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The Bankruptcy Law Firm - Bankruptcy in Los Angeles
Overview of Bankruptcy Law
By Kathleen P. March, Esq.
Los Angeles Bankruptcy Attorney - Former Bankruptcy Judge
1. Who and Where They are:
a. Technically a Unit of District Court: United
States Bankruptcy Courts are actually not separate courts at all,
but are technically units of the United States District Court for
district in which the bankruptcy judges sit, hearing bankruptcy proceedings
by referral from the District Court. [28 USC § 151 ("In
each judicial district, the bankruptcy judges in regular active service
shall constitute a unit of the district court to be known as the bankruptcy
court for that district."); 28 USC § 157(a)]. Bankruptcy
judges sitting in Central District of California are referred to as
the United States Bankruptcy Court for the Central District of California.
b. Bankruptcy Court in Each District Where District Court
Is: Nationwide, there is a bankruptcy court consisting of
1 or more bankruptcy judges in each judicial district of the United
States District Court.
C. Size: The Bankruptcy Court for the Central
District of California presently has 21 judges. Bankruptcy judges
are appointed for 14 year terms by the Circuit Court of the Circuit
in which they sit, on a merit selection basis.
D. Multiple Locations: The Bankruptcy Court for
the Central District of California sits in five permanent locations.
The permanent locations, called "divisions" are Los Angeles,
Santa Ana, Riverside, Santa Barbara and the San Fernando Valley.
1. Los Angeles: In Los Angeles, 10 bankruptcy
judges are located at the Edward R. Roybal Federal Building, 255
E. Temple St., Los Angeles, CA 90012.
2. Santa Ana: Three Judges hold court in Santa
Ana at the Ronald Reagan Federal Building, 411 W. Fourth St.,
Los Angeles, Santa Ana, CA 9270.
3. Riverside: Four Judges hold court in Riverside
at 3420 Twelfth Street, Riverside, CA 92501-2908, and a fourth
judge is being added.
4. Santa Barbara: Judge Riblet holds court
in Santa Barbara at 1415 State Street, Santa Barbara, CA 93101.
5. San Fernando Valley: Three Judges hold court
in the San Fernando Valley at 21041 Burbank Blvd., Woodland Hills,
E. Bankruptcy Court Has Its Own Clerk's Office:
The Bankruptcy Court for the Central District of California, and
for most other districts, has a separate clerk's office from that
of the District Court, referred to as the Office of the Clerk of
the Bankruptcy Court.
1. Bankruptcy Filings Made at Office of Clerk of Bankruptcy
Court: Petitions and all other pleadings in bankruptcy
cases are filed with the Office of the Clerk of the Bankruptcy
Court of the district in question. [See discussion of venue immediately
infra for which district is the proper district]. There are 5
Clerk's Offices--Los Angeles, Santa Ana, Riverside, Santa Barbara
and San Fernando Valley. The filing window for the Los Angeles
Bankruptcy Clerk's Office is located on the ground floor of the
Federal Building at 300 N. Los Angeles Street, Los Angeles, CA
90012 next door to the Roybal Federal Building where Bankruptcy
Court hearings are held. Filing hours are 9:00 a.m. to 4:00 p.m.
Generally speaking, debtors with Los Angeles addresses file at
Los Angeles. Debtors with San Bernardino or Riverside County addresses
file at Riverside. Debtors with addresses in Orange County file
at Santa Ana. Debtors with San Fernando Valley addresses file
at the San Fernando Division. Debtors with addresses in Santa
Barbara county, San Luis Obispo County, and most of Ventura County
file in Santa Barbara. [Local Rule 1071-1].
2. Some Pleadings, Not All, Can be filed Electronically;
E-filing is Optional at Present: The Bankruptcy Court
for the Central District of California is currently working on
implementing electronic filing (“e-filing”), a software
program that allows attorneys to file pleadings electronically,
using a computer and modem, as an alternative to filing pleadings
in “paper” form. Chapter 7 Bankruptcy petitions, with
all required schedules, etc. required for a complete Chapter 7
filing; relief from stay motions; and adversary proceeding complaints
can all be e-filed at present, but only if the attorney has signed
up with the Court to use the Court’s e-filing program. Signing
up to be authorized to e-file pleadings requires, inter alia,
the lawyer to give the Court a credit card number to charge all
filing fees to. Some bankruptcy courts in other parts of the US
have already made e-filing mandatory, and in some future year,
CD CA Bankruptcy Court may do so, but not in the near future.
Signing up for and learning to use e-filing is time consuming,
and attorneys who only occasionally do bankruptcy work would be
better off filing their pleadings in paper form at present. The
Court’s web page to lists the types of pleadings which can
F. Venue for Filing:
1. Venue for Filing Bankruptcy Case Itself:
Proper venue for filing bankruptcy cases is any of the following:
(1) district which is debtor's domicile or residence, (2) district
which is debtor's principal place of business in the United States,
(3) district in which debtor's principal assets in the United
States are located for 180 days proceeding filing or greatest
portion of 180 days, or (4) the district in which a bankruptcy
concerning the debtor's affiliate, general partner or partnership
is already pending. [28 USC §§ 1408, 1409, 1410, 1412]
[Local Rule 1071-1].
