1 7: Commencing a Voluntary Case © Charles Tabb 2010

2 Who can file? Important threshold question is who can file under which chapter i.e., issue of debtor eligibility

3 Who gets in the courthouse door?

4 3 sets of eligibility rules 1 st: Generally applicable rule: § 109(a) Two requirements: (1) “person” AND (2) Nexus to United States Residence Domicile Place of business property

5 “Person” Defined term § 101(41) 1.Individual –> a human being

6 Partnership What is a “partnership”? not defined in Code – Look to state partnership law

7 Corporation Defined term § 101(9) – Very broad

8 Connection to United States Other absolute eligibility requirement is that the debtor must have a connection to the U.S. (domicile, residence, place of business, or property) – Remember problem in Grupo Mexicano??

9 Chapter-specific eligibility 2 nd type of eligibility rule -> Chapter-specific rules: – § 109(b) -> Chapter 7 – § 109(c) -> Chapter 9 – § 109(d) -> Chapter 11 – § 109(e) -> Chapter 12 – § 109(f) -> Chapter 13 – Chapter 15 -> special rules in chapter 15 itself

10 Exclusionary rules 3 rd type of eligibility rule Exclusionary Rules: 1 st – for abusive serial filers § 109(g) 2 nd – not get pre-bankruptcy credit counseling § 109(h)

11 Credit counseling Eligibility rule that individual consumer Dr get pre-bankruptcy credit counseling was added in 2005 – Supposedly to PROTECT Drs Give them a better sense of their options, not file hastily, maybe could work something out – Don’t do us any more favors!! Hundreds of reported cases where Drs had problems

12 Credit counseling Has been a real trap for – Unwary Drs – Drs facing an imminent foreclosure Need to file ASAP to stop foreclosure No time to get credit counseling

13 Problem 2.1(a) Under which chapters of the Code (if any) are the following debtors eligible for relief? a.Bill Gates (founder of Microsoft and richest person in the United States)

14 Answer to 2.1(a) Bill Gates? Chapter 7 [§ 109(b)] – Yes – person with US connection No insolvency requirement Might kick out via dismissal rules (bad faith to file if billionaire?)

15 Gates Chapter 11? [§ 109(d)] – Yes – Individuals can file chapter 11 (Toibb v. Radloff) – Mostly tracks chapter 7 rules

16 Gates Chapter 13? [§ 109(e)] – Individual? yep – Regular income? yep – Debt limit? $336K unsecured, ~ $1 M secured Probably over!

17 Gates Chapter 9? [§ 109(c)] – Obviously not a “municipality” Chapter 12? [§ 109(f)] – Also not likely to qualify as a “family farmer” or a “family fisherman”

18 Problem 2.1(b) Under which chapters of the Code (if any) are the following debtors eligible for relief? b.

19 GM Chapter 7? – Yes = “person” “ corporation ” – Has US connection

20 GM Chapter 11? Yes – person, no exclusions This is chapter actually filed under

21 GM Nothing else Chapter 13 – not an “individual”

22 Problem 2.1(c) Under which chapters of the Code (if any) are the following debtors eligible for relief? c.Writ, Estoppel & Replevin, a law firm partnership

23 Partnership eligibility “person” so can file chapter 7 or 11 – Assuming US connection But not chapter 13 because not an “individual” Each individual partner would have to file chapter 13

24 Problem 2.1(d) Under which chapters of the Code (if any) are the following debtors eligible for relief? d.New York Yankees Baseball Club

25 The Yankees Chapter 7 or 11 “person”  “corporation” § 101(9) – Definition includes virtually any type of organized business, even including unincorporated association No insolvency requirement – Question whether really need bankruptcy relief tested via motion to dismiss, not at eligibility But not 13 – not individual

26 Problem 2.1(e) Under which chapters of the Code (if any) are the following debtors eligible for relief? e.Toronto Blue Jays Baseball Club

27 Toronto Blue Jays Same analysis as Yankees re: “corporation” as “person” Issue: requisite United States connection? – ANY OF domicile, residence, place of business, or property will suffice – Likely have property in the United States

28 Toronto Blue Jays Obviously, also would be potentially eligible for bankruptcy relief in Canada Raise transnational bankruptcy issues – Dealt with in chapter 14 of casebook – Problems of coordination

29 Problem 2.1(f) Under which chapters of the Code (if any) are the following debtors eligible for relief? f.Greg Norman, Australian golf star and resident of Florida

