2012
BANKRUPTCY LAW
UPDATE
Thursday, April 5, 2012
VARIOUS IVN SITES IN NORTH DAKOTA
Sponsored by:
STATE BAR ASSOCIATION OF NORTH DAKOTA
Materials by:
Roger J. Minch
SERKLAND LAW FIRM
10 Roberts Street
PO Box 6017
Fargo, North Dakota 58108-6017
Telephone No.: (701) 232-8957
Fax No.: (701) 237-4049
[email protected]
MN License: 007360X
ND License: 03501
I.
FLOWCHART/KEY TO SUMMARIZE STEPS A CREDITOR SHOULD TAKE TO
REACT TO VARIOUS TYPES OF BANKRUPTCY CASES
A.
General (11 U.S.C. Ch. 1).
1.
Read through all of the definitions in § 101 so that you will at least recognize what a
defined term is when it appears in other parts of the Code. The statute truly works
and if you know the definitions, you will be able to much more quickly grasp the
Code.
2.
The same thing applies to the Rules of Construction at § 102.
3.
Chapter 1, 3 and 5 apply to Chapters 7, 11, 12 or 13. So, if you have a Chapter 12
question, you will need to review, at a minimum, Chapters 1, 3, 5 and 12.
4.
When a case is filed, there is suddenly pervasive federal jurisdiction where the
Bankruptcy Court is given very expansive powers, and when in doubt, might rely on
§ 105 which authorizes the Court to “… issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this title”. With only some
few exceptions, there is nationwide service of process by mail to invoke the
Bankruptcy Court jurisdiction and venue of the particular case.
5.
A bankruptcy filing may entitle debtors or creditors to short extensions of time. For
example, § 108 gives a debtor at least 60 days from the date of filing to commence
an action or cure a default. The latter means that if a debtor files a bankruptcy case
during the redemption period in a real estate foreclosure action, it can assure itself of
having at least 60 days to redeem. But unless the case is commenced before the
sheriff’s sale on foreclosure, this is the only extension available, and it is only
available to the debtor, not non-debtor redemptioners.
6.
Along with understanding the definitions and Rules of Construction, distinguish the
following:
a.
b.
c.
d.
Cases;
Contested matters;
Adversary proceedings; and
Applications.
Cases mean the bankruptcy case in general such as a Chapter 7 case, Chapter 11
case, etc.
Contested matters are raised by motion and heard as a noticed motion hearing. See
Bankruptcy Rule 9014 for the definition.
Adversary proceedings address more serious matters and are raised by a summons
and a complaint and look much like a regular lawsuit, but brought within the context
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of the bankruptcy case. See Bankruptcy Rule 7001 to describe what types of actions
must be brought by an adversary proceeding.
Applications are used to obtain compensation of a professional person under 11
U.S.C. §§ 327 and 328.
7.
B.
Know the Rules of Bankruptcy Procedure. Many places they are substantive, and
not just procedural. As we have seen above, they define the difference between
contested matters and adversary proceedings. But they also do such important things
as describe what types of notices are required, Rule 2002, how a debtor may be
examined, Rule 2004, how claims are addressed, Rules 3001-3008, how motions for
relief from stay are treated, Rule 4001, what the deadline is for objecting to
discharge, Rule 4004, how adversary proceedings are treated, Rule 7001-7087, how
appeals are handled, Rules 8001-8020, how time deadlines are computed, Rule 9006,
and they provide that the Federal Rules of Evidence apply to bankruptcy cases, Rule
9017.
What Happens When a Bankruptcy Case is Filed?
1.
Generally there must be a Court order for professional persons to represent a debtor.
§§ 326-328.
2.
The debtor(s) will need to be completely accountable for everything. In a way, what
might have been a private business, is now a public utility or akin to a publically
traded company. Where a debtor before could have been lax about reporting
requirements and accounting for property, now with Bankruptcy Court jurisdiction in
place, these things are dealt with in a highly structured way under pain of bankruptcy
fraud penalties.
3.
The automatic stay will apply to “freeze everything in place” as much as possible,
with few exceptions. Think of it as an instant indefinite moratorium.
4.
There will be restrictions on outside the ordinary course of business use, sale or lease
of property or use of cash collateral and obtaining credit.
5.
There is created an estate consisting of all of the debtor’s interests in property.
6.
Recoveries are now had based on proofs of claim, judgments in adversary
proceedings or distributions under a repayment plan or from a Chapter 7 trustee,
instead of normal state or federal collection actions.
7.
As of the date the case is filed, secured status will be determined, both whether a
creditor is secured, and if so, to what extent. If the value of the collateral does not
exceed the debt whose repayment the collateral secures, then the claim will be split,
and the creditor will have an allowed secured claim to the extent of the value of the
collateral, and an allowed unsecured claim for the difference (sometimes referred to
as the deficiency).
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C.
8.
The trustee’s or the debtor in possession’s avoidance powers are established and the
various reach back periods are established in the case of preferences, fraudulent
transfers, set off recoveries, and other things done according to the trustee’s or debtor
in possession’s avoidance powers.
9.
The debtor will have detailed disclosure requirements both through the filings,
especially the schedules and statement of affairs, but also by attendance at the
meeting of creditors and being subject to examinations under Bankruptcy Rule 2004.
10.
Deadlines to object to discharge or the dischargeability of a particular debt are set
(generally 60 days after the date of the meeting of creditors).
Chapter 7 Cases Only.
In these cases, the goal typically is for the debtor to obtain a fresh start, meaning that the
debtor will discharge all unsecured claims in existence as of the date of filing, keep as much
property as possible (by judicial use of the exemption statutes) and expect that all post petition
earnings will belong to the debtor without further accounting. Often the debtor will use
reaffirmation agreements to keep critical collateral such as vehicles in which the debtor has an
equity, or can’t do without, and homesteads where there is equity. Although a debtor cannot waive
the right to file a bankruptcy case, once the debtor has done so, that will limit the debtors right to
file another case.
Typically in a Chapter 7 case, unsecured creditors file proofs of claim, hope for the best, and
write the debt off.
With secured creditors, typically the best the secured creditor can do is obtain its collateral
or the value of its collateral. Sometimes a reaffirmation agreement is in order if the creditor
believes it can in fact receive more than the value of its collateral even if the debtor keeps the
collateral, but makes some future payments.
In consumer cases, a debtor must elect, in the case of a secured creditor, to redeem the
collateral, reaffirm the debt or surrender the collateral.
All creditors in Chapter 7 cases, when they get the notice of case commencement, should
note the date of the meeting of creditors, the deadline to object to exemptions, the deadline to file
complaints to determine discharge or dischargeability and, where there is a date stated, the deadline
for filing a proof of claim.
