1 00:00:00,120 --> 00:00:04,040 Avoidance actions, debtors, or the trustees that represent 2 00:00:04,040 --> 00:00:07,640 them, gain the ability to reject or avoid actions taken with 3 00:00:07,640 --> 00:00:10,800 respect to the debtors property for a specified time prior to 4 00:00:10,800 --> 00:00:14,200 the filing of the bankruptcy. While the details of avoidance 5 00:00:14,200 --> 00:00:17,400 actions are nuanced, there are three general categories of 6 00:00:17,400 --> 00:00:20,800 avoidance actions. Preferences 11. 7 00:00:20,800 --> 00:00:25,880 US C-section 547. Federal fraudulent transfer 11 8 00:00:25,880 --> 00:00:30,920 US C-section 548. Non bankruptcy law creditor 11 9 00:00:30,920 --> 00:00:35,360 USC section 544. All avoidance actions attempt to 10 00:00:35,360 --> 00:00:37,680 limit the risk of the legal system accelerating the 11 00:00:37,680 --> 00:00:40,640 financial demise of a financially unstable debtor who 12 00:00:40,640 --> 00:00:44,640 is not yet declared bankruptcy. The bankruptcy system generally 13 00:00:44,640 --> 00:00:47,920 endeavors to reward creditors who continue to extend financing 14 00:00:47,920 --> 00:00:50,440 the debtors and discourage creditors from accelerating 15 00:00:50,440 --> 00:00:53,960 their debt collection efforts. Avoidance actions are some of 16 00:00:53,960 --> 00:00:56,640 the most obvious of the mechanisms to encourage this 17 00:00:56,640 --> 00:00:59,170 goal. Despite the apparent simplicity 18 00:00:59,170 --> 00:01:02,490 of these rules, a number of exceptions exist in the context 19 00:01:02,490 --> 00:01:06,050 of each category of avoidance action preferences. 20 00:01:06,530 --> 00:01:09,570 Preference actions generally permit the trustee to avoid, 21 00:01:09,730 --> 00:01:13,210 that is, to avoid an otherwise legally binding transaction. 22 00:01:13,370 --> 00:01:16,570 Certain transfers of the Debtors property that benefit creditors 23 00:01:16,570 --> 00:01:19,650 for the transfers occur on or within 90 days of the date of 24 00:01:19,650 --> 00:01:22,770 filing of the bankruptcy petition, for example. 25 00:01:23,050 --> 00:01:25,810 If a debtor has a debt to a friendly creditor and a debt to 26 00:01:25,810 --> 00:01:29,050 an unfriendly creditor and pays the friendly creditor and then 27 00:01:29,050 --> 00:01:32,370 declares bankruptcy one week later, the trustee may be able 28 00:01:32,370 --> 00:01:36,050 to recover the money paid to the friendly creditor under 11 US 29 00:01:36,050 --> 00:01:39,890 C-section 547. While this reach back period 30 00:01:39,890 --> 00:01:42,650 typically extends 90 days backwards from the date of the 31 00:01:42,650 --> 00:01:45,490 bankruptcy, the amount of time is longer in the case of 32 00:01:45,490 --> 00:01:49,250 insiders, typically one year. Insiders include family and 33 00:01:49,250 --> 00:01:51,170 close business contacts of the debtor. 34 00:01:51,820 --> 00:01:55,460 Fraudulent transfer bankruptcy Fraudulent transfer law is 35 00:01:55,460 --> 00:01:58,580 similar in practice to non bankruptcy fraudulent transfer 36 00:01:58,580 --> 00:02:01,260 law. Some terms, however, are more 37 00:02:01,260 --> 00:02:03,620 generous in bankruptcy than they are otherwise. 38 00:02:04,060 --> 00:02:07,540 For instance, the statute of limitations within bankruptcy is 39 00:02:07,540 --> 00:02:10,340 2 years as opposed to a shorter time frame in some non 40 00:02:10,340 --> 00:02:13,860 bankruptcy contexts. Generally, a fraudulent transfer 41 00:02:13,860 --> 00:02:17,220 action operates in much the same way as a preference avoidance 42 00:02:17,740 --> 00:02:21,400 fraudulent transfer actions. However, sometimes require a 43 00:02:21,400 --> 00:02:24,120 showing of intent to shelter the property from a creditor. 44 00:02:24,600 --> 00:02:27,800 Fraudulent transfer may involve an actual or a constructive 45 00:02:27,800 --> 00:02:30,320 fraud. Actual fraud is based upon the 46 00:02:30,320 --> 00:02:33,280 intent of the transfer, whereas constructive fraud may be 47 00:02:33,280 --> 00:02:35,520 inferred based upon economic factors. 