2. Venue for Filing Adversary Proceedings and Motions
Within Bankruptcy Case: The general rule is that adversary
proceedings and motions arising in or related to a pending bankruptcy
case are required to be brought in the district in which that
bankruptcy case is pending. [28 USC §1409(a)]. However, there
are exceptions to this for various specialized types of items.
[Exceptions stated in 28 USC §1410].
3. Transfer of Venue: Both the bankruptcy case
itself and proceedings (adversary proceedings and motions) may
be transferred to a different district from the one in which they
were filed, in the interest of justice or for the convenience
of the parties. [28 USC §1412].
c. Much Bankruptcy Court Information Available Electronically:
The C.D.California Bankruptcy Court has joined the electronic age
in a big way.
1. Bankruptcy Court Web Page on the Internet:
Like the District Court, the Central District of California Bankruptcy
Court has its own internet web page at http://www.cacb.uscourts.gov
The web page has much useful information about the Central District
of California Bankruptcy Court, including: addresses of the various
divisions with a search function to check which zip codes are
within which division, various forms (some MANDATORY, some optional)
for use in the C.D. Cal. Bankruptcy Court, General Orders relating
to bankruptcy practice, the full Local Rules for the Central District
Bankruptcy Court, the “local Local” procedures/forms
of various bankruptcy judges, filing fee information for various
2. WebPACER Electronic Docket: The Bankruptcy
Court for the Central District of California maintains all docket
information electronically. All bankruptcy petitions and schedules,
all Chapter 11 and Chapter 13 plans, and all orders, once signed
and entered by the Court, are imaged and may be viewed on your
computer screen and/or printed out using your own personal computer.
The docket information for each bankruptcy case, and for each
adversary proceeding brought within each bankruptcy case, may
be accessed electronically, by using the webPACER system. Attorneys
and the public access the webPACER system by using a computer
equipped with a modem, and dialing into the Bankruptcy Court’s
database. The Court charges 7 cents per page to access this database.
Any attorney, or any other individual, can sign up to use webPACER
by calling 1-800-676-6856 and following the sign-up instructions.
Some pleadings, such as bankruptcy petition documents, and court
orders are imaged by the court, and can be printed to the attorney’s
computer printer from the web pacer docket by “clicking”
on the blue link for that pleadings.
a. Essential to Sign up for and Use Web Pacer:
If you are handling cases, motions or adversary proceedings
in bankruptcy court, it is essential to sign up for web pacer,
and to check on your matters via web pacer. Web pacer will often
show filing of pleadings before they arrive in your mail. Where
the opposing side “forgets” to serve you (a common
problem in bankruptcy practice) looking on web pacer and seeing
that a pleading has been filed which you have not been served
with is the only way to find out about that pleading in time
to respond to it.
b. Access Judge’s Court Calendars and Tentative
Rulings in Advance of Hearings, Electronically: In
addition to being able to access all bankruptcy petition dockets
and adversary proceeding dockets through webPACER, the court
calendars for the bankruptcy judges in most of Los Angeles’
five divisions (showing what items are set for hearing on each
judge’s court calender, by date, time, case number and
item caption) can be accessed through webPACER as well. Sign
up for PACER. The court hearings calendar for each judge, showing
all items set for hearing by that judge, can also be accessed
through webPACER. Some of the bankruptcy judges post written
tentative rulings for each item on their calendar, which are
usually posted by the afternoon of the day before the hearing.
It’s a good idea to check webPACER to see if there is
a written tentative ruling, and what the tentative ruling is,
to prepare for oral argument. To check any judge’s court
hearing calendar, sign up to be a webPACER user, then log onto
the Court’s website at: www.cacb.uscourts.gov At the Court’s
Home Page, at the bottom of the left hand list, click on “Electronic
Services”; then click on “web pacer”; then
select which one of the 5 divisions you want to access; then
sign in to web pacer with your password and user ID. Then on
the lefthand side of the screen, under “search type”,
pull down the pull down menu, and select “judges’
calendars”. Then pick the Judge whose calendar you want
to access from the list. Then pick the day you want to access.
Then scroll down until you find your item. If there is a tentative
ruling, it will be listed below the case name and item description.
Its good practice to check the judge’s calendar using
webPACER the day before the hearing, to be sure the item is
on calendar, and to see if a tentative ruling has been posted
(check again right before you go home, since many judges continue
posting tentative rulings throughout the day before the hearing)
since reading the tentative ruling will help you prepare to
argue at the hearing, and if the tentative says the Court has
not received something (like the proof of service) but you have
the missing item, you can bring a file stamped copy of the missing
item to the hearing and hand it up to the judge at the hearing,
thereby solving the problem.
