1.Individual Debt Collection a. Overview of Bankruptcy System

i. Bankruptcy Chapters1. Chapter 7: Liquidation (For everyone, except railroads and banks)

a. 2 step analysis: i. What’s in the estate (is it yours, accessible for these

purposes)ii. Exempt property (homestead exemption), election b/w

state & federal. b. Means testing requirements for individuals – if you have too

much money, this isn’t an option.2. Chapter 11: Reorganization (for business - chp 7 + bank, RR, but not

brokers)3. Chapter 13: Reorganization (for individuals with regular income, no

brokers)a. Must be an individual with regular income and fit within debt

limits – if you are too far in debt, this isn’t an option.4. Chapters 1, 3, 5: General Provisions (for everyone)5. Others: Chapter 9 Municipal; Chapter 12 Farmers; Chapter 15

International. ii. Counseling requirement – help individuals avoid the problems that caused

the bankruptcy (within 180 days before filing). iii. Involuntary filing – generally insolvent, not paying debts as come due; but

exceptions for farmers, non-profits.iv. What happens when you file?

1. Automatic stay kicks in – no more collection efforts2. But secured creditors can try to avoid this, by showing

a. Debtor has no equity in property and not necessary to reorganize, OR

b. There’s not adequate protection, so you should get cash payments along the way to cover loss in value.

v. Review of claims1. Strip off improperly perfected security interests2. Void preferential transfers (90 days, or 1 year for insider)3. Void fraudulent transfers4. Void postpetition transfers5. But we do allow setoffs for banks.

vi. Debtor get to decide what to do with its stuff in liquidation, decide whether to redeem, reaffirm or ridethrough property you still owe on but want to keep.

vii. Operation in bankruptcy1. Can continue to operate in the ordinary course of business2. Special non-ordniary course events need court approval.3. Decide what contracts to keep and which to reject = executory

contract. 4. Cash collateral: cash that is subject to a lien can’t be used.

5. So may need to get more money; special rules for how to get new loans.

viii. Wrapping up the liquidation bankruptcy1. Secured creditors get their stuff

a. Undersecured - $250K property value, $500K owedb. Oversecured - $1M property value, $500K owed.

2. Unsecured Creditors then get paid in priority ordera. Administrative costs first. b. Special protected groups next – child support, employees, etc. c. Then general unsecuredsd. Equity holders in company last.

3. Dischargeix. Wrapping up the corporate restructuring bankruptcy

1. Create a plan; debtor gets first opportunity to propose2. Create classes of similarly situated creditors. 3. Then vote on the plan4. Court must confirm the plan – at least one impaired class has to vote

in favor of the plan, it must have a reasonable prospect of success, and must get at least as much as they would in liquidation.

b. State Law Debt Collection & Fraudulent Conveyances2.Consumer Bankruptcy

a. Property of the Estate = all property owned by the debtor at the instant of filingi. Exceptions at s541, including:

1. Post-filing services of debtor at 541(a)(6) = debtor (recall problem 5.3)

2. Contingent expectancies & non-transferable property = arguable. a. Tax refunds, look to the nature of the refundb. Bonuses and other contingent monies (recall problem 5.5) c. Non-transferable entitlements, such as permits, license (prob

5.6)d. Contractually non-transferable property – generall disfavored

under 541(c)3. Spendthrift trusts = debtor under 541(c)(2), if meet criteria (cf.

522(d) as exempt property for retirement funds) (Recall problem 5.4)

b. The Automatic Stayi. Protects debtor from all collection actions until stay is lifted, cooling off

period to process the bankruptcy – 362(a)1. Creditor must return estate property under 542(a)2. Exceptions at s.362(b) for certain types of actions that can continue;

e.g.: a. If the landlord has already obtained the eviction (362(b)(22))b. Doesn’t stop criminal prosecutions for hot checks (362(b)(1)),

but some courts will look further to the nature of the

prosecution to determine whether it’s collection-oriented; see also 362(b)(2)

c. Family support (362(b)(2)(C) see also (D))3. Lasts until case is closed, dismissed, or discharge granted/ denied.

ii. Don’t forget post discharge injunction – s.524(see p.259)c. Means Testing – Eligibility for Liquidation

i. All persons, but restrictions on railroad, insurance co’s and banksii. Concern with too many people in 7 instead of 13

iii. 2005 Amendments crack down – s.707(b)1. Abuse under (b)(1): Any party (not just US trustee) can seek

dismissal for abusea. Used to say “substantial abuse” – now just “abuse”b. Unless debtor’s current monthly income x 12 < median

income by state, household size, in which case no one can challenge for abuse

c. The distinction between general abuse and the presumption of abuse based on means testing also has an impact on whose income is considered: i. General abuse – just the filer

ii. Means test – non-filing spuses income is included for purposes of determining whether the debtor is above or below the median income, but only the debtor’s income is used for working through the budgets of the means test [query how this should work when it comes to paying household expenses, etc. for purposes of the form]

d. Section 707 is focused on consumer debt – so if you are dealing with the ramifications of a failed business, if you’ve structured things right, you can get a pass as well.

2. Means test under (b)(2)a. Presumption based on formula 707(b)(2)(A)(i)

i. Exempt if current monthly income of debtor and spouse, x12< median family income for state, household size; no party (including judge or trustee) can assert the presumption against a below median debtor – 707(b)(7)

1. Current monthly income – 101(10A), see also (10B) for payments by others

2. Formula based upon household, even if unrelatedii. Continue with test if above-median debtor; presume abuse

if:1. Available income over 5 years> the greater of

a. 25% of nonpriority, unsecured claims or $7025, OR

b. $11,7252. This means you deduct: monthly IRS expense

amounts, taxes, optional expenses (health insurance,

etc.), secured debt (car, mortgage), priority claims (alimony, child support)

a. Secured debts deducted in ful, no cap – 707(b)(2)(A)(iii)

3. Look to surplus income to unsecured debt (see p. 161)

iii. Can rebut presumption only with showing of special circumstances to adjust the formula under 707(b)(2)(B), showing would meet formula with the adjustment.

iv. US trustee must either move for dismissal/ convert to 13, or file explaining why not appropriate (704(b)(2))

3. Bad faith under (b)(3)a. Totality of the circumstances – 707(b)(1),(3)

i. Even if you pass (b)(1) and (b)(2) tests can still be deemed an abuser

ii. Can use any of the old cases under substantial abuse standard, plus also find more things to be abuse as well.

iii. Some courts want specific bad behavior suggesting a scamiv. Others are broader, look subjectively at what they consider

“recklessly wasteful” – see p. 151b. Remember, in addition to bars on eligibility, there are also

bars on discharge that might be triggered by similar bad faith behaviors – this is worse, in that you’ve gone through bankruptcy, but then don’t get reliefi. 727(a) – Transfers with intent to hinder, delay defraud

ii. See pp. 198-209 for further discussion of pre-filing planning as well as the asset trusts discussion at pp.210-15

d. Exempt Property - s.522i. Can keep some property thru bankruptcy- don’t sell off every thing

1. State exemption law, creates state exemptions and decides whether to allow a choice of state or federal (see Twen for GA)

