Fundamentals of Bankruptcy

Transcription

1 2015 Fundamentals of Bankruptcy

2 TABLE OF CONTENTS INTRODUCTION... 1 I. Sources of Bankruptcy Law... 2 A. Federal Law... 2 B. The Bankruptcy Code Generally... 2 C. The Chapters of Bankruptcy... 2 D. Bankruptcy Rules... 3 E. Jurisdiction of the Bankruptcy Court... 4 F. Other Sources of Law and Rules II. The Main Players A. The Debtor B. Creditors C. The Judge D. The U.S. Trustee E. The Trustee F. Committees G. Ombudsman III. Particular Types of Bankruptcy A. Chapter 7 (Liquidation) Who May File Chapter 7? Dismissal of Case or Conversion to Chapters 11 or Conversion Administration of a Chapter Distribution of the Property of the Estate Fresh Start B. Chapter 9 (Municipal Reorganization) C. Chapter 11 (Reorganization) Who May File a Chapter 11? Administration of a Chapter The Plan Disclosure Statement Confirmation of a Plan i

3 6. Effect of Confirmation Post Confirmation Modification Conversion or Dismissal Small Business Chapter 11's Single Asset Real Estate Cases Individual Chapter 11 Cases D. Chapter 12 (Family Farmer/Fisherman Bankruptcy) Who May File Chapter 12? Administration of Chapter The Debtor's Plan Special Treatment of Secured Creditors Under Chapter Conversion or Dismissal of Cases Discharge in a Chapter 12 ( 1228) E. Chapter 13 (Individual Wage Earner Plan) Who May File Chapter 13? Administration of a Chapter Chapter 13 Plan F. Chapter 15 (Ancillary and Cross Border Cases) G. Credit Counseling Requirements for All Chapters for Individuals Counseling Requirement Qualified Non Profit Credit Counseling Agencies IV. Involuntary Bankruptcy A. What is Involuntary Bankruptcy? B. Limitation on Chapters C. Who May Be an Involuntary Debtor? D. How is an Involuntary Bankruptcy Commenced? E. Preliminaries to and Hearing on Involuntary Petition Debtor's Response Bond Trustee The Order for Relief Failure to Establish Involuntary Bankruptcy Dismissal ii

4 7. Miscellaneous Rules for Involuntary Bankruptcies V. Property of the Estate ( 541) A. Legal and Equitable Interests B. Community Property C. Recovered Property D. Preserved Transfers E. Certain Property Acquired within 180 Days after Filing F. Proceeds, Product, Offspring, Rents or Profits G. After Acquired and Earned Property in a Chapter H. Exceptions to Property of the Estate VI. Exemptions A. Purpose of Exemptions B. Federal Exemptions C. Election Under California Law D. Special Homestead Rules E. No Stacking of Exemptions F. California CCP (b) Exemptions The debtor's right to receive, or property that is traceable to, any of the following: G. Avoidance of Liens Impairing Exemptions VII. Conversion of a Case to Another Chapter A. Generally B. Effect of Conversion C. Pre-Conversion, Post-Filing Claims D. Chapter E. Chapter F. Chapter 12 (See III.D.5) G. Chapter VIII. The Automatic Stay A. Scope of the Automatic Stay B. Duration of the Automatic Stay C. Relief from the Automatic Stay Relief by Abandonment iii

5 2. Relief by Stipulation Relief by Motion Grounds for Relief From the Stay D. Scope of Relief E. Effect of Conversion or Dismissal on Relief from the Automatic Stay F. Violation of the Automatic Stay G. Effect of the Stay on Co-debtors (Chapters 12 and 13) IX. Proofs of Claim ( ) A. When to File Chapter 7, 12 and Chapter Filing a Claim as a Grant of Jurisdiction B. Where to File The Court The Trustee The Debtor's Attorney The U.S. Trustee C. Amount of Claim Unsecured Claims Secured Claims Ordinary Leases (claims on financing leases should be filed like any secured claim) D. Claims Arising After the Filing of Bankruptcy Chapter Chapter Chapter Chapter X. Payment of Claims A. Allowance of Claims B. Secured Claims C. Unsecured Claims D. Priority of Claims Domestic Support Obligations (1st Priority Claim) iv

