Sovereign immunity

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Sovereign_immunity

Sovereign immunity, or crown immunity, is a legal doctrine whereby a sovereign or state cannot commit a legal wrong and is immune to civil suit or criminal prosecution, strictly speaking in modern texts in its own courts. A similar, stronger rule as regards foreign courts is named state immunity.

In its older sense, sovereign immunity is the original forebear of state immunity based on the classical concept of sovereignty in the sense that a sovereign could not be subjected without his or her approval to the jurisdiction of another.

There are two forms of sovereign immunity:

• immunity from suit (also known as immunity from jurisdiction or adjudication)
• immunity from enforcement.

Immunity from suit means that neither a sovereign/head of state in person nor any in absentia or representative form (nor to a lesser extent the state) can be a defendant or subject of court proceedings, nor in most equivalent forums such as under arbitration awards and tribunal awards/damages. Immunity from enforcement means that even if a person succeeds in any way against their sovereign or state, they and the judgment may find itself without means of enforcement. Separation of powers or natural justice coupled with a political status other than a totalitarian state dictates there be broad exceptions to immunity such as statutes which expressly bind the state (a prime example being constitutional laws) and judicial review.

Furthermore, sovereign immunity of a state entity may be waived. A state entity may waive its immunity by:

• prior written agreement
• instituting proceedings without claiming immunity
• submitting to jurisdiction as a defendant in a suit
• intervening in or taking any steps in any suit (other than for the purpose of claiming immunity).

In constitutional monarchies the sovereign is the historical origin of the authority which creates the courts. Thus the courts had no power to compel the sovereign to be bound by them as they were created by the sovereign for the protection of his or her subjects. This rule was commonly expressed by the popular legal maxim rex non potest peccare, meaning "the king can do no wrong".

By country

Australia

There is no automatic Crown immunity in Australia and the Australian Constitution does not establish a state of unfettered immunity of the Crown in respect of the States and the Commonwealth. The Constitution of Australia establishes items which the States and the Commonwealth legislate on independently of each other, in practice resulting in the States legislating on some things and the Commonwealth legislating on others. In some circumstances this can create ambiguity as to the applicability of legislation where there is no clearly established Crown immunity. The Australian Constitution does however, in s. 109, declare that, "When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid." Based on this, depending on the context of application and whether a particular statute infringes on the executive powers of the State or the Commonwealth the Crown may or may not be immune from any particular statute.

Many Acts passed in Australia, both at the State or the Federal level, contain a section declaring whether the Act binds the Crown, and, if so, in what respect:

• Commonwealth Acts may contain wording similar to: "This Act binds the Crown in each of its capacities", or specify a more restricted application.
• State Acts may contain wording similar to: "This Act binds the Crown in right of [the State] and, in so far as the legislative power of the Parliament of [the State] permits, the Crown in all its other capacities."

Whilst there is no ambiguity surrounding the first aspect of this declaration with respect to binding the Crown with respect to the State in question, there have been several cases in respect of the interpretation of the second aspect extending it to the Crown in its other capacities. Rulings by the High Court of Australia on specific matters of conflict between the application of States laws on Commonwealth agencies have provided the interpretation that the Crown in all of its other capacities includes the Commonwealth, therefore if a State Act contains this text then the act may bind the Commonwealth subject to the s. 109 test of inconsistency.

A landmark case which set a precedent for challenging broad Crown immunity and established tests for the applicability of State laws on the Commonwealth was Henderson v Defence Housing Authority in 1997. This case involved the arbitration of a dispute between Mr. Henderson and the Defence Housing Authority (DHA). Mr. Henderson owned a house which the DHA had leased to provide housing to members of the Australian Defence Force (ADF). Under the NSW Residential Tenancies Act 1997, Mr. Henderson sought orders from the Residential Tenancies Tribunal to enter the premises for the purposes of conducting inspections. In response, DHA claimed that as a Commonwealth agency the legislation of NSW did not apply to it and further sought writs of prohibition attempting to restrain Mr. Henderson from pursuing the matter further. Up until this point the Commonwealth and its agencies claimed an unfettered immunity from State legislation and had used s. 109 to justify this position, specifically that the NSW Act was in conflict with the Act which created the DHA and s. 109 of the Constitution applied. Mr. Henderson took the case to the High Court and a panel of 7 justices to arbitrate the matter. By a majority decision of 6:1 the court ruled that the DHA was bound by the NSW Act on the basis that the NSW Act did not limit, deny or restrict the activities of the DHA but sought to regulate them, an important distinction which was further explained in the rulings of several of the justices. It was ruled that the NSW Act was one of general application and therefore the Crown (in respect of the Commonwealth) could not be immune from it, citing other cases in which the same ruling had been made and that it was contrary to the rule of law. As a result of this case, the Commonwealth cannot claim a broad constitutional immunity from State legislation.

In practice, three tests have been developed to determine whether a State law applies to the Commonwealth (and vice versa):

1. does the law seek to merely regulate the activities of the Commonwealth as opposed to deny, restrict or limit them,
2. is the State law constructed such that the Act binds the Crown in respect of all of its capacities, and
3. is there no inconsistency between a State law and a Commonwealth law on the same matter.

If these three tests are satisfied then the Act binds the Crown in respect of the Commonwealth. It is important to note that in Australia there is no clear automatic Crown immunity or lack of it, as such there is a rebuttable presumption that the Crown is not bound by a statute, as noted in Bropho v State of Western Australia. The Crown's immunity may also apply to other parties in certain circumstances, as held in Australian Competition and Consumer Commission v Baxter Healthcare.

Belgium

Article 88 of the Constitution of Belgium states: "The King’s person is inviolable; his ministers are accountable."

Bhutan

According to the constitution of Bhutan, the monarch is not answerable in a court of law for his or her actions.