2. Creates possibility of substantive (not procedural) forum shopping => Special rules for debtors that move pre-filing (522(b)(3), next class)

3. Does this count?a. Raises classification questions – is a bus a vehicle? Is this an

eligible annuity payment?b. Raises valuation questions – if the property is valued below

the exemption, debtor keeps; if it is worth more, it’s sold, the secured creditor takes first, then debtor gets his exemption, balance to estate distribution.

c. Raises tracing questions – child support, wages. ii. Non-PMSI and judicial liens can be voided, if the collateral is exempt and it

falls within 522(f)PMSI Calculation issues:1. Partially exempt property: get cash value

2. Security interests in exempt property: comes off the top, before the exemption

iii. Example:1. Car is valued at $40,000; the loan is for $20,000, of which $5000 has

been paid and 15,000 remains; the state exemption for the car is $7,000 what resul?

a. Sell vehicle (neither bank nor debtor can claim it entirely)b. 15K to bank; 25K in value remainsc. 7K to debtor; 18K remainingd. 18K to estate.

e. Exempt Property – Homesteads and Trustsf. Claims and Priority

i. Secureds – payout to secured creditors up to secured valueii. Priority unsecureds

1. Domestic support and related administrative expenses2. Other administrative expenses3. Involuntary bankruptcy’s ordinary course expenses4. Wages, etc. – 180 days, $11,7255. Employee benefit plans – 180 day/$11,725 aggregate limits6. Farmers, fishermen7. Real property deposits to $2,6008. Government claims – e.g. taxes, but limits

a. Tax Confusioni. Who’s obligation is it?

1. Employee’s past obligation – 507(a)(8)(c)2. If it’s the employer’s contribution – 507(a)(8)(d)

ii. Collecting penalties: 1. Penalties have the same priorities as the original

claim2. But only can be collected if yhey are for actual

pecuniary loss – a vague term that courts split oniii. Duration: Taxes under 8(c) don’t have a reachback limit,

but all others do 1. Where there’s one of these after/ before tests, mark

down the date of filing on a timeline, subtract back the lookback period to create the payable range, and then mark down when the taxes could last be paid without penalty.

a. File 3/1/12; tax penalty imposed on 2/1 each year, so could claim a priority with a one-year look back to the 2011 taxes but not for 2010, since they’d have been due on 1/31/11. Which is more than a year before (3/1/11)

b. 26 USC 1398(d) allows for a truncated class year to get the estate to pay the taxes owed so far in 2012.

9. FDIC10. DUI claims

iii. General Unsecureds, no priorityg. Claims and Priority – Unsecured Creditors

i. Unsecured claims1. Original principal2. Pre-petition interest, collection fees3. No post-petition interest4. Receive pro-rata distribution with other unsecureds of same priority

level.ii. Secured Claims

1. Depends on whether they are over or undersecured. 2. Allowed principal, pre-petition interest, and collection fees like

unsecureds,3. But can also obtain post-petition interest to the extent it can be paid

by the secured property; attys fees if pre-petition or secured, question if unsecured.

iii. So…1. If the balance due is MORE than the property value, it is secured only

to that amount and the balance is unsecured;2. If the balance is LESS, then the property is sold, the secured creditor

is paid, the debtor obtains the value of any exemption claimed in the property, and if money still remains, it goes into the pool for pro rata unsecured distribution.

iv. Disputes & Priorities1. Secured creditors’ secured property off the top

a. Question about payment of sales costs – preference for paying off the top before secured creditor (506c), but can also be paid as an administrative expense (see below)

2. Pro rata distribution at each priority level. a. Decide which category each unsecured falls into; general

unsecured unless they qualify under a priority – look to s. 507 and problem set 11

b. Administrative expenses are bifurcated between two levels: if they are for the benefit of a domestic support claimant they are 507(a)(1)(C); if they are for the other claimants then it comes under 507(a)(2).

c. List all of the claims at each priority level, pay out all at each level before moving onto any payment for the next set of creditors

d. Understand why changing one creitor’s classification, payment of sale costs often changes what the others receive.

v. Distribution 1. Governed by section 726

a. Sale of property

i. Indentify property; may still be sold, but debtor gets the value of exemption

ii. Determine if anyone has an interest in property – co-owner or secured party; may prevent sale or may receive its portion off the top – typically deduct sale costs first.

b. Collect remaining proceeds from sale; distribute by priorityi. Priority creditors – each level of prioriy takes 100% of their

claims before $1 goes to the next level; when the money is not sufficient to payout to that level at 100% then pro rata between creditors at that level

ii. General unsecureds take last, if anything remains. Review Questions. 1. A bank holds a note of $30,000 on a car valued at $40,000. In recovery, which of these is the best statement of what the bank can recover if the car is a non-exempt asset in bankruptcy?

a. Thebankmaytakepossessionofthecarandkeepthefull$40,000value at sale.b. Thebankisentitledto$30,000becausethatisthefacevalueofthedebtc. The bank is entitled to take the $30,000 in principle, plus all interest, and any collection fees, up to the $40,000 value; any remainder to the estate.d. Thebankisentitledtotakethe$30,000inprincipleandanycollection fees, but it can only recover the interest that was accrued before the filing date; any remaining value is divided between the other secured creditors if the property securing their notes is underwater, and only once they are fully compensated are any remaining monies made available to the unsecureds.ew Questions

2. A bank holds a note of $30,000 on a car valued at $20,000. What do you advise the bank it can recover?

a. Thebankcanrecoveronly$20,000becausethatisthevalueofthecar.b. Itcanrecoverthefull$30,000,asthatisthefacevalueofthesecured interest it holds on the car.c. It can elect to receive either $20,000 as a secured creditor or $30,000 as an unsecured creditor, but not both.d. It can recover $20,000 as a secured creditor, but the remaining $10,000 is unsecured as are any pre-petition interest and collection fees; cannot collect post-petition interest.Review Questions

3.You are determining whether your clients are eligible to file in Chapter 7. Which of the following is least likely to be able to file under chapter 7?

a. A corporation with $1 million in assets, seeking to liquidate the corporationb. A woman whose small business just failed, leaving her swimming in business debt, and who is seeking to file for personal bankruptcyc. A man with above-median income, whose available income over the next 5 years will be $12,000 and whose unsecured debts are $20,000d. A woman with an income of $30,000, unsecured debts of $10,000 and secured debts of $5,000 in a state where the median income is $42,500

h. Discharge

i. Discharge of personal liability (not liens, obligations of others) is the goal of bankrupty, but can lose in certain circumstances (pp.229-51; see also 524 for effect)

1. -523 – specific debta. non-dischargeable categories: tax 513(a)(1)(A), 19 types in

523(a)(3)b. also can convert by action – 523(a)(2) fraud or false written

statements in obtaining financing, money, property or services.

