Bankruptcy Law Commons^™

Exceptions To The General Rule That The Automatic Stay Under Bankruptcy Code Section 362(A) Does Not Apply To Non-Debtors, Annmarie Gruick

Bankruptcy Research Library

(Excerpt)

Upon the filing of a bankruptcy petition, the automatic stay takes effect. “The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from its creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him [or her] into bankruptcy.”

Section 362(a) enumerates eight (8) actions and activities from which the debtor is protected—“it does not protect separate legal entities, such as corporate directors, …

U.S. Trustee Fee Increase That Is Not Applicable Uniformly Violates The U.S. Constitution, Malorie Ruggeri

Bankruptcy Research Library

(Excerpt)

Article I, Section 8, Clause 4 of the United States Constitution contains the “Bankruptcy Clause,” which vests Congress with the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” The clause’s requirement that the bankruptcy laws be “uniform” is not a strictly construed requirement as Congress reserves the right to draft legislation depending on different regional issues that arise within the bankruptcy system.

Congress created the United States Trustee Program (USTP) to, among other things, oversee the administration of bankruptcy cases and promote the integrity and efficiency of bankruptcy system for the benefit of …

The Application Of 11 U.S.C. § 523(A) To Subchapter V Corporate Debtors Under 11 U.S.C. § 1192(2), Elizabeth Allhusen

Bankruptcy Research Library

(Excerpt)

Under title 11 of the United States Code (the “Bankruptcy Code”), a debtor can receive a fresh start through a broad discharge of its debts. The general availability of a discharge is limited by section 523(a). Section 523(a) provides that certain types of debts of an individual are excepted from discharge. Section 1192 applies these exceptions in certain small business bankruptcy cases.

In 2019, Congress created Subchapter V of the Bankruptcy Code with the passing of the Small Business Reorganization Act (“SBRA”). The SBRA added provisions to Chapter 11 which apply to small business debtors. Small business debtors, as …

Solvent Debtors Must Pay The Contractual Post-Petition Interest Rate On Unimpaired Claims, Rayla Aberman

Bankruptcy Research Library

(Excerpt)

The default rule in bankruptcy law is that when a debtor files for bankruptcy, interest ceases to accrue on their unsecured claims. This general principle is subject to an exception known as the solvent debtor exception. Under this exception, solvent debtors are required to pay post-petition interest on their outstanding claims, even after filing for bankruptcy. Section 726(a)(5) of the Bankruptcy Code states that solvent debtors must pay interest at “the legal rate.” However, the Bankruptcy Code does not define what the legal rate is, and courts have disagreed over whether it applies to both impaired and unimpaired claimants. …

Exceptions To The Rule: When Non-Debtor Entities Are Protected By The Automatic Stay, Isabella Benchetrit

Bankruptcy Research Library

(Excerpt)

In most cases, the automatic stay, under section 362 of title 11 of the United States Code (the "Bankruptcy Code"), stays all creditors from pursuing litigation against debtors. Nonetheless, non-debtor entities can obtain the protection afforded to debtors by the automatic stay in limited circumstances. There are two primary ways of staying litigation against a non-debtor. First, through demonstrating that there are exceptional circumstances to extend section 362 to a non-debtor. Second, through satisfying the standard for an injunction pursuant to section 105 of the Bankruptcy Code.

This Article considers the circumstances by which a non-debtor entity may receive …

Free And Clear Sale Under Section 363 Of The Bankruptcy Code Prevents Successor Liability, Matthew Bopp

Bankruptcy Research Library

(Excerpt)

The Bankruptcy Code allows a debtor to sell its assets free and clear of any interest in such property, pursuant to section 363(f) of the Bankruptcy Code. Section 363(f) is used to allow the trustee to sell assets not in the ordinary course of business and to allow purchasers to buy assets without the fear of liability. The Bankruptcy Code does not define the term “interest.” Thus, in interpreting section 363(f), a court must view interest in property expansively. Using section 363(f), courts have extinguished several types of claims and interest in property including: possessory interests, employment related claims, …

