Chapter 17- Legal Assent

Legal Assent: a promise the courts will require the parties to obeyVoidable: (without legal assent) a circumstance that can cost a business large profit when the transaction is significantRescinded: cancellation of a voidable contract (if cancelled, the person cancelling the contract is entitled to the return of everything he/she gave to the other party)Mistake of fact: an erroneous belief about the facts of the contract at the time the contract is concludedUnilateral mistake: the result of an error by one party about a material fact, that is, a fact that is important in the context of the particular contract

Rescission (rare, in this case) is permitted when:o One party made a mistake about a material fact, and the other party

knew or had reason to know about the mistakeo The mistake was caused by a clerical error that was accidental and did

not result from gross negligenceo The mistake was so serious that the contract is unconscionable, that

is, so unreasonable that it is outrageous

Mutual mistake: shared by both parties to the agreement. Rescission is fair because any agreement was an illusion: Ambiguity

prevented a true meeting of the minds For mutual mistakes to interfere with legal consent, ALL must be present:

o A basic assumption about the subject matter of the contract (a mistake must be made about the existence, quality, or quantity of items being exchanged)

o A material effect on the agreement (the mistake must effect the essence of the agreement)

o An adverse effect on a party who did not agree to bear the risk of mistake at the time of the agreement (if a person agrees to a contract and then later changes their mind because the item exchanged didn’t meet their expectations or they didn’t account for the risk)

Misrepresentation: the untruthful assertion by one of the parties about a material fact; it prevents the parties from having the mental agreement necessary for a legal contract.

Innocent misrepresentation: results from a false statement about a material fact that the person making it believed to be true

o That person lacked scienter (knowledge) Negligent misrepresentation: If a person could have known the truth by

using reasonable care to discover or reveal it, even though the person might not have intended to deceive (should have known the truth)

Fraudulent misrepresentation: (aka intentional misrep.) the consciously false representation of a material fact

o NECESSARY ELEMENTS:

A false statement about a past or existing fact that is material to the contract

Intent to deceive, which can be inferred from particular circumstances

Justifiable reliance on the false statement by an innocent party to the agreement: generally present unless the injured party knew, or should have known by the extravagance of the claim, that the false statement was indeed false

False Assertion of Fact: Concealment: the active hiding of the truth about a fact Nondisclosure: the failure to provide pertinent information about the

projected contracto Circumstances:

A relationship of trust exists between the parties to the contract

There is a failure to correct assertions of fact that are no longer true

A statute requires disclosure (i.e. residential real estate laws) Nondisclosure involves a dangerous defect

Intent to Deceive Scienter is present when the party making the fraudulent assertion believed

it was false or had no regard to whether it was true or false Intent to Deceive occurs when the party making the false statement claims to

have or implies having personal knowledge of its accuracyJustifiable Reliance on the False Assertion

Chapter 18- Contracts in Writing

Statute of Frauds: Required to be in writing, not oral.Three main purposes-

1. Ease contractual negotiations by requiring sufficiently reliable evidence to prove the existence and specific terms of a contract

2. Prevent unreliable oral evidence from interfering with contractual relationship. By requiring that a contract be in writing, the statute precludes the admittance of oral evidence denying the existence of a contract or claiming additional terms that would substantially alter the contract from its written form

3. Prevents parties from entering into a contract in which they do not agree. (Prevents hasty, improperly considered contracts)

Contracts within the Statute of FraudsThey are:

1. Contracts whose terms prevent possible performance within one year

2. Promises made in consideration of marriage3. Contracts for one party to pay debt of another if initial party fails to pay4. Contracts related to an interest in land5. (NOT required by Statute of Frauds, but IS required under UCC) Contracts for

the sale of goods totaling more than $500

1) A contract for lifetime employment does NOT need to be in writing because it can possibly be completed within one year. (i.e. if the employee dies within the first year of employment)

a. If the contract can possible be performed within a year, even if highly unlikely, it does not need to be in writing

2) When one party promises something to the other as a part of an offer of marriage, it must be in writing.

a. Mutual promises do NOT fall under Statute of Frauds.b. Prenuptial Agreements DO have to be in writing; states ownership

rights of each party in the other’s property.3) AKA Secondary obligations; secondary promises; collateral promises;

suretyship promises.a. i.e. a guarantor on a car loan b. Primary obligations (I promise to pay my neighbor in exchange for

their car) are not required in writing; Secondary obligations (my mother agreeing to pay my debt if I fail to pay) is required in writing

4) Encompasses not only land and the soil itself, but anything attached to the land.

a. Mortgages and leases are required in writing5) Must state the quantity sold; buyer, seller, price and method of payment do

not need to be included.

