ANSWERS TO PROBLEMS
1. (a) Benson goes into bankruptcy. His estate is not sufficient to pay all taxes owed.
Explain whether Benson’s taxes are discharged by the proceedings.
(b) Benson obtained property from Anderson on credit by representing that he was
solvent when in fact he knew he was insolvent. Explain whether Benson’s debt to
Anderson is discharged by Benson’s discharge in bankruptcy.
Answer: Discharge.
(a) Benson’s taxes are not discharged in the bankruptcy proceedings. Section 523,
Bankruptcy Code.
2. Bradley goes into bankruptcy under Chapter 7 owing $25,000 as wages to his four
employees. There is enough in his estate to pay all costs of administration and enough to
pay his employees, but nothing will be left for general creditors. Do the employees take
all the estate? If so, under what conditions? If the general creditors received nothing at
all, would these debts be discharged?
Answer: Priority of Claims. Section 507 provides a priority for wages, salaries or
commissions earned within ninety days before the filing of the petition. To the extent
3. Jessica sold goods to Stacy for $2,500 and retained a security interest in them. Two
months later, Stacy filed a voluntary petition in bankruptcy under Chapter 7. At this time,
Stacy still owed Jessica $2,000 for the purchase price of the goods, the value of which
was $1,500.
(a) May the trustee invalidate Jessica’s security interest? If so, under what provision?
(b) If the security interest is invalidated, what is Jessica’s status in the bankruptcy
proceeding?
(c) If the security interest is not invalidated, what is Jessica’s status in the bankruptcy
proceeding?
Answer: Voidable Preferences.
(a) Possibly. The retention of a security interest in the goods sold would constitute a (1)
transfer (2) to a creditor (3) made within 90 days before the date of the filing of the
4. A debtor went through bankruptcy under Chapter 7 and received his discharge. Which of
the following debts were completely discharged, and which remain as future debts
against him?
(a) A claim of $9,000 for wages earned within five months immediately prior to
bankruptcy.
(b) A judgment of $3,000 against the debtor for breach of contract.
(c) $1,000 for past domestic support obligations. (d) A judgment of $4,000 for injuries
received because of the debtor’s negligent operation of an automobile.
5. Rosinoff and his wife, who were business partners, entered bankruptcy. A creditor,
Baldwin, objected to their discharge in bankruptcy on the grounds that
(a) the partners had obtained credit from Baldwin on the basis of a false financial
statement;
(b) the partners had failed to keep books of account and records from which their
financial condition could be ascertained; and
(c) Rosinoff had falsely sworn that he had taken $70 from the partnership account when
he actually took $700.
Were the debtors entitled to a discharge?
6. Ross Corporation is a debtor in a reorganization proceeding under Chapter 11 of the
Bankruptcy Code. By fair and proper valuation, its assets are worth $100,000. The
indebtedness of the corporation is $105,000, and it has outstanding $100 par value
preferred stock in the amount of $20,000 and $30 par value common stock in the amount
of $75,000. The plan of reorganization submitted by the trustees would give nothing to
the common shareholders and would issue new bonds of the face amount of $5,000 to the
creditors and new common stock in the ratio of 84 percent to the creditors and 16 percent
to the preferred shareholders. Should this plan be confirmed?
Answer: Reorganization-Chapter 11: Confirmation of Plan. The plan should not be
approved in the Chapter 11 reorganization proceedings because it is not fair and
equitable. It is unfair because the amount owing by the Ross Corporation to its creditors
7. Alex is a wage earner with a regular income. He has unsecured debts of $42,000 and
secured debts owing to Betty, Connie, David, and Eunice totaling $120,000. Eunice’s
debt is secured only by a mortgage on Alex’s house. Alex files a petition under Chapter
13 and a plan providing payment as follows: (a) 60 percent of all taxes owed; (b) 35
percent of all unsecured debts; and (c) $100,000 in total to Betty, Connie, David, and
Eunice. Should the court confirm the plan? If not, how must the plan be modified or what
other conditions must be satisfied?
