Bankruptcy Course Outline

Spring 2017
I. Introduction to Bankruptcy and Commencing/Maintaining a BK
case
1. Debtor-Creditor Law, Non-Judicial & Collection, and the Concept of Priority
Multi-Dimensional Problem
o 1st DimensionCreditor v. Debtor (2 Party Issue): Creditors worry about getting paid the money they are
owed by the debtors
o 2nd DimensionCreditor v. Creditor (Multi-Party Issue): Debtor has many unpaid creditors who have to
compete with each other for DR insufficient assets. Some will get left out because resources are scarce.
o 3rd DimensionDebtors: Concerned if DR have enough money to pay their debts and their future credit.

Two Types of Debtor

o 1) Individual: flesh and blood type people
o 2) Non-Human Legal Entities: Corporations, LLCs, and Partnerships.

State Collection Law: Unpaid Creditors trying to get paid.

o Non-Judicial Collection:
Make Leverage Plays: pay up or well stop supplying, pay up or well withdraw credit, pay up or
else.
Hound the Debtor: call repeatedly & send dunning letters, play on debtor concerns about credit
score, there are some restrictions under the Fair Debt Collection Practice Act.
Workouts & Refis: contract modifications

o Secured Creditor:
Lien: Has recourse collateral via a Lien
Personal property security interest under the UCC (auto finance secured on the vehicle)
Real estate mortgage governed by state mtge law.

How to Get a Lien:

o 1) Consensual: up front when you first extend credit (contract law + property
law)
U.C.C. Art. 9 Personal Property Security InterestsDebtor Personal
Property;
MtgeDR real estate

o 2) Non-Consensual: after the fact through the judicial collection process.

Execution Liens (Personalty)
Creditor enforces money judgment by having the state, acting
through the sheriff, seize and all the debtors property
SEE BELOW FOR PROCESS!

Judgment liens (real estate)

What?
o An encumbrance on some part of the judgment
debtors property (usually only real property, some
states allow personal)
o Creditor holding a judgment lien has the right to sell
the property to satisfy the judgment
Advantages (over execution lien)
o May attach at an earlier point in time (because
execution lien requires levy by sheriff)
o Automatically attaches to debtors after-
acquired property, while execution lien does not
Creation
o For property in county where judgment is
rendered
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 Majority: when judgment is docketed by clerk
Minority: when judgment is rendered by court
Trend: postpone creation of judgment lien until
judgment creditor files a notice recording the
judgment in the countys real estate records

o For property located in a different county

Judgment lien arises after judgment creditor
files notice in real estate records
o For property located in another state
If state has not adopted UEFJA, creditor
required to file a new lawsuit to obtain a
judgment in the second state
Then, creditor can obtain a judgment lien by
recording in the county where the property is
located

Garnishment: a court order directing that money or property of a

third party (usually wages paid by an employer) to be seized to
satisfy a debt owned by a debtor to P CR.
What?
o Enables judgment creditor to capture property of
the judgment debtor in the hands of a third party
o Garnishorcreditor steps into the debtors shoes vis-
-vis the garnishee
o Typically used to (1) seize debtors bank account,
and (2) reach debtors future wages
Parties
o Garnishor judgment creditor
o Garnishee third party

Statutory Tax Liens:

Rights of Secured Creditors:

Secured creditor has security for the debt (collateral) & unsecured creditor
does not
Collateral can be personal property subject to security interest (Art. 9); or real
property subject to a mortgage (state mortgage law)
Secured creditor can foreclose on collateral if debtor defaults
Secured creditor has property right in the collateral
Secured creditor & agents subject to liability for debt collection that goes too
far

If DR Defaults: CR can foreclose through the judicial collection process or repossess

Foreclosure Process:
o 1) Judgment, 2) Court ordered sale of collateral, 3) Application of sales proceeds to
payment of debt, 4) Anything Left over goes to junior LH or back to debtor.

Repossession Process:
o Secured party may bring judicial action to foreclose on collateral replevin or
claim and delivery
o Secured party may repossess without judicial process, so long as it proceeds
without breach of the peace

o Breach of the peace factors:

Whether creditor entered debtors premises
Whether debtor either consented to entry and repossession, thus negating the
breach, or objected, thus contributing to a breach finding
Contemporaneous consent required (not just loan documents)
Creditor could be liable for conversion if debtors personal effects are taken

o Judicial Collection under State Law PROCESS:

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 1) Obtain State Court Judgment
2) Enforce State Court Judgment
Execution:
1) Final money judgment & entry of judgment on the court docket and
2) Issuance of writ of execution or certified copy of judgment by clerk
3) Delivery of writ of execution to sheriff
Minority States (ILLINOIS): This is the point of time at which an execution
lien arises & the CR becomes a secured CR
4) The sheriff levies on the DR non-exempt property, makes return
Majority Rule: this is the time that an execution lien arises
Levy: sheriffs assertion of dominion and control over the property.
o This gives the judgment CR priority over other creditors (executive
lien attaches to levied assets)

5) Sale of assets levied on.

6) Distribution of net sale proceeds after deduction of costs & expenses of sale.

Judgment Lien v. Real Estate: Lien gives CR an interest in the DR property that may confer
priority over other CRs.

Basic Premise of State Law Judicial Collection:

The race of diligence. First in Time, First in Right! First CR to collect, gains priority among
the competing creditors.
BUT Secured Creditors Have Head Start: CRs rights are fixed when they get a lien against
the property of the debtor.

o Unsecured Creditor: Unsecured CR has a personal claim (usually under a K).

Unsecured CR has no property rights!!!no collateral
Unsecured CR cannot just seize DRs property to enforce debt.
Has to 1) get a judgment and 2) try to enforce the judgment by getting lien over DR assets.

o Prejudgment remedies
Advantages of prejudgment remedy
Secure possible judgment creditor might obtain by preventing debtor from disposing
of property while case in progress
Claim spot in line versus other creditors and purchasers
If do not allow judgment might be worthless b/c debtor would transfer or hide assets
during trial
Provisional remedy only have ultimate effect if creditor prevails in lawsuit

Due process concerns

Ex parte proceedings debtor deprived of property without having chance to be heard
Enormous coercive leverage for creditor to get debtor to pay disputed debt

Types
Attachment seized property retained (in custodia legit) as security for a
judgment that the creditor-plaintiff may later win
Garnishment debtors property seized from a third party (garnishee)
Replevin creditor alleges a property right superior to debtor in the very property seized
o Ex) secured party seeking to foreclose a security interest in collateral

Issuance of an injunction
o Creditor may obtain an injunction, directing debtor not to dispose of its
assets, or imposing restrictions on debtors use of assets until suit is
concluded
o Brings creditor benefits associated with prejudgment remedies, with fewer
risks

Tort law
o Potential Causes of action for outrageous collection practices: invasion of privacy, intentional
infliction of emotional distress, defamation, assault, battery, interference with contractual relations,
malicious prosecution of criminal or civil proceedings, conversion, fraud
o To recover, debtor must show creditors conduct is extreme or outrageous
o Problem with tort law: creditor has legitimate interest and are thus given a lot of leeway
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 Fair Debt Collection Practices Act FED LAW DOES NOT PREEMPT STATE LAW
o Scope of coverage
Applies to debt collector attempting to collect a debt
Debt collector those in debt collection business
In any business, the principle purpose of which is collection of any debts
Or one who regularly attempts to collect, directly or indirectly, debts owed or due or
asserted to be owed or due another
Does not apply to creditor who is attempting to collect its own debt

Debt
Debtor must be a consumer (natural person)
Nature of debt must be a consumer debt (i.e. for personal, family, or household
purposes)
Does not apply to corporate or partnership debts, or for debts incurred for business
purposes

o Violations of the act

Regulates communication with third parties and to acquire location information
Cant call consumers place of work if employer prohibits communication
Cant communicate about debt with a third person without debtors prior consent
o Prohibits harassment, oppression, or abuse in connection with collection of debt
o Prohibits use of false, deceptive, or misleading representations or means
Cant contact at inconvenient time (before 8am, after 9pm presumption)
o Prohibits use of unfair or unconscionable means to collect debt
o Requires debt collector to give consumer detailed information regarding debt
Must send written validation notice within 5 days of initial communication
Give debtor 30 days to dispute and obtain verification
o Debtor has ability to terminate any further communication if notifies debt collector in writing
that he refuses to pay or that he wishes to stop communication

o Bona fide error defense debt collector protected from liability if:
Violation was not intentional, and
Happened because of a bona fide error notwithstanding maintenance of procedures
reasonably adapted to prevent such an error

o Remedies
Civil liability: actual damages + statutory damages + costs & attorneys fees
Administrative enforcement by FTC: injunctive relief or issue cease & desist

2) State Debtor Creditor Law; Priority of Consensual and Non Consensual

Liens; Nature and Purpose of BK Relief
Article 9:
o Governs security interests in personal property
o SC has rights in specific collateral (DR property) to secure obligation.
o Winner: first party to perfect or levy. (this provides noticeJLC creditor has no public notice of SCR
rights)

o #1) SC gets rights against collateral upon ATTACHMENT

Attachment when your SI arises
SCR has a right as against the debtor with regard to the collateral. Only gives rights to
the CR, not property rights against the world + other creditors.
Requirements:
1) Agreement of DR (Usually in a signed security agreement)
2) DR has rights in the collateral (Nemo Dat)
3) SCR gives value: usually a loan or credit advance.

o #2) SC must PERFECT rights against Third Parties

Secured CRS rights rank from the date of perfection (i.e. first to file a FS)
1) Possessory SI (i.e. a pledge): creditor takes possession of the collateral.
2) Non-Possessory SI (i.e. a lien): File a financing statement with Secretary of State
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 Priority Conflicts
o Art. 9 SI ranks from date of perfection (i.e. first to file a FS)
First to file = senior LH. The second creditor = junior LH. U.C.C. 9-322.

o Lien Holders: A person who becomes a LC before the SI is perfected has priority under UCC 9-317
(A2)

o Purchase Money Security Interest (PMSI)

Arises: where a lender advances money to a borrower to finance the purchase of an asset and
secures payment of the loan on that asset.
i.e. Auto loans made at the point of sale are commonly secured by PM SI. The car the
borrower buys with the help of the loan serves as collateral.
9-324a: gives the PMSI lender a 20 day grace period in which to perfect the PMSI
after the debtor receives possession of goods.
o PMSI perfected on goods during the grace period will be treated for
priority purposes as if it were perfected on the day the debtor received
possession.
o If the lender perfects after expiration of the grace periodthe general
rule applies.
Special treatment of PMSIs prevents a bank lender form gaining priority under a
blanket lien over present and future property to assets that the debtor is only able to
acquire through the assistance of a subsequent PMSI loan.

BK Priority Questions and Hypotheticals:

Porky Question #1

Facts:
Feb 1: SCRs security interest in Porky attaches & is perfected as security for debt of $5K
April 1: Creditor obtains a final money judgment against Debtor for $5K.
May 1: clerk issues 90-day writ of execution
May 2: writ is delivered to the sheriff
May 10, the sheriff levies on Porky, who is worth $5K, pursuant to Creditors writ of execution.

What are the relative priorities of parties with regard to Porky, assuming the state follows the majority rule on
execution liens?
Majority Rule: Execution lien arises when sheriff levies
S CR Wins! SI attached and was perfected before CR got levy.

Would the result change if in a minority rule state, which dates CRs execution from delivery of the writ to the sheriff?
Minority Rule: Execution lien arises from the delivery of writ to sheriff.
CR delivers writ to sheriff (May 2); S CR SI Feb 1st
Result still would not change!

Porky Question #2

Facts
Feb 1: SCRs security interest in Porky attaches, secures debt of $5K
April 1: Creditor obtains a final money judgment against Debtor for $5K.
May 1: clerk issues 90-day writ of execution
May 2: writ is delivered to the sheriff
May 5: SCR perfects security interest
May 10: the sheriff levies on Porky, who is worth $5K, pursuant to Creditors writ of execution

What are the relative priorities of the parties with regard to Porky assuming that the state follows the MAJ Rule on ex
liens?
Majority Rule: Execution lien arises when sheriff levies
S CR perfects (May 5), sheriff levies (May 10) = S CR Wins!

Porky Question #3
Facts
Feb 1: SCRs security interest in Porky attaches, secures debt of $5K
April 1: Creditor obtains a final money judgment against Debtor for $5K.
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 May 1: clerk issues 90-day writ of execution
May 2: writ is delivered to the sheriff
May 10, the sheriff levies on Porky, who is worth $5K, pursuant to Creditors writ of execution
May 15, SCR perfects security interest

What are the relative priorities of the parties with regard to Pork assuming the state follows the majority rule on
execution lines?
Majority Rule: Execution lien arises when sheriff levies.
o 1) CR sheriff levies on Parky (May 10)= senior priority
o 2) S CR perfects SI (May 15)= junior priority

Minority Rule: Execution lien arises form the delivery of writ to the sheriff.
o Same Result.

Porky Question #4

Facts
Feb 1: SCRs security interest in Porky attaches, securing sum of $5K borrowed by Debtor to acquire
Porky. Debtor takes possession of Porky. (PMSI)
Feb 2: Creditor obtains a final money judgment against Debtor for $5K.
Feb 3: clerk issues 90-day writ of execution
Feb 4: writ is delivered to the sheriff
Feb 10, the sheriff levies on Porky, who is worth $5K, pursuant to Creditors writ of execution
Feb 15, SCR perfects security interest

What are the relative priorities of the parties with regard to Porky, assuming that state follows the majority rule
on executive liens?
Majority Rule: Execution lien arises when sheriff levies.
o SCR has PMSI perfected within 20 day grace period
o Gets a priority because of PMSI exception.

Minority Rule: Execution lien arises form the delivery of writ to the sheriff.
o PMSI gets priority regardless of whether the execution lien arose on Feb 4 or 10 (PMSI Feb 1)

Questions:

1 Debtor has five creditors, C1, C2, C3, C4, and C5. Debtor owes each creditor $1,000. Debtors only asset is $1,000 in a
savings account. On October 1, C3 obtained a default judgment against Debtor ordering Debtor to pay C3 $1,000. On
October 5, C2 obtained a default judgment against Debtor ordering Debtor to pay C2 $1,000. On October 10, Debtor
paid C3 $1,000 using the money in the deposit account. D--- $1k- C1

D--- $1k- C2: Oct. 5 (default judgment)

D--- $1k- C3: Oct. 1 (default judgment), Oct. 10 (paid $1k)
D--- $1k- C4
D--- $1k- C5

Of the five creditors, who has priority? C3 because he got paid!

1. Bank One made a general financing non-PMSI loan to Debtor, Inc. Banks loan is secured by a real estate mortgage on Debtor,
Inc.s premises and article 9 security interests in Debtor, Inc.s present and future equipment, inventory, and accounts receivable.
Bank Ones article 9 security interests were perfected on October 1. Bank Two also made a general financing non-PMSI loan to
Debtor, Inc. secured by article 9 security interests in Debtor, Inc.s present and future equipment, inventory and accounts
receivable. Bank Twos article 9 security interests were perfected on October 10. On October 5, Debtor, Inc. took delivery of a new
item of equipment a truck. The purchase of this truck was financed by a PMSI loan from Bank Three. Bank Three took an
article 9 security interest in the truck which it perfected on October 20. On October 15, the sheriff levied on the truck on behalf of
an unpaid supplier who had previously obtained a valid default judgment against Debtor, Inc.

How do the claims of Bank One, Bank Two, Bank Three, and the unpaid supplier rank in relation to the truck?

2 B1: perfected on Oct 1st

3 B2: perfected on Oct 10th
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 1 B3: delivery on Oct 5th (PMSI) and perfected on Oct 20th. PMSI TAKES PRIORITY
4 Unpaid Supplier: S levied truck on Oct 15

How would your answer differ if Banks One and Two failed to perfect their security interests?

Unpaid supplier would have levied the truck before B1 and B2 perfected. UPS would have priority over them.

How would your answer differ if Banks One and Two failed to perfect their security interests and Bank Three didnt
perfect its interest until October 31?

B3 only has a 20 day grace period and Oct 31 st is past that period.

B3 would still be the first to perfect still if B 1 and B2 did not.

3. The Nature and Purpose of Bankruptcy Relief

Function BKY Serves: It is collective as its assume a plurality of creditors
o Louis Levinthal: All BK lawaims first to secure an equitable division of the insolvent debtors property
among his creditorsIn other words, BK law seeks to protect the creditors from one another.
o 1) Where an insolvent debtor has many creditors, BK law seeks to protect creditors from each
other (inter-creditor equity)
o 2) If creditors know that the debtor has multiple CRs and there is not enough assets to pay
everyone, there may be a mad scramble run for the debtors assets. (State law encourages thisbut
this is unfair and inefficient)
Unfair: Between situated CRs (some get paid and others do not)
Inefficient: economically inefficient, destroys value, may kill off a debtor who could otherwise
be saved.
This is compulsory collective actionnone can defect. 362 Automatic stay prevents CR or
DR from opting out
CR are bound to the terms of distribution whether they agree or not, either by statute
726 or through a plan or reorganization (1141)
Collective proceeding
o Collective action problem
State law collection remedies central premise = first in time is first in right
When debtor is insolvent and has multiple creditors, state collection law fails to serve
interests of creditor body as a whole
Unfair as a matter of distributive justice for similarly situated creditors to receive different
amounts
Economically inefficient
Every creditor spends money trying to collect, or is certain to get nothing
More efficient for creditors to agree to cooperate & share admin costs
Debtor may be worth more alive than dead
Cannot just agree to cooperate because one party may defect and get it all

o Solution = compulsory collective action

None of the creditors can defect
Creditors act as a single unit
Trustee acts as agent for creditor group maximize value, save costs, fairer distribution
Automatic stay prevents creditor or debtor from opting out
Bound to distribution (whether agree or not), either by statute, or in the plan

CR Act Collectively Maximize Value= Whiting Pools (1983)US SC:

o Facts: WP sells, installs, and services swimming pools and supplies. Owed $92k in federal taxes put
did not pay IRS. IRS had a lien attached to all of WP personal property (non consensual tax lien).
Property Value = $35k ( LQD break up value); Going Concern Value = $162k. WP files for
reorganization under CH 11. IRS wants to sell the property
o H/Rationale: Made the IRS return the assets to DR so the DR could keep business alive and realize
GCV. Give IRS adequate protection (363e) up to the amount of the debt. Court looks at the purpose
and rationale behind reorganization= enable it to operate successfully in the future

Local Loan v. Hunt (1934)US SC

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 o F/H/R: IL state law that permitted a creditor to have an enforceable lien on future wages is not binding
of the BK court. State not able to garnish pre-petition wages.
This purpose of the [Bankruptcy Act] has been again and again emphasized by the courts as
being of public as well as private interest, in that it gives to the honest but unfortunate debtor
who surrenders for distribution the property which he owns at the time of bankruptcy, a new
opportunity in life and a clear field for future effort, unhampered by the pressure and
discouragement of pre-existing debt

BK Rationales about the Debtor

o Without it Story says: destroys all encouragement to industry and enterprise on the part of the
debtor.
o Societal lossdisincentive a potentially productive person from working
o FRESH START: discharge of prior debt/ protection of future income (so debtor can enjoy her future
earnings + provide incentives to work.
Exemptions: Allows debtor to keep some essential current property.

4. Commencing a Voluntary BK Case: Debtor Eligibility

Basic BK Framework: LQD (Ch 7) vs Re Organization (CH 11 & Ch 13)

Bankruptcy Users: individuals or business entities

o But Chapter 9: municipalities can file bankruptcy

1 Chapter 7: Liquidation
General Rules:
o Debtors existing assets are liquidated and proceeds are distributed to creditors
o Individuals exempt property is returned
o Trustee supervises the process of collecting debtors assets, liquidating them, and making
distributions to the creditors
o While process is pending, creditors are enjoined, or stayed from attempting individually to
collect their claims from the estate or debtor
o Creditors are treated equally, on a pro rata basis
Exception for secured creditors & unsecured creditors who are awarded priority in payment by
Congress
o Following distribution, individual debtor gets a discharge
No corporate discharge corporation dissolves after bankruptcy
o Best for an individual debtor who has few current assets, but substantial earning capacity

Collective proceeding puts a stop via the automatic stay of 362 to individual creditor collection
Filing Petition: creates BK estate.all of debtors assets at the date of filing
What Happens: all creditors collectively enforce their claims against the estate assets which are sold
and distributed by trustee
Debtors pre-B debts are discharged
Dissolution of a corporation under controlling law

1 Chapter 11REORGANIZATION (Businesses)

General Rules:
Purpose to restructure a businesss finances so it may continue to operate
Premise = assets used for production are more valuable than being sold for scrap
Provides for compulsion by stay provision, and a rule binding dissenters to the terms of
the reorganization plan agreed to by the bulk of the creditors

Primary Goal: keep assets together, preserve the going concern value, and provide a forum in which
debtor can negotiate with creditors
Debtor remains in possession so that the business can continue to operate
PLAN: debtor has a 120 day period, exclusivity periodto file a proposed plan with the court
Can be used to effect a going concern sale of the debtors assets
i.e. creditors of Oldco become the owners of NewCo --debt equity swap.

2 Chapter 13REORGANIZATION (Individuals)

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 General Rules
Designed for rehabilitation of individual consumer debtor creditors cannot compel debtor to
proceed under chapter 13
Debtor can keep his property by agreeing to a repayment plan
An individual debtor who has few current assets but some future earning capacity would prefer a
chapter 7 liquidation

Primary Goal: not to break up the debtors assets and distribute the assets to creditors

REQ: for individuals only

BK Trustee is appointed
Stay prevents creditors from grabbing assets or attaching his income
**BUT Debtor: in order to preserve his assets or future income, must propose a plan of 3-5
years duration
Pre BK debts are discharged, and he can protect assets like family home/ car.
Primary Goal:

Benefits of each chapter

i. Chapter 7
1. Pros:
a. Discharge debts now & keep future earnings for self
b. Keep all exempt assets
c. Attractive where debtor does not have significant nonexempt assets that she must turn
over to the trustee
2. Cons:
a. Have to turn over all nonexempt assets
b. Cant cure defaults on secured debts (home, car) or get collateral back unless secured
creditor agrees (reaffirmation)
ii. Chapter 13
1. Pros:
a. May keep nonexempt property, even if debtor is currently in default and facing foreclosure
1306(b)
b. Can cure problems on secured debts
i. Retain some types of collateral by paying secured creditor only the value of the
collateral, even if less than the debt owed, in installments 1325(a)(5)
ii. Power to cure defaults 1322(b)(3)
iii. Reverse an acceleration 1322(b)(5)
iv. Modify secured claims 1322(b)(2)
c. Superdischarge discharges some types of debts that are excluded from chapter 7 1328(a)
2. Cons:
a. Do not get immediate discharge
b. Have to pay creditors for years 5 years if income is at or above state median
i. Plan requires that unsecured creditors will be paid at least as much as they would
receive in a chapter 7 liquidation, and secured creditors must be paid the value of their
collateral

Overview of the BK System: The BK Courts and the BK Trustees

Bankruptcy Courts
Federal Courts
Federally appointed BK judges
14 year fixed terms
Title 28 of the US Code
Governed by the Federal Rules of BK Procedure

US Trustee Program
Appoints 21 regional US trustees, executive office in DC
Establishes, maintains, supervises panels of private trustees
Supervises administration of cases
Main Job: appoints the case trustee not the court

Case Trustee
Bankruptcy trustee
Atty in good standing and certified public accountants

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 Ch7-- has its own professional association
Ch 7, 11, 12, 13: trustees required to file bond with court on faithful performance of their duties.

Standing Trustee
Play important role in the formation, confirmation, and administration of CH 13 plans
Estate fiduciaries: support or oppose plan confirmation, monitor compliance, collect and disburse
earnings to creditors.

Chapter 11 Cases: trustees are not automatically appointed (DIP)

Debtor in possession: debtor has the powers of the trustee
With ct approval, retain professional counsel to advise
Have to be approved by the court, services are paid out of the estate
Court has the power to appoint trustee for cause on the application of a part in interest or US
trustee
Rarely requested.

5. Bankruptcy Cases: Eligibility, Commencement, Dismissal, and Conversion

1 Eligibility 109:
Threshold Requirements 109a:
1. The debtor must be a person or a municipality
2. The debtor is a person--- that resides or has a domicile or place a business or property in
the US
i.e . US residence OR domicile OR place of business OR property

Person (101 (41)): individual (flesh and blood), partnership (state law) corporation (101-9
various types of organizations)

Voluntary: case is commenced by debtor filing with the bk court under a chapter they are eligible for
(301)
99% of the filings
By debtor -301
By debtor and spouse-- 302

Involuntary: only under Ch 7 or 11 against a debtor eligible for those chapters

Undisputed claims of at least $10,000 in aggregate or if there are fewer than 12 holders, by one or
more holding at least $10,000 worth of claims in aggregate (303)
Requirements
Can only be commenced by creditors of the debtor -303
Only permitted under Ch 7 (LQD) and Ch 11 (REORG)

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 Eligibility Process

109a: Two Requirements

Threshold Rules
of General 1) Debtor has to be a person AND
Applicability 101 (41): Individual human being, partnership, and corporation ( does not typically
include government units ---see exception)

2) DR has to have a nexus to the United States

Residence
Domicile
Principal Place of Business
Property

Charter Specific
Eligibility Rules 109(b) -> Chapter 7= STRAIGHT LIQUIDATION BKY

Individuals, corporate entities, partnerships: Not--Railroads, bank, or insurance company

109(c) -> Chapter 9

Municipalities (specifically excluded from the definition of person)

109(d) -> Chapter 11

Individuals, partnerships, corporate entities, and railroads
o Only a railroad, or a person that may be a debtor under Chapter 7
o i.e. this would exclude banks, insurance companies, loan associations, credit unions
Why? Historic reasons= insurance companies are heavily regulated by statesstates have statutes in
place regarding insolvency.
Directly allows for Railroads!

109(f) -> Chapter 12

Individuals, or corporate entities must be family farmer or fishermen.
Debt Threshold:
o More than 50% debts or more attributable to farmingAre you enough of a farmer to
qualify.

109(e) -> Chapter 13

Individuals only! NO CORPS NO PARTNERSHIPS
o using your income to pay down your debt over time.

Debt Ceilings
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 o Unsecured Debt: less than $394, 725, aggregate less than same
o Secured Debts: less than $ 1,184,200, aggregate less than same

Regular Income

****** IF YOU MEET 7 YOU USUALLY MEET 11!

Exclusionary Abusive serial filers are excluded 109g
Rules Did not get pre-bankruptcy credit counseling 109(h)
o 109(h) individual prebankruptcy counseling requirement
Individual must have received a briefing from an approved nonprofit budget
and credit counseling agency during 180-day period preceding date of
bankruptcy filing
Waiver of counseling requirement, if:
Debtor can demonstrate exigent circumstances that merit a waiver
Debtor cannot complete the requirements because is incapacitated or
disabled
Debtor is on active military duty in a combat zone
Trustee determines counseling services are not reasonably available
in individuals district

o To protect DRs, give them a better sense of their options

INSURANCE COMPANIES
o NOT ELIGIBLE under any!!!!!
o Defer to state law classification.

Eligibility Problems
Under which CH of the BK Code would the Following Debtors be Eligible to File?
1. A rich Wall Street Banker resident in Westchester County, NY
Personindividual; Nexusresides in the US
Ch 7, Ch 11, and Ch 13 if meets money threshold.

2. Caesars Inc, a DE chartered corporation that owns and operates several casinos and resort hotels across
the US including Caesar Place in Las Vegas.
Personcorporation; Nexusproperty in the US/ ppb is in US
Ch 7, 11

3. A partnership of certified pubic accountants based in Wheaton IL

Personpartnership; Nexusprincipal place of business IL
Ch 7, 11

4. The Los Angeles Dodgers major league baseball club.

Personpartnership/corporation; Us nexusproperty or ppb in US
Ch 7, 11
5. The Winnipeg Jets Hockey Club, a participant in the National Hockey League
Personpartnership; Nexusproperty bank accounts in US
Ch 7, 11

6. A law professor from the UK, who is a British citizen currently resident in Chicago IL.
Personindividual; Nexusresides in IL
Ch 7, 11, 13if can meet thresholds

7. The City of Detroit, MI

Not an person (i.e. individual, not a corporation)
Ch 9, only possibility

8. The Great Smoky Mountains Railroads, NC.

PersonCorporation; Nexusdomiciled in US
CH 11, Banned from Ch 7, Not 13 because not an individual
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 9. The Allstate Insurance Company
Personcorporation; nexusdomiciled in US
Not allowed in 7, not allowed in 11, not allowed in 13 not an individual. Insurance is something heavily
regulated by the states.

10. A retiree with medical debts of $50k whose only income derives from social security.
Personindividual; Nexusproperty or domicile US
Ch 7, 11, and 13if SS is considered regular income and he is under the debt threshold

11. A farmer who has total debts of $1 million of which $400k are attributable to farming operations
Personindividual; Nexusproperty in US
Ch 7, Ch 11, 13, NOT Chapter 12 because debt does not exceed $4 mil50% of non home mtge debt
must be related to farming.

12. Debter Co Ltd, a private company chartered in the UK that has $5k in a JP Morgan Chasse Bank Account in
New York.
Personcorporation; Nexusproperty in the US
Ch 7, 11

6. VENUE
General Rules
Bankruptcy cases are filed and processed in federal courts
Federal bankruptcy judges are not Article III judges, but serve as a unit of the district court

Two Main Venue Questions

1. What is the proper venue for the bankruptcy case itself?
2. If separate proceedings need to be commenced within the bankruptcy case for example, to recover
property or under the avoiding powers what is the proper venue for those separate proceedings?

Section 1408 of Title 28 provides that:a case under title 11 may be commenced in the district court for
the district-

1 in which the domicile, residence, principal place of business in the United States, or principal assets
in the United States, of the person or entity that is the subject of such case have been located for the one
hundred and eighty days immediately preceding such commencement, or for a longer portion of such
one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United
States, or principal assets in the United States, of such person were located in any other district; or

2 in which there is pending a case under title 11 concerning such persons affiliate, general partner,
or partnership.

Federal courts have jx over all civil proceedings arising under Title 11 or related to cases under title 11.

Venue Shopping 28 USC 1408

1408 (1): District of debtor for 180 days (or greater part) prior to commencement of case
o Domicile (state of incorporation, does not apply to partnerships)
o Residence (subject to personal jurisdiction)
o Principal place of business
o Principal assets
District in which pending case concerning debtors affiliate, general partner, or partnership
Default venue for proceedings is district in which case is pending (i.e. filed)
o Exceptions:
Consumer debts of less than $16,425 (CHECK THESE NUMBERS)
Insiders sued for business debts of less than $1100
Noninsiders sued for business debts of less than $10,950

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 1408 (2): encourages venue shopping
Allows a corporate debtor to pre-select venue by chartering an affiliate entity in the jx in which the
debtor would prefer to file BK

Affiliate Hook= allows the debtors in a corporate group to file administratively consolidated bk
proceedings in a venue where it has an affiliate

Separate Proceedings
o Default Rule: 1409a: a proceeding arising under Title 11 or arising in or related to a case under Title 11 may
be commenced in a DC in which such case is pending

o Exceptions: based on forum conveniens considerations

1409(b), a trustee in a case under title 11 may commence a proceeding arising in or related to such
case to recover:

a money judgment of or property worth less than $1,300; or

a consumer debt of $19,250; or
a debt (excluding a consumer debt) against a non-insider of less than $12,850

Only in the DC for the District in which the defendant resides

Why? Protect D is low dollar value litigation from being forced to incur the cost and
inconvenience of defending in a remote location.

Commencement

Triggers extensive filing obligations

o List of creditors and various schedules 521
Itself constitutes an order of relief under 301b, 302a

Dismissal

o Various grounds on which a court can dismiss

o Dismissal of Ch 7 case: for abuse

o Ch 13 and Ch 11 For Case Dismissal: most are i) non compliance with requirements of Code and Rules that
condition BK relief, ii) unlikelihood of successful reorganization.
1112 (B4):
substantial or continuing loss to or diminution of the estate and the absence of a
reasonable likelihood of rehabilitation;
gross mismanagement of the estate;
failure to maintain appropriate insurance that poses a risk to the estate or to the public;
unauthorized use of cash collateral substantially harmful to one or more creditors;
failure to comply with an order of the court;
unexcused failure to satisfy timely any filing or reporting requirement established by this
title or by any rule applicable to a case under this chapter;
failure to attend the meeting of creditors convened under 341(a) or an examination
ordered under rule 2004 of the Federal Rules of Bankruptcy Procedure without good cause
shown by the debtor;
failure timely to provide information or attend meetings reasonably requested by the
United States trustee;
failure timely to pay taxes owed after the date of the order for relief or to file tax returns
due after the date of the order for relief;
failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by
this title or by order of the court;
failure to pay any fees or charges required under chapter 123 of title 28;
revocation of an order of confirmation under 1144;
14
 inability to effectuate substantial consummation of a confirmed plan;
termination of a confirmed plan by reason of the occurrence of a condition specified in the
plan; and
failure of the debtor to pay any domestic support obligation that first becomes payable
after the date of the filing of the petition.

