BANKRUPTCY

PROCESS
 BANKRUPTCY
JUDGE

PROFESSIONALS
attorneys, DEBTOR
accountants, corporate
financial advisors, individual
agents

BANKRUPTCY
CASE

BANKRUPTCY
TRUSTEE CREDITORS
ch 7, 13 or 11

US TRUSTEE
Timeline

Prepetition Postpetition

BANKRUPTCY
PETITION FILING
28 USC 28 USC
§1334 §157

Arising under Title

11 Core (§157(b)(2))

Non-core
Arising in a case •Counterclaims
•Fraudulent transfers
under Title 11 •Personal injury

Related to cases
under Title 11
 Commencement or continuation of prepetition action against debtor or to
STAY recover prepetition claim against the debtor
APPLIES Enforcement against debtor or property of the estate or prepetition
judgment
Act to obtain possession or property of the estate

Creation or perfection or enforcement of lien against property of the

estate
Creation of lien to secure prepetition claim against property of the debtor

Act to collect prepetition claim

Set off of prepetition debt owed to debtor against claim against debtor

Commencement or continuation of US tax court proceeding on tax liability

AUTOMATIC When property no longer property of the estate
TERMINATION
OF THE STAY Case is closed

Case is dismissed

Discharge of the debtor obtained

Debtor files intent to surrender collateral to secured creditor

Debtor filed second case after first was dismissed within the last
year of the debtor’s current BK case (30 days after petition date)
TERMINATION Sec. 362(d)(1)
BY MOTION
(d) On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay provided
under subsection (a) of this section, such as by terminating,
annulling, modifying, or conditioning such stay--
(1) for cause, including the lack of adequate protection of an
interest in property of such party in interest;

S. 362(d)(2)
(2) with respect to a stay of an act against property under
subsection (a) of this section, if--
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective
reorganization;
Adequate Protection § 361
Adequate protection
When adequate protection is required under section 362, 363, or 364 of this title [11 USCS
§ 362, 363, or 364] of an interest of an entity in property, such adequate protection may be
provided by—
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity,
to the extent that the stay under section 362 of this title [11 USCS § 362], use, sale, or
lease under section 363 of this title [11 USCS § 363], or any grant of a lien under section
364 of this title [11 USCS § 364] results in a decrease in the value of such entity's interest
in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay,
use, sale, lease, or grant results in a decrease in the value of such entity's interest in such
property; or
(3) granting such other relief, other than entitling such entity to compensation allowable
under section 503(b)(1) of this title [11 USCS § 503(b)(1)] as an administrative expense, as
will result in the realization by such entity of the indubitable equivalent of such entity's
interest in such property.
11 USC s. 362 (d)(3) (SARE)
(3) with respect to a stay of an act against single asset real estate under subsection (a),
by a creditor whose claim is secured by an interest in such real estate, unless, not later
than the date that is 90 days after the entry of the order for relief (or such later date as
the court may determine for cause by order entered within that 90-day period) or 30
days after the court determines that the debtor is subject to this paragraph, whichever
is later--
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of
being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that--
(i) may, in the debtor's sole discretion, notwithstanding section 363(c)(2) [11 USCS
§ 363(c)(2)], be made from rents or other income generated before, on, or after the
date of the commencement of the case by or from the property to each creditor whose
claim is secured by such real estate (other than a claim secured by a judgment lien or
by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract
rate of interest on the value of the creditor's interest in the real estate;
362(d) (4) with respect to a stay of an act against real property under subsection (a), by
a creditor whose claim is secured by an interest in such real property, if the court finds
that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors
that involved either-
■ (A) transfer of all or part ownership of, or other interest in, such real property
without the consent of the secured creditor or court approval; or
■ (B) multiple bankruptcy filings affecting such real property.
Week 2: Property of the Estate and the Automatic Stay

Last week’s problem sets and Stern v. Marshal, Belingham etc.

