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Negotiable Instruments, Secured Transactions, Bankruptcy & Ethics

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Emily Bennett

on 14 December 2015

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Transcript of Negotiable Instruments, Secured Transactions, Bankruptcy & Ethics

Chapter 12: The Function & Creation of Negotiable Instruments
Introduction
Negotiable instruments (comercial papers) are instruments used to facilitate commercial sales transactions
They are a signed writing that contains an unconditional promise or order to pay an exact sum of money either on demand or at an exact future date
"Negotiable" implies that special requirments relating to form and content are met; Governed by UCC
"Non-negotiable" are governed by common law (ex: IOUs)
Order to pay: drafts, checks
Promise to pay: notes, CDs
Demand instrument: states it is payable on demand or otherwise indicates it is payable at will of Holder
Does not state any time of payment
All checks are demand instruments by definition because checks must be payable on demand
Time instrument: payable at a future date
Types of Negotiable Instruments
Orders to pay:
Drafts: involve THREE parties
Parties:
Drawer: party creating the instrument
Drawee: party being ordered to pay
Payee: party to be paid
Types:
Time draft: looks like a check but the numbers at the bottom of a check are missing; a time limit is printed
Sight draft: same thing as above minus time limit
Trade acceptance
Acceptance: the drawee's written promise to pay the draft when it comes due
Checks
Promise to pay:
Promissory note:
Parties: two party instrument
Maker & Payee
Payable on demand or at a definite time (demand OR time instrument)
Certificate of Deposit:
The bank owes you money
1. In writing:
On permanent material that is portable
2. Signed by the Maker (note, CD)/ Drawer (draft, check)
Signed using any symbol that can authenticate a writing (place of signature is irrelevant)
Can be signed by an authorized agent
3. Unconditional promise or Order to Pay
Terms must be on face of instrument
Promise to order/pay must not be an implication, an order must be a command
Terms must not have a condition
4. Fixed amount of money
Amount must be ascertainable from face of instrument
Payable in money and nothing else (not even gold)
5. Payable on Demand or at a Definite Time
On demand: "payable at sight" "payable on presentment"
Checks = always payable on demand
If not specified, it is payable on demand
6. Payable to Order or to Bearer
1. In Writing
Writing must be on an object that lends itself to permanence; UCC is lenient (napkins, shirts, tablecloths)
Writing must be portable
In otherwords, it must be freely transportable
A cow CAN move, but it is not freely transferable
2. Signature from Maker
Must be signed by the maker (if note or CD) or the drawer (if draft, check)
An authorized agent may also sign
Nearly any symbol use by a person with intent to authenticate document counts
Can be made by a device (rubber stamp)
The more obscure, the less marketable
Location of signature is unimportant
3. Unconditional Promise/Order to Pay
The terms must be included on the face of the instrument
Terms can not be conditional
Instrument must contain an express promise or order to pay
An acknowledgement of the debt is insufficient (IOU)
CDs do not require express promises
Order = 3 party instruments; must include the word "pay" as a command
Unconditionality:
NOT NEGOTIABLE
An express condition to payment
The promise/order is subject to or governed by another writing
The rights/obligations of promise/order are stated in another writing
Stating in the instrument that the payment will come from a particular fund (money from next year's cotton crop) DOES NOT make it nonnegotiable also the payee may refuse to take it
IF PAYMENT IS TO BE MADE FROM A FUND THAT DOES NOT YET EXIST AND IS CONDITIONED ON A FUTURE OCCURANCE IS NONNEGOTIABLE
Ex: Bobby will pay from a trust account that will be set up when he inherits his father's estate = nonnegotiable
Requirements: Overview
Requirements of NI
4. Fixed Amount of Money
Must clearly state the fixed amount of money to be paid at time the instrument is payable
Fixed amount:
Means that the amount must be ascertainable from face of instrument; interest may be stated as a fixed or variable rate
If there is an installment plan, the total amount need not be listed so long as you can calculate the amount due on the date due
"with interest" leaves interest rate to be determined by the court; called a judgement rate; can be as high as 24%
Payable in money and no other promise:
Not even gold bars would suffice
Must be currency recognized by domestic and foreign governments
5. Payable on Demand/Definite Time
Must be payable on demand or at a definite time
On Demand:
"Payable at sight"
