B’y – Spring 2000

Professor Maute

OUTLINE

I.Chapter 1 – Crs’ Rgts & Remedies
  1. Introduction
  1. Terms:
  1. Dr – owes money to Crs. Has an obligation to pay money to another.
  2. Cr – person to whom Dr owes duty to pay money – b’y, as matter of policy, ignores distinctions b/w types of Crs – ie. contract Crs & tort victim Crs
  3. Unsecured (U/s) (or general) Cr – one w/o security interest from Dr – subject to priorities
  4. Lien – Cr holds collateral interest in property of Dr.
  5. Solvent – value of assets exceed value of debts. Do not have to be insolvent to file b’y.
  1. Essential questions:
  1. What rgts does Cr enjoy against Dr & Dr’s property?
  2. What rgts does Cr enjoy against other Crs also seeking to be paid by Dr?
  1. Underlying purposes of B’y Code: (1) remedies intended to provide fresh start; (2) Congress’ intent that Crs be treated equally & equitably.
  1. Collection of Debts Under State Law
  1. Rgts
  1. when Cr has judgment against Dr but Dr cannot pay, Cr has two primary methods to obtain the debt:

(1)Judgment lien - against any real property the Dr owns in county in which judgment docketed.

(2)Executory lien

  1. Writ of execution – method for enforcing judgment lien – addressed to the sheriff & directs sheriff to seize & sell property of Dr sufficient to satisfy the judgment Cr’s claim.
  1. Exemptions – every state lists, by statute, specific items of property that are immune from Crs’ reach. Provide Dr minimum amount of property necessary for survival.
  1. Priorities
  1. Priority of competing liens is determined by statutenever determined by agreement b/w Dr & Cr b/c such agreement would affect rgts of third parties. General priority rule is “first-in-time, first-in-rgt.” First lien to come into existence has first priority (senior lien) & other liens have lower priority (junior liens).
  1. Perfection – steps required to make lien, already enforceable against Dr, also enforceable against 3rd parties.

C.Consensual Liens – Judgment & execution liens are nonconsensual in that they arise in absence of agreement b/w Dr & Cr. However, they may agree to creation of lien on specified items or types of Dr’s property. Two types of consensual liens: (1) security interests, which attach to personal property; & (2) mortgages, which attach to real property.

  1. Security Interests – interest in personal property, whether tangible or intangible, given to secure performance of obligation, repayment of loan or payment of purchase price of goods. Governed by Article 9 of UCC.
  1. Rgts

(1)Security interests are enforceable when they attach. Attachment requires: (a) parties have written K outlining security agreement; (b) Dr has acquired rgts in collateral subject to security interest; & (c) Cr has given value, by making loan or selling goods on credit.

(2)Upon Dr’s default, secured Cr has an assortment of remedies. Default is defined by security agreement & normally includes any event that increases possibility of nonpayment.

(3)Important remedy under Article 9 is rgt to take possession of collateral w/o judicial process, so long as “self-help repossession” can be accomplished w/o breach of peace.

