9.3 Protection and Enforcement of Liens and Judgments During Bankruptcy

• Library: Enforcement of Liens and Judgments in Virginia (Virginia CLE) (2019 Ed.)

9.3 PROTECTION AND ENFORCEMENT OF LIENS AND JUDGMENTS DURING BANKRUPTCY

9.301 Initial Proceedings.

A. Notice of Appearance; Meeting Under Section 341. Once an attorney is engaged to represent a creditor in a bankruptcy case, the attorney should file a notice of appearance in the case. ¹³⁷ The United States trustee must call a meeting of creditors to be held no fewer than 21 days and no more than 40 days after the order for relief in a Chapter 7 or Chapter 11 case, and no fewer than 21 days and no more than 50 days after the order for relief in a Chapter 13 case. ¹³⁸ The meeting required by section 341 of the Code may be held at a regular place for holding court or any other place designated by the United States trustee within the district that is convenient for the parties in interest. ¹³⁹

The United States trustee presides at the section 341 meeting, and the meeting must include the examination of the debtor under oath. ¹⁴⁰ The United States trustee must record the meeting electronically or by other means, and any entity can request a transcript of the proceedings at that entity's expense. ¹⁴¹

Shortly after the order for relief in a Chapter 7 case, the United States trustee appoints an interim trustee from a panel of disinterested private trustees. ¹⁴² The trustee acts as the representative of the bankruptcy estate and is the one who actually administers the estate. ¹⁴³ At the section 341 meeting, unsecured creditors have the right to elect a qualified trustee by a majority vote if creditors holding at least 20 percent of the amount of the outstanding unsecured claims call for the election. ¹⁴⁴ An elected trustee need not be a member of the panel. However, trustees are generally not elected because of the voting requirements of section 702 of the Code. If no trustee is

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elected, the interim trustee continues to serve as the trustee for the Chapter 7 case. ¹⁴⁵

In a Chapter 11 case, the debtor remains in possession of the business to be reorganized, and there is no trustee unless the court orders one appointed for cause or because it would be in the interested of creditors, equity security holders, and other interests of the estate. ¹⁴⁶ In Chapter 13 cases, a standing Chapter 13 trustee, appointed by the United States trustee, acts as trustee in all Chapter 13 cases. ¹⁴⁷

B. Rule 2004 Examinations. FRBP 2004 provides that "[o]n motion of any party in interest, the court may order the examination of any entity." ¹⁴⁸ A Rule 2004 examination may be ordered at any time and need not be tied to a particular motion or the filing of an adversary proceeding. The scope of a Rule 2004 examination is very broad, the only limitation being that it must relate only "to the acts, conduct, or property or to the liabilities or financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge." In a Chapter 11, 12, or 13 case, the examination may also relate to:

the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan. ¹⁴⁹

The attendance of an entity for examination and for production of documents may be compelled by subpoena. ¹⁵⁰

C. Schedules and Statement of Financial Affairs. Included in the documents a debtor must file with the clerk of the bankruptcy court are a schedule of current assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, a statement of financial affairs, copies of all payment advices or other evidence

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of payment received by the debtor from an employer within 60 days before the filing of the petition, and a record of any interest that the debtor has in an education individual retirement account or a qualified state tuition program. ¹⁵¹ In addition, the debtor must list all property claimed as exempt. ¹⁵² The schedules and statements must be filed with the bankruptcy petition in a voluntary bankruptcy case, or within 14 days thereafter. ¹⁵³ Furthermore, the debtor in a voluntary Chapter 11 case must file a list of the names and addresses of the creditors who hold the twenty largest unsecured claims. ¹⁵⁴ These schedules and statements are the best sources of information about the debtor's financial affairs, and they are very useful in mapping a discovery strategy.

D. Corporate Resolution. Whether an individual has authority to file a voluntary bankruptcy petition on a corporation's behalf is a matter of state law. That authority must be determined in accordance with the corporation's articles of incorporation, its bylaws, and the applicable state corporation law. Because authority to file a bankruptcy petition often rests with the corporation's board of directors, many bankruptcy courts require that a resolution of the board of directors approving the filing of the bankruptcy petition accompany the bankruptcy petition. ¹⁵⁵ An individual who files a bankruptcy petition on behalf of a corporation without proper authority is subject to sanctions.