Canada

Canada inherited common law version of Crown immunity from British law. However, over time the scope of Crown immunity has been steadily reduced by statute law. As of 1994, section 14 of the Alberta Interpretation Act stated, "No enactment is binding on Her Majesty or affects Her Majesty or Her Majesty's rights or prerogatives in any manner, unless the enactment expressly states that it binds Her Majesty." However, in more recent times "All Canadian provinces ... and the federal government (the Crown Liability Act) have now rectified this anomaly by passing legislation which leaves the 'Crown' liable in tort as a normal person would be. Thus, the tort liability of the government is a relatively new development in Canada, statute-based, and is not a fruit of common law."

Since 1918, it has been held that provincial legislatures cannot bind the federal Crown, as Fitzpatrick CJ noted in Gauthier v The King:

Provincial legislation cannot proprio vigore [i.e., of its own force] take away or abridge any privilege of the Crown in right of the Dominion.

It has also been a constitutional convention that the Crown in right of each province is immune from the jurisdiction of the courts in other provinces. However this is now in question.

Lieutenant Governors do not enjoy the same immunity as the Sovereign in matters not relating to the powers of the office. In 2013, the Supreme Court refused to hear the request of former Lieutenant Governor of Quebec Lise Thibault to have charges against her dropped. She was being prosecuted by the Attorney General of Quebec for misappropriation of public funds but invoked royal immunity on the basis that "the Queen can do no wrong". As per convention, the court did not disclose its reasons for not considering the matter. Thibault later petitioned the Court of Quebec for the same motives. Judge St-Cyr again rejected her demand, noting that constitutional law does not grant a lieutenant-governor the same benefits as the Queen and that in her case, royal immunity would only apply to actions involving official state functions, not personal ones. She was eventually declared guilty and sentenced to 18 months in jail but was granted conditional release after serving six months.

China

China has consistently claimed that a basic principle of international law is for states and their property to have absolute sovereign immunity. China objects to restrictive sovereign immunity. It is held that a state can waive its immunity by voluntarily stating so, but that should a government intervene in a suit (e.g. to make protests), it should not be viewed as waiver of immunity. Chinese state-owned companies considered instrumental to the state have claimed sovereign immunity in lawsuits brought against them in foreign courts before. China's view is that sovereign immunity is a lawful right and interest that their enterprises are entitled to protect. Some examples of Chinese state-owned companies that have claimed sovereign immunity in foreign lawsuits are the Aviation Industry Corporation of China (AVIC) and China National Building Material.

Denmark

Article 13 of the Constitution of Denmark states: "The King shall not be answerable for his actions; his person shall be sacrosanct. The Ministers shall be responsible for the conduct of the government; their responsibility shall be determined by Statute." Accordingly, the monarch cannot be sued in his or her personal capacity. On the other hand, this immunity from lawsuits does not extend to the state as such and article 63 explicitly authorises the courts to judge the executive authority: "The courts of justice shall be empowered to decide any question relating to the scope of the executive's authority; though any person wishing to question such authority shall not, by taking the case to the courts of justice, avoid temporary compliance with orders given by the executive authority."

Holy See

The Holy See, of which the current pope is head (often referred to by metonymy as the Vatican or Vatican City State, a distinct entity), claims sovereign immunity for the pope, supported by many international agreements.

Hong Kong

In 2011, the Hong Kong Court of Final Appeal ruled that absolute sovereign immunity applies in Hong Kong, as the Court found that Hong Kong, as a Special Administrative Region of China, could not have policies on state immunity that was inconsistent with China. The ruling was an outcome of the Democratic Republic of the Congo v FG Hemisphere Associates case in 2011.

Democratic Republic of the Congo v FG Hemisphere Associates (2011)

The Democratic Republic of the Congo and its state-owned electricity company Société nationale d'électricité (SNEL) defaulted on payments of a debt owed to an energy company, Energoinvest. During arbitration, Energoinvest was awarded damages against the Congolese government and SNEL. This was reassigned by Energoinvest to FG Hemisphere Associates LLC.

FG Hemisphere subsequently learned that the Congolese government entered into a separate joint venture with Chinese companies later, in which the Congolese government would be paid US$221 million in mining entry fees. As a result, FG Hemisphere applied to collect these fees in order to enforce the earlier arbitral award. The Congolese government asserted sovereign immunity in the legal proceedings. This was eventually brought to the Hong Kong Court of Final Appeal, when the Congolese government fought to overturn an earlier Court of Appeal decision which had ruled that:

• as restrictive sovereign immunity applied in Hong Kong, the Congolese government had no immunity in commercial proceedings.
• if absolute sovereign immunity had applied in Hong Kong, the Congolese government had waived their sovereign immunity rights in this case.

The Hong Kong Court of Final Appeal ruled 3:2 that the Congolese government had not waived its immunity in the Hong Kong courts, and that as a Special Administrative Region of China, Hong Kong could not have policies on state immunity that was inconsistent with China's. Therefore, the doctrine of sovereign immunity applied in Hong Kong should be absolute, and may be invoked when jurisdiction is sought in the foreign court in relation to an application to enforce a foreign judgment or arbitral award, or when execution is sought against assets in the foreign state. This means that sovereign states are absolutely immune to the jurisdiction in Hong Kong courts, including in commercial claims, unless the state waives its immunity. In order to waive immunity, there must be express, unequivocal submission to the jurisdiction of the Hong Kong courts "in the face of the court". Claimants should establish that the state party has waived their entitlement to immunity at the relevant stage, before proceedings can occur in court.

Iceland

According to article 11 of the Constitution of Iceland the president can only be held accountable and be prosecuted with the consent of parliament.

India

According to Article 361 Constitution of India no legal action in the court of law can be taken against President of India and Governors of states of India as long as that person is holding either office. However, he/she can be impeached and then sued for his/her actions.

Ireland

In Byrne v Ireland, the Irish Supreme Court declared that sovereign immunity had not survived the creation of the Irish Free State in 1922, and that accordingly the state could be sued for and held vicariously liable for the acts and omissions of its servants and agents.

Italy

According to the Constitution, the President of the Italian Republic is not accountable, and he is not responsible for any act of his office, unless he has committed high treason or attempted to subvert the Constitution, as stated in Article 90:

The President of the Republic is not responsible for the actions performed in the exercise of presidential duties, except in the case of high treason or violation of the Constitution. In such cases, the President may be impeached by Parliament in joint session, with an absolute majority of its members.

