Bankruptcy Litigation In Usa
Monday, March 21, 2011 22:57BANKRUPTCY LITIGATION IN USA
INTRODUCTION
A bankruptcy case is a unique type of a civil case, involving individuals or organizations who can no longer pay their debts.
Congress has established a unique court, known as as the bankruptcy court to adjudicate bankruptcy matters. Bankruptcy protects both the debtors and creditors
HIERARCHY OF COURTS
Ø US Supreme Court
Ø The Circuit court of appeals
Ø The district courts or bankruptcy appellate tribunal (BAP )
Ø The bankruptcy courts
GOVERNING LAWS
Ø Title 11 Federal rules of bankruptcy process
Ø Title 18 Crimes (sec.151 through 158 deals with bankruptcy fraud and other bankruptcy crimes). E.g.
Ø Title 26 IRC Implication of tax avoidance
Ø Title 28 Judiciary and judicial process
Ø Federal rules of appellate process
Ø Federal rules of Evidence.
BANKRUPTCY JUDGESHIPS
The judges to the bankruptcy courts are appointed by the judges of US circuit courts for such circuits for the period of 14 years. Currently there are 324 judgeships in the US.
Three Principal CHAPTERS ON BANKRUPTCY
There are mainly 3 chapters under the bankruptcy law in USA.
Chapter 7: liquidation
Chapter 11: Reorganization
Chapter 13: Adjustment of debt of the persons, having normal income.
CHAPTER 7: LIQUIDATION
Bankruptcy under this chapter provides a fresh begin for the people. In this chapter, most of the debtor’s property will be sold to raise the quantity of the creditor. If the value of the asset is more than the debt owed, the remaining amount will be paid to the debtor.
After, 2005 enactment by the congress, it is mandatory to pass the Means test in order to qualify for the filing bankruptcy under chapter 7.
How the case move via under chapter 7
1. Petition
The case begins with the filing of voluntary petition with the clerk of the bankruptcy court. Debtor need to also file the following documents shortly after filing the petition, they are
1. the list if creditors
2. the schedule of assets
3. the statement of financial affairs
If the debtor is not in position to pay the fees at once, he can request for payment in installments.
It is not needed that often the creditor ought to file the petition. Even the creditors can initiate the bankruptcy proceedings; these are referred to as as the involuntary petitions. If the debtor has not much more than 11 creditors, then the 1 creditor can file an involuntary petition. If it is more than 12 creditors, 3 creditors ought to join together to file a petition.
2. Automatic stay
Once the petition filed just before the bankruptcy court, there will be an automatic stay. It stays the suits, claims, appeals filed against 1 an additional before or after
3. Trustee selection
After filing a voluntary petition in the bankruptcy court, a notice will be sent to all the creditors. The creditors are needed to be present at the trustee selection. Then the case will be assigned to bankruptcy judge and added to the docket of the US Trustee. US trustees maintains the list of case trustees.These case trustees will liquidate the debtor property at the auction or at the private transactions and collect the cash, deposit it in the account maintained for that purpose.
4. Creditors meeting
It is also called as the Sec.341 meeting. Interim trustee will preside over this meeting. After a notice issued to the creditors, creditors have to come prior to the court and attend the meeting. If the creditor is not found, it will be published in the newspapers on which date the creditors have to attend the court.
It is compulsory that the debtor should be present at the meeting. The debtor will be put under oath and he will be asked various questions by the creditors. The purpose of this meeting is get to know hidden assets or undervalued assets of the debtor. And finding out is there any claim by the debtor which would yield much more funds if pursued. And the goal is to accumulate far more funds for the bankruptcy estate.
5. Liquidation of assets
After the creditors meeting, the case trustees will sell the asset of the debtor either at the auction or at he private transactions.
If the debtor is the business, it will cease to exist. If it is an individual he will be discharged. Even so particular debts are not dischargeable such as the alimony, taxes etc.
