TopicsI. State Law Debt CollectionII. Preferences and Avoidance ActionsIII. Priority (claims and order of priority)IV. DischargeV. Choice of ChapterVI. Treatment of DSO’s

SIX QUESTIONTHESE TOPICS

1) STATE LAW COLLECTIONSDEBT FROM A STATE LAW => AND HOW IT TURNS INTO A JUDGMENTADNT HE DIFFERERENT REMEDIES A CREDITOR CAN USE TO TRY AND GET THAT PROPERTY BACK UNDER STATE LAW

2) CHOICE OF CHAPTER QUESTION

IF SOMEONE COMES INTO YOUR OFFICE, HOW DO YOU ADVISE THEM ON WHICH CHAPTER TO FILE read the chapter 13 book chapter do the problems for it so see better what the benefits are for different chaptersread this part of the E&E

3) HAVE A QUESTION ALL ABOUT DSO’Swhy harp on DSO’s? most common thing. you will need to tell someone how their DSO’s will work in someone else’s bankruptcy.

4) DISCHARGE QUESTIONdischarge under 713 and discharge under 523 considerationswhat is dischargehow does it happenwhat is dischargeablewhat isn’t

5) PREFERNCE QUESTION ELEMENTS OF PREFERENCES & THE VARIANCE DEFENSES THAT MIGHT BE ASSERTED

6) PRIORITIES QUESTION - KNOW HOW 507 WORKS

You can’t get a discharge for restirition or criminal fine under 1328(a)

-call the preference exceptions “defenses”

0. General Things

Bankruptcy Policies1. Orderly distribution of assets2. Fresh start

Adversary Proceedings vs. Contested Matters

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Adversary Proceedsins o AP = its own mini-case within the bankruptcy case, ex. avoidicane of a fraudulent taransfero Is its own lawsuit within a bankrptc ase

Has its own case number Has a new case name Has its own trial An adversary proceeding is its very own lawsuit that proceeds upon the 7000 Part of the Rules of Bankruptcy

Procedure – analogous to the FRCP io Avoidance of Preferences actions is an adversary proceeding

Where you make a payment to someone that will be a creditor in your bankruptcy, and make this 90 days prior to bankruptcy that had the effect of treating 1 creditor differently tha the other others => the AP will fil an adversary proceeding to void the payment: Preference Action. Goal in a preference action is to get the $$ from the prferences added back intot he pool for the unsecured creditors.

The BT can file up to FIFTY diferent AP’s to void preferences BT can employ a attorney, as long as th attorney is not the same lawyer as for the debtor’s case, to file

preference lawsuits – (will hire lawyer to take on the AP) court needs to approve employment of the lawyer: §327

*and each of the actions to avoid the preference will be an adversary proceeding Contested Matters

o In contrast to AP’s, which are their own case, CM’s proceed as motions practice within the bnkrptcy case itselfo Ex. when challenge the claims and the C’s proof of claim (just challenging the #, not saying this was a full-blown

preference just that there is a dsparity between the number on the D’s scheudles on the bankruptcy petition and the # that the C is listing on the proof of claim) => this wil be filed as a MOTION (the BT or the D files a motion to object to the amount that the C lists on their proof of claim, wants to sya that the claim amount is higher or lower)

Chapter 7 Schedules (A, B; I, J) **this is how we find out information about the debtor and this is where LOOK TO for information – can reference these.

Schedules A and B: How will the Trustee know if this is an asset case or a no asset case in a Chapter 7 to notify the creditors? Will be whether there are assets on Schedules A and B.

Schedule C: Claim your exemptions **this is how we determine what “exempt property” is in bkryo (1) Tenants In the Entirety Property => this is an exemption o (2) And then your other exemptions under state law: we stack the exemptions

Homestead Exemption up to $5000 **Special HSE Rule => You have to file Homestead Deed within five days of the §341

meeting in the district court where the debtor lives in order to be exempt Ex. someone could do the $5000 exemption as for their bank accounts.

Family Car Exemption up to $6000 in Virginia Wearing Apparel Exemption

Schedule D: Debtor must list secured creditors o And what happens if doesn’t? Personal liability to the SC will not get discharged.

Schedule E: Debtor must list unsecured creditorso NO DISCHARGE! And the debtor usually gets discharge of the unsecured debts, so crucial. o Credit card companieso Also includes friends who loaned debtor money

Schedule G: List executory contracts and unexpired leases o Executory contract = a contract with substantial obligations outstanding on BOTH SIDES. “Substnatial

obligation” means there is something more than just payment outstanding on both sides Rent – tenant has to pay, meet responsibilities, LL has to keep place habitable, is executory contract Cellphone – can end at any time, not executory contract Relates to §365

Schedule H: Co-Debtor – if there was someone who personally guaranteed the debtor’s loans Schedules I and J: Snapshot of Debtor at Time of Filing (FOR MEANS TEST/C7 eligibility)

o Schedule I: Debtor and debtor’s family’s average income at the time of filingo Schedule J: Debtor’s expenses

“No asset” Cases2

Almost all C7 cases are no asset cases—the debtor HAS NO NON-EXEMPT, UNENCUMBERED ASSETS. Typically the creditors are advised of this

o “no asset notice” They are therefore advised not to bother filing a claim If non-exempt property does come up (ex. waiving a voidable preference), then the C’s will get notice of thi.

Treatment of Secured Parties in Bankruptcy (re: COC) 1. Secured debt remains attached to its collateral even if there is discharge, and can be enforced the collateral after bankruptcy,

even though the debtor cannot be sued for any deficiency. 506(d). a. AKA: Secured debts are treated differently in bankruptcy than other debts: although the secured debt itself may be

discharged in bankruptcy (what the D owes the SP, total), the creditor still has their right to take the property back if the debtor defaults on the payments once the stay is lifted.

b. although a discharge will discharge personal liability of the debtor, but NOT liability of property (“debts are discharged. liens are not.”),

c. The discharge injunction forbids an attempt to collect a debt “as a personal liability” of the discharge debtor . . . but collection by seizure of collateral is not forbidden.

2. Background a. A secured debt has two parts:

i. Debtor’s personal liability – debtor has personal liability for the debt just as would for any other debt, debtor has an obligation personally to pay the debt hat they owe to the creditor. If the debt is otherwise dischargeable, a Chapter 7 bankruptcy will wipe out this personal debt.

1. Once this personal liability is eliminated, the SP cannot sue the debtor to collect the debt.2. AKA: After bankruptcy: The personal liability of the debtor is discharged – the debtor can no longer

be sued for any deficiency. ii. Security interest – and, the second part of a secured debt is the SP’s legal claim on the property that severs as

collateral for the debt. SI gives the SP the right to repossess the property if the debtor doesn’t pay their debt. Liens are not affected by the bankruptcy discharge.

1. If after the stay is lifted, the debtor fails to make their payments on the collateral, then the SP can repossess the collateral – even if the debt is discharged. This is 506(d).

b. The SP originally had two remedies (1) RP the collateral (assert in rem rights against the collateral) and/or (2) sue the debtor for any deficiency on the debt owed that the collateral when the SP repossesses doesn’t cover. But after bankruptcy, the personal liability of the debtor is discharged – the debtor can no longer be sued for any deficiency. However, secured debt remains attached to its collateral even if there is discharge, and can be enforced the collateral after bankruptcy.

3. **What are the debtor’s options for what to do with secured property in bankruptcy if they want to keep it? a. In Chapter 7:

i. If a debtor is behind on payments, and cannot get current on the payments they probably will have to surrender.

ii. Can’t pay to redeem because probably is the value at foreclosure iii. Can’t do ride through – that is the rule, only ride-through when current iv. C won’t agree to do reaffirmation.

b. However, Chapter 13 could help the debtor here i. Cramdown = the debtor keeps the collateral and pays the SP whatever for the price that they could have

sold it for over installments NOT all at once like with the redemption option under §722. ii. Ex: Debtor, if your lender has already accelerated the loan, and won’t let you reaffirm the loan (the

agreement option), you could file for Chapter 13. Under Chapter 13, you can make up the missed payments through the Chapter 13 plan – as long as make the regular payments under your original agreement. And how much does the SP get paid under Chapter 13 plan? Cramdown + Rash Rule = you can reduce the total amount of your payments to the replacement value of the property.

4. Regardless of what the debtor does, the debtor has to issue a statement w/in 30 days of filing bankruptcy as to the D’s intended course of action with respect to the collateral.

a. This is “statement of intention” to creditors: the statement says what the debtor is planning to do about the car/house that the SP has a SI in during the bankruptcy. It is anticipating the SC’s asking, once receive notice that the debtor filed for bky’y, “What about the car/house that I (Bank) have a security interest in?”n

b. Debtor in the Statement of Intention scan say: i. (1) Ride through r

1. If debtor is not behind: “Debtor will maintain and pay the mortgage”

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ii. (2) Claim as exemption1. “Debtor will claim the car as an exemption”

iii. Home - check boxes saying what the debtor will do 1. Retain; Reaffirm and make payments

iv. Car – again, check boxes to answer “what does the debtor want to do with the car?” 1. Debtor: “I want to maintain this debt with you.”

c. After the Statement of Intention => Bank sends the COURT a Reaffirmation Agreement i. The reaffirmation agreement will go to the court for a hearing

d.5. Options – total:

a. “Surrendering the collateral is NOT the debtor’s only option in Chapter 7. The debtor has three alternatives to surrendering the collateral: (1) Redeem the collateral, (2) ride through (but, ONLY IF not in default) -- just continue paying current payments, or (3) reaffirm the debt – sign a K with the SP that you will pay and that you waive your discharge, so they can enforce against you and against the collateral.”

i. However, practically for the C7 debtor, probably just surrender of the collatearl .b. (1) Surrender: Surrender the collateral to discharge the underlying debt (ex. the debtor has paid their car payments of

$100 each month but underlying is a debt of $5000).i. Debtor can walk away from the SA between the parties free and clear – but without the item of the

collateral--if does thisii. Then the SP does get their $$ as their secured claim for the value of the collateral (and then their other

amount will be the unsecured claim). iii. This is where we have the Sears lawnmower situation

1. Secured claim fully secured by sale, SP gets full loan amount with interest2. Secured claim secured, SP gets full loan amount and pre-petition interest 3. Secured claim undersecured, SP gets whatever from the sale for the “allowed secured claim” and

then has bifurcation of the other part, the deficiency, into “allowed unsecured claim” under 506(a) a. the unsecured portion is paid out only with the pro rata payments like the rest of the general

unsecured creditors. 4. After this, the debtor would

a. not have any more personal liability b/c discharageb. and would still have the liability against their lien on the collateral

i. but they have handed the collateral overii. so they do not have the lien on the collatarel: the SP has already exercised its right

against the coll’l b/c has repossed/the D turned it over c. So the debtor is now free and clear.

c. (2) Redeem the debt (§722): Keep the property by redeeming it, assuming the debtor’s equity in the property is protected by an exemption.

i. Redemption of the debt = the debtor pays the creditor the full loan OR the full value of the collateral in cash, whichever is less, and then the debtor gets to keep this collateral.

ii. This means that instead of giving up the property, IF THE EQUITY IN THE PROPERTY IS EXEMPT, the debtor will pay the creditor the full loan or the full value of the collateral, whichever is less.

d. (3) Reaffirm the debt: Keep the property by reaffirming the debt, assuming the debtor’s equity in the property is protected by an exemption.

i. Reaffirmation of secured debt = if a creditor is willing, then the willing creditor agrees to let the debtor keep the collateral in return for a promise to pay that will survive the bankruptcy. The debtor agrees to waive the discharge and allow themselves to be sued again personally and on the lien on the collateral, but they get to keep the collateral.

1. The debtor signs a legally binding agreement to (1) waive the discharge on a given debt, and therefore once again allow themselves sued for a deficiency and, also being subject to losing the collateral, but (2) get to retain the collateral and still make the payments on the collateral.

ii. A debtor cannot force a reaffirmation on a creditor who wants to terminate a relationship with the debtor. e. (4) Ride through/retention (262):

i. This is if: (1) the debtor is NOT IN DEFAULT at the time of the filing, and then (2) continues to make its contracted payments while the creditor does not do anything to reclaim the collateral. THe debtor eventually either pays off the loan as under the SA or later loses the collateral to respossesio.

ii. So the debtor does not owe everything, owes only maintain the contractual paymentsiii. LIMITS

1. 1) Not all circuits allow this2. 2) Must be current on payments when file bkry petition.

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f. (5) EXEMPTION. Debtor could claim the car as an exemption if had the ability/the room within state exemption law of §522.

i.

Blanket nondischargeable debts – not just based on the D’s circumstances (i.e. rifle shot exception for fraud, or luxury goods on the credit card), but always are nondischargeable.1. Some types of debts are never discharged in a C7 bankruptcy. 2. The most common debts that cannot get discharged in a C7 and so the debtor will still owe these after C7 bankruptcy are:

debts incurred to pay nondischargeable taxes court-imposed fines and restitution back child support and back alimony debts owed to an ex-spouse as the result of a divorce or separation (contrast super discharge) loans owed to a retirement plan, such as 401(k) student loans, unless D can show that repaying the laons would be an undue hardship (in a sep. trial) priority taxes: federal and state taxes that first became due less than three years before the debtor’s bankrtupcy filing

date, Ex: taxes that are due on April, 15, 2011 for tax year 2010, would not qualify for discharge until April 16, 2014.

o so if you had any taxes due for tax year 2010, then their filing date would be April 15, 2011o you would have to wait three years from this until they get dischargedo look at the taxes that you are thinking about – ASK: when were these taxes due? Ex?? If this was income tax due

in December 2010, then it would be due April 15, 2011 Then you would have to wait UNTIL April 16, 2014 in order to be able to discharge that.

COC/DSO: this is crucial b/c if you cannot discharge it, then the benefits for C7 are only that some of your creditors got paid. but now you will have no assets to start with (though you will be able to have new earnings pay these) and still owe these.

Initiation of the Bankruptcy Case1. Procedure for Beginning of Bankruptcy Case (1) Debtor files bankruptcy petition

o Exhibitso Schedules o Means Test Analysis – must show you meet the qualification for C7 if filing this as a C7 caseo Day that this happens: (when the petition is uploaded)

Bankruptcy estate is created (of the property of the estate) Automatic stay goes into effect

(2) Filing Fee ($299) or Waiver Request – waiver requests are allowed from pro se debtors only o if you have an attorney cannot file the waiver request o Pro se’s wth their fee waiver requests: can submit a motion to the court

for a waiver or to pay in installments

o Court will ask: does the debtor have any disposable income left on any month (??) (3) Certificate of Credit Counseling (Exhibit D)

o Debtor must do their prepetition courseo There is also a postpetition course they have to do

(4) After the case begins => BT will send “asset notice” to creditors o This tells the creditors that there are assetso Usually most Chapter 7 cases are NO ASSET cases

=> if it is a no-asset case, then the BT files a “no asset” reporto However, if there are assets, BT will file an asset notice to the creditor

tells them “there are asests here” tells the creditors that they may want to go in and file a proof of cliam so that she can give them something

latero which creditors is this to? only to the unsecured creditors

the SC’s are in good shape, they have property rights areldy in something of the debtor’s 2. The Petition

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In order to begin a bankruptcy case, the debtor files a petition. o Petition is the basic request for bkry relief, along with key certificationso Under pejury: This includes a requirement that all the information contained in the filing is true, which is signed by

the debtor under penalty of perjuryo Has schedules: The petition is accompanied by schedules in which the debtor must list important financial

information o Filing fee is $299, but there is a limited form of IFP if someone has income less than 150% of the poverty line (they

can request a fee waiver from the court). Then the filing goes to the bankruptcy court—to the bankruptcy clerk’s office. The clerk will tehn take the filing fee and

date-stamp the minute, hour, and date of the petition. At the instant that the clerk takes the petition and filing fee and date-stamps the petition, TWO KEY THINGS HAPPEN:

o 1) A bankruptcy estate is created, and o 2) The automatic stay goes into effect.

Petition: in order to begin a bankruptcy case, the debtor files a petition; petition is the basic request for bkry relief, along with key certifications.

Key innovcation of BAPCA: distrust of lawyers, and making sure no fraudulent bankruptcy filings o 1) first, the debtor has to sign numerous times under penalty of perjuryo 2) and distrust of lawyers – BAPCA stepped up the pressure on lawyers to verify the accuracy of the debtor’s

records. A lawyer who fails to verify the accuracy of the debtor’s petition may have to forfeit the atty’s fees in the case OR may become subject to sanctions

526: requirements of “debt relief” agencies, including that a debt relief agency cannot “make any statement that is ... untrue or misleading, or should have been known by such agency to be untrue or misleading.” and under 101(12), “debt relief agency,” includes bkry attorneys.

707(b): the atty must sign the debtor’s petition and by signing, the atty represents that the the atty has performed a rsbl investigation and has no knlg that the informat ionin the scheules is incorrect.

1) Penalties against the attorney: if the court finds that the atty violated Rule 9011 (equiv. of FRCP 11), “the court, on its own initiative or on the motion of a party in interest, in accordance with such procedures, may order (i) the assessment of an appropriate civil penalty against the attorney for the debtor; and (ii) the payment of such civil penalty to the trustee, the United States trustee (or the bankruptcy administrator, if any).”

2) The signature of an attorney on the C7 petition:o Reasonable investigation requirement, as well as what represent to court, incl. petition is

well grounded in facto 707(b): “the signature of an attorney on a petition or pleading . . . shall constitute a

certification that the attorney has (i) performed a rsbl investigation into the circumstances that gave rise to the petition, pleading, or written motion; and determined that the petition is (ii) well grounded in fact and (iii) warranted by existing law or a good faith arg for extension of law.

It is crucial that the debtor’s schedules be accurate and complete – WHY? 1) failure to list a debt may make the debt nondischaragble => “unscheduled debt” rifle shot

exception. 2) any false statement in the petition or schedules may result in a complete denial of discharge as to

all of the debtor’s debts (727(a)(4)) o 3) Debt counseling requirement

109(h) 521(b)

o 4) documentation that debtor must file copies of their pay stubs for the two months before fieled include a statement of their monthly include and explanation of how it was claucluated add a statement disclosing their anticipated incrse in income ofver the next 12 months Must file tax return fr the prior year Must file with the bkry court als o tax returns that file with the IRS after commence the bkry case.

A. Automatic Stay (§362) (applies to all) At the moment the petition is filing – when the clerk time-stamps the petition—an automatic stay on all collection actions

against the debtor, the debtor’s property, and the debtor’s property is immediately put into effect. The filing of a petition 6

under C7, C11, or C13 (as well as involuntary petition under C7, C11), automatically STAYS—retrains—creditors from taking further action to collect their claims or enforce their liens against (1) the debtor, (2) the property of the debtor, or (3) the property of the estate.

o **applies to SP’s also and lienholders: they CANNOT enforce their liens. this will be a violation of the AS. 362(a)(3), (4) and (5) stay virtually all types of secured creditor action against property of the estate or property of the debtor: can’t get liens/SI’s after the bkry petition is filed. can’t perfect liens after the bkry petition is filed. can’t enforce liens after the bkry petition is filed.

Filing a bkry petition not only creates a new estate, it also triggers THE AUTOMATIC STAY: a stay that prohibits any creditor’s attempt to continue to collect from the debtor or the debtor’s property.

o “closing the windows and locking the doors” to prevent any property from leaving the newly formed estate: although the bk’ry ct will eventually oversee administration of the estate, for now the creditors will be PRECLUDED FROM TAKING ANY INDIVDIUAL ACTION against the DEBTOR, or the debtor’s bkry estate.

When do we close the windows and lock the door on the bkry estate? Rule: this is a 300 rule, IT APPLIES FOR ALL CHAPTERS.

o If the petition is a voluntary Chapter 7, the bankruptcy trustee needs time to collect the ‘‘property of the estate’’ and make pro rata distributions to creditors. If the petition is voluntary Chapter 11 or Chapter 13, the debtor needs time to prepare a plan.

o So it will not be something to distinguish btw chapterso But note importance for the DSO and their special exceptions

1. Time of the Automatic Stay RULE: The AS is triggered by the filing of the bkry petition: the time stamp when the bkry clerk gets the debtor’s bankruptcy

petition. The AS then dates from the time of filing, and not from when a creditor receives notice of the bkry or learns of the bkry.

o Ex: If D files a bankruptcy petition on April 5, the stay becomes effective on April 5 – even if the C’s don’t learn of this until much later. If a creditor gets a default judgment against D on April 29, not knowing about the AS, what result? the default judgment violates the automatic stay and the default judgment is invalid.

2. Scope of the Automatic Stay Actions Prohibited by the Automatic Stay (362(a)) – what is stayed

– “except as provided in (b) of this section, a petition operates as a stay, applicable to all entities, of” virtually all creditor collection activity. o State collection law litigation

(a)(1): can’t have any action or proceeding against a debtor to recover a claim against the debtor that arose before the commencement of the case under this t

(a)(2): can’t enforce any judgment against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

o Dunning calls, other uses of leverage – ex. Andrews (a)(6): stays “any act to collect” Andrews University v. Merchant (132) – debtor owed her college money. Although the loans were ultimately

nondischargeable, it was a separate issue about AS. And as to the AS: by refusing to provide a student-debtor with their transcripts b/c they are in default on a prepetition debt, a school violates the automatic stay provision. This was a violation of 362(a)(6).

*AS vs. discharge: Although student loans did not get discharge (the ‘bookend injunction’ to AS), did get automatic stay. But implication for the debtor: this means that AS is powerful, but also impermanence: once the bkry case is over and the D once again owes her school the money (b/c payment will not be discharged), the school could once again withhold her transcript.

o Secured parties trying to act against the debtor for their collateral** (a)(3): NO acts “to obtain possession of property of the estate or of property from the estate or to exercise

control over property of the estate” – aka NO RP (a)(4): any act to create, perfect, or enforce any lien against property of the estate (a)(5): no enforcing any lien that secures property of the debtor EXAMPLE: Nissan Motor Acceptance Corp v. Baker – where SP repossessed car after debtor defaulted, not

only was this violation of the AS, but SP got punitive damages. “There is nothing in the Code that grants a creditor the authority to engage In self to retain estate

property . . . which is exactly what the creditor did in this case.” Exceptions to the Automatic Stay (362(b)) – the AS does not apply to: - what is not stayed

o (b)(1): Criminal action or proceeding against the D

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o (b)(2): DSO’s: The commencement of a bkry petition does NOT operate as a stay against 1) commencing or continuing a civil action or proceeding to establish paternity, to establish or modify an

order for DSO’s, concerning child custody or visitation, for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or regarding domestic violence.

2) does NOT stay the collection of a domestic support obligation from property that is not property of the estate;=

3) does NOT stay garnishment (“withholding of income or property”) for DSO obligation.

3. Effect of violation of AS Andrews: “There was a violation of the AS, (a)(6). But as the violation was not willful, sanctions are not merited.” Nissan Motor Acceptance Corp v. Baker (134): after SP repossessed plaintiffs car when they knew that the AS was in effect,

this is a willful violation of the stay and they get punitive damages as well as compensatory damages for the repossession.

4. Seeking relief from the stay A bankruptcy court may grant relief from the automatic stay on request of a ‘‘party in interest,’’ 362(d). The relief will not always take the form of termination of the stay. Section 362(d) provides for ‘‘relief’’ ‘‘such as by

terminating, annulling, modifying, or conditioning such stay.’’ The Bankruptcy Rules provide that the ‘‘request’’ in section 362 takes the form of a motion, Rules 4001(a), 9014.

362(d)(1)o 1) “For cause”

What is “cause”? Might be to allow tort suits against the debtor to go forward in state court to determine the liabity of the plaintiff, where the P agrees that the judgment will only be collected from an insurance carrier. (ex. **the drunk driving ex. we talked about in class)

o 2) For “lack of adequate protection of an interest in property.” can be invoked only by a creditor w/ a lien

362(d)(2) – a lien creditor can obtain relief from stay ifo (A) the debtor does not have any equity in the encumbered property, ando (B) the encumbered property is not necessary to an effective reorganization.

B. Property of the Estate (§541) Significance of what is in the “property of the estate” – what is in the bankruptcy estat

o This is what the BT will collect and sell in order to get $$$$ to pay out the claims. So this will matter for the claims process, because before we give out the money we need to figure out how much there is to give out based on what was in the poe and what was not in the poe.

o In determining COC If it’s in the POE => then the BT is going to SELL IT OFF and this is the PRICE OF THE DEBTOR’S

DICHARGE If it’s NOT going to be in the POE and you really wanted it => ex. the lottery ticket => then being in C7

looks much better for you you would get to keep your item of property and still get whatever discharge you oculd get

aka: In a Chapter 7 case, ‘‘property of the estate’’ is collected by the bankruptcy trustee and sold; the proceeds from the sale of the property of the estate are then distributed to creditors, sections 704, 726. In other words, the loss of property of the estate is the primary cost of Chapter 7 bankruptcy to the debtor; the receipt of the proceeds from the sale of property of the estate is the primary benefit creditors derive from a Chapter 7 bankruptcy.

At the moment a bankruptcy petition is filed (voluntary or involuntary), an “estate” is created” by operation of law, just as if someone had just died and now an estate is created after their death.

o bankruptcy = fiscal deatho when someone files bankruptcy, the law creates an estate consisting of all the interests in property previously owned

by the pre-bankrupt debtor. So at the instant of the filing of the bankruptcy petition, all the property owned byt eh debtor becomes “property of the estate”

o This is a deliberatively expansive concepto It only has a few specific exceptions => those are in 541 of the Code

Key: if you’re the debtor, you want it OUT of the POE. because then the trustee won’t be able to distribute it. if you’re the T (who gets a cut of what goes to the USC’s) or if you’re a creditor, you argue it IS in the POE

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Included in property of the estate: The filing of a bankruptcy petition not only triggers the automatic stay but also creates an estateand in effect transfers the

debtor’s rights in property to that estate, section 541(a). General rule: with only minor exceptions, property of the estate includes all property of the debtor as of the time of the filing

of the bankruptcy petition1. 541(a)(1): The commencement of a case creates an estate. Such an estate is comprised of all the following property,

“wherever located and by whomever held.” Except for exceptions, this is “all legal or equitable interests of the debtor in property as of the commencement of the case.

a. What is included in “interests of the debtor” such that it is included in the POE for (a)(1)?i. Real property of the debtor

ii. Tangible property of the debtoriii. Any intangible property of the debtor – ex. does the debt have $$ owed from anyone? that gets included

in the POE, that’s an interest of the debtoriv. Wages owed that the D has an interest in at the time of the filing.

1. Date rules for wages, g/r: about when the D performs the work .2. So generally, assets that the debtor acquired prior to the petition become property of the

estate property acquired after the petition generally is not property of the estate. a. If D files for bkry on April 5, the money that she earns from work that she does after

April 5 is not property of the estate. But the work that she did up to then would be. v. Tax refund, even if not accrued, if refund was from prior year IS POE

1. Segal v. Rochelle: a tax refund from a business’s prior taxable year WAS property of the estate, even though the entitlement to receive the tax refund did not technically accrue until after the bkry was file.

vi. Vacation pay that had accrued: NOW THIS IS POE 1. Lines v. Frederick: Vacation pay had accrued but was not due and owing on the date of the

bankrtupcy, the debtor did not have a right to this, and it was therefore not POE. 2. CONGRESS: Congress expressly overruled this in adopting present language of 541 -

wanted “all interests of value to the estate” even where was not due and owing yet – the vacation pay had accrued.

3. But Sharp seems somewhat similar... => this WOULD BE POE 2. (a)(3): “any interest in property that the trustee recovers” – so if T got it, T keeps it in the POE. 3. (a)(5)): Not only all property D has on date of filing, but also “any interest in property” that the debtor gets b/c of: (1) A

bequest, devise, or inheritance, (2) from a PSA or (3) asa beneficiary of a life insurance policy or of a death benefit plan within 180 days after the petition is filed.

4. (a)(6): the estate gets “proceeds, product, offspring, rents, or profits of or from property of the estate” – but not what the D got from employment.

a. Ex: insurance proceeds of a house that is in the POE. If marge and bart simpson file, then any insurance proceeds on a house would be POE – but that example was assuming that they both owned the house and both filed for bkry.

5. (a)(7): any interest in property that the estate acquires after the commencement of the case

ON THE MARGINS – depends on specific facts 1. (1) Legal interests not enforceable at the date of bankruptcy – but may by enforceable at some later time: have these legal

interests sufficiently matured and are they sufficiently certain at the time of filing to be included in the estate? Sharp v. Dery (117)

a. Facts: D filed his chapter 7 petition on Dec. 21, 1998. He got an employee bonus from his ER on Feb. 22, 1999. Features of this bonus plan:

i. Bonus plan was based on Jan. 1 – Dec. 31 1998. ii. To receive a bonus check, the bonus plan required that the worker was employed when the company

issued the bonus checks – must have not be fired or resigned during the year that the bonus was for nor been fired before the bonus issued.

iii. The employer had right to amend, suspend, or terminate the bonus plan at any time iv. Timing of the bonus checks was at ER’s sole discretion

b. Trustee then sought determination that the bonus check ($11k) was POE. c. Issue: Was the D’s bonus check POE? It was a bonus almost entirely completed before the filing of the petition

on 12/21. But it was not issued until 2/22 and the D had to remain in good standing, and it was at discretion of ER until then.

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i. Court: the issue then becomes whether the bonus plan “gave Debtor an enforceable right to the bonus check he would eventually receive” in Feb. as of the date he filed petition (12/22) (so as of Dec. 21, 1998).

d. Held: No, this was no property of the estate. The “dispositive characteristic” of the bonus plan, acc. to the court = “the employer, as of the date the debtor filed for bkry, could have decided not to pay any bonus at all under the terms of the bonus plan itself.” –Rule 1: the bonus was discretionary, the employer could have decided to pay any bonus or none at all, and therefore 541 could not expand the debtor’s rights, the debtor did not have the right to this payment as of filing.

i. Caveat: the case might have been POE if Michigan law had rule that a worker had an enforceable right in bonus dividends before payment

ii. In addition, this was dependent on post-petiion performance of services, because the debtor had to remain in good standing, had to keep working there.Rule 2: When post-petition income is dependent upon the continued services of the debtor subsequent to the petition, the amounts do not constitute property of the estate. (This is 541a6) So the court, because here the bonus was still up the ER’s discretion, and the D had to remain in good standing after the daet of the petition, the pay was thus “dependent upon continued services subsequent to the petition, and thus not property of the estate” under (a)(6).

2. (2) Are certain entitlements within the definition of “property”?a. Are licenses w/in POE?b. Majority: Something that is intangible property can be within POE. Ex. a taxicab license, or a FCC license, or a

licnese to run a TV can be included in POE. i. Domain name (like in Umbro) – also could be POE

ii. In re Burgess - Debtor operated a legal brothel outside Las Vegas. Was the D’s brothel licnese part of the POE? Yes. State-created “rights” expressly denominated by the state as “privileges” have often been treated as “property” for purposes of the bkry laws and determining what is the POE. . . and licenses issued by state agencies are “property” for POE. Including:

1. state and federal certifications of eligibility to receive edu’l funding2. corporate name3. airport landing slots4. sales tax license

iii. However, the debtor’s driver’s license can’t be; lisc = a very valuable legal right that is of use to no one but the D.

c. Cf: but some courts have gone the other way – one court held that a state-issued license to sell lotto itickets was not proerpty, another case held that aty’s license to practice law was not property.

3. (3) What should a court do about rxns that are imposed by contract or by law? a. The situation: the D clearly owns valuable property, but the D may have no legal right to transfer the property or

may only be able to transfer the property. b. Rule: 541(c)(1) makes most provisions like this unenforceablec. Exception: (c)(2)’s spendthrift rule (see below: this is NOT INCLUDED)

NOT included in property of the estate:

1) debtor’s wages earned after petition - C7 ONLY these ARE INCLUDED IN CHAPTER 131. If D files for bkry on April 5, the money that she earns from work that she does after April 5 is not property of the estate.

