In a contested involuntary petition, relief is granted and interim trustee appointed only if debtor is not paying debts, or if within 120 days of filing a custodian was appointed or took possession of debtor’s property
For the ten classes of priority claims, see page 781-782.
Patricia Kyllogen owns a five-acre lot with a home and pole barn located on it; the property has an estimated value of $350,000 and is subject to a $90,000 mortgage. She purchased the property from her parents in 1974 and built the home after she married in 1980. The couple has two daughters. She and her husband David also own an adjacent unimproved lot of approximately five acres located behind the lot with their home. The second lot, which is valued at $45,000, was purchased in 1988. Both lots are heavily wooded with mature oak trees and used to be part of Patricia Kyllogen’s parents’ family farm. Much of the surrounding area that once had constituted the family farm has been subdivided into residential parcels of at least two-and-a-half acres or more; many of the parcels contain large, expensive and upscale homes. Three or four nearby properties are occupied by individuals who have full-time outside jobs but who also grow farm crops, primarily hay, on a part-time basis. In 1996 Kyllogen and her husband cleared one-tenth of an acre of land on the front lot and planted ginseng seeds. Ginseng is a small herbal plant harvested for its roots. The longer the root grows before it is harvested the more valuable it is and the earliest one can harvest ginseng root is about five to seven years after it is planted. The ginseng is planted under the shade of mature hardwood trees and, once an area is cleared and the ginseng planted, it requires relatively little care except for periodic weeding. Kyllogen was employed full-time at a Burlington Coat Factory; her husband did not have a regular fulltime job, although he described himself as a ginseng farmer. In five years of operation (1996–2000), the ginseng “farm” had no income and approximately $28,000 in tax deductible losses. Kyllogen filed a petition in bankruptcy. She claimed her home and the two contiguous five-acre parcels as “exempt” assets of the bankruptcy estate. The Bankruptcy Trustee objected to the claimed exemption, asserting that Kyllogen was entitled to exempt a homestead of no more than one-half of an acre of land in area with a value of no more than $200,000. Court: “This case is unlike others in which the debtors are clearly family farmers who live and work on the land and use it for agricultural purposes… Debtor and her spouse are not farming their parcels in any true sense, and there is nothing inherently agricultural about what they are doing. In short, ginseng “farming” is their hobby. Therefore, given the conclusively urban use and nature of Debtor’s two contiguous parcels, Debtor is only entitled to a homestead exemption of one-half of an acre up to $200,000.”
The “means test” has three elements: (1) a definition of “current monthly income”— which is the total income a debtor is presumed to have available; (2) a list of allowed deductions from the current monthly income for the purpose of supporting the debtor and his family and for repayment of higher priority debts; and (3) defined “trigger points” at which the income remaining after the allowed deductions would trigger the presumption of abuse. Commencing in 2000, when she was hired by Mariah Carey, a prominent entertainer, Nicole Siegenberg worked as a costumer in the entertainment business. Her duties were to buy clothes for and costume her employer. In 2004, she lost her job. Since 2004, Siegenberg was employed only sporadically on temporary jobs such as television pilots. During the 2004 to 2006 period she incurred substantial debts. Siegenberg filed a Chapter 7 bankruptcy on Nov. 29, 2006. The United States Trustee (UST) filed a motion to dismiss Siegenberg’s Chapter 7 petition as filed in bad faith and sought a one year bar against refiling. Court: In considering whether a Chapter 7 case should be dismissed because granting relief would be an abuse of the provisions of Chapter 7, courts may consider (a) whether the debtor filed the petition in bad faith; or (b) whether the totality of the circumstances of the debtor’s financial situation demonstrates abuse…. Siegenberg has used her credit cards in various efforts to extricate herself and her family from financial difficulties. She also used her credit cards for tens of thousands of dollars in personal expenditures, the purchase of consumer goods and services, and to obtain unexplained cash advances. The record contains significant evidence of these ostensibly excessive expenditures and contains only patchy, incomplete, and unconvincing evidence that most of these expenditures were made to further Siegenberg’s business efforts. I believe it is appropriate to grant the UST’s motion to dismiss Siegenberg’s Chapter 7 petition, and to impose a one-year bar on future bankruptcy filings by or against Siegenberg.
