Professional Documents
Culture Documents
- The Nature of Debt and the Meaning of Life - Non-judicial Collection methods
Debt: Obligation to pay money a court of competent jurisdiction will enforce Classification of Debt: (1) Legal Status: - Contractual (voluntary) - Implied at law (torts) - Statutory Obligation (tax) (2) Purpose: - Consumer (personal, family, household) - Business (trying to make profit) Constitution: Art.1 8 c.4 The right for Congress to establish uniform laws of bankruptcies throughout the U.S. United States v. Kras Holding: No constitutional or fundamental right to discharge bankruptcy. Bankruptcy legislation is in area of legislation What lawsuit does/doesnt do Does: money judgment (liability + judgment amount) Doesnt: make debtor pay (not self-executory) Peaceful Repo is lawful (as long as doesnt break peace) possible liability for conversion want to document (video and witnesses) Religious Notions (Moral Obligation): Owe to God, The wicked borrow and do not repay. Let no debt stand outstanding except to love others. Why people repay debts (MEPRS): (1) Moral Duty (obligation: right thing to do) (2) Fear of Public Enforcement (3) Peer Group Pressure/Disapproval (4) Reward when Promise kept (5) Social Expectation Leverage: Can get leverage against debtor if know what button to push. similar to possessing nukes Notions of Punishment: (1) Retribution (sanctions) notion of proportionality (2) Utilitarian (appropriate when overall consequences are better) Look at Hostess Articles Chapter 22? (When a corporate files for Chapter 11 for 2
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- Collection Remedies
Why people repay debts? (5) 3 kinds of judgments? (1) consent judgment: both parties agree to stipulations/may reduce (2) default judgment: didnt respond according to rules of civil procedure caveat) has to prove damages (3) judgment by confession: must be included in original document Most states prohibit (class D misdemeanor) consumer or business? Fair Credit Reporting Act (FCRA) - Gives debtor opportunity to fix monster inaccurate information - Asked to enter own view regarding disputable information - Entitled to copy of credit report Fair Debt Collection Practices Act Are attorneys bound by FDCPA? Yes, if engaged in collection practices. - Cant harass consumer debtor to gain info on them - Cant call at unusual hours - Cant call if you know debtor is represented by attorney - Cant call debtor at work if you know that employer prohibits - Caller must stop communicating if debtor requests cessation - Collection Agency cant use threatening language - Cant impersonate someone else Judgment Creditors Objectives (ILKE) (IMPORTANT!! conceptual framework for all cases) (1) Identify property available to satisfy judgment - unencumbered assets (assets with no security interest) - non-exempt assets (2) Locate assets (physical) (3) Keep assets in place (prevent transfer, sale, disposition) (4) Realizing (execute) assets (levying, liquidating) Beneficial to client ** Dont get fixed on one asset!! Multiple assets!! Should always have backup plan!! Workout: Non-bankruptcy negotiated settlement that consensually modifies contractual rights of creditors, in order to resolve the financial difficulties of debtors Readjustment in creditors expectations! (possible in both consumer/business) Examples) may give an extra day, change in interest rate, change in issuance of dividend, allow debtor some security interest status Why workout? - can avoid bankruptcy, avoid costs - can influence business - found out security interest doesnt exist Problems? - Not feasible - General economic situation - Problem with complexity of claims (unions, environmental, products liability, tax) Aging judgments (law rewards the diligent) (1) Dormancy: Lack of effort to collect still valid but unenforceable (mostly procedural and so could probably revive) Some creditors may attempt to collect once a year to keep it alive (2) Limitations: Judgment no longer (good, valid, enforceable) ways around file new claim based on old judgment before limitations and get new judgment and extend another 10 years.