2. -727 – all debts free ride for non-objection creditorsa. Cannot take any of 12 enumerated actions, including:

i. –Defraud creditors by destroying property (a)(2)ii. Destroy, conceal or falsify information – unless it’s justified

(a)(3)b. See also 521(h) – dismissal for failure to file documentationc. For very bad acts, can also face criminal consequences.

i. Keeping favored Propertyi. Can’t use exemptions to trump secured creditor’s claim; may also want to

protect a co-debtor on unsecured loanii. Redemption – buy the property @ current value (722)

1. Pay the lesser of full loan value or collateral value in cash. iii. Reaffirmation – negotiate for a new deal (524(c))

1. Waive the discharge; so debt is legally enforceable post discharge, on the hook for the full amount negotiated again

2. Problem of how to approach without violating stay in 362(a)(6)’ 524(a)(2)

3. Attorney approval required (in contrast to 722, ride-through)iv. Ride through – let’s kep doing what we’re doing

1. Legality is uncertain, and resulting the consequences – how do you notify of balances, etc without violating the stay?

j. Creation of an Acceptable Plan – Payment to Secured Creditorsk. Creation of an Acceptable Plan – Payment to Unsecured Creditors

i. Chapter 13 (pp 275-76)1. Ability to keep all property2. Structure

a. Court-approved plan detailing how much should be paid to each creditor

b. Must make payments for 3-5 years from future earnings (instead of estate property); DIP retains control of property, trustee ensures payments are made.

c. Discharge at end f payments. ii. Comparing creditor treatment (p307)

1. Secured creditors receive the full present value of their claim (506 collateral value or 1325 full contract value)

2. All priority claimants under 507 receive full payment (1322(a)(2))

3. Unsecureds are pooled for pro rata payment; no guarantee of full value.

iii. Pool for unsecred payout s.1325 (pp307-08)1. Best interest test – each creditor must receive at least as much as if

the debtor filed under Ch. 7 (1325(a)(4-5))2. Disposable income test – debtor must contribute all disposable

income to payments during life of the plan (1325(b))iv. Plan must be proposed in good faith and not by any means forbidden in

law (1325(a)(3)) (pp.321-23)v. Plan can of course be modified as circumstances improve for the debtor –

or deteriorate further. (1329(a))vi. Disposable income test – s1325(b) (pp308-18)

1. Below median 1325(b)(2)a. 3 year plan b. “reasonably necessary” standard for payments

i. For income, expenses see cases at pp. 309-3132. At or above median 1325(b)(3)

a. 5 year planb. Fixed payment of surplus form s.707(b)(2) calculations

i. For calculation, see pp. 313-18vii. Priority Payments (pp. 319-20

1. Paid as amount of claim, no interest2. Examples:

a. Administrative expenses; maybe attorneys feesb. Alimony, child support – now risk not just background

penalties/ jail for non-payment, but loss of discharge3. No incentive to challenge each others’ claims now; contrast to Ch. 7

where pro rata distribution may occur in 507(a) priorities and leave nothing for lower priority.

viii. Tax liability (pp.320-21)1. If pre-filing lien, then secured – must repay in full under s.506(a)2. If no lien, then priority claim – must pay ahead of other claims under

507(a)(8)l. Eligibility for Chapter 13

i. Section 109(e) – limits Chapter 13 to;1. Natural persons

a. Not corporations2. Limited debts (pp. 330-34)

a. On the date of filingb. Must have noncontingent, liquidated, unsecured debts of less

than $360,475c. Noncontingent, liquidated, secured debts of les than

$1,081,4003. Regulrar income (pp 326-30)4. (Note re: married couples)

m. Consumer Bankruptcy

i. Contrast between1. Concern that relaxing obligation to pay thru bankruptcy will

encourage irresponsible behavior, risk-taking by debtors2. Concern that debtors are going into bankruptcy because of severe

dislocations not of their own creation (layoff, medical divorce) making bankruptcy necessary as part of the social net.

ii. Study of ex ante causes of bankruptcy1. Focus on debtors’ irresponsibility in taking on debt. 2. Focus on creditors’ irresponsibility in extending credit; but does it

create a moral hazard, costs for others, or instead are the costs absorbed by the high late fees and charges?

3. Inability of debtors to select wisely between cards, termsiii. Pressures toward Chapter 13

1. Most debtors can file in either chapter because they are below median with regular income

2. So why chapter 13? a. Inability to save enough for the bankruptcy (atty, filin fee) b. Pressure on attorneys to certify

i. Further increases feesii. Potential sanctions for attorney if he files for Ch. 7 and it is

eventually tossed out, even over good faith difference. c. Yet most folks do not emerge successfully from chp 13d. As a practical matter, spectrum of partial payment with ch. 7

reaffirmation. iv. Summary of obligations

1. applicable in 7 and 13)a. 527 Disclosures to debtorsb. Written contract with debtor (528(a)(1))c. Credit counseling (109h, 521b)d. Financial education (ch 7 is 727(a)(11), ch 13 is 1328(g))e. 521 Statement regarding collateral, income and expensesf. Annual financial statement 521(f)(4)g. Tax returns (521 e-g)

i. Pre-petition tax 521(e)ii. Post-petition tax 521(f)

h. Sanctions for material violations 526(c)(2-3)2. Applicable only in 7

a. Creditor notice 342(select provisions)b. Statement of financial affairs 521(a) (select provisions)c. Certificate of lawyer as grounded n fact, not abusive, and no

knowledge schedules are wrong – 707(b)(4) d. Certificate of debtor – 707(b)(2)(C)e. Sanctions for reporting omissions (707(b))

i. *** select provisions apply only to 7, other obligations apply to both.

3.Corporate Bankruptcy

a. Corporate Liquidation and involuntary Bankruptcy (Chapter 7)i. Key terminology

1. SME – Small & Medium enterprises (as contrasted with large typically public companies)

2. Liquidation analysis – Parties will run the numbers to figure out their hypothetical takeaway in h 7, to understand their BATNA; this allows parties to compare their result under 7,11, and a non-bankruptcy workout.

ii. Why involuntary petition?1. Available in 7 and 11, not 132. Reorganiztion to incetivize recognizing the problem early3. But if the executives won’t file, creditors can push into involuntary

bankruptcy;a. Relativel rare (most often unecureds file), butb. Incredibly important as a negotiating tool – e.g.

i. Prevent later security interestsii. Favoritism in payment

iii. Wasting assetsiv. Get disclosurev. But sometimes bad faith as with credit derivatives keyed to

bankruptcy filing. iii. Limitations on type of person (farmers, non-profits) in 303(a)iv. 3 creditors must join, if more than 12 creditors exist (some room or

manipulation through claims assignment)1. strategies for challenging the 3 creditor and 12 creditor

requirementsa. Faberge – post-petition payments don’t remedyb. Can challenge the debt allegedly owedc. Are the companies affiliated, truly independent? Gibralter,

Iowa Coald. May exclude insiders – 303(b)(2) (incorporating s.101)

2. Attys fees, costs, maybe punitives if unsuccessful (silverman; 303(i)(2)(B))

v. 303(h)(1) test of debtor’s financial condition1. Generally not paying such debtor’s debts as such debts become due

unless such debts are the subject of a bona fide dispute as to liability or amount.

b. Introduction to Asset Sales s.363i. Canot enter into an agreement to hold down the sale price (violation of