6. Collection of the bankruptcy estate
Once the assets are liquidated, case trustee will deposits the amount in the bank account, along with any other amount accumulated from the legal suits.
7. Distribution of the bankruptcy estate
After the deposit of quantity in the account, the amount deposited will be distributed among the creditors.
Majority of the cases are no asset instances. If there are no assets to distribute then the case trustee will simply file prior to the court a report no assets to distribute.
Even if there is funds to distribute, occasionally the creditors would not get the whole quantity which is due to him by the debtors. Occasionally some creditor will get much less, some creditors will get a lot more.
The question arises in our mind is that, who will be paid very first. At the stage of distribution, the administration of the estate such as the professional fees of the trustee, attorney or accountant appointed by the bankruptcy estate will be paid very first.
8. Claims
There are two kinds of the claim and creditors in the bankruptcy. One is the Secured claims and other 1 is an unsecured claims. Secured claims are one that gives the creditor an interest in property as assurance of payment. For example men and women will mortgage home in secure of loans. If the loan is not paid there will be foreclosure and sale of the home. Holder of unsecured claims can’t look into any such payments.
Under unsecured claims are once more divided into two: Unsecured priority claims and unsecured non priority claims. Unsecured creditors who have priority must be paid very first before paying to unsecured non priority claims.
In Campbell v. Countrywide Home Loans, Inc., 2008 U.S. App. LEXIS 21405 (5th Cir. October 13, 2008, Filed)
It was held that an automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy court forum, not legal actions taken within the bankruptcy court.
9. Conversion
A chapter 7 debtor has right to convert the chapter 7 case to 1 under chapter 11 or 13 at any time during the proceedings.
In re South Star Oil Co.,2008 Bankr. LEXIS 2426 (Bankr. D.Or., September 15, 2008, Decided)
Held that a trigger for conversion or the dismissal consists of a number of criteria, such as substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation
In Toibb v. Radloff, 501 U.S. 157 (1991)
In this case the voluntary petitioner, after discovering stock in an electronic power business, has substantial value, decided to prevent its liquidation by seeking conversion to chapter 11. His motion was granted and he was allowed to file a reorganization plan. But the court dismissed his petition finding that he did not qualify for relief under Chapter 11 because he was not engaged in an ongoing organization. The District Court and the Court of Appeals affirmed.
10. Dispute resolution
The petition might be contested after filing the bankruptcy petition via the adversary proceedings. for example 1 party may initiate proceeding against the other by filing the complaint and questioning the validity of the petition such will be adjudicated if the parties are willing to adjudicate. There might even be motions objecting to the discharge of the debtor, objections to the sale of debtor’s property.
In Dewsnup v. Timm et al].
Petitioner Dewsnup, the debtor in a case under Chapter 7 of the Bankruptcy Code, filed an adversary proceeding, contending that the debt of approximately ,000 that she owed to respondents exceeded the fair market value of the land securing the debt and that, as a result, the Bankruptcy Court should reduce respondents’ lien on the land to the land’s fair market value pursuant to 11 U. S. C. § 506(d), The court determined that the then value of the land in question was ,000, but refused to grant the requested relief and entered a judgment of dismissal with prejudice. The District Court and the Court of Appeals affirmed.
Held: Section 506(d) does not allow Dewsnup to “strip down” respondents’ lien to the judicially determined value of the collateral, due to the fact respondents’ claim is secured by a lien and has been fully allowed pursuant to § 502 and, consequently, can’t be classified as “not an allowed secured claim” for purposes of the lien-voiding provision of § 506(d). Pp.414-420.
11. Discharge and closing of case
After the property of debtor is sold and distributed among its creditors, the debtor will get discharged. However the debts like alimony, child support and specific taxes which are due to the government cannot be get discharged.