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 …

Shared Responsibility Payment May Be A Tax Entitled To Priority Under The Bankruptcy Code, Ashton Bryan

Bankruptcy Research Library

(Excerpt)

The Patient Protection and Affordability Care Act ("ACA") provides that certain individuals must maintain minimum essential health insurance coverage throughout the year. If a person under the mandate fails to maintain the required insurance for one month or more, a shared responsibility payment ("SRP") is imposed on the taxpayer. The SRP is collected by the Internal Revenue Service ("IRS").

The Tax Cuts and Jobs Act ("TCJA") eliminated the individual mandate and reduced the SRP to zero for 2019 and thereafter. The SRPs for 2018 and prior years must be reported to the IRS on the applicable tax return. Otherwise, …

Trustee’S Broad Duty To Disclose Information To Interested Parties Under Section 704(A)(7) Of The Bankruptcy Code, Joel Cardoz

Bankruptcy Research Library

(Excerpt)

A trustee has a duty to disclose information to interested parties upon request. Section 1109(b) of title 11 of the United States Code (the “Bankruptcy Code”) includes creditors in the definition of interested parties. Trustees must obtain a court order to be excused from their duty to disclose.

A trustee’s duty of disclosure is “broad and extensive.” Courts are reluctant to excuse the trustee from their duty of disclosure unless the trustee points to a compelling “countervailing fiduciary duty … whose performance is more important than avoiding the harm resulting from withholding the information in question.”

First, this article …

Uncertainty Surrounding Takings Claimants’ Rights In Municipal Bankruptcies, Gillian Deery

Bankruptcy Research Library

(Excerpt)

Governments in the United States and its territories have the power to exercise eminent domain so long as they provide property owners with the constitutionally guaranteed “just compensation.” The Fifth Amendment’s Takings Clause specifically prescribes this remedy for parties whose property has been subject to a government taking. “Just compensation” has proven to be an issue in the context of bankruptcy, as bankruptcy law inherently allows debtors to alter their obligations to their creditors.

In response to Puerto Rico’s financial crisis, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), which created a modified version of …

Two Valid Approaches For Determining Whether “Taxes” Get Priority In Bankruptcy Cases, Jonathan Fuller

Bankruptcy Research Library

(Excerpt)

In bankruptcies, tax status often effects whether claims are entitled to priority. Thus, debates about whether charges are penalties or taxes date back to the early twentieth century. In 1930, the Supreme Court established that courts are not bound to the characterization given to a charge by the municipality that created it. Rather, courts have a duty to consider the “real nature” and “effect” of the charge. Accordingly, different circuits have implemented different approaches to make these determinations.

This Article examines the ambiguity among circuits regarding charges’ “tax” status and resulting priority entitlement. Part I outlines In re Lorber …

The Third Circuit Requires Inequitable Conduct By A Higher-Priority Creditor To Equitably Subordinate Its Debt To A Lower-Priority Creditor, Caitlyn R. Marino

Bankruptcy Research Library

(Excerpt)

Title 11 of the United States Code (the “Bankruptcy Code”) implements a basic priority system under section 507 to determine the order a bankruptcy court will distribute the assets of an estate. The classic hierarchy begins with secured creditors, then “[s]pecial classes of creditors, such as those [holding] certain claims for taxes or wages . . . [then] low-priority creditors, including general unsecured creditors . . . [followed by] equity holders . . . [who] receive nothing until all previously listed creditors have been paid in full.” Section 510(c) of the Bankruptcy Code authorizes disturbing the fundamental distribution scheme …

Small Business Owners Are Entitled To Exempt Reasonable Compensation From The Bankruptcy Estate, Rachel Mcgarry

Bankruptcy Research Library

(Excerpt)

The COVID-19 pandemic greatly impacted small business owners in the United States. In March 2020, the United States Small Business Administration (“SBA”) began aiding eligible small business owners in the form of Economic Injury Disaster Loans (“EIDL”). EIDLs were made available to small businesses that were unable to meet existing financial obligations for necessary operating costs. Those funds can be used to “make regular payments for operating expenses, including payroll.”