The Italian Penal Code makes it a criminal offence to insult the honor and prestige of the President (Art. 278), and until 2006 it was an offence to publicly give the President responsibility for actions of the Government (Art. 279 – abrogated).

The Italian Constitutional Court has declared the partial incompatibility with the Italian Constitution of a law that forced courts to delay all trials against the Italian Prime Minister while he is in office. The revised version says that the trial hearings have to be scheduled in agreement between the Judge and the Government.

Malaysia

In Malaysia, an amendment to the constitution in 1993 made it possible to bring proceedings against the king or any ruler of a component state in the Special Court. Prior to 1993, rulers, in their personal capacity, were immune from any proceedings brought against them.

Nigeria

Section 308 of the Nigerian constitution of 1999 provides immunity from court proceedings, i.e., proceedings that will compel their attendance in favour of elected executive officers, namely the President and his vice and the Governors of the states and the deputies. This immunity extends to acts done in their official capacities so that they are not responsible for acts done on behalf of the state. However, this immunity does not extend to acts done in abuse of the powers of their office of which they are liable upon the expiration of their tenure. It is important to note that the judiciary has absolute immunity for actions decisions taken in their official capacity.

Norway

Article 5 of the Constitution of Norway states: "The King's person is sacred; he cannot be censured or accused. The responsibility rests with his Council." Accordingly, the monarch cannot be prosecuted or sued in his or her personal capacity, but this immunity does not extend to the state as such. Neither does immunity extend to the monarch in his capacity as an owner or stakeholder in real property, or as an employer, provided that the suit does not allege personal responsibility for the monarch.

Philippines

Article XVI, Section 3 of the Philippines Constitution states: "The State may not be sued without its consent."

Spain

The Spanish monarch is personally immune from prosecution for acts committed by government ministers in the King's name, according to Title II, Section 56, Subsection 3 of the Spanish Constitution of 1978.

The person of the King is inviolable and shall not be held accountable. His acts shall always be countersigned in the manner established in section 64. Without such countersignature they shall not be valid, except as provided under section 65(2).

At the time of the June 2014 abdication of King Juan Carlos the Spanish constitution did not state whether an abdicated monarch retains his legal immunity, but the government was planning to make changes to allow this. Legislation has been passed, although unlike his previous immunity, the new legislation does not completely shield the former sovereign. Juan Carlos must answer to the supreme court, in a similar type of protection afforded to many high-ranking civil servants and politicians in Spain. The legislation stipulates that all outstanding legal matters relating to the former king be suspended and passed "immediately" to the supreme court.

Sri Lanka

By the Constitution of Sri Lanka, the President of Sri Lanka has sovereign immunity (till the period of office).

Sweden

Chapter 5, Article 8 of the Swedish Constitution states: "The King or Queen who is Head of State cannot be prosecuted for his or her actions. Nor can a Regent be prosecuted for his or her actions as Head of State." This only concerns the King as a private person, since he does not appoint the government, nor do any public officials act in his name. It does not concern other members of the Royal Family, except in such cases as they are exercising the office of Regent when the King is unable to serve. It is a disputed matter among Swedish constitutional lawyers whether the article also implies that the King is immune against lawsuits in civil cases, which do not involve prosecution.

Singapore

In Singapore, state immunities are codified in the State Immunity Act of 1979, which closely resembles the United Kingdom's State Immunity Act 1978. Singapore's State Immunity Act has phrases identical to that of Section 9 of United Kingdom's State Immunity Act, and does not allow a foreign state, which has agreed to submit a dispute to arbitration, to claim jurisdictional immunity in judicial proceedings relating to the agreed arbitration, i.e. "where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the state is not immune as respects proceedings in the courts in Singapore which relate to the arbitration". 

The President of Singapore does to a certain extent have sovereign immunity subjected to clause 22k(4). (See Part V under government regarding the President of Singapore)

United Kingdom

Immunity in proceedings

Historically, the general rule in the United Kingdom has been that the Crown has never been able to be prosecuted or proceeded against in either criminal or civil cases. The only means by which civil proceedings could be brought were:

• by way of petition of right, which was dependent on the grant of the royal fiat (i.e. permission);
• by suits against the Attorney General for a declaration; or
• by actions against ministers or government departments where an Act of Parliament had specifically provided that immunity be waived.

The position was drastically altered by the Crown Proceedings Act 1947 which made the Crown (when acting as the government) liable as of right in proceedings where it was previously only liable by virtue of a grant of a fiat. With limited exceptions, this had the effect of allowing proceedings for tort and contract to be brought against the Crown. Proceedings to bring writs of mandamus and prohibition were always available against ministers, because their actions derive from the royal prerogative.

Criminal proceedings are still prohibited from being brought against Her Majesty's Government unless expressly permitted by the Crown Proceedings Act.

As the Crown Proceedings Act only affected the law in respect of acts carried on by or on behalf of the British government, the monarch remains personally immune from criminal and civil actions. However, civil proceedings can, in theory, still be brought using the two original mechanisms outlined above – by petition of right or by suit against the Attorney General for a declaration.

Other immunities

The monarch is immune from arrest in all cases; members of the royal household are immune from arrest in civil proceedings. No arrest can be made "in the monarch's presence", or within the "verges" of a royal palace. When a royal palace is used as a residence (regardless of whether the monarch is actually living there at the time), judicial processes cannot be executed within that palace.

The monarch's goods cannot be taken under a writ of execution, nor can distress be levied on land in their possession. Chattels owned by the Crown, but present on another's land, cannot be taken in execution or for distress. The Crown is not subject to foreclosure.

United States

In United States law, state, federal and tribal governments generally enjoy immunity from lawsuits. Local governments typically enjoy immunity from some forms of suit, particularly in tort. 

In the US, sovereign immunity falls into two categories:

• Absolute immunity: pursuant to which a government actor may not be sued for the allegedly wrongful act, even if that person acted maliciously or in bad faith; and
• Qualified immunity: pursuant to which a government actor is shielded from liability only if specific conditions are met, as specified in statute or case law.