6 2. Administrative Claims (2nd Priority Claim) Gap Creditor Claims (3rd Priority Claim) Wages, Salaries or Commissions Claims (4th Priority Claim) Employee Benefit Plan Claims (5th Priority Claim) Grain Producers and Fisherman Claims (6th Priority Claim) Deposit for Goods or Service Claims (7th Priority Claim) Tax Claims (8 th Priority Claim) Obligations to Maintain Capital in a Federally Insured Financial Institution (9 th Priority Claim) General Unsecured Claims E. Payments Made Under the Doctrine of Necessity F. Reduction of Claim Amount for Failure to Cooperate with Debtor Before Bankruptcy G. Miscellaneous Comments on Claim Payments XI. Statement of Intention A. Time for Filing B. The Debtor's Options Retain the Collateral Surrender the Collateral Redeem the Collateral Reaffirmation Agreements C. Performance of Intentions D. Trustee Duty E. Debtor's Performance F. Trustee Rights XII. Use, Sale or Lease of Property Including Cash Collateral A. Cash Collateral B. Use, Sale or Lease in the Ordinary Course of Business C. Use, Sale or Lease not in the Ordinary Course D. Use of Cash Collateral E. Provision of Adequate Protection F. Sales of Estate Property Free and Clear of Others Interest G. Sale of Co-Owner Interest in Estate Property v

7 H. Sale or Lease Good Despite Appeal I. Bid Fixing Will Allow a Sale to be Unwound XIII. Use of Cash Collateral and Debtor-In-Possession ( DIP ) Financing A. Conceptual Overview B. Use of Cash Collateral - Chapters 7, 11, 12, and Definition of Cash Collateral: 11 U.S.C. 363(a) Applicable Bankruptcy Code Sections and Rules C. DIP Financing - Chapters 7, 11, 12, and Debt Incurred in Ordinary Course of Business Debt Incurred in Other than Ordinary Course of Business XIV. Leases & Executory Contracts ( 365) A. Definitions Executory Contract Unexpired Lease B. Assumption, Assignment, or Rejection of a Lease or Executory Contract Assumption Assignment Rejection C. Time in Which to Assume or Reject Lease Chapter Chapters 11, 12 or Nonresidential Real Property Leases D. Termination or Modification of the Lease or Executory Contract E. When is a Breach Deemed to Have Occurred on a Rejected Lease and What Claim Will Result? Rejected Leases Lease Assumed Then Rejected Lease Assumed Before Conversion Then Rejected Administrative Claim F. Effect of Rejection on the Automatic Stay G. The Debtor as Lessee of Shopping Center Property H. The Debtor as the Lessee of Aircraft Terminal or Gates I. Debtor as the Lessor of Real Property vi

8 J. Other Restrictions on the Assumption and Assignment of Unexpired Leases or Executory Contracts K. The Debtor as the Seller of Real Property L. The Debtor as Licensor of Intellectual Property M. FDIC and other Financial Institutions N. New Provisions for Non Consumer Personal Property Leases after the 1994 Act O. Debtor s Ability to Personally Assume a Personal Property Lease that has been Rejected XV. Preferences A. What is a Preference? B. Exceptions to Preferences C. Action on a Preference XVI. Fraudulent Transfers A. What is a Fraudulent Transfer? B. Constructive Fraud C. Reasonably Equivalent Value D. Religious and Other Charitable Giving E. Foreclosure Sales F. Reach-back Period G. Extended Reach-back Period for Self-Settled Trusts H. Statute of Limitations I. Safe Harbor Against Avoidance XVII. Effect of Discharge A. Chapter All obligations specified in 502 whether or not a claim was filed, including: B. Chapter C. Chapter 12 (Discussed Earlier in Outline) D. Chapter 13 Super Discharge (Not so super anymore) E. Chapter 13 Hardship Discharge Requirements for Hardship Discharge Scope of Hardship Discharge F. Effect of Discharge (applicable to all Chapters) vii

9 G. Revocation and Reaffirmation XVIII. Exceptions to Discharge A. Exception to Discharge of Specific Debts B. Exceptions Denying Discharge Of The Debtor In General Chapter Chapter Chapters 12 and Chapter 13 (Super Discharge) XIX. Setoff Rights Under Bankruptcy A. Setoff Rights Of Creditor B. Set-off of Post-Petition Debts Against Pre-Petition Debts C. Preference Rules for Set-off D. Bank Accounts, Security Interests, and Bankruptcy Set-Off Banker's Lien Administrative Freeze Cash Collateral Recoupment XX. Miscellaneous Bankruptcy Provisions and Issues A. Debt Relief Agency Regulations B. The First Meeting of Creditors C. Status Conferences D. The Avoiding Power E. Return of Goods F. Reclamation G. Loss of Certain Collateral After the Filing of Bankruptcy After Acquired Property Exception to Loss of After Acquired Property Collateral H. Local Practice I. When to Call an Attorney J. Lack of Settled Law viii