Venue Rules

Where do you The BK Case 1408--domicile, residence, principal place of business, or where you have
File? principal assets.
180 day Rule Test (immediately proceeding) OR
Longer Portion Test where not in the same district for the full 180 days. (90 days or
where you spent the most than others)

Proceedings within the BK case 1409

Rule 1014 Factors:

Convenience of Parties
Considerable Deference to DR Choice

Mechanics of
Filing i. Debtor must file petition with the bankruptcy clerk
DR or DR and spouse in joint case 301/302

ii. Petition must be verified or contain an unsworn declaration

1. Sign & declare under penalty of perjury that information is true &
correct
2. Corporation/partnership authorized agent must sign
3. Partnership voluntary petition requires consent of all general
partners

iii. Petition must normally be accompanied by filing fee 1930a

1. Court may waive filing fee for individual debtor whose income is
less than 150% of the income of the official poverty line
2. But, SC says no due process right to access to the bankruptcy
court

iv. Debtor must have attended mandatory credit counseling 109(h)

1. Increases real cost of filing
2. Unless debtor obtains exigent circumstance waiver under
109(h)(3)

v. File lists, schedules, statements filed with petition or within 15

days of petition date
1. List of creditors
2. Schedule of assets and liabilities
3. Schedule of executory contracts and unexpired leases
4. Statement of debtors financial affairs
5. Chapters 9, 11 name, address & claim amounts of creditors with
20 largest unsecured claims
6. Chapter 11 list of equity security holders

vi. Additional filing requirements for individual debtors

vii. Failure to timely file required documents could lead to dismissal
1. 521(a) automatic dismissal if not filed within 45 days

The filing of the petition with the fee commences the case.
Krasthere is not DP right to access to BK court
But 2005, limited in forma pauperis statute

Effects of Filing

viii. Filing of petition & fee with the clerk constitutes an order for
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 relief - 301
1. Entry of the legal order commencing the proceedings occurs
automatically when clerk takes filing fee (important for automatic stay)

ix. Bankruptcy estate is created by commencement of the estate -

541(a)
1. Comprised of all of debtors legal and equitable interests in
property as of the time of the filing of the petition
2. Transfers all of debtors property to the estate
3. Bankruptcy trustee acts as representative of the estate (a
separate legal entity)
4. Estate property within the exclusive jurisdiction of the federal
bankruptcy court

Utility services cant be cut off 366

x. Automatic stay is effectuated - 362(a)

1. Has effect of a federal statutory injunction
2. Stops collection efforts and safeguards estate property
3. Good against the world & valid without notice
4. Actions taken in violation of the stay are void

xi. Debtor protected from termination of utility services - 366

1. Utility may not cut off services unless debtor fails to provide
adequate assurance of future payment within 20 days

xii. Bankruptcy filing may extend certain time periods - 108

1. 108(a) statute of limitations for actions that could have been
brought by the debtor are tolled, and trustee is given 2 years to bring the action on
behalf of the estate
2. 108(b) trustee gets 60-day grace period in which to take an
action other than filing a lawsuit
a. Ex) to respond to a demand to cure a default
3. 108(c) extends any statute of limitations for creditors to sue the
debtor until 30 days after the automatic stay is terminated

Venue Questions
1. Up until Oct. 31, 2016, Della Debtor live her entire life in Lincoln NE. Between November 1, 2016 and Feb 20, 2017
she lived in St. Louis MO. Her employer transferred her to its Chicago office and she now lives in IL. Assume today
is March 15, 2017 and that on this day, Della wishes to file for BK under Ch 7 of Title 11. In which federal DC is she
required to file?

X NE---- (Oct 31, 2016)-(Nov 1, 2016) St Louis MO---------------(Feb 20, 2017) Chicago------Today (March
15, 2017)

1408: domicile, residence, principal place of business, or where you have principal assets.
Majority of 180 days immediately preceding (90 days or where you spent the most than
others)

Longer Portion Test: She spend about 3 months in MO, would have to file in federal DC in St. Louis
MOOR she could wait until enough time has passed in IL.

2. Debtor Corp. is chartered and headquartered in Missouri. Its principal place of business is in St Louis. It issued a
series of corporate bonds that are due to mature next year. Current projections suggest that it is likely to default
on the bonds and it therefore needs to restructure them. It has been advised to plan for a CH 11 filing as a
contingency in the event that the negotiations with bondholders are unsuccessful. DR Corps board takes the view
that it would be best to file in the SD of NY. What steps would Corp DR need to take to achieve this objective.

1408 (2): allows a corporate debtor to pre-select venue by chartering an affiliate entity in jx it prefers
to file in.

16
 DR Corporate needs to charter an affiliate in the SD OF NY. 1408 (1)
Then parent company can file in NY under 1408 (2): because a case is already pending in NY involving
an affiliate.

7. Consumer Bankruptcy Choice: Ch 7/13; Dismissal for Abuse

Consumer Choices
Good Things About CH 7 for an individual debtor:
o Discharge debts NOW: Keep future earnings for yourself
o DR gets to keep all exempt assets

Bad Things for An CH 7 for an individual debtor:

o Have to turn over all non-exempt assets
o Cant cure defaults on secured debts (home, car) or get collateral back unless SC agrees

Good Things About CH 13 for an individual debtor:

o Keep all your property, even if non-exempt
o Can cure problems (defaults, repos) on secured debts

Bad Things About CH 13 for an individual debtor:

o Dont get immediate discharge
o Instead have to pay creditors for years and years

Section 707: Presumptive AbuseDismissal for abuse

707a: the court may dismiss a CH 7 case, for cause after notice and a hearing
707b: gives BK court power to 1) dismiss a CH 7 case filed by indv debtor OR 2) with debtors consent
convert a Ch 7 to a CH 13, on the grounds that a CH 7 discharge would be an abuse. BUT YOU CANNOT STAY
IN CH 7.
o Purpose: give those debtors with no or limited non-exempt assets, but who have some capacity to
make meaningful payments out of current and future income
Also to reduce judicial discretion

Huge Variancesmakes a big difference what state DR resides because median income ranges.
Charitable contributions: When court is determining whether to dismiss a case because of the presumption
of abuse in 707(b)(2), or general abuse under 707(b)(3), it may not take into consideration whether debtor
makes charitable contributions

i. Absolute privileges of debtor:

1. To convert chapter 7 case into chapter 11, 12, or 13
a. Unless the case was already converted once to 7

2. Subject to statutory exceptions, to convert a chapter 11, 12, or 13 case to chapter 7

a. Also absolute right to dismiss chapter 13 case
b. Trustee must show cause to convert a chapter 13 debtor to chapter 7 1307(c)
i. Court may choose to dismiss as an alternative
ii. Test = best interests of creditors and estate

3. To dismiss a chapter 12 or chapter 13 case, subject to narrow statutory exceptions

4. NO absolute statutory right to dismiss a chapter 7 or 11 case must show cause 707(a)
a. Judicial test = no legal prejudice

ii. Abuse test 707(b)(1)

1. Constraint on ability of individual consumer debtor to file under chapter 7
2. Designed to deny chapter 7 relief to individual debtors who have at least a modest capacity to repay their
creditors in a chapter 13 plan
3. If debtor fails test must voluntarily convert case to chapter 13, or judge will dismiss the chapter 7 case

Dismissal/ Conversion 707 b3

The court may dismiss abuse under 707 (b3): if
1. Debtor filed in bad faith or,
2. The totality of the circumstances of Debtor's financial situation demonstrates abuse.

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 Medium income or below medium income debtor= only the BK judge or the US trustee can move for
dismissal on 707 B3 grounds
o Creditors have no standing to move for dismissal or conversion

Procedural Requirements and Additional Hurdles

Threshold: Every individual debtor must complete credit counseling in the 180 days prior to filing otherwise
they not be eligible

521: imposes a series of extensive additional documentary and evidentiary requirements

o File all information by 45th day after filing the petitionleads to automatic dismissal 521(i)(1)

Means Test: distinguish between debtors with meaningful repayment capacity and those that do not.
o Presumption of Abuse (b2): If debtor fails means test, debtor is a presumptive abuser.has to rebut
o Meaningful Repayment Capacity: denied CH7 relief, no BK relief or BK relief under repayment plan CH13
o To whom does means test apply
Individual debtors
With primarily consumer debts (i.e. personal, family, or household)
Low-income safe harbor if debtors income is less than the state median income for family size,
immune from means test screening 707(b)(7)
o Below-median debtor is still subject to dismissal for abuse based on bad faith or the totality
of the circumstances 707(b)(3)
Disabled veteran safe harbor where indebtedness was incurred primarily while the individual was
on active duty 707(b)(2)(D)

Means Test Process

1) File FormDR has to file a very detailed Form 122A-2. This form has means test
Process calculation.
Exception: DR does need not file this form if below state median

THRESHOLD The Threshold Test in 707 (b)

1 Nature of the Debt: 707(b) only applies to 1) individual debtors whose debts are
2) primarily consumer debts
i.e. if you have primarily business debtscannot have their Ch 7 case
dismissed for abuse

2 LOW INCOME SAFE HARBORIndividual Debtors whose income is Equal to or

Below State Medium 707 (b7):
When a debtors currently monthly income (101- 10a) multiplied by 12 is equal
to or below the medium family income (as defined in the debtor's state 101-
39A), safe harbored out of the means tests.

3 Procedural Requirement: Every individual debtor must complete credit

counseling in the 180 days prior to filing otherwise they are not eligible
o 521: imposes a series of extensive additional documentary and evidentiary
requirements
o File all information by 45th day after filing the petitionleads to automatic
dismissal 521(i)(1)

Preliminary Step 1 Calculate the debtors gross current monthly income (CMI): average of all sources
of income received in the 6 months prior to filing
Include spousal income unless separated
Include household expenses paid by another non debtor party
Exclude Social Security Act and other specified payments 101 (10A) (B)

1 Multiply CMI by 12 to arrive at a figure for gross annual income

1 Compare the CMI number with the annual median family income for the debtor's
state and household size per the latest info from the Bureau of the Census 191 (39A)

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 1 If the CMI number is equal to or less than the applicable number for the debtor's
state and household size, the debtor need not take the means test and
presumptively remains in CH 7. ( MEANS TEST OR SAFE HARBOR)

**** DEBTOR CMI is more than the applicable median.so you must take the means
The Means Test test blow.

Idea: If there is enough left over to make meaningful payments to creditors= DR FAILS means
test.

1. Currently Monthly Income (101- 10A) - EXPENSES = NET monthly repayment

capacity
Income: Current monthly income = average monthly income debtor receives from
all sources, whether taxable income or not
Income from all sources
If another non-filing family member makes regular
contributions toward household expenses, included under
101(10A)(B)
Exclusions:
SS benefits
Payments received by victims of war crimes, crimes against
humanity, or terrorism
Derived from the 6-month period ending on the last day of the
calendar month prior to bankruptcy

o Expenses: (living expenses (IRS Collection Standards) + Secured Debts next

60 Months (max period could be in CH 13) + priority debts (i.e. child support)
next 60 months + other allowed expenses) 707 B2A

o Living expenses 707(b)(2)(A)(ii)

Allowed living expenses are specified in IRS Collection Financial
Standards
Debtor may deduct the amounts specified even if greater
than debtors actual expenses
National standards (food, clothing, out-of-pocket health care)
Local standards (housing, transportation)
Secured debt
o Majority view: debtor should subtract from IRS
living expenses all payments on secured debts that
would otherwise fall within the IRS categories
o Minority view: give D local standard deduction
even where D uses up the entire amount as a
secured debt
If debtors secured debt payment is less than the ownership
portion of the standard, then debtor gets net balance
Where D owns free & clear
o Majority view: D can still claim entire amount
specified
o Minority view: D deducts nothing

Other necessary expenses allowable payments you make to

support your health care and/or the production of income
Ex) SS taxes, involuntary employment deductions, term life
insurance, court ordered payments, health care, education,
child care, etc.

Additional living expenses deductions (charitable contribution,

education of minor children, cost of providing for elderly or disabled
household members, etc.)

2. Multiply the net monthly repayment capacity (from Step 1) by 60

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 o This gives the DR total projected capacity over a 5 year period
o This amount time would require and above median debtor to be in CH 13.

3. Compare the Total Projected Repayment Capacity (From Step 2) with presumptive
Abusive Trigger Amounts.

Abuse Trigger Tournament

Round 1: Greater of $7,770 OR 25% of general unsecured debts --> Winner to Round 2
Round 2: Lesser of $12, 850 OR Which ever of 2 things won Round 1.

If total projected capacity is lesser or equal to the applicable presumptive abuse trigger
amount, the DR presumptively fails the means test----> this means your booted
out of CH 7.

Checklist
o Figure out 25% of Debtor's nonpriority unsecured claims
o Compare this number to $7,700
o Take the bigger of the two numbers and compare it to $12,850
o The lesser of those two numbers is the abuse trigger number
o If net disposable income x 60 is the same or higher than the abuse trigger,
debtor is a presumptive abuser. If less, debtor passes the means test and can
continue in Ch 7.

Shorthand Rules!
If DRs projected repayment capacity is < $128.33 per month
o NEVER a presumptive abuser

If DRs projected repayment capacity is > $214.16 per month

o ALWAYS a presumptive abuser

If projected repayment capacity is between $128.33 & $214.16, depends on

whether it is 25% of unsecured debts

Deducting: Debtor does not get the allowance if he or she has no actual
applicable expenses in the vehicle ownership category.
o Charitable Contribution: court may not take into consideration
whether a debtor has made or continues to make charitable
contributions
Debtor only get to deduct and factor in charitable
contributions if the case would otherwise be liable to
dismissal for presumptive abuse
4. REBUTTAL

*******If DR presumptively fails the means test, may try to REBUT the presumption
by showing Special Circumstances
Necessary for fairness to DRs, but detracts for purely mechanical tests by re-
introducing an element of judicial discretion.
707 b2B: i.e. hospitalization for serious medical conditions or job loss

Rebuttal 707(b)(2)(B)
Debtor must demonstrate special circumstances that justify additional expenses or
adjustments of CMI for which there is no reasonable alternative
o Special circumstances
o No reasonable alternative
o Burden on debtor
o Gives judge discretion
Presumption of abuse rebutted only if judge allows the additional expenses or
adjustment of income AND such adjustment allows debtor to pass the means test
Ex) medical condition, call to active duty in armed forces

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 (BACKSTOP)
Even if DR is not subject to the means test, not necessarily free. DR might have her
BAD Faith/Totality case dismissed as ABUSE as a bad faith filing or having regard to the totality of
the circumstances

Finding abuse without presumption

Alternative way to establish abuse bad faith/totality of the circumstances
707(b)(3)
Any party in interest can file motion under 707(b)(3) if debtors income exceeds median
Only judges, trustee & bankruptcy administrative may do so if debtors income is at or
below the state median
Catches abusive debtors who either:
o Immune from means test
CMI < state median
But now income is much higher
o Pass the means test in a dubious way
Historic income artificially low
Expenses too high
Majority of courts consider repayment ability in assessing bad faith/totality

Means Test Problems

1. Debtor and his spouse live in Chicago, Illinois. Both work. Their combined current monthly income is $5,350 per
month. Assume the Illinois state median income for 2-person families is $63,896. Debtor is self-employed as a
landscape gardener, and his spouse has a steady wage-earning job as a nurse.
For purposes of the means test, their deductible monthly expenses are as follows: $2,800 (net of secured debt
payments) under the IRS standards; secured debts of $1,800; priority debts of $300; and various other
deductible expenses of $100, for a total of $5,000. Their combined non-priority unsecured debts are $80,000.
They ask your advice on filing Chapter 7.
Combined Monthly Income: $5,350
IL State Median: $63,896

Combined Non-Priority Unsecured Debts: $80,000

On these facts would they be allowed to stay in Chapter 7 if they filed?

1) Threshold: Yes= Individual Debtor and Primary Consumer Debt

2) Preliminary:
o $5,350 (monthly income) x 12 months = $64, 200
o $64, 200 is ABOVE than the median income of $63,896 so you must take MEANS TEST

3) Means Test
o $5,350 (monthly income) - $5,000 (expenses) = $350
o $350 X 60= $21,000 compare this number with TRIGGER AMOUNTS

Trigger Tournament
o Greater of $7,700 or 25% of 80k =$20,000 $20,000 is greater
o Lesser of $12,850 or $20,000 $12,850 is lesser Trigger Amount

$21,000 > $12,850 = presumptive abuser so you are not allowed to Stay in Ch 7.

Would it be advisable for Debtor to delay filing for a few months and, in the meantime, stop taking
gardening assignments?
On its face, if you delay filing and your income reduces your CMI will Lower.
If your CMI lowers a little bit, you might be able to circumvent the means test all together or might be able
to pass it.

21
 BUTit might be considered BAD FAITH by the courtso its a RISK!

Could Debtor trade in his old car, which is paid off, and buy a new Mercedes on a five-year lease
with monthly payments of $750 each?
You count all your secured debt, no matter how high!
This is allowable as a deduction on the means testit can reduce your projected monthly income to the
extent you pass.

1. Are the following propositions true or false?

PRC is below the trigger= Debtor is not a presumed abuser

PRC is above the trigger= Debtor is a presumed abuser

a) Debtors projected repayment capacity (current monthly income less deductible expenses x 60) is $6,000.
Debtor has unsecured debt of $10,000. Debtor is a presumed abuser under 707(b)(2).
Trigger Tournament:
o 1) Greater of $7,700 or 25% of $10,000 (general unsecured debt) (2,500)= $7,700
o 2) Lesser of $12,850 or $7,700 = $7,700.

$6,000 is below $7,700 so proposition is false.

b) Debtors projected repayment capacity (current monthly income less deductible expenses x 60) is $6,000.
Debtor has unsecured debts of $60,000. Debtor is a presumed abuser under 707(b)(2).
Trigger Tournament:
o 1) Greater of $7,700 or 25% of $60,000 (general unsecured debt) ($15,000)= $15,000
o 2) Lesser of $12,850 or $15,000 = $12,850.

$6,000 is below $12,850 so proposition is false.

c) Debtors projected repayment capacity (current monthly income less deductible expenses x 60) is $7,750.
Debtor has unsecured debt of $20,000. Debtor is a presumed abuser under 707(b)(2).
Trigger Tournament:
o 1) Greater of $7,700 or 25% of $20,000 (general unsecured debt) ($5,000)= $7,700.
o 2) Lesser of $12,850 or $7,700 = $12,850.

$7,700 is greater than $7,750 so proposition is true

d) Debtors projected repayment capacity (current monthly income less deductible expenses x 60) is $7,750.
Debtor has unsecured debt of $40,000. Debtor is not a presumed abuser under 707(b)(2).
Trigger Tournament:
o 1) Greater of $7,700 or 25% of $40,000 (general unsecured debt) ($10,000)= $10,000.
o 2) Lesser of $12,850 or $10,000 = $10,000.

$7,750 is less than $10,000 so proposition is true.

e) Debtors projected repayment capacity (current monthly income less deductible expenses x 60) is $12,900.
Debtor has unsecured debt of $100,000. Debtor is not a presumed abuser under 707(b)(2).

Trigger Tournament:
o 1) Greater of $7,700 or 25% of $10,000 (general unsecured debt) ($25,000)= $25,000.
o 2) Lesser of $12,850 or $25,000 = $12,850.

$12,90 is greater than $12,850 so proposition is false.

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II. The Bankruptcy Estate
1. Property of the Estate
Overview

1. Filing of bankruptcy petition instantaneously creates an estate under 541

i. Composed of all of debtors legal and equitable interests in property as of the time the case is
commenced, plus some postpetition additions
1. Automatic transfer, no order need be entered
2. Even if nonbankruptcy law has transfer restrictions overrides restrictions
3. Even debtors exempt property initially goes into the estate

ii. Separate legal entity, represented by the trustee or DIP

1. Trustee/DIP can use, sell, or lease estate property 363

2. Significance
i. Protected by automatic stay stops race for assets
ii. Federal courts have exclusive jurisdiction over property
iii. In chapter 7, property of estate determines what creditors receive in distribution

Inclusions in the Estate

o Strongly Inclusionary:
General Rule: 1) all property 2) of the debtor 3) at the commencement of the case automatically
vests in the estate by federal law, unless it is specifically excluded. 541 (1A)

EXEMPT Property: Debtors can claim certain property back out of the estate as exempt property.
i.e. but exempt property initially goes into the estate

1. 541(a) all legal or equitable interests of the debtor in property as of the commencement of the
case
i. Property
1. Almost any conceivable interest whether tangible, intangible, novel, contingent
2. Whether interest = property is a question of federal bankruptcy law
3. Estate gets everything of value
o Even Exempt Property is Included (BK ESTATE)
o Initially goes in 541 A1
o Its all about control
o To get it back, debtor must file a schedule of exemptions.

ii. Of the debtor

1. Property comes into the estate only to the extent it is property of the debtor
2. To the extent debtors interest was limited in the instant before bankruptcy filing, estates interest
is identically limited
a. Joint tenancy estate gets debtors undivided share in joint tenancy
b. Subject to lien estate takes subject to all liens and encumbrances
c. Totally encumbered where the lien is worth more than the value, trustee decides
whether to use or abandon to secured creditor

iii. As of the commencement of the case (and a few post-petition additions)

1. Timing problems: where property has roots in both the pre-bankruptcy and post-bankruptcy
periods
a. Segal v. Rochelle D had tax losses prepetition, but didnt get tax refund until post-
petition
i. Court: did fall within estate, because losses were rooted in the pre-bankruptcy period
ii. At instant of filing, D had a potential tax refund, so estate gets the possibility of
receiving a refund (everything of value)

2. Exceptions for post petition property 541(a)(5),(6),(7)

a. Any interest in property acquired within 180 days after petition date:
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 i. By bequest, devise, or inheritance
ii. As a result of a property settlement agreement with debtors spouse or a divorce
decree, OR
iii. As a beneficiary of a life insurance policy or death benefit plan

b. Proceeds rule proceeds of estate property 541(a)(6)

c. Any interest of property that the estate acquires
What is property?

1. Whether something is considered property for purposes of a federal bankruptcy case is a

matter of federal law (CBOT)
i. Whether something is property federal question
ii. Attributes of property state law question
iii. Whatever D has (everything of value), comes into the estate as property under 541, and
state law defines its nature and attributes
iv. State law labels are not controlling

2. Property interests are created and defined by state law, not by federal bankruptcy law
(Butner)
i. Existence, nature, and character of property interest is determined by the underlying
law that created the interest typically state law
ii. Defer to state law, unless a federal interest requires a different result
iii. Policy:
1. Reduce uncertainty
2. Discourage forum shopping
a. Creditors will shop for federal bankruptcy if they get a better result than they
would have outside of bankruptcy
b. Do not want parties to have an incentive to force a bankruptcy case for
reasons that would not normatively support a bankruptcy
3. Prevent windfall by the happenstance of bankruptcy
4. Bankruptcy not designed to restructure rights rather it is meant to be a procedural
means for sorting out various substantive rights and claims of creditors and debtors
5. All the claims (and so the property interests) are created independently

STATE VS FEDERAL LAW

o Federal Law= Defines the estate
o State Law= creates and defines the debtor's property interest
i. Estate interest can be no greater than debtor's interest

Timing
1. General rule: date of filing of petition establishes property of estate

2. Difficult to fix the timing as of commencement in some cases because the property has roots in
both the pre- and postbankruptcy periods
i. Question = whether the postpetition property is sufficiently rooted in the prebankruptcy past,
taking into account the purposes and policies of federal bankruptcy law
ii. Purposes/policies:
1. Secure for creditors everything of value of the debtor as of the petition date
2. Leave debtor free after petition date to accumulate new wealth in the future

3. Fresh start exception 541(a)(6) where postpetition flowering of the property is attributable to the
postpetition labor of an individual debtor

4. Examples of contingent interest in property

i. Ex) blank canvas at the date of filing, paint water lilies post filing
1. Value of painting does not come into estate because virtually all of the value is
attributable to debtors postpetition labor

ii. Ex) fishing quota rights from postpetition law, based on debtors past petition fishing history
(Schmitz)
1. Court: quota rights not property of estate, since regulations did not exist at
commencement of case, so as of date of petition, debtors catch history had no value
2. Tabb: everything of value goes into estate, and someone would have paid for chance
that regulation would pass

What's Included Checklist?

24
 What assets will become the property of Debtor Inc's estate?
Everything which it had an interest in at the commencement of CH 11 (541 A1)
Post petition proceeds of pre-petition property (541 a6)
1. "Proceeds, product, offspring, rents, or profits of or from the property of the estate, except such as are
earnings from services performed by an individual debtor after the commencement of the case:
541(a)(6)"
2. 541 (A6): expressly excludes post-petition earning of individual debtors.
o Earning exceptions applies only to individuals, in Ch 7
o For individual in Ch 11 or 13, post petition earnings are estate property. 1306 (a2); 1115
(a2)The whole point is that DR will pay CRs during the plan period out of those post-
petition earnings and so the earnings need to be ring fenced and protected by the bankruptcy
stay

Post petition revenues from business operations? Yes, corp debtor is within proceeds rules.
Property acquired by the estate as an entity (541 A7)

Basically.Everything Comes into the Estate

1. Already had it (541 a1)
2. Proceeds of what it had (541 a6)
3. Acquired by estate from estate operations (541 a7)

Proceeds Allocation Issues: Assume we are dealing with a Ch 7 debtor who benefits from the 541(a)(6)
earnings from services performed exclusion. What if earnings received post-petition are partly attributable to
work done before the commencement of the bkr case and partly attributable to work done after the
commencement of the bkr case
#1) Apply the statute
[The] estate is comprised of all the following propertyProceeds, product, offspring, rents,
or profits of or from the property of the estate, except such as are earnings from services
performed by an individual debtor after the commencement of the case: 541(a)(6)
Pre-petition earnings not yet received at the time of the bkr filing

#2) What does DR have on filing day?

A contractual right to payment, i.e. a debt = 541(a)(1) property
Therefore pre-petition earnings = 541(a)(6) proceeds: May be protected to some extent by
exemptions

#3) Result?: Post-pet payments with pre-pet roots are part of bkr estate, not excluded as
post-petition earnings

Case: Butner v. US
Facts:
o Debtor Gold filed Ch 11
o Butner, the secured creditor, is the 2nd mortgagee on real estate
o The ct receiver collects rents in 11 and pays out as directed by court
o Feb 1975: it was converted to Ch 7 and the trustee was appointed
During CH 7, trustee collects more post-petition rents
Total- $162k collected.

Issue: Does Butner get those rents?

Rationale:
o Inter-creditor Dispute: If Butner did not have a valid lien on the rents, then the pot of post
petition rents would be distributed to the estate's general unsecured creditors

Which Law Applies?

o State Law= Butner had to take possession of the real estate
o Federal Law: give secured CR automatic liens on rents because SC could not perfect under state
law because of stay.

****DEFER TO STATE LAW: proper approach is to defer to state law unless some federal interest requires
a different result
o Property interests are created and defined by state law. Unless some federal interest requires a
different result, there is no reason why such interests should be analyzed differently simply
25
 because an interested party is involved in a bankruptcy proceeding. Uniform treatment of
property interests by both state and federal courts within a State serves to reduce uncertainty, to
discourage forum shopping, and to prevent a party from receiving a windfall merely by reason of
the happenstance of bankruptcy.

o Why? Uniform treatment (Same result) in or out of bankruptcy

o No RENTS: Butner did not have a lien on the rents when BK commenced results should not be
difference in BK
Uniform treatment of property interests by both state and federal courts within a State
serves to reduce uncertainty, to discourage forum shopping, and to prevent a party
from receiving a windfall merely by reason of the happenstance of
bankruptcy.
Forum Shopping: shop for federal BK if get better result than would outside of BK

BUTNER KEY Proposition: the existence, nature and character of property interests is determined by
the underlying non-BK law under which these interests arise--typically state law.

Case: Chicago Board of Trade v. Johnson

So Butner says: BK law defers to state law in determining property interests

Issue: The issue is whether the DR membership of CBOT (City Board of Trade) was property of his BK
estate and if so to what extent?

Nature of Interest:
o Under the law creating membership of CBOT, a member could only transfer his membership if
he had paid all claims of other members
o Sell to persons only approved by the board
o The board and other members have no power to compel a transfer
o The membership interest could not be levied on by member's creditors

Rationale: FED LAW APPLIES HERE.

o Under IL STATE LAW: because of the various limitations, the membership interest in CBOT
was not a property interest.

o What property is is actually a federal question. The fact that IL didnt call the
membership property was not controlling
State law labels aren't entirely dispositive. Federal law says EVERYTHING DR HAS
= Property.
Seems to Say Federal Law Applies.

SCOTUS IN CBOT: Membership was worth $10,500 and other members of the Board had claims over
$60,000 against the debtor.
o State Law Attributes Control: Membership = Property is a federal question

o But HOW THE PROPERTY IS ACTUALLY TREATED in BKR still depends on State law
characterization
It does come into estate, but subject to members claims, equivalent to a lien, SO NO
VALUE for estate (has to pay members claims in priority)
If there had been value in the estate's interest, the estate rep would want to know
about it. Approach is to give the estate control and have creditors establish their
claims under state law.
Putting Butner and CBOT Together:
The federal question: whatever DR has comes into estate under 541 as property (CBOT)
The state question: state law governs the nature and attributes of the property in the state
(BUTNER)

Takeaways: DR comes into BKR with rights, interest, and liabilities under non-BK state law.
Federal law defers to state characterization of property

Bankruptcy Estate HYPOS

1.) DR and Non DR each own an equal share in a horse as JT. What goes to the BK estate?
26
 Estate gets 1/2 horsedebtor's share (monetizable value of the DR joint tenancy interest)

2) Secured creditor owed $4k has SI in DR's horse worth $10k

Estate interest: $10k horse subject to $4k lien
Net value to estate= $6k EQUITY
SC= $4k secured claim in BK (in the horse)

3) Secured creditor owed $14k has SI in DR horse worth $10k.

Estate Interest: 10k
Net Value to Estate: 0 The loan balance is more than the value of the collateral. Estate rep would not sell
horse as all proceeds would go to SC.

2. Excluded Property
Exclusions from the Estate

Excluded Property = does not make it into the estate at all Section 541(b) contains various specific
exclusions that cover items ranging from educational savings accounts to certain specified employee benefit,
retirement, and pension plans.

Exempt Property= comes into the estate but the debtor can claim it back from the estate by filing a list of exempt
property in accordance with Rule 4oo3 of the Federal Rules of Bankruptcy Procedure

1. Exemptions
i. Exempt property comes into the estate and individual debtor must make a claim of exemption to
remove the property pursuant to 522
ii. Reason for exemption facilitates fresh start of an individual debtor

2. Transfer restrictions 541(c)

i. General rule: nonbankruptcy transfer restrictions (whether in an agreement, or in applicable law) are
invalidated in bankruptcy 541(c)(1)
1. Whatever debtor has comes into the estate
a. The transfer from debtor to estate is permitted
b. But, then the restriction might keep the estate itself from transferring

ii. Exception 541(c)(2)

1. Exclusion from property of the estate for a restriction of the transfer of a beneficial interest of the
debtor in a plan or trust that contains a transfer restriction enforceable under any relevant
nonbankruptcy law (not restricted to state law)
2. Ex) spendthrift trust where debtor is beneficiary, ERISA retirement plan

Classic case: "spendthrift trust" where DR is the beneficiary of the trust

State Law: the beneficiarys CRs cant reach beneficiarys interest in spendthrift trust
(i.e. it upholds the spendthrift trustCR cant reach and beneficiary cant assign. It also
prevent beneficiary from cashing out their interest)
Federal Law (BK Result): the same result. In bankruptcy, the DR-beneficiarys
interest in spendthrift trust does not become property of the estate, 541(c)(2)

This Result is Consistent with CBOT and Butner

o Extent of DRs property interest defined by state law (i.e. Not a transferable interest under
state law)
o Exclusion avoids bankruptcy windfall & forum shopping
No reason why DRs CRs should do better IN bankruptcy than OUT and out of bankruptcy

o Self-Settled Trusts? Under state law, general rule is that while spendthrift trusts are
immune from CRs, a Dr cant put his OWN assets into an immune spendthrift trust (called a self-
settled trust)
27
3. Retirement assets
i. 541(b)(7) property of the estate does not include any amount withheld by an employer from an
employees wages for contributions to ERISA, a plan under IRC 457 or 403(b), or to a health insurance
1. Partially moots Shumate decision

ii. 522(b)(3)(C) & 522(d)(12) all tax-exempt retirement funds are exempt in bankruptcy
1. Limitation = $1,095,000 for individual; $2,190,000 for couple filing jointly
Current statute (2005 amendments)
541(b)(7): excludes from estate amounts in DRs ERISA plan to extent is withheld from DRs wages or DR
directly pays it. Thus partially moots Shumate decision
Does NOT apply to employer contributions to pension plan.So Shumate remains relevant
there
IRAs? (Individual Retirement Accounts) or other types of retirement plan sanctioned by the IRC.

