Bankruptcy Law Commons^™

The Paradoxes Of Secured Landing: Is There A Less Uneasy Case For The Priority Of Secured Claims In Bankruptcy?, Wei Zhang

Research Collection Yong Pung How School Of Law

This paper is inspired directly by two articles coauthored by Professors Bebchuk and Fried, which comprehensively questioned the efficiency of the bankruptcy priority awarded to secured claims. It starts by pointing out the following efficiency benefit of such priority largely unmentioned in the legal literature, including the Bebchuk and Fried articles: the priority of secured debts undermines borrowers’ incentives to pursue excessively risky investment projects under certain circumstances. However, this additional benefit also exposes two interrelated paradoxes pertaining to the welfare effects of secured claims with bankruptcy priority. For one thing, while issuance of secured senior debts helps constrain over-risky …

House Swaps: A Strategic Bankruptcy Solution To The Foreclosure Crisis, Lynn M. Lopucki

Michigan Law Review

Since the price peak in 2006, home values have fallen more than 30 percent, leaving millions of Americans with negative equity in their homes. Until the Supreme Court’s 1993 decision in Nobelman v. American Savings Bank, the bankruptcy system would have provided many such homeowners with a remedy. They could have filed bankruptcy, discharged the negative equity, committed to pay the mortgage holders the full values of their homes, and retained those homes. In Nobelman, however, the Court misinterpreted reasonably clear statutory language and invented legislative history to resolve a three-to-one split of circuits in favor of the minority view …

Banking And The Social Contract, Mehrsa Baradaran

Notre Dame Law Review

This Article asserts that there are three major tenets of the social contract: (1) safety and soundness, (2) consumer protection, and (3) access to credit. Regulators can and should require banks to meet standards in these areas to benefit society even if these measures reasonably reduce bank profits. Implicit in the social contract is the idea that each party must give up something in the exchange. This Article provides policymakers not only the appropriate narrative and justifications needed to frame their regulatory philosophy, but it also provides important textual support from the most prominent acts of banking legislation to give …

Everybody Wins! Elimination Of The Absolute Priority Rule For Individuals Under Bapcpa: A Middle Ground, Liliya Gritsenko

Cardozo Law Review

No abstract provided.

Final Report Of The Abi Commission To Study The Reform Of Chapter 11, Michelle M. Harner

Book Gallery

A robust, effective, and efficient bankruptcy system rebuilds companies, preserves jobs, and facilitates economic growth with dynamic financial markets and lower costs of capital. For more than 35 years, the U.S. Bankruptcy Code has served these purposes, and its innovative debtor in possession chapter 11 process, which allows a company to manage and direct its reorganization efforts, is emulated around the globe. As with any law or regulation, however, periodic review of U.S. bankruptcy laws is necessary to ensure their continued efficacy and relevance.

Whether by design or chance, efforts to review and assess U.S. business reorganization laws are undertaken …

Pensioners, Bondholders, And Unfair Discrimination In Municipal Bankruptcy, Andrew B. Dawson

Articles

Detroit recently confirmed its plan of debt adjustment under which the city has endeavored to adjust its pension obligations. The court's confirmation order and oral opinion on the record present what is perhaps the most significant decision regarding a key question facing any city attempting to adjust pensions in bankruptcy: can a city propose to pay its pension claimants significantly more than its other unsecured creditors? This question involves interpreting the Bankruptcy Code's unfair discrimination rule.

The Detroit bankruptcy court applied a novel interpretation of unfair discrimination, eschewing the relatively thin body of case law interpreting this rule, and suggesting …

Whether A Contract Is Divisible For Purposes Of Section 365 Of The Bankruptcy Code, Christopher Bolz

Bankruptcy Research Library

(Excerpt)

Section 365 of the Bankruptcy Code governs the assumption, rejection, and assignment of executory contracts and unexpired leases in bankruptcy cases. Although the definition of an executory contract has not been codified, it is considered to be a contract that has not been fully performed. The assumption or rejection of an executory contract is achieved through court approval, except in certain instances concerning Chapter 7 bankruptcy. Rejection leads to a non-administrative unsecured claim for damages. Following rejection, neither the estate nor the other party owes performance to one another.