363(n))ii. Can challenge a sale under 363(b), (c) if it does not occur in the ordinary

course of business AND notice and a hearing are not provided.1. But we will want to find out from the docket whether

a. There was a hearing and we alone simply weren’t notified, or

b. That the court didn’t have a hearing, which is within its discretion in 102(1) which defines the term notice and hearing

2. No good post-sale remedy against good faith buyers – 363(m)c. Introduction to Corporate Reorganization

i. Chapter 7 distinctions1. No discharge for corporations 727(a), just expires under state

corporations laws2. No exemptions – all property is used to pay the creditors.

ii. Benefits of bankruptcy v. state law1. Avoids run on the bank, TIB can seek to reverse transactions2. Facilitates collective sale, breathing room to get the best price, no set

dates;3. Forces disclosure by debtor (but see, turnover statute); accelerates

future claims;4. Orderly distribution (a benefit for some, loss to others)

iii. As with other forms of bankruptcy, we rewrite contractual obligations – changing the amount due, the amount of time the debto has to pay, and even terminate some disadvantageous contracts

1. Same automatic stay of 3622. Debtor in possession (DIP operates company “in the ordinary courts”

under 363(c)3. But also has rights, duties of TIB under 107 (so can challenge its own

fraudulent conveyance, executory contracts)d. Plan of Reorganization

i. Creditors committee is appointed to review activities – 1102ii. Negotiations between the debtor and all the different creditor interest

groupsiii. Culminating in a plan of reorganization

1. Pay each class of creditors a negotiated percentage of claims over a determined period of time.

2. Payments may be cash, securities, or property. 3. The classes each vote upon the plan; must be approved by the

specified majorities of creditors in each class under 1126(c)4. Dissenters must get at least as much as they would in liquidation –

1129(a)(7)5. Then it is confirmed by the court if it meets the requirements of 1129

iv. Discharge of debts subject to the plan – 1141(d)e. Automatic Stay & Adequate protection

i. The difficult position of creditors1. DIP can force the return of property repossessed on the eve of filing,

as well as paymentsa. Avoiding power for preferential payments in the last 90 days

– 547b. Assume of breach executory contracts – 365c. Void fraudulent conveyances – 548, 544(b)

d. Set aside late perfected or unperfected security interests – 544(a), 547

e. Turnover of property held by another (that belongs to debtor) – 542, 543

2. Een innoent violations are void (or voidable, minority view)3. Post-petition, the court often allows some breathing room before

seriously considering motions to lift the staya. Unless futility can be shown (conert to ch. 7) or bad faith (SGL

Carbon)4. Pre-petition waivers of 362 not enforceable (Farm Credit)

ii. The difficult position of debtors:1. Courts must rule on motions to lift the stay within 30 days or it is

automatically lifted as to the particular collateral – 362(e)2. DIPP has the burden of showing adequate protection – 362(g)3. There are also exceptions to the stay, listed in 362(b) – but one may

argue that these should be narrowly constued and the stay broadly interpreted under 105

iii. Lifting the stay – 3 alternative tests, any one sufficient; pg 415+1. Lack of adequate protection – 362(d)(1), 361

a. Periodic payments (in addition to any interim interest payments under 506)

b. Additional or replacement lienc. Catch all for other means of providing “equivalent” protection

2. Debtor lacks equity and the property is not necessary to effective reorganization – 362(d)(2)

3. Stay against real property (362(d)(4)), if the petition was filed to delay, hinder or defraud creditors and involved either

a. Transfer of all or partial interest in property without consent of the secured creditor or court

b. Multiple bankruptcy filings affecting the same real propertyiv. Single asset realty case – 362(d)(3); necessary gov’t function – (d)(4,5),

Seitles, pg 410+ discusses the tests. f. Operating in Chapter 11

i. Just as in Ch. 13, need to provide adequate protection for secured creditors or they can seek lifting of the stay (361, 362, 363)

ii. Can seek additional financing, credit with court approval (364)1. This financing gets special protection under the Code, that

encourages firms to extend it2. But necessarily at the cost of he pre-petition creditors because we’re

dealing with a fixed pie. iii. Can avoid pre-petition payments

1. Avoiding power for preferential payments in the last 90 days – 5472. Assume or breach executory contracts – 3653. Void fraudulent conveyances – 548, 544(b)4. Set aside late-perfected or unperfected security interests – 544(a),

547

5. Turnover of property held by another (that belongs to debtor) – 542, 543

g. Getting the DIP outi. Challenge by creditors to continued DIP control, for apptof TIB

1. S.1104 testa. For cause – fraud, dishonesty, incompetence, gross

mismanagement (1104(a)(1)) – Sharon Steelb. In the interest of creditors, equity holders, and other

interested parties (1104(a)(2)) – Eastern Airlines unions, deepening insolvency/ who to favor when there’s an inevitable tradeoff

2. Tradeoff of honesty for information, ability to run business; exacerbated by company’s existing crisis, need for quick turnaround – but maybe a good trade for liquidation sales

a. Result 1104(c) compromise – appt of examiner3. Often accompanied by private ordering, selection of new

management (possibly turnaround management specialists)ii. Creditors Committees

1. Creditors committees – s.1102a. Appointed by US trustee; traditionally, presumption in

practice that the seven largest creditors willing to serve will be appointed.

b. Post 2005 mendments, courts have started to deviate from the rule, adding a small-business creditor with disproportionately large debt

c. Often not appointed in small/ medium sied cases => larger role for the court & US trustee

d. May also have special committees – labor, tort victims, equity2. Beauty contests & operation

a. Owe fiduciary duty to group it represents; otherwise, powers are vague and limited, as described in s.1103 (access to information, hearing)

b. Negotiates with the debtor about its operations, plan – with committee support, the plan is much more likely to go through, court more likely to grant motions if supported by committee.

iii. Cash: Cash Collateral, Setoff1. The special problem of cash: creditors with liens on inventory and

accounts, concerned because they can be turned into cash and dissipated

a. Allow use of cash in the ordinary course of business – 363(c)(1)

b. Cash Collaterali. Cash subject to lien (sale of inventory, collections)

ii. Is effectively in a “lock-box”, accessible only with court approval – 363 (typically part to the creitor, part to the debtor as it comes in)

c. Setoff: extension of any creditor’s right to offset a debt owed to the debtor against a debt owed by the debtor – 553i. Why do creditors like this? Skip ahead in line

ii. Bank claims right of setoff under 506(a), but must get court approval because of automatic stay 362(a)(7) – although it can freeze the money in the interim; treated as cash collateral rules of 363(c)

iii. Protection for special bank accounts – escrow, tax. h. Post-Petition Financing

i. First Day orders – p468ii. 552(a) example: pre-petition security interest (even with an after-

acquired property clause) 1. have first claim on the pre-filing property, subject to the rules we’ve

discussed re: cash collateral etc. 2. But no claim on property acquired post-petition3. “Exemption”: If the property is acquired with proceeds (cash

collateral, swap, etc.) then the creditor can use tracing to show that it has a secured interest – not because of the contractual interest in after-acquired property, but because it was entitled to the proceeds of the earlier property

iii. So what is available to offer a security interest in?1. Pre-petition property that was not encumbered2. New, post-petition property

iv. Can challenge under…?1. 361 (adequate protection), on the theory that the evidence doesn’t

demonstrate a reasonable likelihood of rehabilitation, as this means that the unencumbered assets otherwise available for the unsecureds are being dissipated.

