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I. INTRODUCTION....................................................................................2 A. STATISTICAL OVERVIEW..................................................................................................2 B. TRUSTEES.................................................................................................................2 C. BANKRUPTCY COURT.....................................................................................................3 D. DEBTOR V. CREDITOR...................................................................................................3 II. BANKRUPTCY ESTATE.........................................................................4 A. COMPOSITION OF ESTATE...............................................................................................4 B. AUTOMATIC STAY........................................................................................................6 C. EXEMPTIONS FROM ESTATE..............................................................................................8 D. CLAIMS AND DISTRIBUTIONS..........................................................................................16 E. DISCHARGE.............................................................................................................19 III. CHAPTER 13....................................................................................22 A. OVERVIEW..............................................................................................................22 B. POLICY..................................................................................................................23 C. PROCEDURE.............................................................................................................23 D. LITIGATION..............................................................................................................25 E. EXCEPTIONS TO CRAMDOWN..........................................................................................26 IV. CHAPTER 7......................................................................................27 A. BACKGROUND..........................................................................................................27 B. PROTECTION FOR LOW INCOME DEBTORS.............................................................................28 C. MEANS TEST............................................................................................................28 D. STATISTICS..............................................................................................................30 V. CHAPTER 11.....................................................................................30 A. INTRODUCTION.........................................................................................................30 B. SUCCESS OF CH. 11S...............................................................................................31 C. OBJECTIONS.............................................................................................................31 D. DIP LENDER...........................................................................................................31 E. GETTING IN & OUT...................................................................................................33 F. COSTS...................................................................................................................33 G. 1121................................................................................................................33 H. 1122................................................................................................................34 I. 1124.................................................................................................................35 J. 1126.................................................................................................................35 K. 1129................................................................................................................35 L. ABSOLUTE PRIORITY RULE PROBLEM.................................................................................40 VI. AUTOMATIC STAY & ADEQUATE PROTECTION.....................................40 A. 362.................................................................................................................40 VII. OPERATING IN CHAPTER 11.............................................................43 B. CASH COLLATERAL.....................................................................................................43 C. SETOFF..................................................................................................................44 D. POST-PETITION FINANCING............................................................................................46 E. AVOIDANCE POWERS...................................................................................................52 F. 365 & EXECUTORY CONTRACTS..................................................................................59 G. TAX CONSEQUENCES OF BANKRUPTCY...............................................................................62 H. STATUTORY LIENS......................................................................................................62 I. FRAUDULENT CONVEYANCE............................................................................................63 J. EQUITABLE SUBORDINATION............................................................................................65

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K.

NEGOTIATION

AND

CONFIRMATION

OF

CHAPTER 11 PLAN........................................................66

VIII. ENVIRONMENTAL & MASS TORT CLAIMS..........................................69 A. INTRODUCTION.........................................................................................................69 B. ASBESTOS...............................................................................................................70 C. ENVIRONMENTAL CLAIMS..............................................................................................71 D. MASS TORT............................................................................................................73 IX. 363 SALES.....................................................................................73 A. OVERVIEW..............................................................................................................73

I. Introduction
a. Statistical Overview
1.5 million bankruptcies this year in U.S. Out of 1.5M, only 30,000 are non-consumer o 100 of those are the big ones o 1.1M consumer will be Chapter 7 o 400,000 will be Chapter 13 CC companies said lots of people have income and can be in Chapter 13 o 5 years of fighting: (1) existence of such people and (2) how to identify them o Forced lots of people to file in 2005 before new act became effective Standards set to force into 13 so high that very little people fit it o White feels that CC companies probably wrong Not a very big # that were in 7 that could be in 13 o For now more Ch. 13s than pre-2005, but equalizing again Out of bankruptcy cases, over 70% are no-asset cases o Nothing left for creditors

b. Trustees
US Trustee appointed and resides in Washington o Appoints other trustees throughout US to be US Trustees o They appoint trustee panel which are practicing attorneys Judge not involved with assigning TIB o Setup by US Trustee o Have 341 hearing where debtor answers to creditors and trustee Nobody comes because in majority of cases there are no assets Some repeat lenders will send someone everyday to the court to ask questions in every 341 case to try to find other assets (Sears) If you are TIB, how do you find assets? o 341 hearing is one way o Most TIBs are pretty passive because they know that generally

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wont find anything Chapter 13 Standing Trustee o This person is a full-time trustee o Sits with debtor to help him work out plan of payment and figure out, along with debtors lawyer, what he can pay to creditor over 3-5 years or whatever DIP (debtor-in-possession) in Chapter 11 Cases o Usually old managers or theyll bring outside managers in to run it Used to appoint trustee years ago generally a smart lawyer They make stupid business decisions Would you rather have knave or a fool? Sometimes bring in reorganization companies o For most purposes DIP is basically a trustee DIP can control what happens to things so motivated differently In Chapter 7, trustee just sells assets to maximize returns So DIP is similar to trustee, but not identical

c. Bankruptcy Court

Judges appointed to 14 year terms o Bankruptcy judges like the Chapter 11 cases because it makes their life a little less boring Jurisdiction o You can file almost anywhere you are incorporated, have a business location, or where subsidiary has filed So typically have power to file, if in big case, half a dozen jurisdictions o Why go to NY or DE? They do more cases, so less work for debtors lawyer and more predictable to go to NY or DE judges Getting judge for many years, not days Predictable judges In many places they will assign judges based by week Rigged system so you know what judge youll get when you file Really this leads to massive forum shopping Jurisdiction issue is a little screwy

d. Debtor v. Creditor
You would much rather be debtors lawyer because if a huge company like United Airlines or GM you will staff tons of people on it because of

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II. Bankruptcy Estate


all the creditors o Creditor attorney only staffs a few people to squeeze whatever little money out you can Counter-intuitive, but thats the case In theory, youre setting up an estate in which assets are collected to be sold off and money distributed to creditors 541(a) says any property wherever located o (a)(1) also says legal or equitable interests o (a)(3) assets that will be brought into estate by actions trustee takes after appointed o (a)(5) any bequest you get within 180 days of filing Proceeds of pending lawsuit where parents enter bankruptcy 150 days after plane crash that killed daughter who will get settlement from NWA for the crash? Not in estate because the wrongful death action which they had within the 180 day window wasnt inherited Who owns a wrongful death action? Depends on state law But if owned by survivors, dont get it because not bequest, devise or inheritance This could be different if in a different state the action was owned by the estate of the deceased, in which case the beneficiary of the estate (parents) receive money by bequest/inheritance o Important to realize that bankruptcy code is built on back of state law General proposition is that stuff before filing date is in the estate and stuff after the date is out o Thats slightly inaccurate, but in general thats the rule Salary o If work a week before the date and week after, part of the salary after petition not in estate Not like the bonus case (Sharp v. Dery) because the company is obligated to pay the wage, unlike the bonus Bright Line Rule o Fresh start after the date, debtor gets fresh start instead of continuing to struggle under debt Otherwise bankruptcy is irrelevant Problem 5.1 (130) o Shouldnt he have to give up the retirement account (last thing on list of 5.1)? 4

A. Composition of Estate

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No, even though unfair to creditors - $1M in an IRA Congress supports policy that encourages to invest for retirement So really the line isnt all that bright when push comes to shove Product of lobbying efforts o Suggests a virtue of state law over federal law whats that? In order to change uniform law, have to lobby and change all 50 states Easier to change Federal law rather than uniform state law Uniform law is more conservative; doesnt get changed every year To change bankruptcy code, contribute to senators campaign Why federal income tax and bankruptcy statutes are hard to read Uniform codes read like a novel compared to the Federal statutes o All of these things are in the estate even though arose after date of filing because they are attached to and arose out of something within the state Problem 5.3 (Post-Petition Work) o Argument to not include income from crop is that at date of filing, debtor works for herself, not for the estate But crop belongs to estate because its a pre-petition asset So go to the trustee and ask to pay her to take care of the crop o Where work has to be done afterwards there has to be a negotiation Trustee will want to pay to take care of crop because thats where the money will come from o But what if assets in estate are illiquid? The creditor will possibly want to lend the money in order to secure their pay Could possibly get a loan, but not sure 362(a)(3)-(5) may give bank pause for the post-petition loan but probably meant to restrict pre-petition claims So what does the bank do? Just get the bankruptcy court to bless the grant of the security interest 363 gives power to trustee in bankruptcy to borrow money and other such powers Probably want courts approval, and with that youre 5

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golden o So this problem is really there to present with issue of what is the right outcome when the debtor has lost the benefit of a particular asset, but the asset still needs care Problem 5.4 o Spendthrift trust wont be in estate under 541(c)(2), but worried shell die within 180 days and trustee will step in and say money of estate o If worried about this, file immediately Every day that goes by is a day lost, so file now and maybe send mother to Mayo clinic to get her to last longer than 6 months If doesnt live 6 months goes to trustee, if longer then yours o Trustee will generally negotiate over this and perhaps settle Problem 5.6 o Liquor license is property and part of estate despite Article 9 saying its not property so cant grant security interest in it State has an interest in regulating liquor licenses Licenses are for sale as practical matter, but only in limited way But probably treated as property and will be treated more and more so Lots of recent Article 9 cases that reject old rule o Transfer Restriction is invalid 541(c)(1)(A) says all of these restrictions struck aside in bankruptcy o So debtor has to fall back on argument that license is not property Thats a state law issue probably But for sure if state law says its property, then debtor is out of luck Problem 5.1 o What about account where debtor is trustee of nephews trust account? o 541(d) says that if doesnt have equitable interest, then not in estate Only has legal interest pay taxes, manage, etc Nephew owns equitable interest as beneficiary

b. Automatic Stay
Lawsuits stop immediately upon filing o Collection agencies can no longer call and ask to pay o Everything really just stops, with exception of the exceptions in 362(b) 6

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o Repo company cant hold car but has to give it back Automatic stay is unbelievably powerful o Important benefit to the debtor Problem 6.1 o Creditors must stop collection actions or they violate stay and will be subject to damages Under 362(k)(1) can get actual damages, fees and costs, and punitive damages if appropriate Damages could be really big When individual bankruptcy and someone keeps coming after you, you have a lot of power Who is most likely to mess around and who is most likely to stay away? The nastiest creditors will be the most sophisticated But sometimes have screw-ups that will continue to harass o Service Lien Almost all state law says if provide service on something and have possession, you have a lien So probably a mechanics lien on car if the mechanic still has Stay may force him to give car back, but will probably continue lien secured by the car If gave car back pre-petition, though, garage is screwed and just becomes unsecured creditor o Secured Creditor If have valid perfected security interest it rides through bankruptcy and can be enforced on the asset If wants to keep the car, has to make a deal with the creditor o Can keep and pay the creditor if they agree o Or he can redeem the car o Or he can negotiate with the creditor on a Reaffirmation So he will have to pay for the car, one way or another Even though after bankruptcy he wont be liable personally itll be a nonrecourse debt Problem 6.2 o 521 Can make out schedule of assets/liabilities Schedule of income an expenditures can be made out But she doesnt have copies of paystubs Disclosures intended to make fraud more difficult and encourage fair revelation of assets 7

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521(b) says must provide certificate from debt counseling agency Can possibly have her do it online that afternoon Also needs tax returns though, but dont need those until creditor asks for them o 521(i)(1) Does it authorize you to file without the things she doesnt have as long as file in 45 days? Doesnt say that so we dont know Nobody knows what that means o What risk do you take as a lawyer if you file this? 707(b)(4)(C), (D) You can make reasonable estimate of car just by looking at it and checking KBB Just says after inquiry do you just take her word? We dont really know what this means Answer probably different in every jurisdiction Rules in every jurisdiction and they arent the same Must find out local rules/practices on this issue o Petitioners attorney cant be paid out of estate Must get fee and filing charge up front or you wont get paid Must ask client how they will pay for bankruptcy after explaining cost CC folks like that because drives some people away from bankruptcy This is part of what came out of 2005 amendments Impossible to know how many people are deterred by this People will come to you with sob stories but you have to get paid

c. Exemptions from Estate


They operate in and out of bankruptcy o Operate out of bankruptcy in cases of seizure, garnishment, etc o Collection business would go find assets to seize Usually done illegally (bribing bank workers, etc) Doesnt work that way much anymore o Generally see exemptions outside bankruptcy when creditor gets judgment and levies asset Go into court and assert right to property

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as exempt Started as exemption rules in state law litigation o Bankruptcy law has mostly shoved if off the stage Exemption Election o 522(b)(2) provides election to go under 522(d) or 522(b)(3) (A) Reverse preemption State law gets to preempt the federal law Its this way because Congress says they can o 30 days after file must make election between state law or federal law More than majority states have opted-out 522(b)(3)(A) says take the exemption of the state Use the state you lived in for past 2 years and if moved in that time, use place you lived at 180 days prior to the last 2 years Its avoiding people fleeing to generous state like FL in the face of problem Always a big fight over these exemptions Close to putting federal cap on homestead exemption Interstate movement is one of the things that will do that for the big cases in the paper o In some cases, but not all, you get two choices Problems with exemptions o Classification of assets The exemptions are labeled with things like annuities and have to decide what annuity means to determine if certain things are exempt In some cases, may be unlimited exemptions, so very important o Also problem with cases about proceeds Exemption for wages and money for child support Dollar amounts dont matter if child support, its exempt But what about wages? What you get from your employer for the work you provide is very clearly wages But once you get paid, you no longer have wages but have money, so its different o JJ doesnt care about any of these rules for the course he just wants us to know how important the rules are and how squirrelly the decisions can be when judge wants to favor certain party to 9