I. STRUCTURE OF THE BANKRUPTCY CODE

II. ROLES OF EACH PARTY INVOLVED IN BANKRUPTCY CASE
III. PURPOSE OF BANKRUPTCY
I. Equal distribution to creditors
II. Giving a debtor a fresh start
IV. 3 IMPORTANT CONSEQUENCES OF A BK FILING
V. PROPERTY OF THE ESTATE (Sec. 541)
I. Exception: (retirement and educational trust accounts; income from services
rendered by an individual D postpetition)
VI. AUTOMATIC STAY
I. 2 Purposes
Federal Bankruptcy Exemptions Amounts
■ Section 522(d). The amounts allowed under the federal bankruptcy exemptions are adjusted every three
years on April 1 to reflect changes in the Consumer Price Index. The federal bankruptcy exemption figures
listed in this article are the April 1, 2019 figures. The federal bankruptcy exemptions will be adjusted
again on April 1, 2022.

■ Homestead
522(d)(1), (5) - Real property, including mobile homes and co-ops, or burial plots up to $25,150. The
unused portion of the homestead exemption up to $12,575 can be used for other property.

■ Personal Property
522(d)(2) - Motor vehicle up to $4,000.
522(d)(3) - Animals, crops, clothing, appliances and furnishings, books, household goods, and musical
instruments up to $625 per item, and up to $13,400 total.
522(d)(4) - Jewelry up to $1,700.
522(d)(9) - Health aids.
522(d)(11)(B) - Wrongful death recovery for a person you depended upon.
522(d)(11)(D) - Personal injury recovery up to $25,150 except for pain and suffering or for pecuniary loss.
522(d)(11)(E) - Lost earnings payments.

■ Pensions
522(b)(3)(C) - Tax exempt retirement accounts (including 401(k)s, 403(b)s, profit-sharing and money
purchase plans, SEP and SIMPLE IRAs, and defined benefit plans).
522(b)(3)(C)(n) - IRAS and Roth IRAs to $1,362,800.
■ Public Benefits
522(d)(10)(A) - Public assistance, Social Security, Veteran’s benefits, Unemployment
Compensation.
522(d)(11)(A) - Crime victim’s compensation.

■ Tools of Trade
522(d)(6) - Implements, books, and tools of the trade, up to $2,525.

■ Alimony and Child Support

522(d)(10)(D) - Alimony and child support needed for support.

■ Insurance
522(d)(7) - Unmatured life insurance policy except for credit insurance.
522(d)(8) - Life insurance policy with loan value up to $13,400.
522(d)(10)( C ) - Disability, unemployment or illness benefits.
522(d)(11)( C ) - Life insurance payments for a person you depended on, which you need for
support.

■ Wildcard
522(d)(5) - $1,325 of any property, and the unused portion of homestead exemption up to
$12,575.
Claims (controlling statutes)
s. 502 s. 503 s. 507 S 506

•Unsecured claim •Administrative claim •Priority scheme in •Secured claim is only to

•Properly filed proof of •Arise postpetition bankruptcy the extent of the value of
claim is deemed allowed •Receives priority over all 1.Domestic support and the collateral
unless a party objects claims related trustee’s fees •Undersecured claim is
•Unmatured interest is •Actual and necessary 2.Admin expenses under bifurcated as secured
disallowed cost of the estate s. 503 and unsecured portions
3.Ordinary course claims •Oversecured claim
during gap period entitled to postpetition
4.Employee wages interest and fees
5.Employee benefits •Lien securing a claim
that is not allowed is
6.Claims of grain
void
producers
7.Deposit for purchase,
lease or rental property
8.Income taxes
9.Claims to maintain
capital of fed depository
institution
10.Personal injury claims
or death due to DUI
Claims
Prepetition Interest

•Unsecured creditors
•Secured creditors
•Agreement must provide for allowance of interest payment

Prepetition Attys Fees/Cost

•Unsecured creditors
•Secured creditors
•Ageement must provide for the atty fees/costs or by statute