2. Jurisdiction of Bankruptcy Court [28 USC §157]
g. Reference: Bankruptcy court hears cases by
referral [called reference] from district court. [28 USC §157(a)].
In most districts, including the Central District of California,
this referral is accomplished by a general order issued by the District
Court of the District, referring all bankruptcy cases filed in the
District to the Bankruptcy Court of the District. [US District Court
CD CA General Order 266, dated 10/9/84. A copy of this District
Court General Order can be accessed on the Bankruptcy Court web
page, www.cacb.uscourts.gov, under General Orders].
h. Withdrawal of Reference: Reference may be
withdrawn by motion. Where the district court grants a motion to
withdraw reference, the district court then sits as the bankruptcy
court, and hears all the rest of the proceedings in either the whole
case (if reference was withdrawn as to the whole case) or the particular
proceeding (if reference was withdrawn only as to a single proceeding).
[28 USC §157(d)].
i. Removal: Lawsuits pending in state court or
federal district court may be removed to the bankruptcy court. [28
j. Remand: Removed actions may be remanded to
the court from which they were removed under appropriate circumstances,
upon motion. [28 USC §1452(b)].
k. Abstention: Bankruptcy court may abstain from
hearing adversary proceedings (lawsuits) brought in or removed to
bankruptcy court, upon motion or sua sponte, where certain criteria
are met. [28 USC §1334(c)].
l. Appeals from Bankruptcy Decisions of Bankruptcy Judges:
Within the Ninth Circuit, there are two alternate appeal routes.
i. To BAP: If no party to the appeal opts out,
the appeal is from the bankruptcy
court to the Ninth Circuit Bankruptcy
Appellate Panel (BAP), then to the Ninth Circuit Court of Appeals,
then to the U. S. Supreme Court. [28 USC 158, Part VIII of the
Bankruptcy Rules, Local Rules pages 139-154].
ii. To District Court: If any party opts out,
the appeal is from the bankruptcy court to the U. S. district
court of the district in which the bankruptcy court is located,
then to the Ninth Circuit Court of Appeals, then to the U. S.
Supreme Court. [28 USC 158, Part VIII of the Bankruptcy Rules,
Local Rules pages 139-154].
3. Sources of Authority for Bankruptcy:
g. Jurisdiction: As noted immediately supra,
jurisdiction is contained in Title 28 of the United States Code.
h. Bankruptcy Code: Substantive bankruptcy law
is contained in the United States Bankruptcy Code, which is Title
11 of the United States Code, and was passed by Congress in 1978,
with various amendments since. [11 USC §101 et seq].
i. Amended by Bankruptcy Reform Act of 1994:
The most recent amendments to the Bankruptcy Code are those amendments
made by the Bankruptcy Reform Act of 1994. The Reform Act is the
most substantial amendments Congress has made to the Bankruptcy
Code since the Code was passed in 1978. The Bankruptcy Reform
Act of 1994 took effect on October 22, 1994. However, with a very
few exceptions, the changes made by the Reform Act only apply
to bankruptcy cases filed after October 22, 1994. Bankruptcy cases
filed before October 22, 1994 are governed by the Code as it existed
before the 1994 Reform Act, except for the few retroactive provisions
in the Reform Act.
i. Bankruptcy Rules: Procedural rules governing
bankruptcy nationwide are set forth in the Bankruptcy Rules, also
passed by Congress in 1978 and approved by the United States Supreme
Court, with various amendments since. The portion of the Bankruptcy
Rules governing adversary proceedings (as opposed to those governing
the case itself) incorporate by reference most of the Federal Rules
of Civil Procedure, with some changes. [See Part VII and Part VII
of the Bankruptcy Rules].
j. Federal Rules of Evidence: The Federal Rules
of Evidence apply in Bankruptcy Court, just as they apply in District
Courts, Courts of Appeals and the United States Supreme Court.
k. Local Rules of Bankruptcy Courts: Most bankruptcy
courts have adopted local district wide Local Rules governing
procedural aspects of practice in that district (e.g. Local Rules
of the United States Bankruptcy Court for the Central District
of California, attached to materials) pursuant to Bankruptcy Rule
l. Bankruptcy Case law: There is a large body
of bankruptcy case law interpreting the Code and Rules. This is
reported in the West Bankruptcy Reporter, and other services,
from bankruptcy courts, district courts/BAP, circuit courts and
U. S. Supreme Court.
m. State and Federal Non-Bankruptcy Law: On
many issues, the Code requires applying state and federal non-bankruptcy
law. Non-bankruptcy law on contracts, secured transactions, community
property, real estate, intellectual property and almost every
other area of law may be relevant to various issues.
H. Bankruptcy Crimes: Bankruptcy Crimes are in
18 U.S.C. § 151-157. Other Federal Crimes, such as perjury
may also be committed in bankruptcy cases.
