for assuring adequate protection: a) 361(1): DIP/TIB can make periodic cash payments to the creditor equal to the decrease in value of the creditor's interest in the collateral (e.g., payments equal to depreciation of asset) b) 361(2): DIP/TIB can substitute or give an additional lien on property to the creditor (on another piece of property) - court approval is necessary for this c) 361(3): DIP/TIB can give the creditor other protection which will result in the secured party realizing the "indubitable equivalent" of value of its interest in the collateral -- this must be approved on a case-by-case manner by the judge (1) Code does not define "indebitable equivelant" - usually, it takes the form of a personal guarantee or cash payments (2) 361 is not "all inclusive" - Rogers Development holds that adequate protection can be provided in a variety ways (eg. "equity cushion" where value of property is increasing) (3) If judge makes the wrong call the Code provides 507(b): if guarantee is no good, the unsecured claim goes to the "top of the list," i.e, it is given administrative claim priority (b) Debtor has no equity in property and property not necessary for reorganization: (1) Elements: To lift the Stay under 262(d)(2) C must prove 2 things: (a) D has no equity in the property (b) Property is not necessary to an effective reorganization (2) Courts almost always find the property necessary to an effective reorganization (3) Issue is usually whether the reorganization will be "effective" Timbers holds that D cannot just show that reorganization is conceivable. D must show that property is necessary for an effective reorganization that is in prospect.

Cartwright illustrates that courts should consider adequacy of the plan early in the proceeding before costs become too high. f. 362(e) - In theory, Court must act on a request to lift Stay within 30 days, or else the Stay is automatically lifted. In practice, this doesn't happen too often, since if attorneys "push it" too hard, the judges would be spending all of their time in these "mini-trials," deciding whether to lift Stays. g. Interest Payments during a Stay (1) oversecured & secured creditors can get interest during a Stay (up to the value of the collateral) (2) Unsecured cannot get interest (3) Undersecured creditors also have no right to interest accruing during the Stay h. Operation of Stay during "gap period": During the period between filing and finalization of the reorganization plan, stay remains in effect and business continues to be operated by the DIP in the ordinary course of business. C. Chapter 7 vs. Chapter 13: a debtor's choice 1. Generally a. Code was drafted to encourage debtors to choose Chapter 13 over Chapter 7; Congress believed that this would allow creditors to get more 2. Incentives for Choosing Chapter 13 a. Statutory Incentives (1) Property Incentives (a) Ch. 13 allows debtor to keep property subject to a security interest and continue to make lower payments (1322(b)(2)). Under Ch 7, D would have to redeem or reaffirm in order to keep property. Note: D is permitted to keep all property, as long as D promises to devote future income to future creditors. Under Ch. 7, D is entitled to keep future income. (b) Ch. 13 especially appropriate for homeowners trying to forestall the repossession of their home (c) Debtor can also cure and de-accelerate a mortgage and lien strip (Bellamy). Under Ch. 7, D cannot lien strip (Dewsnup) (2) Discharge Incentives: Chapter 13 affords debtor a Broader discharge from debt than Chapter 7. In Ch. 13, only a few types of debt are not dischargeable: (a) 1328(a)(1) - can't discharge home mortgage (b) 1328(a)(2) - can't discharge domestic payments (child support, alimony) (c) 1328(a)(2) - can't discharge student loan payments (d) 1328(a)(2) - can't discharge liability for death or injury caused by DWI (e) 1328(a)(3) - can't discharge restitution payments made in connection with debtor's conviction for a crime (f) Kourtakis further limits ability to discharge by requiring D to propose plan in "good faith" (3) Judicial "Incentives" - (Substantial Abuse Provision) Bankruptcy Judge can act sua sponte to deny Ch7 access using 707(b) and "push" D into Ch13.

(a) 3 requisites (1) Debtor must be an individual (2) Debts must be primarily consumer debts (3) Court must determine that granting Chapter 7 relief would be a "substantial abuse" of Chapter 7 (b) In re Walton: Party had $497 surplus income per month; court was allowed to take this future income into account in determining "substantial abuse." Court held that dismissal for substantial abuse appropriate in this instance, since facts rebut statutory presumption in favor of granting the relief requested by the debtor. (c) Walton is now the majority law with certain reservations: (1) Court must act sua sponte (creditors barred from moving to dismiss for substantial abuse) (2) only applies to debtor with high consumer debt (Substantial abuse test not applicable to individual with debts arising primarily from stock market acquisitions, see 101(8)) (3) Presump in favor of granting relief requested by D. b. Strategic and Systemic Incentives (1) Attorney may encourage debtor to file Chapter 13 (so that attorney's will get more fees paid) (a) In re San Miguel i) It appeared that only the atty benefitted from Ch. 13; attorney's fees paid over longer period of time seems to be only reason for choosing Chapter 13 ii) court raises issue of good faith sua sponte based on minimal payments and short duration of plan iii) Held: confirmation denied, 15 days to move to convert to Chapter 13 or dismiss (2) "Chapter 20" - Filing Chapter 7 discharge does not bar filing Chapter 13 Plan (a) In re Saylors (D obtained discharge under Ch. 7 of mortgage payments in arrears, then filed Ch. 13 in order to keep his house). i) getting Chapter 7 discharge does not bar Chapter 13 plan ii) must not be filed in bad faith; good faith question of fact iii) debtor maintains rights after discharge c. Societal Incentives (1) calling yourself a bankrupt still involves a stigma (2) credit ratings are more adversely affected by Chapter 7 than Chapter 13 Note: However, many credit companies will welcome you after you file bankruptcy, due to part of the "Global Denial" provision 727(a)(8), which prohibits D from discharging subsequent debts in another Ch. 7 proceeding if filed within 6 years of the first Ch. 7 bankruptcy) (3) local legal culture (Chapter 13 may be what's currently "in fashion" in your jurisdiction or your atty may be more familiar with Ch. 13)IV. REORGANIZATION FOR FAMILY FARMERS (CHAPTER 12)

A. Based upon Chapter 13 Enacted in response to farm crisis of 1980's; many farmers were not eligible for Ch. 13 because their debt loads were too high. B. Differences from Ch. 13 1. Debtor can be eligible with far higher debts: a. Under Ch. 12, a total of $1.5 million is allowable b. Under Ch. 13, fixed unsecured debts may not exceed $100K, fixed secured debts may not exceed $350K (under 109(e)) 2. restricted to family farmers a. a partnership or corporation can be a Chapter 12 debtor as long as the entity is owned by a single family and meets certain additional family farmer tests. 101(17),(20) 3. family farmer must have regular income but may be regular annual income 4. 1205 sets forth modified standards for stay-lifting procedures, a. 1205(b)(3) makes payment of a reasonable and customary rent sufficient for adequate protection regardless of any threatened decline in the value of the mortgaged land 5. expressly permits the family farmer to modify a residential mortgage along with all other secured debt; 6. permits the plan to last more than five years 7. must devote all disposable income for the three to five year period, but disposable income is determined after deducting business expenses 8. discharge is substantially narrower than chapter 13, individual debtor remains liable on the same debts made nondischargeable in Chapter 7 (ie., D can only discharge debts that are also dischargeable under Ch. 7)V. LIQUIDATION BANKRUPTCY (CHAPTER 7) A. Who is eligible to file Ch 7? (1) individuals (Sec 109(a) provides that D not eligible for bankruptcy unless D is resident of U.S., is domiciled in U.S., or has property in the U.S.) (2) businesses (although no incentive to voluntarily do so) (3) Railroads can not file Ch. 7 (although they can file Ch. 11) B. Operation of Businesses in Ch. 7 (1) 727(a)(1) businesses cannot receive discharge (under any Ch?) (2) businesses cannot recieve exemptions (under any Ch?) (3) business has no incentive to file voluntary proceeding: Ch 7 offers no real benefit to the corporation. Therefore, it is usually filed by creditors through involuntary proceedings. C. General Procedure: 1. Trustee in Bankruptcy (TIB) gathers all of debtor's property 2. TIB distributes property according to the following "pecking order" a. Secured Parties b. Applicable Exemptions c. Unsecured Creditors - in the following order: (1) Priority Unsecured Creditors (Trustee's fees) 507, 503 ???

(2) General Unsecured Creditors (C has no Article 9 security interest eg. Visa) (3) Subordinated UnsecuredCreditors (due to some wrongdoing) d. Debtor (if assets exceed liabilities) (rare - no reason to file bkrtcy) D. Exemptions (522) 1. Debtor must choose either the State or Federal Exemption Statute. The 1898 Act incorporated state exemptions. The 1978 Code allows states to "opt out" and require D to take the state exemptions. In Minnesota, D can choose to take federal or state exemptions. 2. Exemptions cannot be waived 3 Specific Federal Exemptions - 522(d)(1-11) a. Summary of Federal Exemptions (see HANDOUT) 522(d)(1) real property up to $7500 522(d)(2) motor vehicle up to $1200 522(d)(3) household items/clothes: $200/item, up to $4000 toal b. "Wild-Card" Provision - 522(d)(5) D can exempt: (1) any unused portion of 522(d)(1) [residence of debtor - $7500 limit] up to $3,750 plus debtor's aggregate interest in any property up to $400 ($4,150 total); (2) See In re LaFlamme, holding cause of action to be "any property" for purposes of (d)(5) "wild card" exemption 4. 522(f) - Judicial liens & certain types of voluntary sec interests are not recognized in Bkrtcy a 522(f)(1) - D can avoid C's judicial liens (liens created by a judge) b. 522(f)(2) - Debtor can void non-possessory, non-purchase money security interests (permist D to void regular security interest in certain household goods, tools of the trade & health aids c. General effect - D can void liens in household goods, tools of trade, and health aids because security interest in these items would generally come before exemption. Voiding a lien does nothing more than allow D's exemption 5. Valuation of Property - 522(a)(2): a. Code provides that value of property is the Fair Market Value (FMV) of the property at the date of filing b. Majority Rule: FMV = liquidation value (See In re Walsh) (Note: liquidation value usually is artificially low, which permits D to exempt more property from the estate) c. Minority Rule: FMV = value under normal selling conditions. In re Nellis E. Procedure for filing Claims: a. Creditor files a Proof of Claim form; indicates creditor has an interest in debtor's estate b. Most of time, TIB does not object to the claim c. When TIB objects, there is a mini-trial (See In re Lanza, holding filing of Proof of Claim establishes prima facie evidence of a valid claim and shifts burden of proof to TIB to deny the claim) F. Types of Claims / Order of Distribution

