Thursday, November 29, 2012

Bankruptcy Law, The Law of Debtors and Creditors Problem Set Answers, Warren Westbrook Sixth Edition - Problem Set 39

Problem Set 39, p.766
  • This case is like US Home. The “plaintiffs” are unknown to the debtor. So the publication notice is enough. Their rights are extinguished by the confirmation of the plan.

  • Can he be released under Ch. 11? Can the corporation bankruptcy discharge the principal? How about the plan itself extinguishing the obligations of the principal, instead §1141 exemption of the claims? What do we worry about?
  • §524(e) discharge limits to the debtor. But is he released partially who voted for the plan?
  • Is the release a fraudulent conveyance?
  • The deeper question is that whether the bankruptcy code can release others than the debtor? Is it constitutional?
  • The courts hold that we have no authority to extinguish the principal, but we can impose an injunction order until some years later or upon some conditions. See the piano case
  • Three different approaches from Arrowmill.

  • Is the debtor the agent of the charity for the $35K? Who owned the money? Pottow: It is the charity’s money; so charity was a creditor.
  • Is the payment to the foundation a preference? It seems yes. Does it have any exception available? Is it ordinary course of business? Maybe not. So there is a risk that the payment could be revoked as a preference. But the charity can challenge the deal as follows:
  • The sale of all the claims. It could be illegal to sell some cause of actions? Some state laws illegalize the sale of cause of action for torts or crimes
  • The sale could be a fraudulent conveyance under UFTA Sec.5 or 4. It is okay to sell the claims for preference.
  • Here the remedy is to challenge the trustee’s sale to the insider based on the conflict of interest; it is an abuse of the trustee’s discretion to sell it to insiders, because otherwise the estate can recover more and the creditors can be paid more. We can sue the trustee for acting not in the best interests of the creditors by selling the preference claims.
  • Hypo: If the trustee sells all claims to an insider, can a creditor bring a suit for preference? Under federal law, no. because the trustee has the exclusive right to dispose the property of the estate, claims being part of the estate. So the creditor has no standing to sue. But can the creditor sue under state fraudulent conveyance law? The state proceeding may be stayed by the federal bankruptcy proceeding and it may be vacated by the federal discharge.
  • $10K is not equivalent value for all the claims. The charity as a creditor can challenge this transfer. The daughter may have defense? The trustee can say that the sale of claims are a sound business decision, because the daughter paid the fair value of the property, there is no preference, so the sale is not an abuse.
  • Conclusion: it is a fraud for him to buy the claims to shield the claims against his daughter; it may be criminal; threaten to complain to prosecutors; so the charity can settle with him.

Problem Sets: Table of Contents

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