Business Law Study Set 14

Business

Quiz 30 :

Bankruptcy Law

Quiz 30 :

Bankruptcy Law

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A QUESTION OF ETHICS: Discharge in Bankruptcy. In October 1994, Charles Edwards formed ETS Payphones, Inc., to sell and lease pay phones as investment opportunities-an investor would buy a phone from ETS, which would lease it back. ETS promised returns of 14 to 15 percent but consistently lost money. To meet its obligations to existing investors, ETS had to continually attract new investors. Eventually, ETS defrauded thousands of investors of more than $300 million. Edwards transferred the funds from ETS to himself. In 2000, ETS filed a petition in a federal bankruptcy court to declare bankruptcy. Darryl Laddin was appointed trustee. On the debtor's behalf, Laddin filed a suit against Reliance Trust Co. and others, alleging, among other things, that the defendants helped defraud investors by "ignoring the facts" and "funneling" the investors' funds to ETS, causing it to "incur millions of dollars in additional debt." Laddin sought treble (triple) damages. [ Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145 (11th Cir. 2006)] (a) The defendants argued, in part, that the doctrine of in pari delicto , which provides that a wrongdoer may not profit from his or her wrongful acts, barred Laddin's claim. Who should be considered ethically responsible for the investors' losses Explain. (b) Laddin contended that his actions, as trustee on behalf of the debtor, should not be subject to the doctrine of in pari delicto because that doctrine depends on the "personal malfeasance of the individual seeking to recover." The defendants field a motion to dismiss Laddin's complaint. Do you think that the court should rule in favor of Laddin or the defendants Why
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a). Ethical Responsibility:
In the case Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards , 437 F.3d 1145 (11 th Cir. 2006), the court granted the IRA Custodians request to dismiss Laddin's complaint because as trustee of the debtor estate he could not maintain a claim of aiding and abetting a breach of fiduciary duties as well as the doctrine of  in pari delicto.
Edwards is completely liable both ethically and legally because he devised a Ponzi scheme that defrauded thousands of investors of over $300 million through the operation of the sale-leaseback program and the fact that as the sole shareholder of ETS, Edwards transferred the proceeds from ETS to himself or other companies he owned.
Reliance Trust Co., PENSCO, Inc., and Community National Bank also share ethical responsibility for the fraud due to their lack of due diligence, however because Laddin was barred from pursuing a claim of action, the court was not in the position to make a determination regarding their culpability.
b). In Pari Delicto:
In the case Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards , 437 F.3d 1145 (11 th Cir. 2006), the court granted the IRA Custodians request to dismiss Laddin's complaint because as trustee of the debtor estate he  could not maintain a claim of aiding and abetting a breach of fiduciary duties and the doctrine of  in pari delicto.
The court reasoned that the doctrine of  in pari delicto  barred Laddin's state law claims because the debtor's claims are only as strong as his interests. The district court also held that the doctrine of  in pari delicto  barred Laddin's claims under RICO.

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Stanley argued that he was not an insider because he was no longer employed by the company when the severance payments were made. How did the court respond to this argument
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Insider Status:
In the case of In re TransTexas Gas Corp., 597 F.3d 298 (2010), the district court issued a judgment in favor of TransTexas for fraudulent transfers made to Stanley under an employment separation agreement. The Court of Appeals affirmed.
The court determined that Stanley received the benefit of monies transferred to him as the benefit of being an insider. He had incurred such obligation for the benefit of being an insider under an employment contract and not in the ordinary course of business.

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What might Stanley have meant when he said that by agreeing to "go quietly," he provided a benefit to the company
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Go Quietly:
In the case of In re TransTexas Gas Corp., 597 F.3d 298 (2010), the district court issued a judgment in favor of TransTexas for fraudulent transfers made to Stanley under an employment separation agreement. The Court of Appeals affirmed.
By going quietly, Stanley asserted that he had information that was damaging to the company if he were not equitably compensated for his departure from employment. He qualified at the time of the payments as an insider.