1. Secured Claims - governed by 506 a. Creditor receives 1 of the following: (1) The Collateral; or (2) A payment equal to the value of the Collateral b. Types of Secured Creditors: (1) Undersecured (a) Collateral is worth less than the amount owed to Creditor (b) Secured claim is limited to the amount of the collateral, with the rest of the debt classified as unsecured Note: D cannot lien-strip in Ch. 7 (2) Oversecured (a) Collateral is worth more than the amount owed to Creditor (b) Secured claim is limited to the amount of the debt, with any excess value of collateral going to pay off unsecured debt (c) if you are oversecured, you can get post-petition interest, up to the full value of the collateral c. Atty's fees: Secured parties can get attorney's fees d. Post-Petition Interest: Oversecured C receives post-petition interest until value of collateral is exhausted 2. Exemptions (in order of distribution, D's exemptions come after secured claims) 3. Unsecured Claims (no article 9 security interest [or judicial lien?]) Governed by 502 a. Amount of Claim: 522(b) - creditor gets whatever the amount of claim is as of the date of filing of the petition b. "Overclaims": If a C "overclaims", C will be allowed the claim unless the D objects (If a creditor claims that debtor owes him [some amount], creditor will be allowed this amount unless TIB objects to it - 522(a)) c. No post-petition interest is permitted on Unsecured Claims - 522(b)(2) d. TIB can assert all defenses against the unsecured claim - 522(b)(1) e. Unsecured Cs can get attorneys fees (1) if contract provides for them (is this required?) (2) for post-petition efforts Note: (CB p. 247) There is a significant debate over this issue. (a) Arguments in favor of awarding fees: (Adam's view) Code does not prohibit atty's fees for unsecured creditors. United Merchant Manufacturers (b) Arguments against awarding fees: The code does not explicitly provide for atty's fees to unsecured parties. Some argue that because the code does provide atty's fees for secured parties, by negative implication, unsecured parties are not entitled to them. In addition, permitting unsecured parties leads to the perverse result that secured parties are only entitled to fees up to the value of the secured collateral, while unsecured parties would be entitled to unlimited atty's fees.

f. Procedure for Unsecured claims: (1) determine the amount of each claim (2) determine the pro rata share for each C (Note: Most unsecured C's unsually get 10 cents on the dollar) (Note: unsecured C may be better off seizing the property prior to bkrtcy) g. Priority Unsecured Claims - 507(a)(1-7), 503(?) See handout re: priority claims G. Discharge 1. Generally: a. Discharge is the main object of declaring Bankruptcy; it gives the debtor a fresh start b. Discharge is not a matter of right, but it is usually granted as a matter or course c. 524(e) - 3rd parties (guarantors) are not discharged (or stayed) 2. Objections to discharge a. 523 - Rifle Shot Objection (1) C must object to prevent discharge - Under 523(b)(1), most of these debts are dischargeable unless C objects (2) Effect of Granting Objection: 523(a) - if C establishes a 523 exception, C can continue to collect the claim (3) Grounds for objection (a) 523(a)(1) - taxes (b) 523(a)(2)(A) Debts for property obtained through fraud To make out fraud, court must be able to infer from all the circumstances that the debtor incurred debts without intending the repay them (c) 523(a)(2)(B) - Debts for property obtained through false financial statements (1) C must show (1) debtor made a materially false statement; (2) reasonably relied upon by creditor; (3) debtor intended to deceive (2) In re Milbank - loans obtained through false pretenses are not dischargeable (3) In re Ward - C must make some credit check to obtain exception to loan discharge (this is the majority rule: C cannot rely on D's financial statements without conducting credit check) (4) Minority Rule: C can rely on D's good faith (d) 523(a)(3) - Debts not listed under schedule of debts required by 521 are not discharged unless creditor had notice or actual knowledge of Bankruptcy filing (Note: D may amend filing within certain time (add section on this) (e) 523(a)(5) - Domestic obligations are not discharged (e.g., child support, alimony, etc.) (f) 523(a)(6) - Liabilities for wilful or malicious injury to a person or a person's property are not discharged

(g) 523(a)(7) - criminal sanctions ("a fine, penalty or forfeiture payable to and for the benefit of a governmental unit") are not dischargeable (h) 523(a)(8) Educational debts are not discharged unless repayment would pose an undue hardship to the debtor [or payments were made for 7(?) years already] In re D'Ettore, held repayment of student loans constituting 82% of total debt merely "garden variety" hardship, & therefore not dischargeable. A high percentage of student loans leads to a presumption of nondischargeability. Factors showing undue hardship: (1) Whether D has total incapacity now and in the future to pay debts for reasons not within control of D (2) Whether D has made good faith efort to negotiate a deferment or forbearance of payment (3) Whether the hardship will be long-term (4) Whether D has made payments on the student loan (5) Whether there is permanent or long-term disability of the D (6) Ability of D to obtain gainful employment in the area of study (7) Whether D has made good-faith effort to maximize income and minimize expenses (8) Whether dominant purpose of the bankruptcy petition was to discharge the student loans (9) The ratio of the student loan to total indebtedness b. 727 - Global Objection ("The court shall grant the discharge unless. . .") 727(a) (1) Effect of Global Denial: All creditors can attempt to collect their debts (2) Bases for Global Denial: (a) 727(a)(1) - Corporations cannot receive a discharge (b) 727(a)(2) - If Debtor, with intent to "hinder, delay or defraud" C has transferred, destroyed, or concealed property of the D within 1 year of filing or after the date of filing Note: this is the same as 523 (WHAT DOES THIS MEAN??? D CANNOT DISCHARGE ANY DEBTS IF GUILTY OF A FRAUD RIFLE OBJECTION???) (See In re Reed, holding attempt to convert property from non-exempt to exempt status ok absent some intent to defraud creditors) (c) 727(a)(3) - If Debtor knowingly destroyed or failed to preserve records of financial position i) Has the debtor failed to keep financial records? ii) Is such failure justified under the circumstances of the case? (See In re Harron, holding debt not dischargeable, as debtor had no justification for failure to keep records) (d) 727(a)(4) - If D deprives TIB of property or information; 4 ways: i) (A) making a false oath or account ii) (B) presenting a false claim iii) (C) deceiving or giving consideration for action or inaction

(i.e., Bribery) iv) (D) withholding books & records from TIB (e) 727(a)(8) - If Debtor has already received a discharge under Chapter 7 or 11 (or 13???) Bankruptcy proceeding within the past 6 years (ie, bankruptcy will permit D to discharge debts only once every 6 years) 3. 525 Protects Bankrupt Party from Discriminatory Treatment a. 525(a) government may not discriminate solely on the basis of Bankruptcy by denying, revoking, suspending, or refusing to renew a license, permit, charter, franchise, or similar grant. Note: Courts have read this provision narrowly (if other reasons motivate government's decision to deny D a license, franchise, etc., there is no violation). See In re Elter, holding mandatory granting of student loan following Bankruptcy not required by 525(a) b. 525(b) Private employers cannot discriminate due to debtor's Bankruptcy filing Note: this does not apply to refusal to grant credit H. Debtor's PostBankruptcy Position (After Ch. 7)? 1. Generally: a. Golden Rule: Liens pass through Bankruptcy unaffected b. Property will be taken back by secured creditors unless D redeems secured collateral or reaffirms the secured debt 2. Redemption - 722 a. In a Nutshell: (1) Debtor pays the creditor the full value of the collateral (see c below) (2) Debtor can force this upon a creditor (3) Purpose: allows debtor maximum freedom to choose the assets he wants to keep (4) Very Rare, since all unsecured creditors must be paid off before debtor may redeem, and if they could all be paid off, why did debtor declare bankruptcy in the first place? b. You can only redeem personal tangible property intended primarily, but not exclusively, for personal, family, or household use c. Amount which must be paid: (1) Under UCC 9506, you must pay off the entire value of the loan, even if the fair market value of the collateral is less than the amount of the loan (2) Congress felt this was too harsh, so under 722 debtor only needs to pay off the value of the collateral to redeem property 3. Reaffirmation - 524(c) a. In a Nutshell: (1) Debtor waives discharge of debt & agrees to be bound by the loan agreement (2) Debtor cannot force this upon a creditor b. Requirements of valid reaffirmation: (1) 524(c)(1) - Reaffirmation must be executed before discharge is granted (2) 524(c)(2) - Agreement must contain a clear & conspicuous statement giving the debtor the right to rescind anytime prior to discharge or within 60 days after

such agreement is filed with the court (whichever is later) (3) 524(c)(3) - If debtor is represented by an attorney, attorney must supply an affidavit stating 3 things: (a) Debtor was fully informed (b) Agreement was voluntary (c) Agreement does not impose undue hardship on debtor (4) 524(c)(6) - if debtor is not represented by an attorney, the Judge must evaluate the agreement to determine that the reaffirmation agreement does not impose undue hardship & that it is in the best interest of the debtor (See In re Pendlebury, holding Court will not negotiate for the parties in reaffirmation agreement - the proper role of the court is to review, not negotiate, the agreement) d. 524(f) - Note: Debtor can still voluntarily repay any debt 4. D may Redeem or Reaffirm Old UNSECURED Debt. Party may redeem or reaffirm unsecured debt as well as secured debt, pursuant to the same requisites listed above (However, See In re Brown, holding Court will refuse to uphold reaffirmation of unsecured debt upon finding agreement "not in party's best interest")VI. CHAPTER 13 BANKRUPTCY REORGANIZATION FOR INDIVIDUALS A. Generally 1. Chapter 13 is reorganization for individuals. The focus is on the court or TIB using future earnings, not assets, to pay off Creditors. The Debtor usually agrees to pay future income for the next 3-5 yrs according to court-appointed reorganization plan, but keeps assets. 2. TIB's Duties under Chapter 13 (1302) a. object to improper Creditor claims & also improper discharge of any debts. b. assist the Debtor in the Debtor's duties. c. recommend approval or denial of the plan. d. ensure that payments commence w/in 30 days of filing of the plan. e. orchestrate successful completion of the plan. 3. 3 primary criteria for Filing Chapter 13: a. only individuals can file chapter 13; no corporations or partnerships b. the individual must have regular income under 101(30); income must be sufficiently stable & regular to enable individual to make normal payments under chapter 13. Note that just about anything that comes in regularly counts as "regular income." McMonagle (eg UE benefits, social security payments) c. dollar limitations: fixed unsecured debts must be < $100K; fixed sec d's must be < $350K (109(e)) Note: contingent & unliquidated claims do not count in this tabulation (a) contingent claim: one Debtor may or may not have to eventually pay. (b) unliquidated claim: liability is admitted, but the amount of the debt is in dispute.