10 INTRODUCTION This outline is prepared with a focus on making bankruptcy law understandable to both non-bankruptcy attorneys as well as non-attorneys. When the current Bankruptcy Code was adopted back in 1978, no one could have anticipated the dizzying heights to which the annual number of bankruptcies filed would rise a mere thirty five years later. Bankruptcy remains a growth industry, with the number of filings continuing to trend upward almost annually. Almost every business person will, at some point, find themselves affected by a bankruptcy filing. As this 2014 edition is being prepared, the bankruptcy community remains busy though the number of filings have dropped from the highs of Whether the current economy remains in the doldrums or can be seen as recovering, it can be debated ad nauseam, but the fact is, bankruptcy remains an important topic within the American Economy. Just as we had settled into the reality of all issues presented by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, we find a debate emerging as to whether further wide- ranging changes are needed to cope with our current financial situation. For years, when we referred to the New Economy, it meant something positive that everyone wanted to be a part of. It meant embracing the information age and all the new technology it was bringing to our doorstep. Now we are experiencing a different New Economy, and it is one that everyone is hoping and praying goes away soon. It is possible in that we may experience additional changes to the Code due to the reaction to the Great Recession. Unfortunately, given the current congressional gridlock, as well as some of the other hot button topics drawing more interest, it is unlikely that the Bankruptcy Code is going to get much attention from this Congress. However, this is certainly a different administration than the one that gave us the last legislation, so anything is possible. It is not the author's intention to deal with all of the fine details of bankruptcy law. The effort is to stay with the basic concepts and to avoid being bogged down in various exceptions that often exist to any general principle. To sort out all the details for all of these various areas of bankruptcy law would take multiple volumes. If you want that, please see Collier on Bankruptcy. Additionally, this is not a case book. There is little reference to court decisions of any kind in this outline. You can find a bankruptcy case in existence to support almost any position you want to take. Often, if you line up all the cases on any one subject end to end, they will point in all directions. Instead, this outline focuses on the statutory framework. If the cases have come to a clear conclusion on a particular subject, it may also be stated. Hopefully you will find this to be a handy reference to use for a quick grasp of various bankruptcy concepts. While you will not pick up any fascinating after dinner conversation within its pages, hopefully it will allow you to sound more informed with your clients or superiors. 1

11 I. Sources of Bankruptcy Law A. Federal Law To successfully practice in the bankruptcy arena, a person must be familiar with a number of different sources of law. It is not enough to be familiar with the Bankruptcy Code. The seminal source of bankruptcy law is the Constitution of the United States. The Constitution, Article 1, 8, specifically provides that Congress shall have the power to establish a uniform rule of naturalization, and uniform laws in the subject of bankruptcies throughout the United States. This is important because this clearly establishes that there shall be a uniform, national bankruptcy law. The states shall not have laws on bankruptcy as these are superseded by the federal law. While states have adopted a variety of law dealing with liquidation issues (e.g. assignment for benefit of creditors), none can develop its own bankruptcy law. B. The Bankruptcy Code Generally The primary body of bankruptcy law is codified at Title 11 of the United States Code. This is the Bankruptcy Code, just as Title 26 is the Internal Revenue Code and Title 28 is the Judicial Code. The current Bankruptcy Code was adopted by Congress in 1978 as the Bankruptcy Reform Act. This was the first complete revision of the American bankruptcy laws since the adoption of the Bankruptcy Act of Subsequent major revisions were adopted in 1984, 1986 and Another major revision of the Code took place in the spring of 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ( BAPCPA ). BAPCPA has affected many sections of the Bankruptcy Code. C. The Chapters of Bankruptcy The Bankruptcy Code is broken down into chapters. With the exception of Chapter 12, all chapters are odd numbered. The first three chapters, 1, 3 and 5, contain code sections which apply to all other chapters of bankruptcy, with certain limitations as described by 103. Chapters 7, 9, 11, 12, 13, and 15 on the other hand, each refer to a particular type of bankruptcy and contain sections that apply almost exclusively to that type of bankruptcy. For example, Sections in Chapter 7 generally apply only to bankruptcies filed under Chapter 7. The same is true for Chapters 9, 11, 12, 13 and 15. Code sections within each chapter are numbered in the 100's, with the first digit being the same as the number of the chapter. In other words, 108 would be found in Chapter 1 and 1322 would be found in Chapter 13, etc. 1. Chapter 1 of the Bankruptcy Code includes general provisions such as definitions, rules of construction, the power of the court, extensions of time, and eligibility requirements. 2