Postpetition Interest

•Oversecured creditor until equity is exhausted

Postpetition Attys Fees/Cost

•Oversecured creditor until equity in exhausted

•Undersecured creditor entitled to fees if contract provides for it
Distribution of property of the estate
(s. 726) (waterfall)
1. priority claims under 507 (which will include administrative claims) (pro rata among
claimants of the same claims; except if converted from chapter 11, then chapter 7
administrative claims over chapter 11 priority claims)
2. timely filed unsecured claims
3. untimely filed unsecured claims if creditor did not receive notice of the BK to file a
timely claim and POC is filed in time to participate in distribution
4. untimely filed unsecured claim
5. penalties and punitive damages
6. interest payments on all of the above
7. debtor
Statement of Intention on Secured Property
(30 days after petition/30 days after first 341(a)
mtg.)

Redemption •Pay full value of allowed secured claim

•Rest is discharged

Reaffirmation
•In writing; reaffirming debt that is otherwise dischargeable
•Test: will not cause undue hardship to the debtor
•Need court approval; hearing if debtor has no counsel

Ride through
Surrender •Usually for overencumbered property
Discharge

s. 727 s. 523
Objection to Nondischargeability
discharge
Property of the Bankruptcy Estate

Jeb wrote and owns a copyright to the song "Be Still My Beating Heart", a classic country
tune. He licensed the use of the song in the US to Beat Back Records, Inc. until 2018.
Beat Back agreed to pay Jeb 20% of the gross royalties it receives from its marketing
and sales efforts. Raylene Believes that Jeb stole the song from her; she has filed suit
in the US Dist Court seeking to invalidate the copyright and for an accounting of profits.
Jeb has counterclaimed for trade libel, and seeks damages arising from Raylene’s falls
statements about hs authorship of the song.
The litigation with Raylene caused Jeb to file for protection under chapter 7
■ Sally filed a chapter 7 bankruptcy case. She does not list in her schedules of assets
her interest in her 401(k) plan, which is a retirement plan subject to ERISA. She
also does not list her house that she lives in and which is subject to a joint mortgage
with her husband because it is held as community property with her husband. One
month after she files, receives a $10,000 inheritance from a long lost aunt’s estate.
Automatic Stay

■ Jack is being sued by Francis for fraud in the sale of a car by Jack to Francis. The
case is in state court. Jury selection is underway when a lawyer enters the
courtroom and hands to Francis’ attorney a copy of Jack’s bankruptcy petition she
had filed that morning. “Too late, bub,” says Francis’ attorney, who continues with
jury selection
■ Bank has a mortgage on Dee’s real property. Dee is in default and Bank has
scheduled a nonjudicial foreclosure sale for August 31 at 10:00 a.m. At the
appointed date and time, Bank conducts the foreclosure. The only people appearing
are Bank, its lawyer and Chris, the purchaser at the foreclosure sale at 40% the
value. The next day, Sept. 1, Dee faxes to Bank a copy of her bankruptcy petition
which shows that Dee filed on August 31 at 9:59 a.m. This is the first time Bank has
ever heard of Dee’s filing.
 Avoidance Actions
DIP/Trustee

Limitations
s. 546

s. 549
s. 544 s. 547 s. 548 Unauthorized
Strong Arm Powers Preference Transfers Fraudulent Transfers Postpetition
Transfers
Can the ch. 7 trustee avoid
the Bank’s security interest
in the equipment?
A. No, because the failure of the
bank to file a financing statement
was not based on a willful act;
B. No, because the Bank obtained a
personal guarantee from Dragon’s
president;
C. Yes, because the transfer would
be considered fraudulent transfer
under s. 548;
D. Yes, because s. 544(a)(1) allows
the trustee to avoid the security
interest
Avoidance Power (S. 544)
Dragon Co., Inc. borrowed $300,000
from the 1st National Bank and
entered into a security agreement has
a value of $175,000. The Dragon’s
president signed a personal guarantee
for any amount due under the loan.
Due to a computer glitch, a financing
statement is never filed on the
equipment as required by UCC Art. 9.
Several months after the parties
signed the security agreement, Dragon
filed for bankruptcy protection under
chapter 7.
Can the ch. 7 trustee avoid Avoidance Power (S. 544)
the Bank’s mortgage?

