bankruptcyEffects of Pandemic, Best Practices, and

Issues for New Practitioners

p l a t i n u m s p o n s o r s

A NOTE CONCERNING THE PROGRAM MATERIALS The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program in dealing with a specific legal matter have a duty to research the original and current sources of authority.

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BANKRUPTCY: EFFECTS OF THE PANDEMIC, BEST PRACTICES, AND ISSUES FOR NEW PRACTITIONERS

Judge Charles Merrill, Chief Judge Gregory R. Schaaf, and Judge Tracey N. Wise* I. EFFECT OF THE COVID-19 PANDEMIC

A. The COVID-19 pandemic has affected court operations across the country. The Bankruptcy Courts in the Eastern and Western Districts of Kentucky have continued to monitor and adapt to the recommendations of the Centers for Disease Control and Prevention (“CDC”) and the Kentucky Department of Public Health.

1. CDC: https://www.cdc.gov/coronavirus/2019-nCoV/index.html. 2. Kentucky Department of Public Health:

https://govstatus.egov.com/kycovid19.

B. As the vaccine is administered to the public, the Courts will continue to monitor guidance from the CDC and the Kentucky Department of Public Health.

C. In the Eastern District of Kentucky, Hearings are Primarily Remote

1. Motion hearings are currently conducted telephonically.

a. Hearings are telephonic until at least August 31, 2021. b. To participate in Eastern District motion hearings, dial

teleconference number (888) 363-4749 and enter the appropriate access code.

i. For Judge Schaaf, use access code 9735709#. ii. For Judge Wise, use access code 6879731#.

c. When calling in:

i. do not place your phone on speaker or on hold; ii. place your phone on mute and unmute your phone

each time you speak; and iii. identify yourself for the record.

d. When your case is complete, please hang up the phone.

There is no need to ask for permission to leave the call.

* Contributors: Mina Khalil, Law Clerk for Judge Merrill; Jeana Mason, Law Clerk for Chief Judge Schaaf; and Andrew Medearis, Law Clerk for Judge Wise.

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e. See the Eastern District of Kentucky’s Telephonic Hearing Instructions: https://www.kyeb.uscourts.gov/telephonic-hearing-instructions.

2. Evidentiary hearings are conducted by video or in-person, in the

discretion of the Court. (The Court will consider a request for a specific format.)

a. The Court uses Jabber Guest videoconferencing software. b. Attorneys must participate either in-person or by video.

i. Counsel must both audibly object during testimony

and raise a hand to gain the attention of the Court.

ii. If presenting or cross-examining a witness, counsel must provide copies of all exhibits to the witness in advance of the hearing in a format that allows quick access by the witness.

iii. If rebuttal exhibits are not filed before the hearing,

counsel must transmit them to the Courtroom Deputy and opposing counsel via email at the presiding judge’s direction. The Court will then determine whether the exhibit is transmitted to the witness by email.

c. Witnesses must participate by video either alone or with

counsel, and they may not consult any materials other than those allowed for the purpose of the hearing.

d. See the Eastern District of Kentucky’s Videoconference

Instructions: https://www.kyeb.uscourts.gov/kyeb-videoconference-instructions.

3. If an in-person hearing or mediation is scheduled, precautionary

measures are in place to curb the spread of COVID-19.

a. Masks are required upon entry to the building and when not physically distant.

b. There are designated seats in the courtrooms to maintain

physical distancing. c. Disinfectant wipes and hand-sanitizer are available for use

(or parties bring their own). d. Separate rooms are available in the building to

accommodate mediations with multiple parties.

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D. In the Western District of Kentucky, hearings for Judge Stout and Judge Merrill are remote. Judge Lloyd is holding in-person hearings when possible.

1. Motion hearings for Judge Stout and Judge Merrill are telephonic

until at least April 30, 2021. The judges are reevaluating the situation on a month-to-month basis.

2. To participate in Western District telephonic hearings, dial

teleconference number (888) 684-8852 and enter the appropriate access code.

a. For Judge Stout, use access code 2390218#. b. For Judge Merrill, use access code 6165472#. c. For Judge Lloyd, use access code 3203814#.

3. Evidentiary hearings are either in-person or by video, as scheduled

by the presiding judge.

a. The Court uses Cisco Meeting App for videoconferencing. b. Counsel must audibly object during testimony. c. Counsel presenting or cross-examining a witness must

provide copies of all exhibits to the witness in advance of the hearing in a format that allows quick access by the witness.

d. Witnesses must participate either alone or with counsel and

they may not consult any materials other than those allowed for the purpose of the hearing.

