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Outside Bankruptcy

Outside of bankruptcy, creditors can act in their own interest and seize the property through liens.
Essentially works as first-come, first served. They can also access some assets that have been
transferred, if the transfers are actually fraudulent (done with the intent of “hindering, delaying, or
defrauding” creditors) or constructively fraudulent (“A debtor must be just before he is generous.”).

Debtors
Not much that a debtor can do to stop a creditor from attempting to seize property outside of
bankruptcy. Only thing that can be done is negotiate with creditors to have new workout agreements,
but those only apply to those creditors who consent.

Basics of Bankruptcy
I. Bankruptcy is a federal power under the Constitution. States cannot impair the rights of
contracts, but under bankruptcy law Congress can.
a. There was no federal bankruptcy code until 1898.
b. Bankruptcy Courts are Article I courts, and have the sole job of administering Title 11
(the bankruptcy code).
c. The Bankruptcy Code is designed to be complete coverage of bankruptcy questions.
II. Bankruptcy creates a creditor class-action type proceeding. Similarly situated creditors
receive similar treatment.
a. Designed to increase average creditor collection.
b. Protects the continuing value in the debtor by keeping them operational during
proceedings.
c. Allows a fresh start for honest debtors.
d. Federal bankruptcy law often depends on state law definitions of property and contracts.
III. Divisions of the Code
a. Chapter 1: Definitions
b. Chapter 3: Administration
c. Chapter 5: Claims and Creditors
d. Chapter 7: Liquidation
e. Chapter 9: Municipal Bankruptcy
f. Chapter 11: Reorganization
g. Chapter 12: Family Farmer Rehabilitation
h. Chapter 13: Rehabilitation of Individuals with Income
i. Chapter 15: Ancillary and Other Cross-Border Cases

Claims
I. 101(5): claim means
a. right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or
b. right to an equitable remedy for breach of performance if such breach gives rise to a
right to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or
unsecured.
II. Claims, or rights of payment, are specific things. Not all obligations are claims under the
bankruptcy code.

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III. 521: The debtor is required to file a list of creditors, and (in most cases) a schedule of assets,
liabilities, current income and expenditures.
IV. 501: Creditors may file proof of claims; equity security holder may file proof of interest. If
they do not do so in a timely manner, and entity liable to the creditor with the debtor may file
proof of the claim. The debtor may also file proof of such claim if the creditor does not
timely do so.
a. All claims need to be filed. Only claims receive payments and get discharged.
b. In Chapter 11, 1111(a) dictates that claims do not need to be filed if they are non
disputed, noncontingent, and liquidated, and the debtor has listed the claim accurately
under its 521 schedules.
c. Filing a false claim is a crime.
V. 502(a): A claim filed under 501 is deemed allowed unless a party in interest objects.

Property of the Estate


I. 541(a): Property of the Estate includes “all legal or equitable interests of the debtor in
property as of the commencement of the case.” This includes all real/personal,
tangible/intangible property held by the debtor or in which the debtor has an interest.
a. 541(b) and (c)(2): Certain property is excluded from the estate.
b. 541(a)(6): income from property (but not from services) after the commencement of the
case is property of the estate.
c. 1306/1115: Proceedings under Chapter 13 and individual cases in Chapter 11 include
income and interests acquired after the commencement of the case as property of the
estate. Such income/interests up to the close of the case/conversion to a Chapter 7, 11, or
12 proceeding is included in the property of the estate.
II. Importance of the Estate
a. Chapter 7: The trustee is charged with collecting and selling the property of the estate.
b. Chapter 11/12: The debtor retains possession as the debtor-in-possession and acts in the
place of a trustee. A party-in-interest can request a trustee be appointed if the property
is not being appropriately used.
c. Chapter 13: There is likely a trustee, but the debtor still retains possession.
d. Chapter 12/13: The minimum value that can be offered to unsecured claims holders in the
plan of repayment is the equivalent of the value of the property of the estate. (Chapter 11
has similar requirements for non-assenting secured claims holders.).
III. 542/543: Actors who are in possession of property that is considered property of the estate
are restricted in their actions with such property, and may be required to turnover such
property to the trustee.
a. If a debtor files for bankruptcy after a secured party takes possession of collateral, but
before a sale is held, there are turnover issues.

Discharge
I. 524(a),(e): A debtor who is eligible for discharge and receives one is relieved from any
further personal, legal liability on her dischargeable debts.
a. “who is eligible”: There are limitations put on who is eligible for bankruptcy discharge.
i. Corporations and other business entities are not eligible for discharge under
Chapter 7.
ii. 727(a) lists eligibility exceptions for human debtors in Chapter 7.
iii. 1141(d) imposes a discharge for business entities who have a plan of
reorganization approved under Chapter 11. Actual completion of payments
under the plan is not required for the discharge.

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iv. Individuals under Chapters 11 and 13 must have a confirmation of the plan and
completed all payments under the plan to get the discharge. See 1328(f).
o “relieved from any further personal, legal liability”: under 524(e) only personal
liability is discharged. The liability of any other parties or guarantors is not affected.
Does not protect third parties. But See § 105(a). Court may issue any order, process, or
judgment that is necessary or appropriate to carry out provisions of the title.
b.
i. NO further collection efforts can be made. 524(a)(2)
c. “her dischargeable debts”: Dischargeability depends on whether the matter is Chapter
7, 11, or 13, when the debt arose, and whether the debt is excepted from discharge.
i. 523(a): lists exceptions from discharge for certain types of debts for individuals.
1. (2), (4), and (6): All deal with “bad acts,” and require action by a
creditor within a certain timespan (typically 60 days, depending on the
type and time of the case) to not be discharged.
2. (1): Taxes
3. (5) and (15): Certain marital debts
4. (8): Student loan debts, except in cases of undue hardship (nearly
impossible to prove)
ii. All corporation debts are dischargeable once a plan is confirmed under
Chapter 11.
iii. Property rights are not discharged, so a secured debtor can still repossess
collateral.
II. The discharge is an injunction on future action (524(a)(2)), and violating the discharge places
the actor in contempt of court.
III. 525: The government is prohibited from engaging in almost any discriminatory behavior on
the basis of bankruptcy, the discharge, or failure to pay a dischargeable debt. Private
employers may not terminate or discriminating “with respect to employment” on those bases.

Overview of the Chapter 11 Process


I. When the debtor files a petition, it has the option to remain in control as the “debtor-in-
possession.”
a. 1107: The debtor-in-possession has all the rights and powers of a bankruptcy trustee.
II. Vendors are not obliged to keep dealing with a Chapter 11 debtor. To the extent that they
supplied goods in the 20 days pre-filing, they have a priority claim (503(b)(9)). Some want
immediate payment, but courts typically won’t order that without a showing of net benefit to
the estate.
III. 1102(a)(1): The U.S. Trustee is obligated to try to put together a creditors’ committee.
a. 1103: The committee has the power to hire counsel, accountants, investment bankers, to
investigate the debtor, to make recommendations on any plan, and to request a trustee if
the DIP isn’t working properly.
b. Many times the power to organize a creditors’ committee is unexercised.
IV. The Bankruptcy Estate’s Counsel
a. 327: Professionals hired by the bankruptcy estate must be disinterested persons and
competent.
b. 330: The court enters an order employing professionals, and can review/approve their
fees.
I. Administrative expenses have priority over all other expenses in Chapter 11, and 1129(a)(9)
(A) requires payment of them in full, in case, on confirmation.

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a. If the filing is converted to Chapter 7, administrative expenses incurred under Chapter 7
get priority over those incurred under Chapter 11.
b. Administrative priority is usually enough to convince vendors to continue engaging with
a debtor. However, it may not be enough to convince new lenders.
i. 364(c): If a lender will not otherwise lend to a DIP, the DIP, after authorization
by the court, can offer priority over “any or all administrative expenses,” security
by a lien on property not encumbered by a lien, or a junior lien on previously
encumbered property.
1. Unencumbered property exists because:
2. 552(a): Property acquired by the estate after commencing the case is not
subject to any lien resulting from any agreement formed prior to
commencement. 552(b): a lien attached to the proceeds, products,
offspring, or profits of property that was agreed to pre-commencement
will still attach post-commencement.
ii. 364(d): If no other option works, the court, after notice and a hearing, may
authorize credit secured by offering a senior “later-in-time” lien on property
already subject to a lien. This MUST provide adequate protection for the pre-
petition lien holder (since there is no unencumbered property, this is usually
premised on the future profitability built on the back of the new financing).

Automatic Stay
I. 362: Commencing a case results in an automatic stay of actions against the debtor, her
property, and property of the estate.
a. The stay does not require court action to go into effect. It starts at filing.
b. The scope of the stay is well defined in 362(a). Essentially all civil actions involving the
debtor, debtor’s property, and property of the estate are stayed.
i. The stay only impacts the debtor, not any guarantors or other parties.
ii. 105: The court has the power to grant a stay protecting other parties if it is
necessary to carry out the provisions of the Bankruptcy Code.
II. 362(b): There are twenty-eight exceptions to the automatic stay.
a. (1): no stay on criminal actions against the debtor
b. (2): no stay on family/domestic proceedings
c. (4): no stay on government’s police or regulatory activities (exception: does not apply to
money judgments/actions which may be categorized as collection efforts)
III. Violations of the Stay
a. Any actions in violation of the stay are void/voidable.
b. 362(k)(1): individuals injured by actions in violation of the stay shall recover actual
damages, including costs and attorneys’ fees, and may recover punitive damages (unclear
how this impacts non-natural persons)
c. Violations can also be punished through contempt of court. In that case, sanctions
are at the discretion of the court, unlike in 362(k)(1).
IV. Termination of the Stay
a. 362(c)(1): The stay no longer applies to property of the estate when the property ceases
to be property of the estate.
b. 362(c)(2): The stay terminates when a case is closed, is dismissed, or when a discharge is
granted or denied.
c. Other grounds for termination are in 362(c)(3), 362(n), and 362(h)(1).
V. Relief from the Stay
a. 362(d): A party in interest may move, and after notice and a hearing the court shall grant
relief from the automatic stay
i. (1): for cause, including lack of adequate protection

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ii. (2): when, regarding the stay against property, (A) the debtor does not have
equity in the property OR, (B) the property is not necessary for effective
reorganization.
11 U.S.C. § 362(d)
(d) On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay provided
under subsection (a) of this section, such as by terminating,
annulling, modifying, or conditioning such stay—
(1) for cause, including the lack of adequate protection of
an interest in property of such party in interest;
(2) with respect to a stay of an act against property under
subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective
reorganization….

b. 362(e): there are time limits (typically 30 days) on how long a court can wait before
holding a hearing on a request for relief from the stay
c. 362(f): to protect a party from irreparable damage to the interest in property (no hearing
necessary if the harm will manifest prior to a hearing)
d. 362(g): the burden is on the party requesting relief to show that relief is warranted/fits
the limits of the law.
e. Relief from the stay can take the form of annulment, modification, or limitations.
Sometimes in these circumstances,
as we mentioned earlier, the trustee will recognize this and just “abandon” the
property under section 554. If the property is abandoned to the debtor, to whom
the stay applies as well, the creditor either still needs relief from stay to seize the
property from the debtor. However, section 554 does not specify to whom
property is abandoned, and its generally agreed this could be any party with a
possessory interest in the property, which would include a secured creditor.