In some situations, sovereign immunity may have been waived by law.

Federal sovereign immunity

The federal government has sovereign immunity and may not be sued anywhere in the United States unless it has waived its immunity or consented to suit. The United States has waived sovereign immunity to a limited extent, mainly through the Federal Tort Claims Act, which waives the immunity if a tortious act of a federal employee causes damage, and the Tucker Act, which waives the immunity over claims arising out of contracts to which the federal government is a party. The United States as a sovereign is immune from suit unless it unequivocally consents to being sued. The United States Supreme Court in Price v. United States observed: "It is an axiom of our jurisprudence. The government is not liable to suit unless it consents thereto, and its liability in suit cannot be extended beyond the plain language of the statute authorizing it." Price v. United States, 174 U.S. 373, 375-76 (1899).

State sovereign immunity

In Hans v. Louisiana (1890), the Supreme Court of the United States held that the Eleventh Amendment (1795) re-affirms that states possess sovereign immunity and are therefore generally immune from being sued in federal court without their consent. In later cases, the Supreme Court has strengthened state sovereign immunity considerably. In Blatchford v. Native Village of Noatak (1991), the court explained that

we have understood the Eleventh Amendment to stand not so much for what it says, but for the presupposition of our constitutional structure which it confirms: that the States entered the federal system with their sovereignty intact; that the judicial authority in Article III is limited by this sovereignty, and that a State will therefore not be subject to suit in federal court unless it has consented to suit, either expressly or in the "plan of the convention". [Citations omitted.]

In Alden v. Maine (1999), the Court explained that while it has

sometimes referred to the States' immunity from suit as "Eleventh Amendment immunity"[,] [that] phrase is [a] convenient shorthand but something of a misnomer, [because] the sovereign immunity of the States neither derives from, nor is limited by, the terms of the Eleventh Amendment. Rather, as the Constitution's structure, its history, and the authoritative interpretations by this Court make clear, the States' immunity from suit is a fundamental aspect of the sovereignty which the States enjoyed before the ratification of the Constitution, and which they retain today (either literally or by virtue of their admission into the Union upon an equal footing with the other States) except as altered by the plan of the Convention or certain constitutional Amendments.

Writing for the Court in Alden, Justice Anthony Kennedy argued that in view of this, and given the limited nature of congressional power delegated by the original unamended Constitution, the court could not "conclude that the specific Article I powers delegated to Congress necessarily include, by virtue of the Necessary and Proper Clause or otherwise, the incidental authority to subject the States to private suits as a means of achieving objectives otherwise within the scope of the enumerated powers".

However, a "consequence of [the] Court's recognition of preratification sovereignty as the source of immunity from suit is that only States and arms of the State possess immunity from suits authorized by federal law". Northern Insurance Company of New York v. Chatham County (2006, emphasis added). Thus, cities and municipalities lack sovereign immunity, Jinks v. Richland County (2003), and counties are not generally considered to have sovereign immunity, even when they "exercise a 'slice of state power'". Lake Country Estates, Inc. v. Tahoe Regional Planning Agency (1979). Nor are school districts, per Mt. Healthy City School District Board of Education v. Doyle (1977).

Additionally, Congress can abrogate state sovereign immunity when it acts pursuant to powers delegated to it by any amendments ratified after the Eleventh Amendment. The abrogation doctrine, established by the Supreme Court in Fitzpatrick v. Bitzer (1976), is most often implicated in cases that involve Section 5 of the Fourteenth Amendment, which explicitly allows Congress to enforce its guarantees on the states.

Bankruptcy in the United States

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Bankruptcy_in_the_United_States 

 

In the United States, bankruptcy is governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

Some laws relevant to bankruptcy are found in other parts of the United States Code. For example, bankruptcy crimes are found in Title 18 of the United States Code (Crimes). Tax implications of bankruptcy are found in Title 26 of the United States Code (Internal Revenue Code), and the creation and jurisdiction of bankruptcy courts are found in Title 28 of the United States Code (Judiciary and Judicial procedure).

Bankruptcy cases are filed in United States Bankruptcy Court (units of the United States District Courts), and federal law governs procedure in bankruptcy cases. However, state laws are often applied to determine how bankruptcy affects the property rights of debtors. For example, laws governing the validity of liens or rules protecting certain property from creditors (known as exemptions), may derive from state law or federal law. Because state law plays a major role in many bankruptcy cases, it is often unwise to generalize some bankruptcy issues across state lines.

History

Before 1898, there were several short-lived federal bankruptcy laws in the U.S. The first was the Bankruptcy Act of 1800 which was repealed in 1803 and followed by the act of 1841, which was repealed in 1843, and then the act of 1867, which was amended in 1874 and repealed in 1878.

The first modern Bankruptcy Act in America, sometimes called the "Nelson Act", was initially entered into force in 1898. The current Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act of 1978, and generally became effective on October 1, 1979. The current Code completely replaced the former Bankruptcy Act, the "Chandler Act" of 1938. The Chandler Act gave unprecedented authority to the Securities and Exchange Commission in the administration of bankruptcy filings. The current Code has been amended numerous times since 1978. See also the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Chapters of the Bankruptcy Code

Entities seeking relief under the Bankruptcy Code may file a petition for relief under a number of different chapters of the Code, depending on circumstances. Title 11 contains nine chapters, six of which provide for the filing of a petition. The other three chapters provide rules governing bankruptcy cases in general. A case is typically referred to by the chapter under which the petition is filed. These chapters are described below.

Chapter 7: Liquidation

Liquidation under a Chapter 7 filing is the most common form of bankruptcy. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Because all states allow for debtors to keep essential property, Chapter 7 cases are often "no asset" cases, meaning that the bankrupt estate has no non-exempt assets to fund a distribution to creditors.

Chapter 7 bankruptcy remains on a bankruptcy filer's credit report for 10 years.

United States bankruptcy law significantly changed in 2005 with the passage of BAPCPA, which made it more difficult for consumer debtors to file bankruptcy in general and Chapter 7 in particular.