4. If an in-person hearing is scheduled, precautionary measures are

in place to curb the spread of COVID-19.

a. Masks are required upon entry to the building and when not physically distant.

b. There are designated seats in the courtrooms to maintain

physical distancing. c. Disinfectant wipes and hand-sanitizer are available for use.

E. Tips for Practicing Law During the COVID-19 Pandemic

1. Maintain communication with clients and other parties through

email and phone. 2. Use technology to limit person-to-person contact.

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a. Take time to learn how to properly use any technology available to you.

b. Videoconferencing software, like Jabber Guest or Zoom,

can assist parties in reducing unnecessary person-to person contact.

i. If clients or other parties do not have the capability

to use videoconferencing software, consider whether conferring telephonically would obviate the need for an in-person meeting.

ii. If an in-person meeting is necessary, consider

whether you could meet outdoors. If not, maintain physical distance, wear a mask, wash hands, and disinfect surfaces.

c. Use email and file-sharing applications, like Dropbox and

Google Drive, to avoid having to physically hand off documents to an attorney or client.

3. If you are working from home, set boundaries to limit stress and

stay on track.

a. Remove distractions from your workspace. b. Set timers to keep track of time. c. Try to work during the same set hours each day. d. Keep a digital calendar so you have access to it at home

and in the office.

4. Take care of your own wellness and mental health.

F. COVID-19 Pandemic has Impacted Debtors

1. The Kentucky unemployment office is overwhelmed, and many debtors must wait several months for unemployment insurance payments. This may contribute to an increase in bankruptcy filings in 2021.

2. Eviction moratoriums have started, stopped, and restarted under

the CARES Act, Executive Orders by Governor Beshear, and a CDC order.

3. Section 341 meetings of creditors are held remotely by video, which

may cause problems for debtors who do not have access to the required technology or who do not understand how to properly use the technology.

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4. Mortgage and student loan forbearance programs were enacted to assist with financial burdens. Federal student loan forbearance is currently set to expire on September 30, 2021.

5. Debtors received stimulus payments and negotiations for additional

payments are ongoing. 6. The CARES Act created the Paycheck Protection Program, but the

Small Business Administration (“SBA”) enacted a rule that companies in bankruptcy could not access the funds.

a. Many courts around the country initially issued rulings that

allowed debtors to obtain loans. b. However, recent appellate opinions make a debtor’s

entitlement to the loans questionable. See In re Hidalgo Cty. Emergency Serv. Found., 962 F.3d 838, 840 (5th Cir. 2020); In re Gateway Radiology Consultants, P.A., 983 F.3d 1239 (11th Cir. 2020).

7. The CARES Act allows Chapter 13 debtors, whose cases were

confirmed on or before March 26, 2020 and who are experiencing or have experienced material financial hardship due to COVID-19, to extend their plans for up to seven years (84 months).

8. Congress, the Biden Administration, federal agencies, and

Governor Beshear (or the legislature) may take further action to extend any of these programs or grant other relief for those affected by COVID-19, such as mandatory forbearance periods or tax credits.

II. BANKRUPTCY BASICS

A. Purposes of the Bankruptcy Code

1. Debtors receive a fresh start.

a. The automatic stay arises immediately upon filing, and it stops collection actions. 11 U.S.C. § 362(a).

b. Discharge of debts is a primary benefit of bankruptcy

(corporate debts are discharged through the process of confirming a plan).

2. All creditors with similar claims are treated equally.

a. The perfected secured creditors occupy the best position, and normally exert strong control over bankruptcy proceedings.

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b. Certain claims are granted a priority status based on special characteristics (policy considerations) that yield superior treatment from unsecured claims. 11 U.S.C. § 507(a). Examples are the reasonable and necessary costs of operating during bankruptcy, employee claims within 90 days, and certain taxes.

c. General unsecured claims that do not fit into any of the

higher priority categories (such as administrative expenses) are in a less favorable position.

d. Equity interests (stockholders) are often lost in a

reorganization or liquidation. (When equity has no value, the equity interest may only participate in a reorganized entity if it brings new value to the table (absolute priority rule).)

