Monday, September 14, 2009

Compensation in a SIPA Action

The SIPA specifies that the bankruptcy court must grant reasonable compensation for the services and expenses of the trustee and the attorney for the trustee. Interim allowances are also permitted. 15 U.S.C. § 78eee(b)(5)(A). Any person seeking allowances must file an application complying in form and content with provisions in Title 11, and must also serve a copy on the debtor, SIPC, creditors and other persons the court may designate. The court is required to fix a time for a hearing on the application. Notice need not be given to customers whose claims have been or will be paid in full or creditors who cannot reasonably be expected to receive any distribution. 15 U.S.C. § 78eee(b)(5)(B).

The SIPC will review the application and file its recommendation with respect to such allowances prior to the hearing on the application. In any case where the allowances are to be paid by SIPC without reasonable expectation of recoupment and there is no difference between the amount applied for and the amount recommended by SIPC, the bankruptcy court must award that amount. 15 U.S.C. § 78eee(b)(5)(C). If there is a difference, the court must, among other considerations, place considerable reliance on the recommendation of SIPC. If the estate is insufficient to cover these awards as costs of administration, 15 U.S.C. § 78eee(b)(5)(E) provides that SIPC will advance the necessary funds to cover the costs.



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Direct Payment Under SIPA Outside the Bankruptcy Court

In certain situations, the SIPC may elect to utilize a direct payment procedure to the customers of a debtor, thereby avoiding a trustee and the courts. Certain preconditions must exist. The claims of all customers must aggregate less than $250,000, the debtor must be financially distressed as defined in the law, and the cost to the SIPC for direct payment process must be less than for liquidation through the courts. 15 U.S.C. § 78fff-4(a).

If direct payment is utilized, the entire proceeding remains outside the court. The process remains essentially a transaction between the SIPC and the debtor's customers.

Although the SIPA provides for a direct payment procedure in lieu of instituting a liquidation proceeding, the bankruptcy court may still become involved in disputes regarding the direct payment procedure. A person aggrieved by a SIPC determination with respect to a claim in a direct payment procedure may, within six months following mailing of a SIPC determination, seek a final adjudication of such claim by the court. 15 U.S.C. § 78fff-4(e). The courts having jurisdiction over cases under Title 11 have original and exclusive jurisdiction of any civil action for the adjudication of such claims. The action is to be brought in the judicial district where the head office of the debtor is located. It would be brought as an adversary proceeding in the bankruptcy court even though there is no main case.


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Powers of the Trustee

The powers of the trustee in a SIPC case are essentially the same as those vested in a chapter 7 trustee appointed under Title 11. "In addition, a trustee may, with the approval of SIPC but without any need for court approval:

(1) hire and fix the compensation of all personnel (including officers and employees of the debtor and of its examining authority) and other persons (including accountants) that are deemed by the trustee necessary for all or any purposes of the liquidation proceeding;

(2) utilize SIPC employees for all or any purposes of a liquidation proceeding; and

(3) margin and maintain customer accounts of the debtor . . ."

15 U.S.C. § 78fff-1(a).

A SIPC trustee may reduce to money customer securities constituting customer property or in the general estate of the debtor. 15 U.S.C. § 78fff-1(b). The trustee must, however, deliver securities to customers to the maximum extent practicable. 15 U.S.C. § 78fff-1(b)(1). Subject to prior approval of SIPC, but again without any need for court approval, the trustee may also pay or guarantee any part of the debtor's indebtedness to a bank, person, or other lender when certain conditions exist. 15 U.S.C. § 78fff-1(b)(2).

The trustee is responsible for investigating the acts, conduct, and condition of the debtor and reporting thereon to the court. 15 U.S.C. § 78fff-1(d)(1). The trustee must also provide a statement on the investigation to SIPC and to other persons as the court might direct. 15 U.S.C. § 78fff-1(d)(4). Moreover, the trustee must make periodic reports to the court and to SIPC on the progress of distribution of cash and securities to customers. 15 U.S.C. § 78fff-1(c).



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Can the discharge be revoked?

The court may revoke a discharge under certain circumstances. For example, a trustee, creditor, or the U.S. trustee may request that the court revoke the debtor's discharge in a chapter 7 case based on allegations that the debtor: obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case. Typically, a request to revoke the debtor's discharge must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will decide whether such allegations are true and, if so, whether to revoke the discharge.

