Chapter 38 BANKRUPTCY Federal Bankruptcy Law Case Administration-Chapter 3 [38-1] Commencement of the Case [38-1a] Voluntary Petitions Involuntary Petitions Dismissal [38-1b] Automatic Stays [38-1c] Trustees [38-1d] Meetings of Creditors [38-1e] Creditors, the Debtor, and the Estate-Chapter 5 [38-2] Creditors [38-2a] Proof of Claims Secured and Unsecured Claims Priority of Claims Subordination of Claims Debtors [38-2b] Debtor's Duties Debtor's Exemptions Discharge The Estate [38-2c] Trustee as Lien Creditor Voidable Preferences Fraudulent Transfers Statutory Liens Liquidation–Chapter 7 [38-3] Proceedings [38-3a] Conversion [38-3b] Dismissal [38-3c] Distribution of the Estate [38-3d] Discharge [38-3e] Reorganization–Chapter 11 [38-4] Proceedings [38-4a] Plan of Reorganization [38-4b] Acceptance of Plan [38-4c] Confirmation of Plan [38-4d] Effect of Confirmation [38-4e] Adjustment of Debts of Individuals-Chapter 13 [38-5] Proceedings [38-5a] Conversion or Dismissal [38-5b] The Plan [38-5c] Confirmation of Plan [38-5d] Effect of Confirmation [38-5e] Discharge [38-5f] Creditors' Rights & Debtors’ Relief Outside of Bankruptcy Creditors' Rights [38-6] Prejudgment Remedies [38-6a] Postjudgment Remedies [38-6b] Debtor's Relief [38-7] Compositions [38-7a] Assignments for Benefit of Creditors [38-7b] Equity Receiverships [38-7c] Cases in This Chapter Husky International Electronics, Inc., v. Ritz Radlax Gateway Hotel, LLC v. Amalgamated Bank Harris v. Viegelahn Hamilton v. Lanning Chapter Outcomes After reading and studying this chapter, the student should be able to: • Explain (1) the requirements for voluntary and involuntary bankruptcy cases, (2) the priorities of creditors’ claims, (3) the debtor’s exemptions, and (4) the debts that are not dischargeable in bankruptcy. • Explain the duties of a trustee and his rights (1) as a lien creditor, (2) to avoid preferential transfers, (3) to avoid fraudulent transfers, and (4) to avoid statutory liens. • Explain the procedure followed in distributing the debtor’s estate under Chapter 7. • Compare the adjustment of debt proceedings under Chapters 11 and 13. • Identify and define the nonbankruptcy compromises between debtors and creditors. TEACHING NOTES Both individuals and corporations sometimes encounter financial crises and business misfortune that may lead to an accumulation of debts that exceeds total assets, or they may for some other reason be unable to pay their debts when due. In this chapter, we will outline one method of debtor relief — a proceeding in a federal court under federal bankruptcy law. FEDERAL BANKRUPTCY LAW Bankruptcy legislation serves a dual purpose: (1) to bring about a quick, equitable distribution of the debtor’s property among her creditors and (2) to discharge the debtor from her debts, enabling her to rehabilitate herself and to start afresh. The US Bankruptcy Code consists of eight odd-numbered chapters and one even-numbered chapter. Chapters 7, 9, 11, 12, and 13 provide five different types of proceedings; Chapters 1, 3, and 5 apply to those five proceedings. Straight, or ordinary, bankruptcy (Chapter 7) provides for the liquidation and termination of the debtor’s business, whereas the other proceedings provide for the reorganization and adjustment of the debtor’s debts and the continuance of the debtor’s business. The 1994 amendments to the Bankruptcy Act require that beginning in 1998, certain dollar amounts be adjusted for inflation every three years. (The dollar amounts in this chapter reflect the adjustment that was effective on April 1, 2016.) The 2005 Act added Chapter 15 to the Bankruptcy Code for cross-border insolvency cases. Chapter 1 and certain sections of Chapters 3 and 5 apply to proceedings under Chapter 15. This text will not cover Chapters 9,12 or 15. • Chapter 7 applies to all debtors, with the exception of railroads, insurance companies, banks, savings and loan associations, homestead associations, licensed small business investment companies, and credit unions. In the past several years, 63 to 70 percent of bankruptcies have been filed under Chapter 7. Moreover, Chapter 7 has special provisions for liquidating the estates of stockbrokers and commodity brokers. • Chapter 11 applies to railroads and any person who may be a debtor under Chapter 7 (except a stockbroker or a commodity broker). Less than 1 percent of bankruptcies are filed under Chapter 11. • Chapter 9 applies only to municipalities that are generally authorized to be debtors under that chapter, that are insolvent, and that desire to effect plans to adjust their debts. • Chapter 12 applies to individuals, or individuals and their spouses, who are engaged in farming if 50 percent of their gross income is from farming, their aggregate debts do not exceed $4,153,150 and at least 50 percent of their debts arise out of farming operations. Less than one-tenth of 1 percent of bankruptcies are filed under Chapter 12. Corporations or partnerships also may qualify for Chapter 12. The 2005 Act made Chapter 12 permanent and extended its coverage to certain family fishermen if 50 percent of their gross income is from commercial fishing, their aggregate debts do not exceed $1,924,550, and at least 80 percent of their debts arise out of commercial fishing operations. • Chapter 13 applies to individuals with regular income who owe liquidated unsecured debts of less than $394,725 and secured debts of less than $1,184,200. In the past several years 29 to 36 percent of bankruptcies have been filed under Chapter 13. • Chapter 15 covers cross-border (transnational) insolvencies and incorporates the Model Law on Cross-Border Insolvency, promulgated by the United Nations Commission on International Trade Law (UNCITRAL). These changes are intended to make cross-border filings easier to accomplish and provide greater predictability. Chapter 15 encourages cooperation between the United States and foreign countries with respect to transnational insolvency cases. 38-1CASE ADMINISTRATION — CHAPTER 3 Chapter 3 of the Bankruptcy Code contains provisions dealing with the commencement of the case, the meetings of creditors, the officers who administer the case, and the officers’ administrative powers. 38-1a Commencement of the Case Voluntary Petitions — More than 99 percent of all bankruptcy petitions are filed voluntarily. Any eligible person may file a voluntary petition for bankruptcy which must list all creditors, property owned, list of exempt property, and a statement of the debtor’s affairs; filing constitutes an automatic order for relief. Insolvency is not required in order to file a voluntary petition. The 2005 Act added a requirement that all individual debtors (with a few exceptions) receive credit counseling from an approved nonprofit budget and credit counseling agency within the 180-day period before filing the petition. Involuntary Petitions — A debtor may be forced into involuntary bankruptcy (Chapter 7 or 11) (1) by three or more creditors who have unsecured claims which total $15,775 or more, or (2) if the debtor has fewer than twelve creditors, by one or more creditors whose total unsecured claims equal $15, 775 or more.. Farmers and banking, insurance, or nonprofit corporations cannot be forced into involuntary bankruptcy. If the petition is not contested, the court will enter an order for relief against the debtor. 38-1b Dismissal The court is empowered to dismiss a Chapter 7case filed by an individual debtor whose debts are mostly consumer debts if granting that relief would substantially abuse the provisions of Chapter 7. Under Chapter 11, the court may dismiss a case for cause after notice and a hearing. Section 1112(b). Under Chapter 13, the debtor has an absolute right to have his case dismissed. Under Chapter 13, if a motion to dismiss is filed by an interested party other than the debtor, the court may dismiss the case only for cause after notice and a hearing. 38-1c Automatic Stays Following the filing of a voluntary or involuntary petition an order of relief is issued: All creditors are precluded from taking legal action against the debtor. *** Chapter Outcome*** Explain the duties of a trustee and his rights (1) as a lien creditor, (2) to avoid preferential transfers, (3) to avoid fraudulent transfers, and (4) to avoid statutory liens. 38-1d Trustees The trustee of an estate may be selected by the creditors (Chapter 7 or, if the court orders a trustee, in Chapter 11) or appointed, (Chapters 12 and 13). Under Chapter 7, the trustee is responsible for collecting, liquidating, and distributing the debtor’s estate. 