BANKRUPTCY ATTACK OUTLINE

I. INVOKING BANKRUPTCY RELIEF Important note: Technically all of this takes place b/f the confirmation of the case. People/Companies that are eligible, 109(a):

(1) Has to be a person, as defined in 101(41): o This includes corporations as they are defined under 101(9)

(2) Resides, or has domicile, place of business, or property in the U.S . o Cannot manufacture a connection to the U.S. in order to use the bankruptcy courts

Must not be excluded from invoking relief under the code, 109(b) & (d):(1) Ch. 7, 109(b): All persons from that are eligible under 109(a), but excludes

o RRs, domestic insurance cos, banks, savings and loan associations, small business investment companies.

(2) Ch. 11, 109 (d): All persons under Ch. 7 (e.g., people under 109(a)), but exclude the followingo Stock brokers, commodity brokers, uninsured member banks.

Venue, 28 U.S.C. 1408:(1) Move to cure/ transfer venue under, 1406: If it is in the wrong venue, or it is in the interest of

justice to transfer such case to any district or division in which it could have been brought. (2) Commences in the district court which:

o (1) Domocile (place of incorporation for a co), residence, place of business, or principle assets in U.S. of person or entity, (AND)

o (2) Of person or entity, o Located 180 days immediately preceding commencement (OR)o Longer portion of 180 day period b/f commencement

o (3) (OR) There is a pending bankruptcy suit concerning affiliate, as defined under 101(2), in the venue

o The affiliate should file first, so the venue can be transferred for the parents proceeding to this venue.

Filing the Petition:(1) Voluntary Petition, 301: Commenced by the debtor by filing a petition with the court clerk,

once it is filed the estate is formed, i.e., an order for relief is automatically issued and is effective w/o notice being given to anyone. The automatic stay is entered into automatically.

(2) Involuntary Petition, 303: stay is triggered. o Chapters: May only be against a person that may be a debtor under 303(a) under ch. 7 or

ch. 11. o Who can file, 303(b): This people who cases may be brought against under 109(b) and

(d). o Before analyzing make sure that they are: not a secured creditor, the claim that

they hold is not contingent, and the amt. of the claim is not disputed. Also for (b)(2) cannot be a employee or an insider.

o People that can file under 303(b): 303(b)(1) If there are more than 12 holders of a claim: If the

noncontigent, unsecured, claims in the aggregate at least equal $15,325. (OR)

303(b)(2) If there are less than 12 holder of a claim: Must have at least 1 creditor w/ a claim for %15,325, but can aggregate

o Relief is not automatic, 303(h): If the order is not timely controverted the court shall order relief against the debtor in an involuntary case only if

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o 303(h)(1) The debtor is generally not paying his debts: unless the debts are subject to some bondafied dispute of liability or amt. (OR)

Factors to consider: (1) Number of unpaid debts (2) % of unpaid debts numerically (3) % of unpaid debts in dollar terms (4) total $$ amt of unpaid debts (5) average age of unpaid debts (6) debtors overall conduct of tis financial affairs.

Debt is a liability on a claim, 101(12): Claim is a right to payment, 101(5) Secured debts are included as a claim, but it is not clear in the

code. o 303(h)(2): A custodian is appointed w/ in 120 days of filing: 120 days b/f filing

custodians is appointed/ took possession of all substantial part of D’s assets. o 303(i): If court does not enter into the petition not on the consent of all creditors

and the debtor then may be dismissed out of bad faith: This can cause the creditors to have damages if they attempted to push the debtor into bankruptcy for reasons of bad faith.

o This triggers the automatic stay Conversion and Dismissal:

(1) Ch. 7 Dismissal (cannot be converted): 707(2) Ch. 11—1112—dismissal of Ch. 11 and conversion to Ch. 7:

o There are two grounds for conversion/dismissal: Cause under 1112(b) and the petition not being filed in good faith.

o (1) 1112(b) For cause 1112(b)(4)(B): Gross mismanagement of the estate, OR 1112(b)(4)(A): Substantial/ Continuing loss to or diminution of estate and

absence of reasonable likelihood of rehabilitationo (2) Does not serve a valid reorganization purpose, i.e., lack of good faith:

Trying to get a litigation advantage is an improper motive, SGL Carbon; however, may if facing an overwhelming amount of liability that will bankrupt the corporation. Mannsville.

II. PROPERTY OF THE ESTATE Estate is created under 541(a) at filling and it consists of:

(1) Jurisdiction over estate, 1134(e)(1): The bankruptcy court has jurisdiction over property of the estate

(2) In Ch.11, 1115(b): DIP keeps property of the estate. (3) Property of the estate

o 541(a)(1): All legal/equitable interest of D in property at commencement of the case. o 541(a)(6): Proceeds, product, offspring, rents, or profits of or form property of the estate

that come into existence.o Floating liens: If have a floating lien, i.e., contract that generates income w/

security interest on that income then this would also be caught in the stay while being the creditors property. (this could also be cash collateral)

o 541(a)(7): Any interest in property that the estate acquires after the commencement of the case.

Property interests are created and defined by state law, not bankruptcy code:

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(1) Note that property is created and defined by federal law: Property is anything with monetary value

(2) Butner Provides that property interests are created and defined by state law: Bankruptcy takes property as it finds them, i.e., as they were created under state law.

(3) Secured claims must be secured by property under state law: A secured claim, to be a secured claim, has to be secured by something that is considered to be secured by something that is considered to be property under state law.

(4) Applications: Rent is not property under state law, Butner, while season tickets are in some states like PA, but not in AZ. See Pheonix Suns.

Once determined to be property under Code, Bankruptcy code determines if becomes property of Estate:

(1) Once state law says it is property look to 541(a): The code controls whether it becomes property of the estate under 541(a).

(2) Property comes in to estate burdened by state law limitations: Even though it will be property of the estate, it will come in with state law restrictions. See e.g. CBOT (holding debtor seat on the CBOT, with its limits on transfer becomes part of the state.

(3) Ispo facto clauses,541(c): Do not transfer into the estate under 541(c)(1), b/c these restrictions could prevent the debtor from filling bankruptcy.

Excluding property from the Estate, 541(b):(1) Cannot use estate to settle your own debts, 541(b): Power of the D may exercise only for the

benefit of another D is a trustee, cannot use trust to settle own debtsIII. AUTOMATIC STAY Overview:

(1) Acts to collect: Only acts to collect. This is important b/c the creditor can continue to acquire new rights.