a. Rejected by court in Garland; some courts permit with reluctance

2. 364 (obtaining credit)a. Unsecured credit, debt – in the ordinary course (364a); non-

ordinary course with court approval (364b) – receive administrative priority

b. If unable to obtain unsecured, with notice and hearing can obtain debt: with priority over administrative expenses as 507(b) aka “super priority administrative claim”; secured by unencumbered property; with junior lien on secured property (364c)

c. Priority lien (senior or equal lien) – if trustee shows inability to obtain credit otherwise and adequate protection of existing security holder (364d; Hubbard Power) aka “priming” the pre-existing lien.

v. Cross-collateralization (upgrading unsecured debt in exchange for new $)1. Secure a pre-bankruptcy loan with new or additional collateral

during the bankruptcy2. Generally disfavored, as not only granted within 364 but inconsistent

with the code’s goals more generallyvi. Timing problems – p461

1. If an appeals court stays a bankruptcy court decision permitting financing, then it may cause the company to go into liquidation

2. If an appeals court permits the financing to go forward, it may be hard to undo later – a result aided by the code, eg 364e (incentivizing creditors to rely on the bankruptcy court decision in going ahead with the money, secure that their rights won’t be upset)

vii. Equitys new money exception to absolute priority rule if fair bargain, no other source – p465

viii. Suppliers – substantial pressure on DIP financing1. Must finish out existing contracts2. But no future obligation: receive administrative priority if they do;

critical vendor rule to permit payment of pre-petition obligations; 546(c) reclamation (goods delivered in last 45 days); 503(b)(9) administrative priority (goods delivered in the 20 days before filing)

ix. Inputs: H-100K unsecured; FSB-250K unsecured; lawyer-150K; assets of 350K

x. Baseline:1. FSB super-priority (503a w/ AP skip to front of 507b) 250 pd first2. Then balance is post petition admin under 503a; so 100K assets left/

(100K+150K )= 40% payout; none to lower priority. xi. 364 scenario

1. Hanratty 364(c)(1) priority first – 100K super super priority (100K)2. Then FSB as super priority under 503a & 507b (250K)3. None left for attorney or other creditors

xii. Chapter 7: 1. TIB & ch 7 attorney paid first – case law of 726(b) – effectively super,

super, super priority.UntanglingthePriorityWebfromProblem21.2: – Chapter 7 administrative claims under 507 (s.726a) – Section 503 claims (s.726c)• Super super priority – negotiated under 364(c)(1) • Super priority – if your 362(d) motion is denied, thenyou get superpriority under 507(b) because your adequate protection wasn’t, and so you jump to the front of your priority group, which is 503(a) because the loss in value was a result of the automatic stay• Administrative priority – standard 503/ 507 administrative priority for post-petition creditors, DIP attorneys fees

i. Reshaping the Estate – Strong Arm Clause (544(a))

i. The strong arm clause grants the TIB he power to test the interests of the purportedly secured parties, to make sure that they have properly perfected their liens.

ii. If hey haven’t, then the TIB can have the lien set aside – even though, in the corporate world, we recall the TIB is the DIP.

iii. Mortgages: did they comply with state’s real property laws?1. The case book suggests a split of authority, but actually think this can

be largely reconciled based on variations in state law2. TIB is equivalent to BFP under 544(a), takes without regard to

knowledge of the trustee (DIP), creditorsa. Most courts see this as meaning actual knowledgeb. The splits then come from whether facts supporting

constructive knowledge were present and whether state law invalidates a BFP based n constructive knowledgei. Constructive knowledge – present and sufficient (Little

key)ii. Constructive knowledge – insufficient, likely not present

(Wonderbowl)iv. Other Property: Perfection under federal law (Article 9)

1. For personal property disputes (not real estate) the TIB only gets lien creditor status under 544(a)(1-2)

2. This is much less powerful because of changes in Article 9 over the years, not allowing the lien creditor to avoid the unperfected seurity interests, in response to concerns that too many security interests were being challenged in bankruptcy

v. Overarching Points1. Timing: unperfected interests are invalidated as of the date the

bankruptcy is filed, to prevent a post-filing rush to file / correct errors; but UCC/ state law may extend that filing period (see e.g. 9-317c)

2. On the exam, I won’t ask you to apply Article 9 (or state law, for the prior slide on mortgages) – I would just note that the security interest had been perfected according to requirements, or had not.

j. Reshaping the Estate – Preferencesi. VOIDABLE PREFERENCES

1. Power to invalidate certain the debtor took within 90 days of the bankruptcy

2. We call it a voidable preference because the TIB is reviewing the transactions to determine whether the debtor gave certain creditors preferential treatment

3. If so, the court unravels – voids- the transaction. ii. The 547(b) Elements

1. To solve just walk through the checklist2. A trustee may avoid any transfer of an interest in the property of the

debtor…a. To or for the benefit of a creditor

b. For or on account of an antecedent debt owed by the debtor (before such transfer was made)

c. Madei. While the debtor was insolvent and

ii. Either (a) on or within 90 days of the date of filing, or (b) between 90 days and one year before filing if the transfer was to an insider

d. And enables the creditor to receive more than it would recive according to a normal distribution under chapter 7, if the transfer had not been made.

k. Reshaping the Estate – Exceptions to Preferences (547(c))i. But the trustee cannot avoid a transfer if the transfer was…

1. For new value given to the debtora. Contemporaneous exchange for new value –(c)(1)b. Collateral for new value given to debtor, to buy property that

the security interest is now in (PMSI exception) – (c)(3)c. New value given by the creditor after the transfer – (c)(4)

2. In payment for a debt incurred in the ordinary course of business (c)(2)

3. Special provision for perfected security interests in inventory/ accounts recieveable (floating lien) – (c)(5)

4. Other miscellaneous provisionsa. Dmestic support – (c)(7); statutory lien that is not avoidable

anyway (c)(8)b. Small value

i. Under $600 in primarily consuer debt case (c)(8)ii. Under $5850 in a non-primarily-consumer debt bankruptcy

(c)(9)ii. Earmarking doctrine – judicial exception (see p483)

l. Reshaping the Estate – The Floating Lieni. No relation-back (547(e)(3)); all property acquired within 90 days is

therefore likely a voidable preference under 547(b), such that the security interest in the property would be voided

ii. Unless you fall into 547(c)(5), which is the exception for inventory and receivables (“the floating lien”)

1. Other types of after-acquired property not saved–only inventory, receivables

2. The idea of this exception is that we will protect the amount of securitization you had, but we won’t let you increase it to become more secured

a. Forthemathinclined,see formula on p.515 b. Everyone else, p. 512: Undersecured 700K (90 day) vs.