In the Manhattan Investment Fund, Ltd. Case, the court held that the trustee could recover margin payments transferred to a brokerage firm as transfers presumed to have been made with actual intent to hinder, delay, or defraud other creditors. Court: “Bear Stearns [brokerage firm] failed to act diligently in a timely manner and accordingly, Bear Stearns cannot satisfy its burden of showing that it acted with the diligence required to establish good faith under section 548(c) of the Bankruptcy Code. ”
Court: “In summary, the Debtor failed to show at confirmation that it had exit financing to fund its plan. The proposed financing had so many contingencies that Debtor’s Plan was conditional at best. Thus, the Debtor’s Plan is not feasible under 1129(a)(11), and the Court must deny confirmation of Debtor’s Plan.”
If a class of creditors or shareholders reject a plan, it can only be confirmed if it is “fair and equitable” under the requirements of Section 1129 (b) of the Bankruptcy Code; the requirements are known as the “cram-down” provisions. The phrase “fair and equitable” means that the plan must not be unfairly discriminatory with respect to each claim that has not accepted the plan.
Gerhardt was a professional cellist Nondischargeable debts include, among others, debts that: 1. Are due as a tax or fine to the United States or any state or local unit of government. 2. Result from liabilities for obtaining money by false pretenses or false representations. 3. Were incurred by the debtor’s purchase of more than $500 in luxury goods or services on credit from a single creditor within 90 days of filing a petition (presumed to be nondischargeable). 4. Are cash advances in excess of $750 obtained by use of a credit card or a revolving line of credit at a credit union and obtained within 70 days of filing a bankruptcy petition (presumed to be nondischargeable). 5. Were not scheduled in time for proof and allowance because the creditor holding the debt did not have notification of the proceeding even though the debtor was aware that he owed money to that creditor. 6. Were created by the debtor’s larceny or embezzlement or by the debtor’s fraud while acting in a fiduciary capacity. 7. Were for a domestic support obligation (unless excepting it from discharge would impose an undue hardship on the debtor’s dependents). 8. Are due for willful or malicious injury to a person or his property. 9. Are educational loans. 10. Are judgments arising out of a debtor’s operation of a motor vehicle while legally intoxicated. 11. Are debts incurred to pay a tax to the United States that would not be dischargeable. 12. Are property settlements arising from divorce or separation proceedings other than support provisions that are priority claims.
False. All bankruptcy proceedings begin by filing a petition , either voluntary or involuntary, such as when creditors force a debtor into bankruptcy to reach the assets. True. False. Chapter 11 is available to individuals and business enterprises
False. A reorganization plan must be confirmed by the court before it becomes effective and the court may force creditors to accept the plan. True.
The correct answer is (b).
The correct answer is (c).
Opportunity to discuss the history of bankruptcy, the continued viability of the constitutional guarantee (if viable), and the latest revisions to consumer bankruptcy protection under Chapter 13. One reason bankruptcy was important to the founding fathers was that a person who got into debt in Europe and England went to debtor’s prison to work off the debt and the colonists wanted to avoid that bit of European civilization. The old print is captioned, “Whoever wants everything has nothing.” Is bankruptcy a result of wanting everything or just poor management skills?