- Collection Remedies
Lender Liability: Popular back in the 1980s, Borrower sues lender claiming that lender put borrower in bad situation. Lawsuit (3): (1) Liabilities, (2) Damages, (3) Legal foundation for judgment creditor for any future collection activities. Collection Remedies (Comprehensive multi-collection efforts is best!) (1) Liens, judgment liens (a) recordation: takes abstract/memorandum of judgment and record it in county clerks office Why engage in recordation give notice to world of debt (establishes priority) Important because has effect on property acquired in future until debt is settled. (Very powerful!) (2) Turnover orders (citation to deliver assets): combination of collection tool and discovery device/ way of identifying assets (a) file from pleading: require debtor to come to court with documents (information) (3) Consensual lien: debtor voluntarily gives lien (4) Levy, writ of execution (utilizing sheriff system) Writ of execution: writ that authorizes sheriff to find, seize, liquidate, sell as the law requires based upon priorities Levy: procedure, seizure and sale of property (to obtain) (assumption: unencumbered & non-exempt) Seizure of real-estate and unmoveable/hard to move items. Tag effectively puts property in sheriffs control. When is lien created? (1) Writ of execution is issued (2) Upon delivery of writ to sheriff (more common) * What helps one creditor hurts other creditors (1) individual remedies (2) collective remedies (5) Garnishment: court order requiring 3 party to turnover something of value to judgment creditor upside is that you can collect quickly? Types: (1) Wage garnishment: powerful weapon, but Downside: could make judgment debtor file for bankruptcy that effectively wipes out judgment debtors debt think twice before! Law: cant get fired for having one wage garnishment (2) Asset garnishment: same general concept but asking for assets * Family support garnishment usually trumps other types of garnishment Limits to garnishment: ordinarily 25% of paycheck (disposable income)
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- Collection Remedies
If judgment debtor is at edge (tilting) of bankruptcy Prof: monitor the judgment debtor, put burden of reporting changes to judgment debtor (file tax, new employment, etc.) Levy, writ of execution (exempted items vary by States, heavily controlled) Sheriff look, identify property (specific) nd Priority (1) personal property (debtor can choose/claim exempt), (2) real estate (2 priority because we dont want to boot out of home) (a) non-homestead property (b) residence is always last Appraisement statutes (what property will be sold for how much?): Property disposed is done properly, IN 2/3 of appraisal value JD, JC each appoint one appraiser each and third is selected by both appraisers Sheriff can look for specific property, also sheriff can go look multiple times Problem Set 2 (pg. 53)
Judgment liens: On judgment creditor to report satisfactory payment (burden) file satisfaction Writ of body attachment (writ of attachment: court order) - Judgment debtor is ordered to pay x/month - Judgment debtor doesnt pay - Petition for show of cause no show contempt - Writ of body attachment works on any random stop (can get picked up during speeding violation) not because failing to pay but failing to appear in court
- Exemptions
Writ of body attachment Levy of execution (priority) Appraisal of property Pre-judgment (provisional) Remedies (pg. 52): Looking to preserve status-quo Back in the days creditor friendly Get clerk of court to sign-off collection Basis: (1) Statutory: establish (a) out of State defendant (b) defendant is risk of flight (c) decamping (hiding and going out back door) (d) liquidate risk (2) Constitutional: due process issue Read: North Georgia Finishing v. Di-Chem (a) have to allege with specificity of entitlement (b) requires judicial officer to order (c) order has to provide (timely hearing post seizure) Read: Grupo Mexicano de Desarrollo Limits placed on federal equity jurisdiction Contracts case workout failed injunction BUTA US CT cant enter injunction judgment on foreign jurisdiction ** Get the judgment!!! (No judgment No collection) Exemptions (for individuals only, corporations cant claim): property not subject to levy, sale, or any other final process and thus not available to satisfy judgment To be liberally construed in favor of debtor (differs by State constitutions, State statutes, federal statutes, case law $ amounts and categories) Application: In all proceedings except in consensual settings such as mortgage Exempt by: (1) category (2) dollar amount Sources of exemptions: (1) State constitution (2) Implemented by state statute (3) 11 USC 522 Bankruptcy code (federal) (4) Other sprinkles (social security, veterans benefits) Public Policy Reasons: Debtor should not be left to absolute destitution. (liberally construed in favor of debtor) (1) Safety net (social fabric) (2) Debtor & dependants shouldnt have to become ward or charges of States (3) Concept of fresh start (something to start with) (4) Some personal items have little intrinsic value but significant value to family (family pet, bible)
- Exemptions
