Copyright 2015 Carolina Academic Press, LLC. All rights reserved. BANKRUPTCY LAW: PRINCIPLES, POLICIES, AND PRACTICE Fourth Edition

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1 BANKRUPTCY LAW: PRINCIPLES, POLICIES, AND PRACTICE Fourth Edition

2 LexisNexis Law School Publishing Advisory Board Bridgette Carr Clinical Professor of Law University of Michigan Law School Steven I. Friedland Professor of Law and Senior Scholar Elon University School of Law Carole Goldberg Jonathan D. Varat Distinguished Professor of Law UCLA School of Law Oliver Goodenough Professor of Law Vermont Law School Paul Marcus Haynes Professor of Law William and Mary Law School John Sprankling Distinguished Professor of Law McGeorge School of Law

3 BANKRUPTCY LAW: PRINCIPLES, POLICIES, AND PRACTICE Fourth Edition CHARLES J. TABB Mildred Van Voorhis Jones Chair in Law University of Illinois College of Law Of Counsel, Foley & Lardner LLP RALPH BRUBAKER Carl L. Vacketta Professor of Law University of Illinois College of Law

4 ISBN: (casebook) ISBN: (looseleaf) ISBN: (ebook) Library of Congress Cataloging-in-Publication Data Tabb, Charles Jordan, author. Bankruptcy law : principles, policies, and practice / Charles J. Tabb, Alice Curtis Campbell Professor of Law, University of Illinois College of Law; Ralph Brubaker, Professor of Law and Guy Raymond Jones Faculty Scholar, University of Illinois College of Law. Fourth edition. pages cm Includes index. ISBN (hardbound) ISBN (looseleaf) ISBN (ebook) 1. Bankruptcy United States. I. Brubaker, Ralph, author. II. Title. 1. Bankruptcy United States. I. Brubaker, Ralph. II. Title. KF1524.T dc This publication is designed to provide authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Matthew Bender and the Matthew Bender Flame Design are registered trademarks of Matthew Bender Properties Inc. Copyright 2015 Matthew Bender & Company, Inc., a member of LexisNexis. All Rights Reserved. No copyright is claimed by LexisNexis or Matthew Bender & Company, Inc., in the text of statutes, regulations, and excerpts from court opinions quoted within this work. Permission to copy material may be licensed for a fee from the Copyright Clearance Center, 222 Rosewood Drive, Danvers, Mass , telephone (978) NOTE TO USERS To ensure that you are using the latest materials available in this area, please be sure to periodically check the LexisNexis Law School web site for downloadable updates and supplements at Editorial Offices 630 Central Ave., New Providence, NJ (908) Mission St., San Francisco, CA (415) (2015 Pub.3609)

5 TABLE OF CONTENTS Chapter 1 INTRODUCTION TO DEBT COLLECTION AND BANKRUPTCY A. INTRODUCTION Questions B. COLLECTION OUTSIDE OF BANKRUPTCY Nonjudicial Collection a. Tort Law b. Fair Debt Collection Practices Act i. Scope of Coverage Problem ii. Violations of the Act Problem iii. Remedies c. Security Interests: Repossession and Foreclosure Problem Judicial Collection a. Postjudgment Remedies: Enforcement of Money Judgments i. Introduction Questions ii. Execution Questions Problem Problem Problem Problem Vitale v. Hotel California, Inc Illi, Inc. v. Margolis iii. Judgment liens Questions Problem Problem Problem Problem United States v. McDermott Questions iv. Garnishment Questions Problem iii

6 b. Prejudgment Remedies i. Introduction ii. Types of Prejudgment Remedies iii. Procedure in Attachment and Garnishment iv. Practical Concerns Questions Problem Problem Problem v. Issuance of an Injunction Grupo Mexicano De Desarrollo, S.A. v. Alliance Bond Fund, Inc Questions C. INTRODUCTION TO BANKRUPTCY DANIEL DEFOE, AN ESSAY UPON PROJECTS OF BANKRUPTS History of Bankruptcy Questions Nature and Purposes of Bankruptcy Relief JOSEPH STORY COMMENTARIES ON THE CONSTITUTION OF THE UNITED STATES Questions Louis Levinthal, The Early History of Bankruptcy Law Questions Max Radin, The Nature of Bankruptcy Questions CHARLES JORDAN TABB, THE LAW OF BANKRUPTCY Questions Problem Questions Problem Questions Chapter 2 INVOKING BANKRUPTCY RELIEF A. INTRODUCTION B. COMMENCEMENT OF A VOLUNTARY CASE Debtor Eligibility Requirements Problem Venue Problem Mechanics of Filing Questions iv

