Business Law Study Set 13

Business

Quiz 35 :

Bankruptcy

Quiz 35 :

Bankruptcy

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Samson Industries ceased doing business and is in bankruptcy proceedings. Among the creditors are five employees seeking unpaid wages. Three of the employees are owed $3,500 each, and two are owed $1,500 each. These amounts became due within 90 days preceding the filing of the petition. Where, in the priority of claims, will the employees' wage claims fall?
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For priority on claims, see the US Code Title 11 Section 507. The priority for claims against a debtor of wages depends on the time when the bankruptcy was filed or cease of business operations.
• Wage claims 180 days prior to cease of business or bankruptcy has higher priority, but only for up to $10,000 per person.
• Otherwise wages owed will be considered unsecured creditors and will be in a lower priority.
Since, the amount due to the workers were only 90 days prior to the file , their claims are in the lower priority of unsecured creditors.

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Carol Cott, doing business as Carol Cott Fashions, is worried about an involuntary bankruptcy proceeding being filed by her creditors. Her net worth, using a balance sheet approach, is $8,000 ($108,000 in assets minus $100,000 in liabilities). However, her cash flow is negative, and she has been hard pressed to meet current obligations as they mature. She is in fact some $12,500 in arrears in payments to her creditors on bills submitted during the past two months. Will the fact that Cott is solvent in the balance-sheet sense result in the court's dismissing the creditors' petition if Cott objects to the petition? Explain.
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Involuntary bankruptcy proceedings are filed by the creditors against the debtors who is not been able to pay its debts. Creditors file the petition in the bankruptcy court in order to initiate the bankruptcy proceedings against the debtor.
Involuntary bankruptcy proceedings have been filed against the corporation CCF by its creditors. The net worth of the company is $8,000 using the balance sheet approach i.e. total assets minus total liabilities ($108,000 - $100,000). The cash flow of the company is in negative. Moreover, the company still owes $12,500 to the existing creditors as arrears in payment on bills submitted during the past two months.
A company is deemed to be insolvent in the cases: (i) when the company is unable to pay its debts once the debts become due, and (ii) when the company's total assets is less than its total liabilities.
Under balance sheet approach, the term liabilities has a much broader meaning and includes both contingent and prospective liabilities whether liquidated or unliquidated. In BNY Corporate Trustees Services LTD. V. Eurosail-UK (2013), the English Supreme Court stated that a balance sheet bankruptcy test should rests on "the balance of probabilities, a company has insufficient assets to meet its liabilities, taking into consideration prospective as well as contingent liabilities."
The corporation CCF will not be able to dismiss the creditors' petition because even though the company is solvent according to the balance sheet method the company's will not be able to pay off its debts. The company has a negative cash flow and has unliquidated assets. Therefore, the court will look at the prospective and contingent liabilities of the company and whether the company will be able to pay its debts or not. The company has a current debt of $12,500. The net worth of the company is $8,000. Thus, the corporation CCF does not have sufficient funds to meet its liabilities.
The corporation CCF hence, will not be able to pay off its depts owed to its creditors and therefore, will not be successful in dismissing the creditor's petition. The court is likely to initiate bankruptcy proceedings against the company in order to pay the debts it owes to its creditors.

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Kentile sold goods over an extended period of time to Winham. The credit relationship began without Winham's being required to furnish a financial statement. After a time, payments were not made regularly, and Kentile requested a financial statement. Winham submitted a statement for the year just ended. Kentile requested a second statement. The second statement was false. Kentile objected to Winham's discharge in bankruptcy because of the false financial statement. Should the discharge be granted? Why or why not?
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See Title 11, section 523 of the US Code Exceptions to discharge. These are debts that can't be discharged through bankruptcy. These are usually debts incurred by fraud or malicious intent.
The plaintiff K will need to show that there was fraudulent misrepresentation in order for the debt owed to K not to be discharged in bankruptcy. Furthermore, K will also have to showed that it relied on these fraudulent material made by debtor W. Since there was fraud, the discharge should not be granted if K relied on these financial statements on making credit sales to W.