12 2. Chapter 3 deals with administrative provisions such as what constitutes a voluntary versus an involuntary case, the role of the United States Trustee, who can serve as a trustee and what the trustee s role and capacity is, how trustees and other professional persons are employed and compensated, how meetings of creditors and equity security holders are handled under the Bankruptcy Code, what happens when a case is converted or dismissed, the concept of adequate protection, the automatic stay, borrowing money, the use, sale or lease of property, and other administrative matters. 3. Chapter 5 deals with creditors and their claims. This chapter addresses such things as how you file proofs of claim, how the claims are allowed, how you value claims into secured and unsecured portions, subordination, what the debtor's duties are, what constitutes property of the estate, how a turnover of property of the estate is obtained, how such things as preferences, fraudulent transfers, and unlawful post -petition transfers are avoided, abandonment of property of the estate, and the like. 4. Again, it is important to note that Chapters 7, 9, 11, 12, 13, and 15 are particular types of bankruptcy and sections within those chapters apply only to the particular type of bankruptcy, unless made specifically applicable by another Code section Thus, a Section in Chapter 7 does not generally apply in Chapter 11 nor does a Section in Chapter 11 generally apply to a Chapter 12 and so forth. D. Bankruptcy Rules Not only is there the Bankruptcy Code, there are also bankruptcy rules. In fact, there are three types of bankruptcy rules: 1. There are national bankruptcy rules called the Federal Rules of Bankruptcy Procedure (F.R.B.P.). These are rules that have been adopted by the Supreme Court of the United States and apply in all federal districts throughout the United States. (28 U.S.C. 2075). 2. There are also Local Rules which may be adopted in each district. In the Eastern District of California (Bakersfield through Sacramento), the seven judges have adopted a set of local rules that apply to cases in their courts. The Eastern District of California Local Rules are always being updated so you should make sure you are dealing with the current version. You should always review the local rules carefully, as they vary greatly from district to district throughout the United States. 3. Even when you have the local rules, they may vary in application from judge to judge within the district. Judges have their unwritten rules and general orders that have the force of law in bankruptcy cases and are 3

13 adopted judge by judge (these individual rules are sometimes referred to as the local rules). You must be thoroughly familiar with all of the rules and it is important to know that local and unwritten rules can vary dramatically from court to court, region to region, district to district. The admonition of know thy judge truly applies in bankruptcy cases. E. Jurisdiction of the Bankruptcy Court The Bankruptcy Court is a special court created by Congress to administer bankruptcy proceedings. The judicial power of the United States exists under Article III and in order to be an Article III judge, you need to have a lifetime appointment and no possibility of salary diminution during your appointment. Bankruptcy judges, however, are appointed for 14 year terms and do not have salary protection. As such, they are considered Article I judges and their jurisdiction is limited by this fact. Congress tried to give the judges very broad jurisdictional authority when the current bankruptcy law was passed in However, by 1982, in the case of Northern Pipeline Construction Company v. Marathon Pipe Line Company, 450 U.S. 50 (1982), the Supreme Court in a decision without a true majority, struck down the broad jurisdictional grant given to the Bankruptcy Courts. The Supreme Court felt that the Legislative Branch was overstepping its boundaries in creating non-article III courts with a jurisdictional grant that mirrored that power of the Article III courts. For a short period of time, the Marathon decision totally shut down the bankruptcy system. The immediate solution would be to pass all the work of the Bankruptcy Courts up to the District Courts since they were Article III courts. However, the last thing that District Court judges wanted was to start handling bankruptcy cases. Congress did not act to solve the problem and so, the Judicial Council of the United States created an emergency interim rule where the jurisdiction for bankruptcy cases was vested in the District Courts of the United States and made the Bankruptcy Courts adjuncts of the District Courts. The District Courts then referred the bankruptcy cases to the Bankruptcy Courts. It defined what the Bankruptcy Courts could and could not hear and decide. Finally, it allowed the District Court to withdraw the reference of any case or portion of a case at any time. Finally, Congress acted in the Bankruptcy Amendments and Federal Judgeship Act of 1984 to attempt to re-establish a legal operating Bankruptcy Court system. In many ways, it followed the Judicial Council interim order in establishing a legal basis for ongoing operation of the Bankruptcy Courts. The focus was on defining bankruptcy jurisdiction between core and non-core matters and holding that Bankruptcy Court would only have jurisdiction to make final rulings in core matters. They could make advisory opinions in non-core matters subject to de novo review by the District Courts. This solution was launched in 1984 and Congress and the bankruptcy bar held its collective breath. One of the challenges for Congress was that the Supreme Court had not issued an actual majority opinion in Marathon, which meant that any solution would be at best, a guess as to what the Supreme Court felt would be acceptable. 4

