Bankruptcy Spring 2014 LienauPaul RodriguezCollection Without Courts

A. Nonjudicial Collection Methodsa. Leveraging: creditors try to determine how, at the lowest cost, to make it more beneficial (or less costly) for D to pay money owed. Creditors seek means to increase the likelihood D will pay. Constant balancing weighing and leveraging process where D must decide which bills to pay, if any. Creditor must weigh both cost of time expended in activities to get paid and potential loss of goodwill against any increase in likelihood of repayment.i. Much of the leverage analysis occurs when loan is incurred. Why banks take collateral: Securing capital equipment provides:a. Leverage: as long as the applicant remains in business, the assets necessary to the business operations are important. Thus, security interests give greater incentives for borrowers to meet their payments.b. Collateral Control: often security agreements prevent the applicant from obtaining an additional loan from another bankc. Loss Reduction: when a loan is in default, security can be sold and proceeds applied toward the loan balanceii. Other leverage factors are entirely outside the scope of legal regulation Example: Loans between family membersiii. Although formal proceedings make up only a fraction of debt collections, formal debtor-creditor laws are important because they impact negotiations. Creditor-debtor behavior is shaped by limits of legally permissible actions, and by what remedies the law will grantat what costif the formal process is invoked.a. Leverage = credible threats of action that will harm the other party.b. Indirect Leverage in the Legal Systemi. The government sometimes shifts the leverage of parties in unexpected ways. Many provisions in fed and state laws that indirectly reallocate the leverage between debtors and creditors. Example: issuing a temporary restraining order closing down any company that twice in 10 years violates duties to pay its employees. Employees can threaten to close the business down if they are not paid immediately.c. The Credit Information Processi. It is the creditors ability to make negative reports to reporting agencies and influence Ds credit rating that creates leverage in debt collections. Creditors who can make credible threats to deny access to future credit may increase their collection leverage. If a creditor can influence other provides of goods and services to withhold future credit from a nonpaying debtor, the unpaid creditor has far greater leverage to push or encourage a debtor to repay. The FCRA offsets some of that leverage by providing procedures to which the reporting agency must adhere.ii. Most debtors deal with agencies when they are denied credit with the most frequent source being the accuracy of the credit information supplied by the creditors-members. Credit report initially contains only the creditors version of any ongoing debtor-creditor dispute. A credit reporting agency cannot defend itself by blaming creditors for misinformation; both are now responsible and both often find themselves as co-defendants.iii. Fair Credit Reporting Act - provides limitations on how much leverage can be attained by placing limits on procedures for debtors to challenge the accuracy of their credit report. Has two principal themes:a. Giving the debtor access to the credit report informationb. Prescribing procedures to ensure accuracy of the information in the file. 1681i (pg 10)- If a customer disputes information, the credit reporting agency shall conduct a free, reasonable investigation and modify or delete the disputed information within 30 days from the date the agency receives notice. 1681m (pg 11) - If anyone takes adverse action b/c of information contained in a consumers credit report, the actor must provide the customer with notice and inform the customer of the rights to obtain a free copy of their consumer report for 60 days and dispute the accuracy of the information. 1681 n (pg 11) - Anyone who willfully fails to comply is liable to the customer for actual damages and potentially punitive damages and attorneys fees 1681 o (pg 12) - Negligent noncompliance creates liability for actual damages and potentially attorneys fees.B. Restrictions on Nonjudicial Collectiona. Usury Lawsi. Marquette National Bank of Minneapolis v. First Omaha Service Corporation: First Omaha was soliciting credit card customers in Minnesota at an interest rate that was lawful in Nebraska, but exceeded the Minnesota cap Holding: Under federal banking laws, the state law of the customers location is not relevant. Instead, a federally chartered bank could charge whatever interest rate was legal in the banks home state.ii. While some states have more restrictive usury laws, FDIC analysts and other government officials now characterize interest rates as deregulated.b. Federal Statutory Controls on Nonjudicial Collectioni. Direct control of debt collection began at the state level with a patchwork of common law decisions and state statutes. In the 1970s, Congress adopted the FDCPA.- The act is an effort to acknowledge debt collection difficulties and provide a federal remedy directed specifically toward debt collection abuses. To stop abusive, deceptive, and unfair debt collection practicesii. Fair Debt Collection Practices Act (pg 435) Scope- Act applies to those who attempt to collect debts owed to others FDCPA 803(6)a. (Does not apply to creditors, their officers, employees collecting debt for the creditor in the creditors name) This would mean banks are excluded from FDCPAb. Attorneys are included as debt collectors even if the activity only consists of litigation if they often involve in such debt collection actions 804 (pg 16)a. If a collector communicated with a person other than D to acquire Ds location, he shall identify himself, not state that D owes any debts, not communicate with any such person more than once unless requested to do so by such person or if the collector reasonably believes the persons earlier response was erroneous or incomplete, and may not use any language/symbol indicating the communication relates to collection.b. Once an attorney has been retained by D, the collector shall not communicate with any person other than the attorney, unless the attorney fails to respond within a reasonable amount of time. 805 (pg 17) communications with 3rd partiesa. Without express consent, the collector cant communicate with D at any inconvenient time/place (including place of employment if the collector knows that the debtors employer prohibits the debtor from receiving such communication), or before 9 a.m. or after 8 p.m. 806 (pg 18) Harassment or abusea. Collector cant harass/oppress/abuse person in connection w/ collection. i. Cannot use or threaten to use criminal violence as a means to damage the physical person, reputation or property of any person.ii. Cannot use obscene or profane language.iii. Cannot cause the telephone to ring continuously with the intent to annoy, abuse or harass. 807 (pg 18)- Debt collector may not use false, deceptive or misleading representation. 808 (pg 19)- Collector may not use unfair or unconscionable means. Cannot collect any amount not expressly authorized by the agreement. Cannot deposit postdated checks prior to the date they are intended. Several issues with post-dated checks enumerated on this page.iii. The Act provides for the recovery of actual damages, costs and $1,000 for violations.iv. Debt Collector- collect a debt owed to another, not a debt owed to you Act covers collection agencies, not banks Heintz v. Jenkins: D [appellee] defaulted on a loan she used to buy a car. P [appellant], the banks lawyer, wrote D a letter stating she owed $4k for the insurance the bank purchased on the car b/c D didnt. D filed suit, claiming FDCPA violations because the bank tried to collect an amount not authorized by the debt agreement. D claimed the banks policy already insured the bank against any loss or damage to the car. Holding: The term debt collector as used in the FDCPA applied to lawyers who regularly use litigation in an attempt to collect consumer debts.a. Congress had enacted an earlier version of the FDCPAwhich contained an express exemption for lawyers that had been eliminated.v. Young v. Citicorp: Collection letters on a lawyers stationary, although sent from her office at Citicorp, was not from the lawyer but instead from Citicorp and using name of another. Citicorp and the lawyer were subjected to the violation because of its intent to mislead the debtor into believing the matter had been referred to an attorney for collectionC. Problem Set 1 a. Problem 1.1 - Consumer Clients- What Counts as an asset/Debti. Liability side- in what way are you a debtor?: Medical Bills, Mortgage Bills (1st when you buy home, once you build equity, you get 2nd home equity line of credit), Credit cards (open-ended loan/revolving door), Student loans, Car payments (closed ended loan), taxes, alimony/child support, Spousal debt.ii. In what way consumers creditors? : bonds in portfolio, properties owned, bank accounts (depository), tax payer, wages, annuities/life insurance, lottery tix/gift cards, trust beneficiaryiii. As a business, how are you a debtor?: accounts payable (bills where you received a good but havent paid yet), warranty liability(contingent), interest payments, loans, dividends, employee wages, taxes on behalf of employees, guarantees entered on behalf of othersiv. As a business how are you a creditor? Accounts receivables (youve sent out a product and bill but havent been paid yet), Inventory (as long as youre using it, or else its property), potential claims/actions, prepayments/down payments.b. Problem 1.2 i. Most likely to pay- Home mortgage loan will likely to be paid, because she needs a place to live. Car loan will also be necessary. Fitness center will depend on how much she values fitness compared to the other payments. Dentist, possibly also depends on her. Co-worker, there are social consequences to not paying back, so likely will be paid. Country club also depends, could be a luxury, but could also be an important place to networkii. How can security improve its position to get paid- By increasing leverage. Call her. Maybe try to settle with her for lower payments just to get something instead of nothing. Maybe ask her to nicely to restructure the loan with some security interest. All the creditors are playing a game to try to make themselves look better to get paid. File a lawsuit- But they are expensive, a hassle, and without any certainty. You could threaten a lawsuit though, but cant do it as part of FRCPA, you cant threaten a lawsuit unless you mean it.c. Problem 1.4 You would have to analyze state usury laws to determine whether or not the interest rates are in compliance.i. FDCPA- Why would a lender want to take a post-dated check? Very easy debt collection. Theres also potential leverage, if you suspect the money isnt there.a. S808-3-If you get a check with intent to threatened criminal sanctionsb. Not allowed to deposit check before postmarked date.2. But is a Payday lender a debt collector under the FDCPA3. 803-6- exception (A) may exclude them as long as they describe themselves as a creditor and is collecting a debt as a creditor. They have to clarify they are the original creditor as well as the debt collector. If they creditor and debt collector must hold themselves out there as being one and the same, and not separate entities.4. Under 808 of the FDCPA, if the check is postdated by more than 5 days, the creditor has to give notice in writing before cashing the check.The solicitation of a post-dated check violates the FDCPA if Integrity plans to use it as the basis for a bad-check prosecutiona. (3) The solicitation by a debt collector of any postdated check or other postdated payment instrument for the purpose of threatening or instituting criminal prosecution. One could argue Kesha was not forced to write a check.b. Cant deposit it (4) Depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrumentii. Is police language of letter ok, assuming they are debt collectors? If you mean to take action yes.1. 807(1)- FDPA only applies to certain actors. It applies to debts. It puts limitations on where and when you can place calls to get paid. b. Problem 1.6 Does FDCPA apply here to tenant? Is MS. Chalmers a creditor and is this a debt(803-5)?i. Question 1- Is Ms. Chalmers claim for damages a debt?1. Yes. 803(5) debt is defined as basically anything owed arising out of transaction. ii. Question 2 - Are you the lawyer a debt collector?1. Yes. 803(6) defines it pretty broadly as any person who uses any instrumentality of interstate commerce . Language of statute doesnt seem to except attorneys. In Heintz, law . Court says lawyers are covered by the plain language because they are NOT exempted.iii. Question 3- Did you the lawyer violate the FDCPA? Look at 805, 806, 807, 808- 807(5) threaten to take any action that cannot be taken- you just wrote saying you were going to take potential action, this is standard for a lawyer. But a debt collector is not supposed to harass or say untrue things. You also cant settle your case for the client, he must.1. Did you really mean to take them to court? Has your client ever taken anyone to court before?