In a chapter 11, 12 and 13 cases, if confirmation of a plan or the discharge is obtained through fraud, the court can revoke the order of confirmation or discharge.

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Can a debtor receive a second discharge in a later chapter 7 case?

The court will deny a discharge in a later chapter 7 case if the debtor received a discharge under chapter 7 or chapter 11 in a case filed within eight years before the second petition is filed. The court will also deny a chapter 7 discharge if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of the filing of the second case unless (1) the debtor paid all "allowed unsecured" claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor's plan was proposed in good faith and the payments represented the debtor's best effort. A debtor is ineligible for discharge under chapter 13 if he or she received a prior discharge in a chapter 7, 11, or 12 case filed four years before the current case or in a chapter 13 case filed two years before the current case.

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Does the debtor have the right to a discharge or can creditors object to the discharge?

In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor's discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object to the debtor's discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an "adversary proceeding."

The court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier case commenced within certain time frames (discussed below) before the date the petition was filed. If the issue of the debtor's right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential to the objection.

In chapter 12 and chapter 13 cases, the debtor is usually entitled to a discharge upon completion of all payments under the plan. As in chapter 7, however, discharge may not occur in chapter 13 if the debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in chapter 13 if he or she received a prior discharge in another case commenced within time frames discussed the next paragraph. Unlike chapter 7, creditors do not have standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment plan, but cannot object to the discharge if the debtor has completed making plan payments.



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Are all of the debtor's debts discharged or only some?

Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor's drunken driving).

There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under chapter 13.

Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523(a) applies. The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

The types of debts described in sections 523(a)(2), (4) and(6) (obligations affected by fraud or maliciousness) are not automatically excepted from discharge. Creditors must ask the court to determine that these debts are excepted from discharge. In the absence of an affirmative request by the creditor and the granting of the request by the court, the types of debts set out in sections 523(a)(2), (4) and (6) will be discharged.

A slightly broader discharge of debts is available to a debtor in a chapter 13 case than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. Although a chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved (i.e., "confirmed") repayment plan, there are some limited circumstances under which the debtor may request the court to grant a "hardship discharge" even though the debtor has failed to complete plan payments. Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor's control. The scope of a chapter 13 "hardship discharge" is similar to that in a chapter 7 case with regard to the types of debts that are excepted from the discharge. A hardship discharge also is available in chapter 12 if the failure to complete plan payments is due to "circumstances for which the debtor should not justly be held accountable."



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What is a action in bankruptcy?

A bankruptcy emission releases the debtor from own badness for doomed specific types of debts. In new language, the debtor is no somebody lawfully required to pay any debts that are fired. The arc is a everlasting prescribe prohibiting the creditors of the debtor from action any word of assemblage action on fired debts, including juristic activeness and field with the debtor, specified as phone calls, letters, and personalised contacts.

Although a debtor is not personally liable for discharged debts, a valid lien
(i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case.Therefore, a secured creditor may apply the lien to revert the belongings secured by the lien.

When does the discharge occur?

The timing of the discharge varies, depending on the chapter under which the case is filed. In a chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting). Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court. In individual chapter 11 cases, and in cases under chapter 12 (adjustment of debts of a family farmer or fisherman) and 13 (adjustment of debts of an individual with regular income), the court generally grants the discharge as soon as practicable after the debtor completes all payments under the plan. Since a chapter 12 or chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor's discharge in a chapter 7 or 13 case if the debtor fails to complete "an instructional course concerning financial management." The Bankruptcy Code provides limited exceptions to the "financial management" requirement if the U.S. trustee or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or incapacitated or on active military duty in a combat zone.

How does the debtor get a discharge?

Unless there is proceedings involving objections to the turn, the debtor faculty unremarkably automatically perceive a stuff. The Northerner Rules of Bankruptcy Activity cater for the clerk of the bankruptcy solicit to aggregation a text of the sect of shooting to all creditors, the U.S. trustee, the trustee in the circumstance, and the fiduciary's professional, if any. The debtor and the debtor's professional also invite copies of the execute status. The notice, which is but a duplicate of the last rule of discharge, is not particularized as to those debts ambitious by the courtyard to be non-dischargeable, i.e., not get been fired and that they should not attempt any encourage grouping. They are cautioned in the remark that continuing assemblage efforts could issue them to penalization for disdain. Any inadvertent insolvency on the line of the salesperson to direct the debtor or any creditor a text of the release impose quickly within the reading required by the rules does not concern the rigor of the rule granting the flow.