Pg. 168 Texas Exemption Statutes (liberal = generous) foundation was based on people fleeing to west Homestead unlimited dollar amount Category: (1) Urban (10 acres), (2) Rural (200 acres) 41.001(c) The homestead claimants proceeds of a sale of a homestead are not subject to seizure for a creditors claim for six months after the date of sale. debtors can move! After claiming bankruptcy. Personal property - $60,000 (1) current wages no wage garnishment (2) professionally prescribed health aids diamond encrusted wheel chair? (3) alimony 42.003 Designation of exempt property Burden is on debtor to tell sheriff what he could take Pg. 196 Problem set 8 Make $250,000 structured settlement (annuity benefits)
- Fraudulent Transfers
Read Matter of Agnew, 818 F.2d 1284 (7 Cir. 1987) Exemptions: look at from State standpoint (Constitution, statutes, etc.) (1) Equity in property ex) only when equity exists in property (2) Exempt categories ex) funky categories guns, livestock, church pew, tools of trade Code 522 exempt for bankruptcy purposes If State opted out (30 something States) must use State law Supreme Court case Uniformity of exemptions laws passed on uniformity must be uniform throughout the state but not by State geographical in nature but not personal U.S. Trustee Program (48 States) Bankruptcy Administrators (Alabama, N. Carolina?) BUT, how can you have uniform if two systems? O.K. as long as uniform within State Tenancy by the entireties (only between spouses) C/L doctrine that has become codified Concept: husband and wife is one unit if one party dies first, other party gets real-estate in entirety without judgment. Ex) Prof incurs debt and dies collectors cant collect from real-estate Ways around: (1) Joint debt, (2) Divorce can sever entirety, (3) One spouse can convey to other, (4) Consensual lien - If property is sold, if money is traceable, exempt - Tenancy by the entirety is applicable to multi-real-estate property Fraudulent Conveyance (Transfer) Subject to execution as if still being held by transferor (debtor). Twynes Case (6) (see handout) Statute of Elizabeth (Fraudulent Conveyance) relied on badges of fraud = circumstantial evidence (1) signs and marks of fraud badge test (smells of fraud) (2) donor continued in possession used them as his own (retained ownership) (3) made in secret (4) made pending writ (5) trust (agreement) between parties (6) transfer said to be gift Issues: (1) moral, (2) creditor expectations Twyne distinguishes: (1) good/bad faith, (2) agreements Classic Fraudulent Conveyance Actual Fraudulent Intent easy rd but, when (1) innocent 3 party and (2) sales price similar to market value Fraudulent? Focus on timing (view from reasonable creditors perspective)
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- Fraudulent Transfers
Gives unsecured creditors leverage Grupo Mexicano: Secured/Judgment creditors can get protection by getting security/judgment Creditor obtains judgment tries to execute no property doesnt pass badges of fraud (smell test) files suit against transferee (because is actual owner of property) (1) Looking for assets (a) not exempt and (b) not encumbered (prior valid security interest) (2) Fraudulent conveyance: any creditor at any time can bring action within statute of limitations (a) Actual fraud (dishonest deliberate motive - intent) So so baddishonest intent is so so bad Badges of Fraud: simple inferences if x, then y (not legal presumption) just look at facts and make factual determination (b) Constructive fraud: dont have to show fraud fraud is established as a matter of law. Have to prove: (i) Debtor didnt receive reasonably equivalent value (ii) Debtor was involved/engaged in business with/leaving him with insufficient capital (iii) Debtor is about to incur debts with actual/imputed intention not to pay back Normally brings both suits!!! (Actual fraud and constructive fraud)
(3) Debtor is insolvent At time of transaction was debtor insolvent? Or did transaction cause insolvency? Reasonably equivalent value SCT: support to transferee cases (1) BFB v. Resolution Very important to have stability in real-estate market (if follows State law, foreclosure sale is presumptively valid) (2) Transaction recognized in industry ex) auto sales auction Remedy - File suitwhy? (1) move property back to debtor, (2) move money in lieu back to debtor Ex) (1) Good faith transferee (2) Reasonably good equivalent value transferee keeps property (not going to punish because innocent) ex) (1) Good faith transferee, (2) paid too little less protection ex) (!) Bad faith transferee no protection Badges of Fraud (Modern day): (1) Transfer is not in the ordinary course of debtors business (2) Asset change due to transaction: transaction caused insolvency? (3) Threat or existence of litigation (4) Receive or benefit less than reasonably equivalent value (5) Secrecy or deviation of transaction (6) Retention of transferor/debtor of ownership (7) Transfer to family members/insiders (8) Retention of assets with highly questionable value
(9) Hurried set of contemporaneous transfers (10) Transfer results in transferors insolvency Bay Plastics Inc. LBO reasonable expectation of creditors changed Courts will see whether (1) actual fraud? (2) constructive fraud?
