Law Commons^™

Under What Circumstances Can A Bankruptcy Court Grant Innocent Spouse Relief To A Debtor?, Noreen Gilroy

Bankruptcy Research Library

(Excerpt)

The United States tax system allows married couples to file joint tax returns. For those married couples that jointly file, there is joint and severable liability for the taxes due on those returns. Because spouses who file joint tax returns are held both jointly and severally liable for those joint returns, the drafters of the Tax Code created an exemption from liability for innocent spouses in Section 6015 of the Tax Code. Section 6015(e) of the Tax Code expressly grants subject matter jurisdiction to the Tax Courts to review determinations of innocent spouse relief. However, the language of Section …

Uncertainty In The Gap Period: The Dangers Of Doing Business With An Alleged Debtor, Daniel Ishoo

Bankruptcy Research Library

(Excerpt)

Section 303 of the Bankruptcy Code allows creditors to initiate an involuntary case against a debtor by filing a petition with the court. Although the provisions applied to an involuntary case and a voluntary case are largely the same, one major difference surfaces in an involuntary case—the existence of what is commonly referred to as the “gap period.” The gap period is the period between the filing of an involuntary petition and a Judge’s entry of an order for relief.

Pursuant to § 303(f) of the Bankruptcy Code, the debtor may continue to operate during the gap period as …

Protecting Valuable Estate Interests Through The Unenforceability Of Ipso Facto Clauses, Kayla Martin

Bankruptcy Research Library

(Excerpt)

A trustee or debtor-in-possession is provided with a plethora of powers under title 11 of the United States Code (the “Bankruptcy Code”). A chapter 13 debtor-in-possession, pursuant to section 1322 of the Bankruptcy Code, may assume or reject any executory contract in connection with its plan. The ability, however, to assume or reject an executory contract is limited by section 365, which in part prohibits the modification or termination of a debtor’s interest in a contractual agreement on the sole basis that the debtor filed for bankruptcy, which is commonly known as an ipso facto provision. This prohibition of …

Successful Motions For Reconsideration Require Extraordinary Circumstances, Maria A. Gomez

Bankruptcy Research Library

(Excerpt)

Motions for reconsideration are not recognized under the Federal Rules of Civil Procedure (the “Rule(s)”) or the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rule(s)”). A party seeking reconsideration of an order in the bankruptcy courts can file either: (1) a motion to alter or amend a judgment under Bankruptcy Rule 9023, if the order is interlocutory; or (2) a motion for relief from judgment under Bankruptcy Rule 9024, if the order is a final one. The applicable rules to motions for reconsideration are different depending on whether the motion is for an interlocutory or final order. There are …

Application Of The Federal Rule Of Bankruptcy Procedure Rule 2004 Balancing Test, Patrick O’Connor

Bankruptcy Research Library

(Excerpt)

Federal Rule of Bankruptcy Procedure 2004 (“Rule 2004”) provides that “[o]n motion of any party in interest, the court may order the examination of any entity.” By its terms, the rule is broad. It is only marginally narrowed by Rule 2004(b) to require that examinations “relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge.” Given that Rule 2004 is broadly available in bankruptcy cases to “any party in interest” …

The Insolvency Effect On Attorney-Client Privilege, Anna Piszczatowski

Bankruptcy Research Library

(Excerpt)

“The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law.” This privilege has been held as sacred and essential to encourage complete and candid communication between attorneys and their clients. In fact, if the attorney’s “professional mission” is to be carried out appropriately to the fullest extent, then the attorney must be able to acquire all the information necessary to represent his client. Therefore, the privilege allows unfettered communication, for the benefit of both parties.

By carving more exceptions to the privilege, as bankruptcy courts, and even the Supreme Court, have in …

Contractual Provider Agreement Provides For Permissible Government Recoupment, Emily Santoro

Bankruptcy Research Library

(Excerpt)

A debtor healthcare provider without significant resources is unlikely to survive any prolonged disagreement with private or government payors. This challenge may be exacerbated by a debtors’ bankruptcy filing if a payor may refuses to make certain payments owed to the debtor. Therefore, whether a payors’ withholding of funds owed to a debtor hospital is considered an impermissible setoff or a permissible equitable recoupment is crucial.

This memorandum will explore whether a Medicaid/Medicare payor can withhold payments owed to a debtor, or whether such withholding violates the automatic stay. Part A will discuss withholding in healthcare bankruptcy scenarios generally. …

Fraudulent Transfer Provision Of The Bankruptcy Code Defined More Narrowly Than Similar Provisions In Other Statutes, Yaakov Seff

Bankruptcy Research Library

(Excerpt)

The fraudulent conveyance provision of the Bankruptcy Code, (“the Code”), Section 548, is an “elemental and ancient provision of debtor-creditor relations.” It provides that “[t]he trustee may avoid any transfer ... of an interest of the debtor in property ... that was made ... within two years before the date of the filing of the petition . . .” where the transfer involved actual or constructive fraud.