(2) Policy: Stops the creditors from running on the debtors assets(3) The key info on the automatic stay, 362(a) and (b)

o Injunction: The automatic stay functions as a super injunction o Automatically triggered: By voluntary and involuntary filings, 362(a)o No notice requirement: The stay is self executing, meaning that action taking in violation of

the stay are entirely ineffective, i.e., it is irrelevant whether the violator knew of the existence of the stay. 365(a).

o No court order necessary: No court order necessary applicable to all entitleso If violate the automatic stay: Must return property or value of property to the trustee,

542(a) Stayed, 362(a):

(1) Actions against the debtor (only pre-petition claims), 362(a)(1): but does not deal w/ post-petition claims. o 362(a)(1):Judicial action that could have commenced b/f filingo 362(a)(2): Enforcement of pre-petition judgmento 362(a)(6): Collect/assess/recovery action o 362(a)(7): Setoff

(2) Action against the D’s property: o 362(a)(5): To create, perfect, or enforce a lien secured by pre-petition claim. In effect this

does not allow for some post-petition claims against the debtors property. (3) Actions against the property of the estate:

o 362(a)(2): Enforcement of pre-petition judgment o 362(a)(3) (broadest stay):Obtain possession, or exercise control over property—applies to

both pre- and post-petition action. o 362(a)(4): Create, perfect, or enforce any lien

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Not stayed, 362(b)(1):(1) Criminal proceedings, 362(b)(1): Commencement/ continuation of criminal action/proceeding

against the debtor, 362(b)(1). (2) Certain government enforcement or regulatory actions, 362(b)(4): Gov/ regulatory actions

against the debtor to enforce police and regulatory power, including enforcement judgment, unless it is a money judgment. o If it is a money judgment: Must go to bankruptcy court to enforce it, 362(b)(4).

The Stay Terminates, 362(c):(1) 362(c)(1): Property not longer party of the estate(2) 362(c)(2): Case is closed or dismissed

Requesting Relief From Stay, 362(d):(1) Timing:

o May ask for stay relief at any time: May ask for stay relief at any time, but earlier you ask for stay relief the hard it will be to get relief

(2) Court shall grant relief by terminating, modifying or conditioning stay: o (1) For cause, including lack of adequate protection of an interest in property [secured

creditors] 364(d)(1), OR: Burden of proof, 362(g)(1): D or the opposing party Cause=lack of adequate protection: Allow creditor to get stay relief if

Protects C’s interest at the time of filing not necessarily the original value Interest of creditor in collateral is diminishing If the C does not foreclose today, collateral will be worth a lot less by the time

the stay is lifted o (2) Requirement to Provide Adequate Protection, 361(e): Upon C’s request, the court

shall prohibit/ condition the use/sale/lease or property to provide adequate protection of such interest.

(3) Moving for Relief for Lack of Adequate protection, 361: (May also at any time move for adequate protection under 363(e)). This protects the interest of the creditor AT THE TIME OF THE FILING . o Against property interest, secured interest if, 365(d)(2):

(1)Debtor has no equity in property (only prong needed for Ch. 7)(AND prong 2 needed for Ch. 11)):

Burden of proof, 362(g)(1): The burden of proof is on the creditor b/c they are requesting relief under, 362(g)(1).

(2) Property is not necessary to an effective reorganization (required for ch. 11 not 7): Feasibility test: reasonable reorganization, in reasonable time Burden of proof: debtor or the opposing party, but debtor should make case

for the record, 362(g)(1). (4) Ways to provide adequate protection (3) ways

o (1) Cash payments for the amt. in depreciation to the secured creditor, 361(1)o (2) Additional/ replacement lien on other collateral, 361(2):

Might impair D’s ability to give to otherso (3) Indubable equivalents of creditors secured interest, 361(3)

Other than a 503 administrative claim. (5) If court says that adequate protection is given, but ends up to be inadequate 507(b):

o If had adequate protection, but value ends up less than what it is supposed to be then have superiority under 507, i.e., a 503(b) claim to the amount that it is inadequate.

o This is not a secured claim, but the court is trying to make amends. (6) No equity cushion or compensation for delay on foreclosing:

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o Equity Cushion: An equity cushion is not necessary in order to determine that a lien is adequately protected and it is not a reason to provide relief form stay under 362(d) for good cause. Lack of equity cushion w/o further showing is not enough to justify relief from stay. Alyucan.

o Not entitled for compensation for delay in foreclosing as part of adequate protection: An under-secured creditor is not entitled to compensation for delay in foreclosing as part of adequate protection.

Sanctions for Violating Stay w/o relief, 362(k):(1) May get sanctions for violating stay w/o relief, 362(k): But there are usually no damages that are

recoverable by the debtor. III. CLAIMS ALLOWANCES AND DISSALLOWANCES: Overview:

(1) These problems may arise when objections to be raised(2) Claims must be allowed

Priority of Claims in Ch. 7:(1) Look at priority list at back of the outline.

Effects of a Claim:(1) Claims are captured by the automatic stay, 362(a)(1): Pre-petition claims are captured by the

automatic stay under 362(a)(1). (2) Claims get paid: Only claims get paid, but payment is stayed(3) Claim holders have voting rights in ch. 11: both claims and interest holders may vote on a ch. 11

plan(4) Claims are discharged in bankruptcy, 1131(d): D discharges all pre-confirmation claims in

bankruptcy Definition of a claim, 101(5):

(1) 101(5)(A): Right to payment whether or not such right is : reduced to a judgment (court need not rule), liquidated, fixed/contingent—future tort liability will constitute a claim under 362(a)(1), matured, disputed, legal/equitable, secured

(2) 101(5)(B): Right to equitable remedy for breach of performance if such breach gives rise to right to payment, whether or not such right is: o Same as Ao Injunction: That had been reduced to monetary obligation, e.g. Kovacs, where the state

governments injunction claim to clean up a site had been reduced to an monetary judgment. o Covenants not to compete: Not a claim unless can be discharged by a payment, but some

courts like the one in Burger King said that it was a claim even if it required performance. o Not a claim: If it may only be discharged by performing.

Filing (only need to file for ch. 7)/Timing of Claims:(1) Ch. 7, Rule 3002: Creditor may file a proof of calm w/ in 90 days after date set for creditor’s

committee meeting that is called under 341(a). There are exceptions for government actions. (2) Ch.11, Rule 1111(a): There is no need to file a proof of a claim in Ch. 11 if it is listed accurately

and is not scheduled as disputed or contingent, or unliquidated. Timing of Claim:

(1) To be a creditor: The claim against the D must arise at the time of or before the order for relief, 101(10)o If it arises after then it is not a claim

(2) Timing in litigation: There are two tests to determine weather the litigation is a claim, therefore, subject to discharge. There is a circuit splito A.H. Robbins Test (conduct test): Whether the conduct that caused the injury occurred b/f

the petition.

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o Piper Air Craft Test (relationship test): If the claimant had a relationship, i.e., contracted w/ or bought products from the pre-petition entity then it is a claim. However, if only bought products form the post-petition entity (i.e, new GM) then it would not be a claim.

o Test: (1) Some event occurs previously to create relationship, and (2) Liability relates to debtor prepetition to create relationship, (3) Only if: relationship was identifiable b/f confirmation

Allowances of Claims, 502:(1) General overview of allowances: It is not enough to have a claim, the claim has to be allowed

o Claims, 101(5)(A) and(B): 101(5)(A): right to payment whether or not such right is reduced to judgment,

liquidated, unliquidated, fixed, contingent, matured, unmatured, undisputed, legal, equitable, secured or unsecured (OR)

101(5)(B): Right to an equitable remedy for breach of performance if such breach gives rise to a right to payment(so no injunction), whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unamatured, disputed, undisputed, secured, or unsecured.