4. Survey of Different Chapters:
g. Files In One Of Five Chapters: Cases may be
filed in any of 5 Chapters, so long as the debtor meets the requirements
for being in that Chapter. The 5 Chapters are:
i. Chapter 7: Liquidation. [11 USC §701-766].
Chapter 7 is the liquidation Chapter. Individuals, corporations,
and partnerships are eligible to file Chapter 7 cases. In all
Chapter 7 cases a Chapter 7 trustee is automatically appointed
by the Office of the U. S. Trustee. [28 USC §586]. The Chapter
7 trustee administers the estate, marshalling and distributing
the nonexempt assets of the estate to creditors, as provided for
by the Code and pursuant to orders of the Court.
ii. Chapter 9: Municipalities. [11 USC §901-946].
Only municipalities and other local government entities can be
debtors in rarely used Chapter 9, which is in effect a Chapter
11 for municipalities.
iii. Chapter 11: Reorganization. [11 USC §1101-1146,
and re. railroads 1161-1174]. Chapter 11 is the main reorganization
Chapter. Corporations, partnerships and individuals can be debtors
in Chapter 11 cases, which makes Chapter 11 broader than Chapters
12 and 13, which are limited to certain types of individual debtors.
Unlike in Chapter 7, where a trustee is always appointed, the
debtor remains "in possession" in a Chapter 11 case
unless the Court, on motion, orders appointment of a Chapter 11
trustee. In a Chapter 11 case the debtor or, within certain limits
some other interested party such as a creditor or the Chapter
11 trustee proposes a plan to reorganize the debtor, and pay the
debtor's debts over a period of time. Chapter 11 plans usually
call for the debtor to reorganize and continue to operate, but
they may also call for sale of the debtor's assets (liquidation
plan). A disclosure statement explaining the plan and its risks
must be approved by the court before votes for or against the
plan may be solicited. Impaired classes of creditors vote on the
plan. The Court then confirms or denies confirmation of the plan
depending on substantive standards set forth in the Code.
(1) Optional Expedited Procedures for Small Business
Chapter 11s: The Bankruptcy Reform Act of 1994 (effective
October 22, 1994) added an optional expedited procedure for
Chapter 11 cases involving a "small business", which
can be used in Chapter 11 bankruptcies filed after October 22,
1994 where the debtor is a "small business". "Small
business" is a defined term. The debtor meeting the definition
of a "small business" gets to elect whether it wishes
to be treated as a small business chapter 11. Making this election
has both advantages and disadvantages for the debtor. The advantage
is making the election streamlines procedures. The disadvantage
is that making this election shortens time limits, including
shortening the debtor's exclusivity period to be the only party
with the right to file a plan of reorganization. [11 USC §1121(e)
and §1125(f); see 11 USC §101(51c) for definition
of small business].
iv. Chapter 12: Individual Family Farmer. [11
USC 1201-1231]. Similar to Chapter 13, but limited to family farmers
with regular income, as the term "family farmer" is
defined by the Code.
v. Chapter 13: Individuals With Regular Income.
[11 USC §1301-1330]. Chapter 13 is a kind of reorganization
chapter. Only individuals with regular income and within certain
debt limits are eligible to be debtors in Chapter 13. In Chapter
13 the debtor proposes a plan which devotes a portion of the debtor's
income to pay creditors for a period of three years, or with court
approval up to but not more than 5 years.
(1) Permissible Debt Limits for Chapter 13 Increase
Automatically Every Three Years: By statute, certain
dollar amounts in the Bankruptcy Code increase automatically
every three years, including the total secured and unsecured
debt a person can have and still be eligible for Chapter 13.
At present, individuals with regular income are eligible for
Chapter 13 if their total noncontingent, liquidated unsecured
debtors total less than $290,525 and their noncontingent, liquidated,
secured debts total less than $871,550. [11 USC §109(e)
as amended by the Bankruptcy Reform Act of 1994].
h. Authority Applying to Cases in All 5 Chapters:
Chapters 1, 3 and 5 of the Code apply to cases filed in any of the
above five Chapters. There are no Chapters 2, 4, 6, 8 or 10. The
contents of Chapters 1, 3 and 5 are as follows:
1. Chapter 1: General Provisions
2. Chapter 3: Case Administration (including
the bankruptcy automatic stay)
3. Chapter 5: Claims Procedures, Debtor's Duties
and Benefits, Definition of Property of Estate, Trustee's/DIP's
5. Overview of a Bankruptcy Case:
g. Bankruptcy Case Itself: The bankruptcy case
itself is referred to as "the case", or the "proceedings
file". A case is commenced by filing a petition. [11 USC §§
301, 302, 303 or 304].
i. Adjusts Rights of Debtor/Creditors: The
Case is the umbrella proceeding in which the court adjusts the
rights of the debtor and the debtor's creditors.
a. How are Rights Adjusted: Bankruptcy adjusts
these rights according to the substantive rules set forth in
the Bankruptcy Code, and using the procedures set forth in the
Code and the Bankruptcy Rules. These procedures include procedures
for creditors and interest holders to file claims, and, in reorganization
Chapters (11, 12, 13) procedures for proposing and the court
confirming a plan of reorganization.
ii. Estate Created Upon Filing: When a bankruptcy
petition is filed, all property of the debtor, as property is
defined by the Code [11 USC §541], becomes the bankruptcy
"estate". The bankruptcy estate is then either liquidated
or reorganized for the benefit of the creditors, and once the
creditors are satisfied, for the benefit of the equity.