Answer: Discharge. No. The plan may not modify the rights of a secured party with a
security interest in the debtor’s principal residence. The plan must provide for full
8. John Bunker has assets of $130,000 and liabilities of $185,000 owed to nine creditors.
Nonetheless, his cash flow is positive and he is making payment on all of his obligations
as they become due. I. M. Flintheart, who is owed $22,000 by Bunker, files an
involuntary petition in bankruptcy under Chapter 7 against Bunker. Bunker contests the
petition. What will be the result? Explain.
Answer: Involuntary Petitions. Decision for Bunker. Where there are fewer than twelve
creditors, one creditor owed $10,000 or more may file an involuntary petition in
9. Karen has filed a voluntary petition for a Chapter 7 proceeding. The total value of
Karen’s estate is $35,000. Ben, who is owed $18,000, has a security interest in property
valued at $12,000. Lauren has an unsecured claim of $9,000, which is entitled to a
priority of $2,000. The United States has a claim for income taxes of $7,000. Steve has
an unsecured claim of $10,000 that was filed on time. Sarah has an unsecured claim of
$17,000 that was filed on time. Wally has a claim of $14,000 that he filed late, even
though Wally was aware of the bankruptcy proceedings. What should each of the
creditors receive in a distribution under Chapter 7?
Answer: Chapter 7–Liquidation: Distribution of the Estate.
(a) Ben receives $14,100
(d) Steve receives $3,500
10. Landmark at Plaza Park, Ltd., filed a plan of reorganization under Chapter 11 of the
Bankruptcy Code. Landmark is a limited partnership whose only substantial asset is a
two-hundred-unit garden apartment complex. City Federal holds the first mortgage on
the property in the face amount of $2,250,000. The mortgage is due and payable six
years from now.
Landmark has proposed a plan of reorganization under which the property now in
possession of City Federal would be returned. Landmark will then deliver a nonrecourse
note, payable in three years, in the face amount of $2,705,820.31 to City Federal in
substitution of all of the partnership’s existing liabilities. On the sixteenth month through
the thirty-sixth month after the effective date of the plan, Landmark will make monthly
interest payments computed on a property value of $2,260,000 at a rate 3 percent above
the original mortgage rate but 2.5 percent below the market rate for loans of similar risk.
Finally, the note will be secured by the existing mortgage. Landmark’s theory is that the
note will be paid off at the end of thirty-six months by a combination of refinancing and
accumulation of cash from the project. The key is Landmark’s proposal to obtain a new
first mortgage in three years in the face amount of $2,400,000.
City Federal is a first mortgagee without recourse that has been collecting rents pursuant
to a rent assignment agreement since the default on the mortgage eleven months ago.
City Federal is impaired by the plan and has rejected the plan. May it complete its
foreclosure action? Explain.
Answer: Chapter 11. Decision for City Federal. For Landmark’s plan to be accepted over
City Federal’s objection, it must be shown that (1) City Federal had retained its lien on
the property; (2) that the total stream of deferred cash payments proposed by the plan
11. Freelin Conn filed a voluntary petition under Chapter 7 of the Bankruptcy Code on
September 30, 2014. Conn listed Banc- Ohio National Bank as having a claim incurred
in October 2013 in the amount of $4,000 secured by an eight-year-old automobile. The
car is listed as having a market value of $3,500. During the period from June 30, 2014,
to September 30, 2014, Conn made three payments totaling $439.17 to BancOhio. May
the trustee in bankruptcy set aside those three payments as voidable preferences?
Explain.
Answer: Voidable Preference. Judgment for BancOhio. The trustee may avoid the transfer
from Conn to BancOhio only if he can show that all five elements of a voidable
12. David files a bankruptcy petition under Chapter 13. After the claims of secured and
priority creditors have been satisfied, David’s remaining bankruptcy estate has a value of
$100,000. David’s creditors with allowed unsecured claims are owed $250,000 in total.
Chris, an unsecured creditor, is owed $13,500. David’s Chapter 13 plan proposes to pay
Chris $150 per month for three years. Should the Bankruptcy Court confirm David’s
plan? Explain.