Advocates of BAPCPA claimed that its passage would reduce losses to creditors such as credit card companies, and that those creditors would then pass on the savings to other borrowers in the form of lower interest rates. Critics assert that these claims turned out to be false, observing that although credit card company losses decreased after passage of the Act, prices charged to customers increased, and credit card company profits increased.

Chapter 9: Reorganization for municipalities

A Chapter 9 bankruptcy is available only to municipalities. Chapter 9 is a form of reorganization, not liquidation. Notable examples of municipal bankruptcies include that of Orange County, California (1994 to 1996) and the bankruptcy of the city of Detroit, Michigan in 2013.

Chapters 11, 12, and 13: Reorganization

A few volumes of Title 11 (Bankruptcy) of the United States Code Annotated (U.S.C.A.) at a law library.

 

Bankruptcy under Chapter 11, Chapter 12, or Chapter 13 is more complex reorganization and involves allowing the debtor to keep some or all of his or her property and to use future earnings to pay off creditors. Consumers usually file chapter 7 or chapter 13. Chapter 11 filings by individuals are allowed, but are rare. Chapter 12 is similar to Chapter 13 but is available only to "family farmers" and "family fisherman" in certain situations. Chapter 12 generally has more generous terms for debtors than a comparable Chapter 13 case would have available. As recently as mid-2004 Chapter 12 was scheduled to expire, but in late 2004 it was renewed and made permanent.

Chapter 15: Cross-border insolvency

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added Chapter 15 (as a replacement for section 304) and deals with cross-border insolvency: foreign companies with U.S. debts.

Features of U.S. bankruptcy law

Voluntary versus involuntary bankruptcy

As a threshold matter, bankruptcy cases are either voluntary or involuntary. In voluntary bankruptcy cases, which account for the overwhelming majority of cases, debtors petition the bankruptcy court. With involuntary bankruptcy, creditors, rather than the debtor, file the petition in bankruptcy. Involuntary petitions are rare, however, and are occasionally used in business settings to force a company into bankruptcy so that creditors can enforce their rights.

The estate

Except in Chapter 9 cases, commencement of a bankruptcy case creates an "estate". Generally, the debtor's creditors must look to the assets of the estate for satisfaction of their claims. The estate consists of all property interests of the debtor at the time of case commencement, subject to certain exclusions and exemptions. In the case of a married person in a community property state, the estate may include certain community property interests of the debtor's spouse even if the spouse has not filed bankruptcy. The estate may also include other items, including but not limited to property acquired by will or inheritance within 180 days after case commencement.

For federal income tax purposes, the bankruptcy estate of an individual in a Chapter 7 or 11 case is a separate taxable entity from the debtor. The bankruptcy estate of a corporation, partnership, or other collective entity, or the estate of an individual in Chapters 12 or 13, is not a separate taxable entity from the debtor.

Bankruptcy court

In 1982, in the case of Northern Pipeline Co. v. Marathon Pipe Line Co., the United States Supreme Court held that certain provisions of the law relating to Article I bankruptcy judges (who are not life-tenured "Article III" judges) are unconstitutional. Congress responded in 1984 with changes to remedy the constitutional defects. Under the revised law, bankruptcy judges in each judicial district constitute a "unit" of the applicable United States District Court. Each judge is appointed for a term of 14 years by the United States Court of Appeals for the circuit in which the applicable district is located.

The United States District Courts have subject-matter jurisdiction over bankruptcy matters. However, each such district court may, by order, "refer" bankruptcy matters to the Bankruptcy Court, and most district courts have a standing "reference" order to that effect, so that all bankruptcy cases are handled by the Bankruptcy Court. In unusual circumstances, a district court may "withdraw the reference" (i.e., taking a particular case or proceeding within the case away from the bankruptcy court) and decide the matter itself.

Decisions of the bankruptcy court are generally appealable to the district court, and then to the Court of Appeals. However, in a few jurisdictions a separate court called a Bankruptcy Appellate Panel (composed of bankruptcy judges) hears certain appeals from bankruptcy courts.

United States Trustee

The United States Attorney General appoints a separate United States Trustee for each of twenty-one geographical regions for a five-year term. Each Trustee is removable from office by and works under the general supervision of the Attorney General. The U.S. Trustees maintain regional offices that correspond with federal judicial districts and are administratively overseen by the Executive Office for United States Trustees in Washington, D.C. Each United States Trustee, an officer of the U.S. Department of Justice, is responsible for maintaining and supervising a panel of private trustees for chapter 7 bankruptcy cases. The Trustee has other duties including the administration of most bankruptcy cases and trustees. Under Section 307 of Title 11 of the U.S. Code, a U.S. Trustee "may raise and may appear and be heard on any issue in any case or proceeding" in bankruptcy except for filing a plan of reorganization in a chapter 11 case.

The automatic stay

Bankruptcy Code § 362 imposes the automatic stay at the moment a bankruptcy petition is filed. The automatic stay generally prohibits the commencement, enforcement or appeal of actions and judgments, judicial or administrative, against a debtor for the collection of a claim that arose prior to the filing of the bankruptcy petition. The automatic stay also prohibits collection actions and proceedings directed toward property of the bankruptcy estate itself.

In some courts, violations of the stay are treated as void ab initio as a matter of law, although the court may annul the stay to give effect to otherwise void acts. Other courts treat violations as voidable (not necessarily void ab initio). Any violation of the stay may give rise to damages being assessed against the violating party. Non-willful violations of the stay are often excused without penalty, but willful violators are liable for punitive damages and may also be found to be in contempt of court.

A secured creditor may be allowed to take the applicable collateral if the creditor first obtains permission from the court. Permission is requested by a creditor by filing a motion for relief from the automatic stay. The court must either grant the motion or provide adequate protection to the secured creditor that the value of their collateral will not decrease during the stay.

Without the bankruptcy protection of the automatic stay, creditors might race to the courthouse to improve their positions against a debtor. If the debtor's business were facing a temporary crunch, but were nevertheless viable in the long term, it might not survive a "run" by creditors. A run could also result in waste and unfairness among similarly situated creditors.

Bankruptcy Code 362(d) gives 4 ways that a creditor can get the automatic stay removed.