B. Elements of an acceptable plan (ie, protections necessary for secured, semi-secured, and unsecured Cs) 1. For Secured Creditors: a. Relief from Automatic Stay. The automatic staty (362) limits the activities of Secured Cs. Even though the automatic stay is in place, however, secured parties are protected by: (1) 362(d)(1) Adequate Protection: If C can show that its interest in the collateral is not adequately protected, stay can be lifted (2) 362(d)(2) D has no equity in property and property not necessary for effective reorganization. Stay can be lifted: if Creditor can show i) Debtor has no equity in the encumbered property; and ii) the property is not necessary for an effective reorganization (both tests must be met) (3) Example: Radden - Although D had no equity in car, court held that car financing lender was "adequately protected" if debtor party takes out car insurance; court also found that car was "necessary for an effective reorganization," since debtor needed car to get to work - to make money - to keep paying creditors. b. Secured Creditor is guaranteed "Adequate Payment": (1) 1322(b)(2): debtor can modify the rights of the secured party in return for "adequate payment", (a) can't modify rights if the Creditor has a security interest solely in the Debtor's principle residence (i.e., a mortgage) [but deacceleration is not considered a "modification"] (b) However, if the Creditor has an interest in the Debtor's home and car, then the Creditor's rights may be modified (2) 1325(a)(5): restricts the power of modification (a) For debtor to modify the rights of a secured creditor, one of the following factors must be present: i) acceptance of plan by the Creditor; or ii) continuation of the lien & payments proposed to the creditor of a present value (see present value computation, infra) that at least equals the value of collateral iii) surrender of the collateral to Creditor (3) 2-part computation of the valuation of the collateral: (a) first, determine the amount of the allowed secured claim (i.e., FMV of collateral) or the amount of the loan, whichever is less; i) Smith illustrates importance of valuation of the collateral, since it bears on the amt of interest, etc. The interest rate typically chosen to compute present value is the contract rate. (b) second, determine the present value of the secured claim (account for interest, inflation, etc.) (4) Deaccelaration of home mortgage is not considered a "modification" for purposes of 1322(b)(2), which prohibits the modification of home mortgages (a) Acceleration occurs when a term of the loan provides that upon certain

condition (eg. D misses 3 consecutive payments), the C can "accelerate" the morgage and collect the entire debt. Under Ch. 13, D can "deaccelerate" by curing the default and reinstating the original payment schedule. (b) In re Taddeo court says de-acceleration of mortgage is allowed, as this is not considered a modification i) court says "de-acceleration" is necessary under 1322(b)(3) and 1322(b)(5) (these provisions permit D to cure default) ii) However, debtor must cure the default to de-accelerate the mortgage under 1322(b)(3) and 1322(b)(5) in order to reinstate the original payment schedule. iii) This case suggests that if foreclosure occurs before the Debtor cures the default, it is too late (c) Timing of Deacceleration: So when can debtor de-accelerate a loan? 5 approaches have been advanced: iv) Never: de-acceleration can't be done after creditor has exercised right to accelerate (minority view) v) de-acceleration can't be done after mortgagee has obtained judgment vi) de-acceleration allowed, but these cases don't talk about the effect of judgments vii) de-acceleration possible even after mortgagee has obtained judgment (majority view - Taddeo) viii) possible even after foreclosure (so long as state exemption period has not expired) 2. For "Semi-Secured" Creditors - Lien Stripping a. Generally: (1) Controversial, due to high potential for abuse (remember you don't need to actually be insolvent to declare bankruptcy; equitable insolvency will do) (2) Debtor permitted to reduce undersecured debt down to the value of the collateral (3) 506(a): if a claim is undersecured (i.e., secured collateral's FMV < loan amount), it gets bifurcated into: (a) secured portion: Fair Market Value of collateral (b) unsecured portion: remainder of the loan amount over and above the FMV of collateral (4) Then 506(d) voids the unsecured portion of the claim which was "excised" by 506(a) (i.e., the creditor "eats" the excess of FMV of collateral) b. Lien Stripping in Chapter 7 (not allowed) (1) Dewsnup v. Timm: D cannot lien strip in Ch. 7 (a) Debtor wanted to void unsecured portion of claim under 506(d) in chapter 7; this would have effectively reduced the value of the debt to the value of the secured property (from $120K to $39K); (b) Held: No, 506(d) only voids claims not allowed pursuant to 502. That is, 506(d) does not allow lien stripping of a fully allowed claim under 502. The court reads "allowed sec claim" as a claim that is 1st allowed, and then secured, not allowed secured claim. (2) The effects of denial of lien-stripping on Creditors: (a) Sec Creditor assured of recovering any appreciation in value of property

during or after filing of Bankruptcy. i) ex: Debtor owes Creditor $100K, property worth $60K at filing; then property increases $20K in value. The benefit goes to the sec party. (b) Secured party does not have to foreclose immediately to assure that Debtors redeem collateral (c) Lien avoidance by 506(d) applies only to secured parties if claim is disallowed under 502. (e.g., barred by Statute of Limitations) (3) The effect of denied lien-stripping on Debtors: (1) forces Debtor seeking to retain collateral either to redeem or reaffirm agreement. c. lien-stripping under chapter 13 (allowed) (1) In re Belamy (a) Court allowed lien stripping in chapter 13 (b) Method: 506(a) bifurcates claim into secured and unsecured portions; 1322(b)(2) says can't modify secured claim, but 506(d) can void the unsecured portion (c) you can lien strip in chapter 13 3. For Unsecured Creditors a. 3 Primary Protections - if these tests are not met, the court will not confirm the plan (1) Best Interest Test: 1325(a)(4) (a) Present value of the proposed payments to the holder of the unsecured claim must be at least equal to the present value of the amt the Creditor would have received in chapter 7 liquidation (minimum floor) (b) This is rarely an issue, since chapter 7 unsecured Creditors usually get very little (2) All Disposable Income Test: 1325(b): Plan must either: (a) provide for payment in full of all claims, 1325(b)(1)(4); or (b) commit all the Debtor's disposable income for 3 yrs, 1325(b)(1)(B); i) "disposable income": all income which is not "reasonably necessary" to support the Debtor & his/her dependents ii) Cases generally hold that debtor cannot have a standard of living greater than the bankruptcy judge iii) Note: Plan can be modified later if D's disposable income subsequently changes (3) Good Faith Test: 1325(a)(3) (a) Debtor must "act equitably in proposing a plan" (b) In re Greer: Debtor attempted to confirm plan in which unsecured creditors got almost nothing (1 on the dollar) i) This was confirmed, since debtor acted equitably ii) nominal or zero payment to general unsecured creditors may be evidence of bad faith, however, other evidence of bad faith is required to justify the denial of confirmation of a proposed Chapter 13 plan b. Classification of Unsecured Claims (1) In general, D cannot unfairly discriminate between unsecured Cs by giving priority to one class over another

(2) Some discrimination between unsecured Cs is acceptable (a) 1322(b)(1) - unsecured claims with co-debtors (consumer debts) can be treated differently under the plan (therefore, these claims can be given preferential treatment) (b) In re: Hosler: it is possible to discriminate among unsecured creditors, but you must consider 4 factors: i) whether discrimination has a reasonable basis ii) whether debtor can carry out the plan without such discrimination iii) whether discrimination was proposed in good faith iv) How the discriminated class is treated C. Chapter 13 Discharge 1. 1328 - debtor can discharge virtually all debts in chapter 13 except: (1) 1328(a)(1) - can't discharge home mortgage (2) 1328(a)(2) - can't discharge domestic payments (child support, alimony) (c) 1328(a)(2) - can't discharge student loan payments (d) 1328(a)(2) - can't discharge liability for death or injury caused by DWI (e) 1328(a)(3) - can't discharge restitution payments made in connection with debtor's conviction for a crime 2. D must propose reorganization plan in good faith: In re Kourtakis - Debtor tried to get criminal assault judgment discharged pursuant to a 3 year plan devoting all "discretionary" income: struck down by court as not proposed in good faith a. Unless Chapter 13 filing is shown to be part of a scheme to defraud, the mere fact that the debtor's primary debt is nondischargeable in Chapter 7 does not by itself preclude Chapter 13 relief b. Length of plan is a relevant consideration in deciding good faith, because it reflects the debtor's state of mind and intentions, as well as the amount of repayment to creditors c. statute on face allowed debtor to discharge tort judgment; however, court holds that plan would not be proposed in good faith if trying to exclude a particular nondischargeable debt was the entire purpose of declaring Chapter 13 D. Modification, Conversion and Dismissal of Chapter 13 Plans 1. 1329 - Plan can be modified at request of debtor or creditor if debtor's status changes (e.g., debtor wins the lottery) 2. 1307 Motions to convert or dismiss a. 1307(a) - debtor can convert plan from Chapter 13 to Chapter 7 b. 1307(b) - debtor can request dismissal of the plan c. 1307(c) - creditor can request dismissal or conversion of the plan pursuant to a showing of cause (e.g., constant default) *See statute for other reasons "for cause" (1) courts will rarely grant request by creditor to dismiss a plan In re Phalen (2) courts will give debtor a chance to complete plan if default was caused by factors beyond the debtors control (See In re Bond) (3) if plan is dismissed (i.e., debtor not allowed to complete the plan), the automatic stay is lifted and it's "open hunting" for creditors 3. Hardship Discharges - 1328 a. some debtors can avoid dismissal upon default and receive hardship discharge under 1328(b) (the court "waves its magic wand and debts are gone"), 3 factors must be met (See In re Bond):