48 00:02:36,000 --> 00:02:38,520 Factors that may lead to an inference of fraud include 49 00:02:38,520 --> 00:02:41,400 whether the transfer was for reasonably equivalent value and 50 00:02:41,400 --> 00:02:44,120 whether the debtor was insolvent at the time of the transfer. 51 00:02:44,740 --> 00:02:47,940 The conversion of non exempt assets into exempt assets on the 52 00:02:47,940 --> 00:02:50,860 eve of bankruptcy is not an indicator of fraud per se. 53 00:02:51,620 --> 00:02:54,300 However, depending on the amount of the exemption and the 54 00:02:54,300 --> 00:02:57,420 circumstances surrounding the conversion, a court may find the 55 00:02:57,420 --> 00:02:59,460 conversion to be a fraudulent transfer. 56 00:02:59,940 --> 00:03:02,700 This is especially true when the conversion amounts to nothing 57 00:03:02,700 --> 00:03:04,420 more than a temporary arrangement. 58 00:03:04,900 --> 00:03:08,260 When finding the conversion of non exempt into exempt assets to 59 00:03:08,260 --> 00:03:11,820 be a fraudulent transfer, courts tend to focus on the existence 60 00:03:11,820 --> 00:03:13,940 of an independent reason for the conversion. 61 00:03:14,570 --> 00:03:17,450 For example, if a debtor purchased a residence protected 62 00:03:17,450 --> 00:03:20,210 by a homestead exemption with the intent to reside in such 63 00:03:20,210 --> 00:03:22,810 residence, that would be an allowable conversion into non 64 00:03:22,810 --> 00:03:26,130 exempt property, but where the debtor purchased the residence 65 00:03:26,130 --> 00:03:29,210 with all of their available funds, leaving no money to live 66 00:03:29,210 --> 00:03:31,890 off, that presumed that the conversion was temporary 67 00:03:32,090 --> 00:03:33,970 indicating A fraudulent transfer. 68 00:03:34,490 --> 00:03:37,250 Courts look at the timing of the transfer is the most important 69 00:03:37,250 --> 00:03:40,090 factor. Non bankruptcy law creditor 70 00:03:40,250 --> 00:03:43,230 strong arm. The strong arm avoidance power 71 00:03:43,230 --> 00:03:47,750 stems from 11 US C-section 544 and permits the trustee to 72 00:03:47,790 --> 00:03:50,590 exercise the rights that a debtor in the same situation 73 00:03:50,590 --> 00:03:52,390 would have under the relevant state law. 74 00:03:52,950 --> 00:03:57,030 Specifically, section 544 A grants the trustee the rights of 75 00:03:57,030 --> 00:04:01,630 avoidance of 1A judicial lien creditor, 2 an unsatisfied lien 76 00:04:01,630 --> 00:04:05,590 creditor and 3A bona fide purchaser of real property. 77 00:04:06,190 --> 00:04:09,030 In practice, these avoidance powers often overlap with 78 00:04:09,030 --> 00:04:11,790 preference and fraudulent transfer avoidance powers. 79 00:04:12,310 --> 00:04:15,830 The creditors secured creditors whose security interests 80 00:04:15,830 --> 00:04:18,470 survived the commencement of the case may look to the property 81 00:04:18,470 --> 00:04:21,149 that is the subject of their security interests after 82 00:04:21,149 --> 00:04:24,070 obtaining permission from the court in the form of relief from 83 00:04:24,070 --> 00:04:27,670 the automatic stay. Security interests created by 84 00:04:27,670 --> 00:04:30,470 what are called secured transactions are liens on the 85 00:04:30,470 --> 00:04:33,350 property of a debtor. Unsecured creditors are 86 00:04:33,350 --> 00:04:35,350 generally divided into two classes. 87 00:04:35,670 --> 00:04:39,230 Unsecured priority Creditors and general Unsecured creditors 88 00:04:39,750 --> 00:04:43,310 Unsecured priority creditors are further subdivided into classes 89 00:04:43,310 --> 00:04:46,830 as described in the law. In some cases, the assets of the 90 00:04:46,870 --> 00:04:50,470 estate are insufficient to pay all priority unsecured creditors 91 00:04:50,470 --> 00:04:52,630 in full. In such cases, the general 92 00:04:52,670 --> 00:04:56,310 unsecured creditors receive nothing because of the priority 93 00:04:56,310 --> 00:04:58,630 and rank ordering feature of bankruptcy law. 94 00:04:58,870 --> 00:05:02,070 Debtors sometimes collude with others who may be related to the 95 00:05:02,070 --> 00:05:05,210 debtor to prefer them. By, for example, granting them a 96 00:05:05,210 --> 00:05:08,210 security interest in otherwise unpledged assets. 