Bankruptcy
§ 35.1:1Federal Bankruptcy Code
Title 11 of the United States Code governs bankruptcies and is generally referred to as the Bankruptcy Code. Chapters 1, 3, and 5 of the Bankruptcy Code apply to all bankruptcies; Chapter 7 governs liquidation bankruptcies; Chapter 11 applies to reorganization or liquidation for businesses and is also available for certain individuals who do not qualify under Chapter 13; and Chapter 13 applies to reorganization for individuals with limited debts and regular income and is not available for businesses. Chapters 9 and 12 of the Code, which are not dealt with specifically in this chapter, cover municipal debt and family farm debt.
§ 35.1:2Bankruptcy Courts in Texas
Texas has four federal bankruptcy districts: the Northern District (covering Dallas, Fort Worth, Amarillo, Abilene, Lubbock, San Angelo, and Wichita Falls), the Southern District (covering Houston, Galveston, Victoria, Corpus Christi, Brownsville, McAllen, and Laredo), the Eastern District (covering Tyler, Plano, Texarkana, Beaumont, and Lufkin), and the Western District (covering Austin, El Paso, Midland, San Antonio, and Waco). Each district has its own local rules governing such issues as the format of pleadings, deadlines for certain filings, and the procedure for requesting a hearing. The practitioner should check the local rules and practice guides for each district and each court before filing any document in bankruptcy court. The websites for each district are www.txnb.uscourts.gov (Northern District), www.txs.uscourts.gov (Southern District), www.txwb.uscourts.gov (Western District), and www.txeb.uscourts.gov (Eastern District).
Commencement of a case under the Bankruptcy Code creates an estate composed of all legal or equitable interests of the debtor in property as of the commencement of the case. See 11 U.S.C. § 541(a). The estate includes all interests of the debtor and the debtor’s spouse in community property to the extent that the interest is under the sole, equal, or joint management and control of the debtor or is liable for an allowable claim against the debtor or the debtor’s spouse. 11 U.S.C. § 541(a)(2).
Among other exceptions, the estate does not include a power that the debtor may exercise solely for the benefit of an entity other than the debtor. 11 U.S.C. § 541(b)(1). And property in which the debtor holds legal title but not an equitable interest becomes property of the estate only to the extent of the debtor’s legal title to the property. 11 U.S.C. § 541(d).
§ 35.1:4Debtor and Debtor-in-Possession
The Bankruptcy Code sets forth who qualifies to be a debtor under each bankruptcy chapter. See 11 U.S.C. § 109. A person who does not meet the requirements set forth cannot be a debtor. For instance, only an individual, not an entity, can be a debtor under Chapter 13. 11 U.S.C. § 109(e).
For cases under Chapter 11, the debtor is also a “debtor-in-possession” or “DIP” unless a trustee is appointed. 11 U.S.C. § 1101(1). The DIP is not just the old debtor now in bankruptcy. The DIP is a fiduciary to the debtor’s bankruptcy estate. The DIP is given the rights and powers and duties imposed on it that a trustee would have, except the right to trustee compensation and except the duty to investigate the debtor itself. 11 U.S.C. § 1107.
§ 35.1:5Role and Duties of United States Trustee
The United States Trustee Program is a component of the U.S. Department of Justice charged with the administrative oversight of bankruptcy cases. The U.S. trustee is the entity charged with policing the bankruptcy system, that is, monitoring the activities and reporting of the debtor or debtor-in-possession, appointing various official committees and overseeing their operation, and managing the debtor’s trip through bankruptcy using a series of guidepost measurements designed to keep the case on track. The U.S. trustee is required to supervise the trustees and the administration of bankruptcy cases under Chapters 7, 11, 12, 13, and 15. 28 U.S.C. § 586. These duties are administrative in nature as they relate to the panel trustee. In Chapter 11 cases, the U.S. trustee appoints and monitors the operation of the official committees and appoints examiners or trustees as directed by the court. 11 U.S.C. §§ 1102, 1104; see also 28 U.S.C. § 586. Additionally, the U.S. trustee reviews and objects to fee applications, disclosure statements, and plans that fail to meet the minimum standards under the Bankruptcy Code. See In re Parsley, 384 B.R. 138, 146 (Bankr. S.D. Tex. 2008). The U.S. trustee has standing to appear and be heard on any issue. 11 U.S.C. § 307. A U.S. trustee is not authorized to promulgate rules or impose substantive or administrative requirements on bankruptcy debtors. In re Johnson, 106 B.R. 623, 624 (Bankr. D. Neb. 1989).
The official committees are created by statute. 11 U.S.C. § 1102. The Bankruptcy Code authorizes the U.S. trustee to appoint committees of creditors or of equity security holders as the U.S. trustee deems appropriate. 11 U.S.C. § 1102(a)(1). Committee members have a fiduciary responsibility to act on behalf of the entire class of creditors represented. Among the duties assumed by committee members are fiduciary duties of undivided loyalty and impartial service to all creditors. See In re Pierce, 237 B.R. 748, 758 (Bankr. E.D. Cal. 1999).
§ 35.1:7Role and Duties of Bankruptcy Trustee
Except in Chapter 11 cases where there is a debtor-in-possession, the bankruptcy trustee is generally the central figure in the bankruptcy case. The bankruptcy trustee is separate and distinct from the U.S. trustee. It is the bankruptcy trustee with whom the debtor has the most contact during the course of the case. The trustee examines the debtor, verifies and evaluates exemptions, gathers property of the estate, liquidates such property, and ultimately distributes such property to the creditors. The trustee makes sure the debtor complies with the requirements of the Bankruptcy Code. The duties of a Chapter 7 trustee are set forth in 11 U.S.C. § 704.
Generally, a trustee has a fiduciary duty to conserve the assets of the estate and to maximize distribution to creditors. In re Rigden, 795 F.2d 727, 730 (9th Cir. 1986). He also has the equitable responsibility to act with the care and diligence of an ordinary prudent person. In re Rigden, 795 F.2d at 730. Trustees, in their official capacity, are officers of the court and as such are held to high fiduciary standards of conduct. In re Topco, Inc., 894 F.2d 727, 739 n.16 (5th Cir. 1990).
In addition to statutory duties, under rule 2015(a) of the Federal Rules of Bankruptcy Procedure, a trustee must—
1.in a Chapter 7 or, in some cases, a Chapter 11 case, file and transmit to the U.S. trustee a complete inventory of the property of the debtor within thirty days after qualifying as a trustee or debtor-in-possession, unless such an inventory has already been filed;
2.keep a record of receipts and the disposition of money and property received;
3.file the reports and summaries required by section 704(a)(8) of the Bankruptcy Code, which shall include a statement, if payments are made to employees, of the amounts of deductions for all taxes required to be withheld or paid for and on behalf of employees and the place where these amounts are deposited;
4.as soon as possible after the commencement of the case, give notice of the case to every entity known to be holding money or property subject to withdrawal or order of the debtor, including every bank, savings or building and loan association, public utility company, and landlord with whom the debtor has a deposit, and to every insurance company that has issued a policy having a cash surrender value payable to the debtor, except that notice need not be given to any entity who has knowledge or has previously been notified of the case; and
5.in a Chapter 11 reorganization case, on or before the last day of the month after each calendar quarter until a plan is confirmed or the case is converted or dismissed, file and transmit to the U.S. trustee a statement of disbursements made during the calendar quarter and a statement of the amount of the fee required pursuant to 28 U.S.C. § 1930(a)(6) that has been paid for such calendar quarter.
Additionally, the local rules of the bankruptcy court may impose other duties that the trustee must perform. In any bankruptcy case, it is crucial to review the local bankruptcy rules that apply to that jurisdiction.
The Bankruptcy Code defines “party in interest” to include “the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee.” 11 U.S.C. § 1109(b). This list is nonexclusive. See, e.g., In re Sullivan Central Plaza I, Ltd., 935 F.2d 723, 726 (5th Cir. 1991). And courts have broadly interpreted the term to include “any other person with a sufficient stake in [the] outcome of a proceeding so as to require representation.” International Transactions, Ltd. v. Embotelladora Agral Regiomontana, S.A. de C.V., 347 F.3d 589, 595 (5th Cir. 2003). Put another way, “persons whose pecuniary interests are directly affected by the bankruptcy proceedings” are parties in interest. In re Orchard at Hansen Park, LLC, 347 B.R. 822, 825 (Bankr. N.D. Tex. 2006) (quoting In re E.S. Bankest, 321 B.R. 590, 594 (Bankr. S.D. Fla. 2005)).
§ 35.1:9Rooker-Feldman Doctrine
The Rooker-Feldman doctrine is a rule of civil procedure enunciated by the U.S. Supreme Court in two cases, Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983). The doctrine holds that lower U.S. federal courts other than the Supreme Court have no subject-matter jurisdiction to sit in direct review of state court decisions unless Congress has enacted legislation that specifically authorized such relief. Feldman, 460 U.S. at 476 (citing Rooker, 263 U.S. at 415). Put more basically, a federal court, other than the U.S. Supreme Court, has no jurisdiction to set aside a state court judgment.
In 2005, the Supreme Court revisited the doctrine in Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280 (2005). The Court noted that the U.S. Supreme Court has exclusive appellate jurisdiction to reverse or modify a state-court judgment based on the certiorari jurisdiction statute, 28 U.S.C. § 1257. The Court also confined the Rooker-Feldman doctrine to cases “brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments. . . . [The Rooker-Feldman doctrine] does not otherwise override or supplant preclusion doctrine or augment the circumscribed doctrines that allow federal courts to stay or dismiss proceedings in deference to state-court actions.” Exxon Mobil Corp., 544 U.S. at 283–85.
The Rooker-Feldman doctrine, although mentioned often, usually is inapplicable. Rather, claim and issue preclusion doctrines, or res judicata and collateral estoppel, are generally more helpful to litigants in bankruptcy. The Rooker-Feldman doctrine generally arises in the context of a creditor seeking its debt to be nondischargeable based on prior state court judgment.
