Creditors’ Rights

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Twin purposes of Bankruptcy:

Protect the Debtor
Provide a means for collecting debt (I don’t think this is right)
 

Chapter’s 7 & 13 deal with individual debtors, although 7 is liquidation bankruptcy and also applies to corporations.  It is largely a debtor protection device.  Chapter 13 is an arrangement for individual debtors; pays future income.  For corporate debtors, we have chapter 7 and 11, the latter being a corporate arrangement proceeding.

 
 

Liens:

By contract
Article 9 security interest
Deals with personal property
Mortgages (on real property)
Garnishment – called “attachment” (NY)
Wages – called “income execution” (NY)
Accounts
Judicial Liens:
These are judgment liens (see last class)
Real property
Personal property
Procedure: 1) docket the judgment, 2) if real property: record; if personal property, get writ of execution, a) deliver to sheriff, b) sheriff will levy on property.  Priority is based on the levy in NY.

Attachment lien – called “judicial remedy” (NY)
Procedure: 1) get order from court granting right, 2) serve the defendant, 3) deliver the order to the sheriff.  It can mature into a judgment lien

By operation of law
Mechanics Lien
The mechanic keeps your car until you pay him
You would have to fill out a form, and file it in the real property records
Film makers lien
Stableman’s lien
Landlord’s lien
 

Creditors’ Remedies:

Income
Garnishment
Wages – called “income execution” (NY)
Wage Assignment
This is by contract
Property
Judgment Lien
Attachment Lien
Bank account (garnishment)
Repossession (per Article 9)
Judicial
Replevin
Self-help
Mechanic’s Lien
Mortgage Foreclosure
Person of Debtor
Arrest
Imprisonment for Debt

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State Grab Law

 

Prejudgment Remedies Post-judgment Remedies 
Attachment
(order obtained from the court on a hearing without notice)
 Judgment Lien
Garnishment (NY = “income execution” –  “garnishment” refers to the process of attaching one’s bank account).  Garnishment
Mechanics’ Lien   
Arrest   
Replevin.  An ancient remedy (form of attachment) where one may obtain an order of seizure; (requires a hearing on notice). 
Usually brought for repossession of property.
Article 9, part 6 also allows for self-help repossession.
NY – replevin =  repossession by judicial remedy (judicial act).
   
Advertisement Sale  Mortgage Foreclosure

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Federal Anti-Garnishment Act

 

Maximum = 25% of disposable earnings
Floor = 30x federal minimum hourly wage
Current minimum wage = $5.15 an hour:  5.15 x 30 = $154.50 – creditors cannot reduce debtor’s disposable earnings to an amount below $154.50/week.
 

Disposable earnings: the part of an individual’s earnings after the deduction from those earnings of any amounts required by law to be withheld.

 

Garnishment = any legal or equitable procedure through which the earnings of any individual are required to be withheld for payment of any debt.

 

Exercises (§§301-303). 

Debtor: $200 (gross pay) – $40 (SS and income tax) = $160 take home
Garnishor: 25% of $200 = $40 (floor is $154.50) – Garnishor takes $5.50. 
Debtor: $300 (gross pay) – $60 (SS and income tax) = $240 – $60 (wage assignment (25%)) = $180 (net take-home)
Garnishor: 25% of $180 = $45.00 (floor is $154.50) – Garnishor takes $25.50
 

Wage assignment

It’s an amount required by law to be withheld. §302(b).
Not automatically a legal procedure (must become one to be enforced, though) – distinguish from legal or equitable procedures through which the earnings are required to be withheld.
Creditor must give notice to Debtor, accompanied by a tear-off hearing request form.  If Debtor returns the card, he gets a hearing.  Mechanism for legal proceeding in statute. 
 

Exercise. Debtor: $400 (after SS & income tax) – $240 (60% - family court support order) = $160.00

Permissible?  Yes, under §303(b)(1)(A) so long as Debtor is not supporting an additional child. §303(b)(2).
Garnishor could get up to $5.50.
Family court order (60%) is an amount required by law.
In NY, family court support orders trump any garnishment (regardless of when filed).
In NY (max = 10% traditionally), floor á $85/week (from $35/week) – violate federal law?
 