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case Security Interests in exempt assets? o 522(c)(2) Can give security interest in exempt asset o Example Car worth $12,000 wholesale, $17,000 retail, $12,500 secured debt Exemption under Federal law is $3,225 ( 522(d)(2)) What will happen to this car in bankruptcy? 506(a)(2) says to use replacement value instead of sale value for individual case under Chs. 7 or 13 So have $17,000 to split among creditor, debtor and trustee in bankruptcy o Assuming get $17,000, creditor gets $12,500, then debtor gets $3,225 based on exemption, and then trustee gets the rest o If doesnt bring $17,000 but only $12,000, all goes to the creditor More common in real estate than other places that value of collateral will exceed amount of debt and exemption Assume $140K mortgage and $20K exemption. Trustee interested only if sells for more than $160K Problem 8.1 o Furniture is all exempt o Law books 522(d)(6) says, if shes a lawyer, her law books are in, but only get 2025 instead of 2400 Probably foolish to put down 2400 But how can she get the other 375? o They wont have homestead exemption, so they can use half of that under (5) for other things o Cash value on insurance She gets this under either (d)(7) or (d)(8) whats the difference between the two? White not sure what fits there o Disney Stock Nothing generally, but maybe under homestead exemption excess (5) o Checking account Cant get in Texas, but can get it under unused portion here o What about Harvs vehicle on blocks? Doesnt qualify for automobile exemption because has to 10

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be operating probably Problem is that defined by state law if state exemption so difficult to know generally Question whether this is a motor vehicle or not But will get the moped o Motorized wheelchair? 522(d)(9) says professionally prescribed health aid is exempt As long as prescribed and probably will be In Texas, get 42.001(b)(2) as well But what about Wyoming? Not exempt there, so what about there? Wheelchair is very important to him, so will the creditors seize it if they arent in bankruptcy? They have a right to seize it Could get reaffirmation. What is generally reaffirmed? Generally car o Almost always they need it and theres a security interest in it What if creditor says will repossess unless pay total amount of debt? o But you say car only worth $10K, so will reaffirm for that because under 506 thats the value Creditors wont do this o Why would you reaffirm to pay a debt for more than the asset is worth? Its worth more money because he knows it and its history He probably has transaction costs built in too If doesnt have car to get to work tomorrow, may lose job Clearly if have security interest in wheelchair, hell reaffirm because its very important to him Problem 8.3 o The Numbers $25K exemption amount, mortgage for $130K, FMV of $180K, auction value of $129K Expected to be lowball sale o Under what circumstances is TIB interested in house? Only if more than $155K (mortgage + exemption), plus commissions for sale ($6K), so now have to get $161K to make it interesting 11

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o What will happen if up for sale? Could go for $180K on market for a few months and pay commission, etc Assumes whole sales process, advertising, waiting, etc o What about foreclosure sale or auction? Faster but lower price, about $130K TIB will abandon property because will get nothing Bidders will be mortgagee for sure Bank will pay by debt forgiveness and will bid up to $130 o That means other buyers will have to bid above that amount and you will pay mortgagee $130K and the rest will be paid to debtor and TIB So bidding against mortgagee who brings just debt theyll write-off In these circumstances, mostly selling for amount of the mortgage Mortgagee will turn around and then resell it on market hopefully for the $180 But banks not looking to make lots of money in these cases Tough to get mortgagee to agree to reaffirmation Problem 8.4 (variation of it) o Debtor goes into bankruptcy and has fridge bought from Sears who has security interest ($400) Also has furniture, appliances, household goods Then has loan for $3000 with perfected security interest in the household goods o What happens to Sears? Interest recognized in bankruptcy because interest automatically perfected and will get the fridge Maybe ask for reaffirmation o The other loan is not purchase money, however (generally either cost to purchase or amount borrowed to pay someone to get good security interest given at time of purchase to fund purchase) Loan is non-purchase money security interest that is perfected o So what happens with the loan? 522(f)(1)(b) - to extent that the lien impairs an exemption In other words, can only avoid the lien to the extent 12

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of the exemption Assuming exemption higher than value, then avoids full lien o Policy Rationale Things secured in non-purchase money interests are things of no value to creditor but high-value to debtor Photographs, beat up furniture from kids, etc Collateral here is like hostage collateral High-value to debtor and low-value to market Is it immoral to have hostage value on credit? What good is security? Its incentive to pay and thats what going on here But a lot of people think that its immoral if theres no resale value to you, despite being efficacious You wont see much of this going on anymore because of this Problem 9.1 (216) o Need to look at 522(b)(3)(A) Go back 2 years and if hasnt been in one place for 730 days, you go to place where he was 180 days prior where he was for the longest period of time That would be Florida, but you have to determine what domicile means What are the indicia of domicile? Appears to be intent of stay Getting license, changing address, etc But only place hes ever owned is in Chicago If we decide domicile always in IL, then easy case On the other hand, he may argue that he was domiciled in FL during that time and qualify for the unlimited homestead exception The point is that the word domicile is there and that thats a function of state law o Assume domiciled in FL. Will the FL homestead law cover the property in IL? FL probably only protects FL residences Hes screwed in that case Hes probably going to lose, but he will probably try to see if IL courts are generous to him But thats the way the law is probably everywhere will only protect residence in FL Problem 9.4 o The tension is that know there are things that will help protect assets, even though might think its morally wrong to make him 13

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judgment proof Problem 9.2 (216) o Fraudulent conveyance UFTA 4 explains fraudulent conveyance as to creditors o Conveyance Conveyed house to husband and wife Another conveyance he owned the cash from the scam as the business owner, so he also conveyed to wife as well Assume they get divorced 4 months later. Does she get half the house? o Yes its entireties property o Characteristic is that individual creditor of one spouse cannot take property o Out of reach of all creditors except for joint creditors What is the conveyance then? Is it the purchase of property or the transfer of half the value to his wife Effects of buying house was to change cash into the house Was cash exempt before the deal? o Clearly not o But property owned by entireties is exempt under 522(b)(3)(B) o So converted non-exempt property to exempt property Mere act of converting is not, in and of itself, a fraudulent conveyance o Have 2 cases in book from 8th Circuit Both cases involved advice from lawyers about buying exempt property In Tveten, denied discharge but Hanson granted (page 210) Decided same day Taken to task about it o Tells us state of law about fraudulent conveyance is quite conflicted Its left to judicial discretion Lawyer better be careful before saying can or cannot do something UFTA Analysis o 4(a)(1) - Actual intent to hinder, delay or defraud any creditor You prove actual intent by looking at UFTA 4(b) Obligation to an insider Debtor retains possession after transfer (here retained 50% control) 14

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Substantially all of assets? not sure here Sued or threatened suit prior that happened Conceal assets didnt do that Value of consideration received equivalent to value of asset transferred or amount of obligation incurred o Assume for sake of argument that property worth what he paid; $10M But wife got 50%, so he paid $10M and got only $5M So probably fail here You dont have to prove all prongs of 4(b) o 4(a)(2) no adequate compensation Insolvent or became insolvent at time of transfer UFTA 2(a) Balance Sheet Test sum of debts is greater than all assets at FMV Not true balance sheet test because that test is based on book value So FMV is deviation from balance sheet test UFTA 2(b) cant pay debts as become due If fail either of these tests, then you are insolvent o Assume you can prove intent, what does the TIB do now? 544(b) if eligible creditor, then trustee able to avoid transfer on their behalf So does trustee get $10M or $5M? One case says that as to his own $5M share, its permitted just changing from non-exempt to exempt Other issue is giving rights to wife o So 2 transfers Maybe successful in striking one down or both What about the argument of wife who says that doesnt work outside home and law shouldnt discriminate against homemakers Not valid argument. We can for sure get the $5M that was transferred to her If get Reed logic, then can get other $5M assuming prove other prongs of intent under UFTA 4 If UFTA isnt available: Look to 727(a)(2) court wont discharge debt if transferred property with intent to hinder, delay or defraud creditor within 1 year prior to date of petition So the money has been transferred to wife for at least $5M 15

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Could be we can also get him under sub (4) or (5) o 522(q)(1)(B) doesnt apply either because requires exemption under 522(b)(3)(A) which homestead election If debtor owes any debt arising from violation of Federal Securities laws, but only for exempt property from homestead exemption o Summarize He may lose the $5M to wife May lose the whole $10M If can convince court under UFTA that fraudulent conveyances, taken away and put in estate Can be denied discharge under 727 523 vs. 727 Discharge o Creditor wants 523 discharge because gets rid of all other creditors so that income goes to pay only creditors debt o Going to be better credit risk after bankruptcy than before Problem 9.4 o Doctor who doesnt have insurance and then gets malpractice claim? Probably evidence of fraudulent conveyance o Hard question of when to put your views ahead of client Is it ok to tell client immoral to not buy insurance while hiding assets offshore?

d. Claims and Distributions

In chapter 11, the type of claim you have and type of claim you earn is important o Oftentimes there are large payoffs in Chapter 11, unlike Chapter 7 To determine claims, you must start in 502 before going on to 507 502(b)(2) what is unmatured interest? o Post-petition interest interest owed for any period beyond filing of period o 506(b) provides exception for over-secured creditors Simply overrides 502(b)(2) Creditor gets the fully secured amount of loan plus interest and fees until value of collateral is used up Valuation Problem Hard to prove worth of collateral GM plant has millions in environmental liabilities, for example, before it is remotely useable o So may really have negative worth as-is Do you value with Replacement value or Market value?

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o Market value will be tiny, or negative. Replacement value will be huge o This is a huge issue in valuation do you apply FMV or replacement value? What about where the asset is depreciating quickly? o Eastern Airlines $200M worth of airplanes, then FAA passes noise control and after bankruptcy only worth $50M because cant fly without noise limiters (expensive) o Do you value at beginning, middle, or end, especially when over-secured at beginning and under-secured at end o 506 doesnt really answer this question/issue Whole lot of issues In theory, you get interest if over-secured creditor In practice, doesnt happen all that often People in bankruptcy generally dont have flourishing business and collateral is probably devalued o Almost always collateral worth less than debt When its not, going to be very hard to prove o Sometimes there is collateral that has easily determinable value Publicly traded stock, short-term debt instruments, cash accounts, securities accounts, etc But of course when someone winds up in Chapter 11, that is seldom the type of asset they have o Summary is that pre-petition interest is added, post-petition is not, unless over-secured, but thats very rare 502(c) o Asbestos manufacturers Perfectly solvent when went into bankruptcy, but had been sued by everyone under the sun o Cant value the claims in the aggregate But Manufacturer cant reorganize without dealing with massive claims o The real answer is that its an almost insoluble problem JJ doesnt know of any company with large asbestos to come out successfully from bankruptcy One thing tried is to setup trust and put money in trust so that when people get sick they make claim against trust Problem is that if pay people early-on, will pay people who will never get true sickness and will have no money for those left at end who end up getting sick and really need the money o So for many companies this doesnt matter, but for others its 17

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everything 503 is allowance of administrative expenses o The whole cost of running company in bankruptcy is an administrative expense Once in bankruptcy, if Chapter 11, its expenses of running business o What about in Chapter 7 individual bankruptcy? Not debtors attorney because not part of the estate Remember that the estate is a separate entity Trustee will have some admin expenses, but almost none o They are huge in Chapter 11, though o Difference between admin expenses and claims Claim means stuff UP TO petition Admin Expense means stuff AFTER petition o Keep these two sections distinct 507 o Here were talking about both expenses or claims o Admin expenses near top because if they arent paid, cant do anything If dont pay wages, then the company ends, obviously There are a whole bunch of people that you have to pay to keep things going o (a)(1)(A) is pandering to divorce lobby to make them look important, but admin expenses will actually be paid first (1) (C), (2) o (a)(4) Covers wages and salaries and such up to $10K, indexed Many execs who make more than this will take money out before filing usually in form of cashiers check from the company No fraudulent transfer because is payment for services rendered What justifies employees being up this high? Mostly just a policy issue we feel employees need to get paid their wages Does bankruptcy code treat all creditors equally? o No. This is one example o Also secured v. unsecured o Fishermen and farmers are favored o Just look in 523 or 522 the exemptions and exclusions are all policy driven We like to pretend theres equality, but in fact there is great inequality 18