(2) Rule for allowance of claims: o Claim is allowed unless a party objects, 502(a): A claim or interest is allowed, unless a

party in interest objects. o Timing, 502(b): Court shall allow objected claim/interest with values as of date of filling.

(3) Exceptions/Disallowance: o 502(b)(2): If not allowable under non-bankruptcy lawo 502(b)(9): Claims that are not timely filedo 502(b)(2): unmatured interests

No interest between petition and confirmation of the plan Post confirmation must account for interest

o 502(b)(6) damages from termination of lease of real property that exceeds the following calculation: Any where you are calculating rent have to go through test.

(1) First look to state law claim: o Amount of time left on the lease (X) the lease rateo This is subject to mitigation

(2) Then calculate the allowed claim: (look to total rent w/o mitigation)o Either 1 years rent (OR)o 15% remaining on lease, but limited to three years of $ in rent

(3) The allowed claim will be the greater of the two: Which ever one is greater (4) Note: Cannot get more than you would get under state law, the law is not

constructed in order to give you a windfall, it just caps the claim (5) Entitled to: The rent that is allowed on the claim

o 502(b)(7): Termination of employment contract: The amt allowed is 1 year (+) any past due amount, so it caps at 1 year regardless the amount.

Interest on claims:(1) Interest stops running when claim filed, 502(b)(2): Claims for un-matured interest is disallowed(2) Exception to this rule, 502(b)(6): Only entitled to specified K amt of interest

o (1) Over secured Claims, 506(b): Entitled to recover post-petition (pre-petition part of claim)up to the amount of their excess security, this only goes until plan confirmation in Ch. 11.

Over secured: Value of underlying asset worth more than the lien.

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o (2) Solvent estates, 726(a)(5): In which interest is paid at the legal rate on all unsecured claims under 726(a)(5), before any distribution is made to the debtor.

(3) Interest likely an unsecured claim: Interest is likely an unsecured claim Secured Claims, 506(a)(1):

(1) Elements of a Secured claim, 506(a)(1): (1) allowed claim, (2) secured by a lien, (3) in property in which the estate has interest, to the extent of value (i.e., replacement value) of such creditors interest in the estate’s inters in such property

(2) Bifurcated claim: creditor has unsecured claim for remainder of allowed claim above value of such secured claim.

Post-petition effect on security interest, 552:(1) 552(a): Property acquired after bankruptcy is not subject to a pre-filing lien unless under the

circumstances expressed in 552(b)(1)(2) 552(b)(1): If debtor and an entity entered into a security agreement b/f commencement of the

case that extends to property acquired b/f the commencement of the case and extends to proceeds, products, offspring acquired by the estate after the commencement of the case to the extent provided by such security agreement by applicable bankruptcy lawso Court may decide otherwise depending on equities of the case

IV. EXECUTORY CONTRACTS & UNEXPIRED LEASES Overviews:

(1) Policy behind allowing to assume or reject: Maximize value to the estate, allows them to assume financially advantageous contracts, minimize liabilities by rejecting burdensome contracts, and maximize the potential for a fresh start.

(2) Options of DIP: Assume K, Assume and Assign K, Reject K, Do nothing.(3) Trustee/DIP have same powers: The DIP has all of the same powers and duties as the trustee,

1107(a). (4) May assume or reject contracts, 365(a): Trustee subject to court approval, can assume or reject

an executor contract or an unexpired lease (5) Up to business judgment of trustee or DIP: Assuming or rejecting is in the business judgment of

the trustee or the debtor. The decision to assume or reject must be what is beneficial to the estate. (6) Standard for evaluation business judgment:

o May reject a burdensome K (net loss to the estate)o May assume a less beneficial K (profitable but estate still benefits)

Rejectionunsecured claims (tiny BR$$) Assumptionadmin priority ($$$)

(7) Must get court approval if you assume or reject, 365(a): The court has to approve an assumption or rejection of a K under 365(a)—this would include an assumption

(8) If do nothing, rejection will be presumed: Acceptance will never be presumed by the court. Defining an Executory K:

(1) Country Man Material Breach Test: Contract under which both parties have substantially under-performed such that failure of either would constitute a material breach of the other

(2) Applying the test: o (1) Substantial performance remaining on both sides o (2) If a contract is not executor, it means that neither party has performed substantially, what

remains then is an asset or a liability, but not both. o (3) Where one party or the other has substantially performed there is no need to consider it an

executor contract (3) Some insurance contracts are not: The court held in Sudbury that insurance contracts under

which both the debtor and the insurance companies had performance obligations remaining were not “executor contracts” under the country man definition.

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o For example in Sudbury: The insurers were obligated to defend and pay third party claims against the debtor arising from pre-petition injuries, and the debtor was obligated to both (1) pay premiums relating to these claims, and (2) notify the insurers of any claims made and cooperate with the insurers in defense and settlement of these claims.

(4) Franchise agreements: These are executory contracts. Noncompetes may be rejected along w/ the contract, Burger King, but it could also be argued that these non-compete clauses are not claims so they cannot be discharged.

Time Limits (when must assume or reject), 365(d):(1) Creditor/nondebtor must continue to perform until assumed or rejected: Court rejects creditors

excuse to stop computer services b/c debtor assumed by continued use of the service. Creditor also profited form continued use. D paid for all post-petition services rendered. Whitcomb.o But given an administrative expense to the extent that they have to perform.

(2) Time limit for Ch. 7, 365(d)(1): o 60 days from order of relief: If do not assume or reject an executory contract or an

unexpired lease w/ in 60 days after the order for relief, or w/ out being given additional time for cause the court will deem the executory contract or lease rejected

o Options w/ in this time period: Trustee may either assume, reject, or seek and extension from the court.

o If fails to act: Deemed rejected as a matter of lawo DOES NOT APPLY TO REAL PROPERTY LEASES

(3) Time Limit for Ch. 11, 365(d)(2): o May accept or reject b/f confirmation of the plan: May accept or reject the plan at any time

b/f the confirmation of the plano EXCEPT FOR: unexpired leases of nonresidential property

(4) Unexpired leases of CRE where the debtor is the lessee, 365(d)(4): o If take no action by time limits or if rejected: The trustee shall immediately surrender that

nonresidential property to the lessor, if the trustee does not assume or reject to lease w/ in the time limits

o 120 days + 90 days by court for cause or agreement: after the date of the order of relief, 365(d)(4)(i) but extension may be given for cause by court for 90 days or lessor agrees to an additional extension, OR

o Date of confirmation plan: The date of the entry of an order confirming the plan, 365(d)(4)(ii)

(5) Debtor may compel trustee/DIP to assume or reject: The basic right of the nondebtor party during the limbo period is to file a motion requesting that the bankruptcy court compels the trustee or DIP to decided whether to assume or reject the K/lease.o The court will look at: Whether the D has had enough time to make a determination, Data

Link and Enron, the importance of the K to the debtors reorganization, and the damages that the creditor will suffer beyond bankruptcy compensation.