New York = 10% of gross pay (subject to 30x the minimum wage or 25% of disposable income). §5231(b).  Thus, calculate the 10%, then figure out if it exceeds either standard.

 
 

Sniadach: at issue was a prejudgment garnishment statute used to garnish debtor’s employer on a promissory note.  The order was (1) issueable by the clerk and allowed (2) up to 50% of the debtor’s wages be garnished (3) without any opportunity to be heard (4) without the need of extraordinary circumstances.  Statute unconstitutional as violative of the 14th Amendment DPC.

Rule: before any taking of wages (by garnishment) there must be a pre-taking hearing with both parties represented – extraordinary circumstances excepted.
Wages are a special type of property because they can drive a debtor to the wall. 
 

Impact and Interest Analysis: 25% (disposable income) vs. 10% (gross income)

Debtors’ Interests
Perhaps an interest in not paying (but not totally)
But at the same time, debtors wish to have access to future credit
Creditors’ Interests
Most creditors are institutional
Make money by lending money via complex machinery
Public Interests
These interests have a vague sense of neutrality
Three specific interests:
Preserve cost and availability of credit
If credit is hard to get, few will get it – bad for creditors and debtors.
The institutional creditor wants to keep bad debts to a minimum.
Protect productive economic units (e.g., corporations).
Corporations provide jobs – economy centers on small businesses.
A larger garnishment takes away the incentive to work.
Promote and protect human dignity (i.e. prevent homelessness)
 

Fuentes v. SHEVIN: two state statutes allowed for summary seizure of goods under a writ of replevin by ordering state agents to seize a person’s possessions upon an (1) ex parte application of any person claiming a right to them and (2) posts a security bond.  The statutes provided (3) no notice requirement or (4) pretaking hearing to challenge the seizure.  Court extended Sniadach to all property except in extreme circumstances.  Statutes violative of 14th Amendment DPC.  Q: could the taking of this property drive a family to the wall? Stove – maybe.

Examples (extraordinary circumstances):

Collect internal revenue
Meet needs of national war effort
Protect against the economic disaster of a bank failure
Protect the public from misbranded drugs and contaminated food
 

Mitchell v. W.T. Grant:  Louisiana sequestration procedure for enforcing a vendor’s lien required a writ of sequestration (1) issueable only by a judge upon an (2) affidavit of the creditor going beyond mere conclusory allegations.  Additionally, the (3) debtor was entitled to immediate hearing after seizure and to (4) dissolution of the writ absent proof by the creditor of the grounds on which the writ was issued.  The nature of the claim and the basis for invoking due process here was different than Sniadach because both the buyer and seller had property rights (vendor’s lien)(creditor had no rights in Sniadach’s wages) and the types of property were different between the two cases.  Statute upheld as an appropriate balancing of the competing interests.

 

North Georgia Finishing Co: at issue was a writ of garnishment was (1) issueable by the clerk of the court (2) on the affidavit of the creditor or his attorney (who need not have firsthand knowledge), (3) based on conclusory allegations the property at issue as a corporate bank account, with (4) no pretaking hearing to challenge the taking.  Statute unconstitutional. 

Rule: there must be an early hearing at which the creditor establishes probable cause for the taking.  The taking of wages requires a pre-taking hearing (Sniadach).  Other types of takings require a prompt post-taking hearing.  Only extraordinary circumstances warrant takings without a pre-taking hearing (see, Fuentes).
 

“Probable cause” for a taking in a civil case means probability (likelihood) of success on the merits – also must show a need for the taking (e.g., a creditor needs to seize a corporations bank account before the funds disappear to Tokyo)

 

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SEE http://sovereignjustice.org/index.php?topic=600.msg4884#msg4884

New York Attachment Statute

Article 62 (CPLR)

 

§6201 – grounds for attachment
§6202 – any debt or property against which a money judgment may be enforced is subject to attachment.
§6210 implies a hearing on notice (TRO).
§6211(a) allows for an order of attachment without notice.  §6211(b) requires such an order be confirmed by P within 5 days.  
§6212, on motion for an order of attachment or confirming such order, P shall show:
A cause of action
P’s likelihood of success on the merits
Grounds for attachment
Amount demanded from D exceeds all counterclaims known to P
§6223(a) allows for a prompt post-taking hearing
 

Policy: Attachment is very efficient.  New York allows prejudgment takings under §6201 circumstances because it’s hard to serve D in those instances.  A corporation can be served by the secretary of state.  A foreign corporation requires minimum contacts under International Shoe and is harder to serve.  The judge has discretion not to grant the attachment, which acts as a check to the broadly written §6201(1).  §6201(3) provides that P must show evidence of fraud or D is about to defraud P.  