§ 35.2:1Local Procedural Rules
In addition to the Federal Rules of Bankruptcy Procedure, each of the four federal districts in Texas has its own local rules (and sometimes each judge in the district has rules specific to that judge’s court). Each federal district maintains a website that includes the local rules for that district as well as other instructions and requirements. The practitioner should check a court’s website before filing any documents in an unfamiliar court. See section 35.1:2 above for the Web addresses for each federal district. See also section 35.2:2 below concerning local rules regarding negative notice.
Under the Federal Rules of Bankruptcy Procedure (found in title 11 of the U.S. Code), a request for an order from the bankruptcy court must be made by written motion unless an application is authorized by the rules or unless the motion is made during a hearing. See Fed. R. Bankr. P. 9013. The motion must state with particularity the grounds and set forth the relief or order sought. Fed. R. Bankr. P. 9013. Unless the motion is one that may be considered ex parte, it must be served by the moving party on the trustee or debtor-in-possession and on those entities specified by the Rules of Bankruptcy Procedure or on the entities that the court directs. Fed. R. Bankr. P. 9013.
When the Bankruptcy Code indicates that an action must be taken “after notice and hearing,” it means after notice that is appropriate in the particular circumstances and after the opportunity for a hearing. 11 U.S.C. § 102(1)(A). The court may act without an actual hearing if notice is properly given and a hearing is not timely requested by a party in interest. 11 U.S.C. § 102(1)(B)(i). To fulfill the notice requirement, the motion must contain certain specific language alerting the debtor to the period within which he must respond to the motion. This language is commonly referred to as “negative notice.” See In re Stogsdill, 102 B.R. 587, 588 (Bankr. W.D. Tex. 1989). The time frame for responding to the motion varies depending on the type of motion and the local rules. Each district has specific negative-notice language that is required in that district. The practitioner should consult the local rules for the specific language required and the applicable time frame before filing any motion. See form 35-18 in this chapter for sample notice language. See also section 35.2:1 above regarding the local rules for each district.
Public Access to Court Electronic Records (PACER) is an electronic public access service that allows users to obtain case and docket information from federal appellate, district, and bankruptcy courts and from the U.S. Party/Case Index. PACER is a service of the U.S. Judiciary. The PACER Service Center is run by the administrative office of the U.S. courts. Currently, most courts have their own websites, and links to these sites are provided on the PACER website at www.pacer.gov. Electronic access is available for most courts by registering with the PACER Service Center, the judiciary’s centralized registration, billing, and technical support center.
A user can request information about a particular individual or case through the PACER system. The data is displayed directly on the user’s computer. Training on using the PACER system is available through the PACER website. All registered agencies and individuals are charged a user fee for access to the site. Users are also charged on a per-page or per-minute basis for each search. A schedule of fees is available on the PACER website.
§ 35.4Admission to Practice before Bankruptcy Court
To practice before a particular bankruptcy court, the attorney must be admitted in such court. An attorney generally may obtain admission pro hac vice to appear for a specific case if the attorney does not otherwise regularly appear before the court. The courts have a form motion and order available on their websites for admission pro hac vice. For the Northern District of Texas, even if admitted, an attorney is required to have local counsel unless the attorney obtains leave from the court to proceed without local counsel. N.D. Tex. L.B.R. 2090-4.
Practice Note: To receive notice of all matters in a case, the attorney needs to appear in the case. See form 35-4 for a sample notice of appearance.
The bankruptcy courts for all districts in Texas require that all documents be filed electronically as Adobe PDF files. The practice generally requires participation in a training course. On completion of the training course, the court issues the practitioner a login ID and a password, which is an electronic “signature.” All the bankruptcy courts in the four federal districts in Texas have adopted Appendix 5005, the “Administrative Procedures for the Filing, Signing, and Verifying of Documents by Electronic Means in Texas Bankruptcy Courts.” A copy can be located online at http://www.txeb.uscourts.gov/sites/txeb/files/TXEB_Appendix_5005.pdf.
Posting a credit card for filing documents requiring a fee may also be part of the procedure in some courts. The practitioner should consult the specific court for filing requirements. See section 35.1:2 above for a list of the official Web addresses for the bankruptcy courts in Texas.
Practice Note: Registration for electronic filing constitutes consent to receive notices electronically. The practitioner is advised to check frequently for filings involving matters in which the practitioner has an interest. Once an appearance has been entered in a case, copies of all documents filed in the case will automatically be sent to the practitioner by e-mail.
[Sections 35.6 through 35.10 are reserved for expansion.]
On the filing of a bankruptcy petition, the debtor receives automatic injunctive relief that broadly prohibits creditors from taking further action against the debtor, the property of the debtor, or the property of the estate to collect their claims or enforce their liens. 11 U.S.C. § 362.
The stay arises at the time of filing, not when notice is given to or received by the creditor. 11 U.S.C. § 362(a); In re Sumpter, 171 B.R. 835, 841–42 (Bankr. N.D. Ill. 1994). The stay is often effective before creditors learn of it. A creditor may innocently obtain a default judgment or hold a foreclosure sale in violation of the automatic stay. See, e.g., In re Abusaad, 309 B.R. 895 (Bankr. N.D. Tex. 2004). The Fifth Circuit Court of Appeals has held that an action taken in violation of the automatic stay is voidable. See In re Coho Resources, Inc., 345 F.3d 338, 344 (5th Cir. 2003); contra In re Elder, 12 B.R. 491 (Bankr. M.D. Ga. 1981) (action is void).
The scope of the automatic stay is extremely broad. The stay prohibits—
1.commencing or continuing an action or proceeding that was or could have been commenced before the bankruptcy case began;
2.commencing or continuing an action to recover a claim that arose prebankruptcy;
3.enforcing a judgment obtained pre-bankruptcy;
4.obtaining possession of property of or from the estate or exercising control over such property;
5.creating, perfecting, or enforcing against the property of the debtor any lien to the extent that the lien secures a claim that arose prebankruptcy;
6.collecting, assessing, or recovering a prebankruptcy claim against the debtor;
7.setting off any prebankruptcy debt owing to the debtor against any claim against the debtor; or
8.commencing or continuing a proceeding before the U.S. Tax Court concerning a corporate debtor’s tax liability for a taxable period that may be determined by the bankruptcy court or concerning the tax liability of an individual debtor for a taxable period ending before the date of the order for relief.
11 U.S.C. § 362(a).
However, a counterclaim asserted by the debtor is not an action “against the debtor” under 11 U.S.C. § 362(a) and, therefore, is not subject to the automatic stay. In re United States Abatement Corp., 39 F.3d 563, 568 (5th Cir. 1994); see also In re Voluntary Purchasing Groups, Inc., 205 B.R. 80, 80–81 (Bankr. E.D. Tex. 1996).
The codebtor stay refers to a stay of collection against codebtors who are not in bankruptcy if they are codebtors with a debtor filed bankruptcy. Except for consumer debt in a Chapter 12 or 13 case, the automatic stay of section 362 of the Bankruptcy Code does not prohibit demands, suits, or any other action by the creditor against guarantors or other codebtors of the bankrupt debtor. See Winters ex rel. McMahon v. George Mason Bank, 94 F.3d 130, 133 (4th Cir. 1996); Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194 (6th Cir. 1983); Pitts v. Unarco Industries, Inc., 698 F.2d 313 (7th Cir. 1983); In re Devine Ripe, LLC, 538 B.R. 300, 302 (Bankr. S.D. Tex. 2015).
In a Chapter 13 case, a codebtor’s stay applies. 11 U.S.C. § 1301. The codebtor’s stay under Chapter 13 stays enforcement of consumer debts against a codebtor. It does not stop the creditor from pursuing the codebtor if the codebtor became liable on or secured the debt in the ordinary course of the codebtor’s business or if the Chapter 13 case is closed, dismissed, or converted to a case under Chapter 7 or 11. 11 U.S.C. § 1301(a).
Streamlined provisions are added for a creditor to obtain relief from the codebtor’s stay. A motion for relief of the codebtor’s stay should be granted if—
1.the codebtor received the consideration for the creditor’s claim;
2.the debtor’s plan proposes not to pay the claim; or
3.the creditor’s interest would be irreparably harmed by the continuation of the codebtor’s stay.
11 U.S.C. § 1301(c). Unless a written opposition is filed to the motion within twenty days after it is filed, the codebtor’s stay lifts without the necessity of a court order. 11 U.S.C. § 1301(d).
Practice Note: If the stay does not apply to a nonbankrupt codebtor automatically by statute as discussed above, the debtor could file a motion seeking extension of the stay by court order. As a court of equity, the court can order to extend the stay or enjoin action against a codebtor. A creditor needs to object to such motion if the creditor wants to pursue the nonbankrupt codebtor. In general, the court should not protect any nonbankrupt codebtor unless the debtor can show that protecting the codebtor will provide a benefit to the bankruptcy estate and its creditors.
§ 35.13Exceptions to Automatic Stay
Despite the broad reach of the automatic stay, there are exceptions. Some of the exceptions are—
1.the commencement or continuation of a criminal action or proceeding against the debtor (11 U.S.C. § 362(b)(1));
2.the commencement or continuation of an action for paternity, modification of domestic support obligations, child custody or visitation, dissolution of marriage (unless the action seeks to determine division of property), domestic violence, collection of a domestic support obligation from property that is not included in the bankruptcy estate, or the withholding of income that is property of the estate or of the debtor for payment of a domestic support obligation (11 U.S.C. § 362(b)(2)(A)–(C));
3.certain acts as specified in the Social Security Act (11 U.S.C. § 362(b)(2)(D)–(G));
4.certain acts to perfect or maintain the perfection of an interest in property (11 U.S.C. § 362(b)(3));
5.the commencement or continuation of proceedings under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction and pursuant police and regulatory powers (11 U.S.C. § 362(b)(4));
6.certain contractual rights exercised by commodity brokers, forward contract merchants, stockbrokers, financial institutions, or securities clearing agencies (11 U.S.C. § 362(b)(6));
7.certain contractual rights exercised by repo participants or financial participants (11 U.S.C. § 362(b)(7));
8.action by the secretary of Housing and Urban Development to foreclose a mortgage or deed of trust covering property consisting of five or more living units (11 U.S.C. § 362(b)(8));
9.certain actions by tax authorities, including—
a.an audit to determine tax liability;
b.issuance of a notice of tax deficiency;
c.a demand for tax returns; and
d.a tax assessment and issuance of a notice and demand for payment of such an assessment (11 U.S.C. § 362(b)(9));
10.an act by a lessor under a lease of nonresidential real property that has terminated by expiration of the stated term of the lease to obtain possession of the property (11 U.S.C. § 362(b)(10));
11.presentment of a negotiable instrument and giving notice of and protesting dishonor of a negotiable instrument (11 U.S.C. § 362(b)(11));
12.certain acts by the U.S. secretary of education regarding the eligibility of the debtor to participate in education loan programs (11 U.S.C. § 362(b)(16));
13.certain contractual rights exercised by swap participants or financial participants (11 U.S.C. § 362(b)(17));
14.the creation or perfection of a statutory lien for an ad valorem property tax or other special tax or special assessment on real property imposed by a government unit if the tax comes due after the petition was filed (11 U.S.C. § 362(b)(18)); and
15.the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant if the lessor has obtained before the date of the filing of the bankruptcy petition a judgment for possession of the property (11 U.S.C. § 362(b)(22)).