14 With only a few hiccups along the way, the 1984 solution worked and provided the Bankruptcy Courts with a jurisdictional grant for almost 20 years. Then along comes Stern v. Marshall 131 S.Ct (2011). It asked the question of whether a Bankruptcy Court, as part of its core jurisdiction, could hear counterclaims against people filing claims against the estate. The Supreme Court, in a 5-4 decision, said that exceeded the power held by an Article I court and the power cannot be conveyed by an Article III court to the Bankruptcy Court. This case involved a Pierce Marshall, who was the son of J. Howard Marshall, a multimulti millionaire. J. Howard, at a very advanced age, married former Playboy Playmate, Anna Nicole Smith. The obviously smitten J. Howard had left a large bequest in his will to Ms. Smith, who was determined to claim her rights as an aggrieved widow. As the legal disputes worked their way through various courts, eventually Ms. Smith filed a bankruptcy and listed as an asset, a claim against Pierce Marshall for tortious interference with her right in the estate. In the meantime, Pierce Marshall had a state law counter claim for defamation against Ms. Smith for disparaging things she had said about him due to this fracas. The Bankruptcy Court, viewing this as a core matter, resolved both the claim and counter claim awarding Anna Nicole Smith $400,000,000 in compensatory damages and $25,000,000 in punitive damages on her counterclaim. However, the Bankruptcy Court was only one place this dispute was heard. There was a lot going on in various courts regarding this and related issues before the Supreme Court. It came down to whether this judgment was within the jurisdiction of the Bankruptcy Court. While the Supreme Court recognized the right of Congress to develop new administrative frameworks and then establish bodies to hear and resolve disputes related to new rights created by Congress, the Court clearly felt, in this case at least, Congress had gone too far. So while they can establish an administrative body (Bankruptcy Court) and a framework to decide matters under those new rights, they cannot give general judicial powers to those bodies. Those belong exclusively to Article III judges. They can create a Bankruptcy Court and imbue it with power to hear bankruptcy matters, but they cannot directly or indirectly give it powers to decide matters beyond that administrative framework. This exception that allows for Article I courts is the ill-defined Public Rights Doctrine. So the Supreme Court had a problem with the Bankruptcy Court claiming jurisdiction to determine a suit for tortious interference that arose totally outside of the Bankruptcy Court with the only nexus being that it was a counter-claim to a claim made against the bankruptcy estate. The Supreme Court agreed that this counter claim was defined as a core proceeding in the Bankruptcy Code ( 157(b)(2)(C)) but that did not mean that Congress had the power to give the Bankruptcy Court the ability to exercise jurisdiction over this matter. If they did that, they would be exercising general jurisdiction, which could only be done by an Article III court. To allow otherwise, would destroy the separation of powers. Congress could emasculate the Article III courts by simply establishing Article I courts and grant them co-equal jurisdiction with Article III courts. The Supreme Court attempted to lessen the impact of its decision in Stern v. Marshall by the majority, describing it as a narrow holding. The narrow reading of the decisions suggests 5

15 that the Supreme Court was simply finding one area where 157(b) (2) overstepped what it could authorize the Bankruptcy Court to do. So the Supreme Court has said that the answer is that you cannot give jurisdiction to the Bankruptcy Court on unrelated counter claims unless the parties consent to jurisdiction (an open question). There is nothing that tells us any other part of 157(b)(2) has been disturbed by this ruling. That is the narrow reading approach. The broader reading of the case creates a lot more problems. When reading Stern v. Marshall in conjunction with Marathon (which found the grant of jurisdiction to hear state law contract dispute to a non-article III court unconstitutional) it becomes more problematic. 28 USC 1334 and 157 were designed to resolve Marathon s concerns, but in all the years since 1984, it has not really been decided how successful those new grants of jurisdiction were. Marathon acknowledged that Article I legislative or administrative courts could be established to adjudicate cases involving public rights. However, to be a public right issue, the government must be on one side of the equation. It is not a public right if it only involves a dispute between private individuals. The court then left things hazy but saying that the right to recover contract damages, even from a debtor, is different from restructuring of the debtor-creditor relationship, which is at the core of the bankruptcy code. This sounds like determining the claim should not be done by the Bankruptcy Court, but the treatment of that claim under a plan is part of the allowable jurisdiction. Later decisions by the Supreme Court on the public rights doctrine have opened this issue up further without clarify it. So it is not necessarily true that the government must be one of the parties to the dispute but what the standard has become remains difficult to deduce. It does appear if the source of the right is from the government, then you have a better argument that a public right is involved, even if the disputants are private. (see Thomas v. Union Carbide 473 U.S. 568 (1985)) In Commodity Futures Trading Comm n v. Schor 478 U.S. 833 (1986) the court seemed to reject outright a distinction between public and private rights as a basis for determining whether an Article I court can determine an issue. The focus is more on balancing the impact on the separation of powers in the particular case. Just when you think the court has moved away from the public rights bright line test in Marathon, you run into Granfinanciera S.A. v. Nordberg, 492 U.S. 33 (1989) regarding jury trials in fraudulent conveyance litigation. There, the public right argument reappeared saying that you must provide for a jury trial unless the matter being adjudicated was a public right. In writing for the majority, they tied the public right issue back into the determination of whether a non-article III court could hear matters that did not involve public rights. So we are back to saying that private rights must not be litigated in an Article I court. In dicta, they then brought into question whether fraudulent conveyance actions could ever be considered core and under the jurisdiction of the Bankruptcy Court. In Stern v. Marshall, the court attempted unsuccessfully to sort this out when it said it is still the case that the right is integrally related to particular federal government action. the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective with the agency s 6