(6) Debtor may also move for stay relief: The debtor may move for stay relief for cause, i.e., it is not necessary for the reorganization or for adequate protection. Would move under 362(g).

Operating During the Gap Period:(1) This is the period post filing, but pre- assumption and rejection:

o If the debtor is required to perform then they get an administrative claim, 503(b)(1) (costs and expenses of preserving estate) claim: To the extent that the nondebtor party is compelled to perform during the limbo period, the nondebtor is entitled to compensation as an administrative expense fore the reasonable value of all benefits actually provided to the estate

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o Creditor must continue to perform b/f assumption or rejection: But they will be rewarded w/ administrative priority

(2) The creditors gets a 503(b)(1) administrative priority claim for post-petition: o Admin priority for actual costs of maintaining the estate: The creditor gets actual,

necessary costs and expenses for those associated with preserving the estate, 503(b)(1)(A), and this includes the time it takes for the estate to assume/rejected an executory K or a non-commercial lease.

o Two different ways to value a claim:o (1) Benefit to estate/market value approach: Based on the benefit that the estate

actually derived. The actual benefit to the estate Could be either the contract rate or the market rate Would have an administrative claim to the extent that it benefitted the estate

o (2) Cost avoidance approach: Cost D avoided by rejecting, this is usually breach of contract damages.

Would have to pay the contract price-the market price=contract damages for breach

This would then be in tiny bankruptcy $$(3) Commercial Real Estate Leases, 365(d)(3),(4):

o Both ch. 7 and 11: Applies to both chapter 11 and 7 cases. o Time limit: 120 days + 90 day extension for causeo Trustee must timely perform all obligations until assumed or rejected notwithstanding

503(b)(4): If they do not act the lease will be deemed rejected and they will have to surrender the property

o Value of claim: K rate, admin. Do not care about market rate or benefit to estate, 502(b)(1). o Two ways to calculate damages, run through both if methods are not specified(this is a

gap period calculation):o (1) Accrual: Separate the rent into pre-petition and post-petition components and hold

that 365(d)(3) only requires payment of the post-petition, pre-rejection period. Essentially it prorates from the petition date to the breach date and that

is the damages. o (2) Billing Date: Any obligation of the debtor under the lease which becomes due

after the entry of the order for relief under the Bankruptcy code and before the lease is assumed or rejected must be paid or otherwise fulfilled when due.

Essentially if rent is due, the whole month/term must be paid.o If rejected: remainder of the lease is an unsecured claim limited by the rules in 502(b)(6)

(4) Equipment/Personal Property Lease, 365(d)(5): o Only applies to ch. 11: Only applies to Ch. 11, 365(d)(5)o First 60 days: Benefit to the estate which would be either cost avoidance or market value

for the property that is actually used, 365(d)(5)—so if it sits in a warehouse then does factor in

o After day 60 until assume or rejected: Will have to pay full K rate as a 503 administrative expense. 365(d)(3).

o If rejected: Unsecured claim (but still have to abide by the above rules and this gives the debtor and incentive to reject b/f day 60).

o Equities of the case: The bankruptcy court may look at the equities of the case Rejection, 365(g):

(1) Rejection is a breach: o REJECTION IS A BREACH, 365(g): Rejection is a breach of contract

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o The time of the breach is set pre-petition 365(g)(1): The breach is timed to take place immediately before the date of the filing of the petition.

o Damages claim: If rejected, the nondebtor is entitled to an unsecured claim, but beware of special rules listed above.

o Beware of when they are operating in the gap period: This may give rise to a partial administrative claim.

(2) The rights of the debtor and non-debtors if the K/lease is rejected: o The rights of the DIP/Trustee:

Does not have to perform the K or pay administrative expenses after date of rejection: A rejection allows the debtor to not preform the K, and not have to pay the administrative expense it would have to if it assumed the K.

Treated as if DIP/Estate Breached: Just treat it as if they committed a pre-petition breach.

Only would have to pay tiny bankruptcy dollars : Just have to pay tiny bankruptcy dollars.

Not entitled to the benefits of the K: The DIP/trustee is not entitled to the benefits of the K.

o The rights of the nondebtor: Will just have a general claim in bankruptcy for damages from the breach

(3) Rejection is a breach, it rejects the entire contract, but only to extent parts of K are claims: o Yet it only rejects the parts of those contracts which are a claim, i.e., that rest of the K

still exists: Burger King : Licensing agreement is rejected, the court rejected the covenant not to

compete, but Baxter says that this may have a claim under 101(5). Ortiz : D no longer has obligation under exclusivity clause of promotional contract, if

cash could be given to get them out of it, but they could sue under bankruptcy. Have to determine if it is a claim, that gives rise to payment in bankruptcy.

(4) Consequences of rejection (breach): o If the nondebtor has a claim, then its subject to discharge: If it is a claim under 101(5)

then it is subject to dischargeo The effects of a breach: It has absolutely no effect upon the contract’s continued existence,

the contract is not cancelled, repudiated or rescinded or in any other fashion terminated. o Injunctions: The court would ask whether it give a right to payment, if it does, then it is

dischargeable If it does not give right to payment: Then it is not a bankruptcy claim b/c bankruptcy

only deals w/ monetary obligations. (5) Value of breach/claim is fixed at petition date if breach, 502(g)(1):

o Breach gives rise to payment: Breach gives rise to an allowed claim under 502(g)(1) (but only in 11)

o Value fixed at date of petition, not rejection: Value fixed at date of petition, not the date of the rejection.

o Rejection in Ch. 11: It is a pre-petition breach, 365(g)(2), but there are certain rules regarding payment that come into effect.

Assumption:(1) Effects of assumption:

o D must perform: The D gets the benefit of the K, so the D has to perform o Creditor/Nondebtor gets admin priority under 503: Gets an administrative priority claim

for K, and any breaches that occur after assumption. o Assumed Cum Onre: Must assume entire K, i.e., the burdens and the benefits to the estate.

Cannot just assume the parts of the contract that would benefit the estate10

Exception, 364(e)(1): Ispo facto clauses are not assumed. o The court will never presume an assumption: Have to get a judicial order to assume, if do

nothing and show no intent to assume, the court will presume a rejection. Whitecomb. (2) Conditions of Assumption three requirements, 365(b)(1)(A),(B),(C):

o (A) Cure existing defaults or provide adequate assurance of prompt cure, 365(b)(1)(A): Must cure all defaults and nonmonetary defaults, except if they are penalty rate or penalty provisions(not CREs).