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was an Atlanta rhythm, blues, and hip-hop band that performed at clubs in 1991. The three-woman group signed a recording contract with LaFace Records. The group's first album that LaFace produced, Ooooooohhh on the TLC Tip , sold almost 3 million albums in 1992. The group's second album, Crazysexycool , also produced by LaFace, sold 5 million albums through June 1996. The two albums together had six top-of-the-chart singles. LaFace had the right to renew TLC's contract in 1996 following renegotiation of the contract terms. In the industry, royalty rates for unknown groups, as TLC was in 1991, are generally 7 percent of the revenues for the first 500,000 albums and 8 percent for sales on platinum albums (albums that sell over 1 million copies). The royalty rate increases to 9.5 percent for all sales on an eighth album. Established artists in the industry who renegotiate often have royalty rates of 13 percent, and artists with two platinum albums can command an even higher royalty. The three women in TLC-Tionne Watkins (T-Boz), Lisa Lopes (Left-Eye, who has since died), and Rozonda Thomas (Chili)-declared bankruptcy in July 1995. All three listed debts that exceeded their assets, which included sums owed to creditors for their cars and to Zale's and The Limited for credit purchases. Lopes was being sued by Lloyd's of London, which claimed she owed it $1.3 million it had paid on a policy held by her boyfriend on his home that was destroyed by fire. Lopes pleaded guilty to one count of arson in the destruction of the home but denied that she intended to destroy it. She was sentenced to five years probation and treatment at a halfway house. Lopes asked that the Lloyd's claim be discharged in her bankruptcy. All three members of TLC asked that their contract with LaFace be discharged in bankruptcy because being bound to their old contract could impede their fresh financial starts. Did the three women meet the standards for declaring bankruptcy? Evaluate whether Lopes's Lloyd's claim should be discharged. Determine whether the record contract should be discharged.
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Sonia, a retailer, has the following assets: a factory worth $1 million; accounts receivable amounting to $750,000, which fall due in four to six months; and $20,000 cash in the bank. Sonia's sole liability is a $200,000 note falling due today, which she is unable to pay. Can Sonia be forced into involuntary bankruptcy under the Bankruptcy Code?
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Three general unsecured creditors are owed $45,000 as follows: A, $15,000; B, $5,000; and C, $25,000. After all other creditors were paid, the amount left for distribution to general unsecured creditors was $9,000. How will the $9,000 be distributed?
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Orso, who had declared bankruptcy, received a structured tort settlement in a personal injury claim he had pending. The settlement would pay him an annuity each year for 30 years because the claim was the result of an auto accident that left him permanently and severely brain damaged with an IQ of about 70. His wife had a pending claim for $48,000 in arrearages on Orso's $1,000 per month child support payments. His wife wanted the annuity included in the bankruptcy estate. Would this property have been included in Orso's bankruptcy estate? [In re Orso, 214 F3d 637 (5th Cir)]
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Harold McClellan sold ice-making machinery to Bobbie Cantrell's brother for $200,000 to be paid in installment payments. McClellan took a security interest in the ice machine but did not perfect it by filing a financing statement. The brother defaulted when he owed $100,000, and McClellan brought suit. With the suit pending, the brother "sold" the ice machine to Bobbie Cantrell for $10. Bobbie then sold the machine to someone for $160,000 and refused to explain what happened to that money. McClellan added Bobbie as a defendant in his suit against her brother. Bobbie then declared bankruptcy. McClellan sought to have the various transfers set aside. The trial court refused to do so, and McClellan appealed. Should the transfers be set aside? Why or why not? [McClellan v Cantrell, 217 F3d 890 (7th Cir)]
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Place the following in order for a bankruptcy proceeding: a. Order of relief b. Collection of bankrupt's estate c. List of creditors d. Petition e. Evaluation of claims f. Voidable preferences g. Discharge
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July 1, Roger Walsh, a sole proprietor operating a grocery, was involuntarily petitioned into bankruptcy by his creditors. At that time, and for at least 90 days prior to that time, Walsh was unable to pay current obligations. On June 16, Walsh paid the May electric bill for his business. The trustee in bankruptcy claimed that this payment was a voidable preference. Was the trustee correct? Explain.