Shumate reasoning and 541(c)(2) do not apply

Because IRAs, unlike ERISA qualified plans are not required to contain transfer
restrictions

But post-2005 these plans benefit from generous federal exemptions (T&B pp.182-183)
Overall exemption cap of over $1.2 million (or in joint case, $2.5 million), 522(n)

4. Fresh start exclusion

i. Segal property is excluded from the estate to the extent that it is attributable to the postbankruptcy
labor of an individual debtor
ii. 541(a)(6) earnings for services performed by an individual debtor after commencement of the
case are excluded from the bankruptcy estate
iii. Chapter 13 individual debtor defers fresh start Ds earnings during plan payment period are
property of the estate 1306(a)
iv. Chapter 11 individual debtors postpetition earnings are also property of the estate 1115

Attribution issues
v. Where debtor does some work prebankruptcy, and some work postbankruptcy, allocate among
the estate (pre-), and debtor (post-bankruptcy)
vi. Ex) non-compete agreement signed as condition of sale of business
1. Court: payments do not fall within definition of earnings for services performed and
thus were properly included in estate
2. Non-compete payments rooted in Ds prepetition activities
3. D should have structured deal so he did something affirmative, like consulting, so
payment could be attributed between estate & debtor
Abandonment
1. 554 trustee has the power to abandon burdensome property or property of inconsequential value
or benefit to the estate
i. Ex) where the value of property is worth less than the amount of a valid lien on the property

2. SCOTUS has barred abandonment of property in contravention of a state statute or regulation that is
reasonably designed to protect the public health or safety from identified hazards (Midlantic)
i. Effect = de facto priority in payment out of debtors estate to the governments claim for environmental
cleanup expenses

Case: Patterson v Shumate (PENSION PLAN INTERET)

Facts:
DR (Joseph Shumate) Pres. & CEO of company
Interest in pension plan valued at $250k when he filed for bankruptcy
Pension plan ERISA-qualified
Issue? Was the $250K in the ERISA plan property of the bankruptcy estate? AND Was whether the ERISA transfer
restriction was enforceable in bankruptcy
Transfer restriction
To qualify under ERISA the benefits under a pension plan may not be assigned or alienated
The plan therefore contained a statutorily mandated transfer restriction that prevented the DR from alienating his

28
interest outside of bankruptcy:
For example, DR could not use the plan as collateral for a loan
Rationale: The general rule in 541(c)(1) overrides non-bkr restrictions on transfer
General rule: 541(c)(1):
an interest of the debtor in property becomes property of the estatenotwithstanding any provision in an
agreement, transfer instrument, or applicable non-bankruptcy law
(A) that restricts or conditions transfer of such interest by the debtor: or
(B) that is conditioned on the insolvency or financial condition of the debtor [or] on the commencement of a case
under this title
Example tort claim: In many states a tort victim cannot transfer a tort claim: the tort claim is said to be
personal to the tort victim

CASE: Moses v. Ehrenberg (PENSION PLAN CASE)

Facts:
In bankruptcy, the DR-beneficiarys interest in spendthrift trust does not become property of the estate, 541(c)
(2)
Under CA law= general rule is that while spendthrift trusts are immune from CRs, a Dr cant put his OWN assets into
an immune spendthrift trust (called a self-settled trust)
Pension plan seems analogous to a self-settled trust
In substance, a pension plan (to extent of beneficiarys contributions) is like a self-settled trust
DR/beneficiary (Shumate) puts in money which otherwise CRs could have reached -- and now CRs cannot reach
it

Issue: What controls state or federal law?

Rationale:
Dueling Policies:
Policy for excluding pension benefits from estate: 1) Follow non-bkr law (pension plan not alienable) 2) Anti-forum
shopping/windfall (CRs should not do better in bkr)
Policy for including pension benefits in estate: 1) Non-bkr policy DR cant immunize his own assets by self-settling
SC HELD FOR DR: Relied on plain language of 541(c)(2)
Restriction on transfer of beneficial interest of DR in a trust-> ERISA requires anti-alienation provisions
b) enforceable under applicable non-bankruptcy law-> yes, enforceable under federal ERISA law
No conflict after all: Butners no windfall principle applies
CRs cant reach ERISA assets outside of bankruptcy..EVEN IF self-settled (i.e. DR contributions)
The originating law (federal ERISA law) favors protection of pension benefits and that nonbankruptcy policy prevails.

Excluded Property and Allocation Problems

1) Debtor works as a junior software engineer for a large corporation. Debtors salary is paid monthly in arrears, i.e. he
receives his paycheck at the end of each month for that months work. Debtor got a paycheck for $4,000 on July 31.
He filed bankruptcy on August 15. He continued to work for his employer and received further paychecks for $4,000 on
each of August 31, September 30, and October 31.

DR gets paid in monthly installments

July 30th ($4,000 paycheck)----------- Files BKY AUG 15th---------------Continues Work $4,000 on Aug 31, Sept 30, Oct 31

Assume that Debtor filed a Chapter 7 case on August 15. Are the paychecks estate property?
o The July 31 paycheck comes into the estate, to the extent he hasnt spent it all by Aug 15. It is property he
receives before the commencement of the case.

29
 o Sept and Oct payment paychecks are earnings from services performed by an individual debtor
after the commencement of the case they are excluded from BK estate under 541 (A6)

o Aug 31 paycheck relates to work DR did before BKY (Aug 1- 15) and after BK (Aug 15- Aug 31). SO Half of
the paycheck will be allocated to the estate and the other half represents earnings from services
performed by an individual DR after the commencement of the case that are excluded under 541 (A6)

Assume that the Debtor filed a Chapter 13 case on August 15. Are the paychecks estate property?
o All paychecks now come into the estate under 1306. The idea is to protect the DR ongoing earnings as
these will be used to FUND Payments to pre-BK creditors under a CH 13 plan.

Assume that the Debtor filed a Chapter 7 case on August 15. Assume also that he continued to work for the
employer but was fired on September 30. If the employer paid him for September and, in addition, paid him a
further month's salary as a severance payment, would the severance payment be estate property?
o The Sept paycheck is clearly for services performed after the commencement of the case.
o Court typically read earnings exception narrowlyso the trustee has a very good argument that the
severance payment should come into the estate because it does not relate to services actually performed
by the DR.

2) As part of her estate planning, Gretchen wishes to put $10 million in trust for her twenty-year-old grandson, Dan.
Dan is a spendthrift and so Gretchen wants to limit Dans access to the trust fund. The current draft of the trust deed
provides that Dan will receive $5,000 each month from the trust income but none of the remaining income and none of
the trust corpus (i.e., the capital) until he reaches the age of thirty.

Dan = $5k/ month from fundbut none of capital until he reaches age of 30.

Before Gretchen executes the trust deed, she wants to know what would happen if, after it becomes effective, Dan
files for Chapter 7 bankruptcy relief. Specifically, what assets, if any, related to the trust would become part of the
bankruptcy estate having regard to 541 of the Bankruptcy Code and to the principles deriving from Chicago
Board of Trade and Butner?
o All legal and equitable interest of the debtor in property as of the commencement of the BK case are
estate property 541 (A1)
o Dans interest would prima facie pass into the estate
o Estate property is a federal concept (BOT) but the extent of Ds interest is to be determined by
reference to State Property Law (Butner)
D would have a vested interest in the $5k per month trust income. That entitlement clearly passes
into the estate and to the extent that the CMI is proceeds of Ds trust intrest.it would Unearned
income rather that earnings from services.SO WOULD NOT BE EXCLUDED by 541 (A6)
D would have contingent interst in the remaining income and trust corpus. This property interest
will only accrue 10 years from now. Absent an enforceable anti-alienation clause in the trust deed,
there would be nothing to stop D from assigning and cashing out his interest.
There is something of value here that has PRE BK roots and it would therefore pass into the
BK estate
Court would apply a DC value the interest to reflect the possibility that B might not survive
until 30.

Explain how Gretchen may be able to prevent Dans trust interest from becoming property of his bankruptcy estate
by reference to 541 of the Bankruptcy Code.
o 541 C: provisions in an agreement that restrict or condition transfer of an interest by D would not prevent
that interest vesting in the BK estate (C1)

o BUT a restriction on the TR of Ds trust interest is enforceable in BK SO LONG AS the restriction is

enforceable under APPLICABLE NON BKY LAW (C2)
IF Trust instrument is governed by state law permits spendthrift trusts, a restriction on assignment
of Ds interest could be included and enforceable in BKY

o Three alternative ways of benefiting D that G might want to consider through: the educational funding
plans structured to fall within 541 (B5). These could be used to protect at least some of Ds interest
up to applicable IRS limits and other limits se out in 541 (B5). 2

30
III. The Automatic Stay

1. Overview/ Acts Stayed

Overview
1. 362 automatic stay essentially serves as a time out, maintains status quo until debtors affairs can be
sorted out
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this
title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as
a stay, applicable to all entities, of

1 the commencement or continuation, including the issuance or employment of process, of a

judicial, administrative, or other action or proceeding against the debtor that was or could have
been commenced before the commencement of the case under this title, or to recover a claim
against the debtor that arose before the commencement of the case under this title;

1 the enforcement, against the debtor or against property of the estate, of a judgment
obtained before the commencement of the case under this title;

1 any act to obtain possession of property of the estate or of property from the estate or to
exercise control over property of the estate;

1 any act to create, perfect, or enforce any lien against property of the estate;

1 any act to create, perfect, or enforce against property of the debtor any lien to the extent
that such lien secures a claim that arose before the commencement of the case under this title;

1 any act to collect, assess, or recover a claim against the debtor that arose before the
commencement of the case under this title;

1 the setoff of any debt owing to the debtor that arose before the commencement of the case
under this title against any claim against the debtor; and

1 the commencement or continuation of a proceeding before the United States Tax Court
concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court
may determine or concerning the tax liability of a debtor who is an individual for a taxable period
ending before the date of the order for relief under this title.

*****Denies creditor their procedural rights.but substantive rights remain in tact

A4: stays any act to create perfect or enforce an lien against the property of the estate
A5: stays an act to create perfect or enforce against property of the debtor
o ******This includes after acquired property that does not come into the estate but that still
belongs to the debtor.

2. Role in bankruptcy
i. Protect integrity of collective action for creditors
1. Stops all collection efforts and protects the estate
2. Creditors must get permission from the estate to proceed (relief from stay 362(d))
3. Avoid chaos and scramble for assets orderly, supervised process instead

ii. Facilitates debtors fresh start

1. Gives debtor a breathing spell during which she cannot be harassed by creditors on
prebankruptcy debts

3. Characteristics of automatic stay

i. Injunction
1. Enjoins efforts to collect prepetition debts from the debtor of the estate
2. Prohibits attempts to interfere with estate property
3. Does not interfere with efforts to collect postbankruptcy debts, or with attempts to collect from
third parties

ii. Automatic
31
 1. Goes into effect the instant bankruptcy petition is filed
2. Good against the world

iii. Self-executing
1. Actions taken in violation of the stay are entirely ineffective
2. Bankruptcy court has the power to annul the stay 362(d) which validates that an action
contravenes the stay
3. For practical purposes, unless the court acts to validate the stay-violating action, the action has no
legal effect

iv. Sanctions 362(k)

1. Actors who knowingly violate stay are subject to sanctions
2. Under 362(k) or under the courts contempt powers
3. Court can award individual D actual damages, costs, attorneys fees, and if appropriate, punitive
damages for a willful violation of the automatic stay

v. Temporary
1. Terminates by operation of law upon the occurrence of one of the events in 362(c)
a. Closing/dismissal of case
b. Granting of discharge to individual debtor permanent discharge injunction of 524(a) kicks
in
c. Removal of property from the estate

vi. Relief court has the power to grant relief from the stay for a particular creditor 362(d), (g)

Acts stayed

1. In general
i. Analysis:
1. 362(a) whether an act is stayed in the first instance
a. If automatic stay is not triggered by the action, it may still be possible to stop the action by
obtaining an injunction
2. 362(b) exceptions to stay
3. 362(c) termination provision

ii. Timing
1. Point of demarcation is date of bankruptcy filing
2. Claims arising prior to bankruptcy are generally subject to the stay, and claims arising after
bankruptcy are not

iii. Protects
1. Property of estate from ALL interference
2. Property of debtor from collection of prepetition debts
3. Any act to collect coercive effect test
4. Ex) repossession and sale, writ of execution, order of garnishment, setoff (freeze of account ok)

iv. Protection limited to

1. Debtor
2. Debtors property
3. Property of the bankruptcy estate
4. Third parties do not enjoy protection

2. Turnover of repossessed collateral - 542(a)

Where secured creditor rightfully repossesses collateral prebankruptcy but D commences bankruptcy
proceeding before foreclosure sale

Secured creditor is required to turn over the property to the trustee or DIP, and is granted adequate
protection as a substitute remedy
If D cant provide adequate protection, court may grant relief from the stay and allow secured party to
foreclose on property

542(a) any entity in possession of property that the trustee may use under 363 shall deliver that
property to the trustee
363(b), (c) trustee may use property of the estate
o (e) conditions use of property on providing adequate protection
32
 Congress theory = Pareto efficiency
o Make one group better off (residual claimants unsecured creditors) without making other
group (IRS) any worse off
o Unsecured creditors will be paid more through successful operation of the business
o Secured creditor give the value of their collateral (cannot be worse off)
Turnover right ends when debtor has NO property interest left at the time files bankruptcy (i.e. if secured party
had sold the collateral at foreclosure)

Whiting Pools (US)

542(a) grants to estate a possessory interest in property of D that was not held at commencement
Ownership not transferred to C until sale to BFP thus still subject to turnover requirement
Trades possession for adequate protection

Turnover without adequate protection? (Thompson)

7th Circuit/Majority: turnover power gives estate a possessory right in the collateral which is
automatic and self-executing
o Thus secured party is not lawfully in possession
o Majority view
o Secured party can get relief from the stay if not given adequate protection, under 362(d)(1)

Opposing courts:
o 542 is not self-executing rather the creditor may hold the property pending the courts
resolution of the adequate protection question
o Any exercise of control over property of the estate, to be sanctionable, must occur post-filing
and must involve an affirmative act on the part of the creditor beyond maintaining status quo

Case: Thompson v. General Motors Acceptance Corporate (Control and Adequate Protection)
Facts
Buyer defaults on car payment, Secured creditors seizes the asset
Buyer files for Ch 13 BKthe big issue is whether the creditor must return the car to the BK estate.

Here, Theodore has an installment contract with GM for purchase of 2003 Chevy Impala.
o He defaults on his loan
o GMAC repossesses the vehicle
o He files for BK CH 13

Issue:
1. Whether an asset that a SC lawfully seizes pre-petition must be returned to the buyer's estate after he
files for CH 13 BK?

1 If so? Whether the creditor must immediately return the asset even in the absence of a showing that the
debtor can adequately protect the creditors interest in the asset?

Holding/Rationale:
o Under BK Code, no creditor may commit any act to obtain possession of property of the estate or of property from
the estate or to exercise control over property of the estate after a debtor has filed for BK.

o Control MEANS:
To have power over to have direct influence over
INCLUDES act of passively holding onto an asset

o BUT Debtor must provide a SC with adequate protection of its interests in the siezed asset if creditor
requests
BUT CREDITOR MUST RETURN ASSET FIRST
Creditor SHALL DELIVER to trustee
STEPS: 1) Return Asset, 2) Seek Adequate Protection of Interest by the Court

Case: In re Kuehn: COERCIVE BEHAVIOR TEST

Facts:
o Kuehn, art teacher, and she enrolled in a 2 year master's degree program at Cardinal Stritch University
o She stopped paying midway through the first year.but was allowed to take exams, receive grades,
and sign up for new classes.
33
 o When she asked for a TR which she needed for an increase in salary.the University refused because
she owed more than $6k in debt ( SHE WAS DENIED A TR BECAUSE SHE DIDNT PAY)
o She files BK (list school as creditor) University stil refuses
o BK Ct: finds university in contempt, orders them to provide a TR and pay damages and atty fees.

Issue: Does a university violate the BK code automatic stay or discharge injunction by refusing to provide a TR
because of pre-petition debt remains unpaid? YES

Holding/Rationale:
o Because a TR has no intrinsic value to University, a refusal to provide one must be an act
to collect a debt.
o Kuehn had a property right in the grades.but intangible grades are worthless without proof (certified
TR).

Test: Whether it was coercive behavior or not? Is it to coerce someone into payment?

Case: Citizens Bank of Md v. Strumpf (FREEZE IS NOT A SET OFF)

Facts:
o The debtor filed for relief under Ch 13.
At the time of filing: he had a bank account at the bank and a loan with the bank for
$5,068 which was in default.

After the bankruptcy filing, the bank refused to pay checks in any amount which reduced the
account below the loan balance.

Immediately after the filing, the bank filed a motion for relief and for setoff.

The debtor filed a motion for contempt for freezing the account.

Issue: Can a bank put a temporary administrative freeze on the debtors bank account upon
learning of the bankruptcy filing without violating the automatic stay under Section 362(a)?

Holding/Rationale:
Temporary freeze was not a setoff and therefore did not violate the stay.

The automatic stay stops any act to collect a debt including the setoff of any debt.
No Actual Set off Here
the bank did not take the funds and offset them against the debt wiping out the debtors
ownership of the funds and reducing or wiping out the debt at the same time. Therefore there
was no actual setoff.

Section 542(a) requires turnover of assets of the estate by an entity in possession of such assets
except to the extent that such debt may be offset . . .
The holding of the debtors funds by the bank is a debt the bank owes to the debtor which Section
542(a) says does not need to be paid to the extent that an offset is available.
bank does not need to turnover the funds because it has the right to an offset.

An offset is itself a violation of the stay but the court said there was no actual offset and no duty to
turnover the asset and therefore the bank should have prevailed.

Automatic Stay 362a Problems:

Is there an automatic stay violation in the following situations? Under which paragraph or paragraphs
of 362(a)?

1. Lauren sued Marty for breach of contract in connection with the sale of an expensive range of
computer equipment. The case is proceeding in state court. After jury selection started, Marty filed a
bankruptcy petition. Martys attorney immediately emailed a copy of the bankruptcy petition to Laurens

34
 attorney. Laurens attorney wrote back saying it is too late to stop the trial now and she carried on with jury
selection.
LM (Breach of K in state court); - M files BK petition L atty carries on with trial and jury selection
Yes, stay violation under 362 A1continuation of a proceedings against debtor; A6: any act to
collect, assess, or recover claim against the DR that rose before commencement.

2. Kevin filed for bankruptcy under Chapter 7 in July 2015. In August 2015, Kevin assaulted Tyrone outside
a local bar after a disagreement and caused him considerable injury. In September 2015, Tyrone sued Kevin in
state court. Kevin ignored the lawsuit because of his bankruptcy. Tyrone obtained a default judgment for
$25,000 and an order garnishing Kevins post-petition wages to the fullest extent permitted by state exemption
law.
July 15 (K files Ch7) Aug 2015 (K assaults T) Sept (T sues K, and $25k garnish post petition wages)
Not a stay violation: T did not commence a proceeding that could have been commenced before BK
proceeding under A1 because the assault to place afterwards.

3. Creditor has a perfected security interest in Debtors Chevrolet securing a loan of $10,000 that
Creditor made to Debtor. Debtor defaulted on the loan and filed for bankruptcy under Chapter 7. Two days after
the bankruptcy filing Creditor repossessed and sold the Chevrolet and used the proceeds of sale to repay the
loan.
CR loaned $10k to DR (had perfected SI Chevy); DR files CH 7; CR repossess Chevy
Yes is a stay violation: Chevy is a estate property (A1); A6- an act to collect recover/ claim against
DR; A4 any act create perfect or enforce lien against property of the estate; A3 any act to obtain
possession of property or enforce estate.

4. How would your answer to Q3 differ had Creditor repossessed the car before Debtor filed for
bankruptcy and sold the car at auction after Debtor filed for bankruptcy?
Whiting Pools scenario. CR got possession lawfully, but the asset goes back the estate.
A3: cannot exercise control over property of the estate
A6: any act to collect
A4: enforcing lien against property of the estate.

5. Creditor obtained a judgment against Debtor for $20,000 in state court on October 10. Debtor filed for
bankruptcy under Chapter 7 on October 12. Creditor obtained a writ of wage garnishment from state court on
October 15 and immediately served it on Debtors employer. Debtor receives his salary monthly in arrears. On
October 31, the employer withheld $1,000 from Debtors October paycheck in accordance with the garnishment
order and sent it to Creditor.
Oct 10 (CR gets judgment against DR), Oct 12 Files BK, Oct 31 employer withhold $1k
Yes its a stay violation: enforcement of pre-petition judgment violates 1,2= wages are estate, 3
wages are estate; 4= wages are estate property, 5 wages are debtor property.
6. How would your answer to Q5 differ if Debtor filed for bankruptcy under Chapter 13 on October 12 but
the facts were otherwise the same?
Under CH 13, future earnings are a part of the estate, so it over riders 541 (A6).

7. Debtor has two accounts with Bank, a checking account and a loan account. There is a credit balance
of $10,000 on the checking account. Debtor owes Bank $20,000 on the loan account. Debtor files for
bankruptcy under Chapter 11. Bank freezes the checking account.
No, it is not a stay violation. Analogous to Lien Enforcement. Freezing is not a set off. Not
exercising control or trying to collect. By freezing the account, the bank is preserving the estate, which
is a good thing. The bank is helping out.
Must ask for relief from stay before setting off.

8. Debtor owed Condo Association fees relating to is condo. As a result Condo Association asserted a lien
under state condo law over property of Debtor that Debtor was storing in a storage unit in the condo building. It
did this by changing the access code to the storage unit and withholding the new access code from the Debtor.
Debtor subsequently commenced a Chapter 7 case. The Condo Association continued to withhold the access
code. ( IN RE KEUHN)

35
 Yes, is a stay violation. A3, A6any act to collect. Changing access code to force payment.
Seeking to collect, assess, or recover.

9. Debtor owed Creditor, Inc. $10,000 for goods previously sold and delivered. Debtor filed a Chapter 11
case and one week later placed an order with Creditor, Inc. for further goods. Creditor, Inc. refused to supply the
goods, even on cash on delivery terms. Creditor, Inc. says that it has no desire to deal with customers who
dont pay their bills.
Coercive Test: outcome depends on the precise facts. If its to leverage debt, A6 is a violation. But if
you dont have an obligation to enter into further supply K, could be not acting.
o One side: Its a free country! No obligation to enter into further supply contracts.
o Other side: Not acting to collect, just declining to supply.

10. Insurer insures Debtor, Inc. against the risk of fire and flood damage to Debtor, Inc.s business
premises. The terms of the policy give either party the contractual right to cancel the policy on 60 days notice
at any time. Debtor, Inc. filed for bankruptcy under Chapter 11. Debtor was current on the premiums. Three
days later, Insurer gave 60 days notice of cancellation of the policy.
Stay Violation: A3 and A6, No collectionpremiums are current. Trying to tamper with valuable rights.
Insurance Policy= Property of Estate (Valuable K rights); Cancellation= exercising control over
property of the estate
In a bankruptcy case, well see that the non-DR partys K right to cancel is trumped by the Code (see
365(e)) if termination is solely b/c of bkr filing
So Insurer must ask Bkr Court for relief from stay
o Would have to show cause e.g. increased risk of default under insurance K justifies higher
premiums
o So long as estate pays premiums for continuation of cover, court is unlikely to grant stay relief

11. How would your answer to Q10 differ if Insurer had given 60 days notice of cancellation one week
before Debtor, Inc. filed for bankruptcy?
No Stay Violation. If cancellation notice is given pre-BKR, it defines the scope of DR property right at
the point---only 60 more days left under K at point of filing.

2) Exceptions to the Automatic Stay

Exceptions - 362(b)

1. 362(b)(1) criminal proceedings not stayed

i. Issue = whether court should read in debt collection exception
ii. Theoretically, D could obtain an injunction against state criminal action under 105(a)
iii. This is not a money collection issue. In criminal actions, the state is enforcing states public policies, on
behalf of the whole society. Federal deference to estates in operations of their criminal justice systems.

2. 362(b)(2) alimony, maintenance, and support debts

i. Collection of domestic support obligation from property that is not property of the estate
ii. Modification of order for domestic support
iii. Concerning child custody/visitation
Proceeding to establish or modify domestic support obligation
Proceedings concerning child custody or visitation
Proceedings for the dissolution of marriage, except to the extent that such proceeds seek to
determine the division of property that is property of the estate.
Proceedings regarding domestic violence

3. 362(b)(3) perfection of PMSI (relation-back honored)

4. 364(b)(4) permits governmental unit to enforce its police or regulatory powers without
interference from the stay

i. Exception from the exception: government may not act to enforce a money judgment in its
favor
1. Mere entry of a money judgment by governmental unit is not affected by the automatic
stay, provided such proceedings are related to the governments police or regulatory powers

36
 Tests from in Re Halo
2. Pecuniary purpose test if government is acting primarily to protect its pecuniary interests,
rather than to protect public safety and welfare, than it is not acting pursuant to its
police/regulatory powers
3. Public policy test distinguishes between actions that primarily adjudicate the private rights of
private parties (which is not within the police or regulatory powers), and governmental acts that
are primarily directed at a larger public policy regarding public health, safety, welfare

ii. Government wears 2 hats: regulator and creditor

1. Government can act as regulator without worrying about the stay, but when it acts as creditor, it
must play by the rules for other creditors
2. Distinction between regulator and creditor is whether the government is focusing on past or future
conduct of the debtor

iii. Ex) environmental cleanup injunction where suit brought as an equitable action to prevent
future harm (Penn Terra)
1. Court: within the exception from the stay for actions by governmental units pursuant to the police
and regulatory powers
2. Test = nature of the injuries for which challenged remedy is intended to address, including
whether state seeks compensation for past damages or prevention of future harm

Automatic Stay 362b Problems:

Does an exception to the automatic stay apply in the following situations? Which paragraph or
paragraphs of 362(b) would control?

1. Debtor owes six months arrears of alimony and child support to his ex-spouse. Ex-spouse brought a
collection suit in state court. Debtor filed a Chapter 7 bankruptcy case. After the bankruptcy filing, ex-spouse
obtained a wage garnishment order that will take effect from the date of the Debtors next paycheck.
DR 6 mo alimony + child support Ex brings suit in state court DR files Ch 7
o Yes, Collection of Alimony: 362 (b) (2) (B)collection of domestic support obligation from property
that is not property of the estate.
o Yes, Post Petition Wages are not property of the estate 541 (A6)under CH 7

2. Would your answer to Q1 differ if Debtor had filed a Chapter 13 bankruptcy case rather than a Chapter
7 bankruptcy case?
o Yes, CH 13 overrides 541 (A6)that post petition wages are not property of the estate .
o 362 (B2c) applies to green light it and make it property of the estate with respect to withholding of
income that is property of the estate or property of the DR for payment of a domestic support obligation
under a judicial/administrative order or statute.

3. Debtor filed a Chapter 7 proceeding. Debtors spouse commenced divorce proceedings in state
court. In the divorce suit, Debtors spouse also seeks custody of the couples two children, child support
payments, and the transfer into her sole name of the couples jointly owned family residence.
DR files Ch 7 Spouse files divorce (wants custody, child support, transfer of family residence)
o 362 (B2A iv): allows proceedings for dissolution of marriage exempt to extent proceeding seeks to
determine the division of property of the estate.
o 362 (B2A iii): proceedings concerning child custody
o 362 (B2 B): domestic support includes child support to extent you are not collecting from property of
the estate.
o Transfer of Family Residence is STAYED: stay would not apply to because the estate has an interest
there. Division of property of the estate
o 362(b)(2)(A)(iv), In re Secrest: for the dissolution of a marriage, except to the extent that
such proceeding seeks to determine the division of property that is property of the estate

4. Debtor, Inc. operated a coal surface mine. The State Department of the Environment (DER) found that
Debtor, Inc was operating the mine in violation of state environmental statutes. DER served Debtor, Inc. with
multiple citations for these violations. Debtor, Inc. did not contest the citations and entered into a consent order

37
 with the DER to rectify the violations. The consent order stipulated that Debtor, Inc. would carry out a series of
enumerated corrective measures. A month after agreeing to the consent order, Debtor, Inc. ceased all mining
operations and filed for bankruptcy under Chapter 7 of the Bankruptcy Code. It took no steps to carry out any
corrective measures before the bankruptcy filing. In its schedules, Debtor, Inc. listed total assets worth $30,000
and total liabilities of $500,000, including estimated costs for complying with the consent order of $100,000. DER
applied to state court for a mandatory injunction requiring Debtor, Inc. to comply with the consent order.

DER served DR with violations and DR enters into consent order to take crr measures DR files Ch 7 (stops
mining, does not take crr measures) DER in state ct want injunction

1) Look at 362(b)(4), governmental unit to enforce [its] police and regulatory power, including the
enforcement of a judgment other than a money judgment
o Here you would argue a public policy purposeseeking an injunction to protect the environment not $$$.
You would argue that its not ordinary collection activity.
o Its to prevent future harm rather than to compensate for past injury.
o
Will the DR actually have to clean it up? No, there is not really a DR left, no assets. State will likely pay for it
and file and reimbursement claim against the BK estate.
What if this was a CH 11: DR would have to comply with the orders. 28 USC 959(b)
o Might argue that because he stopped its functionally equivalent to a money judgment. Forcing the estate
to spend $$.

5. Debtor, Inc. violated federal labor laws in terminating the contracts of 10 of its employees. The
employees filed a complaint with the National Labor Relations Board. Debtor, Inc. filed a Chapter 11 bankruptcy
case. The National Labor Relations Board ordered the Debtor to reinstate the 10 employees and pay them arrears
of back pay and damages.

DR INC violated fed law employees file complaint with NLRB Dr files Ch 11 MLRB orders DR to reinstate +
pay damages
1) Reinstatement Order is Allowed: Allowed, 362(b)(4), governmental unit to enforce [its] police
and regulatory power Public policy.DIP has to obey the law even when in Bankruptcy as seen in In re Halo
Wireless and under 959 b.
The order relates to the DR FUTURE operationsand if DR if continuing to operate business, labor laws
apply going forward & DR can be ordered to reinstate employees fired illegally
2) Cannot Enforce NLRB Pay Back Award:
Entry of back pay award ok police and regulatory power exception, 362(b)(4)
Enforcement of back pay award? NO Money judgment exception in (b)(4)
** If, however, the govt action involves collecting $, a predominantly pecuniary purpose, then bkr law doesnt
defer to the govts role in enforcing non-bkr law,
o If NLRB is trying to make DR pay back the pay claims to workers it violates BKRS money sorting function.
Those workers have to get in the BKY payment line along with other CRS, wherever Congress put them in
line with the BKY code.

6. On July 15, Dealer sells and delivers to Debtor, Inc. a piece of equipment, retaining a security interest
in the equipment to secure repayment by Debtor, Inc. of the purchase price. On July 20, Bank loans Debtor
$20,000, taking a security interest in all of Debtors equipment, and files a financing statement covering the
equipment. On July 25, Debtor, Inc. files for Chapter 11 bankruptcy. On July 30, Dealer files a financing
statement perfecting its security interest in the piece of equipment it sold to Debtor, Inc.