97 00:05:08,690 --> 00:05:12,090 For this reason, the bankruptcy trustee is permitted to reverse 98 00:05:12,090 --> 00:05:14,850 certain transactions of the debtor within a period of time 99 00:05:14,850 --> 00:05:17,050 prior to the date of the bankruptcy filing. 100 00:05:17,530 --> 00:05:20,290 The time period varies depending on the relationship of the 101 00:05:20,290 --> 00:05:23,050 parties to the debtor and the nature of the transaction. 102 00:05:23,530 --> 00:05:28,010 In Chapter 712 and 13, creditors must file a proof of claim to be 103 00:05:28,010 --> 00:05:32,020 paid in a Chapter 11 case. The creditor is not required to 104 00:05:32,020 --> 00:05:35,060 file a proof of claim. That is, a proof of claim is 105 00:05:35,060 --> 00:05:38,260 deemed filed if the creditors claim is listed on the debtors 106 00:05:38,260 --> 00:05:41,980 bankruptcy schedules unless the claim is scheduled as disputed, 107 00:05:42,220 --> 00:05:46,220 contingent, or unliquidated. If the creditors claim is not 108 00:05:46,220 --> 00:05:49,460 listed on the schedules in a Chapter 11 case, the creditor 109 00:05:49,460 --> 00:05:52,700 must file a proof of claim absolute priority. 110 00:05:53,260 --> 00:05:56,420 A distinctive feature of US bankruptcy law is the Absolute 111 00:05:56,420 --> 00:05:59,600 priority rule. How to fight at 11 US C-section 112 00:05:59,600 --> 00:06:03,360 1129-B2B2. The rule provides that with 113 00:06:03,360 --> 00:06:07,080 respect to a class of unsecured claims, the holder of any claim 114 00:06:07,080 --> 00:06:09,960 or interest that is junior to the claims of such class will 115 00:06:09,960 --> 00:06:13,200 not receive or retain under the plan on account of such junior 116 00:06:13,200 --> 00:06:16,960 claim or interest any property. This requirement means that if 117 00:06:16,960 --> 00:06:19,320 any class of creditors votes against a plan of 118 00:06:19,320 --> 00:06:22,840 reorganization, the bankruptcy court may not confirm the plan 119 00:06:22,840 --> 00:06:25,520 of any class of claims or interest junior to the 120 00:06:25,520 --> 00:06:28,990 dissenting class, for example. Subordinated creditors or 121 00:06:28,990 --> 00:06:32,030 shareholders receives any distribution of the debtors 122 00:06:32,030 --> 00:06:35,990 estate pursuant to the plan. In practice, the rule requires 123 00:06:35,990 --> 00:06:38,870 that debtors satisfy the claims of senior creditors in full 124 00:06:38,870 --> 00:06:42,310 before distributing any estate property to junior creditors or 125 00:06:42,310 --> 00:06:45,430 shareholders under the plan, although senior creditors will 126 00:06:45,430 --> 00:06:48,830 often consent to a de minimis recovery for junior stakeholders 127 00:06:48,830 --> 00:06:50,950 in exchange for their support for the plan. 128 00:06:51,570 --> 00:06:54,610 The Supreme Court has recognized an exception to the absolute 129 00:06:54,610 --> 00:06:57,650 priority rule, known as the new value exception, that allows 130 00:06:57,650 --> 00:07:00,690 junior stakeholders to recover property under a plan over the 131 00:07:00,690 --> 00:07:03,970 objection of senior creditors if the junior stakeholders provide 132 00:07:03,970 --> 00:07:07,410 new value to the restructured enterprise, typically defined as 133 00:07:07,410 --> 00:07:10,770 an upfront monetary contribution to the reorganized debtor that 134 00:07:10,770 --> 00:07:13,450 is commensurate with the property received or retained 135 00:07:13,450 --> 00:07:16,030 under the plan. The basis for the new value 136 00:07:16,030 --> 00:07:19,070 exception is that the holder of a junior claim or interest under 137 00:07:19,070 --> 00:07:22,310 such circumstances does not receive or retain under the plan 138 00:07:22,310 --> 00:07:25,590 on account of such junior claim