CLASS 1 – STATE LAW DEBT COLLECTION
Race to Get the Lien on the Property:
Consensual Lien / Non-Consensual LienPersonal
Property / Article 9:
First to File (inchoate) OR
First to Perfect / Majority - Point of Levy
Minority - Delivery of Writ to Sheriff
Real Estate / Record the Mortgage / Record the Judgment (past notice of levy)
I)Judgment Lien by Recordation
a)Obtain Liens by Recordation
i)Judgment creditor can execute at leisure
ii)Secured place in line against other judgment creditors
II)Perfection – Article 9
a)Two Elements of Perfection
i)Attachment (Mortgages)
(1)Three Elements of Attachment
(a)D signs the security agreement
(b)Creditor gives value
(c)D has rights in the collateral
ii)Filing
b)Relation Back Doctrine
i)If Creditor Files, then Attaches – Priority Measured from time of filing
(1)Inchoate until creditor files
ii)If Creditor Attaches, then Files – Priority Measured from point of filing
c)Must wait 10 days between judgment and execution under Federal Rules
i)Time used to pay or appeal
(1)If D appeals, execution doesn’t stop unless D posts a bond which Creditor gets from bond proceeds
III)Levy
a)The act of the sheriff taking custody over property of the debtor
i)Credit Bureau–Sheriff does not have to seize the property
(1)It is enough that the officer expresses control over the writ
(a)If goods left in hands of creditor for unreasonable time with consent of the creditor, the goods will be lost
b)Apparent Ownership Problem
i)D seems to have rights in the assets, but creditor has claim to the assets
(1)“Act” (on chart) cures apparent ownership problem
IV)Execution
a)Sheriff will advertise property for public sale and sell it to the highest bidder
i)The proceeds of the sale will be paid to the judgment creditor until the credit is paid in full
(1)Any remaining proceeds will be paid back to the judgment creditor Unless
(a)Some subsequent judgment creditor levied on the property (symbolically) while the property was at the courthouse
V)When a D has serveral judgments against him they become liens on after-acquired property simoltaneously even though they were docketed at different times
CLASS 2 – GARNISHMENT
I)Vocabulary
a)Garnishee – Third party who
i)Owes a debt to the principal debtor
ii)Has property of the principal debtor
iii)Has property in which the principal debtor has an interest
b)Garnishor – Judgment creditor
i)Must notify both the garnishee and the judgment debtor
(1)Judgment debtor does not want to deposit exempt funds into the garnished bank account
c)Freeze everything as it was on the date of the writ of garnishment
i)Garnishor stands in the shoes of the Judgment Debtor vis a vis the Garnishee
(1)**As far at the Garnishee is concerned, the Garnishor is the Judgment Debtor
II)First in Time for Garnishment
a)Court Split
i)Priority date on delivery of writ to sheriff
ii)Priority date on delivery from the sheriff to the garnishee
III)Pro Rata If Multiple Writs Delivered at the Same Time
a)$6 Assets ---- $8 claim (1,2,3,2)
i)Divide: $ Assets/ $Claim = Rate of Return: 6/8 = .75 on the dollar
ii)Multiply: Rate of Return x Individual Claim (.75, 1.5, 2.25, 1.5)
IV)If D owes the Garnishee anything, Garnishee may offset debt from garnishment before pro rata determination
a)Garnsihee’s unexercised right of setoff takes precedence over garnishor
V)Garnishor Gets a Temporal Net
a)Time between the Writ of Garnishment and the Garnishee’s answer