State Law Debt CollectionA. Collection Remediesa. Introduction to Judgment Collection- Continued recalcitrance of debtors (they wont always pay up/ race of the diligent against the creditors (make sure YOU get paid), once you have the judgment you have to make sure that EVERYONE knows about it, perfect your lien and security interest against everyone, not just the debtor.i. First step is establishing that a debt is owed. 1. What is the judgment? piece of paper that represents the power of government to force them to do what you want. But need to take that judgment and make into writ from court clerk, then you take the writ to sheriff, who levies upon property of the debtor by telling him what YOU KNOW the debtor has. 1) get judgment 2) get writ 3) get sheriff to levy upon the property.ii. Execution1. The judgment creditor remains an unsecured (general) creditor until execution is obtained on the judgment. The only improvement in the judgment creditors position is that the claim has become liquidated (it is indisputable by the debtor).2. The collection process begins with a writ (execution writ, or a writ of attachment).a. The writ orders the sheriff to look for non-exempt property of the debtor, to seize it, sell it and pay the proceeds to the creditor until judgment is paid.b. Issued by the court clerk upon request of the creditor and delivered to the sheriff for execution.c. If personal property cannot be immediately seized (b/c of size, etc), the sheriff may tag it with a notice of seizure. Real property is always seized by posting notice of seizure and sale or some similar method.d. The entire process of seizure is often call a levy. e. The whole process, from writ issuance to seizure, is often called execution.3. Once the sheriff has levied specific property, the creditor becomes a judicial lien creditor as to that property.a. Sheriff will then advertise the property for sale and sell to highest bidder. Once the creditor is paid in full, an entry is made in the judgment record noting the partial or complete satisfaction of judgment, if incomplete, sheriff will be commanded to look for more of the debtors property to seize and process will begin all overb. Surplus proceeds are paid to D, unless a subsequent judgment creditor levied the property symbolically while it was stored at the courthouse.4. Problem 2-1-(pg 53)- we have Rollin hills appliance who is in financial trouble, and A B and C all have judgments against its property. A got judgment November 1, B on Nov 10, and C on Nov 20. BUT judgment is not enough, need to get a writ. A didnt get a writ. B got a writ on Nov 15, and C got one on Nov 22 (some jurisdictions have a time period limitation form when you can get the writ after the judgment, federally its 10 days). Only C got a levy on Nov 25. a. whos gonna get paid?- C, you have to get all 3 of them before you get paid. The remaining 50k gets returned to the debtor until A or B satisfy the 3 requirements. B can get the sheriff not to symbolically levy the property.b. Can B hop over C though?- if theoretically you later get the levy, some jurisdictions say it doesnt matter, that the writ date matters more as long as you eventually levy the property. This encourages creditors to do it quickly, and discourages friendly sheriffs, so you only really have control over Writs, and not when the sheriff levies property. iii. Turnover Orders-. judgment collection deals with readily apparent property, but in modern era it deals with intangible property, so we now have turnover statutes. They examine debtors to see if they have property, and compels them to turn property over.1. D is ordered to turn over property he possesses/controls. D risks imprisonment for contempt if he does not comply. Once property is traced to D, D bears the burden of establishing that certain property is no longer in his possession. All judgment creditor needs to get is necessary info about the asset. Generally permits examination of D under oath so assets can be found. 2. Note a low sale price generally wont invalidate the sale.iv. Judgment Liens by Recordation- Special recordation procedures exist to obtain a lien on a debtors property quickly and simply, without going through the full-blown execution process.a. Generally limited to real property. Obtained by recording a judgment in the county land records where deeds are filed.b. Often fastest/cheapest post-judgment collection step a creditor can take.c. Prevents resale because no purchaser would buy property with the title clouded by a lien.v. Dormancy and Limitations1. Dormancy is a coma-like state in which the judgment still exists but is no longer enforceable without being revived. Typically 1 year2. Expiration of the SOL to enforce a judgment is terminal unless a new lawsuit has been brought on the judgment. Typically 10 years.vi. Debt Collection by the Federal Government- Federal Debt Collection Procedures Act- Generally similar to those procedures under state law and applies only to judgments in favor of the federal government.vii. Family Debts- In recognition of the importance of family support payments and the difficulty of their enforcement, specialized rules surrounding their collection have been made.a. Imprisonment has been retained as an enforcement tool.b. States often exempt some or all wages from garnishment but make an exception for child support.viii. Voluntary Liens - Judgment collection system is involuntary lien system, because it gives judgment creditor rights in debtors property without any acquiescence or cooperation from the debtor. The alternative is obtaining mortgages and security interest in debtors property. Creditors become secured creditors by obtaining voluntary liens. Property on which the debtor grants the lien is called collateral, such as car being collateral for car loan. Those who take security interest are mortgagees in real property and secured creditors for all other property. Secured interests are covered by Art 9 of UCC.1. Many creditors by obtain voluntary liens through collateral.a. Most require a writing where D grants the lien and describes the property.b. To protect third parties who may have dealings with the debtor, consensual liens are given effect against third parties only if the secured party gives public notice of its interest, usually by some form of recordation in a government office.i. Real estate & most personal property notice is given by recordation in a county or state filing system.1. This filing enables other potential creditors or buyers to find out about the earlier creditors interest in the property. Once a creditor has filed and deemed to provide public notice, his lien is perfectedii. Some other types of collateral notice is given when the debtor takes possession of the item. Example: jewelry, security interest in a certificate of deposit.iii. Other special types- Car can be perfected only when lien is entered on certificate of title for the car.iv. Consensual lien will give secured creditor some ability to fence off the property covered by the lien from collection efforts of other creditors. Assures creditor that if debt is not paid, lienholder may force sale of collateral and use proceeds to repay outstanding loan. Consensual lien restricts Ds disposition of property, so creditor can count on its being available at time of default.2. Consensual liens may be purchase-money liens those liens used to furnish the credit necessary for the purchase of the collateral (aka PMSIs). Ex: mortgages, car loans, etc.3. Non-PMSI borrow money and gives a lien on property already owned.a. Ex: home equity line of credit, 2nd mortgage.4. In business, D frequently give security interests in property acquired in the future.a. Article 9 recognizes such interests, so that D may offer a security interest in all my equipment, current and after acquired. When D buys a new piece of equipment, the security interest automatically attaches.5. Sometimes more than one creditor may take a consensual lien on property.6. Creditor with consensual lien can seize the collateral more quickly and cheaply than a judgment creditor who has to go through all the steps of a suit and execution before sheriff sells the goods The seizure for sale foreclosure with real estate and repossession with personal propertyis heavily governed by a myriad of state rules that differ in detail but usually cover similar issues.7. A creditor with a security interest in personal property has two ways to satisfy the outstanding debt that are not available to the judicial lien creditor:a. The Article 9 creditor can seize the property without any help from the sheriff (self-help repossession), orb. Can offer to keep the property in satisfaction of the debt without any sale (retain in satisfaction). Both options have some restrictions, including a requirement that creditors do not breach the peace (no fist-fights or breaking in).8. Secured creditor also has all the remedies of any other creditor. Can sue, obtain a judgment and writ of execution. Unlike unsecured creditor, secured creditor can go through formal process secure in knowledge that his place in line is guaranteed.9. Deficiency judgment. The collateral is sold for less than the amount of the debt.a. Creditor becomes unsecured for deficiency. b. D often claims the sale was conducted in violation of the complex Article 9 UCC rules governing such sales and D isnt responsible for deficiency.i. If D is a consumer and demonstrates proper procedures were not adhered to, many states will stick the creditor with the deficiency.ii. In non-consumer transactions, there is a presumption against the creditor that can be rebutted by showing the deficiency would have been just as great even if all of the procedures had been followed.ix. Statutory Liens and Trust Funds- These are specifically recognized in UCC 9-333.1. State law also creates liens by operation of law favoring certain types of creditors.a. Ex: Artisans lien a possessory lien on personal property of the debtor.i. Ex: garage mechanic can keep the car until the bill is paid or sell the car if necessary to satisfy the charges2. Trust fund statutes make the debtor a trustee and the creditor the beneficiary.x. Property Exempt from the Collection Process (state protects home/goods from seizure)1. FF & C Clause allows state judgments to be enforced in other jurisdictions.a. Common law requires filing