"Payable upon presentment"
It is payable on demand if it is a check and also if no time for payment is specified
If the person responsible for payment must pay on the instrument's presentment it is payable on demand
Payable at a definite time if:
It states it is payable on a specific date
It states it is payable within a definite period of time after presentment
It states that it is payable on a date or time readily ascertainable at the time the promise or order is issued
Acceleration Clause: Allows the Holder of a time instrument to demand payment of the entire amount due if a certain event occurs such as a default
The instrument is still negotiable because
1. The exact value of the instrument can be ascertained
2. The instrument will be payable on a specific date if the event allowing accleration does not occur
If time for payment is based on the occurance of an uncertain event, even if the event occurs, the instrument is nonnegotiable
6. Payable to Order/ Bearer
This is essential so that the NI can substitute for cash; to ensure proper transfer, the NI must be made out to Order or Bearer
Order Instruments must be payable:
1. To the order of an identified person
2. To an identified person OR order
Identified person is the person to whom the instrument is initially payable
"Order" means that the instrument is payable to whomever the "identified person" may later designate
Person must be identified with specificity (James Yung)
Bearer Instruments do not designate a specific payee:
Bearer= person in possession of instrument' payment will be made to whosoever presents the instrument for payment
A bearer is a person in possession of a NI that is either 1) not payable to an identified person" or 2) indorsed in blank
"Payable to order of bearer" "Payable to Simon Reed or bearer" "Payable to bearer" "Pay cash" "Pay to the order of cash"
ALSO if "Pay to the Order of ________" "payable to order of X" "Payable to Captain America"
CAN be negotiated if nonexistent person but NOT nonexistent organization
Factors that Do Not Affect Negotiability
1. Date (unless date is required to fix the time for payment)
2. Postdating or antedating an instrument
3. Handwritten terms outweigh typed; typed outweigh print; handwritten > typed > print
4. Words outweigh figures
5. Omission of place where instrument is payable or drawn
6. Promise to maintain/protect collateral
7. "with interest" = judgement rate of interest
8. Notation stating "nonnegotiable" on instrument
a) Check- no effect, still negotiable
b) Any other instrument - nonnegotiable
Chapter 13: Transferability & Holder in Due Course
Negotitation
Negotiation is the transfer of an instrument in such form that the transferee becomes a holder
There are two methods of negotiating an instrument so that the receiver becomes a holder; the method depends on if the instrument is order or bearer
1. Negotiating Order Paper
Requires 1) Indorsement and 2) Delivery
Whenever a transfer fails to qualify as a negotiation, it is treated as an assignment
Assignment also occurs when a negotiable instrument is transferred improperly; basically no protection of UCC if instrument is considered nonnegotiable
2. Negotiating Bearer Paper
Requires 1) Delivery: transfer into another person's possession
3. Converting Bearer Paper to Order Paper
Order paper: convert to bearer paper by BLANK indorsement
Bearer paper: convert to Order Paper by special indorsement
Indorsements
Indorsement is required whenever an ORDER instrument is negotiated; indorsement = signature on back of instrument or separate paper = allonge
Four types of indorsements: blank, special, qualified and restrictive (can be a combination of several)
Blank Indorsement
A blank indorsement does not specify a particular indorsee and can consist of a mere signature
A check payable to the order of Mark Deitsch is converted from order paper to bearer paper by signing "Mark Deitsch" on the back of the check
A special indorsement contains the signature of the indorser and names the indorsee
"Pay to the Order of Hal Cohen" followed by signature of indorser; this is sufficient to ID indorsee = order instrument
Can convert from blank indorsement to special indorsement by writing words that ID the indorsee above the signature of the indorser = Bearer paper -> Order paper
Special Indorsement
Restrictive Indorsements
A restrictive indorsement requires the indorsee to comply with certain instructions regarding the funds involved but does not prohibit further negotiation of the instrument
Most indorsements are non-restrictive, but there are many types: only have to know "For Deposit Only"
"For Deposit Only": makes the indorsee (Bank) a collecting agent of the indorser
"FDO" or "FcollectionO" have the effect of locking the instrument into the bank collection process
Bank becomes holder until it is specially indorsed by the bank to a non-bank