(1) failure to meet the plan must be the result of circumstances beyond debtor's control; and (2) value of payments under plan to each creditor must be at least what each creditor would have received under Chapter 7; and (3) modification of the plan cannot be practicable (i.e., if you can possibly modify, hardship discharge won't be granted) 4. Filing then Re-Filing - 109(g) a. Prevents debtor from abusing Chapter 13 Stay b. Debtors used to be able to abuse Chapter 13 Stay by (1) filing for Chapter 13, (2) not proposing a plan, (3) waiting for bankruptcy court to dismiss their Chapter 13 filing, then (4) filing another Chapter 13 again c. 109(g) put in place to stop this, if plan is dismissed debtor can't refile again for six months (gives creditors some time to "pick at debtor's bones")VII. CHAPTER 11 REORGANIZATION (BUSINESS) A. In General 1. DEFINITION: involves the rehabilitation of the business entity pursuant to a reorganization plan by which the entity remains in business but with a different ownership structure 2. WHO CAN FILE: businesses can file; Railroads can file (although they can't file Ch 7) ; stockbrokers cannot file, individuals can file (but rarely do) 3. DISTINCTION BETWEEN CHAPTER 7 & CHAPTER 11: a. Chapter 7: relinquishes all control over assets to TIB, who sells them & distributes proceeds to creditors (i.e., Liquidation) b. Chapter 11: Creditors sell their claims & receive in return a share of the reorganized entity (i.e., a sale to the claimants themselves) 4. CHAPTER 11 IS SIMILAR TO CHAPTER 13 a. Debtor takes advantage of Stay to reorder its affairs; it "trims down" b. Business is restructured so that it is once again a viable business entity 5. Advantages to Chapter 11 a. Protects employees of the bankrupt corporation b. Helps creditors get more of their debts repaid (business has greater "going concern" value than liquidation value) c. General benefit to community: economic stability, payment of more taxes, continued availability of goods and services to the community, etc. d. Gives corporation which is insolvent (but economically viable) a second chance 6. Disadvantages to Chapter 11 a. Can hurt the industry by undercutting competition (Ch 11 gives economic advantage to Ch 11 corporations) b. Managers, who control the filing, have a strong incentive to improperly file Chapter 11 (in order to keep their jobs) c. No guarantee to creditors that they will get more later 7. 2 THEORETICAL SCHOOLS OF BANKRUPTCY: a. Law & Economics School (Barnett & Jackson)(Vaird?? & Jackson) (1) Argue that Bankruptcies only serve 2 functions: (a) They regulate the process by which actors make exchanges against the common pool of assets in their efforts to increase individual wealth (i.e., regulates how the "pie" is regulated)

(b) They serve to maximize the outcome for those same individuals as a group by maximizing the size of the pool (i.e., makes the "pie" bigger) (2) From these two propositions, they argue that Chapter 11 is no good; they argue that Chapter 11 does not serve to maximize the common pool b. Non-economic School: (Warren) (1) Argues that bankruptcy is a complex process which serves many interests, not just the interests of the creditors (eg. interests of debtor, creditors, and community) (a) You cannot evaluate the usefulness of Chapter 11 by looking only at the value to the creditors (b) Chapter 11 exists for broader reasons & should therefore continue to exist c. Note: Less than 10% of all Chapter 11 Plans Succeed B. Mechanics of Chapter 11 1. Petition can be filed voluntarily (301) or involuntarily (303) 2. Procedure After Petition is filed: a. Debtor files a list of creditors required by 521 (they are notified pursuant to 342) b. Automatic Stay is imposed under 362 (gives D breathing space and provides for orderly distribution of assets) c. During period between filing & proposal of plan (Gap Period) the business continues to be operated by DIP) (1) DIP runs day-to-day business (2) Management usually serves as DIP (3) Although DIP is the same management their role has changed in two ways (a) DIP No longer controls the corporation, DIP controls the bankruptcy estate of the corporation; since DIP controls the Bankruptcy estate he has powers he previously did not have (b) DIP acts for the benefit of the creditors & shareholders now, rather than just the shareholders d. DIP has powers of TIB (1) Power to obtain financing during bankruptcy (364) (2) Power to avoid preferences (547) (a) this is the most important power (b) preferences = a transfer to a favored creditor within 90 days of the bankruptcy or within 1 year for an "insider" (3) Power to assume or breach outstanding existing contracts (365) (4) Power to avoid fraudulent conveyances (548, 544(b)) (5) Power to set aside unperfected or late perfected security interests (544(a), 547) (6) Power to require the return of certain property to the estate (542 - turnover of property of the estate) d. Negotiation: (1) DIP uses avoidance power to arrive at a consensus regarding a reorganization plan (2) After all parties agree to the plan it is voted on (1126); then plan is submitted to bankruptcy judge who decides whether or not to approve it (1127) (3) Negotiation is a large factor in the above process i) Debtor has leverage to compel creditors to come to the

bargaining table (e.g., automatic Stay - if they don't come to bargain, they get a raw deal in the reorganization plan) ii) Debtor can adopt the plan even though a minority of creditors reject it (4) Chapter 11 negotiations are held in the shadow of Chapter 7 e. Alternatives to Regular Chapter 11 negotiations: (1) Prepackaged plans: everybody signs on before the debtor files for bankruptcy; then the debtor files for bankruptcy to force the minority position Cs to accept the plan (2) Non-bankruptcy Workouts: party negotiates the credit arrangement in the shadow of possible bankruptcy C. Operating in Chapter 11 1. Who runs the entity? a. Either a DIP or TIB (1) Under the 1898 Act, trustee was appointed automatically. (2) Under the 1978 Act, in most instances, the management remains in control as the Debtor in Possession (DIP) under the theory that it is better to let management continue to run the business due to familiarity (3) However, any party in interest (usually a creditor) can request the appointment of a trustee in bankruptcy (TIB) if s/he is unhappy with the way the company is being run (1104(a)) -- must show: (a) Good cause (Fraud, dishonesty, mismanagement); or (b) That it is in the best interest of creditors, equity holders (shareholders), & other interest of the estate (c) appointment of a TIB is the exception rather than the rule In Sharon Steel, the issue was whether appointment of trustee was appropriate. C must show clear and convincing evidence that removal of DIP is warranted. Court held that company was being run for the benefit of management and abuses were obvious; court appointed trustee. (d) Appointment of trustee is a crucial decision in attempt to reorganize a corporation. The decision usually involves an intense struggle between management and Cs. (4) If TIB is not appointed, the Court can appoint an Examiner under 1104(b) (a) Requisites for appointing an examiner: i) a request for an examiner from a party in interest; and ii) must be in the best interest of the estate to make the appointment; or the debtors unsecured debts must exceed $5 million (b) Examiners duties include investigating & reporting on the honesty and competence of the DIP (c) The estate pays for the Examiner 2. Use of Collateral during Ch. 11 a. Unencumbered Collateral (i.e., not subject to lien) (a) can be sold, leased or used in any matter within the ordinary

course of business (363(c)) (b) If unencumbered collateral is not used in the ordinary course of business, sec 363 provides for automatic judicial review b. Encumbered Collateral -- 2 types: (a) Non-cash Collateral: 363(e) i) can be used in the ordinary course of business; creditor can request the court to condition use on DIP/TIB providing adequate protection (363(e)) ii) If not used in ordinary course of business, sec 363(b) provides for automatic court review (b) Cash Collateral: 363(c) i) Defined as cash, negotiable instruments, or cash equivalent ii) Accounts receivable are not cash collateral, but inventory is considered cash collateral iii) TIB/DIP cannot sell, use or lease cash collateral unless: a) each entity who has an interest in the collateral consents; or b) the court authorizes such use after notice & hearing on adequate protection (363(c)(2)) iv) Earthlite C sought to prevent Earthlite from using cash collateral. Court noted that cash collateral is special because it is highly volatile and prone to misuse. To protect creditors, DIP can only use cash collateral upon court approval even if in the regular course of business. However, court cannot deprive DIP of cash needed to survive; thus, court must engage in balancing of interests. v) Use of Cash Collateral is also constrained by Bank's right of Setoff, which is a cancellation of cross-demands between D and C - 553(a): a) Party with right of setoff is treated as a secured party; b) Account subject to setoff is treated as cash collateral; therefore, it cannot be touched without court approval c) 362(a)(7) provides that the filing of the bankruptcy petition stays the right of setoff. Hoffman illustrates that courts are unlikely to lift the stay in order to allow bank to exercise setoff. d) "mini-preference" provision of 553(a)(3) Petition Financing in Chapter 11 a. Question: how does a DIP insure cash infusion? only two alternatives: (1) High risk lenders (2) Prior lenders b. 3 Important Sections re: inducement to lenders: 552(a), 552(b), & 364 (1) 552(a): prepetition security interests do not attach to property acquired by DIP after the filing of the Bankruptcy petition; therefore, DIP/TIB can offer the lender a security interest in collateral acquired post-petition (a) only applies to consensual liens (b) applies to after-acquired property clause, giving security interest in "all property now & in the future" (the effect of 552 is that no security interest will exist, notwithstanding such a clause)

3. Post-

(2) 552(b): Exception to 552(a) (a) if pre-petition security interest encumbers proceeds of pre-petition collateral, the post-petition proceeds of such collateral will also be subject to the C's prepetition security interest Note: A security interest in inventory would not extend to after-aquired inventory, but a security interest in accounts recievable would cover accounts receivable generated from the sale of pre-petition inventory. (b) "Exception to the exception" Under 552(b) i) court can order otherwise, based on "equities of the case" ii) this provision iis used by the court in situations where property of the estate is used to convert collateral into proceeds. Anderson illustrates the exception to the exception: it is designed to cover situations where the collateral is converted into proceeds at some expense to the estate. (c) Under the 552(a) exception, C only gets interest in proceeds generated from pre-petition collateral (3) 364 - Inducement to New Lenders: 364 Gives DIP/TIB ability to tempt potential creditors with the following inducements: (a) 364(a) - allows DIP/TIB to give a post-petition unsecured credit transaction in the ordinary course of business an administrative expense priority over pre-petition unsecured creditors (without a hearing / without court approval) (b) 364(c) - DIP/TIB can authorize, after notice & hearing, can authorize 1 of the following 3 things: i) can give creditor priority over other administrative expenses, including attorneys ii) can give creditor a lien on unencumbered property iii) can give creditor a junior lien on encumbered property (c) 364(d) - DIP/TIB can request the Court to grant "Super Priority" which gives creditor a lien equal or superior to existing liens on secured property i) This can only be done if DIP/TIB can show he can't obtain credit any other way ii) TIB/DIP must give adequate protection to the secured party (Unsecured creditors do not need adequate protection Garland) (d) 364(e) - Protects Creditors who are given priority i) if creditor made the loan in good faith they are protected & the reversal of creditors priority by a higher court does not affect it ii) EDC Holding Co. Court found that lender was not a lender in good faith because it had knowledge that proceeds of loan were to be used for an improper purpose. A portion of the proceeds were designated to pay lawyers whose claims were not allowable under bankruptcy law.

