F. Priority of claims
1. Secured vs. unsecured creditors – secured creditors have priority with respect to collateral and
proceeds from collateral
2. Allowed claims for debts to a spouse, former spouse, or child of debtor and for alimony
3. Costs and expenses of administration
4. Discuss claims arising in the ordinary course of a debtor’ s business after commencement of the case
and before appointment of the trustee
DISCUSSION POINTS: Ethics & the Law
The Skies Are Not So Friendly To Employee Pensions
Key Points:
United Airlines case pointed out problems with pension funding.
Federal agency is a type of guarantor, but the amount is limited.
Result has been reform in funding and accounting.
The companies were acting legally in escaping pensions, but the fairness to those who had been promised
is doubtful.
IV. What are Debtor’s Rights and Duties in Bankruptcy?
A. Debtor’s duties
1. List of creditors
2. Schedule of assets and liabilities
B. Debtor’s exemptions
1. Federal exemptions
NOTE: Revision of Bankruptcy Code limits exemptions; especially for homes; $155,675. Those
convicted of fraud cannot enjoy homestead exemptions and there are substantial residency
requirement.
CASE BRIEF: In re Bronk
775 F. 3d 871 (7th Cir. 2015)
FACTS: Leonard Bronk is a retiree living in Stevens
Point, Wisconsin. He incurred significant debts providing for his wife’s medical care before her
death in 2007, and he himself suffered a stroke in early 2009. With his medical debts mounting −
they exceeded $345,000 by the time he filed for bankruptcy − Bronk sought the advice of an
attorney about pre-bankruptcy exemption planning. His assets included his home, which he owned
free and clear, and a certificate of deposit in the amount of $42,000. On the advice of counsel,
Bronk sought to protect these nonexempt assets by converting them to exempt assets.
In May 2009, a few months before filing his Chapter 7 petition, Bronk borrowed $95,000 from
Citizens Bank and mortgaged his previously unencumbered home. He used these funds to
establish five college savings accounts for the benefit of his grandchildren under Section 529 of the
Internal Revenue Code.
Account owners control the funds in these accounts (known as “Edvest” accounts) and may
designate and change account beneficiaries. Beneficiaries do not control account assets.
In addition to creating the college savings accounts using the equity in his home, Bronk converted
the $42,000 certificate of deposit into an annuity with CM Life Insurance Company. The annuity
contract was issued on May 4, 2009, and does not begin making payments until January 3, 2035,
but it also includes a death benefit.
On August 5, 2009, Bronk filed for bankruptcy under Chapter 7. The trustee objected to the
college-fund and annuity transactions, arguing that Bronk had transferred his property with the
intent to hinder, delay, or defraud his creditors and thus should be denied a discharge.
The judge accepted Bronk’s argument about the annuity, holding that it was fully exempt as a
retirement benefit under Section 815.18(3)(j) as well as on the Edvest accounts.
Both sides appealed to the district court. The district judge vacated the bankruptcy court’s decision
while agreeing with most of its reasoning. First, the district judge agreed that Bronk was entitled to
a discharge because the trustee had not proven that the asset transfers were made with intent to
hinder, delay, or defraud creditors. Second, the district judge agreed with the bankruptcy judge’s
interpretation of Section 815.18(3)(p) and upheld the decision to deny the claimed exemption for
Bronk’s Edvest accounts (which was reversed on remand). Finally, the judge narrowed the
bankruptcy court’s interpretation of “retirement benefit” and remanded the case for additional
fact-finding on whether the annuity qualified under the statute.
Bronk appealed, challenging the disallowance of the exemption for his college savings accounts.
The trustee filed a cross-appeal challenging the court’s ruling on the annuity.
ISSUE: Are the Edvest and annuity accounts exempt property under bankruptcy law?