Qualified Indorsements
By indorsing an instrument, an indorser promises to pay the holder (or subsequent indorser): this is an unqualified indorsement in that the indorser is guaranteeing payment of the instrument in addition to transferring title to it
An indorser who does not wish to be liable on the instrumet can use a qualified indorsement to disclaim liability
"Without recourse": qualified indorsement
Often used not by individuals but as agents acting in a representative capacity
If the check is later dishonored, the holder cannot recover from indorser who indorsed the check without recourse
Special v. Blank Qualified
Special qualified: 1) name of indorsee 2) signature of indorser 3) without recourse= order instrument -> signature & delivery
Blank qualified: 1) signature of indorser 2) without recourse = bearer instrument -> delivery
Misc. Indorsement Problems
If name on instrument is misspelled or incorrect, the indorsement can be the incorrect name as in the instrument, or the correct name, or both
Multiple parties:
Alternate payees: two payees joined with the word "OR"
Joint payees: joined by the world "AND"
Instruments payable to legal entities (like a corporation) may be indorsed by an authorized representative
Holder v. Holder in Due Course
A holder is anyone in possession of a negotiable instrument
A holder has the status of an assignee in that s/he only has those rights that the transferor had and is subject to the same defenses as the transferor, we want to be HDCs
A HDC takes an instrument free of most of the defenses and claims that could be used against a holder/transferor
An HDC is a holder that also meets 3 requirements and thus receives a higher level of protection from defenses and claims asserted by other parties
HDC Requirements
The pre-req to being an HDC is that the potential HDC must FIRST be a regular holder of an instrument
1. Must take the instrument for Value
In other words, must have given something in order to receive instrument; CANNOT be a gift or free = regular holder
Value does NOT equal consideration; cannot give something in the future in exchange for the instrument
Things that are considerd value:
Performing the promise for which the instrument was issued or transfered
Acquiring a security interest/ lien in the instrument
Taking an instrument as payment or security for a preexisting claim
2. Taking in Good Faith (applies to only holder)
3. Taking WITHOUT knowledge of a defect; knowledge = know/has reason to know/received notification about the defect
Defects:
Overdue (time) instruments
Dishonored instruments
Altered (forged) instrument
Claim/defense against the instrument
Instrument is so irregular/incomplete that it makes authenticity suspect
Missing signature, $ amount, etc.
Shelter Principle
Shelter principle extends the benefits on HDC status to anyone who can ultimately trace her/his title back to an HDC
Idea of this is based on legal theory that transferees receive AT LEAST the benefits that the transferor had
Shelter principle promotes marketability and transferability of NIs
LIMITATIONS:
If a holder disqualifies as an HDC (due to fraud, etc) s/he cannot claim benefits of HDC status even if s/he reacquires the instrument after another HDC
Chapter 14: Liability, Defenses & Discharge
Universal Defenses
Used to avoid payment to all holders (including holders, HDCs, and holders using Shelter principle
1. Forgery of maker/drawer signature
2. Fraud in execution (tricked into signing something)
3. Material alternation
Complete defense against holder (H won't collect)
Partial defense against HDC (HDC collects under original terms)
4. Discharge in Bankruptcy
5. Minority
6. Illegality
7. Mental Incapacity
8. Extreme Duress
Personal Defenses
Used to avoid payment to H but HDC will defeat personal defenses and collect on the instrument
1. Breach of contract/warranty
2. Lack/Failue of Consideration
No consideration, no enforceable promise
Delivery of goods is truly impossible
3. Fraud in the inducement (ordinary fraud)
4. Illegality
5. Mental incapacity
6. Others:
Ordinary duress
Discharge by payment of cancellation
Unauthorized completion of incomplete instrument
Nondelivery of instrument
Federal Limitation of HDC Rights
FTC Rule 433 limits the rights of HDCs that purchase instruments arising out of consumer credit transactions
Applies to consumers who bought goods for household purposes; restricts HDC from collecting from consumer unfairly
Signature Liability
Primary Liability
A person who is primarily liable on a negotiable instrument is absolutely required to pay the instrument, subject to certain defenses
Makers and Acceptors are primarily liable
Maker of a promissory note promises to pay the note when it's due
An Acceptor = Drawee that promises to pay an instrument when it is presented later for payment