But the work that she did up to then would be. 2. (a)(6): For Chapter 7 Debtors

a. The most important exception to the expansive definition of the POE is for “services performed by an individual debtor after the commencement of the case.” For the typical consumer debtor, this means that wages, commissions, and the like earned afer the petition has been filed will NOT BECOME POE.

i. 541(a)(6): The estate gets “proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.”

ii. AKA: the debtors receive the “fresh start” benefit upon filing-- $$ that the debtor going to earn at work after the filing of the case is NOT going ot be able to go to the BT in the disitribution of the estate.

iii. So that is why inheritance $ is included, whereas $$ from the D’s job is not if it was after the filingb. **Contrast this with 1306 for chapter 13 or chapter 11!!

i. **Under these provisions, postpetition earnings of the debtor ARE property of the estate. 2) other specific exceptions from §541

3. (b)(1): any power that the debtor may exercise solely for the benefit of an entity other than the debtor will NOT be POE 10

4. (b)(5): $$ for grandkids’ or kids’ education if in an educational retirement account will NOT be POE a. funds placed in an educational retirement account at least 365 days prior to a bankruptcy filing, f/b/o D’s kids or

grankids will be excluded from the POE, with a $5,850 limit on funds contributed between one and two years before filing. – “the creditors shall not the children’s educational trust funds”

5. (c)(2): a spendthrift trusta. By 541(c)(2), debtors are often able to keep retirement accounts out of their bankruptcy estate sb/c such accounts

are often set up spendthrift trusts. This excludes in a trust that is neforcable under “applicable non-bkry law.” Patterson v. Shumate: Supreme Court case in 1992 holding that the “applicable non-bkry” law includes state spendthrift and federal ERISA law.

b. Rule: your trust would be STT under state law also outside POE and you get to keep it. (this is more incentive to file C7 – b/c then you don’t have to pay your debts.... at all.)

c. In re Orkin (123) i. Debtor had real estate business. He established a retirement plan for himself. He then did C7 petition.

Now he wants the IRA plan to be outside of POE. Trustee: no, this is POE. ii. D’s arg: 541(c)(2) validates rxns upon transfer of a debtor’s beneficial interest in a trust that are

enforceable under “applicable nonbankruptcy law’ by excluding this property from the POE.” And because it lets the trust provisions under non-bkry law be outside POE => BT doesn’t get to them, leaves them untouched, and still restricted.

iii. Ct notes that if plan is ERISA qualified, then it will be exempt from POE b/c of (c)(2) and Supreme Court’s holding in Patterson; and if it is spendthrift trust, it will also be outside of POE udner (C)(2)

1. but analyze under ERISA: he didn’t have an ERISA qualified trurst2. but analyze under STT law: the plan didn’t qualify as a STT under sate law (he could terminate

the plan, a STT has to totally restrict the beneficiary’s right to transfer).

3) EXEMPTIONS – will still be included in the ‘property of the estate,’ but the issue is that the debtor gets to keep it, even though it is within the POE

1. One-two punch rule for property of the estate:a. One, if the property is excluded from the “property of the estate,” the debtor keeps it.b. Two, if the property is part of the estate but deemed excempt from creditor attachment , the debtor ALSO

KEEPS IT. 2. RULE: In bankruptcy, an individual debtor may assert the exemptions to which she is entitled under the laws of the state

of her domicile and under federal laws other than title 11. a. 522(b)(2)b. The trustee must consider any valid exemption claimed by the debtor in a particular item of property. c. Exemptions will determine what property is exempt from sale for the benefit of creditors (and the D gets to hold

onto) VS. what the BT gets to include in the POE for the creditors. 3. Ex: Debtor has a camry that is subject to a car loan/SI. But the car is otherwise exempt. If the debtor had a valid

exemption for the car, the trustee might still seize it and sell it, and the trustee and the SP would be paid, but the debtor would get the dollar value of the exemption.

a. AKA: If something is exempt, and even if this a valid exemption, doesn’t guarantee that the debtor gets to hold onto the THING. Instead, the D may only be able to hold onto the dollar value of their exemption.

b. As to the unsecured creditors: only if the car were sold for more money than the trustee’s expenses the SP, and the debtor would there be anything in the car for the USC’s.

4. Which exemptions are we talking about?a. Rule: When property is defined as “exempt” under state law, general creditors cannot seize it to satisfy their

judgments. (consensual SI’s are not so restrained.)b. Why does state law apply when we are in the federal law of the bkry code?

i. It is a state/federal systemii. The federal bankruptcy system establishes uniform federal exemptions, but state are permitted to opt out

of those exemptions, and instead have their own state law exemptions.1. these uniform exemptions are §522 2.

iii. If the debtor claims property in those state law exemptions the debtor’s creditors in bkry CANNOT REACH IT.

iv. The general USC creditors only can get to unencumbered and non-exempt property of the debto r. c. In bankruptcy, an individual debtor may assert the exemptions to which she is entitled under the laws of the state

of her domicile and under federal laws other than title 11. (522(b)). i. Alternatively, individual debtors in a few states may claim the exemptions set out in section 522(d).

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ii. But there is a residency req. for choosing the state’s laws – the law that will be the state exemption law is where the D lived between 2 and 2.5 years before filing – so that way the debtor can’t move to a v. good exemption state to reap the benefits of their exemptions laws just before bkry.

d. Can a debtor contract away their exemptions? NO – 522(e) expressly says that waivers of exemption (but not for voluntary liens) are not enforceable.

5. What happens if a debtor claims too much property is exempt – more than the D is allowed to claim as exempt under the state law?

a. An individual debtor files a list of property she claims as exempt (522(l)) b. Trustee will object if the D claims too much property as exempt

6. What is the significance in bankruptcy of exempt property?a. RULE 1 (re: DSO): Generally, an individual debtor is able to retain his or her property. Exempt property will

NOT be distributed to creditors in the bkry case. And it will be protected from the claims of most of the prepetition creditors after the bkry case.

b. But who are “most”? RULE 2: After bankruptcy, there are three of pre-petition creditors who have recourse to property that was SET ASIDE AS EXEMPT in a bankruptcy case, in addition to creditors w/consensual SI’s:

i. (1) Tax Creditors 1. These C’s have debts owed to them that will NOT get discharged: these are creditors w/tax

claims that are exempt from discharge under 523a12. They are also able to reach the debtor’s exempt property in order to get $$ for that discharge.

ii. (2) DSO Creditors1. DSO’s creditors are exempt from discharge: the $ for support of the spouse, ex-spouse, or child

of the debtor will NOT be discharged. (523(a)(5))2. Moreover, to satisfy that debt owed after the bkry case is over, the DSO creditor can reach the

debtor’s otherwise-exempt property. a. Rule: Spouses, former spouses, and children of the debtor with domestic claims that are

excepted from discharged by 523a5 can have recourse to property set aside as exempt in a bankruptcy case.

3. the rule: 522(c): “Property exempt under this section is not liable during or after the case for any debt of the debtor that arose, except (1) a debt of a kind specified in paragraph (1) or (5) of section 523(a) (in which case, notwithstanding any provision of applicable nonbankruptcy law to the contrary, such property shall be liable for a debt of that kind.”

a. 523a1 = to a tax creditor b. 523a5= for a “domestic support obligation” (101(14A))

iii. (3) creditor’s whose claims arise from the D’s fraud in obtaining $ for higher ed, and

I. State Collection Law debt from state law and how it turns into a judgment what is the process htat a state law turns into a judgment what different remedies does a creidtor have to get the property back under state law (1) Execution lien

◦ whole process ◦ WOE and levy and execution lien

(2) noting the lien in the real estate records (~ to lien on the COT) (3) Garnishment Remedy

◦ writ of garnishment – do NOT need WOE ◦ only need writ of garnishment

1. Debt that consumers have – what kinds of debts does this person have that their creditors can enforce w/state law? Secured vs. priority vs. unsecured Secured debts

o Ex: mortgage loan, HELOC (when a bank thinks that there is some equity left on the house so gives a loan based on being a junior creditor in the house. they are the second mortgage. but if a HELOC is undervalued, then it will be a

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bifurcated claim: secured portion, unsecured portion), car payments (car loan is PMSI), some business loans, some consumer loans (payments on furniture).

o RULE: Exempt vs. nonexempt rules do NOT apply to secured creditors. No such thing as exemptions for secured loans. – these are voluntary, you entered into this, you don’t get exceptions.

o These creditors can repossess their collateral/foreclose on their collateral Statutory liens

o Rule: Consumers may also have their property encumbered thru liens that arise by state statute. o Rule 2: For these, the statutory lien creditor does NOT Have to go to court and get warrant-in-debt, trial, judgment,

WOE, levy. Rather, the lien will have arisen by state statute, the facts that give rise to a lien under state statute just have to happen and state statute creates the lien.

o Examples: attorney charging lien (att’y gets lien on $ that won for client for the amount of unpaid legal fees); mechanic’s lien (mechanic gets lien on car in the mechanic’s possession for the $ amount of the mechanic’s unpaid services), landlord lien (if T has not paid rent, state statute provides that LL gets lien on (1) personal property inside apartment and (2) security deposit, until tenant pays rent).

Priority unsecured debts o Ex: Taxes (state, federal), DSO payments (spousal support, distinguish: distribution of property btw debtor and

spouse), student loans (student loan creditors are priority creditors b/c this was for education to improve yourself, you should be able to pay it back), wages that the debtor owes to other people (they should be able to get paid back).

o These creditors CANNOT foreclose on property – they are still unsecured creditors. To get enforcement on what they are owed, priority unsecured still has to get judgment

o But tax creditors may have tax lien arise and become secured creditors Unsecured debts

o Debts that a consumer owes that do not have a statutory lien arise and were not secured by a SI. When a creditor wants to get paid for these and the debtor doesn’t pay, creditor goes to court and gets judgment against the debtor and then if levy, can get lien – becomes involuntary lien creditor.

o Ex: medical debt, hospital bills, tort debt (they hit someone, and now they have a tort creditor saying they owe payment), personal loans (ex. Aunt Nelda loans D $100), personal amenities (does this person go to a gym? then they owe gym payments, country club, etc.), business loans on unsecured credit.

But a consumer is also a creditor in some instances. These $ streams are what in part a creditor will look to in garnishment. o As to bank: Consumer is a creditor as to the bank where they have a bank deposit account. They have their $$ with

the bank. The bank is getting the “loan” of this money by having it in their bank and in their pool of money that they get to have liquid. The bank therefore pays the consumer interest: b/c this is a ‘loan’ of consumer => bank, bank as D paying its creditor interest.

Creditor will want to garnish this bank account but note: if the D overdraws their checking account w/the bank, the bank will have a SI on the debtor’s

account for the amount overdrawn. So then the bank is a secured party creditor, and the bank will have a lien on the amount overdrawn from the account and have priority over an unsecured creditor who comes later.

o As to employer: Consumer is a creditor as to employer in period between last payday to next payday. Until payday comes, for the 2 weeks in between, employee is creditor of employer.

Creditor will want to garnish these wages. In Chapter 13, Trustee will want to get wage order for these wages, this is good for DSO’s. Contrast: what about social support payments? (ex. SS, SSDI?)

Rule: social Security checks, retirement plan proceeds, unemployment and disability benefits, or workers' compensation awards cannot be garnished, except to pay federal taxes or child support (or unless they have accumulated in your bank account). -- because once they have acculumated in your bank account they are no longer wages, they are in bank account.

o As to commissions due: If in their business they get commissions, then the consumer is a creditor to whoever owes those commissions.

Creditor will want to garnish these commissions (Webb v. Erickson) o As to landlord: If consumer debtor paid a security deposit: is a creditor of the LL as to this security deposit.o As to life insurance: if consumer has kept up with life insurance payments – then as a beneficiary on a life insurance

policy These are contracts, and not service contracts (like in Umbro) So the creditor

o As to another consumer: If a consumer has loaned a friend money – they will be a creditor as to that person. Ex: In re Sharpe (lady gave friend $ based on his false representation that he had money)

o Lottery ticket: owed money on lottery ticket (...ex: in UCC this is an account

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2. Remedies for Debts Owed (nonjudicial/state law) – what will the creditor do when they are owed money under state law?Step 1: Consider nonjudicial collection – leverage. What leverage does each of the parties have here? Nonjudicial collection methods: largely about leverage. “Leverage” = anything that will make the other party do what we want them to do. The debtor wil have many debts and

there won’t be enough $ to pay everyone out. So the D is asking “who will I pay?” and they will pay whoever is exerting the most leverage 1st.

Benefits of leverageo For a secured creditor: they will have their RP remedy under state law. But there might still be benfits to leverage:

don’t risk throwing debtor into bankruptcy by declaring loan accelarting loan, and debtor declaring bankruptcy b/c cannot pay the full debt, and SP might end up getting less $ than debt owed (Ch 7: redemption at foreclosure value OR getting liquidation payment only to the value of the collateral).

o For an unsecured creditor: their only remedy will be state law judgment, so use leverage b/c think judgment (suing and beginning litigation) as expensive, unnecessary costs

Types of Leverage – for creditorso Secured Creditors – what leverage does a SP have? –

They have the most leverage because under A9 a SP can repossess their collateral after default 1) Their item of collateral: can foreclose OR can threaten to foreclose 2) Any other terms of the SA (ex. later charges) 3) Acceleration clause of the ASA

And under bankruptcy, they will get preferred treatment of their SP – their interest in the collatearl NOT get discharged under either Chapter 7 or Chapter 13 (but the collateral can be paid at redemption value under plan payments under Chapter 13). – see above.

o Priority Unsecured Creditors – second-most leverage b/c of the remedies that they get under state/federallaw Tax creditors - an get an IRS federal tax lien or a state tax lien

1) Tax lien over property – so become secured creditoro Rule: Federal Tax Lien-- If D does not pay IRS, they get a tax lien over all of the debtor’s

tangible and intangible property. 2) Some taxes not dischargeable in bankruptcy, will have priority

o Three year income tax rule DSO creditors - three special types of leverage

1) Imprisonmento Can get sent to jail if do not pay debts to a DSO creditor (ex. “Deadbeat dad who owed

$700k is off to prioson”). 2) Higher garnishment permitted.

o Rule: A creditor can garnish up to 65% of a debtor’s “disposable earnings,” as opposed to 25% for a non-DSO creditor.

3) DSO back payments have 1st priority AND are not dischargable in bankruptcy, whether C7 or C13.

Student loan creditors No discharge in bankruptcy, unless v. high “substantial hardship” (In re Green).

o Unsecured Creditors – kind of leverage that will have depends on who the USC is 1) Credit card companies:

charing high interest rates – if D doesn’t pay, credit card co. will keep increasing what they owe; sooner D pays, less will owe

bad credit score -- if D doesn’t pay, will hurt credit score in the future she doens'late fees – sooner D pays, less will owe

2) Personal loans: social leverage, social stigma, personal guilt, embarrassment 3) Personal amenities creditors: social leverage, social stigma, embarrassment (ex. country club) 4) All – uses carrots like etending term of the loan payment (b/c no property interest, and no special priority

remedies) 5) All – sticks like dunning methods. letters, calls, hound 6) Odd leverage – crematory put dead dad on son’s doorstep b/c son didn’t pay These are all stayed by the AS if the debtor files for bankruptcy These can all resume after a discharge is over in theory – but if the discharge is granted, then the D won’t

owe these people debts anymore. “the discharged debtor has no personal liability on any debt after a discharge. this means that

unsecured debts are effectively vaporized” when there is Chapter 7 discharge.

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Types of leverage – for debtor. What kind of leveargae does the debtor have?o All creditors: D can threaten to file for bankruptcy or can actually file

Especially USC’s this is v. drastic. they will be stayed by the AS, end up as general USC’s, get paid out only in tiny bkry dollars.

o Secured creditors: if property is in D’s house, debtor cannot RP w/o breach of the peace Application

o Dr. Talis example (she can’t pay all her loans. who will she pay?) Secured creditors – car co. and home mortgage lender: they have their RP/foreclosure remedies. Car lender

can RP her car; home mortage lender can evict her. these will have the most leverage; she will pay them 1st so she can keep car, so she will pay mortgge lender so she will not get evicted.

Priority USC creditors -- she will pay/ alimony payment b/c fear of criminal penalties and b/c she will have to pay this even if decl. bkry.

Then, the non-priority USC creditors – depends on her specific situation what leverage to her situation. Social vs. coworker (also social, maybe what power of coworker) vs. her welfare.

If you are representing a bank, what advice for them to get paid first?o Increase leverageo Incrase leverage how?

STICKS: (1) dunning methods (hound her, call her to demand payment from her) [**sell the debt to a collection agency and have them do this], (2) increase interest rate that are charging her on the loan, (3) find ways to embarrass her—ex. demand the payment in places like country club, gym, workplace

CARROTS: (1) extend the life of the loan or (2) lower the principal of the loan – agree for the principal of the loan to be for less than original value of the debt

Step 2: Collection Remedies under Law Generally

o These are collection remedies for unsecured creditors under state law. If this a secured creditor, they won’t do the judgment usually, instead will use self-help: repossession of the collateral under A9 or foreclosure on the property under local real estate law. (recall: no exempt/non-exempt rules for voluntary SC debts).

o But, if USC, has no RP remedy, if they did either of these, would be conversion, need a different remedy: look to remedies under state law.

1) Judgment execution lien: the judgment collection process, culminating in judgment lien on property and execution sale. Judicial lien creditor gets proceeds from the execution sale.

Sheriff will conduct levy After levy, have execution sale. JLC gets proceeds from the execution sale. Execution lien method might include use of turnover order by statute.

2) Judgment lien by recordation 3) Garnishment (this is NOT a lien)

o The first step for all of these is a judgment. If the creditor gets a judgment, what does the judgment give the judgment creditor? The right to collect from the debt, AND,

if the court orders, the right to actualize on the property that debtor owns (WOE, levy, judicial lien, JL w/turnover order)

if the court orders, the right to actualize on the property the debtor owns by recording the judgment (judgment lien by recordation), OR

if the court orders, the right to garnish wages (WOG, garnishment) Step 1: Judgment. The first step of the judicial collection process is that the creditor must get a judgment, become

judgment creditor.o Words within judgment step:

warrant in debt (1st, this is what C does) bill of particulars (this is what we have if the debtor does show up, does contest the amount – then D will ask

for the bill of particular and the C has to file it to say more about their claim against D) grounds for defense (this is what the D files w/in 30 days after the C files their bill of partics

o 1) First, C files and serves warrant in debt – a “complaint” saying that D owes C an obligation – the debtor “swears out a warrant in debt”

C must actually serve this on the debtor tip: include attachments for the court to see about why you have a debt owed. ex: if there was a PN, attach a

copy of the PN to the WID that you serve on the debtor and that the court will later read.o 2) After filing/service of the WID, C and D get a hearing date. This hearing is the “first return.” At the hearing,

either debtor shows up or doesn’t show up. If debtor does NOT show up at hearing => default judgment, C now is judgment creditor

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C makes motion for default judgment, court hears motion, C gets a default judgment against the creditor, is now a judgment creditor

If debtor DOES show up at the hearing – does the debtor contest the debt? If debtor doesn’t contest debt, creditor gets a judgment against D, C now is judgment creditor If debtor does contest the debt: we have the bill of particulars and grounds for defense

o Debtor will ask for bill of particulars – tell more about the debt that the D allegedly owesso Creditor files bill of particulars (here is my claim against you, D, in a more specific

manner)o Debtor, 30 days after, files grounds for defenseo 30 days after, hearing (trial)

o 3) Trial: ONLY HAVE this if the debtor both showed up at the hearing and objected to the debt. Trial is a lot like any other trial – it is on the merit and each party gets a change to make their case Result of trial: C gets judgment against the debtor, now is judgment creditor

o 4) At trial, OR by default judgment, the creditor gets a JUDGMENT. - the result of “Step 1” is a judgment. But what is a judgment? What does a judgment give a judgment creditor?

Rule: A judgment is just a sheet of paper. The judgment creditor remains an unsecured (general) creditor until execution is obtained on the judgment.

Until execution is obtained on the judgment, the only improvement for the judgment creditor after trial is that the claim has become indisputable by the debtor.

Furthermore, a judgment creditor who uses the remedy of garnishment instead of judgment does NOT (and NEVER GETS) the property right in the D’s property—they remain an unsecured creditor. Their position is improved because of the garnishment order.

Step 2: This will depend on what method the creditor takes beyond the judgment.o Option 1: Execution Lien. Creditor actualizes on the property of the debtor through a judgment lien.

Step 1: Judgment (C sues debtor for the debt, gets a judgment) Step 2: After judgment, collection process begins with JC getting a writ of execution (“writ of fi fa”) from

the court. WOE is a court order that orders the sheriff or marshal to look for non-exempt property of the

judgment debtor, to seize it, to sell it, and to pay the proceeds to the judgment creditor, until the judgment is fully paid.

Step 3: Then clerk issues the WOE to the sheriff. Rule: the judgment creditor must request the court clerk to issue the WOE to the sheriff. After judgment creditor requests, clerk will issue this, nothing else required (other than their

judgment), WOE’s are routinely issued by the court clerk upon request of the judgment creditor and are then delivered to the sheriff for “execution.”

*NOTE: at this stage, the judgment has not yet arisen: in order for there to be a lien, the sheriff has to go thru with the full execution process: MUST LEVY. if doesn’t, what is this a lien on? we wouldn’t know, because wouldn’t have done the levy.

o And this levy must be an effective levy – i.e. they announced, tagged something of the D’s proerpt and it was not exempt

Step 4: Sheriff levies on debtor’s NON-EXEMPT property. Non-exempt ONLY. If the sheriff levies on the D’s exempt property => not an effective levy, not an effective execution lien.

Rules: o 1) Property must be able to be subject to a levy.

Not encumbered Not exempt Not another reason why not – service K

o 2) Actions of the S in the levy must be sufficient for “effective levy.” Shoes Below Cost issue.

1) Req. 1: Property must be able to be subject to a levy.o Property that can be levied

money (but only to the extent not part of the homestead exemption that debtor claims)

tangible goods and chattels -- but only to the extent not part of the homestead exemption that debtor claims

o Property that cannot be levied: (1) PROPERTY THAT IS SECURED

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RULE: If there is encumbered property, SP will have priority, LC will NOT have priority, sheriff will not levy on someone else’s collateral.

A consensual lien (a SI) gives the SC the right to fence off the property covered by the lien from collection efforts by other creditors – and they have prioritiyes. If the property is encumbered with a valid & perfected security interest, sheriff will not levy on this, it is someone else’s collateral and the SP has priority to that collateral.

o This also applies to statutory liens. Ex. the mechanics lien creditor also will tie up the D’s property the same way an SP would.

ASK: is property encumbered by anyone? is there equity for the lien to attach to? IF SO, CANNOT BE LEVIED ON.

o The only time that a LC would have priority over a SP is if the SP perfected their SI after the judgment creditor’s lien arose under state law. Meaning there wasn’t a valid & enforceable security interest covering the collatearl.

o But if the property is encumbered with a valid & perfected security interest when the JC wants the sheriff levy on the property, the sheriff will not levy on this, it is someone else’s collateral and the SP has priority to that collatearl.

Ex: Friend BMW Example -- friend wanted to know if the ex-wife could take his BMW. But he owed $72k on the car payments and said the car was only worth $70k. Therefore, will the ex-wife be able to get to the car? NO, because it is “someone else’s collateral” – will NOT levy on this.

o car is totally encumbered o he should note: won’t be protected by the state law debt

exemptionso but his judgment creditors, ex. his ex-wife, will not be able to get

to the collateral -- she can’t get @ the BMV because it’s someone else’s collateral.

(2) Cannot be levied: D PROPERTY THAT IS EXEMPT - key: (1) homestead exemption $5000 against an unsecured creditor/judgment creditor, and (2) family car exemption $6000 against unsecured creditor/judgment creditor

RULE: State law provides exemptions that shield the D’s property from ALL USC state law remedies. But this only applies to USC’s, not to SC’s.

How is the sheriff supposed to know which property is exempt? R: Two ways:

o 1) If the debtor has filed for exemptiono 2) Creditor does a debtor interrogatory under state law

In DI, C asks debtor questions about what property has, whether exempt/non-exempt

Debtor’s interrogatories can be every 6 months Important b/c if the property turns out to be exempt and

this was what was subject to D’s lien, then the lien won’t be enforceable, will have to re-levy – the debtor will get to keep the exempt property and debt won’t be satisfied.

What exemptions can the debtor claim in Virginia? o Homestead exemption

Can be pp or real property This can be any property. And whatever the D chooses up

to the $5000 limit will be shielded from the creditor and sheriff’s levy

If judgment debtor under 65: can claim $5000 in HSE plus an additional $500 per dependent to be shielded from creditor and sheriff’s levy.

If judgment debtor 65+: you can claim $10,000 as shielded from the creditor and sheriff’s levy

o Family car exemption

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You can shield up to $6000 of the equity in a car from the sheriff and the from judicial lien creditor

However, this is second in priority to a judicial lien creditor (see also 9-317).

Therefore, only will be able to shield to the extent your car is not encumbered as collateral for a loan – only for the equity in a car.

o Other exemptions Clothes (“wearing apparel”): $1000 worth of your clothes

shielded Disabled veterans: can claim $10,000 worth of additional

property shielded from sheriff’s levy Exempt property of a decedent: can claim up to $15,000

of property of a decedent that would have been exempt as shielded from sheriff’s levy

Family portraits and heirlooms: can shield up to $5000 worth of family portraits and heirlooms

Farmer’s equipment: can shield up to $4000 worth of farming equipment

Firearm: can shield a firearm worth up to $3000 Household furnisheings - $5000 Funeral contracts - $5000

o Debtor is allowed to cbomine exemptiosn (3) Service contracts. Rule: service contracts cannot be used property to

seize/collect for judicial lien levy is permissible elsewhere, but it NOT okay in Virginia.

(4) Intangibles. Rule: Property msut be tangible. Sheriff must be able to take the goods into possession.

o Situations - What can the sheriff levy? R1: If no equity in the property, then sheriff cannot levy because probably

totally encumbered by someone else’s SI – it is someone else’s collateral.o Ex: Person A has a home that is worth $200,000 and a lien

(mortgage) on your home that you owe $210,000 for. Is the exemption going to help A? No, because this is all encumbered, exemptions do not apply to SP’s, apply only to protect your equity in the home => you have no equity.

R2: If there is equity in the property, but debtor is claiming this all as an exemption, the sheriff cannot levy – S cannot levy on exempt property.

o Ex: Person has deposit account at bank for $4000. They can claim this all as their homestead exemption and the S cannot levy.

R3: If something is mostly encumbered, and then the D wants exemption to cover the rest, the sheriff also cannot levy.

R4: And, if something is mostly encumbered, and then the D wants exemption to most of the rest, the sheriff could levy, but it is probably not worth it for the sheriff to levy – as equity in the item, after taking out the encumbrances and the exemptions that D is going to claim, get smaller, incr. less likely S going to levy the property.

o Ex: You have a car worth $20,000. Volvo has a $5000 lien on your car – you are almost all paid off on your car payments but not quite yet. Someone has a judgment against you. Would sheriff repossess the car?

Limit 1: Encumbrances on the car - Volvo still has their $5000 lienon the car.

Limit 2: Let’s say you want to keep the car. So you would claim the maximum amount under state law exemptions that you could in order to keep the car – you would combine them:

$5000 from HSE +

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$6000 from family car exemption That leaves only $4000 in equity that levy could reach.

Will also require the costs of holding the sale. Might mean that the sheriff would try to levy on

something else. (2) Req. 2: Was this an effective levy? Must have an effective action in order to have effective levy

and therefore an effective LIEN.o LEVY MUST WITHIN 90 DAYS FROM JUDGMENT o Seizure is NOT necessary for an effective levy.

The sheriff must (1) have the goods in view and (2) have the ability to take the goods into possession (because the goods are tangible).

BUT, the officer does NOT actually have to take the goods into possession. Specific actions that sheriff takes – are these effective?

(1) Possession – yes, possession is sufficient for effective levyo Ex. sheriff goes down to the property => take physical possession

of any property found at the debtor’s house (stereo or some tools) and put them into the pick-up and lock them up at the courthouse.

(2) Tagging: so in VA for rule above, tagging would be sufficient. o What is tagging: Sheriff goes down to the property. Sheriff writes

list of the property. Then the sheriff may put a physical tag with a notice of seizure on the property.

o Use esp. for: the personal property cannot be seized immediately b- ex. it is too big for the pick-up – like a tractor) , the sheriff may tag it with a notice of seizure.

o But, SPLIT Some jxns allow tagging – just that have goods in view

and have ability to take goods into possession Virginia Nebraska in Credit Bureau of Broken Bow v. Moniger

(47). Held: only req. is that sheriff in express terms asserts dominion over the piece of property. When sheriff sheriff found debtor, served him w/ a copy of the writ, and informed D he was executing on the pickup truck. Sheriff then “grabbed ahold of the pickup” and said, “I execute on this pickup for the County of Custer,” but did NOT take keys, and did NOT take poss’n of car, this was still a valid levy.

Other jxns require more -- disagree w/Credit Bureau, require that sheriff either (1) take poss’n of the property, or (2) appoint an indepdnet custodian.

(3) Post with notice of seizure or sale – real esateo B/c real estate can never be loaded into the pick-up, it is also

seized by “posting” notice of seizure and sale or some similar method.

(4) Announcement of Seizure o Shoes Below Cost: Announcing, like did here, would be

equivalent to tagging the collateral. tagging = which is a method that can have a valid levy – Exception: Some states require that the sheriff actually

seize the property But in VA there is an effective levy even if only tag the

collateral so announcing is ok. o Effect of a Valid Levy

R1: Judgment becomes a judicial lien creditor, and now has a property intrest in this item of collateral.

R2: Therefore, if the debtor goes into bankruptcy, the LC is NO LONGER an UNSECURD CREDITOR.

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R3: But, limit: the judgment creditor is a judgment lien creditor only as to the property that the sheriff has levied on. Once the sheriff has levied upon a specific piece of the debtor’s property, the judgment creditor becomes a “judicial lien creditor” as to that property , AKA is now a “lien creditor.”

o Step 5: Foreclosure After Levy Once there was the levy, execution process is completed: the judgment creditor has been converted into a lien

creditor and now has a lien on whatever property the sheriff levied on. However, the LC still needs to get paid. Therefore: foreclosure after levy

Distinguish foreclosure sale after LEVY from secured party’s foreclosure sale after REPOSSESSION or FORECLOSURE.

One is by the SP basd on a security interest and their right to RP The other is based on a judgment and the sheriff levying on the property and then selling what levied

to distribute proceeds to the judgment lien creditor. - After the levy the sheriff will advertise the property for public sale and sell it t to the highest bidder.

Rules for the sheriff’s foreclosure sale (execution sale) Notice of sale

o Sheriff must post a notice of the sale for 10 days before the sale. & this notice that Sheriff must post this notice at some place near the residence of the debtor.

o Exception to notice length req.: Sales can be held on less than 10 days notice for expensive goods + for perishable goods.

Who can bid? Everyone, except that ppl in govt cannot bid. Distribution of proceeds -- from the sale, the sheriff will get proceeds, and distribute the proceeds of

the sale to the levying judgment creditor until the judgment creditor is paid in full. o If there is too much from the sale: Any remaining proceeds will be paid back to the

judgment debtor, unless some subsequent judgment creditor levied symbolically upon the property while it was stored at the courthouse.

Rule: When have the proceeds, sheriff will have to (1) pay off the admin. expenses, and then (2) pay off the lien creditor. Then, if there is still left over (if the sale brings in more than the judgment and costs (sheriff gets 5% commission) => the surplus is returned to the debtor.

o If there is too little from the sale (not enough proceeds from the sale): Process starts over. If the proceeds are insufficient to pay the judgment creditor’s judgment in full, then entry will be made in the record that there was only partial satisfaction and the sheriff will be commanded to look for more of the debtor’s property to seize, and the process will start over. (you don’t get bifurcated b/c you are already a judgment lien creditor => so process just starts all over again)

o What if there are multiple judgment ien creditors asserting rights to the same proceeds of property that was levied? (1) Figure out who has a competing claim: three main types.

o (1) Unsecured creditors who have gotten judgmento (2) Secured creditors w/consensual lienso (3) Tax creditors

(2) Figure out what the parties are fighting over (3) Determine who has priority: who made the requisite legal move first

Rule: If multiple unsecured creditors have levied on a piece of property, then the priority date will be determined by state law. State law may provide that the priority of the lien relates back to the date of either (1) judgment (rare) or (2) majority rule: the date that the writ of execution was issued to the sheriff.