§ 35.14Termination of Automatic Stay
The stay of an act against property of the estate continues until such property is no longer property of the estate. 11 U.S.C. § 362(c)(1). The stay also terminates automatically against all other actions and proceedings subject to the automatic stay when the bankruptcy proceeding is closed or dismissed or when the debtor receives or is denied a discharge. 11 U.S.C. § 362(c)(2). While the automatic stay in a Chapter 7 case has a limited duration, the automatic stay in a Chapter 12 or Chapter 13 case may not terminate for years. However, it is possible to obtain an earlier termination of the automatic stay.
If the debtor is an individual and the debtor was a debtor in a prior bankruptcy case that was pending within the preceding one year but was dismissed, the automatic stay expires thirty days after the filing of the subsequent case unless the debtor files a motion to continue the stay and obtains an order from the court continuing the stay. 11 U.S.C. § 362(c)(3). A presumption exists that a filing is not in good faith, and the debtor must rebut the presumption with clear and convincing evidence when seeking the stay to be extended past the thirty days. 11 U.S.C. § 362(c)(3)(C). If two or more cases were pending for an individual debtor within the previous year but were dismissed, the automatic stay does not go into effect. 11 U.S.C. § 362(c)(4)(A).
Relief from Automatic Stay for Secured Creditors: A secured party or a mortgagee may obtain relief from the automatic stay if he can establish that the debtor does not have equity in the encumbered property and the property is not necessary for an effective reorganization. 11 U.S.C. § 362(d)(2).
A secured creditor may also obtain relief from the bankruptcy stay by showing that the creditor’s interest in the property is not adequately protected. 11 U.S.C. § 362(d)(1). See section 35.15 below for a discussion of adequate protection.
The party requesting relief from the stay has the burden of establishing the debtor’s lack of equity in the encumbered property. The party opposing the relief from the stay has the burden of proof on all other issues. 11 U.S.C. § 362(g).
“Adequate protection” is a critical issue in controversies under Bankruptcy Code sections 362 (relief from the automatic stay), 363 (use, sale, or lease of property), and 364 (obtaining credit). Unfortunately, the Code does not define adequate protection.
When adequate protection is required under Bankruptcy Code sections 362, 363, and 364, the three nonexclusive methods of providing adequate protection are—
1.requiring the trustee to make periodic cash payments to the lien creditor equal to the decrease in value of the creditor’s interest in the collateral;
2.providing to the entity an additional or replacement lien; and
3.granting such other relief (except allowing the creditor to claim an administrative expense under section 503(b)(1)) as will compensate the creditor for the decrease in value of the creditor’s interest in the collateral.
§ 35.16Prepetition Repossession
An important issue that has generated sharp controversy is whether a creditor that has lawfully repossessed a debtor’s property prepetition violates the automatic stay simply by retaining possession of that property postpetition until adequate protection is assured. Most courts have held that the repossessing secured creditor must turn over the lawfully repossessed property on demand, even without adequate protection, or be in violation of the stay. See, e.g., Thompson v. General Motors Acceptance Corp., 566 F.3d 699, 701–03 (7th Cir. 2009); In re Bunton, 246 B.R. 851 (Bankr. N.D. Ohio 2000); In re Zaber, 223 B.R. 102 (Bankr. N.D. Tex. 1998); In re Bersheidt, 223 B.R. 579 (Bankr. D. Wyo. 1998); but see In re Fitch, 217 B.R. 286 (Bankr. S.D. Cal. 1998) (refusal of creditor to return vehicle without adequate protection did not violate automatic stay).
§ 35.17Consequences of Violating Stay
An individual injured by a willful violation of the automatic stay is entitled to recover actual damages, including costs and attorney’s fees, and, in appropriate circumstances, may recover punitive damages. 11 U.S.C. § 362(k)(1). If, however, the violation was made in good faith, the damages may be limited to actual damages. 11 U.S.C. § 362(k)(2). “Individual” in this context includes only human beings, not other entities. In re LATCL&F, Nos. 3:99-CV-2953-R, 398-35100-HCA, 2001 WL 984912 (N.D. Tex. Aug. 14, 2001); but see In re Freemyer Industrial Pressure, Inc., 281 B.R. 262 (Bankr. N.D. Tex. 2002).
Typically, the debtor or other party must bear the damages unless the violation is, in fact, willful. Willfulness is proven if the violator knew of the automatic stay and his actions were intentional. Mitchell v. BankIllinois, 316 B.R. 891, 901 (S.D. Tex. 2004). Willfulness may also occur even if the stay is violated before notice of the bankruptcy if the violator does not act to restore the status quo when he does receive notice. In re Wariner, 16 B.R. 216, 218 (Bankr. N.D. Tex. 1981); see also In re Zaber, 223 B.R. 102, 107 (Bankr. N.D. Tex. 1998).
Actual damages are not necessary to bring and maintain a violation of the stay. See In re Hill, 19 B.R. 375 (Bankr. N.D. Tex. 1982). Damages for emotional distress and relational injuries are part of “actual damages.” If property of the debtor is taken and held, actual damages may be measured by the value of the property at the time it is taken plus a rate per day for every day the property was out of the debtor’s possession. Further, the court must award attorney’s fees in a successful action for violation of the stay, and such fees are not limited to the amount of the debtor’s damages. See 11 U.S.C. § 362(k).
[Sections 35.18 through 35.20 are reserved for expansion.]
General Unsecured Claims: The Bankruptcy Code determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. See 11 U.S.C. §§ 502, 507.
Priority Claims: A priority claim is an unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. 11 U.S.C. § 507.
Secured Claims: A creditor may have a secured claim either through a security interest in property in the bankruptcy estate or because of a lien or a right of setoff. “Security interest” means a lien created by an agreement. 11 U.S.C. § 101(51). A lien is a charge against or interest in property to secure payment of a debt or performance of an obligation. 11 U.S.C. § 101(37). A judicial lien is a lien obtained by judgment, levy, sequestration, or another legal or equitable process or proceeding. 11 U.S.C. § 101(36).
A claim is secured only to the extent of the value of the collateral securing the claim. See 11 U.S.C. § 506(a).
Practice Note: If the collateral’s value is less than the claim amount, the claim is bifurcated into a secured claim up the amount of the collateral and an unsecured claim for the remainder. If the collateral exceeds the value of the claim, then the claim is “oversecured” and the secured claimant is entitled to interest and costs and attorney’s fees if allowed by agreement or state law. See 11 U.S.C. § 506(b).
Practice Note: Determining and proving “value” of collateral requires evidence. An expert witness is helpful to prove value. Review 11 U.S.C. § 506(a) as to the type of “value” that is considered depending on the case, such as replacement value or value for proposed disposition or use of collateral.
Administrative Expense Claims: Claims incurred in the administration of a bankruptcy case are considered administrative expense claims that are paid before priority and general unsecured claims. 11 U.S.C. § 503. These claims include actual and necessary expenses of preserving the estate, professional fees for the estate, and value of goods received by the debtor within 20 days prior to the bankruptcy filing. 11 U.S.C. § 503.
A party that agrees to postpetition financing of the debtor may seek priority status on such financing, including—
1.credit with priority over any or all administrative expenses of the kind specified in 11 U.S.C. §§ 503(b), 507(b);
2.credit secured by a lien on property of the estate that is not otherwise subject to a lien; or
3.credit secured by a junior lien on property of the estate that is subject to a lien.
See 11 U.S.C. § 364(c).
The bankruptcy court may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if the trustee is unable to obtain such credit otherwise, and there is adequate protection of the interest of the holder of the lien on the property of the estate on which the senior or equal lien is proposed to be granted. 11 U.S.C. § 364(d).
The proof of claim is a written statement describing the reason a debtor owes a creditor money. There is an official form for this purpose (see Fed. R. Bankr. P. 3001, 3003, and 3005 and Official Bankruptcy Form No. 10), which is reproduced at form 35-6 in this chapter. A creditor or its lawyer can file a proof of claim without being admitted to the particular bankruptcy court.
For Chapter 7, 12, or 13 cases, the proof of claim must be filed within ninety days after the first date set for the creditors meeting; however, some exceptions apply:
1.A governmental unit has 180 days after the entry of the order for relief to file a proof of claim.
2.An infant or incompetent may have the deadline extended at the court’s discretion.
3.An unsecured claim that is the result of a judgment may be filed within thirty days after the judgment becomes final.
4.A claim arising from the rejection of an executory contract or lease “may be filed within such time as the court may direct.”
5.If a no-asset notice was served, and thereafter a notice of distribution is served, parties have ninety days after the mailing of the notice of distribution to file proofs of claim.
Fed. R. Bankr. P. 3002(c).
Several courts have held that the bankruptcy court does not have authority in a case under Chapter 7, 12, or 13 to allow a late-filed proof of claim outside the exceptions listed in Fed. R. Bankr. P. 3002(c). See, e.g., In re McLarry, 273 B.R. 753 (Bankr. S.D. Tex. 2002); In re Kelley, 259 B.R. 580 (Bankr. E.D. Tex. 2001); In re Duarte, 146 B.R. 958 (Bankr. W.D. Tex. 1992). A debtor or trustee may file a proof of claim for a creditor that fails to timely file within thirty days after the rule 3002(c) deadline passes. Fed. R. Bankr. P. 3004.