Banks
(trade acceptance)
Secondary Liability
Parties who are secondarily liable are required to pay on an instrument ONLY IF the following events occur:
1. The instrument is properly and timely presented to the primarily liable party AND
2. The instrument is dishonored AND
3. Notice of dishonor is timely given to those who are secondarily liable
Drawers & Indorsers are secondarily liable
Drawer is NOT liable UNTIL the Drawee of a draft or check fails to pay or accept the instrument
Indorser is NOT liable UNTIL the Maker of a note refuses to pay
If there is more than ONE indorsement, each indorser is liable for the full amount to any subsequent indorser or holder
Accommodation Party
Defined as the lending of signature for the purpose of boltstering credit; similar to a guarantor for a minor
1. If Accommodation Party signs on behalf of Maker = Accommodation Maker (Primarily Liable)
2. If Accommodation Party signs on behalf of Payee/Holder = Accommodation Indorser (Secondarily Liable)
3. Any indorsement NOT in the ordinary chain of title gives notice of its accommodation character
4. Accommodation Party is never liable to the party accommodated
5. If Accommodation Party has to pay, s/he can sue the party accommodated to be reimbursed
Authorized Agent's Signature
Agent: signing/acting on behalf of someone else
Principal: the one the agent signs for
1. Liability of Principal
General rule states an authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature
The agent may/may not add his/her own name
Examples to bind the principal:
Agent = Sandra Binney; Principal= Bob Aronson
1. Aronson, by Binney, agent
2. Aronson
2. Liability of Agent
When agent signs his/her own name without naming the principal
When agent signs both his/her name AND principal's name (#1 but lacking "agent") but nothing on the instrument indicates Binney = agent
When agent signs his/her name and the agency status but not the principal (#1 - "Aronson")
Exception: when checks are signed by agents, they are not liable as long as the check is payable on the account of the principal & principal is IDed on the check
Warranty Liability
Transfer Warranties
If one transfers a negotiable instrument to another, transfer warranties are created
1. Warranties are made by any person who transfers an instrument for consideration
2. Warranties are made to the transferee and, if the transfer is by indorsement, to all subsequent Hs
3. Transferor warrants the following:
a) Transferor has good title or the authority to obtain payment or acceptance on behalf of one who does have a good title
b) All signatures are genuine/authorized
c) The instrument has not been altered
d) No defense of any party is good against the transferor
e) Transferor has no knowledge that Maker, Drawer, or Acceptor of an unaccepted instrument is bankrupt
**Application questions are fair game***
Presentment Warranty
A person who obtains payment or acceptance of an instrument warrants to any other person who in good faith pays/accepts the instrument that:
1. The party presenting the instrument has good title or is authorized to obtain payment for a person w/ good title
2. Party presenting the instrument has no knowledge of unauthorized signature of a Maker/Drawer
3. The instrument has not been materially altered
Discharge:
Discharge by Payment: all parties are discharged when the party primarily liable pays the H in full; payment by anyone else discharged ONLY person paying and subsequent parties
Discharge by Cancellation: H can discharge any party by cancellation
Discharge by Impairment of Recourse
Chapter 21: Secured Transcations
Examples to Reference
1. Buy new car/new stereo and can't pay cash so seller or lender extends a line a credit
2. Need a small loan of $5,000, the bank wants rights in personal property (boat worth $10,000) in exchange
3. Starting a new business and need working captial (secured by inventory and equipment)
A secured transaction occurs whenever the payment of a debt is guaranteed by personal ( NOT REAL aka land) property owner or held by the debtor
Secured party
is any creditor who has a security interest in the debtor's collateral
A
security interest
is the interest in the collateral that secured payment or performance of an obligation
A
security agreement
is an agreement that creates or provides for a security interest
Collateral
is the personal property used to secure a loan; it is the subject of the security interest
Secured Transaction Intro
Goals of Creditors
#1. Can the debt be satisied through possession and sale of the personal property you (the creditor) acquire from your debtor? (This is Attachment)
#2. Do you (the creditor) have priority over other creditors who may also have rights to your debtor's specific collateral? (Perfection)
Attachment
There are 3 requirements as seen by you, the creditor:
#1.