E. List of Equity Security Holders. A requirement that is particular to Chapter 11 cases is that a Chapter 11 debtor must, within 14 days of the entry of the order for relief, file a list of equity holders. The list must indicate the number and kind of interests registered in the name of each holder and the last known address or place of business of each holder. ¹⁵⁶

F. Creditors' Committees in Chapter 11. At the earliest "practicable" time after the order for relief in most Chapter 11 cases, the United States trustee must appoint a committee of unsecured creditors, which ordinarily, but not necessarily, consists of the seven creditors with the largest claims who are willing to serve. ¹⁵⁷ On request of a party in interest in

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a case in which the debtor is a "small business debtor," and for cause, the court may order that a creditors' committee not be appointed. ¹⁵⁸ A "small business debtor" may not be primarily engaged in real estate activities and must have aggregate noncontingent liquidated debts in an amount not more than $2,566,050. ¹⁵⁹

If the creditors themselves choose a committee before the petition is filed, then the prepetition committee may continue to serve in the Chapter 11 case under certain circumstances. ¹⁶⁰ However, on request of a party in interest, the court may order the United States Trustee to change the membership of a committee if the court determines that a change is necessary to ensure adequate representation of creditors. ¹⁶¹ In addition, under certain circumstances, the court may also order the United States Trustee to increase the number of members on a committee to include a creditor that is a small business concern. ¹⁶²

The purpose of the creditors' committee is to monitor the operations of the debtor and its compliance with the Code. To this end, the United States Trustee will supervise the creditors' committee. The creditors' committee has the status of a "party in interest" and has the right to be heard on virtually any matter in the bankruptcy. The creditors' committee is entitled to retain counsel to be paid for by the bankruptcy estate. ¹⁶³ The creditors' committee also has a duty to provide access to information and solicit and receive comments from creditors who are represented by the committee but are not members of the committee. ¹⁶⁴

9.302 Proof of Claim.

A. "Claim" Defined. A claim is defined in section 101(5) of the Code to include a right to payment whether or not the right is reduced to

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judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. ¹⁶⁵ The breadth of the Code's definition is such that there need not be "a right to immediate payment of money in the case of a tort or allied breach of warranty or like claim" when the tort activity or contract breach occurred prepetition. ¹⁶⁶ Thus, the practical consequence of this broad definition is that the bankruptcy process provides comprehensive relief to a debtor. Even though a claim may be contingent, it should be filed.

B. Reason for Filing. The Code provisions regarding filing of proofs of claim are permissive and not mandatory. However, all claims must be deemed allowed by the bankruptcy court in order for any creditor to share in the distribution of the bankruptcy estate, and a proof of claim must be filed before the claim is allowed in a Chapter 7 or Chapter 13 case. In a Chapter 11 case, a proof of claim is "deemed filed" if the claim is listed on the debtor's schedules and the claim is not scheduled as disputed, contingent, or unliquidated. ¹⁶⁷ In most cases, safe practice dictates filing a proof of claim upon receiving notice of the filing of the case. In Chapter 13 cases where the secured creditor does not have a claim for arrearages, or in a Chapter 7 case where the secured creditor is oversecured, however, the secured creditor may consider whether it is worth the risk of filing a proof of claim and submitting to the Bankruptcy Court's jurisdiction. As shown by a recent Ninth Circuit case, In re Blendheim, ¹⁶⁸ the danger lies in the fact that a secured creditor who submits a claim to which the debtor objects can have its lien permanently voided under § 506(d) if the court upholds the debtor's objection and disallows the secured creditor's claim. ¹⁶⁹ In such a circumstance, the

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creditor loses not only its ability to recover from the debtor's estate but also its state law right of foreclosure. ¹⁷⁰ In some cases, where the bankruptcy estate appears to have no assets, there may be no need for the general creditors to file proofs of claim. Such cases will be designated as "no asset," and the notice of the commencement of case will...