(e) Importance of Obtaining Post-petition priority: Remember, if the Ch. 11 fails, the post-petition Cs will be fighting among the existing Cs for the D's remaining assets D. Avoiding Powers of the TIB/DIP NOTE: AVOIDING POWERS APPLY TO ALL CHAPTERS 1. Generally a. TIB/DIP can use avoiding powers to invalidate certain pre-bankruptcy transfers of property (in effect, TIB/DIP can invalidate its own transfers) b. Avoiding Powers can be used in any bankruptcy - but they occur most often in Chapter 11 c. Avoiding Powers give the TIB/DIP leverage in dealing with creditors by threatening Cs with avoidance if Cs do not agree to a reorganization plan d. DIP/TIB is not the old debtor with respect to avoiding powers; DIP/TIB can invalidate transfers to preferred creditors months before petition was filed (in effect, avoiding powers permit DIP/TIB to recreate the common pool that existed before the pre-bankruptcy risk behavior began). 2. Why have avoiding powers? a. contributes to policy of allowing business to effectively reorganize by putting everything back into the "common pool" b. it allows everyone to be put back into the position before bankruptcy skewed their behavior (before everybody started grabbing for assets) 3. Avoiding Powers Analyzed Individually a. Strong-Arm Provision - 544(a) (1) Sec 544(a) and Sec 9301 of the UCC provide that perfected secured creditors or lien Cs trump unperfected Cs. This is also true under state law as to mortgage holders. Article 9 identifies who has an interest in the property and cures the ostensible ownership problem through "perfection." The bankruptcy code is consisten with Article 9. The bankruptcy requires notice through filing; without notice, the C basically becomes an unsecured creditor Remember the hierarchy of creditors: (a) perfected creditors & judicial lien creditors (b) unperfected creditors (c) unsecured creditors (2) TIB/DIP can trump unperfected creditors due to conference of 3 powers under 544(a): Under the bankruptcy code, the TIB/DIP acquires: (a) the rights of a hypothetical judicial lien creditor 544(a)(1) (b) the rights of an execution creditor 544(a)(2) (c) the rights of a bona fide purchaser 544(a)(3) - for real estate purposes McCannon Rule: If the C does not record a mortgage, the TIB/DIP is treated as a bona fide purchaser and the interest of a bona fide purchaser trumps the unperfected mortgage holder. However, the court finds that mere occupation constitutes constructive notice and is enough notice to trump the trustee. (minority rule?) (3) 3 Rules of 544(a): (a) if the transfer was recorded or perfected prior to the date the bankruptcy petition was filed, the TIB/DIP cannot invalidate the transfer under 544(a) (b) If the transfer was not recorded or perfected by the date the bankruptcy petition was filed, the TIB/DIP can invalidate the transfer under 544(a)

after unperfected debt is "trumped" it becomes general, unsecured debt (the transfer is invalidated and the property goes back into the estate) (c) A TIB/DIP cannot invalidate a PURCHASE MONEY SECURITY INTEREST (PMSI) perfected within 10 days after delivery of collateral to the debtor even if the debtor files a bankruptcy petition in the gap between creation of the security interest & its perfection Note: 362 Automatic Stay normally extends to perfection. Sec 362(a)(4) provides that a C cannot perfect a security interest after the bankruptcy filing. 362(b)(3) provides an exception: C with a Purchase Money Security Interest has a 10 day grace period to perfect a security interest after the date of filing. (4) Strong- Arm Trumps Unrecorded Federal Tax Liens (a) 6321 of IRC: if a person fails to pay income taxes, a lien is automatically created on his property in the amount owed (b) 6323(a) of IRC: the above lien will not be valid against a judgment lien creditor (the DIP/TIB) until notice is provided (i.e., it must be recorded); once it is filed it trumps the TIB/DIP Avoid Preferences - 547 (1) Generally: (a) 544 permits TIB/DIP to avoid preferences under state law (???) (b) 547 permits TIB/DIP to avoid preferential treatment of 1 creditor (c) discourages "races to the courthouse" (since preferred Cs will only have to return the transfers later) and equality of distribution (2) Elements: 547(b) sets forth 7 elements which = oidable preference: (a) transfer (under 101(54) transfer = voluntary or involuntary disposing of or parting with property (doesn't have to be cash)) (b) of an interest of the debtor in property i) See Sun Railings, where court held that when 3rd party loans money to a debtor for the express purpose of repaying a debt, the money never becomes part of the estate, & therefore not an interest of the debtor ii) Rule: a 3rd party's payment only becomes part of the estate if the debtor, not the creditor, designates which creditor will be paid with the proceeds) (c) to or for the benefit of a creditor i) creditor = an entity who the debtor owes money to ii) Note: No preference exists if recipient of transfer is not a C of the D at the time of the transfer (eg. owner of Co takes a security interest in Debtor company's property - there is no preference if owner was not a C of the Co [although there may be a fraudulent conveyance]) (d) on account of an antecedent debt (i.e., cannot be a contemp. exchange; also, GIFTS generally are not voidable) i) antecedent debt = a debt owed prior to the time of the transfer. Thus, the court looks to when the debt was incurred and then to when the transfer was made. If the debt was incurred prior to the transfer, the transfer meets the "antecedent debt" requirement) ii) Note: (???) 547(e) applies; thus, a transfer of a security interest occurs on the date of the transaction if C perfects the security interest within 10 days. (This rule helps a C because

b. Power to

a transfer of a security interest to C at the time D becomes indebted to C is not "on account of an antecedent debt," (it is treated as contemporaneous) even if C does not perfect the security interest until later) (e) while the debtor was insolvent i) insolvent = liabilities exceed assets ii) debtor is presumed to be insolvent 90 days prior to date of filing bankruptcy petition under 547(f) iii) Is the presumption rebuttable (?????) (f) within 90 days of petition, or in the case of an insider, within 1 year of petition i) in In re Sportsco, transfer by check held to take place when it was honored, rather than when it was mailed. Barnhill adopts Sportsco as the proper rule (this helps TIB?DIP invalidate transfers by check because they are more likely to fall within the preference period ii) 101(31) defines insider - generally a director or officer (or relative of individual D) (g) which has the effect of increasing the amount the transferee would have received in a ch 7 bankruptcy Almost always satisfied unless i) transferee is fully secured before the transfer took place; or ii) the estate is sufficiently large to permit payment of 100% of unsecured claims (rare) (3) Criticism of Preference Provision (a) Overinclusive because it may void ordinary payments needed to keep a business going (b) Underinclusive because Cs can avoid the 90 day time limit by obtaining the transfer before that time period commences if they have warning of impending bankruptcy (4) Remedy for Voidable Preference: 550: gives TIB/DIP right to compel creditor to return the property; no additional penalty is incurred by the creditor (5) 547(e): 10 day grace period to perfect security interest (a) a transfer takes place at the time it is effective between the parties, (not on the date that security interest is perfected) provided that the secured party perfects within 10 days (b) If security interest is perfected after 10 days, the transfer occurs on the date of perfection (c) Effect of (a): It is easier for C to fall outside of the (90 day/ 1 year) preference period. (eg. If C received security interest 99 days before filing, and C perfects 89 days before filing, TIB/DIP cannot avoid the transfer even though security interest was perfected during the preference period) (d) also applies to antecedent debt provision in 547(b) (6) EXCEPTIONS TO POWER TO AVOID PREFERENCES - 547(c) (a) Burden is on C to establish the exception once TIB/DIP establishes a prima facie case of preferential transfer (547(g)) (b) Why give an exception to voidable preference? i) gives creditors a safety net so they will lend debtors money on the eve of bankruptcy ii) This benefits all creditors, by keeping the business going (c) As a practical matter, the creditor does not "give the money back"

when a voidable preference is found; the amount owed to the creditor is simply reduced by the amount of the voidable preference THIS APPLIES TO ALL VOIDABLE PREFERENCES (d) Contemporaneous Exchange For New Value exception 547(c)(1) i) Elements a) Contemporaneous Intent: must be intended to be a transfer to the creditor for new value given to the debtor (cannot be on account of an antecedent debt) b) Contemporaneous in fact: transfer has to occur at a time "substantially contemporaneous" with the time the debt arose (factual issue; See, e.g., In re Strom, where court held that 9 months was not substantially contemporaneous) ii) To complete transfer, C must perfect security interest: (ie, exchange is not contemporaneous unless C perfects near the time of the transaction). In In re Strom, C did not perfect until 9 months after the transaction due to mistake; court held that defense did not apply. a) Argument in favor of treating exchange as contemporaneous where C fails to perfect: some argue that defense should still be valid if C had no intent to deceive. b) Response: C's failure to perfect may induce other Cs to extend credit to D based on D's perceived (but not actual) position. Thus, prohibiting a contemporaneous exchange defense in this situation eliminates fraud by the D; D cannot induce other Cs to loan funds by having other Cs delay perfection after transfer. iii) Cash payment for goods is excepted: These type of payments are not preferences because they are not on account of an antecedent debt and they are not made contemporaneously. (e) Ordinary course of business exception 547(c)(2) i) Elements: a) Debt must be in the ordinary course of business b) Payment must be made in the ordinary course of business c) Payment must be made according to ordinary business terms ii) Only applies to payments - not transfers of property iii) Majority Rule: "Ordinary Course of Business" is determined by the particular parties' usual practice. In Steel Improvement, court held that late payments were in the "ordinary course of business" where the D historically had a practice of paying late iv) Minority Rule: "Ordinary business practice" is determined by industry practice. This rule gives effect to the theird prong of 547(c)(2) by looking not only at the parties' prior practice, but also looking to the ordinary business terms