Majority Rule: The date that a lien arises will relate back to when the judgment creditor’s writ of execution delivered to the sheriff.

o note: MUST be successful execution completed before the successful levy can “relate back” to the lien arising. The judicial creditor gets an “inchoate lien” as of the priority date (ex. when the sheriff gets the writ), which becomes “choate” on the date of actual seizure of levy of the property and then relates back to the earlier date. => if there is never a completed levy, then the lien creditor never becomes choate and the creditor has no priority against any other creditor.

o Therefore, if no property to levy: no attachment, no priority. “while a levy is essential for perfection and priority, the date of the levy is not always the controlling date for determining priorities.

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o And if no successful levy completed, even if this was the 1st judgment creditor to get the WOE to the sheriff, ALSO no priority.

Ex. (2.1, 53): You represent Blake. There are three competing creditors. (1) Ace Machinery obtained its judgment on November 1. (2) Blake got a judgment on Nov. 10 and delivered a WOE to the sheriff on Nov. 15. (3) Cratchett Parts got a judgment on Nov. 20, delivered a WOE to sheriff Nov. 23, and on Nov. 25 got deputy sheriff to execute the writ by seizing all of the appliances at the Rollins store. Who will have priority? C will have priority – even though B had writ of execution first, this will be inchoate lien until actual execution – so although B had the WOE to sheriff first, the only one who actually had levy done, who actually had execution of their lien, was C.

But, if there is an earlier “filing” (earlier issuance of the WOE to the sheriff), and the JC later has the creditor levy, then that LC will have priority. Ex: same facts as above (Ace vs. Blake vs. Cratchett). Could you change that outcome? Yes, if this is a relation back state. Why? IF we are => once you levy => your lien has arisen => priority date relates back to when WOE to sheriff => here it was before Creditor C.

Minority Rule: Lien arises when the sheriff actually levies on the property (some states) o But this leaves priority among judicial lien creditors to the sheriff o *remember: don’t ASSUME that in minority state. could be minority state, evne though

that is worse for policy reasons b/c doesn’t seem fair Unsecured Judgment Creditor vs. Secured Creditor

Rule: The first to have “made some required key legal move” wins. o For SP’s: filing plus security agreement or perfection (“perfection”) o For LC’s: (1) they need to have had a levy. (2) and if they have had a levy, their date of

priority might be when WOE issued from clerk to sheriff. (“while a levy is essential for perfection and priority, the date of the levy is not always the controlling date for determining priorities.” – as against both other USC’s and as against a SP (ex. how 9-317 defers to state law for when lien arises) – this is LC’s “perfection”

o so whoever “perfected” first wins If LC comes on the scene, gets their levy, and then it releates back to priority date that the state

specified – the issuance of the WOE (“the lien arises” for 317) – and this “arising” date is before the SP perfects => LC has prioroity – ex: Shoes Below Cost facts w/o the waiving agreement

o If SP perfects before LC’s lien arises (levy date OR issuance Waivers of Execution Lien Priority by Negotiation

This can happen and it will mean you no longer have the execution lien, even though there was a valid levy on non-exempt property

RULE: Even where there has been an effective levy—i.e., the judgment creditor is no longer just “judgment creditor,” but is now “lien creditor”—entering into an agreement where all the creditors agree to get just a set amount (a settlement of their debts) will negate this levy.

Ex: Shoes Below Cost agreement: Option 2: Turnover Orders (for distant property and intangible property)

o Use for: 1) intangible assets (traditional remedies don’t work for these) 2) property scattered around country/world (traditional remedies also don’t work for these)

o Rule: If the debtor has property that is somewhere not at the debtor’s property that the sheriff and the creditor can get to (property scattered) OR if the debtor has intangible property, then, pursuant to a “turn over” statute, a court can order the debtor to turn over all property that is subject to his control. Once property is traced to the debtor, the debtor bears the burden of establishing that certain property is no longer in his or her possession-- or has to turn the property over.

OR, what would we do for intangible assets? try to get $$ that the debtor would get in exchange for thse intangible assets thru garnishment – ex. in Umbro case. if that had NOT been seen as a services K => then it would have been intangible property, and the JC could have reached it thru

ex. stocks would be by a turnover statute. some jxns the t/o statute requires the judgment creditor to “show that the property could nto be attached

readily or levied on by ordinary legal processes.” (Texas in Gerdes, 45). but when creditor presents cevidence that corporate stock is held in hands of third parties out of the

state, that is sufficient to show that the property could not be readily attached (Gerdes).

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o Sequence for turnover order (1) T/O statute permits examination of the dbro under oath and if debtor doesn’t’ show to that, in contempt

of court (2) From this examination, the jdugmetn creditor has information about the property subject ot the debtor’s

control (3) Then, once the creditor knows of the assets, court order that debtor has to produce the property, or else

will be in contempt of court and can go to jail. Option 3: Judgment Lien -- by Recordation (record a judgment)

o The “judgment lien” against real property is obtained by recording a judgment in the county land records where deeds of sale and mortgages are filed.

(1) Step 1: Need a judgment, see step 1 (2) Step 2: Record. Ten the C records this judgment (gets the judgment record) in the county land records

where deeds of sale and mortgages are filed. o Even though the sheriff may not actually foreclose on the property, the recorded fi. fa. will act as an encumbrance on

the title of the property, which can prevent the property from being sold or refinanced without satisfying the related judgment.

o When potential purchasers of the property do a TITLE CHECK – check to see if this is a good title – they will see that this is actually ENCUMBERED PROPERTY b/c of the judgment lien recorded in the real property records (in the county land records) and will not want to buy

This creates leverage & the D will want to settle debts/pay their debt o TIMING: When does this arise for priority purposes? A: The judgment becomes a lien on all realty owed by the

judgment debtor in city or county where the judgment is docketed, at the time of docketing. Option 4: Garnishment

o Generally Garnishment is a remedy for a judgment creditor, in which the JC “attaches” debts that third parties owe to

the debtor. Thru a writ of garnishment, the court “attaches” these debts that 3d parties owe to the D, divert them to the court, where the court holds them for the benefit of the debtor’s judgment creditor.

Distinguish: a JC using garnishment remedy is NOT a lien creditor: getting garnishment payments frm the employer/bank => to the court for 6 mos. => and then court paying out to the D’s JC is not the same as having a lien. This is not a property right.

Intangible property => can garnish, and should garnish this b/c cannot levy. Also Umbro – it is subject to the control of a third party, but it is intangible property Employer who owes moony – can’t physically collect on this, not tangible Also accounts are intangible (the insurance $ to receive)

o Limitations on Garnishment (1) Can’t garnish service contracts: can’t sell the contract and have someone else now get those services.

Umbro. Must be property that can be garnished See below.

(2) Must comply with restrictions on wage garnishment. RULE: Generally, judgment creditors other than DSO creditors and tax lien creditors are subject to

25% of the debtor’s “disposable earnings” for what they can garnish.o Amount of wages subject to garnishment is of 25% of disposable earnings OR the

amount by which disposable earnings exceed 30x the federal minimum wage, whichever is smaller.

Caveat: If the state and federal laws are inconsistent, the courts should apply the law which garnishes the lesser amount (be nice to the debtor) – fed acts as floor, but if the state is nicer: go w/the state

o What are “disposable earnings”? **CONTRAST: THIS IS ABOUT EARNINGS (the

wages coming in) NOT the same as the Ch. 13 “disposable income” for Income – Expenses analysis.

“Disposable earnings” is a higher number what the D has to spend freely. This means that the % of funds that can be taken out of the 25% of their wages (not

taking into account their expenses). In addition, “disposable earnings” takes the 25% chunk for the garnishment limit

out of a number that includes all employee benefits – these will not go directly to the EE – ex. taxes or an employee health plan.

but, not included in “disposable income”: SSDI, social security payments; taxes

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that would have gotten taken out of paycheck. DSO Creditors: 65%, not 25%: DSO judgment creditor can garnish over half of the debtor’s

disposable earning. The amount of wages subject to garnishment for DSO debtor is 65% of disposable earnings.

o Ex: ex-spouse thru alimony payments or the kids thru child support payments, can garnish from the debtor’s wages is 60% of the wages, not 25%. But that would NOT be true if this was a divorce settlement. Then could still garnish, but only up to 25% of the D’s disposable earnings.

Tax Creditors o Tax creditors are not subject to the 25% cutoff. Gov’t for taxes can garnish more than 25%

of the debtor’s “disposable earnings.” from their wages. Can’t garnish SS, SSDI as the wages.

o ** Social Security and SSDI are not subject to garnishmet o These are not part of “disposable earnings”o And you garnish 25% of “disposable earnings.” o Also can’t garnish state or fed employees.

(3) PROPERTY MUST NOT BE EXEMPT Rule: Whether or not the property/funds/income stream to be garnished are wages or not, the

debtor can claim a homestead exception from the property subject to the garnishment: A debtor could use this to shield up to $5,000 of the debtors assets if not using this to shield something else.

Ex: If the garnishment is of a bank account => whwat the debtor’s options?o Use homestead exemption-- can use the homestead exemption on any personal property,

and this includes bank accounts. No percentage limit for deposit accounts BUT, the D could shield up to $5000: the amount in the bank account that would be

subject ot the garnishment would be the debtor’s equity; the debtor can protect interest in property that they own (ex. the wages due to them, the accounts receivable funds) via the state law exemptions that give debtors a shield

o Ex. If D has family heirlooms in bank account, then could be able to argue that this property is under debtor’s ownership and fits an exemption.

o Property that can be garnished Property held by third party for the debtor: JC should use garnishment remedy where levy would not work

b/c third party holds the property of the debtor. i.e. “Third party, you have some valuable property of the debtor in your ‘hands’ or under your

control. we are garnishing it, so turn it over to us so we can sell it.” Obtain an order to turn over the contents of a safety deposit box -- the true owner (debtor) leaves

physical possession with the bank – the physical property exists in the hands of another (ex. rings in safe deposit account).

Order for third party to turn over proert they hold for the debtor. o Ex. Umbro: wanted to garnish for company’s website property: their website was a type of

property that a third party held, so make the third party turn this over and then sell it (problem there: can’t garnish service contracts)

Order for bank to take out portion of D’s bank account funds – garnish the bank account. o Rules for bank account garnishment:

1) If bank account overdrawn, first in line will be the bank where the account is held.

Ex. if account overdrawn by $10, who is the 1st to be paid when the money comes back in? Assuming the bank was a SC on the deposit account collateral when themoney came in, the bank would.

2) Garnishment limit on wages doe NOT apply to deposit accounts Issue: Does the garnishment limit on wages apply to if the debtor deposists

wages into their deposit account? Answer: NO. The wages are no longer “wages” they are “deposit account funds” and not subject to the wage limitation.

o What can a debtor to do protect $$ in bank account from garnishment? Look to exemptions: HSE, maybe a heirloom exemption Could also move the debtor’s bank account.

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From Umbro: service contracts limitation, but NOT limitation on intangible propertyo service contract: cannot garnisho contract for asset or rights: can garnish (hand over the court + sold off + then give the

JLC the proceeds of the sale).o intangible right: contract right is an intangible right. right to use adomain name by itself

without the services for example.

This also works if the third party OWES THE DEBTOR MONEY (see above: when is consumer a creditor). so the garnishment = divert payments that would have otherwise gone to the debtor the court, court will hold then payments can go to JC. Think: what accounts does the debtor have? we can garnish these.

the debtor might also be providing services as an independent contractor, and may be owed for those services. The attorney for the debtor could be holding money, the debtor may have a claim against an insurance company, or the debtor may have a judgment against others. The debtor might also hold a land contract or lease, under which payments are due.

D has claim against employer btw last paycheck and next paycheck D might have a claim against an insurance company => this is a rt to payment, this is something that

the JC could garnish (capture/divert the right to payment) D might have a judgment against someone else – the $$ that the debtor would have coming from that

the third party is what the JC will garnish D might lease property ($$$ from tenants => D would be able to be garnished)

o rent payments would then be subject to garnishment Payments on promissory notes Accounts receivable for goods the debtor’s business has already delivered, but before the account

debtor has paid the debtor’s business-- this is the debtor’s property but has not yet gone to the debtor Proceeds from contracts Commissions

o Ex. Webb v. Erickson (similar to employment btw pay period: D was real estate broker, so for the garnishment, LC garnished the payment from the “customers” of the real estate broker- the people who bought home from the real estate broker who owed him commission).

Anything else that would be an account/is payment stream to debtor o Contracts => these are generally OKo But, service contracts => cannot garnish

Rule: A contract for services is not a “liability” as used in the Virginia Code garnishment rule and is therefore not subject to garnishable.

Ex. Umbro: creditor wanted third party to place the domain names on hold and deposit control of them to the circuit court so that the domain names could be advertised and sold to the highest bidder.

o third party objected o Issue: were the domain names/service agreements “contracts for services” that could not be

garnished—were not property that could be subject to garnishment—OR were these just “valuable intangible property” (the domain names) that could be garnished.

o Lower ct held it was valuable new intangible property (“new IP”)o But appeals court: contractual right to use an internet domain name was “the product of a

contract for services” and therefore not subject to garnishment – there was a service agreement in place, and the service agreement was “inextricably bound” to the domain names – they could not function without certain services provided by garnishee.

o Therefore => this was not just a contract for property (valuable intang. property) but for property + services inextricably bound ot that property => cannot garnish service contracts, so this was not garnishable.

ASK (if there is property that could be garnished): Could this be something else – services for something PLUS a type of good/collateral/general intangible other than services?

o If it is something else, and that something else is services, are the services inextricably bound to the non-services property? If so, under Umbro couldn’t garnish the contract (couldn’t require the third party to deliver the property to the court/deposit control for the court for the ct to sell to satisfy the D’s judgment).

This rule is not limited to personal service contracts: A contract for services cannot be garnished is NOT limited to personal service contracts – not just btw one person and another, but a service from a company btw another company.

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Ex. automobile insurer’s duty to defend was not garnishable Ex: Cable services cannot be garnished. If Cox owes debtor cable services (ex. a yearly plan) can

someone garnish those cable services? No, under the Umbro rule, do NOT allow service contracts to be garnished, and cable services is not limited to personal services, limitation is on a “contract for services.”

Contrast: a SP can garnish a contract for something services (personal services, or just services in general), where the debtor was to receive some benefit under a contract.

Ex: a contract for property, goods, or other assets held by a third party, that third party owes to debtor

o Mechanics of Garnishment Step 1: Judgment – see above Step 2: Writ of garnishment: judgment creditor delivers this to the sheriff

In VA, a JC can enforcement a judgment by requesting clerk of court issue a writ of garnishment. But the judgment creditor must complete it with:

o a) info abut the existence of their judgment, the unpaid balance, and o b)a statement under oath that the judgment creditor knows or has good reason to believe that

the garnishee either has money or property that belongs to the debtor or may in the future be obligated to make periodic payments to the debtor (such as wages).

The WOG is used to "attach" debts owed to the debtor for the benefit of the debtor's judgment creditor.

o Ex: On Feb. 1st, First Finance Co. got a $3000 judgment against Debtor. On the same day, First delivered a writ of garnishment to the sheriff for service on Amos State Bank, where Wayne held his checking account. The sheriff will then deliver the writs of garnishment to the bank.

There is a summons and a WOG. WOG has two parts: o Set of questions – to see what $$ the 3d party owes the debtor, to see what property of the

debtor the garnishee haso Command to withhold and send to cour

Step 3: Sheriff serves writ of garnishment/summons on the garnishee. Why a summons? Because this is an ancillary lawsuit against the third party Summons is served on the garnishee – the third party

o Ex. the employer or the bank – ex. First got $3000 judgment against Wayne. First delivered a writ of garnishment to the sheriff for service on Amos State Bank to garnish the debtor’s checking account at the bank. The sheriff then delivered the writ of garnishment to the bank.

o If garnishee is a corporation: serve garnishment summons on officer of the corporation or a designated employee

o If garnishee is LLC, serve on manager or managing employee Step 4: Garnishee receives summons. Must comply with obligations or could be liable themselves for the

judgment that the creditor is garnishing. (ex. Webb v. Erickson). For the set of questions part of the WOG

o First part of the garnishment is a set of questions designed to determine whether the party served with the writ (3d party) owes any money to the debtor or has any property belonging to the debtor.

o Garnishee must answer the questions truthfully and send the answers to the court. o If garnishee (3d party) answers question falsely may be liable to the judgment creditor.

For the command part of the WOG o Second part of the WOG is a command for the garnishee to withhold the their payments to

the judgment debtor and send the funds to the court – or in the case of something like Umbro/bank account, give the court control of the property.

If the garnishee disobeys the command to withhold payment or delivery, garnishee may be liable to the judgment creditor for the amount that did not send to the court

o Ex 1: Webb v. Erickson -- where garnishee never responded, JC had the garnishee’s wages garnished –although ordinarily a judgment can be entered against a defaulting garnishee for the full amount of the judgment against the defendant, here there was excusable neglect).

o Ex. 2: if employer pays wages to the debtor after service of the writ of garnishment,

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employer can be liable for amount equal to the wages paid, if if bank honors the debtor’s checks for withdrawals from the bank after service of the writ, then this would be violation of the WOG, and bank will be liable for the amount.

If doesn’t obey the command to withhold payment or delivery of the debtor’s asset INCLUDING IF ALLOWS D TO TAKE CHECKS OUT OF BANK, garnishee may be liable to the judgment creditor.

Exception: if a third party denies owing anything to the debtor, a trial may be held on the issue. Or garnishee may assert that has some superior right to the assets – like if the bank has a seuciryt interest in the property held (and there can be a trial on this issue too).

Step 5: Can the judgment debtor do anything to object to this, as their wages are getting garnished? Rule: Six month rule. For six months, until the “return date,” the employer will send money to the

court and the court will hold onto it. Until then, the debtor cannot contest the garnishment. Only once it is the return date, can the debtor contest the garnishment.

Exception: Exemption being violated. If D alleging that an exemption being violated, or that JC is garnishing more than the statutory amount—if garnishment limits being violated (65% of wages vs. 25% for non-DSO) then can have earlier challenge.

o Priority of Garnishments State law determines Virginia: WOG date based on when filed – when had clerk issue to sheriff. Not based on when sheriff

actually delivered. This was it is more fair if you won vs. if S just happened to deliver them at the same time, ex. 3.1 (70) –

Bank 1 obtained judgment against D for $3,500 and delivered a writ of garnishment to the sheriff first. Bank 2 delivered WOG to sheriff second. But S brought both writs to the bank on the same day. In VA, whoever delivered WOG to the sheriff the 1st (issued), once the writ of garnishment is served on the bank, will have priority to funds for the garnishment.

Meaning that Bank 1 gets its entire debt paid from the garnishment first before Bank 2 gets any, NOT split pro rata.

Step 3: Fraudulent Conveyances What if there is no property for the judgment creditor to levy (or to garnish)? What can the judgment creditor do? Answer: the judgment creditor should look to the fraudulent conveyances statute of their state to try and large the property that the JC can levy on. If there is still nothing after that, then the unsecured will have taken that risk. Generally

o Fraudulent transfers = the remedy that C’s can get when: (1) debtors try to transfer property out of their possession to make it harder for creditors to have their

judgments satisfied, OR (2) debtors transfer out their property for less than its reasonably equivalent value and are insolvent.

o How does debtor find out about these transfers? Creditor can use debtor interoggatories to ask debtors questions about their transfers and if find something out from D’s interrogatories would take action via UFTA suit v. transferee.

o Relation to bankruptcy: like in UFTA cause of action, BT will examine D’s conduct before filing the petition and frequently bring actions to avoid fraudulent transfers made D made w/in two years before the date of filing the petition – has substantial lookback

§548(A) = actual fraud, §548(B) = constructive fraud (debtor recv’d less than a reasonably equivalent value in exchange for such transfer or obligation + D was insolvent on date occurred/became insolvent as a result of the transfer, or the 3 other ways for circ. fraud under UFTA).

Fraudulent conveyances can also be ND: but only 1 year + actual fraud for it to be nondischargeable. BT can also use state law: BT has the power to avoid prepetition fraudulent transfers either as provision of

the Bankruptcy Code that is worded very much the same as UFTA (§548) or under a provision of the applicable state law (usually UFTA)

BT might use state law to get a longer lookback- if BT is closed out of bankruptcy law b/c more than two years back and state offers longer.

Law that applies = state lawo Most states have adopted UFTAo Some states, like VA, have not adopted it.

How avoidance suit workso Plaintiff = unsatisfied judgment creditor

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Avoidance suit is brought by the unsatisfied judgment creditor w/could have execution lien but not enough property (wants to seize assets D transferred out so can add them back ino D’s assets and seize them).

o Defendant = Third Party Transferee Defendant in an avoidance suit is NOT the debtor

Ex. in the brother—sister txn in Rhoades, when brother transferred the $325,000 of land for $1, the one who grossly benefited was Sister, and then the avoidance action was brought against Sister, not against the brother.

Ex. you if you bought a $1000 stereo for $20 amazing deal at a yard sale. (under CF) OR, if needed, JC can also bring suit against a subsequent transferee (someone who acquired

property from the debtor). UFTA has some protections for third-party D’s (which is who the D sues) who behaved honesty and

gave value to the debtor – see below.o Two remedies available to a creditor under UFTA:

1) Recovery of the Property: recovery of the property from the transferee so that it can be subjected to levy and sold in execution; or

2) Money Judgment: A money judgment against the transferee for the lesser of either value of the property measured at the time of the transfer or the amount of the debt due by the debtor to this judgment creditor.

UFTA Fraudulent Conveyance Causes of Actiono Basic Rule: What property is within the scope of UFTA that JC can even bring suit under UFTA to avoid the fr.

transfer? G/R: UFTA rules apply only “every mode, direct or indirect, absolute or conditional, voluntary or

involuntary, of disposing of or parting with property or an interest in property, and includes payment of money, release, lease, and creation of a lien or other encumbrance.”

Exception: BUT does NOT apply to “disposing or parting with or paying or transferring or encumbering”: (1) Property subject to a SI: property to the extent it is encumbered with a valid lien; (2) Exempt property: property to the extent it is exempt under state law; or (3) Spousal property held by spouses in real estate: Interest in property held by tenants by the

entireties to the extent it is not subject to process by a creditor holding a claim against only one tenant.

o TIE =concurrent estate in real property held by spouses, where each owns the undivided whole of the property, plus right of survivorship, so that upon the death of one, the surviving spouse is entitled to get the decedent spouse’s share.

Examples: Within scope: JC could bring suit

o Includes parting in full or in part o Includes leases o And “every mode of disposing of or parting with an asset or an interest in an asset” –

intention is to scoop in all dispositions, of “assets” o Includes a giving a security interest in property

Not in the scope of UFTA: JC should not bring suit o SP repossesses their collateral when the collateral is subject to a valid SI (transfer of

property subject to SI) o Debtor transfers fancy heirloom if it is exempt under state law

o (1) Actual Fraud – UFTA 4(a)(1) RULE: A creditor can avoid a transfer made by the debtor with actual intent to hinder, delay, or defraud

any creditor. §4(a)(1). 4(a)(1): A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether

the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud any creditor of the debtor

Elements 1) Can be brought by present or future creditor (claim existed @ time of the transfer OR not until

after the transfer) 2) Main element: only one. Creditor needs to be able to prove that the debtor made the transfer with

the deliberate motive of removing the property from the reach of the creditors. But C can use circ’l evidence – badges of frau.d

o It is NOT deliberate intent to be fraudulent per se

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o Rather it is deliberate intent to hinder the C’s from reaching the property - The key deliberative motive is not “intent to defraud,” but that the debtor made the transfer with the deliberate motive of removing the property from the reach of the creditors.

Proving Intent to Hinder, Delay, or Defraud: Badges of Fraud Rule: Creditor is allowed to use circ’l evidence – badges of fraud—to show intent because unlikely

that the C would have direct evidence of intent. o ULE: If the creditor can establish a prima facie case of fraud by proving that one or more

badges of fraud exist, the burden shifts to the defendant to prove that the transfer was made in good faith

Badges of Fraud o (1) Transfer made to an insider: transfer was made to an insider or a family member or

someone else connected with the debtoro (2) D Retained Possession: debtor retained possession or control of the property transferred

after the transfer;o (3) Secret: whether the transfer or obligation was disclosed or concealed (ex. Twyne’s Case

was secret);o (4) Been Sued/Threatened: Before the D transferred the property or loaned out money, D

had been sued or threatened with suit – if the transfer occurred just before litigation or some pending collection activity (ex. Rhoads – he had the huge settlement against him and then after knew this, transferred $325,000 interest in land in upstate NY to his sister for value of $1.00)

o (5) Everything: If transfer was of substantially all the debtor’s assets (ex. Twynes) o (6) debtor absconded;o (7) debtor removed or concealed assets;o (8) Value of Consideration: if the value of the consideration received by the debtor was not

reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred – someone did not pay rsbly equiv. value

o (9) D was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

o (10) Transfer occurred shortly before or shortly after a substantial debt was incurred o (11) D transferred the essential acts of the business to a lienor who transferred the assets to

an insider of the debtor... transferring to an inside Therefore, ASK:

o Was the transfer made to an insider? Insider: UFTA §1(7)(i), but not definitive - (A) a relative of the debtor or of a

general partner of the debtor; (B) a partnership in which the debtor is a general partner; (C) a general partner in a partnership described in clause (B); or (D) a corporation of which the debtor is a director, officer, or person in control.

Transfers between relatives must be “closely scrutinized.”o Did the debtor keep the property after the transfer? o Was the transfer hidden? o Was the debtor threatened with suit before the transfer was made? o Was the transfer of substantially all of the debtor’s assets? o Did the debtor abscond or conceal the assets? o What was the value of the consideration received? o Was the debtor insolvent after the transfer was made? o Was the timing of the transfer shortly after substantial debt was incurred? o Did the assets ultimately arrive with an insider of the debtor?

o (2) Constructive Fraud (1. transfer for less than reasonably equiv. value + 2. D insovlent at time of transfer or became insolvent from transfer) -- UFTA 4(a)(2), 5(a)

Constructive fraud is not really fraud. It is just a pattern of facts that are “constructed by law” to constitute “constructive fraud.” (this is fraud constructed as a MOL not b/c of a guilty mind. (Policy: even if D was not guilty here, under these defined circumstances, D has unfairly diminished their assets (or in bkry, their bkry estate) to their creditors and should not be allowed.)

Rule: If JC can prove facts that meet the legal elements, a conclusive presumption of fraud is created and there fraud as a matter of law.

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Elements – depends on if present creditor or future creditor (did not have claim until after alleged fr. transfer)

Present Creditor: A transfer made by the debtor (transfer of “assets,” so excluded if: encumbered by valid SI, exempt property, or TIE property), in which:

o (1) Transferee did not pay reasonably equivalent value, and TEST: Determine whether the debtor received reasonably equivalent value in

exchange for the transfer by: Valuation – was the value paid too low? If low, how low?

o How disadvantageous was the txn for the debtor? o Valuation = fair market value

Relationship of the parties (insiders vs. not insiders) Market environment Apparent motive for the transfer

Foreclosure Sale Safe Harbor, §5(b) Rule: For the purposes of Sections 4(a)(2) and 5 [CF sections], a person

gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon

o (2) When the debtor was insolvent, or the transfer made the debtor insolvent. Insolvency is measured at the time of the transfer, not the time that the JC is

challenging. But, can be that either: 1) the debtor was insolvent at the time of the transfer (so before the

transfer debtor was insolvent), or 2) debtor became insolvent as a result of the disposition of the transferred

property – D was rendered insolvent as a result of the transfer that the creditor is now challenging

Which insolvency test? UFTA 2(a) defines insolvency as balance sheet bankruptcy test: assets vs.

liabilitieso “A debtor is insolvent if the sum of the debtor’s debts is greater

than all of the debtor’s assets, at a fair valuation.” However, the creditor’s burden of proving insolvency is eased by a

presumption in §2(b): if the creditor does not have the financial date to prove the debtor’s insolvency under the balance sheet test, the creditor there is presumption of insolvency under equity test – if the D is generally not paying their debts as they become due.

o (b) OR Presumptive Insolvency: But, aside form 2(a), a debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.

Future Creditors (and Present Creditors) : A transfer made by the debtor (transfer of “assets,” so excluded if: encumbered by valid SI, exempt property, or TIE property), in which:

o That the transferee did not pay reasonably equivalent value, AND: o The transfer

1) Undercapitalized the debtor: the debtor was involved in or was about to engage in a business venture, and the transfer left the debtor w/insufficient capital for the project

This is if the debtor was involved in or was about to engage in a business venture, and the transfer left the debtor w/insufficient capital for the project.

2) OR, The debtor reasonably should have believed this would put the debtor under: debtor believed/reasonably should have believed that he or she would incur debts beyond his or her ability to pay as they became due.

Creditor argues: “Debtor was incurring debts without a justifiable expection of being able to repay them.” Transferree argues that debtor had justifiable expection of repaying the debts

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Focus here is not on the relationship btw the debtor and the third party (Party C, the party engaging in the transfer), but instead btw: the debtor’s financial condition and the debtor’s intended future business activity.

o JC wants to get the property back after proves a fr. transfer. But under UFTA some limitations: (1) A good faith transferee from the debtor, who gave reasonably equivalent value for the property, is fully

protected against an actual fraud suit – won’t ot give back, not their intent, and if in good faith. No matter how guilty the debtor’s motives were, the JC cannot recover the property or get damages

from a transferee who gave the debtor fair, equivalent value (NOT someone who got an amazing deal @ a garage sale) and w/o knowledge or reason to know of the debtor’s fraudulent intent.

(2) A transferee who acquired the property from the debtor in good faith, but for a value that was less than reasonably equivalent, receives partial protection.

If the transferee from a debtor acted in good faith, but value for the transfer is not rsbly equivalent, the transfer is avoidable (the creditor can recover the property). However, the transferee is entitled to offset against that recovery the value that Party C did give to the debtor for that property – you can get back what you paid for the item. you get this back by a lien on the property and must be paid out from the proceeds of the execution sale.

Ex. if you paid $40 for a $300 stereo and what you paid was not rsbly equivalent value => and a creditor challenged this and won under constructive fraud =>

o 1) the creditor will be able to recover the stereo from youo 2) but you will get a lien of the $40 (what you paid for the stereo) on the proceeds of the

execution sale of the stereo. stereo on the proceeds of the stereo at the execution sale (3) A bad faith transferree from the debtor gets no protection against the creditor. (4) A subsequent transferee who acquired the property in good faith and for value is fully protected.

They have good faith, same policy applies as with #1: GF transferee who gave reasonably equivalent value for the property, is fully protected

(5) A subsequent transferee, whether or not in good faith, shelters under the rights of a prior good faith transferee

Shelter principle: a transferee who qualifies for protecition (a #1 transferee) cuts off any rights that the Judgment Creditor may have had to recover the property – so the Judgemtn Creditor will have no right of avoidance against any later transferees.

(6) A subsequent transferee who did not act in good faith and did not derive rights thru a GF transferee has no protection.

o Example fraudulent transfers Rhoades (74)

Brother and sister were partners at a law firm. Brother got a $1.5 million judgment against him for a securities action. Day before the judgment for $1.5 million was signed, he had transferred his $325,000 interest in land in upstate NY to his sister for value of $1.00. Judgment creditor challenged. Held:

o (1) This was constructive fraud (P was present creditor, transferee didn’t pay reasonably equiv. value, rendered insolvent as a result of the txn); and this was also

o (2) This was also actual fraud – many (almost all of badges of fraud were met: insider, after litigation against him, before big debt collected, not rsbly equiv. value, rendered insolvent, contrary to ct order against him).

In re Bay Plastics (82) Rule: LBO’s are not per se fraudulent. however, if a corp pfails to pay its debts after an LBO the

creditors of the corp. may look at fraudulent transfer law to avoid the transfer made by corp – the grant of a security interst by the corporation in order to get the money to buy shareholders out. In most cases, LBO is a GF attempt to finance the sale of ownership in the corporation => so attack via constructive fraud:

o (1) the corporation did not reasonably receive equivalent value for the transfer, and Does not matter if the shareholder may have received equivalent value for its assets

(in Bay Plastics, they got a lot of money), but the corporation as a whole. o (2) the grant of a SI in the corporate assets increased its debt over its assets

Virginia Fraudulent Conveyance Causes of Actiono § 55-80: Actual Fraud

Rule: Any transfer of property made with the intent to delay, hinder, or defraud creditors is void as to those creditors unless the transferree provided valuable consideration and had no notice of the intent of the transferor.