16 authority. Basically, if a statutory right does not belong to or is not asserted against the federal government and is not closely intertwined with a federal regulatory program, it must be determined by an Article III court. Bottom line in Stern v. Marshall, the Supreme Court had real problems with a state law tort claim between two private individuals being adjudicated by an Article I court. There were no federally created rights even at issue here. The opinion states that it does not question Bankruptcy Courts authority to determine state law claims, that stem from the bankruptcy itself or would necessarily be resolved in the claims allowance process. The Stern v. Marshall Court also distinguished the Thomas and Schor decisions because they were out of administrative agencies and not out of something with as wide ranging purported jurisdiction as a Bankruptcy Court. So again, you are left uncertain how to properly apply the precedent. An open question remains as to whether the jurisdictional issue can be overcome by the consent of the parties and if so, what will be defined as sufficient for consent to be deemed given? One way to look at the question is, can private individuals do what Congress cannot do, siphon off the authority of the Article III courts to have the full jurisdiction granted them in the Constitution. Subject matter jurisdiction is granted in 28 USC 1334 and rests in the District Court. This is not a case about subject matter jurisdiction. It is about the constitutionality of 28 USC 157. The grant from the District Court of its jurisdiction is unconstitutional, at least as to (b)(2)(c). That we know. We also seem to know that (b)(2)(h) regarding fraudulent conveyances is also unconstitutional as a violation of the 7 th Amendment right to jury trials. What else about 28 USC 157 that might be unconstitutional will have to wait for another day. So the argument here is that parties cannot create subject matter jurisdiction where it does not exist, but they may be able to waive constitutional rights. So it may be that waiver or consent still may allow the Bankruptcy Court to hear the full range of 157(b)(2) core matters. Stern v. Marshall is not about subject matter jurisdiction but rather, constitutionality. After Stern v. Marshall, we still have core and non-core distinction. Nothing has been added, all that has happened is that a couple of items delineated as core are now to be treated as non-core. If a Stern type objection is raised to jurisdiction, the court has three choices 1. Hear the matter and submit proposed findings of fact and conclusions to the District Court.; 2. Have a motion filed to remove the reference sending the case to the District Court. ; or 3. Abstain and send the matter to state court. There is a case called Samson v. Blixseth out of Montana that said option 1 above is not available, but that court confused Stern v. Marshall about being about subject matter jurisdiction, which it was not. 28 USC 1334 distinguishes between bankruptcy cases (where there is original and exclusive jurisdiction) and proceedings that arise within the proceeding. Then it further distinguishes between proceedings arising under title 11 or those that simply arise within or related to cases under title 11. The District Court has original and exclusive jurisdiction of bankruptcy cases themselves. You can only file a bankruptcy case with the District Court (and by reference of 28 USC 157 the Bankruptcy Court). The question is, what do you do with matters that have arisen or will arise related to the bankruptcy? 7

17 Some are core, they arise under the bankruptcy law or arise in the bankruptcy case itself. The noncore cases are those that are simply related in some way to the bankruptcy case, but did not arise within the case nor do they involve the Bankruptcy Code itself. There are two key code sections in Title 28 of the US Code 1334 and USC 1334 Bankruptcy cases and proceedings (Author s annotating comments) (a)except as provided in subsection (b) of this section, the District Courts shall have original and exclusive jurisdiction of all cases under title 11. (This simply says that you cannot file a bankruptcy case in any court but the District Court (except as they have referred this to the Bankruptcy Court under 157.)) (b)except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the District Courts, the District Courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11. (The District Court has original, but not exclusive jurisdiction over matters arising in the bankruptcy case under the bankruptcy code, cases arising within a bankruptcy case even if not under the Code or any other matter that is related to the bankruptcy case. This provides the District Court with subject matter jurisdiction. They then refer this to the Bankruptcy Court and split it to core and non-core matters. This was to deal with the Marathon concerns.) (c)(1)except with respect to a case under chapter 15 of title 11, nothing in this section prevents a District Court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11. (This tells the District Court that it can abstain from hearing any matters over which it has original but not exclusive jurisdiction if it shares jurisdiction with the state court. This power is also exercised by the Bankruptcy Court.) (2)Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the District Court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction. (This subsection tells the District Court when it must abstain and let the state court proceed. The following are the requirements: 1. Based on state law claim or cause of action 2. Cannot involve a core matter 3. Action could not have been commenced in federal court absent the existence of the bankruptcy filing 4. The action is commenced already in state court 5. Can be timely adjudicated in state court.) 8