Oversecured 99K (filing)i. So during the 90 days, improved position by 700K = bad

preference

ii. Why not by 800K? The court didn’t care how oversecured it was b/c it reverts to estate [if we ignore attorneys fees, interest, etc. which the court was happy to do]

iii. Don’t be fooled by market fluctuation – it must be a transfer, not just value shift

iii. Setoff Rule of 553(b) 1. If you set-off at/ before filing (no ct permission), 90 day setoff of

improvement 2. If you wait and setoff under 362 w/ ct permission, no setoff

m. Reshaping the Estate – Executory Contractsi. If both parties have at least one obligation outstanding, which would

constitute a material breach of contract if not fulfilled, then the contract is executory

1. Example: I will pay you upon delivery for the baby colt, when it is delivered at 6 weeks of age. I must pay, you must give me the horse.

ii. If the contract is executory, then the TIB/DIP has the ability under 365 to either assume or reject the contract

1. Assume = I will keep the contract, complete my part of the bargain2. Reject = On second thought, I don’t like this, I choose to breach.

iii. The limits of Assumption1. Must be executory2. Cannot assume (or assign) if it is in the list at 365©

a. If it would violate background law (e.g. a patent law that prohibits the assignment of a patent) – 365(c)(1)

b. If the contract term is to make a loan, extend other debt financing, or other financial accommodation - 365©(2)

c. If the lease is for nonresidential real property and has already been terminated – 365(c)(3)

iv. Rejecting the Contract1. If the DIP/TIB rejects the contract

a. Then it has to pay breach of contract damages, but can then go on to buy/sell/lease elsewhere if it so chooses. i. As we know from 1L contracts, this will be the difference

between the current market value and the old contract price.

1. DIP is selling: this is the extra amount the other party has to pay to get the goods that the DIP decided not to sell.

2. DIP is buying this is the amoun the other party lost on the sale, subtracting the actual sale price from the contract price it had with the debtor.

ii. So if the other party gets a breach of contract claim that is equal to the differnce in value, then what good is rejection?

1. Whether the debtor breaches pre-filing, or the DIP rejects in bankruptcy, the other party has a general unsecured claim; this means that it gets paid out at

the pro rata distribution rate, which will be paid at pennies on the dollar.

2. As a result the benefit to the other creditors is essentially the percentage differenctial – if the estate ends up paying out at 40 cents on the dollar, then if the cost of cover is $1M the estate gains from rejecting and entering a new contract, 40% will go to the other party (400K) and 60% goes to the other general unsecureds (600K)

2. If this is a lease, and the DIP/TIB is the landlord, the tenant cana. Accept the rejection and take its unsecured damages claim, orb. “reject the rejection” and stay under the lease, offsetting costs

– but it does not get a claim for any costs that exceed the outstanding balance due.

v. Assuming the Contract1. If the DIP/TIB assumes the contract, things continue as they were

a. But if it has already defaulted, it must cure or provide adequate assurance of prompt cure, before or at the time it assumes – 365(b)(1)i. Curable breach: must be cured before assumption

ii. Non-cureable breach: 1. Prevents assumption of non-real-estate contracts2. Is not required to be cured for residential property3. Is deemed to be cured by performance at and after

the contract is assumed, and the payment of damages caused by the default.

iii. Special rule for shopping mallsb. What is default v. termination?

i. A term of dating contract1. Default: boyfriend did not acknowledge birthday. In

breach of their terms.2. Termination: she dumps him.

vi. Difference between 365(b)(2) and (e)(1)1. 365(b)(2) s telling you that you do not need to cure a default (as

provided in (b)(1)) f that default is just abreach of a “bad” terma. Code defines these “bad” terms in both of the specified code

sections, but essentially the idea is that we won’t enforce these terms that mae it breach to become insolvent or file for bankruptcy

b. So if the contract says that you are in default if you fall below $1M in the bank, even if you are making your payments on time, the bankruptcy court will not view this as a default for purposes of (b)(1)

2. 365(e)(1) takes aim at the same bad terms, but here it is in the context of saying that it won’t enforce bad terms that purports to

terminate or modify the contract obligations after the filing of the bankruptcy case.

a. SO if the term says that your rent doubles if you file for bankruptcy because you are a bigger risk, the court is saying that it won’t enforce that term.

3. Yes, the same term can violate both these provision of the Code. vii. Severability

1. Severability impliedly suggested by 365(b)()’s reference2. There is no per se rule saying that the contract must be assumed/

rejected as a single unit, or that each provision can be individually assumed/rejected

a. Don’t want to permit contracting out of bankruptcy by saying no severability, since then every evil banker would just add in a $1 loan on the last day of the lease.

b. Don’t wan to allow TIB/DIP to take advantage beyond what was contemplated in 365, which is already generous

3. Instead, the court will look at whether the unassumable terms are so intergrated with the terms the TIB/DIP wants to assume that they cannot be separated, and whether they are truly material.

viii. Timing1. Must assume within 60 days (ch7, 365(d)(1)), or before confirmation

(ch 11,13, 365(d)(2)), or deemed rejected2. The code is unclear on the timing for cure and adequate assurance

a. Some courts say no tolling, if a time is provided in the contract, must assume and cure within that period

b. Other courts permit tollingi. Some say you must assume immediately (not the longer

period in the code) and propose a plan that provides adequate assurance within 60 days or a reasonable time

ii. Others say that you still have 60 days to both assume and cure

iii. These are competeing interpretations of 365(b)(1)(A, 108(b)(2) and 365(d)(1,2)

ix. Assignment1. 365 also gives the TIB/DIP the power to assign the contract, where it

has a good deal but doesn’t need the thing anymore2. The same restrictions apply from 365(c) on which contracts are

within the scope of these special powers. 3. The same logic from assumption also applies when it comes to

disregarding contract provisions that purport to prevent the assignment to the DIP/TIB, and then from the DIP/TIB to a third-party, but the court won’t force an assignment where prohibited by background law (e.g. no assignment of patent)

a. 365(f)(1) invalidates provisions that condition or limit assignment

i. the court will enforce provisions that merely restrict assignment as with a landlord’s ight of first refusal [no case cite needed, but an example is EZ SERVE, 289 BR 45]

ii. But drawing the line is really difficult, when one considers a term letting the landlord have 50% of the profit would be invalidated, but the effect of a first refusal clause could be monetarily the same.

b. 365(f)(2) requires the DIP/TIB to provide adequate assurance, whether or not the debtor had defaulted, if it is assigning the contract/lease

c. 365(f)(3) is just saying that it will not enforce contract provisions that terminate or modify the lease/contract terms solely because of the assumption or assignment of the lease.

n. Reshaping the Estate – Statutory Liens; Fraudulent Conveyances & Avoidancei. Avoidance actions s.544, 545, 547, 548, 553

1. Lien Avoidance/ Strong Arm (544a, 545) – okay, I lost my priority treatment; I’m not happy, but I can deal

2. Voidable preference/ Fraudulent Conveyances (544b,547, 548; 549 for post-petition) – wait, I have to give back what you already gave me as payment that I am lawfully entitled to under our contract settlement, etc.?