Allows the Perfection of PMSI (within the state law grace period):

38
 362(b)(3): act to perfect an interest in property to the extent the trustees rights are subject to such
perfection under 546(b)

Relation Back Rules are Honored:

If a claimant could have perfected an interest outside of bkr, with relation-back effect, they can do the
same in bkr (see 546(b))
Consistent with Butner principle of anti-forum shopping mirror bkr & non-bkr distributive effects
And outside of bkr, under art. 9, a PMSI can be perfected with relation-back effect within the state law
grace period

IV. Unsecured Claims

1) Definition of claim
1. Claim - 101(5)
Right to payment (look to state law), whether or not such right is reduced to judgment

Claims Defined: 101 (5):

o " right to payment whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, unsecured"
Reduced to Judgment: a judge orders one party to pay or give property to another
party

Liquidated: a debt that is for a fix amount of money

o fixed monetary amounts and contract clauses which both parties agree.
o subject matter is fixed and ascertainableno dispute to that

Unliquidated: specific value has not been determined yet.

o i.e. tort action.

Matured: debt that exists currently and the date of payment has become due.
Un-Matured: debt that exists but payment date is due in the future.
o Affects claims allowance
o i.e. creditor holds DR note, due for repayment in 2017.
Creditor has a claim .even thought the right to payment is unmatured. (i.e. BK
accelerates)

Disputed: one that you dont agree you owe to the creditor
Undisputed: one that you agree is owed to creditor
debt may exist, exact amount isn't know or cant be calculated at the time of filing

Fixed:
Contingent: depends on some even that has not occurred.
o Might or might not occur
o Rights under a guarantorif the debtor doesnt pay, guarantor will pay for the debtor.
Then G has the right of reimbursement from D.

Legal: a request for Money

Equitable: a rest to the court to order someone to do something or stop, not to do something
o i.e. injunction or where you can elect for monetary damages too.
Can be a claim when such breach gives rise to a right to payment 101(5)(B)
Under state law, could remedy be satisfied by payment of $
Injunctive right itself (and not just liquidated damages clause) must give right to
payment
Ex) specific performance, injunction

Secured: payment is backed up by a lien on the debtor's property/collateral.

Unsecured: dont have secured status.

2. Significance of having a claim

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 i. Only a claim may be paid in bankruptcy distribution
ii. Only a claim may be discharged
iii. Holder of a claim is stayed from collecting during bankruptcy
iv. Corporation/partnership significance of non-claim finding:
1. If liquidating (chapter 7) claimant out of luck because entity wont exist
2. If reorganizing (chapter 11) obligation will be enforceable in full by claimant against post-
reorganization entity

3. Determining whether there is a claim

i. Look to state law to determine if the act gives rise to a right to payment
ii. Look to federal law to fix when (accelerate all claims to filing date, even if no present right to sue)

iii. Congressional goal = broadest possible scope of claims

TESTS
iv. Conduct test right to payment arises when conduct giving rise to alleged liability occurs
v. The Pre Petition Relationship test requires (1) prepetition conduct by DR (2) prepetition relationship
between Claimant and DR
o e.g., contact, exposure, impact, or privity
o TIMING: prior to confirmation of plan
Would then be able to identify the particular claimant for purposes of the bankruptcy case

vi. Fair contemplation test claim finding requires knowledge of harm by C

4. Claim or not?
i. Ex) creditor injured by D-manufacturers IUD device which was inserted in her prior to petition
date (Grady)
1. Court: creditors claim arose prior to bankruptcy, when the tortious conduct occurred (i.e. when
the device was inserted inside of her)
2. Creditors claim was contingent depended upon a future uncertain event (the
manifestation of injury from use of the device)
3. Rule: there need not be a right to the immediate payment of money, where the acts constituting
the tort or breach of warranty have occurred prior to the filing of petition, to constitute a claim

ii. Ex) D entered into reorganization plan, and as part of the plan, a legal representative was
appointed to represent a class of future claimants (Piper)
1. Court: no claim, because preconfirmation connection established between D & future claimants
2. No exposure to a specific identifiable defective product, or any other preconfirmation relationship

iii. Ex) state obtained injunctive ordering D to clean up hazardous waste and enjoining from
causing future pollution (Kovacs)
1. Court: cleanup order was a claim
2. Cleanup order was converted into an obligation to pay money, and thus the obligation was
dischargeable in bankruptcy
3. What the receiver wanted was money to defray cleaning costs

iv. Ex) non-compete clause is equitable remedy (injunction) a claim

1. Where under state law the covenant would be considered reasonable and thus enforceable, and
would allow C to enforce the noncompete covenant by a negative injunction
2. No claim injunctive right itself has to be compensable in $$s
3. Note, could implicate fresh start policy

Mass Tort Claims Cases and Holdings

1) Grady (CONDUCT TEST)

Facts:
o She sued post petition
o Grady argued for the last option that she did not have a bkr claim until she had a right to sue under state law
o Which under CA law was only when she knew the nature of her injuries, i.e. post-petition

Holding/Rationale:
o Claim implies the existence pre-petition of a state law obligation
o But beyond that, the classification & timing of the right to payment are federal law matters to be resolved by
reference to 105(5)
o 4th Circuit held that Grady DID have a claim as of the date of the bankruptcy filing

40
 o Said she had a contingent claim with the contingency being the manifestation of injury from use of
the Dalkon shield

o Conduct Test: Courts following this approach favor a conduct test for determining whether a right to payment
has arisen for 101(5) purposes rather than an exposure or manifestation of injury test

2) PIPER (PRE-PETITION RELATIONSHIP TEST) UNKNOWN CLAIMS

But what do we do about unknown claims
e.g. potential victims of defective products whose rights of action are not known or ascertainable on
filing day or (like Grady) during the currency of the bkr case?
11th Circuit held: NO CLAIM
Rationale: the specific future claimants had not yet been identified; indeed, by definition were unidentifiable
Could be anyone in the world!
No prepetition relationship with Piper
Court required BOTH 1) Prepetition conduct by DR AND (2) a relationship between claimant and DR:
e.g., contact, exposure, impact, or privity
TIMING: prior to confirmation of plan
Would then be able to identify the particular claimant for purposes of the bankruptcy case

Case: Jones v. Chemetron Corp ( DUE PROCESS)

o Facts:
o CC filed Ch 11, confirmed reorg plan in 1990
o March 2, 1992 Phyllis Jones and 14 others filed a state law tor action seeking money damages
from exposure to radioactive and other toxic hazardous substances that were located in their residential
neighborhood.
o Newsletters about contamination, Published Notice in NYT Wall street journal
Claimants argue they were unaware
o Issue:
o Rationale:
o Ps had adequate notice and filed to investigate the situation themselveswholly within their
control
o Made no effort through medical history to determine cause of injuries until learned of class
action by other residents.
o Chemtron was entitled to fresh start from Chapter 11 Re org.
o EXCEPT IVANhe was not born until 1992--2 years after the reorganization plan
DUE PROCESS Considerations.was not deemed to have adequate notice
His claim cannot be extinguished.

Rules:
Potential procedural due process violation
Discharging claims of persons with no notice of or opportunity to participate in bankruptcy case

Scope of 101 (5A)s Definition of Claims:

1. Peter supplied goods worth $5,000 to Debtor, Inc. Debtor, Inc. accepted the goods but a month later
filed for bankruptcy. At the date of the bankruptcy filing, Debtor, Inc. had not paid Peters invoice. Does Peter
have a claim?
o Yes, Peter has a claim. His right to payment arose pre-petition

o Secured/Unsecured= need more info

o Fixed= specific amount of $$$
o Matured= debt exists currently at the time payment is due
o Legal= request for money
o Liquidated= debt is for a fixed amount of money

2. In Q1 does it matter that Peter had not sued and obtained a judgment against Debtor, Inc. before the
bankruptcy filing? If Peter had already obtained a judgment before the bankruptcy filing would he have a
claim?
o No, it does not matter because he falls into other categories
o Right to payment reduced to judgment

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 3. Dora, an uninsured motorist, was driving her car along Main Street. She lost concentration and failed to
notice a Stop sign. She drove past the Stop sign and knocked over Paulina, a pedestrian. Paulina suffered
extensive injuries. Dora filed for bankruptcy shortly afterwards. Does Paulina have a claim?
o Yes, pre petition right to damages
o Un-liquidated: specific amount has not been determined
o Legal: Request for $$$.
4. Dana crashed her car into Pams car at an intersection. Pam files suit against Dana claiming damages.
Dana files an answer denying liability. Before the suit comes on for trial, Dana files for bankruptcy. Does Pam
have a claim?
o Yes, pre petition right to payment for damages
o Legal: request for $$
o Unliquidated: amount has not yet been determined
o Disputed: Pam does not think she owes
o Right to payment
5. Retailer sold a product manufactured by Manufacturer to Pandora. Pandora has threatened a lawsuit
against Retailer claiming that the product is defective and she suffered harm by using it. Retailer has a contract
with Manufacturer which says that Manufacturer agrees to indemnify Retailer against any and all claims,
demands, losses, causes of action, damage, lawsuits, judgments, including attorneys fees and costs, to the
extent caused by or arising out of or relating to Manufacturers products. Before Pandora issued her lawsuit,
Manufacturer filed a Chapter 11 bankruptcy case. Does Retailer have a claim?

o Right to payment under K indemnity contingent on P bringing suit

o Contingent claim: right to indemnity is contingent upon the lawsuit taking place and lawsuit awarded.

Mass Tort Claims Problems:

Debtor, Inc., a manufacturer of building materials is the defendant in several multi-million dollar class action lawsuits
filed on behalf of plaintiffs who claim to have been harmed by toxic chemicals in vinyl floor tiles manufactured by the
company. Debtor, Inc. has filed a Chapter 11 case to resolve these liabilities.

Discuss whether the following parties have claims in Debtor, Inc.s Chapter 11 case by reference to the
language of 101(5)(A) of the Bankruptcy Code and In re Grossmans Inc., 607 F.3d 114 (3d Cir. 2010):

1. A plaintiff in a pending class action lawsuit who was exposed to Debtor, Inc.s vinyl floor tiles and had
already begun to manifest harmful symptoms of toxic poisoning well before Debtor, Inc.s bankruptcy filing.
HARM BEFORE BKY
o Harm before BKY so you have pre petition BKY
o 1) Yes you have a vlaim:
o Legal: its for $$
o Unliqudiated: got a right ot payment
o Disputed/Undisputed
o 2) Claim arose when symptoms manifested pre-petition
o COA fully ariseneverything happened pre BKY
2. A party who lived in a house that contained the vinyl floor tiles before Debtor, Inc.s bankruptcy filing
but who only began to manifest harmful symptoms of toxic poisoning during the bankruptcy case. HARM
DURING BKY
o You dont have a pre-petition claim here so the analysis shift to whether party was given the
property notice of the floors
o Piper Test: passes
o Pre-petition conduct
o Relation between C + DR

o Grady Test: passes

o As long as tortious conduct occurs prior to BKY and there is some pre BK obligation. .even
though COA hasnt accrued its okay (contingent)
3. A party who lived in a house that contained the vinyl floor tiles before Debtor, Inc.s bankruptcy filing
but who has yet to manifest harmful symptoms of toxic poisoning. AFTER BK FILING, NO Pre petition COA,
NOT MANIFESTED YET

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 o 1) No pre-petition right to get $$$: You havent manifested symptoms then you dont have a COA yet.
o 2) Check to see if adequate notice was given: you have a claim here
o Grossman (DP Q)
o Did they have proper notice
o You have to show through planned process X many years agoyou have to show that you did not get proper
notice.
o Piper:
o Claim once symptoms arise
o 1) Meaningful pre petition relationship
o 2) Pre petition conduct by D

2) Allowance of claims
1. Allowance process
i. Significance of being allowed
1. To be paid out of estate, claim must be allowed
2. Only allowed claims can vote on a chapter 11
3. Claim may be discharged, whether allowed or not

ii. File proof of claim with clerk - 501

1. Only where there is purpose to be served by allowance (i.e. not in no asset chapter 7 cases)
2. Exception: - chapter 11 - 1111(a) proof of claim deemed filed if claim is listed on the bankruptcy
schedule, unless the claim is scheduled as disputed, contingent, or unliquidated

iii. Notification of bankruptcy proceeding to creditors - 342

1. If creditor was not listed or scheduled in debtors schedule of creditors and thus does not receive
notice of case in time to file a proof of claim, its claim will not be discharged in the case of an
individual debtor 523(a)(3)
2. Also excluded where debtor listed incorrect address
3. Due process: cant eliminate claim if person did not get notice

iv. Time limit to file proof of claims

1. Chapters 7, 11, 13 general rule: proof of claim timely filed if it is filed not later than 90 days
after the first date set for the 341 creditors meeting
2. Exception for claims of governmental units 502(b)(9)
a. Timely if filed 180 days after date of the order for relief, or
b. Timely if filed (in regards to tax claims in chapter 13 case), before 60 days after D files a
return for such taxes

3. Tardily filed claims

a. 502(b)(9) claim disallowed if not timely filed, except to the extent the tardy filing is
permitted under 726(a)(1), (2), or (3)
b. 726(a)(1) tardily filed priority claims still allowed and paid in first tier of proof is filed
before:
i. 10 days after trustee mails to creditors a summary final report
ii. If no report trustee actually commences the final distribution
c. 726(a)(2) tardily filed nonpriority claim still paid in second tier if creditor filed late
because it did not have notice, and proof of time was still filed in time to permit payment
i. Pay timely nonpriority claims, then tardy nonpriority claims

v. Effect of filed claim = prima facie allowed claim (unless someone objects)
1. Payment order
a. 1st tier priority claims timely filed
b. 2nd tier nonpriority claims timely filed
c. 3rd tier tardily filed claims, generally
2. Objections
a. Normally filed by trustee
b. Court determines validity of claim and fixes the amount 502(b)

2. Grounds for disallowance 502(b)(1)-(9)

i. Grounds in 502(b), (d), (e), (k) are exclusive bases for disallowing

ii. Timing of the claim

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 1. Claims arising after bankruptcy not allowed 502(b)
a. Not allowed if debtors legal obligation not rooted in prebankruptcy period

2. Exceptions: for some claims that arise in pendency of bankruptcy case, but which are deemed for
bankruptcy purposes to have arisen prior to case
a. Claims arising from rejection of an executory K 502(g)
b. Claims arising from the recovery of property pursuant to trustees avoidance powers
502(h)

iii. Substantive nonbankruptcy objections

1. Bankruptcy does not confer on creditors new substantive rights against a debtor
2. Bankruptcy estate succeeds to all defenses that debtor could have risen against creditors claim -
558
3. Ex) expiration of statute of limitations, or material breach

iv. Bankruptcy-specific policies

1. Claim for unmatured interest not allowed 502(b)(2)
a. Bankruptcy accelerates all obligations as of the date of filing, and stops the running of
interest
b. Exceptions:
i. Oversecured claims entitled to recover postpetition interest up to the amount of
their excess security 506(b)
ii. Solvent estates 726(a)(5)

2. Tax assessed against property of the estate, to the extent the claim exceeds the value
of the estates interest in the property 502(b)(3)

3. Claim for services of an insider or attorney of debtor in excess of the reasonable value
of services 502(b)(4)

4. Unmatured (postpetition) claims for alimony, maintenance, or support that are non-
dischargeable under 523(a)(5)

5. Limit on amount of landlords rent claim 502(b)(6)

a. Ceiling depends on remaining term of lease
b. Lessors allowable claim cannot exceed greater of:
i. 1 years reserved rent, or
ii. 15% of the remaining lease term (not to exceed 3 years rent)
c. Short-cut to 502(b)(6)
i. If remaining term < 80 months, 1-year cap will apply
ii. If remain term > 80 months and less than 20 years, 15% cap applies
iii. If remaining term > 20 years, 3-year cap applies

d. Exception: when lease is assumed and then rejected

i. All damages from rejection of an assumed lease generally are entitled to
administrative expense priority under 503, and 502 rules generally are
applicable only to prepetition claims allowed under 501
ii. 503(b)(7) affords lessor an administrative expense claim in the amount of all
sums due under the lease for 2 years after rejection, which can be reduced only to
the extent the lessor mitigates the damages by re-letting
iii. Any claim the lessor has for damages attributable to a lease term extending
beyond such 2-year period are to be treated as a prepetition claim, to be allowed
and limited in amount pursuant to 502(b)(6)

6. Limit on the amount of an employees termination claim 502(b)(7)

a. Employee-creditor restricted to compensation provided by the contract (without
acceleration) for one year following the earlier of the filing of bankruptcy, or the
termination of performance under the contract 502(b)(7)(A)
b. Employee also entitled to any unpaid compensation due at the earlier date 502(b)(7)(B)

7. Certain employment tax claims, relating to reduced tax credits upon late payment of tax 502(b)
(8)

8. Tardily filed claims 502(b)(9)

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 9. Claim of a transferee of an avoidable transfer, if transferee has not paid the amount for
which it is liable or turned over the property 502(d)

10. Claim for reimbursement or contribution that is contingent or as to which a right of

subrogation is asserted 502(e)

11. Reduction in the amount of a claim for a consumer debt if the creditor unreasonably
refused to negotiate an alternative repayment schedule for the debt 502(k)
a. Court will reduce claim by 20% - if proposed on behalf of debtor by an approved nonprofit
budget and credit counseling agency
b. D has burden of proving, by clear and convincing evidence, that C unreasonably refused
to consider Ds proposal

3) Distributions on account of unsecured claims

1. Overview
i. Secured creditors are first to be paid (entitled to receive their property or its value)
ii. Remaining assets are then distributed to all general unsecured creditors
iii. Principle for general unsecured creditors = equality of distribution

2. Chapter 7 - 726
i. Trustee collects property of estate, reduces it to money, then distributes according to 726(a)
ii. 6 tiers of claims all claims in each tier must be paid in full before any distribution is made to next tier
iii. If estate does not have enough assets to satisfy all claims at a particular level, then all claims within
that level share pro rata 726(b)

iv. Tiers:
1. Tier 1: priority claims under 507 (10 classes)
2. Tier 2: nonpriority unsecured claims (claim must be allowed)
3. Tier 3: tardily filed claims 726(a)(3)
4. Tier 4: noncompensatory penalty claims 726(a)(4) (fines, penalties, forfeitures)
5. Tier 5: unsecured creditors get postpetition interest on their allowed claim at legal rate
726(a)(5)
6. Tier 6: surplus after full satisfaction goes to debtor 726(a)(6)

3. Chapters 11, 12, & 13

i. Basic premise = debtor pays over time, out of future earnings, according to repayment plan
ii. Priority claims
1. Reorganization plan may be confirmed by the court only if the plan provides for the full
payment of 507(a) priority claims
2. Holder of the claim may waive that privilege

iii. Nonpriority claims in chapter 11

1. Determined by class all class members treated alike
2. Plan designates classes of claims, specifies treatment, and provides the same treatment for
each claim in a particular class 1123(a)(1)-(4)
3. Only claims that are substantially similar may be placed in same class 1122(a)
4. Class votes on plan (1126), after receiving court-approved disclosure statement 1125
5. Dissenting members of class are bound to class vote
a. Best interests test 1129(a)(7)
i. Protection for a class dissenter
ii. Class cannot force an individual claimant to take less under the plan than the
claim holder would receive in a chapter 7 liquidation

6. Cram down rules 1129(b)

a. Plan may be confirmed over negative vote of a class only if proponent seeks
confirmation under and satisfies cram down rules of 1129(b)
b. Plan must not discriminate unfairly, and must be fair and equitable with respect to the
dissenting classes
i. Any class senior to dissenting class may not be paid more than 100 cents on
dollar
ii. Any equal class may not be paid more than dissenting class, absent fair
justification
iii. No junior class can be paid unless dissenting class is paid in full
7. At insistence of unsecured creditor, debtor must pay to creditors under the plan all of his
projected disposable income for a period of not less than 5 years 1129(a)(15)
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 iv. Nonpriority claims in chapters 12 and 13
1. Classes do not vote
2. Debtor proposes a plan, and the court will confirm if statutory requirements are met 1225,
1324
3. Creditor may object to confirmation 1224, 1324
4. If debtor classifies claims, plan must provide for same treatment for each claim in a class
1222(a)(3), 1322(a)(3)
5. Best interest test applies 1225(a)(4), 1324(a)(4)
6. Trustee, or any unsecured creditor can insist debtor devotes all of his projected disposable
income to payments for a minimum period of 3 years 1225(b), 1325(b)
a. Minimum of 5 years, if at or above state median income

4) Priority claims
1. General principles
i. Overview
1. After secured claims are paid, priority claims get paid first
2. Reorganization must provide for full repayment of priority claims
3. 507(a) is exclusive list of priorities courts have no power to establish non-statutory
priorities
a. Only federal government may create bankruptcy policies
b. State law priorities are preempted but states can create a lien that is applicable across
the board (Justice OConnor)
4. Courts narrowly construe priority provisions against claimant violates equality principle

ii. Ranking priority claims

1. Claims in a higher class must be paid in full before claims of a lower priority class are paid
anything
2. Within a priority class, all claims are of equal rank, so they will share pro rata if there is not enough
to go around 726(b)

iii. Super priorities

1. Statutory provisions higher (super) priority
a. 364(c)(1) postpetition lender (DIP financer)
b. 507(b) adequate protection fails
c. 726(b) burial expenses if chapter 11 if converted in chapter 7, administrative costs in
7 are paid before administrative costs in 11

iv. De facto priorities

1. Some code provisions are not called priority rules, but practical effect is a priority
2. Ex) payments under collective bargaining agreement, prior to rejection 1113(f)

v. Priority order
1. 1st domestic support obligations 507(a)(1)
2. 2nd administrative expenses 503(b)
3. 3rd claims in an involuntary case that arise between time petition is filed and the bankruptcy
relief is ordered 507(a)(3), 502(f)
4. 4th employee wage claims 507(a)(4)
5. 5th unpaid contributions to employee benefit plans 507(a)(5)
6. 6th grain producer and fisherman claims 507(a)(6)
7. 7th consumer layaway deposits 507(a)(7)
8. 8th prepetition taxes 507(a)(8)
9. 9th commitments to maintain the capital of insured depository institutions 507(a)(9)
10. 10th DUI caused death or injury claims 507(a)(1)

2. Administrative expenses
i. 2nd priority
1. Administrative expenses 503(b)
2. Court fees & charges assessed against the estate 507(a)(2)
3. 9 types of administrative expenses no ordinary preference, all of equal rank

ii. Not an exclusive list including

1. Court can recognize an unlisted administrative expense, but only if it fulfills the statutory purposes
2. Courts strictly construe 503(b) against claimant

iii. Prerequisites for most administrative expenses:

46
 1. That the claim be incurred postpetition in a transaction with the estate, and
2. That the claim benefits the estate

iv. Exception to postpetition requirement

1. Seller of goods has a priority administrative expense for the value of any goods
received by D within 20 days before petition date, as long as the goods were sold to D in
the ordinary course of Ds business 503(b)(9)

2. Sellers reclamation right for goods received on eve of bankruptcy 546(c)

a. Those who sold goods on credit to debtor prepetition can enforce the reclamation right
against debtors bankruptcy estate
b. Purpose of rule encourages sellers to keep doing business on credit with a financially
distressed debtor form of inducement
c. 546(c) requirements in kind reclamation
i. Goods must be sold in ordinary course of business
ii. Goods received within 45 days before filing of petition
iii. Debtor must have been insolvent when goods were received
iv. Seller must make a written demand for reclamation of goods not later than 20 days
after petition date
v. Implicit in sellers right goods must be in possession of trustee or DIP, and must
still be identifiable
vi. Sellers reclamation right is subject to the prior rights of a holder of a security
interest in the goods

v. Categories of administrative expenses

1. Actual and necessary operating and preserving expenses of the estate
a. Operating expenses ex) rent, wages, insurance, utilities, trade credit, contracts, taxes,
etc.
b. Liquidating expenses ex) storage costs, costs of sale (advertising, auctioneer fees)

2. Compensation and reimbursement of entities that enable the bankruptcy process itself
to function (i.e. people who work on the case)
a. Ex) fees and expenses of trustee, compensation of attorneys who work for estate,
reimbursement of creditors and committee members
b. Inducement principle no one would do this if they could not get paid

vi. Transaction with the estate

1. Ex) D entered into prepetition K with C for ads, under which it was irrevocably committed to pay. C
filed claim for administrative priority. (Jartran)
a. Court: claim did not arise from a transaction with a DIP, and was thus outside the scope of
503(b)
b. It was the prepetition debtor and not debtor as DIP that induced C to perform services
deal was irrevocably committed prior to bankruptcy
c. Need benefit + inducement

vii. What is a benefit

1. Ex) whether tort claims from a negligently caused fire of an employee of the receiver during the
receivorship (predecessor to chapter 11) should be allowed as an administrative expense (Reading
Co. v. Brown)
a. Court: tort claims entitled to administrative priority actual & necessary expenses
b. Prepetition general unsecured creditors could be viewed as the residual owner of the
insolvent business at time bankruptcy is filed
c. Should have to bear possible risks as well as rewards that might materialize during the
bankruptcy proceeding

2.Ex) postpetition, punitive, non-tax penalties that were incurred as fines for state law strip mining
violations (NP Mining Co)
a. Court: civil fines are an administrative expense
i. Based on Reading rationale costs ordinarily incident
ii. Trustee/DIP must comply with state law when manage/operate estate property, and
fine is a cost of doing business
3. Other priorities
i. Employees claims
1. Note that wage expenses for operating of business is actually going to be an administrative
expense
2. 2nd priority: postpetition
3. 4th priority: 180 days prepetition, up to max of $10,950/employee for wages
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 4. 5th priority: benefits for the 180 day period, to the extent the $10,950 is not met
5. No priority: prepetition wages & benefits, either > 180 days old or in excess of cap
6. Timing from when services are performed, not when vested

ii. Taxes
1. Tax debt is not dischargeable in the case of an individual debtor 523(a)(1)(A)
2. Postpetition taxes 2nd priority administration expense
3. Prepetition 8th priority, IF meet requirements of 507(a)(8)
a. Most important is income tax for past 3 years
b. 3-year reach back: but all govt need do is get a lien (then have a secured claim)

iii. Domestic support obligations

1. 1st priority prepetition claims
2. Alimony, child support
3. Ds obligation to pay ongoing postpetition DSOs is paramount must pay in full in reorganization
cases to confirm
4. Additionally, prepetition debts for domestic support obligations are nondischargeable 523(a)(5)
5. Debtors failure to pay ongoing postpetition DSO obligations is grounds for conversion or dismissal
of a chapter 11, 12, or 13 case
iv. Grain producers and fisherman 507(a)(6)
v. Consumer layaway deposits 507(a)(7)
vi. DUI-caused death or personal injury claims 507(a)(1)
1. Also nondischargeable

Distribution Claims Problems:

PRE PETITION WAGES + CONDITION CAP: $12,850

1. Tony, the trustee of the estate of Dan Debtor is holding $21,850 for distribution in Dans Chapter 7
case. The $21,850 includes $4,000 of sale proceeds from a car in which Stan held a perfected security interest.
There are three allowed claims. Stan has a secured claim for the outstanding balance of $3,000 that Dan owed
him on the car. Dan owes Elizabeth, his employee, $15,850 in wages earned in the five months before Dan filed
for bankruptcy. He also owes $9,000 to Chuck, a nonpriority unsecured creditor. In what order should Tony
distribute the $21,850 and what would amount would be paid on each claim?
CHAPTER 7
Tonys BK Estate = $21, 850
o Includes Sale Proceeds which Stan has SI: $4,000
CLAIMS
o Stan Secured: $3k
o Elizabeth: $15,850 wages earned 4 months before BKY
o Chuck: $9,000 non priority sc

Payout Process
1) Stan secured interest gets full $3k Bal: 18,850
2) Elizabeth wages ($12,850 cap)gets $12, 850 BAL: $6k
3) Unsecured Creditors:
Elizabeth unsecured: $3,000 x .5 = $1,500
Chuck: $9,000 x .5 = $4,500

PROPORTIONATE RATIO
$6k Balance

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 $12,000 Unsecured Total Debt

= or .5

2. Dave filed a Chapter 7 case. Dave has three creditors: (i) Chevy Finance, to whom Dave owes $18,000,
secured on his Chevrolet; (ii) The IRS for $4,000 tax due on his federal tax return for the tax year ended
December 31 last year; and (iii) MasterCard for unpaid unsecured credit card debt of $19,000. In addition, the
trustees remuneration and expenses for administering Daves estate comes to a total $1,000. The trustee
abandoned the car to Chevy Finance. Chevy Finance sold the car in a foreclosure auction for $12,000 and applied
the proceeds of sale to reduce what Dave owes them. Dave has $10,000 worth of non-exempt assets. In what
order should the trustee distribute the $10,000 and what amount would be paid on each claim?

CHAPTER 7
Daves BK Estate = $10,000
Car sold for $12,000-given to Chevy

CLAIMS
o Chevy Finance: $18,000 secured on his car -$12,000 =$6,000 unsecured
o IRS: $4k tax due
o Mastercard: $19,000 unsecured
o Trustee expenses: $1,000

Payout Process
1) Trustee: $1k BAL: $9,000
2) IRS tax: $4k BAL: $5,000
3) General Unsecured Claims
Chevy finance $6k x .2= $1,200
Mastercard $19k x .2= $3,800

PROPORTIONATE RATIO
5,000 BAL
$25,000 TOTAL UNSECURED DEBT
= 1/5 or .2 (20 cents on the dollar)

V. Secured Claims
1) Overview
1. Secured creditors have priority over unsecured creditors in bankruptcy

2. Entitled to be paid in full, up to the value of the collateral securing their claim, before unsecured
creditors are paid at all 506(a)(1)

3. What happens to property of estate subject to a lien?

i. Sale if trustee wants to realize on property subject to a lien, all net proceeds must first be applied to the
satisfaction of valid liens on the property
ii. Abandonment if there is no equity in the property to pay unsecured creditors
iii. Exemption if individual debtor claims an exemption in the equity value of property that subject to a lien,
it trustee will abandon to D because it has inconsequential value to estate
iv. Payment of lien if debtor is not liquidating and wants to keep property, debtor must pay secured
creditor its lien through the plan of reorganization
v. Relief from stay creditor can seek relief from stay to exercise its stay law remedies

49
4. Debtors mechanisms to forestall enforcement of lien
i. In reorganization case, D has right to cram down the throat of an unconsenting secured creditor a
proposed repayment of its allowed secured claim, but secured creditor must receive a stream of payments
that, when discounted to present value, equals the amount of the creditors allowed secured claim

ii. Individual chapter 7 debtor must file a statement of intention with respect to retention or
surrender of property, and if applicable, specifying that such property is claimed as exempt, that D intends
to redeem such property, or that D intends to reaffirm debts secured by such property 521(a)(6)
1. D must redeem, reaffirm, or surrender collateral to secured creditor 521(a)(2), 521(a)(6)
a. If a PMSI after 45-day period stay terminates and property no longer in estate if D
does not either:
i. File statement of intention, or
ii. Perform it
2. Redemption D may redeem property by paying creditor the full value of its lien 722
a. Applies to collateral that is tangible personal property used for consumer purposes (i.e.
personal, family, or household purposes)
b. Payment must be in full at time of redemption full retail price (not amount of debt)

3. Reaffirmation agreement contains new payment terms for reaffirmed debt, typically allowing D
to pay the secured creditor over time, rather than at once 524(c)

iii. Debtor must perform his stated intention within 30 days after 341 meeting of creditors
521(a)(2)(B)
1. If D fails to redeem/reaffirm within 45 days after first meeting, property immediately ceases to be
property of the estate and automatic stay is terminated as to the property 521(a)(6)
2. If D fails to file timely statement of intention or to timely perform its intention, property ceases to
be property of the estate, and automatic stay terminates with respect to the property 362(h)(1)

5. Definition what is a secured claim

i. Allowed claim of a creditor that is either
1. Secured by a lien on estate property, or
2. Subject to setoff under 553

ii. Creditor entitled to enforce allowed secured claim in bankruptcy if:

1. Has an allowed claim,
2. Establishes it has a valid lien or right of setoff under nonbankruptcy law, and
3. That lien or setoff right is not avoided in bankruptcy

2) Analyzing secured claims

1. Analysis on exam:
i. Does secured claim exist, and to what extent?
1. Is the creditors underlying claim allowed?
2. Is there a valid lien or right of setoff under nonbankruptcy law?
3. Can the trustee avoid that lien in the bankruptcy case?
4. What is the value of the creditors interest in the collateral?
ii. What is the substantive entitlement of the secured claim holder?
iii. By what procedural means may those substantive rights be enforced?

