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Chapter 34
BANKRUPTCY
RESTATEMENT
Bankruptcy is a statutory proceeding that provides consumers relief from debt. There are three forms of bankruptcy
including Chapter 7 liquidation, Chapter 11 business reorganization, and Chapter 13 debt adjustment plans.
A liquidation or Chapter 7 bankruptcy can be commenced voluntarily by the debtor or involuntarily by creditors.
Consumer debtors must first go through Chapter 13 prior to Chapter 7. If the debtor has 12 or more creditors, 3 or
more creditors with unsecured claims that total at least $15,325 must file the petition. If there are fewer than 12
creditors, then one creditor with an unsecured claim totaling at least $15,325 can file the petition for involuntary
bankruptcy.
In a voluntary case, the debtor is given an immediate or automatic stay for relief because the only assertion the
debtors must make is that they have debts. In consumer cases, there is a test for eligibility. In the case of an
involuntary petition, the stay is lifted in the event the petition is dismissed.
Upon commencement of the case, a trustee in bankruptcy is appointed. The role of the trustee is oversight and
administration of the bankrupt’s estate. The trustee has the right to gather the debtor’s property and determine the
validity of claims. The trustee can set aside transfers made during the period leading up to bankruptcy if those
transfers of property or security interests were made to give preference to certain creditors. Called voidable transfers
or preferences, these transfers are made not in the ordinary course of business while the debtor was insolvent or
made to insiders within certain time limits prior to the bankruptcy.
Debtors submit a list of creditors and creditors submit proofs of claims and then the bankruptcy trustee distributes the
estate according to a statutory list of priorities that begin with secured parties’ rights in collateral and then go to
expenses and administration of the estate, claims in the ordinary course of business, claims for wages and other
forms of compensation, claims for contributions to employee benefit plans, farm producers and fishermen against
storage facilities, consumer deposits, alimony and child support, taxes, unsecured creditors and any remainder to
debtor.
Some property is exempt from attachment by the trustee. The debtor’s exempt property is provided in statutory lists
at both state and federal levels. The debtor selects either set of exemptions.
Upon administration of the estate, the debtor is discharged from all debts with the exception of taxes, student loans,
obligations arising from fraud, alimony and child support, DWI judgments, willful and malicious injury damages, and
excessive consumer debts and luxuries.
Chapter 11 is the business reorganization plan that permits debtors to pay creditors in a manner that affords the
debtors relief from ongoing inadequacies in cash flow. Once the plan is approved, creditors are bound by the terms
of the plan and have forfeited their original contract rights.
Chapter 13 reorganization plans are available for individual debtors who met the tests for bankruptcy. A Chapter 13
plan is a budget of the debtor’s future income and its allocation to creditors. Once the plan is approved and the
payments made, the debtor is discharged from all debts covered under the plan.
STUDENT LEARNING OUTCOMES
LO.1: List the requirements for the commencement of a voluntary bankruptcy case and an involuntary bankruptcy
case.
LO.2: Explain the procedure for the administration of a debtor's estate.
LO.3: List a debtor's duties and exemptions.
LO.4: Explain the significance of a discharge in bankruptcy.
LO.5: Explain when a business reorganization plan or an extended-time payment plan might be used.
INSTRUCTOR’S INSIGHTS
Break the chapter down into seven components – related Learning Outcomes are indicated in ( ):
1. What is bankruptcy?
Describe the federal law
2. How is bankruptcy declared?
List the steps in the declaration of bankruptcy (LO.1)
Explain the process of administration of the bankrupt’s estate
3. How is a bankruptcy estate administered?
Explain an order of relief (LO.2)
4. What are debtor’s rights and duties in bankruptcy?
List debtors’ duties (LO.3)
5. When are debts discharged in bankruptcy?
Discuss the requirements for discharge
6. What are the forms of reorganizations and payment plans available under federal bankruptcy laws?
7. What are the uses and operations of Chapter 13 debt adjustment plans? (LO.5)
CHAPTER OUTLINE
I. What is Bankruptcy?
A. Bankruptcy law – the federal law
1. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)
B. Kinds of bankruptcy proceedings
1. Liquidation, Chapter 7 – full discharge (See Figure 34-1 for eligibility and exemptions)
Ask the students whether bankruptcy creates a stigma that will prevent future credit transactions by the
debtor. One viewpoint is that once you file bankruptcy, you are very unlikely to be allowed to enter into
major credit transactions again. This is particularly true because the bankruptcy appears on the debtor’s
DISCUSSION POINTS: Ethics & the Law
Bankruptcy Records
Review with students the issues of abuse. Determine whether the reforms will reduce abuses.
