1) Should the petition for involuntary bankruptcy be granted? Explain.
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The applicable law to the given case is the United States Code (U.S.C.), specifically Title 11, Chapter 7. The law provides 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)). Thus, applying this provision to the instant case, the petition for involuntary bankruptcy should be allowed and given due course and for the opposing partners, Mannino and Elliot to be required to file their respective answers.
It should be noted that in cases of involuntary bankruptcy, the petition may be initiated against a person except those enumerated under Section 301 of the U.S.C. The exceptions enumerated are “a family farmer, or a corporation that is not moneyed, business or a commercial corporation that may be a debtor” (Section 301, U.S.C.). In case it is a partnership, the petition may be filed and initiated by fewer than all of the general partners. After the petition is filed, the following should documents should also be filed namely, schedules of assets and liabilities; a schedule of current income and expenditures; a statement of financial affairs; and a schedule of executory contracts and unexpired leases (Fed. R. Bankr. P. 1007(b)).
The involuntary bankruptcy has the effect of stopping the operations of business and thereafter, the court appoints a trustee. This trustee is suppose to collect and sell the non-exempt assets and proceeds thereof are distributed to the creditors according to the schedule provided under Section 726 of the Code (US Courts Federal Judiciary web site, n.d.).
Obligations or debts with a lien or mortgage are considered fully secured. Creditors holding such have a legal enforceable right to the lien or collateral. The creditor is no longer allowed to participate when the trustee liquidates the assets if the creditor holds collateral in an amount equal or greater than the amount of debt (US Courts Federal Judiciary web site, n.d.). After full liquidation of the assets of the partnership is made, there is no bankruptcy discharge and the case is deemed terminated.
2) Can the bankruptcy court confirm the debtor’s plan of reorganization? Explain.
The Court should not confirm the reorganization plan. The law specifically mandates and provides the nine classes of preferred claims in the order of preference stated (Section 507, Chapter 11, Title 11 of the U.S.C.). This means that each class must be fully satisfied before full payment and satisfaction of the next lower category/class.
In the given case, the Reorganization Plan filed by Friese, the debtor-in-possession is deemed a violation of the order of preference provided by law. It is noteworthy to discuss that the first class of claims and expenses to be fully satisfied and paid is administrative expenses. And fees assesses under Chapter 123 of Title 28 (11 U.S.C. Section 507 (1) and Section 503 (b)). These administrative expenses consist of any tax incurred by the estate except those kinds specified in Section 507 (a)(80). Clearly, placing IRS in the third class violates this provision.
Unsecured claims are the second class of claims provided by law. The U.S.C. limits this only to those it specified under Section 502 (f) which provides specifically:
“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 Reorganization Plan in the given case contradicts and violates the order of preference specified by the Code since it made and placed the unsecured creditors to the second class and fixed the amount to be satisfied as 50%. The law is clear when it specified the unsecured claims listed into several categories as provided for in Section 507 from (2) to (8). Moreover, Section 1129 grants the court the power only to confirm and approve the plan submitted if amongst others, it follows the mandates of the law.
In essay sum, the bankruptcy proceedings is justified under the U.S. Constitution specifically Article 1, Section 8 which allows and directs the States to pass and enact laws relating to monetary obligations (U.S. Constitution, Article 1, and Section 8). By virtue of this constitutional mandate, a federal statutory law, the U.S.C. particularly Title 11 thereof was enacted to govern the bankruptcy proceedings (Cornell LII, n.d.).
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