1. © 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 21 Creditors’ Rights and Bankruptcy

2. © 2007 West Legal Studies in Business, A Division of Thomson Learning 2 What is a prejudgment attachment? What is a writ of execution? How does a creditor use these remedies? What is garnishment? When might a creditor undertake a garnishment proceeding? In a bankruptcy proceeding, what constitutes the debtor’s estate in property? What property is exempt from the estate under federal bankruptcy law? What is the difference between an exception to discharge and an objection to discharge? In a Chapter 11 reorganization, what is the role of the debtor in possession? Learning Objectives

3. © 2007 West Legal Studies in Business, A Division of Thomson Learning 3 Laws Assisting Creditors Liens: –Mechanic’s Lien (real property). –Artisan’ Lien (personal property). –Innkeeper’s Lien (baggage of guests). –Judicial Lien: Attachment: court-ordered seizure of property. Writ of Execution: court-ordered sale. Garnishment. –Creditor permitted to collect a debt by seizing property held by third party (usually wages held by debtor’s employer).

4. © 2007 West Legal Studies in Business, A Division of Thomson Learning 4 Laws Assisting Creditors Mortgage Foreclosure. –Creditor (mortgagee) has the right to foreclose on property upon debtor’s (mortgagor) default. Suretyship and Guaranty. –Third person promises to pay debt owed by another. Surety (3 rd person is primarily liable). Guaranty (3 rd person is secondarily liable). CASE 21.1 JSV, Inc. v. Hene Meat, Co. (2003).

5. © 2007 West Legal Studies in Business, A Division of Thomson Learning 5 Laws Assisting Debtors Homestead Exemption. –Family home free from claims of unsecured creditors or trustees in bankruptcy. Other Exemptions: –Household furniture. –Clothing and personal possessions. –Vehicle. –Tools of the trade. Special Protection for Consumer-Debtors.

6. © 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Bankruptcy and Reorganization Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Bankruptcy Reform Act of 1978, amended by Reform Act of 1994. Federal court under U.S. district court, can appeal to district courts. Federally appointed judges.

7. © 2007 West Legal Studies in Business, A Division of Thomson Learning 7 Bankruptcy Proceedings Bankruptcy provides different relief: –Chapter 7: Liquidation (wipe out all debt) –Chapter 11: Corporate Reorganizations. –Chapter 12: Family Farmers. –Chapter 13: Adjustment of Individuals’ Debts with a payment plan. Special Treatment of Consumer- Debtors.

8. © 2007 West Legal Studies in Business, A Division of Thomson Learning 8 Chapter 7--Liquidation Most familiar. Any person (including corporation) All debts are discharged. Begins with a voluntary or involuntary Filing of a Petition (Automatic Stay). –Voluntary: filed by debtor. –Involuntary: creditors force debtor to file. Order for Relief.

9. © 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Chapter 7 Debtor must understand there are other chapters available. Debtor does not have to be insolvent. List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. Swear to these and sign. Federal crime to misrepresent.

10. © 2007 West Legal Studies in Business, A Division of Thomson Learning 10 Chapter 7 Automatic Stay upon Filing of Petition: Either voluntary or involuntary. Creditors cannot commence or continue most legal actions. Damages for violation of stay. Creditors can get “adequate protection.” –Periodic or one time cash payments or equivalent.

11. © 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. Within 90 days, Creditors must file “proof of claim” with court clerk. Leases cannot be for more than one year. Chapter 7--Creditors

12. © 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Allowed unless disputed. If claim is disputed or unliquidated, court will decide value. It is a crime to file false claim. Employment contracts and real estate. Chapter 7--Creditors

13. © 2007 West Legal Studies in Business, A Division of Thomson Learning 13 Chapter 7–Property Debtor’s Estate includes: –All Debtor’s legal and equitable interests in property presently held, including community property, –Property transferred in a “voidable” transaction, and –Property which Debtor becomes entitled within 180 days after filing.

14. © 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Chapter 7–Property Estate includes (cont’d): –Proceeds and profits from the property of the estate. –After-acquired property such as inheritances, property settlements, and life insurance death proceeds.

15. © 2007 West Legal Studies in Business, A Division of Thomson Learning 15 Chapter 7–Exempted Property Up to $18,450 in home equity. Up to $2,950 in car. Up to $9,850 in personal possessions (up to $450 per item). Up to $1,225 in jewelry. Up to $1,850 in tools. Social security, alimony and support payments. Up to $18,450 in personal injury awards.

16. © 2007 West Legal Studies in Business, A Division of Thomson Learning 16 Chapter 7–Trustee’s Role Court-appointed until first meeting of creditors. Creditors elect permanent trustee Administers estate. Collects proceeds, liquidates assets and pay Creditors in order of priority.