2. Does secured claim exist?

i. Allowed secured claims holder of claim must be allowed under 501/502 to participate
1. Normally allowed if proof of claim filed under 501 & no grounds for disallowing exist under 502
2. Bankruptcy discharge does not destroy the in rem rights of a lienholder remain enforceable
against collateral after bankruptcy 506(d)(2)

ii. Lien = charge against or interest in property to secure payment of a debt or performance of an
obligation 101(37)
1. Consensual lien lien created by agreement
a. Ex) security interest in personal property, mortgages or deeds of trust on real estate
2. Judicial lien obtained by judgment, levy, or other legal or equitable proceedings
a. Ex) execution liens, judgment liens, garnishment liens, etc.
3. Statutory liens liens arising solely by force of a statute on specified circumstances or conditions
a. Ex) mechanics lien, landlords lien
4. Right to setoff exists where 2 parties owe each other mutual debts 506(a)
5. Underlying law controls bankruptcy law does not create secured claims

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 iii. Avoiding powers
1. Trustee has statutory avoiding powers that enable her to avoid (i.e. set aside) a creditors lien
2. Upon avoidance, creditor is relegated to unsecured status and collateral is freed form the lien and
becomes available for distribution to general unsecured creditor

iv. Extent of creditors priority entitlement how much?

1. 506(a)(1) creditors allowed claim is a secured claim to the extent of the value of such creditors
interest in the estates interest in such property, or to the extent of the amount subject to setoff

2. Steps:
a. Estates interest in collateral (entire interest, or share?)
b. Secured creditors interest in the estates interest (first lien, second lien?)
c. Value the collateral Rash, 506(a)(1)&(2)

3. Substantive entitlement?
i. Holder of an allowed secured claim entitled to receive value of their collateral interest
1. Entitled to have value protected
2. Not entitled to specific items, or specific processes

ii. Secured creditors nonbankruptcy procedural rights may not be preserved in bankruptcy
1. Ex) stayed from repossessing or selling collateral

4. Procedural mechanisms for secured creditor to realize its substantive entitlement?

i. Secured creditor not entitled to insist in bankruptcy on being able to capture their substantive entitlement
via the same procedural means theyre be able to use outside of bankruptcy

ii. Adequate protection - 361

1. Replaces secured creditors nonbankruptcy remedies of seizure of sale
2. Maintains value of secured creditors lien claim until claim can be satisfied

iii. Ways secured creditor might get paid

1. Relief from stay granted 362(d)
a. Can then go forward with state law foreclosure remedy, etc.
2. Collateral abandoned by trustee back to D, and is then still subject to secured creditors lien rights
554
3. Collateral sold by trustee and net proceeds applied toward payment of secured creditors claim
363
4. Collateral redeemed by debtor 722
5. Secured creditor and debtor enter into a reaffirmation agreement 524(c)
a. Debtor reaffirms personal liability on underlying debt and agrees to repayment schedule
b. Permitted to retain collateral
6. Secured creditors claim paid in lump sum or over time pursuant to confirmed reorganization plan
7. Collateral surrendered to secured creditor 725

3) Valuation 506(a)(1)
1. 1st Sentence: Claim is a secured claim to the extent of the value of such creditors interest (in the
estates interest in the collateral)
2. 2nd Sentence: Value is determined in light of the purpose of the valuation and of the proposed
disposition or use of the property

1st Sentence Controls If focus on CRs interest, argue should only have to pay the FORECLOSURE
VALUE.because that is all that the CR could realize on the collateral outside of BKY.
*****2nd Sentence Controls: say the proposed disposition or use is that the DR will be retaining the
collateral, then arguably should have to pay the REPLACEMENT VALUE because DR is getting use of
collateral they otherwise have to replace
o RASH: held that second sentence controlskey is that poposed disposition or use where DRs plan to
retain the collateral , they have to pay the replacement value.
Retention is not the same as purchasing.
FN #6: Replacement Value does not necessarily mean full retail value:

Whether replacement value is the equivalent of retail value, wholesale value, or

some other value will depend on the type of debtor and the nature of the property. We
note, however, that replacement value, in this context, should not include
certain items. For example, where the proper measure of the replacement value of a

51
 vehicle is its retail value, an adjustment to that value may be necessary: A creditor
should not receive portions of the retail price, if any, that reflect the value of
items the debtor does not receive when he retains his vehicle, items such as
warranties, inventory storage, and reconditioning.

3. Rash rule for valuation

i. Under 1325(a)(5)(B) debtor can cram down (keep truck even if creditor objects) the secured
creditor if pay creditor the amount of the allowed secured claim plus interest
ii. Court: because the key is the proposed disposition or use, where debtor plans to retain the collateral,
he must pay the replacement value
1. However, replacement value does not necessarily mean full retail value (FN 6)
a. Creditor should not receive portions of retail price that reflect the value of items that
debtor does not receive when he retains his vehicle (i.e. warranties, inventory storage,
reconditioning)

iii. 2005 Amendments partially overturn Rash FN 6 506(a)(2)

1. Valuation rule only applies to:
a. Personal property securing an allowed claim
b. Of individual debtors
c. In cases under chapters 7 or 13

2. Replacement value (measured as of petition date) is appropriate standard of valuation

3. Costs of sale or marketing are not to be deducted
a. Partially overturns FN 6
b. But other FN 6 adjustments (warranties & reconditioning) are potentially available as
deductions still not full retail value

4. If individual debtors property was also acquired for personal, family, or household purposes,
then replacement value means the price a retail merchant would charge for property of that
kind, consider the age and condition of the property
a. No adjustments for consumer goods for individual debtors in 7 and 13
b. No FN 6 deductions full retail value

5. Rule does not apply to:

a. Chapter 11
b. Real property or collateral
c. Corporate or partnership debtors
4. Valuation summary
i. Full retail price 506(a)(2), 2nd sentence
1. Individual debtor
2. Personal property
3. Chapter 7 or 13
4. Personal, family, or household purposes (i.e. consumer purposes)

ii. Replacement value with no deductions for costs of sale or marketing, but possible
deductions for warranties, storage, and reconditioning 506(a)(2), 1st sentence
1. Individual debtor
2. Personal property
3. Chapter 7 or 13

4. Not for personal, family, or household use (i.e. for business use)

iii. Replacement value all possible FN 6 deductions 506(a)(1); (Rash)

1. Any of the following:
a. Corporate or partnership debtor
b. Chapter 11 case
c. Real property

iv. Valuation example

1. Ex) 5/1/04 D buys car and finances with PMSI to C. 5/1/06 files Chapter 7.
a. Debt = $18K, Foreclosure = $12K, Retail = $15K, sale/marketing = $500,
warranties/reconditioning = $1000

b. To redeem under 722 2nd sentence 506(a)(2)

i. Individual D, personal property, chapter 7, acquired for personal use
ii. Pay full retail of $15,000, no deductions

52
 c. Ex) for business use
i. Cant redeem under 722 only if bought for consumer purposes

d. Ex) files 13, wants to retain car

i. Hanging paragraph of 1325(a)(5) applies:
1. Motor vehicle
2. 910 days of bankruptcy
3. PMSI
4. Personal use
ii. D must pay full debt ($18K) no bifurcation

e. Ex) 13, wants to retain car, bought more than 910 days pre-bankruptcy
i. No strip down prohibition
ii. 2nd sentence 506(a)(2)
iii. Full retail value = $15K (creditor gets $3K unsecured claim)

f. Ex) 13, filed 2 years after purchased, purchased for business use
i. 506(a)(2) 1st sentence
1. Individual debtor, chapter 13, personal property (but not consumer
use)
ii. Pay $14,000 (retail warranties & reconditioning)
1. No deduction for costs of sale/marketing

g. Ex) filed chapter 11

i. 506(a)(2) does not apply (must be chapter 7/13 case)
1. 506(a)(1) + Rash
ii. Pay retail ($15K) minus warranties & reconditioning ($1000), and minus costs
of sale ($500) = $13,500
5. Cram down interest rates
i. Cram down the statute
1. The value, as of the effective date of their plan, of property to be distributed under the plan
on account of such claim is not less than the allowed amount of such claim
2. Allowed amount
a. Principal amount of the claim
b. Goes to the value & extent of secured claim itself 506(a), Rash
3. As of the effective date of the plan
a. Means that the stream of payments made over the life of the plan must be discounted
to present value
b. Interest = the price of money
i. Compensation a borrower must pay for the use of money over time
ii. Borrower must repay principal + interest
4. Issue = what is the appropriate amount of interest

ii. What comprises interest:

1. Opportunity cost creditor cannot use the money right away
2. Inflation money becomes less valuable overtime
3. Risk of nonpayment

iii. Till rule

1. Competing approaches:
a. Formula (plurality) prime plus
i. Start with prime rate, and add a plus premium for added risk of default for
this debtor
ii. Courts typically use a presumptive across-the-board plus (i.e. 1-3%), and
allow creditor to prove more
b. Coerced loan (Tabb)
i. Creditor entitled to rate of interest it would have obtained had it foreclosed and
reinvested the proceeds in loan of equivalent duration and risk
ii. Leaves secured creditor as well off under cram down plan as if had been paid
in full cash at confirmation would have made a similar market loan with the
foreclosure proceeds
c. Presumptive contract (dissent)
i. At the time the initial loan was made (as opposed to time of chapter 13 cram
down)
ii. Adjustments up or down can be made upon proof by creditor or debtor
d. Cost of funds

53
 i. What would it cost creditor to borrow an amount of money equal to the allowed
secured claim (i.e. cost of funds to creditor)
ii. Use borrowed money to make itself home
2. Till holding
a. 8 justices agreed:
i. Cram down interest rate must fully compensate creditor for risk of default by
debtor, and
ii. Fixing the rate necessitates an inquiry into the market for interest rates in light
of the specific risks posed by this debtor
b. Dueling rules of thumb:
i. Plurality start with prime rate (too low), and adjust up
ii. Dissent s tart with presumptive contract, and adjust upward
c. Plurality prime plus
i. Court should select a rate high enough to compensate creditor for its risk but
not so high as to doom the plan
ii. Result = systematic undercompensation for true risks of default Scalia
d. Result 5 votes for any formula, K, or coerced
i. Debtor can pick whichever it likes best
ii. Because Thomas will vote for anything more than the risk-free rate

Till: formula rate undercompensates CR by pitching the interest rate on plan payments below market rates.

Rash: replacement value overcompensates CR on the

principal (allowed secured claim)
o By giving creditor more than could ever realize on foreclosure.

4) Strip down of undersecured creditors claim

1. Treatment of undersecured claims
i. Bifurcate into 2 claims:
1. A secured claim in the amount of the value of the collateral, and
2. An unsecured claim for the deficiency

2. 3 options for reorganizations cases:

i. Secured party accepts plan
ii. Debtor surrenders collateral to secured party & secured party has unsecured claim for the deficiency
iii. Cram down (i.e. Rash, Till)
1. Principal = secured claim
2. Interest
3. Secured party retains lien & has unsecured claim for deficiency
4. Secured partys allowed secured claim paid in full under the plan the collateral value
5. Balance is in pool of unsecured claims

3. Strip down prohibitions exceptions to bifurcation of undersecured creditors claim

i. Home mortgages
1. Cannot strip down a home mortgage, in either chapter 13 or 11 1322(b)(2),
1123(b)(5)
a. To keep home, debtor must keeping paying the home mortgage on the original terms
(principal amount + K interest rate)
b. All debtor can do to a home mortgage against the wishes of mortgagee is to cure a
default, and if the secured party already accelerated, reinstate the original terms

2. Completely underwater with second mortgage:

a. Ex) home worth $120K, 1st mortgage = $150K, 2nd mortgage = $25K
b. Under 506(a)(1) the 2nd mortgage is completely unsecured has no collateral value
c. Strip off
i. Where home mortgage is totally valueless, courts allow debtor to treat the 2nd
mortgagee has the holder of a secured claim of $0
ii. Thus allow debtors plan to strip off the mortgage and treat the 2nd mortgagee
solely as the holder of an unsecured claim
iii. Significance post-bankruptcy, home no longer secures 2 nd mortgages and
debtor will own home free & clear once satisfies the 1st mortgage

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 3. Vacation home can strip down, because anti-modification rule applies only to mortgage
on debtors primary residence

ii. 910-day car loan exception 1325(a)(5)

1. Prohibits strip down of many purchase money security interests (PMSI) for purposes of chapter
13 cram down

2. Applies if:
a. PMSI
b. 910 days of bankruptcy
c. Motor vehicle
d. Personal use

3. Any other thing of value

a. PMSI
b. Any other thing of value
c. 1 year of bankruptcy

4. Result of prohibitions
a. Cannot strip down the allowed secured claim, because the only way to do so is via
506(a)(1) bifurcation
b. However, can still use a lower cram down interest rate, because still do apply 1324(a)
(5)(B)
i. Still cannot use cram down interest rate on primary residence homes

iii. Where debtor proposes to surrender collateral

1. Hanging paragraph says 506 (which provides for bifurcation), no longer applies
2. So if debtor surrenders, does the creditor still enjoy an unsecured claim for the deficiency
that can be asserted in the bankruptcy case?
3. Majority of courts: plain meaning of hanging paragraph precludes creditor from asserting an
unsecured claim for the deficiency remaining after foreclosure of a 910 vehicle surrendered
under 1325(a)(5)(C)
4. In Re Wright minority approach (7th Circuit)
a. Creditor still has an unsecured claim comes from state law rule under Art. 9 for an
unsecured claim for deficiency of the collateral

Surcharging secured creditors

1. Under 506(c), collateral securing a claim may be charged with expenses necessary to preserve or
dispose of the collateral
2. Trustee may recover from property securing an allowed secured claim the reasonable, necessary costs
and expenses of preserving, or disposing of such property
i. Easy examples:
1. Where collateral is being sold, costs directly related to sale may be paid from proceeds
a. Ex) appraisal fees, auctioneer fees, advertising and marketing costs, storage expenses,
etc.

ii. More general benefit?

1. Trustee argues that bankruptcy case (usually reorganization) more generally benefitted the
secured party by keeping debtor afloat and allowing secured party to recover a higher going
concern value for its collateral
2. However - prevailing view limits 506(c) recoveries to cases involving direct and immediate
benefits to the creditors collateral, or clear consent
3. General rule administrative expenses of bankruptcy case are payable only out of the
unencumbered assets of the estate, not out of collateral

3. Under what circumstances is it appropriate to surcharge the secured creditors collateral to pay
the administrative expense claims of other parties?
i. 506(c) surcharge allowed when either:
1. The secured creditor is benefitted by the claimed expenditure, or
2. The secured creditor consents to the expenditure

Valuation Problems:
FULL REPLACEMENT VALUE= individual under Chapter 7/12 for PERSONAL OR HOUSEHOLD USES!

55
Shelley owns a pick up truck which she uses in her business. The truck's applicable bankruptcy value is $10,000 but
she owes $15,000 to Farm Bank under the terms of a recourse loan that is secured by a purchase money security
interest on the truck. She bought the truck and granted the security interest to Farm Bank nine months ago. Shelley
can no longer afford the payments so she files chapter 13 in order to keep hold of the truck. What would be the
amount of Farm Bank's allowed claim in Shelley's bankruptcy?

Farm Bank gets an allowed security claim for $10,000, the value of the collateral and an unsecured deficiency
claim for $5,000.
No full replacement value here because no deduction for personal property.

Ava owns a Toyota Camry for personal and family use. She owes $15,000 to Local Bank under the terms of a recourse
loan that is secured by a purchase money security interest on the Camry. She bought the Camry and granted the
security interest to Local Bank nine months ago. Ava can no longer afford the payments so she files chapter 13 in order
to keep hold of the car. According to expert valuations the Camry has a foreclosure value of $8,000, a full retail
replacement value of $14,000 and a retail replacement value with an allowance for dealer warranties and
reconditioning of $13,000. What would be the amount of Local Bank's allowed claim in Ava's bankruptcy?

Local Bank would get an allowed secured claim for $15,000.

1) Does hanging paragraph rule apply? Yes so you are allowed the full amount.

Similar facts to the previous question. Ava owes $15,000 to Local Bank under the terms of a recourse loan that is
secured by a purchase money security interest on the Camry. She bought the Camry and granted the security interest
to Local Bank nine months ago. Ava can no longer afford the payments so she files chapter 13 in order to keep hold of
the car. According to expert valuations the Camry has a foreclosure value of $8,000, a full retail replacement value of
$14,000 and a retail replacement value with an allowance for dealer warranties and reconditioning of $13,000. The
one factual difference in this question is that Ava acquired the Camry for business not personal use. What would be the
amount of Local Bank's allowed claim in Ava's bankruptcy in the light of this factual variation?

Local Bank would get an allowed secured claim for $13,000 and an allowed unsecured deficiency claim for
$2,000.
1) Does hanging Paragraph apply? No its not for personal use
2) Go to first sentence A2: partial rash.you dont get full replacement value
o A2: only bars you from deducting cost of marketing and sales.

Rash & Till Problems:

Debtor, Inc. is a manufacturer of building materials. Debtor, Inc.s most important piece of plant and equipment is a
Concrete Block Making Machine (the CBMM) used to manufacture concrete posts and paving stones. Debtor, Inc.
purchased the CBMM with the assistance of a loan from Bank two years ago. To secure repayment of the loan, Bank
took a security interest in the CBMM and immediately perfected its security interest. The contract interest rate on this
loan is 10% and monthly payments are $5,000 (each of which includes $1,000 of accrued interest).

Debtor, Inc. filed for bankruptcy under Chapter 11 of the Bankruptcy Code on January 1. As of that date, Debtor
Inc. owed a principal balance of $100,000 to Bank on the CBMM loan. Debtor, Inc. had missed several monthly
payments and Bank had threatened to repossess the CBMM before the bankruptcy filing. The wholesale or
liquidation value of the CBMM is $70,000 and the full retail value of a machine of the same make and condition is
$95,000.

1. How much will Bank be allowed on its secured claim? $100,000, $95,000, $70,000, or some other
amount? Explain your answer.
Not A2, not individual, not Ch 13 So we are in A1.
A1: Rash replacement value with reductions FN 6.
$95,00 Full Replacement
o Only Ch 7/11 Individual, personal use
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 o Have to apply FN 6 deductions!!! Some other amount between $95k-$70k.
2. Debtor, Inc. files a chapter 11 plan of reorganization proposing that Debtor, Inc. will keep the CBMM,
allow Bank to retain its security interest, and repay the full amount of the Banks allowed secured claim over the
next five years with 8% interest per year from the effective date of the plan. Bank objects. Current market
interest rates for similar loans have risen from 10% to 11%. Is the plan confirmable? Explain your answer.

Restructuring the debt

Plan Standard: 1) Retain lien + 2) Cant be les.. equal to $85k (whats the present valuehave to pay
interest over time)
TILL (Plurality Approach CH 13)
o Formal Rate Prime Plus (1-3 %)
o 3.75% +3 = 6.75% You only need to offer this up

VI. Relief from Stay and Adequate Protection

1) Introduction
1. Relief for stay = order from bankruptcy judge giving a party (usually a secured creditor) permission to go ahead
with some action (usually foreclosing collateral) that would otherwise be stayed under 362(a) and not excepted
under 362(b)

Two Main Grounds To Seek Relief for Party in Interest 362 d

1 (D1): for cause, including the lack of adequate protection of an interest in property
2 (D2): (1) the debtor does not have an equity in the property and (2) the property is not necessary to an effective
re-organization.

2. Stay relief grounds:

i. 362(d)(1): cause, including lack of adequate protection
ii. 362(d)(2): no equity, and property is not necessary for effective reorganization
iii. Special cases
1. 362(d)(3): SARE (single asset real estate)
a. If debtor does not file feasible plan in 90 days, must pay interest to secured party for the
delay
2. 362(d)(4): in rem stay relief in fraudulent schemes

3. Burden of proof 362(g)

i. Movant debtor has no equity under 362(d)(2)(A)
ii. Trustee or DIP
1. Secured party is adequately protected 362(d)(1)
2. Property is necessary to an effective reorganization 362(d)(2)(B)

4. Time periods
i. Expedited time periods within which the court must act, or secured party gets relief
ii. 362(e): 30 days
1. Court must either rule, or find reasonable likelihood trustee will win if continue to final hearing
2. Then, if carry over to final hearing, must enter final decision within another 30 days

iii. Emergency ex parte relief may be available 362(f)

1. Irreparable damage test

5. Mandatory shall
i. If secured party proves ground for relief under 362(d), the code is required to order relief from stay
ii. Does not necessarily have to lift stay might condition stay (i.e. on DIP making adequate protection
payments)

6. No res judicata
i. Bankruptcy courts denial of stay relief is not res judicata
ii. Secured party can try again later in case

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2) Relief for lack of adequate protection
1. Basic application
i. Role of adequate protection in bankruptcy
1. Fundamental substantive right of secured party in bankruptcy is to receive the value of its
collateral
2. However, secured partys nonbankruptcy remedies are not necessarily honored in bankruptcy
3. Adequate protection replaces the remedies
a. Provides the bridge for implementing a Pareto trade

ii. Conceptual bases of adequate protection

1. Constitution lien is a property right protected by the 5A
2. Bankruptcy policy SP not deprived of benefit of bargain

iii. When used

1. Stay relief 362(d)(1)
2. Estate wants to use, sell, or lease estate property on which SP has a lien 363(e)
3. Turnover 542(a)
4. Estate wants to borrow money and put up SPs collateral as collateral for a new loan 364(d)

iv. Interest protected = interest of an entity in property 361

1. Secured partys lien on estate property (i.e. the collateral)
2. Specifically, the value of that collateral interest
3. Protected from a decrease during the pendency of the case

v. Examples of adequate protection

1. Pay SP money to compensate for decline in value of its collateral 361(1)
2. Give SP a lien on other collateral to make up for same decline 361(2)
3. Indubitable equivalent 361(3)
a. Ex) personal guarantee from financially responsible entity
4. Cannot give administrative priority as adequate protection
a. Exception super priority under 507(b) if adequate protection was given but failed

2. Adequate protection & opportunity cost of delay

i. SP is not entitled to adequate protection payments to preserve the amount of its equity cushion,
where value of collateral is constant but equity cushion being depleted by postpetition interest (Alyucan)
1. Adequate protection about protecting the value of the collateral (such entitys interest in
property) during the pendency of the case
2. As long as collateral is safe and not depreciating, SP is not suffering an harm
3. Where equity cushion being eaten up by both the accrual of postpetition interest and depreciation
in value of collateral, courts are split some allow SP to maintain the value of the collateral as of
the petition date

ii. Adequate protection does not entitle an undersecured creditor to compensation for delay in
foreclosing caused by the automatic stay (Timbers)
1. No opportunity cost payments for undersecured creditors
2. Adequate protection protects the value of collateral during pendency of case
3. Winner = residual stakeholders (unsecured creditors or equity) in effect get an interest-free
loan for duration of case
4. Loser = secured creditor lose time value of money
5. Relief under (d)(3) applies to SARE debtors
a. No relief if:
i. Debtor files feasible plan (reasonable possibility of being confirmed within a
reasonable time) within 90 days after petition, OR
ii. If debtor did not file feasible plan, begins paying monthly interest, computed on
value of collateral
b. Overrules the Timbers no time-value rule in the special SARE context

3) Stay relief under 362(d)(2)

1. Overview
i. Introduction
1. Assuming that SP is adequately protected 362(d)(1)
a. Because if not stay relief no matter what
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 b. SP must always be adequately protected under 362(d)(1)

2. Estate still must demonstrate a bankruptcy reason why it needs the collateral, and why it
must interfere with the secured partys nonbankruptcy rights

ii. Grounds 362(d)(2)

1. Debtor has no equity in the property, AND
2. Property is not necessary to an effective reorganization
a. DIP in fact needs the collateral if it is to be able to reorganize (necessary)
b. Regardless of need, a reorganization is feasible (effective)

iii. Burdens of proof

1. SP has burden of proof on no equity
2. DIP/trustee has burden of proof on necessary for effective reorganization

iv. How grounds show bankruptcy need

1. No equity ground
a. If debtor does have equity, then the estate representative could sell the collateral and
capture that equity for the benefit of unsecured creditors, and still pay off SP
2. Not necessary for effective reorganization ground
a. If debtor has a chance to reorganize under chapter 11, and it needs the collateral to do so,
keeping the property (and paying SP adequate protection) furthers the reorganizational
goal

2. Lack of equity in the property

i. Compute from viewpoint of estate, not from that of moving creditor
1. Total up all liens and compare property value
2. Reason is that you are trying to determine if estate would get any $ if it sold the collateral and paid
off all the liens

ii. Valuation of collateral

1. In chapter 11 business reorganization case value under 506(a)(1) and Rash
a. Proposed disposition or use is that debtor is keeping collateral, but the purpose of the
valuation is to determine whether estate would capture any $ over and above liens if it
sold the property
b. So, arguably should use liquidation value

2. In chapter 13 case, if it is personal property collateral, valuation will be under 506(a)(2)

a. Some version of replacement value
b. Even though the purpose of the valuation is what the estate would get if it sells the
collateral, which means should use liquidation value

3. In chapter 7 case, only issue under 362(d)(2) will be equity

a. If individual debtor, and personal property stuck with 506(a)(2) replacement value
b. Actually hurts the SP here because it makes it harder to get stay relief (begin with a
higher value)

3. Necessity 362(d)(2)(B)
i. Property at issue must be necessary to an effective reorganization
ii. Almost always find necessity courts defer to DIPs business judgment

4. Feasibility 362(d)(2)(B)
i. Usually the fight is over feasibility whether the debtor has a reasonable possibility of a successful
reorganization within a reasonable time
ii. Timing matters
1. Early in the case, bar for DIP to show feasibility is low
2. After that, the court will become more stringent
iii. Way to win for certain
1. SP can prevail, even early in the case, by showing that the plan DIP is putting forward is legally
unconfirmable without SPs consent
2. I.e., if under plan confirmation rules (1129(a)&(b)), plan could be vetoed by SP
iv. Nature of proof
1. Some concrete evidence of actual and realistic reorganizational prospects
2. Make a legitimate business case, with documentation, financials, market analyses, etc.
v. Pegasus plan held to be not feasible, because it was entirely conjectural, and made unfounded
assumptions and dubious calculations.

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4) Stay relief under 362(d)(3) for single asset real estate
1. Debtor must do 1 of 2 things to keep the stay:
i. File a feasible reorganizational plan within 90 days (or time extended for cause)
1. Reasonable possibility of being confirmed within a reasonable time OR
ii. Start making monthly interest payments to SP
1. Based on value of the lien (i.e. collateral value)
2. Rate of interest = applicable nondefault K rate
3. Directly overrides Timbers

2. Single asset real estate 101(51B):

i. Means real property constituting a single property or project, other than residential real property with
fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not
a family farmer and on which no substantial business is being conducted by a debtor other than the
business of operating the real property and activities incidental
1. Real estate that is single property or project
2. Generates substantially all of the gross income of a debtor
3. On which no substantial business is being conducted by a debtor other than the business of
operating the real property and activities incidental thereto

ii. Exclusions:
1. Residential real estate with less than 4 units
2. Family farmer

iii. Other substantial businesses

1. If debtor is making virtually all of their money from the operation of the real estate itself, then it is
paradigmatic SARE
2. Classic example:
a. Limited partnership owns apartment complex or office building
b. Income flow = the rents generated by that property
3. Ex) sole asset is golf club, including golf course, pro shop, driving range, swimming
pool, adjacent land for sale
a. Court: not SARE debtor, running the golf course, pool, etc. was the operation of a
substantial business other than just holding the real property to generate income
b. Similar to hotels, marina cases

Stay Relief Problems:

Debtor operates ice rinks. Creditor has a valid security interest in a fleet of Zambonis to secure a debt of $500,000.
Debtor uses the Zambonis in its business. When Debtor files chapter 11, the Zambonis have a value in the range of
$425,000 to $500,000. The rate of depreciation is estimated to be $5,000 per month. Debtor is in default on its
monthly payments of $5,600 to Creditor. Of that amount, $3,000 is for interest. Debtor plans to keep operating its
business, and intends to keep using the Zambonis. Debtor also owns real estate worth $800,000, subject to a
mortgage securing a $600,000 debt. Creditor requests relief from stay, or in the alternative, adequate protection.

a. How should the court rule?

CR can claim 362 (d1): lack of adequate protection the zamboni is depreciating at $5k a month.
Unsecured deficit is increasing, not preserving the $450k

362 (d2): 1) Debtor does not have equity in property, but fails 2) because Zambonis are necessary for re-organization

DR estate would rather grant lien than make $5k payments that affect cash flow.

b. How would the ruling differ if the Zambonis were valued at $600,000?

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362 D1): Value is not diminishing even with depreciation, there would still be equity.
362 D2): DR would have equity in property ($100k) so CR would fail.

Equity cushion itself is enough to give you adequate protection (about 1 year) keep liens proceeds of the sale.

Each month that equity cushion will shrink by $8K (capital depreciation of $5K plus accruing interest of $3k per
month that is allowable under 506(b))

So for at least a year Secured CR is fully protected

c. Assume that in response to Creditors motion, the court determined that the Zambonis were worth
$500,000 and ordered Debtor to make cash payments of $5,000 per month to Creditor as adequate
protection. Ten months after Debtor commenced making the monthly adequate protection payments,
Debtor sold the Zambonis for $410,000 and remitted the proceeds to Creditor. Thus, Creditor suffered an
unexpected $40,000 loss: the actual loss in value of the collateral was $90,000 (a decline from $500,000
to $410,000), whereas the parties had expected and provided for only $50,000 of depreciation. What are
Creditors rights?

CR have unsecured claim for $40k + priority

507b: Administrative Expense Priority adequate payments turn out to be inadequate, CR gets a first ranking
administrative expense priority for the short fall.