Further requirements:In some states: Equal dignity rule: contracts that would normally fall under the statute

and need a writing if negotiated by the principal must be in writing even if negotiated by an agent.

Sufficiency of the WritingCircumstances in which the Statute of Frauds applies: Marriage Year (within one year) Land Executor (guarantor) Goods (greater than $500) Suretyship (Secondary obligations)

Requirements of a Writing Sufficient to Satisfy the Statute of Frauds under the Common Law

Name of the parties to the contract The subject matter of the agreement

The consideration given for the contract All relevant contractual terms The signature of at least the party against whom the action is brought

EXCEPTIONS to the Statute of Frauds(1) Admissions, (2) partial performance, and (3) promissory estoppel.

(1) Admissiona. A statement made in court, under oath, or at some stage during legal

proceeding in which a party against whom chargers have been brought admits that an oral contract existed, even thought that contract was required in writing.

b. All states, except Louisiana and California, allow this exception.c. Under the UCC, admission is an exception, but will only be enforceable

for the quantity admitted(2) Partial Performance

a. When the buyer in the alleged contract has already paid any portion of the price, has begun to permanently improve the land, or has taken possession of it, the courts will consider the contract partially performed and this partial performance and will amount to proof of the contract

b. NO longer needs to be in writing if payment begins or delivery of goods has begun. (oral contract is assumed)

(3) Promissory Estoppela. The legal enforcement of an otherwise unenforceable contract due to

a party’s detrimental reliance on the contract.b. Example: you accept an offer to sell your house and then enter a

contract to buy another house. The house you wish to by is more expensive and so you decide to sell your rare collectibles to make up for the difference. The person from whom you were planning to buy a house decides to not sell it to you. Because the other person reasonably should have known you were relying on the contract and because you did so to your own detriment, under promissory estoppel you could when performance of the sales contract.

Exceptions under the UCC: Oral contracts between merchants: not required in writing Oral contracts for customizable goods are required in writing, because these

goods are not likely to be salable to the general public.

Parol Evidence Rule: makes oral evidence of an agreement inadmissible if it is made before or at the same time as a writing that the parties intend to be the complete and final version of their agreement

Prevents contradictions between written and oral evidence If the written evidence isn’t fond to be the complete and final version, other

forms of evidence may be admissible

o Limited to elements missing from the written contract, but consistent with it.

Does not usually exclude extrinsic written evidenceMerger Clause: when a parties signals to judges that the written contract is intended to be a final and complete statement of their agreement.

****Once a final integrated agreement has been written, no oral evidence of any prior or contemporaneous agreement can be admitted into court to change the terms of the agreement.

EXCEPTIONS to the Parole Evidence Rule(1) Contracts that have been subsequently modified, (2) contracts conditioned on orally agreed-on terms, (3) contracts that are not final as they are part written and part oral, (4) contracts with ambiguous terms, (5) incomplete contracts, (6) contracts with obvious typographical errors, (7) voidable or void contracts, and (8) evidence of prior dealings or usage of trade.

(1) Contracts that have been subsequently modifieda. Although parol evidence contradictory to the final terms is

inadmissible, evidence regarding a contract’s subsequent modification IS admissible.

i. Must have been made AFTER, and it must be CLEARLY statedb. If the agreement is required in writing under the statute of frauds,

oral modifications are unenforceablec. However, oral evidence of a subsequent written agreement is

admissible.(2) Contracts conditioned on orally agreed-on terms

a. Condition precedent: when an entire contract is conditioned on someone else’s occurring first

i. Evidence proving the existence of this is admissibleii. Parol Evidence Rule does not apply to condition precedent

(3) Non-finalized, partially written and partially oral contractsa. It is assumed that the written portion is not intended to represent the

entire agreement. Therefore, oral evidence is admissible in order for the contract to be complete.