§6201(4) is unconstitutional because there is no need; the guy is in jail and can be served without a problem.  §6201(5) is unconstitutional because it is a post-judgment provision (D has already had his due process).

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Recovery of Chattel

Article 71 (CPLR)

 

Replevin is like attachment only it deals with chattel (property) and is used for Article 9 repossessions.  Generally, a pre-taking hearing on notice is required.

 

§7101 – an action under this article may be brought to try the right to possession of a chattel.
The need for the taking in the replevin statute is the competing property interests between the two parties (unlike the attachment statute). 
In Mitchell and North Georgia Finishing Co., Court required showing of likelihood of success on the merits.  §7102(4) is on point.
§7102(d)(4) – prompt post-taking hearing is required within 5 days of the seizure. 
§7102(d)(3) provides the only time for a taking without notice: the court must find probability that the chattel will become unavailable by reason of transfer, concealment, disposal, or removal from the state or will become substantially impaired in value.
§7102(d)(1) – P must show probability of success on the merits in order to get the taking on a pre-taking hearing on notice.
 
 

Right to Repossession

 

§9-609 – after default, secured party may take possession of the collateral by judicial process or self-help so long as it doesn’t breach the peace.  No DP claim because not state action.

§9-610 – after default, a secured party may dispose of the collateral in its present condition in a manner deemed commercially reasonable.  Substitute for a sheriff’s sale. 

§9-608(a)(4) – a secured party shall account to and pay a debtor for any surplus, and the obligor is liable for any deficiency (which there usually is).
 

Exercises.  What to do when…

…your client, the debtor, comes to you right before the repossession it about to happen.
If involving a dispute, tell seller that you’ll have the property under lock and key and assure him that he won’t be able to effectuate self-help repossession without breaching the peace.  Force him to go thru judicial process.
…your client comes to your office right after repossession occurs.
Bring a replevin action1 to recover the chattel.  Also sue for:
Breach of contract
Trespass (if sheriff with him, 4th Amendment search & seizure claim)
Breach of warranty
Conversion
Emotional Distress
Damages (punitive and losses suffered)
Fees (see, §9-625)
§9-623 gives debtor a right to redeem the collateral; therefore, client may attempt a tender for fulfillment of all legal obligations.
If the seller denies client’s right to redeem, add a violation of part 6 of Article 9, to the complaint and ask for all related penalties.
…your client’s wages have been seized for deficiency action.
Timely file an answer with affirmative defenses and counterclaims, including:
Conversion + damages
(if no default) – Seller’s actions violate Part 6 of Article 9 + damages, under Art. 9
Breach of Warranty + damages
Trespass + damages
Constitutional challenge (careful about frivolous lawsuits – consider bringing a federal and state constitutional claims, esp. if sheriff was along (state actor))
Assume the chattel was bought back by the creditor.  If he still has the property, debtor may still have the right to redeem.
Challenge the disposition (commercially reasonable?); or
Include a counterclaim for replevin
 

Policy: if there was no self-help, every default would require creditor to sue:

Replevin:
$150 filing fee
Sheriff’s poundage (he gets a percentage)
$500 Attorney’s fees
$75 service of process
This is a total of $925
Consider that 5% of loans go bad – a lot of $$$
Breach of contract
Default Judgments: approximately 90% of actions against individual debtors.
Process
Send 3 letters on attorney letterhead
See state collection and fair collection laws (act)
May not threaten lawsuits that they don’t intend to file   
Prepare, serve, and file
Wait for Answer
Get info from your client (address, paychecks, bank account information, etc.) 
Take the pile of default judgment notices to the sheriff
Nail and Mail service: process of sticking a notice on the door = legitimate.

