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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. [Id.].

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, CA 91367.

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 be “E-filed”.

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 bankruptcy items.

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 USC §1452(a)].

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 9029.

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 Powers

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 petition.

(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 USC §362(b)].

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 I.G.1, supra.)

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 963 (1988)].

(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 Procedure §703.140].

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 USC 1129(b)].

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 adversary proceedings.

(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 proceedings.

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 Rule 9013].

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 matters].

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 Clients:

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 set, etc.

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
Phone: 310-559-9224
E-mail: kmarch@BKYLAWFIRM.com
Website: www.BKYLAWFIRM.com
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