Complaints to determine dischargeability might be in order if the creditor has a strong
feeling that something unusual has happened such as lying, fraud, false financial statements,
vandalism to or conversion of collateral or other unusual events. The general rule is that if a timely
complaint to determine dischargeability is not filed, then the debt will be subject to discharge.
Because of the avoiding powers of a trustee, sometimes a creditor might be better off
making arrangements with a debtor that will provide the debtor some incentive to wait at least 90
days after the arrangements are finalized.
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D.
Chapter 12.
This Chapter is available only to family farmers and family fisherman. See the definitions
of each for more detail. Here the debtor, rather than wanting a fresh start, wants to stay with a
particular business or a particular group of assets, restructure the payments to secured creditors to
avoid foreclosure, and pay unsecured creditors the minimum amount to emerge, at the end of the
plan, with something akin to a fresh start, but with no loss of assets or a functioning business.
E.
1.
From a creditor’s perspective, the key to these cases is the value of your collateral, as
opposed to the debt whose repayment is secured by the collateral, as of the date of
filing. If it were a perfect world, the collateral would be appraised as of the date of
filing, deductions would be made for any past due real estate taxes, prior liens or
lease interests, and an evaluation would be made as to whether the creditor is over or
under secured. When this evaluation is made, the creditor might be well served to
ask the appraiser to also estimate the rate or amount of depreciation of the collateral
from the date of filing on. It is the value of the collateral that is protected and not
equity cushions.
2.
If the creditor is under secured or about to become under secured, a motion for relief
from stay might be in order.
3.
If not, the creditor might not be able to win on a motion for relief from stay, unless
there is other “cause”, but at least if the value of the collateral is maintained and the
over secured position continues, it will not be possible for the debtor to confirm a
Chapter 12 plan that calls for anything less than payment in full and an interest rate
in the area of the prime rate plus 1% for solid collateral such as land, and perhaps
more for “softer” collateral, such as equipment or livestock.
4.
These are typically bigger cases than Chapter 13 cases, and they work well from the
perspective of the debtor because, like Chapter 13, the Chapter 12 plan can be
confirmed without the usual Chapter 11 ballot process and other more detailed
requirements.
Chapter 13.
These cases, like Chapter 12 cases are much simpler than Chapter 11 cases, but tend to be
smaller, more consumer orientated, and directed to de-accelerating mortgage foreclosure actions,
stopping foreclosure actions and allowing consumer debtors to keep consumer collateral such as
automobiles, and sometimes sports equipment. These cases, too, revolved around the secured status
of secured creditors. Generally, as with Chapter 12 cases, if substantial secured debt is involved,
creditors are well advised to seek the advice of a bankruptcy specialist.
F.
Chapter 11.
These cases are usually reserved for bigger business enterprises, farm operations that cannot
qualify for Chapter 12 relief, or even substantial individuals who cannot qualify for either Chapter 7
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or Chapter 13 relief. These cases typically require the assistance of a bankruptcy specialist. There
are some special peculiarities:
1.
The 1111(b) election;
2.
Ballot and plan confirmation process;
3.
The absolute priority rule; and
4.
How post-petition earnings will be characterized and committed to plan
consummation.
II.
HOW MIGHT A CREDITOR OR LENDER GENERALLY APPROACH BANKRUPTCY
CASE FILINGS, MOTIONS OR ADVERSARY PROCEEDINGS AND WHEN WOULD A
LAWYER BE NECESSARY OR ADVISABLE?
A.
B.
C.
Remember the Automatic Stay, 11 U.S.C. § 362, the Instant and Definite Moratorium
and Do Not Violate It.
1.
It is automatic and applies when the case is filed, whether you know of the case or
not.
2.
Acts taken in violation of it are void or voidable.
3.
Acts deliberately taken in violation of it can lead to payment of damages and
attorney fees.
Then Ask Three Fundamental Questions.
1.
What type of case is it (Chapters 7, 11, 12 or 13) and, what type of proceeding is
involved (just a case, a motion, an adversary proceeding or an application?
2.
Am I secured?
3.
What is the value of my collateral and is it at risk?
Unsecured Claim in a Chapter 7 Case.
Generally, if you have an unsecured claim and nothing unusual has occurred, 90% of the
time the best you can do is simply file a timely proof of claim if the notice of case commencement
establishes a deadline to do so. If the case appears to be a no asset case, the notice of case
commencement will advise not to even file claims. Another notice will go out later if assets appear
avoidable to pay claims. Generally, the Chapter 7 trustee will check all of the threshold issues
about whether the debtor meets the means test requirement, is eligible for Chapter 7 relief, has
accounted for all property, etc.
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D.
Unsecured Claim in a Chapter 11, 12 or 13 Case.
In these cases, it is almost always advisable to at least file a timely proof of claim, and
review the terms of the repayment plan. If the claim is substantial ($1,000.00 or more) it is usually
advisable to hire an attorney to file the claim and review the repayment plan, particularly in Chapter
11 cases. Although the Chapter 12 or Chapter 13 trustee will do a lot, and usually catch the major
objections, the trustee will not look out for specific unsecured claims. In Chapter 11 cases, there is
no trustee, but simply a debtor in possession with duties like those of a trustee. Although the
Chapter 11 confirmation standards cover much, they too will not necessarily protect individual
unsecured claims. To object to treatment in a Chapter 12 or 13 case, typically only an objection
need be filed (in the form of a motion in Minnesota). The same is true in Chapter 11 cases, but the
objection will need be done in more detail and likely the creditor or lender will also be called upon
to vote to accept or reject the proposed Chapter 11 repayment plan.
E.
Secured Claim in a Chapter 7 Case.
Here the general rule is that you will either get your collateral or get paid for your collateral,
as long as you watch out for your interests. Generally, if the collateral is substantial (worth
$1,000.00 or more) you will be well advised to obtain the help of an attorney. In consumer Chapter
7 cases, the debtor must elect whether to surrender the collateral, redeem the collateral (pay for it)
or reaffirm the debt. Reaffirmation agreements typically require the input of both the debtor and the
creditor and at least one attorney. If the debtor does not surrender the collateral, redeem the
collateral or enter into an acceptable reaffirmation agreement, then to obtain the collateral you will
either need to terminate the automatic stay, get the Chapter 7 trustee to abandon the collateral, in
which case it will no longer be property of the estate, and thus no longer protected by the automatic
stay, or wait for the case to be closed. Reaffirmation agreements, which generally must be done and
filed before the debtor obtains a discharge, serve to keep the personal obligation to pay from being
discharged. Typically, unless there is a bankruptcy court order to the contrary, the lien created by
the security agreement or mortgage will survive the discharge, but for a time, will be unenforceable
because of the automatic stay. In this situation, creditors should keep track of the date of the
meeting of creditors, and in consumer cases look for the statement of intention, and make sure
reaffirmation agreements are filed on time, motions for relief from stay are brought or requests for
abandonment are made unless other arrangements are forthcoming to either allow you to obtain
possession of your collateral, payment or an acceptable reaffirmation agreement.