7 4. Effects of Filing Questions C. CONVERSION AND DISMISSAL The Statutory Scheme Questions Problem Judicial Limitations on Bankruptcy Relief In re SGL Carbon Corporation Questions D. CONSUMER BANKRUPTCY CHOICE: CHAPTER 7 OR 13? Assessing the Benefits of Each Chapter CHARLES JORDAN TABB, THE LAW OF BANKRUPTCY Questions Problem Limits on the Right to Choose: Dismissal for Abuse and the Means Test a. Introduction and Overview Problem b. The Means Test: Is there a Presumption of Abuse? i. To Whom Does the Means Test Apply? Problem ii. Income Problem iii. Expenses (a) Living Expenses (b) Secured Debts (c) Priority Claims (d) Chapter 13 Administrative Expenses Problem Problem Problem Problem iv. Calculating the Presumption Problem v. Rebuttal vi. Procedure vii. Sanctions c. Finding Abuse Without a Presumption Questions Problem Problem v

8 d. Coordinating the Chapter 13 Choice Hamilton v. Lanning Questions Ransom v. FIA Card Services Questions E. COMMENCEMENT OF AN INVOLUNTARY CASE Introduction Available Chapters Question Eligible Debtors Question Petitioning Creditors a. Claim Requirements Questions b. Number of Creditors Questions Grounds for Relief Questions Problem Problem Operations in the Gap Questions Problem Dismissal F. ABSTENTION Chapter 3 PROPERTY OF THE ESTATE A. OVERVIEW B. INCLUSIONS IN THE ESTATE Butner v. United States Questions Board of Trade of City of Chicago v. Johnson Questions In re Harrell Questions In re Schmitz Questions C. EXCLUSIONS FROM THE ESTATE Patterson v. Shumate Questions Problem vi

9 In re Andrews Questions D. ABANDONMENT Chapter 4 AUTOMATIC STAY A. OVERVIEW Question B. SCOPE OF THE STAY: ACTS STAYED In General Problem Citizens Bank of Maryland v. Strumpf Questions Secured Creditors and the Turnover of Repossessed Collateral United States v. Whiting Pools, Inc Thompson v. General Motors Acceptance Corp Questions C. SCOPE OF THE STAY: EXCEPTIONS Problem Penn Terra Ltd. v. Department of Environmental Resources Questions Securities and Exchange Commission v. Brennan Chapter 5 UNSECURED CLAIMS A. DEFINITION OF CLAIM Questions In re Grossman s Inc Questions Ohio v. Kovacs Questions United States v. Apex Oil Co Questions In re Shearin Family Investments, LLC Questions Problem B. ALLOWANCE OF CLAIMS Allowance Process Questions Grounds for Disallowance Problem C. DISTRIBUTIONS ON ACCOUNT OF UNSECURED CLAIMS In Chapter vii

10 Questions In Chapters 11, 12, and Questions D. PRIORITY CLAIMS General Principles Questions Administrative Expenses Questions In re Jartran, Inc Questions Reclamation for Goods Received on Eve of Bankruptcy: Priority and In Kind Questions Note on Reading Co. v. Brown Note on Midlantic National Bank In re N.P. Mining Co Other Priorities a. Employees Claims Questions b. Taxes Questions c. Miscellaneous Priorities Problem E. SUBORDINATION Questions Chapter 6 SECURED CLAIMS A. INTRODUCTION AND OVERVIEW Problem Problem Problem B. VALUATION OF A SECURED CLAIM Associates Commercial Corp. v. Rash Questions Problem Till v. SCS Credit Corp Questions C. STRIP DOWN OF AN UNDERSECURED CREDITOR S CLAIM In re Wright Questions Dewsnup v. Timm viii

11 Questions D. SURCHARGING SECURED CREDITORS: THE CLASH WITH PRIORITY CLAIMS Hartford Underwriters Insurance Co. v. Union Planters Bank, N.A Questions Chapter 7 RELIEF FROM STAY AND ADEQUATE PROTECTION A. INTRODUCTION TO RELIEF FROM THE AUTOMATIC STAY Questions B. RELIEF FROM THE STAY FOR LACK OF ADEQUATE PROTECTION Basic Applications Questions Adequate Protection and the Opportunity Cost of Delay Problem Problem Bankers Life Insurance Co. of Nebrasksa v. Alyucan Interstate Corp. (In re Alyucan Interstate Corp.) Questions United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd Questions C. STAY RELIEF UNDER 362(d)(2) Overview Questions Lack of Equity in the Property Problem Necessity Feasibility Pegasus Agency, Inc. v. Grammatikakis (In re Pegasus Agency, Inc.) Questions Problem Problem D. STAY RELIEF UNDER 362(d)(3) FOR SINGLE ASSET REAL ESTATE In re Larry Goodwin Golf, Inc Problem E. THE AUTOMATIC STAY AND ABUSIVE SERIAL FILINGS Questions ix