38-1e Meetings of Creditors Within a reasonable time after relief is ordered, a meeting of creditors must be held. Though the court may not attend this meeting, the debtor must appear and submit to an examination of his financial situation by the creditors and the trustee. In a Chapter 7 proceeding, qualified creditors elect a permanent trustee. *** Chapter Outcome*** Explain (1) the requirements for voluntary and involuntary cases, (2) the priorities of creditors’ claims, (3) the debtor’s exemptions, and (4) the debts that are not dischargeable in bankruptcy. 38-2 CREDITORS, THE DEBTOR, & THE ESTATE—CHAPTER 5 38-2a Creditors The Bankruptcy Code defines a creditor as any entity having a claim (right to payment) against the debtor that arose at the time of or before the order for relief. Proof of Claims — Must be filed in a timely manner. The Court may not allow a claim if: it is unenforceable against the debtor or his property, it is for unmatured interest, it may be offset against a debt owed the debtor, or it is for insider/attorney services that are overvalued. Secured and Unsecured Claims — A lien is a charge or interest in property to secure payment of a debt or performance of an obligation and must be satisfied before the property is available to satisfy the claims of unsecured creditors. A lien or secured claim can arise by agreement, judicial action, common law, or statute. Priority of Claims — All secured claims are paid first, with the remaining assets distributed among creditors with unsecured claims according to their priority. The order of priority is: 1. Domestic support obligations (Alimony and support of spouse or child) Subject to the expenses of a trustee in administering assets that can be used to pay these obligations. 2. “ Expense of administration of the debtor’s estate 3. Gap” creditors (arising in the ordinary course of business after commencement of the case but before either the appointment of the trustee or the order for relief) 4. Wages, salaries, or commissions earned within 180 days of filing or date of cessation of business, whichever comes first, up to $12,850 5. Contributions to employee benefit plan up to $12, 850multiplied by the number of employees covered by the plan, less the aggregate amount paid to such employees under number 4 above 6. Grain or fish producer claims against a storage facility up to $6,325 7. Consumer deposits up to $2,850 (money deposited for living expenses or services for personal, family, or household use) 8. Taxes 9. Allowed claims for death or personal injuries resulting from the debtor’s operation of a motor vehicle or vessel while legally intoxicated from using alcohol, a drug, or other substance. Subordination of Claims — When two claims have equal priority, the court may, on equitable grounds, decide which shall be paid first. Claims by a parent corporation against subsidiary may be subordinated where it is demonstrated that the parent was guilty of unconscionable mismanagement to the detriment of other creditors. 38-2b Debtors Debtor’s Duties — Under the Bankruptcy Code, the debtor must file a list of creditors, a schedule of assets and liabilities, and a statement of financial affairs. In any case in which a trustee is serving, the debtor must cooperate with the trustee and surrender to the trustee all property of the estate and all records relating to property of the estate. Debtor’s Exemptions — Certain property is exempt from bankruptcy proceedings including, 1. up to $23,675 in equity in property used as a residence or burial plot; 2. up to $3,775 in equity in one motor vehicle; 3. up to $600 for any particular item, and not to exceed $12,625 in aggregate value, of household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments that are primarily for personal, family, or household use; 4. up to $1,600 in jewelry; 5. any property up to $1,250 plus up to $11,850 of any unused amount of the first exemption; 6. up to $2,375 in implements, professional books, or tools of the debtor’s trade; 7. unmatured life insurance contracts owned by the debtor, other than a credit life insurance contract; 8. professionally prescribed health aids; 9. social security, veteran’s, and disability benefits; 10. unemployment compensation; 11. alimony and support payments, including child support; 12. payments from pension, profit-sharing, and annuity plans; 13. tax exempt retirement funds; and 14. payments from an award under a crime victim’s reparation law, a wrongful death award, and up to $23,675, not including compensation for pain and suffering or for actual pecuniary loss, from a personal injury award. In addition, the debtor may avoid judicial liens on any exempt property and nonpossessory, nonpurchase money security interests on certain household goods, tools of the trade, and professionally prescribed health aids. State law can, by specific legislation, limit exemptions. (More than three-quarters of the states have done so.) The 2005 Act specifies that a debtor’s exemption is governed by the law of the State where the debtor was domiciled for 730 days immediately before filing. If the debtor did not maintain a domicile in a single State for the 730-day period, then the governing law is of the State where the debtor was domiciled for 180 days immediately preceding the 730-day period (or for a longer portion of such 180-day period than in any other State). Whether or not Federal or State exemptions apply, the 2005 Act provides that tax-exempt retirement accounts are exempt. IRAs are subject to a $1,283,025 cap periodically adjusted for inflation. Nevertheless, the 2005 Act makes exempt property liable for nondischargeable domestic support obligations. The 2005 Act also imposes limits on the use of State homestead exemptions. First, to the extent that the homestead was obtained through fraudulent conversion of nonexempt assets during the ten-year period before filing the petition, the exemption is reduced by that amount. Second, regardless of the level of the State exemption, a debtor may only exempt up to $160,375 of an interest in a homestead that was acquired during the 1,215-day period prior to the filing, but this limitation does not apply to any equity that has been transferred from the debtor’s principal residence acquired more than 1,215 days before filing to the debtor’s current principal residence if both residences are located in the same State. Third, a debtor may not exempt more than $160,375 if (1) the debtor has been convicted of a felony, which under the circumstances demonstrates that the filing of the case was an abuse of the Bankruptcy Cod; or (2) the debtor owes a debt arising from (a) any violation of State or Federal securities laws; (b) fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of securities registered under the Securities Exchange Act of 1934; or (c) any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding five years. The $160,375 limitation is to be adjusted periodically for inflation. Discharge — If granted, a discharge relieves the debtor from liability for dischargeable debts. The following are not dischargeable: 1. certain taxes and customs duties and debt incurred to pay such taxes or custom duties; 2. legal liabilities for obtaining money, property, or services by false pretenses, false representations, or actual fraud; 3. legal liability for willful and malicious injuries to the person or property of another; 4. domestic support obligations and property settlements arising from divorce or separation proceedings; 5. debts not scheduled, unless the creditor knew of the bankruptcy; 6. debts the debtor created by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; 7. student loans unless excluding the debt from discharge would impose undue hardship; 8. debts that were or could have been listed in a previous bankruptcy in which the debtor waived or was denied a discharge; 9. consumer debts for luxury goods or services in excess of $675 per creditor, if incurred by an individual debtor on or within ninety days before the order for relief, are presumed to be nondischargeable; 10. cash advances aggregating more than $950 obtained by an individual debtor under an open end credit plan within seventy days before the order for relief are presumed to be nondischargeable; 11. liability for death or personal injury based upon the debtor’s operation of a motor vehicle, vessel, or aircraft while legally intoxicated; 12. fines, penalties, or forfeitures owed to a governmental entity; and 13. certain debts incurred for violations of securities fraud law. (This provision was added by the Sarbanes-Oxley Act.) An agreement between