But the ability to avoid fraudulent transfers is not limited to the bankruptcy context; parallel provisions are found in several areas of the federal legislation. For instance, there is a fraudulent transfer …

Although A Presumption Against Extraterritoriality Generally Precludes A Foreign Plaintiff From Recovering A Debtor’S Assets In A Civil Rico Claim, That Presumption Can Be Overcome To Hold A Foreign Defendant Liable For A Preference Claim, Amanda M. Schaefer

Bankruptcy Research Library

(Excerpt)

The civil portion of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) permits any individual “injured in his business or property by reason of a violation of the statute’s criminal provisions” to pursue a cause of action against a tort feasor. For a party to pursue a civil remedy for economic injury under the civil portion of the statute, its criminal portion must first be violated through illegal activity, such as numerous acts of mail and wire fraud. In RJR Nabisco, Inc. v. European Community (“RJR Nabisco”), the Supreme Court held that RICO’s private right of action under …

More Than Fraud: Proving Fraud On The Court, Stephen Van Doran

Bankruptcy Research Library

(Excerpt)

In all adversarial proceedings, litigants have a duty of full disclosure and honesty with the court. Typically, where a party obtains a judgment through fraudulent conduct, the only way to overturn that judgment is through a motion to vacate pursuant to Federal Rule of Civil Procedure 60(b)(3).

A final judgment can also be overturned by a motion, pursuant to Federal Rule of Civil Procedure 60(d)(3), as incorporated into the Bankruptcy Rules by Rule 9024, to vacate a judgment based upon fraud on the court. Fraud on the court is generally limited to instances where “the integrity of the judicial …

Debtor Malice, Jonathon S. Byington

Faculty Law Review Articles

This Article is about what malice should mean under bankruptcy law. Malice is used in other areas of law as a sorting function—to identify wrongful acts that are especially grievous. For example, criminal law uses malice to separate murder from manslaughter. The Bankruptcy Code uses malice to perform a similar sorting function. Bankruptcy law discharges or forgives certain kinds of debts. It separates debts that society is willing to forgive from debts that are not forgivable. One way it accomplishes this sorting function is through Section 523(a)(6) of the Bankruptcy Code, which excepts from discharge debts for “willful and malicious …

Jevic's Promise: Procedural Justice In Chapter 11, Pamela Foohey

Articles by Maurer Faculty

In this Response to Jonathan Lipson's article, The Secret Life of Priority: Corporate Reorganization After Jevic, 93 Wash. L. Rev. 631 (2018)), I focus on Czyzewski v. Jevic Holding Corp.'s implications for procedural justice and corporate reorganization. In his article, Lipson explicitly links the chapter 11 process with the Bankruptcy Code’s substantive rules about priority, crafting a forceful argument about what procedural values the U.S. Supreme Court sought to uphold when it penned Jevic. In doing so, Lipson expounds on a broader truth about the co-option of corporate reorganization’s process in the name of value preservation. Procedural justice teaches that …

Foreword: Bankruptcy’S New And Old Frontiers, William W. Bratton, David A. Skeel Jr.

All Faculty Scholarship

This Symposium marks the fortieth anniversary of the enactment of the 1978 Bankruptcy Code (the “1978 Code” or the “Code”) with an extended look at seismic changes that currently are reshaping Chapter 11 reorganization. Today’s typical Chapter 11 case looks radically different than did the typical case in the Code’s early years. In those days, Chapter 11 afforded debtors a cozy haven. Most everything that mattered occurred within the context of the formal proceeding, where the debtor enjoyed agenda control, a leisurely timetable, and judicial solicitude. The safe haven steadily disappeared over time, displaced by a range of countervailing forces …

Life In The Sweatbox, Pamela Foohey, Robert M. Lawless, Katherine Porter, Deborah Thorne

Articles by Maurer Faculty

The time before a person files bankruptcy is sometimes called the financial “sweatbox.” Using original data from the Consumer Bankruptcy Project, we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past. We also describe the depletion of wealth and well-being that defines people’s time in the sweatbox. For those people who struggle for more than two years before filing bankruptcy—the “long strugglers”—their time in the sweatbox is particularly damaging. During their years in the sweatbox, long strugglers deal with persistent collection calls, go without healthcare, food, and utilities, lose homes and …

A Bridge Over Troubled Waters - Resolving Bank Financial Distress In Canada, Janis P. Sarra

All Faculty Publications

Effective June 2017, Canada formalized its new resolution regime for “domestic systemically important banks”. This article examines the new resolution regime in the context of the early intervention program by the financial services regulator. The system offers a complex but integrated set of mechanisms to monitor the financial health of financial institutions, to intervene at an early stage of financial distress, and to resolve the financially distressed bank in a timely manner. Resolution is the restructuring of a financially distressed or insolvent bank by a designated authority. To “resolve” a bank is to use a series of tools under banking …

The Empty Idea Of “Equality Of Creditors”, David A. Skeel Jr.