within the industry. This approach limits the exception to almost no practical application. v) The exception applies to long term debts: In ZZZZ Best, Sup Ct held that the exception is applicable to long-term debt payments, because the Code does not distinguish between short-term and long-term debt. vi) Threats by C are not in the "ordinary course of business": Family Home Center held that any time payment is made after threats by a C, the payments will not be considered to be in the ordinary course of business. (f) Purchase Money Security Interest (PMSI) Exception - 547(c)(3) i) 4 Elements: a) Creditor must extend new value to D so D can acquire certain real or personal property b) Debtor must sign a security agreement giving the creditor a security interest in the property c) Debtor must use the money loaned to him to acquire the property in (b) d) Creditor must perfect its security interest no later than 10 days after debtor receives possession of collateral ii) Rationale for treating PMSI as an exception: A PMSI has no net effect on the estate. There is basically no addition or subtraction to the estate, thus other Cs are not hurt by granting the PMSI exception (CWT: in fact, encouraging PMSIs may help the D avoid bankruptcy in the same way the new value exception operates to help keep D afloat) (g) New Value Exception - 547(c)(4) i) Primary Purpose: to provide protection to a creditor who receives a preference & after such preference extends further credit ii) Rationale for Exception: we want to keep the business going; even though the creditor got a preference, he extended further credit & should not be penalized iii) 3 easy steps: a) Identify a payment that is preferential under 547(b) b) Ask whether after the preference the creditor advanced new credit value to the debtor which was unsecured c) if the creditor did advance new value to the debtor, reduce the amount of the preference which was voidable by the new value advanced iv) Note: for the exception to apply, the D must not have subsequently made another transfer to the C. The Code requires that "on account of which new value the D did not make an otherwise unavoidable transfer to or for the benefit of such C"

v) Hypo re: New value exception: on 3/1 Norwest loans you $10,000 pursuant to revolving credit arrangement; on 3/15 you repay $6,000; on 4/1 NW loans you $5,000; on 4/15 you declare Bankruptcy Since there is a voidable preference of $6,000 on 3/15 followed by new unsecured credit of $5,000 on 4/1 the voidable preference is reduced to $1,000 ($6,000 - $5,000) (h) Floating Lien Exception - 547(c)(5) i) When applicable: the exception covers situation where creditor holds a security interest in all present & after-acquired inventory of the debtor and the D acquires new inventory that betters the position of the C after the preference period begins. Arguments that increase in value is a preference: Should be voidable to maximize the pool of assets. If an increase in amount (and hence value) of collateral is not treated as a preference, C could manipulate D by influencing the D to buy inventory during the preference period. ii) Rule: Under 547(c)(5), a Creditor with a security interest in inventory and accounts receivable is subject to a preference attack to the extent that the preference improves C's position during the preference period. This section benefits unsecured Cs. iii) Use two-part test to determine if C's position has improved: look at secured party's position (1) 90 days prior to bankruptcy vis-a-vis his position on (2) the date of filing. Two-part test is administered using the following 7 step approach: a) Determine amount of debt on date of bankruptcy petition filing (e.g., $100,000) b) determine the value of debtor's receivables or inventory encumbered by secured party's lien on the date of bankruptcy petition (e.g., $75,000) c) Subtract (b) from (a) ($100,000 - $75,000 = $25,000) d) Determine the amount of debt 90 days before the petition (e.g., $90,000) e) Determine the value of debtor's receivables or inventory encumbered by secured party's lien 90 days before the petition (e.g., $30,000) f) Subtract (e) from (d) ($90,000-$30,000 = $60,000) g) Subtract (c) from (f) ($60,000-$25,000 = $35,0000 this is the voidable preference) iv) If C is worse off at the time of filing (you end up with a negative number at step (g)) there is no voidable pref. v) If creditor is oversecured (value is greater than amount owed) 90 days prior to petition, there can be no voidable preference, since the creditor cannot be made better off

vi) In valuing collateral, measure value from the creditor's perspective - (use the liquidation value; See Clark Pipe) vii) Nivens: an increase in the VALUE of inventory (as opposed to an increase in the AMOUNT of inventory) does not improve the position of the C for purposes of the exception. Specific holding: An increase in value of certain collateral (e.g., crops) will not create a voidable preference (See In re Nivens) (is this general rule?????) c. Indirect Preferences (Levit Situation) (1) Hypo: a corporation borrows $1 million from Norwest (unsecured); Corp. promises to pay back $50,000 per month; Norwest insists on a guarantee from the president of Corp.; Corp. falls behind on all its bills except for Norwest; Corp. then files for bankruptcy; Question: can these payments to Norwest be voided? (2) 547(b)(1) - a transfer to a party other than a creditor can be voided if transfer is "to or for the benefit" of a creditor (3) Levit: Mr. Deprizio had signed & guaranteed the notes from the bank; as president, Deprizio was an insider under 101; moreover, he is a guarantor & a creditor of the firm; creditor is defined in 101(5)(a) as someone who has a claim which includes a contingent right to payment against the company; if he pays, he can seek reimbursement & subrogation against the company; for insiders, the period is lengthened from 90 days to 1 year (a) Held: because the payment to the lender benefits the guarantor by reducing his exposure (547(b)(1)) payments made by the guarantor/debtor are voidable preferences within 1 year (b) Rule: whenever you have an insider guarantee, the period for voidable preferences is 1 year (c) 550(a)(1) - DIP/TIB can recover the value of a preferential transfer from either the transferee (lender) or the entity for whose benefit the transfer was made (guarantor/insider) (alhtough the lender can then recover from the guarantor) As a practical matter this is very important, because very rarely will the guarantor have the money, but the lender often will (d) Levit has no effect on oversecured C: Levit only adversely affects an unsecured C. Levit has no impact on an oversecured C because such a creditor cannot be given a voidable preference. (e) Available Defenses: Southwest Equipment Rental adopts the Levit analysis. However, the court holds that the C can use its own defenses as well as the defenses of the indirect beneficiary (the guarantor) [CWT: but Guarantor probably cannot use all of C's defenses) (f) Adams' Criticism of Levit: i) In its reading of sec 547, the court mixes two transfers: the transfer between the lender and the debtor and the transfer betweent he insider and the lender. The language of 547(b) does not seem to suport this mixing and matching of transfers. (C-arg: the transfer to the lender is for the benefit of the insider) ii) The legislative history of sec 550 does not support the result

reached by the Levit court (Nickles) (g) Validity of personal guarantees after Levit i) Reasons why C may seek a guarantee: a guarantee gives the bank additional assets to reach in the event of bankruptcy; creates a leveraging device to coerce payment; ensure that the guarantor gives his best efforts in support of the D; the guarantor may have sufficient assets to reimburse the lender if the preference is recovered from the lender ii) Reasons why D may give a personal guarantee: guarantee may help the D acquire creditt; it may also reduce D's cost of acquiring credit (interest rates) (h) Effect on Conglomerates: Where a bank lends money to a conglomerate that subsequently files bankruptcy, and each sub-part of the conglomerate has guaranteed the debts of the others, every payment made by any part of the corp. within 1 year of the petition is a voidable preference (i) Application to Senior and Junior Lien Creditors: Where there is both a senior & junior creditor, & the senior creditor is fully secured, any payments made by the D to the senior creditor improve the position of the junior creditor (by freeing up collateral) & are therefore voidable preferences; DIP/TIP can recover these preferences from either the Senior or Junior creditors [I disagree with this last proposition]. (j) Creditor's Responses to Levit: Require Guarantor to waive rights of subrogation against D: If the guarantor waives its right of subrogation against the D, the whole analysis falls apart, since the guarantor is no longer a contingent creditor of the estate. Majority of courts accept this type of waiver, although some courts reject this as being in bad faith Contracts - 365

d. Executory

(1) Definitions (a) Most widely accepted definition - Countryman: contract that is so far unperformed on both sides that the failure of either party to complete their performance would be a material breach, excusing further performance by the other party (b) Informal Definition: one that is negotiated before filing, for which performance is continuing or due in the future (c) Recent Definitions: i) Rovine: any obligation unperformed on both sides ii) Lubrizol: any contingent obligation unperformed on both sides iii) Warren & Westbrook: any contract not fully performed on either side (2) Effect if Contract is not Executory: (CB p. 572-73) Courts generally have not explored this issue. In some circumstances, courts have held that the TIB cannot reject the contract and therefore must perform the contract. Other courts have held that because the TIB cannot assume a contract, it cannot force the terms of the contract on the other party. Warren and Westbrook find both arguments frivolous.

(3) Powers of TIB/DIP under 365: (a) Three Choices: Under 365(a) DIP/TIB can do 1 of 3 things with respect to Executory Contracts: i) reject the contract ii) assume the contract iii) assume & assign the contract (b) Rationale: DIP/TIB should have the power to keep valuable and profitable contracts and dispose of less valuable or detrimental contracts. DIP attempts to arrive at the most economically efficient solution by assuming those contracts that are economically beneficial to the DIP. These contracts benefit the estate and hence the other unsecured creditors. (c) Effect of each choice? (assume a lease scenario) i) Reject: The D can no longer use the property, but the D is no longer liable for payments. Since the D has breached the contract, C is entitled to an unsecured claim against the bankrupt estate for damages (i.e., a garden variety breach of contract claim). Damages usually consist of the difference between the contract price and the market price, but because this claim is classified as unsecured, the C will only receive the same pro rata share that other unsecured Cs will receive. ii) Assume: debtor continues to be liable for rent & is able to use the property; creditor continues to receive rent payments (note: rent is a first priority administrative expense) iii) Assume/Assign: debtor is relieved of any liability for breach of lease (365(k)); creditor must look to assignee for payment (4) Limitations on Rejection (a) Landlords: Where the debtor is a landlor i) 365(h)(1): a debtor/landlord can't use 365 to evict tenants; however, the landlord can cancel the lease, but the tenant can maintain possession of the property (365(h)(2)) ii) When the lease is cancelled, the debtor/landlord no longer has to perform the services required by the lease (e.g., water, heat, etc.) but the tenant can offset for damages against rent owed. Note: Lessee cannot maintain a claim for damages over the amount of the offset if the amount of the damage is greater than the lessee's rent obligation. iii) Majority View: 365(h) only applies to Real Property - not personal property (e.g., leasing a car) (b) Under collective bargaining agreement i) 1113: a debtor (employer) must engage in negotiations & discussions with the union & seek court approval before altering the agreement