Li’l House Prairie, Inc. mortgage 2.5

A. Yes, because s. 544(a)(3)
acres of its land to 2nd National
applies;
Bank. The Bank does not record
B. Yes, because s. 544(a)(2) the mortgage. Shortly thereafter,
applies; Li’l House Prairie files a chapter 7
C. No, because this case involves
bankruptcy petition.
personal property;

D. It depends on whether there

was an actual bona fide
purchaser (BFP) involved.
Can the ch. 7 trustee use s.
544(a)(1) to avoid the computer
store’s security interest?
A. Yes, because the security
interest was unperfected on
the date of the bankruptcy;
B. No, because the security
interest is a purchase money
security interest;
C. No, because trustee had
constructive knowledge of the
financing statement;
D. It depends on whether trustee
has actual knowledge of the
financing statement.
Avoidance Power (S. 544)
In an effort to be efficient, Candace
decides to computerize her store’s billing,
payroll, and purchase order operations
despite her store’s struggling sales. She
visits a computer store and purchases 3
desktop computers, business software,
and other accessories totaling $35,000.
The computer store extended credit and
took a security interest and note in the
computer system.
With creditors repeatedly calling, Candace
decided to file a ch. 7 petition 15 days
after buying the computer system. Two
days after the petition was filed, the
computer store filed an appropriate
financing statement in the correct
location.
Preferences s. 547
1. Transfer

2. Of any interest of the D in property

3. To or for the benefit of a creditor on account of an antecedent

debt

4. Within 90 days (1 yr for insiders) of the petition date

5. Which enables creditor to receive more than the creditor would

have received in a chapter 7 if the transfer had not been made

6. Made while the debtor was insolvent (presumption: 547(f))

In the action, which of the
following is the most likely
outcome?
A. Jack will prevail because the
transaction constituted a
voidable preference;
B. Jack will not win because there
is a bona fide purchaser at
auction;
C. Jack will win because the
transaction is fraudulent;
D. Jack will lose.
Preference (S. 547)
Jack owes Jill $100,000. Jack owns a
Lamborghini worth $100,000. Tired of
excuses, Jill sues Jack and obtains a
default judgment. Jill then obtains a
writ of execution and has the sheriff
levy the car. The next week, the sheriff
sells the car at auction for $50,000 to
Humpty. Jack immediately files for ch
11 bankruptcy and sues Jill to avoid
the seizure of the sale. He is insolvent
at all relevant times.
Exceptions to Preference s. 547(c)
PMSI
Contemporaneous Ordinary
Exchange for new value Course of (within 30
given to the debtor Business days of D’s
possession)

$600 in Domestic
consumer Support
debt Obligation
Exceptions to Preference s. 547(c)
Less than
$6,425 of debtor Nonavoidable Floating Lien
whose debts are Statutory Lien (improvement in
not primarily s.545 position test)
consumer debt

New Value to or
for the benefit of
the Debtor
Transfer under 547(e)