The filing of a proof of claim in a case under Chapter 9 or 11 of the Bankruptcy Code is governed by Fed. R. Bankr. P. 3003. In cases under Chapter 9 or 11, the court may extend the time to file a proof of claim for cause. Fed. R. Bankr. P. 3003(c)(3); see also In re Eagle Bus Manufacturing, Inc., 62 F.3d 730, 737 (5th Cir. 1995) (creditor’s late-filed proof of claim was allowed where there was no evidence of bad faith and neither other creditors nor debtor would be prejudiced by allowing claim); In re AMWC, Inc., 109 B.R. 210, 214 (Bankr. N.D. Tex. 1989) (court reviewed motion to file late proof of claim under “excusable neglect” test). See form 35-7 for a sample creditor’s motion to allow late filing of proof of claim.
Practice Note: In a no-asset case, many practitioners will file a proof of claim on receipt of the initial notice of the bankruptcy in the event that assets are later discovered.
Practice Note: Effective December 1, 2015, the Official Bankruptcy Forms were superseded with new forms with new numbering and format. The forms and instructions can be found at http://www.uscourts.gov/forms/bankruptcy-forms.
Practice Note: The filing of a proof of claim for a claim outside of limitations might be a violation of the Federal Debt Collection Practices Act (FDCPA). The court of appeals for the Fifth Circuit has not yet ruled, and other circuits are split on the issue. See Trevino v. HSBC Mortgage Services, Inc. (In re Trevino), 535 B.R. 110, 137 n.7 (Bankr. S.D. Tex. 2015).
A proof of claim is deemed “allowed” unless a party objects to the claim. 11 U.S.C. § 502(a). At any time before the case is closed, the trustee, the debtor-in-possession, or a party in interest may file an objection to a proof of claim. 11 U.S.C. § 502. To oppose an objection to its claim, the creditor must file a written response to the objection with the bankruptcy court. At the hearing, the creditor will need to prove the validity of his claim.
A creditor may offset a mutual debt owing by the creditor to the debtor that arose before the commencement of the case against a claim the creditor has against the debtor that arose before the commencement of the case. However, a setoff will not be allowed if—
1.the claim of the creditor against the debtor is disallowed;
2.the claim was transferred, by an entity other than the debtor, to the creditor after commencement of the case;
3.the claim was transferred, by an entity other than the debtor, to the creditor after ninety days before the date the petition was filed and while the debtor was insolvent; or
4.the debt owed to the debtor by the creditor was incurred by the creditor after ninety days before the date of filing, while the debtor was insolvent, and for the purpose of obtaining a right of setoff against the debtor.
11 U.S.C. § 553(a).
Practice Note: The setoff of a claim is automatically stayed. 11 U.S.C. § 362(a)(7). The attorney needs to seek relief from the stay to exercise setoff rights.
§ 35.25Executory Contracts and Unexpired Leases
The bankruptcy trustee is authorized to assume or reject executory contracts and unexpired leases; the decision to assume or reject a contract or lease must be approved by the court. 11 U.S.C. § 365(a). The statute does not define the term executory contract, but legislative history indicates that the term generally includes contracts on which performance remains due to some extent on both sides. See H.R. Rep. No. 95-595, at 347 (1977); S. Rep. No. 95-989, at 58 (1978) (quoted in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984) superseded by statute on other grounds, 11 U.S.C. § 1113.). Section 365 contains provisions allowing the trustee to cure certain defaults before assumption and to provide adequate assurance of future performance of contracts that are in default. See 11 U.S.C. § 365(b). Section 365 permits not only the assumption but also the assignment of most contracts, notwithstanding contractual provisions that might otherwise limit assumption or assignment. See 11 U.S.C. § 365(f).
For a more detailed discussion of executory contracts and unexpired leases, see part VII. in this chapter.
[Sections 35.26 through 35.30 are reserved for expansion.]
A bankruptcy under Chapter 7 of the Bankruptcy Code is often referred to as liquidation bankruptcy. The goal is straightforward: to allow an individual debtor to obtain a discharge, keep exempt property allowed by law, and provide an orderly liquidation. The typical debtor in a Chapter 7 bankruptcy is one who has primarily unsecured debts, who does not have significant problems with secured creditors, and who does not have potential problems with discharge, dischargeability, or substantial abuse.
A debtor who filed a Chapter 7 bankruptcy and received a discharge within the previous eight years is ineligible for Chapter 7 relief. 11 U.S.C. § 727(a)(8); see also 11 U.S.C. § 727(a)(9).
Under the federal Fair Credit Reporting Act, a bankruptcy under Chapter 7 remains on an individual’s credit record for ten years. 15 U.S.C. § 1681c(a)(1).
Under Chapter 7, the individual debtor selects exempt property on Official Bankruptcy Form 106C, better known as Schedule C. If no one objects to the claim of exemptions within thirty days after the conclusion of the first meeting of creditors, the debtor keeps the property listed on Schedule C. See Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). In Texas, the debtor may choose between two potential lists of exempt property: the Texas state exemptions and the federal exemptions. See section 35.32:1 below for discussion of the Texas state exemptions and section 35.32:3 for discussion of the federal exemptions.
§ 35.32:1Texas State Exemptions
When the Bankruptcy Code was passed in 1979, states were given the option to “opt out” of the federal exemptions and prohibit their citizens from claiming the list of federal exemptions. Texas is one of sixteen states that chose not to opt out; therefore, debtors in Texas may choose between the Texas state exemptions and the federal exemptions. In most cases, the Texas state exemptions are more generous than the federal exemptions.
Homestead Exemption: The Texas homestead exemption allows unlimited value as long as the homestead is located on not more than ten acres in the city or not more than 200 acres for a family in the country. Tex. Prop. Code § 41.002. In contrast, the federal exemption allows equity not to exceed $23,675 per spouse as of April 1, 2016, with slight readjustment for inflation every three years. 11 U.S.C. § 522(d). A million-dollar house on ten urban acres would be exempt under Texas law, while only $47,350 in equity would be available to a couple under the federal exemptions. For a more detailed discussion of the Texas homestead exemption, see sections 27.35 through 27.40 in this manual. Some limits, however, are placed on the amount of the state homestead exemption that may be allowed to a debtor in bankruptcy. A debtor electing state exemptions may not exempt any interest in real or personal property that the debtor or a dependent of the debtor uses as a residence that was acquired by the debtor during the 1,215-day period (three years plus 120 days) preceding the date of the filing of the petition that exceeds, in the aggregate, $160,375 in value. This limit does not include any interest transferred from the debtor’s previous principal residence. 11 U.S.C. § 522(p)(2)(B).
Personal Property Exemptions: See sections 27.41 and 27.42 for a full discussion of the Texas personal property exemptions.
Most of the federal exemptions place strict limits on each type of property and, in some cases, the value of each specific item under a type of property. 11 U.S.C. § 522(d). The federal exemptions have some aspects, however, that benefit a small class of debtors who do not have to worry about excess equity in their homestead.
“Wild Card” Exemption: The exemptions include what is known as the “wild card.” With this exemption, each debtor can claim $1,250 plus up to $11,850 of any unused amount of the homestead exemption for any property. 11 U.S.C. § 522(d)(5). In contrast, cash is not exempt under Texas law. Tex. Prop. Code § 42.002.
Crime Victim’s Awards: The federal exemptions include provisions for awards under crime victim’s reparation laws, payment on account of wrongful death, and personal injury awards. 11 U.S.C. § 522(d)(11). None of these is exempt under Texas law.
§ 35.32:3Objecting to Exemptions
It is the duty of the trustee to review the debtor’s claim of exempt property and to file an objection if the claimed exemptions exceed the lawful items or amount.
The bankruptcy discharge makes certain debts unenforceable. The discharge has the effect of an injunction prohibiting enforcement of the discharged debt. Any attempt to collect on a discharged debt can be subject to penalty by civil contempt under a “no fair ground of doubt” standard or objective standard that looks at whether the creditor had an unreasonable understanding of the discharge order. Taggart v. Lorenzen, 139 S. Ct. 1795, 1804 (2019). Any judgments against the debtor with respect to discharged debts become void. 11 U.S.C. § 524(a).
Section 727 of the Bankruptcy Code defines which debtors are entitled to a discharge. See 11 U.S.C. § 727. Discharge under this section is an all-or-nothing proposition; either the debtor receives a discharge, or he does not. Whereas under section 523, specific claims can be excepted from discharge as discussed below.
Certain debtors are not entitled to a Chapter 7 discharge regardless of the debtor’s culpability. A debtor is not eligible for discharge under Chapter 7 if—
1.the debtor is not an individual (corporations and partnerships may receive a discharge only under Chapter 11 or 12) (11 U.S.C. § 727(a)(1));
2.the debtor has been granted a discharge under Chapter 7 or 11 in a case filed within the preceding eight years (11 U.S.C. § 727(a)(8)); or
3.the debtor received a discharge under Chapter 12 or 13 in a case commenced within the preceding six years that paid less than 70 percent of the debts (although in some instances the debtor may be eligible to receive a discharge under Chapter 13) (11 U.S.C. § 727(a)(9)).
A debtor may also be ineligible for discharge because of an infraction against the bankruptcy system. These infractions often constitute criminal offenses as well. See 18 U.S.C. § 152. Grounds for denying discharge based on the debtor’s culpability include—
1.the transfer, removal, mutilation, or concealment of the debtor’s property with intent to hinder, delay, or defraud a creditor or the trustee within one year before filing for bankruptcy (11 U.S.C. § 727(a)(2)(A));
2.the transfer, removal, mutilation, or concealment of property of the estate with intent to hinder, delay, or defraud a creditor or the trustee (11 U.S.C. § 727(a)(2)(B));
3.the concealment, destruction, mutilation, falsification, or failure to keep or preserve financial records sufficient to determine the debtor’s financial condition (11 U.S.C. § 727(a)(3));
4.knowingly and fraudulently making a false oath or account or presenting a false claim in connection with the case (11 U.S.C. § 727(a)(4)(A), (a)(4)(B));
5.bribery (11 U.S.C. § 727(a)(4)(C));
6.withholding recorded information, books, documents, records, and papers relating to the debtor’s property or financial affairs from the trustee or a court officer (11 U.S.C. § 727(a)(4)(D));
7.failure to satisfactorily explain any loss of assets or deficiency of assets to meet the debtor’s liabilities (11 U.S.C. § 727(a)(5));
8.refusal to obey any lawful order of the court or refusal to answer a question (except where there is a proper claim of the privilege against self-incrimination and no immunity is granted) (11 U.S.C. § 727(a)(6)); and
9.commission of any act prohibited under 11 U.S.C. § 727(a)(2)–(6) in another case concerning an insider during the year before bankruptcy (11 U.S.C. § 727(a)(7); see also 11 U.S.C. § 101(31)).