Learning Objectives The Bankruptcy Act Chapter 7 – liquidation Discharge in bankruptcy Chapter 11 -- reorganizations Chapter 12 – family enterprises Chapter 13 – consumer debt30 - 3
Overview Sometimes debtors are faced with financial ruin and the right to file for bankruptcy is guaranteed by the U.S. Constitution30 - 4
The Bankruptcy Code The federal Bankruptcy Code provides an organized procedure for insolvent debtors and is supervised by a federal court Primary proceedings include:3. Straight bankruptcy (liquidations)4. Reorganizations5. Family farms and commercial fishing operations6. Consumer debt adjustments30 - 5
The Bankruptcy Code All bankruptcy proceedings begin by filing a petition, either voluntary or involuntary A voluntary petition may be filed by an individual, partnership, or corporate debtor An involuntary petition may be filed by creditors of a debtor in an attempt to reach debtor’s assets in lieu of payment on debts30 - 6
The Automatic Stay Filing a bankruptcy petition operates as an automatic stay, halting creditor action against a debtor or the property, including: Beginning or continuing judicial proceedings against the debtor Actions to repossess the debtor’s property; Actions to create, perfect, or enforce a lien against the debtor’s property; and Setoff of indebtedness owed to debtor before commencement of the bankruptcy proceeding30 - 7
Order of Relief Once a bankruptcy petition has been filed, the court must first determination that relief should be ordered This step automatic for a voluntary petition or no-contest of involuntary petition If debtor contests involuntary petition, then a trial is held on question of whether court should grant relief.30 - 8
Creditor Claims To participate in the estate of a bankrupt debtor, unsecured creditors must file a proof of claim within a certain time, usually six months after the first meeting of creditors The Bankruptcy Code declares ten types of claims to have priority over other claims Priority claims are paid after secured creditors but before other unsecured creditors are paid30 - 9
Liquidation (Chapter 7) In a liquidation proceeding (straight bankruptcy), the debtor must disclose all property s/he owns and surrender this bankruptcy estate to a bankruptcy trustee The trustee segregates property that debtor may keep and then administers, liquidates, and distributes the remainder of the estate Creditors’ relative rights determined by law30 - 10
The Bankrupt’s FilingsBankrupt person required to file a list of assets, liabilities, and creditors, plus a statement of bankrupt’s financial affairsFailure to file the information within 45 days of petition results in automatic dismissal Extension of time possible30 - 11
Trustee Duties in Chapter 7 Creditors meet and may elect a trustee Whether appointed or elected, the trustee: Sets aside property a debtor may keep Takes possession of debtor’s property and has it appraised Examines creditor claims, objecting if necessary Separates unsecured property from the secured and otherwise exempt property30 - 12
Trustee Duties The trustee also: Sells debtor’s nonexempt property as soon as possible, consistent with best interests of creditors Operates debtor’s business for a time if necessary Keeps an accurate account of all property and money received and promptly deposits money into the estate’s accounts30 - 13
The Bankruptcy Estate The estate includes all of debtor’s legal and equitable interests in property Exemptions permit the bankrupt person to retain a minimum amount of assets considered necessary to life and an ability to continue to earn a living Exemptions vary from state to state See In Re Kyllogen30 - 14
Dismissal for AbuseBankruptcy Code permits court to dismiss cases for abuse of process if debtor acted in bad faith or had present or future means to pay a significant portion of their current debts Means test determines debtor’s ability to repay general unsecured claims In re Siegenberg: court dismissed a Chapter 7 case on the grounds it was filed in bad faith30 - 15
Liens and Business Transactions Debtor may void some liens against exempt properties that impair the exemptions Debtors may redeem exempt personal property from secured creditors by paying the full value of the collateral at the time the property is redeemed A debtor and creditors may engage in ordinary business transactions30 - 16
Fraudulent Transfers If a debtor transfers property or incurs an obligation with intent to hinder, delay, or defraud creditors, the transfer is voidable by the trustee Includes transfers of property for less than reasonable value See In re Manhattan Investment Fund Ltd.: margin payments to brokerage firm presumed to be made with intent to hinder, delay, or defraud30 - 17
Chapter 11 Reorganization Chapter 11 offers a procedure in which the debtor’s financial affairs can be reorganized rather than liquidated because creditors would benefit more from the continuation of a bankrupt debtor’s business than from the liquidation of debtor’s property Chapter 11 is available to individuals and business enterprises30 - 18