Even if there is a reason to continue the stay in the interests of the bankruptcy case
under section 362(d)(2), relief may also be granted if the moving party can show
that its interests are somehow at risk. This entails establishing “cause.” Section
362(d)(1) states that cause “includes” lack of adequate protection of an interest in
property of the movant. Note that when the Code uses the term “includes” and
“including,” it is not limiting. See 11 U.S.C. § 102(2). Thus, lack of adequate
protection is only one example of cause, although it’s the big one. Before examining
that concept, consider what else might constitute cause. If the encumbered
property is somehow in jeopardy, such as not properly insured or not being properly
maintained, this might constitute cause for the court to condition continuation of
the stay on the estate promptly remedying whatever it is putting the creditor’s
interest at risk. Cause might also include that a state court action is sufficiently far
along that it makes sense to reduce the claim to judgment in that setting. Thus, A
might assert, “Judge, my battery claim against Markell (the debtor) was just a
couple of days away from trial when that scoundrel filed bankruptcy. Let me go

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ahead and have my claim determined in that forum.” This is an example when the
court might modify the stay to permit the state court action to proceed to judgment
(that is, to allow the claim to be liquidated in state court), but of course not allow
any action to collect on that judgment.

Lack of “adequate protection,” a concept that comes up a lot under the Code, is
most often the basis on which stay relief is sought under section 362(d)(1).
Adequate Protection
I. 361: Adequate Protection may be required under 362, 363, and 364 in order to protect the
property interest of a secured creditor. It can be provided by
a. (1): requiring the trustee to make cash payment/periodic cash payments to cover the
decrease in value of a secured claim holder’s interest in the property;
b. (2): providing an additional or replacement lien to cover a decrease in value of the
interest in property; OR
c. (3): other relief, other than compensation as an administrative expense, that will realize
the full value of the property.
II. If a property is oversecured, then the “equity cushion” may count as adequate protection.
III. United Savings Association of Texas v. Timbers of Inwood Forest Associates (1988)(CB 5-
14)
a. Adequate protection is meant to protect the value of collateral that is depreciating,
not the time value of an interest in property. There is no need for interest payments
to an undersecured creditor.
b. Oversecured creditors are eligible for interest, but only to the extent that the interest can
be paid out of the “equity cushion.”
IV. Most circuits only require adequate protection payments when there has been a request from
a creditor.

b. Relief Based on Section 362(d)(2)

“No equity in Property” is enough in Chapter 7 for secured creditor to foreclose


- No equity in property - the amount of valid liens against a property exceed its
lien-free value; equity in the property – value of property exceeds the amount
of liens encumbering it.
- nothing in it for general unsecured creditors and really no reason for the
trustee to retain the property.
- the trustee will “abandon” the property under section 554. If the property is
abandoned to the debtor, to whom the stay applies as well, the creditor
either still needs relief from stay to seize the property from the debtor.

Chapter 11 Section 362(d)(2) “no equity in Propery” plus “property (not) necessary
for an effective reorganization”.
the creditor - the burden of proving the absence of equity
party opposing relief - has the burden of proof on all other issues “property
necessary for effective reorganization i.e., Markell, Inc., a widget
manufacturer, cannot possibly hope to reorganize if it loses its widget
stamping machinery”.

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The debtor in possession must also show that it has a “reasonable possibility”
of confirming a plan in “a reasonable time.”
c. Relief for “Cause” Under Section 362(d)(1) (Herein of Adequate Protection)

establishing “cause”
-Creditors interests are somehow at risk, “includes” lack of adequate
protection of an interest in property of the movant.
- “includes” and “including,” it is not limiting. See 11 U.S.C. § 102(2).
i.e., property not properly insured or not being properly maintained; court
might modify the stay to permit the state court action but of course not allow
any action to collect on that judgment.“Judge, my battery claim against
Markell (the debtor) was just a couple of days away from trial when that
scoundrel filed bankruptcy. Let me go ahead and have my claim determined
in that forum.”

Lack of “adequate protection”


Two question:
(1) what is the interest in property entitled to adequate protection? and
(2) what is the method for providing adequate protection?

In the case of secured debt, adequate protection is concerned with the value
of the interest in property, and not necessarily the amount of the debt.

Section 361 offers a nonexclusive list of the methods for providing adequate
protection of that interest, including periodic payments, additional collateral, or
such other relief as will provide the moving party with the “indubitable equivalent”
of its interest in the debtor’s property.
Let’s assume Markell’s Awesome Videos, Inc. (“MAV”) files Chapter 11. Alice has a security interest in all of MAV’s
photographic equipment securing a debt of $500,000. If the equipment is only worth $400,000, Alice might seek
relief under section 362(d)(2) based on lack of equity, but MAV has a pretty good argument that this equipment is
necessary for an effective reorganization. So no relief under § 362(d)(2).
Whether or not Alice can then seek relief under section 362(d)(1) on the grounds
that his interest is not adequately protected will depend on whether the value of the
equipment is stable. If so, or if it is actually increasing in value, then Alice’s interest
in property is adequately protected. If it is declining in value, however, then Alice is
entitled to adequate protection, unless that decline is not due to the stay. Adequate
protection might take the form of periodic payments equal to the rate of
depreciation in the value of the equipment. The idea is that Alice’s $400,000
secured claim must be protected. If MAV cannot come up with those payments, or
some equivalent form of protection, then Alice gets relief from stay.
Now, let’s change the facts so that the equipment is worth $600,000. Clearly no
relief under section
362(d)(2), as there is equity in the property (its value exceeds the amount of liens
encumbering it). What about, however, under section 362(d)(1) if Alice can show
the equipment is declining in value at the rate of $500 per month? Sorry, Charlie,
no dice.
“equity cushion”—that is, the positive difference between the value of the
equipment and the amount of the debt—and will remain so unless and until the
equipment reaches and falls below the amount of Alice’s secured claim.
United Savs. Assocs. Of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S.
365 (1987)

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undersecured creditor is not entitled to compensation for delay due to the stay is, in
other words, a holding that the undersecured creditor is not entitled to postpetition
interest on its secured claim
“interest in property” - does not include opportunity to reinvest the value of the
property or "lost opportunity cost" ; i.e., the time value of money. real economic
value
adequate protection focuses only on preservation of the value of the collateral
throughout the case (depreciation), not losses due to delay in payment.
filing of a bankruptcy case stops the clock insofar as interest is concerned.
This “free money” can be particularly important—and valuable to the debtor—in a
Chapter 11 case.

Try to apply these principles to the following problem:


Problem: Relief From Stay In Chapter 11
J makes soda straws. It incurred some “hiccups” in converting its machinery to make a new, bendable, straw, and
got behind on its payments. It has borrowed $10,000,000 from F, who has a first lien on all of J’s assets (there is no
real estate). It has also borrowed $2,000,000 from H, a hedge fund, and given a second lien on all its assets to H to
secure that loan. J cannot pay both F and H. H, for whom nonpayment was the last straw, gives notice of a UCC
foreclosure sale on May 1. On April 30, J files for chapter 11.
1. Easy one: Can H proceed with its foreclosure sale?
2. Assume the value of J as a going concern is $11,000,000. Assume further that if liquidated and its assets
sold piecemeal, the assets of J would not fetch more than $8,000,000. If H can establish these values, can it obtain
relief from stay? What else would you need to know? What if H testifies, truthfully, that it would never, ever, vote to
accept a plan proposed by J’s management? Does H get “ex-straw-ordinary” relief? What if F joins H’s motion?

Cash Collateral
I. 363(c)(2): Cash collateral cannot be used to operate the estate without consent of the creditor
or a court order.
II. Cash collateral is cash resulting from normal business activities, in which a creditor has a
security interest.
III. Creditors are usually amenable to an agreement on cash collateral, recognizing that it is
essential to the value of the business as a going concern. Sometimes conditions on the
bankruptcy filing are demanded.
IV. If it gets to a court, the DIP needs to show that the pre-petition lender is adequately protected.
Cash collateral is governed by Section 363 of the Bankruptcy Code. The relevant
sections are as follows:
(a) In this section, “cash collateral” means cash, negotiable
instruments, documents of title, securities, deposit accounts, or
other cash equivalents whenever acquired in which the estate
and an entity other than the estate have an interest and
includes the proceeds, products, offspring, rents, or profits of
property . . ., whether existing before or after the
commencement of a case under this title. * * *
(c)(2) The trustee may not use, sell, or lease cash collateral under
paragraph (1) of this subsection unless—

(A) each entity that has an interest in such cash collateral


consents; or
(B) the court, after notice and a hearing, authorizes such use,
sale, or lease in accordance with the provisions of this section.

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Bankruptcy Code section 363(c) provides that the DIP may use “cash
collateral” only with (a) creditor consent or (b) a court order. In a contested
hearing, the pre-petition lender has the burden to prove the “validity, priority
or extent” of its interest in cash collateral. The debtor has the burden of
proving that the pre-petition lender is “adequately protected.” . . . [Recall
that “adequate protection” is explained in section 361 and Unit 4.]
Negotiated cash-collateral orders are fairly common.
A pre-petition lender is also often the DIP lender in a chapter 11 case. Thus, a single motion often
combines a request to use cash collateral with a request to incur DIP financing. A common tactic of such
pre-petition lenders/DIP financiers is to characterize a contemplated DIP financing that includes
permission to use cash collateral as purely a DIP financing. However, bankruptcy courts understand that
different rights ought to inure to a lender who makes a truly new advance of funds as opposed to a
lender who is merely permitting the use of cash collateral.