F.
Secured Claim in a Chapter 11, 12 and 13 Case.
Generally here an attorney should be consulted if the collateral is substantial ($1,000.00 or
more). In this situation, the value of the collateral will be key, you might need appraisals, and if
you are over secured, you might even be able to recover attorney fees, as part of the over secured
claim. If you are under secured, your claim will be split and an attorney can advise you about how
each type of claim will be paid.
G.
Motions and Adversary Proceedings.
Generally you will need the assistance of an attorney to file a motion for relief from stay,
defend an adversary proceeding or take part in a motion. Only individuals can appear in bankruptcy
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court without an attorney to represent themselves. Artificial entities such as corporations, cannot
represent themselves through their officers, and generally must use counsel. Generally too, an
attorney should look over reaffirmation agreements. You should never ignore an adversary
proceedings summons and complaint. These might be served by mail, and might invoke the
jurisdiction of a far away bankruptcy court. Any time you are served with an adversary proceeding,
consult an attorney. If you have filed a notice of appearance and receive a copy of a motion, you
generally should consult an attorney. The motion might result in use of your collateral, or even the
creation of a competing lien.
H.
False Financial Statements, Fraud, Conversion of Collateral, Vandelism to Collateral
or Other Unusual Circumstances.
If you feel you have been abused by the debtor by some type of unusual conduct, you should
consult with an attorney who can advise you better about the possibility of filing a complaint to
determine dischargeability. These actions are not easy to win, and generally require proof by the
preponderance of the evidence, that the debtor had actual intent to harm your interests through the
use of a false financial statement or other improper actions.
III.
WHAT HAPPENS TO CREDITOR CLAIMS IF A BANKRUPTCY CASE IS FILED?
A.
Claim is defined broadly in § 101(5) to include any right to payment or a right to an
equitable remedy. Gray areas include warranty claims, personal injury claims, environmental
claims, and other types of claims that are not pending, threatened or expected, and might not ever
occur.
B.
Once a bankruptcy case has been filed, claims must be asserted, allowed, and if necessary
liquidated in the bankruptcy court. Normally a claimholder, subject to an applicable statute of
limitations, can choose when to assert the claim, select the court, and the venue. For example, there
may be federal diversity jurisdiction if there is complete diversity and the amount in controversy is
$75,000.00 or more. Sometimes a claimant might choose different state courts, or courts within a
state, for example district court, as opposed to small claims court. Sometimes a probate claim in a
probate estate is the proper forum. But once a bankruptcy case is filed, claims become subject to
the equitable jurisdiction of the bankruptcy court, and thus the right to jury trial is lost.
C.
The Fair Debt Collection Practices Act (“Act”) may no longer apply. Normally
where a consumer loan is involved, a claimholder asserting a claim not owned by it must comply
with the Act, which requires a notice, a request for verification, and compliance with other
requirements. The issue becomes then, whether one must comply with the Act when asserting a
consumer claim in a bankruptcy case, by for example, filing a proof of claim, filing a motion from
relief from stay, or even a complaint to determine dischargeability.
The law seems to have gotten clear that one does not need to comply with the Act to pursue
a consumer claim in a bankruptcy case.
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Pariseau v. Asset Acceptance, 395 BR 492 (Bankr. M.D. Fla. 2008) holds that merely filing
a proof of claim is not a violation of the Act. Congress did not intend to interfere with the intricate
workings of the bankruptcy system, and the bankruptcy system would be undermined by allowing
debtors to proceed under the Act.
Some courts have applied the Act in the very narrow context of situations involving the
automatic stay, but not where the mere filing of a proof of claim is involved.
The case also holds that state law consumer protection statutes are superseded by the Federal
Bankruptcy Code.
B-REAL, LLC v. Rogers, 405 BR 428 (D. La. 2009) also holds that the filing of a proof of
claim, even though the claim might be time barred, does not violate the Act.
Chapman III v. Fischer, 49 Fed.Appx. 636 (7th Cir. 2002) also holds that filing a proof of
claim is not a communication that needs to be addressed under the Act.
Baldwin v. Padrick, 1999 W.L. 284788 (N.D. Ill. 1999) holds that the Act does not apply to
filing proofs of claim in a bankruptcy case.
Rice – Etherly v. Bank One, 336 BR 308 (Bankr. D. Mich. 2006) holds that one filing a
motion for relief from stay does not face liability under the Act, for having sought attorney’s fees as
part of the motion. Cooper v. Litton Loan Servicing, 253 BR 286 (Bankr. N.D. Fla. 2000), holds
that one does not violate the Act by making a motion to lift the stay, because the motion is not a
debt collection activity, as defined by the Act, but is instead an attempt to permit a party to seek a
forum in which to attempt debt collection activities. Stoiber v. Prebosky, 2008 WL 2909855
(Bankr. D. Or.) holds that violations of the automatic stay are governed by the Bankruptcy Code,
but not the Act.
Walls v. Wells Fargo Bank, 276 F.3rd 502 (9th Cir. 2002) denied claims under the Act for
alleged violations of the discharge injunction. Issues such as whether a reaffirmation agreement
was required, how much debt rode through a bankruptcy case, and similar issues must be decided as
violations of the Bankruptcy Code, and not under the Act. The Act’s purpose is to avoid
bankruptcy, but if a bankruptcy nevertheless occurs, a debtor’s protection and remedy remain under
the Bankruptcy Code.
The Cooper and Walls cases might be used by analogy to show that one does not need to
comply with the Act to file a complaint to determine dischargeability. Some attorneys, in drafting
complaints to determine dischargeability, state that the complaint does not seek to recover a claim,
but only preserve a claim from discharge.
Of course, if the collection of a consumer debt continues outside of the Bankruptcy Court,
one must comply with the Act. So, for example, if the automatic stay were terminated to allow
some type of state court action to collect a consumer debt, the Act would be applicable again at that
point.
The protection appears only to apply to activities within a bankruptcy case.
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D.
Generally, one must file a proof of claim with the Clerk of the Bankruptcy Court where the
case is pending. Such a claim is deemed allowed unless a party in interest objects. Section 502(a).
Generally, if there is an objection, the matter will be quickly scheduled for a hearing in the
Bankruptcy Court.
If there is a claim, and no proof of claim is filed, then there would be no possibility in
sharing in non-exempt assets, and if the debtor is granted a discharge, the claim will be forever
barred as part of the discharge injunction.
E.
Bankruptcy Court jurisdiction applies, even though a claimholder might have greater
procedural rights in another court, and might be said to be stripped of the constitutional right to a
jury trial.