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Story and Evolution of Bankruptcy

The idea and origin of bankruptcy law as it is now familiar in the Consolidated States originated in England. The prototypal Nation insolvency law is mostly agreed to person been enacted in 1542.(34 and 35, Henry VIII, c.4 (1542) England.)
Actually, bankruptcy was originally planned as a remedy for creditors - not debtors. During the reign of King Henry VIII., bankruptcy law allowed a creditor to seize all of the assets of a trader who could not pay his debts. Additionally, on top of losing all of one's property, the unfortunate debtor also lost his freedom and was subject to imprisonment for failure to pay his debts. This left the family of the debtor in the position of having to pay the debts in order to obtain the release of the debtor. As time progressed, however, so did the rights of debtors in England. In the 1700s, for example, debtors were often released from prison and many fled to the United States to live. Many immigrated to Georgia and Texas, which became known as debtors’ colonies. Finally, by the early 1800s in England, debtors were often released from prison and their debts discharged. However, for many years, bankruptcy continued to be a remedy favoring creditors, involuntary in nature and largely penal in character. It was generally used only against traders.

Under the English system, collusive bankruptcy (agreed upon by creditor and debtor) was codified by the English Act of 1825. This occurred when a trader filed a declaration of insolvency in the office of the Chancellor’s Secretary of Bankrupts which was then advertised. The advertised declaration supported a commission in bankruptcy to be issued. A law was thereafter enacted which declared that no commission grounded on this act of bankruptcy was to be “deemed invalid by reason of such declaration having been concerted or agreed upon between the bankrupt and any creditor or other person.” (6 Geo. IV, c.16, sections VI, VII (Eng.). Voluntary bankruptcy was not authorized until 1849. (12 and 13 Vict., c.106, section 93 (1849) (Eng.).

The subject of bankruptcy was given specific recognition upon the adoption of the United States Constitution in 1789. The United States Constitution says that Congress shall have power to establish “uniform laws on the subject of Bankruptcies” throughout the United States. U.S. CONST. I, section 8, Cl.4. Thus the law of bankruptcy, as enacted by Congress, is federal law. The first bankruptcy act enacted by Congress was in 1800. Bankruptcy Act of 1800, Ch. 6,2 Stat. 19. It was limited to traders and provided only for involuntary proceedings. Voluntary bankruptcy at that time was unknown.

Voluntary bankruptcy in the United States was established as an institution by the Acts of 1841 (Act of Aug. 19, 1841, section 1, 5 Stat. 440) and 1867 (Act of Mar. 2, 1867, section 11, 14 Stat. 521). From these early acts to the Bankruptcy Act of 1898, which established the modern concepts of debtor-creditor relations, to the Bankruptcy Act of 1938, widely known as the Chandler Act, and to subsequent acts, the scope of voluntary access to the bankruptcy system has been broadened and has made voluntary petitions more attractive to debtors.

The Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code, constituted a major overhaul of the bankruptcy system. First of all, it covered cases filed after October 1, 1979. Second, the 1978 Act contained four titles: Title I was the amended Title 11 of the U.S. Code; Title II contained amendments to Title 28 of the U.S. Code and the Federal Rules of Evidence; Title III made the necessary changes in other federal legislation affected by the bankruptcy law changes; and Title IV provided for the repeal of pre-Code bankruptcy, the effective dates of portions of the new law, necessary savings provisions, interim housekeeping details, and the pilot program of the United States trustee.

Perhaps the most important changes to bankruptcy law under the 1978 Act, however, were to the courts themselves. The 1978 Act drastically altered the structure of the bankruptcy courts and conferred pervasive subject matter jurisdiction upon the judicial officers of the courts. The act granted the new courts jurisdiction over all “civil proceedings arising under title 11 or arising in or related to cases under title 11.” 28 U.S.C. §1471(b) (1976 ed. Supp.)

While the new courts were denominated adjuncts of the district court, they were in practice free standing courts. The expanded jurisdiction was to be exercised primarily by bankruptcy judges. The bankruptcy judge would continue to be an Article I judge, who was appointed for a set term.

The provisions of the 1978 Act came under scrutiny in the case of Northern Pipeline Construction Co. V. Marathon Pipeline Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed.2d 598 [6 C.B.C.2d 785] (1982). In Marathon, the name by which this Supreme Court case is commonly referred, the Court held unconstitutional the broad grant of jurisdiction to bankruptcy judges because those judges were not appointed under and protected by the provisions of Article III of the Constitution. Under the United States Constitution, Article III judges hold their offices during good behavior (an appointment for life) and their salary cannot be cut during their continuance in office. Article I judges do not enjoy that kind of protection.