18 (d)any decision to abstain or not to abstain made under subsection (c) (other than a decision not to abstain in a proceeding described in subsection (c)(2)) is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of this title or by the Supreme Court of the United States under section 1254 of this title. Subsection (c) and this subsection shall not be construed to limit the applicability of the stay provided for by section 362 of title 11, United States Code, as such section applies to an action affecting the property of the estate in bankruptcy. (e)the District Court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction (1)of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate; and (The locus of control of all property of the estate, no matter where it is located, is the court where the case is filed.) (2)over all claims or causes of action that involve construction of section 327 of title 11, United States Code, or rules relating to disclosure requirements under section 327. (All issues involving the employment of professional persons in a bankruptcy are decided in the court where the case is venued.) So 28 USC 1334 assigns jurisdiction to the District Courts. Then 28 USC 157 sets forth the procedures under which District Courts can assign matters within their jurisdiction to Bankruptcy Courts. It is here that the Article I vs. Article III issues arise. The Bankruptcy Courts are basically allowed to hear and determine core matters. 157(2) gives a laundry list of what are considered core. Again, Stern v. Marshall s focus was on the 157 grant of authority from the District Court to the Bankruptcy Court. 28 USC 157 Procedures (Author s annotating comments) (a) Each District Court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district. (It should be remembered that the Bankruptcy Court has no independent grant of jurisdiction. All that it has is what is provided in 1334 and then referred to it by the District Court under special reference orders based on this 157.) (b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 (appeals) of this title. (This says that the Bankruptcy Court presides over the bankruptcy itself and it can make final determinations in core matters.) (2) Core proceedings include, but are not limited to - (A) matters concerning the administration of the estate; 9

19 (B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11; (C) counterclaims by the estate against persons filing claims against the estate; (This is where Stern v. Marshall had a problem. It does not mean that some counter claims could still be core, but in the case of Stern v. Marshall the particular counter-claim was too far divorced from the bankruptcy case itself to be considered core. It was a constitutional issue of giving jurisdiction to a court (Article I Court) beyond what Congress could do.) (D) orders in respect to obtaining credit; (E) orders to turn over property of the estate; (F) proceedings to determine, avoid, or recover preferences; (G) motions to terminate, annul, or modify the automatic stay; (H) proceedings to determine, avoid, or recover fraudulent conveyances; (Bankruptcy Courts do not hold jury trials and so, if you have a 7 th Amendment right to a jury trial and want a jury, then a fraudulent conveyance matter cannot be heard in the Bankruptcy Court at all. This would be true for any core matter where a jury trial right exists.) (I) determinations as to the dischargeability of particular debts; (J) objections to discharges; (K) determinations of the validity, extent, or priority of liens; (L) confirmations of plans; (M) orders approving the use or lease of property, including the use of cash collateral; (N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and (P) recognition of foreign proceedings and other matters under chapter 15 of title 11. (3) The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a 10

20 proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law. (This section of the code was not overturned in Stern v. Marshall. The distinction between core and non-core continues.) (4) Non-core proceedings under section 157(b)(2)(B) of title 28, United States Code, shall not be subject to the mandatory abstention provisions of section 1334(c)(2). (This keeps determination of claims and exemption matters in the Bankruptcy Court, even if they would otherwise meet the requirements of mandatory abstention.) (5) The District Court shall order that personal injury tort and wrongful death claims shall be tried in the District Court in which the bankruptcy case is pending, or in the District Court in the district in which the claim arose, as determined by the District Court in which the bankruptcy case is pending. (Personal injury and wrongful death claims against the estate will not be tried in the Bankruptcy Court. They must go to the District Court.) (c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the District Court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected. (The process for hearing non-core matters. The bankruptcy judge will simply prepare proposed findings of fact and conclusions of law for review and finalization to the District Court, subject to de novo review on any issues upon which a timely objection has been filed.) (2) Notwithstanding the provisions of paragraph (1) of this subsection, the District Court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title. (Parties can consent to the Bankruptcy Court s jurisdiction of a non-core matter and allow the Bankruptcy Court to make a final decision. Section 158 covers appeals.) (d) The District Court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The District Court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce. (The District Court can withdraw in whole or part any case that is referred under this section at any time.) (e) If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the District Court and with the express consent of all the parties. In order to have a jury trial in Bankruptcy Court you must have the approval of the District Court and the consent of the parties. 11