a debtor and a creditor permitting the creditor to enforce a discharged debt is enforceable to the extent State law permits but only if certain requirements are met. 38-2c The Estate Includes all legal and equitable interests of the debtor in nonexempt property at the time bankruptcy proceedings are filed, and also covers property acquired by the debtor within 180 days after commencement of the case through inheritance, property settlement, divorce decree, or life insurance proceeds. Trustee as Lien Creditor — The trustee acquires the rights and powers of a hypothetical judicial lien creditor — has priority over a creditor with an unperfected security interest. Voidable Preferences — Allows the trustee to invalidate pre-bankruptcy transfers: 1) made to or for the creditor’s benefit; 2) made for or on account of an antecedent debt; 3) made while the debtor was insolvent; 4) made within 90 days of the filing; and 5) if the creditor receives more than he would under Chapter 7. The 90 day rule does not apply to an exchange for new value (such as a purchase of an automobile), enabling security interests, and payment of a debt in the ordinary course of business. The trustee may not void transfers of property of less than $600 for debtors whose debts are primarily consumer debts. In a case filed by a debtor whose debts are not primarily consumer debts, the trustee may not avoid any transfer of property valued at less than $6,425. Bona fide payments of alimony and child support are also not voidable, due to a 1994 amendment. Fraudulent Transfers — If made within one year of the filing date, the trustee may void it; includes the debtor’s transferring property with the actual intent to hinder, delay, or defraud any of her creditors or the transfer of property for less than a reasonably equivalent consideration. A transfer of a charitable contribution to a qualified organization will not be considered a fraudulent transfer if the amount does not exceed 15 percent of the gross annual income of the debtor for that year or if the contribution is “consistent with the practices of the debtor in making charitable contributions.” At least forty-four States have adopted the Uniform Fraudulent Transfer Act, which has a four year statute of limitations. Statutory Liens — Arise by statute and do not include a security interest or judicial lien. Statutory liens may be voided by the trustee where the lien (1) first becomes effective when the debtor becomes insolvent, (2) is not perfected or enforceable against a bona fide purchaser on the date the petition was filed or (3) is for rent. *** Chapter Outcome*** Explain the procedure followed in distributing the debtor’s estate under Chapter 7. 38-3 LIQUIDATION — CHAPTER 7 Liquidation involves terminating the business of the debtor, distributing his nonexempt assets, and, usually, discharging all his dischargeable debts. 38-3a Proceedings Proceedings under Chapter 7 apply to all debtors except railroads, insurance companies, banks, savings and loan associations, homestead associations, and credit unions. Begins with an interim trustee, who can become permanent trustee if the creditors do not select someone else. Trustee collects and sells property, investigates the debtor’s financial affairs, examines claims, decides whether to oppose a discharge of debts and makes reports. A committee of 3-11 unsecured creditors makes recommendations to the trustee. 38-3b Conversion The debtor may convert a case under Chapter 7 to Chapter 11 or 13; however any waiver of this right is unenforceable. Moreover, on request of a party in interest and after notice and a hearing, the court may convert a case under Chapter 7 to Chapter 11. The court may also convert a case under Chapter 7 to Chapter 13, but this can occur only upon the debtor’s request. Any conversion to another chapter can only occur if the debtor may also be a debtor under that chapter. Section 706. CASE 38-1 HUSKY INTERNATIONAL ELECTRONICS, INC., v. RITZ Supreme Court of the United States, 2016 578 U.S. ____, 136 S.Ct. 1581, ____ L.Ed.2d ____, 2016 WL 2842452 Sotomayor, J. The Bankruptcy Code prohibits debtors from discharging debts “obtained by ... false pretenses, a false representation, or actual fraud.” 11 U. S. C. §523(a)(2)(A). The Fifth Circuit held that a debt is “obtained by ... actual fraud” only if the debtor’s fraud involves a false representation to a creditor. That ruling deepened an existing split among the Circuits over whether “actual fraud” requires a false representation or whether it encompasses other traditional forms of fraud that can be accomplished without a false representation, such as a fraudulent conveyance of property made to evade payment to creditors. We granted certiorari to resolve that split and now reverse. Husky International Electronics, Inc., is a Colorado-based supplier of components used in electronic devices. Between 2003 and 2007, Husky sold its products to Chrysalis Manufacturing Corp., and Chrysalis incurred a debt to Husky of $163,999.38. During the same period, respondent Daniel Lee Ritz, Jr., served as a director of Chrysalis and owned at least 30% of Chrysalis’ common stock. All parties agree that between 2006 and 2007, Ritz drained Chrysalis of assets it could have used to pay its debts to creditors like Husky by transferring large sums of Chrysalis’ funds to other entities Ritz controlled. For instance—and Ritz’ actions were by no means limited to these examples— Ritz transferred $52,600 to CapNet Risk Management, Inc., a company he owned in full; $121,831to CapNet Securities Corp., a company in which he owned an 85% interest; and $99,386.90 to Dynalyst Manufacturing Corp., a company in which he owned a 25% interest. In May 2009, Husky filed a lawsuit against Ritz seeking to hold him personally responsible for Chrysalis’ $163,999.38 debt. Husky argued that Ritz’ intercompany transfer scheme was “actual fraud” for purposes of a Texas law that allows creditors to hold shareholders responsible for corporate debt. [Citation.] In December 2009, Ritz filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Southern District of Texas. Husky then initiated an adversarial proceeding in Ritz’ bankruptcy case again seeking to hold Ritz personally liable for Chrysalis’ debt. Husky also contended that Ritz could not discharge that debt in bankruptcy because the same intercompany-transfer scheme constituted “actual fraud” under11 U. S. C. §523(a)(2)(A)’s exemption to discharge. The District Court held that Ritz was personally liable for the debt under Texas law, but that the debt was not “obtained by ... actual fraud” under §523(a)(2)(A) and could be discharged in his bankruptcy. The Fifth Circuit affirmed. It did not address whether Ritz was responsible for Chrysalis’ debt under Texas law because it agreed with the District Court that Ritz did not commit “actual fraud” under §523(a)(2)(A). Before the Fifth Circuit, Husky argued that Ritz’ asset-transfer scheme was effectuated through a series of fraudulent conveyances—or transfers intended to obstruct the collection of debt. And, Husky said, such transfers are a recognizable form of “actual fraud.” The Fifth Circuit disagreed, holding that a necessary element of “actual fraud” is a misrepresentation from the debtor to the creditor, as when a person applying for credit adds an extra zero to her income or falsifies her employment history. [Citation.] In transferring Chrysalis’ assets, Ritz may have hindered Husky’s ability to recover its debt, but the Fifth Circuit found that he did not make any false representations to Husky regarding those assets or the transfers and therefore did not commit “actual fraud.” We reverse. The term “actual fraud” in §523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation. Before 1978, the Bankruptcy Code prohibited debtors from discharging debts obtained by “false pretenses or false representations.” [Citation.] In the Bankruptcy Reform Act of 1978, Congress added “actual fraud” to that list. [Citation.] The prohibition now reads: “A discharge under [Chapters 7, 11, 12, or 13] of this title does not discharge an individual debtor from any 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.” §523(a)(2)(A). When “‘Congress acts to amend a statute, we presume it intends its amendment to have real and substantial effect.’” [Citation.] It is therefore sensible to start with the presumption that Congress did not intend “actual fraud” to mean the same thing as “a false representation,” as the Fifth Circuit’s holding suggests. But the historical meaning of “actual fraud” provides even stronger evidence