B. Different Types of Bankruptcy Protection

1. Chapter 7 cases.

a. The debtor is required to turn over all of its non-exempt assets to the bankruptcy trustee.

b. The trustee liquidates any non-exempt assets and pursues

potential claims to bring assets into the case. c. Most consumer Chapter 7 filings are “no asset” cases. d. Eligible persons include individuals, partnerships, and

corporations (not banks, savings and loans, or insurance companies).

e. Creditors should try to obtain reaffirmation agreements,

review schedules for high-equity assets that the trustee could liquidate and monitor the case for potential distributions.

2. Chapter 11 cases.

a. The ultimate goal of Chapter 11 is reorganization. b. There are five general categories of Chapter 11 cases (see

Section III): corporate, individual, Sub-V, small business, and single asset real estate.

c. The debtor continues operating its business as a

debtor-in-possession while it proposes a plan of reorganization that will provide for a greater return to creditors than they would receive in a Chapter 7 case.

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d. The debtor-in-possession remains managed by the pre-bankruptcy management.

e. Reorganization usually involves restructuring to allow the

debtor to remain in business (new money or a reduction in liabilities). However, sometimes reorganization results in a liquidation of the debtor’s assets.

f. There are no solvency requirements. g. A statutory number of creditors with sufficient assets may

file an involuntary petition, but there is liability if the case was improperly filed. 11 U.S.C. § 303.

3. Chapter 12 cases (family farmers).

a. The debtor must qualify as a family farmer or family

fisherman with a regular annual income. Individual debtors, corporations, and partnerships may qualify.

b. Farmers continue to operate, and the Chapter 12 trustee

collects money, distributes the funds, and takes a fee. If necessary, a Chapter 12 trustee can replace the Chapter 12 debtor-in-possession.

c. Creditors do not vote, but they may seek relief from the

automatic stay or object to confirmation of the plan. d. The Chapter 12 plan may provide for the modification of a

claim secured solely by the debtor’s residence.

4. Chapter 13 cases (consumer reorganization chapter).

a. Chapter 13 is for individual debtors (including sole proprietors) that have:

i. regular income to support plan payments; and ii. unsecured/secured debt within the limits to qualify.

b. The Chapter 13 trustee collects money, distributes the

funds, and takes a fee. c. Creditors do not vote but may object to the plan. d. A confirmed Chapter 13 plan sets forth a payment plan of

three to five years. e. Creditors should ensure that the proposed plan fairly treats

their claim in accordance with the Code and that the debtor complies with the plan throughout its term.

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f. A confirmed plan is binding on all creditors. See United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010).

III. GENERAL CATEGORIES OF CHAPTER 11 CASES

A. Corporate Chapter 11 Cases

1. Corporate Chapter 11 cases are designed for large businesses to continue to operate and use the income from their operations to pay creditors. However, businesses sometimes use this chapter to liquidate and sell assets.

2. First day motions are usually filed with the petition, including

motions for:

a. cash collateral use, see 11 U.S.C. § 363(c)(2); b. payment of pre-petition wages and benefits; c. authority to pay pre-petition taxes; d. employment of bankruptcy professionals (attorneys,

accountants, etc.), see 11 U.S.C. § 327; e. continuation of debtor’s cash-management operations; f. joint administration of cases involving related debtors; and g. payment of critical vendors.

3. The United States Trustee appoints a creditors’ committee to assist

the debtor in its efforts to reorganize.

4. The debtor has an exclusive right to file a plan within 120 days. 11 U.S.C. § 1121(b). If a plan is filed, no creditor may file a plan within 180 days of the petition date. Id. § 1121(c).

B. Individual Chapter 11 Cases

1. Individual Chapter 11 cases are used by:

a. individuals who exceed the debt limits of Chapter 13; or b. individuals who do not have regular income.

2. Chapter 11 cases are generally more costly than Chapter 7 or 13. 3. Debtors must submit projected disposable income for five years. 4. Debtors must file monthly operating reports and pay United States

Trustee fees.

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5. If unsecured creditors do not accept the plan, the absolute priority rule applies, and every unsecured creditor must receive full payment before the debtor may retain any property under the plan.

C. Sub-V Small Business Debtor Reorganization Cases

1. Sub-V went into effect on February 19, 2020, providing a faster and

less expensive Chapter 11 reorganization process for small business debtors.

2. Eligibility is governed by 11 U.S.C. § 1182, which sets a debt limit

of $2,725,625 and requires that at least 50 percent of the debtor’s aggregate debt arose from its commercial or business activities.