  1. Priorities - In order to obtain priority against other claimants to Dr’s property, secured party must “perfect” its security interest. Perfection requires filing of financing statement & can be accomplished by possession in most cases.
  1. Mortgages – interest in real estate, given to secure performance of obligation (usually, repayment of loan).
  1. First-in-time, first-in-rgt rule applies in this context, generally dating interests from time that public notice is placed in real estate records. “Race” statutes; “notice” statutes”, & “race-notice” systems.
  1. Mortgage documents define default.
  1. Mortgagee’s remedy is foreclosure w/ proceeds of sale distributed to Crs in accordance w/ their priority.
  1. Statutory Liens – interests in property created by state or fed statutes. Includes: (1) materialmen’s & mechanic’s liens, which secure compensation for parties who contribute materials & labor to make improvements on land; (2) Landlord’s liens, which attach to T’s property & secure lease obligations; (3) environmental liens to secure reimbursements of amounts spent in cleaning up contaminated property; & (4) tax liens.
  1. Overview of B’y – device for resolution of collective interests of Crs & for relief of overburdened Drs. Crs barred from collecting any debts remaining unpaid at end of b’y proceedings.
  1. Purposes of B’y – rgts & obligations originating from other areas of law, such as K & torts, are brought into b’y & processed according to special procedural & substantive rules.
  1. Goal – B’y designed to relieve honest Dr of debts & to provide opportunity for fresh start financially. Dr discharged from obligation to pay at end of b’y proceeding.
  1. B’y stresses equality of distribution b/w similarly-situated Crs. In this regard, then, b’y protects Crs.
  1. B’y is compulsory & presents Cr’s only chance to get paid.
  1. Structure of 1978 B’y Code – two main types of b’y: (1) liquidation & (2) reorganization.
  1. Ch 7 – governs liquidation cases. Tr appointed & charged w/ duty to collect Dr’s assets, reduce them to cash & distribute proceeds to Crs in accordance w/ Code. Short time b/w filing petition & closure. All post-petition earnings go to Dr in order for him to start over again.

(1)Dr’s process is over in 90 days & ends w/ fresh start.

  1. Ch 13 – reorganization proceeding available only to individual Drs who have steady source of income. Dr retains possession of all property & is given a three-to-five year plan specifying amount to be paid each Cr. Use post petition earnings to pay pre-petition debts.

(1)Debt Requirements – individual Dr w/ regular income whose u/s debts total less than $250,000 & wose secured debts total less than $750,000.

(2)Plan – proposes how Dr is committing his assets for next 3-5 years.

(3)Dr trudges along for 3- years & only gets discharge after full performance of plan.

(4)Dr currently has free choice b/w Chs 7 & 13 – but proposed for nat’l rules that would call for Ch 13 filings where Dr able to pay post-petition.

  1. Ch 11 – reorganization proceeding available to corps, but not restricted to business use. Plan governs repayment but is not limited in duration. Must pay each Cr at least as much as would be available under Ch 7.
  1. Ch 12 – reorganization provision for family farmers w/ steady source of income derived from farming, whether Dr is individual or corp.

F.Juris, Venue & Jury Trials

  1. Juris – 20 U.S.C. § 1334 (a) & (b) govern basic grant of juris in b’y cases.
  1. Venue
  1. Venue of Case – proper venue for entire b’y case lies in place where Dr’s domicile, residence, principal place of business or principal assets have been located for greatest period of time in 6 months proceeding filing of petition. Forum shopping available b/c multiple venues possible for any given case.
  1. Venue of Proceeding – Under 28 U.S.C. § 1409(a), proper venue for a proceeding in b’y case lies in dis ct in which b’y case is pending.
  1. Change of Venue - § 1412 – dis ct may transfer b’y case or proceeding to another dis ct in interest of justice or for convenience of parties.

(1)Ct faced w/ change of venue issue look at following factors:

(a)economic harm to Dr & Crs that would result from change in venue;

(b)location of estate assets;

(c)economic administration of estate;

(d)necessity for ancillary administration if liquidation should result;

(e)effect of transfer on parties’ & witness’ willingness & ability to participate in case or proceeding;

(f)interrelationship w/ another b’y case involving Dr’s affiliate, etc.

  1. Jury Trials – B’y is equitable proceeding & neither party has rgt to jury trial. However may be entitled to jury in event that b’y case is identical to civil actions that would carry rgt to jury but for fact that one party files b’y.
  1. Class Notes:
  1. State law protects Crs who are vigilant & assertive in collecting their debt.
  2. Hearing on assets – ask Dr to bring bank account statements, stubs from employment checks, tax returns, etc. Find out about any property owned by Dr.
  3. If Dr’s vacation home is in Cleveland County, go to county clerk’s office to search title – will find other liens or mortgage on property.
  4. If Dr inherited vacation home –
  5. Writ of execution – order sheriff to execute against the property. Sheriff gives notice of execution lien. Sold for $40,000. Polly gets $38,000 (minus the $2000 in expenses).
  6. Dr could move into vacation home b/c he has more equity in it.
  1. § 362 – duration of b’y – discontinue ordinary collection actions. Financial relief to Dr where Cr violates automatic stay. 362 (b) - exceptions.
  1. Difference b/w state & fed b’y laws – State Cr – “early bird.” Fed b’y – comprehensive, compulsory, & collective – equality, orderly, administrative.
  1. Ch 7 “hotchpot” - Administrative expense