30 Greg Norman “Person” – yes US connection? – Yes – even though Aussie citizen, is a resident of Florida So, eligible for chapters 7 and 11 for sure Chapter 13 – likely problem with debt limits

31 Problem 2.1(g) Under which chapters of the Code (if any) are the following debtors eligible for relief? g.New York City

32 New York City ONLY chapter 9 -- § 109(c) “municipality” -- § 101(40) Specifically excluded from definition of “person” So cannot file chapter 7 or 11

33 NYC Detailed rules in § 109(c) and in chapter 9 to protect sovereignty of states – Must be specially authorized to file – Must be insolvent – Pre-bankruptcy negotiations with creditors

34 Problem 2.1(h) Under which chapters of the Code (if any) are the following debtors eligible for relief? h.Probate Estate of the late Warren Burger, former Chief Justice of the United States Supreme Court

35 Probate Estate NOT eligible Not a “person” Compare definition of “entity” § 101(15) – Includes person and estate – thus indicating that an estate is not a person Why exclude? – Insolvent probate estates handled under state law probate proceeding

36 Problem 2.1(i) Under which chapters of the Code (if any) are the following debtors eligible for relief? i.Reading Railroad

37 Railroad ONLY eligible under chapter 11, § 109(d) Specifically excluded from chapter 7 Subchapter IV of Chapter 11 deals specifically with railroad reorganizations

38 Problem 2.1(j) Under which chapters of the Code (if any) are the following debtors eligible for relief? j.John Hancock Insurance Co.

39 Insurance company NOT eligible Excluded from chapter 7, § 109(b)(2), (3) Chapter 7 exclusion carried over to chapter 11 Why? – Heavily regulated by states – States have statutes in place regarding insolvency

40 Problem 2.1(k) Under which chapters of the Code (if any) are the following debtors eligible for relief? k.HealthCare America, a health maintenance organization

41 HMO Problem – a hybrid Part insurance company – which is excluded, as saw in last problem But also part medical provider, would be an eligible corporation -> So how decide which part controls for bankruptcy eligibility?

42 HMO Defer to state law classifications If treated as insurance company under state law, then have same justification for excluding as for any other insurance company, namely, detailed state law regulation

43 Problem 2.1(l) Under which chapters of the Code (if any) are the following debtors eligible for relief? l.Sue Debtor, a retired individual with credit card debts of $25,000 and a monthly social security check of $750

44 Retiree on Social Security “Person” Assuming US connection, clearly eligible under chapter 7 and 11 Chapter 13? – Individual? – yes – Under debt limits? – yes, $25K unsecured, well below $336K ceiling – Regular income? yes, gets monthly social security check Function is whether she could fund a payment plan

45 Problem 2.1(m) Under which chapters of the Code (if any) are the following debtors eligible for relief? m.Bob Farmer, an individual who farms a quarter section of corn and soybeans, and whose total debts are $1.1 million, of which $900,000 is attributable to the farming operation

46 Farmer “person” and thus eligible under chapters 7 and 11, assuming US connection Chapter 13? – Issue is debt ceiling – Depends on mix of secured and unsecured Facts say has total debts of $1.1 M Chapter 13 ceiling is $336K unsecured and ~ $1M secured So depends on whether > $336K of total debts are unsecured

47 Farmer Chapter 12, §§ 109(f), 101(18), 101(19) “individual” – yes Under debt ceiling? – Yes – Ceiling is ~ $3.5 M, Bob has $1.1M Enough of a “farmer”?  50% of debts attributable to farming  – yes, $900K of $1.1M Regular income? – Fact question – fund a plan?

48 Problem 2.1(n) Under which chapters of the Code (if any) are the following debtors eligible for relief? n. Guillaum is the official Liquidator of the Cayman Islands insolvency case regarding Offshore Assets Inc. (OAI). OAI has assets in the United States. Guillaum would like to obtain relief in the U.S. courts protecting those assets

49 Foreign representative Guillaum may commence a chapter 15 proceeding by filing a petition for recognition under § 1515 and then, upon recognition, filing a petition under 301-303. See 1511. He is the “foreign representative” of a “foreign main proceeding” – the Cayman liquidation of OAI.

50 COMI The U.S. court should grant the petition for recognition if the Caymans is the “center of main interests” of OAI and if all else is in order. See § 1517. The relief that will be granted is governed by §§ 1519-1524.