3. Under the CARES Act, the debt limit under § 1182 was increased

to $7,500,000 until March 27, 2021. There are already suggestions of an extension.

4. The debtor’s management remains, but a Sub-V Trustee is

appointed to monitor the debtor, evaluate assets, assess prospects for success, and make recommendations regarding confirmation of a plan. 11 U.S.C. § 1183.

5. There are several key features of a Sub-V case:

a. debtors must file a plan of reorganization within 90 days, see

11 U.S.C. § 1189; b. the court must hold a status conference within 60 days, see

11 U.S.C. § 1188;

c. the absolute priority rule does not apply, which allows owners to retain equity, but debtors must contribute their projected disposable income for three to five years or its value must go towards the plan;

d. no disclosure statement is required; e. creditors cannot file competing Chapter 11 plans; f. creditor voting is eliminated; g. the plan must have a remedy for defaults; h. no creditors committee is appointed;

i. debtors avoid paying United States Trustee quarterly fees;

and j. debtors can pay administrative expense claims over the

term of the plan.

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D. Small Business Chapter 11 Cases

1. To file a small business Chapter 11 case: a. the debtor must engage in commercial or business activities

(other than primarily owning or operating real property); b. the total aggregate debt must not exceed $2,725,625; and c. at least 50 percent of the debtor’s aggregate debt must have

arisen from its commercial or business activities. 11 U.S.C. § 101(51D).

2. Small business Chapter 11 cases have the following features:

a. the debtor’s exclusivity period to file a plan is limited to a

maximum of 180 days, unless extended by the court, 11 U.S.C. § 1121(e)(1)(A);

b. creditors’ committees are not required; c. there is no disposable income requirement, unlike Sub-V; d. a trustee is not appointed, unlike Sub-V, which avoids Sub-

V Trustee fees; e. the debtor must pay United State Trustee quarterly fees; f. these cases allow for a one-step plan solicitation and

confirmation process; g. the debtor must obtain confirmation of its plan within 45 days

of the time it was filed, 11 U.S.C. § 1129(e); and h. the debtor is subject to additional reporting requirements,

see 11 U.S.C. § 1116.

E. Single Asset Real Estate Chapter 11 Cases

1. Single asset real estate is defined in the Bankruptcy Code as a single property or project that generates substantially all of the debtor’s gross income. 11 U.S.C. § 101(51B).

2. The court will grant relief from the automatic stay 90 days after the

petition date or 30 days after the court determines the debtor is a single asset real estate, unless the debtor has:

a. filed a plan of reorganization that has a reasonable

possibility of being confirmed within a reasonable time; or

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b. begins making monthly adequate protection payments equal to the interest payments at the original contract rate.

IV. JURISDICTION

A. Bankruptcy Courts Have Jurisdiction Over:

1. all cases under Title 11; and 2. all core proceedings listed in 28 U.S.C. § 157(b), including:

a. administration of the estate; b. allowance of claims and counterclaims against persons who

filed claims against estate; c. the use, sale, lease, or turnover of estate property; d. the trustee’s avoiding powers; e. dischargeability of debts and objections to discharge; f. the validity, extent, and priority of liens; g. the automatic stay; and h. confirmation of Chapter 11, 12, or 13 plans.

B. There are Limits on a Bankruptcy Court’s Jurisdiction

1. A bankruptcy court has no authority to issue a final judgment in a

case arising solely under state common law to bring assets into a debtor’s bankruptcy estate. See Stern v. Marshall, 564 U.S. 462 (2011).

2. The outcome of the proceeding must conceivably “have any effect

on the estate being administered in bankruptcy.” Mich. Emp't Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1142 (6th Cir. 1991) (quoting In re Pacor, Inc., 743 F.2d 984, 994 (3rd Cir. 1984).

3. The Rooker-Feldman doctrine ousts lower federal courts of subject-

matter jurisdiction in “[1] cases brought by state-court losers [2] complaining of injuries caused by state-court judgments [3] rendered before the district court proceedings commenced and [4] inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 281 (2005).

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V. THE AUTOMATIC STAY UNDER 11 U.S.C. §362

A. The automatic stay arises immediately upon filing and provides immediate and necessary protection for the debtor and the estate.

1. The stay prevents actions, whether harassing or not, to collect a

prepetition debt, continue pre-petition litigation, enforce a lien, or improve a creditor’s position, without the permission of the bankruptcy court.