DIP Financing
II. 364(a): A trustee/DIP can obtain unsecured credit and incur unsecured debt in the ordinary
course of business, which will be allowable under 503(b)(1) as an administrative expense.
III. 364(b): Allows a court to permit unsecured credit/incurring unsecured debt that does not fit
under 364(a) (not limited in “ordinary course”) after notice and a hearing, which will be
allowable under 503(b)(1) as an administrative expense.
IV. Administrative expenses have priority over all other expenses in Chapter 11, and 1129(a)(9)
(A) requires payment of them in full, in case, on confirmation.
a. If the filing is converted to Chapter 7, administrative expenses incurred under Chapter 7
get priority over those incurred under Chapter 11.
b. Administrative priority is usually enough to convince vendors to continue engaging with
a debtor. However, it may not be enough to convince new lenders.
i. 364(c): If a lender will not otherwise lend to a DIP, the DIP, after authorization
by the court, can offer superpriority- priority over “any or all administrative
expenses,” security by a lien on property not encumbered by a lien, or a junior
lien on previously encumbered property.
1. Unencumbered property exists because:
2. 552(a): Property acquired by the estate after commencing the case is not
subject to any lien resulting from any agreement formed prior to
commencement. 552(b): a lien attached to the proceeds, products,
offspring, or profits of property that was agreed to pre-commencement
will still attach post-commencement.
ii. 364(d): If no other option works, the court, after notice and a hearing, may
authorize credit secured by offering a senior “later-in-time” lien on property
already subject to a lien. This MUST provide adequate protection for the pre-
petition lien holder (since there is no unencumbered property, this is usually
premised on the future profitability built on the back of the new financing).

There are additional reporting requirements for the debtor (see 308 and 1116)
1. When a Chapter 11 case is converted to Chapter 7, section 726(b) requires
that the administrative expenses incurred in the Chapter 7 part of the case be paid

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in full before the administrative expenses incurred in the Chapter 11 part of the
case can be paid; and
2. Section 364(c), which we will consider next, empowers the court to grant
qualifying post-petition creditors a priority over administrative expenses.
Under section 364(c), a debtor in possession needing additional financing can offer
a DIP lender
(1) priority over any or all other administrative expenses,
(2) a lien on property that is not subject to a lien (lien on unsecured property)
and/or
(3) a junior lien on property already subject to a lien.

“property of the estate not otherwise subject to a lien.”


section 552(a)
“property acquired . . . by the debtor after the commencement of the case is
not subject to any lien resulting from a security agreement entered into by
the debtor before the commencement of the case.”
But Section 552(b) is subject to an exception:
11 U.S.C. § 552(b)
[I]f the debtor and an entity entered into a security agreement before the
commencement of the case and if the security interest created by such
security agreement extends to property of the debtor acquired before the
commencement of the case and to proceeds, product, offspring, or profits
of such property, then such security interest extends to such proceeds,
product, offspring, or profits acquired by the estate after the
commencement of the case . . ., except to any extent that the court, after
notice and a hearing and based on the equities of the case, orders
otherwise.”
Problem: “Property of The Estate Not Otherwise Subject To A Lien”
In 2015, SP entered into a loan agreement with G & L Marble Co., a company that quarries, processes and sells
natural stones and tiles. The loan agreement granted SP a security interest in “all of G & L Marble’s inventory of
processed granite slabs and tiles, now owned or later acquired.” In 2016, G & L Marble Co. filed a Chapter 11
petition. Does G & L Marble Co have “property of the estate not otherwise subject to a lien”? no Does your answer
change if G & L acquires more granite slabs and tiles after it files for bankruptcy? No, this is not proceeds from
after acquired property (exception in 552 (b).)

Buyer buys computer post-petition- security agreement will not attach even if security agreement contrains an
after-acquired property clause.
Buyer sells computer- floating lien on proceeds. Secured party’s lien will extend to proceeds.
Distinction between after-acquired collateral or proceeds of original collateral.

Pursuant to §552(a), "property acquired by the estate or by the debtor after


the commencement of the case is not subject to any lien resulting from any
security agreement entered into by the debtor before the commencement of
the case." 11 U.S.C. §552(a). Section 552(b), however, provides an exception
to §552(a) for proceeds, products, offspring or profits of encumbered pre-
petition property, except to any extent that the court, after notice and
hearing and based on the equities of the case, orders otherwise.

DIP Financing
364 (a) - debt in ordinary course will not require court approval; granted administrative expense priority
364 (b) – debt not in ordinary course but has court approval and granted administrative expense priority

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364 (c) – debt not under (a) and (b) debtor can offer: (1) super priority; (2) lien in unsecured property
(post petition property 552 (a) except if pre-petition, they agree on lien on pre-petition property and
post-petition proceeds on proceeds of property, lien extends to proceeds post-petition); (3) Junior lien
on property already subject to lien.

Administration of a Chapter 11 Case; Everyday Issues and Getting Ready


to File a Plan of Reorganization

A. Living in a Fishbowl: Reporting Duties

Bankr. R. 1007- Debtors in bankruptcy have to files schedules of creditors, assets


and liabilities. They also have to file a Statement of Financial Affairs. See Forms
106A through 106J, at http://www.uscourts.gov/forms/bankruptcy-forms.

information -all dates as of the date of filing.


post-petition operations- “operating reports” on a monthly basis. Trustee has to
submit monthly cash flow; tax reconciliation statements, and listings of changes in
its postpetition assets. See OFFICE OF THE UNITED STATES TRUSTEE, UNITED
STATES TRUSTEE PROGRAM POLICY AND PRACTICES MANUAL §§ 3-3.3 to 3-3.6
(2015).

Ordinary Course of Business – Section 363 (b)


11 U.S.C. § 363(b) & (c)
(b)(1) The trustee, after notice and a hearing, may use, sell, or lease, other
than in the ordinary course of business, property of the estate, . . . .
(c)(1) If the business of the debtor is authorized to be operated under section 721,
1108, 1203, 1204, or 1304 of this title and unless the court orders otherwise, the
trustee may enter into transactions, including the sale or lease of property of the
estate, in the ordinary course of business, without notice or a hearing, and may use
property of the estate in the ordinary course of business without notice or a hearing

Sale as a Going Concern


I. Rather than completely reorganizing, some debtors simply opt to sell the business. 363 is
now interpreted to permit sales of the whole business.
II. 363(b): sales outside the ordinary course of business require court approval (this includes
sales of the full business). Such approval is normally governed by the business judgment
rule.

Authorization to Run Business. § 1108.


i. Does not need court approval if “in ordinary course of business. § 363(c).
ii. Horizontal: How all similar businesses operate
iii. Vertical: How this particular debtor operated
iv. Key is creditor expectations
v. If not ordinary, need course approval after notice and hearing. § 363(b)

Section 363 -- The Ordinary Course of Business


The first step of our analysis requires us to determine whether the courts below
properly held that Lavigne’s initial cancellation of the policy was invalid under 11

11
U.S.C. § 363(b)(1). The bankruptcy court found that the cancellation was “part of
an illogical and desperate course of action” culminating with the closing of
Lavigne’s last office and his attempted suicide. In re Lavigne, 183 B.R. at 70. We
agree that cancellation was beyond the ordinary course of business and required
notice under section 363(b)(1).
Lavigne’s insurance policy with MMIA was property of the bankruptcy estate. See In
re Johns-Manville Corp., 837 F.2d 89, 91-93 (2d Cir. 1988). Section 363(c)(1) of the
Bankruptcy Code authorizes a debtor-in-possession to enter into
transactions involving property of the estate within the ordinary course of
business without notice or a hearing. How
ever, where the transaction is outside the ordinary course of the debtor’s
business, the debtor may not “use, sell, or lease” estate property until
creditors and other interested parties are given notice of the proposed
transaction and the opportunity for a hearing if they object
Because Lavigne gave no notice of the proposed cancellation to his
creditors, the transaction is null and void if it was beyond the ordinary
course of business.
The term “ordinary course of business” generally has been accepted “to
embrace the reasonable expectations of interested parties of the nature
of transactions that the debtor would likely enter in the course of its
normal, daily business
two tests:
(1) the “creditor’s expectation test” also known as the “vertical test,”
-the court “views the disputed transaction from the vantage point of a hypothetical
creditor and inquires whether the transaction subjects a creditor to economic risks
of a nature different from those he accepted when he decided to” enter into a
contract with the debtor.
a hypothetical malpractice claimant and trade creditor would not expect Lavigne “to
cancel his malpractice insurance in light of the bankruptcy proceeding, the
cessation of his medical practice and the outstanding claims against him
not reasonable to expect a doctor facing over seventy malpractice claims without
the ability to generate revenue from his practice to cancel his policy without
purchasing tail coverage.

2) the “industry-wide test” also called the “horizontal test.”


an industry-wide perspective in which the debtor’s business is compared to other
like businesses. In this comparison, the test is whether the postpetition transaction
is of a type that other similar businesses would engage in as ordinary business.
A reasonable physician practicing high risk laser surgery, facing a multitude of
claims and who has lost the ability to generate income would not have cancelled his
insurance policy without opting for tail coverage.

The circumstances surrounding Lavigne at the time of the cancellation make such
an act extraordinary for which notice was required under section 363(b)(1)
MMIA claims that the transaction was ordinary is not correct. Lavigne decided to
close his remaining practice. Lavigne never purchased the tail coverage because
two days after the cancellation, he attempted suicide. While it may be within the
ordinary course of business for professionals to cancel their professional liability
coverage and purchase tail coverage upon the closing of their practice, the
cancellation here was clearly an extraordinary action requiring notification.

12
No notice, cancellation was void and the policy remained the property of the estate
through the conversion from Chapter 11 to Chapter 7.

Priorities
I. Priority only applies to unsecured claims, varying the typical pro-rata schemes. It is
important to remember that secured claims and liens still rank above prioritized claims in
bankruptcy, and are administered according to their priority outside of bankruptcy.
a. In Chapters 11, 12, and 13, priority claims must be paid in full, but sometimes payment
can be stretched over time.
b. In Chapter 7, priority claims are paid in the order in which they are listed in 507. One
class is paid in full first, and then move to pro rata payments of the next priority class.
See 726(a)(1).
II. Administrative Priority
a. 507(a)(1)(A+B): Allowed unsecured claims for domestic support obligations, subject to
(C): administrative expenses of the trustee under 503(b)(1)(A), (2), and (6) are to be paid
prior to the claims in (A) and (B).
i. 503(b)(1)(A): actual, necessary costs and expenses of preserving the estate,
including wages, salaries, commissions for services rendered after the
commencement of this case.
ii. 503(b)(2): compensation and reimbursement awarded under 330(a)
b. 507(a)(2): Administrative expenses allowed under 503(b) and any fees and charges
assessed against the estate under chapter 123 of title 28.
i. 503(b)(9): “the value of any goods received by the debtor within 20 days before
the date of commencement of a case…in which the good have been sold to the
debtor in the ordinary course of such debtor’s business.” Note: This normally
would be a pre-petition claim, but the 2005 Amendments included it as an
administrative claim.
c. 507(a)(4): Wages earned in the 180 days prior to filing or cessation of business, only up
to $12,475 per employee.
d. 507(a)(5): Contributions to an employee benefit plan for services rendered in the 180
days prior…, but only to the extent of the unused portion of the allowance in 507(a)(4).
i. Howard Delivery Service v. Zurich American Insurance (2006)(CB 5-26):
Payments to a workers’ compensation carrier are not included in the
heading of “benefits.”
e. Administrative priority will be granted to those expenses that arose out of transactions
between a creditor and the trustee/debtor-in-possession. The service must have been
“induced” by the debtor-in-possession, not the pre-petition debtor.
III. Subordination
a. 510(a): “A subordination agreement is enforceable in a case under this title to the same
extent that such an agreement is enforceable under applicable nonbankruptcy law.”
i. This means that creditors can form agreements before a bankruptcy about
who will have priority if a bankruptcy occurs.
b. 510(c): The court has an equitable power to change priority (usually done to remove
priority from a creditor who has acted inequitably and harmed other creditors). Test:
i. The claimant engaged in some type of inequitable conduct;
ii. The misconduct caused injury to the creditors or conferred unfair advantage on
the claimant;
iii. Equitable subordination of the claim is consistent with bankruptcy law.

