7: commencing a voluntary case © charles tabb 2010

7: Commencing a Voluntary Case© Charles Tabb 2010

Who can file?

• Important threshold question is who can file under which chapter

• i.e., issue of debtor eligibility

Who gets in the courthouse door?

3 sets of eligibility rules

1st: Generally applicable rule: § 109(a) Two requirements:

(1) “person”AND

(2) Nexus to United States• Residence• Domicile• Place of business• property

“Person”

• Defined term § 101(41)1. Individual –> a human being

Partnership

• What is a “partnership”? not defined in Code– Look to state partnership law

Corporation

• Defined term § 101(9)– Very broad

Connection to United States

• Other absolute eligibility requirement is that the debtor must have a connection to the U.S. (domicile, residence, place of business, or property)– Remember problem in Grupo Mexicano??

Chapter-specific eligibility

2nd type of eligibility rule-> Chapter-specific rules: – § 109(b) -> Chapter 7– § 109(c) -> Chapter 9– § 109(d) -> Chapter 11– § 109(e) -> Chapter 12– § 109(f) -> Chapter 13– Chapter 15 -> special rules in chapter 15 itself

Exclusionary rules

• 3rd type of eligibility ruleExclusionary Rules:

1st – for abusive serial filers § 109(g)

2nd – not get pre-bankruptcy credit counseling § 109(h)

Credit counseling

• Eligibility rule that individual consumer Dr get pre-bankruptcy credit counseling was added in 2005– Supposedly to PROTECT Drs • Give them a better sense of their options, not file

hastily, maybe could work something out

– Don’t do us any more favors!!• Hundreds of reported cases where Drs had problems

Credit counseling

• Has been a real trap for– Unwary Drs– Drs facing an imminent foreclosure• Need to file ASAP to stop foreclosure

• No time to get credit counseling

Problem 2.1(a)

• Under which chapters of the Code (if any) are the following debtors eligible for relief?

a. Bill Gates (founder of Microsoft and richest person in the United States)

Answer to 2.1(a)

• Bill Gates? • Chapter 7 [§ 109(b)]– Yes – person with US connection• No insolvency requirement• Might kick out via dismissal rules (bad faith to file if

billionaire?)

Gates

• Chapter 11? [§ 109(d)]– Yes– Individuals can file chapter 11 (Toibb v. Radloff)– Mostly tracks chapter 7 rules

Gates

• Chapter 13? [§ 109(e)]– Individual? • yep

– Regular income?• yep

– Debt limit?• $336K unsecured, ~ $1 M secured• Probably over!

Gates

• Chapter 9? [§ 109(c)]– Obviously not a “municipality”

• Chapter 12? [§ 109(f)]– Also not likely to qualify as a “family farmer” or a

“family fisherman”

Problem 2.1(b)


b.

GM

• Chapter 7?– Yes = “person”• “corporation”

– Has US connection

GM

• Chapter 11?• Yes – person, no exclusions• This is chapter actually filed under

GM

• Nothing else• Chapter 13 – not an “individual”

Problem 2.1(c)


c. Writ, Estoppel & Replevin, a law firm partnership

Partnership eligibility

• “person” so can file chapter 7 or 11– Assuming US connection

• But not chapter 13 because not an “individual”

• Each individual partner would have to file chapter 13

Problem 2.1(d)


d. New York Yankees Baseball Club

The Yankees

• Chapter 7 or 11• “person” “corporation” § 101(9)– Definition includes virtually any type of organized

business, even including unincorporated association

• No insolvency requirement– Question whether really need bankruptcy relief

tested via motion to dismiss, not at eligibility• But not 13 – not individual

Problem 2.1(e)


e. Toronto Blue Jays Baseball Club

Toronto Blue Jays

• Same analysis as Yankees re: “corporation” as “person”

• Issue: requisite United States connection?– ANY OF domicile, residence, place of business, or

property will suffice– Likely have property in the United States

Toronto Blue Jays

• Obviously, also would be potentially eligible for bankruptcy relief in Canada

• Raise transnational bankruptcy issues– Dealt with in chapter 14 of casebook– Problems of coordination