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55-80: “Every gift, conveyance, assignment or transfer of, or charge upon, any estate, real or personal, every suit commenced or decree, judgment or execution suffered or obtained and every bond or other writing given with intent to delay, hinder or defraud creditors, purchasers or other persons of or from what they are or may be lawfully entitled to shall, as to such creditors, purchasers or other persons, their representatives or assigns, be void. This section shall not affect the title of a purchaser for valuable consideration, unless it appear that he had notice of the fraudulent intent of his immediate grantor or of the fraud rendering void the title of such grantor.”

How to prove intent of the transferor? Burden of proof is on the Plaintiff (Judgement Creditor trying to void this txn so can recover the

property). Standard is clear and convincing – must establish the actual fraud by clear & convincing evidence This cominbation makes it hard for the creditor to prove fraudulent intent But VA does have badges of fraud too -so argue this was to an insider litigation pending, done in

secret, etc. o § 55-81: Constructive Fraud: limitations added to UFTA

RULE: A creditor may set aside a voluntary conveyance (transfer) if: (1) The transferor did not receive valuable consideration in return (2) The transfer was made while the debtor was insolvent

o This nixes the rule from 5(a) that this can render the transferor (the debtor) insolvento The transfer was made while the debtor was insolvento How does the creditor prove this??? THe creditor may require the debtor to share financial

documents. (3) The creditor was a present creditor – same as the 5(a) req. under UFTA.

However, this is more limited than UFTA b/c there although didn’t have “not for reasonably equiv. value and insolvency” for a future creditor, did have other remedies.

55-81: “Every gift, conveyance, assignment, transfer or charge which is not upon consideration deemed valuable in law, or which is upon consideration of marriage, by an insolvent transferor, or by a transferor who is thereby rendered insolvent, shall be void as to creditors whose debts shall have been contracted at the time it was made, but shall not, on that account merely, be void as to creditors whose debts shall have been contracted or as to purchasers who shall have purchased after it was made. Even though it is decreed to be void as to a prior creditor, because voluntary or upon consideration of marriage, it shall not, for that cause, be decreed to be void as to subsequent creditors or purchasers.”

Next one doesn’t add anything to this – the two provisions are 55-80 and 55-81.

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II. Preferences 1. Generally 547 allows the trustee to recover certain payments made by the debtor to creditors in the period before the bankruptcy filing.

Those creditors who are treated unequally (preferred) prior to the petition date are forced to return the preference payment and the preference payment will then go to the property of the estate.

o The point is to avoid those transfers in the period recently before the bankruptcy petition that give the the creditor an advantage that the creditor is not entitled to in bankruptcy. “Equity is equalty.”

o Although there is nothing illegal about preferring one creditor to another, but the Code is committed to equality of treatment among creditors.

o Who is 547 aimed at? 547 is aimed creditors who have previously given consideration to the debtor for the transfer. Distinguish 547 Avoidance of Preferences from 548 Avoidance of Fraudulent Transfers

o Here, the trustee is avoiding transfers that are fully effective outside of bankruptcy – not fraudulent at state law.o Unlike fraudulent transfer law, 547 is NOT concerned with the recovery of dispositions for inadequate value (548 -

avoidance for constructive fraud). Nor is 547 concerns with the state of mind of the debtor or the transferred (548 - avoidance for actual fraud). RATHER, the grounds for avoidance under 547 are ENTIRELY OBJECTIVE: even if the most good faith persons does this, if the txn has the external attributes of 547, then it is avoidable.

How does the BT go after prefrences if the debtor has no assets (but we want to enlarge the estate if can)? o What if we have a no asset case, but T thinks that may have been some kind of transfer w/in the 90 days or 1 year =>

the trustee can go back and create an estate? If win preference cas,e, now have asests. But if lose preference case, no $ to pay lawyer doing preference ction – no expenses for the admin. expense, BT only getting paid from the $65 from the filing fee. Therefore: BT will pay by having attorney do preference litigaton on contingency fee basis

Proving the elements of avoidanceo RULE: Trustee has to prove all the elements of avoidance under 547(b) in order for a transfer to be avoidable.

However, this is burden lessened in part by the presumption of 547(f) – 547(f) presumes (but as a rebuttable presumption) the debtor to be insolvent in the 90 days preceding the petition.

o (b) = confers the power of avoidance on the trusteeo (c) = exceptions to the trustee’s avoidance power o RULE: Even if a transfer meets all the requimrets of 547(b), it CANNOT be avoided to the textent it fits within

one of the exceptions of 547(c). But, note that 547(c) will ONLY BE NECESSARY when you have satisfied all the requirements of 547(b). Why? Because you don’t need an exception to avoidable preference if this is not an avoidable preference. If

the transfer is unavoidable, then don’t need to look to 547(c). Adversary proceeding?

o Yes, o 7001(1) a proceeding to recover money or property, other than a proceeding to compel the debtor to deliver property

to the trustee, or a proceeding under §554(b) or §725 of the Code, Rule 2017, or Rule 6002;o 7001(2) a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a

proceeding under Rule 4003(d);A. Analyzing Pereference

1. 1) First map out what is going on here2. 2) Then analyze whether the transfer qualifies as a preference under 547(b):

a. (1) Was there a transfer of property? (of a debtor’s interest in property?)b. (2) Was this transfer of property to, or for the benefit of, one of the debtor’s creditors? c. (3) Was this transfer based on an antecedent debt, or instead was this merely an exchange of value at the

same time? d. (4) Was this transfer made while the debtor was insolvent?e. (5) Was this transfer made within the preference period?

i. Is the transferee an insider? (relative, but “includes,” so anyone D is close with) If so, all transfers within one year will be within the preference period.

ii. If not, then preference period is 90 days. (7/1 to 4/2)f. (6) Liquidation test – did the preference payment improve the creditor’s position compared to if they were in

the Ch. 7 scheme? 3. 3) Then consider whether any of the exceptions to avoidance in 547(c) apply:

1. Elements of 547(b) 547(b) sets out six elements , all of which must be satisfied for a payment to qualify as a preference.

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§547: A preference is: (1) A transfer of property (2) To or for the benefit of a creditor; (3) On account of antecedent debt; (4) Made while the debtor was insolvent; (5) Made during the preference period;

o Generally: In the 90 days before bankruptcy petitiono For transfers to insiders: In the year before bankruptcy petition

(6) That enables the creditor to receive more than it would have gotten in a Chapter 7 liquidation.

(1) Transfer of Property: There must have been a “transfer of an interest of the debtor in property.” (547(b)(1))o This is broadly defined – a preference is “any transfer of an interest of the debtor in property.”o (a) Transfer: What kind of transfer can this be for 547?

The transfer can be the granting of a security interest. (Ex: debtor buys a TV on credit and grants Sears a SI in the TV. This is a transfer for §547. But it will get exempt under the “New Value” exception.)

o (b): Property: What kind of property can this be for 547? The property transferred does not have to be money. Debtor can transfer a complete interest in property, or just a partial transfer. But the property does have “an interest of the debtor” in property – it has to be an interest of this debtor.

The property interest transferred must have been property of the debtor. Usually this is clear But what if the debtor gets $$ from someone else to pay off a debt – is that an interest of the debtor

in property? This would depend on the court. (2) To or for the benefit of a creditor: The transfer must have been to, or for the benefit of, one of D’s creditors. (547(b)

(1))o 101(10): “Creditor” = the holder of a prepetition claim against the creditor. o This section is about equality of creditors – not preferring one creditor over another. So if D transfers their property to

someone else, they might have a problem for 548 construction fraud or discharge (for making it harder to get the property), but they will NOT have a preferences issue.

(3) On account of an antecedent debt: The transfer must have been for or on account of an antecedent debt. (547(b)(2)) o RULE: A preference is a transfer that is made regarding a pre-existing obligation. The debt has to be before the

debtor gives the creditor something (before there is the transfer of an interest of the debtor in property). A contemporaneous exchange is NOT a preference. If there is an ‘exchange’ happening at one moment in time between the debtor and the creditor, then the BT is NOT going to be able to satisfy the elements of 547(b) – a preference is a transfer that is made regarding a preexisting obligation.

Why? because what we are concerned about in 547 is debtors giving people who they already have debts to preferential treatment. If there is contemporaneous obligation with when the debtor gives goods/value, then this is just an exchange.

o What if the period of time between the two sides’ exchange was very short? R: Although this would still meet the elements 547(b), one of the exceptions in 547(b) will probably apply

(there will likely be a Contemporaneous Exchange of Value) so this would NOT be a voidable preference. But note: if there was inadequate value received for this, then there might be a fraudulent transfer (548).

o What if the exchange was goods for money? ex. if debtor paid $20,000 and traded in their car. Rule: Money and property are treated equally under 541 (property of the estate). Accordingly, under the new value exception (below), an exchange of $20,000 for a $20,000 car is not a

preference. (4) The debtor must have been insolvent at the time of the transfer. (547(b)(3))

o Insolvency is determined by the balance sheet test, for the time that the transfer occurred. 101(32) defines “insolvent” by the balance sheet test: that the debtor’s liabilities exceed assets at fair

valuation. Has to be the debtor’s insolvency at the time of the transfer – not now, but whenever the transfer the BT is

challenging occuredo Rule 2: But, 547 also provide a presumption of insolvency – 547(f) presumes the debtor to have been insolvent

during the 90 days before the petition. §547(f): For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90

days immediately preceding the date of the filing of the petition33

Transferee can rebut the presumption (not conclusive). But the BT’s burden of proving insolvency at the time of the transfer is eased unless someone else

(transferee) rebuts using the D’s balance sheet to argue that the D was not insolvent at the time of transferee. (5) During the preference period: The transfer must have occurred within the prepeititon avoidance period. (547(b)(4))

o The preference period is 90 days before the filing of the petition, unless the transferee is an “insider.” o If the transferee is an “insider,” the preference period is one year before the petition.

Rule: Where the transfer was made outside of the “90 days before” preference period, but within a year of the bankruptcy petition, the transfer will be voidable against an insider.

Who is an “insider”? 101(31) defines “insider” to “include” if the debtor is an individual, the D’s relatives, general

partners, or a corp. where the D is an officer, director, or “in control.” But because “includes,” not exclusive to this list- ex. if a friend. “any other person who has a close

and influential relationship with the debtor could qualify.” Court would probably take the surrounding circs into account.

(6) Liquidation Test Element: The transfer must have improved the creditor’s position. (547(b)(5))o Rule: In order for this to be a preference, the BT must be able to show that the transferee (the creditor) to receive

more than it would have received if the transfer had not been made and the debt had been paid under a typical Chapter 7 bankruptcy distribution.

AKA: BT must be able to show that the creditor/transferee of potential preference was in a better spot than what this creditor would have been in had (1) the transfer not occurred and (2) the creditor had just gotten paid under Chapter 7.

Basic purpose of the liquidation test: test whether the prebankruptcy transfer gave the creditor a higher level of payment on its claim than it has the right to receive under the Chatper 7 bankruptcy scheme.

NOTE: This test (547(b)(5)) is in Chapter 5, so it therefore applies for ALL CH’S, even when you are NOT in Chapter 7. – it will be a hypothetical Ch. 7 liquidation if you are C13 that will be calculated.

o General inquiry: Does the transfer enable the transferee to obtain more than it would under the Code’s basic Chapter 7 distributional scheme?

You compare: the total payment that the transferee would receive if the transfer is LEFT INTACT VS. the total payment that the debtor would receive if (1) the transfer were restored to the estate

and (2) the transferee had a claim in the estate for the debt that was reduced or eliminated by the transfer.

o Results of the liquidation test: If the first # (world with transfer) is higher than the second number (world where transfer is restored to the

estate and transferee treated as if had claim under C7) => then liquidation test is satisfied and the BT has met the elements of an avoidable transfer (if the other elements were met) => preference.

If world with transfer is higher than the world without the transfer, then this creditor has been benefited – preferred – because of the payment that they got during the preference. So the trustee is going to avoid that preference transfer.

If the first # (world with transfer) is, OTOH, lower than the second number (world with Chapter 7 claim), then the transferee is not better off because of the transfer, and they aren’t getting “preferred.” Creditor will NOT have met all the elements of 547(b) => cannot prove an avoidable transfer => no preference.

o Note: if the debtor is insolvent, because there will be no $ for the unsecured creditors. So the test is almost always satisfied where the debtor is insolvent.

The Timing of the Transfer o Timing of the transfer matters. The timing of the transfer is crucially important for:

1) Knowing whether the transfer falls within the preference period or not How do we know whether this transfer falls within the preference period? We will need to know

when the transfer occurred. And the Code for secured txns provides special rules for when a transfer occurs. So this is critical.

2) Knowing whether the transfer was an antecedent debt or not [see examples] dd

3) Knowing whether the debtor was insolvent or not when the transfer was made We need to know WHEN the transfer was made to determine whether the debtor was insolvent the

transfer was made!o Generally, the date of the transfer is the date of the transfer – when it was made by the debtor, the date that the debtor

transferred an interest in property to one of their creditors. But with secured parties, there is a special problem: is this the date of filing? attachment? perfection?

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o Rules for Date of the “Transfer” for Secured Parties – 547(e) Rule 1: Within 30 Days => Pegged Back. If the transfer is perfected at the time it becomes effective

between the parties, or within 30 days thereafter, the transfer is deemed to occur on the date that the transfer becomes effective.

Ex: On Jan. 10th, S lends D $10,000 and takes a non-PSMI SI in D’s equipment. S perfects this SI on Jan. 19th. Transfer date: For the purposes of 547, the transfer will be deemed to have occurred on January 10, because of 547(e)(2)(A)): S perfected within 30 days after the transfer. So, under 547, the transfer is deemed made when it attached (was actually transferred) Jan. 10th.

Because the transfer is deemed to occur on the day there was actually the transfer between the parties, this will not be an antecedent debt. Therefore this cannot qualify as a preference, because does not meet antecedent debt prong.

Rule 2: After 30 Days => Not Pegged Back. If the transfer is perfected more than 30 days after the time it becomes effective, the transfer is deemed to occur on the date it was perfected.

Ex: On Jan. 10th, D borrows $10,000 from S and grants S a seuciryt interest in its equipemtn. S perfects its SI on Feb. 22. Transfer date: For the purposes of 547, the transfer will be deemed to have occurred on Feb. 22, when it was finally perfected – because it was not perfected within the 30 days of when it became effective btw the parties.

Therefore, this is a transfer for an antecedent debt. o January 10 is when there was the DEBT. The debt arises on the date of the “effective

between the parties” itself – ex. when the SP gives D a loan.o Feb. 22 is when the TRANSFER was deemed to happen.o So... this is an antecedent debt.

There was a debt: Jan. 10th Then there was a transfer: Feb. 22nd. Whenever you have debt 1st and transfer 2nd, then this is a transfer for an old

debt and it is an antecedent debt. Rules 3 and 4: Relation to Time of Bankruptcy

These are whether there is a “straddling” between attachment and the bankruptcy petition OR the SP never perfects at all.

o ASK: (1) when was the bkry commencement? (2) when was filing? Rule 3: Straddling the Petition and Within 30 days => Transfer occurs on the day it became

effective. If the transfer was not perfected on the date of commencement of the case, but was perfected within 30 days after it became effective, the transfer occurs on the date it became effective.

o Even though the SP filed after the bkry petition, still within 30 days so they can still have their date as the day of the “effective btw the parties,” not day of perfection.

o Ex: On Jan. 10th, S lends D $10,000 and obtains SI in D’s equipment. D files a bankruptcy petition Jan. 15th. S perfects its SI on Jan. 19th. Transfer date: This SP’s date of transfer also gets pegged back—for the purposes of 547, the transfer will be deemed to have occurred on Jan. 10.

Rule 4: Never Perfected OR Perfected After Petition Filed => Transfer occurs immediately before petition. If the transfer was not perfected by the later of either the commencement of the case or thirty days after it became effective, the transfer occurs immediately before the filing of the petition.

o Ex: On Jan. 10th, S lends D $10,000 and obtains SI in D’s equipment. D files a bankruptcy petition Jan. 15th. S perfects its SI on Feb. 22nd. Transfer date: On January 15 – immediately before the bkry case commencing.

Petition was 1/15, perfection was 2/22 So because this was NOT perfected at the later of:

(1) transfer not perfected within 30 days of the “effective between the parties” (the Jan. 10th date: Feb. 22 is more than 30 days), or

(2) the bankruptcy petition. here, which was later? the 30-day date was later. But, the SP still didn’t file within

that window. Therefore, the transfer is deemed to be made at the date of the bankruptcy petition.

o “SP, if you don’t perfect at all – you’re going to be deemed of having your transfer ‘transferred’ immediately before the filing of the petition.”

o – So debtor can’t really argue not insolvent (prong 4) o – So obviously in grace period (prong 5)

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o And this will be an antecedent debt Questions to ask for 547(e) analysis:

(1) Is this a secured or an unsecured creditor? o Secured => go to next stepo Unsecured => will be the day that it occurred

do you have a buyer-seller? delivery (2) If this is a secured creditor . . .

o When did the security interest attach? (“become effective between the parties”) o When did the security interest get perfected? (filed)

(3) Was the SI perfected when at the time of attachment, or within 30 days after?o IF SO => Rule 1, Thirty Day Peg-Back, the “transfer” for 547 is deemed to occur on the

date that the transfer became effective between the parties. . . Unless: Was the transfer within 30 days, but straddling the bankruptcy

petition? If so, Rule 4: It will be under other rule, but will still be the date that it was effect.

o IF NOT => Rule 2, No Thirty Day Peg-Back (4) Was the transfer never perfected? Then transfer is deemed to occur on the time immediately prior

to bankruptcy. o What happens if there is an after-acquired property clause on the security interest?

Situation: On Jan. 1, Debtor gets a loan from Bank, and grants Bank SI in its equipment, with an after-acquired property clause. On Jan. 29, bank perfects by filing a UCC-1. On June 1, the debtor gets a new front-end loader. When did the transfer of the new front-end loader be deemed to occur for purposes of 547?

RULE: For bankruptcy, the transfer will not be deemed to occur until the debtor acquires the collateral, so that the SI can attach to the physical collateral (because now the D will have rts in the coll’l). Only now that the debtor has rights in the AA’ed collateral, once it has been acquired, that the SI becomes ‘effective between the parties’ for the transfer date rules.

Therefore, here, the transfer between the would not be deemed to occur for purposes of 547 until June 1 – when the debtor got rights in the collateral.

2. Preference Defenses -- Exceptions to Trustee’s Avoidance Powers 547(c)What defenses to preference will the creditor/transferee bring? Will they win?

Note on application: AS A PREFERNCE DEFENDANT ARE NOT LIMITED TO ONLY ONE DEFENSE, so TRY THEM ALL

General ruleso Goal of these is to distinguish between ordinary business course dealings and last-minute preferenceso Once the trustee has established that the transfer is avoidable, the burden shifts to the transferee to prove that an

exception from 547(c) is applicable.

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There are nine exceptions to trustee’s avoidance power (exceptions to discharge) in 547(c):o (1) Substantially Contemporaneous Exchange for New Value Exception – 547(c)(1)o (2) The “Ordinary Course of Business” Exception – 547(c)(2)o (3) Purchase Money Security Interests – (c)(3)o (4) Net Exception – (c)(4)o (5) Floating Liens in Inventory and Receivables – (c)(5)o (6) Statutory Liens (c)(6) (these are beyond the scope of 547, dealt with 545)o (7) DSO’s: Payment for debts for domestic support obligations -- (c)(7).

To the extent that a transfer was the bona fide debt for a domestic support obligation, it is not avoidable as a preference.

It is the actual nature of the obligation—as support—that is determinative here, not what the parties call it. The payment must relate to that domestic support.

o (8)-(9): Small value transfers Where the debtor is an individual whose debts are primarily consumer debts, 547(c)(8) will exclude an

individual rom avoidance of a preference if the aggregate value of the property include in the transfer is less than $600. Section 547(c)(9) will exclude avoidance of up to $5,475 where the debtor’s debts are not primarily consumer debts.

(1) The Substantially Contemporaneous Exchange for New Value Exception – 547(c)(1)o Rule: A transfer may not be avoided to the extent that it was intended by both parties to be a substantially

contemporaneous exchange for new value given to the debtor – even if it was not exactly at the same time. 547(c) excludes from avoidance a transfer, to the extent that the transfer was:

(1) Intended by the debtor and the creditor to be a contemporaneous exchange for new value given to the debtor, and

(2) That the transfer was in fact a substantially contemporaneous exchange. “If you repay a creditor and the creditor in return grants you more credit or gives you something else of

value, and that exchange was contemporaneous (within a short time period), the creditor may have a defense.”

Why the exception? If a debt is created even a short time before a transfer, then the debt is “antecedent” – it came before. The exception is intended to protect txns where the both parties intended an immediate exchange, but there was some delay btw the creation of the debt and the transfer of coll’l, but the delay is inconsequential (the exchange is still subst’lly contemp.).

o What does “substantially” contemporaneous mean? Debtor can argue – up to a court, not defined in 547(c)(1) Post-dated checks – is this a substantially contemporaneous exchange of value?

Post-dated check = a  check delivered now with a written date in the future, so that it cannot be cashed until that date. 

Rule: It is a matter of degree, mostly matters how post-dated that it was. Ex. stronger argument for substnatally contemporaneous if post-dated the check for the next day and it was 5PM.

What about checks that creditor failed to deposit – is contemp. exchange of value here? Rule: again, a matter of degree. 1 month failed to deposit vs. 1 day.

What about bounced checks? Rule: NO. bounced checks will almost never be SCE for new value.

Accepted that where have SCE exception that would work/would not get avoided b/c it would fit 547(c) is buyer/seller for goods paid for by check on delivery.

(1) Buyer and seller intend for this to be a cash transaction (prong 1 of SCE of New Value exception) AND,

(2) The exchange is in fact substantially contemporaneous. (2) The Ordinary Course of Business Exception, 547(c)(2) -- if the debt was incurred and the payment made in the ordinary

course of your business with the creditor, the creditor may have a defense.o (c)(2) creates an exception from avoidance to the extent both the creation of the debt and its payment qualify as

ordinary course transactions. Two sep. req’s must be satisfied to meet the OCB exceptions: (1) Creation of the debt itself: The debt itself must have been created by a txn that was int eh ordinary course

of business or of both the creditor and the transferee.

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(2) The payment of the debt was either in the ordinary course of business or financial affairs of the debtor and trustee, or it was made according to ordinary business terms.

o AKA (Speckhart’s verision): A transfer is not avoidable to the extent it meets the following requirements: (1) The debt itself must have been incurred in the ordinary course of business or financial affairs between

the debtor and the transferee, and (2) The transfer satisfies 1 of these 2 requirements:

The transfer was made in the ordinary course of business the debtor and the transferee; or The transfer was made according to ordinary business terms.

o Purpose of (c)(2); don’t avoid normal pre-bankruptcy transfers that are usual and routine – these don’t give other C’s unfair advantages on eve of bkry, these are part of the debtor’s business.

o This is a question of fact – whether a debt was incurred in the OCB and whether the transfer was made/according to the OCB is a question of fact to be determined under the circs.

o Examples If debtor always pays supplier every month for bringing inventory supplies, this would be an antecedent debt:

SP gave to you (debt arose), and you paid back for the inventory after you ahd the money, after the debt (transfer of property).

Because (1) supplier devliered to you, and (2) you paid back after you had the debt, this would be an antecedent payment.

However, if you have always paid in the ordinary course of business, the transfers of $$ from you (D) to the inventory lender will have a defense ot pref and this payment is protected against a prerference action by the trustee.

Catch-up payments: usually no, unless that is the ordinary course. If within the preference period, debtor started paying catch-up payments => that will NOT be

“ordinary course” – that is NOT how you have always done biz wit this creditor.However, if your “ordinary course” is always being late and making catch-up paments.

Power bill: could be (ex. expenses paid by consumers for utilities or services can fill into the OCB exception), but power bill usually treated/defended by the “substantially contemporaneous exchange of new value” exception.

G/R: where parties have had an ongoing relationship, their established course of dealing can be taken into account.

Ex: Larry is a sole proprietor. One of his vendors is X Corp. Larry buys inventory from X Corp. on a monthly basis and pays his invoices every 45 days. He receives inventory on May 1 with a bill for $50,000. He pays the invoice in full on June 16 and files bankruptcy 60 days later. The debt (the $50,000) was incurred in the ordinary course of business between Larry and X Corp., and Larry paid the debt within the ordinary course of business between Larry and X Corp. Does X Corp have a defense? – yes, therefore, X Corp. likely has a defense against a preference action by Larry's trustee.

(3) The Advance of New Value Exception (547(c)(4)) o This is the replenishment rule. This refers to post-preference advances of new value, in which the estate is

“replenished” by the creditor’s advance of new value after a preference occurs. If, after receiving an avoidable transfer, the creditor gives to the debtor new value that is not itself secured or paid for by a new transfer (just pure new advance), the otherwise voidable transfer cannot be avoided to the extent of the new value.

o Rule: The analysis must be sequential and mechanical. Jan 1 – Advance of $5,000 by creditor Feb 1 – Preference payment of $3,500 Feb 15 – Advance of $4,000 by creditor Feb 20 – Preference of $5,500

o What is the preference liability? The preference liability is $5,500. Because of the new value exception, the debtor’s first preference payment

to the creditor of $3,500 on Feb. 1 was “wiped out” by the SP’s advance of $4000 on Feb. 15. But there was no new advance on Feb. 20 to wipe out the Feb. 20 preference from the debtor of $5,500. So the preference liability will be $5,500. Rule: Payments are protected only to the extent that new value is given after the payment without a corresponding new transfer by the debtor.

For something to be “new value” it must be new benefit to the estate (547a2). (4) The PMSI Exception – 547(c)(3)

o Rule: IF there is a PMSI, then this is not a preference for the debtor to transfer some interest of their property to the creditor/transferee—rather, the holder of the SI (that 547c3 is enabling the debtor to transfer w/o subjecting the SP to an avoidance suit) has enabled the debtor to obtain property that secures the debt. So it is not a preference.

o Caveats

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(c)(3) does NOT totally exclude PSMI’s frm avoidance There is instead a special grace period – The interest is unavoidable, provided that it was perfected w/in

30 days from the date on which the D received poss’n of the collateral. But, if the creditor/SP does NOT perfect its SI within 30 days of attachment, what happens?

Now the debt is dated to whenever perfection happens => not from the date of the “effective between the parties.” That means only deemed to “transfer” on whenever this is perfected.

o This could make the debt antecedent. In addition, the later date (when perfected) could push the transfer into the 90-day period =>

meaning that it could be avoidable. (5) The DSO Exception – 547(c)(7)

o Rule: To the extent that a transfer was the bona fide debt for a domestic support obligation, it is not avoidable as a preference.

It is the actual nature of the obligation—as support—that is determinative here, not what the parties call it. The payment must relate to that domestic support.

The transfer must be a bona fide payment of a debt for a domestic support obligationo Example

Debtor paid ex-wife $5000 in alimony during the preference period. The estate will be administratively insolvent. Debtor wants to void preference payments. What is the trustee’s option here? NONE. YOU DON’T PROSECUTE PREFERENCES AGAINST DSO’s, if it was a “bona fide support payment” - §547(c)(7)

but note ISSUE: was this a bona fide support payment? If sham, then it is a preference payment. If no sham, then the creditor/transferee (the one getting support payments) n has total exception to preference avoidance,

Trustee can’t go after this DSO creditor. Ex. 2: I DSO claimant and I tell the debtor that they owe me money for my support payments, and Debtor

says, “OK, I will scrounge around and pay you.” So ex-wife gets $1000 from debtor. Should the ex-wife’s $1000 payment be a voidable preference that the Trustee can void? Maybe it should be, but DSO is a bad example => Trustee will never void a transfer on a DSO. 547c7.

o AKA: If the debt you repaid is for child support, spousal support or any other domestic support obligation, the trustee cannot avoid the transfer.

Ex: Todd owes $10,000 in back child support to his ex-wife. He repays her $10,000 and files bankruptcy three days later. The trustee cannot avoid the transfer as long as Todd made the payment for purposes of catching up on his child support and not for purposes of hiding his money from the trustee

3. Examples Generally

o Example 1. Tom owed $15,000 on a personal loan from his bank. He receives a tax refund of $5,000; in a last ditch effort to get debt relief, he pays the $5,000 to the bank for the loan. Forty days later, he files Chapter 7. The trustee will sue the bank to recover the $5,000, because Tom is presumed to have been insolvent; the payment was made within 90 days before he filed his bankruptcy; the payment was on an antecedent debt; if Tom had not paid the bank and had filed Chapter 7, the bank would have received less than $5,000; and the payment was over $600.

o Example 2. Jennifer's mother loaned her $10,000 in 2009. In 2011, Jennifer received a bonus at work and repaid her mother in full. Less than a year later, in 2012, Jennifer is unemployed and files Chapter 7. Jennifer's trustee can sue Jennifer's mother for the $10,000 payment if the trustee can prove that Jennifer was insolvent at the time of the transfer and that Jennifer's mother would have received less than $10,000 in Jennifer's bankruptcy case if Jennifer had not made that payment

Applying the Insolvency Test o Gloria and B&P (EE 379):

On January 1, B&P Inc. sold and delivered goods to Gloria Transit Co. The price of the goods was $2000 and was to be paid within 30 days of delivery. Gloria failed to pay on the due date, Feb. 1. After making demands for payment, B&P received a check for $2000 from Gloria on March 30. The check was deposited immediately and paid by Gloria Transit’s bank on April 5. Gloria had been in financial difficulty for some time, and its liabilities had exceeded the value of its assets since November last year. On July 1, it filed a voluntary C7 petition. After secured and priority claims are paid, the fund remaining in in the estate will be enough to pay 10% of the unsecured general claims. Has there been an avoidable transfer under 547(b)?

(1) Transfer of property of the debtor – is the payment here a transfer of property of the debtor (the one that counts, within the payment period)?

Here, filing was on July 1 (7/1) – subtract 3, 90 day period ~4/1 (here April 2)

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That means that on March 30, the debtor had written the check and the creditor received the check on March 30 (outside the payment period), but D’s bank had actually paid out the $ due to the creditor on the check on April 5.

o Which date is operative? RULE: When payment is made by check, it is not the delivery of the check, which is a mere order to the bank to pay the name, but instead the payment of the check by the drawee bank, that will constitute “the transfer” for purposes of 547. because the other is just a mere order to pay, and not the actual funds, it is not the “transfer” for 547.

So there was a transfer of the debtor in property. (2) To benefit one of the debtor’s creditors – yes, this was to benefit one of the debtor Gloria’s creditors. (3) On account of an antecedent debt – was this payment on account of an antecedent debt of some kind, or

was it a pure exchange at the same time? We know that it wasn’t paid until April 2nd But when did the debt arise? RULE: In a sale of goods, the debt of the buyer arises when the goods

are delivered. (4) Made while the debtor was insolvent – yes, told this here. And even if had not been told, §547(f) provides

a presumption of the debtor’s insolvency during the preference period. (5) During the preference period – yes, this was during the preference perio.d

But when doing preference period analysis, always ASK: Could this have been an insider?? (6) Where the creditor was better off than they would have been than if had been in Chapter 7

(Liquidation Test)? – does this transfer improve the position of the creditor compared to A7? Compare:

o What they got under the preference payment Here, they got $2000 on April 2 (which we said was within pref. period) This is their reality in the “world with the preference payment” – they didn’t have

any other debts that we would analyze under the Ch. 7 distribution here. If they did (ex. if they had $4000 owed to them, and only got the $2000

preference payment), then we would have to combine the preference payment with the Chapter 7 distribution on the portion of the C’s claim that the preference did not take care of.

o VS. What they would have gotten if no preference and just a general unsecured creditor under the bankruptcy Ch. 7 scheme

Here, the creditor would be a general USC – didn’t take a SI in the goods that sold. So, here we are told that the payout % in C7 for the unsecured creditors is 10%.

