Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 23 Bankruptcy and Reorganization

23 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Federal Bankruptcy Code (1 of 2) Article I, section 8, clause 4 of the U.S. Constitution Article I, section 8, clause 4 of the U.S. Constitution provides that “The congress shall have the power...to establish... uniform laws on the subject of bankruptcies throughout the United States” federal law Bankruptcy law is exclusively federal law There are no state bankruptcy laws

23 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Federal Bankruptcy Code (2 of 2) Bankruptcy Act Congress enacted the original Bankruptcy Act in 1878 Chandler Act Amended by the Chandler Act (1938) Bankruptcy Reform Act Bankruptcy Reform Act (1978) completely revised the law Bankruptcy Code This is the Bankruptcy Code The Bankruptcy Code establishes rules and procedures for filing and completing bankruptcy

23 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Bankruptcy Courts (1 of 2) Bankruptcy Amendments and Federal Judgeship Act (1984) Bankruptcy Amendments and Federal Judgeship Act (1984) – federal statute that created federal bankruptcy courts core proceedingsbankruptcy Bankruptcy courts decide core proceedings regarding bankruptcy cases: e.g., allowing creditor claims e.g., deciding preferences e.g., confirming plans of reorganization

23 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Bankruptcy Courts (2 of 2) core proceedings Only federal bankruptcy courts can hear core proceedings regarding bankruptcy cases Noncore proceedings Noncore proceedings concerning the debtor are resolved in federal or state court: e.g., decisions on personal injury e.g., divorce e.g., other civil proceedings

23 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Bankruptcy The Bankruptcy Code is divided into chapters The most common forms of bankruptcy are provided by the following chapters: Chapter 7 Chapter 7 – Liquidation Bankruptcy Chapter 11 Chapter 11 – Reorganization Bankruptcy Chapter 13 Chapter 13 – Consumer Debt Adjustment Chapter 12 Chapter 12 – Family Farmer Bankruptcy

23 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Fresh Start The primary purpose of federal bankruptcy law is to discharge the debtor from burdensome debts The law gives debtors a fresh start by freeing them from legal responsibility for past debts

23 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7 Liquidation Bankruptcy The most familiar form of Bankruptcy The debtor’s nonexempt property is sold for cash, The cash is distributed to the creditors, and discharged Any unpaid debts are discharged Any person (including individuals, partnerships, and corporations) may be debtors in a Chapter 7 proceeding

23 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Bankruptcy Procedure 1. Filing a petition Voluntary petition Involuntary petition 2. Order for relief 3. Meeting of the creditors 4. Appointment of a trustee 5. Proof of claims

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: The Bankruptcy Estate An estate created upon the commencement of a Chapter 7 proceeding exempt property It includes all the debtor’s legal and equitable interests in real, personal, tangible, and intangible property, wherever located, that exist when the petition is filed, minus exempt property

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Exempt Property Property that may be retained by the debtor pursuant to federal or state law Debtor’s property that does not become part of the bankruptcy estate The Bankruptcy Code also permits states to enact their own exemptions Declaration of Homestead Many states require the debtor to file a Declaration of Homestead prior to bankruptcy

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Voidable Transfers (1 of 2) payments transfers The Bankruptcy Code prevents debtors from making unusual payments or transfers of property on the eve of bankruptcy that would unfairly benefit the debtor or some creditors at the expense of others

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Voidable Transfers (2 of 2) The following transfers may be avoided by the bankruptcy court: Preferential transfers within 90 days before bankruptcy Preferential liens Preferential transfers to insiders Fraudulent transfers

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Distribution of Property Nonexempt property Nonexempt property of the bankruptcy estate must be distributed to the debtor’s secured and unsecured creditors pursuant to the statutory priority established by the Bankruptcy Code secured creditor’s A secured creditor’s claim to the debtor’s property has priority over the claims of unsecured creditors

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Discharge The termination of the legal duty of a debtor to pay debts that remain unpaid upon the completion of a bankruptcy proceeding Only individuals may be granted a discharge Not all debts are dischargeable in bankruptcy Discharge is not available to partnerships and corporations

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Acts That Bar Discharge (1 of 2) Certain acts by the debtor may bar discharge: Making false representations about his or her financial position when he or she obtained an extension of credit Transferring, concealing, or removing property from the estate with the intent to hinder, delay, or defraud creditors

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 7: Acts That Bar Discharge (2 of 2) Falsifying, destroying, or concealing records of his or her financial condition Failure to account for any assets Failure to submit to questioning at the meeting of the creditors (unless excused)

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11 Reorganization Bankruptcy A bankruptcy method that allows reorganization of the debtor’s financial affairs under the supervision of the Bankruptcy Court Chapter 11 is used primarily by businesses to reorganize their finances under the protection of the Bankruptcy Court The debtor usually emerges from bankruptcy a “leaner” business, having restructured and discharged some of its debts A bankruptcy method that allows reorganization of the debtor’s financial affairs under the supervision of the Bankruptcy Court Chapter 11 is used primarily by businesses to reorganize their finances under the protection of the Bankruptcy Court The debtor usually emerges from bankruptcy a “leaner” business, having restructured and discharged some of its debts

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Reorganization Proceeding available Chapter 11 is available to individuals, partnerships, corporations, non- incorporated associations, and railroads not available Chapter 11 is not available to banks, savings and loan associations, credit unions, insurance companies, stockbrokers, or commodities brokers

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Debtor-in-Possession A debtor who is left in place to operate the business during the reorganization proceeding The court may appoint a trustee to operate the debtor’s business only upon a showing of cause debtor-in-possession The debtor-in-possession has the same powers and duties as a trustee in a Chapter 7 proceeding

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Creditors’ Committee creditors’ committee The creditors holding the seven largest unsecured claims are usually appointed to the creditors’ committee Representatives of the committee appear at Bankruptcy Court hearings, participate in the negotiation of a plan of reorganization, assert objections to the plan, etc.