Special rule for commercial real estate leases, 365(b)(1)(A): Performance: Of assumption in accordance with terms of lease Compensate: For actual pecuniary loss (not penalties) from such default, this

may include accelerated and rent increases Most everything may cured: Going dark leases are a bit hard to cure w/o

cash. o (B)Must compensate the nondebtor or provide adequate assurance that they will

compensate the debtor for any actual pecuniary loss caused by the default, 365(b)(1)(B):

o (C) Provide assurance of future performance under such contract or lease, 365(b)(1)(C): This my include providing financial statements, cash reserves, contingency plans, personal guarantees, reasonable projections, financial history, and market studies may all be relevant evidence.

(3) Limits on assumption: o Contract (and commercial CREs) has to be in existence when bankruptcy is filed:

Cannot assume or assign contracts that do not exist when enter into bankruptcy. o Termination provisions: If debtor files bankruptcy b/f the termination provision runs then

the contract is still alive, but if doesn’t it is not in existence at time of bankruptcy. o Personal service contracts, 365(c): A DIP/Trustee may not assume an executory contract

over the nondebtor’s objections if applicable law would bar assignment to a hypothetical third party even whether the DIP/Trustee has non intent of assigning the K to any third party. Catapault.

o Certain types of loan financing o Ispo Facto Clauses, 365(e)(1):

Ispo Facto Clauses: Will not have to cure a default under an ispo facto clause as a condition of bankruptcy

(4) Post-assumption breach: o The creditor is provided w/ an administrative claim, 365(g)(2): But look out for special

rule for leaseo Commercial real estate leases, 503(b)(7): A post-assumption breach shall be entitled to

administrative damages (excluding failure to operate or penalty provisions) for the period of 2 years following the later of the rejection date or the date of actual turnover of the premises.

(5) Special Rules for shopping centers, 365(b)(3): o Must make sure that it actually is a shopping center: A shopping center is often a

carefully planned enterprise and through it consists of numerous individual tenants, the center is planned as a single unit and is often subject to a master lease or financing agreement.

o Will be considered to be an incurable default if do not act in accordance with the lease: Going dark breaches(turning off the lights) or not complying with the terms of the lease may only be cured by continuing to perform in accordance with the lease.

o Assurance of future performance includes: 365(b)(3)(A) : Source of the rent 365(b)(4)(B) : They have similar financial conditions

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365(b)(3)(B) : % of rent will not decline substantially 365(b)(3)(C): Will be subject to all of the provisions of the previous lease such as use

restrictions and exclusivity, (AND) 365(b)(3)(D): The assumption will not disrupt any tenant mix or balance in the

shopping center. Assignment:

(1) Requirements for assignment, 365(f)(2): The trustee may assign an executory contract only ifo 365(f)(2)(A): The trustee assumes such contract or lease in accordance w/ the provisions

of this section, (AND): This means you need to through all of the provisions above.o 345(f)(2)(B): Adequate assurance of future by the assignee of such lease or contract is

provided, whether or not it is in default: Have to prove that the assignee can actually perform the K.

(2) Trustee/DIP may assign regardless of anti-assignment restrictions, 365(f)(1): Not subject to anti assignment provisions of Ks.

(3) But if cannot be assumed, it cannot be assigned, 365(c): This includes personal service contracts under 365(c)(1), contracts to make a loan or make a financial accommodation under 365(c)(2), and the golf club membership in Magness.

V. AVOIDANCE POWERS AND RECOVERY POWERS Overview:

(1) If avoidable: Not void, only voidable—have to bring a separate lawsuit to recover. (2) Automatic Preservation, 551: Any transfer that is avoided under the sections below or any lien

that is preserved for the benefit of the estate, but only with respect to the property of the estate. Recovery, 550:

(1) Recovery may be had from, 550(a)(1): o Initial transferee: Initial transferee of the avoided transfer (OR)o The person who benefitted: The entity whose benefit the transfer was madeo Subsequent transferees: May recover from subsequent transferees, 550(a)(2)

But are protected to the extent they took for good faith, 550(b)(1):Secondary transferee’s are protected to the extent that they took for value, in good faith and without knowledge of the violability of transfer.

If the secondary transferee took it in good faith and for value: Then the secondary transferee may get protection too, 550(b)(2).

But note Video Depot : If the debtor cannot put funds to his own use, he would not be considered to be the initial transferee. This comes into play when a corporation pays a debt on a third parties behalf on their instructions.

(2) Only Entitled to a single satisfaction: May only recover once on an avoidance, and may not recover from more than one person under 550(d).

(3) Special Rules for transactions w/ insiders 547(i): If avoided under (b) and the transaction was made by a debtor who is a non-insider on the benefit of the creditor that is the insider then it should only be considered to be avoided under this section with resect to the creditor that is an insider.

(4) What happens when a transfer is avoided, recovery 550: o If it was an outright transfer of property: Then the trustee will attempt to recover the

property transferred or its value under 550o If a lien is avoided: Then the lien will be eliminated, the secured creditors will be relegated

form unsecured status and the property will be freed from the lien, but they could retain the lien and pay the lien’s value to the trustee.

o If property is recovered from the entity under 550: They will have a claim against the estate in the amount of the property recovered if it is allowable, 550(h)

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(5) Time limits, 550(f): 1 year after the avoidance of the transfer (OR) the time the case is closed Strong Arm Clause and Constructive Trust:

(1) May avoid an unperfected securities, 544(a)(1): o Gives the trustee judicial lienholder status: This allows the trustee to bring property back

into the estate and provides them with the rights that they had before the commencement of the case.

o Allows them to trump unperfected security interest: Does not allow the secured creditors to perfect their security interest after the commencement of the case.

o But there is an for non-bankruptcy relation back rules of general applicability under 544(a): If a non bankruptcy rule would permit subsequent perfection of a lien to be effective against prior intervening parties, i.e., the perfection would relate back to the point in time b/f the intervening party’s interest arose, then bankruptcy will time that perfection as of that earlier relation back point.

(2) May avoid unperfected interest in personal property, 544(a)(3): o Gives the trustee the powers of a bonafide purchase of real property: This section vests

the trustee with the rights and powers of a bona fide purchasers of debtors real property whether or not under bankruptcy law this power exists

o Would allow them to trump unrecorded land interests: If under the applicable nonbankruptcy law a BFP would prevail over an unrecorded interest, that unrecorded interest may be avoided.

o Under some state law knowledge of the BFP may matter: Under bankruptcy it does not. FRAUDULENT CONVEYANCE:

(1) Steps: Determine if the transfer is fraudulent/Partial defenses?, automatic preservation under 551(title reserved for benefit of the estate, recovery under 550

(6) Standing to challenge: Trustee, individual creditors of the debtor, but o Present: A creditor who was creditor at the time of the transfer has standing to challenge the

transfero Future: A creditor whose claim arose after the transfer does not have standing in all cases

(2) May attack the transfer under state law if there is one creditor in existence that would be able to attack under state law, 544(b)(1): o Usually goes farther back: State conveyance laws usually goes back 4-5 years, but must be

an actual unsecured creditor that still existso Does not apply to charities: This does not apply to charitable organizations

