Chapter 19
Bankruptcy and Environmental Law
Chapter Outline
1. Introduction
2. The Bankruptcy Code
3. Liquidation Proceedings
4. Individual Repayment Plans
5. Reorganizations
6. Environmental Law
Chapter Objectives
After completing this chapter, you will know:
· The various types of relief available for debtors under federal bankruptcy law
· The basic procedures involved in an ordinary, or straight, bankruptcy proceeding
· How bankruptcy law provides relief for corporate debtors and what basic procedures are involved in corporate reorganizations
· The major laws regulating environmental pollution
· The basic purpose and provisions of Superfund
Chapter Outline
I. INTRODUCTION
A. Since 1980, the number of personal bankruptcies filed has risen from fewer than 300,000 per year to over 16 million per year
B. Bankruptcy law is an area where there will be an increasing demand for paralegals
II. THE BANKRUPTCY CODE
A. Bankruptcy is Federal law
1. Governed by the Bankruptcy Code
2. The Bankruptcy Code was amended in 2005 by the Bankruptcy Reform Act
B. Goals of Bankruptcy Law
1. Provide relief and protection to debtors who have gotten in over their heads
2. Provide a fair means of distributing the debtor’s assets among the creditors
C. Bankruptcy Courts
1. Bankruptcy hearings are held in Federal Bankruptcy Court
2. Appeals are to the U.S. District Court
D. Types of Bankruptcy Relief
1. Chapter 7, liquidation proceedings
2. Chapter 11, Business reorganization
3. Chapter 13, Individual Reorganization
III. LIQUIDATION PROCEEDINGS
A. Chapter 7 Bankruptcy
1. Ordinary or straight bankruptcy
2. All assets are turned over to a bankruptcy trustee who sells the non-exempt assets
3. Proceeds are distributed to the creditors
4. Remaining debts are discharged
5. Individuals, partnerships and corporations can file under Chapter 7
6. File a Petition in Bankruptcy, voluntarily or involuntarily
B. Voluntary Bankruptcy
1. Before filing, the debtor must undergo credit counseling
2. Chapter 7 Schedules
a) A list of both secured and unsecured creditors, their addresses, and the amount of debt owed to each
b) A statement of the financial affairs of the debtor
c) A list of all property owned by the debtor, including property that the debtor claims is exempt
d) A listing of current income and expenses
e) A certificate from an approved credit counseling agency
f) Proof of payments received from employers within sixty days prior to the filing of the petition
g) A statement of the amount of monthly income, itemized to show how the amount is calculated
h) A copy of the debtor’s federal income tax return (or a transcript of the return) for the year ending immediately before the filing of the petition
3. Means Test
a) Petition will be dismissed if substantial abuse occurs
b) Presumed if the debtor’s income is above the state’s median income by $6,000 or more
c) Abuse is not presumed if the income is below the state’s median income
4. Additional Grounds for Dismissal
a) Failing to file necessary schedules
b) Debtor was convicted of committing a violent crime
c) Debtor fails to pay child and spousal support
C. Involuntary Bankruptcy
1. Creditors force the debtor into bankruptcy
2. Debtor can challenge the involuntary petition
D. Automatic Stay
1. Granted the moment the bankruptcy petition is filed
2. Suspension of every collection effort by creditors
3. Exceptions
a) Spousal or child support
b) Investigations by a securities regulatory agency
c) Certain claims against real property
d) Eviction actions
E. Bankruptcy Estate
1. This estate contains all of the property of the debtor
F. Creditor’s Meeting
1. Between 20 and 40 days of the petition being filed, a meeting of the creditor’s takes place
2. Debtor is required to attend unless excused by the Court
G. Creditors’ Claims
1. Creditors file a proof of claim with the court. The claim is allowed unless contested by the debtor, the bankruptcy trustee, or another creditor
H. Exemptions
I. The following are examples of property that is exempt from the bankruptcy
1. Up to $20,200 in equity in the debtor’s residence (the homestead exemption)
2. Interest in a motor vehicle up to $3,225
3. Interest, up to $475 for a particular item, in household goods and furnishings, wearing apparel, appliances, books, animals, crops, and musical instruments (the aggregate total of all items is limited to $9,850)
4. Interest in jewelry up to $1,225
5. Interest in any other property up to $975, plus any unused part of the $20,200 debtor’s residence exemption up to about $10,000
6. Any tools of the debtor’s trade up to $1,850