VIII. Executory Contracts

1) Overview
1. Basic decision that trustee or DIP must make = whether the value to the estate of obtaining the asset is
worth taking on the correlative liability
i. If yes assume the K
ii. If no reject the K

2. Effect if assume
i. Legal effect is that the estate itself takes over the K from the debtor & steps into debtors shoes
ii. Performance of debtors obligations are now obligations of the estate, and thus administrative expenses
iii. Right to performance by other party is property of the estate

3. Effect if reject
i. Estate is not liable on the K
ii. Is treated as a breach, which gives the other party a general non-priority unsecured claim in the
bankruptcy case
iii. Estate is not entitled to other partys performance

2) Definition
1. Executory contract not defined in the code

2. Countryman test:
i. Contract under which the obligation of both the bankrupt and the other party to the contract are so far
unperformed that the failure of either to complete performance would constitute a material breach
excusing the performance of the other
1. Contracts on which performance remains due to some extent on both sides
2. If non-D has already substantially performed, but D has not, non-D has a prepetition claim
3. If D has already substantially performed, but non-D has not, then non-D is required to pay the
estate 542(b)
a. All that remains of the K from Ds perspective is the asset (i.e. the right to non-Ds
performance)

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 ii. Countryman test is functional
1. Asks if a bankruptcy reason would be served by processing the case through the assume-or-reject
construct
2. If estate wants to get the asset, and hasnt yet itself performed, then need to assume

3) Trustees options
1. The 4 options
i. Assume
1. Estate gets benefit of other partys performance
2. Is liable on the K as an administrative expense
ii. Assume & assign
1. Estate gets profit from valuable K from assignee, but not itself liable on K
iii. Reject
1. Estate does not get asset
2. Rejection treated as prepetition breach, leaving non-D with a general unsecured claim for damages
365(g)(1)
iv. Wait do none of the above
1. Can force the other party to perform on an interim basis, with current compensation as
administrative priority but without getting stuck with the total liability on the K
v. How to decide?
1. Whether contract will be beneficial to estate
2. Do burdens of the K outweigh its benefits

2. Court approval
i. Trustees assume or reject decision is subject to approval by bankruptcy court 365(a)
1. As is assignment decision 365(f)

ii. Exceptions: time limited decisions

1. Treated as rejection automatically if trustee fails to act before deadline
a. In chapter 7 365(d)(1)
b. Nonresidential release property lease 365(d)(4)
3. Timing
i. Parties conflicting interests
1. Estate wants to wait as long as possible to make final decision whether to assume/reject
2. Other party wants a fast decision

ii. Chapter 7
1. Trustee is only given 60 days to act 365(d)(1)
2. If does not assume within 60 days, automatically rejected
3. If not sure, must get extension from court within the 60-day period

iii. Reorganization cases

1. Trustee or DIP is presumptively given until confirmation of plan to decide 365(d)(2)
2. Other party may persuade bankruptcy court to enter an order forcing an earlier decision by the
estate representative

iv. Nonresidential real estate leases

1. Special time-limited rule, where debtor is the lessee 365(d)(4)
2. DIP only given 120 days to decide (or plan confirmation date, if earlier)
3. Extension only for a maximum of 90 days, unless non-debtor lessor consents to longer

4) Rejection
1. Standard for rejection business judgment standard
i. General rule: approve trustees decision to reject (or assume), if satisfies the business judgment rule
ii. In practice, always approve, unless trustee made a legal error as to what the effect of rejection would
be
iii. Do not have to balance harm to other party
1. Exception for collective bargaining agreements

2. Effects of rejection
i. Estate not liable on the K
ii. Estate does not receive benefits of the K
iii. Rejection treated as an anticipatory breach of the K 365(g)
1. Other party has a claim in bankruptcy case
2. Treated as if prepetition 365(g)(1), 502(g)
3. Since has claim, discharge debtors monetary liability under the K
4. Rejection is not more than breach (i.e. not termination, rescission, quasi-avoiding power)
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 iv. Breach remedies other than money damages
1. Policy = let estate escape any continuing obligation that D could escape through breach of K
2. If state law says there is no substitute for actual performance, and D could not escape those
obligations through breach and payment of money outside of bankruptcy, then there is no special
policy in 365 allowing a different result

3. Ex) D, boxer had signed 5-year K with a promoter containing an exclusivity provision. Trustee
rejected under 365(d)(1). (Ortiz)
a. Court: held for debtor effects of rejection were:
b. D had not remaining obligations on the K
c. Promoter limited to filing a claim for money damages against the estate
d. D free to enter into a promotional K with anyone free of the contracts exclusivity
restrictions
e. Rationale:
i. Rejection as breach terminates the K
ii. Under 365(g)(1), promoter only has a claim for damages, no remaining equitable
rights

4. Bankruptcy analysis
a. Under 365(g)(1) and 502(g), the rejection of the K gives rise to a breach of the K, and
that breach is deemed to occur prepetition
b. Under state law, does promoter even have a right to enforce the exclusivity provision via a
negative injunction, in the event of breach?
i. Turns on whether it is a reasonable restraint
ii. Are money damages adequate?

c. Even if promoter would have an injunctive right under state law, is that equitable remedy a
claim under 101(5)(B)
i. Which depends on whether it gives rise to a right to payment
ii. Courts ask whether money damages are a viable alternative or adequate
substitute
iii. Typically would be the case that when state law would grant the injunction, it
would not be a claim in bankruptcy because to get the state law injunction, it is
necessary to show that it cannot be adequately compensated in money damages
iv. Possible fresh start caveat
1. Possibly that court will try, if possible, to find a compensable damages
remedy in lieu of the equitable remedy if a nonclaim finding would
implicate the fresh start policy

d. If promoters remedy for breach of the exclusivity provision does give rise to a right to
payment and is thus a claim under 101(5)(B), then that claim is subject to discharge

3. Special cases where non-D has option to retain property interest despite trustees rejection
i. D is lessor, and non-D is lessee under a real estate lease 365(h)
1. Non-D can treat lease as terminated, or retain its rights for the balance of lease term, as well as
any enforceable renewal or extension periods
2. Must keep paying rent and otherwise perform its obligations under the lease, even though D does
not have to perform
a. Non-D may offset against rent any damages caused by Ds nonperformance
b. Other than the right to offset against rent, non-D waives all other claims against estate

ii. D is vendor, and non-D is vendee in possession under a K for sale of real estate 365(i),(j)
1. Non-D in possession has choice between treating K as terminated, or remaining in possession
2. To the extent non-D already paid part of the purchase price, it is granted a lien on Ds interest in
the real property to secure recovery of the price paid

iii. D is licensor and non-D is licensee of right to intellectual property 365(n)

1. Non-D may treat license as terminated and simply claim damages, or elect to retain its rights to
the IP for the duration of the license term and any extension periods
2. By choosing to retain rights, non-D must continue making royalty payments

4. Collective bargaining agreements

i. Bildisco issues: (1) can a DIP reject a collective bargaining agreement; (2) is it an unfair labor practice
of DIP unilaterally modifies the CBA pending the bankruptcy courts rejection decision?
1. Court:
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 a. DIP may reject standard = that the K is burdensome, and balancing of equities favors
rejection
b. Not an unfair labor practice to unilaterally modify
ii. 1113
1. Rejection essentially codified Bildisco
a. Allow rejection
b. Detailed procedures for negotiation enacted 1113(b),(c)
c. Strict timetable 1113(d)
d. Standard: balance of equities clearly favors rejection 1113(c)(3)

2. Interim modification
a. 1113(e) overturns Bildisco
b. DIP has no power to modify unilaterally must have bankruptcy courts permission
c. Reorganization failure standard

5) Do nothing the limbo period

1. General principles
i. Non-debtor party cannot enforce contract against the estate, but is still fully bound to the terms of the K
ii. Estate can enforce against other party by getting an order compelling non-debtor to perform under the
limbo K
iii. Benefits of waiting for estate
1. Even if want to assume, do not have to cure defaults now
2. If assume, future breaches/liabilities under the K are all administrative priorities, but if not
assumed, only have administrative priority for current performance compelled
3. Have time to figure out what estates needs will be

iv. Substantive rights of non-debtor in limbo

1. Administrative expenses for reasonable value of actual benefits conferred on the estate
postpetition
a. Not necessarily at K rate whatever a reasonable rental would be
b. So, if market rates are below K rate, DIP benefits
2. DIP does not have to cure, or give non-debtor assurances of future performance

v. Procedural rights of non-debtor in limbo

1. Time limits in which DIP has to decide
a. Chapter 11 confirmation 365(d)(2)
b. Special rule for commercial real estate leases 365(d)(4)
2. Can ask court to reduce the time, and force DIP to make an earlier decision

2. Special rules for commercial leases

i. Lessor is entitled to full performance of all obligations of D during the gap period 365(d)(3)
1. 365(d)(3) trustee shall timely perform all obligations of the debtor that arise in limbo period
(i.e. after case begins, until lease is assumed or rejected)
2. Notwithstanding 503(b)(1)
3. So do not have to show actual benefit to the estate
4. Do not have to cure prior defaults, however

ii. Procedural rights

1. Change default decision date from confirmation of plan, to 120 days after filing
2. Only a single 90-day extension possible
3. After that, non-debtor lessor must consent to further extensions

iii. Allocation where rent falls due during case, but part of time it applies to was prepetition
1. What happens when rent falls due during the case, but part of the time period to which it applies
was prepetition?
a. Statutory text timely perform all the obligations of the debtor arising from and after the
order for relief
b. Billing date approach if K bill falls due during the limbo period, then the entire bill must
be paid
c. Accrual method allocate rent to pre- & postpetition periods

2. What is the remedy if DIP does not timely perform?

a. Majority: 365(d)(3) automatically confers administrative priority status on the obligation
b. Dissent: no priority under 365(d)(3)

3. Special rules for personal property leases

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 i. Applies to an unexpired lease of personal property other than personal property leased to an individual
primarily for personal, family, or household purposes
ii. DIP is required to timely perform all obligations, including payment of the rent at lease rate, pending
decision to assume or reject 365(d)(5)
1. Only applies in chapter 11 cases
2. And only applies if trustee takes more than 60 days to assume or reject
3. During 1st 60 days, have traditional actual use & benefit approach
iii. Court may override based on the equities of the case
iv. Ex) cars leased for business use

6) Assumption & Assignment

Assumption
i. Effects of assumption
1. Fundamental premise = estate steps into debtors shoes and becomes a party to the executory K
2. Estate is entitled to the benefit of non-debtor partys performance
3. Estates obligations under the K are priority expenses
4. Estate is liable to perform the debtors obligations on the K, and if does not (or later rejects), non-
debtor is entitled to administrative priority
a. Whereas, absent assumption non-debtor just has non-priority claim
b. Administrative expense claim allowed under 503 rather than 501, so limits on
allowance of claims in 502(b) do not apply
i. 503(b)(7) administrative expense cap for commercial real estate leases
1. 2-year rent rule as administrative expense
2. Remaining claim treated as a claim under 502(b)(6)
ii. Limits on assumption
1. Court must approve the decision to assume, which requires trustee to show a benefit to the
estate
2. Contract must still be in existence
a. K that was completely terminated prior to bankruptcy cannot be assumed
3. Estate must cure defaults
a. At minimum, estate rep has 60-day period in 108(b) to take acts, including curing defaults
b. For executory Ks better view is that 108(b) is not a limit, and have the time period in
365(d) until plan confirmation
4. Estate must assume the entire K, cum onere (i.e. with all burdens)
a. Exceptions:
i. Ipso facto or bankruptcy clauses are not given effect 365(e)(1)
1. Make bankruptcy filing an event of default, or even terminate K
ii. Clauses barring debtor from assigning the K without non-debtors permission are
not enforced 365(f)(1)

5. Do executory K time rules trump?

a. Ex) D has K for option to be exercised by 11/1. D files Ch. 11 on 10/15 and does not
exercise option in time. Option becomes valuable.
i. Non-D argue: under CBOT, the Ds property right (option) was limited, requiring
exercise by 11/1
ii. DIP argue: option K is executory K, subject to 365 rules, including that DIP has until
plan confirmation to act, thus DIP had until plan confirmation to decide
iii. Non-D: under cum onere principle, even if DIP were to assume, estate only gets a
right to exercise option by 11/1 (now impossible)
iv. DIP: 108(b) gives trustee/DIP 60 days after filing to deal with any deadline
1. Possible 60 day grace period to exercise option

iii. Default rules limitations where K is in default 365(b)

1. Estate must cure the default (or given assurance of prompt cure)
2. Estate must compensate the non-debtor party for the damages it suffered due to default
3. Estate must give adequate assurance of future performance (special rules for shopping center
leases)

iv. Exceptions to default rules

1. Estate does not have to cure defaults under ipso facto clauses 365(b)(2)
2. Estate does not have to comply with penalty provisions to cure just compensatory 365(d)(2)
(D)
3. If default is under a so-called going dark clause on commercial real estate, cure simply
requires resuming operations, 365(b)(1)(A), & then paying actual damages & giving assurance

v. Shopping center lease rules

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 1. If lease estate is seeking to assume is a shopping center lease special limitations
2. More weight given to interests of non-debtor parties, including other tenants
3. Adequate assurance 365(b)(3) requires stricter compliance with all lease terms, and those of
the master lease
Assignment
Assignment outside of bankruptcy
1. Anti-assignment clauses are presumptively valid outside of bankruptcy
2. By assignment, assignor cannot relieve itself of its liability on the contract

ii. Effects of assignment in bankruptcy

1. Anti-assignment clauses are invalidated 365(f)(1)
2. Ipso facto clauses are invalidated 365(e)(1)
3. Upon assignment, estate and debtor are relieved of any liability 365(k)
a. Non-debtor has no say in approving the assignee, court approves instead
b. Essentially estate can capture all of the profit under a valuable contract
immediately, and bear none of the future performance risk

iii. Adequate assurance of future performance

1. Condition to assignment that is supposed to provide the requisite protection for the
non-debtor is that the assignee must demonstrate adequate assurance of future performance
2. Usually goes to whether the assignee can provide evidence of its prospective ability to
perform the obligations of the K, financial or otherwise
a. Evidence = financial statements, access to working capital, cash reserves,
contingency plans, personal guarantees, reasonable projections, financial history
3. For leases non-debtor is authorized to require a deposit or security substantially the
same as lessor would demand if it leased voluntarily to a similar tenant 365(l)
4. Shopping centers more weight given to interests of non-debtor parties
a. Adequate assurance requires stricter compliance with all lease terms
5. Required even if K is not in default

iv. Assumption as a prerequisite to assignment

1. Estate must first assume the K under 365(b)
2. Ramifications:
a. Any defaults must be cured
b. Assignment must be cum onere the whole K, benefits and burdens alike
c. Some types of Ks cannot be assigned, because they cannot be assumed (i.e. K
to make a loan)

v. Anti-assignment clauses invalid 365(f)(1)

1. Non-debtor cannot protect itself from bankruptcy by using anti-assignment clauses,
although perfectly legal outside of bankruptcy
2. Ex) lease has assignment condition that debtor pay lessor 75% of amounts received
from assignee above base rent
a. 75% clause is just an indirect form of anti-assignment clause, and is
invalidated by 365(f)(1)

vi. Use clauses

1. Allow deviation from the use clause unless non-D can show actual and substantial
detriment
2. Unless a shopping center lease

vii. Special case of shopping centers 365(b)(3)

1. Shopping center = more than just a group of retail tenants in one building
a. Planned tenant mix, shared common areas, shared common services, common
plans regarding business hours, advertising promotions, etc, with lots of lease covenants
that restrictions that carry out common plan
2. 365(b)(3) adequate assurance of future performance for shopping centers includes
adequate insurance of:
a. Source of the rent
b. In an assignment, that the financial condition and operating performance of
assignee and its guarantors is similar to that of debtor and its guarantors
c. That any % of rent will not decline substantially
d. That assumption or assignment will be subject to all provisions of the lease
including provisions such as radius, location, use & exclusivity, and will not breach any
provision in any other lease, financing agreement or master agreement relating to the
shopping center

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 e. That assumption or assignment will not disrupt any tenant mix or balance in
the shopping center

2. Problem of nondelegable contracts

i. Nonbankruptcy reasons for nondelegability
1. Default rule: ARE delegable
2. Exceptions:
a. K says no delegation
b. Delectus personae, i.e. performance by this obligor is material
i. Ex) cant assume/assign a K to make a loan, or extend other debt
financing
ii. Ex) personal association Ks
c. Limiting legislation (government Ks, patents)

ii. Ignore K clauses

1. If the reason for nondelegability is dependent on a K clause, the clause is not
enforceable
2. Ex) yard-mowing K with an anti-delegation clause
a. Since it is unlikely that the identification of the yard mower is inherently
material, ignore the anti-delegation clause in bankruptcy
b. K may be assumed or assigned

iii. Bar may be honored where reason for nondelegability under nonbankruptcy law is
due to either:
1. Non-debtor has a material interest in performance by the debtor personally, or
2. Limiting legislation restricts the debtors power to delegate duties under K
3.
iv. Assumption by a DIP 365(c)(1)
1. Hypothetical v. actual test
a. Hypothetical test
i. Hypothetically, would a non-debtor party be entitled to block
assignment by debtor to a third party?
ii. If so, then debtor as DIP cant assume unless non-D consents
b. Actual test
i. Is DIP actually trying to assign to a third party?
ii. If not (i.e., if DIP just trying to assume), then may assume

v. Assignment 365(f)(1)
1. Dayton Country Club issue was whether trustee had the right to assume and
assign through sale Ds special limited golfing membership.
a. Contradictions in 365(f)(1)
i. Nixes anti-assignment restrictions
1. In the K
2. Or in applicable law
ii. But, (f)(1) is subject to (c)(1), and under (c)(1), anti-assignment rules
in applicable law are enforced unless dependent on a K clause
b. Court: personal association contracts, such as country club memberships, are
inherently non-assignable under state law, because the identification of the specific person
is material. Thus, (c)(1) exception applies, and K is not assignable
i. (f)(1) contains the general rule
ii. (c)(1) contains a narrow exception if assignment by the trustee will
impact upon rights of a non-debtor third party, then applicable law protecting
right of third party to refuse to accept performance from assignee will prohibit
assignment

RECAP

The Trustees Powers in Relation to Executory Contracts and Unexpired Leases

365a: the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired
lease of the debtor.

Executory Contract
o Both parties still have obligations
o A Contract under which the obligation of both the bankrupt and the other party to the K are both so far
unperformed that the failure of either to complete the performance would constitute a material breach
excusing the performance.
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 Trustee's Choices
1. Assume the Contract: T files a motion to assume
BK estate steps into the DR shoes and takes over the K or lease
Debtor's continuing post petition obligations under the K or lease are post petition
obligations of the estate that acquire administrative expense status.
Counter party's continuing post-petition obligations under the contract or lease are
property of the estate.

1 Reject the Contract: T files a motion to reject

Estate is not liable to perform DR obligation's under the K or the lease.
Rejection is treated as a breach of the K or lease, that entities counter party to a general unsecured
claim in the BK case.
The estate forfeits the right to any benefits under the K or lease (i.e. counter party no longer has to
perform

1 Assume and Assign the Contract/Lease

2 Do Nothing: wait and see before acting.

CH 7: TR has 60 days in which to assume or reject

o If TR does not act, deemed REJECTED.
o If want more time, must ask ct for an extension before 60 days expires 365 (d2).

CH 11 or 13: Default is that the TR has until the plan confirmation to assume or reject. Onus is thrown on
counter party who many not wish to wait for a decision, to apply to the court for the court order to make a
decision within a specified period of time. 365 (D2)
o Commercial Real Estate Industry: 365 (D4): an unexpired lease shall be deemed rejected if the
TR does not assume or reject it by the earlier of 1) 120 days after the order of relief or 2) the plan
confirmation.

For an Executory K:
Both parties still have obligations
Its a contract where the obligation of both the BK and other party are so far unperformed that the failure of
either to complete would constitute a material breach excusing the performance.

Executory K Problems:

Analyze whether any of the following transactions fall within the scope of section 365:
1. Analyze whether any of the following transactions fall within the scope of section 365:

A. Debtor pays Farmer $10,000 for a crop of harvested wheat. Debtor files bankruptcy. Farmer has not
yet delivered the wheat to Debtor.
DR $10,000 for crop DR files BKY and crop is not delivered

Does not fall under 365 because debtor has already performed its obligation
The estate has the right to get paidproperty of the estate under 541can say just deliver

B. Debtor agrees to pay Farmer $10,000 for a crop of harvested wheat. Farmer delivers the wheat to
Debtor. Debtor files bankruptcy. Debtor has not yet paid Farmer the $10,000.
DR agrees to pay $10k- Farmer Delivers DR files BK DR has not paid
No, does not fall under 365: Farmer has already performed obligation by delivering wheat.
Farmer here is just left with an unsecured claimjust has to file a claim.
C. Debtor agrees to pay Farmer $10,000 for a crop of harvested wheat, which Farmer agrees to deliver in
two weeks time. A week after making the agreement, Debtor files bankruptcy
DR agrees pay $10k , FR agrees to deliver DR files BKY

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 Yes, this falls under 365both DR and farmers obligations are unperformed.failure of either would
constitute a material breach.
Both the asset and the liability is unperformed.

D. For $100 Farmer grants Debtor an option to purchase a crop of harvested wheat for $10,000, the
option to be exercised within four weeks. Debtor pays Farmer the $100 option price. Two weeks later
Debtor files bankruptcy without yet having exercised the option.

Option to Purchase K

No, does not fall under 365

If you dont exercise the option, then non performance IS NOT a material breach under countryman.
You would still have a K right (option) which comes into the estate under 541a.

3.Debtor agrees to pay Farmer $10,000 for a crop of harvested wheat, which Farmer agrees to deliver in
sixty days with payment to be made on delivery. Five days later Debtor files for bankruptcy. Should the
trustee assume or reject the wheat contract?

DR agrees to pay FR ($10,000) in wheat

FR agrees to delivery in 60 days (P.O.D.)
DR files Bankruptcy

It depends on what the price of wheat is (depending on price of wheat) depending on price of wheat could assume +
resell.
If not worth buying, then reject.and the FR would get an unsecured claim ($10,000)

4. Debtor agrees to pay Farmer $50,000 for his entire crop of harvested wheat. Farmer agrees to deliver
in six months time with payment to be made on delivery. Debtor immediately agrees to resell the wheat
to Third Party for $60,000. Five months later Debtor files for bankruptcy. The market price of an
equivalent crop of harvested wheat as at the date of the bankruptcy filing has declined to $30,000. The
trustee moves to reject the contract with Farmer. Farmer objects citing the likelihood that he too will
have to file bankruptcy if he has to resell his crop on the open market rather than at the contract price.
Will the court approve or deny the trustees motion?

Business Judgment Standard: Estate would likely win...the estate will make more $$ the court will approve the
TR decision to reject.
Estate Assumes: it will make a profit of $10k - Farmer price $50k sell fror $60 under resale kmake $10k
profit
Estate Rejects: Buy wheat ($30 and close a resale K for a gain of $30k

Farmers Damages: 50-30 = $20k damages claims for loss of bargain.

FORMULA K PRICE MARKET VALUE

Limits on Assumption Problem & Hypos:

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 Debtor leases a unit in Landlords shopping mall at a rent of $36,000 per annum payable monthly. Included in
the written lease were the following provisions:

OPERATING COVENANT

Tenant shall in good faith continuously throughout the Term carry on in the entire Premises the type of business
for which the Premises are leased. Tenant shall operate its business with a complete line and sufficient stock of
merchandise of current style and type, attractive displays, and in an efficient and reputable manner so as to
produce the maximum amount of sales from the Premises, and shall keep the Premises open for business with
adequate and competent personnel in attendance on all days and during all hours (including evenings)
established by Landlord from time to time as store hours for the Shopping Center, and during any other days and
hours when the Shopping Center generally is open to the public for business, except to the extent Tenant may be
prohibited from being open for business by applicable law.

USE COVENANT

Tenant shall use the Premises only for the sale or rental of photographic and video equipment and related
accessories and supplies.

TERMINATION AND LIQUIDATED DAMAGES

Failure to operate the Premises in accordance with either of the Operating Covenant or the Use Covenant for a
continuous period of one week constitutes an event of default. In such event Landlord (i) may terminate the
lease and (ii) shall be entitled to liquidated damages in the amount of one years rent ($36,000). Further if rent is
not paid for three consecutive months this Lease will automatically terminate.

Note the following additional facts:

1 Debtor filed a chapter 11 case on 1 March. On this date the lease had five years still left to run. Debtor had failed
to pay the rent for any of the previous four months.
2 Applicable nonbankruptcy law prohibits landlords from evicting tenants without first giving them an opportunity
to cure a default though service of a statutory cure or quit notice.
3 In the month prior to the filing the Debtor had only opened for business at the premises on three days per week
even though the store hours in the mall are Monday through Saturday 9:00 am 9:00 pm and Sunday 10:00 am
5:00 pm.
4 Debtor filed a motion under section 365 to assume the lease in which it proposes to pay the back rent and
resume full operations from the premises trading as a Verizon franchise selling smartphones bundled with access
to Verizons cellular network.
Discuss whether or not the court will approve the motion.

Discuss whether or not the court will approve the motion?

1) CURE
General rule in 365 (b1A): must cure or provide adequate assurance of cure as PRE-REQ to assumption

Exception: Wording of 365(b)(1)(A)Trustee must cure defaults other than an default that is a breach of a provision
relating to the satisfaction of any provision relating to a default arising from any failure to perform nonmonetary
obligations under an unexpired lease of real estate, if it is impossible for the trustee to cure such default by perfoming
non-monetary acts

2) COMPENSATE: Must also compensate any actual pecuniary loss resulting from defaults: Section 365(b)(1)(B)

3) ADEQUATE ASSURANCE: Section 365(b)(1)(C) again: Must provide adequate assurance of future performance
under such contract or lease So couldnt change use w/o Landlord agreement & variation of lease terms (i.e. might
have to renegotiate if necessary

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 DR has breached lease and is subjection to termination . When filed, DR was in breach of his operating
covenant and proposing a new use

PRE REQ TO ASSUMPTION: there needs to be something left to assume

o Here, there might bebut you would have to cure.
o Failed to pay rent for 3 monthsso the lease would automatically terminate.if you are looking at the
terms of the K it seems done.

But You should Argue In Re Stoltz: You have to be given an opportunity to Cure Defaults first.
o This lease required notice to be servedthe termination provision is besides the point
o The statute protects the tenant

What to Do to Correct and Go Forward

o 1) pay all rent pass due ( 4 months)
o 2) Breach of OP Cov not monetary dont have to cure.its not possible to cure such default
because you cant go back in time.
o 3) Given the operating covenant you have to resume operations.

Limits on Assumption Hypos

1. K MUST BE IN EXISTENCE: DR in default on K. Other Party gives 30 day notice of termination under
the terms of the K. 45 Days later, DR files CH 11, not having cured the default.
No, the K cannot be assumed
It was dead and gone once the 30 day period expired, which was prior to BKY.
K must be completely terminated under applicable law.NO life left at all.

2. MUST CURE DEFAULTS AS PRE CONDITION TO ASSUMPTION: How long does the DIP have to cure
once it files CH 11?
At min the estate rep or DIP has the 60 day period in 180 (b2) to take acts including curing defaults
For executory contracts you get time period in 365 d (i.e. in ch 11 until plan confirmation)

3. CUM ONERE: Estate must assume the entire K will all the burdens as well as benefits

VII. Avoiding Powers

1) Introduction
1. Meaning & effect of avoidance
i. What?
1. Avoidance powers contained in 544-553
2. Avoidance = transfer or obligation is set aside, or invalidated, pursuant to court order
ii. Premise & goals
1. Facilitate & maintain integrity of bankruptcy as a collective proceeding by protecting creditors from
each other
a. Preserve equality paradigm
i. Avoid transfers that undermine, recover value
b. Invalidate secret liens and transfers
2. Protect creditors from debtor (fraudulent transfer)
iii. Effect of avoidance
1. Transfer trustee will attempt to recover the property transferred (or its value) under 550
2. Obligation cancels the obligation
3. Lien lien is eliminated property free from lien & secured creditor relegated to unsecured status,
or alternatively lienholder can retain the lien and pay the trustee for the liens value
iv. Recovery
1. Avoidance does not bring money or value into the estate, rather the trustee must afterwards bring
an action under 550 to recovery the property or value
2. Recovery from whom?
a. Initial transferee 550(a)(1)
i. Trustee has absolute right to recover from either the initial transferee, or the entity
for whose benefit for transfer was made
1. Benefit Ex) if debtor paid of a guaranteed debt, it also benefits
guarantor

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 ii. Party is subject to strict liability
iii. Rationale: burden of inquiry and risk of whether conveyance is fraudulent is placed
on him in best position to monitor
iv. Mere conduit?
1. First party in the chain of possession who has independent dominion and
control over the property, or who has a legal right to apply the property to
his own purposes
b. Subsequent transferee 550(a)(2)
i. Secondary transferee is protected to the extent that it took for value, in good faith,
and without knowledge of the voidability of the transfer 550(b)(1)
ii. Principle of derivative title transferee taking from or through a protected
transferee is similarly protected, if taken in good faith 550(b)(2)
c. Trustee may choose but only a single satisfaction 550(d)
d. 502(h) entity that property is recovered from has a general unsecured claim against
estate, if otherwise allowable

v. Preservation - 551
1. Ensures estate will capture the economic value of the avoided transfer by stepping into the
transferees shoes
2. Ex) $20,000 property subject to $10,000 avoided senior lien & $25,000 junior lien
a. Estate takes place of avoided senior lien receives first $10,000

vi. Limitations - 544, 545, 547, 548, 553

1. 546(a)(1) later of:
a. 2 years after the entry of order for relief, or
b. 1 year after appointment or election of first trustee
2. 546(a)(2) cant be brought after case is closed or dismissed
3. 549 postpetition transfers
a. Trustee must sue within 2 years from date of transfer
b. Must sue before case is closed or dismissed
4. 550 actions to recover avoided transfer
a. Trustee must bring recovery action within 1 year of time transfer is avoided
b. Before case is closed or dismissed

2. Overview of trustees avoiding powers

i. 547 preferential transfers made shortly before commencement of bankruptcy case
ii. 549 post-filing preferential transfers
iii. 553(b) setoff by creditor in the immediately prebankruptcy to the extent that it enabled creditor to
improve its position
iv. 545(1) avoidance of statutory liens that become effective only in the event of insolvency or bankruptcy
v. 544(a) strong-arm clause avoid liens and conveyances that have not been perfected or recorded by
the time the bankruptcy case is filed
vi. 545(2) unrecorded statutory liens avoided

Trustee as successor to actual creditors 544(b)

544(b) gives bankruptcy trustee the power of actual unsecured creditor to avoid transfers under the applicable
nonbankruptcy (usually state) law if:
o Actual creditor exists who has power under applicable nonbankruptcy law to avoid a transfer by debtor,
and
o Creditor holds an allowable unsecured claim in the bankruptcy case

Concept if unsecured creditor has power to avoid, trustee takes over that power for the benefit of all creditors
o Adds state fraudulent conveyance law to trustees avoiding power
Longer reach-back period (up to 4 years, instead of 2)
State law might avoid certain transfer that 548 would not
Entire transfer is avoided, no matter how small the claims of the creditors whose standing the trustee assumes
All creditors of the estate share in the recovery, even those who could not have avoided the transfer

550 Practice Problems

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550: permits TR to recover the property transferred of the value of the property from the initial transferee, from an
entity for whose benefit the transfer was made or from a subsequent transferee from an entity for whose benefit the
transfer was made or from a subsequent transferee.

In each of the following scenarios, identify what and from whom the trustee can recover and what (if
any) defenses would be available to the transferees:

1. Debtor gifts a portfolio of energy stocks worth $25,000 to Debtors Mom. Debtor files
bankruptcy. The trustee successfully avoids the gift to Mom as a fraudulent transfer under 544(b)
and 548.
Ideally, want the property stock back or $25k value
Sue the DR MOM: She is the initial transfereeit went directly to her
She has no defenses and she did not give value under 551 (A1 D)

2. Debtor gifts a portfolio of energy stocks worth $25,000 to Debtors Mom. Debtor files
bankruptcy. The trustee successfully avoids the gift to Mom as a fraudulent transfer under 544(b)
and 548. In the meantime, Mom has sold the portfolio on the NYSE. It is now owned by Citibank.
You can go after mom initial for the value not the property.
City Bank T2: exception good faith for value. 550 B Defense.
Hopefully she hasnt sold the cash away.

3. Debtor owns real estate in which he has $50,000 worth of equity. He sets up an offshore trust in the
British Virgin Isles and transfers the title to BVI Trustees Ltd. BVI Trustees Ltds legal ownership of the
title is properly recorded with the local Recorders Office. The beneficiaries under the trust instrument
are Debtors adult children, Bill and Ben. Debtor files bankruptcy. The trustee successfully avoids the
transfer to BVI Trustees Ltd as a fraudulent transfer under 544(b) and 548.

Seeking to shelter asset for the benefit of your family.

Who are we suing:
o BVI Trustees (initial trustees) OR
o The Kids--benefiting from the transferentity for whose benefit the transfer was made
They are A1 = BENEFIT you are A1 and you have no-defense
Go after property or value.

2) Strong arm clause & constructive trusts 544(a)

General principles
o Strong arm clause 544(a) gives trustee the power to avoid secret (i.e. unrecorded) liens and
conveyances
o Time frame = time that bankruptcy case is commenced
o Trustee is given rights and powers of:
Hypothetical lien creditor,
Hypothetical execution creditor, or
Hypothetical bona fide purchaser
Note: do not need actual creditor, unlike 544(b)
o Actual knowledge is irrelevant trustee is deemed not to have knowledge
o Availability of avoidance depends on the context of the applicable nonbankruptcy law
Winner depends on who would have priority under governing state law in a contest between the
holder of the security interest and the lien creditor, execution creditor, or bona fide purchaser

Trustee as lien creditor 544(a)(1)

o Trustee may use to avoid secret liens in personal property
o If an unperfected security interest would lose to a lien creditor under Art. 9, then 544(a)(1) empowers
the trustee to avoid that unperfected security interest
Under Art. 9, a lien creditor takes priority over an unperfected security interest
Thus trustee can avoid a security interest that is unperfected at the time of bankruptcy
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 Ask was the security interest perfected at the instant the case was filed?
o Purchase money relation back exception
Nonbankruptcy relation back rules apply
Purchase money security interest = security interest in which the collateral subject to the security
interest was purchased by the debtor with the money loaned by the secured creditor
Secured party is given a 20-day grace period to perfect after debtor takes possession
Perfection within grace period is deemed to relate back to the time of attachment
Postpetition perfection of the security interest would also not violate the automatic stay
362(b)(3)

Trustee as bona fide purchaser 544(a)(3)

o Trustee may use to avoid unrecorded real estate interests
o 544(a)(3) vests trustee with rights & powers of a bona fide purchaser (BFP)
If under state law, a BFP would prevail over an unrecorded interest, the unrecorded interest may
be avoided
o Knowledge
Actual knowledge of DIP/trustee is not relevant
Still can avoid even with knowledge without regard to actual knowledge
Constructive notice cannot be ignored
Ex) adverse possession, or prebankruptcy purchaser who failed to record is in possession
Bankruptcy gives effect to a notice that is good against the world (and thus acts as a
substitute for recordation)

o Where D holds legal title subject to unrecorded equitable interests

Nonbankruptcy law would permit D to convey property to a BFP free of the unrecorded equitable
interests
Under bankruptcy law, only Ds legal interest becomes property of the bankruptcy estate, and
equitable interests of others remain outside the estate - 541(d)
Majority view: avoidance permitted
Minority view: avoided should be denied

Trustee State Law Priority Practice Problem 544 (A1)

544a:
o Gives TR the right to that which the general creditors could have reached under non-BK law
o Allows TR collectively to act on behalf of creditors to avoid liens and transfers that creditors could have
avoided under state law outside BKY.
o TR as hypothetical lien creditor can avoid unperfected personal security interests.