(3) Actual Fraud—Fraudulent Intent, 548(a)(1)(A): o (1) Made w/ in 2 years of filing the petition of a debtor whether voluntary or

involuntary, 541(a)(1): This is less then 544(b)(1), but under 544(b)(1) you need to have a secured creditor

o (2) Mad a transfer OR incurred such obligation, 548(a)(1)(A), (AND) Transfer, 101(54): the creation of a lien, retention of title to security interest,

foreclosure, disposal with property—or interest in property. Obligation: May in include a guarantee.

o (3) With actual intent to hinder, delay, or defraud any entity to which the debtor was or became on or after the date of transfer was mode or such was incurred, indebted, 541(a)(1)(A):

o Fraudulent state of mind is rare to get, but look to the badges of fraud for circumstantial evidence:

Transfer or obligation to insider (101(31)) defines insider below D retained possession or control of property after transferred Transfer or obligation was concealed Before incurred, D had been sued or threatened w/ suit

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Transfer of substantially all of the D’s assets D absconded (fled) D removed or concealed assets Value of consideration received by D was not reasonably equivalent to the

value of transfer/obligation. D was insolvent or became insolvent shortly after Transfer occurred shortly before or after substantial debt was incurred Transfer essential assets of business to lienholder who transfers to the insider

or debtor Transfer to a family member or anther insider Gift transfer for no consideration Insolvency of the debtor after transfer was made

Constructive Fraud:(1) Constructive fraud, 548(a)(1)(B): same first two elements of actual fraud. Does not have to be

actualy intento (1) Made w/ in 2 years of filing the petition of a debtor whether voluntary or

involuntary, 541(a)(1): This is less then 544(b)(1), but under 544(b)(1) you need to have a secured creditor

o (2) Mad a transfer OR incurred such obligation, 548(a)(1)(A): (AND) Transfer, 101(54): the creation of a lien, retention of title to security interest,

foreclosure, disposal with property—or interest in property. Obligation: May in include a guarantee.

o (3) Received less than a reasonably equivalent value in exchange for such obligation, 548(a)(1)(B)(i): (AND)

Fair consideration: With in a range of valueo (4) The debtor was in an insolvent like state on the date of the transfer or when the

obligation was incurred, or became insolvent b/c of it, 548(a)(1)(B)(ii)(I)-(IV): Th is is balance sheet insolvency test under 101(32), ie., debts> sum of entities assets

at fair value Had an unreasonable small capital: equity cushion test: assets>liabilities Intent to incur or incurred to much debt: Intended to incur, or believed D would incur,

debts beyond D’s ability to pay as such debts b/f they matured, cash flow test. Insider transactions: Transfer to or for the benefit of an insider, or incurred such

obligation or for benefit of insider, under and employment K and not in an ordinary course of business.

(2) Partial Defenses, 548(c): o If the oblige or transferee takes the obligation for value and in good faith then will be

protected to the extent that they took it in good faith under 548(c): Only if in good faith and for initial transferee: Only for initial transferee who must act

in good faith.o In corporate context: Watch out for situations where the debtor orders a

company or third party to facilitate a transaction, this would make it fall outside of the exception—so this would be the debtor giving property to another. Video Depot.

Protects to extent transferee value in exchange: What is not protected will fall under the exception.

Result: has a lien or may retain the property transferred Preferences, 547:

(1) Overview: o Process: Preference/Exceptionautomatic preservation 551Recovery 550

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o Transfer, 101(54): Does not include obligations incurredo Distinguishing this from fraudulent transfers that include obligations incurred:

It has to be debtors property, if not then there has been no depletion Has to be a pre-existing debt, debt must predate the transfer Pre-payment are not preference—the debtor is securing future goods or services Focus is when the debt becomes fixed Even if debt is unmatured, un-liquidated, it is fixed

o Insolvent 101(32): Debts exceed the assets at a fair valuation if the debtor has assets to pay off creditors then there is no preference by the payment.

o Prevent pre-filing preferential treatment of unsecured creditor: Cannot avoid transfer to fully secured C (no preferential effect—think hypo 7).

(2) The six elements of transfer law, 547(b): Go through each elemento (1) Transfer, 547(b):

Has to be a transfer under 101(54): the creation of a lien, the retention of title as a security interest, the foreclosure of the debtor’s equity of redemption, or getting rid of property or an interest in property in any way.

o (2) Of property of the debtor, 547(b): Property of the debtor: Has to be the property of the debtor

o (3) To or for the benefit of the creditor, 547(b)(1)o (4)For or on account of an antecedent debt for benefit of creditor, 547(b)(2): On account

of the debtor’s antecedent debt owed b/f the transfer o (5)Made while the debtor was insolvent, 547(b)(3),(f):

Rebuttable presumption of insolvency 90 days (1 year for insiders) period b/f filing: The creditor must rebut this presumption Burden of proof: The trustee ultimately has the burden of proving preference

and insolvency w/ in the 90 day period Insider, 101(31): Includes directors, officers, persons in control of D and

relative of any of these. o (6) made during the preference period of 90 days before bankruptcy (or one year for

insiders), 547(b)(4)o (7) Enables the creditor to receive more than it would have in a hypothetical ch. 7

liquidation, 547(b)(5): Preferential effect: Enables the creditor to receive more than it would have received

in a hypothetical Ch. 7, i.e., $>liquidation value=preference This is an improvement in position test: Would the debtor have received more than it

would have received during a ch. 7 liquidation if they would have received less then it is a preference.

Secured creditors: Very hard to fall under this test. (3) Exceptions 547(c):

o Subsequent new value 547(c)(4): Allows for transfer if it gave new value: Allows transfer to or benefit of creditor to

extent that, after such transfer they gave , C gave new value under 547(a)(2) to or to the benefit of the estate.

New value, 547(a)(2): Means money or money’s worth in goods, services or new credit, or release by a transferee of property previously transferred to such transferee in a valid transaction

Elements:o (1) Not secured by otherwise unavoidable security interest (AND)o (2) On account of which new value of the debtor did not make an

otherwise unavoidable transfer to or for the benefit of such creditor15

o Contemporaneous Exchanges, 547(c)(1): Trustee may avoid a transfer to the extent that such transfer was:

(1) Both the creditor and the debtor intended it to be contemporaneous: Exchange to new value to D and was substantially contemporaneous, if wishy washy look to intent

(2) Payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor in that: Ordinary business terms

(3)Must be in fact a contemporaneous exchange for new value:o Preference: Check treated as payment of an antecedent debto Defense: Check treated as a contemporaneous exchange for new value

at the money. o De minimis defense, 547(c)(9):

$6,225 cap: For debts not primarily consumer debts, aggregate value of all property that constitutes or is affected by such transfer is less than $6,225.

Trustee/DIP may aggregate damages: Trustee could argue multiple small payments are one aggregate transfer or effects property larger than $6,225.