(1) Chapter 7 Trustee: In a Chapter 7 case
a Chapter 7 Trustee is appointed by the office of the U. S.
Trustee to marshall and liquidate the estate pursuant to the
provisions of the Code and the supervision of the Court. [28
USC § 586, see also Part X of the Bankruptcy Rules].
(2) Debtor in Possession: In the reorganization
chapters, the debtor remains "in possession", unless
the Court appoints a trustee on motion. The debtor in possession
(DIP) has most of the duties of a trustee and carries out the
function of marshalling and reorganizing the debtor's estate,
pursuant to the Code and the supervision of the Court. [11 USC
§§ 1107, 1203 and 1303].
(3) Powers and Duties of Trustee/DIP: The
Code gives the trustee or DIP many powers, including avoiding
powers, and strong arm powers, to enable the trustee/DIP to
recover/marshall/preserve the assets of the estate for the benefit
of creditors. [11 USC §§ 704, 1106, 1203, 1303].
(4) Court Must Approve Hiring and Payment of Professionals
Doing Work For Estate: The trustee/DIP has the power
to hire professionals, such as attorneys, accountants and real
estate brokers, to perform services for the estate. [11 USC
§327, Bankruptcy Rule 2014]. No professional can be compensated
from estate funds unless an application to hire the professional
is made to and approved by the Court. No professional can be
paid from estate funds unless an application to pay the professional
is made to and approved by the Court. [11 USC §330. See
also 11 USC §503, Bankruptcy Rule 2016, and Local Rule
2014-1 & 2016-1].
iii. The Automatic Stay [11 USC §362]:
(1) Most Powerful Protection: The automatic
stay is probably the most powerful protection which the Code
gives the debtor and the debtor's estate.
(2) If a Creditor Wants To Do Something It Can't:
The Code stays creditors and other entities, including governmental
entities such as the IRS from taking a wide variety of acts
against the debtor and/or property of the debtor's estate. [11
USC §362(a)]. The general rule of thumb is that most things
that a creditor or other entity would want to do to the debtor
or property of the debtor's estate, such as suing the debtor
or otherwise seeking to collect prepetition claims against the
debtor, are automatically stayed by the filing of the bankruptcy
(a) Exceptions to Stay: The Code gives
13 express exceptions to what is stayed, including that exercise
of police and public health activities are not stayed. [11
c. Move to Lift Stay: Upon motion of creditors
or other interested parties, the court may lift the stay either
for (1) cause, including lack of adequate protection or (2) if
the debtor has no equity in property and the property is not necessary
for reorganization. [11 USC §362(d)(1) and (2), Bankruptcy
Rule 4001, Local Rule 9013-1(a)(5). See also burdens of proof
at 11 USC §362(g)].
(1) Mandatory Forms for Motions for Relief from Stay
Motions and Orders:: The Central District California
Bankruptcy Court has mandatory forms to use to move for Relief
from Stay Orders. These mandatory forms can be accessed and
downloaded from the C.D. Cal Bankruptcy Court web page, which
is www.cacb.uscourts.gov (See discussion of web page at section
d. Damages for Violating Stay: Actual and punitive
damages may be awarded against a creditor or other party which
wilfully violates the automatic stay. [11 USC §362(h)].
e. Stay Expires Eventually: The Code specifies
various events which cause the stay to expire automatically, without
the creditor taking any action. For example, the stay expires
as to the estate when property ceases to be property of the estate;
expires as to the debtor when the debtor receives or is denied
a discharge; and expires as to both the estate and the debtor
when the case is dismissed. [11 USC §362(c)].
f. Stay Does Not Protect Nondebtors, With One Exception:
Except in Chapter 13, where there is a limited stay protecting
the spouse of the debtor concerning certain consumer debts, the
automatic stay does not extend to nondebtor third parties such
as partners of a partnership in bankruptcy, officers or employees
of a corporation in bankruptcy, or guarantors or co-obligers of
a debtor's debts.
g. "Quick Trigger" Relief from Stay in Single
Asset Real Estate Cases: The Bankruptcy Reform Act of
1994 added an expedited relief from stay provision for "single
asset real estate" bankruptcy cases filed after October 22,
1994, the effective date of the 1994 Reform Act. "Single
asset real estate" is a defined term. [11 USC §101(51B)].
For cases meeting the definition, secured creditors can obtain
relief from stay 90 days after the order for relief uless the
debtor commences paying specified adequate protection payments
or files a plan meeting certain requirements. [11 USC §362(d)(3)].