21 F. Other Sources of Law and Rules 1. In addition to the F.R.B.P. and local rules, bankruptcy cases are also governed by many of the Federal Rules of Civil Procedure (F.R.C.P.). Remember that bankruptcy is a federal question and therefore the F.R.C.P. in use throughout the District Courts in the country have application. Some of the F.R.C.P. have been specifically adopted and in some cases slightly modified, by the F.R.B.P. 2. Because bankruptcy arises as a federal question and because the Bankruptcy Court is an adjunct of the District Court, you must also be familiar with the Federal Rules of Evidence. 3. Not only must a bankruptcy practitioner be familiar with the above federal rules and laws, he or she must also be familiar with state law. This is especially true in situations where there is no applicable federal statutory law or rule. In those situations state law will be applied. This means that you must be familiar with such things as property exemptions under state law, as well as state law on foreclosure, commercial transactions, inheritance, and the like. Bankruptcy is a very complicated matter because of this complex interplay between the several bodies of federal and state law. II. The Main Players A. The Debtor The debtor is the person or entity that files the bankruptcy or has a bankruptcy filed against him or her. Only in the case of spouses may more than one person or entity be in the same bankruptcy. ( 101(13)). B. Creditors Creditors are either persons or entities that have a claim against the debtor that primarily arose prior to the filing of the bankruptcy or the debtor's estate. Creditors can be secured or unsecured, priority or non-priority based on the nature of the claim. ( 101(10)). C. The Judge The bankruptcy judge is federally appointed and serves under the jurisdiction of the federal District Court. He hears and decides all disputes within the bankruptcy case. (28 U.S.C ). D. The U.S. Trustee The Attorney General of the United States appoints a U.S. Trustee for each of 12

22 twenty-one separate judicial districts in the United States. The U.S. Trustee's office then administers and supervises cases, as well as the bankruptcy trustees serving in individual cases. They may appear and be heard on a wide range of subjects in bankruptcy cases. They basically focus on Chapter 11 cases. ( 307). E. The Trustee A trustee is appointed to take over the debtor's estate (assets) and manage them for the interested parties in the bankruptcy. Trustees are always appointed in cases under Chapter 7, 12 and 13. They may be appointed by court order in Chapter 11 but their appointment is not automatic. ( ). F. Committees There are a variety of types of committees that can exist in bankruptcy cases. Usually committees only exist in Chapter 11 cases, though the creditors can elect a committee in a Chapter 7 case. In almost every Chapter 11 case, the U.S. Trustee will attempt to appoint a committee of unsecured creditors. The court may be petitioned to appoint other types of committees (i.e.an equity holders committee). Committees give a particular group participants with common interests in the case a collective voice in the proceedings. ( 705, 1102 & 1103). G. Ombudsman BAPCPA created new positions to be established by court order to protect consumer privacy and medical patient interests. The consumer privacy ombudsman will be appointed when, in the transfer of business assets, personal consumer information will be transferred and such transfer is not part of a preexisting policy of the business. ( 332 & 363(b)(1)). Whenever the debtor is in the health care business, the Court shall appoint a patient care ombudsman to monitor quality of care and represent the interests of patients unless the Court determines that, based on the facts of the case, it is not necessary. ( 333). III. Particular Types of Bankruptcy A. Chapter 7 (Liquidation) Chapter 7 liquidation is by far and away the most popular type of bankruptcy. It accounts for more than 70% of all filings. Additionally, many Chapter 11 and 13 filings eventually end up as Chapter 7 cases. In a Chapter 7 case, a trustee is appointed and he or she takes the debtor's nonexempt assets, liquidates them, and to the extent possible, uses the resulting funds to pay the debtor's creditors. A goal of BAPCPA is to get more people into Chapter 13, at least initially. 1. Who May File Chapter 7? a. Any individual, corporation, or partnership except: 13

23 (i) (ii) (iii) a railroad insurance company bank, savings and loan or similar institution. ( 109(b)) b. Each individual, corporation or partnership must file its own separate bankruptcy. The only exception is that an individual and that individual's spouse may file a single bankruptcy under a joint petition. ( 302(a)). Even though the Bankruptcy Code does not mention limited liability companies, such entities have filed bankruptcies and the courts have had no problem recognizing their right to file. c. An individual or family farmer may not file a Chapter 7 petition within 180 days of dismissal of a previous case for willful failure to abide by orders of the court, nor within 180 days of obtaining a voluntary dismissal of a previous case following the filing of a motion for relief from the automatic stay ( 109(g)). 2. Dismissal of Case or Conversion to Chapters 11 or 13 a. Dismissal The court can dismiss a Chapter 7 case after notice and hearing only for cause including: (i) (ii) (iii) (iv) Unreasonable delay that is prejudicial to creditors; Nonpayment of certain fees; Failure to file the schedules and statement of affairs within 15 days of filing the petition for relief; 707(a) Situations where granting relief under Chapter 7 would be an abuse of the provisions of the Bankruptcy Code. 707(b). b. Determining Abuse to Require Dismissal or Conversion The first determination that must be made relates to the debtor s income. In order to file a Chapter 7 the debtor must pass what is called the means test. If the debtor s income is less than the state s median income for a family the size of the debtor s, such a person qualifies for a Chapter 7 and resort to the means test is unnecessary. If the debtor s income is less than the median income for the state, no parties but the judge and the U.S. Trustee can even make a motion on the issue of abuse. If the debtor s income 14