Therefore, would get only $200. Note that (as a fallacy of 547), this percentage will actually increase in reality

because now are adding back in voided creditor’s preference payment amount into the pool of the estate.

Note: this test is almost always satisfied when the transfer has been made to a general unsecured (or even a bifurcated, partially secured creditor) and the estate does not pay all the unsecured creditors in full. Any portion of the debtor’s claim that is paid in full (like in Gloria, when she paid them the full $2000 she owed) will be a higher percentage than the payout in the Ch. 7 plan.

Applying the insolvency test: bifurcated claims from creditor o Debtor owes me $1000 and pays me $500 70 days before files for bankruptcy (within the preference period). I now

have a $500 cash payment and a $500 unsecured claim. What would the liquidation step be? The claim is now “split” – owed $1000

had $500 preference payment (assuming the other factors, but w/in pref. period and to a creditor), and

also have the other $500 on claim – from the amount that the preference payment did not pay. What result under the liquiation test? The payout % will be 50% for USC’.s

World with the transfer: got $500 + for the other $500 whatever the pay rate is (50%), so $250. Therefore, $750 for the discounted part of claim + from the transfer.

World without transfer: transfer never made, so the SP has claim is $1000. We are (under the fallacy of) saying still pay rate 50% here... so would be $500 only. Less.

Means that the creditor “did better” under the “world with preference payment,” meaning that they were preferred, this does meet liquidation test. If met other req’s, Trustee can avoid the transfer of property (the $500 payment).

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Preference Defenses **remember to bring ALL that can, NOT JUST ONE***o (1) Rent Example #1: Tenant (debtor) pays LL $3000 in rent on the 1st of the month (each month) during the

preference period. Is this a voidable preference? (1) This would be a 1. a transfer of property that the debtor has an interest in, 2. to a creditor, 3. for an

antecedent debt? debt arose when? when all the months began? yes. when each month begins... then you owe your rent. your rent is due?, 5. during preference period, and 6. not enough information about the other issue.

(2) But, we said that the creditor could use two exceptions: (1) Substantially Contemporaneous Exchange for New Value

o LL will argue: This was a contemporeanous exchange of valueo I continued to give her something that is of value to the debtor, the apartment, so I was

giving her valueo The fact that she gave me something was NOT a preference payment , it was her

exchanging back to me payment for the new value (the apartment, the ability to live in the apartment), that I am giving her.

o This would work. (2) Ordinary Course of Business Defense

o This would also work as an OCOB defense. Ex: D pays me this on the 1st of every month, look at the elease

Full analysis: preference and defenses to preference o Gloria and Prudential (376): On January 1, Gloria Transit Co. bought some other goods on credit from Prudential.

At the time of the sale, Prudential retained a SI in the goods that was properly perfected under A9 on Jan. 20th. The price of the goods was $2000. Gloria Transit was obligated under the SA to pay for the gods in two installments due at the end of Feb. and March. It failed to make the payments on the due dates. Upon being threatened with foreclosure, it paid half the debt ($1,000) on April 10. No further payments made. Gloria filed its C7 petition on July 1.

The collateral was worth $2500 on the time of the petition. Can the Trustee avoid the payment of $1000? What difference would it make if the collateral were worth $1,500 or $2,000?

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III. Priority and Claims Distribution

A. The Chapter 7 Claims Process1. Introduction Before analyze priority need to determine whether the creditors’ claims are “allowed” under the Code, meaning whether the

BT will give these creditors a portion of the payment, and to what amount the BT will pay the creditors. “precursor to priority”

This relates to:o 1) Priorities question: if we are going to say what order people are going to get paid, also should know how much they

will get paid? How much does this leave for the other creditors? o 2) Discharge question: if someone gets discharged, how much is the claim that is getting discharged. More

importantly, if this is an exception to discharge, what will the debtor owe even after the bankruptcy case?o 3) COC: What will the debtor owe in Chapter 7 to a certain creditor (i.e. if there is a 1. an allowed claim by this

creditor, and 2. the claim is NOT DISCHARGABLE DEBT or as to this particular debtor, the C’s claim can’t be discharged, so the D will still owe it), compared to what the D will owe this creditor in a Chapter 13 payment plan?

Once it is clear what property belongs in the debtor’s estate  - what is in the POE,  & what is in the POE but exempt and therefore sheilded from the creditors during bkyt - the trustee beings to assemble any non-exempt property for sale.  The proceeds will be paid out pro rata to the creditors, but with the priority USC creditors getting the full share of their claims before the general USC creditors get one penny.

Questions to ask for claim o 1) Who filed- Which creditors FILED a claim?o 2) What are the claims- What amounts of $$  are the creditors claiming?o 3) Is anyone claiming too much?

Rule 1: A claim is allowed unless a party in interest makes an objection. Rule 2: But if they are seeking ot have more than the proper caclculation of the claim, the BT will be able to

reduce the amt. of that C’s allowed claim… and hold onto more f$$ for the bankruptcy estate and the USC’s. => Calculation of a Claim

Rules for secured creditors Rules for priority unsecured creditors Rules for unsecured creditors

(1) Who filed? Creditors must file for claims in order to get any distriubtion from the bky estate Background

o When the debtor files for bkyr, the debtor will file a list of creditors (521).o The court will then send notice of the bankruptcy case to the listed creditors (342) o Then, those creditosrs that wish to participate in the distribution scheme – that want in on the proceeds of the

liquidation and the POE—must file a proof of claim. (501, 726) but also file for C13, C11

Proof of Claim Form : Creditors file for claims by submitting a “proof of claim” on a proof of claim form.o Ordinarily the creditor will receive a proof of claim form with the notice of bankruptcy. o The creditor’s claim must be based on a writing and the creditor must have a copy of the writing attached to the

proof of claim form. o Submitting the proof of claim is mandatory if the creditor wants to receive any distributions, at all, in C7 and in

C13. Filing a claim is necessary unless meet one of the specific exceptions.

o Rule 3002: A creditor must file a claim in Chapter 7 or Chapter 13 cases, even if the creditor is listed on the debtor’s schedules, in order to receive any distribution in Chapter 7 or in Chapter 13. 90 days after the 341 meeting.

o **this includes SP’s -- even if you’re a perfected SP, they are a creditor for the purposes of the priority distrubtion scheme and they must file a proof of claim or interest for the claim or interest to be allowed.

3002: An unsecured creditor or an equity security holder must file a proof of claim in order for the claim or or interest to be allowed, except as provided in

o 3004: Trustee or debtor can file for a creditor that doesn’t file - if a C doesn’t file a timely proof of claim, and trustee and/or debtor want the creditor included, the D or C may file a proof of the claim within 30 days after the bar date. (ex: if this is a non-dischargeable DSO that would have priority, the D will want that included so it eats up the $$ and then the unpaid creditors are the ones that can get discharged\

o In C11, a creditor who is on the debtor’s schedules is not required to file a proof of claim to receive payment.

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Must be timely – were the claims filed timely? o Rule: To receive any distribution, each C7 and C13 creditor must submit a proof of claim. and must be a timely

proof of claim. o Timing Rules - “bar dates”

Chapter 7: A claim must be filed within 90 days after the first meeting of creditors. Exception: the T or the D can file 30 days after the bar date expires for a creditor who they want

included in the bkry distribution. Chapter 13: Same as C7 -- within 90 days after the 1st meeting of creditors (the 341 meeting). Chapter 11: a creditor is not required to file proof of claim.

(2) What are the creditors claiming? o Unless there is an objection, this will be the amount that the creditor gets paid out: their claim will be allowed unless there

is an objection. Most claims in consumer bkry are presented for payment from the proof of claim forms and are paid out without objection by the trustee for a pro rata share of whatever the claim.

o Ex: Creditor A, Creditor B, and Creditor C. Total pool is $200. Creditor A’s claim that they represented on their POC = $10,000 Creditor B’s claim that they represented on their POC = $5000 Creditor B’s claim that they represented on their POC = $3000

o What will each creditor get if there are no objections to these claims? (1) Add up what the three are claiming together: $18,000. (2) Make fraction: What Have to Distribute / Total of what being claimed

200/18,000 (3) Multiply each C’s claim against this fraction – this will add up to the amount in the pool:

Creditor A: $111.11 Creditor B: $55.55 Creditor C: $33.33

o 502(a): a claim is allowed unless a party in interest makes an objectiono But in some instances, the BT or the debtor may object to paying certain creditors: because they argue there is no valid

debt under state law or because they argue that the amount of debt that should be allowed is lower than what the creditor has claimed.

o If a party objects, the dispute is treated as a contested matter under 9014, not as a A -- determining allowed vs. not allowed is within the bkry case, not its own proceeding.

o Exception: If a party in interest (the debtor if thinks doesn’t owe that much, like In re Lanza, or the BT if thinks that the specific creditor is claiming to be owed too much) makes an objection to a claim & says it shouldn’t be allowed, and makes a demand for a type of relief, that converts the matter into an AP.

(3) If this is a disputed claim: will the creditor have a claim? To what extent will the creditor’s claim be allowed?

1. Validity of the claim under state law – who has a claim?o A claim, under §101: A “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,

fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable or unsecured.” o EX: D’s car runs into C, and C contends that was negligent and that her negligence caused C substantial damages. Before

C files a lawsuit against D, D files for bankruptcy. Under these facts, does C have a “claim” against D in D’s bankruptcy that C could file a claim as a creditor? Yes. Even though D disputes C’s allegations of negligence and even though the amount of any liability has not yet been liquidated, C has a claim for the Code against D in D’s bkry.

2. Allowance of Claims: Has the creditor claimed more than the amount that should be allowed under the Code?

RULE: In a chapter 7 liquidation, the proceeds of liquidating the POE are not distributed to all holders of unsecured credit. Rather, the distribution is made only to the unsecured creditors who (1) filed for their claims and (2) whose claims are “allowed.” §726.

o If a proof of claim is FILED, it is DEEMED ALLOWED unless a party in interest objects. Oa. Only then – only if a party in interest objects – will we analyze allowance vs. disallowance of claims. b. But if there is something wrong with the claim, it will be v. impt. to object: because determines whose in and

whose out of the priority scheme and what amount each of the creditors can claim and can get paid out.

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o Why is this important? The amount of the claim that is allowed and whether the claim is allowed will determine the amt that the creditor gets paid out in the priority scheme, or if the creditor is even included in the priority scheme at all.

1. Party in interest might object because there was not sufficient evidence to support the amount of the creditor’s claim – In re Lanza o In re Lanza: were bank had kept ambiguous records and there were conflicting statements, reduce the claim to be

lowest of the conflicting statements (although the onus is on the debtor to overcome the presumption of validity of the creditor’s claim where there are conflicting statements as to the amount in the balance of indebtedness, creditor’s claim was reduced to only the lower of the two conflicting statements)

o But, if a debtor tries to challenge the amount of a claim allowed or validity of a claim and doesn’t’ have documentation to back it up- will not have be able to negate/reduce the claim

2. Party in interest might object because the amount of the claim that the creditor is claiming is more than what there allowed claim should have been calculated as: o Rules for unsecured creditors

The Claim Rule: An unsecured creditor is entitled to the full amount of debt accrued to the creditor before

bankruptcy (the full amt. of their prepetition claims). The amount of claim is NOT just the amount of the “straight loan” but also + Interest + Any collection efforts expended so far. -- ex. Sears charge card (CB 223)

Example – Searso D had a charge account with Sears. Terms of card were the D had to pay cash in full w/in 30

days or pay later, but would have interest at an annual rate of 12% (12% interest/year). At the date of the bkry, debtor had made one charge for $1000, was three months late in paying, and Sears had begun its collection efforts. What would Sears file as its proof of claim?

1. $1000 – for the straight amount that the debtor owes Sears2. $30 for the interest for 3 months before bkry (assuming it was simple interest,

not compounded, this means that it was 1% of the interest a month, $10/month, so $30 interest for the three late months)

3. and the $200 it spent on its collection efforts so faro Result: So Sears would file for $1230 as its claim. Let’s say that the debtor did not have

much money and the general unsecured creditors got paid out at 10 cents on the dollar. Then Sears will be getting only $123. (see above, similar)

Interest? RULE: No. Unsecured creditors do NOT get post-petition interest. They do, however, get pre-

petition interest. – above, Sears could get the 1st three months of interest that it claimed. Premise = it will probably take some time for the estate to be liquidated and for Sears to get

paid. If 5 months elapse btw initital filing of the bkry petition and the distribution, does Sears get another $50 interest while it awaiting any bkry payout (and after its interest has started running).

RULE: If this is an unsecured creditor, the USC will NOT be able to claim post-petition interest. 502(b)(2). This is going to be treated as an “unmautred” interest

Rationale: some C’s will have high interest rates, some will not, and want to further the goal of equality among the unsecured creditors once the case is in bankruptcy.

Accelerated Claims:o Rule: Because in bankruptcy the debor’s obligations are about to resolved in a SINGLE FORUM,

ONCE AND FOR ALL, the bankruptcy courts has to accelerated all pre-bankruptcy claims, whether they have matured or not.

The valuation questions for how much will have to may for that claim that ct will accelerate is expert question

o Exception: One category of claim is NOT accelerated: DSO’s. If domestic support obligations are not yet due at the petition date, they will NOT be accelerated

Don’t need to accelerate these claims because can still go after them after the bkry is over Post-petition DSOs are also not allowable claims.

Attorneys Fees

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o USC’s can claim pret-petition attorneys fees -- If the USC is entitled to the pre-petition attys fees by contract or state law, then (like Sears with the collection), the C will add the amount of the atty’s fees to the amount of their claim.

o What about post-petition attorneys’ fees? Less clear Seems like they shouldn’t for same reason hat can’t get post-pet interest: equality among the

creditors However, Supreme Court in Travelers Causaulty & Ins. Co upheld post-petition atty’s fees

in an USC claim but in an odd case SO: atty for the USC will claim this: will include the post-pet attys fees (...accelarated, b/c

accelerate all post-pet claims) into the amount of their claim. These are allowed unless BT objects => so will see if the BT objects to it.

o Rules for Secured Creditors The Claim

Like an USC, “the claim” for a SC will be whatever they are owed when the debtor files the petition If the SP’s collateral (the proceeds of their collateral) when sold are not enough to satisfy their debt, then

the SC’s claim is bifurcated they will then be partially secured

Partially Secured vs. Fully Secured If the collateral is sold by BT for more than what the SC is owed, they have a secured claim for

the full amount of what they are owed, this is “fully secured.”o this creditor doesn’t have any portion of what they are owed go into the general USC

pool If the collateral is sold by BT for less than what the SC is owed, then they have a “partially

secured claim”o they will have a secured claim for the amount that the coll’l was sold foro they will have an unsecured claim for the rest – they will be with the general

unsecured creditors for the rest **this is important for doing the priority analysis.

Example: Sears and Lawnmower Fully secured: If D owes Sears $5000 for a top of the line lawnmower, and the TIB sells the

lawnmower and clears $6000 after deducting what spent on the costs of the sale [506(c)]. But the SP will have a $5000 secured claim for the amount they are owed

o And, the BT can add in interest that they would be owed from the excess. o Rule: the BT gets to deduct what they spent in selling the SP’s collateral. 506(c): The

trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all property taxes with respect to the property that the BT had to pay for estate propert.

Partially secured: If D owes Sears $5000 for the lawnmower, and the BT only sells it for $3500, then the BT will be able to 1st take out their chunk for costs of sale and taxes and ad expenses (506c) and then the ST might get $3000.

o Now ST has secured claim for $3000o And ST has unsecured claimf or $2000

where does this go? this claim goes into the general fund with the unsecured creditors – it is now a mere unsecrured claim that will get the same pro rata distribution as the other unsecured creditors – of which the bifurcated portion of the SP’s claim has become.

And, for priority purposes, they have moved from the top to the bottom of the line.

So if the USC’s each got only 10 cents on the dollar, Sears would get $200 for its $2000 claim... meaning it would have $3200 total for its distribution.

Although this is bad, it isn’t as bad as if had been entirely an USC’ed creditor. o Interest

*Important difference btw USC’s and SC’s is about what interest they can add to their allowed claim. RULE:

Unsecured creditors: can include pre-petition interest only (ex. Sears) as part of their allowed claim

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Secured creditors: SC’s can include pre-petition interest, and, if the value of the collateral when sold is greater than the SC’s claim (the prepetition debt + the prepetition interest that the D owes SC) , SC can get the POST-PETITION interest at the original contract rate until the value of the collateral is exhausted.

Ex. 1: Oversecured SC (fully secured, w/excess) Debtor owes SC $5000 for the lawnmower, the sale is for $6000 after the BT takes out their

expenses under 506c, and the pre-petition interest was $200. What post-petition interest? Then the SC could get post-petition interest under the original

contract rate for as much as $800. If there is anything left after that => it will go to the general USC pool.

priority not only for the $5200 but also for the interest: this is part of their allowed claim. Ex. 2: Secured SC (fully secured, no excess)

Debtor owes SC $5000 for the lawnmower, the sale is for $5200 after the BT takes out their expenses under 506c, and the pre-petition interest was $200.

SC now has a “claim” that is allowed fro $5200 (like the USC: the amt of the debt owed + the prepetition interest). But there is no $$ from the sale that exceeds the amt of the debt owed + the prepetition interest, so does not get the prepetition interest. But, also not bifurcated here, because fully secured.

still has full priority Ex. 3: Undersecured SC (only partially secured)

Now the SC doesn’t get the post-petition interest, only gets partially paid (ex. for $3000 if the sale was $3000 after BT’s costs of sale and ads) and the rest of the BT’s claim (the $2200) goes into the general USC pool to be paid out at pro rata payment (10 cents on the dollar).

o Attorneys Fees Pre-petition attorneys fees are treated the same as pre-petition interest for a secured creditor and for an

USC: If a creditor, secured or unsecured, is entitled to pre-petition attorneys’ fees by contract or state law, then the fees are part of the creditor’s claim .

Post-petition attorneys fees for SC’s that are oversecured are also part of what the SC can have of their allowed claim. – like post-petition interest.

Unclear for what post-petition fees can be in allowed claim for secured creditor who is undersecured.

Same as for USC –add it to the claim, b/c have default status that it is an allowed claim, and then see if the BT objects.

o Remember that a valid SI can go into exempt property. o And distinguish: if the BT has post-petition expenses, and then there are creditors of the BT, what happens to

these creditors? these creditors = creditors of the trustee’s “expenses of administration” If BT bought paint at Home Depot to paint the D’s non-exempt furniture, and hadn’t yet paid Home

Depot for the paint, Home Depot would have a claim, and it would be a post-petition claim, but HD’s claim would be for “expense of administration” and fall under §503 not 502.

This would be an “expense of administration” Therefore Home Depot’s claim is an “administravtive claim” Therefore, Home Depot—even though not actually THE Trustee, but a CREDITOR of the

trustee—would have priorioty under 507(a)(1) for administrative expenses. o

3. Which claims are not allowed? 502(b) DISALLOWED CLAIMSo (1) POST-PETITION DSO’S

RULE: If the claim is for post-petition alimony or child support, it will NOT BE ALLOWED under §502(b)(5).

502(b): “If such objection is made [to a claim], the court shall determine the amount in lawful currency of the claim, and shall allow the claim in that amount, except to the extent that . . . (5) such claim is for a debt that is unmatured on the date of the filing of the petition and is excepted from discharged under 523(a)(5). ”

o 523a5 = the DSO discharge ruleo therefore: post-petition alimony or child support claims are not part of allowed claims

(across chapters – this is a500rule) but this is OK b/c they get paid later- are nondischargeable.

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The post-petition DSO obligations still get paid even though not within allowed claims (just only the PRE-PETITION DSO claims will be included as part of the priority scheme) b/c the D will have to pay them after bkry petition – they are nondischargeable.

Ex: H and W are divorced in January 2012. The divorce decree orders H to pay alimony of $1,000 a month. H files a bankruptcy petition on December 31, 2012. He owes W $2,000 for November and December alimony. W’s claims for $2,000 of unpaid 2012 alimony is allowable. -- 502(b)(5) only disallows a claim for alimony that is ‘‘unmatured on the date of the filing of the petition.’’ BUT, W’s claim for postpetition alimony is disallowed. If W’s claim for $2,000 of unpaid 2012 alimony is not fully satisfied by the bankruptcy distribution, W may attempt to collect any deficiency from H personally – and this is OK b/c DSO exempt from discharge.

o (2) Insiders: If the claim is for the services of the debtor’s attorney or an ‘‘insider,’’ it will be allowed only to the extent the claim is for the rsbl value of the services.

and it’s not like with the DSO rule where they are nondischargeable after. (b)(4): “if such claim is for services of an insider or attorney of the debtor, [if] such claim exceeds the

reasonable value of such services” then NOT an allowed claim o (3) Ad valorem tax that exceeds the value of the estate’s interest in the property will not be allowed o (4) Claim from a LL for future rents and for an EE claiming back wages -- only will be allowed to a cap of 502(b)(6),

(b)(7)o (5) Late-Filed Claims:

Chapter 7 - In a C7 case, late filed claims are not disallowed, but their priority of distribution will be subordinated to the other crediotrs under 726.

In a C11 or C13 - Under 502(b)(9) => these late filed claims will be disallowed

B. The Priority Waterfall 1. Overview 726(a)(1): The various priority classes must be paid out in the order that they are listed in 507. AKA:

o You go down the chain.o and each each first priority claim must be paid out in full before any second priority claim gets even one penny.o If there is not enough $$ to pay all claims within a particular class => pro rata for the claims within a particular class

what is the total that people are owed make fraction: what we have to distribute to these people / what all these people are owed multiply each of them X this fraction (ex. .0111) and get what their pro rata payouts will be.

Priority unsecured creditors are 507 Subordination is 510

o Although the general USC’s get moved to the end of the line under 507, someone who is within 510 is ensured to be at the back of the line.

2. Overall Distribution Scheme Chapter 7

o Secured party gets their collateral value o § 507 Prioritieso Allowed USC claims that were tardily filed by a creditor who did not know of the bankruptcy o Allowed unsecured claims which were tardily filed by creditors with notice or actual knowledge of the bankruptcyo Fines and punitive damageso Postpetition interest on prepetition claims

Chapters 11 and 13 o RULE: Chapter 11 and 13 REQUIRE THE PLAN TO PROVIDE PAYMENT IN FULL OF ALL PRIORITY

CLAIMS. o But the other debts that do NOT pay after the priority claim will have superdischarge.o So if the debtor has a lot of priority debt – may Ch. 13 is good for them.

3. §507 Priorities 1) First priority: DSO’s, as defined in 101(14A)

a. Priority within this priority: if the expenses from the T’s sale aren’t sufficient to pay all the DSO’s then support that is owed to children or former spouses gets paid 1st before any payment to a gov’tl unit on an assigned support obligation.

2) Second priority: Trustee’s administrative expenses

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a. But sometimes the trustee will argue: you only have this because of my work, I should get paid first before the DSO creditor.

b. After payment in full of all DSO’, then distributions made to the second priority: the trustee’s administrative expenses.

c. To get in here, the admin expenses have to be allowed under 503(b). – what do administrative expenses that come into this part of priority include?

i. Costs of maintaining, repairing, and restoring the property of the estateii. Taxes the BT incurs in administering the POE

iii. Professional fees the BT incurs in administering the POEiv. Limited expenses of certain creditors

3) Third priority: only in involuntary cases: claims that arise in the OCOB after creditors file an involuntary petition but before an order for relief or the appointment of a trustee

a. Ex: Creditors of a restaurant, D, file an involuntary petition on January 11. On January 15, C makes its usual weekly delivery of grits to D. C’s claim will be entitled to a third priority under section 507(a)(3).

4) Fourth priority: wage claims within half a year, under the allotted cap per employee a. Fourth priority goes to wage claims. b. This includes

i. commissions – ex. our real estate brokerii. severance pay that EE creditors have against the D employer

iii. vacaction pay and sick pay leave that EE creditors have against the D employerc. Two limitations

i. 1) Compensation must be earned w/in 180 days before the bankruptcy petition. ii. 2) Amount: only up to $12,475

5) Fifth priority: claims for contributions to an employee benefit plana. These payments will be made to the benefit plan, not directly to the individual EE’s

6) Sixth priority: claims against grain storage facilities and fishermen a sixth priority against fish processing facilities. – if this is a debt grain storage facility. but hten won’t be a consumer.

7) Seventh priority: Another consumer gave the debtor a deposit and never got what they paid the deposit for. a. (1) If the creditor is a consumerb. (2) And the debt that they’re claiming is a money deposit for property or services that were never provided

i. => then this creditor gets seventh priority .c. See ex. where friend gave deposit foor a lawnmower but D never delivered the lawnmower

8) Eighth priority: to unsecured tax claimsa. Caveat: many tax claims will be SECURED! If the tax creditor got a LIEN on the taxes – a statutory lien on

the debtor’s property b/c of the statute creating the tax lienb. But, if there are USC tax claims, and they meet the requirements, they will get eighth priority. Which

unsecured taxes are the kinds that get eighth priority? i. (1) Income Taxes – but three year rule

1. Must be for the three tax years immediately preceding the filing of the bankruptcy petition

2. Income taxes for fed or state get priority3. BUT, these are only from the three years immediately preceding the bankruptcy filing.4. How is this three year period calculated?

a. You count back the three year period NOT from the date of the filing of the bankruptcy

ii. (2) Property Taxes – only if the property taxes were assessed before the filing of the bankruptcy petition and last payable without a penalty 1 year before the bankruptcy petition, and

iii. (3) **If the debtor is an employee, taxes withheld from the employee’s paycheks. 9) Ninth priority: institutions – not sconsumers 10) Tenth priority: for personal injury claimants where the debtor caused the tort in a DUI

a. tenth priority goes to “allowed claims for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”

Then: §510 Subordiation Section 507, the priority provision, has the effect of moving certain, specified claims to the head of the line.

Section 510, the subordination provision, has the effect of moving some claims further back in the line.

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Section 510 requires subordination in two instances:o where there is a subordination agreement that would be enforceable under nonbankruptcy law, section

510(a)o 2) when a seller or purchaser of equity securities seeks damages or rescission, section 510(b).

Additionally, he court has the discretion, after notice and hearing to subordinate any claim to other claims ‘‘under principles of equitable subordination,’’ section 510(c).

507 Priority Scheme1. Trustee takes expenses from the sale of the SP’s collateral. 506(c)

2. Secured parties gets paid from the proceeds of the sales of their collateral (under 506): a SP gets paid from the proceeds of the sale of its collateral up to the extent of the debt owed, pre-petition interests, pre-petition atty’s fees, and post-petition interest if sale of the collateral exceeds to amount SP is owed on other payments.

506(a): A secured creditor has an allowed secured claim up to the value of its collateral, plus post-petition interest. Anything that the SP has as an allowed claim (debt owed, prepetition interest owed, prepetition attorneys fees owed)

that the proceeds of the sale of the coll’l did not cover => the balance will become a general unsecured claim.

3. Priority Unsecured Claims Waterfall – under 507

After the secured creditors have ben satisfied by the sale of their collateral, the unsecured creditors being the process of dividing the remaining assets. The undersecured creditors, to the extent that the sale of the collateral did not satisfy their allowed secured claims, also join in this process.

Overall Priority Scheme: -- the waterfall (this is how many flows down once the Trustee liquidates the assets) o (I) Secured Creditors – but only to the extent that their collatearl covers them

If their claim is bifurcated => they are in the general undersecured creditors poolo (II) Priority Unsecured Creditorso (III) General Unsecured Creditors In Order According to §507(a)

Including deficiency claims from Secured Creditors In bankruptcy, we no longer care about first in time, first in right. Within BANKRUPTCY priority scheme, we care about what TYPE OF CREDITOR this is, not when the

creditor got their debt. So if you are the very last one and you are a DSO, you will trump the very first one who is a friend who

loaned you money (general unsecured creditor, and not a general unsecured creditor w/§507 priority). o (IV) Subordinated Unsecured Creditors (§726)

BANKRUPTCY PRIORITY SCHEME: Code §507(a). The following expenses and claims have priority in the following order:

o (1) First: DSO’s and Trustee’s Administrative Costs Issue: Should the trustee trump the DSO’s?

Code DOES put Trustee as trumping DSO’s (A) Pre-petition DSO’s: Allowed unsecured claims for domestic support obligations that, as of the date

of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is field by such person or is filed by a governmental unit on behalf of such person.

And (B), Assigned pre-petition DSO’s: allowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition, are assigned by a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or relative of the child for the purpose of collecting the debt or are recoverable by a gov’t unit.

(C): If a trustee is appointed or elected (in Ch. 7, 11, 13), the administrative expenses of the trustee allowed under 503(b)(1)(A), 503(b)(2), and 503(b)(6) shall be paid before the payment of claims under subparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.

503(1)(A): Her wages and wages of others to handle services rendered after the commencement of the case

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o The actual, necessary costs and expenses of preserving the estate, including (but not limited to) wages, salaries, and commissions for services rendered after the commencement of the case (and also before NLRB)

Wages of the trustee to herself Wages to others: ex. if the BT hires an attorney to handle a preference avoidance

action as an AP => that would be a wage/commission for services rendered after commencement of the case => that would get priority here

503(b)(2): Compensation of professionals and others employed by the trusteeo Compensation and reimbursement awarded under §330(a), aka an award form the court to a

trustee, an appointed consumer privacy ombudsman or an an examiner, or a professional person employed under §327 (broad: any “professionals,” like auctioneers, etc., to assist the T in carrying out the T’s duties) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman, professional person, or attorney and by any paraprofessional person employed by any such person

503(b)(6): transportation expenses – fees and mileage o (2) Second: Administrative Expenses (other than the trustee)

Administrative expenses (other than those of the Trustee) allowed under §503(b) of this title, and any fees and charges assessed against the estate under Title 28 Ch. 123.

This is broader than just to the trustee o (3) Third: Claim Arising Out of Debtor’s Business in involuntary Case

unsecured claims allowed under §502(f). 502(f) = (1) In an involuntary case (2) a claim arising in the ordinary course of the debtor’s business or financial affairs (3) that arose after the commencement of the case but before the earlier of the appointment of a

trustee and the order for relief Application – although this is a narrow exception, there are social security payments coming out fo the D’s

business during the period of an involuntary case btw when the C’s put the D into a bnakupty case and when a trustee is appointed => this could happen

EX. in prob 11 answers, Spekchart put for the SSA, a(3) this as an option. – if it were involuntary. o (4) Fourth: If debtor is an employer... employees’ wages, and $ owed to independent contractors

Allowed unsecured claims, but only to the extent of $12,475 for each individual or corporation that the claimant (ex. an EMPLOYEE) earned within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business, whichever occurs first, for:

(A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual; or [507(a)(4)(A) = paying an individual who worked for you, if that $$ was earned w/in 180 days before the date of filing]

(B) sales commissions earned by an individual or by a corporation with only 1 employee, acting as an independent contractor in the sale of goods or services– specifically:

o sales commissions earned by an individual or by a corporation with only 1 employee, acting as an independent contractor in the sale of goods or services for the debtor in the ordinary course of the debtor’s business if, and only if, during the 12 months preceding that date, at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor.

o (5) Fifth: If debtor is an employer... contributions to EE benefit plans Allowed unsecured claims for contributions to an employee benefit plan (A) arising from services rendered within 180 days before the date of the filing of the petition or the date of

the cessation of the debtor’s business, whichever occurs first; but only (B) for each such plan, to the extent of

(i) the number of employees covered by each such plan multiplied by $12,475(*); less (ii) the aggregate amount paid to such employees under paragraph (4) of this subsection, plus the

aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan.o (6) Sixth: allowed unsecured claims of people who = farmers or fishermeno (7) Seventh: Deposits by Individuals for Goods/Services Not Delivered

Allowed unsecured claims of individuals, to the extent of $2,775, for each such individual, arising from: (1) A pre-petition

o A deposit arising from before the commencement of the case, (2) Deposit of money

(3) Made in connection with purchase, lease, or rental of household/family goods50

(4) And the goods were not delivered or provide EX: In CB 11, “creditor George Nartowski, who is D’s creditor for a down payment against a tractor

lawnmower that debtor Harold had agreed to sell to Geroge that the Debtor had not yet given him” => fits §507(a)(7)’s deposits-for-goods-not-delivered in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.

o (8) Eighth: TAXES – by IRS or by state, they are on the same subset, IRS does NOT trump state. Taxes for: (A) Income Tax – for certain period only. A tax on or measured by income or gross receipts for a taxable

year ending on or before the date of the filing of the petition Rule 1: Income taxes only Rule 2: The income tax priority is only for the three tax years immediately preceding the filing

of the bankruptcy petition o January 1 --> April 15 (priority will be FOUR YEARS of back taxes)o April 16 --> December 13 (priority will be for THREE YEARS of back taxes)

(B) Property Tax -- a  property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition;

What does this mean?? means that here is a 1 year limitation (C) tax required to be collected or withheld and for which the debtor is liable in whatever capacity; (D) an employment tax on a wage, salary, or commission o (E) Excise tax, (F) customs duty, (G) Penalty tax in compensation for actual pecuniary loss

o (9) Ninth: Unsecured claim by an agency Allowed unsecured claims based upon any commitment by the debtor to a Federal depository institutions

regulatory agency (or predecessor to such agency) to maintain the capital of an insured depository institution.o (10) Tenth: Personal injury --- people who are suing the debtor for personal injury claim

Allowed claims for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.