or interest any property, but 139 00:07:25,590 --> 00:07:28,110 rather receives or retains property under the plan on 140 00:07:28,110 --> 00:07:31,670 account of the new value contribution executory 141 00:07:31,670 --> 00:07:34,350 contracts. The bankruptcy trustee may 142 00:07:34,350 --> 00:07:37,990 reject certain executory contracts and unexpired leases 143 00:07:38,470 --> 00:07:41,450 for bankruptcy purposes. The contract is generally 144 00:07:41,450 --> 00:07:44,810 considered executory when both parties to the contract have not 145 00:07:44,810 --> 00:07:48,010 yet fully performed a material obligation of the contract. 146 00:07:48,490 --> 00:07:52,090 If the trustee or debtor in possession in many Chapter 11 147 00:07:52,090 --> 00:07:55,770 cases rejects a contract, the debtors bankruptcy estate is 148 00:07:55,770 --> 00:07:58,770 subject to ordinary breach of contract damages, but the 149 00:07:58,770 --> 00:08:02,050 damages amount is an obligation and is generally treated as an 150 00:08:02,050 --> 00:08:05,890 unsecured claim committees under some chapters. 151 00:08:06,150 --> 00:08:09,670 Notably, Chapter 79 and 11 committees of various 152 00:08:09,670 --> 00:08:13,350 stakeholders are appointed by the bankruptcy court in Chapter 153 00:08:13,350 --> 00:08:15,750 11 and 9. These committees consist of 154 00:08:15,750 --> 00:08:18,390 entities that hold the seven largest claims of the kinds 155 00:08:18,390 --> 00:08:21,590 represented by the committee. Other committees may also be 156 00:08:21,590 --> 00:08:24,310 appointed by the court. Committees have regular 157 00:08:24,310 --> 00:08:26,910 communications with the debtor and the debtors advisors, and 158 00:08:26,910 --> 00:08:29,950 have access to a wide variety of documents as part of their 159 00:08:29,950 --> 00:08:33,390 functions and responsibilities exempt property. 160 00:08:33,980 --> 00:08:36,380 Although in theory all property of the debtor that is not 161 00:08:36,380 --> 00:08:39,260 excluded from the estate under the Bankruptcy Code becomes 162 00:08:39,260 --> 00:08:42,539 property of the estate, for example, is automatically 163 00:08:42,539 --> 00:08:45,340 transferred from the debtor to the estate at the time of 164 00:08:45,340 --> 00:08:48,500 commencement of a case. An individual debtor, not a 165 00:08:48,500 --> 00:08:51,940 partnership, corporation, etcetera, may claim certain 166 00:08:51,940 --> 00:08:54,900 items of property is exempt, and thereby keep those items 167 00:08:55,100 --> 00:08:58,980 subject, however, to any valid liens or other encumbrances. 168 00:08:59,590 --> 00:09:02,270 An individual debtor may choose between a federal list of 169 00:09:02,270 --> 00:09:04,910 exemptions and a list of exemptions provided by the law 170 00:09:04,910 --> 00:09:07,670 of the state in which the debtor files the bankruptcy case, 171 00:09:07,670 --> 00:09:10,470 unless the state in which the debtor files the bankruptcy case 172 00:09:10,470 --> 00:09:13,070 has enacted legislation prohibiting the debtor from 173 00:09:13,070 --> 00:09:16,270 choosing the exemptions on the federal list, which almost 40 174 00:09:16,270 --> 00:09:18,870 states have done. In states where the debtor is 175 00:09:18,870 --> 00:09:21,630 allowed to choose between the federal and state exemptions, 176 00:09:21,790 --> 00:09:24,470 the debtor has the opportunity to choose the exemptions that 177 00:09:24,470 --> 00:09:27,670 most fully benefit him or her, and in many cases. 178 00:09:27,980 --> 00:09:30,820 May convert at least some of his or her property from non exempt 179 00:09:30,820 --> 00:09:34,100 form, For example, cash to exempt form. 180 00:09:34,300 --> 00:09:38,060 For example, increased equity in a home created by using the cash 181 00:09:38,060 --> 00:09:41,340 to pay down a mortgage prior to filing the bankruptcy case. 182 00:09:41,820 --> 00:09:44,740 The exemption laws vary greatly from state to state. 183 00:09:45,220 --> 00:09:48,700 In some states, exempt property includes equity in a home or 184 00:09:48,700 --> 00:09:51,780 car, tools of the trade, and some personal effects. 