2. The automatic stay is interpreted broadly. 3. The automatic stay serves the following purposes:

a. it promotes equality of distribution by preventing a rush to

the courthouse; and b. it allows breathing room to facilitate reorganization or

aggregation of assets.

4. The automatic stay remains in place under 11 U.S.C. § 362(c) until:

a. the closing of the case; b. dismissal of the case; or c. grant/denial of a discharge. d. Exception: If a case was dismissed within the previous year,

the automatic stay only lasts 30 days. 11 U.S.C. § 362(c)(3). Before the expiration of the 30-day period, a debtor may file a motion requesting that the court order an extension of the stay if the debtor can demonstrate that the later case was filed in good faith, including showing a change of financial circumstances between the dismissal and new filing. Id.

e. Exception: If two or more cases were dismissed within the

previous year, the automatic stay does not go into effect. 11 U.S.C. § 362(c)(4). Within 30 days after the filing of the later case, a debtor may file a motion requesting that the court impose the stay if he can demonstrate that the later case was filed in good faith, including showing a change of financial circumstances between the dismissal and new filing. Id.

5. The automatic stay does not extend to third parties.

a. E.g., co-debtors, affiliates, or partners.

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b. Exception: In Chapter 12 and 13 cases, the co-debtor stay applies if (1) it is a consumer debt of the debtor, and (2) the co-debtor is an individual. 11 U.S.C. §§ 1201 and 1301.

B. Several common actions are stayed upon the filing of a bankruptcy petition

under 11 U.S.C. § 362(a), including:

1. commencement or continuation of a lawsuit (generally excluding appellate proceedings);

2. enforcement of a judgment obtained before the commencement of

a case; 3. any act to obtain or control estate property (e.g., a foreclosure

action); 4. Exception: Passive retention of property lawfully seized pre-

bankruptcy does not violate the automatic stay. City of Chicago, Illinois v. Fulton, 141 S.Ct. 585 (2021).

5. any act to create, perfect, or enforce a lien; 6. any acts to collect, assess, or recover a claim against the debtor;

and 7. setoff of debts without court authorization.

C. The automatic stay does not apply to certain actions listed under 11 U.S.C.

§ 362(b), including:

1. criminal proceedings; 2. police and regulatory powers (health and safety); and 3. the commencement or continuation of actions to collect a domestic

support obligation, or for dissolution of a marriage (but not including the division of estate property).

D. If unsure whether the automatic stay applies, a party should request relief

from the stay before acting. E. Creditors May Seek Relief from the Automatic Stay 11 U.S.C. § 362(d)

1. Relief is granted for cause under the following circumstances:

a. there is a lack of adequate protection (not getting paid)—

• debtors may provide adequate protection under 11 U.S.C. § 361 with:

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o periodic cash payments to compensate for any loss due to depreciation in value;

o additional or replacement liens; or o the indubitable equivalent of the rights lost;

b. there is another forum that is more appropriate to hear the

matter (e.g., a divorce or probate proceeding); c. naming the debtor as a defendant is necessary to proceed

against the debtor’s insurance carrier (e.g., a car accident case); or

d. there is a default under the terms of a Chapter 12 or 13 plan.

2. Relief is also granted if the debtor has no equity in the property and

the property is not necessary for reorganization. 11 U.S.C. § 362(d)(2).

3. A debtor may defend a request for relief from the automatic stay by

asserting that:

a. there is an equity cushion (value > secured debt); b. there are payments being made to the secured creditor

(often interest only); or c. the collateral is increasing in value.

4. A court’s denial of a motion for relief from stay might be a final and

immediately appealable order. See Ritzen Grp., Inc. v. Jackson Masonry, LLC, 140 S.Ct. 582 (2020).

F. When a party violates the automatic stay, the action is void and the debtor

could request damages.

1. Willful violations of the stay in an individual case are punishable under 11 U.S.C. § 362(k) or in an entity case as contempt under § 105.

2. Failing to take steps to stop collection efforts, like foreclosure sales

or wage garnishments, could result in liability. 3. Violations of the automatic stay can become costly for creditors and

debtors due to damages awarded and attorney’s fees incurred by both parties.