In Roe v. College Access Network , 2008 U.S. App. LEXIS 21362 (10th Cir., October 9, 2008, Filed)
It was held that a permanent medical condition will undoubtedly contribute to the unlikelihood of a debtor earning sufficient funds to repay her student loan debt, but such a condition is not a prerequisite to discharging the debt.
In re Hlavin, 2008 Bankr. LEXIS 2397 (Bankr. D. Ohio, September 30, 2008, Decided)
It was held that under 11 U.S.C.S. § 707(b)(1), the court may possibly dismiss a case filed by an individual debtor under Chapter 7 whose debts are primarily consumer debts if it finds that the granting of relief would be an abuse of the provisions of Chapter 7.
12. Appeal
When there is a discharge of the debt or dismissal of the bankruptcy petition, there may be an appeal. If the petition dismissed, the debtor may possibly go an appeal. If there is discharge with out any payment to the creditors, the creditors could go an appeal. Appeal may possibly be preferred either to the district court or to the bankruptcy appellate panel. Where there is no bankruptcy appellate panel, appeal is constantly preferred to the district court.
CHAPTER 11: REORGANIZATION
This chapter is recognized as the organization reorganization chapter. Sometimes people might also seek remedy under this chapter. Once the petition is filed under this chapter the debtor shall also file plan of reorganization.
Debtor is also required to file following documents along with the voluntary petition.
Ø Schedules A through J
Ø Summary of Schedules
Ø Statement of Financial Affairs
Ø Matrix
Ø Statement of No Prior Filing
Ø List of Equity Security Holders
Ø Corporate Resolution (when applicable)
Ø Pro Se Debtor’s Statement
How the proceedings takes location under chapter 11
1. Petition
There will be a voluntary or involuntary petition
2. Automatic stay
There will be an automatic stay after the petition is filed.
In re Forletta, 2008 Bankr. LEXIS 2491 (Bankr. D.N.Y., October 10, 2008, Decided)
Held: debtor could not extend the automatic stay under 11 U.S.C.S. § 362(c)(three)(B) since the debtor’s earlier Chapter 7 proceeding was closed on a final decree and discharge under 11 U.S.C.S. § 727 and § 362(c)(3)(B) did not apply unless the case had been dismissed under 11 U.S.C.S. § 707. Extension of stay was warranted under § 362(c) (3)(C).
three. Continued control by management
As in chapter 7 case, the US trustee doesn’t appoint a case trustee; instead the US trustee monitors the progress of the case. He reviews the financial reports of the debtor, who continued to operate the organization and adequacy of the disclosure statement and reorganization plan.
4. Role of the creditors committee
There will be an unsecured creditors committee appointed by the US trustee who is willing to serve monitor the case. Unsecured creditors cannot look at he specific property of the debtor.
Distinction secured claim and unsecured claim
A secured claim is 1 that gives the creditor an interest in property as assurance of payment, such as a mortgage on the house to secure a property loan; the holder of an unsecured claim can’t look to any particular property of the debtor for payment. The committee negotiates with the debtor to develop a plan that will protect the interests of unsecured creditors. Due to the fact there is no case trustee in a Chapter 11 case, the committee has the authority to perform investigative functions, such as reviewing the debtor’s assets, liabilities, and financial conduct to figure out its capacity to continue in company.
5. Creditors meeting
It is also called as the 341 meeting. It may possibly take location within 20 to 40 days of filing the bankruptcy petition. Debtor takes an oath in this. Generally US trustee or the assistant presides at the 341 meeting.
6. Plan of reorganization
It is a Debtor’s proposal to repay the quantity in certain period. Debtor files it in the court for its approval.
7. Disclosure and disclosure statement
The debtor must file the disclosure statement which must be approved by the court. Once this filed there will be a disclosure hearing. Sometimes the creditors could oppose to it. Once the disclosure statement is approved he or she will also set a time limit on voting for or against the reorganization plan.