What do §726(a) and (b) say about priority? Subordinating Tardy and Subordinating Punitivte Damageso 1) tardy payments get paid out later - compare 726(a)(2) and (3): Except as provided in 510, POE shall be distributed:

(1) First, according to 507 (2) Second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph

(1), (3), or (4) of this subsection, proof of which is— (timely led, or was late w/o the creditor having notice of the case)

(A) timely filed under section 501(a) of this title; (B) timely filed under section 501(b) or 501(c) of this title; or (C) tardily filed under section 501(a) of this title, if—

o (i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section501(a) of this title; and

o (ii) proof of such claim is filed in time to permit payment of such claim; (3) Third, tardy payments: Third, in payment of any allowed unsecured claim proof of which is tardily filed

under section 501(a) of this title (other than those that were justified in being tardy b/c didn’t have notice) o 2) We also subordinate claims for punitive damages – why?

More important that everyone gets crumbs to compensate rather than we don’t compensate some people and give other people punitive damages instead

o 3) if any $$ is going to the debtor, that is after even the punitive damages o and note: just like with the pro rata per class rule for §507, we also distribute pro rata w/in the clases under §726.

Other Key Priority Ruleso 1) Within subsection, split pro rata

And how do you split pro rata? 1: add up total amont within that subsection 2: make fraction: what % is this creditor/total and assign percentage

3. based on the $$ that you have, give everyone the $$ based on their assigned percentage

o 2) Must go in order. No junior creditor can be paid until senior creditors have been paid out in full.

Application – CB Problem 11 (228)

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o Harold Smith declared Chapter 7 bankruptcy in March 2005. His non-excempt assets consisted of his condo in Kitty Hawk, which the Trustee sold for $400,000 but which was subject to a $365,000 mortage, and misc. personal property that was sold for $25,000. All his other property was exempt.

=> and if it’s exempt: it’s not getting sold under the bankruptcy liquidation. o The claims filed in bankruptcy court were the following:

Neil Nelson, a private duty nurse whom Harold hired while his father was ill: 12,000 Social Security Administration, with SS from Harold’s earlier paychecks: $1080 City of Eden, property taxes: $3000 per year for the last three years, plus $500 per year in penalties for each

of the three years George Nartowski, who is D’s creditor for a down payment against a tractor lawnmower that debtor Harold

had agreed to sell to George that the Debtor had not yet given him State Dept. of Revenue and IRS, for income taxes: state has claim for $4000, IRS has claim for $14,000 Telephone, utility, and other regulatr bills following bankruptcy: $3000 Sara Fleet, D’s attorney: $1,750 in fees ($500 for a will. $1,250 for preparing bankruptcy filing) Sue Smith, H’s ex-wife, negotiable note: $25,000 Bank, for a deficiency on H’s car loan after the car was sold: $2,200 Trustee and trustee’s counsel: $4000 Insurance premiums for insurance on the non-exempt personal property prior to its sale by the Trustee

($750) General unsecured claims: $17,000

o Who will get what? o ANALYSIS:

Step 1: Identify the creditors – we have that in our list above Step 2: Categorize the creditors and rank them on where they fall in the §507, 726 priority scheme

Neil Nelson, a private duty nurse whom Harold hired while his father was ill: 12,000 – this is an INDIVIDUAL who the debtor was EMPLOYING... seems like it would be a 507(4)situation – when pay an individual who worked for you, if that $$ was earned within 180 days before the date of filing. The nurse who Harold had pay for helping his Dad would have up to $12,475 what could pay to an individual (or corp) who the debtor was employing

o *remember that even “causal” or “unofficial” arrangements like this = employmento Hypo: Debtor has a nanny. Pays nanny $3,000 a month. Hasn’t paid nanny for an entire

year. Will the nanny’s claim have priority? R1: Must be earned within 180 days – so only the last six months worked R2: Only to a max of $12,000 earned. So nanny worked 6 months x 3000, got

$18,000, but only $12,000 of that will be within the (a)(4) of priority scheme R3: Even though this is a nannying arrangement, ASK: was someone WORKING,

in any form, for someone else? yes, here, Neil was working as a nurse for Harold for the dad.

Policy = we don’t want people who did the services already (these services are already done) not to get pai for their work. But also cut it off w/in 180 days, because if you don’t get paid within half a year and haven’t taken enforcement action, laches.

Social Security Administration, with SS from Harold’s earlier paycheckso $1080 – NOT AN AGENCY PAYMENT. Rather, this gets priority under the “Trust Fund

Tax provision” of 507(a)(8)(C). This is included within “a tax required to be collected or withheld and for which the debtor is liable in whatever capacity.” Social Security is included within this => so is treated as a TAX, rather than agency payment => 8th priority, not 9th.

o but note: WE COULD ALSO HAVE THEM AS AN (a)(3) payment => City of Eden, property taxes: $3000 per year for the last three years, plus $500 per year in penalties

for each of the three years – taxes, they will be a 507(8) debtor => but, are all of these taxes permitted??

o Remember that property tax has a special rule: Property tax ha a ONE YEAR LIMITATON. Although statute is poorly worded, this means that City of Eden will get only the most recent years’ property taxes.

o Here, City of Eden will only get $3000 for the most recent year’s property taxes o The other two years’ property taxes, he $6000, will be in the general o And the others are punitive damages: punitive damages = subordinated, §726

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But disintguish: if this a damage that is to penalize for extra monetary damage incurred (like late payment... because every day late your LL was denying someone else the use of that property), that would NOT be a late payment, because that is tuned to the actual monetary loss.

contrast, here: we had the extra $500 as “the standard fee for any delay in paying” – not finely tuned to the “actual pecuniary loss.” (here we are assuming that the penalty is NOT compensation for actual pecuniary loss.

intended to punish and not for actual pecuniary loss is b/c then we aren’t compensating anyone. we care about compensating people first before “avenging justice.”

George Nartowski, who is D’s creditor for a down payment against a tractor lawnmower that debtor Harold had agreed to sell to George that the Debtor had not yet given him – if SEE “downpayment” or “deposit” in the context of priority, THINK => Were the services/good that the deposit was for delivered? if so, does it fit w/in the rule as...

o (1) A pre-petition (deposit = before the commencement of the case)o (2) deposit of money

(3) made in connection with purchase, lease, or rental of household/family goods (so the creditor is also an individual, buying/renting this for family use)

o (4) and the goods were not delivered or provide o This is an illustration of 507(a)(7)

Note that there is A $$$ CAP ON THE PRIORITY HERE It is NOT a 180-day cap: for the time, we just rquire that was before filing But there is a monetary cap:

“allowed unsecured claims of individuals, to the extent of $2,775 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.”

State Dept. of Revenue and IRS, for income taxes: state has claim for $4000, IRS has claim for $14,000 – taxes, 507(8) -- What is the rule? See below.o Practice with KK.

Telephone, utility, and other regulator bills following bankruptcy: $3000 o These are 502(b) claims o They do NOT GET PRIORITY AT ALL!!!!o Sometimes the utility company will bifurcate the claims for the debtor

Have one account: prepetition Have another account: post petition

o But these get nothing as far as priority for 507 is concerned Sara Fleet, D’s attorney: $1,750 in fees ($500 for a will. $1,250 for preparing bankruptcy filing) –

o ISSUE: Is the attorney a priroty creditor under 50o Answer: No. Even when is helping with the bankruptcy fiiling, iS NOT a priority

creditor – not doing it on behalf of the trustee, doing it for the debtor (distinguish: attorney hired by the trustee for avoidance action).

o But here, the lawyer has NO priority. Debtor’s lawyer is only a general unsecured creditor. So if you are a lawyer and you want to want to get paid, you must get the money before the debtor files for bankruptcy so you don’t get the Automatic Stay on you, and because you know that you will NOT be a priority creditor, you will just be in the general USC’ed creidotrs pool

Sara may still have a claim, but it is a GUC and subject to discharge—and she must must tell her client that it is just a GUC subject to discharge.

o NOTE: Claim for the bankruptcy 507(a)(2), 503(b)(2), 330. Bankruptcy work may be compensable as a priority claim under 330 in chapters 11 or 13, but not in chapter 7.

o Contrast: the Trustee does have piroriyt, and this will be an administrative expense for the BT’s attorney

Sue Smith, H’s ex-wife, negotiable note: $25,000--- analysis when you see someone who looks like a DSO:

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o (1) Is this a DSO? Don’t assume that just b/c there is an ex-wife loan or a debt owed from an

ex-wife that this is automatically a DSO obligation It could be, but it also possible that it isn’t – could have had a business deal with the ex-spouse – could have been some other form of a contract – AND IT COULD HAVE BEEN A PSA: a property settlement

agreement RULE: The term “domestic support obligation” (§101(14A)) means a

debt that is owed toa spouse, child, or relative ... in the nature of alimony, maintenance, or support

o alimony = an order of a court for the support of one spouse by the other spouse.

o maintaince o support

All of these are about FINANCIAL SUPPORT FOR THE OTHER – not just a matter of splitting up assets, which is what happens with a PSA.

What kind of priority if this is just a PSA? general unsecured creditor ; if it was just a court-ordered PSA, it is NOT a court-ordered support obligation, and so has NO priority.

However, could alos be possible that this is a LUMP SUM ALIMONY – in which case it would have priority under 507(a)(1)

in sum: It could be a lump sum alimony => if it were, her huge claim would get

priority under 507(a)(1) It could be a property settlement betweent he parties => and if it were, it

would only be a general unsecured creditor, no special priority, just in the general pool

Or it could be some random deal btw the parites => also in the general USC pool.

o (2) What result depending Here, the issue is priority => so if this is a support obligation (seems high for

support, but it could be a LUMP. SUM. ALIMONY. or one big payment to pay support for the spouse) => then it would have priority.

Bank, for a deficiency on H’s car loan after the car was sold: $2,200 – definency judgment = the bifurcated part of their secured debt that is now part of the general unsecured crediotrs pool => no priority, goes into the general unsecured creditor pool

Trustee and trustee’s counsel: $4000 – first in line, 507(1). This is expense of trustee w/in “the administrative expenses of the trustee allowed under 503(b).”

o What about DSO vs. Bankruptcy Trustee’s Administrative Expense?o Genearlly, the DSO is first. o But, sometimes the BT says, “I am the only reason that there is even any money to pay the

DSO creditor, so I should get 1st priority, this DSO’s $ is coming directly from my work as BT.”

but also doesn’t the Code say this? – say that the trustee is first o What happens if the trustee eats up all of the costs?

If the estate has only enough to pay the administrative costs, it is “administratively insolvent.”

Insurance premiums for insurance on the non-exempt personal property prior to its sale by the Trustee ($750) – expenses for the estate, 507(2)

o Ex. if trustee is liquidating a car, the car needs to be ensured.o RULE: IF it is estate property that getting the insurance for, then get first priority for

administrative claimso Is this different than (a)(1)?o note also that in most jxns, DSO’s will have priority over everyone else. o Costs of Sale – will have the same rule

1st priority under (a)(1), (a)(2) for administrative claims

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o About Insurance: key distinction is whether PRE-petition as the debtor’s insurance costs incurred, r whether the insurance bought for the property of the estate after the petition

Insurance paid out before the filing of bankruptcy petition: if just in arrears, insurance claimant (going after D for not making insurance payments) => this would be just a general unsecured creditor (the insurance company in general USC pool for the insurance payment that D is in arrears for)

By contrast, where BT buys between Petition => Distribution as property of the estate, it is an administrative expense.

General unsecured claims: $17,000 – end of the line, but before the subordinated (so before the penalty claims by the town taxing authority

Step 3: Put them in order – now that have assigned everyone their number, but in order: (1) Sue, if DSO (a)(1) $25,000, under (a)(1) (2) Trustee (a)(1or2) $4000 (2) Insurer ((a)(1 or 2)) $750 (2) Cost of Sale (a)(1or2) $2,800 (3) Nurse (under (a)(4)) $11,725 (4) SSA (under “trust fund” rule (a 3 or 8) $1,080 (5) City of Eden for Property Tax (a)(8) $3,000 (5) IRS for Income Tax (a)(8) $18,000 (6) General Unsecured Creditor Pool $28,000 (7) Penalties (§726) $1,500 subordinated AND: EVERYONE GETS PAID PRO RATA WITHIN THEIR CATEGORY. So debtor here starts off with $60,000. How far does that go?

o $25,000 right away to Sueo $35,000 left over to move to the next group o We have three within our next group

(2) Trustee (a)(1or2) $4000 (2) Insurer ((a)(1 or 2)) $750 (2) Cost of Sale (a)(1or2) $2,800

o is there enough to cover them all?? then they will all get it here – don’t need to go to pro rata. total here = $7,550 for the three combine

o so then we are are Then we move on to the next – we have $27,450 Then all goes to nurse, who gets paid Then we go to our tax creditors

o They both get paid? No. have to do pro rata between them

IV. Discharge and Exceptions to Discharge0. Overall Discharge Scheme R1: Discharge will be granted unless it is challenged by the trustee or a creditor. R2: There are two ways that debtors and creditors can object to the discharge:

o Object to the discharge of particular debts under 523. – a rifle shot, renders only the one debt challenged nondischargable

o Object to discharge of all debts under 727. – global denial, renders all of the debtor’s debts nondischargeable. Although most debtors file bankruptcy to get relief from their debts, bankruptcy discharges certain debtors from certain debts.

o Nondischaragble debts or events that can make a debt nondischargeable is now 19o Grounds for total denial of discharge is now 12

Distinguish between global denial vs. rifle shoto If an objection to 727 has been established => then the discharge injunction is lifted => and all creditors may attepmt

to collect the unpaid balance of their claims from the debtor. This benefits all creditors – if a C/BT proves a global denial of discharge, then ALL creditors can enforce

their claims against the debtor, there is NO DISCHARGE INJUNCTION for the debtor against his C’s AT ALL

o If a creditor establishes an objection to 523 => then only that creditor has an exception to discharge, only that creditormay attempt to collect the unapidportion of tis claim from the debtor. All other prepetition claims will remain discharged.

This benefits only the single creditor that establishes the objection55

The debtor still gets discharged from debts that owes to everyone else o Makes more sense to analyze the global denials 1st from the position of someone who wouldn’t have a global denial

-- because if get global denial, then everyone can enforce their claimso But if you are a DSO who would have a special rifle shot discharge, you probably would not want that, you’d prefer

523 b/c then more money just for you (not open season on the D to collect because now no one has a discharge)

A. Grounds for Global Denial (727) --The grounds for global denial of discharge under 727(a) are exclusive: Unless the bkry trustee or a creditor can establish one of the 727(a) objections, the debtor will receive a bankruptcy discharge. However, individual debts might be nondischargeable under 523. --There are TWELVE GROUNDS for global denial under 727(a).

1. (1) Be an individual: If the debtor isn’t an individual => global denial of dischargea. 727(a)(1) – if you’re not an individual, don’t get a discharge under C7. “The court shall grant the debtor a

discharge, unless the debtor is not an individual.”2. (2) Bad acts: If some kind of dishonesty or lack of cooperation by the debtor as defined in (a)(2) – (a)(7) => global

denial of discharge a. 727(a)(2): Fraudulent Transfers – Actual Fraud

i. (a)(2): The court shall deny a discharge if the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate has or has permitted the transfer, removal, destruction, or concealment of either (i) property of the debtor, within one year before the date of the filing of the petition, or (ii) property of the estate, after the date of petition.

ii. Not only can fraudulent transfers be avoided by the BT so that the funds transferred with the FT are not POE, but it can also be grounds for a global discharge.

iii. But, distinguish: differences between BT’s avoidance power for discharges vs. 727(a)(2)’s global discharge for fraud?

1. Actual Fraud ONLY for global denial of discharge - is “with intent to hinder, delay, or default” a creditor from getting to POE or the D’s property. This means that the C or BT can only get the global discharge if they establish actual fraud. By contrast, the avoidance rules, incorporating UFTA, allows the BT to prosecute avoidance claims dealing with either actual or constructive fraud.

2. 1 Year vs. 2 Year Lookback-- the prosecution of an avoidance action can be any transfer in the past 2 year that the BT wants to bring. By contrast, for global exception to discharge, the BT gets to go back only one year.

iv. Example: In re McNamara (232) – was an example of “failure to satisfactorily explain” under (a)(5) but also within (a)(2)(A) (“the D with intent to . . . defraud creditors . . . within one year before the date of the filing of the petition.. . about property of the debtor”).

b. 727(a)(3): Failure to Preserve Financial Records i. (a)(3): Ct shall grant global denial of discharge IF the debtor has: concealed, destroyed, mutilated,

falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained,

1. unless such act or failure was justified under all the circumstances of the case. ii. Issues of fact that get raised when a C/BT objects to discharge based on a3;

1. 1) Has the debtor failed to keep financial records?2. 2) Is that failure ‘‘justified under all of the circumstances of the case”?3. 3) Is it still possible to ascertain the debtor’s financial condition and business transactions? --if

it is, then maybe do not need full discharge iii. Note: “any recorded information . . . from which the debtor’s financial condition or business txns might

be ascertained . . . unless the failure was justified under all the circumstances of the case.” -- don’t need ALL the recorded information to be failed to be preserved from the lang. – just “any” and just “might” ascertain the txns.

c. 727(a)(4): False Oath. False Claim. Party to bribes. Withholding books & records – (a)(4) lists four acts that if the debtor does 1 of any of the 4 of these, the C/BT can get a global denial of discharge against the debtor:

i. RULE: If the trustee/the creditor can prove that the debtor “knowingly and fraudulent” committed one of the following acts, then it will bar discharge:

1. (1) False Oath-- Made a false oath or account in connection with the bankruptcy case; 2. (2) False Claim--Presented or used a false claim against the estate;

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3. (3) Party to bribes—If the debtor received or gave consideration for action or inaction in the bkry proceeding; or

4. (4) Withholding books & records—if the debtor withheld books and records from the BT. ii. If showed that D knowingly and fraudulent committed one of those acts => global discharge.

d. 727(a)(5): Failure to “Satisfactorily Explain” Loss or Deficiency of Assets. i. (a)(5): Ct shall grant global denial of discharge IF the debtor has failed to explain satisfactorily, before

determination or denial of discharge, any loss of assets or deficiency of assets to meet the debtor’s liabilities.

ii. So the debtor can get a denial of discharge for failing to explain “satisfactorily” any loss or deficiency of assets.

iii. What does this mean?1. G/R (In re McNamara) - It doesn’t meant that the debtor didn’t sound smart in talking about

their assets; rather, it means that the debtor didn’t sound truthful in explaining the loss or deficiency of his or her assets.

a. “may mean rsbl, or it may mean that the court . . . elieves the explanation” – relates to idea of credibility.

2. These cases involve a lot of discretion – what is “satisfactory”? (could argue both ways)—see McNamara (though his v. suspicious) vs. Texas rancher

iv. Procedural rules 1. The plaintiff (BT or C)has the burden of introducing evidence of the disappearance of assets or

unusual txns.2. Burden then shift to the debtor to satisfactorily explain the loss or deficiency of assets3. Then the court considers whether the debtor “satisfactorily explained the loss or deficiency of

assets”.a. The test relates to the credibility of the proffered explanation, not the propriety of the

disposition. b. When is an explanation not “satisfactorily explained” => if it is not offered in good

faith or if it is vague, indefinite and uncorroborated.v. Application

1. 1) In re McNamara (cb 230) – debtor could not explain details about a poker game where he said he lost $130k, had an “unlikely difficulty” in recalling details of significant bank account deposits, and also had trouble “remembering” big bank account withdrawals b4 his alleged gambling losses.

a. Court: Trustee here had challenged the D on the 727(a)(5) “failure to satisfactorily explain,” and he could’t explain the poker game where he said he lost the $130k. He also wanted to keep $ from his wife (testimony demonstrated he was angry about former wife and didn’t want her to get his $, plan to hide $).

b. So, held: as a result of all this => global denial of D’s discharge under (a)(5). Also under (a)(2)(A), because he this was an example of actual fraud.

2. 2) Cf. Texas rancher couple case – Tx court accepted the debtors’ explanation as “satisfactorily explaining” fact that lots of cash was disappearing b/c South Texas ranchers often carry around a lot of cash to hire day workers

a. why esp. here though? A: fact that the D’s had disclosed everything was a major factor in that they “satisfactorily explained” & therefore didn’t get a global denial/get barred from discharge

e. 727(a)(6): Refusing to testify after having been granted immunity or after improperly invoking the const’l privilege against self-incrimination.

i. If we want you to talk, and we grant you immunity, then you can’t not talk! And if you refuse to talk still => global denial of discharge.

ii. Rule, (a)(6): a debtor will be denied discharge if he refuses to testify after having been granted immunity or after improperly invoking the constitutional privilege against self-incrimination.

f. 727(a)(7): Violations of (2) – (6) in bankruptcy of an insider i. Rule: If the debtor has committed any act of (2) thru (6) within the year of filing for bankruptcy petition

in connection with another bankruptcy case concerning an “insider”, then the court will deny the debtor discharge.

ii. Who is an insider? 1. 101(28) = an insider is an individual’s relatives, partners, parnterhsip, and corporation.

Maybe friends. 2. So if the debtor has

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a. – committed actual fraud w/r/t the insider’s caseb. – failed to preserve recrods in connection w/the insider’s case c. –committed false oath in insider’s case d. –brought false claim in insider’s casee. –been party to bribes in insider’s casef. –withheld books and records in insider’s caseg. or – refused to testify under immunity in insider’s caseh. => then the debtor can be subject to a global denial of discharge in their own case.

3. (3) Limiting Frequency of Discharge – Limitng the Frequency of C7 Discharge Relief a. Both 727(a)(8) and (a)(9) limit the freuqncy of C7 discharge relief.b. Rule 1: Discharge in C7, C11 in the Last Eight Years

i. If a debtor has received a discharge in a Chapter 7 or Chapter 11 case in the past eight years => she will have a global denial of discharge.

c. Rule 2: Discharge in C13 in the Last Six Yearsi. If a debtor has received a discharge in a Chapter 13 case within the past six years, she will be denied a

discharge.... UNLESS:1. (1) Payments under the plan totaled at least 100% of the allowed unsecured claims;

OR2. (2) Payments under the plan totaled at least 70% of the allowed unsecured claims and the

plan was proposed in GF and was the debtor’s “best effort.”d. When do we start counting from?

i. RULE: Looking to the FILING DATES. We count from btw the filing dates – need five years between the two dates of filing.

1. ex. if D filed for Chapter 7 on January 15, 2005 and got the discharge on April 5, 2005, is he barred from getting a discharge on a bankruptcy case filed in March 2013?

2. Answer: No. There is an 8 year rule but it is between from Filing Date 1 to Filing Date 2. Filing Date 1 here = Jan. 15, 2005; Filing Date 2 = Mar. 15, 2013; are there at least 8 years in between those two? Yes, so if D obtains a discharge from the Mar. 15th petition, 728(a)(8) would not bar D’s bankruptcy discharge.

e. But distinguish: (a)(8) and (a)(9) don’t’ say that the creditor cannot file a brky petition and go thru the liquidation, but rather that there will not be discharge.

4. **(4) DIDN’T DO YOUR CREDIT COUNSELING a. RULE: 727(a)(11) is a GLOBAL DENIAL of discharge for failure to complete an approved ‘‘instructional

course concerning personal financial management.”i. have to do one pre-petition and one post-petition

5. Delay of discharge – 727(a)(12) RULE: If there is: a. (1) a proceeding against the debtor b. (2) and there is reasonable cause to believe that the debtor may be found guilty of a felony or liable for a debt

arising from i. violation of securities law

ii. OR iii. personal injury caused by the D’s criminal act, intentional tort, or willful or reckless misconduct

c. THEN: the court will delay the discharge against the debtor.

B. Grounds for Rifle-Shot Denial of Discharge- Specific Nondischargabeility of a Debt 1. Initial Rule: Which kinds of discharge do the nondischargeabilty rules of §523 apply to? – what is the scope of when a

discharge D would have gotten against C will NOT come into effect if the C/BT objects, and will be instead be nondischargeable under §523?

a. Rule: A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) does not discharge an individual debtor from any debtor if one of the 19 conditions in 523(a)(1) - (19) are met.

i. 727: discharge under Chapter 7 – if there D has discharge under C7 against D, then D can object that C’s debt should be nondischargable under 523 – there is a blanket discharge. but a C can object to the discharge as applied to their debt. and if the req. for nondischargeability is met => then the debt will be ND.

ii. 1141: equivalent provision for C11 – the blanket discharge, but a C can object and if one of the (1) thru (19), debt will be ND.

iii. 1228(a), (b): farmer blanket default rulesiv. or 1328(b)

b. What does this leave out?? The super-discharge of 1328(a).58

c. RULE: 1328(a): After successful performance of the debtor’s Chapter 13 plan, the debtor receives a discharge of the balance owing on all dischargeable debts. There are exceptions to this discharge, but there are ONLY SIX in contrast to the NINETEEN in §523 and the global ones of Chapter 7 will not apply.

i. What exceptions will still apply? 1328(a) discharges everything but: 1. (1) Debts incurred through fraud (523a2) 2. (2) Unscheduled debts (523a3)3. (3) Fraud or defalcation while acting as a fiduciary (523a4)4. (4) DSO’s (523a5) 5. (5) Student Loans (523a8) 6. (6) DUI’s: Damages incrrued thru drunk driving (523a9)

ii. What exceptions NO LONGER APPLY? aka, what debts are DISCHARGABLE in Chapter 13 that would NOT BE DISCHARGABLE in Chapter 7?

1. 523a12. 523a63. 523a74. 523a10 -> end

d. In other words: i. (1) Look at your debtor’s facts

ii. (2) Would your debtor meet any of the exceptions to discharge? -- that is bad. we want the D to be able to get as much relief as possible.

iii. (3) Which exceptions to discharge for the D will apply?iv. (4) Are the exceptions that your debtor would meet the ones that apply for Chapter 7 discharge

but NOT in the case of the C13 superdischarge? 1. If so => then C13 looks better method

2. RIFLE SHOT EXCEPTIONS TO DISCHARGE UNDER §523(a) – which debts can the creditor/the BT object to for being nondischargable, and if prove the requirement, these debts will be ND and the debtor will still have to pay the C’s back after bkry case? 19 Exceptions to Discharge

(1) Taxes that had priority: 523(a)(1) makes any income taxes and excise taxes for the three years immediately preceding bankruptcy.

a. These are the ones that got priorityb. If they aren't paid, they do NOT get discharged: the D will still be on the hook for these taxes, notwithstanding

their bkryc. This is something that is dischargeable under the C13 super discharge d. In addition, a debt incurred to pay state or local taxes that would have been nondischargeable is itself

nondischargeablei. Ex: D uses her American Express card to pay such a state or local tax bill, then the portion of D's

American Express bill that she used to pay the state or local tax bill could have an exception to discharge under another tax provision: (a)(14)

(2) Fraudulently incurred obligation -- false pretenses, don't have to be written down, but not about debtor's or an insider's financial condition, 523(a)(2)(A)

1. Rule: 523(a)(2)(A) applies if the creditor alleges that the debtor incurred the debt to C through ‘‘false pretenses, a false representation, or actual fraud, other than a statement respecting the an insider’s or debtor’s financial condition.’ 523(a)(2)(A) does require proof of both the debtor’s intent to deceive and the creditor’s reasonable reliance.

2. Elements for a 523(a)(2)(A) Claim – In order to show a debt is nondischargeable 523(a)(2)(A), C show:a. (1) that the debtor made representations other than a statement concerning his financial conditionb. (2) that at the time the debtor made the representations he or she knew they were falsec. (3) that the debtor made the representations with the intention and purpose to deceive the creditor, d. (4) that the creditor justifiably relied on such representations, ande. (5) that the creditor sustained losses as a proximate result of the false representations

3. A pplication a. Rule: If it’s just oral => then just having about debtor’s financial condition won’t cut it to get an exception to the

discharge of your debt under 523(a)(2)(A) (In re Sharpe) b. In re Sharpe (235) – by dressing expensively, wearing custom-made suits, ordering $15,000 priced bottle of

wine, flying in private jets, and making oral representation to the creditor (the gf) that he had sufficient funds to repay the debt he owed, did the debtor’s conduct rise to the level of false pretenses and false representations that

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is was nondischargeable under (a)(2)(A)? Held: No, because was false pretenses... but this was false presents about the debtor’s financial condition, and this is expressly NOT within (a)(2)(A) by the Code.

i. in another case, this might be ok as far as the false represnetations – the issue here was what this was about. – the conduct issue here not gen’lly decisive, decisive b/c this was about financial condition => and that is not OK by the Code. (“False representations need not be overt . . . misrepresentations may also be made through conduct.”)

(3) Written, Intentionally False Financial Statements, 523(a)(2)(B) 1. Hard to prove for the creditor – needs that piece of paper, plus the intent 2. RULE: To prove that debtor fraudulently incurred his debt from C thru written false false financial statement, C must

show:a. (1) A materially false written statement respecting the financial condition of the debtor or a ‘insider’’

i. ex: that the debtor has a lot of $$ and will be able to pay you back (Sharpe - but problem for her was that the D's false reps not written down. if this had been written statement: would have met (a)(2)(B)).

b. (2) The creditor's reasonable reliance on the statement, ANDc. (3) The debtor’s intent to deceive.

3. AKA: Merely establishing the falsity of a written statement involving the debtor’s financial condition will not be enough to get an exception to discharge under a2B. Rather, the creditor will also have to establish its reliance, the reasonableness of the reliance, and - esp. difficult- the debtor’s intent to deceive.

4. Application a. In re Sharpe (235)-- debtor Sharpe's representations were all false and all concerned his financial condition. This

fits into 523(a)(2)(B) – so it would have worked. But: no writing to accord relief. => and this is a critical element => therefore C could not prove an exception to discharge, he gets to discharge the debt he owes her. (“nonverbal is NOT sufficient”)

b. In re Hill (237) – “Stated income” loan issue i. Facts: Stated income loan = a loan that applicant could just state their income on their loan, not required

to provide any kind of veritification of this. Bank argued: we foreclosed on their house and now we are owed $$$. The D will have a discharge against us .... BUT, we think their loan should be nondischargeable, because they lied to us about their income on their stated income loan application.

ii. Ninth Circuit had seven elements to a creditor’s (a)(2)(B) objection to discharge iii. Held: Bank did not perform rsbl investigation => no remedy of nondischargeability.

(4) Luxury Goods and Services and Cash Advances , 523(a)(2)(C)1. Rule: Debts will NOT be dischargable if they are:

a. (1) Consumer goods + luxury goods + within 90 days before the order of relief under this title i. Consumer debts owed to a single creditor and aggregating more than $650 for luxury goods or services

incurred by an individual debtor on or within 90 days before the order for relief => then are presumed to be nondischargeable

1. are going to be presumed to be nondischargeable. ii. What is a “luxury good or service” that will be presumed nondischargeable?

1. RULE: 523(a)(2)(C): something that is not reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.

a. “The term ‘luxury goods or services’ does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.”

2. Note: it used to be “necessary” not “rsbly necessary” 3. What is the difference btw “rsbly necessary for the support or maintence of the debtor”” vs.