(4) Contracts containing ambiguous termsa. Presents a dilemma in interpretationb. Court allows evidence even oral, in order to clarify, but not change or

modify the ambiguous terms(5) Incomplete contracts

a. When this is the case, courts may allow parol evidence to fill in the missing parts while not modifying

b. Parol evidence is used here to facilitate business transactions, not force the parties into a new contract

(6) Contracts with obvious typographical arrors

a. Parol evidence is admissible in order to prove that there was a typo, as well as to set forth the proper term

b. The correction does not alter the agreement because the typo is not an accurate reflection of the parties agreement

(7) Void or voidable contractsa. Parol evidence is used to demonstrate the conditions of the void or

voidable contractb. Evidence of a defense against a contract is admissible to prove a

contract is void or voidable(8) Evidence of prior dealings or usage of trade (UCC)

a. Falls under UCC, not Statute of Fraudsb. Parol evidence is admissible for the sole sake of proving prior dealings

of tradec. By examining past dealings, courts expect both parties to interact in a

similar manner to they way the did in the past

Integrated ContractsWritten contracts intended to be the complete and final representation of the

parties’ agreement. When deemed integrated, parol evidence is inadmissible. (with the exception

of the of the above exceptions)

CHAPTER 19- Third-Party Rights to Contracts

Assignments and DelegationsObligers: contractual parties who agreed to do something for the other partyObligees: contractual parties who agreed to receive something from the other party

Assignment: occurs when a party to a contract- an assignor- transfers her rights to receive something under the contract to a third party- an assignee.

Assignments covered by the Statute of Frauds must be in writing Rights that cannot be assigned:

o Rights that are personal in nature (unless it is rights to payment)o Rights whose assignment would increase the obligor’s risk or dutieso Rights whose assignment is prohibited by contracto Rights whose assignment is prohibited by law or public policy

Notice of assignment is not required, but if notice is given you can avoid two complications:

o If notice isn’t given, the obligor may still fulfill the contract AS WRITTEN (to the oblige, not the assignee)

o If assigned to multiple parties and the obligor is not notified, there may be confusion as to whom has the rights to the contract.

Most states use first-assignment-in-time rule, which gives the rights to the first party assigned

Some use the English Rule, which states that the first assignee to give notice to the obligor has rights to the contract

Delegation occurs when a party to a contract- a delegator- transfers her duty to perform for a third party- a delegate- who is not part of the original contract

Duties that cannot be delegatedo Duties that are personal in natureo Duties for which the delegatee’s performance will vary

significantly from the delegator’so Duties in contract that forbid delegation

Third-party beneficiary is created when two parties enter into a contract with the purpose of benefiting the third party (called the intended beneficiary)

The beneficiary need not be named in the contract as long as the terms of the contract or events occurring after its creation make it clear who he or she is

Intended beneficiary: a third party to a contract whom the contracting parties intended to benefit directly from their contract

In determining whether a third party is the intended beneficiary, courts may ask the contracting parties whether they intended the third party to be the “direct,” “primary,” or “express” beneficiary

Promisor: In a third party beneficiary, is the party who makes the promise that benefits the third partyPromisee: the party who owes the promisor something in exchange for the promise made to the third-party beneficiary

Credit beneficiary: A third party that benefits from a contract in which the promisor agrees to pat the promisee’s debt

Alex agrees to pay Melissa’s debt to a credit card company.Donee Beneficiaries: third parties who benefit from a contract in which a promisor agrees to give a gift to the third party

Most common example: Life insurance policies and the beneficiaries who receive payment after death

Vesting of Rights: Vest: when a person’s rights to a contract mature such that he/she can

legally act on them Before the beneficiary’s rights vest, the original contracting parties

may make any changes they want One of three things must occur:

o If the beneficiary does not know about the contract, his or her rights to the contract vest.

o When the beneficiary decides to accept, then his or her rights to the contract vest.