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Voluntary versus Involuntary Bankruptcy Burke has been a rancher all her life, raising cattle and crops. Her ranch is valued at $500,000, almost all of which is exempt under state law. Burke has eight creditors and a total indebtedness of $70,000. Two of her largest creditors are Oman ($30,000 owed) and Sneed ($25,000 owed). The other six creditors have claims of less than $5,000 each. A drought has ruined all of Burke's crops and forced her to sell many of her cattle at a loss. She cannot pay off her creditors. (a) Under the Bankruptcy Code, can Burke, with a $500,000 ranch, voluntarily petition herself into bankruptcy Explain. (b) Could either Oman or Sneed force Burke into involuntary bankruptcy Explain.
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VIDEO QUESTION: Bankruptcy. Go to this text's Web site at www.cengage.com/blaw/darkson and select "Chapter 30." Click on "Video Questions" and view the video titled Field of Dreams. Then answer the following questions. (a) Before this scene, the movie makes clear that Ray (Kevin Costner) is unable to pay his bills, but he has not filed a voluntary petition for bankruptcy. What would be required for Ray's creditors to force him into an involuntary bankruptcy (b) If Ray did file a voluntary petition for a Chapter 7 bankruptcy, what exemptions might protect him from "losing everything" and being evicted as the man indicated in this scene How much equity in the farm home could Ray claim as exempt if he filed the petition (c) What are the requirements for Ray to qualify as a family farmer under Chapter 12 of the Bankruptcy Code (d) How would the results of a Chapter 12 bankruptcy differ from those of a Chapter 7 bankruptcy for Ray
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Distribution of Property Montoro petitioned himself into voluntary bankruptcy. There were three major claims against his estate. One was made by Carlton, a friend who held Montoro's negotiable promissory note for $2,500; one was made by Elmer, an employee who was owed three months' back wages of $4,500; and one was made by the United Bank of the Rockies on an unsecured loan of $5,000. In addition, Dietrich, an accountant retained by the trustee, was owed $500, and property taxes of $1,000 were owed to Rock County. Montoro's nonexempt property was liquidated, with proceeds of $5,000. Discuss fully what amount each party wall receive, and why.
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QUESTION WITH SAMPLE ANSWER: Preferences. Peaslee is not known for his business sense. He started a greenhouse and nursery business two years ago, and because of his lack of experience, he soon was in debt to a number of creditors. On February 1, Peaslee borrowed $5,000 from his father to pay some of these creditors. On May 1, Peaslee paid back the $5,000, depleting his working capital. One creditor, the Cool Springs Nursery Supply Corp., had extended credit to Peaslee on numerous purchases. Cool Springs pressured Peaslee for payment, and on July 1, Peaslee paid Cool Springs half the amount owed. On September 1, Peaslee voluntarily petitioned himself into bankruptcy. The trustee in bankruptcy claims that both Peaslee's father and Cool Springs must turn over to the debtor's estate the amounts Pcaslêe paid to them. Discussfully the trustee's claims.
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Substantial Abuse James Stout, a professor of economics and business at Cornell College in Iowa City, Iowa, filed a petition in bankruptcy under Chapter 7, seeking to discharge about $95,000 in credit-card debts. At the time, Stout had been divorced for ten years and had custody of his children: Z. S., who attended college, and G. S., who was twelve years old. Stout's ex-wife did not contribute child support. According to Stout, G. S. was an "elite" ice-skater who practiced twenty hours a week and had placed between first and third at more than forty competitive events. He had decided to home school G. S., whose academic achievements were average for her grade level despite her frequent absences from public school. His petition showed monthly income of $4,227 and expenses of $4,806. The expenses included annual home school costs of $8,400 and annual skating expenses of $6,000. They did not include Z. S.'s college costs, such as airfare for his upcoming studies in Europe, and other items. The trustee allowed monthly expenses of $3,227- with nothing for skating-and asked the court to dismiss the petition. Can the court grant this request Should it If so, what might it encourage Stout to do Explain. [ In re Stout , 336 Bankr. 138 (N.D. Iowa 2006)]