All Faculty Scholarship

For two hundred years, the equality of creditors norm—the idea that similarly situated creditors should be treated similarly—has been widely viewed as the most important principle in American bankruptcy law, rivaled only by our commitment to a fresh start for honest but unfortunate debtors. I argue in this Article that the accolades are misplaced. Although the equality norm once was a rough proxy for legitimate concerns, such as curbing self-dealing, it no longer plays this role. Nor does it serve any other beneficial purpose.

Part I of this Article traces the historical emergence and evolution of the equality norm, first …

Beyond Bankruptcy: Resolution As A Macroprudential Regulatory Tool, Steven L. Schwarcz

Faculty Scholarship

To try to protect the stability of the financial system, regulators and policymakers have been extending bankruptcy-resolution techniques beyond their normal boundaries. To date, however, their efforts have been insufficient, in part because bankruptcy law traditionally has microprudential goals (to protect individual firms) whereas protecting financial stability is a “macroprudential” goal.

This Article seeks to derive a logical and consistent theory of how and why resolution-based regulation can help to stabilize the financial system. To that end, the Article identifies three possible regulatory approaches: reactive resolution-based regulation, which comprises variations on traditional bankruptcy; proactive resolution-based regulation, which consists of pre-planned …

Too-Big-To-Fail Shareholders, Yesha Yadav

Vanderbilt Law School Faculty Publications

To build resilience within the financial system, post-Crisis regulation relies heavily on banks to fund themselves more fully by issuing equity. This reserve of value should buttress failing banks by providing a mechanism to pay off creditors and depositors and preserve the health of financial markets. In the process, shareholders are wiped out. Scholars and policymakers, however, have neglected to examine which equity investors, in fact, are purchasing bank equity and taking on the default risk of U.S. banks. This Article addresses this question. First, it shows that five asset managers - BlackRock, Vanguard, State Street Global Advisors, Fidelity and …

Insolvency Law As Credit Enhancement And Enforcement Mechanism: A Closer Look At Global Modernization Of Secured Transactions Law, Charles W. Mooney Jr.

All Faculty Scholarship

This essay revisits earlier work on the relationship between insolvency law and secured credit, the role of secured transactions law reforms, and the benefits of secured credit. These complex relationships require a holistic approach toward reforms of secured transactions law and insolvency law. Merely enacting sensible secured transactions laws and insolvency laws may be insufficient to produce the intended benefits from either set of laws.

The essay is informed by an ongoing qualitative empirical study of business credit in Japan—the Japanese Business Credit Project. The JBCP involves interviews of representatives of Japanese financial institutions and governmental bodies and legal practitioners …

Bankrupted Slaves, Rafael I. Pardo

Scholarship@WashULaw

Responsible societies reckon with the pernicious and ugly chapters in their histories. Wherever we look, there exist ever-present reminders of how we failed as a society in permitting the enslavement of millions of black men, women, and children during the first century of this nation’s history. No corner of society remains unstained. As such, it is incumbent on institutions to confront their involvement in this horrific past to fully comprehend the kaleidoscopic nature of institutional complicity in legitimating and entrenching slavery. Only by doing so can we properly continue the march of progress, finding ways to improve society, not letting …

Access To Consumer Bankruptcy, Pamela Foohey

Articles by Maurer Faculty

This essay examines the state of access to justice in the context of consumer bankruptcy from two vantage points: (1) how people decide that their money problems are legal problems addressable by filing bankruptcy; and (2) the barriers people face in using the consumer bankruptcy system. To shed new light on how people decide to use bankruptcy to address their financial troubles, I analyze a sample of narratives accompanying consumers' complaints about financial products and services submitted to the Consumer Financial Protection Bureau. I also chronicle the evolution of research regarding consumer bankruptcy’s “local legal culture,” systemic racial bias, and …

A Canadian Lens On Third Party Litigation Funding In The American Bankruptcy Context, Stephanie Ben-Ishai, Emily Uza

Articles & Book Chapters

This Article offers two major recommendations to expand the use of third party litigation funding ("TPLF") into the U.S. insolvency context. As seen in the Canadian context, courts have accepted the use of litigation funding agreements fitting within certain parameters. If U.S. courts follow suit, friction against the implementation of TPLF can be mitigated. Alternatively, regulation may occur through legislative and regulatory models to govern and set out precisely what types of arrangements are permitted. Involving entities such as the SEC may expedite the acceptance of TPLF, but special attention is necessary not to intermingle notions of fiduciaries into the …