The right to a jury trial in actions at law (not equity) is guaranteed by the Seventh
Amendment. However, when a bankruptcy case is filed, claims become equitable claims, where
there is no right to a jury trial. By filing a proof of claim, a claimholder submits to the equitable
jurisdiction of the Bankruptcy Court, and thus claims by the bankruptcy estate against the
claimholder will be equitable claims, where there is no right to a jury trial.
If a claimholder fears a fraudulent transfer recovery action or a preference recovery action
might be brought, and wants a jury trial, the claimholder might refrain from filing a proof of claim,
because then the right to a jury trial to defend the preference or fraudulent transfer recovery action
would remain.
F.
Right to Arbitration.
The right to arbitration is created by statute and probably remains a legal right under the
Federal Arbitration Act. Thus, this statutory right, probably survives a bankruptcy case filing,
whereas the right to a jury trial does not.
G.
Automatic Stay.
The automatic stay prevents a claimholder from doing anything to assert the claim, other
than the filing of a proof of claim, unless the automatic stay of § 362(a) is modified or terminated.
(copies of a motion for relief from stay used in North Dakota or Minnesota are attached).
The automatic stay becomes permanent if a discharge is granted, and is replaced by the
discharge injunction of Section 524.
H.
Administrative Claims.
These claims, although unsecured, are entitled to priority, meaning that they are paid ahead
of general unsecured claims. These were defined by Section 503.
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I.
Priorities.
Various claims are paid in the order of priority spelled out by Section 507. A case is
generally referred to as “administratively solvent” if there are funds available to pay all
administrative claims. A case is generally called “solvent” if there are assets available to pay all
administrative and priority claims. Only in a “solvent” or “asset” case will there will be claims paid
to general unsecured creditors.
J.
Reorganization Cases.
In Chapters 11, 12 and 13, claims are paid according to the confirmation standards of the
respective chapter.
1.
Chapter 11.
See § 1123 concerning what a Chapter 11 Plan must contain, and § 1129, the
confirmation standards.
Generally, a Chapter 11 Plan must provide the same treatment for each claim
of a particular class, and must provide adequate means for the plan’s
implementation.
Plans must be filed in good faith, at least one class of creditors must accept
the Plan, and creditors must receive at least what they would have received if the
case were liquidated in Chapter 7, and no more junior classes may receive anything,
unless more senior classes are paid in full (absolute priority rule).
2.
Chapter 12.
See § 1225 which requires plans to be proposed in good faith, creditors to
receive at least what they would have received in Chapter 7, and secured creditors
must retain their liens and be paid the value of the lien.
3.
Chapter 13.
See Section 1325 which, like Chapter 12, requires plans to be proposed in
good faith, for creditors to receive at least what they would have received in Chapter
7, and for secured claims to be paid in full. As with Chapters 11 and 12, a Chapter
13 Plan must be feasible, and the debtor bears the burden of proof.
Secured claims, if they are fully secured, will need to be paid in full. If a
claim is only partially secured, then it will be split under § 506(b), and the secured
portion will be paid in full, but the unsecured portion will be paid as any other
unsecured claim.
This is the minimum standard required by the Due Process Clause.
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K.
Secured Claims.
Generally, secured claims “ride through” a bankruptcy case, meaning that the claimholder
either receives the collateral or the value of the collateral. In a Chapter 7 case, a debtor must file a
Statement of Intention indicating whether the debtor intends to surrender collateral, redeem the
collateral or reaffirm the debt. § 521(a)(2).
Generally, if a claimholder is fully secured, it cannot have received a preference under §
547, and unless there is bankruptcy fraud, vandalism of collateral, or someone fails to properly
monitor the bankruptcy case, there will be no possibility of the secured creditor being paid anything
less than in full. However, the creditor may be bound by a repayment plan that allows the creditor
to retain a lien in the collateral, but requires payments over time, at a market rate of interest, plus a
small increase because of the increased bankruptcy risk.
IV.
CREDITOR’S RIGHTS GENERALLY
I.
Secured or Unsecured
II.
Unsecured – I will pay if, using hindsight, I like the good or service, or the loan proved
profitable and I have the money, I’m still alive, my family won’t suffer, I’ll be able to enjoy all my
habits and life style as I have grown accustomed to it, I’m still in good health, I don’t have other
pressing creditors, I like the tone of your voice when you insist that I keep my promise to pay you,
and I might need you for other goods or services or loans in the future.
Other stoppers –
1.
Statue of Frauds §9-06-04 (can’t be performed within a year, amounts to a promise
to answer for the debt, default or miscarriage of another, is for the leasing of a period
longer than 1 year or for the sale of real property or an interest therein, or is a
promise for the lending of money or the extension of credit over $25,000 or a
promise to alter the terms of repayment or forgiveness of a debt of over $25,000) or
§41-02-08 (a contract for the sale of goods for the price of $500 or more).
2.
Statue of Limitations §28-01-16 (6 years if the claim for relief is an action upon a
contract, obligation, or liability, express or implied.)
3.
Bankruptcy 11 U.S.C §362 (a).
4.
Perjury
5.
Off Shore Trusts
6.
Fraudulent Transfers (UFTA Chapter 13-02.1 or 11 U.S.C §548).
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III.
7.
Exemptions – Chapter 28-22 (Personal Property) and 47-18 (Homestead).
8.
Strike Suit
9.
Filing Fees - $80 in North Dakota and $245 in Minnesota plus a $55 Motion filing
fee in Minnesota.
10.
Service and Jurisdiction – Rule 4 N.D.R.Civ.P.
Can I get secured after the fact?
A)
Consensual Lien – Mortgage, Security Agreement or assignment?
Preference? 11 U.S.C §547!
B)
Co – Signer or Guarantor? – Consideration?
C)
Statutory Liens? Chapter 35-05?
Time limits? Statutory requirements? Preference?
D)
Judgment Lien
Real Estate on Docketing
Levy and execution on personal property
Garnishment
Discovery – Rule 69 N.D.R.Civ.P.
Same StoppersIV.
Do it right at the time the good or service is provided or the loan is made.
A)
Consideration on Guarantees presumed and no preference problem.
B)
But there still can be trouble with:
1.
Collateral
2.
Documentation problems – pictures?
3.
Filing Fees
4.
CNS 1 on crops §41-09-40, N.D.C.C.
5.
Special Language – motor vehicles §41-09-50(b) but not in §41-09-106,
homestead mortgages, §47-18-05 and crop liens, §35-05-01.1.
6.
Appraisal expense.
7.
Insurance.
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V.
8.
Environmental problems.
9.
Anti – deficiency Judgment Statutes §32-19-06 and §32-19-06.1 and §32-1907, N.D.C.C. (exceptions for commercial real property for mortgage signed
after August 1, 1993 and second mortgages after August 1, 1993 where the
Mortgagee waives the right to foreclose and the mortgage concerns
residential real property consisting of four or fewer residential units).