3. Also know: turnover (547), setoff (553), post-petition financing (364), executory contracts (365), abandonment (554)

ii. Statutory liens1. Section 545 – power to avoid certain liens that are created by the

automatic operation of state lawa. Bankruptcy priority liens – 545(1)

i. Created only when someone goes into bankruptcy or similar proceeding (A,B,C)

ii. Created only when someone becomes insolvent, or fails to meet certain financial standard (D,E)

iii. Skipping ahead in line – if someone else levies the property, then at that instant a lien is created in favor of a 3rd person (F)

b. Liens not properly perfected at time of filing – 45(2), similar to strong arm

c. Landlord’s liens – 545(3,4)iii. Refresher on Fraudulent Transfer/ Voidable Preference

1. State fraudulent conveyance law –transfer of assets by insolvent debtor for less than REV (reasonably equivalent value)

a. UFTAs.4–present and futureb. UFTA s.5 – present only

2. Section 544b – lets TIB bring those UFTA actions under 544b of the Code, if there is an actual unsecured creditor that was able to bring an action (contrast to 544a’s hypothetical creditor)

3. Section 548 – Code’s own fraudulent transfer provision

4. Both get the same remedies of 550iv. Fraudulent Conveyance

1. Section 544(b) – Code provision that gives the TIB the ability to bring a fraudulent conveyance action if the creditors could have brought it under state law

a. Must be an actual unsecured creditor who can (1) identify a fraudulent or illegal transaction, and (2) has standing to sue at state law for reversal – not just a hypothetical creditor (544(b)(1))

b. But that creditor may prefer to go it alone. 2. Section 548 – federal fraudulent conveynce law, meant to create a

baseline minimum protection independent of a state law variationa. Any transfer of an interest of debtor in property/ new

obligation to payb. Made on or within two years before the filing date of the

petitionsc. And either

i. Actual intent to hinder, delay, or defraud present or future creditors, OR

ii. Less than reasonably equivalent value and insolvent (or about to be); 4 tests for insolvency.

v. Limits on TIB’s Avoidance Powers1. Timing – 2 years from “order of relief” (in voluntary petitions for

bankruptcy, that’s the petition date; the involuntary may be later) or 1 year after TIB appointed, whichever’s earlier – s.546a

2. 544, 545, 549 have additional limits – 546(b)(1) – secured creitro can finish perfecting

a. If that means seizing property, that is done by giving notice to TIB rather than seizing – 546(b)(2)

b. Does not violate stay under 362(b)(3), if TIB powers are subject to under 546(b) or finish within the 30 day period of 547(e)(2)(a)

3. 544(a), 545, 547, 549 limited by – reclamation rights under 546(c)a. Ordinaru courts of seller’s businessb. Received while D insolvent AND within 45 days of filingc. Writen demand within either 45ays after receipt or 20 days

after filing, as applicable. vi. So, what happens? S.550 (applies to avoidance under: 544, 545, 547, 549,

553(b), 724(a)1. TIB can seek either to get the property back, or the value of the

property from any of 3 folks:a. Initial transferee (person who bought from D),b. Entity whose benefit it was for (your mom bought you a xmas

present from D, so she’s the IT but you are also now on the hook), or

c. Subsequent transferee (that’s the immediate or mediate transferee language)

2. Money to estate not secured creditor (550a, 551) limits on: a. Recovery action must be brought within one year of the

avoidance action (550f) AND you can only recover from one entity (550d)

b. If the transfer was 90_ days, but to insider, can still avoid, but can’t go after transferee who was not an insider (can go after insider) – 550c

c. If you (transferee) improved property in good faith, can have a lien on the property for the lesser of the cost of the improvement (minus what you got in profit already) OR increase in value – 550(e)(1)

3. The initial transferee or for whom it was madea. Repay, despite good faith and lack of knowledge = undo the

deal or repay the value if they don’t have the property – 550(a)(1), no 550(b) protection

b. But if made n good faith, can recover under setoff for improvements – cf. 550(e)

4. Subsequent transfereea. Does not have to repay if taken in good faith, gave value –

500(b)b. If not good faith, must repay and no setoff – because they are

under 550(a)(2) and no 550(b) protection; also not good faith so no 550(e) setoff

5. Limit: can only recover once, 550(d), not against both6. Setoff: IF you make improvements but are now having to return

property, you get the lesser of the value of improvements or increase in value.

o. Reshaping the Estate – Equitable Subordinationi. Basic Idea: For equitable reasons (read as “you were naughty”) we are

sending you to the back of the line (read as “you get paid last and therefore aren’t really going to get anything”)

1. Basic example – owners who undercapitalize their company with “loans” from the founding partners; court may say despite the loan label this was really startup capital meant to purchase their share of stock, and thus treat them as equity instead of lenders (p576+)

a. Carolee’s Combine – lender preference, but also equity?b. SI Restructuring – problem, given the new value? Deepening

insolvency2. General test:

a. Inequitable conductb. Injury to others, or unfair advantagec. Granting relief wouldn’t be inconsistent with Code

3. Result: don’t just return money (if received), but paid after all others rather than a pro rata rate.

p. Negotiating & Confirming the Plan – Best Interests and Feasibilityi. When? Can be filed at the same time as petition, or after

ii. Who? S.1121, 1122(d)(2)1. Debtor gets a period of exclusivity, 120 days (180 days if the debtor

files a plan in the first 120)2. During that period, creditors can only:

a. Accept the debtor’s planb. Move to convert to ch 7 c. Move to end period of exclusivity

3. Court often extends period, but can’t be more than a. 120 days to file extending to 18 monthsb. 180 day period to get it accepted extended to 20 months

4. What? See 1123 for checklist5. Note: if a trustee is appointed, any party in interest can file (1121(c))

iii. Funding1. Can borrow from existing creditors, get ne funding/investors, or sell

assetsa. Remember: non-ordinary course asset sales are done after

notice and hearing under 363(b)(1)2. Debtor want to use chapter 11 & 363, because it means they can

continue to operate as the DIP until they can negotiate good terms; in contrast to

a. Chapter 7 liquidation, which does not allow for continued operation

b. Chapter 11 sales pursuant to the plan, which are less efficient in terms of time and cost.

3. But, don’t have to offer cash; can use securities (don’t have to meet securities registration requirements – exemption under 1145)

a. Either stock or warrants equal to the value of stock but without the obligation of reporting, etc. of stock

q. Confirming the Plan – Classification & Voting, Claims Tradingi. Classification of claims

1. To be approved, need at least one class o support the plan; prefer unanimity to better ensure approval

2. All claims in a class must be substantially similar (1122(a)), and must receive the same treatment under the plan (1123(a)(4))

a. So secured claims, claims with priority, are different then general unsecured claims, so they can’t be grouped together

b. Often first mortgages will be in a different class than second mortgages

3. Small claims can be segregated if “reasonable and necessary for administrative convenience” - 1122(b)

4. Because the debtor wants to get the approval of one class, often they want to create smaller groupings our problem set presents the opposite problem, with a creditor seeking smaller groupings

a. Separate long term suppliers willing to take long term notes/stock’ versus short term lenders not willing to take the deal.