This article addresses whether small business owners are entitled to pay themselves reasonable compensation as earnings for their efforts, which in turn may be exempted from their future bankruptcy …

The Effect Of Rejection Of A Copyright License On A Non-Debtor Licensee, Thomas Meininger

Bankruptcy Research Library

(Excerpt)

In general, a trustee may assume, reject, or assign an executory contract of the debtor under title 11 of the United States Code (the “Bankruptcy Code”). Courts have generally held that intellectual property license agreements are executory contracts. If the license is an exclusive copyright license, it is a transfer of ownership under title 17 of the United States Code (the “Copyright Act”). Thus, some courts treat a copyright license as transfer of ownership, not an executory contract.

This article explores the rights and obligations of a non-debtor licensee when a debtor-licensor rejects a copyright license under the Bankruptcy …

A Secured Creditor’S Ability To Have An Automatic Stay Lifted Against A Single Asset Real Estate, Zachary Rozycki

Bankruptcy Research Library

(Excerpt)

The filing of a petition for relief under title 11 of the United States Code (the “Bankruptcy Code”) results in an automatic stay, which generally enjoins any creditor from taking action against the debtor or its property. Pursuant to section 362(d)(1) of the Bankruptcy Code, an automatic stay may be terminated upon a showing of “cause.” Additionally, under section 362(d)(2) a stay may be terminated as to property if the debtor has no equity in the property, and the property is not necessary to an effective reorganization. Further, under section 362(d)(3), an automatic stay may be lifted as to …

Avoidance Of An Unauthorized Post-Petition Transfer Of Intellectual Property Under Section 549 Of The Bankruptcy Code, Kathryn-Rose Russotto

Bankruptcy Research Library

(Excerpt)

Under section 549 of title 11 of the United States Code (the “Bankruptcy Code”), a trustee may avoid an unauthorized post-petition transfer of property of the debtor’s estate. Property is not limited to tangible property. Thus, a trustee can avoid a post-petition transfer of intangible assets, including intellectual property.

This article explores a trustee’s ability to avoid a post-petition transfer of intellectual property. Part I analyzes the legal standard for avoidance of unauthorized post-petition transfers under section 549. Part II examines section 549 in relation to intellectual property. Part III discusses the procedure for remedies a trustee can seek …

Non-Income Producing Properties That Never Operated May Be Single Asset Real Estate Under The Bankruptcy Code, Paul R. Spagnoli

Bankruptcy Research Library

(Excerpt)

Section 101 of title 11 of the United States Code (the “Bankruptcy Code”) includes a definition for a single asset real estate (“SARE”). A debtor that owns SARE is subject to certain special rules. In particular, the automatic stay will be lifted, upon the request of a secured creditor as to the SARE unless the debtor has either (i) begun making payments with interest at the nondefault rate to the secured creditor or (ii) has filed a plan of reorganization which has a reasonable possibility of being confirmed within a reasonable period of time. This article addresses whether a …

Debtor Needs To Have Benefitted From Fraud To Be Barred A Discharge Under 11 U.S.C. § 523(A)(2)(A), Elizabeth Tighe

Bankruptcy Research Library

(Excerpt)

Title 11 of the United States Code (the “Bankruptcy Code”) provides that a court may grant a debtor a discharge of its debts, subject to certain conditions and exceptions. One exception to dischargeability is set forth in section 523(a)(2)(A), which bars a discharge from debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.”