17. © 2007 West Legal Studies in Business, A Division of Thomson Learning 17 Trustee’s Duties (2005) New Duties under the 2005 Bankruptcy Reform Act: –Promptly review all materials filed by debtor. –Not later than 40 days after filing, Trustee must file: a motion to dismiss the case, change to Chapter 13, or why motion would not be appropriate. –New duties to protect domestic-support obligations.

18. © 2007 West Legal Studies in Business, A Division of Thomson Learning 18 Chapter 7–Trustee’s Powers Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: –Debtor against the creditors. –Lien creditors against the creditors. –Bona fide purchaser against the creditors. –Trustee still loses to the PMSI creditor who perfects within his “magic” 10-day period. Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

19. © 2007 West Legal Studies in Business, A Division of Thomson Learning 19 Trustee’s--Preference A Debtor is not permitted to transfer property or make a payment that favors— or gives a preference to—one creditor over another. For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

20. © 2007 West Legal Studies in Business, A Division of Thomson Learning 20 Trustee--Preferences Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. Creditor gets more than he would in a Chapter 7. Consumer can transfer up to $600 without constituting a preference.

21. © 2007 West Legal Studies in Business, A Division of Thomson Learning 21 Trustee--Liens Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. Can avoid liens which were unperfected on date of bankruptcy.

22. © 2007 West Legal Studies in Business, A Division of Thomson Learning 22 Fraudulent Transfers Trustee may avoid fraudulent transfers made within one year of filing of petition. Trustee may proceed under state law for fraud with a 3 year statute of limitations.

23. © 2007 West Legal Studies in Business, A Division of Thomson Learning 23 If Secured property: –Consumer debtors. Have 30 days from filing petition or before first meeting of creditors. Debtor must tell what she intends to do with collateral-- keep or surrender. Trustee must enforce within 45 days. –If surrenders: creditor can keep or sell. If creditor keeps = full satisfaction of debt. If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency. Chapter 7—Distribution of Property

24. © 2007 West Legal Studies in Business, A Division of Thomson Learning 24 Unsecured property: –Paid according to bankruptcy law. –All of one class must be paid before moving to next. –Creditor within last class receive proportionately if not enough. –See Priority List in text. –All creditors paid, trustee gives extra back to debtor. Chapter 7—Distribution of Property

25. © 2007 West Legal Studies in Business, A Division of Thomson Learning 25 Chapter 7--Discharge Exemptions. Objections to Discharge. Effect of Discharge. Revocation of Discharge. Reaffirmation of a Debt.

26. © 2007 West Legal Studies in Business, A Division of Thomson Learning 26 Claims for back taxes. Claims for amounts borrowed by Debtor to pay federal taxes. Claims against property/money obtained by Debtor under false pretenses. Claims by Creditors who did not know about bankruptcy. Student Loans. CASE 21.2 In re Savage (2004). Chapter 7—Discharge Exceptions

27. © 2007 West Legal Studies in Business, A Division of Thomson Learning 27 Chapter 7--Reaffirmation of Debt Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. Agreement is filed with court. Debtor can rescind agreement at any time.

28. © 2007 West Legal Studies in Business, A Division of Thomson Learning 28 Chapter 11 --Reorganization Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. Same debtors as are eligible under Chapter 7.

29. © 2007 West Legal Studies in Business, A Division of Thomson Learning 29 Chapter 11--Reorganization “Fast track” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. “Workouts” (private negotiated settlements).

30. © 2007 West Legal Studies in Business, A Division of Thomson Learning 30 Chapter 11--Reorganization Debtor in Possession (DIP). –Trustee may be appointed. –DIP has same powers as trustee in Chapter 7. Strong-arm clause. Collective Bargaining Agreements. Creditors’ Committees.

31. © 2007 West Legal Studies in Business, A Division of Thomson Learning 31 Chapter 11--Reorganization The Reorganization Plan. –Acceptance and Confirmation of the Plan. –CASE 21.3 In re Beyond.com Corp. (2003) –Rehabilitates debtor and conserves estate –Plan must be equitable and: Designate classes of claims and interests. Specify treatment to be afforded the classes. Provide adequate means for execution.

32. © 2007 West Legal Studies in Business, A Division of Thomson Learning 32 Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$307,675 or fixed secured debts of <$922,975. Not for partnerships or corporations. Chapter 13--Repayment

33. © 2007 West Legal Studies in Business, A Division of Thomson Learning 33 Chapter 13–Repayment Repayment Plan. –For all or a portion of debts to be paid during a period not to exceed 3 years. –Confirmation of the Plan. Hearing for interested parties to object to plan. Court will confirm (order) the plan after creditors approve. –Objections to the Plan. Discharge balance of debt (after completion of all payments in the plan).

34. © 2007 West Legal Studies in Business, A Division of Thomson Learning 34 Chapter 12: Family Farmer Plans. –“Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. –Procedure for filing. –Content of plan. –Court confirmation. Chapter 12—Family Farmer