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VI. PROPERTY OF THE ESTATE UNDER 11 U.S.C. § 541

A. Under 11 U.S.C. § 541(a), Property of the Estate Includes:

1. all of the debtor’s legal or equitable interest in property at the moment the petition was filed;

2. post-petition earnings in Chapter 12 and 13 cases while the case is

pending;

3. property recovered from third parties by the trustee or debtor-in-possession;

4. certain property within 180 days after the petition date, including

property from an inheritance, property from a divorce decree, or life insurance proceeds; and

5. proceeds, products, rents, and profits generated from property of

the estate.

B. Under 11 U.S.C. § 541(b), Property of the Estate Does Not Include

1. property held by a debtor for the benefit of a third party; 2. expired leases of non-residential real estate; and 3. spendthrift trusts.

VII. CLAIMS IN BANKRUPTCY

A. A Claim is Defined in 11 U.S.C. § 101(5) as a:

1. right to payment, even if contingent, unmatured, or disputed; or 2. right to an equitable remedy, such as breach of performance.

B. Different Types of Claims

1. Secured claims.

a. Secured creditors have a lien or security interest in the

debtor’s property up to the value of the property. b. Secured creditors may receive post-petition interest if they

are over-secured. c. Secured creditors can seek relief from the automatic stay if

the debtor fails to make payments or for cause.

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2. Priority claims.

a. Priority claims are unsecured claims that are given a higher priority by statute. 11 U.S.C. § 507(a).

b. Priority claims are paid based on the following hierarchy:

i. administrative expenses of a trustee; ii. domestic support obligations; iii. other administrative expenses; iv. pre-petition employee wages; v. unpaid contributions to employee benefit plans; vi. consumer deposits; vii. pre-petition income taxes (three-year lookback) and

property taxes (one-year lookback).

3. General unsecured claims.

a. General unsecured debt for consumers often include credit cards, medical debt, personal loans, and unsecured portions of secured claims.

b. General unsecured debt for businesses typically includes

trade creditors that have delivered goods or services to the debtor in the ordinary course of their business and expect payment within 30-60 days.

c. These claims are paid by a pro-rata distribution after

administrative expenses and other priority claims are paid in full.

C. Proof of Claim

1. Under Bankruptcy Rule 3001, a proof of claim requires a written

statement setting forth the creditor’s claim accompanied by documentation of the validity of the claim.

2. A filed proof of claim is prima facie evidence of the amount and

validity of the creditor’s claim. 3. Creditors must file proofs of claim no later than 90 days after the

first date set for the § 341 meeting of creditors. Government agencies have a longer time to file. See 11 U.S.C. § 502(b)(9).

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4. Untimely proofs of claims filed by creditors are disallowed. See 11 U.S.C. § 502(b); In re Fryman, No. 18-20660, 2019 WL 2612763 (Bankr. E.D. Ky. July 24, 2019). However, the debtor may file a proof of claim on behalf of the creditor. 11 U.S.C. § 501(c).

5. Filing a proof of claim is not necessary in a no-asset Chapter 7 case

because there are no assets to distribute to creditors. If assets are discovered, the Chapter 7 trustee will notify creditors to allow time to file a claim.

VIII. PRESERVING ASSETS: EXEMPTIONS AND REAFFIRMATIONS

A. Individual Debtors Can Exempt Property During Bankruptcy

1. Exemptions avoid liquidation of the property by a trustee. 2. Debtors can avoid judicial liens impairing exemptions. 3. A trustee or creditor can challenge exemptions.

B. Debtors may elect to use either state or federal exemptions. In Kentucky,

most debtors elect to use the federal exemptions due to a higher homestead exemption.

1. See Federal Exemptions: 11 U.S.C. § 522. 2. See Kentucky Exemptions: Ky. Rev. Stat. Ann. §§ 427.005-

427.990.

C. The federal exemption caps under 11 U.S.C. § 522(d) change every three years. The most beneficial exemptions are:

1. $25,120 in a residence, § 522(d)(1); 2. $4,000 in one motor vehicle, § 522(d)(2); 3. $1,325 in any property plus up to $12,575 of an unused amount for

real property (the “wildcard exemption”), § 522(d)(5); 4. the debtor’s right to receive a social security, unemployment

compensation, disability, or veteran’s benefit, § 522(d)(10); and 5. funds in a retirement account such an IRA or 401k, § 522(d)(12).

D. Debtors Can Reaffirm a Debt Subject to a Security Interest Under 11

U.S.C. § 524

1. A reaffirmation is a debtor’s renewed, legally enforceable, post-petition promise to pay in exchange for the creditor’s agreement to refrain from exercising its right to repossess collateral immediately.