The trustee or debtor in possession must assume or reject …

Whether The Absolute Priority Rule Has Been Abrogated In Individual Chapter 11 Cases, Colin Coburn

Bankruptcy Research Library

(Excerpt)

In recent years, a debate has been raging over whether the absolute priority rule in applies to individual chapter 11 debtors. Essentially, the absolute priority rule dictates that junior creditors cannot retain anything under a plan if an objecting senior creditor is not paid in full. If each class of creditor does not consent to a plan of reorganization, a bankruptcy court can still confirm the plan if it meets statutory requirements and is deemed “fair and equitable.” This method of confirmation is known as a “cramdown.” In order for a plan to be “fair and equitable,” it must, …

S-Corp And Qsub Tax Status As Property Of The Bankruptcy Estate, Ryan Jennings

Bankruptcy Research Library

(Excerpt)

Under the Internal Revenue Code, a corporation can elect to be an “S” Corporation (“S-Corp”) for federal income tax purposes. Electing for S-Corp status will make the corporation a pass through entity, meaning that the corporation itself will not have any tax benefits or liability. Instead, the company’s income will be passed on to it shareholders, who will have to report it on their personal tax returns. Similarly, an S-Corp that owns a subsidiary corporation can elect to treat it as qualified subchapter S subsidiary (“QSub”). A QSub is also a pass through entity that passes its tax benefits …

Contract Claims And The Willful And Malicious Injury Exception To The Discharge In Bankruptcy, Scott F. Norberg

Faculty Publications

No abstract provided.

Section 362(C)(3): Does It Terminate The Entire Automatic Stay?, Michael Aryeh

Bankruptcy Research Library

(Excerpt)

Section 362 operates to create an automatic stay upon the filing of a bankruptcy petition. The automatic stay, among other things, prevents a debtor’s creditors from seeking to enforce a judgment against a debtor or against property of the estate, taking any act to obtain possession of property of the estate, or taking any act to create or enforce a lien. Section 362, however, does contain numerous provisions that provide for limitations to the automatic stay.

Among these provisions is section 362(c)(3)(A), which provides in relevant part that “if a single or joint case is filed by or against …

Determining When Projected Disposable Income Test May Be A Basis For A Post-Confirmation Modification, Steven Ching

Bankruptcy Research Library

(Excerpt)

In order for a chapter 13 plan to be confirmed, the plan must provide that the debtor will contribute his projected disposable income towards his plan payments. However, circumstances may change after confirmation of the chapter 13 plan, and the debtor or trustee may find themselves in need to modify the plan payment. Under section 1329 of the Bankruptcy Code, the debtor, trustee, or an unsecured creditor may request to modify the plan after confirmation of the plan but before completion of the payments.

Generally, bankruptcy courts have broad discretion to approve or disapprove a post-confirmation modification of a …

Professional Firm Retention: Determining Whether A Professional Is A “Professional Person” Within Section 327(A) Of The Bankruptcy Code, Alexandra Hastings

Bankruptcy Research Library

(Excerpt)

An important issue in chapter 11 cases is whether a “professional person” qualifies as a bankruptcy “professional” within section 327(a) of the Bankruptcy Code. Section 327(a) requires that a trustee or debtor-in-possession must seek court approval for the employment of attorneys, accountants, appraisers, auctioneers, or other “professional persons” assisting the debtor with its bankruptcy case. Further, section 327(a) specifies, among other things, that a trustee or debtor-in-possession may only employ professionals that are “disinterested persons” to assist in the administration of the debtor’s bankruptcy case. The failure to obtain court approval under section 327(a) “may result in the denial …

Whether Funds Transferred From Trust Account Can Be “Property Of The Debtor” That Is Subject To A Fraudulent Transfer Claim, Adam C.B. Lanza

Bankruptcy Research Library

(Excerpt)

One of the main purposes of bankruptcy is to maximize the value of the bankruptcy estate for the benefit of creditors. Consistent with this goal of maximizing the value of a bankrupt estate, a bankruptcy trustee has certain “avoidance powers” that are codified in chapter 5 of the Bankruptcy Code. These broad powers allow the trustee to file adversary proceedings to avoid certain pre- and post-petition transfers of property of the debtor. After a trustee avoids a transfer, the “transferred property is returned to the estate for the benefit of all persons who have presented valid claims.”

