978-0134004006 Chapter 28 Case

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Chapter 28

Bankruptcy and Reorganization

VI. Answers to Critical Legal Thinking Cases

28.1 Bankruptcy Estate

No, the debtor’s jewelry does not qualify as necessary and proper wearing apparel and is therefore not

exempt property from the bankruptcy estate. Mrs. Lebovitz’s jewelry is part of the bankruptcy estate. The

debtor argues that she should be able to exempt all of her jewelry as wearing apparel because the items

are worn by the debtor regularly, have sentimental value to her because they were given to her by her

husband, and were not purchased for investment. However, under Tennessee law the debtor is not entitled

28.2 Petition

Yes, the involuntary petition to place Walnut Street Four, a general partnership, into bankruptcy should be

granted. The Bankruptcy Code provides that the Bankruptcy Court shall grant an involuntary petition if

the debtor is not paying its debts as they become due. The court heard evidence from creditors that the

28.3 Automatic Stay

Yes, First Interstate, as the mortgagee, should be granted a release from stay so that it can foreclose on the

debtor’s residence. Normally, the filing of a bankruptcy petition stays legal proceedings against the debtor

and his property. However, the Bankruptcy Code provides that the court may grant a creditor relief from

stay if there is lack of adequate protection of the creditor’s interest in the property or the debtor does not

have adequate equity in the property and it is not necessary to an effective reorganization. In this case, the

28.4 Student Loan

No, the debtor’s student loan should not be discharged in bankruptcy. Congress, which was concerned

about debtors who incurred student loans and then filed for bankruptcy after leaving school, enacted

in bankruptcy. This section provides that during the first five years after a student loan becomes due and

payable, it is not dischargeable in bankruptcy unless payment would cause “undue hardship” on the

virtue of the state court’s order that he pay $300 per month for the support of the children. In addition, the

court found that the debtor’s former wife was not dependent on the debtor. Therefore, the only question

was whether the liability for the student loan would impose an undue hardship on the debtor. The court,

recognizing that this was a “close case,” held that the monthly payment of $50 per month toward paying

28.5 Discharge

Yes. A debt arising from a medical malpractice judgment that is attributable to negligence or reckless

conduct is dischargeable in bankruptcy. The Bankruptcy Code provides that a debt for willful and

malicious injury by the debtor to another is not dischargeable. The U.S. Supreme Court stated, “The

(Supreme Court of the United States)

28.6 Executory Contract

Yes, The Record Company may reject the purchase agreement to buy the record stores from

using its efforts to obtain extensions of the due dates for the trade debt. The court held that the sum total

of the performance outstanding by both parties made the purchase agreement an executory contract. As

VII. Answers to Ethics Cases

28.7 Ethics Case

transfer of the house was made for no consideration, which raised a presumption of insolvency that the

debtors did not overcome. The court held that the transfer could therefore be voided as a fraudulent

28.8 Ethics Case

If UAL Corporation (UAL) was not in bankruptcy and defaulted on its secured loans or leases, the

secured creditors could use state law and foreclose on their security interests and recover these assets as

collateral. UAL would be left without most of its major assets that it would need to operate its business.

and ask the bankruptcy court to discharge the unpaid unsecured debt. UAL should try to reduce its

unsecured debt to a level that it could reasonably afford to pay after coming out of the bankruptcy

proceeding. This often means reducing unsecured debt to 40%-60% of its prior level.

Further, UAL should examine all of its executory contracts and unexpired leases. After carefully

labor unions may result. If UAL’s good faith negotiations with the labor unions do not reach an

acceptable outcome, then UAL can request that the bankruptcy court to rule on the legality of rejecting

the labor contracts. When UAL emerges from Chapter 11 bankruptcy, it will still have most of its assets.

The secured creditors will remain secured creditors, and in order to come out of bankruptcy, UAL must

relieved of some of its legal obligations? The answer probably depends on which creditor or party is

being asked the question. Secured creditors are usually not hurt by a debtor’s Chapter 11 bankruptcy.

They are restricted by the automatic stay rule, but in the end they will get paid all unpaid arrearages and

will continue to be paid what is owed them. In addition, many unsecured creditors may not think it is

the greater good of society. In re UAL Corporation