5. Assume that the debtor’s biggest asset is a building6. The bank that has the mortgage on the building is owed $20 million

on a $15 million buildinga. $15 million secured claimb. $5 million unsecured claim

7. Assume it has $2 million in other unsecured claims 8. This would mean that

a. The bank is the only voter in the secured classb. Would be the biggest creditor in the unsecured class

9. As a result, it would have a veto power over every plan10. For this reason, the courts have split on whether a single asset real

estate creditor can be classified separately from the other unsecureds

ii. Disclosure1. The bankruptcy code takes the view that if creditors get adequate

disclosure, they can decide for themselves whether or not to take the deal – s. 1125

2. So the role fo the court is not to decide whether a plan is good or not, but to decide whether the disclosure is adequate:

a. Copy or summary of the planb. A written disclosure statement approved by the court for

having adequate information – reasonably practicable information required to enable a hypothetical reasonable investor typical of the creditors to make an informed judgmenti. Condition of the debtor’s books (reasonably practicable)

ii. Sophistication of creitors, shareholdersiii. Nature of the plan.

iii. Voting1. Creditors with claims allowed under 502 and shareholders all get to

votea. The 502 requirement is deemed satisfied unless anyone

dispute it as disputed, contingent, or unliquidatedb. “double-deeming” = 1111 deems any scheduled claim to be

filed unless contested, and 502 deems any claim or interest that is filed an allowed claim unless contested

2. Classes that are getting nothing are deemed to have rejected the plan – so don’t solicit their votes under 1126(g)

3. If the class is not impaired, deemed to have accepted – so don’t solicit under 1126(f)

a. Claims are impaired unless, the legal, equitable, and contractual rights are not altered or the only alteration is the

reversal of an acceleration on default, by curing the default and reinstating the debt.

b. No determination of actual adversity required, just alteration. iv. 1111(b) Election

1. Consider our real estate claim again, partially secured, so have a claim for $15M secured and $5M unsecured (506(a))

2. 1111(b) allows the creditor to elect to hae $20M secured claim and no unsecured claim

a. This election is made by the class of secured claims, not by each individual creditor; but it may practically allow for individual election in a SARE case, or where each secured creditor is put into a separate class.

b. Advantage: gets paid the full debt of $20m (1129b), but it need not be cash today or have the present value.

c. Disadvantage: can’t vote with the unsecureds; can’t participate in the distribution to unsecureds (which could be sooner.

v. Tabulating the Vote1. A class of claims has accepted a plan when

a. More than one half in numer andb. At least two thirds in amount of allowed claimsc. Actually voting on the plan to approve it.

2. Example from a hornbooka. 222 creditors, totaling $1M in debtb. Plan divides into 4 classesc. One class has 55 creditors with $650K claimsd. 39 / 55 participate in vote; their claims total $450K/ 650Ke. What do they need to approve the plan?

i. 20 / 39 to vote yes, andii. Those 20 must total at least 300K (2/3 of $450K)

vi. Confirmation1. Need not only approval through the vote, but also court confirmation

a. Obviously, only one plan can be confirmed; if more than one gets enough support, the court selects, considering the preferences of creditors and equity holders

2. If every class accepts, looks to 1129(a)a. Must be approved by the court if every class of claims and

interests has approved, and met the 13 requirements in (a)3. 1129(b) applies where there is not unanimity (“Cramdown”)

a. At least one impaired class has acceptedb. Plan does not discrimintate unfairlyc. Is fair and equitabled. (obviously, this override the 1129(a)(8) unanimity

requirement)r. Confirming the Plan – Cramdown

i. Cramdown of secured claims (similar to ch. 13)1. Determine amount of secured claim, based on collateral’s

replacement valuea. Figure out the interest rate to be paid going forwardb. Have to pay out under the plan an amount at least equal to the

amount of the secured claim (always satisfied; only matters where you make an 1111(b) election)

2. Example:a. 100K owed; 75K secured, 25K unsecured under 506b. Under 1111b election can become 100K secured, so…

i. Cramdown means that the plan must have a present discounted value of 75K, and

ii. That the payments face amount (not discounted to present value), total 100K

ii. Cramdown of unecured claims1. If a class dissents (doesn’t approve), then any class junior to it cannot

receive anything = revert to the absolute priority we saw before, now that’s happening as between creditors and equity.

2. Examplea. Plan provides for 70% payout to unsecureds; equity to keep

their sharesb. Can it be confirmed

i. Yes, if it gets the majority of each classc. But, if any class does not accept the plan, then 1129(b)

applies, and says because equity is getting to keep its shares and the plan isn’t paying 100%, then the plan is not fair and equitable

3. Open question whether new capital infusion by equity is considered new value making it fair, or whether there is no

iii. Best interests and Feasibility1. Requirements of 1129(a)(7,11)2. Feasibility – 1129(a)(11): likelihood the plan will succeed

a. Not guaranteed to work, nor are they just “visionary schemes” b. Must show reasonable likelihood of success

3. Best Interests 1129(a)(7): are the dissenters hurt, just one individual creditor being harmed is enough to bar the plan

a. The creditor must get at least as much as in ch 7 liquidation, if they did not vote in favor of the plan

b. So, you do a liquidation analysis, i. calculate the amount that you would get in a liquidation

sale of each assetii. then figure out what each dissenter would have received

iv. What is “Prepack”

1. It just means that the bankruptcy plan was negotiated and accepted by the required number of creditors before the chapter 11 case was filed

2. The plan still has to meet the same requirements, but just changes the order

3. Reasons they are populara. Minimize the time operating in bankruptcyb. Reduces disruption to the businessc. Gives more control over the process to the debtord. Plan is finalized before being submitted to the court

4. Disadvantagesa. Debtor doesn’t get chapter 11 protections of automatic stay,

rejection of executory contracts, reduced ability to use the “superpowers” of the TIB/DIP

4. Simulationa. Clarifying points form motion: DIP wanted to …

i. Get DIP financing to keep operating until it could have a longer auction process of the property; wanted to let the best bidder thus far provide bid financing

ii. That financer insisted on1. Super-priority for its $7.5M loan2. Priming the liens of the senior and junior lien holders

a. Seniors get adequate protection paymentsb. Juniors get 100% secured, 75% unsecured payout in plan

3. Being the co-proponent of the plan4. $1M breakup fee if it is outbid in the auction

b. Clarifying points from oral argument: DIP wanted to…i. Waive 506© = make secured pay for costs of expenses that benefit it

1. Objection – harms the unsecuredsii. Let the DIP lender and senior lien holder use the proceeds of avoidance

actions (remember those?) to pay their super-priority claims1. Objection – they are already getting enough protections, that would

wipe out the ability of the unsecureds to ever recover, that money should be saved for the unsecureds

iii. Give SIP lender $50K/month for expenses1. Objection – should be an actual expense basis instead, also wanted

more fees for unsecureds which were only getting $15K/ month in attorneys fees

iv. Let the DIP lender be a co-proponent of its plan1. Objection – that gives the DIP lender too much control, the debtor

should do it alone so it can be free to propose the terms it thinks best without being under the control of the lender.