10.
Personal property foreclosure under Articles 9 of the UCC less restrictive, but
notice and commercially reasonable sale requirements. §§41-09-108 and 4109-107 respectively.
11.
A lease is the easiest – statutory damages and attorney’s fees allowed – T.F.
James Co. v. Vakoch, 2001 N.D. 112, 628 NW2d 298 (ND 2001) despite
N.D.C.C. §28-26-04 (Attorney’s fee provision in any note, bond, mortgage,
security agreement, or other evidence of debt for the payment of an attorney’s
fee in case of default in payment or in proceedings had to collect such note,
bond or evidence of debt, or to foreclose such mortgage or security
agreement, is against public policy and void).
12.
Monitor it.
13.
Soft Collateral –
Live Stock ????
Crops §41-09-40, C.N.S. 1, notices to elevators (18 months) action against
Debtor, statutory liens are five-year statute of limitations.
Interest
A)
Legal rate – 6%, §47-14-05.
B)
Judgment rate – 12% (unless based upon an instrument) not compounded, §28-2034.
C)
Other – yes if contracted for in writing, §47-14-05, but cannot exceed usury rate of
§47-14-09 (many exceptions - $35,000).
D)
1¾ % per month – yes and can apply to past due bills for Attorney’s fees.
§13-01-14 and 13-01-15 permit this on all money due on account from 30 days after the
obligation of the Debtor to pay has been incurred, but the late payment charge cannot exceed 1¾ %
per month. This late payment charge can only be charged if, when the obligation was incurred, the
Creditor did not intend to extend any credit beyond 30 days and any late payment of the obligation
was unanticipated. To collect this interest rate, the Creditor must, however, provide a monthly
statement stating the percentage amount of the late payment charge that will be charged beginning
30 days after the obligation was incurred, the unpaid balance at the end of the period, and
13
identification of any amount debited to the Debtor’s account during the period, payments made by
the Debtor during the period and the amount of the late payment charge.
VI.
VII.
VIII.
Other Attorney’s Fees
A)
Rule 11(c) N.D.R.Civ.P. – Sanctions (on motion and right to withdraw)
B)
§28-26-01 – complete absence of actual facts or law that a reasonable person could
not have though a Court would render Judgment in their favor, providing the
prevailing party has in responsive pleading alleged the frivolous nature of the claim.
C)
§28-26-31 – if pleadings are made without reasonable cause and not in good faith,
and found to be untrue.
The Gold Standard – get and stay over-secured as part of the initial transaction and use
guarantees of payment, Chapter 22, N.D.C.C.
A)
No possibility of loss if death, change of intent or bankruptcy unless;
B)
Caution to the Wind
1.
Felony conversion – 12.1-23-08, defrauding secured creditors, class C felony
if property has a value more than $500.
2.
Vandalism
3.
Lack of insurance.
4.
Asleep at the switch in Bankruptcy Court.
Bankruptcy, if secured
A)
Due Process and 11 U.S.C. §506(a). Split claims?
B)
Chapter 7 cases surrender collateral, reaffirm debt or redeem collateral. 11 U.S.C.
§521.
C)
Chapter 13 pay in full or retain lien and pay deferred payments having a present
value equal to the value of the collateral. 11 U.S.C. §1325(a)(5).
D)
Chapter 12- Same 11 U.S.C. § 1225(a)(5).
E)
Chapter 11 – Same, 11 U.S.C. §1129(b)(2)(A), but absolute priority Rule 11 U.S.C.
§1129(b)(2)(B)(ii) attorney’s fees if over secured allowed by 11 U.S.C. §506(b) if
the Creditor is over secured in excess of the fees requested, the fees are reasonable,
and there is an agreement giving rise to the claim providing for Attorney’s fees.
White v. Coors Distrib. Co. (In re White), 260 B.R. 870, 880 (BAP 8th Cir. 2001),
14
citing First W. Bank & Trust v. Drewes (In re Schriock Constr., Inc.), 104 F.3rd 200,
201 (8th Cir. 1997).
IX.
Bankruptcy, if unsecured
A)
Chapter 7, the shaft!
B)
Chapters 12 and 13 at least what you would have gotten in Chapter 7 11 U.S.C.
§§1225(a)(4) and 11 U.S.C. §1325(a)(4), but “good faith” 11 U.S.C. §§1225(a)(3)
and 1325(a)(3) and three years disposable earnings, pro rata. 11 U.S.C.
§§1225(b)(1)(B) and 1325(b)(1)(B).
V.
AGRICULTURAL LAW
A.
CROP LIENS AND ASSIGNMENTS OF GOVERNMENT PAYMENTS
1.
Crop Liens.
Typically an agricultural loan, whether a term loan or an operating loan, is secured by a
mortgage on the land and a security agreement creating security interests in machinery, equipment,
livestock, crops and government payments. If the borrower is an artificial entity, personal
guarantees of payment from the owners are also common.
One type of collateral that provides special challenge is crops.
a. Covered by N.D.C.C. Chapter 35-05.
b. Generally security interests in growing and un-harvested crops are prohibited and
any security agreement purporting to create a security interest in them is void, but
this section, N.D.C.C. §35-05-01, does not apply to a security interest or lien “in
favor of the United States, this State, any county, or any department or agency of any
them, including the Bank of North Dakota, nor to any financial institution as defined
by §6-01-02 or §21-04-01, nor to any agricultural cooperative or agricultural lending
agency, nor to any security interest created by contract to secure money advanced or
loaned for the purpose of paying governmental crop insurance premiums or to secure
the purchase price or the rental or improvement of the land upon which the crops
covered by the contract are to be grown” (Landlord’s Liens). Query whether large
unregulated agricultural lenders can have valid crop liens under North Dakota law.
c. The Lien only attaches to the “crop next maturing after the deliver of the security
agreement”, and the financing statement covering a crop cannot be used to enforce a
security interest on any crop other than the crop listed in the security agreement.
This prohibition does not apply to “liens by contract” given to secure the purchase
price or the rental of land upon which the crops covered by the lien are to be grown
(Landlord’s Lien) N.D.C.C. §35-05-01.1.
15
d. The above limitation also does not apply to a security agreement that contains an
after-acquired property clause and the following wording or its equivalent, in bold
face print or set forth in some other conspicuous manner in the agreement:
“This security agreement covers crops now growing. The security
agreement also covers future crops to be grown in the current year or
any year hereafter.”
N.D.C.C. §35-05-01.1.
e. The lien on future crops, where permitted, “maintains its priority as to crops grown
in future years only so long as the lien holder continues to provide operating funds to
the borrower.” N.D.C.C. §35-05-01.1. In other words, a new operating lender can
“leap-frog” the prior secured lender.
f. Use of bills of sale to circumvent these provisions are void, and the person
attempting to use a bill of sale as a disguised crop lien “is guilty of an infraction”.