■ (e)(1) For the purposes of this section--

■ (A) a transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale
of real property, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits
such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee;  and
■ (B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a
judicial lien that is superior to the interest of the transferee.
■ (2) For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made--
■ (A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30
days after, such time, except as provided in subsection (c)(3)(B);
■ (B) at the time such transfer is perfected, if such transfer is perfected after such 30 days;  or
■ (C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of--
■ (i) the commencement of the case;  or
■ (ii) 30 days after such transfer takes effect between the transferor and the transferee.
■ (3) For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred.
Problem 21.8 (p. 489)
DATE TRANSACTION AMOUNT BALANCE OWED
1/1 Beginning balance $80,000
1/3 Payment from Notions $5,000 $75,000
1/15 New credit from DMPB 4000 $79,000
2/10 Payment from Notions 2000 $77,000
2/28 New credit from DMPB 8000 $85,000
3/4 New credit from DMPB 9000 $94,000
3/10 Payment from Notions 1000 $93,000
3/17 New credit from DMPB 6000 $99,000
3/20 Payment from Notions 10000 $89,000
4/1 Payment from Notions 9000 $80,000
4/10 Notions files bankruptcy
Fraudulent Transfer s. 548
■ 2 years prior to bankruptcy ■ Charitable Contribution Exception
■ Actual fraud (548(a)(2))
– <15% of gross annual income
■ Constructive fraud
for the year or transfer; or
■ Not charitable contribution – Transfer was consistent with
■ Self-settled trust or similar device practices of the debtor in
made by the debtor, in which the making charitable contribution
debtor is the beneficiary and intent
to hinder, delay, defraud, creditors
(10-year look-back) (s.548(e))
■ Good faith defense (s.548(c)) by
transferee who took for value in
good faith: or may enforce
obligation to the extent of value
given
Fraudulent Transfer s. 548
ACTUAL FRAUD
■ Transfer or obligation Made or
incurred by debtor
■ Actual intent to hinder, delay or
defraud any creditor
– Badges of fraud UFTA s. 4
– Prove subjective intent to
defraud
CONSTRUCTIVE FRAUD
■ Debtor received less than
“reasonably equivalent value” for
transfer or obligation at the time of
transfer AND
■ One of the following is satisfied:
– Debtor was insolvent at the
time the transfer was made
(pl. burden to prove; no
presumption)
– Debtor engaged in business
with an unreasonably small
capital as a result of transfer
– Incur debts beyond debtor’s
ability to pay
– Benefit of insider under
employment K not in OCB
Actual Intent (CUVTA) s. 3439.04(b)
(b) In determining actual intent under paragraph (1) of subdivision (a), consideration may be given,
among other factors, to any or all of the following:
(1) Whether the transfer or obligation was to an insider.
(2) Whether the debtor retained possession or control of the property transferred after the
transfer.
(3) Whether the transfer or obligation was disclosed or concealed.
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued
or threatened with suit.
(5) Whether the transfer was of substantially all the debtor's assets.
(6) Whether the debtor absconded.
(7) Whether the debtor removed or concealed assets.
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to
the value of the asset transferred or the amount of the obligation incurred.
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or
the obligation was incurred.
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was
incurred.
(11) Whether the debtor transferred the essential assets of the business to a lienor
that transferred the assets to an insider of the debtor.
Adequate Protection s. 361
When adequate protection is required under section 362 , 363 , or 364 of this title of
an interest of an entity in property, such adequate protection may be provided by--
■ (1) requiring the trustee to make a cash payment or periodic cash payments to
such entity, to the extent that the stay under section 362 of this title, use, sale, or
lease under section 363 of this title, or any grant of a lien under section 364 of this
title results in a decrease in the value of such entity's interest in such property;
■ (2) providing to such entity an additional or replacement lien to the extent that
such stay, use, sale, lease, or grant results in a decrease in the value of such entity's
interest in such property;  or
■ (3) granting such other relief, other than entitling such entity to compensation
allowable under section 503(b)(1) of this title as an administrative expense, as will
result in the realization by such entity of the indubitable equivalent of such entity's
interest in such property.
Chapter 11: First Day Motions

Use of Cash Payment of Cash Retention of Key

Collateral Prepetition Management Employees
s. 363 Wages Motions (KERP)