One common …

Whether Non-Spousal Inherited Retirement Accounts Are Exempt Under The Bankruptcy Code, Kimberly Tracey

Bankruptcy Research Library

(Excerpt)

Recently, the Court of Appeals for the Seventh Circuit, in In re Clark, adopted a new approach to the treatment of non-spousal inherited individual retirement accounts (hereinafter referred to as IRAs) in bankruptcy cases. This case exemplified a typical situation in which a debtor inherits a non-spousal IRA, and then files for bankruptcy. Often times this debtor will claim that the non-spousal, inherited IRA is a “retirement account” that is exempt from the bankruptcy estate under sections 522(b)(3)(C) and (d)(12) of the Bankruptcy Code. However, frequently the trustee managing the bankruptcy estate will object to the debtor’s proposed …

Repeat Bankruptcies And The Integrity Of The Canadian Bankruptcy Process, Thomas G. W. Telfer

Law Publications

One of the often-cited purposes of bankruptcy law is to permit the rehabilitationof the debtor as a citizen unfetteredby past debts. The bankruptcy regime thus allows an honest but unfortunate debtor toobtain a fresh start through the discharge. However, Canadian bankruptcy law has long taken the position that a repeat bankruptcy will preclude an order of an absolute discharge. The different treatment of repeat bankrupts suggests that there are other policy objectives at play beyond rehabilitation. While the court must consider the interests of the debtor and creditors in a contested discharge hearing an equally important consideration is the protection …

A Solution-Based Approach To Rejecting Trademark Licenses In Bankruptcy, 13 J. Marshall Rev. Intell. Prop. L. 621 (2014), Chandra J. Critchelow

UIC Review of Intellectual Property Law

The Seventh Circuit created a circuit split in bankruptcy law regarding the rejection of trademark licenses in its 2011 decision in Sunbeam Prods., Inc. v. Chi. Am. Mfg. LLC. All other courts have held that when a trademark license is rejected under 11 U.S.C. § 365 in a Chapter 11 bankruptcy proceeding, the licensee may no longer use the licensed trademark. All other forms of intellectual property are subject to § 365(n), which prevents automatic termination of the licensee’s rights. In Sunbeam, the court held that the rejection of a trademark license under § 365 does not automatically terminate the …

Securitization Of Aberrant Contract Receivables, Thomas E. Plank

Chicago-Kent Law Review

Originators of traditional receivables, such as automobile loans, use securitization and structured finance debt transactions to obtain financing at lower net costs than traditional secured financing. The typical securitization or structured finance debt transaction combines (i) a sale of receivables to a separate, bankruptcy remote, special purpose legal entity (an “SPE”) and (ii) a loan to the SPE secured by the receivables. This combination produces lower net financing costs because the SPE’s lender can obtain repayment of its loan from the receivables while avoiding the costs that the Bankruptcy Code imposes on direct secured lenders to originators that could become …

Not Just Anna Nicole Smith: Cleavage In Bankruptcy, David G. Epstein

Law Faculty Publications

This is an essay about the unwarranted erosion of two basic bankruptcy principles:the cleavage effect of a debtor's filing of a bankruptcy petition and the equality of treatment of prepetition unsecured claims. These are two of the most fundamental bankruptcy concepts. First courts and then Congress have fashioned rules favoring the prepetition unsecured claims of vendors and lessors that are inconsistent with these concepts. We explore the origins of such favored treatment, question the commonly offered policy justifications, and argue that the prepetition unsecured claims of vendors and lessors generally should be afforded the same treatment in bankruptcy as other …

When Churches Reorganize, Pamela Foohey

Scholarly Works

This Article combines an analysis of documents submitted in connection with Chapter 11 cases filed by religious organizations with the results of in-depth interviews with these organizations’ leaders and their bankruptcy attorneys to assess whether reorganization has the potential to offer an effective solution to these debtors’ financial distress. In doing, it makes three contributions. First, it identifies a subset of organizations that seemed more likely to turn to bankruptcy: small congregationalist and non-denominational churches, often with predominately African-American membership. The Article pinpoints salient questions about these churches’ access to credit and use of bankruptcy for future study. Second, it …