N.D.C.C. §35-05-03.
g. The old provision that a security agreement could not create a lien in crops and other
personal property in the same agreement was repealed in 1997.
2.
Assignments of Government Payments.
Most agricultural producers expect government payments in many different forms such as
CRP payments, disaster payments, deficiency payments and others. These payments can be
assigned to a lender as additional collateral, but the lender needs to use the government form,
typically CCC-36, and a financing statement still must be filed to perfect the assignment.
B.
MORTGAGES
1.
Collateral Real Estate Mortgages.
Collateral real estate mortgages are allowed by §35-03-17. There must be a special caption.
The advantage is that even though during the term of the mortgage, no indebtedness is due from the
mortgagor to the mortgagee, there is still is a continuing lien against the real property covered by
the mortgage for the amount stated in the mortgage. So this would be a good mortgage to secure an
operating line of credit. Any sum not exceeding the face amount of the mortgage, together with
interest, has priority from the date the mortgage is filed. The maturity date can be up to five years.
The collateral real estate mortgage lapses sixty days after the five-year period unless an addendum
is filed.
2.
Deficiency Judgments.
§32-19-06.2 allows deficiency judgments in an action to foreclose a mortgage on
agricultural land of more than 40 acres if the complaint so provides and a separate action for a
deficiency is brought within ninety days after the sheriff’s sale. The deficiency cannot be in excess
of the amount found by the Court to by which the sum adjudged to be due and the cost of the action
exceed the fair market value of the mortgaged premises. The parties must be given fifteen days’
notice of the time and place for determination of the fair market value, and then any deficiency
16
judgment can only be enforced by execution within three years from the date of entry of the
judgment. N.D.C.C. §32-19-06.2.
Presumably, if the mortgage covers an area less than 40 acres, N.D.C.C. §32-19-06 applies
and the older tougher rules on obtaining a deficiency judgment still apply which would require a
jury to determine that the “fair value” as opposed to the “fair market value” of the property is less
than the amount due on the mortgage.
3.
Redemption.
All real property sold upon foreclosure may be redeemed according to N.D.C.C. §32-19.104 or by Chapter 28-24. Under Chapter 32, the redemption period is six months if the amount due
on the mortgage is more than 66⅔% of the original indebtedness. Otherwise, it is one year. The
short-mortgage redemption act, N.D.C.C. Chapter 32-19.1 was repealed in 2005.
§28-24-02 restates that the redemption period is six months if more than 66⅔% of the
original indebtedness is due, otherwise the redemption period is one year. However, §28-24-02
specifies that “The period of redemption begins at the time of the filing of summons and complaint
in the office of the Clerk of District Court or at the time of first publication of the notice before
foreclosure by advertisement,” but the final date for redemption “may not be earlier than sixty days
after the sheriff’s sale”.
4.
Foreclosing Mortgage Liens and Security Interests.
When bringing an action to collect an agricultural loan, friction arises from the fact that the
creditor wants to commence the action right away, yet an action to foreclose a real estate mortgage
cannot be brought until thirty days after service of the notice before foreclosure. N.D.C.C. §32-1920. One solution is to serve the notice before foreclosure, wait the thirty days, and bring one action
to foreclose the real estate mortgage(s) and foreclose the personal property security interests.
Another solution is to start the action to foreclose the personal property liens right away specifically
reserving the right to amend the complaint later to include a count for foreclosure of the real estate
mortgage(s).
However, because of the anti-deficiency judgment statutes, care must be taken to make
certain that all personal property liens have been foreclosed and the net proceeds applied to the
indebtedness before the creditor completes the real estate foreclosure process and establishes the
amount due in the foreclosure action.
C.
OTHER LIENS
1.
Statutory Liens.
a.
Agricultural Processor’s Lien.
1.
Covered by N.D.C.C. Chapter 35-30.
17
2.
Available to “Any person who processes any crop or agricultural
product…”.
3.
This person is entitled to a lien upon the crop or product processed for
the reasonable value of the services performed. The lien can only
apply to the crop or product processed.
4.
One who processes a crop is anyone who threshes, combines, drives
or harvests any crop or agricultural product.
5.
The agricultural processor’s lien is effective from the date the
processing is completed.
6.
To obtain the lien the processor must file a verified statement within
ninety days after the processing is completed in the office of the
recorder in any county of the state or in the office of the Secretary of
State. N.D.C.C. §35-30-02 supplies a detailed list of the items to be
included in the verified statement.
An agricultural processor’s lien has priority, as to the crops or the
agricultural products covered by the lien, “over all other liens or
encumbrances.” N.D.C.C. §35-30-03.
7.
b.
Agricultural Suppliers Lien.
1.
Covered by N.D.C.C. §35-31-01.
2.
“Any person who furnishes supplies used in the production of crops,
agricultural products, or livestock is entitled to a lien upon the crops,
products produced by the use of the supplies, and livestock, and their
products including milk.” N.D.C.C. §35-31-01.
3.
The term “supplies” includes “seed, petroleum products, fertilizer,
farm chemicals, insecticide, feed, hay, pasturage, veterinary services,
or the furnishing of services in delivering or applying the supplies.”
N.D.C.C. §35-31-01.
4.
This lien is effective from the date the supplies are furnished or the
services are performed.
5.
The procedure to obtain the lien is outlined in N.D.C.C. §35-31-02.
Here, the verified statement must be filed within 120 days after the
supplies are furnished, but within 150 days after “petroleum products”
are furnished or delivered. N.D.C.C. §35-31-02 supplies a list of the
information to be contained in the verified statement.
6.
An agricultural supplier’s lien has priority, as to the crops or
agricultural products covered thereby, “over all other liens or
18
encumbrances except any agricultural processor’s lien.” N.D.C.C.
§35-31-03.
7.
c.
See Stockman Bank v. AGSCO, 2007 ND 26 and Stockman Bank v.
AGSCO, 2007 ND 27.
Warehouseman’s Lien.
If an elevator, mill, warehouse, sub-terminal, grain warehouse, terminal warehouse, or other
structure or facility in which grain is received for storing, buying, selling, or shipping for
compensation becomes insolvent, the public service commission will take over its assets, N.D.C.C.
§60-04-03, and a trust fund will be established for the benefit of noncredit-sale receipt holders
consisting of, among other things, all grain in the warehouse obtained through the sale of such
grain, accounts receivable from grain sold and insurance policy proceeds, among others. N.D.C.C.