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IV. Priority only applies to unsecured claims, varying the typical pro-rata schemes. It is
important to remember that secured claims and liens still rank above prioritized claims in
bankruptcy, and are administered according to their priority outside of bankruptcy.
a. In Chapters 11, 12, and 13, priority claims must be paid in full, but sometimes payment
can be stretched over time.
b. In Chapter 7, priority claims are paid in the order in which they are listed in 507. One
class is paid in full first, and then move to pro rata payments of the next priority class.
See 726(a)(1).
V. Administrative Priority
a. 507(a)(1)(A+B): Allowed unsecured claims for domestic support obligations, subject to
(C): administrative expenses of the trustee under 503(b)(1)(A), (2), and (6) are to be paid
prior to the claims in (A) and (B).
i. 503(b)(1)(A): actual, necessary costs and expenses of preserving the estate,
including wages, salaries, commissions for services rendered after the
commencement of this case.
ii. 503(b)(2): compensation and reimbursement awarded under 330(a)
b. 507(a)(2): Administrative expenses allowed under 503(b) and any fees and charges
assessed against the estate under chapter 123 of title 28.
VI. Creditor Requests for Conversion or Dismissal
a. 1112(b)(1): The case shall be converted and dismissed for cause.
b. 1112(b)(4): Sixteen incidences of cause. The list is not exhaustive.
i. Marshall v. Marshall (In re Marshall) (2013)(CB 10-12): Bad faith may be
“cause.” The most damning evidence against bad faith is a plan actually
qualifying for confirmation.
c. 1112(b)(2): If the court identifies “unusual circumstances specifically identified by the
court that establish that the requested conversion or dismissal is not in the best interest of
creditors and the estate” the requirement to convert or dismiss is not mandatory.
i. 1112(b)(2): Also requires that a debtor or another party in interest establish:
ii. (A): there is reasonable likelihood that a plan will be established in the
appropriate timeframes established in 1121(e) and 1129(e), or within a
reasonable period if those timeframes do not apply
iii. (B): The grounds for conversion or dismissal include a debtor’s act or omission
other than those in 1112(b)(4) for which there is a reasonable justification and
that will be cured in a reasonable time fixed by the court.

Leases and Executory Contracts


I. Executory Contract: A contract in which both sides have some obligations that are still due,
and which, if not fulfilled, are a material breach of the contract.
a. Examples: Leases, supply contracts, intellectual property licenses, etc.
II. 365: The trustee has one of three choices with regard to executory contracts:
a. (a): Rejection: This will be treated as a material breach of contract, and the non-debtor
party will have whatever remedies they would have had under non-bankruptcy law.
365(g) impacts rejection by categorizing the damages from the breach as having arisen at
the time of the order of relief (making them pre-petition claims).Estate must show it
exercises good faith business judgment in determining that the executory contract is a
burden-cost more to perform.
b. (a): Assumption: The estate assumes the benefits and burdens of the contract.

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c. (f): Assignment: Sale of an intangible right. Someone else will take over the benefits and
burdens of the contract. Unlike in non-bankruptcy law, assignment of the contract under
365(k) relieves the original party of all obligations.
d. There is no statutory right to modification of the terms of an unexpired lease or
executory contract. The debtor may, however, be able to convince the other party to
agree to modifications.
i. In fact, most motions to assume are actually motions to amend and assume.

Consequences
I. Assumption
a. In re Enderle (2006)(CB 12-3): Assuming an unexpired lease constitutes a post-
petition obligation, which means that default is entitled to administrative priority
under 503(b)(1)(a).
II. Rejection
a. In re Old Carco LLC F/K/A Chrysler LLC (2010)(CB 12-5): In case of a rejection, state
law will help determine the amount of the relevant claim, but it will not impact
priority. 365(g) clearly states that rejection creates a pre-petition claim.
III. Assignment
a. In re DH4, Inc. (2007)(CB 12-9): Once there has been adequate assurance of future
performance by the assignee, 365(f)(2)(B), and the court has approved the
assignment, 365(k) relieves the debtor of any responsibility for an assigned contract.
State law cannot change this; neither can the terms of a lease.

Time to “Choose”
I. 365(d)(4): With regard to nonresidential real property, the trustee must assume or reject the
unexpired lease within 120 days of the order for relief (or before a plan is confirmed). One
90 day extension is permitted for cause. Any extension beyond this must be approved by the
lessor and the court.
a. If a decision is not made within that time period, the contract is deemed rejected.
II. 365(a): The trustee makes the decision to accept or reject, subject to the approval of the
court. The court typically uses a business judgment rule when considering approval.

Requirements for Assuming a Lease


I. 365(b)(1): If there has been a default in an executory contract or unexpired lease, the trustee
may not assume unless at the time of assumption the trustee
a. (A): cures, or provides adequate assurance that the trustee will promptly cure, such
default other than a default which is a breach of a provision relating to the satisfaction of
any provision relating to a default arising from any failure to perform nonmonetary
obligations under an unexpired lease of real property, if it is impossible to cure such
default by performing the acts at the time of assumption, except if the default arises from
a failure to operate in accordance with a nonresidential real property lease (that shall be
cured by performance at and after the assumption in accordance with the lease).
Pecuniary losses will be compensated in accordance with the provisions of 365(b).
i. Adequate assurance can take a number of forms, including additional security
deposits.
b. (B): compensates a party other than the debtor for any actual pecuniary loss to such party
resulting from the default.
c. (C): Provides adequate assurance of future performance.
II. 365(b)(2): Paragraph 1 does not apply to defaults that are a breach of a provision relating to
insolvency or financial condition of the debtor at any time before the close of the case, the
commencement of a bankruptcy case, the appointment of a trustee in a bankruptcy case, the

15
satisfaction of any penalty rate/provision relating to a default arising from any failure by the
debtor to perform nonmonetary obligations under the contract/lease.
III. In re M. Fine Lumber Co. (2008)(CB 12-17): If the contract provides for attorney’s fees in
the case of breach, then attorney’s fees can be required to cure the default.

The Gap Between Petition and Choice


I. 365(d)(1): Reg

II. arding residential property or personal property in a Chapter 7 case, if an


assumption/rejection decision is not made within 60 days, the contract is deemed rejected.
III. 365(d)(2): In all non-Chapter 7 cases, the deadline for the choice regarding residential
property or personal property is confirmation of the plan. The non-debtor party can request a
time limit, but those requests are rarely granted.
IV. 365(d)(3) and (5): Prior to a decision, the basic assumption is that the trustee will continue to
perform the obligations of the contract (weird time limits in (5)).

Pre-Bankruptcy Provisions and the Impact on Choice in Bankruptcy


I. 365(e): Any sort of ipso facto clause (bankruptcy or related events = default) in a contract
CANNOT be enforced in bankruptcy. The estate has full control of what it accepts or rejects,
and will get the full benefit of those decisions.
II. 365(f)(1): Notwithstanding any provision in the contract or in applicable law that prohibits,
restricts, or conditions the assignment of such contract or lease, the trustee may assign such
contract of lease under 365(f)(2) (subject to the trustee first assuming the contract and then
providing for adequate assurance of future performance by the assignee
a. 365(f)(3): Pre-bankruptcy provisions cannot terminate or modify the contract on the basis
of in-bankruptcy assumption or assignment.

Additional Issues in Assignment


I. Change in Use
a. Matter of U.L. Radio Corp. (1982)(CB 12-27): Ensuring that the lessor receives the
full benefit of his bargain does not mean that each and every term of the bargain
must be met in assignment. The preference favoring assumption encourages
moderate allowances when it comes to deviation from the original lease in
assignment.
b. 365(b)(3): There are special requirements with regard to use when it comes to shopping
centers, reflecting the careful planning that goes into their breakdown of use.
II. Contracts Not Open for Assignment
a. 365(c): The trustee may not assume or assign any executory contracts or unexpired lease
of the debtor if (1)(A) applicable law excuses a party to the contract from accepting
performance from or rendering performance to an entity other than the debtor or the
debtor in possession, whether or not the contract restricts assignment of rights or
delegation of duties, and (B) such party does not consent to such assumption or
assignment OR (2) such contract is a contract to make a loan or extend other debt
financing or financial accommodations, to or for the benefit of the debtor, or to issue a
security to the debtor.
i. What this means: Contracts specific to the individual, or types under state law,
cannot be assigned.
b. In re Pioneer Ford Sales (1984)(CB 12-32): 365(c)’s restrictions on contract
assumption are not limited to personal services contracts.
c. In re Catapult Entertainment, Inc. (1999)(CB 12-34): 365(c) specifically applies to
assumption, not only assumption and assignment. Without a patent holder’s

16
consent, the DIP cannot assume a nonexclusive patent license. If the DIP lacks
hypothetical authority to assign the contract, it cannot itself assume the contract.

Debtor as Landlord
I. 365(h)(1)(A): If the trustee rejects an unexpired lease where the debtor is lessor and (i) the
rejection amounts to such breach as would entitle the lessee to treat the lease as terminated by
the terms OR applicable nonbankruptcy law OR any agreement made by the lessee, the lessee
may treat such lease as terminated by the rejection OR (ii) if the lease has commenced, the
lessee may retain its rights under the lease (including requirements to pay rent), including all
rights in or appurtenant to the real property for the balance of the lease and for such
extensions as nonbankruptcy law permits.
II. 365(h)(1)(B): If the lessee exercises rights under 365(h)(1)(A)(ii), then the lessee may offset
from rent any damages the lessor’s failure to perform after rejection causes. There is no other
right of claim against the estate or debtor for such damage.