Acceptance is assumed when the beneficiary becomes aware of the contract and does not reject it

o Third, in order for their rights to the contract to vest, the beneficiary must change his or her position based on a reliance on the contractual rights

He must take some action that he would not have otherwise taken because he is expecting benefits from the contract

Creditor vs Donee BeneficiariesTwo main differences:

The reason the third-party beneficiary contract was createdo Creditor: if the main reason for the contract is to release a party from

an obligation to a third partyo Donee: if the sole purpose is to grant a gift to a third party

The time at which a beneficiary can enforce their rightso Creditor: can enforce their rights whenever the contract is valid

May sue the promisor or promise for performance (ONLY one of them)

If against a promise, the promise may sue the promisor for breach of contract

o Donee: can enforce their rights to most contracts (some jurisdictions don’t allow beneficiaries to enforce their rights)

When they can enforce, it may only be against a promisor, beause the promise has no duties to the donee beneficiary

Incidental Beneficiaries: When the contracting parties unintentionally benefit a third party that wasn’t

originally intended

Chapter 20- Discharge and Remedies

CONDITIONSConditional Contracts- contracts containing conditions affecting the performance obligations of the parties

Discharge by Conditions Precedent, Subsequent, and Concurrent Condition precedent: a particular event that must occur in order for a party’s

duty to arise (if the event doesn’t happen, the party’s duty isn’t required)o Common examples: real estate contracts and insurance contracts

Condition subsequent: a future event that terminates the obligations of that parties when it occurs

o Example: 5 year lease on an apartment on the condition that you pay unless you get called to active duty for National Guard. If you get called for active duty, you no are no longer bound by the contract.

Concurrent conditions: when each party’s performance is conditioned on the performance of one another.

o These only occur when the parties are required to perform for each other simultaneously

Expressed and Implied Conditions Express conditions: are explicitly stated in the contract and are usually

preceded by words such as conditioned on, if, provided that, or when. Implied conditions: not explicitly stated, but inferred from the nature and

language of the contracto Example: If you enter a contract with a construction company to

remodel your kitchen, there is an implied condition that the builder will be given access to your home so that they may fulfill their obligations

DISCHARGE BY PERFORMANCETypes:

Complete performance: when all aspects of the parties’ under the contract are carried out perfectly. (Difficult, and almost impossible)

Substantial performance: occurs when the following conditions have been met:

Completion of nearly all the terms of the agreement An honest effort to complete all the terms No willful departure from the terms of agreement

o Generally, discharges the party from its obligations, but the judge may require compensation for parts not completed

DISCHARGE BY MATERIAL BREACH Material Breach: discharges the non-breaching party from his obligations

under contracto Occurs when a party unjustifiably fails to substantially perform his

obligations Anticipatory Repudiation: when a party decides not to complete their

obligations before the time of performance occurs (due to changes in market and profitability)

o Once the contract is anticipatorily repudiated, the non-breaching party is discharged and is free to sue for breach.

DISCHARGE BY MUTUAL AGREEMENT Mutual Rescission: when both parties with to discharge each other from

their mutual obligations and therefore rescind/cancel the contract Substituted contract: Instead of cancelling, parties may wish to substitute a

new agreement in place of the old one. Accordance and Satisfaction: when one party wishes to substitute a

different performance for his or her original duty.o Accord: the promise to perform the new dutyo Satisfaction: the actual performance of the new duty

Novation: when certain parties to an agreement want to replace one of the parties with a third party.

o ALL parties must agree to the novation

DISCHARGE BY OPERATION OF LAW Alteration of contract: If one of the parties alters the contract without the

other party’s knowledge or consent, the innocent party is discharged from their duties

Bankruptcy: When a party files bankruptcy, the court allocates the assets among creditors and then issues the party a discharge

Tolling of the Statute of Limitations: doesn’t technically discharge the parties from contract but once the statute of limitations tolls, all parties are no longer able to sue so they are no longer bound to perform

Impossibility of Performance: events occurring that make the obligations impossible to perform. Two kinds:

o Objective impossibility: it is not possible to lawfully carry out one’s contractual obligations (discharges all parties from their obligations)

o Subjective impossibility: it would be very difficult to carry out the contract (does NOT discharge the parties from their obligations)

Commercial Impracticability: when performance is still objectively possibly but would be extraordinarily injurious or expensive to one party

o The following MUST be proven in order for them to be discharged:

That an event occurred whose nonoccurrence was a basic assumption of the contract

That there is commercial impracticability of continued performance

That the party claiming discharge did not expressly or impliedly agree to performance in spite of impracticability that would otherwise justify nonperformance

Frustration of Purpose: (not frequently used) when factors beyond the control of both parties cause the event to not occur, and the nonoccurrence of this event was not an assumed risk by either party. Therefore, they may be discharged.