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2. Typically, debtors seek reaffirmation agreements with respect to a motor vehicle or tool of their trade.

3. The debtor must file reaffirmation agreements before the debtor’s

discharge is granted. 4. The court must approve the agreement if there is a presumption of

undue hardship. 5. Debtors are liable for debt incurred post-discharge, even if the

property is destroyed (e.g., a car accident).

6. Debtors can rescind the agreement before their discharge is granted or within 60 days after the agreement is filed with the court, whichever occurs later. 11 U.S.C. § 524(c)(4).

IX. DISCHARGE

A. The Main Goal of Bankruptcy is a Discharge of Pre-Petition Debts

1. Debtors’ in personam liability is discharged, which gives debtors a fresh start.

2. The discharge prevents future collection actions. 3. A court may hold a creditor in civil contempt for violating a discharge

order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct. See Taggart v. Lorenzen, 139 S.Ct. 1795 (2019).

4. Secured creditors may still seek in-rem remedies against the

property such as a foreclosure or repossession.

B. Some debts are non-dischargeable under 11 U.S.C. § 523, including:

1. income taxes that are last due within three years of the filing or property taxes that are last payable within one year of the filing, see § 523(a)(1);

2. unscheduled debts, § 523(a)(3); 3. domestic support obligations, § 523(a)(5); and 4. student loans, § 523(a)(8).

C. Other debts are non-dischargeable if an adversary proceeding is filed

before the deadline to object to discharge, including:

1. money or property obtained by fraud or a false representation, § 523(a)(2);

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2. fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny, § 523(a)(4); and

3. willful and malicious injury by the debtor to another entity or the

property of another entity, § 523(a)(6).

D. Timing of a Discharge

1. In a Chapter 7 case, discharge is granted shortly after the objection to discharge deadline, which is 60 days after the first meeting of creditors. 11 U.S.C. § 727.

2. In Chapter 12, Chapter 13, and individual Chapter 11 cases,

discharge is granted upon completion of the debtor’s payment plan. 11 U.S.C. §§ 1141(d)(5), 1228, 1328.

3. In a corporate Chapter 11 case, discharge occurs upon

confirmation of the plan. 11 U.S.C. § 1141(d).

E. Domestic support obligations are non-dischargeable in both Chapter 7 and 13 cases. See 11 U.S.C. §§ 523(a)(5), 1328(a). However, debts incurred in connection with a property settlement agreement resulting from a divorce or separation are treated differently in Chapter 7 and 13 cases.

1. In Chapter 7 cases, debts incurred in connection with a property

settlement agreement are non-dischargeable. See 11 U.S.C. § 523(a)(15).

2. In Chapter 13 cases, debts incurred in connection with a property

settlement agreement are dischargeable. See 11 U.S.C. § 1328(a)(2).

X. AVOIDANCE, PREFERENCES, AND FRAUDULENT TRANSFERS

A. Trustees Have Strong-Arm Power to Avoid Liens Under 11 U.S.C. § 544(a)

1. A trustee has the status of a hypothetical judicial lien creditor to avoid unperfected security interests.

2. A trustee has the status of a bona fide purchaser of real estate to

prevail over unrecorded mortgages, leases, and deeds. 3. Liens or interests that are avoided are preserved for the benefit of

the estate. 11 U.S.C. § 550.

B. Trustees Can Also Avoid Preference Payments Under 11 U.S.C. § 547

1. A trustee can recover payments to creditors made on the eve of the bankruptcy filing.

2. The elements of a preference under 11 U.S.C. § 547(b) are:

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a. a transfer of the debtor’s property; b. to or for the benefit of a creditor; c. on account of an antecedent debt; d. made while the debtor was insolvent; e. made during the preference period (90 days before the

filing, but one year for insiders); and f. that enables the creditor to receive more than it would get in

a Chapter 7 liquidation of the debtors.

3. There are exceptions to avoidance under 11 U.S.C. § 547(c), including if:

a. there was a substantially contemporaneous exchange for

new value; b. the transfer was in the ordinary course of business for the

debtor and transferee;

c. there was an advance of new value subsequent to the preference;

d. certain Article 9 floating liens were involved; e. the transfer was for alimony, maintenance, and support; or f. the transfer is a small preference ($600 for consumer debts

and $6,825 for business debts).