A) You, the creditor, must be in possession of your debtor's collateral in accordance with an ageement
OR
B) There is a written/authenticated security agreement that is 1) signed by your debtor and 2) contains a specific description of the collateral
#2. You, the creditor, must give value by either extending credit or giving a loan to the debtor
#3. The debtor must own the collateral or are in the process of acquiring ownership
*If the collateral is successfully attached, you, the creditor, are refered to as a Secured Creditor/Party
Perfection
Perfection is the legal process by which you, the creditor, can protect yourself against the claims of other creditors or third parties who want to claim your debtor's collateral for themselves; there are different types of collateral
Perfection With Filling
Perfection Without Filling
Filling out the financing statement with the correct public offices gives constructive notice (that is, makes the knowledge public to anyone willing to look it up) of the secured interest to other creditors of your debtor
The financing statement requires:
Signature of your debtor
Name/address of YOU and your debtor
Statement specifically indicating the type of collateral or describing the collateral
The financing statement is filed under the DEBTOR'S name
It is filed either with
1) a state official such as the secretary of state's office or
Determination of which states depends upon debtor's location
If an individual debtor: state of residence
If organization: state of incorporation or main business center
2) local office such as local county clerk's office
The filing of a financing statement is effective for FIVE YEARS; if extension needed: file continuation statement 6 months prior to expiration of FS
If filed incorrectly: you, the creditor, are unperfected
Occurs if debtor's name is inaccurate or the collateral is insufficiently described
1. Perfection by Possession of debtor's collateral
You, the creditor, can perfect a security interest by taking physical possession of tangible/semi-intangible collateral
This is usually impracticle for most collateral
2. Perfection by Attachment (PMSI)
Purchase-Money Security Interest (PSMI) in consumer goods is created when a person buys goods primarily for personal, family, or household purposes, and you (the seller or lender) agree to extend credit for all/part of the purchase price of the goods
Automatic Perfection:
A PSMI in consumer goods is automatically perfected at the time of the credit sale, i.e. when the PSMI is created
Take example #1: I lend a debtor money to buy a new stereo at time of purchase and it is all documented in a single document (attachment & perfection simultaneously)
Exceptions to Automatic Perfection:
1. Consumer goods subject to title statues (cars, boats, tractors); to be perfected, you the creditor must file a certificate-of-title with appropriate state office
2. PSMIs in NON consumer goods (livestock, inventory) are not automatically perfected
The Scope of a Security Interest
Using example #3, Joe takes a loan from you to start a business; he puts up his inventory as collateral and as he sells things, your collateral thins. You'll want to add clauses to your agreement so that you can broaden the scope and increase your chance of recovering collateral in the event of a default
1. Proceed clause: you the creditor have an interest in the proceeds received from the sale, exchange, or other disposition of the collateral
Mary engages in a credit agreement with Joe; in the event of a default, you, the creditor, can collect on payments
2. After-Acquired Property: you the creditor can claim inventory that is order after execution of security agreement
Joe's inventory thins as business continues; you want to make sure that the new inventory he purchases is also included as collateral under your agreement
3. Future advances: this entitles you the creditor to collect on future advances made against the line of credit Joe has with the bank so that they fall under the same collateral
The Floating Lien Concept
The FLC provides for a security interest in SOME or ALL THREE: proceeds, after-acquired property, and future advances
It usually applies to inventory but also stock of goods as goods are processed, sold, and turned into cash
Resolving Priority Disputes
1. A perfected creditor has priority over unsecured creditors & unperfected security interests
2. Two perfected creditors: the first to perfect (via filing or possession) has priority
3. Two unperfected creditors: the first to attach (secure) has priority = "first in time rule"
Perfected: you've filed necessary paperwork to protect your claim to your debtor's collateral
Unperfected: you haven't done this!