a new suit, serving a summons and so forth.b. Judgments obtained in district court are enforceable locally in the state where the court sits using local procedures.They can be enforced in other states by registration with other federal district courts.c. Judgments are often enforced in other countries.xi. Collection in Other Jurisdictions1. Gerdes v. Kennamer: G was a debtor of K. G owned DR, a company that was valuable because it owned a large plot of land in Mexico. The trial court signed a turnover order, requiring G to turn over the original stock certificates of DR. Here, evidence established Gerdeses ownership interest in Don Rogelio. They must simply sign documents, obtain wifes signature, and deliver documents to sheriff. Easy to comply with.a. Holding: A court ordered turnover is an equitable remedy that may be invoked to assist a judgment creditor to collect on his judgment. Turnover statutes permit ct to compel the execution and surrender of documents. JC is entitled to aid form court through injunction or other means to reach debtors property. TC has authority to compel a debtor to execute documents that will aid in collecting a judgment debt.b. The Struggle Among Creditors: Priorities - Focus of collection shifts from whether a creditor has a right to collect from debtor over to which of several creditors gets to collect form which assets first; creditors often compete frantically to get paid, with the rule first in time, first in right commandingi. Background- Often, the 1st creditor to levy will have right to be paid in full from the proceeds before any other creditor gets even a single dollar from the sale. Race of diligencei. Generally, the first to perfect wins, but the rules vary depending on the nature of each competitors interest.1. Unsecured Creditor Versus Unsecured Creditor- Must first get judgment and then execute or levy on that judgment in order to get an interest in a piece of property belonging to judgment debtor. Levy perfects the judgment lien on that property. Between two judgment creditors, first to levy wins property. However, the date of levy is not always the controlling date.a. In many states, priority depends on date which judgment creditor initiated the execution process by delivering the writ to the sheriff.2. Unsecured Creditor Versus Secured Creditora. Ordinarily, the secured creditor or the mortgagee perfects when it records its consensual lien according to statutory prescription. If judgment creditors lien is later, it loses. If judgment creditors lien is earlier, it wins. Secured creditors must take consensual lien AND RECORDb. Credit Bureau of Broken Bow v. Moninger: P obtained a judgment against D. D then took out a loan and promised his truck as security. No security agreement was entered into at the time(unperfected security interest). P then got a writ of execution issued on the judgment. The sheriff examined the countys records and found the bank had not recorded the security agreement. The officer visited D, touched the truck and said I execute on the truck for the County of Custer. The sheriff didnt take possession of the truck at the time. The bank heard about the purported levy and got D to execute a security agreement, which it then filed. P contends that actions of sheriff amounted to a valid levy which bound vehicle for satisfaction of Bureaus judgment against D. The trial court found that the Banks security interest in the truck was superior to the execution lien.c. Holding: The trial court erred. To execute a valid levy on property, all a sheriff needs to do is temporarily take control of the property and express his or her assertion of dominion over the property on the basis of the writ of execution; no physical possession is required for levy. an unperfected security interest is subordinate to the rights ofa person who becomes a lien creditor without knowledge of the security interest and before it is perfectedi. Was P a lien creditor on July 7? A valid levy occurred before the bank had perfected its security interest in the truck. Cop even said sorry for doing it.1. 9-301 defines a lien creditor as a creditor who has acquired a lien on the property involved by attachment, levy or the like. A lien on personal property is acquired in this state at the time it is seized in execution, so the Bureau becomes lien creditor within meaning of UCC 9-301 when sheriff levied vehicle.2. **While most jurisdictions agree with this approach, there are still a number that require the sheriff to take possession.3. Because subsequent creditors could be misled if goods are left with the debtor, there is a caveat in the situation where no possession is required:a. If the levied-upon goods are left in the hands of the debtor for an unreasonably long period of time with the consent of the creditor, the lien will be lost.ii. whether the Bureau was a lien creditor without knowledge of the Banks alleged security interest prior to the perfection of such interest by the Bank?3. Judgment Lien Creditors/Secured Creditors Versus Buyersa. First in time, first in rightgenerally measured by perfection.4. Summary - When becoming a judicial lien creditor, must ask which creditor have the liens, and have they succeeded in their levy? Is announcement enough? Is it possible SOL has expired. When were these creditors secured and what was the order?-date is essential. You have to follow these steps for each creditora. Key date, is that youre looking for date of perfection, date to secure your date in line. Whoever perfects first, wins. ii. Discovery- Getting information on existence/location/exemption status of levyable property.a. FRCP and most state rules of procedure, permit the creditor to conduct discovery concerning Ds assets and affairs.iii. Pre-judgment Remedies1. Two categories:a. Traditional protection under state law by means of special requirements that a creditor must satisfy before being able to get a pre-judgment remedyi. Typically require:1. A showing of need for example, the debtor is decamping with its assets; and2. A bond, often twice the amount of propertys value, to provide a fund for the Ds damages in the pre-judgment remedy turns out to have been wrongfully employed.b. Procedural requirements in the pre-judgment process that the Supreme Court has found to be necessary to ensure the debtor due process of law.i. A debtors property may not be seized without an order issued by a judicial officer (not a clerk) upon a factual showing of need. Once it has been seized, the debtor must be given a hearing and a chance to get the property back very quickly.1. The limitations imposed have made pre-judgment remedies less attractive for harassment and oppression, but at the same time have lessened the usefulness for creditors with legit concerns.c. Problem 2.2 - Your client had a judgment lien, served the writ to the sheriff, and then the sheriff went to levy but decided not to b/c D said they will work out a deal - in the interim, D gave the bank a security interest who perfected it by recordingi. Depends on the state, whether its enough for sheriff to actually possess property or symbolically levy the property. If it is good then you get it, if its not then the bank gets it. Question is the levy by announcement enough for your state Does your state requires tagging/physical seizure or just announcement?ii. But does it matter that everyone agreed to stop the procedure, whats effect of halting process/does it expire? Look at state law. YES if you wait too long. Were the collection efforts halted in bad faith? Or was it a good faith effort to try to make it work?iii. What could have been done on Nov 25 instead- At this point you have all the leverage in seizing the shoes, so you can sign something that says that you have a security interest in the shoes, and file it. Maybe part of a loan restructuring. -You could also get them to sign a personal guarantee that you will get paid. Or just levy. Purpose of perfection or formal levy is to make sure other creditors knows whats up as to that person and debtors financial situation.d. Problem 2.3 - Your client Hassan has a judgment for breach of K against Handler, who has a letter of credit for 350k form bank of A. Letter can get assigned to Handler or an assignee (here maybe Omar). i. Must ask whether Handler has finished the work, and whether the work is satisfactory. If it has been done, court compel handler, using Gerder, to assign the letter to Hassan? Is it like a transfer of stock certificate?. Can court compel Handler to FINISH the work and THEN pay, probably not because it amounts to involuntary servitude, even if he voluntarily entered into work contract.ii. Gerdes case talks about the turnover order, where you have to turnover your interest to a creditor, allows you to say you dont know where property is, but whatever you have must be turned over and used to satisfy judgment. Court can also force you to take a last step to make asset realizable to creditor, like in Gerdes where he is forced to sign stock certificates. If he refuses to follow court order you pay or go to jail.B. Fraudulent Conveyances and Shielding Debtor Assetsa. D transfers assets to third party or preferred creditor to protect assets from certain other creditors. Attempt to shield assets. Thus, every state has a rule permitting the court to invalidate improper transfers.b. Origins of Fraudulent Conveyance Lawi. Twynes Case: Pierce (debtor) was indebted to Twyne for 400, and to C for 200. C brought action against Pierce, since he possessed goods of 300 (assets), made a gift of this to Twyne to satisfy debt, though Pierce still possessed them. Gift was made in secret and pending the writ with C.Was the gift fraudulent and of no effect?1. Holding: Debtors who attempt to obstruct collection efforts by their creditors by transferring leviable property to a third person with the intent that it be transferred back at a future date are guilty of fraud and any fraudulent transfers that they have made can be set aside. Because of the marks of fraud, the insider relationship between the two, it raises alarms.a. Pierce continued to hold possession of the property, Possession in donor is sign of trust.i. This is a badge of fraud. UFTA 4(b) b. It was made in secret, It was made pending the writ, There was a special relationship between the debtor and the transfereec. Development of the Uniform