12 Chapter 8 EXECUTORY CONTRACTS A. OVERVIEW B. DEFINITION OF AN EXECUTORY CONTRACT Problem In re Exide Technologies Questions C. TRUSTEE S OPTIONS The Four Options Problem Court Approval Timing D. REJECTION The Standard for Rejection Problem Effects of Rejection Questions In re Enron Corp Questions Top Rank, Inc. v. Ortiz (In re Ortiz) Questions Collective Bargaining Agreements E. DO NOTHING: THE LIMBO PERIOD General Principles Questions Data-Link Systems, Inc. v. Whitcomb & Keller Mortgage Co. (In re Whitcomb & Keller Mortgage Co.) Questions Special Rules for Commercial Leases Questions In re Burival Questions Problem Questions Problem F. ASSUMPTION AND ASSIGNMENT Assumption a. Effects of Assumption Nostas Assocs. v. Costich (In re Klein Sleep Products, Inc.) Questions b. Limits on Assumption i. Contract in Existence x

13 Problem ii. Cum Onere iii. Defaults Problem Assignment a. Effects of Assignment b. Assumption as a Prerequisite of Assignment c. Anti-Assignment Provisions Problem d. Adequate Assurance of Future Performance In re Martin Paint Stores Questions e. The Special Case of Shopping Centers The Problem of Nondelegable Contracts a. Assumption by a Debtor in Possession Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.) Questions b. Assignment Reiser v. The Dayton Country Club (In re Magness) Questions Chapter 9 AVOIDING POWERS A. INTRODUCTION TO AVOIDANCE Meaning and Effect of Avoidance Questions In re Video Depot, Ltd Questions In re Railworks Corp Questions Overview of Trustee s Avoiding Powers Questions B. TRUSTEE AS SUCCESSOR TO ACTUAL CREDITORS Problem C. STRONG ARM CLAUSE AND CONSTRUCTIVE TRUSTS General Principles Questions Trustee as Lien Creditor Questions Problem Trustee as Bona Fide Purchaser xi

14 Questions Problem In re Omegas Group, Inc Questions D. FRAUDULENT TRANSFERS Overview of Fraudulent Transfer Law Questions In re Costas Questions Actual Fraud: Fraudulent Intent Questions Problem Problem Alan Drey Co. v. Generation, Inc Constructive Fraud Questions Problem BFP v. Resolution Trust Corp Questions In re Chomakos Questions Problem Problem Appendix: Uniform Fraudulent Transfer Act E. PREFERENCES Rationale for Preference Law Questions Overview of Elements of a Preference Cunningham v. Brown Questions In re Marshall Questions Problem In re Freedom Group, Inc Questions Palmer Clay Products v. Brown Questions Problem Defenses to Preference Liability In re National Gas Distributors, LLC xii

15 Questions Problem In re Kaypro Questions Problem Problem Problem F. SETOFF AND RECOUPMENT Problem In re Semcrude, L.P Questions G. SYNTHESIS: PONZI SCHEME CLAWBACKS In re Independent Clearing House Co Questions Chapter 10 DISCHARGE A. INTRODUCTION Local Loan Co. v. Hunt Questions B. SCOPE Problem C. ENFORCEMENT Discharge Injunction Procedure Questions Reaffirmation Prohibition Against Discrimination Questions Toth v. Michigan State Housing Development Authority Questions Leonard v. St. Rose Dominican Hospital (In re Majewski) Questions In the Matter of Anonymous Questions D. DENIAL OF DISCHARGE Problem Problem Lansdowne v. Cox (In re Cox) Questions Fokkena v. Tripp (In re Tripp) Questions xiii

16 E. EXCEPTIONS TO DISCHARGE Overview Questions Fraud and Related Provisions Star Bank, N.A. v. Stearns (In re Stearns) Questions Archer v. Warner Questions Problem Problem Bullock v. Bankchampaign, N.A Questions Willful and Malicious Injury Kawaauhau v. Geiger Questions Problem Other Exceptions Brunner v. New York State Higher Education Services Corp Problem Chapter 11 EXEMPTIONS A. INTRODUCTION Questions Problem B. APPLYING EXEMPTION LAWS Questions Robinson v. Hagan Questions In re Laube Questions Clark v. Rameker Notes C. PROCEDURE Schwab v. Reilly Questions D. LIEN AVOIDANCE Questions Problem Problem Problem Problem xiv