185 00:09:52,370 --> 00:09:55,410 In other states, an asset class, such as tools of trade, will not 186 00:09:55,410 --> 00:09:58,210 be exempt by virtue of its class, except to the extent it 187 00:09:58,210 --> 00:10:01,450 is claimed under a more general exemption for personal property. 188 00:10:01,970 --> 00:10:05,130 One major purpose of bankruptcy is to ensure orderly and 189 00:10:05,130 --> 00:10:08,930 reasonable management of debt. Thus, exemptions for personal 190 00:10:08,930 --> 00:10:11,770 effects are thought to prevent punitive seizures of items of 191 00:10:11,770 --> 00:10:15,890 little or no economic value, personal effects, personal care 192 00:10:15,890 --> 00:10:19,530 items, ordinary clothing, since this does not promote any 193 00:10:19,530 --> 00:10:23,530 desirable economic result. Similarly, tools of the trade 194 00:10:23,530 --> 00:10:26,810 may, depending on the available exemptions, be a permitted 195 00:10:26,810 --> 00:10:29,770 exemption as their continued possession allows the insolvent 196 00:10:29,770 --> 00:10:32,490 debtor to move forward into productive work as soon as 197 00:10:32,490 --> 00:10:35,290 possible. The Bankruptcy Abuse Prevention 198 00:10:35,330 --> 00:10:39,250 and Consumer Protection Act of 2005 place pension plans not 199 00:10:39,250 --> 00:10:42,210 subject to the Employee Retirement Income Security Act 200 00:10:42,210 --> 00:10:47,610 of 1974 ERISA like 457 and 403 B plans. 201 00:10:47,890 --> 00:10:51,090 In the same status as Aresa qualified plans with respect to 202 00:10:51,090 --> 00:10:55,370 having exemption status akin to spendthrift trusts, Sep, IRA's 203 00:10:55,370 --> 00:10:58,490 and SIMPLE still are outside federal protection and must rely 204 00:10:58,490 --> 00:11:03,210 on state law spendthrift trusts. Most states have property laws 205 00:11:03,210 --> 00:11:06,010 that allow a trust agreement to contain a legally enforceable 206 00:11:06,010 --> 00:11:08,810 restriction on the transfer of a beneficial interest in the 207 00:11:08,810 --> 00:11:12,290 trust, sometimes known as an antialionation provision. 208 00:11:12,890 --> 00:11:16,210 The antialionation provision generally prevents creditors of 209 00:11:16,210 --> 00:11:19,650 a beneficiary from acquiring the beneficiary share of the trust. 210 00:11:20,170 --> 00:11:24,090 Such a trust is sometimes called a spendthrift trust to prevent 211 00:11:24,090 --> 00:11:25,810 fraud. Most states allow this 212 00:11:25,810 --> 00:11:28,650 protection only to the extent that the beneficiary did not 213 00:11:28,650 --> 00:11:32,890 transfer property to the trust. Also, such provisions do not 214 00:11:32,890 --> 00:11:35,850 protect cash or other property once it has been transferred 215 00:11:35,850 --> 00:11:37,490 from the trust to the beneficiary. 216 00:11:38,120 --> 00:11:41,960 Under the US Bankruptcy Code, an antialionation provision in a 217 00:11:41,960 --> 00:11:46,040 spendthrift trust is recognized. This means that the beneficiary 218 00:11:46,040 --> 00:11:48,840 share of the trust generally does not become property of the 219 00:11:48,840 --> 00:11:53,920 bankruptcy estate redemption. In a Chapter 7 liquidation case, 220 00:11:54,000 --> 00:11:56,960 an individual debtor may redeem certain tangible personal 221 00:11:56,960 --> 00:12:00,800 property intended primarily for personal, family, or household 222 00:12:00,800 --> 00:12:04,440 views that is encumbered by a lien to qualify the property 223 00:12:04,440 --> 00:12:08,780 generally either a. Must be exempt under section 522 224 00:12:08,780 --> 00:12:12,460 of the Bankruptcy Code or B must have been abandoned by the 225 00:12:12,460 --> 00:12:15,980 trustee under section 554 of the Bankruptcy Code. 226 00:12:16,500 --> 00:12:19,460 To redeem the property, the debtor must pay the lion holder 227 00:12:19,460 --> 00:12:22,060 the full amount of the applicable allowed secured claim 228 00:12:22,060 --> 00:12:23,100 against the property.