Have to be made in ordinary course of business: Have to be made in the ordinary court of business.

VI. CH. 11 REORGANIZATION OVERVIEW Policies:

(1) Incentive for the parties: o C’s incentive: Business worth more alive than dead (more $ for claims)o D’s incentive: Bind everyone with less unanimity

Trustee/Appointing a trustee:(1) DIP usually remains in charge: The existing management usually stays in charge during the

reorganization(2) Appointment of Trustee, 1104:

o On the request of a party in interest or the U.S. Trustee, and after a notice and a hearing, 1104(a): The court shall order the appoint of a trustee if, 1104(A)

(1)For cause, 1104(a)(1): (OR) For cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case.

Fraud: If there is fraud U.S. Trustee may move to remove the DIP if there is reasonable grounds to believe that the CEO or CFO, etc participated in actual fraud, [ENRON, Worldcom], 1104(e)

(2) Interest of creditors, 1104(a)(2): Interest of the creditors, equity holders of the estate

o Trustee authorized to rune debtors business under 1108. Fiduciary Duties:

(1) DIP (Corp) always has duty to shareholder, never creditors: o Runs contrary to BR Rules: To prefer creditors over equity/shareholderso Delaware law: says board of directors has duty to the shareholders and this does not change

in bankruptcy, the board still has to act reasonably under the business judgment rule o There is no zone of solvency: Some courts say that when you get into this zone, that the

duty turns over to the creditors. This is not supported by Del law. (2) Shareholders have interest in bankruptcy, not claims:

o Ch. 7 equity gets nothing: In Ch. 7 equity gets nothingo In Ch. 11, however: allows the various classes to bargain or agree by class voting on a plan

of reorganization, as a way to share the reorganized value of the company and this could allow them to get paid.

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Creditor Committee(1) Creditors Committees, 1102:

o Official committee of unsecured creditors is appointed by the US. Trustee:1102(a): The U.S. Trustee may appoint a committee of creditors holding unsecured claims and may appoint additional committees of creditors of equity security holders as the U.S. Trustee deems appropriate.

o Powers of the creditor committee, 1102: One of the most important powers of the creditor committee is to engage professionals, such as attorneys,, which are paid under 503(b) as an administrative expense, but these have to be approved by the court.

o A party of interest may appoint additional committees of creditors, 1102(a)(2): C can request the court to appoint additional committees if necessary to assure adequate representation of creditors or of equity security holders.

o This is only applicable to ch. 11 cases. 103(g)o Meeting of the creditors: Must be convened by the U.S. trustee, and the creditors can get

testimony under oath, sometimes from the debtor. Operating the Business, 363

(1) Use, sale, or lease of property, 363: o May do so w/court approval if, 363(c)(1): In the ordinary course of businesso Must have court approval if outside of ordinary course of business, 363(b)(1)

(2) Use of Cash collateral is restricted, 363(c)(2): o Cash collateral, 363(a): cash, negotiable instruments, documents of title, securities, deposit

accounts or other cash equivalents whenever acquired in which the estate and an entity other than the estate has an interest and includes the proceeds, products, offspring’s.

o Trustee cannot use, sell or lease cash collateral in the ordinary course of business unless, 363(c)(2):

363(c)(2)(A): Each Party that has an interest in such cash collateral consents (OR) 363(c)(2)(B): The court, after notice and a hearing, authorizes such use, sale or lease

in accordance with the provisions of this section. o The court may condition such use, sale, or lease as is necessary to provide adequate

protection of the interest, 363(e): To prohibit or condition use, sale, or lease as is necessary for adequate protection of C’s interest.

Burdens, 363(o): o C’s burden: Demonstrate that they have an interest in the propertyo Trustee’s burden: To show that there is adequate protection

DIP Financing 364:(1) The need for DIP financing: Few are willing to lend to DIP financing, usually existing creditors(2) Unless the court orders otherwise, the trustee may obtain unsecured credit or debt in the ordinary

course of business, 364(a): The court may not order otherwise and the creditor gets a 503(b)(1) claim

(3) Super Priority (over other admin claims) or secured credit, 364(c)(All creditors want this): o If DIP is unable to obtain unsecured credit as an admin claim—court approval will

allow the DIP to obtain:o Three types of credit/debit:

364(c)(1): With priority over any or all administrative expense of any kind specified in section 503(b) or 507(b) of this title

364(c)(2): Secured by a line on property of the estate that is not otherwise subject to a lien, (OR)

364(c)(3): Secured by a junior lien on property of the estate that is subject to a lien.

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(4) Senior or equal secured Credit, 364(d)(1): The court after notice and a hearing may authorize the obtaining of credit or the incurring of debt secured by a senior lien or equal lien to property that is already subject to a lien only if:

o 364(d)(1)(A):Cannot obtain credit otherwise: A trustee is unable to obtain such credit otherwise (AND):

o 364(d)(1)(B): There is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted.

Trustee has burden: to show adequate protection. Usually have to prove: Property is worth way more than both liens.

VII. REORGANIZATION AND PLAN CONFIRMATION Effects of Confirmation:

(1) Discharges DIP of all Pre-Confirmation Debts, 1141(d)(1)(A): o Discharges, 1141(d)(1)(A): Discharges the debtor from any debt that arose b/f the date of

such confirmation but only discharges to the extent provided for in the plano Binds all parties including dissenters, 1141(a): It is binding on all parties whether or not

they voted for the acceptance of the plan.o Exception: Will not discharge claims that are not dischargeable debts listed under 523

(2) Does not discharge if, 1141(d)(3): o It is a liquidation plan, 1141(d)(3)(A): The plan provides for the liquidation of all or

substantially all of the property of the estateo Debtor does not engage in confirmation after consummation of the plan, 1141(d)(3)(B),

(AND)o The debtor would be denied a discharge under section 727(a) b/c it is filing a ch. 7

(3) The court order it not to be part of discharge: The court may approve a written waiver of discharge executed by the debtors after the order for relief under this chapter.

Filing of Plan/Exclusivity, 1121:(1) First 120 days the DIP has exclusive right to propose a plan, 1121(b): W/ exceptions, only the

debtor may file a plan until after 120 days after the date of the order for relief under this chapter. o Hard to convert to Ch. 7 during this time period

(2) This gives a huge amount of power to the debtor b/c nobody can file competing plans: Creditors will always want to file a competing plan.

(3) A party in interest, including the debtor, trustee, a creditor committee, an equity security holders committee, a creditor, an equity security holder, or any indentured trustee may file a plan if and only if, 1121(c):o (1) A trustee has been appointed under this chaptero (2) the debtor has not filed plan before 120 days after the date of the order for relief under

this chaptero (3) the debtor has not filed a plan that has been accepted, before 180 days after the date of the

order for relief under this chapter, by each class of class or interest that is impaired under the plan.