8. Voting and confirmation
Once the debtor has the reorganization plan the court should approve or confirm the plan. Just before confirmation hearing, every class of creditors votes separately by mail on whether or not to accept the plan. If a majority of the voters in each class and holders of two-thirds of the amount of claims in every class approve the plan, the court will usually confirm the plan. The plan then becomes binding on all of the pre confirmation creditors, regardless of whether they voted for or against it.
If majority of the creditors did not approve the plan, then the debtor could attempt a cram down.
9. Discharge
After the reorganization plan is confirmed the debtor gets a discharge. Most claims for pre confirmation debts are wiped out. The debtor only has to pay the debts spelled in the plan.
Custom Mortg. Solutions, Inc. v. Hood (In re Hood),
2008 Bankr. LEXIS 2474 (Bankr. D. Ill., October 2, 2008, Decided)
A plaintiff has the burden of proof by preponderance of the evidence to show that the debt in question is non-dischargeable under 11 U.S.C.S. § 523(a)(6).
In re Timmerman, 379 B.R. 838, 2007 Bankr. LEXIS 4055 (Bankr. D. Iowa, December 10, 2007, Decided)
Debtors had been estopped from seeking dismissal of their bankruptcy action under 11 U.S.C.S. § 707(a) due to the fact they falsely stated that they had obtained credit counseling and had taken advantage of the bankruptcy laws for 21 months, and granting their motion would have prejudiced their creditors and impaired the integrity of the bankruptcy system.
10. Paying creditors
The debtor has to make payments according to the reorganization plan. If not met accordingly, the creditors can seek the liquidation of the debtor by moving to convert the cases to chapter 7, or they could sue to force the debtor to make the plan payments.
11. Dispute resolution
Suits, contesting matters will be resolved if any.
12. Appeal
Appeal is preferred either to the bankruptcy appellate tribunal or to the district courts.
CHAPTER 13:ADJUSTMENT OF DEBT OF THE PERSONS, HAVING Regular INCOME
Under this chapter debtor develops a plan, how he or she proposes to repay creditors. By agreeing to use future income for plan payments, the debtor is able to keep his or her property.
Difference chapter 7 and chapter 13
In chapter 7 the debtor property is liquidated but it does not include future income.
But in the chapter 13 debtors is allowed to keep his property and the debtors have only 15 days to propose a plan, in contrast to the 120 days of chapter 11 debtors.
How the proceedings takes place
1. Petition
Debtor files a voluntary petition prior to the court. He is required also to file following documents:
Ø Schedules A by way of J
Ø Statement of Financial Affairs
Ø Matrix
Ø Statement of No Prior Filing
Ø Plan
Ø Disclosure of Compensation – FRBP 2016(b)
Ø Pro Se Debtor’s Statement
Ø Filing fee
2. Automatic stay
Once the petition is filed before the court, each and every suit concerning the debt recovery will be stayed.
three. Creditors meeting
It is also known as as the 341 meeting. It may take place after the 15 to forty days after the petition is filed. Both creditors and the debtor attend it.
Chapter 13 trustees or Standing trustee presides over the 341 meeting.
4. Confirmation
Prior to the debtors plan takes effect, the court must approve the plan. It is the standing trustee’s job to review the plan and guidance the court whether or not it seems workable or legal. Standing trustee has to recommend the plan. Creditors have no appropriate to propose a new plan but they can oppose the plan.
5. Paying creditors
Within thirty days after filing the plan, the debtor must start paying the creditors. Debtor pays it to the trustee who then pays it to the creditors as provided for in the plan. The debtor has up to five years to pay of his debts.
6. Dispute resolution
Adversary proceedings if any contested matters will be resolved at this stage.
7. Discharge
After completion of plan payments, the debtor will receive a discharge. It discharges all debts except the long term house mortgage debts, alimony, child support obligations, and specific education loans.
8. Appeal
Appeal might preferred either to the district court or to the BAP.
Sadanand Naik