Secured: you've gone through attachment
Unsecured: you haven't!
General Rules of Priority
Exceptions to General Rule
1. BIOCB (Buyer in Ordinary Course of Business)
BIOCB: a person who, in good faith & without knowledge of a wrongdoing, buys goods from a person who is in the business of selling goods of the kind bought
A BIOCB will have priority to the consumer goods they purchase, over a creditor, even if the security interest is perfected and the BIOCB knows of its existence
Ex: You are a customer at Home Depot and purchase a flower pot; they have a loan from a creditor and their inventory is collateral; the creditor can't come collect the flower pot from you because you are a BIOCB
2. Buyers of Consumer Goods from Consumers
A PSMI in consumer goods is perfected by attachment
A buyer of consumer goods from Joe's shop has priority over the good if:
1) The buyer does not have knowledge of the security interest
2) Consumer gives value (pays for the good)
3) Purchases the good for household use
BUT, WON'T HAVE PRIORITY OVER THE GOOD IF:
*The creditor properly filed a financng statement
Suzie has a creditor agreement on a fridge with Lowes; she sells fridge to Chris; Lowes can collect frige from Chris when Suzie defaults ONLY IF Lowes filed a financing statement, otherwise they can't
Rights & Duties of Debtors and Creditors
Unless parties otherwise agree in the security agreement, their rights and duties prior to default or termination are determined by Art. 9 of UCC
If agreement does not provide to contrary, the UCC provides the following:
1. When filing financing stmt, creditor can ask for a copy
2. Prospective creditor can ask for information on possible financing stmts of potential debtor
3. Secured creditor can release collateral (b/c value has depreciated) and assign to another
4. Any amendment to a financing stmt must be signed by BOTH parties
5.A debtor can ask about amt of his/her debt as of a specified date
6.When debt is paid, creditor must send/file debtor a termination stmt
Default
What consitutes a default by the debtor is usually stated in the security agreement, subject to UCC good faith requirement & unconscionability doctrine
Default occurs because of a breach of the terms of the security agreement such as:
1. Failure of debtor to make payments
2. Bankruptcy of debtor
3. Breach of warranty of good title with regard to equipment or warranty that the equipment is free of liens/other security interests
Basic Remedies
1. A creditor can take possession of collateral and retain collateral in satisfaction of the obligation or sell the collateral applying the proceeds toward the debt (repo)
2. Creditor can relinquish security interest and sue debtor based on underlying obligation of the debtor, obtain judgement, & enforce judgement
Creditor's Right to Take Possession
1. Secured party must do so without breach of peace
2. Creditor can't enter home, business, garage without permission

Retention of Collateral:
Creditor who retains collateral in satisfaction of obligation must give written notice to debtor & other secured parties who have interest in collateral
If, within 20 days after notice is sent, creditor received written objection from other creditor, creditor must dispose of collateral
Consumer Goods:
Creditor who has PMSI may not retain goods if more than 60% of price or debt has been paid by the debtor UNLESS after default, debtor signs written agreement renouncing right to demand sale of goods
Disposition Procedures:
Creditor may dispose of collateral by sale, lease or other commercially reasonable means; notice must be given to debtor & other creditors; other creditors may exercise rights of redemption
Proceeds from Disposition: after disposition, we have cash- how do we pay it out?
