Twomey & Jennings BUSINESS LAW

1. Twomey & JenningsBUSINESS LAW Chapter 34 Bankruptcy

2. Bankruptcy Law • Jurisdiction over bankruptcy cases is in U.S. district courts, which may refer all cases and related proceedings to adjunct bankruptcy courts. • Three bankruptcy proceedings are available: • Chapter 7 (consumer liquidation), • Chapter 11 (business reorganization) and • Chapter 13 (consumer time payment plan). • Automatic stay prevents creditors from taking legal action against the debtor.

3. Declaration of Bankruptcy Chapter 7 Chapter 11 Chapter 13 Trustee Yes No Yes Eligible persons: Individuals Yes Yes Yes Partnerships Yes Yes No Corporations Yes Yes No Voluntary Yes Yes Yes Involuntary Yes, except Farmers and Yes, except Farmers and No Nonprofit Nonprofit Exemptions Railroads, insurance Same as Chapter 7 except Only individuals companies, S&L’s, small for railroads are eligible businesses (under SBA), for Chapter 11 and stock municipalities, farmers brokers are ineligible for Chapter 11 Requirements — Debts Debts unsecured <$290,250 Voluntary secured <$871,550 < *special sections (chapter 9 - municipalities; chapter 12 - farmers)

4. McClellan v Cantrell (2000) Was this a fraudulent transfer? Trustee in Bankruptcy • The trustee is elected by the creditors. • Trustee acquires the rights of the debtor. • Trustee can avoid (cancel) transfers of property. • Preferential Transfers to creditors. • ‘Insider’ transfers.

5. Executory Contracts (60 days) Property Rights (180 days) List of Creditors OrderofRelief Appt. of Trustee Evaluation of Claims Creditors* meeting Collection of Assets Dismissal Voidable preference *Automatic with Involuntary Petition Exemptions Sale and Payment Priority of creditors Discharge Administration Petition—either voluntary or involuntary

6. Liquidation Proceedings • A liquidation proceeding under Chapter 7 may be either voluntary or involuntary. • A voluntary case is commenced by the debtor’s filing a petition with the bankruptcy court. • An involuntary case is commenced by the creditors’ filing a petition with the court. • If there are 12 or more creditors, at least 3 whose unsecured claims total $10,775 or more must sign the involuntary petition. • If there are fewer than 12 creditors, any creditor whose unsecured claim is at least $10,775 may sign the petition.

7. Creditors and Claims • Bankruptcy law regulates the way creditors present their claims and the assets of the debtor are to be distributed in payment of the claims. • Certain property of the debtor is exempt from the claims of creditors.

8. Creditors and Claims • Proof of Claim. • Creditors object to discharge of debt and demand payment. • Must be filed within 90 days of bankruptcy petition filing. • Priority of Claims. • Creditors with security interests (such as a mortgage or lien) are not affected.

9. Creditors and Claims • Unsecured claims are paid in this order: • (1) administrative expenses; • (2) claims arising in the ordinary course of the debtor’s business; • (3) wage claims, with limits; • (4) contributions to employee benefit plans; • (5) claims by consumer creditors; • (6) certain taxes; and • (7) general creditors.

10. 1. Secured creditors (to the extent of repossession) 2. Administration costsAttorneys, Accountants, Trustees, Appraisers 3. Claims arising in ordinary course of business after bankruptcy petition is filed but before of relief (involuntary) 4. Employee wages (not officers)$4,000 maximum3 months preceding petition 5. Contributions to benefit plans$4,000 maximum (reduced by wages received) 180 days preceding bankruptcy 6. Consumer deposits$1,800 maximum 7. Alimony and child support 8. Taxes 9. Unsecured creditors Distribution Priorities

11. In Re Innes (2002) Student Loan Relief. Discharge in Bankruptcy • The decree terminating bankruptcy proceedings is generally a discharge that releases the debtor from most debts. • Exemptions from Discharge: • Income taxes, student loans, loans obtained by fraud, alimony, judgments based on willful and malicious injury.

12. 1. Taxes within Three Years of Filing Bankruptcy Petition 2. Liability for Obtaining Money or Property by False Pretenses 3. Willful and Malicious Injuries 4. Debts Incurred by Driving DWI 5. Alimony, Maintenance, or Child Support 6. Unscheduled Debts (unless actual notice) 7. Debts Resulting from Fraud as a Fiduciary (embezzlement) 8. Government Fines or Penalties Imposed within Three Years Prior 9. Educational Loans Due within Seven Prior Years 10. Prior Bankruptcy Debts in Which Debtor Waived Discharge 11. Presumption on Luxury Goods: $1,100 Goods; $1150 Cash. 12. Reaffirmation Agreements Writing Filed with Court Not rescinded prior to Discharge NonDischargeable Debts

13. Reorganization & Payment Plans • Individuals, partnerships, and corporations in business may be reorganized under Chapter 11 so that the business may continue to operate. • A plan for reorganization must be approved by the court. • Individual debtors with a regular income may adopt extended-time payment plans under Chapter 13 for the payment of debts. • A plan for extended-time payment must also be confirmed by the court.

14. debtor Identifies ownership interests and debts not affected by adoption of the plan or File plan for reorganization of the debtor party in interest Identifies ownership interests and debts affected by adoption of the plan or committeeof creditors Owners and creditors have only such rights as are specified in the plan Confirmation of plan — Approval by court Specifies whatwill be done tointerests and claims affected Reorganization Under Ch. 11