Fraudulent Transfer Act (pg 267 of supp).i. Most states have adopted UFTA, which governs the invalidation of fraudulent transfersii. The term asset includes all property of D except exempt or encumbered property.iii. A present creditor is one whose claim arose before the transfer was made.iv. Passed to protect creditors against debtors who would give away their property with intent to have it re-conveyed at future date. Much turned on proof of debtors intent to delay, hinder, or defraud creditors or purchasers, much through badges of fraud (such as a gift without transfer of possession.)v. UFTA Section 5(a) permits a creditor to avoid any transfer made 1. In exchange for Unfair low consideration2. At a time when the debtor was insolvent (includes transfer when debtor was utterly innocent of fraudulent intent).3. These actions deplete the assets of an already insolvent debtor by the difference between the true value of the property and the amount the debtor actually received, injuring the debtors creditors.vi. Actual fraud is covered in 4(a)(1), and in 4(b) codifies the badges of fraud seen in Twyne. Burden of proof to establish actual intent is on creditor who seeks to set aside conveyance, and must do so with clear evidence. Intent is rarely susceptible to proof and must be established by inference from circumstances surrounding alleged fraudulent act (badges) 4. Transfers Fraudulent to Present and Future Creditors((a) A transfer made/obligation incurred by D is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made/obligation was incurred, if D made the transfer/incurred the obligation: INTENTIONAL FC(1) with actual intent to hinder, delay, or defraud any creditor of D; or(2) without receiving a reasonably equivalent value in exchange for the transfer/obligation, and D:(i) was engaged or was about to engage in a business or a transaction for which Ds remaining assets were unreasonably small in relation to the business or transaction; or(ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.(b) In determining actual intent under (a)(1), consider these factors: CONSTRUCTIVE FC(1) the transfer or was to an insider;(2) the debtor retained possession or control of the property after the transfer;(3) the transfer or obligation was disclosed or concealed;(4) before the transfer was made/obligation was incurred, D had been sued or threatened with suit;(5) the transfer was of substantially all the debtor's assets;(6) the debtor absconded (fled);(7) the debtor removed or concealed assets;(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred;(9) the debtor was insolvent or became insolvent shortly after the transfer;(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.i. Note- Are badges of fraud necessary under 4(a)(2)? No - b/c badges of fraud listed on 4(b) specifically state they are for 4(a)(1) ONLY 5. Transfers Fraudulent to Present/existing Creditors (strict liability)(doesnt care about mind frame of D)(Good Faith irrelevant)(a) A transfer is fraudulent if D made the transfer without receiving a reasonably equivalent value and D was insolvent at that time or became insolvent as a result of the transfer or obligation.(b) A transfer made by D is fraudulent if made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent. 2. Insolvency (if:)(a) The sum of D's debts is greater than all of the debtor's assets, at a fair valuation.(b) A debtor who is generally not paying his debts as they become due is presumed to be insolvent.(d) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this [Act]. 7 Remedies:(a) Creditor may obtain avoidance, an attachment, an injunction or an appointment of a receiver, subject to defenses below Defenses(a) Bona-fide purchaser (will be given lien equal to value paid).(b) NOTE: 8(a): transfer is not voidable under 4(a)(1) against a transferee who took in good faith and for reasonably equivalent value (good faith purchasera. 8(d): they get a lien on the purchased property for the purchase price, but lose the benefit of the bargain and any value increase. (b) Any money put into the property: unjust enrichment claim.(c) If a debtor conveys a security interest in all of his personal property to secure a debt, but remains in possession of the property, its not a fraudulent conveyance under Article 9- this is b/c its not done in secretACLI Govt Sec v Rhoades1. Concerns validity of conveyance of property from D to his sister, which occurred the day before a 1.5 million judgment was entered against D in favor of P. D and sister owner 38 acres of land as tenants in common with D having 3/5 share, D then conveyed property for 1 dollar and other consideration. Was conveyance Fraudulent? This is a present creditor so they can use either UFTA 4 or 5. 2. P argues it was made without fair consideration by a D in suit who failed to satisfy final judgment. Burden of proof to establish that Ds conveyance was made without fair consideration is on creditor, but where nature and value of consideration are within transferees control, burden shifts to transferee. Heavier burden with intra-family transactions.3. Conveyance was made without fair consideration, so must now find whether the conveyance made D insolvent within meaning of statute. Proof of solvency is on the D, who claimed he had enough to pay his debts. Look at Sec 2. One of his properties was grossly overvalued by expert, and was appraised at 212k, not 700k. Expert had strong friendship with 2. Other 2 properties of D were almost valueless. -Additionally, badges of fraud here are the close relationship, intermingling of finances, issues of the appraisal of other properties, secrecy and haste of sale, inadequacy of consideration- subjective element- the timing is suspicious. Cant determine whether there was adequate consideration for supposed debt, too much secrecy.-objective prong (goes to REV and solvency)- valuation- maybe theres no REV, and it also likely made them insolvent at the time of the property transfer. Cash flow can also go into solvency.Ruling- D failed to show that at the time he transferred property to sister, he had assets whose aggregate fair, salable value was equivalent to judgment of 1.5 mill. Conveyance was fraudulent under UFTA 4(a)(2)- 5, and creditor get brothers share of property.Problem Set 4vii. Problem 4.1 - A is insolvent, owing $50k to FF; he sells his piano [FMV $40k, asks $20k, sells for $15k] for food money. Can FF successfully claim a fraudulent conveyance? Use 5(a)1. Transfer? Yes Did arise before transfer? Yes owed FF before she sold piano, so present creditor/not insider. Debtor insolvent? Yes. 25k less than valued, so incredibly undervalued.2. Probably yes the debtor is insolvent and it isnt for reasonably equivalent value, so it meets UFTA 5(a). But valuation is everything! $15k is probably the real FMV given the hurried conditions of sale; it could also be reasonably equivalent value because its a crisis sale.a. Note UFTA 3(b) reasonable value includes what is received at a foreclosure sale. You could argue that this ought to be extended to mean the value that would have been received at a foreclosure sale. Improper valuation given the context, the relevant market for her is different.b. Note- have to ask whether creditor would have gotten a better value. Could argue shes only getting half the value. 3. Note that if this transaction was invalidated (if judge doesnt look at exigencies of situation and finds no REV, so fraud), could void transfer and take piano back. The purchaser of the piano would have a lien against the debtor for the $15k ( 8(d)(1)). However, he loses his time value of money and his bargain. 4. There seems to be no intent by the debtor to hinder, delay, or defraud- Doesnt seem to be a sale to insider. So UFTA4(a)(1) or (5)(b) doesnt apply5. Is there a sec 8 defense? . Good faith matters only for transfers voidable under 4(a)(1) (intentional fraudulent conveyances). 5 doesnt care about mind frame of anyone.viii. Problem 4.2 - B is insolvent. He sells his coin collection (FMV $75k) to his cousin for $5k to keep it in the family. B then buys $25k of furniture on American Express. Can AmEx use the UFTA to void the coin collection transfer?1. Probably not. AmEx is a future creditor the furniture debt did not arise until after the coin collection was transferred. Thus, they cant use UFTA 5. (If there was prior debt on the card, you could use that; you could also argue that the line of credit the card represents is the functional equivalent of present debt).2. They are therefore left with UFTA 4. Probably can Under (a)(1), youd have to prove actual intent to defraud. Cant really prove she had requisite intent, but can infer it through badge of fraud here, but thats not conclusive on the issue 4(b). There was a transfer made to an insider, value received wasnt REV, the debtor became insolvent shortly after transaction, and the transfer occurred before substantial debt incurred. Also, although debtor didnt retain possession she expected to get property backa. Under (a)(2), could argue not getting REV since theres a huge difference in value. Use (a)(2)(ii), quasi-constructive fraud. Creditor would need to prove that D reasonably should have believed that she was about to incur debts that they would not be able to repay.3. Its difficult for future creditors. You want to put some burden on both sides of the transaction. If creditors can prevent the loan, and are diligent, then can determine financial picture and couldve prevented this.ix. Problem 4.3- D owns Homestead (200k),which is exempt from creditors- other assets (55k) and debt is (75k). He conveys homestead to son as a gift. Can creditors reach homestead conveyed to son?1. Unsure if hes insolvent (55k >75, but does home count?), it MADE him insolvent2. Is homestead an asset? 1(2)(ii) does not include property that is exempt, so he is insolvent. 3. Is gift a transfer? No, house is not an asset under 1(2), so there was no transfer of an asset under 1(12), so no violation of 4 or 5.d. Leveraged buyouts i. What is the fraudulent conveyance problem in LBOs?- assets of corporation being acquired are used to secure purchase price for those assets, often through issuance of junk bonds. Key element is that purchasers use the assets of company being bought as a security for funds borrowed to purchase shareholders. 