that the phrase has long encompassed the kind of conduct alleged to have occurred here: a transfer scheme designed to hinder the collection of debt. This Court has historically construed the terms in §523(a)(2)(A) to contain the “elements that the common law has defined them to include.” [Citation.] “Actual fraud” has two parts: actual and fraud. The word “actual” has a simple meaning in the context of common-law fraud: It denotes any fraud that “involv[es] moral turpitude or intentional wrong.” [Citation.] “Actual” fraud stands in contrast to “implied” fraud or fraud “in law,” which describe acts of deception that “may exist without the imputation of bad faith or immorality.” [Citation.] Thus, anything that counts as “fraud” and is done with wrongful intent is “actual fraud.” Although “fraud” connotes deception or trickery generally, the term is difficult to define more precisely. [Citation.] There is no need to adopt a definition for all times and all circumstances here because, from the beginning of English bankruptcy practice, courts and legislatures have used the term “fraud” to describe a debtor’s transfer of assets that, like Ritz’ scheme, impairs a creditor’s ability to collect the debt. One of the first bankruptcy acts, the [English] Statute of 13 Elizabeth, has long been relied upon as a restatement of the law of so-called fraudulent conveyances (also known as “fraudulent transfers” or “fraudulent alienations”). * * * In modern terms, Parliament made it fraudulent to hide assets from creditors by giving them to one’s family, friends, or associates. The principles of the Statute of 13 Elizabeth—and even some of its language—continue to be in wide use today. [Citations.] The degree to which this statute remains embedded in laws related to fraud today clarifies that the common-law term “actual fraud” is broad enough to incorporate a fraudulent conveyance. Equally important, the common law also indicates that fraudulent conveyances, although a “fraud,” do not require a misrepresentation from a debtor to a creditor. As a basic point, fraudulent conveyances are not an inducement-based fraud. Fraudulent conveyances typically involve “a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration.” [Citations.] In such cases, the fraudulent conduct is not in dishonestly inducing a creditor to extend a debt. It is in the acts of concealment and hindrance. In the fraudulent-conveyance context, therefore, the opportunities for a false representation from the debtor to the creditor are limited. The debtor may have the opportunity to put forward a false representation if the creditor inquires into the whereabouts of the debtor’s assets, but that could hardly be considered a defining feature of this kind of fraud. Relatedly, under the Statute of 13 Elizabeth and the laws that followed, both the debtor and the recipient of the conveyed assets were liable for fraud even though the recipient of a fraudulent conveyance of course made no representation, true or false, to the debtor’s creditor. * * * That principle also underscores the point that a false representation has never been a required element of “actual fraud,” and we decline to adopt it as one today. *** * * * Because we must give the phrase “actual fraud” in §523(a)(2)(A) the meaning it has long held, we interpret “actual fraud” to encompass fraudulent conveyance schemes, even when those schemes do not involve a false representation. We therefore reverse the judgment of the Fifth Circuit and remand the case for further proceedings consistent with this opinion. 38-3c Dismissal The court may dismiss a Chapter 7 case for cause after notice and a hearing. In a case filed by an individual debtor whose debts are primarily consumer debts, the court may dismiss a case or, with the debtor’s consent, convert the case to one under Chapter 11 or 13, if the court finds that granting relief would be an abuse of the provisions of Chapter 7. Under the means test abuse is presumed (i.e., the debtor is not eligible for Chapter 7 unless the debtor can prove special circumstances) for an individual debtor whose net current monthly income is greater than the State median income and if either (1) the debtor has available net income (income after deducting allowed expenses) for repayment to creditors over five years totaling at least $12,850, or (2) the available net income for repayment to creditors over five years is between $7,700 and $12,850 and such available net income is at least 25 percent of nonpriority unsecured claims. Section 707. The means test can be explained by the following scenarios: 1. If the debtor’s net current monthly income is less than or equal to the State median income, no presumption of abuse arises. 2. If the debtor’s net current monthly income is greater than the State median income and the debtor’s current monthly income less allowed expenses is less than $128.33 per month, no presumption of abuse arises. 3. If the debtor’s net current monthly income is greater than the State median income and the debtor’s current monthly income less allowed expenses is at least $128.33 per month, a presumption of abuse arises if the current monthly income less allowed expenses is sufficient to pay 25 percent of the debtor’s nonpriority unsecured claims over sixty months. 4. If the debtor’s net current monthly income is greater than the State median income and the debtor’s current monthly income less allowed expenses is at least $214.17 per month, a presumption of abuse arises without regard to the amount of nonpriority unsecured claims. 38-3d Distribution of the Estate Assets of the estate are distributed in the following order: 1. Secured creditors, on their security interests. 2. Creditors entitled to a priority, in the order provided. 3. Unsecured creditors who filed their claims on time (or tardily, if they did not have notice or actual knowledge of the bankruptcy.) 4. Unsecured creditors who filed their claims late. 5. Claims for fines and multiple, exemplary, or punitive damages. 6. Interest at the legal rate from the date of the filing of the petition, to all of the above claimants. 7. Whatever property remains, to the debtor. NOTE: See Figure 38-1: Collection and Distribution of the Debtor’s Estate. 38-3e Discharge Following distribution of the estate a debtor may receive a discharge except where the debtor: (1) is not an individual; (2) has destroyed, falsified, concealed, or failed to keep records; (3) has knowingly and fraudulently made a false oath or used a false claim; (4) has transferred, removed, destroyed, or concealed any of his property with intent to hinder, delay, or defraud his creditors; (5) has been granted a discharge within the previous six years; (6) has refused to obey a lawful court order or to answer approved questions; (7) has not explained losses or deficiency of assets; or (8) has executed a written waiver of discharge approved by the court. The 2005 Act denies a discharge to an individual debtor (with some exceptions) who fails to complete a personal financial management course. Also, for up to one year after discharge, upon request of the trustee or creditors, the court may revoke a discharge the debtor obtained through fraud. *** Chapter Outcome*** Compare the adjustment of debt proceedings under Chapters 11 and 13. 38-4 REORGANIZATION — CHAPTER 11 As an alternative to liquidation, Chapter 11 allows the development of an equitable and feasible plan of reorganization to allow a business to continue operation and to keep possession of its business assets. Reorganization is the process of correcting or eliminating the factors that caused the distress of a business enterprise and thereby preserving its value. Chapter 11 permits but does not require a sale of assets. Rather, it contemplates that the debtor will keep its assets and use them to generate earnings that will pay creditors under the terms of the plan confirmed by the court. The 1994 and 2005 amendments provide for streamlined and more flexible procedures in a small business case, which is any case under Chapter 11 filed by a small business. The amendments define small business to include (1) persons engaged in commercial or business activities whose aggregate, noncontingent, liquidated debts do not exceed $2,566,050 (subject to periodic adjustments for inflation); and (2) for a case in which the United States trustee has not appointed a committee of unsecured creditors, or where the court has determined that the committee of unsecured creditors is not sufficiently active and representative to provide effective oversight of the debtor. Under a small business case the U.S. trustee has additional oversight duties, the debtor has additional reporting requirements, while the plan process can be simpler and the time periods and deadlines are different. 