Trustee Duties Under Chapter 11 Rather than liquidating the debtor’s estate, a trustee for a Chapter 11 proceeding develops a plan for handling creditor claims and the various interests of persons such as shareholders The reorganization plan is essentially a contract between a debtor and its creditors and may involve recapitalization or giving creditors some equity30 - 19
The Bankruptcy Plan Plan must: (1) divide creditors into classes; (2) set forth how each creditor will be satisfied; (3) state which claims, or classes of claims, are impaired or adversely affected by the plan; & (4) provide equal treatment to each creditor in a particular class, unless creditors in the class consent to other treatment In re Made In Detroit, Inc.: plan not feasible, therefore court unable to confirm plan30 - 20
The Bankruptcy Plan A reorganization plan must be confirmed by the court before it becomes effective Plans may be confirmed by voluntary agreement of creditors or a cram down: Court forces dissenting creditors whose claims would be impaired to accept the plan if the court finds it is fair and equitable to the creditors If confirmed, debtor must implement plan30 - 21
Bankruptcy & Ethics Bankruptcy petitions have been filed to avoid obligations under divorce judgments, collective bargaining agreements, and mass tort and product liability litigation (asbestos, breast implant, and birth control device litigation) These cases aren’t merely a matter of economics, but are a matter of ethics30 - 22
Chapter 12 Chapter 12 is modeled after Chapter 13 and is available only for family farmers and fishermen with regular income30 - 23
Chapter 13 – Consumer Debt Chapter 13 gives individuals who do not want to be declared bankrupt the right to file a voluntary petition for federal bankruptcy protection, obtaining the opportunity to pay debts in installments and free of such problems as garnishments and attachments of property by creditors30 - 24
Chapter 13 – Consumer Debt Only individuals with regular incomes (including business sole proprietors) who owe individually (or with a spouse) liquidated, unsecured debts of less than $336,900 and secured debts of less than $1,010,650 may file for bankruptcy relief30 - 25
Chapter 13 – Consumer Debt After filing, the debtor submits a plan of payment to secured creditors for acceptance 3-5 year payment plan If acceptable to creditors and the court, the court will approve the plan and appoint a trustee to carry out the plan In re Burt: unacceptable plan because it was a “cram-down” of creditor’s secured interest30 - 26
Discharge A bankrupt person not guilty of dishonest acts and who fulfilled duties as a bankrupt is entitled to a discharge in bankruptcy A discharge relieves the bankrupt person of further responsibility for dischargeable debts and gives him a fresh start. A corporation or partnership is not eligible for a discharge in bankruptcy30 - 27
Discharge Certain debts, including educational loans, are not dischargeable in bankruptcy In re Gerhardt: court denied the request of a debtor that his student loans be discharged because their repayment would constitute an undue hardship to him30 - 28
Test Your Knowledge True=A, False = B All bankruptcy proceedings begin by filing a voluntary bankruptcy petition Once a voluntary bankruptcy petition has been filed, the automatic stay prevents a creditor from filing suit against the debtor for repossession of the property. Chapter 11 is available only to business enterprises30 - 29
Test Your Knowledge True=A, False = B A reorganization plan under Chapter 11 requires unanimous consent by all creditors before it becomes effective To participate in the estate of a bankrupt debtor, unsecured creditors must file a proof of claim within a certain time, usually six months after the first meeting of creditors.30 - 30
Test Your Knowledge Multiple Choice Days before filing for reorganization, Bernie gave six of his properties to friends in return for an agreement that they would sell the property back to him in five years. Has Bernie done anything wrong? (a) Yes, he must have sold the properties for at least $1 minimum value (b) Yes, he engaged in fraudulent transfer (c) No, properties given to friends are exempt from inclusion in the bankruptcy estate (d) None of the above30 - 31
Test Your Knowledge Multiple Choice In JarlCo’s reorganization, the bankruptcy court forced dissenting creditors whose claims would be impaired to accept the reorganization plan. The court: (a) Improperly abused its power and will be reversed on appeal (b) Prioritized execution of the plan (c) Engaged in a cram down (d) none of the above30 - 32
Thought Questions Why did the founding fathers incorporate bankruptcy into the U.S. Constitution as a constitutional guarantee? What is your opinion of the current bankruptcy laws?30 - 33