Debtor as Licensor of Intellectual Property


I. 365(n)(1)(A): If the trustee rejects an executory contract under which the debtor is the
licensor of intellectual property, the licensee may elect to treat the contract as terminated by
the rejection if the rejection would amount to breach allowing the license to treat the contract
as terminated under the contract’s terms, nonbankruptcy law, or an agreement made by the
licensee with another entity OR
II. 365(n)(1)(B): To retain its rights as they existed immediately before commencement of the
case for the duration of the contract and any period that applicable law would permit for
extensions.
III. 365(n)(2): If the licensee elects to retain its rights, (A) the trustee shall allow the licensee to
exercise the rights, (B) the licensee shall make all royalty payments due under the contract for
the duration of the contract, and (C) the licensee is deemed to waive any right to setoff it may
have with respect to the contract under applicable nonbankruptcy law, and any claim
allowable under 503(b) arising from the performance of the contract.

Plan Confirmation
I. Whatever the plan provides (allowing for adequate protection, etc.), is what gets dispersed.
II. Chapter 11 Distribution

17
a. Cash
b. Notes
c. Equity Securities

Stocks and Bonds


Companies can raise money in two principal ways: by selling equity, or shares, and
selling debt through bonds. Investors who buy bonds get an interest payment, but
no ownership in the company. Stockholders gain the possibility of dividends,
although not the guarantee of such, as well as ownership in the company.
Therefore, bondholders legally are due to receive their money back with interest,
while a stockholder is not. This is true regardless of whether the company is public
or private.
Bankruptcy Rules
That legal obligation is what puts debt owners ahead of stockholders when a
company goes into Chapter 7 bankruptcy. The company's assets will be liquidated,
and the money will go toward paying off all the company's outstanding debts; this
includes bond obligations. If there is any money left over after all the creditors have
been paid off, the stockholders may get some of their money back as well. In
general, however, bondholders have priority over stockholders in bankruptcy.
The Hierarchy
Not all stocks and bonds are created equally. First in line to be paid off during
bankruptcy is senior debt, which is backed by company assets. Next is junior debt,
which is not secured by assets. After that comes preferred stock, which usually does
not give the owner the power to vote on company issues, and finally common, or
voting stock. Buying common stock grants the owner the most power when it comes
to controlling the company, but the lowest priority in getting repaid in bankruptcy.

III. Chapter 11 Classes


a. 1123(a)The plan shall distinguish creditors into classes. The three major classes are
secured creditors, unsecured creditors, and equity holders. In some cases, each
secured claims holder is given their own class.
i. 1122(a): Members of a class must be substantially similar to other members of
the class.
ii. 1123(a)(4): All claims in a class must be treated in the same manner.
iii. The code does not define “class” or “class of claims.”
iv. In re Keck, Mahin & Cate (1999)(CB 10-43): Secured claims are usually put in
their own classes since they are typically different than other secured claims
(security in different property, different priority levels in the same property, etc).
When secured claimholders share a pro-rata interest in the same security,
they can be placed in the same class.
v. In re Dow Corning Corp. (2002)(CB 10-45): When there are economic reasons
for different classifications of claimants, the classification will be
permissible.
1. Dow separately classified foreign tort claimants based on the fact that
foreign torts payouts were often substantially lower than domestic.
b. All classes must approve of the plan. Individual creditors can be outvoted within their
class.

18
i. 1126(c)/(d): A class of claims/interest is deemed to have accepted the plan if
such plan has been accepted by creditors representing two-thirds in amount and
one-half in number of the allowed claims of such class.
c. 1129(a)(8)(B): Unimpaired classes are deemed to approve of the plan.

A. The Basic Consent Requirement: Voting


11 U.S.C. § 1129(a)(8)
(a) The court shall confirm a plan only if all of the following requirements are
met:
***
(8) With respect to each class of claims or interests—
(A) such class has accepted the plan; or
(B) such class is not impaired under the plan.
Section 1129(a)(8) is one of the sixteen mandatory confirmation requirements, and
in some respects it is the most important. It requires that, to confirm a plan
consensually, each class of creditors must accept the plan.
B. The Standards for Voting
11 U.S.C. § 1126(c), (d)
(c) A class of claims has accepted a plan if such plan has been
accepted by creditors, other than any entity designated under subsection
(e) of this section, that hold at least two-thirds in amount and more than
one-half in number of the allowed claims of such class held by creditors,
other than any entity designated under subsection (e) of this section, that
have accepted or rejected such plan.
(d) A class of interests has accepted a plan if such plan has been
accepted by holders of such interests, other than any entity designated
under subsection (e) of this section, that hold at least two-thirds in
amount of the allowed interests of such class held by holders of such
interests, other than any entity designated under subsection (e) of this
section, that have accepted or rejected such plan.
Problems on the Mechanics of Voting
1. Flintco has ten unsecured creditors, each of which is owed $10 (for a total debt
of $100). They are all classified together for purposes of Flintco’s plan. Does the
class accept or reject the plan under the following scenarios:
(a) Five creditors turn in ballots. Three vote in favor of the plan, and two reject
it.
(b) Six creditors turn in ballots. Four vote in favor of the plan, and two reject it.
(c) Only one creditor turns in a ballot, and votes in favor of the plan.
(d) No creditor turns in a ballot.
2. Assume the facts in Problem 1, above except now the ten creditors are owed
money as follows: Two creditors are owed $30 each, and the remaining eight
creditors are owed $5 each (again for a total of $100 in debt). Does the class
accept or reject the plan under the following scenarios:
(a) All creditors turn in ballots. The two creditors holding $30 claims each vote in
favor of the plan; all other creditors reject it.
(b) All creditors turn in ballots. The two creditors holding $30 claims each vote in
favor of the plan, as do two creditors holding $5 claims. All other creditors reject it.
(c) All creditors turn in ballots. All eight creditors owed $5 vote in favor of the
plan; the two other creditors reject it.

19
(d) All creditors turn in ballots. Seven of the eight creditors owed $5 and one of
the creditors owed $30 vote in favor of the plan; the remaining two creditors (one
with a $30 claim and one with a $5 claim) vote to reject.
(e) The following are the only votes cast: One creditor holding a $30 claim votes
to accept; one creditor holding a $5 claim votes to reject.

d. 1123: Sets the limits on what the plan must include.


i. 1126/1129: Sets the real limits on what the plan will include (creditor/court
approval)
11 U.S.C. § 1123(a)(1)
(a) Notwithstanding any otherwise applicable nonbankruptcy law, a
plan shall—
(1) designate, subject to section 1122 of this title, classes of claims,
other than claims of a kind specified in section 507(a)(1), 507(a)(2), or
507(a)(8) of this title, and classes of interests; What’s a “class” of claims?
See Section 1122:
11 U.S.C. § 1122
(a) Except as provided in subsection (b) of this section, a plan may
place a claim or an interest in a particular class only if such claim or
interest is substantially similar to the other claims or interests of such
case.
(b) A plan may designate a separate class of claims consisting only of
every unsecured claim that is less than or reduced to an amount that the
court approves as reasonable and necessary for administrative
convenience.
Note that Section 1122 doesn’t tell you what a “class” is; it just tells you what a
plan may do to a class, and some things it may not do.
Problems on Classification
1. Balrog, Inc. has a former president who owns 25% of the common stock of
Balrog and who also hold two notes of the company: one which is secured by
inventory, and the other of which is unsecured. May Balrog place the former
president in a class by himself and provide that that class will take nothing?
2. Balrog has a secured creditor, Kram. When Balrog filed, Balrog owed Kram
$100,000. Kram’s security, however, is only worth $25,000. May Balrog place
Kram in a class by itself and propose that it be paid 10% on the dollar for all claims?
Section 1123(a) goes on to require that the plan do the following as well:
11 U.S.C. § 1123(a)(2)-(4)
(2) specify any class of claims or interests that is not impaired under the
plan;
(3) specify the treatment of any class of claims or interests that is
impaired under the plan;
(4) provide the same treatment for each claim or interest of a particular
class, unless the holder of a particular claim or interest agrees to a less
favorable treatment of such particular claim or interest; . . . .

11 U.S.C. § 1123(a)(5)
(a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan
shall—

20
***
(5) provide adequate means for the plan’s implementation such as—
(A) retention by the debtor of all or any part of the property of the estate;
(B) transfer of all or any part of the property of the estate to one or more
entities, whether organized before or after the confirmation of such plan;
(C) merger or consolidation of the debtor with one or more persons;
(D) sale of all or any part of the property of the estate, either subject to or
free of any lien, or the distribution of all or any part of the property of the
estate among those having an interest in such property of the estate;
(E) satisfaction or modification of any lien;
(F) cancellation or modification of any indenture or similar instrument;
(G) curing or waiving of any default;
(H) extension of a maturity date or a change in an interest rate or other
term of outstanding securities;
(I) amendment of the debtor’s charter; or
(J) issuance of securities of the debtor, or of any entity referred to in
subparagraph (B) or (C) of this paragraph, for cash, for property, for existing
securities, or in exchange for claims or interests, or for any other appropriate
purpose . . .
Problem on Plan Contents
Mayco, Inc. has the following simplified capital structure:

Assets: $30,000,000

Secured $20,000,000 (all covered by


Debt: collateral)

Unsecured Debt: $30,000,000

Equity (20,000,000)

Evaluate whether the following ways of implementing the plan are permissible
under Section 1123(a):
(a) The plan proponent intends to cancel all debt, cancel all equity,
and issue 2 shares of common stock to the secured creditors, and 3
shares of common stock to the unsecured creditors;
(b) The plan proponent intends to cancel all debt, cancel all equity,
and issue a note to secured creditors in the amount of $20,000,000,
secured by their present collateral, and issue all common stock in the
reorganized debtor to all unsecured creditors;
(c) The plan proponent intends to cancel all debt, cancel all equity,
and issue a $18,000,000 unsecured note to the unsecured creditors, and
issue all the common stock in the reorganized debtor to the secured
creditors
d. What May a Plan Contain?