II. How is Bankruptcy Declared? (See Figure 34-1)
A. Liquidation under Chapter 7
1. Commencement of the case
CASE BRIEF: In re Gomery
523 B.R. 773 (W.D. Mich. 2015)
FACTS: Topous obtained a judgment against Clarence Kenyon Gomery, a lawyer, (Debtor) and his law firm,
Gomery and Associates, PLLC. The state court litigation arose from the Debtor's representation of
Topous in various business transactions, including the purchase of property referred to by the
parties as the Old Mitchell Creek Golf Course. Topous alleged that the Debtor drafted an Operating
Agreement creating a limited liability company, T & G Real Estate Development, LLC, to purchase
and hold the Mitchell Creek property. Although Topous paid the full purchase price to acquire the
property, the Debtor defrauded Topous in the transaction by surreptitiously giving himself a one half
ownership interest in T & G in the Operating Agreement he drafted. After a trial in the state court,
the jury awarded ownership of the Mitchell Creek property to Topous and ordered the Debtor to pay
Topous damages in the net amount of $11,622.22 and sanctions for Frivolous Defense and for
Spoliation of Evidence (See Chapter 2) against the Debtor and his law firm, jointly and severally, for
$314,629.27.
Unable to pay the judgment, Debtor filed a voluntary petition under Chapter 13 on April 2, 2014.
In July 2014, the Debtor was arrested and charged with solicitation of murder. Detective Gomez
testified about the circumstances that led to the criminal charge, including a recorded conversation
between the Debtor and Dale Fisher. During the course of the recorded conversation, the Debtor
offered Mr. Fisher $20,000 to kill Christopher K. Cooke, the attorney who represented Topous.
Detective Gomez also testified that the Debtor paid Mr. Fisher $1,000 during the recorded
conversation, purportedly to purchase the weapon that would be used in committing the crime. Mr.
Gomery is currently incarcerated and awaiting trial on these criminal charges.
Mr. Gomery seeks confirmation of his Chapter 13 Plan. The Trustee and Topous have objected to
the Plan on the grounds that the Plan is not feasible, and that neither the Plan nor the petition was
filed in good faith. The Trustee has also requested that the Debtor's case be converted to Chapter
7 due to the Debtor's lack of good faith. Topous has concurred in this request.
ISSUE: Does Gomery qualify for Chapter 13?
REASONING: The Bankruptcy Court, James W. Boyd, J., held that:
(1) debtor did not act in “good faith” either in filing his petition to stay collection on prepetition
judgment entered against him or in proposing the Plan, so as to preclude confirmation of the
Plan and to provide possible grounds for dismissal/conversion of case;
(2) appropriate remedy for debtor's lack of good faith in filing petition and in proposing the Plan
was conversion of case, and not just denial of confirmation;
(3) debtor failed to satisfy burden of showing that proposed the Plan, even as one which initially
required him to make only minimal payments of $100 per month while he was incarcerated,
possessed the “feasibility” required in order to be confirmed; and
(4) debtor was not person with “regular income,” as required to be eligible for Chapter 13 relief.
The Debtor's schedules failed to disclose a significant and valuable asset, JACCK Enterprises, LLC
in which the Debtor had an interest. The assets of JACCK consist of two commercial buildings
located at 413 and 423 Eighth Street in Traverse City, Michigan. When questioned about tax
returns that showed Debtor as having a fifty percent ownership interest in JACCK, the Debtor
insisted the tax returns were filed in error.
The Debtor's Schedules did not disclose that he owned any firearms. At a 2004 exam held on June
5, 2014, the Debtor testified that he owned a “30–06 deer rifle” and that any other guns were
owned by his son. Dale Fisher testified at the evidentiary hearings that he had personally observed
a .308 rifle on the gun rack in the Debtor's residence. When the Debtor was questioned at the
hearings about whether he owned a .308 rifle, he invoked his rights under the Fifth Amendment.
“Chapter 13 relief is reserved for the ‘honest, but unfortunate debtor,” and in Chapter 13 cases, a
debtor's good faith may be relevant in several respects. Section 1307(c) also provides that a
Chapter 13 case may be converted or dismissed, “whichever is in the best interests of creditors and
the estate,” for “cause.”
The concept of good faith under both § 1325(a) and § 1307(c) is an “amorphous notion” that is both
flexible and fact-specific.
The evidence is indisputable that the Debtor possessed an ownership interest in JACCK. The
Debtor's own individual tax returns for 2009 through 2013, along with the returns of JACCK itself,
reflect his income from JACCK and show him as having a one half ownership interest in the LLC.
Several other documents admitted into evidence at the hearing also demonstrate that the Debtor
held himself out as a half owner of JACCK and signed documents in that capacity.
Based on the totality of circumstances in this case, the Court concludes that the Debtor lacked
good faith in filing his Chapter 13 Plan and his Chapter 13 petition. The Debtor sought bankruptcy
relief when he was unable to obtain an appellate bond to stay collection of the Topous judgment
and sanctions order, a large portion of which resulted from the Debtor's misconduct in the state
court litigation. The Debtor's bankruptcy schedules were filed under penalty of perjury, yet they
contained several material omissions and errors. Fundamental omissions have impeded the
Chapter 13 case and the bankruptcy process. Throughout this case, the Debtor has not been fair in
his treatment of his creditors, and has not been forthright in his dealings with the Trustee, the
creditors, and this Bankruptcy Court. Under the circumstances, the Debtor has not acted in good
faith.