38-4a Proceedings Any debtor eligible for Chapter 7 (excluding stockbrokers, commodity brokers), PLUS railroads are eligible for an involuntary or voluntary Chapter 11 petition. Although the debtor will remain in possession of the property and continue to manage the business, a committee of unsecured creditors will be appointed to assist during the reorganization process. The court may order for cause the appointment of a trustee who is elected by the creditors. The trustee’s duties under Chapter 11 are to: (1) be accountable for property received; (2) examine proofs of claims; (3) furnish information to all parties; (4) provide the court and taxing authorities with financial reports of the debtor’s business operations; (5) make a final report and account of the administration of the estate; (6) investigate the debtor’s financial condition and to determine whether continuing the debtor’s business is desirable; and (7) file a plan or a report on why there will be no plan, or to recommend either conversion of the case to Chapter 7 or dismissal of the case. 38-4b Plan of Reorganization For 120 days after the order for relief, the debtor has the exclusive right to file a plan unless a trustee has been appointed. The plan must divide all creditor claims into classes, explain how each will be handled, and be approved by the court. 38-4c Acceptance of Plan To be accepted, each class of claims must approve the plan by creditors that hold at least two-thirds in amount and more than one-half of the allowed claims of such class that actually voted on the plan. A class of interests must be approved by holders of at least two-thirds in amount of the allowed interests of such class that actually voted on the plan. 38-4d Confirmation of Plan For a plan to be approved by the court it must: a) be developed in good faith, b) be feasible, i.e., not likely to be followed by a liquidation, c) pay certain creditors in full in cash, d) be accepted by at least one class of claims, and within each class every holder must either accept the plan or receive an amount comparable to that which he would have received under Chapter 7. 38-4e Effect of Confirmation The confirmed plan binds the debtor and any creditor, equity security holder, or general partner of the debtor and discharges the debtor from all prior debts and liabilities, except as otherwise provided. It does not discharge an individual debtor from debts that are not dischargeable. Unlike Chapter 7, partnerships and corporations may receive a discharge under Chapter 11, unless the plan calls for the liquidation of the business entity’s property and termination of its business. CASE 38-2 RADLAX GATEWAY HOTEL, LLC v. AMALGAMATED BANK Supreme Court of the United States, 2012 566 U.S. ____, 132 S.CT. 2065, 182 L. Ed. 2d 967 http://scholar.google.com/scholar_case?q=132+S.CT.+2065+&hl=en&as_sdt=2,34&case=15917701183349776872&scilh=0 Scalia, J. [In 2007, RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC (debtors) purchased the Radisson Hotel at Los Angeles International Airport, together with an adjacent lot on which the debtors planned to build a parking structure. To finance the purchase, the renovation of the hotel, and construction of the parking structure, the debtors obtained a $142 million loan from Longview Ultra Construction Loan Investment Fund, for which Amalgamated Bank (creditor or Bank) served as trustee. The lenders obtained a blanket lien on all of the debtors’ assets to secure the loan. Within two years the debtors had run out of funds and were forced to stop construction. By August 2009, they owed more than $120 million on the loan, with over $1 million in interest accruing every month and no prospect for obtaining additional funds to complete the project. Both debtors filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Pursuant to Section 1129(b)(2)(A) of the Bankruptcy Code, the debtors sought to confirm a “cramdown” bankruptcy plan over the Bank’s objection. That plan proposed selling substantially all of the debtors’ property at an auction and using the sale proceeds to repay the Bank. Under the debtors’ proposed auction procedures, however, the Bank would not be permitted to bid for the property using the debt it was owed to offset the purchase price, a practice known as “credit-bidding.” Instead, the Bank would be forced to bid cash. The Bankruptcy Court denied the debtors’ request, concluding that the auction procedures did not comply with the Bankruptcy Code’s requirements for cramdown plans. The Seventh Circuit affirmed, holding that Section 1129(b)(2)(A) does not permit debtors to sell an encumbered asset free and clear of a lien without permitting the lienholder to credit-bid.] A Chapter 11 bankruptcy is implemented according to a “plan,” typically proposed by the debtor, which divides claims against the debtor into separate “classes” and specifies the treatment each class will receive. Generally, a bankruptcy court may confirm a Chapter 11 plan only if each class of creditors affected by the plan consents. Section 1129(b) creates an exception to that general rule, permitting confirmation of nonconsensual plans—commonly known as “cramdown” plans—if “the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” Section 1129(b)(2)(A) * * * establishes criteria for determining whether a cramdown plan is “fair and equitable” with respect to secured claims like the Bank’s. * * * A Chapter 11 plan confirmed over the objection of a “class of secured claims” must meet one of three requirements in order to be deemed “fair and equitable” with respect to the nonconsenting creditor’s claim. The plan must provide: (i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property; (ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or (iii) for the realization by such holders of the indubitable equivalent of such claims.” 11 U. S. C. §1129(b)(2)(A). Under clause (i), the secured creditor retains its lien on the property and receives deferred cash payments. Under clause (ii), the property is sold free and clear of the lien, “subject to section 363(k),” and the creditor receives a lien on the proceeds of the sale. Section 363(k), in turn, provides that “unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property”—i.e., the creditor may credit-bid at the sale, up to the amount of its claim. Finally, under clause (iii), the plan provides the secured creditor with the “indubitable equivalent” of its claim. The debtors in this case have proposed to sell their property free and clear of the Bank’s liens, and to repay the Bank using the sale proceeds—precisely, it would seem, the disposition contemplated by clause (ii). Yet since the debtors’ proposed auction procedures do not permit the Bank to credit-bid, the proposed sale cannot satisfy the requirements of clause (ii). Recognizing this problem, the debtors instead seek plan confirmation pursuant to clause (iii), which—unlike clause (ii)—does not expressly foreclose the possibility of a sale without credit-bidding. According to the debtors, their plan can satisfy clause (iii) by ultimately providing the Bank with the “indubitable equivalent” of its secured claim, in the form of cash generated by the auction. We find the debtors’ reading of §1129(b)(2)(A)—under which clause (iii) permits precisely what clause (ii) proscribes—to be hyperliteral and contrary to common sense. A well established canon of statutory interpretation succinctly captures the problem: “[I]t is a commonplace of statutory construction that the specific governs the general.” [Citation.] That is particularly true where, as in §1129(b)(2)(A), “Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions.” [Citations.] * * * Here, clause (ii) is a detailed provision that spells out the requirements for selling collateral free of liens, while clause (iii) is a broadly worded provision that says nothing about such a sale. The general/specific canon explains that the “general language” of clause (iii), “although broad enough to include it, will not be held to apply to a matter specifically dealt with” in clause (ii). [Citation.] * * * The structure here suggests * * * that (i) is the rule for plans under which the creditor’s lien remains on the property, (ii) is the rule for plans under which the property is sold free and clear of the creditor’s lien, and (iii) is a residual provision covering dispositions under all other plans—for example, one under which the creditor receives the property itself, the “indubitable equivalent” of its secured claim. Thus, debtors may not sell their property free of liens under §1129(b)(2)(A) without allowing lienholders to credit-bid, as required by clause (ii). * * * * * * Because the RadLAX debtors may not obtain confirmation of a Chapter 11 cramdown plan that provides for the sale of collateral free and clear of the Bank's lien, but does not permit the Bank to credit-bid at the sale, we affirm the judgment of the Court of Appeals. 