No action is required to deny discharge under 11 U.S.C. § 727(a)(1), (a)(8), or (a)(9); these provisions are self-executing. See Fed. R. Bankr. P. 4004(c)(1). A timely filed complaint is necessary, however, to deny discharge under 11 U.S.C. § 727(a)(2)–(7). See Fed. R. Bankr. P. 4004(a), (b). A complaint objecting to discharge must be filed not later than sixty days following the first date set for the meeting of creditors pursuant to section 341(a). Fed. R. Bankr. P. 4004(a). In a Chapter 11 case, the complaint must be filed not later than the first date set for the hearing on confirmation. Fed. R. Bankr. P. 4004(a). The court may extend this deadline as long as the request is made before the deadline. Fed. R. Bankr. P. 4004(b).
See form 35-16 in this chapter for a sample complaint to determine dischargeability.
A discharge may be revoked in some instances. Within one year of discharge, the discharge can be revoked if the debtor obtains his discharge through fraud and the party requesting revocation did not know of the fraud until after the discharge was granted. 11 U.S.C. § 727(d)(1), (e)(1). The discharge may be revoked before the later of one year after granting the discharge or the date the case is closed if—
1.the debtor knowingly and fraudulently acquires or becomes entitled to acquire property of the estate and fails to disclose it;
2.the debtor fails to obey a lawful order or respond to a material question; or
3.the debtor fails to explain satisfactorily a material misstatement in an audit or fails to make records and documents available for inspection, as referred to in section 586(f) of title 28.
11 U.S.C. § 727(d)(2)–(4), (e)(2).
The trustee, a creditor, or the U.S. trustee may request revocation of a discharge. The discharge may be revoked only after notice and a hearing. 11 U.S.C. § 727(d).
Waiver of Discharge: The debtor may choose to waive his discharge under 11 U.S.C. § 727(a)(10).
Time between Successive Cases: A debtor cannot receive a discharge under Chapter 7 if the debtor has received a discharge under Chapter 7 or Chapter 11 during the preceding eight years or under Chapter 13 during the preceding six years. 11 U.S.C. § 727(a)(8), (a)(9). A debtor cannot receive a discharge under Chapter 13 if the debtor received a discharge under Chapter 13 during the previous two years or under Chapter 7, 11, or 12 during the previous four years. 11 U.S.C. § 1328(f).
Practice Tip: The deadline for a Chapter 7 dischargeability complaint runs from the date set for the first meeting of creditors. If the meeting of creditors is rescheduled, it does not affect the deadline; the deadline is still from the first date set for the meeting of creditors.
§ 35.34Nondischargeability of Specific Debts
Automatically Nondischargeable: Certain debts require no action to ensure their nondischargeability. A creditor may attempt to enforce these debts long after the bankruptcy is discharged without seeking permission from the bankruptcy court. Some debts that are automatically nondischargeable include—
1.most debts for taxes, although some income taxes may be discharged under certain circumstances (11 U.S.C. § 523(a)(1));
2.debts that are neither listed nor scheduled if they were not listed in time to file a proof of claim or in time to file a timely nondischargeability complaint (11 U.S.C. § 523(a)(3));
3.a domestic support obligation (including some debts for attorney’s fees used to establish the obligation) (11 U.S.C. § 523(a)(5); see also In re Hudson, 107 F.3d 355 (5th Cir. 1997); In re Fulton, 236 B.R. 626 (Bankr. E.D. Tex. 1999));
4.most debts for fines, penalties, or forfeitures payable to and for the benefit of a governmental unit (11 U.S.C. § 523(a)(7));
5.student loans, unless the debtor obtains a determination that failure to discharge the debt would impose an undue hardship on the debtor and the debtor’s dependents (11 U.S.C. § 523(a)(8); see also In re Gerhardt, 348 F.3d 89 (5th Cir. 2003) (outlining test for “undue hardship”));
6.debts for death or personal injury caused by the debtor’s operation of a motor vehicle or boat while intoxicated from using alcohol, a drug, or another substance (although a debt for property damage caused while intoxicated may be dischargeable) (11 U.S.C. § 523(a)(9));
7.debts the debtor waived or was denied a discharge for in a prior case (11 U.S.C. § 523(a)(10));
8.instances of fiduciary fraud against an insured bank or savings and loan (11 U.S.C. § 523(a)(11));
9.malicious or reckless failure to maintain a commitment to maintain the capital of an insured depository institution (11 U.S.C. § 523(a)(12));
10.restitution orders issued under title 18 of the United States Code (11 U.S.C. § 523(a)(13));
11.debts incurred to pay a nondischargeable tax (11 U.S.C. § 523(a)(14)); and
12.condominium fees and homeowners association dues incurred after filing the bankruptcy case as long as the debtor received an actual benefit (such as residing there or renting the property out to a tenant) (11 U.S.C. § 523(a)(16)).
In some instances, the debtor or the creditor may want to obtain a determination that the debt is or is not dischargeable. This is absolutely necessary to establish a hardship discharge of a student loan. In re Gerhardt, 348 F.3d 89. There also may be questions concerning the nature of domestic support obligations or fact issues surrounding a hardship discharge that require litigation in the bankruptcy proceeding. Because the rules relating to dischargeability of tax debts are quite complicated, it may be preferable to obtain a ruling from the bankruptcy court than to bring the issue before a state court. Except for dischargeability under section 523(a)(2), (4), and (6), state courts share concurrent jurisdiction with bankruptcy courts to determine dischargeability issues. In re Bingham, 163 B.R. 769, 772 (Bankr. N.D. Tex. 1994).
There may be questions concerning the nature of domestic support obligations or fact issues surrounding a hardship discharge that require litigation in the bankruptcy proceeding.
Debts that Must Be Timely Proven to Be Nondischargeable: Three categories of nondischargeable debt require the creditor to file a timely complaint in the bankruptcy court seeking a determination of nondischargeability. 11 U.S.C. § 523(c). The bankruptcy court has exclusive jurisdiction for these three categories. The creditor’s failure to file a timely complaint could result in the loss of the ability to collect the debt. The three categories of debt are—
1.debts for money or property obtained through fraud or false pretenses including money obtained or renewals or extensions obtained through use of a false written financial statement (11 U.S.C. § 523(a)(2));
2.debts incurred as a result of fraud or defalcation while acting in a fiduciary capacity, larceny, or embezzlement (11 U.S.C. § 523(a)(4)); and
3.debts for willful and malicious injury (11 U.S.C. § 523(a)(6)).
The court determines the dischargeability of these debts after notice and hearing. 11 U.S.C. § 523(c)(1).
If the court finds that a debtor’s case would constitute an “abuse,” the court has the authority to dismiss the case. 11 U.S.C. § 707(b)(1). A motion for dismissal may be brought by the court on its own motion, by the U.S. trustee, the trustee (or bankruptcy administrator), or any party in interest. The abuse concept applies to only an individual debtor who owes primarily consumer debts. 11 U.S.C. § 707(b)(1).
“Abuse” is not defined in the Bankruptcy Code, but section 707(b)(2)(A) of the Code sets out a test for the presumption of abuse. See 11 U.S.C. § 707(b)(2).
A finding of abuse will generally not close the door on bankruptcy completely. The court may also, with the debtor’s consent, convert the case to Chapter 11 or 13.
Reaffirmation relates to both exempt property and discharge. If a debt is reaffirmed, the debtor does not get the benefit of the discharge of the debt. Reaffirmation is frequently used in the case of secured or nondischargeable debts.
Reaffirmation is sometimes used for secured debts. With a secured debt, the liability on the debt may be dischargeable, but the lien is not discharged. This means that the creditor is still free to enforce its lien once the bankruptcy case is over. The Bankruptcy Code gives debtors three options for dealing with property subject to a lien in Chapter 7: reaffirmation, redemption, or surrendering the collateral. See 11 U.S.C. § 521.
The debtor must file with the clerk of the court a statement of his intentions for the retention or surrender of a secured creditor’s collateral and to specify whether the debtor intends to redeem (for cash) the collateral or reaffirm the debt secured by the collateral. 11 U.S.C. § 521.
The Fifth Circuit Court has held that the choices under section 521—surrendering the collateral, redeeming it, or reaffirming the debt—are unambiguous and mandatory and that, therefore, there are no other choices. See In re Johnson, 89 F.3d 249 (5th Cir. 1996).
Of the three options, reaffirmation and surrender are the most commonly used. Redemption requires paying the value of the property in cash. Obviously, this may be difficult if the collateral is a house or a car. If the debtor wants to keep collateral that has a high value, the only practical option is likely to be reaffirmation of the debt.
The reaffirmation agreement must—
1.be entered into before the discharge is granted; and
2.be filed with the court and either contain a certification from the debtor’s attorney that the agreement is voluntary, it does not impose undue hardship, and the debtor has been advised on the legal effect and consequences of the agreement or, if the individual is not represented by an attorney during negotiation of the agreement, the court approves that the agreement does not impose an undue hardship and is in the best interest of the debtor.
11 U.S.C. § 524(c)(1), (3), (6).
Also, the agreement is enforceable only if—
1.the debtor received the disclosures described in 11 U.S.C. § 524(k) at or before the time the debtor signed the agreement;
2.the debtor has not rescinded the agreement before discharge or within sixty days after the agreement is filed with the court (whichever occurs later); and
3.provisions of 11 U.S.C. § 524(d) have been complied with.
11 U.S.C. § 524(c)(2), (4), (5).
See form 35-9 for a sample reaffirmation agreement.