The Court believes that conversion to Chapter 7, which will allow these matters to be investigated
by a Chapter 7 trustee, is in the best interests of creditors in this case.
The Debtor has offered no explanation, let alone evidence, of the source of the funds he proposes
to use to make the $100 monthly payments required under his proposed Plan. The Debtor is
currently incarcerated and has offered no evidence that he has any current income. The Debtor's
Plan also proposes increasing his payments in the future, if he is able to obtain employment.
Debtor's attorney admitted that it is unlikely that the Debtor will resume his legal practice in the
future. Because the Debtor has no current income, and limited prospects for income in the future,
the Court concludes that the Debtor is not eligible to be a debtor under Chapter 13. Conversion of
the Debtor's case to Chapter 7 is warranted.
DISCUSSION POINTS: Thinking Things Through
Means Test Justifying The End of Debt
Highlight the following:
1. The ease of declaring bankruptcy has changed
2. Courts still allow for living standards
B. Number and claims of petitioning creditors
1. For involuntary case
DISCUSSION POINTS: Sports & Entertainment Law
From Millions to Nada: Celebrity Bankruptcies
Bankruptcy very often results despite an individual being very wealthy. Bankruptcy results from one simple problem:
debts are greater than cash or liabilities are greater than assets. Generally, bankruptcy is a spending problem, not a
lack of income problem, and the Hollywood figures illustrate how quickly money can be lost because of poor
decisions on spending and investments.
C. Grounds for relief for involuntary case
D. Automatic stay
E. Rights of debtor in involuntary case
III. How is a Bankruptcy Estate Administered? (See Figure 34-2 in text)
A. Order of relief – stops all proceedings
B. List of creditors
C. Status of the trustee and bankruptcy
1. The trustee owns all nonexempt property of the debtor
2. Property inherited within six months of filing passes to the trustee
D. The bankrupt’s estate
1. Voidable transfers – within one year of bankruptcy, a debtor may not transfer property to prevent
creditors from satisfying claims
2. The insolvent debtor
3. Preferential transfers (voidable preferences)
a. Debt was incurred at an earlier time
b. Occur while insolvent and within 90 days of filing
CASE BRIEF: In re Conklin
511 B.R. 688 (D. Idaho 2014)
FACTS: On July 3, 2013, Scott and Nicole Conklin (Debtors) entered into a retail installment contract with
Hannigan Auto Sales, LLC, in Emmett, Idaho to purchase the Honda. CAC agreed to finance
Debtors' purchase in the amount $12,871.20. Debtors took possession of the Honda the same day.
CAC thereafter mailed a “Report of Sale and Application for Certificate of Title” to Gem County. The
Application was received by Gem County on August 2, 2013, as is evidenced by a date stamp
appearing on the Application. However, while the certificate of title issued for the Honda by the
State of Idaho properly listed CAC as the “lienholder,” it indicated that CAC's lien was “recorded” on
August 6, 2013. August 2, 2013, is thirty days after July 3, 2013, the day Debtors purchased and
took possession of the Honda.
Debtors filed their Chapter 7 case on September 4, 2013. On October 21, 2013, the Trustee
commenced this adversary proceeding against CAC contending that because CAC's security
interest in the Honda was not perfected until August 6th, as evidenced by the recording date on the
title, that security interest was a voidable preference.
The discrepancy between the date the Application was received by Gem County, and the lien
recording date listed in the title record for the Honda occurred when the information was
transmitted by Gem County to the Department to create the certificate of title. Legal Counsel for the
Conklins made a request to have the date changed and thereafter, the date in the electronic
records for the Honda title certificate was changed to reflect a recording date of August 2nd,
instead of August 6, 2013. A certified copy of a printout of the electronic record of title for the Honda
which shows August 2, 2013, as the “recorded” date for CAC's lien was submitted in evidence.
Both parties moved for summary judgment.
ISSUE: Is the lien a voidable preference or protected under secured creditor status properly filed prior to
bankruptcy?
REASONING: Currently under Idaho Code, there is a twenty (20) day time[ ]frame from the date of sale in which a
lender can perfect a security interest. Federal bankruptcy code was amended to allow a thirty (30)
day time frame to perfect a lien. The amendments eliminate redundant lien creation date language
and simplify processes, thereby clarifying that the filing time frame for perfection of a lien is the
filing date of a properly completed title application with the department. They further change the
transitional ownership document filing requirement to 30 days.
Applying the revised Idaho statute, the Court concludes Debtors and CAC have shown that the lien
on the Honda was perfected under Idaho law on August 2, 2013, the 30th day after Debtors
received possession of the Honda. Therefore, under § 547(c)(3), Debtors' transfer of the security
interest to CAC is protected from avoidance, and as a matter of law, Trustee's § 547(b) action fails.
Trustee's motion for summary judgment will be denied, and the motion for summary judgment filed
by Debtors, and joined by CAC, will be granted.
E. Proof of claim – filed by creditors