Continuation of Employment of
Postpetition Utilities CROs,
Financing professionals,
s. 366 TMS
Ch 11 First Day Motions
Cash Collateral
■ Secured creditor’s consent
■ Provide adequate protection to
secured creditor under 361 (D has
burden of proof)
■ Budget/cash flow projections
Utilities
■ Can’t refuse or terminate utility w/in
20 days of petition date
■ Adequate assurance of payment in
form of deposit or security
■ Can terminate after 30 days and no
adequate assurance of payment
■ No admin claim
Prepetition Wages
■ Can’t exceed limits under s.
507(a)(4) and (a)(5)
■ Need consent of secured creditor of
cash or court order
■ Paid as priority anyway
KERP s. 503(c)
■ Can’t pay incentive to insider to remain in the debtor’s
business unless
– Bona fide job offer from another business =/>
compensation
– Work is essential to the survival of business and
– Can’t be more than 10X the regular employee
or 25% of insider’s salary
■ No severance of more than 10x the regular employee
severance
■ Transfers outside the ordinary course
Utilities s. 366
(b) Such utility may alter, refuse, or discontinue service if neither the trustee nor the debtor, within 20
days after the date of the order for relief, furnishes adequate assurance of payment, in the form of a
deposit or other security, for service after such date. On request of a party in interest and after notice
and a hearing, the court may order reasonable modification of the amount of the deposit or other
security necessary to provide adequate assurance of payment.
(c)(1)(A) For purposes of this subsection, the term “assurance of payment” means--
■ (i) a cash deposit;
■ (ii) a letter of credit;
■ (iii) a certificate of deposit;
■ (iv) a surety bond;
■ (v) a prepayment of utility consumption;  or
■ (vi) another form of security that is mutually agreed on between the utility and the debtor or the
trustee.
– (B) For purposes of this subsection an administrative expense priority shall not constitute
an assurance of payment.
■ (2) Subject to paragraphs (3) and (4), with respect to a case filed under chapter 11, a utility
referred to in subsection (a) may alter, refuse, or discontinue utility service, if during the 30-day
period beginning on the date of the filing of the petition, the utility does not receive from the debtor
or the trustee adequate assurance of payment for utility service that is satisfactory to the utility.
Ch 11 First Day Motions
Retention of Restructuring
Professionals
■ Outside the ordinary course
■ Need approval under s. 363(b)
Cash Mgmt System
■ For convenience
■ Need new DIP account for
postpetition deposits/checks
Setoffs s. 553 / 362(a)(7)
■ Helpful to unsecured creditors; get
paid in full for the amount set off
■ MUST be MUTUAL DEBT; no
triangular setoffs; need obligation
not just practice
■ Claim must be allowed
■ Claim must not have been
transferred to creditor postpetition
or within 90 days prior to petition
■ Debt to debtor must not have been
incurred within 90 days prior to
petition
Reclamation Rights UCC 2-702; s.
503(b)(9); 546(c)
■ Available to suppliers of goods
■ BK filed within 45 days of shipment, can reclaim what was shipped
■ Within 20 days of shipment, can get admin claim under 503(b)(9) for invoices incurred
during that time
■ Elements:
– 1. need to be in writing
– 2. shipped while D insolvent
– 3. within 45 days of petition

■ Doctrine of Necessity /Critical Vendors (s. 105; 363) not applicable in 7th and 9th Circuit
Postpetition Financing s.364
■ s. 364(a): unsecured credit in ordinary course entitled to administrative claim
■ s. 364(b): Unsecured debt not in ordinary course, need court approval to be entitled
to admin claim
■ s. 364(c): If cannot obtain unsecured debt, 3 debt options:
– Superpriority
– Lien on unencumbered asset of the estate or
– Secured by a junior lien on property of the estate that is subject to a lien
■ s. 364(d): if incurring debt secured by a senior or equal lien on property of the estate
that is subject to a lien, only if (PRIMING LIEN):
– The trustee is unable to obtain such credit otherwise; and
– Holder of the existing lien is adequately protected
■ Subject to scrutiny by Committee on validity of lien, terms of DIP financing
Cross collateralization v. Roll up

Cross
Roll Up
collateralization
Obtains liens on Prepetition lien is
pre and included with the
postpetition assets postpetition
of the Debtor security interest

Elevates
Securing more than undersecured
one loan against creditor to suddenly
debtor’s assets becoming fully
secured