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o You want to be as high in list as you can in 507 so that if assets dont go around, you arent left with nothing o Lots of variations and deviations form equality o (a)(7) If landlord goes into bankruptcy, you get the deposit money back before most creditors All renters care about this in regards to landlord o For exam, at least realize set of tax rules in here that are important that will allow Federal Government or taxing authorities to (1) have priority and (2) to be exempt from discharge to some extent Govts interest will be protected Look at (8)(C) & (D) Employer has to pay some types of employment taxes into trust fund and some paid directly Imagine you invest in a restaurant that goes into bankruptcy and turns out never paid money from trust fund to the taxes o They get priority before you get your equity investment back. Sucks (C) has no time limit on it.

e. Discharge

Secured Creditors o Nothing in code really explains what happens o If perfected security interest in automobile, trustee wont bother to sale o Theres a section that allows trustee to abandon property That leaves creditor and debtor to talk to each other, reaffirm debt, or could repossess car to sell for the loan o Right is to have the asset Same is true in Chapter 7, 11, & 13 Assume debtor continues to make payments and creditor doesnt do anything o It just rides through the bankruptcy If its secured, it cannot be discharged without creditors approval (which will never happen) o Effect of discharge in bankruptcy on secured assets Discharge will discharge all personal liability After bankruptcy, can only go after asset Before bankruptcy can go after the person too, seize wages, etc E.g. Car loan for $10K, worth $5K. After bankruptcy, can 19

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only repossess. Cant garnish wages or anything for other $5K In most cases, things like this will have reaffirmation o Negotiation between secured creditor and debtor, but sometimes debtor will continue to make payments and creditor does nothing When does that, can only go after asset o Student loans will almost always be reaffirmed because generally someone else is on the hook Another place about what creditors can do is 1129(a)(7), (8), (b)(2) In re Sharpe (233) o Argues under both 523(a)(2)(A) & (B) o She flunks (B) because representation of wealth wasnt in writing He was evidencing wealth by places they ate, fancy clothes, behaving as rich man Presumably more effective representation that writing, but oh well What kind of circumstances fit exactly in this case? In re Hill is exactly the kind of case theyre thinking about where you go get a loan and bring false statements about wealth o Fraudulent income statement, etc o Type of fraud been around a long time She loses because verbal communication, not in writing o She also flunks (A) Has exception regarding financial conditions because theyre covered by (B) So what kind of false pretenses and misrepresentations are contemplated here? Identity theft claiming youre someone youre not In re Milbank fits well here received loans on false pretenses of wanting to fix marriage. o Those are false pretenses o What about getting him under 523(a)(4)? Terrible statutory construction Generally relate things back, not forward, so if fraud shouldnt be modified by while clause, should be after it, but thats not clear Perhaps comma helps, so indicates that while clause should modify fraud What is an example of fiduciary relationship where there could be fraud? Everything in bankruptcy no debtor owes any fiduciary duty to creditors and vice versa But is there a fiduciary relationship when 20

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o In re o

approaching bankruptcy as member of board of a company? o Once become insolvent, creditors, in effect, become owners of company shareholders have nothing to gain, all money to creditors o So if youre a lawyer and Visteon calls you in, then afraid that shareholders are out do you owe creditors a fiduciary duty at that point? Whats the difference between a fiduciary duty and a normal debtor-creditor relationship? o Can withhold irrelevant information from creditors that you arent required by contract to disclose So Ms. Baker loses as legal realist, might think she would have won Hill (237) Deed of trust is just the term for a mortgage in California Technical reason to call it that But in CA, theyre basically talking about a mortgage So they have a second deed of trust and first deed of trust Lender issuing line of credit has second deed of trust In April line is $190K, then in October they raise to $250 So have huge line of credit What do they do for a living? He works in an auto parts store and wife distributes catalogs for some companies His actual income is $39K with overtime Hers is $26K Basically they have combined around $60K In April, they showed they were making $145K and in October $190K October deal not done through broker whereas April deal was Court is suspicious as to why this is Hills afraid their buddy, who they used previous 6 times, would notice theyre playing games and would not let them do it So she deals directly with bank What other datum did bank have to make this decision? CPA letter. Certified her business because she is selfemployed, but the signature doesnt match letterhead Is judge accusing them of forgery? She doesnt say it, but it surely seems shes hinting at it 21

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Implies that forgery or someone not from CPA office o Bank says they lied about income on 2 occasions as well as the CPA letter Say that material misrepresentations that they relied on and the debtor knows its false and intends to deceive But the final elements are reliance and that reliance is reasonable Court says reliance wasnt reasonable Bank really only relied on value of the home Bank finally sold for value of first trust deed o Only $450K, and if worth $856K in that October transaction, why didnt second deed trust holder buy? Probably not sure of value

III. Chapter 13
A. Overview
Allows individuals with steady stream of income to pay off debts with a payment plan over 3-5 years Unless you can show undue hardship, will be pushed out of Chapter 7 o Debtors now have the ability to push a debtor out of 7 and into 13 o CC companies afraid of abuse that would rack up balances then wipe out instead of pay off o Those in higher income stream will get pushed here 2005 amendments o Presumption of abuse for debtors who failed means test in 707(b) o Waiting period between filings if filed previously Waiting period between filings is 8 years The events are the filing dates o Mandatory credit counseling o Limits to homestead exemptions o Allows the court to convert case from 7 to 13 if/when discover that satisfies the requirements Eligibility o Proceedings must be voluntary Cannot be forced into 13 Tricky policy, however, because the debtor might be forced into bankruptcy and then only available option to remove to 13 o Individuals must have some source of income This is very broad though Doesnt just have to be wages

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o Debt o Must

Used be that way and were termed wage-earner plans Now just stock dividends might count cap Must be less than prescribed in 109(e) have received credit counseling in past 180 days

b. Policy
2005 amendments began in 1997 and debates lasted until 2005 Was intended to discourage Ch. 7 filing where debtors dont get enough returns o In 13, theres a payment plan worked out where all disposable income paid to creditors over period of years o In 7, they sell everything in estate to payoff creditors and that often fetches sub-market returns Over 3-5 year 13 plan, can potentially pay off a lot more o In Ch. 7, no post-petition income is counted, but it is taken into account in paying in Ch. 13 Often as little as 10% return in 13, but many times get 0 in 7, so its better Stricter auditing requirements o Attorneys have to audit filings to make sure everything complies o Attorneys cant encourage filers to take on more debt in order to be sure they are paid More generous discharge under Ch. 13 o Things that werent allowed in 7 are allowed to be discharged in 13 o But discharge is only modestly better than Ch. 7, but still more than in 7

c. Procedure
Similar to 7, except that plan is created to force wages into estate There is still an automatic stay once the petition is filed Trustee here is pretty much full time o Money under plan given to trustee and the trustee then distributes to creditors according to plan o Thats part of the 2005 amendments. Used to be that debtors made payments directly to creditors Repayment Plan Mandatory o Must provide for full payment of 507 priorities o Must provide equal treatment for members of same class So 2 credit card companies cant be treated differently, but can treat CC company and mortgage company differently because mortgage may be more important

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If theres a reasonable basis for treating them differently, then probably approved o Must include supervision for trustee in bankruptcy Repayment Plan Optional o Designate classes as long as no unfair discrimination Must be reasonable basis for treating classes differently o Modify rights of secured parties with consent of creditors o Allow creditors to retain lien o Main reason people choose 13 is to save houses but most others will choose 7 One, they dont want to give up post-petition income Two, they dont want people looking over their shoulder for 5 years They already arent doing well financially, so dont like oversight Only 30% who start generally even finish a 13 plan Mortgages o 1322(c)(1) allows missed mortgages to be cured until foreclosure In the plan, you would say $5000 behind, so will make it up in plan So can propose a plan where for 5 years you are paying down the arrears but the future accruing are being paid normally Thats why the plan is calculated off disposable, so it already takes into account that you pay mortgage before calculating how much youll pay monthly to cure arrears o Amount necessary to cure is same as though debtors were not in bankruptcy o Debtor must still pay current mortgage o Court needs to give permission... Unsecured Creditors o Best interest test Cant pay unsecured creditor less than they would receive under 7 This is why many creditors wanted the 2005 amendments This means have to go through theoretical Ch. 7 to see what the unsecured creditors would have gotten o Debtor must devote all disposable income to payments plan 132(b)(1)(8) o Maintain good faith effort to repay their loans Secured Creditors o Secured Creditors look to 1325(a)(5)(B) o Cramdown is the process of reducing an undersecured claim to the value of the collateral 24

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d. Litigation

Can be imposed over objection of secured creditor o Also called: Lien-stripping Strip-down o 506(a) Bifurcation of secured claims This is essentially lien-stripping Debtor has to pay the fully secured amount under the plan, but then the deficiency goes into the pool with other general unsecured So if the pool is recovering 10%, only gets 10 on the dollar $12,000 secured car, worth $8,000. $8,000 secured, then $4,000 unsecured So assuming 10% unsecured recovery, $8,400 keeps car o 1322(b)(2) Says that plan may modify rights of holders Essentially lets judge change original terms of the claim o 1325(a)(5)(B) Allows court to confirm cramdown over secured lender objection Saying that what you are going to give over the plan must be more than the value on the day of the plan Thats in (ii) o All provisions work together o Under 1325(a)(5)(B), courts find that repayment of the crammed down claim must include interest payments

Value of underlying collateral o Foreclosure value, replacement value, or midpoint? o Associate Commercial Corp. v. Rash Replacement value is appropriate standard when debtor invokes lien-stripping option because thats the value the debtor will have if were to purchase same asset alone This is now built into the statute in 506(a)(2) It says use replacement value, then for personal applications, even defines replacement value as price a retail merchant would charge for property So in case of car, what it costs to buy from lot, not cost to buy at auto auction This issue is really important in Ch. 11 contexts right now

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Not sure if this will be applied in Chapter 11 This would be big issue in Chrysler sale if it got there because how do you value the factory that is useless because of all the crap from it, but costs millions to build What is appropriate interest rate to use? o Till v. SCS Credit Corporation Formula rate (prime rate + risk premium) Prime rate is the rate only a select few get the best rate a lender can possibly get Scalias dissent formula rate under-compensates creditors for risk of default 7th Circuit said that should have used the contract rate Presumptive rate is whatevers written on the K Thats what the S.C. overturned What would Liz Warren say in response to Scalias dissent? Shell say the market is fixed and not competitive, so the right number is a lower number Thomas defected from conservatives and didnt go along with them

e. Exceptions to Cramdown
2 instances where cant use cramdown Home Mortgage Exception o 1322(b)(2) says plan can modify rights of secured creditors other than claim secured only by interest in real property that is principal residence o Because of housing bubble, many people have homes valued less than mortgages Makes this pretty controversial now Negative equity-holders in residences cant use cramdown provision in bankruptcy, but can do it for vacation home, 2nd homes, etc So easier to retain vacation home than primary home which is odd o Legislation proposed to change provision but failed in senate Hope is that lenders and debtors will renegotiate on their own, but thats not happening Rep. Frank has attempted to reintroduce legislation o Should it be reformed? Will reduce foreclosures and allow debtors to hold onto homes Will make lending more expensive because lenders will have to hedge risk of losing value

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This would mean it would go counter to governmental interest in promoting homeownership Hanging Paragraph Exception o 1325(a) paragraph about 910-day window for auto debts o Prohibits cramdown for purchase money security interest in car purchased within 910 days (2.5 years) prior to filing of petition Purchase money security interest is just an interest created specifically to make the purchase Secured creditors think that will drive people into 13 and out of 7, but in 7 auto companies get reaffirmations In 13 they dont reaffirm because they get a statutory reaffirmation at lower price GMAC and other lenders say not going to go along with the 2005 amendments if going to drive everyone out of 7 and into 13 where they get screwed This was the compromise o Lots of people with outstanding debts wont be able to use 13 strip-down on them Purchase money security interest Issues o Interest now where if debtor purchases car with purchase money security interest but then trades it in with negative equity. Owes $20000 but worth $17000 o If go and trade in for new car, they roll the negative-equity into the new car ($3000) and werent sure if that is purchase money o Many circuits have said that the overage added into the car loan is still purchase money Is secured creditor on the old car the same as the new one? Not necessarily Could have borrowed from Chase for 1st, then GMAC for 2nd who pays negative equity, so not necessarily same creditor

IV. Chapter 7
A. Background
BAPCPA (2005) o Debtors able to get discharge regardless of ability to change o After BAPCPA, created means test under 707(b)(2)(A)(i) and if fail test, then deemed to be abusing Chapter 7 Can then be dismissed or converted into Ch. 13 Means test created because of lobby of consumer credit industry/lobby o Mostly this is CC industry o In 1978 could choose Ch. 7 for any reason o 1984 case could be dismissed if filing constituted substantial 27