Exemption

Secured Cr

U/s Crs

II.Chapter 2 – First Consequences of B’y

A.Introduction

  1. BAP cts – B’y Appellate Panels – uniformity in interpretation of b’y code. § 157 Procedure.
  1. B’y ct issues final order – appealed to BAP – appealed then to Sup Ct
  1. Noncore Proceedings (case related to b’y)
  1. Competing Policies - 2 schools of thoughts on b’y:
  1. Collectivism – b’y is merely fed debt collection system
  2. Traditionalism – debt collection can be sacrificed to achieve other goals & purposes of b’y. B’y has various purposes other than debt collection.
B.Initiating Proceedings
  1. Voluntary Proceedings – Is there significant differences in vol proceedings b/w Chs 7, 11, & 13?
  1. § 109 – defines Dr
(1)Debt Limits - Ch 12, 13 - “noncontingent” – real, not speculative; “liquidated” – reduced to certain sum. Ch 13 – noncontingent, liquidated, u/s debts less than $269,250 noncontingent, liquidated, secured debts of less than $807,750.

(a)Toibb v. Radloff (US, 1991) – P not eligible for Ch 13 b/c no regular income & b/c debt exceeded limits.

(i)Rule – Statutory interpretation begins by looking at statutory language & then to legis history if statutory language unclear. In viewing legis history, looking for “clearly expressed legis intent.”

(ii)Holding – Clear language of § 109 does not specifically exclude individual consumer Drs from Ch 11 b/y.

  1. § 301 – Voluntary cases – provides for commencement of voluntary cases under any ch of Code
  2. § 302 – Joint cases – advantage – one filing fee. Individual & their spouse.
  1. Involuntary Proceedings - § 303 – Involuntary proceedings comprise 1% or less of b’y proceedings & not real important. Only commenced under Chs 7 or 11 & only against “person, except farmer, family farmer, or corp that is not moneyed, business, or commercial corp,” that may otherwise be Dr under Ch.
  1. Eligible petitions – Must be filed by three or more entities, each of which (a) hold claims that are not contingent; (b) & not subject to bona fide dispute.
  1. Burden of Proof – weak $ (financial) condition.
  1. State collection law has section that could be likened to involuntary b’y – Cr petitions state ct to appoint receiver, sell assets & distribute. Attractive if few Crs, locally found.
  1. Why would Crs want to pursue involuntary b’y? Dr owes substantial amount & Cr hears Dr transferring assets or putting money into off-shore accounts, etc. But sanctions if petition filed in bad faith.
  1. § 303 (f) – Involuntary gap period – Dr allowed to continue business operations b/w time of filing & relief granted, as if no involuntary proceeding had been filed – keeping Dr afloat until adjudication.

(1)§§ 502(f) & 507 – Crs during involuntary gap period given super priority – claim arising after commencement of case but before Tr appointed or relief granted shall be determined as of date such claim arises, & allowed as if claim had arisen before date of filing petition. U/s claims arising in ordinary course of business during gap period entitled to second priority status. Gap period b/w filing petition & ct entering order for relief provides incentive for business to continue.

3.Contingent Claim – whether eligible to participate as Cr in involuntary actions
4.Dismissal - every ch of b’y has its own section pertaining to dismissal
  1. Ch 11 - § 1112(b) – lists cause for dismissal; § 1112 – Conversion or Dismissal - dissolve automatic stay & leave Dr vulnerable to Cr claims.

(1)No plan feasible (most common reason for dismissal) or other cause warranting dismissal.