“necessary for the support or maintence of the debtor”? think of cigarettes. necessary? maybe. rsbly necessary? no.

b. or (2) Cash advances + within 70 days of the order of reliefi. If these are more than $925 and are extensions of consumer credit under an open end credit plan obtained

by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable

(5) Unscheduled Debts – 523(a)(3)1. Unscheduled debts are not dischargable.2. Why? The schedule of debts is how the court knows who the D’s creditors are => ths is how the ct sends out the notice of

the bkry case => and then only after having the notice of the bkry case will the creditors file their POC’s => and need the POC in order to get the $. So equity: not fair to deny discharge to a C who didn’t get notice of the bkry case in order to file its POC and get distribution.

(6) Fraud or Defalcation in Fiduciary Capacity -- 523(a)(4)60

1. 523(a)(4): Liabilities that the debtor has from ‘‘fraud or defalcation while acting in a fiduciary capacity.’’ a. If the C can prove that the D owes them a debt => and that the D was acting fraudulently in capacity as a

fiduciary => then can get the debt made ND under a4. b. Requirements

i. Proof of ‘‘fraud or defalcation’’ is not enough to establish the exception;ii. Rather, 523(a)(4) requires proof that it occurred while the debtor was a fiduciary.

c. But also: also all all embezzle ment and larceny liabilities, whether the debtor is a fiduciary or are ND. (7) DSO’s – 523(a)(5)

1. RULE: “Domestic support obligations,” as defined in 101(14A), are NOT DISCHARAGBLE. 2. But, what is a “dso” that the debor cannot get rid of after bankruptcy?

a. includes: support payments – alimony (spousal support), child support b. does NOT include: nonsupport obligations owed to a spouse, former spouse or child as a result of divorce or

separation. 3. But don’t the (a)(15) people get discharge also? – the PSA spouses?

a. Yes, they do. But that is one of the provisions that does NOT apply to Chapter 13, whereas the (a)(5) one is. b. In addition, 523(a)(5)-type obligations but not section 523(a)(15)-type obligations are afforded a first priority

under section 507. (8) “Willful and malicious” – 523(a)(6)

1. Rule: If C objects, willful and malicious injury by the debtor to another entity or to the property of another entity will be nondischargeable.

2. BUT, the C who wants to get this exception has to show that the debtor was being willful or malicousin order to satisfy (a)(6) and have the debt be ND.

(9) Debts owed from harm caused by drunk driving – (a)(9) 1. Rule: If C objects, personal injury and wrongful death claims based on a debtor’s drunk driving will be

nondischargeable. 2. This rule differes from (a)(6) (the “willful and malicious” rule) because it does NOT require proof of willfulness or

maliciousness – just that D was drunk driving. (10) Fines, penalties, or forfeitures that the debtor owes to a governmental entity – 523(a)(7)

1. Rule: These are ND unless the debt is compensation for an actual pecuniary loss or a tax penalty on a dischargeable tax.(11) Student Loans

1. Rule: 523(a)(8), student loans and other obligations to repay ‘‘educational benefits” are nondischargeable. The only way the debtor will be able to get her debt discharged is if she can prove that repaying the debts will be “undue hardship.” o Otherwise, she cannot have her loans dischargedo And esp. not in the 4th Cir: see In re Luria Greene

2. TEST: Some courts (including EDVA) us the Brunner Test to determine the debtor’s “undue hardship:”  Under this standard, debtor can discharge their student loans only if meet all three factors: o Poverty. Based upon your current income and expenses, you cannot maintain a minimal standard of living for

yourself and your dependents if you are forced to repay your loans.o Persisitence. Your current financial situation is likely to continue for a significant part of the repayment period.o Good faith. You have made a good faith effort to repay your student loans. 

3.

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V. DSO’s

1. State Law2. Automatic Stay3. Property of the Estate4. Preferences5. Claims and Distribution6. Priority

a. Chapter 7: DSO’s are 507(a)(1) and enjoy first priority.b. Chapter 13: DSO’s

7. Discharge8. Other

DSO’s

Both Chapter 7 and Chapter 131. Definition – Is this a DSO?

a. 101(14A): Defintion of a DSOi. A domestic support obligation is a debt owed to (1) a spouse, former spouse, or child of the debtor, or such

child's parent, legal guardian, or responsible relative; or (2) a governmental unit.ii. To qualify as a domestic support obligation, the debt must be in the nature of alimony, maintenance, or

support (including assistance provided by a governmental unit), without regard to whether such debt is expressly so designated. It must be established or subject to establishment before, on, or after the date of the order of relief pursuant to: (1) a separation agreement, divorce decree, or property settlement agreement; (2) an order of a court of record; or (3) a determination made in accordance with applicable nonbankruptcy law by a governmental unit.

iii. It does not apply to a debt assigned to a nongovernmental entity, unless it was assigned voluntarily by the spouse, former spouse, child, or parent solely for the purpose of collecting the debt.

2. Alimony and child support must be disclosed on the bankruptcy petition 3. Property of the Estate: What are the rights of the DSO creditor with respect to property of the estate?

a. Property that is exempt by the debtor still remains liable for payment of domeistic support obligations by the DSO creditor – outside of the bankruptcy context.

i. The trustee cannot liquidate exempt property – it is exemptii. however , the DSO creditor can reach it: notwithstanding its exempt status, exempt property remains liable

for the payment of DSO’s under the Code’s exemption rules. iii. But the BT cannot get to this – it is not property of the estate and the T only has authority over the property

of the estate. (because it is exempt)4. Notice to holders of a domestic support obligation

a. This applies for both Chapter 7 and Chapter 13b. What kind of notice req’d?

i. C7: 704(a)(10), (c)1. The trustee shall, if with respect to the debtor there is a claim for a domestic support obligation,

provide the applicable notice: a. notify a DSO creditor that they have the right to use services of the child support agency to

collect child support during the case (notice to holder of DSO that he or she may use the services of the state child enforcement agency for assistance in collecting the claim through and after the bankruptcy)

b. notify the state’s child support agency of the debtor’s bankruptcy filing, andc. upon discharge: notify the DSO creditor of the D’s last known address an employer

ii. C13: 1302(a)(6), (d) (same) 5. Automatic Stay: Exceptions to the AS

a. DSO’s are one of thee exceptions to the AS in 362(b)b. 362(b)(2)(A): Under 362b2A, the stay does NOT BAR the commencement or continuation of a civil action or

proceeding to establish paternity OR to establish or modify a domestic support obligation. i. Meaning during the bankruptcy, the DSO creditor can still file a new suit or proceeding to get more domestic

support obligation

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6. Preferences: Exceptions to Preferences a. 547(c)(7): To the extent that a transfer was a payment of a bona fide debt for a domestic support obligation, even if it

otherwise meets the elements of 547, it is NOT AN AVOIDABLE PREFERENCE. i. This must actually be a domestic support obligation – paying for the support of

ii. Divorce payment will not be sufficient here

Chapter 7 1. Claim of the DSO

a. BT will have to report the bankruptcy filing to the state DSO enforcement agency – that way the agency can determine whether going to file a claim on the DSO beneficiary (ex. the child).

b. What should the DSO creditor’s claim be? i. Past due support only

ii. BUT, future support can be initiated – exception to the ASiii. And after the bankruptcy case over (the 6 months):

1. There will be te new support payments to make – because no AS2. And the old support payemtns, to the extent they weren’t paid out, will still be required to be paid -

because nondischaragbable 2. Priority

a. DSO’s receive first priority in 507(a)b. The only issue is between (in a very low asset case) between the BT and the DSC creditor

3. Discharge: DSO’s and Ex-Spouses from Divorce (not support, but property)a. Rifle Shot

i. 523(a)(5): RULE: A domestic support obligation is a NONDISCHARGBLE DEBT. 1. DSO’s, as defined in 110(14A), as exception to discharge: if these are not paid out (because the

debtor does not have any non-exempt assets), then the debtor will still owe the payments after the discharge, D cannot have “fresh start” with respect ot the debst that they owe for DSO’s.

ii. And, ALSO payments from a divorce proceeding - 523(a)(15) 1. 523(a)(15) provides that obligations to a spouse, former spouse, or a child of the debtor (not

otherwise described in section 523(a)(5)) incurred in connection with a divorce or separation or related action are nondischargeable irrespective of the debtor's inability to pay such debts.]

iii. Both types here are nondischargeable. b. Global vs. Rifle Shot

i. Could analyze whether the debtor would get rifle shot OR globalii. If global: because if get global denial, then everyone can enforce their claims

iii. But if you are a DSO who would have a special rifle shot discharge, you probably would not want that, you’d prefer 523 b/c then more money just for you (not open season on the D to collect because now no one has a discharge)

Chapter 131. Payment During Plan

a. If debtor does not pay DSO’s during plan, could be grounds for dismissal or conversion b. DSO’s must be paid both prepetition and postpetition.

i. Debtor must provide for full payment of all prepetition DSO’sii. In addition, if a debtor is in arrears on post petition DSO’s => not paying is a cause for retracting the

CH. 13 plan iii. in addition to all what we know about DSO’s – there is this in ch. 13

1. you have to pay your DSO obligations in full thru the plan2. and you have to maintain current status on your dso’s thru the life of the plan

2. Priority a. All priority debt must be paid in full in order to get plan confirmed in Chapter 13. 1322(a)(2)b. This relates to eligibility: if the debtor has so many DSO’s that they cannot pay them in full, then the debtor

cannot get their plan confirmed under Chatper 13. This is one of the key basic req’s for getting a plan confirmed in Chapter 13.

i. You could in theory a plan that will never get to the USC’s because all it’s doing is paying the DSO’s. c. And in theory that could be confirmed under Chapter 13: as long as liquidation test and disposable income tests are

met, and this is a wage earner/someone getting income, and a person. d. However, EXCEPTION IN OUR JXN:

if the plan does not pay at least 1% to USC’s, then the plan will NOT GET CONFIRMED. 63

what if in the Ch. 7 plan it would have .5% to USC’s?? you can round up and say that this is “rounded up to 1%” so we are ok for the EDVA rule

But if in CH. 7 it would have been no asset case => have to in the Ch. 13 plan hav e to at least get something.

3. Discharge – and Lack of Discharge (even with the superdischarge, but not (a)(15))a. When the court will grant a superdischrage

i. 1328 has special provision for DSO paymentsii. When will ct grant superdischarge?

1. “As soon as practicable after completion by the debtor of all payments under the plan” is the general rule.

2. For DSO debtors, debtor has an additional certification req: They have to certify that all amounts payable under their DSO orders that are due on or before the date of certification of the plan have been paid.

b. 1328(a) discharge WILL discharge (a)(15) payments to divorce ex-spouse. c. 1328(a) discharge WILL NOT discharge DSO obligations. 1328 Superdischarge – discharges everything except:

i. 532(a)(2) – Debts incurred through fraudii. 523(a)(3) – Unscheduled debts

iii. 523(a)(4) – Fraud or defalcation while acting as fiduciaryiv. 523(a)(5) – DSOsv. 523(a)(8) – Student Loans

vi. 523(a)(9) – Damages incurred through drunk driving4. Dismissal

a. 1307(c): Failure of the debto to pay a DSO that first becomes payable after the petition is cause for conversion or dimssial of the debtor’s case.

i. “Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including . . . failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.”

ii. RULE: With respect to chapter 13 cases, e section 1307(c) to provide that the failure of a debtor to pay any domestic support obligation that first becomes payable postpetition is cause for conversion or dismissal of the debtor's case.

1. The bankruptcy court may also dismiss a Chapter13 case or convert it to a C7 case on the request of the BT or a creditor. The failure of the D “to pay any domestic support obligation” that first became payable after the date of the filing of the petition is one reason for this mandatory dismissal or conversion.

5. Administration a. BT pays the fund payments to the DSO creditorb. Might be good in taking the parites out of this

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VI. Choice of Chapter

** see sheet**

Eligibility for Chapters 7 and 13

Chapter 7

Is there even a choice of chapter? Eligibility for Chapter 7 – and compare with eligibility for Chapter 13 Change in philosophy – the question of when a liquidation should be permissible is so great that Congress has revisisted the

question a number of times. AND THE KEY GATE = WHO IS ELIGIBLE FOR C7 BANKRUTPCY. Starting with the 1978 Code, Congress wanted to make C13 inviting**

o C13 provided unique opportunity to get current on a home mortgage that was in arrearso C13 provided a chance to keep more property o and C13 covered a discharge that discharged debts that could not be discharged in other chapters.

Discretionary vs. Regimented Testo In 1984, C7’s going up, so Congress put sin place standard of “substantial abuse” – Congress gave bkry judges the

power to dismiss C7 cases if the filing involved “substantial abuse.” But there wa a presumption that there was not substantial abuse.

Debtors who had substantial incomes were told to convert their cases to repayment plans “It looks like with a little sacrifice you can repay your creditors” – so no C7. In re Shaw (145) -- Debtors primarily had consumer debts. Included helping their daughter pay for college,

cable bil. Issue: Was a dismissal for substantial abuse of the Code under 707(b) of the D’s case appropriate? Held: Yes – on the discretionary test, looking at the Green “totality of circumstances test.”

(illustrative of pre-BAPCA discretionary approach) o 1) whether the D has ability to repay the debto 2) whether the D filed his bkry petition b/c of sudden calamityo 3) whehther the D’s schedules accurate o 4) whether excessive spending by the debtor.o Looking at these, the debtors would have a no asset case in a C7, and their current family

budge is “excessive and unrsbl” – just b/c they want to help their daughter out doesn’t mean creditors come 2nd.

o 2005 amendments: Means Test – strict formula, removed discretion (1) Introduced a presumption of abuse – previously did not PRESUME abuse.

There is a presumption of abuse But it only applies to CONSUMERS: Congress exempted anyone whose debts were mostly

business-related from any screening for abuse. – ex. someone who runs a small business and is loaded w/debt is not subjected to 707(b)(1) scrutiny like other debtors are.

o but if another small business person had debts that were mostly consumer debts, then that person would NOT be exempted from the means test—they would still have to go thru it.

(2) Introduced fixed formula The Means Test and Presumption of Abuse

o Rule 1: C ourts shall dismiss a case or convert it to C11 or C13 if the Chapter 7 filing constitutes “abuse .” 707(b)(1): After notice and a hearing, the court, on its own motion or on a motion by the United States

trustee, trustee, or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.

o Rule 2: What is ABUSE? Two ways for a court to find abuse

(1) Means Test: Presumption of abuse (with 2 caveats) - means test idea: if debtors have the means to pay their creditors: they should do this, instead of filing in Chapter 7: If debtors can afford to pay their creditors at least between $7,475 and $12,475 over five years—the 60 month adding up of their monthly income minus expenses—then they should pay instead of using Chapter 7 to avoid paying.

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o 1) Presumption of Abuse (abuse of filing in C7): D’s with the means to pay their creditors 707(b)(2)(A)(i): In considering under (b)(1) whether granting this debtor Chapter 7

relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of— (I ) 25 percent of the debtor’s nonpriority unsecured claims in the case, or $7,475(*), whichever is greater; or II) $12,475(*).

This requires comparing the debtor’s INCOME for 5 year o 2) Caveat 1: “Special circumstances” can justify adjustments to calculations and debtors

will not have abused Chapter 7. 707(b)(2)(B): The presumption of abuse can only be rebutted by establishing

special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.

(ii) In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide—

(I) documentation for such expense or adjustment to income; and (II) a detailed explanation of the special circumstances that make such

expenses or adjustment to income necessary and reasonable. (iii) The debtor shall attest under oath to the accuracy of any information

provided to demonstrate that additional expenses or adjustments to income are required.

o 3) Caveat 2: Below-Median Debtors – below-median D’s will NOT have presumption of abuse.

707(b)(7) - Rule: If the debtor’s ‘‘current monthly income times 12 is less than the debtor’s than ‘‘median family income,’’ no one can file a motion to dismiss the Chapter 7 case based on the section 707(b)(2) means test.

**this is why have the extensive median income analysis on the bankruptcy petition itself

Key is whether the D can check the box “the presumption of abuse does not arise” because they are a below median debtor.

(2) General Abuse Based on “Bad Faith” and “Totality of the Circumstances”o Rule: There is also a second way for a court to find abuse under §707. Even a debtor who

passes the means test formula of 707(b)(2) could nonetheless be deemed to have committed “abuse” of C7 and therefore the presumption of abuse is not rebutted and dismissal of bkry case from C7.

o §707(b)(3): In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in paragraph (2)(A)(i) does not arise or is rebutted, the court shall consider—

(A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances (including whether the debtor seeks to reject a

personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse.

o this is unclear. – what do cts do? some believe specific bad behavior required others review the D’s expenses and budget – see if there are expenses court

considers waseful. Who can raise what charges? – distinguish btw ABOVE-MEDIAN and BELOW-MEDIAN

Above-Median Debtor: An above-medina debtor is subject to a charge of 707(b) abuse by the judge, the UST’s office, or any creditor, either because the A-M Debtor failed the means test (depending on their income) OR because of “general abuse.” 707(b)(1).

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At-or-Below-Median Debtor: By contrast, only a judge or the UST’s office can raise a claim of abuse against the at-or-below-median debtor, and the only claim they can raise is of general abuse. 707(b)(6).

What is the difference if couple files jointly or separately? File jointly: BOTH INCOMES ARE INCLUDED FOR ALL PURPOSES. that ist hat. File separately – only one spouse files:

o if only 1 files and the claim is general abuse, only the income of the filer is used to determine who can raise the objection.

o But if only 1 files and the objection is based on the means test, both incomes are included. Summary of Eligibility for C7 Generally, there are not any requirements for who can be a debtor in bankruptcy, generally.

109(a), Who may be a debtor: Notwithstanding any other provision of this section, anyone that resides in the U.S. can file for bankruptcy.

Don’t even have to be a citizen to file for bankruptcy Common misconception is that there are requirements to be a debtor in a bankruptcy case. §109(a): Notwithstanding any other provision of this section, only a person that resides or has a domicile, a

place of business, or property in the United States, or a municipality, may be a debtor under this title.o But there are strict requirements for getting into Chapter 7o And there are debt limits for filing a Chapter 13 plan.

So how to do you get into Chapter 7?o if do not meet the means test, the Chapter 7 case will have to be dismissed or converted into a Chapter 13 or Chapter

11 case.o 707(b) provides two ways for the bkry court to dismiss a petition filed by an individual debtor with primarily

consumer debt – don’t seem to be concerned with “abuse” by other entities (ex. non-consumers) who file for bankruptcy.

o What are the two 707(b) tests for abuse? 707(b)(1) provides the standard = the bkry court may dismiss a case filed by an indvidiual if it would “be an

abuse of the provisions of this chapter” (it says ‘may’ but hten the (b)(2) and (b)(3) language is “shall dismiss a case if the conditions are met)

And how do you determine abuse? 1) (b)(2): Means Test

o there is a presumption of abuse.o if the debtor is BELOW MEDIAN, the presumption of abuse DOES NOT ARISE.

do not have to do any caluclations they GET IN—if the debtor’s income is less than or equal to the state median

income (if it’s =, you’re fine, you get in), then the debtor “passes” the means test and may file Chapter 7.

the presumption of abuse DOES NOT ARISE So if we see a debtor who has huge expenses and very little income => likely they

will be below the median income for the family of their size => and they will be below or at-median => and they will not have the presumption abuse arise, so they would be fine to file in Chapter 7 (without having to do the Income – Expenses calculation).

caveat: it is still possible that the court finds they have bee in “bad faith” and their petition is dismissed from C7 on account of “general abuse” of the Chapter 7 bkry process.

OTOH, if we have a debtor that has fairly high income and the expenses don’t look high, or are only in one thing – which would mean that the Federal and Local Guidelines would cap what this person could claim for their expenses on this (absent special circumstances) – then they might be above median, and the presumption would arise. They then could only get into Chapter 7 if (1) they didn’t fall above the Income – Expenses calculation for (b)(2) – about $12k over five years in “surplus” amount of the Income – the allowed Expenses, or (2) they could establish special circumstances that should alter their means test calculation – ex. had a serious medical condition. Has to have documentation for this an da detailed explanation of the special circumstances, and the adjustment has to be “necessary and rsbl.”

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o but if the debtor is ABOVE MEDIAN, then the presumption of abuse DOES ARISE and it is only rebutted if the debtor doesn’t have at least $12,475 left over in calculating their monthly income – their allowed expenses.

o the presumption can be rebutted by “special circumstances” the calucations do not definitvely establish “abuse” => rather, if the presumption of

abuse arises, the debtor can rebut the presumption of abuse by swearing to and documenting ‘‘special circumstances’’ that increase expenses or decrease ‘‘current monthly income’’ so as to bring the debtor’s income after expenses below the $12,000 trigger points.

Note – it can’ just be that there were special circumstances. It has to be that the Income – Expenses was different here for some reason and that the special circumstances taken into account would increase or decrease the “current monthly income” to bring the debtor iwthin the trigger point that needs to be.

o But it the debtor is ABOVE MEDIAN an has INCOME WITH MORE THAN 12,475 LEFT OVER IN INCOME – EXPENSES FOR FIVE YEARS (do the monthly income – expenses, then you multiply that by 60), then the debtor has a presumption of abuse, and they have not rebutted this presumption of abuse.

2) (b)(3): General Abuse o The presumption of abuse for bad faith (whether the debtor filed the petition in bad faith)

and the totality of the circumstances.o These are the particular gates for Chapter 7 o COC: If the debtor is going to be not eligible for C7... obviously then the debtor is either in C11 or C13, even if their

gen’l situation would be more inclined for C7.

Chapter 13

Chapter 13 Summary: 1. Chapter 13 debtor is not a Ch. 7 debtor b/c wants to keep house and assets2. So Ch. 13 debtor will lok at its disposable income. And will do liquidation test: will put together hypothetical

liquidation under Ch. 7 and see hat the C’s would get under CH. 7.. 3. As long as the D and the atty can come up with a plan that would give the C’s more than they would have had

under Ch.7 => will be Ok. 4. The plan will provide:

a) Secured parties restructured and with “prime plus” interest rate, In re Tillb) At a length that D can payc) T will devote first few months of payments to satisfy the priority claimants in fulld) Then securede) Then to unsecured in pro rata amounts

5. This will happen over time - -three to five years. a) That is why we have the interest rate for the SP’s who cannot foreclose now, even though the debtor

has defaulted on their collateral and hasn’t handed over the collateral (surrendered) to the SP.6. Results for the debtor:

a) Debtor gets to keep all its stuff b) and , as long as the trustee confirms the debtor’s Chapter 13 plan, and the debtor is faithful to

theplan and pays it, the debtor will get the 1328(a) superdischarge. 7. The Trustee is there to:

a) Superviseb) Make sure debtor does not improperly lien strip (ex. mortgage of a 1st mortgage)c) Doesn’t improperly lien strip a PMSI within 1 yeard) Doesn’t improperly lien strip a PMSI within 910 days.

8. If the plan is confirmed (because no objections), then:a) Debtor starts making payments

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b) And, if debtor pays faithfully, emerges with super-discharge – emerges in a much different position than before (loans restricted and not in arrears, with unsecured debts and even some of the 507a5 debts discharged), while still holding onto the property

9. But this will take 3-5 years, much more of a commitment. a) And need to have the steady income stream in order to have the Chapter 13 plan

i. need “Regular income” as one of the requiermentsii. But also need to have enough to pay in full all your priorioty creditors or won’t get confirmed.

-----

Common to all consumer bankruptcies is (1) enforcing the AS and (2) deciding what is the POE. But how does the C13 plan for example differ from C7?

o Chatper 7 Debtor essentially freezes their assets and debts when they file for bankruptcy All of the debtor’s non-exempt assets become the POE

Debtor turns over non-exempt assets to the trustee for sale and distribution to the creditors (but holds onto exempt property)

For secured property, debtor either relinquishes the property subject to a SI or holds onto the property, if can (1) redeem, (2) reaffirm, or (3) ride through (or claim an exemption).

In return for liquidating all of the D’s non-exempt assets, the D gets reliveved of any future obligations to pay their dischargeable pre-bankruptcy debts.

This means that all of the D’s subsequent earnings are freed from the reach of the D’s pre-petition creditors – to the extent that the debtor has paid the prepetition debts that do NOT get discharged and post-petition debts. Common nondischargeable debts in chapter 7:

debts incurred to pay nondischargeable taxes court-imposed fines and restitution back child support and back alimony debts owed to an ex-spouse as the result of a divorce or separation (contrast super discharge) loans owed to a retirement plan, such as 401(k) student loans, unless D can show that repaying the laons would be an undue hardship (in a sep. trial) priority taxes: federal and state taxes that first became due less than three years before the debtor’s

bankrtupcy filing date, Ex: taxes that are due on April, 15, 2011 for tax year 2010, would not qualify for discharge until April 16, 2014.

luxury items within 90 dayso Consumer debts incurred for luxury goods and services owed to a single creditor in excess

of $500 incurred within 90 days of the bankruptcy filing are ‘‘presumed nondischargeable.’’ cash advances rule

o obligations to pay cash advances of $750 obtained within 70 days of the bankruptcy filing are ‘‘presumed to be nondischargeable” like the luxury goods.

o Chapter 13 Debtor also freezes... but the debtor keeps all their assets, regardless of whether assets are exempt or non-

exempt... But the debtor agrees to turn over a portion of future income for a minmum of three yars. If this is an above-

meidan debtor, it will be five years, no adjustments: five years or nothing. The trustee will take a percneatege of the D’s income for each pay period and

(1) Deduct a percentage to cover the admin expenses and then (2) Distirbute the remainder to the creditors acc. to the court-approved paln.

When the D has compelted the agreed payout plan, the D’s remaining obligatios are discharged – with a 1328 “superdischarge” that works against more types of debt than the C7 dischrage

RULE: if the debtor does not satisfactorily complete their plan, they will NOT get the 1328(a) superdischarge.

This is even though for an above-median it is five years and cannot be modified in length They may be able to get the reduced discharge of 1328(b)l This would require

o (1) The D’s failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor;

o (2) meets the liquidation test: creditors have received at least as much as they would have received in a chapter 7 liquidation case, and

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o (3) modification of the plan is not possible. What would this be?

o Could be an injury or illness that precludes employment – could try to modify plan but they might not be ablet to pay even that

What will the modified discharge in 1328(b) discharge? Only those debts that that could be discharged in C7 - and does not apply to any debts that are nondischargeable in a chapter 7 case. See 523, where the only type of discharge missing from the list of the “rifle shot exemptions” is 1328(a), not 1328(b).

o Supervision of the court differs btw the two options for the debtor In C7, debtor generally under jxn of court only from the filing date to the day of the (theoretical) discharge

hearing which is usually held within 6 months. But in C13 surpevious of the court will last form the day of filing until the payments are completd, usually 3

to 5 years. And no discharge will get granted until the v. last payemtn If you think D is very irresponsible and will not make payments either get wage order or do C7

because if do not make the payments then will not get the discharge o Role of the trustee differs in the two chapters

Chapter 7: BT resposniblef or collecting, preserving, selling the POE Chapter 13: The debtor remains in possession of the property here, this is one of the key advantages for

the debtor of Chapter 13. the role of the truste is objecting to improper creditor claims, ensuring that the debtor gives up the required amount of income and asserting any objections to the debtor’s discharge.

But at the same time, BT also has a duty to assist the debtor in performance of the D’s duties (1302,b1, b4)

BT also recommends approval or cdnail of a conformation of D’s plan. Must ensure that payemtns are commenced w/in 30 days after the lan is filed and that payments are

properly distributed to creditors Ordinarily the plan provides that D will make lump sum monthly payments to the BT, the BT will

then distribute thefunds to the creditors. Some SP’s can be paid directly. If the D falls behind in the payments, BT is the one that minorities the performance and then files to

dismiss the D’s case for nonpayment. o If D mises a payment in Chpater 13, BT will often seek wage attachment orders (these are

routinely granted). o and if you get behind on your payments

Trustee will file a motion to DISMISS YOUR CASE and you will have a hearing before the bankruptcy cour

Rule of thumb = the CH. 13 T will allow your four months in arrears to work it out, buthtey probably won’t go beynd fOUR OR FIVE MOTNHS to cure your arrears

o Role of the Debtor Full disclosure Full payment of plan installments Pay DSO’s – both prepetition and postpetition

Must provide for full payment of all prepetition DSO’s in addition, if a debtor is in arrears on post petition DSO’s => not paying is a cause for

reecteding the CH. 13 plan So in addition to all what we know about DSO’s – there is this in ch. 13

o you have to pay your DSO obligations in full thru the plano and you have to maintain current status on your dso’s thru the life of the plan

Supply tax returns - so that everyone knows what your financial situation is, esp. the Ch. 13 T Report increase in income to the trustee

why => b/c creditors will want more $$$ if your income goes up

Benefits of Chapter 13 BROADER DISCHARGE DEBTORS GET TO RETAIN THEIR PROPERTY

o Debtors get to retain their property, even if there is equity in it, by using their future income to repay their creidotrs Benefits of the Chapter 13 trustee

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o Trustee deals with payments of DSO’s – avoid conflicts Many debtors will pay alimony or child support in their priority claims of their Chapter 13 plans So those will get full repayment in Chapter 13 – full repayment priority. 1322(a)(2). This could be a benefit because in Chapter 13 the trustee will take over the job of collecting child support

payments. They could have sought a garnishment order outside bankruptcy – but instead, the Trustee often will use a

wage order so that money is diverted directly from the employer to the spouse/ex-spouse/child. Why is this good for the DSO creditor?

Because in Chapter 13, failure to do the plan successfully will mean there is a potential discmissal of the Chapter 13—will lose whatever property the debtor was holding onto.

o Trustee handles disbursement to creditors, so debtor only has to worry about making one consolidated payment, in a set monthly amount, to the trustee

Benefits for tax debto Chapter 7: Taxes (for the three or four tax years) are nondischargeable. So a debtor with a lot of tax problems (tax

claims against them) rarely will receive much directrelief in their dealings iwht the tax authorities in C7.o Chapter 13: chapter 13 has 2 advantages for tax claims

(1) Paying over time The automatic stay will hold off the IRS until the plan is completed – three to five years. In

Chapter 13, the stay lasts until discharge, which is not granted until the plan is completed. 362(c)(2)(C).

(2) Claim will get locked at its value when the petition was filed, at the date of the bankruptcy filig, because of the denial of post-petition interest on unsecured claims.

If this was liquidation and more (new) tax debts could accrue after, those would have interest on them

Stopping the accrual of interest may be the only way for the taxpayer to catch up on what they owe. Because the plan is 3 to 5 years and no post-pettion interest, then the plan gets locked at its value.

o 1) Automatic Stay The IRS does get a tax lien, but if the D files the C13 before the IRS files for a lien (remember the IRS has to file for a tax lien), then the claim will be unsecured – they will be stopped by the AS from doing anything else here.

And if athe tax claim exceeds the value of the lien or they have a tax lien and it doesn’t secure everything, the AS will provent the IRS from getting a new lien on the debtor’s property.

o 2) “Full Value” NOT “Present Value “– pay priority unsecured creditors not at “present value,” but only a “full value.”

Allowed secured claims are paid out in present value dollars. 1325a4, a5. The payment to unsecured claims isis also “the value, as of the effective date of the

paln” (the present value or interest). 1325a4, a5. But the priority (USC) claims that are going to get paid out in full are not

determined by present value dollars. Rather, 1322a2 for the payment of priority debt is only for “fully payment in deferred cash payments.” Courts have determined that this amount does not include interest.

So when the tax debts had interest at the time of the Chapter 13 filing, the interest payments on the tax debt will stop at the filing and will just have to pay the amount owed.

(3) And, KEY: Unlike DSO’s, under 1328(a), tax CAN get discharge in the Chapter 13 – vs. in the Chapter 7 (if it hadn’t been paid). Here it will get paid. And the 1328(a) discharge will discharge most of the remaining taxes (as well as most of the other dischargabel debt).

Property of the Estate for Chapter 13 1306(a): The commencement of the case creates an estate which includes (under 541) all “legal or equitable interests of the D

in property” as of the commencement of the case. This is like Chapter 7. But, unlike Chapter 7, the estate also includes all property and earnings acquired after the commencement of the case (between the commencement of the case and before the case is closed or dismissed/converted).

o So this ADDS TO THE POE the income of the D earned while the case is pendingo therefore: AS applies to the D”s earnings thruout the if of the plan, tot the exten thtey are used to fund the plan

Therefore, POE in Chapter 13 is broaer than in Chapter 7o Here, it includes all property specified in section 541, plus income of the debtor earned while the case is pending.