7. Any unmatured life insurance contract owned by the debtor
8. Employee contributions to a qualified pension plan
9. The right to receive Social Security and certain public assistance benefits, alimony and support, certain retirement funds and pensions, and education savings accounts held for specific periods of time
10. The right to receive certain personal-injury and other awards up to $18,450
J. The Homestead Exemption
1. Exemption was amended by the 2005 Reform Act
K. The Bankruptcy Trustee
a) Duties for Means Testing
(1) To collect and liquidate the non-exempt property of the debtor
(2) Review all materials filed by the debtor
(3) Determine if the case is a bad faith case
(4) Give notice to a person who is owed child support or spousal support
b) Trustee’s Powers
(1) Order a person holding a debtor’s property to deliver the property to the trustee
(2) Can set aside or void a sale or other transfer of the debtor’s property
(3) Recover payments made to one creditor in preference over another
(4) Voidable rights—grounds include fraud, duress, incapacity and mutual mistake
(5) Preferences—The trustee is allowed to recover payments made by the debtor to one creditor in preference over another
(6) Fraudulent Transfers—Trustee can void any fraudulent transfers of property that took place within two years of filing the bankruptcy
L. Distribution of Property
1. Distribution to Secured Creditors
2. Distribution to Unsecured Creditors
a) Claims for domestic-support obligations, such as child support and alimony
b) Administrative expenses—including court costs, trustee fees, and attorneys’ fees
c) In an involuntary bankruptcy, expenses incurred by the debtor in the ordinary course of business
d) Unpaid wages, salaries, and commissions earned within ninety days of the filing of the petition; the amount is capped for each claimant
e) Unsecured claims for contributions to be made to employee benefit plans; the amount is capped for each claimant
f) Consumer deposits given to the debtor before the petition was filed; the amount is capped for each claimant
g) Certain taxes and penalties due to government units, such as income and property taxes
h) Claims for death or personal injury resulting from the unlawful operation of a motor vehicle
i) Claims of general creditors
M. Discharge
1. Purpose is discharge of debt
2. Exceptions to Discharge
a) Discharge of debt may be denied because of the claims made or the conduct of the debtor
b) The following are examples of debts that are not discharged
(1) Claims for back taxes accruing within two years prior to bankruptcy
(2) Claims for amounts borrowed by the debtor to pay federal taxes or any nondischargeable taxes
(3) Claims against property or funds obtained by the debtor under false pretenses or by false representations
(4) Claims by creditors who were not notified of the bankruptcy; these claims did not appear on the schedules the debtor was required to file
(5) Claims based on fraud or misuse of funds by the debtor while acting in a fiduciary capacity or claims involving the debtor’s embezzlement or larceny
(6) Domestic-support obligations and property settlements as provided for in a separation agreement or divorce decree
(7) Claims for amounts due on a retirement account loan
(8) Claims based on willful or malicious conduct by the debtor toward another or the property of another
(9) Certain government fines and penalties
(10) Certain student loans or obligations to repay funds received as an educational benefit, scholarship, or stipend—unless payment of the loans imposes an undue hardship on the debtor and the debtor’s dependents
(11) Consumer debts of more than $500 for luxury goods or services owed to a single creditor incurred within ninety days of the order for relief
(12) Cash advances totaling more than $750 that are extensions of open-end consumer credit obtained by the debtor within seventy days of the order for relief
(13) Judgments against a debtor as a result of the debtor’s operation of a motor vehicle while intoxicated
(14) Fees or assessments arising from property in a homeowners’ association, as long as the debtor retained an interest in the property
(15) Failure of the debtor to provide required or requested tax documents
3. Objections to Discharge
a) Discharge can be denied based upon the debtor’s conduct
b) Property is sold and assets are distributed but the debt is not discharged
c) Discharge can be denied because:
(1) The debtor’s concealment or destruction of property with the intent to defraud a creditor
(2) The debtor’s fraudulent concealment or destruction of financial records