(6) some states require reports (IN 6 month status report) ABC is not like Chapter 11 (not rehabilitative) - possible for assignee to keep business open for limited time and has to let creditors know of intent Although not discharge per se, can result in de facto discharge Overall open/transparent process Creditors options: (1) dont participate in assignment process (2) threaten/actually file involuntary bankruptcy (3) possibility of State court receivership appointment
109(b) broad (almost anyone can file) 109(c) municipality 101 109(e) individual with regular income 101 dollar amount 104 (can get thrown out of 13 and sent to 11) 109(f) family farmer 101 109(g) bad faith filing 109(h) some judges can require prior mandatory credit counseling
- Chapter 11 Reorganization
Venue (What is the proper venue?) Debtor in possession. New entity? SCOTUS...said not new entity. Same entity empowered by bankruptcy code to take care of assets... Who can be a debtor? See 109... Chapter 11 (what's needed? Cash, Friends, and a Plan!) (1) Cash is important in Chapter 11 because... (a) Need cash to keep business going...(Chapter 11 is reorganization) pay employees, pay bills, etc. (b) Necessary to fund the plan. (ex) will pay 20 on the dollar) make the plan feasible. Debtor stops paying bills to accumulate cash. (2) Friends are important because... (a) Need the support of friends during the pendency of the case (want to continue operating business and therefore need clients) (b) Need friends to vote for your plan (Secured creditors, unsecured creditors, taxing authority...) need impaired voting for your plan. (ex) gerrymandering a category, pay more to a certain category...?) (3) Need a plan to sell because... (a) Plan to continue operating (b) Persuade constituencies that you know what the problem was and have formalized a plan (new contract). Two General approaches to Chapter 11 (1) Realistic Approach Bankruptcy is all about the allocation of losses amongst disappointed parties (2) Positive Approach Participatory process leading to confirmation of a consensual plan Good thing about Chapter 11 and why it has become more acceptable (5) (1) Companies are more used to Chapter 11 process (2) Lenders are more willing to work with distressed debtors because they know what the downside is and the only plausible option is to work with Chapter 11 debtors (3) Market encourages filing of Chapter 11 bankruptcy. Market is not as super negative when a company files since they are used to the venue. (4) Employees and unions 1113 and 1114. Unions hate the notion of Chapter 11 due to the 1113 and 1114. Although unions will never admit that they like bankruptcy filing, there could be a situation where they might not have liked the previous CEO and the bankruptcy filing brought in new management. (5) Bankruptcy practitioners are more sophisticated and are better at what they do. Terminology! (1) Burn-rate: Administrative expenses will be incurred by Chapter 11 debtors. Rate at which cash is expended in a Chapter 11. -> Crater (2) Administrative Insolvency: Administrative costs will eat up the case. Can't pay the administrators. (3) Hair-cut: Client will take a 50% haircut means that if they were owed 10mn, they will only get 5mn. (4) Drop-dead: If entered into drop-dead provision and debtor doesn't comply, deal is droppeddead. (5) Fresh start: Although not a running start, debtor gets a new start. (6) Good faith/Bad faith: Did the debtor file the bankruptcy/plan in good faith? Are the debtors complying with the bankruptcy code? If not in good faith, want to tell the judge.