i)Garnishor may “catch” obligations arising in favor of the debtor
ii)Garnishment of a bank account will”catch” amount on deposit and amounts deposited prior to the garnishee’s deadline
(1)If the garnishment is contested at trial, deadline may extend to end of trial
iii)Garnishee has responsibility not to reduce the value of the recovery after the writ of garnishment
VI)Garnishee leasing property of the Debtor
a)Garnishee entitled to a right of turnover after the lease expires and right to receive the rent payments
b)First in Time
i)Delivery of writ of garnishment beats the interests of after-acquired lessee
VII)Ancillary Lawsuit Against the Garnishee
a)If a garnishee fails to comply with the terms of the writ of garnishment, then the garnishee may be held liable for the full amount of the debt (Webb)
VIII)Exempt or Consumer Credit Protected Property
a)If money is automatically debted in to the account, then it is not entitled to protection of the Wage Garnishment or Consumer Protection Act
i)Ohio court has held that D should be given opportunity to withdraw funds
CLASS 3 – EXEMPTIONS FROM SEIZURE
I)Categories of Exemptions
a)Homestead – Must own, not rent
b)Each state has its own categories – must fit property into category to exempt
i)Much has to do with where you live
II)Most States have Caps
a)Different for different kinds of people (family, individual…)
III)Only Apply to Judgment Creditor’s Efforts to Reach the Property
a)No protection for consensual liens– waived- unless otherwise provided by statute
IV)IRS is brutal – Not constrained by any state exemptions
V)Distribution Example
a)Parties
i)Secured Creditor $1,500
ii)Debtor Exemption $1,000
iii)Judgment Creditor $3,000
iv)Car Value $2,800
b)Distribution of $2,800
i)Secured Creditor - $1,500
ii)Debtor - $1,000
iii)Judgment Creditor $300
VI)Classification
a)Disputes between debtors and creditors often center on classification issues
i)Look to things like annuity contracts, tools of trade which are often exempt
VII)Proceeds and Tracing
a)Courts split on proceeds from exempt money
i)Proceeds from exemptions extend to property acquired from exempt property
(1)Requires proof through tracingWilliams
ii)Once money received, legislation mustprotect converted proceedsHolmes
VIII)Forcing Sale of Exempt Property
a)Judge Won’t Do It Unless Requesting Party Recevies Money
i)First, Value the Property (Amount of proceeds from property)
(1)Usually liquidation value rather than market value for valuation purposes
ii)Second, Line Up All of the Claimants in Order
(1)CommissionsConsensual LiensExemptionsNonconsensual Liens
iii)Third, Determine the Amount of Claim Each Creditor Will Receive
CLASS 4/5 – FRAUDULENT TRANSFERS
I)Types of Fraudulent Transfers:
a)4(a)(1) Actual – Mens Rea required
i)Transfer Made or Obligation Incurred (see: (b)(i)(1)(a))
ii)With actual intent to hinder, delay, or defraud any past, present, future creditor
(1)Look to 4(b) – Factors to determine hinder, delay, or fraud
b)5(a) Constructive – Fraudulent, but no mens rea required (3 elements)
i)Three Elements
(1)Transfer made or obligation incurred by D that had other claims against it
(a)Obligation Incurred – D guarantees for no benefit OR LBO
(2)Lack of Reasonably Equivalent Value in Exchange
(a)3(b) May determine reasonableness by looking at the circumstances
(3)Insolvency
(a)Either at the time of the transfer or as a result of the transfer
(b)2(a) Balance Sheet Test – Are debts greater than assets?
