WALSH Bankruptcy

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<p>Bankruptcy Outline 1. What do you want to know before you extend credit? a. The history of the business Get this through financial statements, and see what their assets and liabilities are b. Look at the credit report and history. Want to see if the person is likely to repay voluntarily? Not only about the balance sheet which shows if they are going to be able to repay. c. Bankruptcies, criminal history d. Want to look at the managers and look for references to see their past history and what happened to those businesses 2. Only the debtor is obligated to pay the creditor, so it is very important to know who the debtor is, unless there is a guaranty a. Corporation only the assets owned by the corporation can be reached by the creditor b. Could be a co-signor [also called a guarantor] where the extension of credit doesnt go to a person c. A person who is in the business of guaranteeing, is a surety 3. What can a bank do if they loan someone money and they are start missing payments? a. Accelerate the Loan As long as they do have a provision in the loan contract 4. Non-Bankruptcy Rights of Unsecured Creditors a. All a creditor has is a right to get paid i. No right to take the borrowers things ii. Is it different if you are a seller? No. So if I sell someone my book, and they say they promise to pay for it in 30 days, but they dont, I cant take your stuff. I would need you to agree that I can take it back if you dont pay iii. Must always go to court and get a judgment iv. If you dont have a security interest, how do you get paid? 1. Try and entice the debtor to pay, such as stop supplying if you are a supplier 2. At some point, the collection methods run up against the line with criminal law and tort law 5. Fair Debt Collection Practices Acts a. Debt collectors are given leeway to try and collect debts i. PFC v. Davis IIED Case Even though debt collectors did many bad things, still no tort against the debtor 1. Policy reasons for difficult tort liability: a. want people to pay debts, b. gives businesses some leeway to conduct activity c. Costly to business and consumers if debts cannot be easily collected b. Only applies to human beings, not corporations, or business debt c. Applies to a debt collector who is attempting to collect a debt</p> <p>i. Debt Collector any person . . . who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another 1. Does not apply to a creditor who is attempting to collect its own debt ii. Debt Two limitations 1. Debtor must be a consumer meaning a natural person 2. Nature of the debt must be a consumer debt i.e. personal, family, or household purposes a. If the debt is incurred by a natural person for business purposes, FDCPA does NOT apply 6. If the person doesnt pay why not just get the judge to hold them in contempt? a. A judgment simply states that there is a liability, but it is not a court order or injunct. 7. Process of Execution a. 1) Final money judgment is rendered or entered b. 2) Writ of execution is issued (usually by the clerk) c. 3) Writ is delivered to the sheriff i. Creditor must tell the sheriff where to find the debtors assets ii. In IL and minority view, the lien is created at this moment if the sheriff is successful and levies on the property iii. Vitale v. Hotel California 1. Sheriff is required to go and get the assets if the creditor tells them where the assets are and when to go, even if it is late at night and on the weekends a. Sheriff in this case refused to go late at night and on the weekends to go and get cash from the register d. 4) Sheriff levies on the debtors nonexempt property pursuant to the writ i. The sheriff is then going to file a return what he has levied, or he is going to write that he got nothing. If he got nothing he is going to write nulla bona ii. The writ then becomes functus officio, and it has no legal power after he returns the writ nulla bona 1. If the sheriff seized things after he returns the writ, it is an illegal seizure 2. The writ also has a limited time period that it has legal significance, and it would be an illegal seizure if the sheriff seizes things after the time period ends. 60-180 days iii. The creditor can then go get another writ if the judgment has not yet been satisfied, and can get an unlimited number of these writs e. 5) Property levied on is sold at an execution sale</p> <p>f. 6) After paying the expenses of the sale, proceeds go to the judgment creditor 8. Does the debtor filing an appeal halt the execution process? a. No, unless you get a stay from the court, and you must put down a supersedeas bond [amount of judgment and a little more depending on state law] for the amount of the judgment, because if not then the judgment debtor would just give away all of their assets 