(a)In re Nucor, 1999 WL 1268082 (lack reorganizational purpose)

(2)Bad Faith - § 1112(b) does not list bad faith as element of cause

(a)In re Johns-Manville Corp (NY, 1984) – asbestos litigation – Held – No explicit requirement of good faith. Fact that Cr could not prove bad faith points to P having filed in good faith – P is real company w/ real debts & has compelling need to reorganize.

(b)Originally b’y code required insolvency but new b’y code has no explicit requirement of either insolvency or good faith for dismissal.

(c)Carolyn Corp v. Miller, 868 F.2d 693 (4th Cir. 1989) (dismissal if both objective futility of any possible reorganization & subjective bad faith of Dr).

(d)Phoenix Piccadilly v. Life Ins. (1988, 11th Cir.) – Held - Possibility of successful reorganization cannot transform bad faith filing into one undertaken in good faith. Implied requirement of good faith.

(i)Rule – Automatic stay may be terminated for “cause” pursuant to § 362(d)(1) of B’y Code if petition filed in bad faith. Ch. 11 may be dismissed for cause pursuant to § 1112 of B’y Code if petition not filed in good faith. No particular test for whether Dr filed in bad faith. Instead, cts consider any factors that evidence “intent to abuse judicial process & purposes of reorganization provisions” or factors that evidence petition filed “to delay or frustrate legitimate efforts of secured Crs to enforce their rgts.”`

(ii)Reasoning – Choice to file b’y petition so far from where property & Crs are located may itself be evidence of bad faith. Other circumstantial factors of bad faith: single asset, few u/s creditors w/ small claims, pending foreclosure.

(3)Concept of trust fund – can take Dr’s assets & set up system for paying Crs & future claimants. Fact that future claims are not dischargeable does not knock out Ch. 11 b’y.

b.Ch 7 - § 707 – gives presumption in favor of granting relief requested by Dr.

(1)§ 707(a) – May dismiss only for cause, including:

(a)unreasonable delay prejudicial to crs

(b)nonpayment of fees

(c)failure to file info required by § 521.

Note – how particular ct decides to evaluate “cause” has actually caused great disparity among Circuits & among judges w/in particular districts. Hopefully, BAP panels will work towards uniformity.

(2)Voluntary Dismissal - § 707(a)

(a)In re Underwood – § 707 requires showing cause before granting dismissal. Exception – where no party objects to dismissal, no cause required. Held Dr could not invoke exception in absence of proof that post-petition Crs had notice of Dr’s plan to dismiss & refile. Reasoning – might be prejudicial to post-petition Crs. However, § 727(a)(8) permits Dr to receive discharge in Ch 13 notw/standing Ch 7 discharge in past 6 years.

(b)In re Watkins (229 B.R. 907 (Bankr. N.D. Il.) (dismissal denied under § 707(a))

(c)Whether Dr can amend petition – Rule 1009 – may be amended by Dr as matter of course at any time before case closed. Shall give notice of amendment to Tr.

(d)AWFOD (article pg. 59-62) – found very little b’y abuse if have reasonable budget figures. 3% abuse out of millions of b’y cases a year is insignificant number.

(3)§ 707(b)

(a)Types of Ch 7 cases subject to dismissal under § 707(b):

(i)individual Dr

(ii)debts must be primarily consumer debts

(iii)dismissaol where relief would cause substantial abuse

(b)“Means” Testing

(i)In Re Walton (8th Cir, 1989) –– Held – Good faith filing & statutory presumption favoring relief do not prevent dismissal of Ch 7 claim where evidence shows “substantial abuse” in filing. Although statute does not mandate a future income test, it does not preclude consideration of future income in giving meaning to “substantial abuse” standard. Does not consider pure ability to pay but all other indicia of bad faith or avoiding disfavored Cr considered as well.

(a)Essential factor in determining “substantial abuse” for § 707(b) is ability of Dr to paysubstantial portion of his debts under Ch 13 plan.