C. Trustees May Also Avoid Fraudulent Transfers Under 11 U.S.C. § 548

1. The trustee or debtor-in-possession has the power to avoid fraudulent transfers that occurred within two years before the debtor’s petition.

2. Trustees may also utilize state fraudulent transfer statutes. 3. Actual fraud.

a. Trustees can avoid a transfer that was made with the actual

intent to hinder, delay, or defraud any entity to which the debtor was or became indebted.

b. Courts use “badges of fraud” to evaluate a debtor’s

fraudulent intent.

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4. Constructive fraud.

a. Trustees can avoid the transfer if:

i. the debtor received less than a reasonably equivalent value in exchange for the transferred property; and

ii. the debtor was either insolvent or otherwise facing

inappropriate risk of being unable to pay its debts.

b. Examples include:

i. selling property to a relative for nominal consideration;

ii. intercorporate guarantees; iii. distributions to shareholders; and iv. Ponzi schemes.

XI. OTHER THINGS TO KNOW

A. All Opinions are Uploaded to the Courts’ Websites

1. Eastern District: http://www2.kyeb.uscourts.gov/opin/CaseIndex/cites.htm 2. Western District: http://www.kywb.uscourts.gov/opinions/index.php

B. Read the Courts’ Local Rules

1. Eastern District: https://www.kyeb.uscourts.gov/court-info/local-rules-and-orders 2. Western District: http://www.kywb.uscourts.gov/fpweb/lr_admin_man_final.htm

C. Study the Courts’ Local Forms and Practice Aids

1. Eastern Districts’ Local Forms: https://www.kyeb.uscourts.gov/local-forms 2. Eastern Districts’ Practice Aid on Motions to Avoid Liens: https://www.kyeb.uscourts.gov/sites/kyeb/files/Lien%20Avoidance

%20Practice%20Aid.pdf 3. Western Districts’ Local Forms: http://www.kywb.uscourts.gov/fpweb/forms_update.htm

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D. See the Courts’ General Orders

1. Eastern Districts’ General Orders: https://www.kyeb.uscourts.gov/court-info/local-rules-and-orders

2. Western Districts’ General Orders (2020-present), including those concerning COVID-19:

http://www.kywb.uscourts.gov/fpweb/forms_update.htm.

E. Calling Chambers or the Clerk’s Office

1. Check the assigned judge prior to calling chambers. 2. Law clerks, courtroom deputies, and case administrators cannot

give legal advice. 3. The only way to know how a judge will rule is to file a motion seeking

the relief you want. 4. The Courts’ local rules answer a lot of questions. 5. You should have the case number readily available when you call. 6. Consult the administrative manual when filing exhibit lists to ensure

you label them appropriately. 7. For Chapter 11 cases, give the courtroom deputy a courtesy call

before filing a case, particularly if a hearing date is necessary. Always call the clerk an emergency hearing is required.

8. If you have any questions about a deficiency order, it is best to call

the Clerk’s office and provide the case number. The Clerk’s office will route you to the appropriate person.

F. Practice Tips

1. It is important to cite code sections, bankruptcy rules, and/or case

law with your pleadings. 2. It is important to cite the electronic filing number when you refer to

prior papers in a case. 3. If the motion requires the Court to assess evidence, provide a

statement of facts and supporting evidence (e.g., an affidavit). 4. Understand the difference between service under Bankruptcy Rule

2002 and 7004.

a. Rule 2002 governs notice of general matters that typically concern all parties, such as the deadline for filing proofs of claim and notice of the confirmation hearing.

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b. Rule 7004, on the other hand, governs service of matters that typically involve only certain parties (e.g., adversary proceedings and contested matters).

i. Under Rule 7004(b)(3), the party should address the

notice to an officer or director. ii. Under Rule 7004(h), the party should address the

notice to an FDIC creditor and send the notice by certified mail.

5. If you file an amended motion, withdraw the original motion. 6. Submit a proposed order that the Court could enter if your motion

is granted. 7. Put the name of the party filing the motion or brief in the title. 8. For a Chapter 13 plan, make sure you check the boxes correctly.

Many attorneys fail to fill in the forms appropriately. 9. When filing objections to claim, specifically state the relief

requested (e.g., do you want a claim disallowed completely, reduced, or allowed as unsecured rather than secured?).

10. Rule 2016 fee disclosures are important and should reflect the fee

agreement. An attorney must file amended fee disclosures within 14 days of any payment not previously disclosed.