(7) Loading up: Context of consumer case (Chapter 7 and 13). Excessive spending on the eve of filing bankruptcy. (8) Abusive serial filing: Nothing wrong with serial filing. However, when it becomes abusive and somebody tries to use the system or gain an automatic stay. No good faith intent with complying with the Bankruptcy code. (9) Turnaround management: Higher guys that will come in and turnaround the company. (10) Deepening insolvency: Lender starts to manage and the financial situation gets worse. (deepening loss of money) shareholders might file an action against lender. (11) Pre-pack Chapter 11: Debtor has worked out a deal before filing for bankruptcy. Everyone knows whats going to happen before filing. Filing is completed on fast-track (expedited). (12) First-day motions/first-day orders: Things that need to be done on the first day. Lot have to do with findings... (13) Creditor fatigue/Borrower fatigue/Lender fatigue: May or may not work to debtors advantage. Filing a Chapter 11 Bankruptcy is "an invitation to negotiation."
- Chapter 11 Reorganization
How many days to file a bankruptcy appeal? 14 days Rule 8002(c)(2) - 14 days to appeal exception (as long as within 21 days and excusable excuse) BUT, focus on 14 days! Hard to get exception...) Chapter 11 bankruptcy All about three things... (1) Money: to operate while pending (2) Friends: to continue to do business with (3) Plans Competing goals of Chapter 11 bankruptcy (1) Enhance value of business: organization sense (2) Establish orderly distribution scheme: distribution to the creditors in a single form (3) Attempt to internalize cost of bankruptcy and default (4) Establish privately monitored system: Trustee will try to establish a creditors' committee, consultation of parties with interest, negotiation behind the scene, ultimately creditors get to vote (5) Protecting third parties
Preserve (Maximize) value (amongst many different parties), Readjust expectations 363 Sales, Use, and Lease of property (If in the 300s, section applies to all chapters of bankruptcy!) Court must authorize debtor unless in the ordinary course of business. If not in the ordinary course, debtor must apply for special permission. Have to check what business the debtor is in. Different tests to determine the business. Test ex. - (1) Does it subject creditors to new risk? (ex. used car salesman selling cars is what creditors want) If unusual deal, debtor has to file motion beforehand (good faith argument why deal will be beneficial) - give notice to everybody - people have opportunity to object Cash collateral: 363(a) cash collateral means cash, negotiable instruments, documents of title, securities... -> In order to continue to operate, you will need cash. The problem is that their is a restriction on what the debtor can do with cash collateral... Can't use cash collateral unless... (1) Non-debtor entity (whoever has security interest) consents. But usually there are conditions attached. (2) Court order allows you to use (usually conditions attached also) 361 Adequate protection (1) Cash payment or periodic cash payments When no cash (2) Provide additional or replacement lien When no unencumbered assets (3) indubitable equivalent (ex. equity cushion) For adequate protection debtor will probably have to provide budget. Insurance. Cosigners. 364 Obtaining Credit (1) Debtor in Possession (DIP) Financing (2) Bridge Financing
- Chapter 11 Reorganization
Debtor in Possession (DIP): Has to know business to know whether ordinary course of business. Are the creditors in greater risk? ex) Car Dealer tries to sell entire lot...(kinda fishy) If someone enters into non-ordinary course of business - Court will ask debtor why he is doing particular act. Is debtor in good faith? Cash Collateral 363(a): Cash that someone has a security interest in. What are the restrictions in which DIP can use CC? (1) Creditor consent (2) Court order Have to provide "Adequate Protection" ex) Rolling stock "truck and trailers" - Necessity for business. What can you use for adequate protection? (1) Cash payment or periodic cash payments (cash is king!) When no cash (2) Provide additional or replacement lien When no unencumbered assets (3) indubitable equivalent (ex. equity cushion) For adequate protection debtor will probably have to provide