Avoidance actions

Debtors, or the trustees that represent them, gain the ability to reject, or avoid actions taken with respect to the debtor's property for a specified time prior to the filing of the bankruptcy. While the details of avoidance actions are nuanced, there are three general categories of avoidance actions:

• Preferences: 11 U.S.C. § 547
• Federal fraudulent transfer: 11 U.S.C. § 548
• Non-bankruptcy law creditor: 11 U.S.C. § 544

All avoidance actions attempt to limit the risk of the legal system accelerating the financial demise of a financially unstable debtor who has not yet declared bankruptcy. The bankruptcy system generally endeavors to reward creditors who continue to extend financing to debtors and discourage creditors from accelerating their debt collection efforts. Avoidance actions are some of the most obvious of the mechanisms to encourage this goal. 

Despite the apparent simplicity of these rules, a number of exceptions exist in the context of each category of avoidance action.

Preferences

Preference actions generally permit the trustee to avoid (that is, to void an otherwise legally binding transaction) certain transfers of the debtor's property that benefit creditors where the transfers occur on or within 90 days of the date of filing of the bankruptcy petition. For example, if a debtor has a debt to a friendly creditor and a debt to an unfriendly creditor, and pays the friendly creditor, and then declares bankruptcy one week later, the trustee may be able to recover the money paid to the friendly creditor under 11 U.S.C. § 547. While this "reach back" period typically extends 90 days backwards from the date of the bankruptcy, the amount of time is longer in the case of "insiders"—typically one year. Insiders include family and close business contacts of the debtor.

Fraudulent transfer

Bankruptcy fraudulent transfer law is similar in practice to non-bankruptcy fraudulent transfer law. Some terms, however, are more generous in bankruptcy than they are otherwise. For instance, the statute of limitations within bankruptcy is two years as opposed to a shorter time frame in some non-bankruptcy contexts. Generally a fraudulent transfer action operates in much the same way as a preference avoidance. Fraudulent transfer actions, however, sometimes require a showing of intent to shelter the property from a creditor.

Generally, conversion of nonexempt assets into exempt assets on the eve of bankruptcy would not be indicia of fraud per se. However, depending on the amount of the exemption and the circumstances surrounding the conversion, a court may find the conversion to be a fraudulent transfer. This is especially true when the conversion amounts to nothing more than a temporary arrangement. The cases that held a conversion of nonexempt into exempt assets to be a fraudulent transfer tend to focus on the existence of an independent reason for the conversion. For example, if a debtor purchased a residence protected by a homestead exemption with the intent to reside in such residence that would be an allowable conversion into nonexempt property. But where the debtor purchased the residence with all of their available funds, leaving no money to live off, that presumed that the conversion was temporary, indicating a fraudulent transfer. The courts look at the timing of the transfer as the most important factor.

Non-bankruptcy law creditor – "strong arm"

The strong arm avoidance power stems from 11 U.S.C. § 544 and permits the trustee to exercise the rights that a debtor in the same situation would have under the relevant state law. Specifically, § 544(a) grants the trustee the rights of avoidance of (1) a judicial lien creditor, (2) an unsatisfied lien creditor, and (3) a bona fide purchaser of real property. In practice these avoidance powers often overlap with preference and fraudulent transfer avoidance powers.

The creditors

Secured creditors whose security interests survive the commencement of the case may look to the property that is the subject of their security interests, after obtaining permission from the court (in the form of relief from the automatic stay). Security interests, created by what are called secured transactions, are liens on the property of a debtor.

Unsecured creditors are generally divided into two classes: unsecured priority creditors and general unsecured creditors. Unsecured priority creditors are further subdivided into classes as described in the law. In some cases the assets of the estate are insufficient to pay all priority unsecured creditors in full; in such cases the general unsecured creditors receive nothing.

Because of the priority and rank ordering feature of bankruptcy law, debtors sometimes improperly collude with others (who may be related to the debtor) to prefer them, by for example granting them a security interest in otherwise unpledged assets. For this reason, the bankruptcy trustee is permitted to reverse certain transactions of the debtor within period of time prior to the date of bankruptcy filing. The time period varies depending on the relationship of the parties to the debtor and the nature of the transaction.

In Chapters 7, 12, and 13, creditors must file a "proof of claim" to get paid. In a Chapter 11 case, a creditor is not required to file a proof of claim (that is, a proof of claim is "deemed filed") if the creditor's claim is listed on the debtor's bankruptcy schedules, unless the claim is scheduled as "disputed, contingent, or unliquidated". If the creditor's claim is not listed on the schedules in a Chapter 11 case, the creditor must file a proof of claim.

Executory contracts

The bankruptcy trustee may reject certain executory contracts and unexpired leases. For bankruptcy purposes, a contract is generally considered executory when both parties to the contract have not yet fully performed a material obligation of the contract.

If the Trustee (or debtor in possession, in many chapter 11 cases) rejects a contract, the debtor's bankruptcy estate is subject to ordinary breach of contract damages, but the damages amount is an obligation and is generally treated as an unsecured claim.

Committees

Under some chapters, notably chapters 7, 9 and 11, committees of various stakeholders are appointed by the bankruptcy court. In Chapter 11 and 9, these committees consist of entities that hold the seven largest claims of the kinds represented by the committee. Other committees may also be appointed by the court.

Committees have daily communications with the debtor and the debtor's advisers and have access to a wide variety of documents as part of their functions and responsibilities.

Exempt property

Although in theory all property of the debtor that is not excluded from the estate under the Bankruptcy Code becomes property of the estate (i.e., is automatically transferred from the debtor to the estate) at the time of commencement of a case, an individual debtor (not a partnership, corporation, etc.) may claim certain items of property as "exempt" and thereby keep those items (subject, however, to any valid liens or other encumbrances). An individual debtor may choose between a "federal" list of exemptions and the list of exemptions provided by the law of the state in which the debtor files the bankruptcy case unless the state in which the debtor files the bankruptcy case has enacted legislation prohibiting the debtor from choosing the exemptions on the federal list. Almost 40 states have done so. In states where the debtor is allowed to choose between the federal and state exemptions, the debtor has the opportunity to choose the exemptions that most fully benefit him or her and, in many cases, may convert at least some of his or her property from non-exempt form (e.g., cash) to exempt form (e.g., increased equity in a home created by using the cash to pay down a mortgage) prior to filing the bankruptcy case.

