Bankruptcy Law Commons^™

Creditors Not Precluded From Recovering Debtors’ Commercial Tort Litigation Recovery Through Security Interest, Dana Aprigliano

Bankruptcy Research Library

(Excerpt)

Title 11 of the United States Code (the “Bankruptcy Code”) provides valuable protections for secured creditors. A secured creditor of a chapter 7 debtor is entitled to distribution of any debtor property (or its value) in which they have an interest before any other creditors are paid. Even if the debtor has filed under chapter 11 or 13, a secured creditor is still entitled to receipt of their collateral or its value.

Under Article 9 of the Uniform Commercial Code (“UCC”), commercial tort claims and their proceeds may collateralize secured liens. Hence, creditors believing they are secured by a …

An Unincorporated Entity Will Be Unable To Recover As A Secured Creditor In Bankruptcy Unless A Court Invokes The Doctrines Of De Facto Corporation Or Corporation By Estoppel, Andrew Braverman

Bankruptcy Research Library

(Excerpt)

Under New York law, an entity that has failed to properly incorporate cannot assume liabilities or acquire rights. As a result, unincorporated entities will typically lack capacity to enter into contractual agreements. Within the context of bankruptcy, this may hinder a creditor’s ability to maximize its recovery.

A creditor that is adversely affected by a lack of corporate recognition will attempt to persuade a court to impose the doctrines of de facto corporation or corporation by estoppel. These doctrines, which are matters of state law, provide unincorporated entities with the rights and obligations that a legally recognized entity would …

Creditors Are Unable To Directly Assert Claims For Breach Of Fiduciary Duty Or Fraudulent Transfer Against Another Creditor When The Debtor Is In Bankruptcy, Anthony Norris

Bankruptcy Research Library

(Excerpt)

In order to effectuate the efficient resolution of bankruptcy proceedings, courts have followed the public policy of reducing the number of suits that are ancillary to a bankruptcy case. Courts have achieved this goal by limiting those that have standing once a bankruptcy case is initiated. Thus, courts will appoint a trustee who alone has standing to handle the estate of the debtor.

Typically, the issue of standing will be straightforward when a creditor sues a debtor. However, the question becomes more complicated when a creditor sues another creditor, where their only connection is the debtor.

This memorandum focuses …

The Standards The Court Uses To Determine The Priority Of A Party’S Entitlement To Dividends In A Bankruptcy Proceeding, Nally Ann Scaturro

Bankruptcy Research Library

(Excerpt)

Although the entitlement to receive dividends is not explicitly addressed in the United States Bankruptcy Code (the “Bankruptcy Code”), it is likely this right will be categorized as a security interest and thus be subordinated to creditors’ interests in a bankruptcy proceeding.

Creditors are entitled to be paid ahead of shareholders in the distribution of corporate assets. Furthermore, securities are subordinated to claims by creditors of the debtors. Presently, all interests not captured by the Bankruptcy Code are analyzed under the residual clause. This clause provides that unless the interest in dispute is explicitly excluded from the definition of …

Sec V. Creditors: Why Sec Civil Enforcement Practice Demonstrates The Need For A Reprioritization Of Securities Fraud Claims In Bankruptcy, Sean Kelly

St. John's Law Review

(Excerpt)

This Note examines how this tension has motivated the SEC to use receiverships as a preferred vehicle to maximize recovery for defrauded security holders and, in the process, create what amounts to an SEC-run bankruptcy proceeding. The use of these receiverships has triggered a high-stakes race to the courthouse among the SEC and creditors, where mere hours can be the difference between millions in recovery and nothing at all. To end this costly race, this Note proposes a solution that seeks to harmonize securities fraud enforcement with bankruptcy law, which starts with revisiting Bankruptcy Code § 510(b) to reprioritize …

Under A Confirmed Chapter 11 Plan A Liquidating Trustee May Have Sole Authority To Review And Object To Claims, Ryan C. Beil

Bankruptcy Research Library

(Excerpt)

A liquidating trust is one that is organized for the primary purpose of liquidating and distributing the assets transferred to it. When a plan under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) is confirmed and establishes a liquidating trust, the trust is treated as a distinct entity. The liquidating trust terminates the debtor in possession’s status and conveys the estate’s rights and assets to a “liquidating trustee.” The confirmed plan does not simply substitute the trustee for the debtor-in-possession, but rather it creates a separate and distinct trust, holding certain property of the …

Analyzing A Creditor’S Ability To Exercise Its Shareholder Rights To Prevent A Bankruptcy Filing By A Company, Frank Pecorelli

Bankruptcy Research Library

(Excerpt)

Title 11 of the United States Code (the “Bankruptcy Code”) operates as a tool allowing an honest, struggling debtor to gain a fresh start absent of their burdensome debts. Generally, when a company is about to enter bankruptcy, shareholders and creditors of the insolvent company play two distinct roles. Shareholders, those with an ownership stake in the company, have voting rights enumerated in their shareholder agreement, allowing them to vote on certain actions, including the company’s bankruptcy filing. On the other hand, creditors generally have a claim (i.e., a right to payment) against the company, which typically has arisen …