1. LBOs are attractive to all parties because it shifts the risk of loss to other creditors of the corporation. Acquired corporation receives little or nothing in exchange for the debt it incurs.2. From creditors point of view, LBO is pretty much a gift to shareholders. If value of security interest given by the corporation does not exceed the shareholders equity, there is usually no substantial harm to creditors. If price paid to selling shareholders is higher however, there may be insufficient assets remaining to satisfy creditors.3. The Vice of an LBO lies in fact that selling shareholders are paid indirectly with assets from the corporation itself, rather than by purchasers.ii. Application of FC law to LBOs1. In re Plastics- Shareholders (SSH) formed debtor Bay Plastics in 1979. Financing: Debtor here is Bay Plastics, and selling shareholders are the founders, and Millhous wants to buy them. They use a subsidiarys subsidiary, to buy BP for 3.5 million, for the stock. They dont want to put up money, so they use BT(bank) to make the loan of 3.9m to Bay, with BAY keeping the extra 450k, which remaining 3.5 million getting funneled to BPI to pay shareholders. BT gets a secured interest in all of Bays assets to secure the loan. Shintech is another creditor, though now an unsecured creditor. They did have a secured interest and guaranty, but were induced to release security/guaranty, without disclosure of the LBO. Milhous bought the company without using any cash or assets.a. Shintech, a creditor at the time of the transaction didnt learn of the LBO until 10 months later. 3 months before the LBO, Shintech had entered into a K whereby Bay Plastics granted Shintech a security interest in all its assets and the shareholders gave personal guaranties, after the LBO, Milhous persuaded Shintech to release both its security interest and the guaranties, but never disclosed LBO character of transaction. Before transaction Bay had net equity of 1.1 million, but after it went down to 250k. Bay filed for bankruptcy 15 months later. It owed 4 mil to BT and 3.5 to Shintech.b. Post transaction they had 7 million in assets (+2.3 in goodwill) and 9 million in liabilities, so difference of 250k in equity. Pre they had 6.7 mill in assets and 5.6 in liabilities, equity of 1.1 Equity disappeared even if assets went up. Company couldnt meet obligations because of excessive debt and ended in bankruptcy. BT gets payment in full, BPI gets nothing (but loses nothing), SH already have money. Shintech probably get nothing as unsecured creditors. c. Is there fraudulent conveyance that could allow C to recover?i. Does debtor make transfer of property interest that could be basis for fraudulent transfer? Under 5(a) Yea, Debtor undertook 3.95 Million to BT, transferred secured interest in assets to BT, transferred 3.5 million to selling shareholders. Court says you must consider other relationships in the structure because they are not isolated. ii. Lack Of reasonably equivalent value- reality of transaction is that 3.5 million of the funds Bay borrowed form Bt went to pay for the stock of the selling shareholders, rather than Bay. selling shareholders had full knowledge that this was an LBO, even discussing their exposure to fraud. Court collapses into 1 transaction, not multiple ones. In that case, the 3.5 million goes to the shareholders and Bay gets only 450k, which is not reasonably equivalent value in exchange for all their assets. iii. Debtor also has to be insolvent at time, or have been rendered insolvent as a result of transaction. Here, they were rendered insolvent by the transaction, because the 2.3 in goodwill doesnt count because it cant be sold in liquidation. Has no value. They were very much over leveraged. All of risk was placed on creditors Must also look at whether they can make their debt payments, which here they cant. 2. Legitimate LBOs, in which assets are mortgaged by a corporation to support an LBO do not exceed the net equity of business, transaction will not make corporation insolvent. If it has sufficient cash flow to pay its dents as the are due, cash flow solvency test is met. This leaves an LBO ex-post to fraud attack only if the margin of equity is too thin to support the corporations business. Even if corporation is left insolvent, if the cash flow is sufficient to make debt payments, transaction is unassailable.3. For LBOs, ask whether the was a transfer, of reasonable value (can argue what goes in into valuation), and whether this caused insolvency. iii. Problem 4.5 - KW loans $500k to her friend PR to start a business (money lent to the company directly), repayable in six years in exchange for interest. One years later, PR says she sold all stock of MK to RL (who has no business know-how) for 100k by getting a loan. The sale was on credit, with the company guaranteeing RLs payments to PR with all of the companys assets. The companys assets > its liabilities, but its bills are piling up. KW is worried about the business failing. Can she invalidate the sale? (i) First of all, what transaction are you trying to undo? Answer: the companys security of the loan on the stock sale, since the company is what owes KW. (ii) Theres no actual fraud, so UFTA 4(a)(1) doesnt apply. Thus, we are left with UFTA 4(a)(2), which probably also doesnt apply because there is reasonably equivalent value given (presumably the stock sale reflects the value of the company; theres no indication in the facts of a bargain-basement sale, price that seems more than adequate for business that hasnt profited.(iii) The company isnt balance-sheet insolvent, but it cant pay its debts as the come due so they are presumed insolvent, UFTA 2, so UFTA 5 applies. Company is an insider, and it would have reason to know of its insolvency. Thus, can void under UFTA 5(b). Insolvency question is at issue here.iv. Problem 4.6 - Tithing while legally insolvent. Can he make a 4(a) subjective intent? Seems unlikely, if theyre legitimately Christian then their intent was legit. What about with 5(a), because they didnt receive anything of value in return? Maybe they received emotional well-being by religious services. Maybe social stature? Sticky questions about reasonably equivalent value. In this case, court said it was fraudulent conveyance because they got no value, but congress then passes RFRA, which outlaws statutes that interferes with religious expression in federal laws. The big point: by the strict statutory language, a tithe to a church while insolvent is a fraudulent transfer under UFTA 5(a) unless value was exchanged (and spiritual fulfillment probably does not fit in UFTA 3s definition of value).v. State Collective remedies-1. assignment for benefit of creditors wants lawyers to deal with creditors, liquidate non-exempt property, and he distributes it. Doesnt provide discharge of remaining debt.2. Composition and extension- restructuring. Agreement that debtor will pay less, with an extension. It is entirely voluntary. 3. Receivership court appoints guarding that takes control od debtors financial picture and administrates.4. These all apply for those that cant apply to file under Title 11 federal code, like banks and places of worship.Introduction to Consumer Bankruptcy

A. Premised on idea of a fresh start while business bankruptcy is focused more on saving the business.B. Federal Bankruptcy Statute Purposea. Creditor Perspectivei. Collection under state law is very individualistic. It is a race to Ds property and often creditors are hurt b/c only one makes it first. Higher recovery in consolidated liquidation.ii. Federal reach of the statute. You do not have to deal with particular state rules. The federal government also has treaties with other countries.iii. Finding the assets. D is required to provide extensive schedules of assets up front.b. Debtor Perspectivei. Compassion for debtors.ii. In the interest of the society and the state to have productive and happy individuals.iii. Economic basis: economy depends on relatively free credit/people to taking risks. You want to balance economic stimulation and responsible credit maintenance. C. Bankruptcy Court Organizationa. Bankruptcy courts are federal courts with federal judges. Appointed by courts of appeals for 14 years1. Article I appointments. Not Article III. Under the control of federal district judges2. Bankruptcy judges have jurisdiction over core proceedings; their decisions become final unless they are appealed.3. With regard to non-core proceedings, a bankruptcy judge can hear them only as a master who submits proposed findings to the district court, unless the parties involved consent to a binding decision by the bankruptcy judge.b. Two ways to appeal a bankruptcy decisioni. BR Court -> Dist. Ct. -> COA -> U.S. Supreme Courtii. BR Court -> BAP -> COA -> U.S. Supreme Court1. BAP = Bankruptcy Appellate Panel- Sidesteps the district court. Panel jurisdiction is consensual because any party can insist that the appeal be heard by the district court.i. Used only in 1st, 6th, 8th, 9th and 10th circuits.c. Supreme Court promulgates the rules of bankruptcy procedure.D. Structure of the Bankruptcy Codea. Title 11 is divided into chapters.b. Chapters 1, 3 and 5 are chapter of general applicationi. Chapter 1 - definitions, rules of construction & general powers of the bankruptcy court.ii. Chapter 3 - case administration, including appointment of the TIB and compensation of the TIB and attorneys, accountants, etc.iii. Chapter 5 provisions include regulation of the claims and distribution process, discharges and the TIBs avoiding powers.c. Chapters 7, 9, 11, 12, 13 and 15 a.re operating chaptersi. Chapter 7 - liquidation bankruptcy for consumers and debtors. debtor receives a discharge for all pre-existing debts. Liquidation achieves 2 objectives: fair distribution of debtors assets for the benefit of all creditors and a fresh start for debtorii. Chapter 9 - governmental bankruptcies.iii. Chapter 11 - business reorganization.iv. Chapter 13 - excludes large corporations, is used by consumers and small businesses to make payments over time. alternative to liquidation, the payout plan. (ch 11 for businesses)- debtor can propose to keep all assets in exchange for promising to pay off debts over a period of time out of future income. This means debtors get to keep assets, and that creditors may get higher returns. A modest payout looks better to a creditor than no payout in Ch 7.