REASONING: Wisconsin’s exemption statute allows debtors to exempt “[a]n interest in a college savings account
under s. 16.641” from execution by creditors. § 815.18(3)(p). The term “interest” is not specifically
defined in the statute or by regulation, but an “interest” is generally defined as “[a] legal share in
something; all or part of a legal or equitable claim to or a right in property.” Bronk clearly has a legal
interest in each of the Edvest college savings accounts. He owned the accounts and could at any
time select and change beneficiaries, transfer funds between accounts, receive distributions from
the accounts, and (subject to certain limitations) remove funds from the accounts.
To qualify for full exemption under this subsection, the retirement plan or contract must meet one of
two additional requirements: (1) it must be employer sponsored; or (2) it must comply with the
Internal Revenue Code § 815.18(3)(j)2.
The bankruptcy judge read the statute to include any retirement product that was purchased by
reason of age, death, etc. The trustee, on the other hand, argues for an interpretation that narrows
the reach of the retirement-benefits exemption, at least where annuities are concerned. He
proposes that to qualify for exemption as a “retirement benefit” under Section 815.18(3)(j), an
annuity must “provide [ ] income as a substitute for wages upon the withdrawal from occupation or
active working life” rather than “operat[ing] merely as a savings account.”
Both interpretations stray from the statutory text. By its terms, the statute requires that the
retirement product “provid[e] benefits” by reason of age, illness, death, etc., not that it be
“purchased” by reason of age. Moreover, there is no special test for annuities.
Bronk’s annuity begins paying on a fixed date − January 3, 2035 − and thus does not pay benefits
because of age, length of service, or the onset of an illness or disability. But the annuity also
contains a death benefit. That feature brings it under the umbrella of Section 815.18(3)(j).
There is a second requirement, however. To qualify for full exemption as a “retirement benefit,” a
retirement product must be either employer sponsored or “compl[y] with the provisions of the
Internal Revenue Code”. Despite these reservations, we do not reach the question whether Bronk’s
annuity “complies with” the Internal Revenue Code. The trustee raised this issue for the first time in
the district court, and even then simply asserted − without developing an argument − that Bronk’s
annuity was not tax qualified. The district judge considered the argument waived and we agree.
Accordingly, for the foregoing reasons, we Reverse the judgment of the district court to the extent
that it affirmed the disallowance of the exemption for the college savings plans. In all other
respects, the judgment is Affirmed.
C. Protection against discrimination – no discrimination on basis of bankruptcy
V. When are Debts Discharged in Bankruptcy?
A. Denial of discharge
1. Fraudulent transfers within one year
2. Failure to keep financial records
6. Discharge within six years
B. Effect of discharge
1. Nondischargeable debts (See Figure 34-3 in text)
a. Taxes
b. Student loans, within five years of bankruptcy
c. Fraudulent loans
CASE BRIEF: In re Looper
2007 WL 1231700 (B. E.D. Tenn. 2007)
FACTS: Bryan Anthony Looper had over $300,000 in student loans that were used to finance his education
at Mercer University where he obtained an A.B., an M.B.A, and another unspecified graduate
degree as well as a large number of courses toward his J.D. degree. He did not make payments
on these student loans.
In 1996, he was elected assessor for Putnam County, Tennessee, a position he held for 2 years
and 4 months. He was then convicted of the first degree murder of state Senator Tommy Burks.
He has exhausted all of his appeals and is currently serving a life sentence without the possibility of
parole. The debtor has one dependent, a son born in August 1998. The circuit court for Putnam
County, Tennessee, ordered Looper to pay child support of $161.00 per month plus $7,254.20 in
medical expenses. Looper did not make any of the court-ordered child support payments and was
in arrears by more than $23,515.00.
ISSUE: Looper asked to have his student loans discharged on the basis of his hardship.
RESONING: Looper had all of his living expenses covered by the Tennessee Department of Corrections. Looper
had made no effort to make any payments on any of his student loans and had also not made
attempts to try and work with his lenders or apply to programs set up to help with student loans.
The court also noted that Looper’s circumstances were the result of his choices and conduct, not
the result of unforeseen and uncontrollable events. He had three degrees and the capability of
earning a living but, through poor choices, produced his own difficult circumstances.