REMEDIESLegal Remedies (Monetary Damages): include compensatory, punitive, nominal, and liquidated damages.

Compensatory damages: the MOST FREQUENTLY awarded damages which are designed to put the plaintiff in the position he would have bee in had the contract been fully performed

o One can only recover damages only for those provable losses that were foreseeable at the time he entered the contract

o Sometimes there are no damages to be recovered

Punitive Damages: designed to punish the defendant and deter him and others from engaging in similar behavior

o Damages are RARELY awarded (unless fraud is involved)o Wealth and income of the defendant are taken into consideration

when deciding punishment Nominal Damages: when no actual damages result from a breach in

contract. A small award is granted in order to signify that the plaintiff has been wronged by the defendant

Liquidated Damages: a fixed amount of damages pre-determined when the contract was created to avoid a difficult court battle if a breach does occur

Mitigation of Damages: The non-breaching party cannot intentionally increase their damages as a result of their anger towards the other party.

o In fact, the plaintiff must demonstrate that he used reasonable efforts to minimize damages resulting from the breach (aka duty to mitigate one’s damages)

Equitable Remedies Rescission and restitution:

Rescission: termination of the contract Restitution: the return of any property given up under the

contracto BOTH are most frequently awarded in situations where there is a

genuine lack of assent.o May be sought if a party enters the contract because of fraud,

duress, undue influence, or a bilateral mistake Specific Performance: (aka specific enforcement) It is an order requiring

that the breaching party fulfill the terms of an agreemento Only granted when monetary damages are not adequateo Appropriate for REAL ESTATE

Injunction: an order either forcing a person to do something or prohibiting a person from doing something

o More commonly PROHIBITIONS Reformation: Sometimes a written contract does not reflect the parties’

actual agreement, or there are inconsistencies in the contract, such as the price being listed as “$200,000 (twenty thousand dollars)”

o In such a case, the contract may be rewritten to reflect the actual agreement

Recovery based on Quasi-Contract: recovery granted when an actual enforceable contract does not exist.

o The court may impose a contract-like obligation on a party to prevent an injustice from occurring.

o Often occurs when one party thought a contract existed

Chapter 26- Negotiable Instruments: Negotiability and Transferability

Negotiable Instruments: a written document containing the signature of the creator that makes an unconditional promise or order to pay a certain sum of money, either at a specified time or on demand.

Contracts as Commercial Paper A contract is commercial paper and under assignment may be circulated

through the business world

Types of Negotiable Instruments Draft: an order by a drawer to a drawee to pay the payee (a three party

instrumento Example: Bob buys oranges from Pat; As a result, Bob now owes Pat

$5. Instead of paying Pat, he draws a draft stating that Susan will pay Pat $5 since she owes Bob $5 for the apples he sold her

Note: a promise, by the maker of the note, to pay a payee Demand instrument: where a payee can demand payment at any time.

o If a time of payment is not defined or specifies that payment can be requested on demand or on sight then it is a demand instrument.

Time Instrument: payment can only be received at a specific future timeo Must be easily determined from the document itself

Certificate of Deposit (CD): a promise by a bank to pay a payee a certain amount of money at a future time.

o A “note of the bank” Check: a specific draft, drawn by the owner of a checking account, ordering

the bank to pay the payee from that drawer’s accounto ALWAYS a demand instrumento Types of checks:

Traveler’s Checks: payable on demand, and requires as a condition to payment that a co-signature by a person whose signature appears on the instrument

Cashier’s Check: A check used when both the drawer and drawee are from the same bank

Certified Check: Check accepted by the bank on which it is drawn

Requirements for an instrument to be negotiable:o Written document

Must have two characteristics: Relative permanence: on paper for later proof Movability: Paper can be moved about in a

commercially reasonable manero Be signed by the creator of the instrumento Contain an unconditional promise or order to pay