Elements Common to Consumer BankruptciesA. The Estatea. At the moment the petition is filed (voluntary/involuntary) an estate is created and a stay on all collection actions against the debtor, the debtors property, and the property of the estate is immediately put in place.b. Property of the Estate 2 questions is it property of the estate?, was it property before the petition filed?a. Things included: At the instant of filing the bankruptcy petition, all the property owned by the debtor becomes property of the estate.1. Income from rents, profits, etc. of estate property (even if post-petition). 541(a)(6)i. Exception not for income from services performed by the debtor after the bankruptcy filing, such as wages, commissions, etc. 541(a)(6)ii. Winnings from a lotto ticket purchased pre-filing (it is a contingent right to any winnings). Ticket is POE under 541(a)(1). Proceeds under 541(a)(6). Winnings POE under 541(a)(7). Any interest in property that the estate acquires after the commencement of the caseiii. Does not include a mere expectancy: a bet youre going to get something, as opposed to an enforceable contingent right.iv. Another example: I am engaged to marry Ivanka trump. Is my right to her assets, upon marriage, property of my bankruptcy estate reachable by my creditors? Of course not! The right must be an enforceable right (ie tort claim or contract right) not a mere expectancy.2. Property Interests All of Ds legal and equitable interests in property unless an exception applies. 541(a)(1). aside form wages, there are a number of expectancies that must be allocated to debtors past (estate) or futures (part of fresh state), which must be determined at which expectancy becomes property.a. Power D exercises for benefit of another not part of estate. 541(b)(1). b. Nontransferable beneficial interest in a trust is not part of the estate. 541(c)(2). This is the spendthrift trust exception.i. Ex: D can often keep retirement acct b/c such accts are generally set up as spendthrift accounts.1. Note: Protection for retirement accounts not limited to STs. Congress spec. excluded other retirement devices, such as tax-deferred annuities, employee compensation plans, health ins plans and educational accounts.c. Also, 541(c)(1) generally invalidates provisions in contracts that make property inalienable. d. Segal v Rochelle- tax refund from business prior taxable years was property of estate, even though entitlement to receive refund did not technically accrue until after the bankruptcy was filed. This looks at wages on special status as opposed to policy grounds.3. Inheritance, divorce decree, or life insurance payout D acquires within 180 days of filing are estate property. 541(a)(5)4. Non-Assignment Clauses: 541(c)(1): invalid in bankruptcy, K still goes into estateb. Disputes over expectancy inclusions usually fall within 1 of 3 categories:1. Legal interests not enforceable at date of bankruptcy but become enforceable at later time.a. Sharp v. Dery: P sought to include Ss post-petition employment bonus as property of the estate. D filed for bankruptcy, then began working for Valasis and received a bonus of 11k. The bonus is form Jan 1 to Dec 31, and must have been in good standing year before or before issuance of dividend. Timing of bonus check was at employers discretion. Bankruptcy trustee wants it to be property of the estate, so you creditors more money. Trustee argues that these are pre-petition wages he was entitled to based on the work he had done the previous year, pre-petition.i. Holding: Post-petition income (bonus) that is dependent upon the continued services of the debtor subsequent to filing doesnt constitute property of the estate.1. Employer had discretion over whether to pay the bonus. Thus, S had no property interest in the bonus. When post-petition income is dependent upon the continued services of debtor subsequent to petition, the amounts do not constitute property of the estate. Because he worked more than 2 months after date of filing to be eligible for bonus, it was dependent upon his continued services of the debtor subsequent to the petition, and doesnt constitute property of the estate2. Even though its related to pre-petition wages, Bonuses dont generally have to be paid, and there was no legal entitlement to the bonus at the time of petition. For bonus to be issued, person had to still be employed at workplace, which requires post-petition activity.2. Certain entitlements, such as permits or licenses that are non-transferable, which may or may not be property.a. In re Burgess: D argued that the county couldnt revoke his license to operate a brothel because the license was property of the estate. In this case Burgess wants it to be property of the estate. Because its reorganization, debtor wants it to be part of estate, because its now reorganization estate. Both trustee and debtor are working together. Property is defined broadly. It has enormous value to estate, so how could they reorganize as a brother without the license.i. Holding: License is property of the estate. If a license has value (liquor license, casino license) then it is property of the estate. Majority of cases have held that liquor and similar licenses are property for bankruptcy purposes. But in In re wade, 9th circuit bankruptcy panel held that license to practice law was not property. court hold that license is property.1. Stands for the proposition that the automatic stay prohibits attempts to revoke certain licenses. 3. Restrictions on transferability imposed by contract or state law. 541(c)(1) makes most non-transferable property, restriction-free for purposes of bankruptcy, besides the spendthrift exception in 541(c)(2) (like retirement accounts). 542(c)(2)- validates restrictions upon transfer of debtors beneficial interest in trust by excluding property from the estate.a. In re Orkin- has business that goes bankrupt, and he set up a retirement account during this time. Then he goes to bankruptcy, and wants to not be part of property of the estate (different than exempt). If his retirement account is ERISA-qualified, then fed law protects it from his creditors and the SC has ruled that it will not be part of the estate. If it is not qualified, the debtor can try with state law. If under Mass law, plan has a valid spendthrift trust provision preventing alienation and thus protecting it form creditors, it will not become part of the estate. Is his plan ERISA qualified and not part of the estate, under 541(c)(2)?i. What counts as ERISA-qualified? Most courts agree it must satisfy both IRC and ERISA. Here he is not ERISA qualified because he is an employer, which goes against definition in ERISAii. Does it qualify under state law? Trustee in Bankruptcy says plan doesnt qualify under ERISA as a pension because sole shareholder gave himself employee status, and under state sole shareholder cannot have employee status. When debtor has power to amend or terminate the trust, the debtor has such absolute authority over the trust that it must be included as property of the estate. Although his plan contains a restriction on transfer, the plan is easily terminable on 60 days notice, with all funds reverting to him. Plan then does not contain a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under Mass spendthrift trust law and plans assets cannot be excluded if state law exemptions were claimed.c. The Trusteea. The TIBs duties are to gather all the property, protect and maintain it, sell it for the highest possible price and distribute the proceeds among creditors according to statutory priorities. 704. TIB must also scrutinize claims and oppose those that may be invalid or overblown, challenge any improper exemption claims by the debtor and investigate the debtors affairs to the extent necessary. 704b. Theoretically, the trustee can be elected by the creditors in Ch7. However, he is usually appointed by the U.S. Trustee. c. He has a special duty (by custom) to the unsecured creditors, and thus must attack anything that harms them (including security interests, preferences, and priority claims)d. TIP has incentive to maximize recoveries for unsecured creditors b/c he receives a percentage of the funds distributed and that distribution is primarily to unsecured creditors. 326, 330d. Problem Set 5a. Problem 5.1 What counts as property of the Estate?1. Parakeet? Yes (LOE), though not saleable probably and Pets are exempt in some jurisdictions.2. 07 Camry, subject to PMSI in amount exceeding value? No equity in car, though still LOE interest, so POE. Even though he doesnt have equity interest, he has a legal interest that arose before filing3. Intimate pictures? should be considered property of estate, may have value. But no one may want the picture, may just be abandoned by TIB or may be subject to exemption.4. Two U2 tickets? property of the estate, has value, may be abandoned though. Ticket may be not-transferable though, but notwithstanding, it still becomes property of estate.5. Household Furniture -clearly be property of the estate, items around the house, but may be exempt6. Stock left by uncle- POE, acquired by inheritance 541(a)(5)(A)/(6) within 180 days of filing?7. 3/48th interest in oil well, left by uncle- Undivided interest8. Baseball Cards Yes, have value9. Catchers mitt- Yes, has value. Though may matter if brother left for college years ago, state of limitations may have run and he may not have right to get back. 10. Bank Account named trustee for benefit of little sister? ) to extent hes named trustee, hes still named trustee(legal title), but its still technically property of the estate. 541(d) protects the equitable interest, thus the beneficiaries will not be affected. So the estate gets whatever rights the debtor has.11. Salary month prior to petition that received hours after petition? Its pre-petition wages, so included. 541(a)(6) because he had the right to the salary on the commencement of the case.12. Retirement account he cant touch? But is it kind of trust that isnt transferable under applicable law, then it doesnt transfer under property of estate. So, depends, we need more info. ERISA benefits are excluded.13. Parakeet eggs? - belongs to property because it is the product or proceed of property of the estate, so becomes its property. 541(a)(6):14. 7 months later, received dividend for stock (item 6)- Divided.15. Post-petition salary/contribution to RA- these both occurred after he filed for bankruptcy, so its not part of the estate. This occurred after the creation of the estate.b. Problem 5.2 If the lottery ticket was purchased prior to the time he filed for bankruptcy, the proceeds would be the property of the estate. Want to ask if lottery ticket has restriction for transferability, but in general theyre not applicable unless its some trust or investment account situation. Here, ticket was bought pre-filing. -what about the fact ticket is worth 0?