17 E. EXEMPTION PLANNING AND HOMESTEAD LIMITATIONS Questions Norwest Bank Nebraska, N.A. v. Tveten Questions Hanson v. First National Bank in Brookings Questions Problem Chapter 12 REORGANIZATION A. WHY REORGANIZATION? Questions B. CONTROL AND MANAGEMENT OF A CHAPTER 11 CASE In re Ionosphere Clubs, Inc Questions In re Spielfogel Questions C. OPERATIONAL ISSUES Overview DIP Financing CHARLES JORDAN TABB, THE LAW OF BANKRUPTCY Critical Vendor Orders and the Doctrine of Necessity In re Kmart Corp Questions D. CONFIRMATION OF A PLAN OF REORGANIZATION The Top Ten Things a Law Student Needs to Know About Confirmation A Little Elaboration on the Top Ten Things Ten Problems about the Top Ten Things Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Absolute Priority and the New Value Debate Bank of America National Trust and Savings Association v. 203 North Lasalle Street Partnership xv

18 Questions Absolute Priority and Gift Plans In re DBSD North America, Inc Questions Absolute Priority and Cram Down of Secured Creditors In re the Pacific Lumber Co Questions RadLAX Gateway Hotel, LLC v. Amalgamated Bank Questions E. SECTION 363 SALES: THE NEW CHAPTER 3 REORGANIZATION? In re Chrysler LLC Questions Ralph Brubaker & Charles Jordan Tabb, Bankruptcy Reorganizations and the Troubling Legacy of Chrysler and GM Ralph Brubaker, Successor Liability and Bankruptcy Sales: Free and Clear of What? Questions In re Fisker Automotive Holdings, Inc Questions Chapter 13 JURISDICTION AND PROCEDURE A. HISTORY The English Precursor and Early American Bankruptcy Statutes Ralph Brubaker, A Summary Statutory and Constitutional Theory of Bankruptcy Judges Core Jurisdiction After Stern v. Marshall Questions Summary and Plenary Jurisdiction Under the Bankruptcy Act of Questions Constitutional Crisis: The 1978 Reform Act and the Marathon Decision Questions B. THE MARATHON FIX: CORE AND NONCORE JURISDICTION Problem Stern v. Marshall Questions C. THE OUTERMOST LIMITS OF FEDERAL BANKRUPTCY JURISDICTION Related to Jurisdiction over Third-Party Claims Ralph Brubaker, One Hundred Years of Federal Bankruptcy xvi

19 Law and Still Clinging to an In Rem Model of Bankruptcy Jurisdiction Questions Pacor, Inc. v. Higgins Questions In re Salem Mortgage Co Questions Problem Problem Problem Problem Problem Problem Problem Problem Supplemental Bankruptcy Jurisdiction Ralph Brubaker, One Hundred Years of Federal Bankruptcy Law and Still Clinging to an In Rem Model of Bankruptcy Jurisdiction In re Hospitality Ventures/Lavista Questions Ralph Brubaker, One Hundred Years of Federal Bankruptcy Law and Still Clinging to an In Rem Model of Bankruptcy Jurisdiction D. FEDERAL-STATE TRANSFERS : ABSTENTION, REMOVAL, AND REMAND In re Dow Corning Corp. ( Dow Corning I ) Questions In re Dow Corning Corp. ( Dow Corning II ) Questions Problem Problem Problem Problem Problem E. BANKRUPTCY PROCEDURE General Concepts John D. Ayer, The Forms of Action in Bankruptcy Practice: An Exposition and a Critique Ralph Brubaker, On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory Honorable William L. Norton, Jr., Bankruptcy Terminology and xvii

20 Proceedings Procedure John D. Ayer, The Forms of Action in Bankruptcy Practice: An Exposition and a Critique Problem Historical Note Jury Trials a. Right to a Jury Trial Questions Note on Granfinanciera, S.A. v. Nordberg Langenkamp v. Culp Questions b. Bankruptcy Judges Authority to Conduct Jury Trials Problem Problem Chapter 14 TRANSNATIONAL BANKRUPTCY CASES A. OVERVIEW Law Reform Efforts Universalism Versus Territorialism Problem Types of Proceedings Issues in Transnational Insolvency Cases In re HIH Casualty & General Insurance Ltd Questions Maxwell Communications Corp. PLC v. Société Générale (In re Maxwell Communications Corp. PLC) Questions B. WHERE MAY A MAIN PROCEEDING BE CONDUCTED? Conducting a Main Proceeding of a Foreign Debtor in the United States In re Aerovias Nacionales De Colombia S.A. Avianca Questions COMI Under the EU Insolvency Regulation In re Eurofood IFSC Ltd Questions Academic Commentary on COMI Benjamin J. Christenson, Best Let Sleeping Presumptions Lie: Interpretation of Center of Main Interest Under Chapter 15 of the Bankruptcy Code and an Appeal for Additional Judicial Complacency COMI Under Chapter 15 of the U.S. Bankruptcy Code xviii

21 In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd Questions C. LIMITS ON DEFERENCE TO FOREIGN PROCEEDINGS Jaffé v. Samsung Electronics Company, Limited Questions Table of Cases TC-1 Table of Statutes TS-1 Index I-1 xix

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