4. Distribution of the Estate: The bankruptcy
process ultimately marshals the debtor's assets and redistributes
them to creditors and equity holders in an orderly fashion as provided
for by the Code.
a. Claims: Creditors and interest holders (stock,
partners, etc.) file proofs of claim and proofs of interests stating
their claims. [11 USC §§ 501, 502, Bankruptcy Rules
3001 - 3008].
b. Objections to Claims Process: [11 USC §§
501,502, Bankruptcy Rules 3001 - 3008].
c. Order of Distribution:
(1) Classification by Class: The Code requires
claims of creditors and interest holders to be classified into
various classes (classes of various types of secured creditors,
classes of those types of administrative claimants required
to be placed in classes, class of unsecured creditors, class
of equity holders). [11 USC §507, 11 USC §1122, 1123].
(2) Absolute Priority Rule in Chapter 7:
In a Chapter 7 case, the debtor's estate is distributed to creditors,
(and in solvent estates to interest holders) according to the
absolute priority rule, which is codified by Section 726 of
the Code. [11 USC §726].
(a) What Absolute Priority Rule Requires:
"The absolute priority rule provides that a dissenting
class of unsecured creditors must be provided for in full
before any junior class can receive or retain any property
. . . ." [Norwest Bank Worthington v. Ahlers, 108 S.Ct
(3) Modified Absolute Priority Rule in Chapter 11:
Unlike in Chapter 7, Chapter 11 (reorganization) has two mechanisms
for modifying the absolute priority rules in Chapter 11 reorganization
cases. [11 USC § 1129(a) and (b) (2)]. The absolute priority
rule may be modified by consensual confirmation of a plan, and
alternately by cramdown of a plan, both discussed infra.
(4) Exemptions: Individual debtors can claim
certain property as exempt. If there is no objection to the debtor's
claim of exemption, or if objections to claims of exemption are
made but overruled, the property claimed exempt, or the dollar
amount of the exemption, is returned to the debtor and is not
available to satisfy claims of creditors. [11 USC §522].
(a) California Uses State Exemptions: The
Code specifies amounts of exemptions, but allows states to choose
to use state law exemptions instead. [11 USC §522(b)(1)
and (2)]. California has chosen the state exemptions. [Cal.
Code of Civil Procedure §703.130 and §703.140]. Thus,
for California debtors, the scope of exemptions is defined by
the California Code of Civil Procedure. [Cal. Code of Civil
d. Pay by Liquidation in Chapter 7: In a Chapter
7 case the creditors and interest holders are paid by liquidation
of the debtors estate, supervised by the Chapter 7 trustee.
e. Pay Through Plan in Reorganization Chapters:
In the reorganization chapters creditors and interest holders
are paid through a plan (either a reorganization plan where the
debtor reorganizes and continues to operate or a liquidating plan).
[11 USC §§ 1123 - 1141]. In all reorganization Chapters
(9, 11, 12, 13) the Court must confirm the proposed plan before
it becomes effective.
(1) Chapter 11 Impaired Classes Have Right to Vote
[11 USC §1126]: In Chapter 11 classes of creditors
which are impaired (a term of art defined by 11 USC §1124)
have a right to vote on the proposed plan.
(2) Chapter 11 Consensual Confirmation: In
Chapter 11 a plan where all impaired classes of creditors vote
to accept can be confirmed by the Court if it meets 12 additional
requirements set forth in Section 1129(a). [11 USC §112(a)(1)-(13)].
(3) Chapter 11 Procedure for "Cramming Down"
Plan on Classes Which Do Not Accept: So long as at
least one impaired class votes to accept a Chapter 11 plan,
the plan may be confirmed nonconsensually, by "cramdown"
on the nonaccepting impaired classes, so long as various requirements
specified in sections 1129(a) and (b) of the Code are met, including
that the plan is "fair and equitable" as defined by
the Code and "does not discriminate unfairly". [11
5. Eligible Debtors Get Discharge: Through the
bankruptcy case, eligible debtors receive a discharge of their debts,
to the extent that the debts are not paid through liquidating the
debtor's nonexempt assets or through a plan of reorganization. [11
USC §727, see also 11 USC §524, effect of discharge].
a. Individual Discharge--The Fresh Start: Individual
debtors are eligible to receive a discharge of unsecured debts
in all Chapters (7, 11, 12, 13), unless they have done certain
(generally bad) acts which make them ineligible for discharge,
or which make the particular debt “nondischargeable”.
(1) Suits to Deny Discharge: [11 USC §727].
Where an individual debtor has fraudulently conveyed property
within a year of filing bankruptcy, lies on the bankruptcy petition
or schedules, lies when examined under oath by the Chapter 7
Trustee, has received a Chapter 7 discharge in a bankruptcy
case filed less than 6 years before the debtor’s present
bankruptcy case is filed–or flunks any of the other provisions
of 11 USC §727(a)(1)-(10)–a creditor or the Chapter
7 Trustee or the Office of the US Trustee can bring an adversary
proceeding in the bankruptcy case to ask the bankruptcy court
to deny that debtor a Chapter 7 discharge, or in limited circumstances
to revoke a discharge already granted. There are strict time
limits for such suits.