A debtor may completely avoid certain types of liens on property in which the debtor has an interest if the lien impairs an exemption on that property to which the debtor would otherwise be entitled. 11 U.S.C. § 522(f).
Judicial Liens: Judicial liens are liens “obtained by judgment, levy, sequestration or other legal or equitable process or proceeding,” including writs of garnishment. 11 U.S.C. § 101(36). Although judicial liens are avoidable under section 522(f)(1), judicial liens to a spouse, former spouse, or child of the debtor for domestic support are not avoidable. 11 U.S.C. § 522(f)(1)(A). Judgments on mortgage foreclosures are not avoidable. 11 U.S.C. § 522(f)(2)(C).
Garnishment Lien: As described above, a garnishment creates a judicial lien. Under Texas law, the garnishment lien attaches at the date of service of the summons. In re Latham, 823 F.2d 108, 110 (5th Cir. 1987). The date of attachment is used for determining whether the garnishment falls within statutory time frame to be clawed back as an avoidable preference. In re Latham, 823 F.2d at 110.
Nonpossessory, Non–Purchase-Money Security Interests: The debtor may avoid nonpossessory, non–purchase-money security interests in—
1.household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are primarily for the personal or household use of the debtor or the debtor’s dependents;
2.implements, professional books, or tools of the trade of the debtor or debtor’s dependents; and
3.professionally prescribed health aids for the debtor or the debtor’s dependents.
11 U.S.C. § 522(f)(1)(B). Non–purchase-money liens on motor vehicles are not avoidable under section 522(f) because motor vehicles are not considered household goods. A lien on property in which the security interest was taken not only for purchase but for additional funds advanced is not avoidable. Consolidation, renewal, and refinancing loans, however, can transmute a nonavoidable lien into one that is avoidable.
Trustee’s Power to Avoid Liens: The trustee may avoid liens and transfers of the debtors. 11 U.S.C. § 544. The trustee can avoid transfers and liens on the debtor’s property that could have been avoided by a creditor under the applicable state statute and liens arising by statute (such as a landlord’s lien). The individual debtor may also use these powers when the trustee refuses to do so. 11 U.S.C. § 522(h). The purpose of the “strong arm powers” under section 544 is to cut off unperfected security interests, secret liens, and undisclosed prepetition claims against the debtor’s property as of the commencement of the case.
Under section 544, the trustee is granted the following powers:
Status of Creditor with Judicial Lien: The trustee has the status of a creditor with a judicial lien on all property on which a creditor could have obtained a judicial lien. Thus, the trustee has the rights and powers, as of the date of the commencement of the case, to avoid any transfer or obligation of the debtor that is avoidable by a hypothetical creditor and may subordinate any other creditor who holds a security interest in the debtor’s property but failed to take the necessary steps to perfect his security interest under applicable state law. 11 U.S.C. § 544(a)(1).
Right of Creditor with Unsatisfied Writ of Execution: The trustee has the rights of a creditor who obtains a writ of execution against the debtor that is returned unsatisfied. The effect of this provision is to vest the trustee with the equitable rights of a hypothetical creditor that has exhausted its legal remedies. The trustee may raise a presumption that the debtor is insolvent and has the ability, in some states, to invoke the equitable doctrine of marshaling. 11 U.S.C. § 544(a)(2).
Right of Bona Fide Purchaser of Real Property: The trustee has the rights of a bona fide purchaser of real property (but not of personal property) if, at the time of the commencement of the case, a hypothetical buyer could have obtained bona fide purchaser status. 11 U.S.C. § 544(a)(3). The trustee has the right to avoid an unrecorded transfer of land. A debtor-in-possession may also prosecute such a cause of action because the test is whether the trustee, not the debtor, qualifies as a bona fide purchaser. Thus, the mortgage valid between the debtor and a mortgagee, which could not be avoided before bankruptcy, may be avoided after bankruptcy. 11 U.S.C. § 544(a)(3).
Right to Avoid Voidable Transfers: The trustee has the right to avoid any transfer of the debtor or obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim. This includes any cause of action under state law for a fraudulent transfer or to avoid a bulk transfer in violation of state law. An actual unsecured creditor must be in existence; otherwise, if there are no creditors against whom the transfer is voidable under state law, the trustee is powerless. 11 U.S.C. § 544(b).
[Sections 35.38 through 35.40 are reserved for expansion.]
Chapter 13 allows an individual with regular income to file a plan for the reorganization of debts. The three main issues in Chapter 13 are—
1.eligibility to file;
2.confirmation of a plan; and
3.the extent of the discharge.
A complete discussion of Chapter 13 is beyond the scope of this manual. The following is intended to provide the collections practitioner with an idea of the structure of a bankruptcy under Chapter 13 and some indication of the issues that may arise.
To file for bankruptcy under Chapter 13, a debtor must—
1.be an individual or an individual and the individual’s spouse;
2.have regular income; and
3.owe, on the date of filing of the petition, noncontingent, liquidated unsecured debts of less than $394,725 and noncontingent, liquidated secured debts of less than $1,184,200.
11 U.S.C. § 109(e); see also 11 U.S.C. § 101(30).
The requirement that a debtor be an individual or an individual and a spouse eliminates corporations and partnerships from filing for bankruptcy under Chapter 13. These entities may reorganize under Chapter 11 or, in rare circumstances, under Chapter 12.
An additional requirement for staying in Chapter 13 is filing all necessary income tax returns. See In re Koval, 205 B.R. 72 (Bankr. N.D. Tex. 1996).
The requirement that the debtor have regular income simply means that the debtor must have some level of income on a recurring basis. Social Security payments, welfare payments, disability payments, and pension income have all been held to satisfy the regular income test. See In re Hammonds, 729 F.2d 1391, 1394–95 (11th Cir. 1984); In re Howell, 138 B.R. 484, 489 (E.D. Pa. 1992). Support from family members, however, standing alone, will not be sufficient to constitute “regular” income because such support can cease at any time.
Practice Note: The “regular income” test is independent of the feasibility test for confirming a plan. Thus, a debtor may qualify for filing under Chapter 13 but still not have enough income to confirm a plan. In that instance, the case would subsequently be dismissed or converted to Chapter 7.
The debt limits under Chapter 13 pose another restriction on eligibility. A debtor’s eligibility to file under Chapter 13 may depend on whether the debt was contingent or unliquidated.
The Bankruptcy Code does not define the terms contingent or unliquidated, but the courts have supplied definitions. A debt is “noncontingent, if all events giving rise to liability occurred prior to the filing of the bankruptcy petition.” In re Loya, 123 B.R. 338, 340 (B.A.P. 9th Cir. 1991). A debt is “liquidated” if the amount can be readily determined with precision and is capable of ascertainment by reference to an agreement or a simple mathematical computation. In re Elrod, 178 B.R. 5 (Bankr. N.D. Okla. 1995). Thus, a claim on a promissory note will generally be liquidated, while a tort claim may well be unliquidated. Contingent and unliquidated debts do not count toward the debt limits. See 11 U.S.C. § 109(e).
In Chapter 13, the automatic stay can apply to nonbankrupt codebtors of a debtor. 11 U.S.C. § 1301. The codebtor’s stay, however, does not apply to debts that a codebtor became liable on or secured in the ordinary course of the codebtor’s business, or after the Chapter 13 case is closed or dismissed or converted to a case under Chapter 7 or 11. 11 U.S.C. § 1301(a).
Streamlined provisions are added for a creditor to obtain relief from the codebtor’s stay. A motion for relief of the codebtor’s stay should be granted if—
1.the codebtor received the consideration for the creditor’s claim;
2.the debtor’s plan proposes not to pay the claim; or
3.the creditor’s interest would be irreparably harmed by the continuation of the codebtor’s stay.
11 U.S.C. § 1301(c). Unless a written opposition is filed to the motion within twenty days after it is filed, the codebtor’s stay lifts without the necessity of a court order. 11 U.S.C. § 1301(d).
§ 35.44Confirmation of Chapter 13 Plan
To confirm a Chapter 13 plan, a debtor must meet the following requirements:
1.The debtor must pay all of his “projected disposable income” into a plan for the applicable commitment period to unsecured creditors under the plan if the trustee or holder of an allowed unsecured claim objects to the confirmation (11 U.S.C. § 1325(b)(4)).
2.All priority claims must be paid in full without interest.
3.For secured claims, the debtor must make equal monthly periodic payments that equal at least an amount sufficient to provide the creditor with adequate protection (11 U.S.C. § 1325(a)(5)).
4.Unsecured creditors must receive at least as much as they would receive under a Chapter 7 liquidation (11 U.S.C. § 1325(a)(4)).
5.The plan is submitted in good faith (11 U.S.C. § 1325(a)(7)).
6.All amounts required under a domestic support obligation are paid (11 U.S.C. § 1325(a)(8)).
7.All tax returns are filed (11 U.S.C. § 1325(a)(9)).
See generally 11 U.S.C. §§ 1322, 1325 for more about contents of the plan and confirmation.
See forms 35-14 and 35-15 in this chapter for sample objections to confirmation of a plan under Chapter 13 of the Bankruptcy Code.
The Bankruptcy Code defines “disposable income” as current monthly income that is received by the debtor (other than certain child support payments, foster care payments, or disability payments for a dependent child) less amounts reasonably necessary to be expended for the maintenance or support of the debtor or his dependents, a domestic support obligation, or certain charitable contributions. For debtors engaged in business, it does not include income that is necessary for the continuation of the debtor’s business. 11 U.S.C. § 1325(b)(2).
Thus, “disposable income” is the debtor’s total income less reasonable living expenses and domestic support obligations (and less business expenses for an individal with a business). This includes charitable contributions of up to 15 percent of the debtor’s income. 11 U.S.C. § 1325(b)(2)(A)(ii). Other types of expenses that constitute living expenses include food, housing, clothing, laundry and cleaning, utilities and telephone, medical, insurance, taxes, support, and transportation. Generally, voluntary contributions to a retirement plan are not considered reasonable living expenses. See In re Johnson, 241 B.R. 394, 402 (Bankr. E.D. Tex. 1999).