The jurisdictional challenge started when the debtor filed an adversary proceeding in bankruptcy court, which covered issues such as a breach of contract, warranty, and misrepresentation. The bankruptcy court denied the defendant’s motion to dismiss, which the defendant appealed to the District Court. The District Court held that 28 U.S.C. §1471 violated Article III of the United States Constitution because it delegated Article III powers to a non-Article III Court by its broad grant of jurisdiction to the bankruptcy courts. In a plurality opinion, the Supreme Court held that the broad grant of jurisdiction accorded bankruptcy courts by 28 U.S.C. '1471 was an unconstitutional delegation of Article III powers to a non-Article III Court. Similarly, Section 241(a) of the Bankruptcy Reform Act of 1978, by establishing the jurisdictional provisions set forth in 28 U.S.C. '1471 was unconstitutional. The Court stayed its judgment until October 4, 1982 to give “Congress an opportunity to reconstitute the bankruptcy courts or to adopt other valid means of adjudication, without impairing the interim administration of the bankruptcy laws.” Id. 458 U.S. at 89.

After the stay had expired, Congress still failed to act. Instead a model “Emergency Rule” was adopted as a local rule by the district courts. The purpose of the rule was to avoid the collapse of the bankruptcy system, and it was a temporary measure to provide for the orderly administration of bankruptcy cases and proceedings after the judgment in Marathon. The rule remained in effect until enactment of the 1984 legislation on July 10, 1984. Although the constitutionality of the “Emergency Rule” was under constant attack, the Supreme Court consistently denied certiorari.

In 1984 the legislature revised the Bankruptcy Code and implemented the Bankruptcy Amendments and Federal Judgeship Act of 1984. The observation has been made that most of these amendments were taken out of Justice Brennan’s opinion in Marathon. Title 28 U.S.C. ' 157(a) and (b)(1), which govern the jurisdiction of the bankruptcy court state in part:

(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.

(b) (1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title. [emphasis added]

Core proceedings as delineated by 28 U.S.C. §157, include but are not limited to:

(A) matters concerning the administration of the estate; (B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under Chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11; (C) counterclaims by the estate against persons filing claims against the estate; (D) orders in respect to obtaining credit; (E) orders to turn over property of the estate; (F) proceedings to determine, avoid, or recover preferences; (G) motions to terminate, annul, or modify the automatic stay; (H) proceedings to determine, avoid, or recover fraudulent conveyances; (I) determinations as to the dischargeability of particular debts; (J) objections to discharges; (K) determinations of the validity, extent or priority of liens; (L) confirmation of plans; (M) orders approving the use or lease of property, including the use of cash collateral; (N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; and (O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury, tort or wrongful death claims.

Thus, in effect, Congress granted jurisdiction to an Article III court, namely the district court, and then authorized (by 28 U.S.C. §157) that this jurisdiction could be delegated to the bankruptcy court. The district court was also authorized to withdraw in whole or in part, any case or proceeding referred under Section 157, on its motion or on timely motion of any party, for cause shown.

By this act, with few exceptions, such as the trial of personal injury and wrongful death claims and matters that require consideration of both Title 11 and organizations or activities affecting interstate commerce, the new bankruptcy courts were allowed to exercise all of the subject matter jurisdiction of the district courts. Thus, bankruptcy courts were enabled to hear cases such as the Marathon case.

The Bankruptcy Amendments and Fed Judicature Act of 1984 in galore distance resembled the Insolvency Act of 1898. Among opposite things, the law provided for the redesignation of part units for insolvency book low the order room system. Bankruptcy cases pending on or filed after July 10, 1984, are substance to most of the amendments relating to bankruptcy power.

The Bankruptcy Book, Suprasegmental States Trustees, and Household Tenant Bankruptcy Act of 1986 prefabricated essential changes relating to folk farmers and established a stable One States trustee method. The 1986 Act applies to cases filed since November 26, 1986.

The Bankruptcy Reform Act of 1994 is good as to cases filed on or after Oct 22, 1994. The reform act and the case law explanation its viands make a high outcome upon the mortgage banking business and the servicer of mortgage loans. The changes effectuated by this act are discussed in the chapters that result.



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