9. When do you get a Lien on the Assets? a. 2 Prevailing Views i. 1. Majority - At the time of levy, when property is actually seized ii. 2. Minority and in IL Delivery of Writ to Sheriff 1. Lien dissolves if there is no levy by the sheriff, though 2. Inchoate Lien in this minority, you have an inchoate lien as soon as the writ is delivered to the sheriff that will either be dissolved if the sheriff doesnt levy, or will turn into a consummate lien if the sheriff is successful 10. What are the problems with the execution a. Delay between the time of trial, then judgment, then a delay, and then you have to find out whether the debtor has any assets b. In some cases, the threat may be worth more value then actually taking all the junk and trying to get the resale value for it 11. Illi v. Margolis a. 2 Creditors had a sheriff levy on property, but then worked out an arrangement with the debtor to allow him to keep the property if the debtor made payments b. Court says that this is alright, b/c the creditors were getting their money, but their might be problems if the creditors were related to the debtor, and just letting him keep the property 12. How do we decide distribution if multiple people have liens on the same property? a. First in Time, First in Right First person paid completely, then the 2nd, . . . 13. What needs to occur for a security interest to attach? - UCC 9-203b a. 1) Value has been Given; [this is the amount of the loan] b. 2) debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party c. 3) One of the following conditions is met: debtor has authenticated[signed] a security agreement that provides a description of the collateral, d. These 3 can happen in any order 14. Does a judicial lien creditor or security interest have priority? . UCC 9317(a)(2) a. A judicial lien creditor beats an unperfected security interest b. How do you perfect a security interest? i. Creditor must file a financing statement 1. Must be filed in the right office [normally Sec of State]</p> <p>15.</p> <p>16.</p> <p>ii. Creditor can file the financing statement first if they have debtors permission c. Exception - UCC 9-317e i. Purchase-money security Interest 1. Basic idea is that the creditor advanced the money that enabled the debtor to purchase the collateral 2. Another kind is where the seller says that they will sell the machine for 10%, and then pay 200 a month, and then the seller keeps a security interest in goods that are sold 3. If a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing Other types of Liens a. Garnishment Lien i. Used to reach property that a 3rd person is holding, but belongs to the debtor ii. So if the neighbor is holding the debtors lawnmower, and you get a garnishment lien, and go to the neighbor and ask if he has any property that belongs to the judgment debtor iii. Also reaches Debts that are owed to the judgment debtor. 1. Wage Garnishments serve on the employer, and ask him do you owe any money to the judgment debtor 2. Banks if you have a bank account, then the bank owes the judgment debtor something, you can reach bank accounts through garnishment b. Judgment Lien i. Lien that applies to real estate, and there is some public notice given of the judgment lien. Priority ranking is when the judgment is docketed, so it is much quicker than an execution lien ii. Applies to all the real estate in the county, and normally have to record it and give notice iii. Applies to all property the debtor owns, and any property that the debtor acquires subsequently iv. Then you normally have to go through the execution process to actually be able to sell the property c. Common Law Liens [As opposed to Statutory Liens] i. If you dont pay for a room at an inn, then the innkeeper has a lien on the property in the room ii. Artisan Lien If you bring something to be repaired, the artisan will be able to have a lien on the property you brought in if you dont pay your bill There are short comings to the collection system [The Race to the Assets]</p> <p>17.</p> <p>18.</p> <p>a. Costly sheriff costs, court costs, when you sell the property you arent going to get that much money b. Several Creditors you get duplicate costs, of each creditor trying to reach the assets, and you never know when the race is going to start, so there are costs in monitoring other creditors and what they are doing c. Not everyone is equally swift Tort victim[years for a trial] vs. Secured creditor d. Destroys Value enforcement through seizing and selling can destroy value, because if you are a manufacturer, and one creditor seizes one machine that is needed to make the product, but once one creditor seizes one machine i. Function Called Synergy Value of the Whole is greater than the sum of the parts. Think right shoe and left shoe, where each creditor takes either