Private school tuition will probably not be allowed as a reasonable living expense. Univest-Coppell Village, Ltd. v. Nelson, 204 B.R. 497 (Bankr. E.D. Tex. 1996). Additionally, payments on secured claims for luxury items, such as a boat, may be objected to by the Chapter 13 trustee. See, e.g., In re Samadi, No. 02-30336-H2-13, 2002 WL 31833254 (Bankr. S.D. Tex. Sept. 30, 2002).
Practice Note: Disposable income is initially based on the schedule of income and expenses submitted by the debtor. If no party objects to this schedule, the amount listed by the debtor will be presumed to be reasonable. Any questionable areas will usually be resolved by negotiation with the Chapter 13 trustee. Only rarely will a creditor object to the proposed budget.
To be entitled to confirmation, the Chapter 13 plan must have been proposed in good faith. 11 U.S.C. § 1325(a)(3). Good faith is generally a fact-specific inquiry into whether the debtor is using Chapter 13 for its intended purpose or is attempting to manipulate the system unfairly. See, e.g., In re Cedar Shore Resort, Inc., 235 F.3d 375, 380 (8th Cir. 2000); In re Elmwood Development Co., 964 F.2d 508, 510 (5th Cir. 1992); In re Little Creek Development Co., 779 F.2d 1068, 1072 (5th Cir. 1986).
Serial Filings: The court shall not grant a discharge under Chapter 13 if the debtor has received a discharge in a case filed under Chapter 7, 11, or 12 during the four-year period preceding the filing of the Chapter 13 petition or if the debtor has received a discharge in a case filed under Chapter 13 during the two-year period preceding the filing of the Chapter 13 petition. 11 U.S.C. § 1328(f). Some courts have found that a “serial filer” has filed in bad faith. See, e.g., In re Thomas, 123 B.R. 552 (Bankr. W.D. Tex. 1991). If the court finds that the debtor has acted in bad faith, the court can either lift the stay to allow a secured creditor to foreclose its lien on its collateral or dismiss the case with prejudice. An individual or family farmer who previously filed a petition under the Bankruptcy Code is ineligible for relief if the earlier case had been pending within 180 days before the date on which the newer petition was filed and the earlier case either was dismissed by the court on the ground that the debtor disobeyed orders or failed to appear to prosecute the case or was dismissed when the debtor’s motion for relief from the automatic stay was filed. 11 U.S.C. § 109(g).
Practice Note: Section 109(g), related to a bankruptcy filing 180 days after prior dismissal, is usually invoked by a creditor filing a motion to dismiss the subsequent case. The court then decides if the debtor in the earlier case either dismissed the case voluntarily after a motion for relief had been filed or if the debtor intentionally disobeyed an order of the court.
Automatic Termination of Stay in Subsequent Case: If the debtor is an individual and the debtor was a debtor in a prior bankruptcy case that was pending within the preceding one year but was dismissed, the automatic stay expires thirty days after the filing of the subsequent case unless the debtor files a motion to continue the stay and obtains an order from the court continuing the stay. 11 U.S.C. § 362(c)(3). If two or more cases were pending for an individual debtor within the previous year but were dismissed, the automatic stay does not go into effect. 11 U.S.C. § 362(c)(4)(A). A party in interest, however, can seek to impose a stay by filing a request within thirty days and showing that the bankruptcy filing is in good faith as to the creditors to be stayed. 11 U.S.C. § 362(c)(4)(B).
Practice Note: For second bankruptcy filings within a year, debtors almost always seek the extension of the stay. A rebuttable presumption exists that the filing was not in good faith. The presumption can be rebutted with clear and convincing evidence to the contrary. 11 U.S.C. § 362(c)(3)(C). Courts, however, routinely grant the extension of the stay.
Secured Claims: There are two options for payment of secured claims. One option is to surrender the collateral to the creditor. In this instance, the secured claim is extinguished by surrendering the collateral, and the remaining balance is treated as an unsecured claim. If the debtor wishes to keep the collateral, the debtor must provide for the creditor to retain its lien and be paid the value of its claims with interest. See 11 U.S.C. § 1325(a)(5). To pay the secured claim, the debtor may continue to make the regular contractual payments outside the plan and make payments to cure the arrearages within the plan (this is the only option allowed for home mortgages) or make equal monthly periodic payments that equal at least an amount sufficient to provide the creditor adequate protection. 11 U.S.C. § 1325(a)(5).
The entire secured claim to be paid under the plan (whether it is the arrearage or the entire claim) must be paid in full with interest over the life of the plan. Rather than the contract rate on the debt, the interest rate to be paid will be a “prime-plus” rate calculated by the bankruptcy court based on the circumstances of the estate using the national prime rate adjusted to reflect the additional risk of the bankrupt debtor’s nonpayment. Till v. SCS Credit Corp., 541 U.S. 465, 478–79 (2004); see also Drive Financial Services, L.P. v. Jordan, 521 F.3d 343, 347 (5th Cir. 2008).
Unsecured Claims: Unsecured creditors get whatever is left over. The two requirements for payment of unsecured creditors are—
1.that the unsecured creditors receive at least as much as they would receive in a Chapter 7 liquidation; and
2.that the debtor pays all of his projected disposable income into the plan for the applicable commitment period.
11 U.S.C. § 1325(a)(4), (b)(1).
As long as these two tests are satisfied, it does not matter what percentage unsecured creditors receive back on their claims.
Practice Note: In Texas, where exemptions are generous, unsecured creditors will frequently receive no distribution in a Chapter 7 case. Therefore, it is frequently easy to satisfy the Chapter 7 liquidation test. However, for a debtor with a business or significant nonexempt property, the Chapter 7 liquidation test may require a much higher distribution to creditors.
Payments: Payments into a Chapter 13 plan are typically made on a monthly basis by payroll deduction. A pay order may be waived if the debtor is self-employed. However, the presumption is that debtors with third-party employers will have their plan payments withheld from their paychecks. If the amount of monthly payments under the plan is insufficient to pay the priority claims, the secured claims, and the minimum required payment to unsecured creditors, the plan will not be confirmable unless the debtor shows an ability to make a balloon payment either at the end of the plan or during the plan term. See 11 U.S.C. § 1325(a)(6).
The super discharge formerly available in Chapter 13 was eliminated effective October 17, 2005. The Chapter 13 discharge is essentially the same as the Chapter 7 one except that the debtor does not receive his discharge until he has completed making all payments under his Chapter 13 plan. 11 U.S.C. § 1328.
[Sections 35.45 through 35.50 are reserved for expansion.]
A preferential transfer or preference is a transfer made within ninety days (or one year if made to an insider of debtor) on an antecedent debt before the bankruptcy filing while the debtor was insolvent. The transfer is of an interest of the debtor in property, typically money paid to a creditor or a lien on debtor’s collateral. Unless a defense exists, a creditor that received a preferential transfer may be liable for turning over the money received or having any lien obtained set aside. The policy behind preferences is that one creditor that obtains payment or a lien shortly before bankruptcy should not get “preferred” over other creditors of the debtor. Instead, the money or property is clawed back and distributed pro rata to all equally situated creditors.
A preference is defined as any transfer of an interest of the debtor in property that—
1.is to or for the benefit of a creditor;
2.is for or on account of an antecedent debt owed by the debtor before the transfer was made;
3.is made while the debtor was insolvent;
4.is made on or within ninety days before the date of the filing of the petition or between ninety days and one year before the date of the filing of the petition if the creditor at the time of the transfer was an insider; and
5.enables the creditor to receive more than the creditor would receive if the case were a case under Chapter 7, the transfer had not been made, and the creditor received payment of the debt to the extent provided by the provisions of the Bankruptcy Code.
11 U.S.C. § 547(b).
§ 35.52Defenses to Recovery of Preference
There are nine statutory defenses to recovery of a preference under section 547 of the Bankruptcy Code. See 11 U.S.C. § 547(c).
§ 35.52:1Transfers in Exchange for New Value
A preference will not be avoided if it was intended by the debtor and the creditor to or for whose benefit the transfer was made to be a contemporaneous exchange for new value given to the debtor and if it was in fact a substantially contemporaneous exchange. 11 U.S.C. § 547(c)(1).
§ 35.52:2Transfers in Ordinary Course of Business
If the transfer was made in payment of a debt incurred by the debtor in the ordinary course of the business or financial affairs of the debtor and the transferee or was made according to ordinary business terms, the transfer will not be avoided. 11 U.S.C. § 547(c)(2).
Practice Note: The ordinary course of business defense is most often relied on; however, it is fact driven by things such as whether it was normal or not for a debtor to pay invoices thirty days late, thirty-one days late, fifty days late, etc. In many cases, debtors payments are varied and inconsistent, thus finding the “ordinary course” is not clear cut and can lead to extensive litigation. The vast majority of preference claims are settled. Consider using an experienced preference litigator to assist you due to nuances associated with litigating preferences and negotiating an appropriate settlement amount.
§ 35.52:3Purchase-Money Lien Perfected within Thirty Days
A security interest in property acquired by the debtor will not create an avoidable preference to the extent that—
1.the security interest secures new value given;
2.a security agreement describing the property was signed at or before the time the new value was advanced;
3.the new value was given by or on behalf of the secured party under the agreement;
4.the new value was given to enable the debtor to acquire the property;
5.the debtor used the new value to acquire the property; and
6.the security interest was perfected within thirty days after the debtor received possession of the property.
11 U.S.C. § 547(c)(3).
A preference will not be avoided if it is to or for the benefit of a creditor, to the extent that, after the transfer, the creditor gave new value to or for the benefit of the debtor not secured by an otherwise unavoidable security interest and, on account of the new value, the debtor did not make an otherwise unavoidable transfer to or for the benefit of the creditor. 11 U.S.C. § 547(c)(4).
Practice Note: The new value defense is more straightforward than some other defenses and is often applicable. This defense should be first analyzed when addressing the value of a preference claim.
§ 35.52:5Perfected Interest in Inventory or Receivables
A preference will not be avoided if it creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interest for such debt on the later of—
1.ninety days before the date of the filing of the petition or, with respect to a transfer to an insider, one year before the date of the filing of the petition; or
2.the date on which new value was first given under the security agreement creating the security interest.