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Automatic Stay The result of the filing of a voluntary or involuntary petition The suspension of certain actions by creditors against the debtor or the debtor’s property Relief from stay Relief from stay – may be granted in situations involving depreciating assets where the secured property is not adequately protected during the bankruptcy proceedings

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Plan of Reorganization A plan that sets forth a proposed new capital structure for the debtor to have when it emerges from reorganization bankruptcy The debtor has the exclusive right to file the first plan of reorganization Any party of interest may file a plan thereafter

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Disclosure Statement about the proposed plan of reorganization A statement that must contain adequate information about the proposed plan of reorganization that is supplied to the creditors and equity holders The court must approve the disclosure statement before it is distributed

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Executory Contracts A contract that has not been fully performed Chapter 11 reorganization bankruptcy permits a debtor (with court approval) to assume or reject executory contracts e.g., leases for office space, and sales and purchase contracts

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Rejection of Collective Bargaining Agreements A collective bargaining agreement may be rejected or modified as an executory contract if: 1.It is necessary to the reorganization, 2.The debtor acted in good faith, and 3.The balance of the equities favors rejection or modification of the agreement

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Confirmation of a Plan of Reorganization confirmation The final step is the confirmation of the plan of reorganization by the court A plan of reorganization must be confirmed by the court before it becomes effective Confirmation is either by: acceptance The acceptance method; or cram down The cram down method

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Confirmation by the Acceptance Method The Bankruptcy Court must approve a plan of reorganization if: best interests 1.The plan is in the best interests of each class of claims and interests; feasible 2.The plan is feasible ; votes to accept the plan 3.At least one class of claims votes to accept the plan ; and non- impaired 4.Each class of claims and interests is non- impaired

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Confirmation by the Cram Down Method A method of confirmation of a plan of reorganization where the court forces an impaired class to participate in the plan of reorganization The plan must be fair to the impaired class: Secured Creditors Unsecured Creditors Equity Holders

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 11: Discharge discharge Upon confirmation of a plan of reorganization, the debtor is granted a discharge of all claims not included in the plan The plan is binding on all parties once it is confirmed

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 13 Consumer Debt Adjustment A rehabilitation form of bankruptcy that permits the courts to supervise the debtor’s plan for the payment of unpaid debts by installments Debtor avoids the stigma of Chapter 7 liquidation Creditors may recover a greater percentage of the debts owed them than they would under a Chapter 7 proceeding

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 13: Filing the Petition A Chapter 13 proceeding can be initiated only by the voluntary filing of a petition by the debtor Creditors cannot file an involuntary petition to place a debtor in Chapter 13 bankruptcy A Chapter 13 is a form of reorganization bankruptcy plan of payment The debtor must file a proposed plan of payment on how the debts are to be rescheduled A Chapter 13 proceeding can be initiated only by the voluntary filing of a petition by the debtor Creditors cannot file an involuntary petition to place a debtor in Chapter 13 bankruptcy A Chapter 13 is a form of reorganization bankruptcy plan of payment The debtor must file a proposed plan of payment on how the debts are to be rescheduled

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 13: Automatic Stay The filing of a Chapter 13 petition automatically stays: Liquidation bankruptcy proceedings Judicial and non-judicial actions by creditors to collect prepetition debts from the debtor Collection activities against co-debtors and guarantors of consumer debts The automatic stay continues until the Chapter 13 plan is completed or dismissed

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 13: Plan of Payment plan of payment The debtor’s plan of payment must be filed within 15 days of filing the petition The debtor must file information about his or her finances The plan period cannot exceed three years unless the court approves a longer period Installment payments to the trustee must begin within 30 days after the plan is filed

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 13: Confirmation of the Plan The plan may modify the rights of unsecured creditors and some secured creditors The plan must: Be proposed in good faith Pass the feasibility test Be in the interests of the creditors

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 13: Discharge A discharge is granted to a debtor in a Chapter 13 consumer debt adjustment bankruptcy only after all the payments under the plan are completed by the debtor hardship discharge Even if the debtor does not complete the payments called for in the plan, the court may grant the debtor a hardship discharge

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Chapter 12 Family Farmer Bankruptcy Chapter 12 is a reorganization provision of the Bankruptcy Code Allows family farmers to reorganize financially under the supervision of the Bankruptcy Court The major provision of Chapter 12 allows family farmers to have mortgage loans rewritten to the fair market value of the property in cases where the value of the farm land has decreased below the value of the loan Chapter 12 is a reorganization provision of the Bankruptcy Code Allows family farmers to reorganize financially under the supervision of the Bankruptcy Court The major provision of Chapter 12 allows family farmers to have mortgage loans rewritten to the fair market value of the property in cases where the value of the farm land has decreased below the value of the loan