Deck 44: Consumer Protection and Product Safety

Question 1

Suppose you are the creditor of a debtor who is involved in straight bankruptcy (liquidation) proceedings. Would you be best off if your claim were (a) covered by a perfected security interest in collateral of the debtor, (b) based on a claim for wages, or (c) unsecured? Explain.

Answer 1

The perfected security interest would be preferable. The creditor with a perfected security interest in collateral realizes first on his security interest. Then any excess over that creditor's debt would be available to satisfy the claims of other creditors, such as one with a claim for wages or an unsecured claim.

Question 2

Suppose a friend of yours is insolvent and asks for your assistance in choosing between filing for straight bankruptcy (liquidation) under Chapter 7 and filing under Chapter 13. What would you tell your friend are the major differences between the two kinds of proceedings?

Answer 2

In the straight bankruptcy proceedings the debtor's property (except for exempt property) is turned over to the trustee and used to satisfy the claims of creditors. If the debtor has been honest in his dealings and in the bankruptcy proceeding, he is usually entitled to a discharge of his remaining debts. However, a discharge is not available if he has received one in the last six years. In the Chapter 13 proceeding, the debtor works out a plan to pay off his debts over the next three (or possibly five) years under the supervision of the court. He avoids the stigma of bankruptcy and is relieved of some creditor pressure while he is complying with the plan once it is approved by the court.

Question 3

Gilbert and Kimberly Barnes filed a voluntary Chapter 7 petition in the U.S. Bankruptcy Court for the District of Maryland. Subsequently they moved to avoid a nonpurchase money lien held to ITT Financial Services on their exempt "household goods." Among the goods that the Barneses were claiming as "household goods" were a videocassette recorder (VCR), a 12-gauge pump shotgun, a 20-gauge shotgun, a 30-06 rifle, and a.22 pistol. ITT contended that the VCR and the firearms were not household goods that they could exempt. Under Maryland law, household goods are items of personal property necessary for the day-to-day existence of people in the context of their homes. Should the court consider the VCR and firearms to be "household goods"?

Answer 3

The court considered the VCR to be an exempt "household good" but denied the exemption for the firearms as it did not believe they were reasonably necessary for day-to-day existence. Barnes v. ITT Financial Services , 117 B.R. 842 (Bankr. D. Maryland 1990)

Question 4

William Kranich, Jr., was the sole shareholder in the DuVal Financial Corporation (DFC). On November 10, 1981, Kranich filed a voluntary petition for relief under Chapter 7; on January 6, 1982, DFC also filed a voluntary petition under Chapter 7. Prior to the commencement of the Chapter 7 proceedings, Kranich conveyed his personal residence in Clearwater, Florida, to DFC. The transfer was wholly without consideration. Shortly thereafter, DFC transferred the property to William Kranich III and June Elizabeth Kranich, Kranich's son and daughter, as tenants in common. This transfer was also without consideration. The Bankruptcy Trustee brought suit to recover the property from the son and daughter on the grounds that the transfer was fraudulent. Could the trustee recover the property on the grounds that its transfer, without consideration, was fraudulent?

Question 5

David Hott was a college graduate with a degree in business administration who was employed as an insurance agent. He and his wife graduated from college in 1996. At the time he graduated, Hott had outstanding loans of $14,500 for which he was given a grace period before he had to repay them. Hott became unemployed. Bills began to accumulate and a number of his outstanding bills were near the credit limits on his accounts. About that time, he received a promotional brochure by mail from Signal Consumer Discount Company, offering the opportunity to borrow several thousand dollars. The Hotts decided it appeared to be an attractive vehicle for them to use to consolidate their debts. Hott went to the Signal office and filled out a credit application. He did not list the student loan as a current debt. He later claimed that someone in the office told him he didn't have to list it if he owned an automobile, but there was significant doubt about the credibility of this claim. Had he listed it, he would not have met the debt-income ratio required by Signal and it would not have made the loan. As it was, Signal agreed to make the loan on the condition Hott pay off a car debt in order to reduce his debt-income ratio and Hott agreed to do so. On March 30, 1997, Signal loaned the Hotts, $3,458.01. On June 24, 1998, the Hotts filed for bankruptcy. Signal objected to discharge of the balance remaining on its loan on the ground it had been obtained through the use of a materially false financial statement. Was discharge of the debt barred on the ground it had been obtained through the use of a materially false financial statement?

Question 6

Brian Scholz was involved in an automobile collision with a person insured by The Travelers Insurance Company. At the time, Scholz was cited for, and pled no contest to, a criminal charge of driving under the influence of alcohol arising out of the accident. Travelers paid its insured $4,303.68 and was subrogated to the rights of its insured against Scholz. Subsequently, Travelers filed a civil action against Scholz to recover the amount it paid, and a default judgment was entered against Scholz. Eleven months later, Scholz sought relief from the bankruptcy court by filing a voluntary petition under Chapter 7. One of the questions in the bankruptcy proceeding was whether the debt owing to Travelers was nondischargeable. Is the debt dischargeable?