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abuse That wasnt defined in the Code and lots of litigation over it Split among courts Not many cases were dismissed o In 2005 means test enacted to calculate net income available to repay unsecured creditors Calculate net income available to repay unsecured creditors This was an effort to extend 1984 rule with a more brightline test 707(b) applies only to individual debtors whose debts are primarily consumer (b)(1) Abuse under 707(b)(1) can be established by failure of means test or through bad faith/totality of financial circumstances test in 707(b)(3) o Can rebut by proving special circumstances under 707(b)(4)

b. Protection for low income debtors


Means test doesnt apply to debtors whose combined income equal to or lower than state median income o 707(b)(7)(A) Only judge or US trustee can bring 707(b) motion to dismiss for below median debtors o 707(b)(5) o Creditors cant do this o Practically speaking, this means that it really doesnt happen because US Trustee doesnt know and judge never looks at this stuff

c. Means test

Take current monthly income (average of past 6 months income so not looking toward future), subtract deductions allowed in Code, then multiply by 60 o Deductions allowed are living expenses, projected payments per month on actual secured debts and actual priority debts o This is based on table by IRS (if pay more, limited on how much you can deduct) o Multiply by 60 to get to 5 years to approximate 5 year repayment plan o You then take lesser of (1) greater of 25% of debtors nonpriority unsecured claims or 6575 OR (2) 10950 If the calculation income is greater than the other equation, deemed to have abused system Shorthand method of applying means test o If monthly disposable income is less than 109.58, presumption of abuse never arises o If more than 182.50 always has presumption of abuse 28

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o In the middle ground, depends on amount of unsecured debt Based on formula, theres an incentive to minimize current monthly income and maximize allowable deductions o Ch. 7 will have lower monthly income and will be more likely to rent instead of own because thats unsecured debt which cant be subtracted against income o Debtor also has incentive to increase amount of unsecured debt, especially in that middle ground, because the income will be less than 25% and will discharged anyway Under what circumstances will debtor have 3 years vs. 5 years o 3 years if below state income o If above, then 5 years and means test applies o May not have to pay all of his disposable income Problems calculating income o If relative helps debtor with expenses, how regular do they have to be to count as income? o If laid off prior to bankruptcy, since current monthly income uses past 6 months records, might fail means test but will really need it Then doesnt get into 13 either because have to be employed to be there o People with lots of projected future earnings (student who will have high-paying job after graduation) Even though can pay with future earnings, current monthly income likely 0 and wont fail means test, but probably abusing o Incentive to keep income low Debtor might not want to work overtime prior to filing because will increase income and be more likely to fail test o Provision allowing subtraction of full amount of secured debt under 707(2)(A)(iii) inserted to secure automotive lenders approval o Incentive to incur new secured debt before filing for bankruptcy This takes away from income Debtor rather buy car or vacation home and have asset which is counted against income and helps them qualify So instead of paying unsecured creditors, they are able to keep assets instead Takeaway o Means test is way to calculate debtors ability to repay vs. what they would have to pay in Ch. 13 o Wont be applied to most cases because most debtors below the state median anyway, to which means test doesnt apply

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d. Statistics
Total petitions 14,073 in Jan 06 and 34,445 in June 09 Only about a 3rd complete the repayment plan o No one releases official data, though, so not certain of this o A lot of academics argue that discharge isnt example of success So many things can happen so maybe not system People lose jobs, get better jobs and payoff, etc Ch. 13 as percentage of all bankruptcies o Huge spike after 2005 amendments, but has settled back o Averaging around 28% outside of the spike Around Jan 2006 is when a professor started tracking with PACER data but will be off because doesnt count reopened cases or transferred cases o 13s as percentage of noncommercial bankruptcies is steadily declining from 42% to 25% between 06 and now Ch. 13s as percentage of all Chapter 7 and 13 cases o Around 33% or so

V. Chapter 11
A. Introduction
Reasons to do Chapter 11 o Selfish preserve your salary for a bit o Try to make it survive wishful thinking o John Connally example too in 7 could see transfer of docs as fraudulent conveyance and TIB would have done that In Ch. 11 hes DIP and wont challenge Question whether security interest of secured creditors is valid o DIP wont raise that question because hes in bed with the secured creditors o How does unsecured creditor raise it? Court will allow unsecured creditors committee to make the claim DIP essentially run by the secured creditor But wont go unchallenged if problem Easy to understand why someone with small business and no great chance of reorganization will go into 11 Why dont out-of-court workouts work more often? o Has to be unanimous out of court All creditors have to agree o Negotiating hand stronger in bankruptcy or under threat of bankruptcy than would be otherwise Creditors may have small return in bankruptcy Absolute priority rule says if people above dont agree, cant give anything to lower priority if shorts 30

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the higher priority at all o Lose protection of the automatic stay as well Can get judgments against you during negotiations and they will levy property and take liens on assets and tear apart the process o Easy to see why work-outs often dont work where Ch. 11 will But management hesitant to do Ch. 11 because will likely be replaced

b. Success of Ch. 11s


Success in sense of plan filed or business sold in 363 sale is pretty high If liquidating, however, probably very low success rate Ch. 11 is essentially a long negotiation, not litigation o Litigation is a mischaracterization o Its a long negotiation with lots of hiccups o This is part of the fun of bankruptcy law You get to negotiate a lot and litigate

c. Objections
Early on will have objections to stays and such But later on, will have challenges to things like security interests o In trustees personal interest to avoid security interest Representing the unsecured creditors Income is determined by how large you grow the estate for distribution Paid on contingent fee basis If professional trustee and get right cases, can make a lot of money o That interest is gone in Ch. 11 because manager is DIP who has other interests

d. DIP Lender
Has tons of power Will require whatever they want o Force to hire restructuring officer (probably suggest a few people) o They want to forum shop Almost all big ones in NY or DE More experience with these large restructurings Going to live with the judge for years If no confidence in the judge, going to be difficult few years They know how the game is played o Wont have to argue with, and educate, the judge So they will require debtor to file in forum of their choice 31

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Most big cases have moved to S.D.N.Y. Is that bad or good? o Probably good. Maybe some cons, but for the most part, its good that these judges and lawyers are so familiar with process/rules that can do restructurings much more efficiently o If in different district, have to educate judges on how to run the case and such but they already know that in S.D.N.Y. and D.D.E. o Will also be interested in first day order Want to be in place where first day order is favorable Have to have authority to do anything in bankruptcy, so need authority quickly to make payments, pay salary, etc Judges usually sign first day orders to keep business going Sometimes temporary and have hearings later for final orders o Rules in jurisdiction about paying off important suppliers Thats important for Ford Cant pay off pre-petition creditors in theory, but in practice theres an exception for particularly prized unsecured lenders o Want jurisdiction where they let us roll-up debt If have pre-petition secured debt and will make postpetition loan, want jurisdiction where DIP can take money payments on new loan to pay old loan and leave DIP facility as only facility Why do they want this? Will get priority status under 507 Case in book says cant do that, but they do it all the time Not too sure how Law firm that does these things will have a grid o One column for each Circuit and then rows for these things they want and how it is in that Circuit o Then they can look at the needs for the particular bankruptcy and choose the best forum Why does DIP Lender want to lend in Ch. 11? o They are higher priority because they will take security Other claims are stayed as well, so full hack at the pot o Who is most likely candidate for DIP lender? Existing secured lenders because they already have sunk costs If debtor fails and other DIP lender comes in, gets screwed So current secured lender wants it 32

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e. Getting In & Out

Typically negotiation will all happen before filing, ahead of time

Prepackaged plan o Will work if have fixed and identifiable set of creditors o Get deal setup before hand and then go in and do it 363 Sales o Section allows debtor to sell goods in ordinary course without court approval o Thats how when K-Mart files 11, can still open doors and sell goods next day which are technically part of the estate o But what about selling properties in a state? Yeah. Can do that too But need court approval because not ordinary course sale o GM and Chrysler are most elaborate forms of this They both went through 363 sales Very unusual sales, but now not uncommon to sale going concern business in 363 sale Big debate over whether thats a good thing or bad thing o Controversial section o Often are an auction

f. Costs
Doesnt cost a lot more than going through standard merger for the large guys But when a little company, costs a lot more as percentage of assets o Apparently theres an irreducible minimum of costs that make up larger portion in little cases So probably pretty efficient if big case If little, though, probably not o Probably need a way to make it more efficient SEE PAGE 404-06 IN TEXT

g. 1121.

Outlines the exclusivity period o (d)(2) it can be expanded by not more than 18 months o Why do companies sit there so long Many companies have a big problem getting money loaned to them So most ch. 11s require DIP financing Why dont secured creditors that were already in there go in and propose a liquidation plan? o Well youd have to figure out a plan that got votes o Youd also have to go out an hire a fancy lawyer You dont have that kind of money, nor do you want to 33

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spend that kind of money if youre not sure how itll work So what actually happens? o Youd have to hire an accountant, a financial analyst, etc o Then they have to go through all the books and propose a plan o It is time consuming and extremely expensive o As a practical matter, the creditors are probably like a small dog on a leash. They bark a whole lot, but if you let them off the leash, they cower o The worst day of their lives is when someone says ok, file your plan So its in here as though it were an important threat. Probably is in some cases, but not all. The thing you could do, is file a liquidating plan o Are you going to get that through the judge in Delphi? The judge feels as though the constitution blesses chapter 11 When you go to lift the stay in the first month, youre going to lose To the secured creditors, it might be a great deal Unsecured creditors, though, wont get anything Secured creditors take all the assets, come out maybe ok JJs suspicion is that this threat doesnt carry much credibility. 1121 has these restrictions. Query what these restrictions are going to do.

h. 1122

Whats a claim and whats an interest? o Claim creditor o Interest shareholders usually they will get nothing here. Critical language is substantially similar. o Cant put secured and unsecured creditors into the same class o Each secured creditor is in its own class They are usually separate EXAMPLE: Taking 2 unsecured creditors Assume Z is a group of trade creditors and Y is a group of unsecured bondholders o How do we decide whether they are substantially similar? What is the nature of their claim against the company? Theyre not secured. They should get the same pro-rata share These two creditors should get the

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i. 1124

same distribution o The same priority in the bankruptcy state, the same priority outside the bankruptcy state o Cant discriminate if one is fat and one is skinny o Probably the fact that you are the same level and will share pro rata will make you similar, should be able to put in the same class Now suppose you want to put Y in class 4 and Z in class 5 o Can you put substantially similar creditors in different classes and give them different treatment? o 1122 doesnt appear to restrict that. o Only a ONE way restriction, not TWO way If in same class, must be similar. If similar, does NOT have to be same class

A claim is unimpaired if claim is going to be paid in full If the payment term is extended, though, probably you are impaired In some cases, there will be questions about that o It will easy to impair somebody o Give them 90 on the dollar Or you could change the interest rate, extend the payback period

j. 1126

Assuming class has more than 1 person in it, how do the numbers in 1126(c) apply? Need at least 2/3 in amount. o If 1 person makes up 1/3 of the debt in a class, they have the power to block a plan Just having one of them say no, says you dont meet the approval process in 1129(b)(8). o So you need to look at this o Secured creditors can be crammed down in some cases.

k. 1129
Most important provisions o Referred to as creditors Bill of Rights 1129(a)(3) o Good faith is unclear o The most likely bad faith plan is a company that has 1 mean creditor, otherwise healthy and doing well o No one knows what good faith is until the judge tells you.

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1129(a)(7) o Applies to each member of the class Each holder of a claim Each person, not each class o Must get as much as you would have gotten in liquidation on the filing of the plan EXAMPLE: Assume would be liquidated for 500,000, then plan has to pay at least 500,000 Interest? Waiting 3 years and not collecting any interest so recovering less than 500K because of TMV You dont get any interest value. You eat that loss. o Somewhere or another, theres a higher value somewhere Its very hard to figure out It would cost quite a bit of money to do the actual valuation Valuation hearings are very expensive and very unlikely to happen 1129(a)(8) o The class has to accept it o Go back to 1126, and heres where the voting becomes important o Youre going to negotiate with all the classes and agree, or youre going to do a cram down. 1129(a)(10) o So even if you do a cram down, some classes will have to accept Youre have to have at least one impaired class accept Sometimes theyll put accountants or layers in a class to accept But have to be impaired. Stand still for 80% o What is the argument when this is proposed in the plan? 1122 doesnt require similarly impaired creditors to be in same class If youre going to attack this, would say this is BAD FAITH But there are some cases that say you cant gerrymander the class Cant just put accountants and lawyers into the class In the GM case, can they put Axel in there for 80% of their pay and have them vote for the plan? Quite possible that I can find a legitimate class and have them vote for the plan. o Example Class 1 is a $50MM note. Secured

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Plan gives $10MM and a 30 year mortgage Class 2 is a $50MM deficiency, and were going to give them 10%. Class 3 is $3MM of trade, and were going to give them 70%. No prohibition against giving 2 classes of unsecured creditors different percentages In liquidation, they share equally But nothing in 1129 that says specifically you have to treat each unsecured claimant the same Creditors would argue bad faith In chapter 13, there are some cases that say you cant pay off your doctor 100 cents on the dollar and give peanuts to everyone else Why do you need 1129(a)(8) and (a)(10)? o Under (a)(10) need at least one class of claims accept o Under (a)(8) you need all classes, but if not, can bump to (b)(2) which isnt available for (a)(10) 1129(b)(2) o (A)(i) Secured Creditors Must receive cash payments equal to allowed claim Deferred cash payments totaling at least allowed amount of such claim, of a value of at least the value of such holders interest What does that mean? If $1M claim, second clause about value requires that it be PV o First part means get $1M, but of a value equal to estates interest or whatever means has to get the present value o Thats the Codes way of saying setup to get PV of $1M Must be careful throughout Code. Some places requires PV and others dont So if have collateral worth $1M, you get PV of $1M If have collateral worth $1M and $2M claim, only the $1M is secured and so will be included in 2 classes, secured and unsecured, and only secured gets the PV cash payments o (A)(ii) Here sell off asset and security interest attaches to whatever proceeds they get How did this happen in Chrysler? When Chrysler sold to Fiat, Fiat paid essentially 37