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Erik Von Kiel obtained loans from the U.S. Department of Health Human Services so that he could complete his education as an osteopathic physician. He works at the International Academy of Life (IAL) in Orem, Utah, for no salary but receives gifts from IAL that total $150,000 per year, or about $12,787 per month. He pays no taxes on these "gifts" and has received them since 2005. Dr. Von Kiel pays all but $1,000 to his ex-wife and nine children for their support. He has given up his practice, taken a vow of poverty, and works at IAL to concentrate on alternative medicine. He has signed over full authority for the management of his financial affairs to two individuals, who apparently failed to manage wisely. As a result, Dr. Von Kiel filed for bankruptcy in order to be discharged from his HHS loans. HHS says that Dr. Von Kiel should not be discharged because of bad faith. Who is correct and why? [ In re Von Kiel , 461 B.R. 323 (E.D. Pa.)]
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Leeves declared voluntary Chapter 7 bankruptcy. The trustee included the following property in her bankruptcy estate: ? Jane's wedding ring ? Jane's computer for her consulting business that she operated from her home ? Jane's car payment from a client in the amount of $5,000 that was received 91 days after Jane filed bankruptcy After collecting all of Jane's assets, the bankruptcy trustee was trying to decide how to distribute the assets. Jane had the following creditors: ? Mortgage company-owed $187,000 (the trustee sold Jane's house for $190,000) ? Expenses of the bankruptcy-$3,000 ? Federal income taxes-$11,000 ? Utility bills-$1,000 ? Office supply store open account-$1,000 The trustee had $11,500 in cash, including the $3,000 additional cash left from the sale of the house after the mortgage company was paid. How should the trustee distribute this money? What if the amount were $14,500; how should that be distributed?
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Hall-Mark regularly supplied electronic parts to Peter Lee. On September 11, 1992, Lee gave Hall-Mark a $100,000 check for parts it had received. Hall-Mark continued to ship parts to Lee. On September 23, 1992, Lee's check was dishonored by the bank. On September 25, 1992, Lee delivered to Hall-Mark a cashier's check for $100,000. Hall-Mark shipped nothing more to Lee after receipt of the cashier's check. On December 24, 1992, Lee filed a voluntary petition for bankruptcy. The trustee filed a complaint to have the $100,000 payment to Hall-Mark set aside as a voidable preference. Hall-Mark said it was entitled to the payment because it gave value to Lee. The trustee said that the payment was not actually made until the cashier's check was delivered on September 25, 1992, and that Hall-Mark gave no further value to Lee after that check was paid. Who was correct? [In re Lee, 108 F3d 239 (9th Cir)]
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Steven and Teresa Hornsby are married and have three young children. On May 25, 1993, the Hornsbys filed a voluntary Chapter 7 petition. They had by that date accumulated more than $30,000 in debt, stemming almost entirely from student loans. They wanted a discharge of their student loans on grounds of undue hardship. The Hornsbys attended a succession of small Tennessee state colleges. Both studied business and computers, but neither graduated. Although they received several deferments and forbearances on the loans, they ultimately defaulted before making any payments. Interest had accumulated on the loans to the extent that Steven was indebted to the Tennessee Student Assistance Corporation (TSAC) for $15,058.52, and Teresa was indebted to TSAC for $18,329.15. Steven was working for AT T in Dallas, Texas; he made $6.53 per hour, occasionally working limited overtime hours. Teresa was employed by KinderCare Learning Center. Although she had begun work in Tennessee, she had transferred to become the director of a child care facility in Dallas. Teresa was earning $17,500 per year with medical benefits at the time of the hearing. In monthly net income, Steven earned approximately $1,083.33, and Teresa earned $1,473.33, amounting to $2,556.66 of disposable income per month. The Hornsbys' reported monthly expenses came to $2,364.90. They operated with a monthly surplus of $191.76 to $280.43, depending on whether Steven earned overtime for a particular month. Under the federal bankruptcy laws, are the Hornsbys entitled to a discharge on their student loans? Explain your answer. [In re Hornsby, 144 F3d 433 (6th Cir)]
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Okamoto owed money to Hornblower Weeks- Hemphill, Noyes (a law firm and hereafter Hornblower). Hornblower filed an involuntary bankruptcy petition against Okamoto, who moved to dismiss the petition on the ground that he had more than 12 creditors and the petition could not be filed by only one creditor. Hornblower replied that the other creditors' claims were too small to count and, therefore, the petition could be filed by one creditor. Decide. [In re Okamoto, 491 F2d 496 (9th Cir)]
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