§60-04-03.1. Stored grain is still owned by the receipt holders. The so-called “house grain”
becomes part of a trust for the benefit of all receipt holders. N.D.C.C. §60-04-06. The so-called
“receipt holder’s lien” “shall be preferred to any lien or security interest in favor of any creditor of
the warehouseman regardless of the time when the creditor’s lien or security interest attached to the
grain.” N.D.C.C. §60-02-25.1. No notice of the lien need be filed to perfect the lien, but the lien is
discharged “as to grain sold by the warehouseman to a buyer in the ordinary course of business.”
N.D.C.C. §60-02-25.1.
D.
CORPORATE FARMING LAW
North Dakota’s Corporate or Limited Liability Company Farming Law is contained in
N.D.C.C. Chapter 10-06.1. Generally, all corporations and limited liability companies are
prohibited from owning or leasing land used for farming or ranching and from engaging in the
business of farming or ranching, except as allowed by Chapter 10-06.1. Non-profit organizations
(The Audubon Society, The Nature Conservancy, etc.) also have severe limitations placed on their
ability to obtain farmland or ranch land. N.D.C.C. §10-06.1-10. Non-profit organizations are
limited to a total of 12,000 acres, and then can only acquire land for the purpose of conserving
natural areas, and then only by approval by the Governor. N.D.C.C. §10-06.1-10(3).
The general corporate farming law prohibits corporations or limited liability companies
having more than 15 unrelated members from owning farmland and the officers and directors must
be actively engaged in operating the farm and at least one of the corporation’s shareholders must be
an individual residing on or operating the farm or ranch. N.D.C.C. §10-06.1-12(1) and §10-06.112(6). 65% of the gross income of the corporation or limited liability company earned over the last
five years, or each year of its existence if less than five years, must be derived from farming or
ranching operations. N.D.C.C. §10-06.1-12(7).
These statutes have come under increasing attack. See for example Jones et. al. v. Gale No.
06-1308, 8th Cir., December 13, 2006.
19
E.
RELIEF FROM DEFAULTS AND HARDSHIPS
N.D.C.C. Chapter 28-29 is sometimes referred to as the confiscatory price defense. Most of
its provisions were repealed in 2003.
F.
CHAPTER 12
Chapter 12 of the Bankruptcy Code, 11 U.S.C. §1201 et. seq. provides special relief for
“Family Farmers or Fishermen”.
Most of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)
tightened up filing requirements and generally made it tougher for debtors, and especially debtors’
attorneys, to initiate and obtain a Chapter 7 discharge or other bankruptcy relief. Ironically, Chapter
12 became easier in the process. For example, an individual or a spouse engaged in a farming
operation whose aggregate debts do not exceed $3,237,000.00 and not less than 50% of whose
aggregate and non-contingent liquidated debts arise out of a farming operation is eligible for
Chapter 12 relief. Under the old law, the debt limit was $1,500,000.00 and 80% of the aggregate
non-contingent liquidated debts had to arise out of a farming operation. In addition, some of the
new provisions designed to address homestead exemption planning abuse do not apply to Chapter
12.
In Chapter 12, unsecured creditors and undersecured secured creditors can face substantial
losses.
Oversecured creditors, however, have little to fear in a Chapter 12 bankruptcy case. They
can look forward to payment in full, payment of their attorneys fees connected with the case, 11
U.S.C. §506(b), an enhanced interest rate, and enforceable “drop-dead” provisions, should a plan be
confirmed.
G.
JOINT CHECK STATUTE
1.
Covered by §41-09-40 entitled “Buyer of Goods”.
2.
The general rule is that a buyer in the ordinary course of business, other than a
person buying farm products from a person engaged in farming operations, takes free
of the security interest created by the buyer’s seller, even if the security interest is
perfected and the buyer knows of its existence. §41-09-40(1).
3.
But a secured party with a perfected security interest in crops or livestock can
impose liability on purchasers of the crops or livestock if the “name of the secured
party or lien holder …appear[s] on the most current list distributed by the Secretary
of State pursuant to §54-09-10.” §41-09-40(6).
4.
To appear on the list the secured party or lien holder must file a CNS-1 form.
5.
Once done, when a crop or livestock buyer issues a check to a person engaged in
farming operations in payment for crops or livestock in order to take free of the
20
security interests or liens against such crops or livestock, the crop or livestock buyer
must issue the check for payment jointly to the person engaged in farming operations
and those secured parties or lien holders who have a security interest or lien in the
crops or livestock sold and whose name appears on the most current list or lists
distributed by the Secretary of State at the time the check or draft is issued. §41-0940(7).
6.
So, when a crop or livestock buyer buys grain, for example, from a person engaged
in farming operations, the buyer must check the list and make sure the check is made
payable jointly.
7.
If this is not done, the secured party can collect the amount of the check directly
from the crop or livestock buyer if the lien holder sends a notice within eighteen
months of the date of the draft or check containing the information specified in §4109-40(7).
Then, any further action cannot be commenced with five years after the date of the
draft or check.
8.
H.
9.
However, the complaint by the secured party cannot be filed until the secured party
has obtained a judgment and made a good faith effort to collect the judgment against
the person engaged in farming operations, or collection has been stayed by a federal
bankruptcy proceeding. §41-09-41(8).
10.
Secured creditors, therefore, want to make sure they file the CNS-1 statement to get
on the list, and then keep track if the debtor has made any sales where the secured
party’s name was not on the check. If so, the notice must be given within eighteen
months and the secured creditor should start collection efforts right away to obtain
entry of judgment.
11.
North Dakota is one of the few states to have this provision. Sometimes persons
engaged in farming operations will take crops or livestock to South Dakota, but
experience has shown that the South Dakota buyer can still be liable under the North
Dakota law, even though South Dakota does not have a similar statute.
MISCELLANEOUS
1.
CRP contracts require ongoing maintenance, and tax treatment of CRP payments for
retired farmers or operators may change from rental income to income subject to the
15.3% self employment tax.
2.
Be aware of grassland easements and waterfowl easements when purchasing
agricultural property or mortgaging agricultural property. Typically, a grassland
easement prohibits any disruption of the grassland, and prohibits mowing before July
1st of the year. Typically, only grazing uses are permitted. In the case of waterfowl
easements, typically all burning is prohibited. Query whether these types of
easements allow development of wind energy, and the constructed roads necessary
for installation.
21
VI.
THE GENERAL SCHEME OF THINGS – HOW TO ADDRESS ANY BANKRUPTCY
CASE, OR RELATED ISSUE
I.
Constitutional provisions
II.
The Statute Title 11, United States Code
III.
State Law
IV.
Bankruptcy Rules
a.
Motions
b.
Adversary proceedings
c.
Applications
V.
Local Bankruptcy Rules
VI.
Supreme Court Cases, 8th Circuit Court of Appeals Cases, Cases from the 8th
Circuit Bankruptcy Appellate Panel and Bankruptcy Court Decisions
VII.
Bankruptcy Court Websites
VIII.