11 U.S.C. § 547(c)(5).
§ 35.52:6Unavoidable Statutory Lien
A preference will not be avoided if it is the fixing of a statutory lien that is not avoidable under section 545 of the Bankruptcy Code. 11 U.S.C. § 547(c)(6). A statutory lien is avoidable under section 545 if it first becomes effective on the filing of a bankruptcy, is not perfected or enforceable at the time of filing bankruptcy, is for rent, or is a lien of distress for rent. 11 U.S.C. § 545. A perfected Texas mechanic’s lien is an example of a statutory lien that may not be avoided under section 545 and therefore qualifies for the defense under section 547(c)(6).
§ 35.52:7Domestic Support Payments
A preference will not be avoided to the extent a transfer was a bona fide payment of a debt for a domestic support obligation. 11 U.S.C. § 547(c)(7).
§ 35.52:8Consumer Payments under $600
A preference will not be avoided if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by the transfer is less than $600. 11 U.S.C. § 547(c)(8).
§ 35.52:9Nonconsumer Payments under $6,425
A preference will not be avoided if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by the transfer is less than $6,425. 11 U.S.C. § 547(c)(9). The amount is adjusted every three years on April 1st based on the Consumer Price Index, with the next adjustment scheduled for April 1, 2022, with such adjustments not applying to cases filed prior to the date of the adjustment. 11 U.S.C. § 104.
§ 35.53Statute of Limitations for Recovery of Preferences
A case to recover a preference must be filed before the later of two years after the entry of the order for relief or one year after the appointment of the first trustee in the case as long as the trustee was appointed less than two years after the case was filed or the time the case is closed or dismissed. 11 U.S.C. § 546(a).
The trustee can recover transfers made within two years before bankruptcy has been filed if they meet the definition of a fraudulent conveyance. 11 U.S.C. § 548. Fraudulent conveyances may also be recovered under applicable state law.
The two types of fraudulent conveyances under the Bankruptcy Code are—
1.an actual fraudulent conveyance, and
2.a constructive fraudulent conveyance.
11 U.S.C. § 548(a)(1).
An actual fraudulent conveyance exists for transfers made with actual intent to hinder, delay, or defraud. 11 U.S.C. § 548(a)(1)(A). A constructive fraudulent conveyance exists for transfers made for less than reasonably equivalent value. 11 U.S.C. § 548(a)(1)(B).
§ 35.54:1Actual Intent Standard
The trustee may avoid a transfer made or obligation incurred “with actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted.” 11 U.S.C. § 548(a)(1)(A). See, e.g., In re Major Funding Corp., 126 B.R. 504, 508 (Bankr. S.D. Tex. 1990) (there was requisite intent to defraud where debtor commingled various corporate accounts and used corporate funds for personal benefit); In re Missionary Baptist Foundation of America, Inc., 24 B.R. 973, 976 (Bankr. Tex. 1982) (no intent where debtor continued to make charitable contributions while creditors were not paid).
The trustee may avoid a transfer that was made for “less than a reasonably equivalent value” and the debtor—
1.was insolvent or became insolvent as a result of the transfer;
2.was about to engage in a business or transaction for which the debtor’s remaining property was an unreasonably small capital;
3.intended to incur or believed the debtor would incur debts beyond the debtor’s ability to repay; or
4.made the transfer or incurred the obligation to or for the benefit of an insider under an employment contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(B).
Securing Existing Debt: The definition of “value” under section 548 includes the securing of a present or antecedent debt. 11 U.S.C. § 548(d)(2)(A).
Foreclosures: The consideration paid at a foreclosure sale conducted in accordance with state law conclusively establishes “reasonably equivalent value.” BFP v. RTC, 511 U.S. 531, 545 (1994).
Charitable Contributions: Charitable contributions made by an individual are protected from recovery as long as the contribution did not exceed 15 percent of the annual gross income of the debtor or, if the transfer was greater than 15 percent of the annual gross income of the debtor, it was “consistent with the practices of the debtor in making charitable contributions.” 11 U.S.C. § 548(a)(2). See also 11 U.S.C. § 548(d)(3).
§ 35.54:3Protection for Good-Faith Transferees
If a transfer is recovered from a good-faith transferee who gave value, the transferee is entitled to a lien on the property recovered or may retain the property to the extent of the value given. 11 U.S.C. § 548(c).
§ 35.54:4Statute of Limitations for Actions to Recover Fraudulent Conveyances
An action to recover a fraudulent conveyance must be brought before the later of two years after the entry of the order for relief or one year after the first trustee is appointed, as long as the trustee is appointed before the expiration of two years; or the time the case is closed or dismissed, whichever is earlier. 11 U.S.C. § 546(a).
[Sections 35.55 through 35.60 are reserved for expansion.]
VII. Executory Contracts and Unexpired Leases
§ 35.61Scope of Executory Contract Provisions
The trustee is authorized to assume or reject executory contracts. 11 U.S.C. § 365(a). The trustee is empowered to cure certain defaults before assumption and to provide adequate assurance of future performance of contracts that are in default. 11 U.S.C. § 365(b)(1). The trustee may also assign most contracts, notwithstanding contractual provisions that might otherwise limit assumption or assignment. 11 U.S.C. § 365(f). The nondebtor party to the contract may still insist on performance from the debtor rather than a trustee. 11 U.S.C. § 365(c).
The Bankruptcy Code does not define the term executory contract. Legislative history indicates that the term generally includes contracts under which performance remains due to some extent on both sides. See H.R. Rep. No. 95-595, at 347 (1977); S. Rep. No. 95-989, at 58 (1978); see also NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), superseded by statute on other grounds. 11 U.S.C. § 1113.
§ 35.62Deadlines for Assumption or Rejection
Section 365(d) of the Bankruptcy Code fixes the time within which the trustee must assume or reject an unexpired lease or executory contract. See 11 U.S.C. § 365(d). In a case under Chapter 7 of the Bankruptcy Code, the trustee must assume or reject an executory contract or unexpired lease of residential real property or of the debtor’s personal property within sixty days after the order for relief (there is a different time frame for nonresidential real property; see 11 U.S.C. § 365(d)(4)). An extension of this deadline can be accomplished only by filing a motion with the court and obtaining the court’s approval. See 11 U.S.C. § 365(d)(3), (d)(4). If the trustee fails to act within the period established by section 365, the contract or lease is deemed rejected by operation of law. 11 U.S.C. § 365(d)(1), (d)(4).
In a case under Chapter 9, 11, 12, or 13 of the Bankruptcy Code, the trustee may assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor any time before confirmation of the plan. But the court, on the request of any party to the contract or lease, may order the trustee to determine within a specified period whether to assume or reject the contract or lease. 11 U.S.C. § 365(d)(2). See forms 35-19 and 35-20 in this chapter for a motion compelling assumption or rejection of an unexpired lease and its corresponding order.
A lease of nonresidential real property is governed by section 365(d)(4), and the trustee must assume or reject the lease within the specified time frame or obtain a court order extending the deadline. Otherwise, the lease will be deemed rejected. 11 U.S.C. § 365(d)(4).
§ 35.63Effects of Existing Defaults
The bankruptcy trustee may not assume an executory contract or unexpired lease on which there has been a default unless the trustee complies with three requirements. The trustee must—
1.cure the default or provide adequate assurance that the default will be promptly cured (with certain exceptions);
2.compensate or provide adequate assurance that the trustee will promptly compensate the other party to the contract or lease for any pecuniary loss to the party resulting from the default; and
3.provide adequate assurance of future performance under the contract or lease.
11 U.S.C. § 365(b)(1).
If the trustee rejects the executory contract or lease, the rejection generally constitutes a breach of the contract or lease. 11 U.S.C. § 365(g), (h). The other party in a rejected lease will be allowed to keep any money held as deposit and may also seek reimbursement for any amounts due under the lease agreement, subject to the limits of the Bankruptcy Code. The claim of a lessor for damages resulting from the termination of a lease of real property cannot exceed the rent reserved under the lease for the greater of one year or 15 percent, not to exceed three years of the remaining term of the lease plus any unpaid rent due under the lease. 11 U.S.C. § 502(b)(6).
§ 35.65Allowance of Administrative Expense
A creditor may be entitled to an administrative priority claim for the “actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). A motion and order, not a proof of claim, is required to allow an administrative expense claim. Unless a trustee immediately rejects an unexpired lease for nonresidential real property, the landlord has what amounts to a superpriority administrative claim for the first sixty days after the debtor has filed for relief under the Bankruptcy Code. 11 U.S.C. § 365(d)(1), (3); see also 11 U.S.C. § 503(b)(1).
Under the Uniform Commercial Code, a seller of goods is entitled to reclaim the goods if the buyer is insolvent. Tex. Bus. & Comm. Code § 2.702. Ordinarily, a seller of goods has only ten days from buyer’s receipt to assert a reclamation demand. If the buyer of goods files bankruptcy, the Bankruptcy Code provides a larger time frame to reclaim goods. Under the Bankruptcy Code, a seller can reclaim goods received by the debtor in the forty-five days prior to the bankruptcy. The seller must make demand in writing to reclaim such goods either within the forty-five days after debtor received the goods, or if the forty-five day period expires after the bankruptcy filing, within twenty days after the bankruptcy filing. 11 U.S.C. § 546(c). If a lender holds a security interest and floating lien over the goods being reclaimed, the seller’s reclamation rights are eliminated if the value of the goods is less than the amount secured by the lender’s lien. See In re Dana Corp., 367 B.R. 409, 419 (Bankr. S.D.N.Y. 2007); In re Circuit City Stores, Inc., 441 B.R. 496, 509–10 (Bankr. E.D. Va. 2010). See form 35-21 in this chapter for a sample reclamation demand.
§ 35.67Goods Received by Debtor within Twenty Days before Bankruptcy
The Bankruptcy Code provides an administrative expense claim for creditors who sold goods that were received by a debtor within twenty days prior to the debtor’s bankruptcy case. 11 U.S.C. § 503(b)(9). The purpose is to encourage suppliers to continue to sell goods to struggling businesses. The seller of such goods must file a motion seeking approval and allowance of its administrative expense claim through a court order. An allowed administrative expense is generally paid in full on the effective date of a Chapter 11 plan or in the order of priority of claim under a Chapter 7 case if distributions are made at all. See forms 35-22 and 35-23 in this chapter for a sample motion and order for allowance of administrative expense claim.