(i)§1(2)(ii) – Exempt property does not count as an asset
(c)2(b) – Presumed insovlent if generally not paying debts as come due
ii)ONLY works to protect CURRENT creditors – not future creditors (Try § 4)
c)5(b) – Constructive fraud in transfers made to insiders
d)4(a)(2)Quasi-Constructive
i)Transfer Made or Obligation Incurred
ii)Without Receiving Reasonably Equivalent Value AND the D:
(1)Engaged or Was about to engage in transaction where remaining assets were unreasonably small in relation to the transaction OR
(2)Intended to incur, or believed that he would incur, debts beyond his ability to pay as they became due
II)Remedies
a)7(a)(1) – Avoid the Transfer– Lien or Obligation Incurred (LBO) Only
b)7(a)(1)/8(b) – Get a Judgment – Works For Transfers of Property
i)First, avoid transfer under 7(a)(1) in order to get a right to judgment in 8(b)
(1)Creditor may receive lesser of:
(a)Amount of the claim OR
(b)Value of the property
(2)If transferee improves property,creditor may not get improvement $ 8(c)
(a)Mechanics Lien – Worker that adds value gets lien for value
c)7(b) – Levy Execution on Assets Transferred
i)If creditor already has judgment against D,may levy as if D still in possession
III)Transferee Protection (All Three Defenses Require Good Faith)
a)8(a) Transfer not voidable if transferee good faith and reasonably equiv value
i)Only works with 4(a)(1) because others require less than reasonably equiv
b)8(d) If transferee had good faith and gave full value, then full defense, may get:
i)8(d)(1) Lien or right to retain interest in the asset transferred
(1)Use this if the judgment creditor is seeking 7(b)
ii)8(d)(2) Enforcement of any obligation incurred
iii)8(d)(3) Reduction in the amount of the liability of the judgment
(1)They get their money back – Use with 7(a)(1)/8(d)(3)
IV)Debtor Protection
a)Courts split as to rememdy under UFTA to protect nonexempt turned into exempt property
V)Leverage Buyout Option
a)Company incurs obligation to lender; gives lender lien on all assets
i)Lenders’ money goes to the shareholders that are being bought out
(1)Only value D Co. gets is new management
ii)IF creditor can make a showing under 5(a), 4(a)(1) OR 4(a)(2) THEN 7(a)(1) is enough to avoid transaction
CLASS 6/7–PROPERTY OF THE ESTATE
I)What comes into the estate?
a)541(a)(1) – Brings in all property of the D into the estate, regardless of value
i)As long as property is something D can sell, TIB will probably accept it
(1)If the property is worthless, D can abandon the property - 554
ii)Estate’s rights to property should be no better than D’s
(1)Restrictions on Transfer
(i)541(c)(1) – Property that restricts D’s transfer still comes into the estate
- Exempt property comes into estate – subsequently dropped:522
- Entitlements that become legally enforceable only with passage of time become property of the estate
- Question of whether the D could have sued for the property
- If D has great enough power to amend or terminate the trust, it becomes property of the estate
- Nontransferrable entitlements allowed in the estate if they are bought and sold regularly – Liquor licenses
(ii)Becomes part of the estate even if D does not have possession
(iii)Becomes property of estate even if subject to a lien
iii)541(a)(6) Offspring, rents, proceeds of property of the estate
(1)Goose Eggs, Dividends of stocks, rent checks
iv)541(a)(5) – Any interest in property that would have come into estate within 180 days after filing by life insurance, will, demise, property settlement agreement…
(a)Income from trust that comes in within 180 days of triggering event is part of the estate
(2)If triggering event happens within 180 days of filing (a)(5) trumps (c)(2) – trust becomes a legally enforceable interest, and therefore the trust comes into the estate
v)Paycheck from pre-petition work comes into the estate despite 541 (a)(6)
II)What does not Come into the Estate
a)541(a)(6) - D allowed to keep all wages earned after commencement of the case
i)Property subsequently bought by the D does not come into the estate
ii)Prizes and awards that come from pre-petition labor
b)541(b) - Any power D may hold solely for the interest of another entity – Trustee