Optimal Deterrence And The Preference Gap, Brook E. Gotberg

Faculty Publications

This Article is the first of its kind to argue that preference law is ineffective as a deterrent of collection behavior based on empirical evidence, drawn from interviews of actors within the field-debtors, creditors, and the attorneys who represented them in bankruptcy proceedings. This Article reports on interviews of sampled individuals who participated in successful 7 Chapter 11 reorganization cases involving preference actions. The overwhelming and indisputable conclusion from these interviews is that creditors may adjust their behavior in response to preference law, but not in ways that further the purported goal of preference deterrence. Accordingly, if preference law is …

The Federal Law Of Property: The Case Of Inheritance Disclaimers And Tenancy By The Entireties, David G. Carlson

Articles

The Supreme Court has issued two disturbing tax opinions which disrupt the notion that “property” (when used in federal statutes) refers to state-law notions. In Drye v. United States, the Supreme Court pierced the Arkansas fiction that inheritance disclaimers are retrospective in effect. Thus the Internal Revenue could claim that a tax lien attached to the pre-disclaimer inheritance. Disclaimer could not defeat this lien. In United States v. Craft, the Supreme Court pierced the Michigan fiction that a tenancy by the entireties does not belong to the individual spouses but, rather, the a corporate “marital” entity that is a separate …

Sare Manipulation: The Hurdles In Single-Asset Real Estate Cases, David R. Hague

Faculty Articles

Under § 1129(a)(10) of the Bankruptcy Code, a debtor's plan of reorganization cannot be confirmed unless at least one "impaired class" accepts the plan, excluding acceptance of any insider of the debtor. A class of claims accepts the plan if more than one-half in number and at least two-thirds in amount of claims voting in a class favor the plan. Thus, a debtor's composition of its classes clearly has a substantial impact upon its chances of successfully confirming its plan of reorganization over dissenting creditors. Obviously, the debtor would like to have unfettered power and full discretion to group creditors …

Valuation Disputes In Corporate Bankruptcy, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

Prior scholarship points to disagreements about valuation and judicial valuation error as key drivers of Chapter 11 outcomes. Avoiding valuation disputes and valuation errors is also the underlying driver of most proposed reforms, from Baird’s auctions to Bebchuk’s options. In this paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. Our paper has two goals. The first is to understand how parties and their expert witnesses justify their opposing views to the judge, and how judges decide between them. The second is to provide practical guidance to judges in resolving valuation disputes. We document surprisingly pervasive …

Bankruptcy’S Uneasy Shift To A Contract Paradigm, David A. Skeel Jr., George Triantis

All Faculty Scholarship

The most dramatic development in twenty-first century bankruptcy practice has been the increasing use of contracts to shape the bankruptcy process. To explain the new contract paradigm—our principal objective in this Article-- we begin by examining the structure of current bankruptcy law. Although the Bankruptcy Code of 1978 has long been viewed as mandatory, its voting and cramdown rules, among others, invite considerable contracting. The emerging paradigm is asymmetric, however. While the Code and bankruptcy practice allow for ex post contracting, ex ante contracts are viewed with suspicion.

We next use contract theory to assess the two modes of contracting. …

The New Bond Workouts, William W. Bratton, Adam J. Levitin

All Faculty Scholarship

Bond workouts are a famously dysfunctional method of debt restructuring, ridden with opportunistic and coercive behavior by bondholders and bond issuers. Yet since 2008 bond workouts have quietly started to work. A cognizable portion of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. The result has been a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 (“TIA”), …

Limited Liability Property, Danielle D'Onfro

Scholarship@WashULaw

This Article offers a theory of secured credit that aims to answer fundamental questions that have long percolated in the bankruptcy and secured transactions literatures. Are security interests property rights, contract rights, or something else? Why do secured creditors enjoy a priority right that, in bankruptcy, requires them to be paid in full before other debt holders recover anything? Should we care that secured credit creates distributional unfairness when companies cannot pay their debts?

This Article argues that security interests are best understood as a form of “limited liability property.” Limited liability—the privilege of being legally shielded from liability that …

Limited Liability Property, Danielle D'Onfro

Scholarship@WashULaw

This Article offers a theory of secured credit that aims to answer fundamental questions that have long percolated in the bankruptcy and secured transactions literatures. Are security interests property rights, contract rights, or something else? Why do secured creditors enjoy a priority right that, in bankruptcy, requires them to be paid in full before other debt holders recover anything? Should we care that secured credit creates distributional unfairness when companies cannot pay their debts?

This Article argues that security interests are best understood as a form of “limited liability property.” Limited liability—the privilege of being legally shielded from liability that …