38-5 ADJUSTMENT OF DEBTS OF INDIVIDUALS — CHAPTER 13 Chapter 13 of the Bankruptcy Code permits an individual debtor to file a repayment plan that, if confirmed by the court, will discharge him from almost all debts when he completes his payments under the plan. If, as occurs in many cases, the debtor does not make the required payments under the plan, the case will be converted to Chapter 7 or dismissed. 38-5a Proceedings Chapter 13 filing is voluntary, and provides for adjustment of debts of an individual (including a sole proprietor) with regular income who owes liquidated unsecured debts of less than $394,725 and secured debts of less than $1,184,200. A trustee is appointed in every Chapter 13 case. 38-5b Conversion or Dismissal The debtor may convert a case under Chapter 13 to Chapter 7. On request of the debtor, if the case has not been previously converted from Chapter 7 or Chapter 11, the court shall dismiss a case under Chapter 13. On request of a party in interest or the United States trustee, and after notice and a hearing, the court may convert a case under Chapter 13 to Chapter 7 or may dismiss a case under Chapter 13, whichever is in the best interests of creditors and the estate, for cause, including (1) unreasonable delay by the debtor; (2) failure of the debtor to file a plan timely; (3) denial of confirmation of a plan; or (4) material default by the debtor with respect to a term of a confirmed plan. Before the confirmation of a plan, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under Chapter 13 to Chapter 11.Nonetheless, a case may not be converted to another chapter unless the debtor may be a debtor under that chapter. CASE 38-3 HARRIS v. VIEGELAHN Supreme Court of the United States, 2015 575 U.S. ___, 135 S.Ct. 1829, 191 L.Ed.2d 783 Ginsburg, J. In February 2010, petitioner Charles Harris III filed a Chapter 13 bankruptcy petition. At the time of filing, Harris was indebted to multiple creditors, and had fallen $3,700 behind on payments to Chase Manhattan, his home mortgage lender. Harris’ court-confirmed Chapter 13 plan provided that he would immediately resume making monthly mortgage payments to Chase. The plan further provided that $530 per month would be withheld from Harris’ postpetition wages and remitted to the Chapter 13 trustee, respondent Mary Viegelahn. Viegelahn, in turn, would distribute $352 per month to Chase to pay down Harris’ outstanding mortgage debt. She would also distribute $75.34 per month to Harris’ only other secured lender, a consumer-electronics store. Once those secured creditors were paid in full, Viegelahn was to begin distributing funds to Harris’ unsecured creditors. Implementation of the plan was short lived. Harris again fell behind on his mortgage payments, and in November 2010, Chase received permission from the Bankruptcy Court to foreclose on Harris’ home. Following the foreclosure, Viegelahn continued to receive $530 per month from Harris’ wages, but stopped making the payments earmarked for Chase. As a result, funds formerly reserved for Chase accumulated in Viegelahn’s possession. On November 22, 2011, Harris exercised his statutory right to convert his Chapter 13 case to one under Chapter 7. By that time, Harris’ postpetition wages accumulated by Viegelahn amounted to $5,519.22. On December 1, 2011—ten days after Harris’ conversion—Viegelahn disposed of those funds by giving $1,200 to Harris’ counsel, paying herself a $267.79 fee, and distributing the remaining money to the consumer-electronics store and six of Harris’ unsecured creditors. Asserting that Viegelahn lacked authority to disburse funds to creditors once the case was converted to Chapter 7, Harris moved the Bankruptcy Court for an order directing refund of the accumulated wages Viegelahn had given to his creditors. The Bankruptcy Court granted Harris’ motion, and the District Court affirmed. [The Fifth Circuit reversed, holding that despite a Chapter 13 debtor’s conversion to Chapter 7, a former Chapter 13 trustee must distribute a debtor’s accumulated postpetition wages to his creditors. The U.S. Supreme Court granted certiorari.] *** This case concerns the disposition of wages earned by a debtor after he petitions for bankruptcy. The treatment of postpetition wages generally depends on whether the debtor is proceeding under Chapter 13 of the Bankruptcy Code (in which the debtor retains assets, often his home, during bankruptcy subject to a court-approved plan for the payment of his debts) or Chapter 7 (in which the debtor’s assets are immediately liquidated and the proceeds distributed to creditors). In a Chapter 13 proceeding, post-petition wages are “[p]roperty of the estate,” [citation], and may be collected by the Chapter 13 trustee for distribution to creditors, [citation]. In a Chapter 7 proceeding, those earnings are not estate property; instead, they belong to the debtor. [Citation.] The Code permits the debtor to convert a Chapter 13 proceeding to one under Chapter 7 “at any time,” [citation]; upon such conversion, the service of the Chapter 13 trustee terminates, [citation]. When a debtor initially filing under Chapter 13 exercises his right to convert to Chapter 7, who is entitled to post-petition wages still in the hands of the Chapter 13 trustee? Not the Chapter 7 estate when the conversion is in good faith, all agree. May the trustee distribute the accumulated wage payments to creditors as the Chapter 13 plan required, or must she remit them to the debtor? That is the question this case presents. We hold that, under the governing provisions of the Bankruptcy Code, a debtor who converts to Chapter 7 is entitled to return of any postpetition wages not yet distributed by the Chapter 13 trustee. *** Chapter 7 allows a debtor to make a clean break from his financial past, but at a steep price: prompt liquidation of the debtor’s assets. When a debtor files a Chapter 7 petition, his assets, with specified exemptions, are immediately transferred to a bankruptcy estate. [Citation.] A Chapter 7 trustee is then charged with selling the property in the estate, [citation], and distributing the proceeds to the debtor’s creditors, [citation]. Crucially, however, a Chapter 7 estate does not include the wages a debtor earns or the assets he acquires after the bankruptcy filing. [Citation.] Thus, while a Chapter 7 debtor must forfeit virtually all his prepetition property, he is able to make a “fresh start” by shielding from creditors his postpetition earnings and acquisitions. Chapter 13 works differently. A wholly voluntary alternative to Chapter 7, Chapter 13 allows a debtor to retain his property if he proposes, and gains court confirmation of, a plan to repay his debts over a three- to five-year period. [Citations.] Payments under a Chapter 13 plan are usually made from a debtor’s “future earnings or other future income.” [Citations.] Accordingly, the Chapter 13 estate from which creditors may be paid includes both the debtor’s property at the time of his bankruptcy petition, and any wages and property acquired after filing. [Citation.] A Chapter 13 trustee is often charged with collecting a portion of a debtor’s wages through payroll deduction, and with distributing the withheld wages to creditors. *** Many debtors, however, fail to complete a Chapter 13 plan successfully. [Citation.] Recognizing that reality, Congress accorded debtors a nonwaivable right to convert a Chapter 13 case to one under Chapter 7 “at any time.” [Citation.] *** Conversion from Chapter 13 to Chapter 7 does not commence a new bankruptcy case. The existing case continues along another track, Chapter 7 instead of Chapter 13, without “effect[ing] a change in the date of the filing of the petition.” [Citation.] Conversion, however, immediately “terminates the service” of the Chap¬ter 13 trustee, replacing her with a Chapter 7 trustee. [Citation.] *** Section 348(f) [of the Bankruptcy Code], all agree, makes one thing clear: A debtor’s postpetition wages, including undisbursed funds in the hands of a trustee, ordinarily do not become part of the Chapter 7 estate created by conversion. Absent a bad-faith conversion, §348(f) limits a converted Chapter 7 estate to property belonging to the debtor “as of the date” the original Chapter 13 petition was filed. Postpetition wages, by definition, do not fit that bill. *** By excluding postpetition wages from the converted Chapter 7 estate, §348(f)(1)(A) removes those earnings from the pool of assets that may be liquidated and distributed to creditors. Allowing a terminated Chapter 13 trustee to disburse the very same earnings to the very same creditors is incompatible with that statutory design. *** *** [Judgment of the Fifth Circuit is reversed.] 