- expected value Is still something (Probability X value).c. Problem 5.3 - March 1 sold; April 1 filed for bankruptcy. On March 1: $10; April 1: $15; May 1: $20; Farmers contract is part of the estate. The trust has an equitable and legal right to enforce the contract. But what if Frances refuses to harvest the wheat since she doesn't own the wheat? She was under contractual obligation. But the bankruptcy estate now owns the contract. Would the trustee hire Frances to harvest it? TIB would argue that proceeds of sale belong to estate, because property of estate was created at filing on April 1, and property that belonged to estate was wheat itself. Anything resulting from what belonged to estate, INCLUDING the contract. Farmer is going to say she harvested it and did a lot of the added labor to generate 200k. Could also bring up a quantum meruit claim, to recover the labor work. Splitting it seems contrary to Vogel. TIb could also claim they own it, and then hire someone else to harvest it. d. 5.4- Client owes 100k, income is 1k from 200k trust from mom. Only gets income from trust until mom dies, at which point he gets corpus of trust. Rights are not assignable. Mother is ill, may last 6months, though not a year.1. If restriction on trust is non-transferable under state law, if he filed bankruptcy, it wouldnt be part of the trust as long as she doesnt die within 180 days. If she dies a week after filing it becomes property of estate Look at 541a(5)(a)- 541(c)(2). you could also try to amend the trust, but you might want to look at fraudulent conveyance, if hes doing it with intent to defraud creditors, then you might come up against subjective conveyance problem. (look at REV, was he insolvent?) Must also look at how you define a transfer, and how active debtor has to be in active transfer?e. 5.5 according to sharp v dery, bonus didnt have to be paid (discretionary) and he had no legal entitlement to it at the time of the petition. He should get the award. TIB can argue it was product of pre-filing work. depends on whether award was based on post-filing activities. Was it already a mature legal interest by time filing? Who actually gave the award? Did the dean? Is it award given to ALL teachers (could be POE). Was it given for alumni? (making it post-petition gift, not POE).f. 5.6 liquor licenses issued by state and are nontransferable. Can TIB make claim for license? As a TIB, you want liquor license to resell the store. Depending on Burgess, state-created rights dominated by state have been treated as property for purposes of Bankruptcy law, if have value. Majority of cases have held that liquor and similar licenses are property for bankruptcy purposesB. The Automatic Staya. 362(a) prohibits collection efforts unless an exception applies once the petition has been filed. Filing petition triggers automatic stay that prohibits any creditors attempt to continue to collect from the debtor or debtors property. Creditors are generally precluded from taking any individual action against the debtor or debtors bankruptcy estate, and against TIB and POE. Primarily designed to maintain the status quo while the court figures things out; Everyone stops what theyre doing, so for both TIB and Ds benefit. Creditors can also petition the court to lift the stay, especially if they need protection. Stay is powerful, but temporary.a. Includes right to setoff. 362(a)(7)b. Includes any act to create, perfect or enforce a lien 362(a)(4) - Grace period exceptions (see below).c. Exceptions to the automatic stay:1. Commencement of criminal proceedings 362(b)(1) 2. Actions to establish paternity or alimony/child support, or to collect alimony/child support from non-estate property. 362(b)(2)3. Perfection of PMSI within state law grace period (typ. 10 days) 362(b)(3)4. Actions concerning a governments enforcement of its police or regulatory power. 362(b)(4)5. An audit by a government agency for tax liability, notice of tax deficiency, or demand for tax returns. 362(b)(9)6. Act of lessor to regain property on terminated nonresidential lease. (362(b)(10))b. Violations of the Automatic Staya. Willful violation ct can award attorney fees to the estate, as it is a contempt of court.b. Nonwillful violation The action is void or voidablec. When the Automatic Stay can be lifteda. After notice and a hearing if there is not adequate protection for the creditors. What needs to be shown depends on the type of creditor.1. Protection can be shown by either making periodic cash payments to the creditor, or by giving additional/substitute liens, or by giving other protection. 361b. Secured Creditors can lift the stay for cause, meaning his interest in the collateral is in jeopardy. 362(d)(1)c. Unsecured and secured creditors can get the stay lifted if the debtor has no equity in the property [value liens = 0], and the property is not necessary for an effective reorganization.d. Andrews University v. Merchant: Merchant took out loan from bank in connection with loan program arranged with Uni., had provision that gave bank full recourse against the Uni. in the event a student defaults. When merchant defaulted, university pursuant to guaranty agreement paid the bank and took sole assignment of note, becoming sole creditor for Merchants expenses. She filed for bankruptcy, then asked for copy of transcript and was denied, and she filed against Uni. claiming their refusal violated automatic stay (362a). Whether refusing to provide debtor their transcript because they are in default on prepetition debt, school violated automatic stay provision 362.a. Holding: Withholding a transcript violates the automatic stay. Refusal to issue transcript until debtor pays a prepetition debt is an act to collect, assess, or recover a prepetition debt and a violation of 362(a)(6)1. Though they are not dischargeable, they are not isted within the exceptions to the automatic stay found in 362(b). It applies to creditors of education loans and remains in effect until case is closed, dismissed, or discharge is granted. Get several transcripts you might need before you will pay off loan, while the automatic stay lasts.e. Nissan Motor Corp. v. Baker: Nissan repossessed and sold a debtors car after the debtor filed CH 7. Nissan had notice of the filing shortly after repossession but prior to sale. The sale happened while a motion for relief from stay was pending.a. Holding: A creditor may not retain or sell property of the estate.1. Nissan argues adequate protection, whether a secured creditor is required to turn over its collateral, which is property of the estate, without first receiving adequate protection. 362(a)(3), prohibits any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the state2. 542(a) imposes an affirmative duty on creditors to return estate property and does not require the debtor to provide the creditor with adequate protection as a condition to turnover. Punitive damages were awarded.3. Nissan disregarded bankruptcy courts order, so their sale of vehicle was a willful violation of the stay. Evidence also shows that there was plenty of proof of actual damages, punitive damages, and attorneys fees. Court says thought hey agree they need protection is not relevant. In general, 542a says vehicle was supposed to be given to TIB, 362a3 says you cant exercise control over property of the estate, and shouldve delivered to trustee, afterwards court may decide.f. Preliminary Procedures- 521 lists all of the filing requirementsg. Problem 6.1- 34k wage, though current wage reduced by 100 per week through garnishment. Owes 68k in unsecured debt, including credit cards, medical bills, loans, and past alimony/child support.. Also owes 4.5k in car loan and 750 to auto repair. Does he get his FULL paycheck undiminished by garnishment tomorrow (for past 2 weeks, and every 2 weeks after?) a. Probably will stop because it was pre-petition and it becomes property of the estate, subject to automatic stay and trustee should get it because its part of prepetition work. Garnishment is lifted, so TIB gets it 362(a2) (a3)b. paycheck in a couple weeks? Whatever work is done POST-petition, is his. Can that stuff be garnished though? Regardless of whether its POE or not, Both pots of money are protected from garnishment because of the automatic stay.c. Overdrawn check Criminal actions not stayed- 362(b)(1), but could be seen as a way to gain leverage over debtor through another way, especially if there is evidence of such. Sneaky collection effort.. d. credit cards, medical bills- standard collection efforts stoppede. Utility- 366 buys you 20 day period. After 20 days (order of relief) they can do whatever they want. After 20 days can continue utilities effort. under366utilities can ask for a deposit.f. In terms of timing- You want to file as soon as possible for purposes of his money going to him and not POE, in terms of garnishment, it doesnt matter because its not garnished (is it a bad faith effort though?)g. eviction 363(b)(22)- does not operate as stay of the continuation of any eviction, unlawful detainer, or proceeding against debtor by a lessor against a debtor involving residential property in which the debtor resides as a tenant under lease or rental agreement, obtained BEFORE the fate of filing petition, a judgment for possession of such property against debtor.h. domestic support obligations- exempted under B, against debtors property and property of the estate.h. Problem 6.2- a. would bankruptcy help her. Wont discharge because eventually bank will apply foreclose, BUT this will put a stay in the meanwhile they find her husband.b. can she file- 521a- list of creditors, current income, expenditures, needs credit counseling certificate(109) (new) by someone accredited by office(521b). 521(b)(i) has 45 days to file the information required after the date of filing. In case you dont have all the information. This only applies to the paperwork in (a)(1).c. Theres higher bar for lawyer under 707(b)(4)(C)- requires signature of attorney on petition, which constitutes certification from attorney that he did reasonable investigation. You have the 45 days to try at which time you can change your mind. d. Have to watch out for the $250 valuation of the car. Attorney has to watch this under 707(b)(4)(C), (D) requires an attorney to perform reasonable investigation as tocircumstances that gave rise to the petition, and determined that it is well grounded in fact. =this is aLOW standard.(D) requires that atty signpetition stating that they have noknowledge that info is incorrecti. Problem 6.3-a. they deposited the check after she filed bankruptcy. Problem with retirement account (exemption), if you liquidate it and make it cash, then its property of the estate; she shouldve talked to lawyer before liquidating the retirement account.b. 362(a)(6) says it might be an act to collect a pre-petition debt, and 362(a)(3) says it is an act to take possession of property of the estate. 362(b)11- allows the presentment of a negotiable instrument and the giving of notice of and protesting dishonor of such an instrument, though will probably not apply here.c. What should Avanta do?- Did she have legal or equitable interest in the car? Yea, it is POE, and have to give the car back, along with the cash (Nissan).d. they can have a preferential claim on the car because its secured 521a(2)- within 30 days or at creditor meeting, Sydney has to say she will redeem (pay in full) or reaffirm that debt, then and only then they will understand whats going on. If they dont perform the intention, the stay is automatically lifted under 362(h).e. When the creditor pays back the money from the check, does Sydney get it? No. It goes into the estate and is distributed pro rata. What would have happened if shed filed for bankruptcy before she cashed out her retirement account? Shed have been able to keep it. (541(c)(2)/exemption). She could have used that money to redeem the car post-petition. Now its gone!