(b)Legis history shows § 707(b)’s “substantial abuse” language is aimed at stemming use of Ch 7 relief by unneedy Drs. Irresponsibility in spending does not make filing a substantial abuse b/c most persons in b’y have some sort of pattern of irresponsible spending.

(c)Dissent – “To rule that Ch 13 is only way out where there is some disposable income after b’y is to thwart & circumvent express will of Congress that no one can be forced into Ch 13.”

(ii)In re Smith, 119 WL 342795 (D. R.I.1999) (dismissed where Drs lacked pre-petition history of charitable giving)

(iii)Problem w/ “Means” Testing – whether worth transaction cost to make Dr go thru – disclose so Tr can examine budget to determine whether to go forward under ch. 7 or convert to ch. 13.

(iv)Moral Definition of “Can Pay” – Where to draw line – how much sacrifice to require of people in debt – is key question in b’y. Income exceeds expenses.

(v)In re Stewart (10th Cir) – § 707(b) promissory notes to wife’s parents to finance medical education. Most debts incurred to support family lifestyle & counted as consumer debt. Adopted “totality of circumstances” view. Discretionary, looks to many factors. Primary factor – ability to pay. Nature of debt sought to be discharged (recently purchased Range Rover) evidenced bad faith. Unfortunate or tragic events that lead to b’y procedure. Should formula be built into b’y code that if make certain income cannot file b’y?

(4)Charitable Contributions – § 707(b) – last sentence about “charitable contributions” – exception for Drs to give to churches, etc. Not limited to faithful Drs – ct cannot consider whether Dr has made or continues to make charitable contributions.

(a)Does exception allow $10,000 contribution to art museum just prior to b’y. Probably not intended use but by plain meaning, it probably is permitted.

(b)§ 548(d)(3) – defines charitable contribution - & specifies that such contributions are immune from attack as long as don’t exceed 15% of income.

(c)In re Young – Tr able to get back money from church in amount contributed over past year prior to filing petition.

(d)Charitable Contributions also arise in context of § 1325 – budget setting – Ct cannot consider amount of charitable contributions made as to whether Dr satisfied Best Efforts of Dr or Disposable Income Tests.

(5)Policy & philosophical question – what is role of b’y & do we want to force Drs to pay off pre-petition debts in ch. 13 or is it sufficient for them to confess financial woes under ch. 7 & move on w/ fresh start.

C.Property of Estate
  1. § 541 – filing b’y petition creates estate comprised of “all legal or equitable interests of Dr in property.” Only Dr’s interest in property becomes property of estate.
  1. Questions to ask:
  1. Is it property w/in § 541(a)?

(1)Bd of Trade of Chicago v. Johnson (US, 1924) – Although board memberships were not property under state law, Sup Ct refused to limit “property” for b’y purposes to correspond w/ state law & held that membership became property of estate. Under Chicago Bd, what is property is determined by fed b’y law, but nature of property rgts (attributes of property) are governed by state law.

(2)Butner v. US (US, 1992) – state law rgts respected in b’y unless b’y policy mandates differently. Property interests created & defined by state law. Unless some fed interest requires different result, no reason why interests should be analyzed differently simply b/c interested party is involved in b’y action.

(3)Patterson v. Shumate (US, 1992) – Rule – § 541 excludes from b.e. property of Dr that is subject to restriction on transfer enforceable under “applicable nonb’y law.” Held – Phrase “applicable nonb’y law” not limited to state law & includes fed law such as ERISA. Further, anti-alienation provision of ERISA plan constitutes enforceable transfer restriction for purposes of § 541(c)(2)’s exclusion of property from b.e.

(a)Rationale – Plain language of B’y Code is determinate. Natural reading of § 541 entitles Dr to exclude from property of estate any interest that contains transfer restriction enforceable under any relevant nonb’y law. Nothing in § 541 suggests phrase “applicable nonb’y law” refers exclusively to state law. Holding furthers public policy of creating uniform nat’l treatment of pension benefits under ERISA.