DISCUSSION POINTS: Have the students discuss nondischargeable debts in bankruptcy using the In re Looper
case.
j. Consumer debt exceeding $5,775 for luxury goods within 90 days (as adjusted)
k. Cash advances exceeding $825 based on consumer credit within twenty days (as adjusted)
l. Homestead exemption limited to $146,450 (state) or $20,200 (federal)
VI. What are the Forms of Reorganizations and Payment Plans Available Under Federal Bankruptcy Laws?
A. Discuss the advantages and disadvantages of plans under Chapters 11 and 13 for both the debtor and the
creditors. The advantage for the creditors is that they get paid rather than discharged under Chapter 7. The
B. Business reorganizations under Chapter 11
1. Contents of plan
2. Confirmation of plan
VII. What are the Uses and Operations of Chapter 13 Debt Adjustment Plans?
A. Extended time payment plans under Chapter 13 – prerequisite for Chapter 7
1. Contents of plan – budget of future income
2. Confirmation of plan
3. Discharge of debtor – after making all payments
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Voidable preference. The court held that a transfer by an ordinary check takes place not on the day the check is
delivered but on the day it is honored by the bank. The personal check, delivered more than 90 days prior to the
2. Bankruptcy estate. Orso’s payments are non-exempt. Under the terms of the settlement agreements, Orso
received regular installments from annuities funded by the debtors. Orso had no control over the annuities, but
3. Voidable preferences. There was no voidable preference. Bobbie sold the machine at a time when she was
4. Procedure for involuntary bankruptcy. The petition could not be filed by only one creditor. Three creditors would
5. Priorities.
Jane’s mortgage company is owed $87,000. The trustee sold Jane’s house for $90,000.
Expenses of the bankruptcy – $3,000
The trustee has $11,500 in cash, including the $3,000 from the sale of the house. The mortgage company has
been paid. The first payment goes to the expenses of the bankruptcy of $3,000, leaving $8,500. The next
6. Effect of discharge. Yes. The false financial statement did not bar the discharge in bankruptcy because the
creditor had not relied on it before extending the initial credit to the debtor.
7. Discharge. The court refused to grant a discharge because of Dr. Von Kiels’ deception and evasion, noting:
For ten years before filing his bankruptcy case, Debtor has been evading taxes and shielding his assets
and income from creditors. Under the label of a ministry, Debtor has avoided and evaded his obligation
to report his income and file tax returns. He has also kept his assets and income beyond the reach of
his creditors, including the United States, to which is owed significant unpaid student loans and
probable unpaid taxes. Electing a shield of poverty and maintaining some separation from his family,
8. Requirements for involuntary case. Probably Sonia could not be forced into bankruptcy. The courts have ruled
that there were two exceptions to this general rule:
10. Grounds for relief for involuntary case. No. In an involuntary proceeding, all the creditors need to show is that
11. Voidable transfers. No, the trustee is not correct. A payment by an individual debtor in the ordinary course of
business is not subject to attack as a preference.
12. Student loan discharge. The bankruptcy court therefore concluded that the Hornsbys could not pay their loans
and maintain a minimal standard of living and discharged the student loan debt totaling $33,387.67. The district
court affirmed but found that the bankruptcy court had impermissibly shifted the burden to TSAC in analyzing
13. Nondischargeable debts. There were certain ethical constraints associated with the declaration of bankruptcy.
At the time the bankruptcy rights were created, bankruptcy was viewed as a last resort, an act of desperation
Because bankruptcy does accomplish a discharge of obligations, some debtors, particularly those in the
The musicians are using bankruptcy to avoid obligations they incurred for the purpose of paying extra to those
14. Administration of bankrupt’s estate. In the order for a bankruptcy proceeding: d, a, c, b, e, f, g.
15. Unsecured creditors. A + B + C = $45,000
$45,000
management system for classroom use.