(3) The granting of a discharge to the debtor within eight years prior to the petition filing
(4) Failure of the debtor to complete the required credit counseling course
(5) Proceedings in which the debtor could be found guilty of a felony
4. Effect of Discharge
a) Any judgment of a discharged debt is void
b) Any collection action must stop
IV. INDIVIDUAL REPAYMENT PLANS
A. Some debtors who file for bankruptcy may prefer liquidation under Chapter 7 but, due to the means test, may be required to file under Chapter 13
B. Filing the Petition
1. A repayment-plan case can be initiated only by the filing of a voluntary petition by the debtor
C. Filing the Plan
1. Only the debtor may file a repayment plan to provide either for payment of all obligations in full or for payment of a lesser amount
2. The duration of the payment plan (three or five years) is determined by the debtor’s median family income
3. If the debtor’s income is greater than the state median income under the means test (previously discussed), the proposed time for repayment must be five years
D. Confirmation of the Plan
1. The court will confirm a plan with respect to each claim of a secured creditor under any of the following circumstances:
a) If the secured creditors have accepted the plan
b) If the plan provides that secured creditors retain their claims against the debtor’s property until payment is made in full or until the debtor receives a discharge
c) If the debtor surrenders the property securing the claim to the creditors
E. Objections to the Plan
1. The court can approve a plan over the objection of the trustee or any unsecured creditor only in either of the following situations:
a) When the value of the property to be distributed under the plan is at least equal to the amount of the claims
b) When all the debtor’s projected disposable income to be received during the plan period will be applied to making payments
F. Modification of the Plan
1. Prior to completion of payments, the plan may be modified at the request of the debtor, the trustee, or an unsecured credit
G. Discharge
1. After the completion of all payments, the court grants a discharge of the debts provided for by the repayment plan
V. REORGANIZATIONS
A. Chapter 11 Reorganization is the bankruptcy type most commonly used by a corporate debtor
1. A plan is developed where the debtor pays a portion of the debt and the rest is discharged
2. Debtor is allowed to continue in business
3. Case may be brought voluntarily or involuntarily
4. Automatic stay is the same
5. Principles governing the granting of the discharge are the same
B. Workouts
a) Out-of-court negotiated agreement between the debtor and a creditor regarding repayment of the debt
C. Must Be in the Best Interests of the Creditors
a) Court may dismiss or suspend any of the proceedings in a Chapter 11 bankruptcy if that would better serve the interests of the creditors
b) Case can also be dismissed for cause
D. Debtor in Possession
a) Debtor in Possession means the debtor is allowed to continue to operate the business during the bankruptcy
b) A trustee or receiver may be appointed by the court if there is gross mismanagement
E. Creditors’ Committees
a) A creditors’ committee of unsecured creditors is appointed
b) The Committee must consent to any orders or a hearing must be held where the court hears the position of the committee
F. The Reorganization Plan
a) The plan must:
(1) Designate classes of claims
(2) Specify how each class is to be treated
(3) Provide an adequate way for the plan to be carried out
(4) Provide for payment of tax claims over a five year period
b) Filing the Plan
(1) Only the Debtor may file a plan within the first 120 days of the order for relief
(2) If this deadline is not met, any party may propose a plan
c) Acceptance and Confirmation of the Plan
(1) Each class of creditors must accept the plan
(2) The court can refuse to accept the plan if it is not in the best interests of the creditors
(3) Court can confirm the plan over the objection of the creditors This is known as the cram down provision
d) Discharge
(1) Discharge can be granted any time after the plan is confirmed
VI. ENVIRONMENTAL LAW
A. Common-Law Actions
1. Common-law remedies against environmental pollution originated centuries ago in England
2. A developing area of tort law, and legal practice, involves toxic torts―actions against toxic polluters
B. Federal Regulation of the Environment
1. Environmental Regulatory Agencies
a) The most well-known agency regulating environmental law is the Environmental Protection Agency (EPA), created in 1970