MUST be specified, not impliedo Fixed sum of money specified

Payment MUST be in a type of currency

o Payment either on demand or at a fixed time It cannot say “payment to be made 10 days after delivery”

without stating when the delivery is to be madeo Contains words “to the order of” or similaro Contain no additional promises

Chapter 32- Bankruptcy and Reorganization

Debtor: an entity that owes money to another entityCreditors: entities to which a debtor owes moneyInsolvent debtors: debtors who are unable to pay their bills in a timely fashionBankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005: a revision of the Bankruptcy code for reasons, including an increase in the number of bankruptcy filings, significant losses associated with bankruptcy filings, loopholes and incentives that allow/encourage abuse of personal bankruptcy filings, and the fact the some debtors are actually able to repay a significant amount of their debt.BANKRUPTCY LAW IS FEDERAL LAWChapter 7: sales of debtor’s assets by trustee and the distribution of money to creditorsChapter 9: Adjustment of municipality’s debtChapter 11: Reorganization of the debtor’s financial affairs under the supervision of the bankruptcy courtChapter 12: Reorganization of family farmer’s debtsChapter 13: Reorganization of an individual’s debtsChapter 15: Recognition of insolvency proceedings pending in a foreign country and relief for foreign debtors

Bankruptcy Proceedings:1. Filing of petition for bankruptcy2. Court grants an automatic stay for creditors actions against the debtor’s

estate. (Legal action ceases between the two)3. Court determine whether an order of relief should be granted4. The creditors meet with the debtor5. Some type of payment plan is created and approved, usually by the creditors

and the court6. Payment plan is carried out through actions of the trustee and the debtor7. Debts remaining after the payments are carried out are usually dropped.

If an individual files for bankruptcy, the individual’s ability to file again is restricted for a particular time period depending on whether the petition was dismissed or not.

Chapter 7: Liquidation Proceedings

Liquidation: the most familiar type of bankruptcy; when a debtor turns over all his assets to a trustee, a person who takes over another’s estate

Debtors: include individuals, partnerships, and corporationso DO NOT include: Railroads, insurance companies, banks, savings and

loans associations, industrial banks, credit unions, and health maintenance organizations

Liquidation Proceedings are as follows:o Petition Filing: a voluntary or involuntary petition must be filed.

The person filings must pay the filing feeso Voluntary Liquidation Petition

Debtor must state that he is aware of the other bankruptcy reliefs available and is choosing to go with liquidation

All of the debtor’s pre-petition assets make up the bankruptcy estate.

Assets gained after filing the petition by the debtor are generally not part of the estate unless it falls under exemption.

Debtor does NOT have to be completely insolvent or unable to pay debt

He must demonstrate that he owes money to someone. Must also submit extensive info on their financial affairs

under oath It is a CRIME to conceal assets or supply information

regarding the debtor’s financial affairso Involuntary Liquidation Petition

If payments aren’t being made as they become due, creditors may attempt to force the debtor into bankruptcy.

Creditors may attempt to force debtor to surrender their assets so that they can be distributed among all of its creditors

12+ debtors If fewer than 12, a single creditor with a claim of

$12,300+ can file a petition for involuntary Chapter 7 Bankruptcy.

If the judge believes the creditor is filing the petition frivolously, the court could force the creditor to pay attorney costs, fees of the debtor, and even punitive damages.

Farmers, ranchers, and non-profit organizations CANNOT be forced into liquidation, as well as debtors who are not able to file bankruptcy on their own (voluntarily)

o Under Chapter 7, the debtor is required to list: (Schedules A-J) All real property All personal property Property in A & B that is exempt Secured creditors and their addresses

Unsecured priority claims Unsecured non-priority claims Executory contracts and expired leases List of co-debtors Statement of current income of debtor Statement of current expenditures

o Dismissal of Petition A petition, voluntary or not, may be dismissed by the judge

