Bankruptcy refers to the court proceedings and statutes concerning persons or enterprises, i.e. corporations or partnerships that are unable to meet their financial obligations. They seek judicial intervention and are allowed to devise a plan to resolve the debts through division of assets of the debtor or in certain proceedings allow a debtor to continue his business and use the revenue generated to liquidate his debts (Cornell LII 1).
The proceedings relative to bankruptcy is governed by a federal statutory law specifically Title 11 of the United States Code. The law was enacted by Congress to establish uniform laws on the subject throughout the United States but allowing the States to pass laws on other areas of monetary debts (U.S. Constitution, Article 1, and Section 8). In April 2005 the Bankruptcy Prevention and Consumer Protection Act was passed. It introduced among others, revised guidelines on dismissal or conversion of Chapter 7 liquidations to Chapter 11 or 13 proceedings.
Petition for Involuntary Bankruptcy: Title 11, Chapter 7, U.S.C.
On involuntary cases of bankruptcy, Section 301 provides that an involuntary case may be initiated against a person except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor. And if such person is a partnership, the proceedings may be initiated by fewer than all of the general partners. Section 109 enumerates those who are not regarded as a ‘debtor’ within the contemplation of Chapter 7, Section 303 (d) provides further that “the debtor, or a general partner in a partnership debtor that did not join in the petition, may file an answer to a petition” (11 U.S.C. Section 303 (d)). After filing the petition, it is also required to file the following 1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases (Fed. R. Bankr. P. 1007(b)).
The filing under Chapter 7 causes cessation of business and a trustee is appointed by the court. The trustee generally gathers and sells all non-exempt assets and pays the creditors with the proceeds thereof in accordance with the provisions of the Code (US Courts Federal Judiciary web site, c 7).
Creditors who are secured by a lien or mortgage are deemed fully secured and have a legally enforceable right to the collateral. A fully secured creditor holding collateral with a value equal or more than the amount of debt, is not entitled to participate in the liquidation of assets by the trustee (US Courts Federal Judiciary web site, c 7). The distribution of the proceeds shall be in accordance with Section 726 of the Code. Finally, in case or partnerships, no bankruptcy discharge granted unlike in cases of individual filings (11 U.S.C. Section 727 (a)(1)). After all the assets of the partnership is fully liquidated and administered, the case is deemed terminated.
In the instant case, Walnut Street Four partnership is insolvent. It has more debts than its assets. The involuntary petition filed by Beren should be given due course and the opposing partners, Mannino and Elliot shall be required to file their respective answers.
Plan of Reorganization: Title 11, Chapter 11 U.S.C.
The court should not confirm the reorganization plan. The provisions of Section 507 Section 507, Chapter 11, Title 11 of the U.S.C. clearly mandates nine classes of preferred claims having priority in the order provided. Thus, each class must be satisfied in full before the next lower class is paid anything. Applying the provisions of law to the instant case, the Reorganization Plan filed by the debtor-in-possession, Friese, violates the order of preference.
The first class of expenses and claims to be satisfied and paid is administrative expenses allowed under Section 503 (b) and any fess assessed under Chapter 123 of Title 28 (11 U.S.C. Section 507 (1)). The administrative expenses referred to any tax incurred by the estate, except a tax of a kind specified in section 507 (a)(80). Thus, placing IRS in the third class contravenes the provisions.
The second class provided in the plan is unsecured claims. The Code limits the unsecured claims in the second class only to those allowed under Section 502 (f). This section refers to “an involuntary case, a claim arising in the ordinary course of the debtor’s business or financial affairs after the commencement of the case but before the earlier of the appointment of a trustee and the order for relief shall be determined as of the date such claim arises, and shall be allowed under subsection (a), (b), or (c) of this section or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition” (11 U.S.C. Section 502 (f)).
The plan contravenes the order of preference given by the Code in such a manner that it groups all unsecured creditors to the second class and fixing the amount to be paid out as 50%. Section 507 lists unsecured claims into several classes from (2) to (8). Section 1129 grants the court the authority to confirm the plan if amongst others, the plan complies with the provisions of law.
List of References
Cornell Law School. Bankruptcy. Legal information institute. Retrieved on March 2, 2007 at
Federal Rules of Bankruptcy Procedure, as amended. 1987. Retrieved on March 2, 2007 from
United States Code. Title 11, Chapters 7 and 11. Retrieved on March 2, 2007 from
U.S. Courts The Federal Judiciary. Chapter 7 liquidation under the bankruptcy code.
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