[insert p. 50-51] Assignment

(5) Limitations on Assumption or Assumption &

(a) Some Contracts Cannot be Assumed or Assumed & Assigned i) Contracts terminated before bankruptcy cannot be assumed or assumed & assigned (In re Mimi & In re Mulkey - court looks at the provisions of the lease to see whether party complied with termination procedure before bankruptcy filing. If the party fulfills the requirements for proper termination, DIP/TIB cannot assume or assume and assign the contract) 365(c)(3) - prohibits the assumption of a lease of non-residential real property that is terminated before bankruptcy ii) Loan Commitments cannot be assumed [& or ???] assigned (365(c)(2)); rationale: a lender doesn't want a debtor who was solvent at the time of the loan to assign a loan to an insolvent party iii) Contract not assignable by State Law cannot be assigned nder Bankruptcy (365(c)(1)); rationale: to allow this would allow bankruptcy code to "re-write" state law (orreverse ?????) Typically applies to contracts for personal services or contracts for law enforcement (?) (b) Requirements for Assumption & Assignment: i) if there has been a default on the contract, the party assuming the contract must meet the criteria of 365(b); 2 main requirements: a) Cure or provide "adequate assurance" that the default will be cured b) provide adequate assurance of future performance ii) To assign a contract: a) assuming party must provide adequate assurance of future performance by the assignee (365(f)(1), 365(f)(2) - it doesn't matter whether or not there has been a default for assignment purposes b) What is adequate assurance? In re Sapolin Paints: defines adequate assurance as a factual question of whether assignor exercised good faith & observed commercial standards. The assuming party (assignor) must investigate assignee to determine assignee's financial viability. iii) To assume a lease, you must assume the entire lease - so if a contract has both a loan commitment & a lease commitment, the contract cannot be assumed (i.e., C can "get around" 365(e)) (by drafting contract in such a manner???) (c) Contracts which prohibit or limit the assumption & assignment of contracts in bankruptcy are not effective (365(e))

(d) Obligation of the parties to the contract, pending decision by the TIB to assume, assign or reject (i.e., during the "gap period") i) In re Feyline Presents, Inc.: contract is enforceable against the nonbankrupt party but not against the bankrupt party. (Note: Thus, the effect on the other party is severe if the D declares bankruptcy. The other party must continue to perform under the contract, but only receives an unsecured claim for a breach of the contract by D) ii) 365(d)(2) Other party can bring an action to force the TIB make an early election (e) In re Rovine: Burger king forced TIB to make an election re: assumption or rejection; TIB chose rejection; Burger King later sought injunction to enforce a non-compete agreement that was part of contract a) Holding #1: A contract is executory when, at the time of filing, both parties have any obligation to perform - the obligation need not be a MATERIAL obligation. This was an executory contract, since both parties have an obligation to perform (regardless of whether these obligations were material) b) Holding #2: Executory contract must be rejected in its entirety or not at all. Therefore, the covenant was not enforceable b/c DIP rejected the contract (f) Lubrizol: Holder of patent license (licensor) wanted to reject a license agreement & sell to another party - court held this was OK because a contract is executory if there is any CONTINGENT obligation on both sides under the contract Note: Congress reacted with 365(n) - Licensee can retain their license & sue for any damages for breach of license (an affirmative damage action) so long as the licensee continues to make payments for the license. However, the Lubrizol approach to executory contracts still has validity. e. Fraudulent Conveyances - 548 (1) Generally (a) Similar to Uniform Fraudulent Conveyance Act (b) Fraudulent Conveyance = property is transferred to a party for less than a reasonable value--to the disadvantage of all other creditors (c) We are basically trying to put as much as possible back into the "pool" (2) Elements (a) Under 548 the TIB/DIP can avoid a transfer of assets by a debtor within 1 year of the transfer if the transfer was made either: i) with the actual intent to hinder, delay or defraud creditors (548(a)(1)); or ii) if the debtor received less than a reasonable equivalent value in exchange for the transfer (548(a)(2)) AND a) was insolvent or became insolvent as a result of the transaction; or

b) was engaged in a business or about to engage in a business transaction for which the remaining property was unreasonably small capital; or c) intended to incur or believed he would incur debts beyond his ability to pay Note: d/n have to be a conveyance to a C (infact, usually it isn't) (b) Cases re: Fraudulent Conveyances: i) Actual Intent to Defraud: In re Tri-State Paving (owners of corp took corporate funds, claiming as past salary, & went to Las Vegas): Held: paying yourself as a director in full, while leaving the other creditors with nothing constitutes actual intent to defraud a) actual intent may be proven using "badges of fraud" (are these same as in UFCA???) b) as an officer, you should pay yourself regularly (if the salary had been paid in regular course of business, there would have been no fraud) ii) Less than Reasonably Equivelant Value: Date of Transfer of security interest: Durett (D filed bankruptcy 9 days after foreclosure sale, in which house with FMV = $200,000 was sold for $115,000 a) 70% Rule: reasonably equivalent equals at least 70% of FMV b) For purpose of one year limitation, Transfer deemed to take place on date of foreclosure sale, not when the security interest was created (typically years before) c) As a consequence of Durett, banks simply pass the transaction costs on to their customers iii) Consideration for 3rd Party: Date of security of guarantee: Definition of insolvency: Rubin (subsidiary company's used collateral from parent corp. to secure loans) - issue: did parent corp. receive "reasonably equivalent value" a) Holding: a debtor can receive fair consideration for his property, even though the consideration goes initially to a third party, so long as economic benefit is conferred to the debtor in exchange for the property b) Sub-issue 1: when did "transfer" take place? Transfer by way of guarantee occurs on the date the guarantees were exercised, not granted c) Sub-issue 2: was the debtor insolvent? insolvency is when the sum of the debts is greater than the FMV of assets (don't use book value)

(3) Good Faith Defense for subsequent transferees: The initial transferee has no good faith protection under 550 (??) however, the transferee of the initial transferee is protected by good faith under 551 f. State Law Avoiding Powers - 544(b) (1) Generally (a) 544(b) gives the TIB the ability to use any avoiding powers provided by state law (b) There must be at lease 1 unsecured creditor to use 544(b) It provides that TIB can avoid any pre-bankruptcy transfer that is avoidable under applicable state law by a creditor holding an unsecured claim (2) For example, TIB can use the UFTA or UFCA to avoid transfers (a) TIB can avoid a transfer if it is fraudulent toward an actual creditor with an unsecured claim (TIB steps into shoes of unsecured creditor & voids the transfer on his behalf) Note: this is different than under 544(a) (Strong Arm Provision), where TIB can avoid unperfected security interests whether or not there is an unsecured C because the TIB assumes the position of a hypothetical lien creditor. (b) This gives the TIB state substantive law & state statute of limitations (e.g., O.P.M. Leasing: TIB lost under 548 because transfer occured outside of one year, but had a valid claim under 544(b), since state statute of limitations was 6 years (c) Also gives the TIB the ability to use any voiding powers of State Corp. law; specifically, state corp. law usually prohibits payment of dividends when corp. is insolvent (d) The asset which is the product of a voided transfer is returned to the common pool - it doesn't go to the unsecured creditor on whose behalf the transfer was voided (this is not a "mirror" of what happens outside of Bankruptcy, yet it comports with the "theory" of Bankruptcy, in that nobody should get preferential treatment) (3) The TIB can void the entire transfer, even though the resulting liability may be greater (?) than that owed the unsecured creditor on whose behalf the transfer is voided (e.g., if there is 1 unsecured creditor owed $10 the TIB can wipe out a $10,000,000 transaction!) Moore v. Bay (4) Once the transfer is voided, the party who lost the asset becomes an unsecured creditor in the amount of the asset (5) Under 544(b), the holding of Durett (under the Code, fraudulent conveyance occurs if D receives less than 70% of FMV) does not apply. UFTA sec 3(b) provides that reasonably equivelant value is realized at a justly-held foreclosure sale. Therefore, the 70% minimum requirement is not applicable to a claim under 544(b). g. Statutory Liens - 545

(1) Generally, allows TIB to avoid certain liens created by state law (e.g., landlord lien) (2) 2 Threshold questions: (a) Is the claim the TIB seeks to avoid a statutory lien? i) Statutory Lien = any non-consensual lien which arises by force of statute (except Art. 9) (b) If So, is it the type of lien described in 545? 2 main types: i) landlord's liens 545(3),(4) - landlord's liens (lien for nonpayment of rent). Thus, TIB can void a lien fixed on D's property for non-payment of rent. Rationale: combats incredible leverage landlords would have over tenants Note: 545 does not apply to consential liens. Thus, a lien for nonpayment of rent created by virtue of a lease would not be affected ii) Bankruptcy priority liens 545(4) - (i.e., a lien that becomes effective upon bankruptcy filing) are voidable; rationale: don't want states to "re-write" the Bankruptcy code In re National Sugar Refinery: UCC 2-702, which allows a party to withhold shipment of goods to a known insolvent party does not create a "hidden priority lien", thus TIB cannot avoid under 545. Rationale: 546(c) allows creditor to reclaim goods if the D has recieved such goods while insolvent; since the seller has the power to reclaim goods it certainly has the power to stop goods from being transferred h. Equitable Subordination - 510(c) (1) Principles of Equitable Subordination (a) CWT: effect of Equitable subordination under code can be to subordinate the C's claim OR to avoid the claim (transfer lien back to the estate (???) (b) Rationale: 510(c) penalizes Cs who have taken undue advantage of D and other unsecured Cs. (c) After notice and hearing, court (under principles of equitable subordination) may subordinate a C's claim: (d) 3 Pre-requisites for Equitable Subordination (Mobile Steel): i) creditor must have engaged in some type of inequitable conduct (advantage taking) ii) such conduct must have resulted in injury to other creditors or conferred an unfair advantage to the party being subordinated iii) Equitable Subordination must not be inconsistent with the Bankruptcy code (e) 3 Fact patterns

i) where there is an allegation of wrongdoing, & the wrongdoer is an insider (e.g., trying to convert equity into secured debt is inequitable conduct) ii) where there is an allegation of wrongdoing, & the wrongdoer has exercised control over the debtor, making itself almost an insider (e.g., bank making a debtor pay it first; or where the lender persuades the debtor to use suppliers who charge higher prices because the lender owns the suppliers) iii) where corporate owners or investors capitalize a corp. with a very small equity investment plus a much larger amount "loaned" to the corp., & the loan/investment is treated like an equity investment (see Carolee's Combine) a) Carolee's Combine: D conducted auctions. In order to get money to finance acution, D promises a high return to investors and first priority on the proceeds of the auction. Aucntion took place and overall D owed 230M. D pays off the investors first and the other Cs goth nothing. Court held that these investors were more similar to equity holders; and equitably surbordinated them. b) 2 holdings: (1) court will focus on the effect of the arrangement -- did it put a favored party in an advantageous portion over other parties; (2) then court applies the 3-part Mobile Steel test, supra (2) Equ insub may be applied to situation where equity holder is given security interest prior to bankruptcy. (eg. owner of corp takes security interest in corp to defraud Cs) This "preference" cannot be attacked under 547, because an equity holder is not a creditor. however, it could be attacked as a fraudulent conveyance, or court could equitably subordinate C's claim. (3) Hypo: Adams buys Golf-ball factory then takes a security interest in the machinery; 3 questions: (a) is this a voidable preference under 547? No, he is not a creditor; must be a creditor before the transfer was made (b) is this voidable as a fraudulent conveyance under 548? Yes (c) is this voidable under 510(c)? Yes, because he is an insider (d) Suppose now the bank steps in & runs the corp. into the ground -- what result? Lender Liability! (4) Note there is no time frame with respect to 510(c) equitable subordination (5) Consensual Subordination - 510(a) (a) Generally i) Party consents to being subordinated ii) Creditors agrees to subordination in a contractual arrangement; i.e., mutual consent, consideration iii) This is the rule in practice, 510(c) is the exception (b) 3 important points i) governed by general contract principles of mutual assent and consideration ii) does not have to be in writing iii) no public filing required