American Bankruptcy Institute
Article 1, § 8 of the United State Constitution gives Congress the power “To establish a
uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the
Unites States.” The Fifth Amendment of the United States Constitution states that no person shall
“… be deprived of life, liberty, or property, without due process of law, nor shall private property
be taken for public use without just compensation.” Article 13 of Unites States Constitution
prohibits “Involuntary Servitude”. The Seventh Amendment of the United States Constitution
reserves the right to a jury trial and suits of common law where the value and controversy exceeds
$20.00. Article 1, § 10 of the U.S. Constitution prohibits laws “… impairing the obligations of
22
contract …”. The same is true of Article 1, § 18 of the Constitution of North Dakota and Article 1,
§ 11 of the Constitution of the State of Minnesota.
Most “Pure Bankruptcy Law” is found in Title 11 of the United States Code with bankruptcy
crimes outlined in Title 18, beginning with § 151, and important provisions in Title 28, especially §
157 which defines core proceedings, where the Bankruptcy Court clearly has jurisdiction through
entry of judgment, and § 158 concerning appeals. 28 U.S.C. § 1334 describes District Court
original and exclusive jurisdiction, § 1409 discusses venue and § 1411 concerns jury trials. 28
U.S.C. § 2075 gives the Supreme Court the power to prescribe General Rules of Bankruptcy
Procedure. As shown below, Bankruptcy Rules, are particularly important, and sometimes seem to
go beyond clearly procedural matters into substantive matters.
Although “Pure Bankruptcy Law” is found Title 11 of the Unites States Code, it tells only
about half the story about how bankruptcy cases are ultimately resolved, and distributions made.
The watershed demarcation in a bankruptcy case is whether a creditor is secured or unsecured, or a
lease is at stake. But there is nothing in the Bankruptcy Code to tell which it is. That is all left up
to state law, the Uniform Commercial Code, and state law on what it takes to have a valid and
enforceable mortgage. The Uniform Commercial Code discusses security agreements, attachment,
perfection, priorities, default, default rights, rights to deficiency judgment, etc. Similarly, the state
law determines the validity and priority of mortgages and assignments of rents. So too, it is left to
state law to determine exemptions, except in states where a debtor can elect the federal exemptions,
and thus the state law usually determines what will be property of the estate, and through a
liquidation analysis, what minimum amounts will need to be paid to unsecured creditors in
reorganization cases. Contract rights are left to state law. Recoverability of causes of action are left
to state law. Validity of claims filed in bankruptcy cases are ultimately left to state law, if there is
an objection. As we see above, States like North Dakota have many special provisions relating to
23
agricultural law, and thus farm bankruptcy cases. So too, North Dakota has special laws protecting
certain classes of claimants, such as mechanic’s lien claimants, and those trying to return goods
from an agricultural equipment dealership.
A bankruptcy case is initiated by a petition, either voluntary or involuntary, and begins with
an order for relief. Many bankruptcy cases are administered without bankruptcy court direct
involvement. One of the goals of the Bankruptcy Code was to make what had been bankruptcy
referees into bankruptcy judges, concerned with resolving adversary proceedings or contested
matters, while being removed from the administration of bankruptcy cases generally. For example,
the bankruptcy judge is prohibited from attending the meeting of creditors.
The Bankruptcy Rules set out what type of matters can be brought before the bankruptcy
judge. Bankruptcy Rule 7001 specifies ten types of things that are adversary proceedings. Where
there is an adversary proceeding, there is a summons and complaint, and an action that looks, for all
practical purposes, like any other lawsuit where there is simply a plaintiff or a defendant. But an
adversary proceeding is brought as part of a bankruptcy case, and its outcome will usually affect the
outcome of the bankruptcy case itself. For example, if a complaint to determine dischargeability is
successful in a Chapter 7 case, the Chapter 7 debtor will either not receive a general discharge, or
will be unable to discharge a particular debt. Most of the Rule 7000 Bankruptcy Rules parallel the
Federal Rules of Civil Procedure. For example, discovery is done according to Bankruptcy Rules
7026 through 7071, and many of these Rules mirror the Federal Rules of Civil Procedure having the
same last two digits of the Federal Rule. Generally, adversary proceedings raise serious issues such
as actions to recover money or property, actions to determine validity and priorities of liens, to
revoke discharges, to determine dischargeability, to subordinate claims or to obtain injunctions.
If a matter is not an adversary proceeding as defined by Bankruptcy Rule 7001, then it is
known as a “contested matter” under Bankruptcy Rule 9014, and there relief is requested by a
24
motion, with a reasonable notice and opportunity for a hearing, instead of an adversary proceeding
complaint. Bankruptcy Rule 9013 sets out the form of a motion and service.
In addition to adversary proceedings brought by a complaint and contested mattes brought
by a motion, there are also applications such as applications for employment of professional persons
or allowance of professional fees under 11 U.S.C. § 327 or § 328.
Some of the other usually familiar Federal Rules of Civil Procedure show up in the 9000
Bankruptcy Rules. Rule 9006 discusses time computation. Bankruptcy Rule 9011 is much like
Rule 11 of the Federal or State Civil Rules of Procedure that specify the effect of signing a pleading
and the representations made by doing so. Bankruptcy Rule 9017 states that the Federal Rules of
Evidence, as well as Rules 43, 44 and 44.1 of the Federal Rules of Civil Procedure, apply in cases
under the Bankruptcy Code.
Bankruptcy Rule 2002 is particularly important because it describes what type of notice
must be given in a bankruptcy case, who must be given notice and how long the notice must be, for
various actions.
Once one has identified the particular sections of the Bankruptcy Code that apply, the
Federal Bankruptcy Rules that apply, and the type of proceeding that needs to be brought; then it is
time to check the local Bankruptcy Rules, and then U.S. Supreme Court cases, 8th Circuit Court of
Appeals cases, cases from the 8th Circuit Bankruptcy Appellate Panel, and earlier cases of the
Bankruptcy Court where your matter is venued.
Anyone serious about bankruptcy practice must be conversant with the local Bankruptcy
Court website, and would be well served by being a member of the American Bankruptcy Institute.
www.abiworld.org or (703) 739-0800.
25
VII.
MISCELLANEOUS UPDATES
Page No.
A.
Complaints to Determine Dischargeability ................................................................. 27
B.
Motions for Relief from Stay (ND and MN) ............................................................... 41
C.
Summary of time computations .................................................................................. 52
D.
Notice of Appearance .................................................................................................. 54
E.
Objection to Confirmation of a Chapter 13 Plan (MN)............................................... 57
F.
Ex Parte Motion to Extend Deadline for Filing Complaint to
Determine Dischargeability......................................................................................... 70
G.
Involuntary Petition ..................................................................................................... 75
H.
Flowchart of activities in a Chapter 7 bankruptcy case .............................................. 80
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53