Question 7

Bryant filed a Chapter 7 petition on January 7, 1984. On March 8, she filed an application to reaffirm an indebtedness owed to General Motors Acceptance Corporation (GMAC) on her 1980 Cadillac automobile. Bryant was not married, and she supported two teenage daughters. She was not currently employed, and she collected $771 a month in unemployment benefits and $150 a month in rental income from her mother. Her monthly house payments were $259. The present value of the Cadillac was $9,175; she owed $7,956.37 on it, and her monthly payments were $345.93. Bryant indicated that she wanted to keep the vehicle because it was reliable. GMAC admitted that Bryant had been, and continued to be, current in her payments. GMAC said that the car was in no danger of being repossessed but that, absent reaffirmation, it might decide to repossess it. Under the law at the time, permission of the court was required for a reaffirmation agreement. Should the court grant Bryant's petition to reaffirm her indebtedness to GMAC?

Question 8

During their 12 years of marriage, Roger and Georgianne Huckfeldt accumulated over $250,000 in debts while Roger completed college, medical school, and six years of residency in surgery while Georgianne completed college and law school. These debts included $166,000 in student loans to Huckfeldt and $47,000 jointly borrowed from Georgianne's parents. The Huckfeldts divorced on March 26, 1992. The divorce decree ordered Roger to pay his student loans, one-half of the debt to Georgianne's parents, and other enumerated debts totaling some $241,000. The decree also ordered Roger to hold Georgianne harmless for these debts but otherwise denied Georgianne's request for maintenance.
On June 4, 1992, six months before Roger would complete his residency, he filed a voluntary Chapter 7 petition, listing assets of $1,250 and liabilities of $546,857. After filing the petition, Roger accepted a fellowship at Oregon Health Sciences University, a one- or two-year position paying $45,000 per year, substantially less than the income he could likely earn during the pendency of his Chapter 7 proceeding. Following Roger's petition, creditors of the debts assigned to him in the divorce decree began pursuing Georgianne for repayment. She filed for bankruptcy protection in March 1993.
In September 1992, Georgianne and her parents filed a motion to dismiss Roger's Chapter 7 petition on the ground that it was filed in bad faith. They alleged that Roger had threatened to file for bankruptcy during the divorce proceeding and had commenced the bankruptcy proceeding in defiance of the divorce decree for the purpose of shifting responsibility for assigned debts to Georgianne. They also alleged that Roger had deliberately taken steps to reduce his annual income to avoid payment of his debts through the Chapter 7 liquidation.
After a hearing the bankruptcy court granted the motion to dismiss the proceeding on the grounds it was filed in bad faith, finding, among other things, that Roger could be earning $110,000 to $120,000 after expenses. The district court affirmed the decision, and Roger appealed to the court of appeals. Should Roger's Chapter 7 petition be dismissed on the grounds it was filed in bad faith?

Question 9

The A. H. Robbins Company is a publicly held company that filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Robbins sought refuge in Chapter 11 because of a multitude of civil actions filed against it by women who alleged they were injured by use of the Dalkon Shield intrauterine device that it manufactured and sold as a birth control device. Approximately 325,000 notices of claim against Robbins were received by the bankruptcy court. In 1985, the court appointed the Official Committee of Security Holders to represent the interest of Robbins' public shareholders. In April 1987, Robbins filed a proposed plan of reorganization but no action was taken on the proposed plan because of a merger proposal submitted by Rorer Group, Inc. Under this plan, Dalkon Shield claimants would be compensated out of a $1.75 billion fund, all other creditors would be paid in full, and the Robbins stockholders would receive stock of the merged corporation. However, its being a time of other critical activity in the bankruptcy proceeding, no revised plan incorporating the merger proposal had been filed or approved.
Earlier, in August of 1986, the court had appointed Ralph Mabey as an examiner to evaluate and suggest proposed elements of a plan of reorganization. On Mabey's suggestion, a proposed order was put before the district court supervising the proceeding that would require Robbins to establish a $15 million emergency treatment fund "for the purpose of assisting in providing tubal reconstructive surgery or in vitro fertilization to eligible Dalkon Shield claimants." The purpose of the emergency fund was to assist those claimants who asserted they had become infertile as a consequence of their use of the product. A program was proposed for administering the fund and for making the medical decisions required. On May 21, 1987, the district court ordered that the emergency treatment fund be created. This action was challenged by the committee representing the equity security holders. Was the court justified in ordering the distribution of some of the bankrupt's assets on an emergency basis before a reorganization plan was approved?

Question 10

Winifred Doersam was the borrower on three student loans made to her by First Federal Savings and Loan and guaranteed by the state of Ohio Student Loan Commission (OSLC) totaling $10,000 to finance her graduate education at the University of Dayton. Doersam also signed as the cosigner for a $5,000 student loan for her daughter, also made by First Federal and guaranteed by OSLC. With the use of the loans, she was able to obtain a position as a systems analyst with NCR Corporation, which required her to obtain a master's degree in order to retain her position at an annual salary of $24,000. Approximately six weeks before her graduation, and before the first payment on her student loans was due. Doersam filed a petition and plan under Chapter 13. In her plan, she proposed to pay $375 a month to her unsecured creditors over a 36-month period. Doersam's total unsecured debt was $18,418, 81 percent of which was comprised of the outstanding student loans. Her schedules provided for payment of rent of $300 per month and food of $400 per month. Her listed dependents included her 23-year-old daughter and her 1-year-old granddaughter. At the time, her daughter was employed in the Ohio Work Program, a program designed to help welfare recipients, for which she was paid a small salary. The OLSC objected to the plan proposed by Doersam on the grounds that it was filed in bad faith. Should the bankruptcy court refuse to confirm the plan on the grounds it was not filed in good faith?