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nothing So they get secured interest in nothing We do NOT normally see this. Very unconventional Normally theres a bid on the asset or whatever and then money goes to estate o (A)(iii) We dont know what the language here means Indubitable equivalent is unusual language o (B)(i) Unsecured Creditors Must pay off in full This wont ever happen in bankruptcy because almost by definition dont have money to pay unsecured creditors that amount OR o (B)(ii) The only thing junior to unsecured debt are shareholders So this rule means that cant give shareholders ANYTHING if not going to pay the unsecured creditors less than full amount ABSOLUTE PRIORITY RULE o So what is the minimum you can give to the unsecured creditors here? 0 Can give 0 and still cram-down the plan Quite infrequent to have a plan crammed down o Especially if big bankruptcy have to prove the requirements for all of the creditors and stuff and its hard and expensive If youre one of the $700K why cant debtor just give nothing? o Say not giving anything to SH so also not giving anything to unsecured creditors o What protects them from doing that? Cant give 0 if would have gotten more under liquidation 1129(a)(7) requires that give at least as much as would have gotten under Ch. 7 liquidation Going to have a very long argument out of court about what liquidation value is Probably rarely going to get from (a)(8) over to (b)(2) o If youre negotiating, youre going to say havent satisfied (a) (8) and havent satisfied the vote o Have to always consider other creditors while negotiating with one Particularly if creditors with big claims that can stop you If give something good to one creditor, all others will come after you for same treatment 38

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o Involuntary creditors? People who have a products liability claims against Chrysler, for example People didnt voluntarily lend money to debtor but it was done involuntarily Example o Class 1 is $50M mortgage Will get $10M cash, $50M mortgage 30yr + interest o Class 2 is $50M deficiency Will get $5M (10%) over 10 years The deficiency is the amount that the loan exceeds the value of the collateral So this is the same creditor as Class 1, but here unsecured o Class 3 is trade 100% on the dollar payment o Assume the mortgage votes no on this plan. Can you approve it? A class has voted no, so not satisfied under (a)(8) and will have to go to (b)(2)(A) for secured If the interest is the PV of $40M, then can be approved because PV of cash paid (interest and cash payment) is equivalent of value ($50M mortgage) o So potentially could be satisfied o Will it be indubitable equivalent? Could argue for it, though not sure what it means exactly But if original mortgage was 10 years and jacked up to 30 years here, arguably not indubitable equivalent What about the $50M deficiency? Thats (b)(2)(B) for unsecured Can say 10% on dollar because not violating absolute priority rule If they paid any money to SHs, different matter but here they didnt So then trade credit. Still cant approve. Why? (a)(10) Class 2 certainly impaired and Class 1 possibly impaired Only class that voted yes was Class 3 and they arent impaired, so no impaired class voted and cant be approved How do you get around it? Can you setup a 4th class with lawyers and bankers and such? 39

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o What o o

Probably not because bad faith about cutting trade back to 90 Doesnt that make them impaired? Quite possible that it will and trade probably wants to do continuing business relations, so theyll probably stay onboard for a 10% cut o If do that, then probably ok

l. Absolute Priority Rule Problem


In case of little businesses often, owner will say will put some personal money if can keep company but wants to cut back creditors Question is whether thats an exception to absolute priority rule What about a reorganization that happens through 363 that circumvents the Ch. 11 rules? o For example, for the entrepreneur that wants to protect his investment (equity) at expense of creditors, why not setup separate company and then do 363 sale to the new company? Not sure that would work o 363 has a true difference, namely that open risk others will bid and have to hope you win Not sure you will win Many people would argue that we need exceptions for these little cases

VI. Automatic Stay & Adequate Protection


A. 362
Problem 19.1 o Secured creditors want liquidation because they can get $ and walk away If can convince court that 140 is the correct value, they can possibly convince court to lift stay because undersecured o What if judge says 220 is correct? Then probably adequate equity cushion because of 180 debt and 220 value Can accrue interest here o Suppose 6 months down the road and creditor not agreeing to plan and they want to cram-down. Then what do you want to argue? If argue 140 will get PV of 140 If convince 220, then get PV of the secured amount, or 180 This is under 1129(b)(2)(A) o Notice when wants stay lifted, wants low value declining. When arguing for rights in cram-down, want to argue higher

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Tension on what you want to do o This example is not unrealistic o What do you get for adequate protection when debt is 140 and value is 220? You really get nothing. Interest really is just a payment for waiting, so it doesnt count With equity cushion, you dont get anything The cushion IS the adequate protection o Assume now that there is creditor 2 has security interest of 100 Judge picks 220 as value He tells Creditor 1 no adequate protection because equity cushion What about Creditor 2? Assume subordinate to Creditor 1 o Creditor 1 has 40 cushion o So Creditor 2 should ask for adequate protection and should get it o Hell is a place where youre a subordinated creditor Those who take 2nd mortgages ought to think of themselves as unsecured Adequate Protection o Most common form periodic payment to creditor that makes up for decline in value of collateral Debtor is selling off inventory, for example, and not replacing with the same amount, or piece of property is depreciating, etc Debate about issue and must be prepared for it Often will negotiate for adequate protection under threat of motion o Value of secured creditors collateral should be the same going out of bankruptcy as they do going in But they dont usually think thats true Thats one of the reasons why creditors will look for ways to stay out of bankruptcy o Look to 507(b) If this happens, he goes to the head of the list of people seeking administrative claims Treated as HIGH priority creditor What if never asked for adequate protection or asked and never got approval? Probably no dice here because language says provides adequate protection It has to have been provided 41

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Even if ok but never ordered by court o You want order, though cases arent clear whether order is required or not o Keep 507(b) together in mind with 362 and drive hard to get a court order to try to cover yourself Problem 19.4 o 362(d)(1) what does for cause mean? Includes lack of adequate protection But besides that, not sure what it means Perhaps anything that would cause collateral to decline substantially in value But assume cant prove that o 362(d)(2) She doesnt have any equity interest Theres a $350K PMSI and a $200K non-PMSI security interest You count both, so $550 security interest and only worth $500K, so no equity in property So what about necessary to effective reorganization? Operative work is effective o Without that condition, youd never get stay lifted The argument here is that there is no possible effective reorganization o Can be necessary to reorganize, but it wont be effective, so cant qualify here o Creditor will argue this that wont be effective o Unsecured 2nd creditor wants to push for this immediately because Creditor 1 is over-secured, so if drag out a year, accrues interest and depreciation which will eat into Creditor 2s recovery Problem 19.5 o Projections probably cant be confirmed by objective market participants o This isnt a case about bringing someone in to reorganize and make a profit and such Its about the real estate market on one building Just a 2-person case, not what you would design Ch. 11 for, but it has had an impact on the law, expressed in 362(d)(3) o 362(d)(3) Either debtor has to file plan likely to be confirmed, OR This really has no chance of being confirmed so go to test 2 Pay monthly payments generated from income of estate equal to interest at non-default rate 42

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VII. Operating in Chapter 11


b. Cash Collateral

Has to be pay current interest If cant do it, stay is lifted o This is pretty harsh. Whats going on here? Forcing out of court work-outs Problem 19.6 Allocation of Adequate Protection Payments o Shes made $1M in payments during bankruptcy o Do you allocate it to principal or interest? Nothing in the Code says what should be done No right to interest payments in bankruptcy o But what if its negotiated for that. 1/2 to principal 1/2 to interest o If treat as interest it will never help the unsecured creditors o Unsecured creditor committee will want it to go to pay down principal so that they will get some recovery Should be suspicious of any kind of agreement splitting the payment Think about alimony payment dichotomy in tax Payor wants it to be alimony for deduction, payee wants it to be property settlement so not in GI So they can make agreements mutually beneficial for tax reasons Be suspect of it

Problem 20.1 (450) o After bankruptcy, what can you do? Most normal business functions, like buying and selling inventory Anything in ordinary course, generally o But cash complicates it 363(c)(2) Has to either have consent of any entity with interest in it or court order Bank has security interest in inventory and ,under UCC 9315, its proceeds as well, That of course undoubtedly happened So this is cash collateral under 363(a) o As a practical matter, has to have court order or consent So if creditors lawyer, what does this mean while in negotiation a week before filing? Want money in the bank to cover self about setoff o What has to exist before setoff in state law? Bank has to have claim against debtor and debtor has to have claim against bank Equal in position 43

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So if debtor + spouse are the creditor and debtor, then wont work Has to be equal If dont have security interest, then dont have that problem o So does it make sense to tell client to move money if bank is unsecured creditor? Its certainly not illegal Could even be malpractice not to tell them Should certainly tell them They should move money If big customer, will be a signal to the bank that youre about to file Would only do it if unsecured o Why will debtor go to bank to negotiate week before filing? Will be Part I in first day order Has to have permission day 1 for cash to pay employees and such Except in rare cases, there will be negotiation between secured creditor and debtor before filing And in most cases, the secured creditor will likely be the DIP financier, so theyll want to work with you anyway

c. Setoff

Problem 20.3 (451) o Debtor has $61K in the bank and owes bank $50K as assignee 553(a)(2) says no setoff because claim was transferred by 3rd party to creditor within 90 days before filing petition o If take a big loan out, bank will require that you open an account with them and maintain some sort of balance It offers them setoff To the extent money in the account, it in effect reduces exposure on the loan If loan of $100K and $15K in account, have exposure of only $85K, not $100K o (a)(3) Exception for when bank gets setoff money right before bankruptcy Within 90 days, while insolvent, and for purposes of setoff Bank has to require compensating balance for life of loan, more than 90 days, to be ok for setoff If not, bank is jumping the absolute priority rules They are unsecured and make themselves secured ahead of all other creditors

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Whats the policy that says cant favor one creditor over another when you can do it all day long outside of bankruptcy? o Absolute Priority Rule o Have a bit of skepticism about this, though o The theory is that want to discourage creditors from ripping debtor apart and taking things away necessary for reorganization Probably cant really make the case for this though, but thats the argument If the debtor is insolvent, if dont do anything, what do you get? You dont get 100% and get paid pro rata with all other unsecured But on the setoff deposit in bank, you do get 100% of that cash So thats the argument against the cash deposit if doing it to subvert bankruptcy o But here, the creditor is buying a debt of the debtor while already has obligation to debtor of $61K (a)(2) says cant set this off Whats the policy rationale? Congress probably had normal suspicion about people who wanted to seize bank accounts They are immediately liquid so when seize it, the company is done the very next day o It needs money So partly whats behind this is being careful about not letting bank account be seized so quickly What else might be dubious about this? Never buys debt for 100% If bought the receivable from supplier for 20 on dollar, he has a 50K setoff, but only cost him 10K, so they are making large profit off of this while seizing cash of company o Need to see whats going on in 553 Policy is quite clear in (a)(3) its like a preference that the Code does away with Policy in (a)(2) isnt quite as clear Perhaps its about making it risky for creditor to seize bank account because we think thats important o If going to bankruptcy, want to draw down cash Some people think if dont tell them to do that, its malpractice 45

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No moral obligation to keep money at that bank (unless part of agreement) If large industrial company withdraws money from account, signal to bank that thinking about bankruptcy o How else can you signal that youre thinking about bankruptcy during workout? Invite a prominent bankruptcy lawyer to the workout negotiation. Can just sit there at the table. Problem 20.4 o Youre going to want to move to appoint a trustee Sucks to represent equity in these cases. Usually get nothing o So whats the lever trying to get hand on when goes to 1104? Get a trustee appointed but what will he do? Examiner just investigates and reports to court. Trustee replaces CEO and runs the company How will this help the equity holders? Threatening executives who are making under-table deal with VC guys will get distribution to management and if can get trustee, that all goes away and get level playing field o Are they going to get trustee appointed? Not very likely Never see trustees in Chapter 11 cases When redone in 1978, drafters made conscious decision to go with DIP instead of trustee Choice between knaves and fool Lawyer as trustee will be fool so made conscious decision to leave guys there who are at fault in screwing up business, but thats better than having a fool managing Process developed outside Code is new management, but picked by, and forced on company, by creditors, not court o Should tell client well go in and make noise, but probably wont do much Kiss investment goodbye and move on Will wind up with nothing, or very close to it

d. Post-Petition Financing
Need money after filing petition to be able to run business Day file petition, need to know how youre going to get money to run the company o Need to pay employees, checks written have to clear, pay 46