A Lender’S Knowledge Of Alleged Breaches Of Fiduciary Duties Shall Not Be Imputed Upon Debtors In A Statute Of Limitations Analysis, Michael Derosa

Bankruptcy Research Library

(Excerpt)

Section 541 of the United States Bankruptcy Code (the “Code”) provides in part that the debtor’s estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” The debtor’s interests include “whatever causes of action the debtor may have possessed prior to the petition date.” In certain circumstances, a creditor may obtain the right to bring claims of the debtor. In such a case, generally the creditor is stepping into the shoes of the debtor, and the creditor is subject to all defenses proffered by the defendant that would apply had …

Substantive Consolidation Of Debtor And Non-Debtor Entities, Eileen Ornousky

Bankruptcy Research Library

(Excerpt)

Based on section 105’s grant of equitable powers, bankruptcy courts have the power to substantively consolidate debtors. Substantive consolidation pools the assets of separate legal entities and treats them as one, allowing each entity’s liability to be satisfied out of the common pool. Although it has been accepted that courts have the power to consolidate a debtor with other related debtors, it its less clear when courts can consolidate a debtor with a non-debtor, or if courts have the authority to do so at all.

Even though most courts have determined that they do have the power to substantively …

Creditor And Debtor Burdens When Confirming A Chapter 11 Reorganization Plan, Corey Trail

Bankruptcy Research Library

(Excerpt)

In Chapter 11 bankruptcy, after a debtor has submitted a reorganization plan, the creditor has the right to vote on that plan. However, the right to vote on that plan is grounded in the understanding that the creditor will not vote against a debtor’s reorganization plan in bad faith. If a court finds that the creditor rejected the plan in bad faith, the court may “designate” the votes of the creditor that voted against the plan. But the issue of good faith does not solely lie with the creditor’s behavior. Reorganization under Chapter 11 also demands that the debtor …

Are Government Creditors Exempt From U.C.C. Article 9 Filing And Perfection Requirements?, Thomas Sica

Bankruptcy Research Library

(Excerpt)

Article 9 of the Uniform Commercial Code (the “UCC”) requires a creditor to perfect its security interests against its collateral in order to recover the creditor’s priority in such collateral. Former versions of the UCC that predate 2001 provided that the Article 9’s perfection requirements did not apply “[t]o a transfer by a government or a governmental unit of the state.” This exception was eliminated from the UCC in 2001. Thirty-two states, however, still have versions of the UCC that contain some version of this exception. Within the states that still enforce this exception for governmental units, there are …

The Differences Between The Right To Setoff Under 11 U.S.C. §553 And 11 U.S.C. §558, Maria Ehlinger

Bankruptcy Research Library

(Excerpt)

In bankruptcy cases, the right to setoff is a powerful tool used by both debtors and creditors to avoid having to pay a debt owed to another. The right to setoff is defined as “[a] debtor’s right to reduce the amount of a debt by any sum the creditor owes the debtor the counterbalancing sum owed by the creditor.” A right to setoff usually arises when a debtor owes a debt to a creditor and the creditor owes a debt to the debtor. The purpose of a setoff is to “allow entities that owe each other money to apply …

Discharging Non-Filing Co-Debtor Debt Under Chapter 13, Carly Krupnick

Bankruptcy Research Library

(Excerpt)

During chapter 13 proceedings, both the debtor and the non-filing co-debtor are protected from their creditors by a stay. Once a bankruptcy petition is filed, section 362(a) of the Bankruptcy Code creates an “automatic stay” that operates by halting almost all actions by creditors against the debtor and his property to collect a prepetition debt. In a chapter 13 bankruptcy case, section 1301(a) provides that the filing of the petition also automatically creates a co-debtor stay that generally prevents a creditor from taking any “act[ion], or commenc[ing] or continu[ing] any civil action, to collect all or any part of …

Trustee's Ability To Waive Individual Debtor’S Attorney-Client Privilege, Rebecca Leaf

Bankruptcy Research Library

(Excerpt)

Courts disagree about whether a trustee may waive an individual debtor's attorney-client privilege. Although the Supreme Court has addressed the issue in the case of corporate debtors, it has not done so in the case of individual debtors. Thus, lower courts have adopted three approaches to cases involving individual debtors: allowing the trustee to always waive privilege, never allowing the trustee to waive privilege, and a balancing approach.

This memo explores the importance of the attorney-client privilege, its relevant statutory bases, Supreme Court precedent, and the three approaches mentioned above. This memo also considers the advantages and disadvantages of …

The Exclusive View V. The Non-Exclusive View: Can A Creditor’S Claim Be Dismissed For Failing To Provide Supporting Documentation?, Robert J. Ryan

Bankruptcy Research Library

(Excerpt)

May a creditor’s claim be dismissed simply because he failed to provide supporting documentation in violation of Federal Rule of Bankruptcy Procedure 3001? The answer depends on which jurisdiction the creditor is pursuing its claim in. Courts are currently sharply divided on the issue. If the creditor is fortunate enough to be in a jurisdiction which follows the “exclusive” view, which is the majority rule, the answer to this problem will be yes. However, if the creditor happens to be in a jurisdiction which follows the “non-exclusive” view, which is the minority rule, the answer to this problem will …