In each of the following scenarios, analyze whether the bankruptcy trustee can avoid the security
interest under 544(a)(1):

1. On October 1, Debtor grants Creditor an Article 9 security interest in her Dodge Caravan to
secure a loan of $5,000. On October 10, Debtor files chapter 7. The appraised value of the Caravan
is $8,000. As of October 10, Creditor had not yet perfected its security interest.
Strong Arm would apply because the Creditor has not perfected yet.
Assuming this is not a PMSI.
Straight forward A1 Avoidance
LC unsecured for 5k.

2. Same facts except Creditor perfected on October 8.

LC takes subject to perfected interest of the CR.

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 3. On October 1, Dealer sells Debtor a Dodge Caravan for $20,000 and arranges for Creditor to
advance Debtor the $20,000 purchase price. Having done the deal, Debtor takes immediate
possession and drives away from Dealers in the car. On October 10, Debtor files chapter 7. As of
October 10, Creditor had not yet perfected its security interest.

Intended to be a PMSI.
CR still has 20 days to perfect.

3) Fraudulent transfers
1. Overview of FT law
i. Function
1. Protects body of creditors from unfair actions by the debtor that harms the creditor groups
financial interests
2. Permits creditors (or the trustee acting on their behalf) to set aside unfair transfers that place
debtors property out of the reach of creditors and hinder efforts of creditors to get paid

ii. State fraudulent transfer law

1. Statute of 13 Elizabeth 5 states
a. Required actual intent to hinder, delay, or defraud
b. Courts identified badges of fraud circumstantial factors believed to be indicia of
debtors actual fraudulent intent
2. Uniform Fraudulent Conveyance Act (UFCA) 2 states (NY)
a. Actual fraud
b. Constructive fraud proof of objective facts in combination conclusively establish fraud,
irrespective of debtors intent
3. Uniform Fraudulent Transfer Act (UFTA) 43 states
a. Party with standing must challenge transaction
i. Trustee (or DIP) has standing in bankruptcy
ii. Outside of bankruptcy, individual creditors of debtor have standing
1. Present creditors had claim at time of transfer
a. Universal standing
2. Future creditors claim arose after challenged transfer
a. Lacks standing to challenge some types of constructive fraud, but
can challenge actual fraud
b. 4-year reach back period
i. Under 548, trustee can only avoid transfer made within 2 years before filing
ii. Trustee may use 544(b)(1) to avoid a transfer made within 4 years by invoking
the rights of an actual bankruptcy creditor with standing to attack the transfer
under state law
c. Remedy
i. Most commonly set aside transfer and recover transferred property or its value
from the transferee
ii. Innocent transferee who gives value may be protected 548(c), UFTA 8
1. If transferee takes for value, and was in good faith (i.e. did not know of the
fraud) 548(c);
a. Transferee gets a lien in the property to the extent of the value he
gave
b. Plus, debt might be nondischargeable for fraud under 523(a)(2), so
transferee can go after D post-bankruptcy
2. Not voidable against person who takes in good faith, and for reasonably
equivalent value UFTA 8
a. Thus captures later appreciation of transfer

iii. Actual v. constructive fraud

1. Actual fraud set aside based on proof of actual intent
2. Constructive strict liability, no mens rea required

iv. 548(a)(1) debtor must fraudulently occur an obligation, or make a fraudulent transfer of an interest in
property
1. Transfer
2. Of debtors property

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2. Actual fraud: fraudulent intent
i. Requires proof of the subjective intention of the debtor in making the transfer
ii.
iii. Courts rely on badges of fraud to establish debtors fraudulent state of mind
1. Circumstantial evidence
2. Facts & circumstances inquiry

iv. UFTA 4(b) factors relevant to proof of debtors actual fraudulent intent
1. Transfer or obligation was to an insider
2. Debtor retained possession or control of the property transferred after the transfer
3. Transfer or obligation was disclosed or concealed
4. Before the transfer was made or obligation was incurred, debtor had been sued or threatened with
suit
5. Transfer was of substantially all of debtors assets
6. Debtor absconded
7. Debtor removed or concealed assets
8. Value of the consideration received by debtor was not reasonably equivalent to the value of the
asset transferred or the amount of the obligation incurred
9. Debtor was insolvent or became insolvent shortly after the transfer was made or the obligation
was incurred
10. Transfer occurred shortly before or shortly after a substantial debt was incurred
11. Debtor transferred the essential assets of the business to a lienor who transferred the assets to an
insider of debtor

v. BAPCPA asset protection trusts 548(e)

1. Debtor sets up the trust with her own property, and
2. Is the beneficiary of that trust
3. Within 10 years before the bankruptcy
4. Actual intent to defraud present/future creditors

3. Constructive fraud
i. Proof of certain specified facts conclusively establish that the transfer at issue is a fraudulent transfer,
irrespective of the actual subjective intention of debtor
1. Strict liability, designed to redress creditor injury
2. Focused on the victims (creditors), rather than on debtor

ii. Rationale:
1. May serve as a useful surrogate for actual fraud more efficient to create per se rule
2. Some transactions by their very nature injure creditors of the debtor

iii. Types of constructive fraud

1. Transfer in exchange for less than reasonably equivalent value by a debtor:
a. Who is insolvent or who is rendered insolvent by the transfer
b. With unreasonably small capital remaining after the transfer
c. Who is about to incur debts beyond its ability to pay as they mature

2. Transfer in which debtor received less than reasonably equivalent value in exchange for
a transfer made
a. To or for the benefit of an insider
b. Under an employment contract
c. Not in the ordinary course of business

3. UFCA: note that constructive fraud requires fair consideration

a. Requires fair equivalent in value AND good faith
b. Relevant where transfer made to a family member, but for a fair consideration
c. Can be constructively fraudulent if there is a lack of good faith

iv. What is reasonably equivalent value?

a. UFCA value prong is fair consideration
i. Fair consideration = fair equivalent + good faith of transferee
ii. Under UFCA, even if value was equivalent, no fair consideration if the transferee
was not acting in good faith

b. Foreclosure sale

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 i. Reasonably equivalent value for foreclosed property is the price in fact received at
the foreclosure sale, so long as all the requirements of the states foreclosure law
have been complied with
ii. Irrebuttable presumption that whatever is received at a proper foreclosure sale is
reasonably equivalent value for purposes of 548

c. Consumption?
i. Not violating rights of creditors so long as debtor obtains reasonably equivalent
value compliance with an objective market determinant of value
ii. If creditors believe debtor is consuming too much, recourse is to commence an
involuntary bankruptcy and strip debtor of the power to decide how to deploy his
assets
iii. Church donations not reasonably equivalent value, because can go to church for
free, but there is a safe harbor for charitable contributions

d. Gambling
i. Court: debtor received a reasonably equivalent value
1. Measure value at the time of the transfer, when the bet is made
2. Bet has value when it is placed, because there is a mathematical chance
that the debtor will make money
ii. Problem: once debtor is insolvent, they are essentially gambling with creditors
money
1. Debtor gets all the upside of winnings, no downside
2. Creditors enjoy little of the upside of the winning bet, and all the downside
from a losing bet

v. Charitable contribution safe harbor 548(a)(2)

1. Limited to constructive fraud cases
2. Only applies for cash donations, or financial instruments
3. Where not exceed 15% of Ds gross income, or if it does, where it is consistent with Ds giving
history

4. Analyzing fraudulent transfers

i. Was transfer at issue fraudulent?
1. Identify a party with standing to challenge the transaction
a. Trustee under 548 or 544(b)
b. Present v. future creditors measured from the time transfer was made

ii. If so, what is the remedy?

1. Most commonly, set aside transfer and recover transferred property or its value from transferee
2. Protection for good faith transferees for value
3. Remember that individual debtor who makes a fraudulent transfer within 1 year of bankruptcy will
be denied a discharge in chapter 7 727(a)(7)

Actual Fraudulent Transfer Problem

ACUTAL: focus on the DR Behaviorwhat is the DR intending to DO!
Factual indicators:
o Transfers to family members or other insiders
o Gifts
o Transfers for less than full consideration
o Transfers made at a time when debtor was insolvent.

Badges of Fraud: Twyne case

1. The gift was general, of all of Pierce's property, without excepting even his apparel or anything of necessity.
2. Pierce retained possession of the property supposedly transferred, and treated it as his own.
3. The transfer was made in secret.
4. The transfer was made while C's suit was pending against Pierce.
5. Twyne held the property in trust for Pierce.

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 6. The deed contained a recital that the gift was bona fide.

Defense to Avoidance
o Transferee took in good faith and for reasonably equivalent value. (Bona fide purchaser)

In the following scenarios could the bankruptcy trustee apply successfully set aside the transfer as
an actually fraudulent transfer? If so, what could the trustee recover and from whom? Consider any
applicable defenses to avoidance and/or recovery.

1 Debtor owes 20 creditors a total of $100,000. Debtor is in default on 12 of the debts owed to the 20
creditors. Eight of the creditors have commenced lawsuits to recover their debts. Debtor has one
valuable non-exempt asset a Cartier diamond necklace worth $50,000. Debtor sells the diamond
necklace to Jim Jeweler for $45,000. Debtor wire transfers the $45,000 from his Chicago bank
account to a bank account in Panama in the name of Debtors best friend, Brenda. Jim Jeweler is
unaware of Debtors financial situation. He just thinks that he made a good trade. Three months
after the sale of the necklace, an involuntary bankruptcy order is made against Debtor on the joint
petition of the 8 creditors who had previously commenced suit.
o 11 USC 548(c): a transferee or obligee of such a transfer or obligation that takes for value and in good
faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case
may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer
or obligation [PROTECTS THE $45K SPENT].
o UFTA: SECTION 8. DEFENSES, LIABILITY, AND PROTECTION OF TRANSFEREE.
o A transfer or obligation is not voidable under Section 4(a)(1) against a person who took in good
faith and for a reasonably equivalent value or against any subsequent transferee or obligee
[PROTECTS THE TRANSACTION].

2 Same facts as 1. except Debtor sold the necklace to Jim for $30,000.
o PLUS now have the sale of the Debtors one nonexempt asset for less than reasonably equivalent value
o Purchase for 20k discount raises doubts
o If not in good faith, no protection at all
o Liable under 550(a)(1) as initial transferee to return necklace or its value
o If Jim was in good faith:
o In bankruptcy under 548(c) he gets a lien to the extent he gave value: here, $30K
In this instance he would get a lien back on the necklace to secure what hed paid out

3 Same facts as 1. except Debtor sold the necklace to Jim for $20,000 and he then gave the necklace
to his mother, Mabel.
Purchase for 30k discount raises serious doubts
If not in good faith, no protection at all
Liable under 550(a)(1) as initial transferee
o Doesnt have the necklace, so trustee would get judgment for the value of the necklace, i.e., for the
full $50K
1) Mom has no defense under 548(c)
Only works for initial transferee
In any event she gave no value
2) Mom is liable under 550(a)(2) as a secondary transferee & must either give back the necklace or its
cash equivalent value
No defense under 550(b) b/c she did not give value and her title derives from Jim who is not protected

4 Same facts as 1. except Debtor sold the necklace to his sister, Sadie, for $48,000.
Fraud Badges:
All the same as before, PLUS a transfer to a family member historically one of the most significant
badges
In the law of some states, transfers to family members raise a presumption of fraud and shift the
burden onto transferee to defend the legitimacy of the transfer

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 While selling to a family member is badge of fraud, Sadie would be an initial transferee meaning she
would be strictly liable to return the property or value.
However if she was a good faith purchaser for value than she would have a defense and could keep
the necklace.

5 Same facts as 1. except Debtor gave the necklace to his sister, Sadie.
o Badges of Fraud: Gift, family member
o Sadie would be an initial transferee. And be strictly liable to return the property or its value. She will not
have any good faith purchaser defense because she did not purchase anything

6 Same facts as 1. except Debtor donated the necklace to a permanent Cartier exhibition at the local Art Museum,
which is a tax exempt nonprofit corporation.

Not under 548(c) b/c it gave no value

Not under the charitable contribution safe harbor of 548(a)(2) b/c that is limited to
Constructive fraud cases not actual fraud
And anyway charitable donations are only protected if made in cash or via other financial instrument:
548(d)(3)
Strictly liable as an initial transferee: 550(a)(1)

Constructive Fraudulent Transfer Problem

YOU ARE NO LONGER WORRIED ABOUT BADGES OF FRAUD!!

In the following scenarios could the bankruptcy trustee apply successfully set aside the transfer as
a constructively fraudulent transfer? If so, what could the trustee recover and from whom? Consider
any applicable defenses to avoidance and/or recovery.

1. Debtor owes 20 creditors a total of $100,000. Debtor is in default on 12 of the debts owed
to the 20 creditors. Eight of the creditors have commenced lawsuits to recover their debts. Debtor
has one valuable non-exempt asset a Cartier diamond necklace worth $50,000. Debtor sells the
diamond necklace to Jim Jeweler for $45,000. Debtor wire transfers the $45,000 from his Chicago
bank account to a bank account in Panama in the name of Debtors best friend, Brenda. Jim Jeweler
is unaware of Debtors financial situation. He just thinks that he made a good trade. Three months
after the sale of the necklace, an involuntary bankruptcy order is made against Debtor on the joint
petition of the 8 creditors who had previously commenced suit.

Not under 548(c) b/c it gave no value

Not under the charitable contribution safe harbor of 548(a)(2) b/c that is limited to
Constructive fraud cases not actual fraud
And anyway charitable donations are only protected if made in cash or via other financial instrument:
548(d)(3)
Strictly liable as an initial transferee: 550(a)(1)

2. Same facts as 1. except Debtor sold the necklace to Jim for $30,000.
o TR can show there was 1) a transfer of the Diamond, 2) for which the DR received less than reasonably
equivalent value 40% Discount!! and 3) at the time the DR was insolvent. Now this is constructive fraud.

o The only thing that would change hereis that Jim would probably only have a partial good faith defense. 548c
or UFTA 8d

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 o 30k discount might raise a red flag to good faith. If not in gf, you get no protection at all. TR can recover the
asset and you cannot protect any valueyour left with just a claim in BK under 550h for the $30k you paid.
This is quite bad news.
o BUT IF SOME HOW Jim gave some but not reasonably equivalent value.so he would get to retain only an
interest in the property for the amount provided. GETS A LIEN TO THE EXTENT HE GAVE VALUE.

3. Same facts as 1. except Debtor sold the necklace to Jim for $20,000 and he then gave the
necklace to his mother, Mabel.
o TR cann show there was 1) a transfer of the Diamond, 2) for which the DR received less than reasonably
equivalent value 50% Discount!! and 3) at the time the DR was insolvent.
o Jim would probably only have a partial good faith defense.
o Jim gave some but not reasonably equivalent value.so he would get to retain only an interest in the
property for the amount provided.
o Jim's mother would have to return the necklaceshe would be subsequent transferee and does not have a
bona fide purchaser defense. NO defense under 548c
o Also a gift to a family member when insolvent is a fraud indicator.
o She must give back the necklace or the cash equivalent.

4. Same facts as 1. except Debtor sold the necklace to his sister, Sadie, for $48,000.
o CF YOU NO LONGER WORRIED ABOUT BADGES OF FRAUD>>>>
o TR cannot show there was 1) a transfer of the Diamond, 2) for which the DR received less than
reasonably equivalent value (YOU GOT AROUND THE REASONABLE VALUE) and 3) at the time the DR
was insolvent.
o CANT RECOVER NECKLACE You cant make an actual or fraudulent claimyour left tracing the $48k in
Panama.

5. Same facts as 1. except Debtor gave the necklace to his sister, Sadie.
TR can show there was 1) a transfer of the Diamond, 2) for which the DR received less than reasonably
equivalent value The debtor receives 0! and 3) at the time the DR was insolvent.
Sadie would be an initial transferee. And be strictly liable to return the property or its value. NO VALUE..HARD
TO MAKE OUT ANY DEFENSE. She will not have any good faith purchaser defense because she did not
purchase anything.

6.Same facts as 1. except Debtor donated the necklace to a permanent Cartier exhibition at the local Art
Museum, which is a tax exempt nonprofit corporation.

Not under 548(c) b/c it gave no value

o It would not fall under the charitable contribution safe harbor of 548(a)(2)
o Even though this is a Constructive fraud case charitable donations are only protected if made in cash
or via other financial instrument: 548(d)(3)

o Strictly liable as an initial transferee: 550(a)(1)

4) Preferences
1. Introduction
i. Preference = a transfer that favors one creditor over another
ii. 547 empowers trustee to set aside preferential transfers
iii. Permits trustee to unwind many settled prebankruptcy transfers that were legal when made
iv. Problem: making the transition from state collection law, where the priority rule is race, to bankruptcy,
where the priority rule is equality

2. Rationale

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 i. Equality of distribution
1. If debtor is insolvent, state law regime fails to achieve distributive justice because paying one
creditor in full directly harms other creditors
2. Preference law helps restore bankruptcy equality in such cases
3. Good preferences v. bad preferences
a. 547(c)(2) contains exception for transfers in the ordinary course of business
ii. Deterrence
1. Preference law helps to deter the race of diligence by telling creditors that they will be forced to
disgorge the spoils of victory in the race
2. However not much of a deterrent because the worst case is that they will have to give the money
back (no sanction)

3. Overview of 547
i. Structure
1. Elements of a preference 547(b)
a. Transfer of an interest of the debtor in property
b. To or for the benefit of a creditor
c. For or on account of an antecedent debt
d. Made while debtor was insolvent
e. Made during the preference period of 90 days before bankruptcy (or 1 year for insiders)
f. That enables creditor to receive more than it would have in a hypothetical chapter 7
liquidation
2. Exceptions (safe harbors) 547(c)
a. Creditor has burden of proof

ii. Trustee must carry burden of proving the existence of all the elements of a voidable
preference
1. Transfer of property
a. Dominion/control test transfer of property will be a transfer of an interest of the debtor in
property if debtor exercised dominion or control over the transferred property
b. Diminution of the estate test debtors transfer of property constitutes transfer of an
interest in property if it deprives the bankruptcy estate of resources which would otherwise
have been used to satisfy the claims of creditors
c. Includes:
i. Payments
ii. Outright transfers of property in satisfaction of pre-existing debts
iii. Grants of liens or other forms of SI to secure repayment of pre existing debts.

2. Of property of debtor
a. Earmarking doctrine
i. Court may find transaction is simply a substitution of creditors (and not property of
D)
ii. Question: did D have control and power to use funds for other purposes?
b. Trust claimants
i. Department store with eyeglass section contracted out to independent company.
Money paid to store is remitted to company.
ii. Whether or not funds paid to the company constitute preference depends on the
relationship between the store & company
1. Trust agreement money is the property of company, no preference
2. Debtor-creditor relationship preference
iii. Money must be traceable to claimant

c. Property: 101 (54)

i. The creation of a lien
ii. The retention of title as a SI
iii. The foreclosure of DR equity or redemption or
iv. Each mode, direct or indirect, absolute or conditional, voluntary or involuntary of
disposing or parting with property or any interest in property.

3. To or for the benefit of a creditor

a. Creditor: an entity that has a claim against the debtor that arose at the time of or before
the order for relief concerning the debtor: 101(10)(A).
b. Example: payment of a principal debt that benefits a party who guarantees the debt by
reducing or eliminating the guarantors exposure.

4. For or on account of an antecedent debt

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 a. To be avoidable= a transfer has to be in satisfaction of an already existing debt.
b. Preexisting obligation
c. Prepayments not preferential will receive benefit later
d. Excludes gifts no antecedent debt

5. Made while debtor was insolvent

a. 547(f) Presumption that debtor was insolvent or 90 days prior to bankruptcy
b. Creditor must rebut to prove debtor was solvent

6. Made during the preference period of 90 days before bankruptcy (1 year for insiders)
(made within the applicable claw back period)

7. That is Preferential in effect: i.e. That enables the creditor to receive more than it
would have in a hypothetical chapter 7 liquidation
a. Determined by the actual effect of the payment when bankruptcy results
b. Transfers to fully secured creditors cannot be avoided
c. Any payment on an unsecured debt, even partial, will satisfy improvement-in-position test
because they will receive more than other unsecured creditors
d. Prepetition payment to undersecured creditor prefers the creditor because the transfer is
seen as paying off the unsecured debt first
i. Exception: when undersecured creditor is paid from creditors own collateral

iii. If trustee establishes a prima facie case for avoidance, burden shifts to creditor to establish
any of the exceptions (safe harbors) to preference liability under (c)
1. Contemporaneous exchange of new value
2. Ordinary course transfers
3. Enabling loans
4. Subsequent advances of new value
5. Floating liens
6. Statutory liens
7. Domestic relations debts
8. Transfers of less than $600 by an individual debtor whose debts are primarily consumer debts
9. Transfers of les than $5475 by a non-consumer debtor
10. Transfers made as part of an alternative repayment schedule created by an approved nonprofit
budgeting and credit counseling agency

iv. Recovery - 550

1. If the transfer can be avoided, trustee must attempt to recover under 550
a. 550(c) trustee may not recover from a noninsider based upon a transfer made more than
90 days before bankruptcy that is avoided only as against the insider
b. 547(i) if trustee avoids the transfer to a non-insider for the benefit of an insider that was
made between 90 days and 1 year before the petition, the transfer is only considered to be
avoided with respect to the insider creditor
2. 551 transfer is preserved for the benefit of the estate

4. Timing issues
i. Critical to know when a transfer is deemed made for preference purposes
1. Was transfer made within the preference period?
2. Was transfer made on an antecedent debt?
ii. Timing of a lien transfer for preference purposes is when the transfer is recorded 547(e)(1)
1. I.e., when effective v. third parties
a. Realty beat BFP
b. Personalty beat lien creditor
2. Subject to 30 day grace period, after transfer is effective as between D & SP 547(e)(2)
a. If SP records within 30 days, deem transfer to have occurred back when it was effective
between D & SP
b. Does not have to be an enabling loan for provision to apply
3. Timing example:
a. 4/1 D buys car & gives C PMSI in car, D takes possession
b. 4/25 C perfects
c. 6/1 D files bankruptcy
d. SI effective between D & C on 4/1
e. SI perfected on 4/25 which is within 30 days of effective date between D & SP
f. Thus, deem transfer of SI as date effective b/w D & SP (4/1)
g. So, date of debt (4/1) is not antecedent to date of SI transfer, and thus NO PREFERENCE
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 iii. Check transferred when it is honored by the bank
iv. Garnishment/attachment no transfer until final order of garnishment/attachment issued

5. Defenses to preference liability

i. Role of defenses
1. Trustee must first prove a prima facie case for avoidance under 547(b)
2. Burden then shifts to the creditor-defendant to prove any of the defenses to preference liability
under 547(c)
a. See 547(g) for burdens of proof
ii. List of defenses:
1. Contemporaneous exchanges of new value, (c)(1)
2. Ordinary course transfers, (c)(2)
3. Enabling loans, (c)(3)
4. Subsequent advances of new value, (c)(4)
5. Floating liens, (c)(5)
6. Statutory liens, (c)(6)
7. Domestic relations debt, (c)(7)
8. Transfers of less than $600 by an individual debtor whose debts are primarily consumer debts, (c)
(8)
9. Transfers of less than $5474 by non-consumer debtors, (c)(9)
10. Transfers made as part of an alternate repayment schedule created by an approved nonprofit
budgeting and credit counseling agency, 547(h)

iii. Most important defenses

1. No preference liability for business debtor if transfer is less than $6,425 (c)(9)
a. Floor = 6,425 for consumer debtor (C8)
2. For unsecured creditors:
a. $5475 immunity
b. Ordinary course (c)(2)
c. New value (c)(4)
d. Contemporaneous exchange (c)(1)
3. For secured creditors:
a. Enabling loans (c)(3)
b. Floating liens (c)(5)

iv. Ordinary course of business safe harbor 547(c)(2)

1. Where debt is incurred in the ordinary course of business, creditor can prevail by proving either:
a. Transfer was subjectively ordinary (between debtor & transferee), OR
b. Transfer was objectively ordinary (measured against industry)
i. Payment made according to ordinary business terms in industry
ii. Range of terms that encompasses the practice in which firms similar in some
general way to the creditor engage
iii. Only dealings so idiosyncratic as to fall outside the broad range should be deemed
extraordinary (Tolono Pizza)
2. Pre-2005, creditor had to prove both

v. New value defense 547(c)(4)

1. Subsequent advances of new value from creditor to debtor are credited against prior preferential
transfers
2. ONLY applies if new value is given AFTER Ds preferential transfer (no incentive rationale)
3. Creditors preference liability is reduced to the extent that creditor returns value to debtor after
receiving a preference
4. Justification:
a. Estate has been replenished to the extent of the new value, and thus other creditors have
not been harmed
b. Encourages creditors to continue doing business with a financially troubled debtor
5. Requirements
a. After a preferential transfer, creditor gives new value to or for the benefit of debtor,
b. New value is not secured new value,
c. Debtor does not make an otherwise unavoidable transfer to or for the benefit of creditor on
account of that new value
6. In practice, applied most often in a trade credit situation, involving ongoing extensions of credit on
open account
a. Add amount of preference to outstanding balance to get amount of claim
7. Ex)
a. 4/1 D pays $8500; Preference = $8500
b. 4/15 C ships $4000 goods; Preference = $4500
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 c. 4/20 D pays $3000; Preference = $7500
d. C only gets credit for $1,000 in new value, because D made an otherwise unavoidable
transfer to C ($3000 is protected under (c)(9)s $5475 safe harbor)

vi. Enabling loan 547(c)(3)

1. Safe harbor for enabling loan
a. Ex) On 5/1, lender loans D money to enable D to purchase equipment. D grants lender a SI
in equipment and lender immediately perfects. On 6/1, D purchases the equipment.
i. Technically, the SI in the equipment does not attach until D acquires rights in the
collateral. So, transfer is deemed to occur when the equipment was purchased
(6/1) although the debt arose when the loan was made on 5/1.
ii. So because of artificial construction that transfer occurred after debt arose,
technically a preference without safe harbor
2. Secured party has statutory 30-day grace period to perfect after debtor receives possession
3. Even though there is technically an antecedent debt
4. Delayed perfection
a. Nonbankruptcy law might give secured party a grace period as well
b. Ex) UCC 9-317(e) PMSI valid against intervening creditors if secured party perfects within
20 days after debtor receives possession of collateral
c. Note: where SP does not perfect within 30 days, transfer dates from date of perfection.
Thus the debt will be antecedent to the transfer date. This could push the transfer into the
90-day period, making it voidable.

vii. Floating liens 547(c)(5)

1. Protects secured creditors with floating liens in inventory and receivables
2. Lien is said to float when it attaches to collateral that debtor acquires after the initial security
transfer
a. Note that creditors security interest cannot attach to collateral until D has rights in the
collateral
b. So absent a saving rule, the new collateral would be deemed transferred to SP for the
antecedent debt and thus constitute a preference
3. (c)(5) exempts floating lien that attaches to inventory or receivables during the preference period,
except to the extent that creditor has improved its position during the 90-day preference period
4. Requires a comparison of the creditors security position at the beginning of the preference period
with its position at the time of bankruptcy
a. Safe harbor defense = 547(c)(5) the 2-point improvement in position test
i. Compare secured partys position 90 days before bankruptcy, and see if
improved by the time of bankruptcy
1. Point 1 = beginning of preference period
a. Unless creditor does not make a loan until a later date, in which
event the date new value is first extended will be point 1
2. Point 2 = date of bankruptcy
3. Comparison between the points: extent creditor is undersecured (i.e. the
amount the debt exceeds the value of the collateral)
4. Preference is only found to the extent creditors unsecured claim gets
smaller
ii. Formula
1. Point 1 deficiency (debt collateral value)
2. Point 2 deficiency (debt collateral value)
3. = Amount avoided

Preference 547 (b) Problems

The federal avoiding power

Section 547(b) enables a bankruptcy trustee and chapter 11 debtor-in-possession to avoid transfers by an
insolvent debtor made on or within 90 days of the filing of a bankruptcy petition (or up to one year before the filing
where the transferee was an insider) that have preferential effect.

Elements: In order to avoid a transfer as a preference under 547b the trustee has the burden of proof and must
establish all of the following elements:

1 A transfer;
2 Of property of the debtor;
3 To or for the benefit of a creditor;

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 4 For or on account of an antecedent debt;
5 Made while the debtor was insolvent;
6 Made on or within 90 days before the date of the filing of the bankruptcy petition or between 90 days and
one year before the date of the filing of the bankruptcy petition if the creditor was an insider at the time of
the transfer;
7 That enables the creditor to receive more than the creditor would receive if the case were a case under
chapter 7 and the transfer had not been made.

Apply the elements of section 547(b) to determine whether the transfer or transfers in each of these
hypos is avoidable as a preference and, if so, as against whom:

1. Debtor has 3 creditors A, B, and C. He owes A, B, and C $6,000 each ($18,000 total) but
he only has $6,000 in available non-exempt assets. A week before filing for bankruptcy, Debtor paid
A in full leaving no other assets.
*** YES, the transfer of cash is avoidable as a preference against A.
Transfer: payment of $6k
Of property of the Debtor: Cash
For or on account of Antecedent debt: Says paid in full--so I am assuming what he was owed.
Made while Debtor was insolvent: Yes, occurred a week before filed.
Made On or within 90 days before the date of the filing: Made within a week.
That enable creditor to receive more than would have received: Yes got $6k would have
only been able to $2,000 through BKY.

2. Creditor loaned Debtor, Inc. $20,000 on May 1. The loan is guaranteed by Gloria, the
managing director of Debtor, Inc. On July 1, Debtor, Inc. pays Creditor $20,000. On August 1, Debtor,
Inc. files chapter 11.

Sue Debtor Inc or also Sue Gloria because she is the guarantee of that debt.
***IT DEPENDS!
Transfer: Payment of $20,000
Of property of the Debtor: Yes money was of DR
To the benefit of the Creditor: Yes
For or on account of Antecedent debt: Yes, was a loan
Made while Debtor was insolvent: Yes, presumed within 90 days before.
Made On or within 90 days before the date of the filing: Yes, about 30 days after filing.

That enable creditor to receive more than would have received: Your getting 100%, but there is
not a great chance that not all unsecured creditors are getting 100 cents on the dollar.
Gloria:
Transfer: Payment of $20,000
Of property of the Debtor: Yes money was of DR
To the benefit of the Creditor: (GLORIA)--her exposure gets eliminatedno longer has this exposure
to pay.
For or on account of Antecedent debt: Yes, was a loan
Made while Debtor was insolvent: Yes, presumed within 90 days before.

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 Made On or within 90 days before the date of the filing: Yes, about 30 days after filing.

That enable creditor to receive more than would have received: Your getting 100%, but there is
not a great chance that not all unsecured creditors are getting 100 cents on the dollar.

3. Same facts as 2. except Debtor, Inc. files chapter 11 on November 1.

**NO PREFERNCE THAT CAN BE AVOIDED
Transfer: Payment of $20,000
Of property of the Debtor: Yes money was of DR
To the benefit of the Creditor: Yes
For or on account of Antecedent debt: Yes, was a loan
Made while Debtor was insolvent: NO Made On or within 90 days before the date of the
filing: ***NO was not within 90 days before filing.
That enable creditor to receive more than would have received: Not sure herewe dont
know how many other creditors here.
o Might have received the same amount in BK as outside of BK

Gloria: INSIDER 1 YEAR not 90 days

Transfer: Payment of $20,000
Of property of the Debtor: Yes money was of DR
To the benefit of the Creditor: (GLORIA)--her exposure gets eliminatedno longer has this
exposure to pay.
For or on account of Antecedent debt: Yes, was a loan
Made while Debtor was insolvent: *** more than 90 daysso you have to prove this!!
Made On or within 90 days before the date of the filing: Yes, YOU HAVE 1 year.
That enable creditor to receive more than would have received: Your getting 100%, but there
is not a great chance that not all unsecured creditors are getting 100 cents on the dollar.