c)541(c)(2)Reitrement Account unless it is ERISA or covered under state law
i)If there is an anti-alienation provision, the retirement fund likely stays out
(1)If D still retains significant power over the trust, then it may come in
(a)Property that is subject to contingency (see (I)(ii)(1)(i)(2)(i)
d)541(c)(2) – Spendthrift Trusts (no control, rations funds out)
i)Future Interests in corpus protected unless triggering event occurs w/in 180 days of filing
CLASS 8 – THE AUTOMATIC STAY
I)Allows parties to maintain status quo while court sorts things out
II)362(a) Prohibits creditor’s attemtp to continue to collect from D or the D’s property
a)(1) – Commencement or Continuation of proceedings
b)(2) – Enforcement of a judgment obtained before commencement of the estate
c)(3) – Any act to obtain possession or control over property of the estate
d)(4) – Any act to create, perfect, or enforce any lien against the estate
e)(5) – Property of the Debtor
i)Post-petition wages – don’t become property of the estate
f)(6) – Any act to collect, assess, or recover a claim against D
i)Garnishment
g)(7) – Setoff of any debt owing to D that arose before commencement of case
h)Landlord/Tenant
i)Can’t kick D out – (a)(1), (a)(3), (a)(6)
III)362(b) Exception to Stay
a)(1) Commencement or Continuation of criminal proceedings
i)Prosecution for pre-petition bad check
(1)Some say it involves the debt and is therefore in the stay
(2)Some say it is secifically within 362(b)(1)
b)(2) Commencement, Continuation, Collection of Paternity, Alimony, Support
i)Only post-petition alimony and support, not pre-petition
(1)Collection of property that is not property of the estate – post-petition earnings
c)(3) Perfection of Transfer
IV)566 - Utility company cannot refuse service for pre-petition debt
a)May demand deposit w/in 20 days for post-petition debt
i)If they shut off ignorant of filing, remind them of sanctions – 362(h)
V)Creditors generally prohibited from taking any individual action against D or D’s Estate until stay is lifted
VI)Violations of Stay
a)Take No Affirmatve Steps to Collect
i)Creditors do not have to continue lending to D, but they may not send “deadbeat” letter shaming D into making payments
ii)If Creditor receives payment, payment should be turned into TIB
(1)Could constitute a violation of the stay
iii)362(h) Sanctions for violating stay
(1)An individual injured by any willful violation of a stay shall recover:
(a)Actual Damages
(b)Attorney’s Fees
(2)Punitive damages in appropriate circumstances
VII)Anything dealing with property or credit obtained after the stay does not apply to 362(a)
LIQUIDATION BANKRUPTCY
CLASS 9 – FEDERAL EXEMPTIONS
I)522(d) Federal Exemptions
a)House – 15,000
b)Car – 2,400
c)Household Goods – 8,000
d)Jewelry – 1,000
e)(d)(5) Wildcard - Unused Exemption – 7,500
i)Parties need to use this strategically to maximize exemptions
f)Tools of the Trade – 1,500
i)May use that of D or dependent of D
g)Unmatured Life Insurance
h)Other Insurance Stuff – 8,000
i)Professionally Prescribed Health Aids
j)522(d)(10) D’s Right to Receive SS, Welfare, Unemployment, Veteran’s Benefits, Alimony...
k)522(d)(11) Reward from crime victim’s reparation law, wrongful death of dependent, life insurance of dependent, ….
II)D has the choice of State or Federal Exemption Law
a)State’s may opt-out of the federal system
III)Married couples may stack exemptions, but they must both choose the same law
IV)Lien Avoidance
V)Lien Impairment
a)Impair – Lien preventing the ability to cliam the exemptions (*Add WC)
i)If the creditor’s equity in the impaired property is greater than exemption, than D can’t claim exemption
ii)If consensual lien impairs property, exempt amount becomes general unsecured debt
b)522(f)(1)(A) Exemption Trumps:
i)Judicial Lien
(1)Not for alimony, maintenance,or support
(2)Not assigned to another entity
ii)[Nonpossessory – As long as D possesses the goods
iii)Nonpurchase money – Loan not made for purchasing the collateral
iv)Security interest in]:
(1)Household items, Clothes, Jewlry, Appliances, Musical Instruments
(2)Tools of the Trade
(a)Remember Car ((d) is not meant to be mutually exclusive!)