A key phrase in the statute is “obtained by” and courts have applied a …

Covid-19 & The Warn Act During A Bankruptcy Case, Audrey Victor

Bankruptcy Research Library

(Excerpt)

The Worker Adjustment and Retraining Notification Act (“WARN Act”) provides that “an employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such order to each impacted employee.” Under the WARN Act, a plant closing is “permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment….” A mass layoff is “a reduction in force which…(a) is not the result of the plant closing; and (b) results in an employment loss at …

True Sales Or Secured Transactions? The Contract Is Not Dispositive, Daniel Mosayov

Bankruptcy Research Library

(Excerpt)

Receivables are debts owed to a company for goods or services. A company seeking liquidity may sell the future interest in receivables generated through operations or use the future interest in receivables as collateral to secure a loan. The parties’ rights will vary depending on whether the receivables are sold or used as collateral. If sold, the buyer holds absolute ownership of the acquired receivables protected from other interests. If the transaction is a loan, the lender holds a security interest in the receivables, which may be junior to other interests.

A bankruptcy court can recharacterize a transaction as …

A Foreign Debtor Who Lacks Permanent Residence In The U.S. May Qualify For Florida’S Homestead Exemption, Jenna Kirkland

Bankruptcy Research Library

(Excerpt)

The home has special significance under Florida law, as public policy favors property ownership, citizen independence, and preserving a home where a family can be sheltered and “live beyond the reach of economic misfortune.” Generally, once an individual files for bankruptcy, all property of the debtor becomes property of the estate. However, Section 522 of title 11 of the United States Code (“Bankruptcy Code”) allows a debtor to exempt certain property from the estate. The Bankruptcy Code permits states to opt out of the federal exemption scheme provided. Florida is one of the states that has opted out, therefore …

The Features And Limitations Of Asbestos Settlement Trusts: A Primer, Michael Quintman

Bankruptcy Research Library

(Excerpt)

Section 524 of title 11 of the United States Code (“Bankruptcy Code”) prevents creditors from recovering pre-bankruptcy debts after plan approval if their recovery was not already provided for in the approved bankruptcy plan. Subsection (g) of section 524 provides a special procedure for debtors previously engaged in the sale or production of asbestos-containing products to restructure while ensuring those injured through exposure to those products are compensated. In particular, section 524(g) provides for the formation of a trust that can settle asbestos related tort claims after the plan has been confirmed by a bankruptcy court. These trusts are …

Chapter 15 Recognition Is Necessary For Efficient And Consistent Cross-Border Proceedings, Sarah Franzetti

Bankruptcy Research Library

(Excerpt)

When Chapter 15 of title 11 of the United States Code (the "Bankruptcy Code") was adopted in 2005, it repealed the former section 304, which had often led to ad-hoc and inconsistent rulings for foreign debtors seeking assistance in U.S. bankruptcy courts. The new Chapter was passed to achieve greater efficiency on a domestic scale, as well as the "fair and efficient administration of cross-border insolvencies" by promoting greater cooperation between U.S. and foreign courts. For a foreign debtor to reap the benefits of this cooperation, a representative of the foreign bankruptcy proceeding must petition a U.S. bankruptcy court …

Granting Derivative Standing To A Creditors’ Committee, Jordan Milite

Bankruptcy Research Library

(Excerpt)

A party has “standing” (the right to challenge the conduct of another in court) when that person or entity has suffered an “injury in fact.” “Derivative standing” is when a person or entity other than the harmed party steps in to assert the claim in place of the harmed party. In a case under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”), a bankruptcy court may grant derivative standing to a creditors’ committee or similar body, rather than the bankruptcy estate itself, to bring a claim on behalf of a debtor’s estate. This often …

The Ability To Set And Enforce Bar Dates And Determine Untimely Administrative Expense Claims In A Chapter 11 Case, Kayla Nieves

Bankruptcy Research Library

(Excerpt)

Title 11 of the United States Code (the “Bankruptcy Code”) does not expressly provide that bankruptcy courts may set and enforce deadlines, i.e., “bar dates,” for administrative expense claims. The Bankruptcy Code also does not expressly define “timely” or “tardy” administrative expense claims. Courts, however, have interpreted sections 105 and 503 of the Bankruptcy Code as sufficiently broad to provide bankruptcy courts with discretion to establish bar dates and allow untimely filed administrative expense claims “for cause.”