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utilities, pay suppliers o 90-day open credit Deliver on day 1 and have to pay 90 days later Common form of credit with suppliers In effect, lending money so become unsecured creditor for those 90 days With American Axel, may have already been cut short on this Last few weeks probably on COD terms That eats up cash o So need money 364 o (a) is about accruing ordinary course, unsecured debts Wages, utilities with DTE, etc o (b) is slightly different End up in (b) when need unsecured credit for things not in ordinary course Here were talking about some type of bigger, longer-term loan that isnt done every day o (c) goes another step further (1) allows debt to jump ahead of all administrative expenses specified in 503(b) or 507(b) This means go to head of line This is a big deal compared with (a) or (b) (2) allows security interest on unsecured things Wont really help big bankruptcy like Ford where everything already secured because outstanding debt is massive (3) allows junior lien on assets already secured o (d) is the big one Until get here, not hurting anyone but changing priorities Here you actually jump ahead of secured creditor This is very rare Can get super-lien senior to all other liens on property of estate But have to show that cant get credit any other way, AND Have to provide adequate protection to holder of lien being superseded What will creditors demand? If have cash flow, can get periodic payments That may be all thats left But without adequate protection, stop 364 debt

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o First day orders will account for most of these priority things Provision to get perfected security interest, prior to so-andsos interest Payment terms will be built in as well o Who is looking out for best interests of unsecureds? Possibly DIP has fiduciary duty because once file, wipe out equity holders and unsecureds effectively the equity holders o Need to understand that company needs money on day 1 and judge has no way to know whether what company asks for is necessary On other hand, dont have anyone speaking for unsecured creditors on first day motion So what do we do? Cant put it off for a month because company needs money on first day Have 364(e) protected DIP lender who lends in good faith that wont be undone and security lost Can get unsecured money and under 503(b)(1) makes it administrative expense which bumps in front of all other unsecured creditors Gets better for creditors the deeper you go into section o So where does company look for help if cant get financing under (d)? Person that youre into is person with most to lose if doesnt succeed So will go to lender and say give us money. They probably wont want to do that and youll say, we can liquidate for 20%, how would you like to take an 80% hit? There will be a negotiation, generally, prior to the filing and will already have an agreement when they file Person with greatest interest in success is person that lent money o If can find someone to do this, will want security interest in everything, so how do they deal with the current secured lender? Will offer to buy the claim at discount If pre-petition debt was $800MM, DIP lender will buy that claim for $600MM and add to loan and then take security in pretty much everything Youre buying out the claims ahead of you So youre first in line and your claim is post-petition o So this DIP business is quite profitable Can get great rates and full security 552 48

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o (a) any property acquired after filing is not subject to any lien, subject to sub (b) Many security agreements have after-acquired security clauses If security agreement doesnt attach, then not protected by that stuff Becoming more and more unsecured One reason you want stay lifted or adequate protection Both debtor and creditor want this taken care of in first day order to protect both interest Security for creditor and running business for debtor 1129(b)(2)(B) o Can you propose a plan under which person lending money is equity owner and will wind up having share of assets? In effect, shorting some creditors while giving SHs who put some money in a right to assets S.C. says cant do that unless up for auction so that other people able to bid to make loan Not clear how that satisfies (b)(2)(B) but they say it does 546(c) o Suppliers who sell on credit generally are unsecured creditor Typically suppliers and can stop shipping, assuming no extended contract to ship o (c)(1) Perfected security interests beat out this section, but otherwise, seller of goods has right to reclaim goods if debtor Receives within 45 days before commencement of case But must demand in writing not later than 45 days of date of receipt or not later than 20 days after date of filing If look at date of filing, can go back 45 days and claim assets that havent been paid for Company will generally pay because need supplies for business o Pushes them up the ladder above other claimants o Look at 503(b)(9) administrative expenses Besides the 546 right, this section gives pre-petition administrative claim over goods from 20 days before Ahead of other creditors o So couple these two sections together 49

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o Best of all, want order to pay, next best is 503(b)(9) to exercise right o Many people with 546(c) claims will not assert them because too expensive to enforce Will generally just rely on 503(b)(9) and hope after that theres enough left to pay them off probably not though o Note that who has right to goods bought and sold daily in an operation like K-Mart is extremely difficult to determine Critical Vendor Rule o Violates premise of bankruptcy that all creditors treated the same You can treat critical unsecured vendors better than others o What is justification for the rule? Maintain necessary relationships with vendors without whom cant survive o How do you determine who is a critical vendor? You would assume its vendors who, if dont deliver, will shut you down Lots of people will think theyre critical vendors The more you feed critical ones, the hungrier and more jealous the others get Going to have to have some type of testimony This might influence where you will file depending on how they see certain vendors o Very weird rule because there are no clear rules on what a critical vendor is In most cases, lawyer running business will not be sending out list of criticals, but will wait to see who complains a lot and such o K-Mart case in 7th Circuit overturned use of criticals because no testimony May as a result have less claims, but not clear yet They didnt strike down rule, just said had to do something to help prove that vendor is critical Shapiro v. Saybrook (462) o $34MM pre-petition secured debt, but collateral only worth $10MM Really part secured, part unsecured o Wants to give $3MM post-petition loan as administrative expense for priority Wanted to cross-collateralize Take collateral for post-petition assets to secure the deficiency on pre-petition debt As it stands, deficiency is unsecured and shares pro rata 50

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with other unsecured creditors So by cross-collateralizing and securing the deficiency, theyre being given more favorable treatment than other unsecured creditors o Surprisingly to the parties, court also decides issue not moot under 364(e) because that section only applies to lending under 364 and they say cross-collateralization not allowed under 364, so 364(e) doesnt apply o What fiction can you construct to get around Saybrook? Make a $40MM post-petition loan secured by assets, and use proceeds to payoff pre-petition loan and left with $6MM outstanding This is really a sham, getting exactly what they wanted This is called a Roll-Up Has same effect as cross-collateralization, but just go through process to make it fit in 364 Post-petition loan because thats when they made the loan, but just pay off the debt DIP Lender will probably require certain filing venues and this issue probably has some influence over the choice o Need to be careful how you term it, though, so no one gets on stand saying Chase said they wouldnt lend if we didnt file here This is mostly ok in DE and NY o But not many places that have decision like Saybrook Problem 21.2 (469) o Parties Chapter 11 Lawyer Chapter 7 Trustee and lawyer FSB Hanratty o Have $350K that will need to be allocated Who gets first dollar? Need to focus on 726(b) o Probably puts Ch. 7 trustee and lawyer at the top of the list What about FSB? Asked for adequate protection but wasnt good enough This means goes to 507(b) which says if get adequate protection but not good enough, goes to head of administrative expense line, so goes ahead 51

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of other two What about Hanratty? If had lent under 364(c)(1), then would jump ahead, but lent under 364(c)(2) o Purpose of this is how little tiny things can change priority, often for things that make no sense For case administratively insolvent, lots of arguing over this If going to make post-petition loan, need to think about all of this

e. Avoidance Powers
Mostly contained in 544(a), (b), 547, 548 544(a) Strong-Arm Clause o Without regard to knowledge means its a hypothetical test. Whether the trustee or creditor has knowledge or not is irrelevant o Whether or not creditor exists means that its a hypothetical test again. There doesnt actually have to be a creditor asserting the claim. Just that there could be a creditor asserting it o Trustee is treated like someone with a judicial lien on property on the day of the petition This essentially gives the trustee the power to knock off unperfected security interests o UCC 9-317 explains rights of a judicial lienholder under state law To perfect security interest, file UCC statement with SoS One-page statement listing assets on lien The implication taken from 9-317 is that you rank above the lienholder if you perfect before the lien 544(a) effectively saying that trustee gets perfected judicial lien on date of petition, so if lienholder is unperfected, trustee beats them out o This section allows trustee to recover from unperfected lieholders if any value/property was transferred via 550(a) Must either return the collateral or pay the value o Lots of litigation involving 9-317 and 550(a) Litigation is always about perfection was it filed right, in the right place, right type of collateral asset, etc ISSUE: If submit UCC statement with company name with character not on QWERTY keyboard, what happens? Unresolved issue. Lots of decisions about whether perfected or not Also with really common name, like Wang, can become a problem 52

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o NOTE: It is in the interest of the trustee to say liens are not perfected This generates lots of litigation 544(b) o This section incorporates state law which will point you to UFTA for a given state UFTA 7 allows avoidance of transfer or attachment or other relief o If trustee can apply UFTA, why have 548? Language tracks pretty well except for SoL. 2 years in 548, 1 year in UFTA o EXAMPLES: Easiest cases for application of UFTA/548 is house sale to brother for dirt cheap or transfer of property into wifes name Transfer to wife is not reasonably equivalent value 4(a) (2) o BigLaw Examples: Parent has Sub1 grant security interest in assets to bank for $100MM loan to Corp Creditors of Sub1 not same as creditors of Parent and so security interest on behalf of Parent puts secured creditors at $100MM disadvantage that otherwise wouldnt have had Structural Subordination Where setup structure that subordinates otherwise senior creditors How is this different than any loan? Theres always structural subordination with creditors being junior/senior to each other o Difference here is that balance sheet not same o Parent has $100MM asset with no liability and Sub1 has $100MM liability with no asset In conventional loan, Borrower gets both liability and asset o So no reasonably equivalent value to the Sub1 LBOs Borrow $100MM from bank and grant security interest, then use money to pay off SHs o SHs are lower in priority that secured lenders so if things go badly, perhaps a fraudulent conveyance What is the justification? o Improve value by attracting managers to run company well and such. Thats value to the creditors. Better chance of success

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People get really nervous about LBOs o Opinion letters only go so far because firms are so nervous they are overly-cautious when writing letters 547(b) - Preferences o If the transfer fits in (b) then its a preference. If not, then no preference o If it fits (b), then go to (c) to see if an exception fits Never go to (c) before doing the (b) analysis o Only avoids transfer of interest of debtors property no one else Letters of Credit are not preferences because not debtors money o (1) Must be to, or for the benefit of, a creditor Most typical is just a payment to a creditor to get them to back off Payment for benefit is to a 3rd party for benefit of the creditor, such as a guarantor o (2) Antecedent debt Must have some time elapsed between incurring debt and making the payment If payment is immediate, no preference, or even if grant security interest immediately Big question of how long a wait is necessary o (3) While insolvent Much less of an issue with sub (f) which says presumed insolvent 90 days prior to bankruptcy This is a rebuttable presumption though (In re Pysz) Can prove that they werent insolvent, but very tough and expensive o (4) Time requirement Common preference is within the 90-day period prepetition Could end on a weekend, so some discrepancy on this period Extended to 1 year for insiders Elaborate definition of insider, includes family members, officers, board, etc Why would you challenge transfer to wife/friend as preference instead of fraudulent conveyance under UFTA/548? These rules are hard edged, as opposed to mushy UFTA rules If you have the data, much easier to prove preference than fraudulent conveyance 54

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o (5) Creditor receives more than would in Ch. 7 Fully secured creditor getting 100 would not apply here because would recover anyway in liquidation o The evil that preference provision is trying to avoid is the rearranging of priorities If fully secured, you havent taken money out of anyones pocket, so fail (b)(5) and not a preference Havent hurt anyone o Law grew out of UFTA Makes it harder for creditors to destroy business because if seizes assets, can get them back If take preference payment, just have to return it So really no cost to taking a preference payment o APPLICATION: If JPMorgan and have DIP that wants to pay $50MM, what do you do? Do everything you can to help him stay out of bankruptcy for 90 days so cant void payment If he really owes $70MM, dont want to demand other $20MM for 90 days so you dont trigger bankruptcy and void your preference payment o EXAMPLE: Debtor has creditors C1 and C2 both owed $1MM Collateral worth $1.5MM with C1 having priority over C2 If make $100K payment to each, are either of them preferences? C1 fully secured, so probably not preference under (b)(5) C2 is secured up to $500K, so probably not preference either o But this assumes application of payment to the secured claim o If applies to unsecured claim, Hell then end up with a $500K secured and $400K unsecured claim in bankruptcy, giving total payment of $600K and would be in a better position than would have been under Ch. 7 violating (b)(5) What if no payment to C2, but only $100K to C1 Could argue preference to C2 because payment to C1 lowers claim to $900K, giving C2 claim on $600K. Would have gotten $500K in Ch. 7, so payment to C1 was for the benefit of C2 and could be voided as preference Could imply that for benefit implies scienter, but not sure itll work Seems NUTS to call this a preference, but rule makes 55