(2) Suits to Hold Particular Debt(s) of Individual
Debtor Nondischargeable: [11 USC §523]. Debts
for fraud, breach of fiduciary duty, embezzlement, and/or willful
and malicious acts will be held to be “nondischargeable”
(means not discharged), pursuant to 11 USC §523(a)(2),
(4) and (6) where the creditor timely brings a “nondischargeability”
adversary proceeding in the bankruptcy case to ask the bankruptcy
court to hold the particular debt not discharged, despite the
fact the debtor receives a Chapter 7 or 11 receives a discharge.
There are strict time limits fro bringing these types of nondischargeability
(3) Certain Types of Debts are NOT Dischargeable in
Any Chapter of Bankruptcy: Certain types of debts are
NOT discharged, even if the debtor receives a discharge. The
most common types of debts which cannot be discharged in any
chapter of bankruptcy are alimony and/or child support that
the debtor owes to an ex-spouse or child (11 USC §523(a)(5);
debts for death or injury to another while the debtor was driving
drunk or drugged (11 USC §523(a)(9). Priority taxes cannot
be discharged in any Chapter of Bankruptcy, unless the tax agency
fails to file a claim or fails to object to their Chapter 11
or 13 plan treatment. Non priority taxes that are nondischargeable
in Chapter 7 may under some circumstances be dischargeable in
Chapter 13. Federally insured student loans are extremely difficult
to discharge in any Chapter of bankruptcy (11 USC §523(a)(8);
11 USC §1328(a)(2)).
b. SSlightly Broader Discharge in Chapter 13 bankruptcy, but Delayed: Before the BAPCPA 2005 major amendments to the Bankruptcy Code, a Chapter 13 discharge could discharge debts that arose from the Chapter 13 debtor having committed fraud, conversion, embezzlement, breach of fiduciary duty, or willful and malicious acts, even though those debts could be held to be "nondischargeable" in Chapter 7 and 11 bankruptcy. This ability was known as the Chapter 13 "super discharge". The BAPCPA 2005 amendments substantially eliminated the "super discharge". However, there are still a few ways in which the Chapter 13 discharge is broader than the discharge that a debtor can receive in Chapter 7 or 11 bankruptcy. For example, in Chapter 13, under present law (BAPCPA 2005), a Chapter 13 debtor whose Chapter 13 plan is confirmed by the Bankruptcy Judge, and who fully performs that Chapter 13 plan, by making all the payments required by the plan, and who therefore receives a Chapter 13 discharge, will be able to discharge prepetition debts arising from the debtor having committed willful and malicious acts, unless those willful and malicious acts caused death or bodily injury, and the debt has been reduced to a court judgment. In Chapter 13 debtors do not receive a Chapter 13 discharge unless the Bankruptcy Court confirms their proposed Chapter 13 plan, and they fully perform the Chapter 13 plan, by making all the payments specified in the plan. Sometimes Chapter 13 debtors are unable to complete making their Chapter 13 plan payments, and so are unable to fully perform their confirmed Chapter 13 plans. When that happens, under some specific circumstances set forth in the Bankruptcy Code, the debtor may be able to move the Bankruptcy Court to give the debtor a "hardship discharge", which is a discharge of the same scope as a Chapter 7 discharge.
c. Corporations/Partnerships No Discharge in Chapter
7; and Discharge in Chapter 11 Only If They Do Not Liquidate:
Corporations and partnerships are ineligible to receive a discharge
in Chapter 7. [11 USC §727(a)(1)]. Corporations and partnerships
which liquidate in Chapter 11 do not receive a discharge. [11
USC §1141]. Corporations and partnerships which reorganize
in Chapter 11, and continue to operate are eligible to receive
a discharge in Chapter 11. [11 USC §1141].
d. Discharge Does Not Get Rid of Liens: Where
a debtor is entitled to a discharge, it is the debtor’s
in personam liability for unsecured debts, plus liability for
the deficiency (unsecured) portion of secured debts, which are
discharged. The U. S. Supreme Court has ruled that liens ride
through bankruptcy, i.e. liens are not discharged by the bankruptcy,
they remain encumbering the collateral until the secured debt
is paid. Dewsnup v. Timm, 112 S.Ct. 773, 778 (1992); Farrey v.
Sanderfoot, 111 S.Ct. 1825, 1829 (1991). Thus the discharge in
bankruptcy court does not get rid of secured debt, because the
collateral remains encumbered. It is unsecured debt, such as most
credit card debts, which can be discharged in Chapter 7 bankruptcy.
