B-1
ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 31
BANKRUPTCY LAW
31-1A. Chapter 7 liquidations
The court dismissed Busbin’s petition. The court concluded that the primary purpose for the
“substantial abuse” provision of Chapter 7 was to provide for the dismissal of cases of debtors
who can pay their debts from their excess disposable income. The court discussed “a long line
of cases which uniformly hold that a debtor’s ability to pay his debts defines substantial abuse.”
31-2A. Property of the estate
A bankruptcy court can dismiss or suspend a petition in bankruptcy if the interests of the
creditors and the debtor would be better served by dismissal or suspension. Unless the debtor’s
unsecured debts are consumer debts, in which case the court on its own motion can dismiss a
petition if the debtor’s ability to pay constitutes grounds for dismissal, the court can only grant
B-2 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 31
31-3A. Preferences
The court concluded that Itano Farms was a “creditor” for purposes of the preference provisions
of the Bankruptcy Code, and that therefore, the payments it received under the restitution order
were avoidable as preferences. The court explained that the term creditor is defined by the
Code to include any “entity that has a claim against the debtor that arose at the time of or before
the order for relief concerning the debtor.” The filing of the bankruptcy petition constituted an
order for relief. A claim as defined by the Code to mean a “right to payment,” which includes a
31-4A. Voidable preference
The court allowed RSW to remain as counsel for First Jersey, concluding that the stock transfer
was not a voidable preference. The court reasoned that the transfer was not made to “satisfy an
antecedent debt” because a debt is not “owed” until payment is past due, and thus this transfer
was timely. The court also ruled that the transfer was made in the ordinary course of business.
On appeal, a federal district court affirmed these conclusions, and the case was appealed to the
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 31 B-3
31-5A. Discharge in bankruptcy
Student loan debts are dischargeable “to the extent that they constitute an ‘undue hardship’
upon the debtor or his dependents.” The court stated that the “essential starting point [is] one
simple question: Is there a reasonable prospect that the debtor will ever be able to repay these
loans? . . . If the debtor has done everything he can to minimize expenses and maximize
income, there is no basis for refusing to discharge the student loans.” In this case “the Court has
31-6A. Automatic stay
The court entered a judgment for DPW for the amount in Sisco’s account, and Tinker appealed.
The intermediate state appellate court held in part that the federal bankruptcy automatic stay
prevented Tinker from turning the amount in Sisco’s account over to DPW. DPW argued that
31-7A. Discharge in bankruptcy
The bankruptcy court concluded that repaying the loans would impose an undue hardship on
Goulet and discharged the loans. The creditor appealed to a federal district court, which
reversed this decision. Goulet appealed to the U.S. Court of Appeals for the Seventh Circuit,
which affirmed the decision of the district court that the loans were not dischargeable. The
appellate court acknowledged that student loans are dischargeable if they constitute an undue
B-4 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 31
31-8A. Automatic stay
The court refused to terminate the automatic stay, reasoning that Moffett’s right of redemption
was part of the bankruptcy estate, and ordered the car returned to Moffett. The court required
adequate protection, however, in Moffett’s reorganization plan for Tidewater’s security interest.
As modified, the plan then provided for full payment of the amount due under the contract over
the course of the plan. Tidewater returned the car and appealed to the U.S. Court of Appeals for
the Fourth Circuit, which affirmed the lower court’s decision. The appellate court explained,
31-9A. Discharge in bankruptcy
The bankruptcy court granted ECMC’s motion, and on Hanson’s further appeals, a federal
district court and the U.S. Court of Appeals for the Seventh Circuit affirmed this ruling. The U.S.
Court of Appeals for the Seventh Circuit explained that student loans are “presumptively
nondischargeable in bankruptcy proceedings. Debtors can overcome this presumption by . . .
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 31 B-5
31–10A. A QUESTION OF ETHICS
1. The parties who might be considered at “ethical” fault for the investors’ losses in this
case include Edwards, ETS, the defendants, and the investors themselves. For obvious
reasons—the scheme, the fraud, and the funds transfer—Edwards should likely be held
responsible. ETS, regardless of who operated its business, is at fault for the same reasons. The
defendants, assuming that they did what Laddin accused them of—“ignoring the facts”—might
have arguably violated their fiduciary duty to their clients. The investors, too, might have failed to
2. The court granted the defendants’ motion to dismiss, concluding that the doctrine of in
pari delicto barred Laddin’s complaint. The court reasoned that the “legal and equitable interests
of the debtor” in bankruptcy were only as strong as the debtor’s claim against the defendants at
the commencement of the bankruptcy. Imputing Edwards’s wrongdoing to ETS undercut the
debtor’s claim. Laddin appealed to the U.S. Court of Appeals for the Eleventh Circuit, which
affirmed the lower court’s decision. The appellate court explained that a trustee “stands in the