(3)Professionally Prescribed Health Aids
c)*D may only avoid up to $5,000 if state opted out – 522(f)(3)
d)When would 522(f)(1)(A) be used:
i)In CA: Tort Claimaint or Medical Services
ii)When D does not claim exemption in timely manner provided by state
(1)Gives the D a second chance to claim exemption
iii)When states don’t opt out of federal bankruptcy and judgment creditor impairs property not exempt under state law
CLASS 10 – THE CLAIMS PROCESS
I)502(a) Claim of pre-petition interest is allowed
a)502(b)(2) – Claim for unmatured interest is not allowed
b)Attorney’s Fees
i)Post-petition attorneys fees not allowed
ii)Pre-petition attorney’s fees provided for in K allowed
iii)Costs of sale of property subject to a lien
II)Post-petition interest allowed for oversecured creditors only
III)506(a) All Secured Claims Covered
a)506(c) TIB may cover reasonable costs in recovering secured property as unsecured claim
i)Costs of sale may come before the lienholder’s claim
b)506(b) Secured creditors may get post-petition attorney’s fees
IV)506(b) - Oversecured Creditors get post-petition interest
V)Undersecured Creditors
a)Receive the amount of the collateral, and the rest becomes an unsecured claim
b)Not entitled to interest or post-petition fees
VI)Oversecured Creditors
VII)Timing
a)Date of FILING is key
i)Hit you with my car, file tomorrow – Claim (Garnishing post-petition wages not prevented from stay)
ii)File today, hit you with my car tomorrow – No Claim
b)Corporation
i)File today, hit you with my car tomorrow – Claim
(1)Supreme Court has held that post-petition courts are part of doing business – entitled to an administrative expense priority
CLASS 11 – PRIORITY AMONG UNSECURED CREDITORS
I)Secured Claimants Always Get Paid First
II)Unsecured Priorities – Pay 100% as long as possible, then go Pro Rata with next level, then you are done!
a)1 – Administrative Expenses
i)503(b) TIB as trustee and lawyer
ii)Insurance protecting estate prior to sale
b)2 – Gap Claims
c)3 – Earned Wages
i)Must show claimant is employee rather than independent contractor
ii)If independent contractor – 75% of earnings w/in year were from bankruptcy
d)4 – Contributions to Employee Benefit Plan
e)5 – Agricultural Claims
f)6 – Money Connected with Rental, Purchase, and Services of Property
i)Consumer down payment rule:
(1)Claims arising from pre-petition deposit of $ with D OR
(2)Purchase of services that have not been delivered or provided
g)7 – Alimony, Maintenance, and Support
h)8 – Taxes
i)(a) – Income Tax
(1)Within 4 Taxable years to get the priority
(a)If D filed between 1/1 and 4/15 – Previous 4 years
(b)If D filed between 4/15 and 12/12 – Previous 3 years
ii)(b) – Property Tax
(1)Must have been within a year of filing
(2)Penalties that make up for actual pecuniary loss
iii)(c) – Any current tax for which the D is liable
iv)(d) – Employment Tax
v)(g) – Penalty in compensation for actual pecuniary loss
(1)Only penalties that matter are those that substitute for interest
(2)Punitive Penalties don’t count
i)9 – Federal Depository Institution
III)General Unsecured Claims
IV)No Claim At All
a)Any post-petition debt incurred
i)Utilities
ii)Attorney’s Fees
V)Punitive Penalties for not paying subordinate to general unsecured claims - Nondischageable
CLASS 12 – DISCHARGE
I)727 Global Denial – Going to Lose Entire Discharge – N/A to Chapter 13
a)(a)(2) – Transferred property with intent to hinder, fraud, delay w/in year of filing
i)Actual fraudulent transfer – Not constructive fraudulent transfer
b)(a)(3) –Destroy/Failure to Keep Adequate Records – Court must balance
i)Whether D’s failure to keep records really matters to creditors