21
Section 1123(a) specifies what a plan must have to be confirmed. In many cases,
those provisions will be sufficient to provide creative lawyers with means to
restructure a debtor in financial trouble. But other provisions may assist, and that
is the function of Section 1123(b). It provides:
11 U.S.C. § 1123(b)
(b)Subject to subsection (a) of this section, a plan may—
(1) impair or leave unimpaired any class of claims, secured or unsecured,
or of interests;
(2) subject to section 365 of this title, provide for the assumption, rejection,
or assignment of any executory contract or unexpired lease of the debtor not
previously rejected under such section;
(3) provide for—
(A) the settlement or adjustment of any claim or interest
belonging to the debtor or to the estate; or
(B) the retention and enforcement by the debtor, by the trustee, or by a
representative of the estate appointed for such purpose, of any such claim or
interest;
(4) provide for the sale of all or substantially all of the property of the
estate, and the distribution of the proceeds of such sale among holders of
claims or interests;
(5) modify the rights of holders of secured claims, other than a claim
secured only by a security interest in real property that is the debtor’s
principle residence, or of holders of unsecured claims, or leave unaffected the
rights of holders of any class of claims; and
(6) include any other appropriate provision not inconsistent with the
applicable provisions of this title.

IV. Submission and Approval Timeline


a. 1121(b): The debtor has exclusive right to submit a plan for the first 120 days. 1121(c)
(3): The debtor then has 60 days after that 120 day deadline to have the plan approved by
all impaired class.
b. 1121(c): If a trustee has been appointed, the debtor has not filed a plan within the first
120 days, or a plan the debtor submitted has not been approved within the first 180 days,
any party in interest can then submit a plan.
c. 1121(d)(1): The timelines above may be reduced or extended for cause.
i. (A): The extension of debtor exclusivity may not be for longer than 18 months.
ii. (B): The extension of debtor exclusivity for approval may not be past 20 months.
d. 1125(a)/(b): The plan proponent files the plan and a disclosure statement, which
provides adequate information for a reasonable investor to make an informed
judgment about the plan. The court declares what constitutes adequate information,
after which a plan proponent may solicit creditor approval of the plan.
i. Adequate information has the same goal as securities law: informed decision-
making.
ii. 1125(c): Different disclosure statements can be sent to different classes, but not
to different claims within a class.

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11 U.S.C. § 1125(b)
(b)An acceptance or rejection of a plan may not be solicited after the
commencement of the case under this title from a holder of a claim or
interest with respect to such claim or interest unless, at the time of or
before such solicitation, there is transmitted to such holder the plan or a
summary of the plan, and a written disclosure statement approved, after
notice and a hearing by the court as containing adequate information.
The court may approve a disclosure statement without a valuation of the
debtor or an appraisal of the debtor’s assets.
What is adequate information? That concept is defined in Section 1125(a):
(a) In this section—
(1) “adequate information” means information of a kind, and in sufficient
detail, as far is reasonably practicable in light of the nature and history of
the debtor and the condition of the debtor’s books and records, that would
enable a hypothetical reasonable investor typical of holders of claims or
interests of the relevant class to make an informed judgment about the plan,
but adequate information need not include such information about any other
possible or proposed plan; and
(2) “investor typical of holders of claims or interests of the relevant class”
means investor having—
(A) a claim or interest of the relevant class;
(B) such a relationship with the debtor as the holders of other claims or
interests of such class generally have; and
(C) such ability to obtain such information from sources other than the
disclosure required by this section as holders of claims or interests in such
class generally have.

e. 1129(a): Even with unanimous approval, the court cannot approve a plan that is not
proposed in good faith, is partially forbidden by law, etc.
V. Pre-Pack Plans
a. A pre-pack is when the debtor negotiates with creditors pre-filing, and then submits the
plan and disclosure statement all at once at asks for approval.
b. 1126(b): If the court approves everything, the pre-petition solicitations of approval may
count for plan approval.
c. Risk: The court may not approve the pre-petition disclosure statements, mooting
everything.
d. Problem: There is no automatic stay protection.
DAY 4

Sale as a Going Concern


I. Rather than completely reorganizing (going through the Chapter 11 process), some
debtors simply opt to sell the business. 363 is now interpreted to permit sales of the whole
business. This is done through a Motion to Sell to an Identified Bidder, assign
all executory contracts.
II. 363(b): sales outside the ordinary course of business require court approval (this includes
sales of the full business). Such approval is normally governed by the business judgment
rule.
III. 363(f): It is possible to sell a business “free and clear of any interest in such property of an
entity other than the estate,” stripping off any other security interests in the property. (This
is not afforded in state law)

23
a. This can only be done under certain circumstances:
i. (3): if the sale price is greater than the aggregate values of all liens
(oversecured properties can be sold without consent of lien holders)
ii. (2): if the entities with pre-petition interests consent to the sale (failure to
respond to notice of sale is construed as consent).
iii. (4): if you have a bona fide dispute over the interest, you can sell free of that
interest (but the interest likely still attaches to proceeds)
b. This can lead to a much higher purchase price than property encumbered by liens.
c. 363(f) is still subject to adequate protection concerns, so the liens stripped are usually
transferred to the proceeds of the sale.
d. 363(f) may also break the chain of successor liability. But give adequate
protection to those stripped of security.
e. 363(k): A lien holder may bid on the property/company, and offset its purchase price by
the amount of its lien. Secured creditor can credit bid; this is very important
so that if first bidder bids, bid can be challenged by credit bid.
f. 363(m): Only good faith is required to show that the sale is valid. All appeals are moot.
i. Campbell v. Motors Liquidation Co. (In re Motors Liquidation Co. et al. F/K/A
General Motors Corp.) (2010)(CB 10-28): Absent a stay, mootness of appeals
in 363(b) sales is almost inevitable, because the court would essentially have
to rewrite a sale agreement based on a successful appeal—something they
lack the power to do.
Appellate Jurisdiction over unstayed sale order issued by a
bankruptcy court is limited to whether the property was sold in
good faith.
g. In re On-Site Sourcing, Inc. (2009)(CB 10-21): Elements of a 363 sale designed to
substitute for a Chapter 11 plan will not be permitted, as they constitute a run-
around of the plan process.
IV. If there are no assets remaining after the secured creditors, professionals, and government
creditors get paid, the Asset Purchase Agreement typically provides for dismissal of the
Chapter 11 case. If there are assets to distribute, the Agreement typically provides for
conversion to Chapter 7.
a. In re Buffet Partners, LP (2014)(CB 10-35): A structured dismissal can avoid the
unnecessary cost/expense of conversion to Chapter 7, while still not rising to the
level of a sub rosa plan.
b. In re Humboldt Creamery, LLC (2009)(CB 10-38): 363 sales are often premised on the
fact that the company is losing value, and if not purchased immediate, all value as a
going concern will be lost. This is too easy for companies to manipulate for courts to
take such a lackadaisical approach to reviewing the cases.

11 U.S.C. § 363(f)
(f) The trustee may sell property under subsection (b) or (c) of this section free
and clear of any interest in such property of an entity other than the estate,
only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such
interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater
than the aggregate value of all liens on such property; (4) such interest is in bona
fide dispute; or

24
(5) such entity could be compelled, in a legal or equitable proceeding, to
accept a money satisfaction of such interest. Problems: Sales Free and Clear
BurnRubber, Inc. (BRI) manufactures tires. It has hit a bad patch of the road, and files for chapter 11
bankruptcy. Tired of being not paid, its lender, Scorched Earth, Inc., (SEI) tells BRI that it plans to move
to dismiss its case—“No use running on flat tires.” SEI threat has to be taken seriously; BRI owes SEI
$15,000,000, and SEI holds a first lien on all of BRI’s assets. But BRI has a sale in mind; Smooth Movers
LLC (SML) has offered to buy all of BRI’s assets for $12,000,000 (which all agree is a fair price), but with a
condition: they want the bankruptcy court to enter an order stating that they will obtain the assets free
and clear of all claims, including SEI’s.
1. Assume that SEI consents, because it prefers SML to BRI. Can the court authorize the
sale free and clear? What paragraph of Section 363(f) would you use? What if BRI sends notice to SEI,
and SEI does or says nothing in response? See In re GSC, Inc., 453 B.R. 132, 183 (Bankr. S.D.N.Y. 2011)
(“Consent pursuant to section 363(f)(2) may be satisfied where an entity has not objected to a sale.”)
2. Assume that SEI does not consent, and there is no disputing its claim. Can the court
authorize the sale free and clear? What paragraph of Section 363(f) would you use? See Clear Channel
Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 39–40 (B.A.P. 9th Cir. 2008)
(rejecting the claims that, although “conventional bankruptcy wisdom, supported by § 506(a), [holds
that] the amount of an allowed secured claim can never exceed the value of the property securing the
claim, [and since] a secured claim is a form of “lien,” see 11 U.S.C. § 101(37), . . . an estate
representative may use § 363(f)(3) to sell free and clear of the property rights of junior lienholders
whose nonbankruptcy liens are not supported by the collateral’s value. That is, there may be a sale free
and clear of “out-of-the-money” liens.”).
3. Assume that SEI does not consent, but that BRI contests its claim. Can the court
authorize the sale free and clear? What paragraph of Section 363(f) would you use? What if BRI’s claim
is baseless? Just how good does it have to be?
4. Assume that BRI also owes $2,000,000 to BancVulcan (BV). Can the court authorize the
sale free and clear if SEI consents but not BV (and there is no disputing BV’s claim)? What paragraph of
Section 363(f) would you use? Compare Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R.
25, 42 (B.A.P. 9th Cir. 2008) (“Although it is tautological that liens securing payment obligations can be
satisfied by paying the money owed, it does not necessarily follow that such liens can be satisfied by
paying any sum, however large or small. We assume that paragraph (5) refers to a legal and equitable
proceeding in which the nondebtor could be compelled to take less than the value of the claim secured
by the interest.”) with In re Jolan, Inc., 403 B.R. 866, 870 (Bankr. W.D. Wash. 2009) (“Because there are
in Washington legal and equitable proceedings by which lienholders may be compelled to accept money
satisfactions, § 363(f)(5) here permits a sale free and clear of liens, with the liens attaching to the
proceeds, notwithstanding that those proceeds may be insufficient to pay all liens.”).
Questions About Campbell
1. Trick question: Did the court rule that the assets could be sold free and clear of present
or future products liability claims?
2. Isn’t this a whole lot of sound and fury signifying nothing? Doesn’t the appellee (Old
GM) have to pay future products liability claims to the extent that dealers in their dealer network are
tagged with a products liability judgment?
3. Does this opinion mean that section 363(m) essentially insulates all trial court
judgments ordering a sale of a debtor’s assets free and clear from any appellate review if no stay is
obtained? Doesn’t this give the bankruptcy court judge too much power? See the very controversial
opinion in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 35–36 (B.A.P. 9th Cir.
2008) (Markell, J.) (concluding that “Congress intended that § 363(m) address only changes of title or