The Uneasy Case Against Tax Lien Subordination, Shu-Yi Oei

Faculty Scholarship

I.R.C. § 6323, which governs how the federal tax lien ranks against the interests of the taxpayer’s other creditors, subordinates the tax lien to the claims of other creditors in various ways. Tax lien subordination is commonly justified on the grounds that it enhances taxpayer asset value, facilitates commercial transactions, and reduces monitoring costs for private creditors. This short essay argues, however, that these benefits may be illusory. Tax lien subordination may, in fact, create costs and distortions and may lead to unfair distributive results. This essay suggests that the tax lien priority scheme might be made less costly by …

Taxing Bankrupts, Shu-Yi Oei

Faculty Scholarship

When a debtor goes bankrupt and limited assets have to be divided between competing creditors, should unpaid taxes owed to the government be paid before the debts owed to other creditors? This Article defends the notion that some tax debts should be awarded priority. Insofar as bankruptcy protection transfers the risk of financial distress from a debtor to her creditors, the tax priority debate should be understood as a fight about how much debtor default risk the government should have to assume relative to other creditors. This Article argues that the government’s share of debtor default risk should be limited …

Rollover Risk: Ideating A U.S. Debt Default, Steven L. Schwarcz

Faculty Scholarship

This article examines how a U.S. debt default might occur, how it could be avoided, its potential consequences if not avoided, and how those consequences could be mitigated. To that end, the article differentiates defaults caused by insolvency from defaults caused by illiquidity. The latter, which are potentiated by rollover risk (the risk that the government will be temporarily unable to borrow sufficient funds to repay its maturing debt), are not only plausible but have occurred in the past. Moreover, the ongoing controversy over the federal debt ceiling and the rise of the shadow-banking system make these types of defaults …

The Bankruptcy-Law Safe Harbor For Derivatives: A Path-Dependence Analysis, Steven L. Schwarcz, Ori Sharon

Faculty Scholarship

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers—whether in the United States or abroad—should not automatically assume, based on its …

Derivatives And Collateral: Balancing Remedies And Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Curbing The Exploitation Of Passive Creditors In Chapter 11 Reorganization By Leveraging The Oversight Role Of The United States Trustee, Addison Pierce

American University Business Law Review

No abstract provided.

Swords, Shields, And Shackles: Human And Corporate "Persons" Under The Bankruptcy Abuse Prevention And Consumer Protection Act Of 2005, Linda E. Coco

Faculty Scholarship

No abstract provided.

Ice Cube Bonds: Allocating The Price Of Process In Chapter 11 Bankruptcy, Edward J. Janger, M. B. Jacoby

Faculty Scholarship

No abstract provided.

Where Do We Go Now? The Uncertain Future For 29 U.S.C. § 1301(B)(1), Private Equity Funds, And Multiemployer Pension Plans After Sun Capita, Crighton T. Allen

Georgia Law Review

The United States faces a growing problem concerning corporate indebtedness to pension plans, specifically, multi-employer pension plans (MEPPs). MEPPs are group pension plans in which a number of employers join together to contribute to a fund benefitting all employees of the participating companies. If an employer seeks to withdraw from a MEPP by ceasing to contribute into it, the company faces a withdrawal penalty-its proportionate share of the plan's vested but unfunded benefits. The recent decision by the First Circuit in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund has the potential to greatly …

The Challenges Of The New Defalcation Standard, Jonathon S. Byington

Faculty Law Review Articles

The crux of bankruptcy law is giving debtors a fresh start by discharging their debts. Yet society has recognized that some debts should not be discharged because they either have a high level of societal importance or derive from a debtor’s culpable conduct. One of these exceptions from discharge is for defalcation while acting in a fiduciary capacity. The legal meaning of defalcation has been unclear for 172 years, ranging from a breach of trust by one who has charge of money to the misappropriation of money in one’s keeping. A three-way federal circuit split developed on whether a state …