budget. Insurance. Cosigners. * Thing that you can't do: Can't give administrative expense (ex. expense critical to ongoing of business because if business fails there is risk of losing all administrative expenses) as adequate protection. Recent phenomena 363 - Sales (stalking horse not required...management, etc...can buy...) Buyers are buying assets of company rather than reorganization efforts. Stalking Horse: Buyer who signs a purchase agreement (subject to (1) court approval and (2) competitive bidding) agreeing to buy certain assets Other protections for SH: (1) breakup fees, (2) earnest money deposit, (3) union concessions Financing for 363 Interim financing. Lot of lenders that will lend bridge loans between filing and execution. There will be exit costs. (needs exit financing). Problem: if sale is specific (buys only certain assets) Contracts: buyer can assume certain contracts but don't need to assume all. Purchase agreement: contingency withholdings, final disposition of the breakup fee money Bottom line: Seeing a lot more of 363 sales of good assets and then motion to chapter 7 than reorganization within chapter 11. Pre-Bankruptcy Exemption Planning (Read Smiley? case) Purpose: Maximize exemptions (1) (2) move assets into exemption friendly states (Florida, Texas, Kansas...) Smiley (1) Nothing inherently wrong with pre-bankruptcy exemption planning (Congress said its ok) (2) Can't deceive (must be in good faith), can't mislead, can't defraud (3) Don't have to prove all bad faith but just hindrance --> Although you can engage in planning, you can't go outside of the rules (motivation of intent was to hinder and delay. (Shows you the extent of what you can do) 548(e)(1) and (2) - The trustee may void (reach back, claw back) any transfer of an interest of the debtor in property that was made within 10 years of filing of bankruptcy.
- Chapter 11 Reorganization
Someone (usually debtor), can be 3rd party, plan gets submitted to creditor. At least 1 class of unsecured creditors votes against plan. (because interests were not jeopardized - unimpaired) Not end of world for DIP... Cram down provisions are available to enforce plan on everyone, including unimpaired creditors that voted against. (kind of safe harbor) (1) lobby constituents to vote for plan (2) cram down which includes the absolute priority rule * but must have at least one consenting class of creditors to have the plan confirmed (even by cram down) What is judge going to do... (1) look at code 1129 - confirmation of the plan 1129(b)(1) and (2) 1129(b)(1) - plan does not discriminate unfairly, is fair and equitable with respect to each class of the claims... Hypo) If junior unsecured claim doesn't approve of plan and judge effects cram down... (junior unsecured claim cannot be paid until every other creditor is paid) Absolute Priority Rule: Junior Unsecured Creditors get paid before equity shareholders! < CRAM DOWN > Impaired class that is unsecured --> votes against the plan Debtor can vote 1129 cram down --> must satisfy judge that he did everything under 1129 As long as not discriminate unfairly (can discriminate some), and is fair and equitable, CT will have to approve the plan despite being voted down by a class < ABSOLUTE PRIORITY > Equity shareholders can receive nothing under the plan until all the junior unsecured creditors get payed. Forces shareholders to contribute new capital (new value - cash) before they can retain shareholder interest in corporation. *************************************************************************************************************** Core Issues of Bankruptcy (1) Jurisdiction: Historically had bankruptcy referees handle bankruptcy cases. Decades ago, SCT said need bankruptcy CTs (not article III). Although not article III judges, a part of the district CT. Congress comes up with 28 USC 157 - various things that bankruptcy judges can do regarding "core" proceedings. There was no problem until Stern v. Marshall. *************************************************************************************************************** Pre-bankruptcy exemption planning in Re Smiley, 864 F.2d 562, (1989) Moved all assets to Kansas... 548(e) Debtor made such transfer with actual intent to hinder delay for fraud to which the debtor was or became... Duress provision: you got my trust...