Consumer Liquidation BankruptcyA. Introductiona. At end of liquidation process, creditors get proportional share of debtors shit, and debtor is discharged from remaining outstanding debt. Straight liquidation chapter both consumers and business. All of debts are discharged, you hand over all your assets (liquidate), and when you leave bankruptcy you dont have further paymentsb. TIB is appointed to collect estate property, sell assets that are not exempt, and distribute proceeds to creditors. The distribution process covered later by 726. TIB must consider valid exemptions to items of property, those which are reserved for debtors fresh start.c. Once proceeds from sales of all property have been obtained and secured parties and other entities with property interests paid, then the TIB distributes the remaining funds to general creditors. none of these are secured, though some may have been partially secured, and now collecting on portion of claim not yet satisfied There are 3 types of unsecured creditors: Priority, General (GUC) & Subordinatedi. Priority- first in line, entitled to get paid in full or up to the dollar limits of statutory priorities, before other creditors. Among priority creditors, some get paid before others. 507aii. General creditors get paid in middle.iii. Subordinated creditors- all the way at the back, equitable subordination, because of some wrongdoing.B. Eligibilitya. A Change in Philosophyi. In re Shaw: Ds had a $415k house and personal property totaling $56k. They earned $8k/month for the five years preceding their ch 7 filing. They claimed $7.5k in monthly expenses, many lavish. Prior to bankruptcy they had amassed huge debt, with first mortgage of 338k and 2nd mortgage of 60k on their home, with their total secured debt being 469k+ and 131k+ in unsecured debt (had over 15 credit cards). They have spent more money than they earn, and want fresh Ch. 7 start so they retain home and 3 vehicles. TIB moved to dismiss for substantial abuse.1. Holding: A ch 7 petition may be dismissed for substantial abuse. However, the code does not define substantial abuse or indicate what circumstances justify dismissal, so look to totality of the circumstances. Was dismissal appropriate for substantial abuse under 707(b)/ Green Substantial Abuse Test. a. Whether debtor has ability to repay the debtsb. Whether debtor filed petition because of sudden illness, calamity, disability or employment (here, long term spending, not sudden)c. Whether the debtors schedules and income statement and expenses accurately reflect his financial condition (accurate)d. Whether the debtor incurred cash advances and made consumer purchases beyond his ability to repay (definitely made purchases in excess of their income, made purchases assuming they would get bonuses, also, they have a huge house)e. Whether the debtors proposed family budget is excessive or unreasonablei. Ds expenses were excessive and unreasonable. may be dismissed for substantial abuse under 707(b). Shaws could modify their monthly expenditures and repay their debts. House too big for them/ obtain less expensive house. Cannot pay her tuition at expense of creditors. Reductions can be made on Pool/phone expenses, transportation expenses unreasonable. f. Whether the petition was filed in good faith.( good faith met here)1. In granting ch 7 there is a presumption of granting debtors the relief requested, even so, the court finds that cause should be dismissed for substantial abuse. Should be dismissed under 707(b), have opportunity to convert to Ch 13. theres no presumption of abuse, but here this is substantial abuse.b. The Presumption of Abusei. 707(b)(1) exempts anyone whose debts are mostly business-related from abuse screening. Screening test is semi-automatic, employing fixed formula with courts judgment being limitedii. Eligibility test is broken into two parts:1. 707(b)(1) instructs ct to dismiss a case or to convert to CH 11 or 13 if CH 7 constitutes an abuse.a. Two ways to determine whether a filing is an abuse:i. 707(b)(2)(A)(i) The ct shall presume abuse exists according to an intricate formula of income minus expenses.1. 707(b)(2)(B) Special circumstances, such as serious medical conditions or service in the armed forces, may justify adjustments to the calculations.ii. 707(b)(3) 2nd way to find abuse, even after means test grounds for dismissal are bad faith or totality of the circumstances- which has no guidelines.1. Some courts see this as a chance to re-review finances. Bad Faith has no real definition or standardb. Some cts require a history of filings and voluntary dismissals that suggest a scam.c. The Formula: Income and Expensesi. Income & Expenses- key was to determine whether debtor could make meaningful repayment of their debts, through the MEANS TEST. Must Define Income and expenses, subtract them, and if the difference (more income) would pay at least X amount of debt, debtor is barred from Ch 7.1. Is D at or below the median income level for the same-sized household in a particular state?a. Calculate income over the last six months, divide by six and then multiply by twelve. In general, test is whether debtors income exceeds the median income for similar families in state where filed. If Equal to or lower, debtor passed, if higher then must calculate more.i. 101(10A) defines current monthly income. Must calculate debtors average monthly income form past 6 months pre-ceeding bankruptcy.ii. Can include income from all sources (interest on bank, stock dividends, unemployment, tax refunds, business profits, and amounts paid by others towards household expenses.b. Compare it with Census Bureau data for specific statei. If below median level, D is eligible for CH 7ii. If above median level, more calculations neededc. Means Test = [MI ME (707(b)(2)(A)(i)-(iv)] x 60.i. Income after expenses- If D has a surplus after allowed expenses are deducted from income, CH 7 may still be available.1. If the surplus is less than $110/month D passes2. If the surplus is b/w $110 and $183/month, D passes if the surplus is less than 25% of his unsecured debt divided by 60.3. If the surplus is greater than $163/month D flunks no matter what he owes.4. Another way to look at it:a. Total size of surplus of income over expenses over 60 months. How much general unsecured non-priority debt debtor owes ABUSE PRESUMED IFi. If the debt is greater than 26,300, and Surplus is at least 10,950 or 25% of the debt; orii. If the debt is 26300 or less, and the surplus is at least 6575ii. Expenses- those that failed median-income screen(it was higher), then next step is to determine expenses debtor may deduct. Based on IRS model of repayment, where IRS negotiates around family budget, leaving some for taxpayer and rest for IRS, with guidelines developing which included expense allowances for tax delinquents.1. National Standard guidelines based on sliding scale. Allowed to include ACTUAL expenses for things like: childcare, taxes, life insurance, union dues, taxes, arreages, mortgage pay, health insurance, private school. Can cheat system by buying better health insurance, increasing unsecured debt, buying a car. This risks bad Faith though.2. Secured debts-congress made a special provision for lenders who have a security interest in debtors property. Loans can be deducted in full, no matter how large, along with payment arrearages (gas, insurance, and maintenance follows local standards)- 707(b)(2)(A)(ii)(I)a. Same with home mortgages (707(b)(2)(A)(ii)(I)3. Spouses income- If couple files jointly, both incomes are included for all purposes, and thats it. If only one files and the claim is general abuse, only the income of the filed is used to determine who can raise the object (707(b)(6). But if only one files and the objection is based on the means test, the non-filing spouses income is nonetheless included for purposes of continuing the inquiry under the means test (707(b)(7). BUT if debtor fails the test, if debtor and Ds spouse have income above the median, only the Ds income and not that of the Ds spouse is used for working through the budgets and the means test. 2. In re Kimbro: Ps deducted an ownership expense for an unencumbered (not subject to debt or lease) vehicle. 358 for vehicle (472 local standard 112 monthly), and 332 for second vehicle, no payment or debt secured from this car. TIB argues against deduction of second vehicle expense because not indebted and didnt make payments,a. Holding: Under the means test of 707(b)(2)(A)(ii)(I), a debtor may deduct an ownership expense for a vehicle, regardless of whether the debtor has a debt or lease payment on that vehicle.i. Debtors incur expenses arising from a vehicle regardless of whether he makes a lease or loan payment on it.ii. Problem 7.1-600 per month in unemployment, then she got a job and 6.1k per month income. 1k per month in child support but doesnt get it. Instead he pays 6K per year in tuition. Is she eligible for chapter 7?1. First thing to do is find the median income in Michigan and compare it to hers. 4 months at 6100 and 2 months at 650= 25700 divided by six= 4283 x 12=. Her Annual salary is 51400. Michigan median is 52540, for 2 person household and for 1 person is 44,072. Since her income is above the 1 person level, She really wants to be a 2 person household. BK doesnt define HH, but Census says all people who live in house.a. Although Social Security benefits dont count, unemployment benefits are part of the calculation.b. Argument in favor of 2 person- because she has custody of child she has right to claim him. Argument against 2 person- not clearly a 2 person HH, and she doesnt spend money on him. And shes getting money in child support. c. Child Support Income shouldnt include child support. In tax, its exempt from income consideration, so dont count as income. What about the tuition, gifts, and clothes? Is this income to her?i. Section 101(10A)(A) talks about income to the debtornot to her son. But Section 101(10A)(B) includes any amount paid by someone other than the debtor for household expenses of the debtor or the debtors dependents.d. What advice?- IF count as 2 person household, you recommend to file because she will be eligible. If she keeps working and keeps making that much money (and overtime), then she wont qualify. If you want to wait, then you would recommend people not to work over time (or get into unsecured debt.) or even quit her job for a month or two.i. Assuming she was over median, you have to figure what her general unsecured priority debt is, and run it through means test.ii. Maybe advice to do Ch 13?iii. Problem 7.2- - Earn 11,800 monthly. 2 children, 1 required surgeries for heart problems, debt of 100k(credit cards and co pays). Live in