The exemption laws vary greatly from state to state. In some states, exempt property includes equity in a home or car, tools of the trade, and some personal effects. In other states an asset class such as tools of trade will not be exempt by virtue of its class except to the extent it is claimed under a more general exemption for personal property.

One major purpose of bankruptcy is to ensure orderly and reasonable management of debt. Thus, exemptions for personal effects are thought to prevent punitive seizures of items of little or no economic value (personal effects, personal care items, ordinary clothing), since this does not promote any desirable economic result. Similarly, tools of the trade may, depending on the available exemptions, be a permitted exemption as their continued possession allows the insolvent debtor to move forward into productive work as soon as possible.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 placed pension plans not subject to the Employee Retirement Income Security Act of 1974 (ERISA), like 457 and 403(b) plans, in the same status as ERISA qualified plans with respect to having exemption status akin to spendthrift trusts. SEP-IRAs and SIMPLEs still are outside federal protection and must rely on state law.

Spendthrift trusts

Most states have property laws that allow a trust agreement to contain a legally enforceable restriction on the transfer of a beneficial interest in the trust (sometimes known as an "anti-alienation provision"). The anti-alienation provision generally prevents creditors of a beneficiary from acquiring the beneficiary's share of the trust. Such a trust is sometimes called a spendthrift trust. To prevent fraud, most states allow this protection only to the extent that the beneficiary did not transfer property to the trust. Also, such provisions do not protect cash or other property once it has been transferred from the trust to the beneficiary. Under the U.S. Bankruptcy Code, an anti-alienation provision in a spendthrift trust is recognized. This means that the beneficiary's share of the trust generally does not become property of the bankruptcy estate.

Redemption

In a Chapter 7 liquidation case, an individual debtor may redeem certain "tangible personal property intended primarily for personal, family, or household use" that is encumbered by a lien. To qualify, the property generally either (A) must be exempt under section 522 of the Bankruptcy Code, or (B) must have been abandoned by the trustee under section 554 of the Bankruptcy Code. To redeem the property, the debtor must pay the lienholder the full amount of the applicable allowed secured claim against the property.

Debtor's discharge

Key concepts in bankruptcy include the debtor's discharge and the related "fresh start". Discharge is available in some but not all cases. For example, in a Chapter 7 case only an individual debtor (not a corporation, partnership, etc.) can receive a discharge.

The effect of a bankruptcy discharge is to eliminate only the debtor's personal liability, not the in rem liability for a secured debt to the extent of the value of collateral. The term "in rem" essentially means "with respect to the thing itself" (i.e., the collateral). For example, if a debt in the amount of $100,000 is secured by property having a value of only $80,000, the $20,000 deficiency is treated, in bankruptcy, as an unsecured claim (even though it's part of a "secured" debt). The $80,000 portion of the debt is treated as a secured claim. Assuming a discharge is granted and none of the $20,000 deficiency is paid (e.g., due to insufficiency of funds), the $20,000 deficiency—the debtor's personal liability—is discharged (assuming the debt is not non-dischargeable under another Bankruptcy Code provision). The $80,000 portion of the debt is the in rem liability, and it is not discharged by the court's discharge order. This liability can presumably be satisfied by the creditor taking the asset itself. An essential concept is that when commentators say that a debt is "dischargeable", they are referring only to the debtor's personal liability on the debt. To the extent that a liability is covered by the value of collateral, the debt is not discharged.

This analysis assumes, however, that the collateral does not increase in value after commencement of the case. If the collateral increases in value and the debtor (rather than the estate) keeps the collateral (e.g., where the asset is exempt or is abandoned by the trustee back to the debtor), the amount of the creditor's security interest may or may not increase. In situations where the debtor (rather than the creditor) is allowed to benefit from the increase in collateral value, the effect is called "lien stripping" or "paring down". Lien stripping is allowed only in certain cases depending on the kind of collateral and the particular chapter of the Code under which the discharge is granted.

The discharge also does not eliminate certain rights of a creditor to setoff (or "offset") certain mutual debts owed by the creditor to the debtor against certain claims of that creditor against the debtor, where both the debt owed by the creditor and the claim against the debtor arose prior to the commencement of the case.

Not every debt may be discharged under every chapter of the Code. Certain taxes owed to Federal, state or local government, student loans, and child support obligations are not dischargeable. (Guaranteed student loans are potentially dischargeable, however, if debtor prevails in a difficult-to-win adversary proceeding against the lender commenced by a complaint to determine dischargeability. Also, the debtor can petition the court for a "financial hardship" discharge, but the grant of such discharges is rare.) 

The debtor's liability on a secured debt, such as a mortgage or mechanic's lien on a home, may be discharged. The effects of the mortgage or mechanic's lien, however, cannot be discharged in most cases if the lien affixed prior to filing. Therefore, if the debtor wishes to retain the property, the debt must usually be paid for as agreed. (See also lien avoidance, reaffirmation agreement) (Note: there may be additional flexibility available in Chapter 13 for debtors dealing with oversecured collateral such as a financed auto, so long as the oversecured property is not the debtor's primary residence.)

Any debt tainted by one of a variety of wrongful acts recognized by the Bankruptcy Code, including defalcation, or consumer purchases or cash advances above a certain amount incurred a short time before filing, cannot be discharged. However, certain kinds of debt, such as debts incurred by way of fraud, may be dischargeable through the Chapter 13 super discharge. All in all, as of 2005, there are 19 general categories of debt that cannot be discharged in a Chapter 7 bankruptcy, and fewer debts that cannot be discharged under Chapter 13.