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it so If C1 has L/C on debt of $1MM and makes $100K payment, preference? Appears so. By paying C1, lowers the amount that guarantor is on the hook by $100K, conferring a benefit Seems crazy to call this a preference, but the law reads it that way 550 would theoretically give C2 the ability to collect from C1 Demonstrates the crazy state of preference law o Security Interest Grants Suppose on day -91 creditor takes security interest and lends money, but perfects 70 days later by filing UCC statement. Is it a preference? 547(e)(1)(B) says transfer for property other than real property is perfected when no one else can get superior claim, so thats when the statement is filed, so this would be a preference However, sub (2) says that if filing occurs within 30 days of transfer, perfection deemed to be the transfer date So if filing is between -91 and -61, then deemed to have occurred on day -91 and no preference EXAMPLE: If conveyed day -87, filed day -65, what happens? Its all clearly within 90 days so violates (b)(3). But (b)(2) requires the transfer be on account of antecedent debt (e)(2)(A) says if file within 30 days of conveyance, then deemed to have all occurred on date of conveyance Because within 30 days, then the transfer and conveyance of security interest all happened on day -87 and so not on account of antecedent debt o NO PREFERNECE Point is to allow business to continue to operate o If company hurting, no bank would lend because would be preferences and would lose their money o This way theyre protected. Consequence of 30-day period in (e)(2)(A) is that it might knock the transfer out of the 90-day period, or even within it, it might make the transfer and conveyance the same

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day, so doesnt meet (b)(2) and so no conveyance MORE EXAMPLES: Assume Debtor has L/C with Bank and Bank pays $10M to Creditor to satisfy debt. o No preference because doesnt involve debtors property o No one is worse off here. All that happened is Bank stepped in Creditors shoes Assume Debtor grants security interest to Bank in return for L/C o If bank pays of creditor within the 90-day window, cases on point say this is a preference o Its no different than when a debtor gives a security interest to a creditor Just gaming system by giving the security interest to a 3rd party o If within 90-days, clear preference, though JJ not sure how you get there under statute What if Creditor draws on L/C 40-days prior to bankruptcy? o Doesnt matter to analysis when L/C drawn on. Only the transfer matters, so as long as security interest granted outside the 90-days, its ok to draw on L/C on day -40. o No Preference. 547(c) Preference Exceptions o (1) Attempt to stretch antecedent debt issue (Not very important ) Most common case is check. If pay by check and doesnt bounce, ok under (1) because while check isnt immediate payment, the intent is to be immediate If check bounces and then gets cashiers check, then dont get the exception and will be antecedent debt This isnt intended to cover UCC filings o (2) Most Important Section Have to show that debt is incurred in ordinary course (Easy) and that payment was in ordinary course or made according to ordinary business terms (A) is about historical relationship how things have been done in the past (B) is about the sector/industry practices As long as can show debt was incurred in ordinary course and either A or B, then transfer ok even if a clear preference under (b) (payment to creditor on day -40)

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Available to any type of creditor Exception almost swallowing rule Tons of litigation on this issue JJ thinks preference rule sucks and suspects judges do to, so they use (c)(2) to circumvent preference rules o (3) Purchase-Money Security Interests (Not very important) o (4) SEE PAGE 505-506 in book for analysis Can offset new value against preference payment If make $1000 preference payment, then creditor ships $700 of inventory to debtor on credit, can offset the $700 so the preference payment is only $300 This is only available if the offset qualifies as a preference In other words if the $700 payment was in cash, theres no antecedent debt so not preference and thus isnt netted out. Full $1000 is a preference o (5) JJ SAYS FORGET ABOUT SECTION ASSURED IT WONT BE ON FINAL BECAUSE CASES DONT COME UP Earmarking Doctrine o Common law doctrine No statute o EXAMPLES: C1 has claim against debtor and wants out. C2 comes along and says will pay debtor $100K but its to pay C1 Payment is earmarked for C1 If this is clearly done, then theres no preference If payment is clearly earmarked for C1, no other creditors ever had a claim to that money so they arent hurt by the payment Assume C1 is Chase and C2 is Citi and Debtor is Sears C2 could buy C1s loan to Sears and try to take his secured position If pays money to Sears and earmarks it for C1, 2 risks o One is that judge wont see it as true earmark for whatever reason o Other is that theres no perfected interest during time that loan is paid off to C1 and deal closed with C2 To further this, C2 has new loan and might end up behind some creditors that perfected after C1, but before C2 Surest way is to purchase the loan directly from C1 to take over their position o Avoid earmark problems and takes over C1s perfected position instead having new position 58

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f. 365 & Executory Contracts


at time of loan from C2 to debtor Just do assignment

Section is a mess. Congress didnt figure out what they were really trying to do so they keep amending for lobbies. Hard to parse the section Executory Contract Definition o Countrywide test: if non-performance by either side/both sides is breach of contract Mortgage is a good example at the beginning, but can become non-executory when one party completely performs Licenses are big problem If 10 year license, want to know about royalties. If licensee pays up front, no executory K If monthly royalty, then executory 365(n) Rejection o If trustee rejects contract, constitutes a breach immediately prior to petition under 365(g) This makes it a general, unsecured claim o What about if would have had specific performance as remedy under K? Can force to sell property if real estate But section has exceptions and doesnt say when you get specific performance Also only applies to real estate, not other property o EXAMPLES: Debtor is Franchisor and rejects franchise agreement Franchisee has claim for damages, but will be prepetition, unsecured GM is example that not all Ks treated the same Only way to help franchisor is to argue no executory o If successful convincing Court, Debtor can just repudiate and say so sue me o But puts franchisor in better position because then the claim is post-petition In GM and Chrysler, companies settling with terminated franchisees, so they wont ever sue on this point o Some commentators argue that 365(g) can imply availability of specific performance Others say that since only says breach, thats all you get o 365 provisions (h), (i), (j), (n), (p) are exceptions

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One argument out there is that subsections cover certain scenarios, so if it isnt explicitly stated in these subsections, then it was excluded and nothing can be imputed to mean something Assumption & Assignment o (b)(1) If breach under lease or executory contract, have to either cure, or provide adequate assurance that you can cure promptly Derives from UCC 2-609 which says if theres a danger of default, other party will suspend performance until receive adequate assurances Non-Monetary breaches If non-monetary provision is also broken, it must be cured as well Case in book where didnt maintain adequate insurance o This cant be cured because time lapse o If nonresidential lease, can cure by becoming current cure by performance o Otherwise cant cure Untimely cure is only allowed under (b)(1)(A) for nonresidential leases o So if non-monetary breach on, say, an airplane lease, the lessor can take airplane back o Lease cannot be assumed o (c) instances where cant assume and/or assign under any circumstances (1)(A) applicable law excuses party other than debtor from accepting performance from an entity other than debtor AND that party doesnt consent Think performance K for a movie star Can possibly be used where state law says auto franchise agreements cant be assigned (2) contract to make a loan or extend debt financing or other financial accommodations, or issue a security Cant assign agreement with bank to lend $1MM because agreement to lend was based on debtor credit history (3) if lease of nonresidential real property and terminated pre-petition o Ipso Facto Clauses (e) & (f) deal with clauses that say K is ipso facto CXLd if enter bankruptcy Harder case is where its not explicit

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EXAMPLES: o Provision that says if assign lease, lessor gets first right of refusal Not outright prohibition, but effectively it is because landlord will take property back so no one will negotiate for lease o Provision that says if assign lease, lessor gets 1/2 of increase of rent Could argue that this is a condition on assignment prohibited by (f)(1) Problems with these things is that it chills the ability of bidders to bid highest amount Just more clever way of restricting ability assign (f) (1) Theres nothing that can be done by lessor to prevent lessee from shopping leases and keeping any upside in the assignment Short-term lease is the only way to protect against that Most any clause that is condition will probably be seen as subterfuge under (f) and not going to be valid Problem 26.5 (525) o Pretty hard to force acceptance/rejection. Added provision where deemed rejected after 120 days if do nothing Gives companies time to analyze contracts o Idea here is that most provisions are financial, so not assignable under 365(c)(2) Lease, purchase terms, loans Lease not necessarily financial, but if you are pre-paying, say the month ahead of time, then setup creditor/debtor situation, so possibly can argue financial term This will be the hardest one to argue under (c)(2). Others pretty easy o Cant divide K. Have to accept/reject as a whole Problem 27.1 (533) o Cant cure nonmonetary breaches of property other than commercial real estate o So can cure real estate lease, but not equipment leases, unless they agree Problem 28.1 (545) o Have to look at 365(i) o If buyer has possession, they can keep the property NOTE: If buyer has paid full amount but doesnt have possession, we still arent helped because the K wouldnt 61

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be executory o Can you get specific performance? Odd argument because if you can get specific performance instead of allowing rejection of K, then 365(i) is really unnecessary Would respond saying that cant draw expressio unis conclusions from 365 because so full of lobbyist concessions, cant infer that the negative of anything not enumerated isnt true To get specific performance, you would want to argue property right, not K right 365(g) just says theres a breach of K. Doesnt talk about property rights, specific performance, or anything else Would argue all that happened is a breach, but doesnt affect the property right expressed by specific performance Conflicted statute o Very unclear applications EXAMPLE: o K-Mart comes to you to file bankruptcy and has 1,000 leases to analyze Because not ch. 7, get 120-day rule in (d)(4)(A) Allows company to make business judgments about each lease Can get one 90-day extension for cause Up to 210 days (209 effectively because have to request extension prior to 120th day) Odds are good will be able to reject what want to reject and accept what want to accept

g. Tax Consequences of Bankruptcy


Generally debt forgiveness is taxable o Have to pay income tax on the debt that is forgiven In bankruptcy, they dont do that. Discharged debts are NOT taxable o But they make adjustments to other things: Reduction of any NOL carryovers Reduction to basis in assets All sizable bankruptcies must involve tax lawyers to handle these issues

h. Statutory Liens
De facto liens created by a statue o EXAMPLE: Mechanics lien if take car and dont pay, statute automatically grants lien to mechanic on the automobile Date of liens go back to when work began 62

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o If constructing building and client doesnt pay, the lien goes all the way back to when the work began o If project lasts 4 years and defaults in last month, the lien extends back 4 years Usually requires some type of filing, then you are ahead of other creditors, future, etc 545 o Allows avoidance of statutory liens in certain instances o (1) Mostly just ipso facto clauses Doesnt do much o (2) If filing is required and not filed, then lien is avoided This depends on the state law o (3) Not sure of the reason for this, but liens for rent payments are avoided Problem 29.1 (553) o Lease provision is both a statutory lien and contract lien The statutory lien is invalid under 545(3), but the contractual lien doesnt apply to 545 so can go to court for a judgment lien Would then have to look to 544(a)(3) and would get BFP status If BFP loses to lien, then trustee cant avoid it o For judgment lien, also have to look to state law to see if filed in records If BFP loses to this lien, then trustee cant avoid it either. State law at issue o Plumbers statutory lien is avoided because didnt file. 545(2) If statutory lien, even unfiled, beats judicial lien, plumber still cant be helped because his lien is avoided under 545 Cant get 544(b) because thats fraudulent conveyance law

i. Fraudulent Conveyance
Problem 30.1 (574) o Burt isnt company, so the money isnt his. Probably FC o No reasonably equivalent value under either UFTA or 548 o Also have solvency issue to prove o Big problem here is what to tell client Have to remember you represent company, not Burt, so would really need to tell Burt to give the $40K back, but hell think youre crazy and will likely find another attorney ISSUE: How do you effectively represent a party when you and the party have different opinions as to who the client is? Cant really avoid the problem and will just have to tell him its an FC and let the chips fall where they may 63

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o Is the FC to Burt or to the cruise company? Cruise company will want to point to 550(b)(1) good faith transferee Also, (a)(1) says for whose benefit such transfer is made, and transfer is for Burts benefit Company probably off the hook o Suppose Do E/P for Burt and he calls and says bill the company. Do you do it? Probably shouldnt but JJ doesnt know full reasoning why not Its a question of do you make client happy and how you do that is very complicated Not clear you should do this o UCC Article 3 says good faith recipient of negotiable instrument takes free and clear of any upstream claims If Burt paid by check, UCC seems to support Cruise Companys claim that has right to money free and clear of any FC claim Problem 30.3 o 548(a)(1)(B) is at issue here less than reasonably equivalent value o Go to 550(e)(1) for some hope Has $100K lien on the transfer back But cant get the building back from Wang because he has BFT defense under 550(b) Problem 30.4 o Estate cant argue FC Entire real estate industry would go crazy because all foreclosure sales happen like this The facts are rare, but could happen if theres no mortgage Generally mortgagee just bids what theyre owed and they take house and right off debt. No money exchanged Entire mortgage sales industry would unravel if this was fC Answer to client is theyre screwed. Plumber gets property for $1600 Lawyer for lumber would say Enjoy Barbados o S.C. case says cannot challenge these transactions as FC assuming comply with state law Sheriffs auction complies with state law Problem 30.5 o Could challenge dividend as FC under state law Most state corporate laws prohibit dividends by insolvent 64

