1. Copyright © 2009 by Pearson Prentice Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 6 th Edition by Henry R. Cheeseman Chapter 24 Bankruptcy and Reorganization

2. 24 - 2Copyright © 2009 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.

3. 24 - 3Copyright © 2009 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 as did the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Bankruptcy Code This is the Bankruptcy Code The Bankruptcy Code establishes rules and procedures for filing and completing bankruptcy

4. 24 - 4Copyright © 2009 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: i.e., allowing creditor claims i.e., deciding preferences i.e., confirming plans of reorganization

5. 24 - 5Copyright © 2009 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: i.e., decisions on personal injury i.e., divorce i.e., other civil proceedings

6. 24 - 6Copyright © 2009 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

7. 24 - 7Copyright © 2009 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.

8. 24 - 8Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Bankruptcy Procedure Prepetition and Post Petition Counseling File a Petition – voluntary vs. nonvoluntary Schedules Attorney Certification Order of Relief Proof of Claim Trustee is appointed and takes action Automatic Stay Discharge

9. 24 - 9Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Bankruptcy Procedure Exceptions from Discharge Taxes Fines and Penalties Injury Fraud Alimony, etc. Unscheduled Luxury Goods Cash Advances

10. 24 - 10Copyright © 2009 by Pearson Prentice Hall. All rights reserved. The Bankruptcy Estate An estate created upon the commencement of a Bankruptcy case 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.

11. 24 - 11Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Bankruptcy Procedure Preferential and Fraudulent Transfers Median Income Test Means Test

12. 24 - 12Copyright © 2009 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.

13. 24 - 13Copyright © 2009 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.

14. 24 - 14Copyright © 2009 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.

15. 24 - 15Copyright © 2009 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)

16. 24 - 16Copyright © 2009 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.

17. 24 - 17Copyright © 2009 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.

18. 24 - 18Copyright © 2009 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.

19. 24 - 19Copyright © 2009 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.

20. 24 - 20Copyright © 2009 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.

21. 24 - 21Copyright © 2009 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.

22. 24 - 22Copyright © 2009 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

23. 24 - 23Copyright © 2009 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

24. 24 - 24Copyright © 2009 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.

25. 24 - 25Copyright © 2009 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.

26. 24 - 26Copyright © 2009 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.

27. 24 - 27Copyright © 2009 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

28. 24 - 28Copyright © 2009 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.

29. 24 - 29Copyright © 2009 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.