Entities that cannot be debtors

The section of the Bankruptcy code that governs which entities are permitted to file a bankruptcy petition is 11 U.S.C. § 109. Banks and other deposit institutions, insurance companies, railroads, and certain other financial institutions and entities regulated by the federal and state governments, and Private and Personal Trusts, except Statutory Business Trusts, as permitted by some States, cannot be a debtor under the Bankruptcy Code. Instead, special state and federal laws govern the liquidation or reorganization of these companies. In the U.S. context at least, it is incorrect to refer to a bank or insurer as being "bankrupt". The terms "insolvent", "in liquidation", or "in receivership" would be appropriate under some circumstances.

Status of certain defined benefit pension plan liabilities in bankruptcy

The Pension Benefit Guaranty Corporation (PBGC), a U.S. government corporation that insures certain defined benefit pension plan obligations, may assert liens in bankruptcy under either of two separate statutory provisions. The first is found in the Internal Revenue Code, at 26 U.S.C. § 412(n), which provides that liens held by the PBGC have the status of a tax lien. Under this provision, the unpaid mandatory pension contributions must exceed one million dollars for the lien to arise.

The second statute is 29 U.S.C. § 1368, under which a PBGC lien has the status of a tax lien in bankruptcy. Under this provision, the lien may not exceed 30% of the net worth of all persons liable under a separate provision, 29 U.S.C. § 1362(a).

In bankruptcy, PBGC liens (like Federal tax liens) generally are not valid against certain competing liens that were perfected before a notice of the PBGC lien was filed.

Bankruptcy costs

In 2013, 91 percent of U.S. individuals filing bankruptcy hire an attorney to file their Chapter 7 petition. The typical cost of an attorney was $1,170. Alternatives to filing with an attorney are: filing pro se, meaning without an attorney, which requires an individual to fill out least sixteen separate forms, hiring a petition preparer, or using online software to generate the petition.

The U.S. Bankruptcy Court also charges fees. The amounts of these fees vary depending on the Chapter of bankruptcy being filed. As of 2016, the filing fee is $335 for Chapter 7 and $310 for Chapter 13. It is possible to apply for an installment payment plan in cases of financial hardship. Additional fees are charged for adding creditors after filing ($31), converting the case from one chapter to another ($10-$45), and reopening the case ($245 for Chapter 7 and $235 in Chapter 13).

Bankruptcy crimes

In the United States, criminal provisions relating to bankruptcy fraud and other bankruptcy crimes are found in sections 151 through 158 of Title 18 of the United States Code.

Bankruptcy fraud includes filing a bankruptcy petition or any other document in a bankruptcy case for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud also includes making a false or fraudulent representation, claim or promise in connection with a bankruptcy case, either before or after the commencement of the case, for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud is punishable by a fine, or by up to five years in prison, or both.

Knowingly and fraudulently concealing property of the estate from a custodian, trustee, marshal, or other court officer is a separate offense, and may also be punishable by a fine, or by up to five years in prison, or both. The same penalty may be imposed for knowingly and fraudulently concealing, destroying, mutilating, falsifying, or making a false entry in any books, documents, records, papers, or other recorded information relating to the property or financial affairs of the debtor after a case has been filed.

Certain offenses regarding fraud in connection with a bankruptcy case may also be classified as "racketeering activity" for purposes of the Racketeer Influenced and Corrupt Organizations Act (RICO). Any person who receives income directly or indirectly derived from a "pattern" of such racketeering activity (generally, two or more offensive acts within a ten-year period) and who uses or invests any part of that income in the acquisition, establishment, or operation of any enterprise engaged in (or affecting) interstate or foreign commerce may be punished by up to twenty years in prison.

Bankruptcy crimes are prosecuted by the United States Attorney, typically after a reference from the United States Trustee, the case trustee, or a bankruptcy judge.

Bankruptcy fraud can also sometimes lead to criminal prosecution in state courts, under the charge of theft of the goods or services obtained by the debtor for which payment, in whole or in part, was evaded by the fraudulent bankruptcy filing.

Bankruptcy and federalism

On January 23, 2006, the Supreme Court, in Central Virginia Community College v. Katz, declined to apply state sovereign immunity from Seminole Tribe v. Florida, to defeat a trustee's action under 11 U.S.C. § 547 to recover preferential transfers made by a debtor to a state agency. The Court ruled that Article I, section 8, clause 4 of the U.S. Constitution (empowering Congress to establish uniform laws on the subject of bankruptcy) abrogates the state's sovereign immunity in suits to recover preferential payments.

Social and economic factors

In 2008, there were 1,117,771 bankruptcy filings in the United States courts. Of those, 744,424 were chapter 7 bankruptcies, while 362,762 were chapter 13.

Personal bankruptcy

Personal bankruptcies may be caused by a number of factors. In 2008, over 96% of all bankruptcy filings were non-business filings, and of those, approximately two-thirds were chapter 7 cases.

Although the individual causes of bankruptcy are complex and multifaceted, the majority of personal bankruptcies involve substantial medical bills. Personal bankruptcies are typically filed under Chapter 7 or Chapter 13. Personal Chapter 11 bankruptcies are relatively rare. The American Journal of Medicine says over 3 out of 5 personal bankruptcies are due to medical debt.

Corporate bankruptcy

Corporate bankruptcy can arise as a result of two broad categories—business failure or financial distress. Business failure stems from flaws in the company's business model that prohibit it from producing the necessary level of profit to justify its capital investment. Conversely, financial distress stems from flaws in the way the company is financed or its capital structure. Continued financial distress leads to either technical insolvency (assets outweigh liabilities, but the firm is unable to meet current obligations) or bankruptcy (liabilities outweigh assets, and the firm has a negative net worth). A company experiencing business failure can stave off bankruptcy as long as it has access to funding; conversely, a company that is experiencing financial failure will be pushed into bankruptcy regardless of the soundness of its business model. The actual causes of corporate bankruptcies are difficult to establish, due to the compounding effects of external (macroeconomic, industry) and internal (business or financial) factors. However, some studies have indicated that financial leverage and working capital mismanagement are likely two of the major causes of corporate failure and bankruptcy in the US.

Largest bankruptcies

The largest bankruptcy in U.S. history occurred on September 15, 2008, when Lehman Brothers Holdings Inc. filed for Chapter 11 protection with more than $639 billion in assets.