51 Venue Where file? – The bankruptcy case 28 USC § 1408 – Proceedings in that case 28 USC § 1409

52 Problem 2.2(a) Apply the federal bankruptcy venue statute to answer the following questions: a. Sue Debtor had lived in Illinois all her life. On March 1, she moved across the Mississippi to Iowa. On June 1, she filed chapter 7 in the district court in Iowa. Is venue proper? 

53 2.2(a): Case venue when move? Venue of the case is proper in Iowa – § 1408(1) Sue has lived in Iowa (residence or domicile) for the longer portion of the 180 days before bankruptcy – Specifically, has lived in Iowa for 92 days

54 Other problems arise with pre-bankruptcy move Note: other problems – especially with applicable exemption laws – arise when a debtor moves before bankruptcy - will see in chapter 11 of casebook

55 Problem 2.2(b) Apply the federal bankruptcy venue statute to answer the following questions : b.Enron Corp.: – home office, principal place of business in Houston, Texas – incorporated in Oregon. – Enron Metals, a small affiliate of Enron, is headquartered in New York

56 Corporate venue Enron’s management would love to file chapter 11 in the Southern District of New York Very experienced (and debtor-friendly!) court Any way to do this?

57 Corporate venue (2.2(b)) YES – use the “affiliate hook” Have Enron Metals, which is headquartered in NY, file first, under 1408(1) THEN the parent company, Enron Corp., can file in NY under 1408(2) – Because a case is already pending in NY involving an “affiliate” – And affiliate is defined to include parents or subs

58 Forum shopping The upshot of – 1408(1) allowing a corporation to file where it is incorporated (domicile) Plus – 1408(2) allowing parents to use the affiliate hook  Is that a large corporation can file virtually anywhere it wants - which promotes forum shopping

59 Problem 2.2(c) Apply the federal bankruptcy venue statute to answer the following questions: c. Debtor Inc. filed chapter 11 in District of Hawaii * Shortly before filing, Debtor had paid off a $1,200 debt to Creditor, a supplier located in Maine * Debtor (as DIP, e.g., trustee), sues Creditor in the federal court in Hawaii to recover the $1,200 as a preferential transfer under § 547. Was Debtor supposed to file suit in Maine?

60 Venue of proceeding General rule: home court 1409(a) provides that the default rule is that a proceeding connected with the bankruptcy case may be filed in the district where the case is pending, e.g., the “home court” If that rule applies, then the filing in Hawaii is proper

61 Distant defendant, small $ Is it fair for a creditor located in MAINE to have to go to HAWAII to defend a lawsuit over a measly $1,200? Over 5,000 miles away! Hardship on Cr Under non-bk law, likely would have to sue in Maine (where Defendant “resides, 28 USC 1391(c))

62 Special protective rule 1409(b) protects a distant defendant on a small debt – Here, a non-insider being sued on a non- consumer debt is protected for amounts less than $10,950 – So the $1,200 debt is covered – Have to sue in Maine

63 Statutory glitch 1409(b) by its terms applies when trustee sues on matter “arising in or related to” bankruptcy case A preference action under § 547 technically is a proceeding “arising under” title 11 A minority of courts thus hold that the protective rule of 1409(b) is n/a to preference actions Congressional intent, though plainly was directed at preferences – Legislative history – see 1997 Commission Report

64 Mechanics of filing Debtor (or Debtor and spouse in joint case) file a petition – §§ 301, 302 Pay filing fee – Specified in 28 USC 1930(a)

65 That’s it! The filing of the petition, accompanied by the fee, “commences” the case And in voluntary case (e.g., DR files), the “commencement” of the case = “order for relief” – Exactly same force and effect as if the Bankruptcy Judge formally entered an order

66 What if Debtor too poor? Can this guy file bankruptcy? Maybe NO – Supreme Court held in US v Kras (1973) that no Due Process right to access to bankruptcy court – can be too poor to file bankruptcy! – 2005 – limited in forma pauperis statute passed

67 Paperwork DR has huge burden of paperwork to file, either with petition or shortly thereafter If doesn’t, case may be dismissed

68 Effects of Filing Automatic stay § 362 Stops all collection efforts Protect Dr, property

69 Effects of filing Property of estate § 541(a) DR  Estate

70 Effects of Filing Utility services can’t be cut off, § 366