iv) If a party with a higher priority agrees to be subordinated, all other parties with lower priority to the party agreeing to be subordinated are also subordinated to the new party. VIII. NEGOTIATING & CONFIRMING THE PLAN A. Generally 1. While business continues to operate the DIP/TIB attempts to reach an acceptable reorganization plan 2. A DIP can propose a reorganization plan during the first 120 days after the filing (1121(b) gives an exclusive right to the DIP/TIB) 3. Typically, the plan is not proposed for a year after the filing 4. Proposed plan will usually already have been worked out & agreed to prior to filing B. DIP/TIB has 3 Main Objectives: 1. Evaluate the Firm's current financial situation 2. Determine any changes necessary in the viability of conducting future operations 3. Reconcile goals (1) & (2) with those of the various claimants a. e.g., In Northwest Situation, different classes of creditors have very different agendas; Secured creditors prefer liquidation; just about everybody else (unsecureds, equitys, government, union, etc.) prefers reorganization 4. DIP/TIB cannot look at bankruptcy in a vacuum; must also consider: a. Tax Law - loan forgiveness is treated as income (108, 1017 of I.R.C.); a discharge of indebtedness can be excluded from income, but only as an offset against certain tax advantages (most importantly Net Operating Loss [NOL] carryovers) b. Labor Law - (ERISA generally protects pensions) c. Environmental Law C. Confirmation: Once plan is formulated it must be confirmed 1. Under 1126 a statutory majority of each class of creditors must vote in favor of a plan for the plan to be confirmed 2. If creditors vote for the plan then the court will confirm the plan if 13 requirements are met (1129(a) - the 2 most important (we will focus only on these) are: a. "Best Interest Test" - Unless the creditor voted for the plan, he must receive at least as much under the plan as he would have received under a chapter 7 liquidation (1129(a)(7)) - remember: this does not apply unless a party votes against the plan b. "Feasibility Test" - Bankruptcy Judge asks what is the likelihood that the plan will succeed (e.g., what his the likelihood that initial reorganization will not be followed by an immediate liquidation) (1129(a)(11)) - a safeguard against "over-optimism"; no matter how many creditors voted for a plan, it will not be confirmed unless it meets the feasibility test; the following 4 factors are considered in the "feasibility test" (1) Adequacy of capital structure (2) Earning Power of the new business (3) General Economic Conditions (4) Ability of Management 3. Under the feasibility test, the court looks at the performance of the entity during the "gap" period (time after filing petition & before proposing a plan) 4. Final Note: under 1129(a)(10) at least 1 impaired class must vote for the plan to confirm D. Voting Under the Plan 1. 1126 - Voting Provisions a. 1126(a) - all parties with claims (creditors) or interests (equity holders) can vote b. 1126 eliminates 2 classes from voting: (1) 1126(g) - if a class will receive nothing under a plan, it is deemed to have rejected the plan (2) 1126(f) - if a class is not impaired under the plan, it is deemed to have accepted the plan c. 1126(c) - (applies to all other classes of impaired creditors) 2 requirements for approval: (1) it must be approved by a simple majority in number of creditors in the class who

2.

3.

4.

5.

voted; & (2) a 2/3 majority in the amount of debt must vote for the plan Classification of Claims a. Question: under what criteria can creditors be separated into different classes? (1) a class may be grouped together only if they are substantially similar (2) conversely, class can be grouped separately if their claims are substantially dissimilar b. Remember, under 1129(a)(10) at least one class of impaired creditors must vote for the plan in order to confirm Impairment a. 1124 sets forth requirements for impairment; a class is impaired unless: (1) the legal, equitable, or contractual rights of a holder are left unaltered; or (2) if the only alteration of legal, equitable, or contractual rights is a reversal of an acceleration of default by curing the default & reinstating the debt; or (3) there is a cash payment to the creditor on the effective date of the plan equal to the amount of the claim Solicitation of Disclosure - 1125 a. Question: how do the parties know how to vote? (1) 1125 - prescribes that people should have enough information to make an informed decision (2) 1125(b) - before creditors vote, they must be supplied with: (a) a copy of the plan (or summary) (b) a written disclosure statement containing "adequate information" (3) 1125(a)(1) defines "adequate information" as information which is reasonably practicable to enable a hypothetical reasonable investor to make an informed judgment regarding the plan (See In re Malek, which sets forth a "celebrated" list of what is required in a disclosure statement) b. Since there is a great deal of litigation involved in disclosure, 1125(e) sets forth the Safe Harbor Rule: (1) under 1125(e), no person connected with the solicitation of a plan is liable for a violation of the securities laws, so long as that person acts in good faith & in compliance with Chapter 11's disclosure requirements (2) This issue generally arises because debtors often solicit creditors with stock offerings (i.e., selling securities in exchange for capital) Cramdown - 1129(b) a. Generally - confirming the plan even if all parties don't vote for it; i.e., cramming it down the creditor's throats (1) Remember, for a judge to confirm a plan we need 2 things: (a) "Best Interest" test must be met (b) Plan must be accepted by a statutory majority of each class (1126(c)) b. The Statute: (1) 1129(b) - a plan accepted by less than every impaired class can only be confirmed if: (a) at least 1 class of impaired creditors has accepted the plan (1129(a)(10); and (b) the plan does not discriminate unfairly between classes (c) the plan is fair & equitable (this is the key to Cramdown) (2) 1129(b)(2) defines "fair & equitable" according to which class is dissenting to the plan: (a) For Secured Creditors (2 criteria): i) Liens of the secured creditor must be preserved by the plan ii) Creditors must be paid the present value of their allowed claims (b) For Unsecured Creditors & Equity Holders: i) Must either be paid in full; or ii) the plan must provide that any parties junior to them get

nothing (ABSOLUTE PRIORITY RULE) (3) For all practical purposes, the equity holders are screwed, so. . . 6. New Value Rule a. created because equity holders have no leverage; they are at the mercy of the senior. creditors b. Equity holder, notwithstanding absolute priority rule, can retain their equity interest if 3 prerequisites are met: (1) the new value must be contributed in money or money's worth of new value (no "sweat equity"; and (2) Contribution from the shareholders must be substantial & necessary to the reorganization; and (3) Shareholders must receive in return a participation interest reasonably equivalent to their contribution (e.g., similar to what new equity holders are getting for their money) c. Therefore, there are 2 options for an Equity Holder who wants to stay "on board": (1) Make a new contribution to the company; or (2) convince senior creditors to vote for the plan d. Benefits: encourages cash contributions to a company that desperately needs it e. Disadvantages: equity holders will never exercise this option if the corp. is overvalued; conversely, they will always exercise this option if the judge undervalues the corp. 7. Secured Creditor Cramdown - 2 cases a. Secured Creditor who is fully secured or oversecured (1) DIP/TIB has several options if he believes this creditor will vote against the plan: (a) leave the creditor unimpaired (b) pursue alternative's outlined in cramdown provision (i.e., cramdown all junior creditors) (c) offer the creditor additional stock equity b. Secured Creditor who is undersecured - 1111(b) (1) Generally: 1111(b) sets up special rules for non-recourse secured claim (a claim secured merely by the collateral; no personal liability) - Congress enacted 1111(b) to prevent bankrupts from "stripping down" non-recourse loans (2) 1111(b)(1) - Unless a non-recourse creditor makes a 1111(b)(2) election (discussed below), he has a right of recourse against the debtor: (a) on secured claim: for fair market value of property; (b) on unsecured claim: for the rest of the loan (3) 1111(b)(2) - if a non-recourse creditor makes this election, he is treated as having a secured claim for the entire obligation/loan (a) Under this election, the debtor must, during the course of the plan, pay the creditor: i) the full amount of the non-recourse loan; & ii) the present value of these payments must equal the "secured" portion of the loan (e.g., the fmv of the collateral) - this prevents a debtor from stretching out the payments for an inordinate amount of time (b) If creditor makes the 1111(b)(2) election he loses both his unsecured claim (no big deal, since it becomes "secured") & the right to vote as an unsecured party (c) Generally, if the plan is one of short duration, a creditor will make the 1111(b)(2) election, since the present value of the payments won't "catch up" to the value of the loan Statute Index

101 (9), (13), (22), (25)

1017 (30) 105 (8), (18) 108 (8), (30) 109 (13), (16) 1104 (19) 1111 (33) 1113 (26) 1121 (30) 1124 (31) 1125 (31), (32) 1126 (18), (30-32) 1127 (18) 1129 (31), (32) 1205 (9) 1302 (13) 1307 (16) 1322 (8), (13-15) 1325 (13), (15) 1328 (8), (16) 1329 (16) 1983 (5) 2-702 (29) 262 (19) 301 (7) 303 (7) 342 (17) 362 (7), (8), (13), (17-20) 363 (19), (20) 364 (17), (20), (21) 365 (17), (25-27) 4 (6) 5 (6) 502 (10), (14), (15) 506 (10), (14), (15) 507 (11), (19) 510 (29), (30) 522 (10) 523 (11) 524 (12) 541 (7) 544 (17), (18), (21), (28), (29) 545 (29) 546 (29) 547 (17), (18), (22-25), (30) 548 (27) 550 (23), (25), (28) 551 (28) 552 (20) 553 (20) 605 (1) 606 (1) 609 (1) 610 (1) 611 (1) 612 (1)

613 (1) 615 (1) 616 (1) 617 (1) 6321 (22) 6323 (22) 707 (8) 722 (12) 727 (9), (11), (12) 8 (6) 805 (1) 806 (2) 807 (2) 9506 (12)