In Chapter 11 and 13 there is some ability to get rid of liens,
by paying undersecured secured creditors the value of their collateral;
except in Chapter 13, debtors cannot “lien strip”
on their primary residence. [11 USC §1129(b)(2)(A)(i)(II),
11 USC §1322(b)(2)].
6. Commence by Petition: The bankruptcy case
is started by filing a bankruptcy
petition at the Office of the
Clerk of the Bankruptcy Court. [11 USC § 301-304].
7. Voluntary or Involuntary: The petition may
be voluntary (filed by the debtor) or involuntary (filed by creditors
or interest holders). [11 USC §§ 301-304].
B. Adversary Proceedings Within Case: Lawsuits
on any subject affecting the debtor or the debtor's estate may be
brought and tried within the bankruptcy case. These lawsuits are
called adversary proceedings. [Bankruptcy Rule section 7001, see
also 28 USC 157].
1. Very Similar to Non Bankruptcy Litigation:
Adversary proceedings are very similar to regular lawsuits in
state and federal court. They are commenced by a complaint, answered
by an answer, have discovery, may have the normal range of motion
practice, have pretrial proceedings such as a pretrial conference
and pretrial conference order at the discretion of the bankruptcy
judge, have a trial (nonjury) unless settled before trial. [Bankruptcy
Rule 7001 et. seq.].
2. Modified Federal Rules of Civil Procedure Apply:
Most of the Federal Rules of Civil Procedure are incorporated
by reference into the Bankruptcy Rules, with some modifications,
and apply to adversary proceedings (and other contested matters).
[See Part VII and Part IX of Bankruptcy Rules].
3. Major Kinds: The following are the major
kinds of adversary proceedings:
a. Action By Creditor to Hold a Debt of Individual
Debtor Nondischargeable: [11 USC §523].
b. Action by Trustee or Creditor to Deny Debtor Receiving
Any Discharge: [11 USC §727].
c. Action by Trustee/DIP to Recover Preferential or
Fraudulent Transfer: [11 USC §547, 548].
d. State or Federal Cause of Action Affecting Debtor
or Debtor's Estate: Any state or federal cause of action
affecting the debtor or the debtor's estate as either the plaintiff
or the defendant can be tried in bankruptcy court, except that
personal injury actions are required to be tried in district
court. [28 USC §157].
C. Motion Practice: Some motions are brought
within the bankruptcy case itself. Others are brought within adversary
1. When Seeking an Order: Orders are obtained
upon request made by motion, except in a few specific instances
where the Rules allow them to be requested by application. [Bankruptcy
2. Consult National and Local Rules: The Bankruptcy
Rules on motion practice [Bankruptcy Rule 9013, 9014] are supplemented
in almost all districts by Local Rules. Always consult local rules
of the district in question before making or opposing any motion.
The Central District of California has extensive local rules which
may be viewed, downloaded, and printed from the Central District
of California Bankruptcy Court’s website at http://www.cacb.uscourts.gov.
[See particularly Local Rules 9013-1 re motions, 9075-1 re- exparte
3. When Become Contested Matters: Motions become
contested matters if an opposition is filed to the motion. [Bankruptcy
Rule 9013, 9014]. Once opposition is received most of the Federal
Rules of Civil Procedure apply to the motion. [Bankruptcy Rule
9014, through Part VII of the Bankruptcy Rules]. Thus, the full
range of civil discovery becomes available in motion practice.
[Bankruptcy Rule 9014].
VI. How Bankruptcy Affects Non Bankruptcy Lawyers and Their
A. Stay: Discussed supra.
B. Claims: Not every client will be a debtor,
but most clients at some time or another will be creditors of an
individual or entity in bankruptcy, and will need advice on filing
a claim, and possibly an objection to claim procedure.
C. Bankruptcy as a Litigation Tactic: Threatening
to file, and actually filing bankruptcy has become a major litigation
tactic. Threatening to file or filing bankruptcy can force a settlement.
Judgments and unliquidated claims can be reduced (or if unsecured
eliminated) through the bankruptcy process, through a plan or liquidation.
Bankruptcy wipes out prejudgment attachments obtained within 90
days of filings. The stay stays discovery and trial, and can buy
the debtor valuable time, cause plaintiff to lose trial dates, already
D. Make Sure Your Creditor Client is an oversecured Secured
Creditor: Debtors in bankruptcy have limited ability to
alter the rights of secured creditors, whereas unsecured creditors
can often be paid little or nothing. When structuring a real property,
personal property or other transaction for your creditor client,
make sure they are secured, and that their liens are properly perfected
under nonbankruptcy law. This will protect them as much as possible
if a bankruptcy is later filed by the other party(ies) to the transaction.
E. Moral of the Story for All Types of Lawyers:
BASIC KNOWLEDGE OF BANKRUPTCY LAW--DON'T ACT WITHOUT IT.
Materials Prepared by:
Kathleen P. March, Esq.
Los Angeles Bankruptcy Lawyer
The Bankruptcy Law Firm, P.C.
10524 W. Pico Blvd, Suite 212
Los Angeles, CA 90064
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for your personal bankruptcy attorney”
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