Problem 2.1(f)


f. Greg Norman, Australian golf star and resident of Florida

Greg Norman

• “Person” – yes• US connection?– Yes – even though Aussie citizen, is a resident of

Florida• So, eligible for chapters 7 and 11 for sure• Chapter 13 – likely problem with debt limits

Problem 2.1(g)


g. New York City

New York City

• ONLY chapter 9 -- § 109(c)• “municipality” -- § 101(40)• Specifically excluded from definition of

“person”• So cannot file chapter 7 or 11

NYC

• Detailed rules in § 109(c) and in chapter 9 to protect sovereignty of states – Must be specially authorized to file– Must be insolvent– Pre-bankruptcy negotiations with creditors

Problem 2.1(h)


h. Probate Estate of the lateWarren Burger, former Chief Justice of the United States Supreme Court

Probate Estate

• NOT eligible• Not a “person”• Compare definition of “entity” § 101(15)– Includes person and estate – thus indicating that

an estate is not a person• Why exclude?– Insolvent probate estates handled under state law

probate proceeding

Problem 2.1(i)


i. Reading Railroad

Railroad

• ONLY eligible under chapter 11, § 109(d)• Specifically excluded from chapter 7• Subchapter IV of Chapter 11 deals specifically

with railroad reorganizations

Problem 2.1(j)


j. John Hancock Insurance Co.

Insurance company

• NOT eligible• Excluded from chapter 7, § 109(b)(2), (3)• Chapter 7 exclusion carried over to chapter 11• Why?– Heavily regulated by states– States have statutes in place regarding insolvency

Problem 2.1(k)


k. HealthCare America, a health maintenance organization

HMO

• Problem – a hybrid • Part insurance company – which is excluded,

as saw in last problem• But also part medical provider, would be an

eligible corporation

-> So how decide which part controls for bankruptcy eligibility?

HMO

• Defer to state law classifications

• If treated as insurance company under state law, then have same justification for excluding as for any other insurance company, namely, detailed state law regulation

Problem 2.1(l)


l. Sue Debtor, a retired individual with credit card debts of $25,000 and a monthly social security check of $750

Retiree on Social Security

• “Person”• Assuming US connection, clearly eligible under

chapter 7 and 11• Chapter 13?– Individual? – yes– Under debt limits? – yes, $25K unsecured, well below

$336K ceiling– Regular income?

• yes, gets monthly social security check• Function is whether she could fund a payment plan

Problem 2.1(m)


m. Bob Farmer, an individual who farms a quarter section of corn and soybeans, and whose total debts are $1.1 million, of which $900,000 is attributable to the farming operation

Farmer

• “person” and thus eligible under chapters 7 and 11, assuming US connection

• Chapter 13?– Issue is debt ceiling– Depends on mix of secured and unsecured• Facts say has total debts of $1.1 M• Chapter 13 ceiling is $336K unsecured and ~ $1M

secured• So depends on whether > $336K of total debts are

unsecured

Farmer

• Chapter 12, §§ 109(f), 101(18), 101(19)• “individual” – yes• Under debt ceiling?– Yes – Ceiling is ~ $3.5 M, Bob has $1.1M

• Enough of a “farmer”?50% of debts attributable to farming – yes, $900K of $1.1M

• Regular income?– Fact question – fund a plan?

Problem 2.1(n)


n. Guillaum is the official Liquidator of the Cayman Islands insolvency case regarding Offshore Assets Inc. (OAI). OAI has assets in the United States. Guillaum would like to obtain relief in the U.S. courts protecting those assets

Foreign representative

• Guillaum may commence a chapter 15 proceeding by filing a petition for recognition under § 1515 and then, upon recognition, filing a petition under 301-303. See 1511. He is the “foreign representative” of a “foreign main proceeding” – the Cayman liquidation of OAI.

COMI

• The U.S. court should grant the petition for recognition if the Caymans is the “center of main interests” of OAI and if all else is in order. See § 1517. The relief that will be granted is governed by §§ 1519-1524.