1. First pay off, expenses of sale, possessing collateral, prepping the sale & attorney fees
2. Second, satisfaction of debt (keep what you are titled to)
3. If money is left over, money will go to the other creditors who had interest in the collateral
4. If any is left, it goes to the debtor
Deficiency Judgement:
If after disposition, the entire amount of obligation is not collected by creditor, the debtor is liable for the balance; creditor can obtain a deficiency judgement
Disposing of Collateral
Redemption rights: the debtor or other creditors interested in collateral can redeem the collateral by tendering performance of all obligations that were secured by the collateral and by paying certain expenses to main creditor prior to disposal of collateral OR enters into a contract for collateral's disposition OR before debtor's obligation has been discharged by creditor
Chapter 22: Bankruptcy
Introduction
Two goals of Bankruptcy:
1. Protect a debtor by giving him/her a fresh start free from creditors' claims
2. Ensure equitable treatment to creditors who are competing for debtor's assets
Proceedings
Federal Bankruptcy courts have exclusive subject matter jurisdiction over bankruptcy matters; decisions can be appealed to US District Courts
Role of Courts: deals with procedures required to administer the estate of the debtor; can conduct a jury trial if District Court and parties involved agree
Special Treatment of Consumer Debtors: certain information is given to the debtor whose debts result primarily from purchase of household goods
Clerk provides info on the purpose, benefits and costs of each type of bankruptcy and info on credit counseling services
Liquidation
Chapter 7 bankruptcy (most common type):
Debtors' assets are used to settle debts; remaining debts are discharged; anyone can file
Voluntary Bankruptcy
The debtor files the petition for bankruptcy; s/he certifies that s/he has received info on credit counseling
Debtor must confirm the contents of the petition and state s/he understands the relief availble and opts to proceed with liquidation
To conceal assets/supply false info on these schedules is a crime; all schedules must be filed within 45 days of petition
Substantial abuse: debtor is subject to "means testing" to determine if the debtor is attempting to abuse the situation
If debtor's family income exceeds median income of state by $6,000, abuse is presumed and creditor can file motion to dismiss
Debtor can still move forward IF they can prove why they can't pay their debts (child with cancer)
Order for relief: court's grant of assistance to the petitioner is given if the petition is found to be proper
Involuntary Bankruptcy
Occurs when creditors force debtor into bankruptcy
Requirements:
If debtor has 12+ creditors, 3+ creditors who have unsecured claims totaling $15,325 or more must join in the petition
If debtor has less than 12, 1+ creditors having a claim of $15,325 may file
If debtor challenges petition, court will hold a hearing and will only order relief if debtor is generally not paying debts
If court orders relief, debtor must supply same info on same schedules as in chapter 7 proceeding
An involuntary petition should NOT be used as an everday debt-collection device; there are penalties for filing frivolous petitions
Automatic Stay
Is a suspension of virtually all actions by creditors against the debtor; automatic stay normally goes into effect the moment the petition is filed
It is the halting of collection process where creditors collect from debtor on payments
Creditors who knowingly violate this can be sued by any injured party including debtor, may be awarded punitive damages
Exceptions:
Domestic-support obligations
Proceedings against debtor related to divorce, child custody, vistitation
Investigations by a securities regulatory agency
Creation/perfection of liens for property taxes/ special assessments on real estate
Eviction actions on judgements obtaied prior to filing petition
Withholding from debtor's wages for repayment of a retirement account loan
Other types of Proceedings
Bankruptcy Estate: basically everything the debtor owns (minus Exemptions) becomes part of the estate




Creditors' Meeting & Claims: within a reasonable time after the order of relief is granted (20-40 days) the creditor may call a meetings of creditors listen on schedules
Exemptions
Debtor can exempt certain property from bankruptcy according to Federal code
Exemptions:
Up to $22,975 in equity in debtor's residence and burial plot
Interest in a motor vehicle up to $3,675
Interest in jewelry up to $$1,550
Interest in any tools of the debtor's trade up to $2,300
OTHERS:
Interest in household goods, furnishing, apparel, animals, crops, musical instruments, appliances, books (total limited to $12,250)
Interest in other property
Life insurance contract owned by debtor
Certain interests in accrued dividends and interest owned by the debtor
Professionally prescribed health aids
Right to receive Social Security and welfare benefits, alimony and support, retirement funds, pensions and education savings
Right to receive certain personal-injury and other awards
States have power to pass laws precluding debtors from using the federal exemptions; a majority of states have done this so the debtors use state exemptions