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Imprisonment

 

Imprisonment takes place daily in Onondaga County for failure to pay certain Family Court debts.

Inefficient method (tough to earn $$ when in jail).
Contempt of court results in a fine in the amount payable to the creditor backed by a commitment order. 
Creditors wanted this threat technique to get paid, but it was used against the unemployed, welfare, or no bank account-holding debtors.

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Bankruptcy

United States Code – Title 11

 

Types 1898 Act 1978 Bankruptcy Reform Act
Straight Bankruptcy General Provisions, Ch. 7   
Chapters 1 – 7 (sec. 1-72) 
Chapters 1, 3, 5 (general provisions)
Chapter 7 = Liquidation Proceeding

 
Municipal, Ch. 9  Chapter 9 Chapter 9 = Municipal
Corporate Reorganization and Arrangements,
Ch. 11
 Chapters 10 & 11 Chapter 11 =Corporate Reorganization (combination of the old 10 and 11) 
Wage Earner’s Proceedings, Ch. 13  Chapter 13 Chapter 13 = Debtors w/ Regular Income

 

Bankruptcy may be voluntary (Form 1) or involuntary (Form 5), unless filing a Chapter 13 (voluntary only) or a farmer (exempt under §303(a)).
Involuntary bankruptcy most common where a corporation has a complex debt situation (usu. Ch. 11 (reorganization), may liquidated under Ch. 7).
Note: involuntary Ch. 7 may be avoided by borrowing $1 from 12 friends
A voluntary Chapter 7 requires debtor to file a completed Form 1 under §301.
No discharge in a corporate Chapter 7 (corporation ceases to exist)
In Ch 11, per the absence of a trustee, the Debtor in possession runs the business
A joint petition may be filed under §302.
Banks can liquidate or reorganize, but no bankruptcy under fed law (FDIC would step in)
§109(e) – a person’s unsecured debt must be less than $250,000 to file a Chapter 13, and must have secured debts of less than $750,000.
Donald Trump could file a Chapter 11 because under §109(d), he’s eligible to file Chapter 7.
 

Obstacles to Involuntary Bankruptcy:

3 or more petitioning creditors
However, you can have only one if there are less than 12
Creditor(s) must be owed at least $11,6252, in aggregate, above the value of any lien on property of the debtor.  §303(b)(1).
§303(e) – a bond may be required (e.g., if debtor alleges damages from reckless petition)
§303(i) – costs, attorney’s fees, and damages
§303(h) – basis for relief
§305 – Abstention (can likely appeal §305(c) for abuse of authority)

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§707 – Automatic Relief Provision

Being used more frequently than in the past (e.g., where debtor can pay off debts more efficiently under Ch. 13);
Prevents debtors from escaping creditors
Protects creditors from “dead-beat” debtors.
 

§362 – Automatic Stay

 

§541 – All interests become property of the estate upon filing of the petition. 

Any interests that exist after the filing does not become property of the estate (e.g., if debtor files Friday morning and gets paid Friday afternoon, the paycheck does is debtor’s).
 

§522 – Exemptions – KNOW SUBSECTIONS (b) & (c)

38 states have opted out

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Priorities

§507

 

Nine priorities: very general

Administrative expenses
Unsecured claims under §502(f)
Unsecured claims earned within 90 days of filing for compensation-related claims
Contributions to employee benefit plan
Claims of farmers and fishermen
Deposits (paid to debtor)
Alimony
Taxes
Committed funds to banking regulatory agency
 

   ** If it’s not on the list, then it goes to unsecured, general claims.

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Discharge

 

§523 –  Exceptions to Discharge (all Chapters)

§727 –  Chapter 7 discharge (reasons barring discharge)

Only applies to individuals; 1 Ch. 7 discharge every 6 years (§727(a)(; 1 Ch. 7 proceeding within 6 years of a Ch. 13 (§727(a)(9)).

§1328 – Chapter 13 Discharge – gets debtor out from under a lot of the §523 exceptions to discharge (so long as it’s a good §1328(a) filing).  Note: if filing Chapter 13, must be fairly sure the plan will be successful, otherwise the §523 exceptions kick back in.