13. Yolanda Christophe filed a bankruptcy petition under Chapter 13. Her scheduled debts
consist of $11,100 of secured debt, $9,300 owed on an unsecured student loan, and
$6,960 of other unsecured debt. Christophe asserts that the student loan is
nondischargeable and that assertion has not been questioned. Christophe’s proposed
amended Chapter 13 plan calls for fifty-six monthly payments of $440 a month. The
questioned provision in that plan is the division of the unsecured creditors into two
classes. Under Christophe’s proposed plan, the general unsecured creditors would
receive 32 percent and the separately classified student loan creditor would receive 100
percent. Should this plan be confirmed?
Answer: Confirmation of Chapter 13 Plan. Confirmation of Debtor’s Chapter 13 Plan is
denied. A bankruptcy judge may not confirm a Chapter 13 plan that is not presented in
good faith or unfairly discriminates. A debtor may designate classes of unsecured claims
but may not discriminate unfairly against any class of claims. Christophe has proposed to
14. On December 17 ZZZZ Best Co., Inc. (the debtor), borrowed $7 million from Union
Bank (the bank). On July 8 of the following year the debtor filed a voluntary petition for
bankruptcy under Chapter 7. During the preceding ninety days, the debtor had made
interest payments of $100,000 to the bank on the loan. The trustee of the debtor’s estate
filed a complaint against the bank to recover those payments as a voidable preference.
The bank asserts that the payments were not voidable because they came within the
ordinary course of business exception. The trustee maintains that the exception applies
only to short-term, not long-term, debt. Who is correct? Explain.
Answer: Voidable Preferences. The Bankruptcy Code authorizes bankruptcy trustees to
avoid any transfer of the debtor’s interest in property that: 1) benefits a creditor; 2) is on
15. A landlord owned several residential properties, one of which was subject to a local rent
control ordinance. The local rent control administrator determined that the landlord had
been charging rents above the levels permitted by the ordinance and ordered him to
refund the wrongfully collected rents to the affected tenants. The landlord did not comply
with the order. The landlord subsequently filed for relief under Chapter 7 of the
Bankruptcy Code, seeking to discharge his debts. The tenants filed an adversary
proceeding against the landlord in the Bankruptcy Court, arguing that the debt owed to
them arose from rent payments obtained by “actual fraud” and that the debt was
therefore nondischargeable under the Bankruptcy Code. They also sought treble damages
and attorney’s fees and costs pursuant to the state Consumer Fraud Act. The Bankruptcy
Court ruled in favor of the tenants, finding that the landlord had committed “actual
fraud” and that his conduct violated state law. The court therefore awarded the tenants
treble damages totaling $94,147.50. Does the Bankruptcy Code bar the discharge of
treble damages awarded on account of the debtor’s fraud? Explain.
Answer: Dischargeable Debts. Yes. The Bankruptcy Code has long prohibited debtors from
ANSWERS TO “TAKING SIDES” PROBLEMS
Leonard and Arlene Warner sold the Warner Manufacturing Company to Elliott and Carol
Archer for $610,000. A few months later the Archers sued the Warners in a state court for
fraud connected with the sale. The parties settled the lawsuit for $300,000. The Warners
paid the Archers $200,000 and executed a promissory note for the remaining $100,000.
After the Warners failed to make the first payment on the $100,000 promissory note, the
Archers sued for the payment in state court. The Warners then filed for bankruptcy under
Chapter 7 of the Bankruptcy Code. The Archers claimed that the $100,000 debt was
nondischargeable because it was for “money obtained by fraud.” Arlene Warner claimed
that the $100,000 debt was dischargeable in bankruptcy because it was a new debt for
money promised in a settlement contract and thus it was not a debt for money obtained by
fraud.
(a) What are the arguments that the debt is dischargeable in bankruptcy?
(b) What are the arguments that the debt is not dischargeable in bankruptcy?
(c) Explain whether the debt is dischargeable in bankruptcy
ANSWER:
(a) The settlement agreement and promissory note were a novation, which replaced an
original potential debt to the Archers for money obtained by fraud with a new debt.
The new debt was not for money obtained by fraud. It was for money promised in a