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o The automatic stay applies to the debtor’s earnings throughout the life of the plan, to the extent they are used to fund the plan.

of the Debtor in a Chapter 13 Caseo Debtor must make full disclosure – ex. if gets a better job, has to disclose that, so the payments can be adustedo Full payment of plan installmentso Must pay DSO’s – both pre-petition (as part of the plan) and post-petition o Supply tax returns o Report increase in income to the truste

Threshold Eligibility for Chapter 13 – Does this debtor even have a choice of chapter?o Three requirements (109(e)): C13 is limited to natural persons, with limited debts, and regular income.

(1) Must be an individual (not company) (2) Must have regular income

But something like a boyfriend putting $ into the D’s bank account was sufficient SSDI, SS, federal support paments sufficient here – entitlemetns such as welfare eare income for eligbility of

Chapter 13 (3) Must be within debt limits – Debtor must have debts that do not exceed the debt limits – if the debts do exceed the

limits, must either file a chapter 11 to reorganize, or a chapter 7 to liquidate Unsecured debts: Debtor has to owe less than $383,175 of unsecred debts to get into Chapter 13 of

noncontinguent, liquidated debts Secured debts: Debtor has to owe less than $1,149,525 to get into Chapter 13 of noncontinguent,

liquidated debts What about married?

[the question I emailed her] But there are some advantages if married couple

o **if you own a house Tenants by the Entirey to your spouse, that asset is only available to joint creditors

o If you go out and rack up a bunch of credit card debt, they can’t go out and get the house that you own joinly as Tenants by the Entiery with your husband

o So there is a benefit to the non-filing spouse through the filing spouse’s chapter 13.

Payments must begin w/in 30 days of filing

Requirements for the Chapter 13 Plan: Required Provisions Every debtor who decides to do a C13 plan must prepare a plan detailing the amounts to paid and the terms of the repayment. This plan must met certain § requirements about adequate protection (of SC’s) and adequate payment (of everyone). Key hurdle in Chapter 13 = having debtor develop a legally acceptable Chapter 13 plan: 1322(a)(2) gives the D power to use the plan to modify the rights of creidtors, both secured and unsecured. But have to comply with the req’s of 1322 and 1325

The Chapter 13 plan MUST: don’t forget about the disposable income requirement to the unsecured creditors if the plan pays the unsecured creditors out at anything less than 100%. If your plan pays less than 100% to your unsecured creditors, you must pay your plan payments to the Trustee for distribution to creditors for the entire term of your plan.  In addition, if your plan pays less than 100% to your unsecured creditors, you are required to pledge any tax refunds to the Trustee

o (0) Be the required length of timeo Determined through the Means Test of 707(b)(2) -- Is this a median debtor?

Above Median Debtors: Plan must be minimum of five years (IF YOU ARE Above median debtor you will have 5 year plan, minimum, also max.)

Below Median Debtor: Plan must be minimum of three years But note: sometimes below median D’s will have to go to five years b/c that is the only

way they can satisfy the liquidation test

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o liquation test = the C’s have to receive at least as much as in a Ch. 7 – if this had been filed in Chapter 7

o Sometimes will take the debtor five years to do this – so have a 5 year plan (even though not necessary).

o (1) Plan MUST submit all “disposable income” to fund the plan. -- this means contribution of all income less deductions for necessary living expenses. (1325(b))

o And, if a plan pays less than 100% to unsecured, it has to pay its disposable income to the unsecured creditors for 36 months.

o 1325(b): Debtor must devote all of their disposable income (or whatever is defined as “disposable income”) to their Chapter 13 plan payments. This is during the life of the plan.

o Step 1: Median Income Test: Is this debtor above state median for household median HH income, or below the median?

Income for the entire household: look at schedules I and J. Two consequences if debtor above median

Five year plan minimum - 1325(b)(4)) Different tests – instead of judge’s reasonably necessary, have “reasonably necessary” from the IRS

standards o Step 2: Apply the disposable income test for this kind of debtor to determine their “disposable income” – and

therefore what they have to devote all of to the their plan payments, or the planwill not get passed. Below-Median Debtors => how do we calculate “disposable income” for them and therefore what they will

have to pay to their payment plan? TEST = Reasonably Necessary Test

o Rule 1:In order for a Chapter 13 plan for below-median debtors to be confirmed, plan MUST commit all “disposable income” for three years to plan payments.

o Rule 2: For below-median debtors, “disposable income” is defined as “income received by the debtor that is not reasonably necessary for the support of the debtor or the debtor’s dependents.”

o => In order for a Chapter 13 plan for below-median debtors to be confirmed, plan MUST commit all income received by the D that is not reasonably necessary for the support of the D/D’s dependents.

Analyzing Resaobnly Necessary Income Testo (1) Get the debtor’s income # -- which may be the debtor’s income plus the debtor’s

spouses income Carter Rule: If a debtor is married, courts will include the debtor’s spouses income

for purposes of calculating projected disposable income under 1325(b). In re Carter: wife had income she reported only of $600 for her monthly

income and said had $500 expenses. Plan was only for her to make $75 payments a month in her plan (for 3 years, b/c the 3 yr. req). But then unsecured creditor challenges: “her husband is making $90,000 a year.”

o Issue: Did she have to (1) include on her petition was husband made, and (2) for the “Reasonably Necessary” test to determine her plan payments, was this going to get include in what her Income – Expenses was (as her “income”)?

o Held: Had to income H’s income and expense. In considering married debtors, “courts base their calculation of the debtor’s disposable income on the debtor’s family budget, include the income and expenses of the nondebtor spouse.”

o (2) Then deduct payments required to satisfy the secured creditors and the priority creditors from the debtor’s income.

See above Who are the priority unsecured creditors? 507 priority creditors.

o (3) Then, the court will engage in “reasonably necessary” expenses and deduct expenses are “reasonably necessary.”

In Carter, the expenses for the married person filing alone include the expenses of the married couple unit together also: “courts base their calculation of the debtor’s disposable income on the debtor’s family budget, include the income and expenses of the nondebtor spouse.”

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After the court deducts the payments that are necessary to satisfy the priority creditors, the court will review the debtor’s proposed expenses to determine which ones are “reasonably necessary.”

*compare: there isn’t a reasonableness inquiry in the chapter 7 context in general, but there is the req. that if luxury goods and nondischg. presumption = if 90 days before and “luxury goods”.

What is “reasonably necessary”? Carter: What is directed toward the debtor’s basic need for support,

unrelated to the debtor’s former status and lifestyle. Wyant: The debtor’s proposed plan had payments of $850 a month to the

trustee. Court had that the cdebtor could spend $100 a month on vet and horse feed costs as “reasonable expenses” but not more than that. So changed the original payments ($850 a month) to $1,300 a month (the original $850 plus disallowed expenses of $450.

Private school case in Texas – her private school for cheerleading wasn’t rsbly necessary, move her to public school

Above-Median Debtors => how do we calculate “disposable income” for them and therefore what they will have to pay to their payment plan?

o Remember that debtors with incomes above their state medians must propose five year plans, not three year plans

o Rule: “IRS Standards from Means Test” Test. Rule 1: If a trustee or USC objects to a confirmation plan that does not pay 100%

of unsecured claims, the court may confirm the plan only if the plan provides that all of the debtor’s “projected disposable income” received during the time of the plan is applied to make payments under the plan.

Rule 2: “Projected disposable income” has been linked to the Means Teset disposable income calculation.

In Kagne, court would not decouple this def of “PDI” from Means Test simply to give more $ to unsecured creditors

o Analysis 1) Is this person above-median or below median?

Ex. Kagen, she was above-median debtor. Looking at Schedules I and J only, she had a monthly net income of $1,523 per month.

2) If they are above median => do they have a surplus of income under the Means Test? (using the IRS standards for allowed income and expenses)

If they do, then that is what you use as the surplus disposable income. Rule: If you have an above-median debtor, their “projectable disposable income” must be calcuated using IRS standards (707(b)(2)). .

What if this is a v. small number because of the iRS standards?o In re Kagenveama: Because she was an above-median debtor, her

“projectable disposable income” had to be calculated using IRS standards (707(b)(2)).

It was okay that she was only paying pennies in theor – because by using this standard, her projected “disposable income” was a negative number/

Summary Below-median debtors

o Start with incomeo Then deduct from income what the judge thinks is “reasonably necessary” expenses. (not

cheerleading, not dog food) – measured by a judgeo Then you are left with what is the “projected disposable income”o And this (PDI) = what debtor has to pay to the trustee during the term of the plan. These are

their payments as C13 debtor. Above-median debtors

o Start with incomeo Then deduct from income according to the IRS Means Test Guidelines, as modified by the

exceptions Congress added to 707(b)(2) Can deduct secured debts

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Can deduct care of family members Can deduct higher local utitlies, private schools In addition, 1352(b)(2) establishes additional deductions for DSO’s and chariatable

contributions. o Then you are left with what is the “projected disposable income”o And this (PDI) = what debtor has to pay to the trustee during the term of the plan. These are

their payments as C13 debtor. Result = this creates some strange reasons for below-median debtors not to want to choose C13

o if you are below-median debtor, you could end up with a judge who has v. low view of what is “reasonable” and wants more $ to your unsecured creditors, so you have lower “rsbly necessary expenses” and higher “PDI” and so higher paymentsunder the plan.

o Conversely, if you are above-median debtor, you get all the IRS excemptions and like Kavengemva could end up with $0 as what you have to pay in expenses under the test.

o (2) Plan MUST provide that all creditors are in a better position than they would have been in a Chapter 7 liquidation bankruptcy. So this is also a function of the property of the estate. –

Each creditor, whether secured or unsecured, must receive at least as much as that creditor would have received if the debtor had gone into Chapter 7 instead of Chapter 13. 1325(a)(4).

1325(a)(4): In order to get confirmed, a Chapter 13 plan MUST MEET the req’s of the ‘‘best interests of creditors’’ test/liquidation test: the present value of the proposed payments to a holder of an unsecured claim must be at least equal to the amount that the creditor would have received in a Chapter 7 liquidation.

If the unsecured creditors would not be better off in Chapter 13 plan (if the amount that D proposes to pay to the unsecured creditors per month in their Chapter 13 plan is not more than what the unsecured creditors would have gotten in Chapter 7 liquidation, at present value), then the plan cannot be confirmed.

This is why property of the estate concept matters also in Chapter 13: Because it is one of the requirements for the C13 plan that the C’s be better off in C13 than they would have been in a C7 bankruptcy. And the only way you know what the C7 bankruptcy payout is => by determining the payout when the BT liquidates all property of the estate.

The “present value” of the amounts that debtor pays to the unsecureds must exceed the liquidation test. This means that even if the numbers come out the same between the amount to the creditors in the Chapter 13 and the Chapter 7 plan, because the Chapter 13 has to be more at present value, merely equal will not satisfy the test. The money “at present value” includes analysis that need to get paid more to get compensated the same when the payments are going to be paid over time.

Ex: D owes C $1000. D files a Chapter 13 petition. If D had filed a Chapter 7 petition, the sale of the property of the estate would have yielded a sufficient sum to pay all priority creditors in full and pay unsecured creditors like C with 36 cents on the dollar. What doe D’s Chapter 13 petition propose? D’s proposes in their Chapter 13 petition plan to pay C $10 a month for 36 months.

o Is this enough payment to C to satisfy the req. (the “second element”) of a C13 plan that the debtor pay the C’s at least what they would have gotten in a C7, “at present value”?

o No. Rule: In order to satisfy the “at present value” rule of 1325(a)(4), the numbers being equial is not sufficient because payment of a certain amount over a three year period (or 5 year period) does not have a present value of that number. Interest rate will be added to it to account for the cost of getting paid out over time: This plan does not satisfy the requirement of section 1325(a)(4). Payment of $360 over a 36–month period does not have a ‘‘present value’’ of $360. A payment now is money now and it is liquid, it is worth more than $ in the future. So must add interest rate onto the amount in order to bring it up to “present value.”

o (3) Plan MUST pay back the value of the collateral at replacement value for the secured creditors (Rash) – at “present value” and provide adequate protection. Rule: As long as the payments received under the plan amount to full value of the C’s allowed secured claim

One of the most common reasons that debtor will want to choose C13 is to keep property that is subject to a SI. If the C fiels for C7, then the C will have to turn over all nonexempt property to the BT unless they redeem

and pay their loan owed to the SP (this is at the foreclosure value, but it is in a lump sum). By contrast, in the C13 context, debtor is not required to hand over their property if they pay their creditors.

Debtors can retain property by using future income to repay creditors Adequate Protection of SP’s

Issue: the debtor is proposing to keep the property under the C13 plan, but the collateral is stil lteh D’s collateral and the bankruptcy does not affect the SP’s lien on their collateral. The SP is concerned about the risk to their collatearl if the D holds onto it—that it will lose its value (depreciate) and that the collateral will get lost/destroyed. Then if the D defaults later on, the SP will only have a reduced value collatearl to look to.

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They will seek relief from the automatic stay. o When a debtor files for bky under C13, like in C7, all collection efforts against the D are statyed,

including repossession of the collatear. 362(a). o However, a creditor can move to have the AS lfited under 362(d), claiming that it sinterest in

collateral is not adequately protected. adequate protection not usually necessary in C7 b/c so short

RULE: Lack of adeq. protection is asufficient cuase for a court to grant the creditor relief from AS under 362(d)(1): If a debtor’s SI not getting adequate protection under terms of a plan, court might grant relief from the AS.

o If the court finds adequate protection by the D holding onto the collateral under the terms of the payment plan and other measures the D agrees to take, can be powerful – ex for Raden he was able to restructure the terms of his car payments, keep his car, and potentially get discharge for his other debts (unless they are nondischarg.)

o Radden: SP argued that they should get relief from the AS in Chapter 13 because I have an interest in property that is not adequately protected.

o Court disagreed – thoguth that under the debtor’s payment plan, the Sp’s interestsin the coll’l were adequately protected

D had not demonstrated that remote chances that he would pay his plan D going to be fullymkaing payments D agreed to get insurance

o An alternative to 362d1 (adeq. protection) is 362(d)(2): SP will argue that they should get relief from the stay because (1) D does not have equity in the property and (2) The property is not necessary for the D’s effective reorganization.

Radden: SP argued D did not have equity in the car. SP argued property was not necessary for the D’s effective reorganization, court disagreed (even though lived 1.5 mi from work)

Adequate Payment of SP’s General Rule: 1325(a)(5):

o (1) Secured party must be paid its allowed secured claim in full, and Under 506(a), an undersecured claim is bifurcated to yield 2 claims a secured claim equal

to the value of the collateral, and an unsecured claim for the remainder (what the D owes to the SP for the loan that isn’t covered by the value of the collateral).

Rule, Rash: In a cramdown case, the value of the property, and thus the amount of the SP’s secured claim under 506(a), is the price that a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller – “fair market value.”

By using the replacement value, we’re giving the SC a larger secured claim which is going to be paid out at its present value, rather than more being an USC’ed claim which would be paid out in pro rata, 6 cents on the dollar bankruptcy dollars

o (2) Secured party must be paid interest on that allowed claimo Therefore, the key question will be then the value of the collateral.o WHATEVER THE “VALUE” OF THE COLLATERAL IS, THAT IS WHAT THE DEBTOR

MUST PAY OUT IN ITS CHAPTER 13 PLAN. What happens if the debtor wants to keep the property (which is what they probably want – probably

why they picked C13)? o RULE: Under the cramdown section of 1325(a)(5), after the SP has objected to the debtor keeping

the collateral, the debtor can promise to pay the allowed secured claim—the value of the collateral, which under Rash is the replacement value—in full, while treating the unsecured portion of the debt like any other unsecured debt in the SP’s plan.

o Therefore, in the cramdown option, even if SP objects to the plan: (1) Debtor keeps the property over the objection of the creditor (2) SP retains its lien securing its claim (keeps its SI), and (3) Debtor is required to provide the creditor with payments, over the life of the plan,that

will total the allowed secured claim. The value of the allowed secured claim is governed by § 506(a) of the Code.

Because the value of the allowed secured claim is the “present value” of the collateral => valuation question becomes very important.

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What is the value of the allowed secured claim, aka the “present value”? Rash: When applying 506(a) in the cramdown context, the value of property for the secured portion is “the cost the debtor would incur to obtain a like asset for the same proposed use.”

o EXCEPTIONS TO CRAMDOWN: 1325(a) contains a limitation on the right to modify as it pertains to PMSI, and vehicles. 910 day rule for PMSI in vehicles. 1 year rule for PSMI in other property.

1) IF PMSI w/in 1 year of filing the petition => debtor who wants to keep the collateral must promise to pay the debt in full in order to satisfy their req. for a Chapter 13 plan.

2) IF car PMSI in a motor vehicle w/in 910 days prior to filing of the petition=> debtor who wants to keep the collateral must promise to pay the debt in full in order to satisfy their req. for a Chapter 13 plan.

This is problematic for cars because the values often drop, but keeping the family car is critical.

Before the 2005 amendments, one of the big attractions of Chapter 13 as the ability to keep the ar by cramming it down:

o –keep the caro –SI retains its lieno –but you pay only the fair market value of the car (Rash)

But three years is okayo Ex: in Rash, even if had been after the 2005 Amendments, then Rash

would have been under the same rule. Even if the 2005 Amendments had applied, the debtors had purchased the truck three years before they filed for bankruptcy.

o Results of Cramdown If debtor fails to complete the plan => their debt will not be discharged.

Then, following bankruptcy the SP can again:o (1) enforce its SI in the unpaid debt and o (2) repossess the collateral.

In other words, debtor who fails to complete C13 plan no longer gets the benefit of cramdown – when they were

o able to keep the collateral despite defaultingo treat the deficiency portion of the SP’s secured claim as “unsecured” under

506(a), and o get a C13 plan in place that will not fully pay out the unsecured claims -

including this portion of the SP’s claim. If the debtors successfully complete their Chapter 13 plan:

If the debtors do comply with the plan & make it through, the unpaid, unsecured portion of the SP’s lien will be discharged along with all other unpaid, unsecured debt upon successful completion of the Chapter 13 plan.

o this was also true in Chapter 7 that we split the claim (but splitting on foreclosure value, note that diff. valuations)

o BUT there the debtor had to give up the item of collateral for sale – here they are keeping it.

o Payments MUST BE MADE at “present value” for secured creditors. What interest rate? In re Till: Not usig the pure interest rate, but instead the prime intrest rate (8%) plus 1 to

3 % of risk that the bankruptcy judge determines plus prime. “Prime plus.” This was plurality – not a hard and fast rule 4th Cir: prime + 1.5% for the purposes of confirming a good ch. 13 plan, you are pretty good using

prime + 1.5% Secured creditors want a higher interest rate because they have to wait for their payments rather than being

able to get paid now. Unsecured creditors want less, so there is less going to the SP’s and more left for them to get paid (the higher the interest rate is, the more required to pay “at the replacement value” but “at present value” (so adding interest rate to the payment because this is not in a lump sum but deferred payment).

o Treatment of Mortgages in Chapter 13: Payments on the Home Mortgage Cramdown applies to personal property – to allowed secured claim for a creditor with a SI in personal

property. Home mortgages have oalways been exempt from the cramdown rule.

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Nobleman v. American Savings Bank – Supreme Court says that crmaodwn will not apply to home mortgages.

“Cannot strip a lien down to its value (cramdown) for home mortgages” Cramdown is ok for other types of property though in 1322(b)(2): this section nseems to permit

other liens to be stripped down to their (replacement) value -- other than a lien on real property that is the debtor’s principal residence:

o investment property – not a problemo stereo – not a problemo car – not a problemo but MORTGAGE – problem (as a result of the mortgage lobby) and says you can’t strip lien

down to its value for the D’s principal residence. There has been disagreement among the bankruptcy courts about this rule.

Camp 1. No lien stripping on resideital mortageso interpreting the Code literally to say that if there is a mortgage, and it is applied to a

residence => you cannot strip it offo So the plan must pay off as if it were fully secured by the collateral. The debtor can only

“cure and maintain”: 1) Catch up arrears, while 2) Make current pyaments on the mortgage as they become due.

Camp 2. Second mortgages may be stripped down to the amount of the secuiryt, but not 1st mortgages

Camp 3. Only completely USC’ed second mortgages can be stripped. (middle ground) “Notwithstanding the restriction impose by the Code on lien-stripping mortgages, some curts have read 506 and 1325 to permit a strip-down for a second or subsequent home mortgage that is entitle unsecured.”

o Ex: home is worth $200,000. first mortgage was for $210,000. Second mortgage is for $30,000. The second mortgage is entirely unsecured now.

o Only in the event that there is absolutely no collateral value to support the second lien will we permit tit to be stripped in a Chapter 13 plan. Courts will allow the strip-down in these circumstances b/c do not view the second mortgage as “supproted by collateral” anymore, b/c no longer protected “in real property that is the debtor’s residence.”

o Alvarez- demonstrates that he Fourth Circuit is in this camp. Rule: As long as a second lien is not supported by any coll’l, is completely

unsecured, you can strip it off & treat it thru the CH. 13 plan like an USC’ed claim.

Camp 1 reflects the exception to the “no modification” rule on primary residence mortages provided in 1322(b)(5) – although the Code seems to provide that no lien stripping, 1322 has a “cure and reinstate” provision that serves as the motivation for many debtors to seek protection under Ch. 13.

Ex. “I am way behind on my mortgage. Many payments late.” o outside of b’kry => your lender will foreclosureo in bankruptcy => ch. 13 will take the prepetition arreages that you owe your lender and

have these incorporated into the plan. T Then the plan helps you additionally by helping your restructure your mortgage and

refinance This allows the C13 debtor, although not being able to “lien strip” the mortgae

(reduce what they pay to its replacement value), 1322(b)(5) permits the debtor to cure and de-accelrate the residential debt that the lender had accelerated prior to their C13 petition. (“Cure” in 1322(b)(5) contains the power to d-accelrate – Taddeo)

1322 giees hoomeowns theright to de-accerlate by stautet.

o (4) Plan MUST provide for payment of all priority unsecured creditors. Rule: The Chpater 13 plan in order to get confirmed MUST provide for full payment of priority claims. In chapter 13

cases, these are usually DSOs and taxes. Caveat: this is NOT “at present value” but lower, “in full.” Priority claims must be paid “in full,” not at “present

value”)

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This is because of 1322(a)(2) – it is the amount of “fully payment, in deferred cash installments,” not “the value, as of the effective date of the plan” (the present value0.

Therefore, the debtor is required to pay only the nominal amount of the claim, without interest. What would present value be? (we have present value requirement for unsecured and secured creditors. The

only ones who do not are the priority USC claimants) See above- not just the nominal amount of the debt, but also interest for the cost of having the payment come later and waiting than all at once.

(5) The plan must be proposed in good faith. 1325a3.

Modification of Chapter 13 Plans Code limits any C13 plan to a max. of 60 monhts A plan can get modified – if thre are subsequent disruptions, the debtor orc rediotrs will seek modification of the plan

o Ex. D seeks modification because lost job However, problem with modification is that the plan can only be max. of 60 months, so cannot keep paying after that point

and extend the payment.o So there is not a lot of flexibility.

C’s will also argue that plan should be modified to permit higher payments if the D starts making more money. o Debtors must file annual financial updates if the judge or any party in interest reuquests them under 521(f)(4). The

updates must describe the D’s income and expenditures for the last tax year under penalty of perjury.

Paying Arrears Before the Chapter 13 Plan (Pre-Petition Defaults and Cure) 1. Rule: If the debtor defaulted on a secured debt prior to filing, he must cure the arrears through the plan and through

the trustee.a. Sometimes debtors will elect to make payments directly to the creditor, outside the plan. b. But we know that arrears on student loans and other N-D loans wll not go away. For these: Arrears on student loans

and other non-discharagble debts may also be paid thru the plan, but the regular monthly loan does not go away.2. Student Loans (THIS ANALYSIS CAN ALSO APPLY FOR DSO’S)

a. if you are in default on your student loans you will get out of arrears thru your planb. your plan will restructure the student loan

i. You will pay a modified amount to your SL Lender through your Chatper 13 planii. All those payments that you pay to your SL will decreates what you have to pay after your Ch. 13 plan

iii. Because your student loan not going awayiv. But this will mean that you do not have to pay (more than 1%) to your unsecured creditors – and those

obligations will get discharged. c. In other words:

i. (1) We know that student loan debts are non-dischargeable under 523(a). 1. This is also true for DSO’s and taxes.

ii. (2) Because these will not be discharged, there is nothing that you can do in your Chapter 13 to discharge these types of debt (they are n-d, even with the super-discharge).

1. In Chatper 13, if this were a regular unsecured creditor, we would pay them thru the life of your plan.

2. Then, once the end of the three year plan, whatever did not pay the unsecured creditors under the plan (ex. 30% of their claims) will GO AWAY + GET DISCHARGED after.

3. Ex. If there was $80,000 that you owed them that they didn’t get => it will be dischargediii. (3) However, n-d wll be treated differently, because cannot discharge them

1. if the DSO, TAX, STUDENT LOANS don’t get fully paid thru the plan, you will finish your Chapter 13 plan, you will get your discharge, but you will still owe them $90,000.

2. It will be up to you and Sallie Mae to determine your new payment plan

Assumption & Rejection of Contracts Important when thinking about where a Ch. 13 debtor lives or what she drives. we now know that Ch. 13 allows us to stretch out debts – adjustment of debts for wage earners

o If the dbtor owns the house/car, the debt can be restricted and cured IF the debtor rents the house/car, the lease must be REJECTED or ASSUMED

o 1) what happens if the debtor REJECTS the lease? the debtor can get out of the lease it is treated as a breach to the landlord the breach for the LL (the damages to the LL) will be treated as an USC’ed claim int eh bankrtupcy

o 2) what happens if the debtor decides to ASSUME the lease

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“cum onere” – “with all of the obligations” – D isn’t allowed to cherrypick which oblibations of the lease the D gets to keep

RULE: if the lease is assumed, it must be assumed cum onereb if you are going to assume a lease, you hvave to cure all arrears through the plan

what happens if the lease matures during the plan and a balloon payment becomes due?o so what if this happens (the lease matures) during the plan period and you have no choice but to py $1500 for the car?

Rule: THIS IS A LEASE And the privosision apply only to secured lenders => modification only to working with the terms of the

SC’s Use cannot use your chapter 13 plan a provision that says “we are going to turn this into a 4 year lease

instead of a 2 year lease” If the dealer says “give me your car back”

now they have the car back what goes away? the amount of the monthly payment goes away as a result, there is more money free for the other creditors

o now you have more disposable incomeo C’s say: now you have more dipsoable income to commit to your plan

debtor says in response, “but I need a car” try to fiancne a car at a comparable amount has to file a motion to file new debt with the court to get new cout

o why? b/c we have to make sure that the ch. 13 plan is not changed too much and we cannot take POE out to a different creditor and disrupt the plan.

o if there is flucation either way , the plan payment is going to get modifiedConfirmation Process Code: The court “must” “shall” hold a hearing on confirmation

o in our district, “unless there is an ojection, your plan just gest confirmed.”o objection period = 21 dayso and then you will now be in your plan o and all you have to do is make your monthly payments to your trusteeo so 8/10 theree is no confirmation hearing

The effect of confirmation = a binding contract btw the D and C’s o all those prepetition contracts are superseded and displaced by THIS binding contract o Ch. 13 plan is what governs everybody’s rights w/r/t each other

Confirmation of the plan does not give you a discharge Completion of the plan is what gives you of the plan – contingency

o specifically, only on successful plan completion or as provide din 1328(b) Upon completion of the CH. 13 plan, or as provided in 1328(a)

o 1328(a) is the SUPER-DISCHARGE provision Broader discharge than Ch. 7 reason why people file Ch. 13

o 1328(b) – you can still get if do not meet 1328(a) Thus far received more than they did You did not ....

Note:If your Chapter 13 plan does not pay at least a seventy percent (70%) dividend to unsecured creditors, you may not be able to obtain a discharge under a Chapter 7 liquidation bankruptcy for six years following completion of your Chapter 13 plan. Although you may feel that this is not important, giving up the right to full bankruptcy relief is significant and could work to your disadvantage if, in the future, you are faced with a catastrophic financial problem. If your financial situation improves while you are in your plan, you can increase the dividend to your creditors and thus improve the effect of your discharge. If you want to do this, meet with your attorney to review whether a better discharge is possible.

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Distribution: The Order of Distribution

1. Overall Order of Distribtuion in Bankruptcy

A. Secured Claims

Fully secured debts ------------> have a Secured claim -------------> Paid in full plus post-petition interestplus costs (to the extent of the SP’s equity cushion)

Partially secured debts ---------------> Secured portion --------------> Paid in full to extent of the collateral |___506a----> Deficiency -----------------------> General unsecured claim

B. Priority Claims (* = dollar limits, to the extent claim exceeds Code’s dollar limit, it is a general unsecured claim)

(1) Domestic support payments (2) Administrative expenses (3) Involuntary cases only: ordinary course business expenses in gap period between

filing and order for relief(4) Wages and salaries (limited) (where D owes their employees wages/salaries)*(5) Employee benefits (limited) (where D owes their employees benefits)(6) Grain producers and fishermen’s claim against processor or storehouse (limited)*(7) Deposits for consumer goods or services (limited)*(8) Taxes: Income within 3/4 years, real estste within 1 year (limited)(9) Claims arising out of federal depository insurance (10) DUI Death/SBI: Claims for wrongful death or personal injury resulting from debtor’s

driving while intoxicated

C. General Unsecured Claims

-- This includes the balance (deficiency) from the undersecured secured creditors-- This includes other claims that the creditor had filed a proof of claim for (“claims proved”) that were above the $ limits of the priority claims.

1. Order of priority within general unsecured claims: a. (1) Timely filed: Timely filed general unsecured claims and late claims where the creditor have

no notice or knowledge of the case to file in time, but filed early enough to be able to participate, will be first

b. (2) Other tardily filed general unsecured claims will be second (where they were late, but it wasn’t because they didn’t have notice).

D. Subordinated Claims

1. Claims for fines, penalties, forfeiture, or punitive damages, which are not compensation for an actual pecuniary loss, get subordinated.

2. Interest on priority and general unsecured claims also gets subordinated (but interest on the SP’s secured SI does not)

E. Any surplus remaining goes to the debtor. .

How will secured claims get satisfied in bankruptcy?

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1. Recovery of the Collateral Surrender by trustee: If the holder of a secured claim recovers its collateral, the secured claim is

extinguished. Assume, for example, that D owes S $22,000 and S has a security interest on equipment worth $10,000. D files a Chapter 7 bankruptcy petition. If the trustee turns over the equipment to S, S no longer has a secured claim. S still has a $12,000 claim, but the claim is an unsecured claim. SP was only secured up to the value of their collateral. They now join the bankruptcy as an unsecured creditor for the $12,000 unscured.

Relief from the automatic stay: If the Trustee doesn’t surrender the property to the SP, a holder of a secured claim can recover its collateral by obtaining relief from the stay §362(d) and foreclosing on its lien. A Chapter 7 trustee can voluntarily turn over encumbered property to a lien holder for this under §725 (if there was no equity, so the trustee not going to go to the trouble of selling it).

2. Payments of the Amount Equal to the Value of the Collateral [c7 rule only]

If the holder of a secured claim does not recover its collateral, in bankruptcy it will get a payment at least equal to the value of the collateral (i.e. here, what the SP would have gotten if they foreclosed on it). In a Chapter 7 case, this payment to the holder of a secured claim can come from the trustee’s sale of the collateral – this is the Sears Lawnmower example.

363(f): A trustee can sell a ship encumbered with a $100,000 security interest if the sale looks like it will yield more than the SP’s $100,000 secured claim under § 363(f)(3).

The proceeds of any such sale will 1) first be used to cover the costs of the sale, and then 2) the remaining net proceeds will be first used to pay the SP, and then 3) the $$ will trickle down to the priority creditors.

Alternatively, this payment can come from the debtor themselves (redemption), or the property could be exempt – but recall that exemptions do not apply to liens, and liens remain enforceable after discharge.

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