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 …

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 …

Can A Secured Creditor Be Denied The Right To Credit Bid When The Creditor’S Collateral Is Sold Pursuant To A Chapter 11 Plan Of Reorganization?, Marshall E. Tracht

Articles & Chapters

CASE AT A GLANCE

A bankruptcy plan can only be confirmed over the objection of a secured creditor if the plan is found to be “fair and equitable.” The fair and equitable standard requires, at a minimum, that (i) the creditor may retain its lien on its collateral; (ii) the collateral will be sold subject to the creditor’s right to credit bid its debt; or (iii) the creditor will receive the “indubitable equivalent” of its claim. The Supreme Court must decide whether a plan can provide for the sale of collateral without granting the creditor the right to credit bid …

Modified Plans Of Reorganization And The Basic Chapter 13 Bargain, David G. Carlson

Articles

A very large number of chapter 13 plans are confirmed each year. Unlike chapter 11 plans (for non-individuals), these plans may be revised after confirmation. The modification provisions of the Bankruptcy Code, however, give very little guidance as to what constitutes a permissible modification. In contrast, confirmation of the original plan is very carefully governed. This article theorizes that modification must honor the basic chapter 13 bargain. According to this bargain, the debtor is entitled to the bankruptcy estate and the creditors are entitled to net surplus income. The article assesses whether the diffuse and disorganized caselaw of modification adheres …

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 …

Leverage In The Board Room: The Unsung Influence Of Private Lenders In Corporate Governance, Frederick Tung

Faculty Scholarship

The influence of banks and other private lenders pervades public companies. From the first day of a lending arrangement, loan covenants and built-in contingency provisions affect managerial decision making. Conventional corporate governance analysis has been slow to notice or account for this lender influence. Corporate governance discourse has traditionally focused only on corporate law arrangements. The few existing accounts of creditors' influence over firm managers emphasize the drastic actions creditors take in extreme cases - when a firm is in serious trouble - but in fact, private lender influence is a routine feature of corporate governance even absent financial distress. …

Managers’ Fiduciary Duties In Financially Distressed Corporations: Chaos In Delaware (And Elsewhere), Rutheford B. Campbell Jr., Christopher W. Frost

Law Faculty Scholarly Articles

The inherent conflict between creditors and shareholders has long occupied courts and commentators interested in corporate governance. Creditors holding fixed claims to the corporation's assets generally prefer corporate decision making that minimizes the risk of firm failure. Shareholders, in contrast, have a greater appetite for risk, because, as residual owners, they reap the rewards of firm success while sharing the risk of loss with creditors.

Traditionally, this conflict is mediated by a governance structure that imposes a fiduciary duty on the corporation's managers-its officers and directors-to maximize the value of the shareholders' interests in the firm. In this traditional view, …

Debtor Discharge And Creditor Repayment In Chapter 13, Scott F. Norberg, Andrew Velkey

Faculty Publications

Consumer bankruptcy filings hit another record high in 1998, with nearly 1.4 million consumers filing for bankruptcy relief. This trend sparked a debate in Congress about means-testing chapter 7 bankruptcy filings. Proponents of reform argued that it would curtail fraud and abuse. Opponents believed that consumer debt was swamping income growth, and that the deregulation of the consumer credit market had led to overgenerous lending and hence to more bankruptcies. This is an empirical study of whether filers for chapter 13 bankruptcy cases are abusing the system, or whether debtors are truly being swamped by debt in excess of their …

The Case For Cooperative Territoriality In International Bankruptcy, Lynn M. Lopucki

UF Law Faculty Publications

Universalism - the idea that a multinational debtor's "home country" should have worldwide jurisdiction over its bankruptcy - has long had tremendous appeal to bankruptcy professionals. Yet, the international community repeatedly has refused to adopt conventions that would make universalism a reality. In an article published last year, I proposed an explanation. Universalism can work only in a world with essentially uniform laws governing bankruptcy and priority among creditors - a world that does not yet exist. Because it is impossible to fix the location of a multinational company in a global economy, the introduction of universalism in current world …

Thin Red Line: An Analysis Of The Role Of Legal Assistants In The Chapter 13 Bankruptcy Process, David G. Epstein

Law Faculty Publications

The delegation by a lawyer of substantial amounts of non-ministerial functions to legal assistants raises various unauthorized practice of law issues. This Article provides an overview of the Chapter 13 bankruptcy process and state law rules regarding the unauthorized practice of law. We then discus~ these rules in the context of a typical Chapter 13 debtor practice.

The Past And Future Of Kentucky's Fraudulent Transfer And Preference Laws, Douglas C. Michael

Law Faculty Scholarly Articles

An important part of the law of creditors' remedies is the ability of creditors to recover property formerly held by the debtor, but transferred to others under circumstances that are considered to be unfair or inequitable. There are two principal ways a creditor can seek to have a debtor's transfer characterized as unfair in order to recover it. First, a transfer to another creditor or a third party can be fraudulent as to one or all of the remaining creditors, or may be deemed to be fraudulent because of the circumstances surrounding the transfer, such as a transfer made by …

Successor Liability In Bankruptcy: Some Unifying Themes Of Intertemporal Creditor Priorities Created By Running Covenants, Products Liability, And Toxic-Waste Cleanup, David G. Carlson

Articles

No abstract provided.

Chapters 11 And 13 Of The Bankruptcy Code--Observations On Using Case Authority From One Of The Chapters In Proceedings Under The Other, David G. Epstein

Law Faculty Publications

This Article will focus on the relationship between Chapter 11 and Chapter 13 of the Bankruptcy Code. A number of issues are similar or identical in Chapter 11 and Chapter 13. Furthermore, much of the language of Chapter 13 mirrors that of Chapter 11. This Article explores whether courts should apply case law and concepts of one chapter when similar issues arise in proceedings under the other chapter. Parts II and III of this Article address basic similarities and differences between Chapters 11 and 13. Parts IV, V, and VI examine three issues governed by statutory language common to both …

Discharges Under The New Bankruptcy Code, David G. Epstein

Law Faculty Publications

Prepared for the ALIABA Course of Study on Consumer Debtors and the Bankruptcy Code, September 24-25, 1981; revised by the author prior to publication in the Course Materials Journal.

Unless otherwise indicated, all section references are to the Bankruptcy Act of 1978, Title 11 of the United States Code ("Code"). "B.C.D." refers to the Bankruptcy Court Decisions; "B.R.," to West's Bankruptcy Reporter; "C.B.C.," to Collier's Bankruptcy Cases; and "UCC," to the Uniform Commercial Code.

Proceeding Under The Uniform Commercial Code, David G. Epstein

Law Faculty Publications

The Uniform Commercial Code is the "most important piece of business legislation ever prepared in the United States .... " "Article 9 is the most novel and probably the most important article in the Code." "The greatest change under the Code will probably come about in due time because of the so-called 'floating lien' "made possible in part by the Code's proceeds provision, section 9-306. The proceeds provision represents an innovation significant to both debtors and creditors. For example, in order to carry on his business, the borrower who avails himself of inventory financing often desires some right to dispose …

A Surety's Claim Against His Bankrupt Principal Under The Present Law, Evans Holbrook

Articles

"The peculiar three-sided relationship of principal, surety and creditor gives rise to many vexatious questions of law, and one of the most interesting is that of the relationship between surety and principal in the case of the latter's bankruptcy."

Exit Of Doctrine Of Situs, John R. Rood

Articles

A decision rendered by the Supreme Court of the United States on the 8th day of last May seems to mark the elimination of the doctrine of situs as a jurisdictional question in garnishment and attachment proceedings in the United States.