25
other essential attributes of a sale, together with the changes of authorized possession that occur with
leases. The terms of those sales, including the “free and clear” term at issue here, are not protected.”).
4. Do you think the appellants could have afforded the bond that they would have had to
post if they had sought a stay pending appeal, and if it had been granted on condition of obtaining a
bond that would have protected the appellees’ interests?
E. The End: Jevic and Structured Dismissals
The bankruptcy code provides three ways to end a Chapter 11 case: confirmation of a plan,
conversion to a Chapter 7 liquidation, or dismissal. The code contemplates that dismissal will
return the parties to their prebankruptcy positions, except to the extent the bankruptcy court
orders otherwise. In a structured dismissal, however, the bankruptcy court’s dismissal order
alters the rights and liabilities of the parties in ways that differ from the three options outlined
in the code. Unlike a Chapter 11 plan, a structured dismissal does not require disclosure, voting
by affected constituents and bankruptcy-court findings that the plan meets substantive and
procedural legal standards, including compliance with the code’s priority rules. Unlike
conversion to Chapter 7, a structured dismissal does not lead to a statutorily regulated
liquidation consistent with established bankruptcy priorities. And unlike a straight dismissal, a
structured dismissal does not simply return the parties to their prebankruptcy positions.
Jevic is a trucking company that filed under Chapter 11. During the bankruptcy proceeding,
fraudulent-transfer claims against Jevic’s senior secured lenders were resolved by a $3.7-million
settlement subject to a structured dismissal in which certain priority claims, based on
employment-law violations under the Worker Adjustment and Retraining Notification Act, of
truck drivers who worked for Jevic were skipped over. Had there been a settlement but no
dismissal, and had the settlement proceeds been distributed under a plan or in a Chapter 7
liquidation, the workers’ priority claims would have entitled them to $1.7 million. Had there
been no settlement but rather a straight dismissal or conversion, the fraudulent-transfer claims
against the senior creditors would have revested in the workers or become an asset of the
Chapter 7 bankruptcy estate, respectively. In the structured dismissal approved by the
bankruptcy court over the workers’ objection, however, the workers received no proceeds, even
as junior creditors received a distribution out of the settlement funds, and the fraudulent-
transfer claims were extinguished.
The courts below approved this structured dismissal on the basis that no good alternative
existed. No Chapter 11 plan could be confirmed given the estate’s inability to satisfy outstanding
administrative and priority claims (i.e., the estate was “administratively insolvent”), and, in a
Chapter 7 liquidation, no one other than the senior secured creditors would receive anything,
because the fraudulent-transfer action would have to be abandoned for lack of resources to
prosecute. In short, the lower courts concluded, the workers were no worse off in the structured
dismissal, and other constituents were all measurably better off.
More importantly, however, the court went out of its way to draw a sharp line between interim
orders entered by the bankruptcy court in connection with its administration of an ongoing
bankruptcy case and the structured dismissal at issue in Jevic. The common Chapter 11 practices
of first-day wage orders, critical-vendor orders, roll-ups and interim settlements were all
expressly distinguished from the objectionable structured dismissal in Jevic, which, the court
expressly noted, involved a final distribution inconsistent with the code’s priority scheme as part
of the case’s final disposition. The court’s implicit ratification of these established practices to
the extent they serve other reorganization objectives undoubtedly will be embraced by the
bankruptcy community

Plan Confirmation
Plan Confirmation –

26
Consensual- comply with 16 requirements 1129 (a) (1)- (16)- good faith, best interest, class
feasibility; key requirement is voting requirement under 1129 (a) (8); 1126
Non-consensual – complies with all requirements of 1129 (a) except voting requirement 1129
(a)(8)

Consensual
Of these confirmation requirements, five are major, and the remaining eleven are
relatively minor in most corporate reorganizations. In order of appearance, and
called by their colloquial names, the five major requirements are: consent by class
(§ 1129(a)(8))); good faith (§ 1129(a)(3)); the “best interests” test (§ 1129(a)(7));
consent of all classes (§1129(a)(8)); payment in full of all administrative claims (§
1129(a)(9)); and feasibility (§ 1129(a)(11)).

1. The Basic Consent Requirement: Voting


11 U.S.C. § 1129(a)(8)
(a) The court shall confirm a plan only if all of the following requirements are
met:
***
(8) With respect to each class of claims or interests—
(A) such class has accepted the plan; or
(B) such class is not impaired under the plan.
Section 1129(a)(8) is one of the sixteen mandatory confirmation requirements, and
in some respects it is the most important. It requires that, to confirm a plan
consensually, each class of creditors must accept the plan.

B. The Standards for Voting


11 .S.C. § 1126(c), (d)
(a) A class of claims has accepted a plan if such plan has been
accepted by creditors, other than any entity designated under subsection
(e) of this section, that hold at least two-thirds in amount and more than
one-half in number of the allowed claims of such class held by creditors,
other than any entity designated under subsection (e) of this section, that
have accepted or rejected such plan.

(b) A class of interests has accepted a plan if such plan has been
accepted by holders of such interests, other than any entity designated
under subsection (e) of this section, that hold at least two-thirds in
amount of the allowed interests of such class held by holders of such
interests, other than any entity designated under subsection (e) of this
section, that have accepted or rejected such plan.
Both creditors and shareholders vote on Chapter 11 plans. According to section
1126 (a), creditors with claims “allowed under Section 502” and shareholders with
interest “allowed under section 502” vote on Chapter 11 plans. The statutory
requirement of “allowed under Section 502”is generally satisfied by the Bankruptcy
Code’s “double deeming.”
1126(c)/(d): A class of claims/interest is deemed to have accepted the plan if such plan has been
accepted by creditors representing two-thirds in amount and one-half in number of the allowed claims
of such class.

27
a. 1126(a): Only holders of allowed claims or interests under 502 may vote to accept or reject a
plan.
b. Stone Hedge Prop. V. Phoenix Capital Corp. (In re Stone Hedgee Prop.) (1995)(CB 10-53):
Disputed claims under 502(a) can be temporarily allowed for the purposes of voting, if the
dispute has not been resolved by the time a plan is to be voted on.

In a Chapter 11 case, section 1111 deems filed a claim or interest that is scheduled
and is not shown as disputed, contingent or unliquidated. And, section 502 deems
allowed any claim or interest that is filed and not objected to by a party in interest.
Problems on the Mechanics of Voting
1. Flintco has ten unsecured creditors, each of which is owed $10 (for a total debt
of $100). They are all classified together for purposes of Flintco’s plan. Does the
class accept or reject the plan under the following scenarios:
(a) Five creditors turn in ballots. Three vote in favor of the plan, and two reject
it. Five creditors is equal to $50 amount of claim.
(1) 2/3 Total amount requirement - Compute the total amount of claims of those
who voted- if the amount of claim of those who accept is equal to 2/3 of the
total amount of claims of those who voted – check
(2) 50% Total claim requirement – more than 50% of the number of claims who
voted.
a. Total amount – 3 voted so they have total amount of claim of $30 and
2/3 of total amount of claim that voted is $50 and 2/3 is $33.33 – not
accepted
Total number of claim -3 out of 5 is more than 50% - accepted.

(b) Six creditors turn in ballots. Four vote in favor of the plan, and two reject it.
Accepted
Total amount – 40 of out 60 – 2/3- compliant
Total claim- 4 out of 6 - compliant
(c) Only one creditor turns in a ballot, and votes in favor of the plan. Accepted
(d) No creditor turns in a ballot. Not accepted.
2. Assume the facts in Problem 1, above except now the ten creditors are owed
money as follows: Two creditors are owed $30 each, and the remaining eight
creditors are owed $5 each (again for a total of $100 in debt). Does the class
accept or reject the plan under the following scenarios:
(a) All creditors turn in ballots. The two creditors holding $30 claims each vote in
favor of the plan; all other creditors reject it. No- fails to meet 50% total amount of
claims; $60 amount of claim who voted of $100, but 2/3 is $6.66 - fails to meet to
meet total number of claims- 2 out of 10, not 50%
(b) All creditors turn in ballots. The two creditors holding $30 claims each vote in
favor of the plan, as do two creditors holding $5 claims. All other creditors reject it.
Yes. Total amount of claims is $70, while 2/3 is $66.66
(c) All creditors turn in ballots. All eight creditors owed $5 vote in favor of the
plan; the two other creditors reject it. Total amount of claims is $40- rejected since
2/3 is $66.66
(f) All creditors turn in ballots. Seven of the eight creditors owed $5 and one of
the creditors owed $30 vote in favor of the plan; the remaining two creditors (one
with a $30 claim and one with a $5 claim) vote to reject.No. Total amount of claim-
$65

28
(g) The following are the only votes cast: One creditor holding a $30 claim votes
to accept; one creditor holding a $5 claim votes to reject. No, more than one half of
claim.
I. 1129(a): The court will only confirm a plan which abides by the sixteen conditions listed in
1129(a)
a. (3): The plan has been proposed in good faith and not in any forbidden manner
i. In re Dow Corning Corp. (1999)(CB 10-62): A plan that rehabilitates a
“solvent but financially-distressed corporation,” even by resolving tort
liability, does not automatically violate good faith. Look at procedures
(arms-length negotiations, etc) to determine good faith.
b. (10): At least one non-insider impaired class has confirmed the plan.
 Under section 101 the “term ‘insider’ includes” a long list of
categories such as director, officer, person in control, relative, and
affiliates or insiders of affiliates. 
c. (7): In each impaired class of claims or interests, each claim holder has either accepted
the plan or will receive at l
d. east what they would have received under a Chapter 7 liquidation. (Best interest test
of creditors)

i. You don’t file proof of claim, you don’t get this protection.
Non-Votes
a. 1126(f): A class that is not impaired under the plan is presumed to consent and does not
need to vote on the plan.
i. 1124: A class is unimpaired if the plan (1) leaves unaltered the legal, equitable,
and contractual rights to which the claim entitles the holder, or (2)
notwithstanding a contractual provisions entitling accelerated payment after
default, the plan cures any default that occurred before or after the
commencement of the case, reinstates the maturity of the claim as it existed pre-
default, compensates the holder for any damages that occurred due to reasonable
reliance on the contractual provision allowing accelerated payment, and does not
otherwise alter the legal, equitable, and contractual rights of the holder.
If the creditor has a debtor who has a below market rate interest
rate pre-petition, i.e., 3% as opposed to market rate of 6%, the
best interest test allows the debtor to lock in the interest rate
post-petition. If the plan in any way changes the rights of the
holder, adversely or beneficially, there is impairment. Shorting
payment period of extending the term-impairment.
Trade creditors will be paid. -  § 503(b)(9) of the Bankruptcy Code. That
section provides that a creditor must be allowed an administrative
claim for “the value of any goods received by the debtor within 20
days before the date of commencement of [the bankruptcy case]
in which the goods have been sold to the debtor in the ordinary
course of such debtor’s business.” 11 U.S.C. § 503(b)(9). In effect,
this section puts claims for goods sold to a debtor in the twenty
days before the debtor’s bankruptcy at the same level of priority
as the expenses the debtor incurs in administering its bankruptcy
case. Those expenses must be paid in full before any amounts are
paid to general unsecured creditors, so in many cases, this means
that creditors meeting the requirements of § 503(b)(9) will receive
full payment for shipments received by the debtor within the