4. On February 1, Debtor borrows $50,000 from Creditor and grants Creditor an Article 9
security interest over equipment owned by Debtor to secure repayment. On April 1, Creditor
perfects the Article 9 security interest. On June 1, Debtor files a bankruptcy case.
Could you use 544a to set aside lien: Noo. Trustee is LC June 1. they are subordinated to Art. 9 security
interest.
****YES PREFERENCE that can be Avoided.
Transfer: Creation of a SI (Lien)
Of property of the Debtor: Yes, in equipment of the DR
To the benefit of the Creditor: Yes
For or on account of Antecedent debt: Yes, on account of the $50,000 was borrowing.
Made while Debtor was insolvent: Yes, presumed insolvent on or within 90 days.
Made On or within 90 days before the date of the filing: Yes, would have been on Day 90.

That enable creditor to receive more than would have received: Wouldnt have received a SI in
BKYjust an unsecured claim for value.

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5. Same facts except Creditor perfected on February 15.
****NO Not a preference that can be Avoided.
Transfer: Creation of a SI (Lien)
Of property of the Debtor: Yes, in equipment of the DR
To the benefit of the Creditor: Yes
For or on account of Antecedent debt: Yes, on account of the $50,000 was borrowing.
Made while Debtor was insolvent: Was made over 90 days (105 days) not insolvent.
Made On or within 90 days before the date of the filing: No, not made within 90 days.
That enable creditor to receive more than would have received: Wouldnt have received a SI in
BKYjust an unsecured claim for value.

6. Debtor owes Creditor $50,000. The debt was incurred on March 1 and Debtor granted
Creditor a perfected security interest in collateral that is currently worth $60,000. On July 1, Debtor
repays $40,000 of the debt. On August 1, Debtor files a bankruptcy case.

SECURITY INTEREST --March 1 and files Aug 1--6 x30=180 days

*** NO THIS IS NOT A PREFERNCE THAT CAN BE AVOIDED

Transfer: Created a security interest (worth $60k)

Of property of the Debtor: Yes, was of property of the Dr.
To the benefit of the Creditor: Yes
For or on account of Antecedent debt: Yes, for the $50k debt owed.
Made while Debtor was insolvent: No, made more than 90 days from filing
Made On or within 90 days before the date of the filing: No.
That enable creditor to receive more than would have received: Yes, Wouldnt have been able
to receive SI just unsecured claim for $50k YOU ARE FULLY SECUREDYOU ARE NO BETTER OFF WOULD
GET PAID 100% IN BKY.

CASH---YES THIS IS A PREFERENCE THAT CAN BE AVOIDED

July 1 pays $40k and Aug 1 files BKY.
Transfer: Cash Payment
Of property of the Debtor: Yes, was of property of the Dr.
To the benefit of the Creditor: Yes
For or on account of Antecedent debt: Yes, for the $50k debt owed.
Made while Debtor was insolvent: Yes, made within 30 days--under the 90 day presumptive rule.
Made On or within 90 days before the date of the filing: Yes.
That enable creditor to receive more than would have received: **Depending on the amount of
creditors and assets.

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 7. Same facts except the collateral is currently worth only $30,000.

under secured to $20k.

1. Transfer:
2. Of property of the Debtor:
3. To the benefit of the Creditor: Yes
4. For or on account of Antecedent debt:
5. Made while Debtor was insolvent:
6. Made On or within 90 days before the date of the
filing:
7. That enable creditor to receive more than would
have received:

Preference 547 (C) ProblemsPreference Defenses

Section 547(c) lays out nine statutory defenses to preference avoidance. Most important three:

1) De minimis transfers: 547(c)(8), (9).

2) New value transfers: 547(c)(1), (4).
3) Transfers in the ordinary course of business: 547(c)(2).

De minimis transfers: The trustee may not avoid a transfer if:|

in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property
that constitutes or is affected by such transfer is less than $6,425: 547(c)(9);

in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all
property that constitutes or is affected by such transfer is less than $600: 547(c)(8).

One issue under these provisions is what happens if the debtor makes a series of transfers in the 90 days before filing
bankruptcy and each transfer is below the statutory threshold. (Aggregate value?)

New value transfers: There are two new value defenses in 547(c).

The first new value defense is in 547(c)(1) which provides that the trustee may not avoid a transfer to the
extent that such transfer was:
intended by the debtor and the creditor to or for whose benefit such transfer was made to be a
contemporaneous exchange for new value given to the debtor; and
in fact a substantially contemporaneous exchange.

The second new value defense is in 547(c)(4). This defense protects subsequent advances of new value
from creditor to debtor and credits them against earlier preferential transfers. The statute provides that the
trustee may not avoid a transfer:

to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to
or for the benefit of the debtor;

not secured by an otherwise unavoidable security interest; and

on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the
benefit of such creditor.

Transfers in the ordinary course of business: This defense trades off bankruptcy policy against finality of
transaction by exempting regular (ordinary as distinct from extraordinary) payments to creditors.

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The ordinary course defense involves a fact-intensive inquiry focusing on payment history and the extent to which
the payment the trustee seeks to avoid accords with previous payment history and/or industry standards.

deterring unusual payments made by desperate debtors to specially favored creditors.

Analyze whether the transferees in the following scenarios can raise a successful defense to preference
avoidance:

1 Debtor has 3 creditors A, B, and C. He owes A, B, and C $6,000 each ($18,000 total) but he only
has $6,000 in available non-exempt assets. A week before filing for bankruptcy, Debtor paid A in full
leaving no other assets. Assume that the 3 creditors are regular business creditors, the debts arose
from normal business operations, the debts all came due in accordance with Debtors standard
payment terms, and that As debt just happened to come due first.

Total Cash: $6k; Outstanding Debt: $18k

Week Before filing BKY: DR pays A in full ($6k)

Debts arose from normal business operations in accordance with DR standard payment terms.A debt = come
due first

Business Debt= Non consumer Debt

Consumer Debt= individual for primarily personal, family, or household purposes.

o Can make out either limb of the test:

o Debt= ordinary business debt & transfer was made because debt fell due on ordinary trading term
o Difficult to see how a payment made when falling due on parties terms would not be made on
ordinary business terms from an industry standard perspective

2 Creditor and Debtor have a long trading relationship. Under Creditors standard terms, invoices
must be paid within 30 days of the date of the invoice. A study of both parties books and records
reveals that Debtor has consistently paid Creditors invoices between 50 and 60 days after the date
of the invoice for the last five years. The standard in the industry (established by reference to
payment norms laid down and publicised by a trade association of which Creditor and Debtor are
members) requires payment within 30-days. In the 90 days before Debtor filed for bankruptcy,
Creditor received separate payments on five invoices after (respectively) 52, 55, 58, 56, and 51
days.

o CR wins: payments all fall squarely within the 50-60 day payment range in accordance with the parties
subjective practice (limb 1)
o Now totally irrelevant that the industry norm was 30 days (limb 2)

3 Would your answer to 2. differ if the five payments had been received after (respectively) 52, 50,
40, 30, and 25 days?

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4 Creditor sells goods on a running account. On September 1, Creditor is owed $20,000. On
September 2, Debtor pays Creditor $10,000. On September 15, Creditor makes a shipment of $5,000
worth of goods on credit. On October 1, Debtor files bankruptcy.
52 days: Yes, Ordinary course of the financial affairs btwen DR and transferee (50-60)
50 days: Yes, Ordinary course of the financial affairs btwen DR and transferee (50-60)
40 days: Previous answer would remain the same.
30 days: Yes, within 30 days is the industry standard.
25 days: Yes, within 30 days is the industry standard.

5 Creditor sells goods on a running account. On September 1, Creditor is owed $20,000. On

September 2, Creditor makes a shipment of $5,000 worth of goods on credit. On September 15,
Debtor pays Creditor $10,000. On October 1, Debtor files bankruptcy.
o No new value defense
o Only applies if CR provides new value AFTER the DRs preferential transfer
o Makes senseneither the replenishment nor the incentive rationale applies where CR ships 1 st

6 Creditor sells goods on a running account. On September 1, Creditor is owed $15,000. On

September 2, Debtor pays Creditor $10,000. On September 15, Creditor makes a shipment of $5,000
worth of goods on credit. On September 20, Debtor pays Creditor $3,000. On October 1, Debtor files
bankruptcy.

7 Creditor sells goods on a running account. On September 1, Creditor is owed $15,000. On

September 2, Debtor pays Creditor $10,000. On September 15, Creditor makes a shipment of $5,000
worth of goods on credit. On September 20, Debtor pays Creditor $3,000. On September 25,
Creditor makes a shipment of $8,000 goods on credit. On October 1, Debtor files bankruptcy.
o 0 preference
o Final Credit shipment of new value on Sept 25 canceled out the remaining $8k in the existing preference
liability
o Shows you can apply new value to all prior transfers by DR
8 Creditor sells goods on a running account. On September 1, Creditor is owed $8,000. On September
2, Debtor pays Creditor $5,000. On September 15, Debtor pays Creditor $3,000. On October 1,
Debtor files bankruptcy.
o This turns on the question of whether or not we can aggregate all the transfers by DR to CR during the
preference period
o If so, no (c)(9) defense, b/c total = $8K which is greater than $6,425
o If not, there is a (c)(9) defense as each transfer in isolation is less than $6,425

o Natonal approach is to aggregate.avoid both transfers $8k ( no new value which could be used under
C4)
o Note CR WORSE off when got 2nd transfer was fully protected as to 1st $5k transfer but
after 2nd transfer kicks up aggregate total to $8K, no defense at all!
o * (c)(9) is NOT a credit against liability like the new value defense its an either-or
defense

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VII. Exiting Bankruptcy
1) Discharge
Introduction
Discharge frees debtor from the legal obligation to pay discharged debts, and allows debtor to enjoy her future
(postbankruptcy) earnings free from the claims of her discharged creditors
Creditors are barred by statutory injunction from making any attempt to collect discharged debts as a personal
liability of the debtor 524(a)(2)
Any new property acquired by an individual debtor after the commencement of a bankruptcy case is not subject
to any lien resulting from any security agreement entered into by debtor before the commencement of the case
552(a)

Reason for discharge = gives honest but unfortunate debtor a new opportunity in life, clear field for future
effort, unhampered by pressure and discouragement of preexisting debt
o Matter of public interest want people to utilize human capital
o Little incentive to work if all future earnings go to creditors

Scope

Limitations on discharge
1. Only debts are discharged
i. Debt = liability on a claim 101(12)
ii. Claim = right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured
101(5)
1. Not every legal obligation falls within this definition
2. Ex) cease-and-desist order or equivalent injunctive order might not give rise to a right to payment,
and thus would not be subject to discharge

2. Timing concerns
i. Chapter 7: only debts that arose before the date of the order for relief are discharged 727(b)
1. Voluntary case
a. Order for relief entered when petition filed
b. Only prebankruptcy debts are discharged
2. Involuntary case
a. Order for relief not entered at the time petition is filed entered later, after court
determines bankruptcy relief is appropriate
3. Debts that arise after the order for relief are not discharged
a. Difficulty = where conduct that gives rise to claim occurs prior to bankruptcy, but
creditors injury or right to payment is not fully manifested and fixed until after bankruptcy
i. Ex) tort claims, product liability claims, environmental claims
ii. Some courts find a claim if debtors conduct occurred prior to bankruptcy
iii. Other courts find claim only if creditor and debtor had a prebankruptcy
relationship
ii. Reorganization cases
1. Chapter 11: all debts that arose prior to confirmation of plan are discharged 1141(d)
2. Chapter 13: only debts provided for by chapter 13 plans are discharged

3. Not all debtors receive a discharge

i. 727(a) 12 grounds for denying or delaying debtors discharge
1. Usually involve debtor misbehavior in connection with the bankruptcy

4. Not all debts are discharged

i. Debts identified by 523(a)
ii. Secured debts
1. Liens are not discharged
2. Discharge only serves to extinguish the debtors personal liability for the debt 524(a)
3. Creditors in rem claims against property, such as a right to payment out of collateral, is not
affected by the discharge
4. But, secured creditors recourse is limited to the collateral itself, or its value and deficiency claims
against debtor are fully subject to the discharge

iii. Debt that debtor reaffirms 524(c)

1. By reaffirming debt, debtor effectively waives the discharge with regard to that debt

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 2. Usually done to retain collateral
3. Alternatives to reaffirmation
a. Redemption 722
i. Pay creditor for value of the collateral, rather than entire outstanding debt
ii. Requires D to pay full redemption amount in single lump sum

b. Reorganization instead of liquidation

i. D may keep collateral by paying C only the value of the collateral, rather than the
full debt
ii. Allows D to pay in installments

iv. If debt discharged, debtor permitted to pay voluntarily 524(f)

1. Creditor may not seek payment because of the discharge injunction
2. But, if debtor makes a voluntary repayment, creditor can keep the payment, and debtor does not
have a right to restitution

v. Discharge does not affect liability of any entity other than debtor for discharged debt 524(e)
1. Ex) if there is joint liability on the debt, other party is not discharged

2) Enforcement
1. Automatic & self-executing
i. Statutory injunction against discharged creditors trying to collect debts as a personal liability of debtor
524(a)
ii. Creditor is in contempt if tries to collect a discharged debt

2. Anti-discrimination provision 525

i. Prohibits various forms of discrimination against a debtor solely because she filed bankruptcy
ii. Governmental unit may not discriminate 525(a)
1. With respect to grant of a license, permit, charter, franchise or the like, or
2. In employment, solely because of debtors bankruptcy
iii. Private employers 525(b)
1. May not fire an employee or discriminate in employment solely because of a debtors
bankruptcy
2. However, no prohibition against discriminating in hiring
iv. Debtor may not be denied a student loan because of debtors bankruptcy
v. Congress invited courts to continue development of anti-discrimination doctrine, but largely they have
not

3. Denial of discharge
i. Grounds for denial of chapter 7 discharge 727(a)
1. Only individual debtors 727(a)(1)
a. No corporations nor partnership debtors may receive chapter 7 discharge
b. But they are discharged by confirmation of a plan in chapter 11

2. Actual fraudulent transfer 727(a)(2)

a. Transfer or conceal property within 1 year of filing of the petition, or estate property
after the filing
i. Note that it does not go back 2 years, as does the avoiding power of the
trustee in 548(a)
ii. No constructive fraud

3. Unjustified failure to keep proper books and records 727(a)(3)

a. Exception: even if debtor did not maintain adequate records, she still may be
discharged if failure was justified
i. Ex) relying on a spouse absent indications that he was not properly managing
the couples business dealings
b. Prima facie case under 727(a)(3) P must establish:
i. Debtor failed to maintain and preserve adequate records
ii. Such failure makes it impossible to ascertain debtors financial condition and
material business transactions
iii. Once established, burden of proof shifts to debtor to justify the inadequacy or
nonexistence of records

4. Commission of a bankruptcy crime 727(a)(4)

a. Ex) knowingly and fraudulently filing false schedules

5. Failure to explain satisfactorily any loss of assets 727(a)(5)

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 6. Refusal to obey a lawful court order or to testify 727(a)(6)
a. Except because of the 5A privilege against self-incrimination

7. Commission of a prohibited act in the prior year in the bankruptcy of an insider

727(a)(7)

8. Waiver 727(a)(1)
a. If debtor waives discharge in writing after the filing of the case
b. Debtor may not waive discharge in advance of bankruptcy (meaning creditors cant
obtain boilerplate language from debtor ex ante)

9. Failure to complete debtor education 727(a)(11); 1328(g)

a. Debtor must complete an instructional course concerning personal financial
management after filing the petition
i. This is in addition to debtor eligibility rule of 109(h), which requires debtor to
receive credit counseling in the 180 days prior to filing
b. Applicable in chapters 7 and 13
c. Limited exceptions
i. Debtors described in 109(h)(4)
ii. If trustee determines that adequate approved instructional courses are not
available

10. Homestead exemption limitation proceeding 522(q)

a. Enron rule delay discharge
b. Applies a cap to homestead exemption in limited circumstances relating to securities
law violations
c. Court is to delay entry of discharge if it fids reasonable cause to believe that a
proceeding under 522(q)(1) is pending
d. Does not effect permanent denial of discharge

ii. Time period discharges

1. Chapter 7 discharge only once every 8 years 727(a)(8)
a. Computed from petition filing to petition filing (not from when discharge entered)
b. For chapter 7 followed by chapter 7

2. Conditional 6-year ban on chapter 7 cases where debtors first case was a chapter 12 or 13
727(a)(9)
a. Condition: debtor may receive discharge in the chapter 7 case only if:
i. Payout on unsecured claims in the original chapter 12 or 13 was 100%, or
ii. Payout was at least 70%, the plan was proposed in good faith, and was the
debtors best effort

3. BAPCPA time bar where 2nd case in chapter 13 1328(f)

a. If second case is chapter 13, discharge is denied (even if debtor made all payments), if
debtor got discharge:
i. Chapters 7, 11, or 12 filed within 4 years before
ii. Chapter 13 filed within 2 years before

3) Discharge exceptions
523(a) contains exclusive list of types of debts that are excluded from discharge
1. Creditor that is owed the excluded debt is entitled to pursue collection of the debt after bankruptcy
2. Apply to individual debtors who otherwise receive a discharge in chapter 7 (or individuals in
chapter 11)

ii. Procedure
1. When litigated
a. Creditor may only challenge dischargeability in an adversary proceeding in the bankruptcy
court during the bankruptcy case 523(c)(1)
i. Fraud
ii. Larceny, embezzlement, fiduciary defalcation
iii. Willful & malicious injury
iv. Timing must be filed within 60 days after first date set for creditors meeting
b. Everything else can bring action to collect in state court
2. Proof
a. Creditor has burden of proof in discharge exception action (and in discharge denial)
b. Standard of proof = preponderance of the evidence
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 3. Res judicata not applied to bar a creditor from raising a discharge exception claim for the first time
in bankruptcy

iii. Taxes
1. Many tax debts are excluded from discharge 523(a)(1)
2. Nondischargeable tax debts are even enforceable against debtors exempt property 522(c)(1)
3. Many tax debts entitled to priority 507(a)(8)
4. Several common law activities a taxing authority would take in establishing a tax lien are excepted
from automatic stay 362(b)(9), (18)
5. Recent income taxes
a. Priority & excepted from discharge
b. Income taxes for which a return was last due within 3 years after filing of petition

iv. Fraud most litigated

1. Discharge exception for debts incurred by fraud 523(a)(2)
a. All fraud-based debts other than those obtained by the use of a false financial statement
i. Rebuttable presumption of fraud is triggered if debtor incurred a consumer debt of
$550 or more for luxury goods or services within 90 days of bankruptcy, or
obtained cash advances aggregating more than $825 in the 70 days prior to
bankruptcy 523(a)(2)(C)
ii. Common law fraud:
1. D made false representation of fact
2. D knew the representation was false when made
3. D made the representation with the intention of deceiving C
4. C justifiably relied on the representation
5. Cs loss proximately resulted from the false representation
b. Fraud debts that do arise from the use of a false financial statement
2. Actual fraud required to prevail under (a)(2) constructive not enough
3. Credit card debt incurred in months immediately preceding financing
a. Prevailing view = permits creditor to try to prove debtors subjective fraudulent intent
through the use of circumstantial evidence
i. Totality of the circumstances test
ii. It is fraud if the debtor incurred debt, never intending to pay it
b. Creditor must prove:
i. Debtor made a false representation of fact
1. Most courts hold use of a credit card = representation
2. Implied representation of intent to pay (not ability to pay, as C argues)
ii. Debtor knew the representation to be false at the time debtor made it
iii. Debtor made the representation with the intent and purpose of deceiving the
creditor
iv. Creditor justifiably relied on the debtors representations
1. Many courts infer reliance unless creditor has reason to know otherwise
2. Entitled to carry forward initial promise made and apply to each
transaction
v. Creditor sustained the alleged injury as the proximate result of the making of the
representation

v. Willful & malicious injury 523(a)(6)

1. Bars discharge of a debt for willful and malicious injury by debtor to another entity or to the
property of another entity
a. Prevents discharge of debts based on intentional torts
b. Procedure creditor must file in bankruptcy court within 60 days

2. Debate: whether requires proof of:

a. Special malice i.e. debtor intended to injure creditor, or
b. Implied malice i.e. debtor intentionally committed an act knowing that the act was
wrongful and likely to harm creditor, without harm or excuse
c. History
i. Tinker v. Colwell implied malice
ii. Davis v. Aetna not every intentional tort falls within exception
1. Ex) where consumer-D purchases refrigerator from Sears on credit, sells
and pockets money, then defaults
a. Conversion yes
b. Willful and malicious no (D not sophisticated, thought it was his
refrigerator)
d. Geiger required special malice intentional injury, and not merely an intentional act that
leads to injury
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 e. Lower courts:
i. Geiger left out alternative meaning of intent or that he believes the
consequences are substantially certain to result
ii. Show intent through alternative formulation
1. C can prevail by showing:
a. D willed or desired harm, or
b. D believed injury substantially certain to result
vi. Student loans 523(a)(8)
1. Debtor may still discharge if she can prove that not discharging the student loan debt would
constitute an undue hardship
2. Undue hardship showing:
a. Debtor cannot maintain, based on current income and expenses, a minimal standard of
living for herself and her dependents if forced to repay the loans
b. Additional circumstances exist indicating that this state of affairs is likely to persist for a
significant portion of the repayment period of the student loans
c. Debtor has made good faith efforts to repay the loans
vii. No discharge for injury inflicted while driving a vehicle while intoxicated 523(a)(9)

4) Exemptions
Introduction
Background Info
o INDIVIDUAL DRS ONLY!
o WHY? Survival, dignity, cultural & religious identity, earn a living, protect family, subsistence.
Work together with discharge to comprise fresh start protection
o Source of Exemptions: State DR-CR law serves as limits on judicial collection
Current Propertyuse exemptions to keep

Exemption laws permit a debtor to retain certain property for herself and her family even if her creditors are not
paid
Creditors are only permitted to collect out of debtors nonexempt property
Debtor is (almost) always entitled to use the exemption laws of her state of residence 522(b)(3)(A)
Exemptions are not always enforceable:
o Liens, tax claims, alimony and child support

a. Federal exemptions
i. Bankruptcy debtor might be able to select the exemptions provided in the code instead
ii. Unless their state opts out of federal bankruptcy exemptions and limit their residents to state
exemptions (as of states have)

b. Interstate flight where debtor moves to a state with more favorable exemption laws and then files bankruptcy
i. 730 day residency requirement for state exemption
1. Look back 2 years can only use new state if debtor was living there at 2-year mark
2. If not, look to where debtor was living in the 6 months prior (i.e. the 2 year mark) for the
majority of time
3. No intent aspect to the rule holds whether debtors move was an exemption-planning move or
not
ii. Test determines which state (old or new) laws will control both:
1. State exemption laws available under 522(b)(3)(A) and
2. The opt out as regards to 522(d) federal exemptions, under 522(b)(1) and (2)

iii. Notes:
1. Where debtor must use the old states law, if opt out prohibition is limited to residents of the
state debtor would not be precluded from electing federal exemptions under 522(d) (because no
longer a resident of old state)
2. 522(d) savings clause debtor may use federal exemption (despite opt out) if old state limits
exemption to either residents or to property located within the state
c. Domicile = physical presence + intent to remain

Applying Exemption Laws

In re Laube debtor allowed to claim a semi-truck cab as exempt homestead
o Look to underlying purpose of homestead exemption public interest

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 o Function and purpose of homestead exemption is to preserve to the debtor at least some minimal value in
his dwelling place
o Cab was debtors home/primary shelter where he lived for protection from the elements

For the amount of exemption, look to the net of the line (debtors equity)
o Exemptions only attach to debtors equity in the property, so the value of the property reduced by the
value of the lien is the debtors equity in the property

Lien avoidance 522(f)

Debtor not allowed to waive exemptions, but effectively can do so by granting creditor a lien on what would
otherwise be exempt property
522(f) gives D power to avoid certain liens that impair his exemptions
Unless lien is avoided, a lien is enforceable notwithstanding exemptions (i.e. bank can foreclose on mortgage)
Does not permit avoidance of PMSI

Types of liens avoided:

o Judicial lien on any type of exempt property 522(f)(1)(A)
Ex) Ds home worth $100,000. Subject to $80,000 mortgage, $10,000 homestead exemption,
$20,000 judgment lien. D can avoid all but $10,000 of judgment lien. Allocate value of home to
$80,000 mortgage, $10,000 exemption, $10,000 of judgment lien. D can enjoy her full homestead
exemption, as well as any additional equity created post-bankruptcy.

o Nonpossessory, non-purchase money security interest in certain types of personal property collateral
522(f)(1)(B)
Ex) household goods

Exemption Planning & Homestead Limitations

Exemption planning whether debtor may convert nonexempt property to exempt property in
contemplation of bankruptcy
o Court may deny state homestead exemption to the extent attributable to a conversion done with the intent
to hinder, delay, or defraud a creditor 522(o)
o Enron rule: cap homestead under state law at $136,875 if:
D convicted of felony which demonstrates that filing of the case was an abuse,
D owes a debt arising from a securities law violation, racketeering, federal fraud, etc. 522(q)

Exemption planning as fraudulent transfer?

o Mere fact of conversion of nonexempt property to exempt property is not fraudulent in and of itself
o For nonexempt to exempt asset conversion, courts require extrinsic fraud for conversion to be considered a
fraudulent conveyance
Extrinsic evidence must mean evidence other than the conversion (i.e. concealing whereabouts
of assets, lying to or misleading creditors)
o If evidence of extrinsic fraud then:
Disallow exemption as being fraudulent
Possibly lose discharge if close enough in time to bankruptcy
o Separation of powers problem courts efforts to try to independently put a dollar cap on exemptible
property improperly intrudes into the domain of the legislative body that set the statutory limits
o Federalism issue Congress has said extent of exemptible property must be determined by state law

VIII. BK Jurisdiction, Procedure, and Procedural Concepts

CHAPTER 11 RE-ORGANIZATION

1) Why Reorganization?
a. Receive more for liquidation or creditors if keep the company as a going concern
b. Necessity of compulsory process to bind all stakeholders
i. Holdout problem
ii. Chapter 11 binds dissenters to confirmation of the plan
iii. Automatic stay (362) enjoins creditors from collecting

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2) Control and Management
a. DIP has exclusive right for a period of time to put plans on the table
b. During interim period, strong presumption in favor of debtor management staying on as DIP
c. For whose benefit?
iv. DIP is still elected by shareholders, but assumes fiduciary responsibilities to creditors that trustee has,
as representative of the estate, to maximize the value of the estate for the benefit of creditors
v. Fiduciary duties of estate representative are not limited just to shareholders
vi. Concern = who are the real parties in interest (whose money is on the line)?
1. Wildly insolvent company residual stakeholders are creditors, and shareholders are
underwater
2. Maybe solvent, maybe insolvent
a. In re Spielfogel valuation uncertainty + uncertainty of amount of going concern
b. Court: it was a breach of the trustees fiduciary duty to ignore debtors interests when
there was a legitimate potential that debtor was solvent
3) DIP Financing
a. Cross-collateralization
i. Occurs when a prepetition lender (1) makes a postpetition loan and (2) receives a security interest in
postpetition assets to secure not only the postpetition loan, but also the prepetition loan
ii. If lenders prepetition claim is undersecured, the effect of cross-collateralization is to prefer the lenders
prepetition unsecured claim over all other unsecured claim
3. Necessary inducement to the advancement of post-petition operating funds?
iii. Mootness provision 364(e)
4. With regard to security for new money, new lender protected as to new money they advanced, so long
as advanced in good faith
iv. Majority rule = allow cross-collateralization
v. Minority (Saybrook) rule = cross-collateralization not authorized
5. Mooted by 364(e)?
a. 364(e) only talks about the incurring of debt and clearly contemplates new money
b. Can get past provision because not prejudicing lender with regard to their prepetition claim
6. Not authorized as a method of post-petition financing under 364(e)
7. Statutory/equitable authority?
a. 105(a) power to issue any order necessary or appropriate to carry out provisions of the title
i. No beyond the scope of courts inherent equitable power, because it is directly
contrary to the fundamental priority scheme of the code
ii. No equitable power in courts to reorder priority scheme
iii. Separation of powers issue Congress as legislative function determines priority order
b. Critical vender cases
i. Where suppliers with leverage threaten to scuttle reorganization unless their prepetition claims are
paid
ii. Court authorization, using equitable powers, of payment of the claims of prepetition creditors who
have sufficient leverage to demand the payment as a condition to continuing to deal with debtor
postpetition

iii. Majority rule = allow payment of prepetition claims

8. Requirements:
a. D cannot acquire alternative financing, products, services, etc.
b. D needs creditors financing, products, services, etc. for the postpetition operation of
its business
c. Payment of prepetition claims is critical to Ds reorganization

iv. Minority (Kmart) rule = allow payment only when last resort (Easterbrook)
9. Statutory/equitable authority for court to approve?
a. 105(a) no, equitable powers may not be exercised in a way that is inconsistent with
the other, specific provisions of the code
b. 363(b) use & lease of property section could justify paying critical vendors
i. 363(b)(1) requires court approval of any proposed use of estate property
outside the ordinary course of business, and courts generally defer to the
articulated business justification proffered by trustee or DIP
ii. Stringent proof barriers
1. Actual proof of why vendor is critical
a. Reorganizational failure test but for this vendor, debtor will
go out of business
2. Show vendors actually would not ship unless debt was paid, even if
paid in cash

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4) Confirmation
a. Effect confirmed plan sets forth all obligations of reorganized entity, discharges all prior obligations, and
is binding on all parties, including dissenters
i. Creditors prior claims are discharged, and the new claim is substituted for old claim
ii. Corporate debtors discharge upon confirmation
iii. Individual debtors delay discharge until plan is confirmed

b. Contents plan may include just about anything, as long as parties agree

c. Who may propose debtor has initial exclusive right to propose a plan, but eventually other parties in
interest might be allowed to propose a plan
iv. 1121(b) debtor has 120 days of exclusive rights to propose plan
10. May extend time period, but there is an absolute 18-month cutoff (b)(2)
v. How debtor may lose exclusive right:
11. Trustee appointed for cause 1104(a)
12. Party can make motion to reduce exclusivity period 1121(d)
d. Class structure
i. Claims and interests must be classified
ii. Only substantially similar claims/interests may be put in same class
iii. All claims/interests in same class must be given same treatment

e. Creditors and interest holders get to vote on a plan by class (unless class is impaired in
which case it is deemed to accept), with majority rule (majority in # and 2/3 in $ amount)
i. 1126(c) count only those who actually vote
ii. Designating votes i.e. disallowing 1126(e)
13. Can be designated for violating disclosure statement rule of 1125(b)
14. Or other bad faith
15. If vote is designated, it takes the partys claim of the table and redo the math

iii. For plan to be confirmed, all classes must either vote in favor of the plan, be
unimpaired, or be crammed down
16. To make a creditor unimpaired:
a. Debtor can decelerate and reinstate the original payment terms of a defeaulted
debt if the plan cures any such default that occurred before or after
commencement of the case 1124(2)
b. Cure and reinstatement under 1124(2) leaves creditors claim unimpaired, and the
creditor is conclusively presumed to have accepted the plan under 1126(f)
c. If any class is impaired under the plan, at least one impaired class must vote in
favor of the plan 1129(a)(10)

f. Voting is preceded by full disclosure 1125(b)

i. Predicate for confirmation = informed suffrage
ii. Cannot solicit votes in absence of a court-approved disclosure statement with adequate
information
iii. But does not mean that debtor cant talk to creditors about the plan, as its necessary to negotiate

g. Dissenting creditors are protected by best interests test

i. Plan must give everyone at least as much as they would have gotten in a chapter 7 liquidation
ii. Every plan must put forward liquidation analysis that is reduced to present value

h. Court must always find the plan is feasible

iii. More likely than not, reasonably probable

i. If class votes against the plan, the plan still might be confirmed under cram down rules -
1129(b)
i. Proponent may request plan to be confirmed under 1129(b), notwithstanding the dissenting vote of
an impaired class
ii. Cram down requires full payment of secured classes, and incorporates the absolute priority
rule for unsecured and equity classes (with a possible new value corollary)
iii. Requires a costly valuation of the debtor
iv. General standard = plan does not discriminate unfairly and is fair and equitable with respect to
each impaired dissenting class
17. Absolute priority rule requires honoring under the plan the nonbankruptcy priority ranking
of various classes against the debtor and debtors assets
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