38-5c The Plan A Chapter 13 plan must provide that all or a portion of future earnings will be turned over to a trustee, must allow for full payment of all priority debts on a deferred basis, and must treat the each member of the same class equally. Such plans cannot provide for payments over a period exceeding three years unless approved by a court to extend up to five years. 38-5d Confirmation of Plan The plan must comply with applicable law, be submitted in good faith, provide for payments not less than what the unsecured creditor would have received under Chapter 7, and all payments must be made. Secured creditors must also approve the plan, or the plan must mandate surrender of the secured collateral, or secured creditors must be allowed to retain their interest in the property. CASE 38-4 HAMILTON v. LANNING Supreme Court of the United States, 2010 560 U.S. ____, 130 S.Ct. 2464, 177 L.Ed.2d 23 http://scholar.google.com/scholar_case?q=132+S.CT.+2065+&hl=en&as_sdt=2,34&case=15917701183349776872&scilh=0 Alito, J. Chapter 13 of the Bankruptcy Code provides bankruptcy protection to “individuals] with regular income” whose debts fall within statutory limits. [Citation.] Unlike debtors who file under Chapter 7 and must liquidate their nonexempt assets in order to pay creditors, [citation], Chapter 13 debtors are permitted to keep their property, but they must agree to a court-approved plan under which they pay creditors out of their future income, [citation]. A bankruptcy trustee oversees the filing and execution of a Chapter 13 debtor’s plan. [Citations.] Section 1325 of the [Bankruptcy Code] specifies circumstances under which a bankruptcy court “shall” and “may not” confirm a plan. §1325(a), (b). If an unsecured creditor or the bankruptcy trustee objects to confirmation, §1325(b)(1) requires the debtor either to pay unsecured creditors in full or to pay all “projected disposable income” to be received by the debtor over the duration of the plan. We granted certiorari to decide how a bankruptcy court should calculate a debtor’s “projected disposable income.” Some lower courts have taken what the parties term the “mechanical approach,” while most have adopted what has been called the “forward-looking approach.” We hold that the “forward-looking approach” is correct. I * * * Before the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), [citation], the Bankruptcy Code (Code) loosely defined “disposable income” as “income which is received by the debtor and which is not reasonably necessary to be expended” for the “maintenance or support of the debtor,” for qualifying charitable contributions, or for business expenditures. §1325(b)(2)(A), (B). The Code did not define the term “projected disposable income,” and in most cases, bankruptcy courts used a mechanical approach in calculating projected disposable income. That is, they first multiplied monthly income by the number of months in the plan and then determined what portion of the result was “excess” or “disposable.” [Citation.] In exceptional cases, however, bankruptcy courts took into account foreseeable changes in a debtor’s income or expenses. [Citations.] BAPCPA left the term “projected disposable income” undefined but specified in some detail how “disposable income” is to be calculated. “Disposable income” is now defined as “current monthly income received by the debtor” less “amounts reasonably necessary to be expended” for the debtor’s maintenance and support, for qualifying charitable contributions, and for business expenditures. [Citation.] “Current monthly income,” in turn, is calculated by averaging the debtor’s monthly income during what the parties refer to as the 6-month look-back period, which generally consists of the six full months preceding the filing of the bankruptcy petition. [Citation.] The phrase “amounts reasonably necessary to be expended” in §1325(b)(2) is also newly defined. For a debtor whose income is below the median for his or her State, the phrase includes the full amount needed for “maintenance or support,” [citation], but for a debtor with income that exceeds the state median, only certain specified expenses are included, [citations.] II Respondent had $36,793.36 in unsecured debt when she filed for Chapter 13 bankruptcy protection in October 2006. In the six months before her filing, she received a one-time buyout from her former employer, and this payment greatly inflated her gross income for April 2006 (to $11,990.03) and for May 2006 (to $15,356.42). [Citation.] As a result of these payments, respondent’s current monthly income, as averaged from April through October 2006, was $5,343.70—a figure that exceeds the median income for a family of one in Kansas. [Citation.] Respondent’s monthly expenses, calculated pursuant to [citation] were $4,228.71. [Citation.] She reported a monthly “disposable income” of $1,114.98 on Form 22C. [Citation.] On the form used for reporting monthly income (Schedule I), she reported income from her new job of $1,922 per month—which is below the state median. [Citations.] On the form used for reporting monthly expenses (Schedule J), she reported actual monthly expenses of $1,772.97. [Citation.] Subtracting the Schedule J figure from the Schedule I figure resulted in monthly disposable income of $149.03. Respondent filed a plan that would have required her to pay $144 per month for 36 months. [Citation.] Petitioner, a private Chapter 13 trustee, objected to confirmation of the plan because the amount respondent proposed to pay was less than the full amount of the claims against her, [citation], and because, in petitioner’s view, respondent was not committing all of her “projected disposable income” to the repayment of creditors, [citation]. According to petitioner, the proper way to calculate projected disposable income was simply to multiply disposable income, as calculated on Form 22C, by the number of months in the commitment period. Employing this mechanical approach, petitioner calculated that creditors would be paid in full if respondent made monthly payments of $756 for a period of 60 months. [Citation.] There is no dispute that respondent’s actual income was insufficient to make payments in that amount. [Citation.] The Bankruptcy Court endorsed respondent’s proposed monthly payment of $144 but required a 60-month plan period. [Citation.] The court agreed with the majority view that the word “projected” in §1325(b)(1)(B) requires courts “to consider at confirmation the debtor’s actual income as it was reported on Schedule I.” [Citation] (emphasis added [by court]). This conclusion was warranted by the text of §1325(b)(1), the Bankruptcy Court reasoned, and was necessary to avoid the absurd result of denying bankruptcy protection to individuals with deteriorating finances in the six months before filing. [Citation.] Petitioner appealed to the Tenth Circuit Bankruptcy Appellate Panel, which affirmed. [Citation.] * * * The Tenth Circuit affirmed. * * * This petition followed, and we granted certiorari. [Citation.] III The parties differ sharply in their interpretation of §1325’s reference to “projected disposable income.” Petitioner, advocating the mechanical approach, contends that “projected disposable income” means past average monthly disposable income multiplied by the number of months in a debtor’s plan. Respondent, who favors the forward-looking approach, agrees that the method outlined by petitioner should be determinative in most cases, but she argues that in exceptional cases, where significant changes in a debtor’s financial circumstances are known or virtually certain, a bankruptcy court has discretion to make an appropriate adjustment. Respondent has the stronger argument. First, respondent’s argument is supported by the ordinary meaning of the term “projected.” “When terms used in a statute are undefined, we give them their ordinary meaning.” [Citation.] Here, the term “projected” is not defined, and in ordinary usage