This memorandum explores the decisions that have addressed a bankruptcy court’s ability to set and enforce bar dates and to determine what …

Constitutionality Of Non-Uniform Quarterly Fees, Michael Francis Pecorella

Bankruptcy Research Library

(Excerpt)

In the United States, there are two different government entities entrusted with overseeing the administration of cases under title 11 of the United States Code (the “Bankruptcy Code”). In all but two states, the Office of the United States Trustee, which is a part of the Department of Justice, oversees the administration of bankruptcy cases. In North Carolina and Alabama, the two states that do not have a United States Trustee system, a Bankruptcy Administrator, which is funded by and housed in the Judicial Conference, oversees the administration of bankruptcy cases. The U.S. Trustees and the Bankruptcy Administrators generally …

When A Critical Vendor May Be Insulated From Preference Liability, Michael A. Solimani

Bankruptcy Research Library

(Excerpt)

Under Title 11 of the United States Code (the “Bankruptcy Code”) a trustee or debtor in possession (“DIP”) may avoid certain payments made by the debtor to a creditor within ninety days prior to filing for bankruptcy, or one year if the creditor is an insider. The Bankruptcy Code contains certain defenses to preference claims. A court may also release a creditor from such claims. Such a release may be found in orders approving payment of pre-petition claims to a “critical vendor.” Absent such an express release, it is unclear whether a trustee or DIP is precluded from pursuing …

Circumstances Under Which A Court Will Dismiss A Chapter 11 Filing Made In Bad Faith, Nicholas Wogan

Bankruptcy Research Library

(Excerpt)

Under section 1112(b) of title 11 of the United States Code (the “Bankruptcy Code”), a bankruptcy court may dismiss a Chapter 11 filing “for cause.” It is a generally accepted principle that “for cause” dismissal includes dismissal of filings made in bad faith, and this concept originates in a need for bankruptcy courts to uphold the jurisdictional integrity of the Chapter 11 process from those who would seek to abuse it. Courts deciding whether dismissal for bad faith is warranted typically employ a two-step analysis: first to determine whether a bad faith filing is “cause” for dismissal under section …

Private Student Loans May Be Dischargeable In Bankruptcy Without Meeting The Undue Hardship Requirement And If Not, There Are Two Ways To Prove Undue Hardship, Kimberly Lee

Bankruptcy Research Library

(Excerpt)

Section 523 of title 11 of the United States Code (the “Bankruptcy Code”) prevents former students from discharging certain educational debts in bankruptcy, unless the failure to discharge “would impose an undue hardship on the debtor and the debtor’s dependents.” Typically, it is a debtor’s burden to show that their loans may be discharged on the grounds of “undue hardship.” However, Congress has not defined “undue hardship” leaving jurisdictions divided regarding the appropriate test. Most courts have followed the Brunner three-prong test, while only the First and Eighth Circuits use the totality of the circumstances test.

Additionally, section 523(a)(8) …

Analysis Of Courts' Discretion To Enforce Arbitration Of Core Claims, Sarah L. Hautzinger

Bankruptcy Research Library

(Excerpt)

In general, a bankruptcy court has original and exclusive jurisdiction of chapter 11 bankruptcy cases. However, problems arise when a prepetition contract contains an arbitration clause, and a court must decide if it has discretion to enforce arbitration of a core claim. The statutes that play essential (but competing) roles in a court's analysis are the Federal Arbitration Act ("FAA") and the United States Bankruptcy Code (the "Bankruptcy Code"). In sum, "bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach toward dispute resolution."

In these cases, a bankruptcy court must determine if there …