(4) Must be voted on by creditors: With in 180 days of order for relief to maintain exclusivity(5) For cause, 1121(d)(1): The court after notice and a hearing may reduce or increase the 120 or

180 periods mentioned in this sectiono Max increase:

120 day period: May not be extended for a day that is more than 18 months after the order for relief under this chapter. 1121(d)(1)(A)

180 day period: May not extend beyond a date that is 20 months after filing. 1121(d)(1)(A).

Class Structure, 1122:18

(1) Claims and interest in a class must be substantially similar, 1122(a): A plan may place a claim or interest in a particular class only if such claims or interest is substantially similar to the other claims or interests of such class. o But do not have to all be in the same class: In bankruptcy things are often classified as

unsecured claims but in different classes, so they are treated differently. (2) Need a business reason to split claims/interests into different classes: e.g., maybe classes that

you have a long standing business relationship w/, but you want to engineer it in a way that they will accept the plan

(3) If in the same class: Then they will be given the same treatment(4) Courts may approve separate classes of small unsecured claims, 1122(b): As is reasonable and

necessary for administrative convenience. Impaired claims:

(1) Class is impaired unless, 1124(1): the plan leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest, (OR)

(2) Unless plan takes steps to make it so the claim or interest is unimpaired by, 1124(2): Have to all of the belowo (A) Cures default: Cures defaults that occurred b/f or after the commencement of the case

under this title, other than ispo facto clauses. o (B) Reinstates maturity: Reinstates the maturity of such claim or interest as such maturity

existed b/f such defaulto (C) Plan compensates for any pecuniary loss to C: as a result of such failure to preform a

nonmonetary obligation—other than failure of 365(b)(1)(A) (AND)o (D) Does not otherwise alter rights: legal, equitable, or K rights to which the holder is

entitled. (3) Importance of impairment: It decides who votes.

Disclosure:(1) Vote solicitation must be preceded by disclosure, 1125(a)(1): Solicitation must be preceded by a

disclosure statement approved by the court, 1125(b)(1), which will only be approved if it contains adequate information

(2) Adequate information ,1125(a)(1): Would allow a hypothetical investor to make an informed judgment bout the plan—it is similar to a prospectus in securities law

(3) Creditors may attack the plan: A lot of creditors use the disclosure hearing as a way to say that the plan is not confirmable as a matter of law, and most courts will take this up at a confirmation hearing.

(4) May not seek votes until after disclosure statements are sent, 1125(e): If do may designate the votes.

Voting, 1126:(1) Who can vote, 1126(a): Holders of claim or interest allowed under section 502 of this title may

accept or reject the plano Claims, 101(5)o Interests: Includes equity holders

(2) Class of claims accept if : 2/3 of $ and 51% of actual votes casted., 1126(d).o If designated under, 1126(e): Take them out of both the top and the bottom of the

calculation. (3) If unimpaired presumed to accept, 1126(g): Unimpaired claims are presumed to accept the plan

b/c their legal, equitable, and contractual rights have to been impaired. (4) Presumed Rejection if you get nothing, 1126(g): Holders that do not receive anything under the

plan are presumed to have rejected under 1126(g). (5) Bad faith votes (accept or reject) do not count, 1126(e):

o Insiders: May vote as long as not designated by courts19

o Must affirmatively seek designation: Court can designate entity under 1126(e) any creditor not solicited in good faith or in accordance with ch. 11. Designation votes are excluded completely from voting calculations(excluded from the numerator and denominator)

Steps to confirmation, 1129:(1) Each impaired class accepts (by required vote) (OR) satisfies the best interest test, 1129(a)(7):

o Best interest test: Dissenters/abstainers gets at least as much as would in a hypothetical ch. 7 liquidation:

o A pplicability: Applies to claims and interests Does not apply to class acceptance, it applies to individuals who reject Does not apply if the claim or interest is unimpaired Requires the corut to engage in a hypothetical ch. 7 liquidation

o Have to consider present vale (market interest rate)(make sure to mention on exam): o This is b/c when you are getting paid you are getting a stream of payment: Therefore

you have to figure out what it is worth on the day of the plan and whether it is better than the ch. 7 rate

o The key to this: If you are getting a payment stream over time it is not going to be worth the aggregate of those payments it is going to be worth less b/c money in the future is worth less than money now.

(2) One impaired class (if any exist) must accept the plan w/o including inside acceptance under 1129(a)(1):

o Insiders (w/ claim or interest) may vote for class acceptance of plan: 1126(c) does not bar them from voting as long as they are not designated under

1126(e) for bad faith The mere fact that you are an insider does not mean that you do not get to vote

o But as a proxy as the fairness of the plan: At least one class that is not impaired with out insiders is a proxy that it is faired, 1129(a)(10).

(3) Feasibility—reasonable plan that will work in reasonable time, 1129(a)(11): o Cannot be likely to be followed by liquidation or need future reorganization:

Purpose: Pointless to confirm a plan that is doomed for failure and likely to bring the debtor back into court

Do not need absolute certainty: Absolute certainty is not required Burden is on the one who proposed the plan to show this: The burden is on the one

who proposed the plan to show this.(4) Each class must accept, satisfy the best interest test, be not impaired,(a)(8) or be crammed down

Cram Down under 1129(b)(1):(1) Usually each class of impaired claims or interest must approve a claim: However, under 1129(b)

(1) if all other (a) requirements above are met, court can confirm the plan over dissenting votes (cram down).

(2) Plan meeting all 1129(a) requirement except (a)(8) can be confirmed if: o (1) Does not unfairly discriminate:(but may treat different) (AND)o (2) Is fair and equitable to class that did not accept: Has to be fair and equitable with

respect to each class of claims/interest that is impaired and did not accept. Fair and equitable test, 1129(b)(2):

o Secured cram-down, 1129 (b)(2)(A): hard to do (1)Creditors retain a lien and receive cash payments totality

present value, (b)(2)(A)(i) [add interest if paid over time] (OR) (2) Creditors provided the indubitable equivalent of secured claim,

(b)(2)(A)(iii) [$ that is no doubt the equivalent of the claim]o Unsecured cram-down, 1129(b)(2)(B):

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(1) Creditors receive or retain property on account of such claim at present value, (b)(2)(B)(i) [add interest if paid over time](OR)

Equity share holders get paid in this scenario Interest rate must be higher than for unsecured cram down

(there is no collateral) (2) Any junior class to unsecured dissenting impaired class cannot

receive any property, (b)(2)(B)(ii)— Absolute priority rule: Equity cannot get paid: Equity cannot get paid—equity is

the most junior. o This means that if an unsecured class dissents you

cannot pay any junior to that class Dish Network: No cram down, SR lienholders cannot gift

% to equity holders under the plan [give gift outside of plan].

New value exception(there is none): If old equity got an exclusive opportunity by interest in the company then it would break this rule and there would be no cram down b/c others must have the opportunity

o Equity cram down (b)(2)(C): Must prove that either equity is getting paid in full or no junior class, e.g. common shares get paid.

But there is usually no class junior to equity so you can easily cream them: This would only occur if you had different class of preferred and common stock.

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