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CASE PROBLEM WITH SAMPLE ANSWER: Discharge in Bankruptcy. Rhonda Schroeder married Gennady Shvartsshteyn (Gene) in 1997. Gene worked at Royal Courier and Air Domestic Connect in Illinois, where Melissa Winyard also worked in 1999 and 2000. During this time, Gene and Winyard had an affair. A year after leaving Royal, Winyard pled a petition in a federal bankruptcy court under Chapter 7 and was granted a discharge of her debts. Sometime later, in a letter to Schroeder who had learned of the affair, Winyard wrote, "I never intentionally wanted any of this to happen. I never wanted to disrupt your marriage." Schroeder obtained a divorce and, in 2005, filed a suit in an Illinois state court against Winyard, alleging "alienation of affection." Schroeder claimed that there had been "mutual love and affection" in her marriage until Winyard engaged in conduct intended to alienate her husband's a ffection. Schroeder charged that Winyard "caused him to have sexual intercourse with her," resulting in "the destruction of the marital relationship." Winyard filed a motion for summary judgment on the ground that any liability on her part had been discharged in her bankruptcy. Is there an exception to discharge for "willful and malicious conduct" If so, does Schroeder's claim qualify Discuss. [ Schroeder v. Winyard, 375 Ill.App.3d 358,873 N.E.2d 35, 313 III.Dec. 740 (2 Dist. 2007) ]
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Discharge in Bankruptcy Caroline McAfee loaned $400,000 to Carter Oaks Crossing. Joseph Harman, president of Carter Oaks Crossing, signed a promissory note providing that the company would repay the amount with interest in installments beginning in 1999 and ending by 2006. Harman signed a personal guaranty for the note. Carter Oaks Crossing defaulted on the note, so McAfee sued Harman for payment under the guaranty. Harman moved for summary judgment on the ground that McAfee's claim against him had been discharged in his Chapter 7 bankruptcy case, filed after 1999 but before the default on the note. The guaranty was not listed among Harman's debts in the bankruptcy filing. Would the obligation under the guaranty have been discharged in bankruptcy, as Harman claimed Why or why not [ Harman v. McAfee , 302 Ga.App. 698, 691 S.E.2d 586 (2010)]
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Discharge in Bankruptcy Cathy Coleman took out loans to complete her college education. After graduation, Coleman was irregularly employed as a teacher before filing a petition in a federal bankruptcy court under Chapter 13. The court confirmed a five-year plan under which Coleman was required to commit all of her disposable income to paying the student loans. Less than a year later, she was laid off. Still owing more than $100,000 to Educational Credit Management Corp., Coleman asked the court to discharge the debt on the ground that it would be undue hardship for her to pay it. Under Chapter 13, when is a debtor normally entitled to a discharge Are student loans dischargeable If not, is "undue hardship" a legitimate ground for an exception With respect to a debtor, what is the goal of bankruptcy With these facts and principles in mind, what argument could be made in support of Coleman's request [In re Coleman , 560 F.3d 1000 (9th Cir. 2009)]
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Exception: to Discharge Between 1988 and 1992, Lorna Nys took out thirteen student loans, totaling about $30,000, to finance an associate of arts degree in drafting from the College of the Redwoods and a bachelor of arts degree from Humboldt State University (HSU) inCalifornia. In 1996, Nys began working at HSU as a drafting technician. As a "Drafter II," the highest-paying drafting position at HSU, Nys's gross income in 2002 was $40,244. She was fifty-one years old. Her net monthly income was $2,299.33, and she had $2,295.05 in monthly expenses, including saving $140 for her retirement, which she planned for age sixty-five. When Educational Credit Management Corp. (ECMC) began to collect payments on Nys's student loans, she filed a Chapter 7 petition in a federal bankruptcy court, seeking a discharge of the loans. ECMC argued that Nys did not show any "additional circumstances" that would impede her ability to repay. What is the standard for the discharge of student loans under Chapter 7 Does Nys meet that standard Why or why not [In re Nys , 446 F.3d 938 (9th Cir. 2006)]
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