the left or right ii. Also, if you put the business out of business, you lose the going concern value, and that a business is worth more open than closed Solution to the Short Comings of the Race to the Assets a. Collective Proceeding If all the creditors are included, then you only have one set of costs, and you can take the entire asset pool and treat it the way that a single person would treat the assets, and you dont have to destroy the value by separating them if they are worth more together b. We have already seen in the Illi case, that you can give the property to an assignee for the benefit of the creditors Chapters under Bankruptcy a. Chapter 7 - Liquidation i. Petition operates as an order for relief ii. File a Petition along with schedules of the assets and liabilities, pay a filing fee iii. Who is the Trustee In a ch.7 case, an interim trustee is appointed 1. If the creditors dont like the interim trustee, then they can put in their own trustee 2. The creditors will be notified and have a 341 meeting, and the debtor is examined under oath for any assets that he has iv. If you have an individual debtor[human being], he may be free to exempt certain property, and take it out of the bankruptcy and keep it v. 726 Certain unsecured creditors go toward the front of the line, like tax claimants, domestic support obligations, employees vi. Following a Chapter 7, There is a discharge of the debts, and creditors get whatever they get, and then the debtor doesnt</p> <p>owe them any more, and they are no longer liable to the creditors. Give the Debtor a Fresh Start b. Chapter 11 Reorganization i. Idea is to keep the financial enterprise going, and keep the business going until a plan is approved, and it will say who gets paid what. ii. Ordinarily, No Trustee is appointed, and the management continues to operate the business. iii. This is known as a Debtor in Possession, and the automatic stay kicks in iv. The goal is to propose a plan that will indicate how the business assets are going to be applied, and debts are repaid over a longer period of time v. The Creditors vote on the plan, and if the requisite majority doesnt approve, then the plan doesnt kick in vi. If the Creditors do approve by a requisite majority, the plan will be confirmed and all the creditors are bound by the plan, whether they voted for it or against it vii. How are the votes? 1. There are multiple classes of debts, and you need 50% + 1 in number, and 2/3 in the amount of debt in each class 2. There is a procedure even if one class does not approve it, and it is known as a cram down viii. There is a Discharge Whatever the creditors get under a confirmed plan, is all they get, and then the debt is discharged c. Chapter 13 Adjustment of Debts of an individual with Regular Income i. Only individuals can file for chapter 13, and they will use future earnings to help pay off the debt ii. Debtor will formulate a plan to use post-petition income to pay pre-petition debt iii. Debtor gets to keep property, and there is a trustee but he works as a dispersement agent iv. Does not have to be approved by creditors d. Chapter 9 i. Municipalities that can go into bankruptcy e. Chapter 12 i. For family farmers, and kind of a merge between 11 and 13 19. Who can be a debtor? 109a a. Only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor b. Person includes individual, partnership, and corporation i. Key Words Person and some connection to the US c. What are the requirements to be a debtor under a particular Chapter? i. Chapter 13 Only individuals 1. 109e - Only an individual with regular income with less than $ $360,475 in unsecured, noncontingent (not arising</p> <p>20.</p> <p>21.</p> <p>out of a contingent event), liquidated debt and less than $1,081,400 in secured, noncontingent, liquidated (liquidated if readily determinable- would you need a simple summary hearing to figure out what was owed or would you need a full adjudication of how much was owed) debt a. Individual with regular income - means individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker i. Includes someone on Social Security ii. United Airlines 7 or 11 iii. Grand Funk Railroad Not incorporated and not a partnership 7 or 11 1. 101(9) Corporation includes unincorporated company or association iv. Physician who is being sued for 160 million, no judgment entered 1. What about 13? It is contingent, not noncontingent. It is not liquidated either. Liquidated means some determined amount. For 13, debt must be liquidated and noncontingent. Even though judgment has not been entered yet, it is a debt d. Cash Currency Exchange i. Issue: Can a currency exchange file for bankruptcy, because of the prohibition in 109b2, stating that a bank may not file under Ch. 7, and therefore not 11? ii. Holding: No, because they are...</p>