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cos. Big problem here whether creditor has standing to challenge under state corp law or UFTA o Could argue not reasonably equivalent value Company will argue that attraction of capital, increased liquidity, etc are all value added to co. by dividends o Practical problem with large companies like GM How do you get dividends back from millions of shareholders? o Under DE law, no single creditor has standing to make illegal dividend claim

j. Equitable Subordination
510(c) o This is really like an avoidance power o Court can subordinate a more senior claim in the interest of equity 510(a) Just saying subordination agreements valid in bankruptcy 510(b) Claims regarding stock issuance are treated as SH, not unsecured creditor EXAMPLE: o C1 has $100M claim, C2 has $100M claim, C3 has $40M claim. C1 subordinates to C3 to extent of C3s claim o $130M to divide up C2 might try to say he gets $100M, then C3 $30M, C1 nothing o C1 will argue no agreement with C2, so C2 cant be elevated above C1 Doesnt give up first place in line o So C1 gets $100M, then via K, gives $40M to C3. C2 gets remaining $30M C2 isnt hurt here. Without subordination agreement, still would only have gotten $30M. Hell be jealous, but cant be angry o Why sign subordination agreement? If financial difficulty, will subordinate to allow new loan to company and increase chance of recovery to help company survive That will lead to agreement at time C3 loan is made o Why sign sub agreement up front when 1st loan made to C1? Can get better interest rate because of agreement to subordinate in future Want to be very careful about description of who will qualify for elevation so not stuck behind idiot EXAMLE 2: 65

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o A & B going to start company and want to issue $5M stock Can try to game system by issuing $100K stock and making a $4.9M loan If things go badly, will then try to recover under loan because with stock, creditors get first swipe o Equitable subordination doctrine Under 510(c) judge can say, no, effectively youre SHs and just gamed system, so Im subordinating your claims to the unsecured creditors o Almost all 510(c) cases look like this where equity investors try to look like secured investors to get a higher claim

k. Negotiation and Confirmation of Chapter 11 Plan


Problem 32.1 (627) o Go after $7.5M payment as a preference Even though secured creditor, collateral worth only $2.5M, so got way more than would have in Ch. 7 Can recover the $7.5M for estate o Cant approve plan now without redoing the calculations and providing more for all the unsecured claims out of the $5M ($7.5M preference minus the $2.5 secured claim) In re US Truck (628) o Must have at least one impaired class approve plan under 1129(a)(10) o Routinely split classes in order to get a class that will approve plan o In order to justify gerrymandering of classes, have to show some good business reason for doing so Here, teamsters were sufficiently different from other unsecured debt because of continuing business relations, collective bargaining agreements, and so forth, so ok to put in separate class to neutralize their vote Claims Trading o Banks trade claims in an effort to improve books, especially under pressure from regulators o Creditors involved in bankruptcy often creditors who have purchased debt, oftentimes hedge funds, but not always o ASSUMPTION: If by $1MM debt for $300K, the claim is still $1MM Get whole claim you buy, regardless of price o In re Figter (644) TIA purchased majority of unsecured class to oppose plan $100M claim was bifurcated so had $34.5M unsecured claim Afraid if plan allowed, would end up with some 66

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condos, some still apartments and titles would be difficult to enforce Court says ok to challenge plan this way Just stepping into shoes of other creditors o Credit-Default Swaps Essentially an insurance policy Going to be lots of traded creditors who have interests different because of insurance Not sure how this will be viewed, but likely that judges wont like it o If competitor buys debts in order to block reorganization, court will clearly see bad faith Problem 33.1 (651) o Has $1.6M dissenting, but $5M unsecured, and 1.6/5.0 is less than 33% o What can be done? $300K claim guaranteed by CEO. If he can knock that out of unsecured debt, then ratio is 1.6/4.7 which is 34% and that puts him in blocking position under 1126(c) o How can you get $300K out? 1122(a) says can only put similar debts together. Argue that guaranteed debt is different than unsecured, with different incentives Possible to knock out o This discussion will take place in negotiation Will almost never end up before a court Problem 34.1 (661) o Obligation to SHs is fiduciary duty because rights not protected by K o Creditors protected by K, so duty only goes as far as K imposes Can do lots of stuff with creditors you cant with SHs Creditors dont care what you do with money as long as paying bill Dont care if take $100K to buy car for wife unless default on obligation But SHs can sue o In bankruptcy, possible that SHs will get nothing and creditors will end up equity holders Have to determine when fiduciary duty begins running to them o Not sure how this will work out in public, but issue always on attorneys mind in bankruptcy If SHs will receive 0, what duty is owed to creditors? If can get 40 in liquidation, or can go for plan with 30% 67

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o Bank o o

chance of 80, 20% chance of 40 and 50% chance of 0 Not sure how that comes out In DE, courts resolved that dont owe duty to creditors because too tough to know when duty changes of America v. 203 North LaSalle Street Partnership (664) Absolute Priority Rule at issue here Trade creditors paid in full, but 1124 doesnt say paid in full isnt impaired, so even paid in full, any change in agreement is impairment 1124 used to have 3rd subsection paid in full on date of confirmation It was removed, insinuating that payment in full doesnt mean not impaired Gerrymandering issue lost in 7th Cir. And wasnt appealed Issue that deficiency and trade creditors split to two different classes maybe impermissible gerrymandering If were together, deficiency would overcome trade and wouldnt have impaired class approving 1111(b)(2) election Election means get the entire claim treated as secured claim Dont bifurcate in 1111(b) By making this election, no unsecured claims to affect votes under plan Under 1129(b)(2)(A)(i)(II) payoff in plan must be the AMOUNT of the claim, of a VALUE of at least the value as of the effective date of plan In other words, payment must meet 2 requirements: o Total amount of claim o Value of claim as of effective date by the time its paid off So here, Total claim is $93M, so with 1111 election, gets the entire secured amount The plan, then, must have total payments of at least $93M (the amount) and the TMV of the payments at payoff date must be greater than $54M (the current value at petition date) At some point, TMV kills the analysis. If 5 year payoff, probably ok. If 30 year payoff, probably not ok Why elect 1111? Because of appreciation. If you bifurcate, your claim is stuck at $54M If you expect value to rise over coming years, you 68

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o o

dont want to take the election because you will get the full $93M secured claim so youll capture some of that appreciation back Plan proposes 16% on deficiency and 100% on trade credit BofA votes no and says cant cramdown because equity holders are going to contribute $6M over the next few years and equity interest in reorganized company, which cant do if the deficiency isnt paid in full Defense is that 1129(b)(2)(B)(ii) says on account of such claim and they arent receiving equity on account of old equity theyre receiving it on account of new value. Court holds not ok because of exclusivity Deal not offered to anyone else only offered to old equity holders, which means deal offer was on account of old equity, so impermissible Rule is meant to keep equity from conspiring with top of co. to screw creditors in the middle So Bank going to be able to be given chance to propose alternative plan They will opt to seize asset and liquidate and payoff creditors as much as possible Bank might be able to offer new plan, but Banks plan probably wins on votes.

VIII. Environmental & Mass Tort Claims


A. Introduction
These claims are enormous, so bankruptcy is usually the forum to resolve o Most famous are Fen-Phen, asbestos, and breast implants Environmental Claimants o CERCLA is Fed Statute from 70s requiring cleanup of hazardous waste o Strict liability claim Causes billions in liabilities with no way out Clash between policies and bankruptcy o Bankruptcy about fresh start, but environmental law about protecting public health and encouraging good business practices o Tort law about compensating victims, etc Conceptual Problems o Involuntary creditors in environmental and mass tort claims. How should bankruptcy treat them? Involuntary Creditors o Claimants dont choose it like banks and bondholders do But they are generally lumped in low on the totem pole 69

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general unsecured o Code doesnt provide any special privileges. Maybe it should o However, most companies have insurance policies, so claimants not left high and dry They at least get something, but only for medical claims generally. Not otherwise Definition of a claim o 101(5)(A) Very broad definition If dont qualify as claim, dont have right in bankruptcy o 502(c) Allows for the estimation of claims, but no guidance on how to do it Judicial determination o When claim arises is a timing issue Asbestos claims can span lifetime of claimant, so how do you determine when the claim arose pre- or postpetition? o Conflict between present and future claimants Some claimants have been injured but wont manifest injuries until post-petition Long-tail Torts o Often times the claims force bankruptcy which will force negotiations

b. Asbestos
Companies used asbestos with knowledge that it was bad for people Everyone started suing when the public learned it was bad and companies knew it was bad o Johns-Manville is most famous example Companies went to Congress and they refused to help o Filed bankruptcy to try to deal with it all at once o Created trust in 1989 with life of 49 years Paid out $2.5B to 300,000 claimants so far Payouts down to 5 on the dollar Legislation o FAIR Act of 2005 Sought to create $150B trust for asbestos claimants funded by cos. Never signed into law 524(g) o Channeling Injunction is most important part Companies absolved from responsibility Anyone with claim must bring against trust Requires someone to represent future claimants interests

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Hard technical requirements often not met insolvency o Supermajority Requirement 75% of claims must agree to funding of trust and 524 plan o Gives power to claimants Attorneys control the process They generate databases of potential claimants and so if debtor wants to reorganize, firms have to approve Few key firms that are big players with massive lists of claimants Supermajority reqs. give P firms veto power o Effectively, this means debtor and P firms work together to setup trust o Big issue that no one knows if law firms claimants are valid or not Leaves insurance companies as only ones with adversary position, but dont have standing in court to challenge plans

c. Environmental Claims

Unique timing problems, somewhat similar to asbestos 1141 discharges all claims that arise prepetition o Problem with determination of when claim arises o DICHOTOMY: If Debtor in Ch. 7, EPA wants to have pre-petition claim so that it can recover something If Debtor in Ch. 11, EPQ wants to have post-petition claim so that it can sue for full recovery Main Tests for Claims o Right to Payment Test Claim doesnt arise unless all elements of violation exist under substantive non-bankruptcy law prior to petition To be valid, assumes that 101(5) term right to payment means right to be paid Thats probably not the case Note widely used o Underlying Acts Test As long as underlying act occurs pre-petition, the claim arises pre-petition regardless of whether there was knowledge or not Also widely criticized because leads to discharge mostly and undermines environmental policy o Relationship Test Pre-petition claim when act occurred pre-petition and debtor/creditor began their relationship pre-petition, regardless of knowledge 71

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Regulatory relationship alone held to be sufficient Contemplation Test Most widely used test Pre-petition claim only if creditor could reasonably have ascertained that it had a claim at time of petition Not as strict as other tests one way or the other Allows claims before Right to Payment would, but not as broad as Underlying Acts test because requires constructive notice Signature Combs, Inc. v. US (725) o Company dumps toxic waste from 1950-1970 File Chapter 11 in 1986 1998 EPA cleans site then sues SC to force reimbursement Was CERCLA liability for cleanup discharged in Chapter 11? o Right to Payment test Not pre-petition claim because costs hadnt accrued Not discharged o Underlying Acts Actual acts were pre-petition, so pre-petition debt Discharged o Relationship Basically same as underlying acts EPA regulated pre-petition and acts committed, prepetition, so pre-petition claim Discharged o Fair Contemplation Test Applied By Court No evidence EPA could have seen that it would have had claim in 1986 Not discharged o Company held liable Criticism of Fair Contemplation test o Prioritizes regulatory goals over fresh start bankruptcy policy o Debtor may have no idea there will be a claim in the future so couldnt give notice even if it wanted to. It cant and the debt can never be discharged in that circumstance Justification of Fair Contemplation o Prioritizes environmental goals Important to protect public health o Public is more important that Company Its a value judgment o Fresh start is only one of many goals of Code o Fair

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d. Mass Tort

Central goal is also to provide creditors with maximum recovery

In re Fairchild Corp (738) o Plan stipulated release from liability for pre-petition airplanes Trustee and Court confirmed 3 years later plane crash kills 4 Issue is whether confirmation extinguished liability o Policy Concerns Bankruptcy designed to give fresh start, so should roll up debt Bankruptcy supposed to protect creditors; extinguishing everything doesnt help them o One idea is that bankruptcy shouldnt extinguish any liabilities that people dont know exist Flip side is this will encourage rush to bankruptcy to extinguish possible claims before they arise o Same Tests as Signature Combs Add State Law Approach Determine if claim exists at state law If state law says claim existed at time of manufacture, then pre-petition claim Court doesnt like Court focuses on Relationship Test Planes produced pre-petition and foreseeable lawsuits Trustee never took steps to establish potential tort claims as claims in bankruptcy o Court concludes that should focus less on which test is the right test to apply in all case, and focus more on what will get the right result

IX. 363 Sales


A. Overview
Sub (b) allows sales of assets outside ordinary course, free of liens if best way to protect value o Sub (a) allows sales in ordinary course Differences from Plan o Very quick Chrysler 42 days start to finish o Approval of judge only not creditors o Plan is more comprehensive than 363 sale o Sale focuses less of valuation and feasibility o Business justification is all thats required 73

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SEE Lionel for list of justification factors Requirements for Approval o Sale terms are highest and best offer o Arms length negotiations Chrysler puts this in question o Best interests of estate and creditors o Purchaser acts in good faith 363(f) o (3) Speaks in terms of value. Circuits split on what this means Face Value Appraoch Economic Value approach (FMV) Congress insinuates should be Face Value Approach, but because of 506 bifurcation, many argue that it should come into play and mean FMV o (5) Only talks about interest, doesnt mention lien like (f)(3) was amended to say Interpretation is sketchy. Could mean that if a lien is involved, you dont get (f)(5), only (3)

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