Venue

• Where file?– The bankruptcy case • 28 USC § 1408

– Proceedings in that case• 28 USC § 1409

Problem 2.2(a)

• Apply the federal bankruptcy venue statute to answer the following questions:

• a. Sue Debtor had lived in Illinois all her life. On March 1, she moved across the Mississippi to Iowa. On June 1, she filed chapter 7 in the district court in Iowa. Is venue proper?

2.2(a): Case venue when move?

• Venue of the case is proper in Iowa– § 1408(1)

• Sue has lived in Iowa (residence or domicile) for the longer portion of the 180 days before bankruptcy– Specifically, has lived in Iowa for 92 days

Other problems arise with pre-bankruptcy move

• Note: other problems – especially with applicable exemption laws – arise when a debtor moves before bankruptcy

- will see in chapter 11 of casebook

Problem 2.2(b)


• b. Enron Corp.: – home office, principal place

of business in Houston, Texas – incorporated in Oregon. – Enron Metals, a small affiliate of Enron, is

headquartered in New York

Corporate venue

• Enron’s management would love to file chapter 11 in the Southern District of New York

• Very experienced (and debtor-friendly!) court• Any way to do this?

Corporate venue (2.2(b))

• YES – use the “affiliate hook”• Have Enron Metals, which is headquartered in

NY, file first, under 1408(1)• THEN the parent company, Enron Corp., can

file in NY under 1408(2)– Because a case is already pending in NY involving

an “affiliate”– And affiliate is defined to include parents or subs

Forum shopping

• The upshot of – 1408(1) allowing a corporation to file where it is

incorporated (domicile)Plus– 1408(2) allowing parents to use the affiliate hook

Is that a large corporation can file virtually anywhere it wants- which promotes forum shopping

Problem 2.2(c)


c. Debtor Inc. filed chapter 11 in District of Hawaii * Shortly before filing, Debtor had paid off a $1,200 debt to Creditor, a supplier located in Maine * Debtor (as DIP, e.g., trustee), sues Creditor in the federal court in Hawaii to recover the $1,200 as a preferential transfer under § 547.

Was Debtor supposed to file suit in Maine?

Venue of proceeding

• General rule: home court• 1409(a) provides that the default rule is that a

proceeding connected with the bankruptcy case may be filed in the district where the case is pending, e.g., the “home court”

• If that rule applies, then the filing in Hawaii is proper

Distant defendant, small $

• Is it fair for a creditor located in MAINE to have to go to HAWAII to defend a lawsuit over a measly $1,200?

• Over 5,000 miles away!• Hardship on Cr• Under non-bk law, likely would have to sue in

Maine (where Defendant “resides, 28 USC 1391(c))

Special protective rule

• 1409(b) protects a distant defendant on a small debt– Here, a non-insider being sued on a non-consumer

debt is protected for amounts less than $10,950– So the $1,200 debt is covered– Have to sue in Maine

Statutory glitch

• 1409(b) by its terms applies when trustee sues on matter “arising in or related to” bankruptcy case

• A preference action under § 547 technically is a proceeding “arising under” title 11

• A minority of courts thus hold that the protective rule of 1409(b) is n/a to preference actions

• Congressional intent, though plainly was directed at preferences– Legislative history – see 1997 Commission Report

Mechanics of filing

• Debtor (or Debtor and spouse in joint case) file a petition– §§ 301, 302

• Pay filing fee– Specified in 28 USC 1930(a)

That’s it!

• The filing of the petition, accompanied by the fee, “commences” the case

• And in voluntary case (e.g., DR files), the “commencement” of the case = “order for relief”– Exactly same force and effect as if the Bankruptcy

Judge formally entered an order

What if Debtor too poor?

• Can this guy file bankruptcy?

• Maybe NO– Supreme Court held in US v Kras

(1973) that no Due Process right to access to bankruptcy court – can be too poor to file bankruptcy!

– 2005 – limited in forma pauperis statute passed

Paperwork

• DR has huge burden of paperwork to file, either with petition or shortly thereafter

• If doesn’t, case may be dismissed

Effects of Filing

• Automatic stay § 362• Stops all collection efforts• Protect Dr, property

Effects of filing

• Property of estate § 541(a)

• DR Estate

Effects of Filing

• Utility services can’t be cut off, § 366

7: commencing a voluntary case © charles tabb 2010

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