If there is substantial abuse foundo The debtor’s income is taken into consideration

when determining if they are abusing the system (the means test)

o Automatic Stay Moratorium- where creditors are no longer allowed to bring on

or continue legal action against the debtor Exception: if the debtor was a debtor in a bankruptcy

case that was dismissed within the past year, the stay automatically terminates 30 days after the current filing

o Order of Relief If granted, the court proceedings can now continue Typically this is automatic, unless a debtor objects to an

involuntary petition. If he/she objects, a hearing will be held. The judge will

grant an order of relief if one of two conditions occur:o The debtor isn’t paying debts as they come dueo The custodian took possession of almost all of

the debtor’s property within 120 days before filing

After the court enters an order of relief, a U.S. trustee, appointed by an attorney general, selects an interim trustee who is responsible for organizing the creditor’s meeting.

o Creditor’s meeting: Between 20 and 40 days after the order of relief, the interim

trustee calls for the meeting, which includes all of the creditors listed in the Chapter 7 required schedules.

Everyone attends, including the trustee and debtor (EXCEPT the bankruptcy judge)

IF the debtor fails to show, the court may decide to reject the file for bankruptcy

Another purpose of the meeting is to appoint a permanent TRUSTEE

o The Trustee Sells the debtors property and distributes the money among

the creditors

Additionally, he has power to sue and be sued, initiate collection actions and defend against creditor claims, can resume or reject executor contracts, the right to obtain credit, and also has the power to void credit liens on the debtor’s property

o Exempt Property Up to $20,200 for residence Interest in a motor vehicle (not necessarily an automobile) up

to $3,225 Interest, up to $525 for a particular item, in personal and

household goods and furnishings, clothing, appliances, books, animals, crops, and musical instruments (aggregate total of all items limited to $10,775)

Interest in jewelry up to $1,350 $1,075 of any property the debtor chooses (functions as a

“wild card” exemption) Tools of trade and professional books up to $2,025 Any unmatured life insurance contract owned by the debtor Professionally prescribed health aides Interest in any other property up to $1,075, plus any unused

part of the homestead exemption up to $10,125 The right to receive certain personal injury awards up to

$20,200 Retirement funds in an IRA or SEP up to $1,095,000 per person

o Preferential Payments Payments made within 90 days of filing can be considered

preferential (preferential treatment of one creditor over another by a debtor)

The debtor is assumed to be insolvent within 90 days of filing for Chapter 7

If the “preferred” creditor is a relative or a partner, the trustee may recover payments from up to 2 years prior.

However, he must prove the debtors insolvency compared to an outsider preferred creditor where he could only recover from 90 days prior and the insolvency is assumed

o Fraudulent Transfers Made with the intent to defraud creditors

o Distribution of Property Priority Claims

Class 1: Unpaid domestic support (alimony, child support)

Class 2: Court costs, trust fees, etc Class 3: Unsecured claims in involuntary bankruptcy

(ordinary business expenses)

Class 4: Unsecured claims for unpaid wages, salaries (within 180 days)

Class 5: Employee retirement plans Class 6: Claims by fishers, farmers, Class 7: Deposits given to debtor for property or service

not yet performed Class 8: Certain taxes and penalties due to gov’t unites Class 9: claims in bankruptcy related to Federal deposit

institutions Class 10: Claims for personal injuries and deaths related

to debtors property or companyo Discharge:

Court order stating that debtor is immune to any and all creditor collections

Available ONLY to individuals (not corps or businesses) Privilege, not a right.

o Exemptions to Discharge: Claims for back taxes or fines within 3 years Claims for liabilities against debtor for obtaining money or

property under false pretenses or fraud Claims by creditors not listed in schedule or have no

knowledge of the court proceedings Claims based on fraud, embezzlement, and larceny Alimony, child support and property settlements Claims of willful or malicious conduct that caused injury or

death Specific student loans, unless it poses undue hardship on

debtor Claims resulting from drunk driving Debts not discharge from previous bankruptcies Claims for money borrowed to pay US taxes Cash advances on a credit card

o Objections to Discharge: The debtor has concealed or destroyed property in attempt to

defraud creditors Debtor has concealed or destroyed financial records Debtor fails to account for loss of assets

o Revocation of Discharge: If debtor acted fraudulently during proceedings

o Reaffirmation of Debt When a debtor decides to repay debt even though it was

discharged (to a family member?) to maintain a good relationship