future occurrences are not “projected” based on the assumption that the past will necessarily repeat itself. For example, projections concerning a company’s future sales or the future cash flow from a license take into account anticipated events that may change past trends. * * * While a projection takes past events into account, adjustments are often made based on other factors that may affect the final outcome. [Citation.] Second, the word “projected” appears in many federal statutes, yet Congress rarely has used it to mean simple multiplication. * * * By contrast, we need look no further than the Bankruptcy Code to see that when Congress wishes to mandate simple multiplication, it does so unambiguously- most commonly by using the term “multiplied.” [Citations.] Third, pre-BAPCPA case law points in favor of the “forward-looking” approach. * * * Pre-BAPCPA bankruptcy practice is telling because we “‘will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.’” [Citation.] Congress did not amend the term “projected disposable income” in 2005, and pre-BAPCPA bankruptcy practice reflected a widely acknowledged and well-documented view that courts may take into account known or virtually certain changes to debtors’ income or expenses when projecting disposable income. In light of this historical practice, we would expect that, had Congress intended for “projected” to carry a specialized—and indeed, unusual— meaning in Chapter 13, Congress would have said so expressly. [Citation.] * * * In cases in which a debtor’s disposable income during the 6-month look-back period is either substantially lower or higher than the debtor’s disposable income during the plan period, the mechanical approach would produce senseless results that we do not think Congress intended. In cases in which the debtor’s disposable income is higher during the plan period, the mechanical approach would deny creditors payments that the debtor could easily make. And where, as in the present case, the debtor’s disposable income during the plan period is substantially lower, the mechanical approach would deny the protection of Chapter 13 to debtors who meet the chapter’s main eligibility requirements. Here, for example, respondent is an “individual whose income is sufficiently stable and regular” to allow her “to make payments under a plan,” §101(30), and her debts fall below the limits set out in §109(e). But if the mechanical approach were used, she could not file a confirmable plan. Under §1325(a)(6), a plan cannot be confirmed unless “the debtor will be able to make all payments under the plan and comply with the plan.” And as petitioner concedes, respondent could not possibly make the payments that the mechanical approach prescribes. * * * IV * * * Consistent with the text of §1325 and pre-BAPCPA practice, we hold that when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation. We therefore affirm the decision of the Court of Appeals. 38-5e Effect of Confirmation A confirmed plan binds the debtor and all her creditors and clears all remaining property from creditor claims. The plan may be modified after confirmation. 38-5f Discharge After a debtor completes all payments under the plan, the court will grant him a discharge of all debts provided for by the plan, except the nondischargeable debts for (1) unfiled, late-filed, and fraudulent tax returns; (2) legal liabilities resulting from obtaining money, property, or services by false pretenses, false representations, or actual fraud; (3) legal liability for willful or malicious conduct that caused personal injury to an individual; (4) domestic support obligations; (5) debts not scheduled unless the creditor knew of the bankruptcy; (6) debts the debtor created by fraud or embezzlement while acting in a fiduciary capacity; (7) most student loans; (8) consumer debts for luxury goods or services in excess of $675 per creditor if incurred by an individual debtor on or within ninety days before the order for relief; (9) cash advances aggregating more than $950 obtained by an individual debtor under an open-ended credit plan within seventy days before the order for relief; (10) liability for death or personal injury based upon the debtor’s operation of a motor vehicle, vessel, or aircraft while legally intoxicated; (11) restitution or criminal fine included in a sentence for a criminal conviction; and (12) certain long-term obligations on which payments extend beyond the term of the plan. This discharge is considerably more extensive than that granted under Chapter 7, and under certain conditions is not subject to the six-year limitation of Chapter 7. The 2005 Act denies a discharge under Chapter 13 to a debtor who has received a discharge (1) in a prior Chapter 7 or Chapter 11 case filed during the four-year period preceding the filing of the Chapter 13 case, or (2) in a prior Chapter 13 case filed during the two-year period preceding the date of filing the subsequent Chapter 13 case. It also denies a discharge to a debtor (with some exceptions) who fails to complete a personal financial management course. NOTE: See Figure 38-2: Comparison of Bankruptcy Proceedings. *** Chapter Outcome*** Identify and define the nonbankruptcy compromises between debtors and creditors. CREDITORS’ RIGHTS AND DEBTOR’S RELIEF OUTSIDE OF BANKRUPTCY Principally governed by state law; the rights and remedies of creditors are varied. 38-6 CREDITORS’ RIGHTS When a debtor fails to pay, the creditor may obtain a judgment against the debtor to collect on the debt. 38-6a Prejudgment Remedies To prevent a debtor from disposing of his assets a creditor may seek an attachment, which is a judicial order bringing the property under court custody. Garnishment may be sought by the creditor where the debtor is owed money by a third party and is most often used against an employer or bank. 38-6b Postjudgment Remedies A writ of execution is issued subsequent to a judgment and is an order that demands payment by the debtor; if unsatisfied, the creditor may order a levy on and sale of specified nonexempt property. Following the sale of property, any deficiencies may be sought in a supplementary proceeding and by garnishment. 38-7 DEBTOR’S RELIEF The rights of creditors and the debtor’s need for relief involve inherent conflicts arising from: 1. the right of diligent creditors to pursue their claims to judgment and to satisfy their judgments; 2. the right of unsecured creditors who have refrained from suing the debtor; and 3. the social policy of giving relief to a debtor who has contracted debts beyond his ability to pay. Various forms of nonbankruptcy compromises have been developed to resolve these conflicts. 38-7a Compositions A common law or nonstatutory composition is an ordinary contract or agreement between the debtor and two or more of her creditors under which the creditors receive a proportional part of their claims and the debtor is discharged from the balance of the claims. A composition is the State law analogue of Chapter 11 of the Bankruptcy Act. As a contract, it requires contractual formalities. By avoiding a conflict among themselves to obtain the debtor’s limited assets, all the creditors benefit. 38-7b Assignments for Benefit of Creditors A common law or nonstatutory assignment for the benefit of creditors is a debtor’s voluntary transfer of some or all of her property to a trustee, who applies the property to the payment of all the debtor’s debts. This prevents the debtor’s assets from being attached or executed and halts diligent creditors in their race to attach, but does not discharge the debtor. State statutes that combine the advantages of assignments and compositions by permitting debtors to obtain voluntary releases from balances owed. An assignment for the benefit of creditors is a State law analogue of Chapter 7 of the Bankruptcy Act. In most States, statutes now govern assignments for the benefit of creditors. These statutes typically require recording of the assignment, filing schedules of assets and liabilities, and providing notice to the creditors. Almost all of the statutes require that all creditors be treated equally except those with liens or statutorily created priorities. 38-7c Equity Receiverships A disinterested person (receiver) is appointed by the court in equity to liquidate assets, run the business, or protect the assets until final action is taken by the court. A receiver may be appointed on the petition of a secured creditor, a judgment creditor, or a shareholder. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637
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