If state didn't pass law, debtor can choose between state and federal exemptions
Homestead Exemption
Each state permits the debtor to retain the family home either entirely or up to a specific amount, free from claims of creditors
New Bankruptcy Reform Act rule: if the debtor acquired the homestead within 3.5 years PRIOR to bankruptcy, the max equity exempted is $155,675 even if the state law would exempt a higher amount
The rule was to prevent debtors in 6 states (TX, FL, etc) from shielding unlimited amounts of equity in their homes from creditors
Debtor must have lived in the state for 2 years PRIOR to filing to be able to use homestead exemption
Trustee: is to collect the debtor's available assets and reduce them to cash for distribution, preserving interests of both debtor and creditors

Reaffirmation of a debt: debtor may wish to pay a debt, like to family member, doctor, bank, and thus may enter into a reaffirmation agreement with that creditor, even though debt would usually be discharged
Discharge
Once debtor's assets have been distributed to creditors, all remaining debts are discharged, judgements on debts are voided and creditors are enjoined from bringing any collectiona actions against debtor
Excemptions:
Claims for amounts borrowed by debtor to pay federal taxes or any nondischargeable taxes
Claims by creditor who were not notified of the bankruptcy; these claims did not appear on the schedules the debtor was required to file
Domestic-support obligations and property settlements as provided for in a separation or divorce decree
Student loans, unless payment of loans imposes an undue hardship on debtor and dependents
Consumer debts of more than $650 for luxury goods owed to a single creditor incurred within 90 days of offer of relief
Judgements against debtor as result of debtor's DWI
Objections to Discharge: in certain circumstances, the court may deny the discharge of debtor and s/he will remain liable to creditors even after liquidation
Occurs if:
Debtor concealed or destroyed property or financial records with intent to defraud creditor, or delay proceedings
Debtor had already been discharged of bankruptcy 8 years prior to filing this petition
Debtor failed to complete the required consumer education course
Debtor has possibility of being found guilty of a felony
Revocation of discharge: occurs if debtor acted fraudulatently/dishonestly during proceedings; revocation power of court is for 1 year and any creditor or trustee can petition the court for revocation
Chapter 11 Bankruptcy
Most common type of bankruptcy for corporate debtors
The creditor and debtor formulate a plan under which debtor pays a portion of debts and is discharged of the remainder (same liquidation rules apply here)
Must be in the best interests of the creditors: the courts decide after a hearing if chapter 11 is the best route for creditors
Workouts: these are speedy settlements outside of courtroom
Debtor in possession: debtor is allowed to continue doing business during reorganization (ch.11); court may still appoint a trustee (receiver)
Reorganization plan: the purpose is to conserve and administer the debtor's assets in hope the debtor will be able to return to successful operation and solvency
Filing the plan:
Debtor may file within 120 days after date of order for relief
If debtor doesn't meet 120 day deadline, any party may propose a plan up to 20 months from the date of order for relief
Plan must be fair and equitable and:
Designate classes of claims and interests
Specify treatment to be afforded the classes
Provide adequate means for execution
Provide for payment of taxes over 5 year period
Acceptance & Confirmation of plan:
Plan is submitted to each class of creditors for acceptance
Acceptance = majority vote =2/3 amt of total claim
Court can refuse to confirm even if everyone else accepts
Former spouse/child of debtor can block plan
Even if only 1 class of creditor accepts, court can still confirm via Cram-Down Provisions
Court confirms plan over objections of other creditors
Discharge: individual debtor must complete plan in order to be discharged
Ethics
Intro
Ethics: what's right and wrong
We should study ethics so we can learn how to balance profit and ethics in a successful business
Corporations should strive to be good citizens and evaluate each decision on the basis of:
Legal implications of each decision
Public relations impact
Safety risks for consumers and employees
Financial implications
Short run maximazation: doing whatever it takes to make a profit NOW
Long run: anticipate costs of turning a profit NOW and how it harms the public (usually the more ethical path)

The law is not always ethical
*Moral minimum: compliance with the law, it is our moral minimum to learn the law and comply with it
*You work for a pesticide company and the EPA makes an ingredient in your product illegal, so it's not good to sell in the US. You could sell in a 3rd world country, is this ethical? Research & thought is NEEDED
*Attitude of Top Management: leaders' attitude towards ethics sets an example for employees
*Sarbanes-Oxley Act 2002 (SOX): requires companies to set up confidential system for employees to report suspected illegal or unethical auditing and accounting practices; anonymity for whistle blowers via computer application


Test Questions
Full transcript