29
twenty-day period, rather than the fractional distribution they
otherwise would have received.

ii. ALL changes to legal, equitable, and contractual rights constitute


impairment.
b. 1126(g): A class that is fully impaired, i.e. that will receive nothing under the plan, is
deemed to not accept the plan and does not need to vote.

e. (11): Feasibility Study: Confirmation is not likely to be followed by liquidation or the


need for further financial reorganization of the debtor, unless such liquidation or
reorganization is proposed in the plan.

i. In re Trans Max Technologies (2006)(CB 10-66): The plan proponent needs to


prove by a preponderance of the evidence that the plan is feasible…the
evidence must support such an inference (speculation is not sufficient).
If you are anticipating ongoing operations, should you are prepared to finance
operations.
Consider:
1. The adequacy of the debtor’s capital structure
2. The earning power of its business
3. Economic conditions
4. The ability of the debtor’s management
5. The probability of the continuation of the same management, and
6. Any related matters which determine the prospects of a sufficiently
successful operation to enable performance of the provisions of the plan.
f. (9): Administrative claims, domestic support obligations, taxes under 507(a)(8), and
secured government claims that would be taxes under 507(a)(8) except for their secured
status must be paid in full.
g. (1) and (2): The plan and proponent comply with the applicable provisions of Chapter
11.
i. 524(e): This says that the discharge only applies to the debtor. But is there a ban
on third-party release/discharge in Chapter 11? This may be a question of
1129(a)(1). N.B. If you put such a release/discharge in the plan, no one
objects, and the court enters an order on it, that release/discharge sticks
with the plan.

II. 1126(e): On request of a party in interest, and after notice and a hearing, a court may
designate (disqualify) any entity whose acceptance/rejection of a plan was not in good faith,
or was not solicited/procured in good faith/the provisions of this title. Not in good faith if not
for economic reasons, i.e., a competitor buying claims to reject plan to keep competition out.
a. Figter Ltd. V. Teachers Ins. & Annuity Ass’n (In re Figter Ltd.) (1997)(CB 10-58):
Purchasing other claims and voting them in line with the claimant’s interests is not
per se a violation of good faith. Good faith is a fluid concept and must be judged
under the circumstances.
i. A lender purchased unsecured claims in order to prevent cram down of its
secured claim.
ii. Each CLAIM gets a vote, not each CREDITOR.

30
Cram Down Under 1129(b)
I. You need the consent of all classes of creditors for a plan. If you fail to receive the support of
a class, you may still be able to get approval through 1129(b).
a. This usually arises with secured creditors.
b. 1129(b): If all requirements of plan approval in 1129(a) are met except for 1129(a)(8),
the court, on request of the plan’s proponent, shall confirm the plan so long as the plan
does not unfairly discriminate, and is fair and equitable with respect to those classes
of claims or interests that are impaired but have not accepted the plan.
i. You drop class approval requirement and add fairness requirements.
ii. Unfair Discrimination: Some courts look to whether the discrimination is
necessary to confirm the plan. Others look to whether there is a business reason
for discrimination. The toughest case is where one class is getting far less than a
class that was similar pre-bankruptcy.
1. Markell Rules: A Chapter 11 plan is presumptively subject to denial of
confirmation on the basis of unfair discrimination when there is (1) a
dissenting class, (2) another class of the same priority, and (3) a
difference in the plan’s treatment of the two classes that results in (a) a
materially lower percentage recovery for the dissenting class OR (b) an
allocation of materially greater risk to the dissenting class.
2. Justifications: See Above.
iii. 1129(b)(2): Fair and equitable means that the plan provides
1. For secured claims: Either retaining liens of the allowable amount,
receive deferred cash payments at least of the allowable amount, liens
attached to the proceeds of a 363(k) sale of the property, or “the
realization by such holders of the indubitable equivalent of such claims.”
a. 1111(b)(1)(A): Secured creditors with nonrecourse claims (don’t
get the unsecured claim in bifurcation) are given all the same
rights as a secured creditor with a recourse claim.
b. 1111(b)(2): If the class of creditors to which the 1111(b)(1)
claim holder belongs elects, by 2/3 amount and ½ number,
application of this section, the claims are secured claims to the
extent that the claims are allowed.
c. Assuming the plan includes deferred cash payments as allowed
in 1129(b)(2)(A), and that the election in 1111(b)(2) was made,
the creditor would be given a note in the full value of the original
deb, and the note would pay below market interest so that the
current value was the same as the value of the collateral.
2. For unsecured claims: Receive/retain property of the value of the
allowable interest OR holders of claims or interests that are junior to the
claims of the class will receive no payout.
a. Bank of America v. 203 N. LaSalle St. Partnership (1999)(CB
10-85): Prebankruptcy shareholders cannot secure value in
contravention of 1129(b)(2)(B)(ii) by contributing new value
to the post-bankruptcy organization, without consent of the
unsecured claim holders. If unsecured claim holders are to
be crammed down, shareholders must get nothing.
3. For interests: Receive/retain property of a value equal to the greatest of
the allowed amount of any fixed liquidation OR holders of any interest
that is junior to the claims of the class will receive no interest in
property.

31
363(k): A lien holder may bid on the property/company, and offset its purchase price by the amount of
its lien.

“Fair and Equitable”


“Fair and Equitable” are words from 19th and 20th Century equity receiverships.

Means three basic things:

1. Payment in full does not have to be in cash. Payment can be property and property includes
promissory notes of the debtor.
2. Absolute priority rules apply.
Senior obligations must be paid in full or must consent before junior obligations or interests may
participate in the reorganization.
3. A plan may not be pay creditors more than what they are owed.

Examples of “Fair and Equitable”


Section 1129(b)1 sets the requirements of “fair and equitable” with respect to a class includes the
following requirements:
The subparagraphs that follow then set forth examples of fair and equitable treatment
Subparagraph (A) covers secured claims
Subparagraph (B) covers unsecured claims
Subparagraph (c) covers equity interests.

Secured Claims and Section 1129 (b)(2)(A)(i) - involuntary refinancing


(A) With respect to a class of secured claims, the plan provides-
(i) (i) that the holder of such claims retain the liens securing such claims whether the property subject
to such lien is retained by the debtor or transferred to another entity, to the extent of the allowed
amount of the claims (you can maintain the lien to the secured claim to the extent of the value of
collateral), and
(ii) that each holder of a claim of such class receive
on account of such claim deferred cash payments totaling at least the allowed amount of such claim
of a value as of the effective date of the plan
of at least the value of such holder’s (creditor) interest in the estate (debtor) in such property.
Debtor M owns a piece a property with R. M takes a loan and secures its interest in the property, only
M’s interest.
Present Value – Lawyer’s Segment

“Property” is usually just an interest bearing note.


What interest rate will make the present value of the payments under the note equal to the note’s face
value?
“If the interest rate paid is equivalent to the discount rate used, the present value and the face future
value will be identical.” H.R. Rep. No. 595, 95th Congress, 1st Sess. 414 (1977).
If rate too high, present value exceeds claim
If rate too low, present value is less than claim.

Value, Interest Rates and Problem, p.123


Two questions
What is the current value of the collateral?

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What is the appropriate interest rate?

Value of collateral
Section 506 (a): “Such value shall be determined in light of the purpose of the valuation and of the
proposed disposition or use of such property, and in conjunction with any hearing on such disposition or
use on a plan affecting such creditor’s interest.” Assocs. Comm. v. Hash, 529 U.S. 953 (1997)
Appropriate Interest Rate
Till v. SCS Credit, 341 US 465 (2004) (Chapter 13 case though)
Prime Rate, plus 1% to 3% or “Market Rate of Interest”

Examples of Application of Section 1129 (b) (2) (A) (i)- interest rate in contract higher than market rate,
you can use market rate.
Debtor borrowed $10M from X, Granted X a security interest in all equipment. Interest rate of 10% loan;
loan accelerated.
Debtor files. Market rate of interest is now 5%; equipment now worth 9 M.

Without lender’s consent, Debtor can:

Give X a note for $9M secured by equipment (X will then also have an unsecured claim for $1M). Note
will bear interest at 5%
Maturity and amortization will be whatever is consistent with feasibility,
Debtor’s cash flow and general commercial terms (no 100 year notes)

Examples of Application of Section 1129 (b) (2) (A) (i)- interest rate has risen.

Same facts as the last slide, except flip interest rates: loan was made at 5% interest, and the rates have
now risen to 10%

Debtor can, without lender’s consent (and under 1124 (2))


Cures any defaults;
Compensate the lender for such defaults
Reinstate the loan
And continue with the loan at 5%.
Section Claim and Section 1129(b)(2)(A)(ii)- Sale of Collateral
“(ii) for the sale
“Subject to Section 363 (K) of this title” (That’s credit bidding)
“of any property that is subject to the liens securing such claims, free and clear of such liens, with such
liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause
(1) and (111) of this subparagraph.

Without the consent of the creditor, you can sell the secured property and the treatment of such lien on
proceeds will be (1)- involuntary financing or (111) surrender

Application of Section 1129 (b)(2)(A)(ii)


Debtor has two office buildings. One building is worth $8M and has two mortgages; one for $8M and the
second for $2M.
In plan, debtor proposes to sell the building for $8M payable $1M down, $7M note at a market rate of
interest. Both lenders object.

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Debtor can sell the building in the plan (subject to lender’s credit bid).

The lender’s lien will then attach to the proceeds. This is an application of clause (ii) Then have to treat
proceeds under clause (1) or clause (iii).

Clause(iii)- “indubitable equivalent”


Generally used to surrender collateral to satisfy secured claim.
Does not eliminate unsecured claim deficiency claim.
No substitutions allowed (unless cash) due to uncertainties in valuation.

Prior Problem
Debtor can “surrender” the proceeds of the sale to senior lender in full satisfaction of both secured
claims (leaving the junior lender with an unsecured claims) – This is application of clause (iii)i

Note this this is not possible under Section 363 (f), unless you interest 363 (f) (5) broadly.

363(f): It is possible to sell a business “free and clear of any interest in such property of an entity other
than the estate,” stripping off any other security interests in the property.

Unsecured Claims
Realm of absolute priority rule
Statute: Section 1129 (b) (2) (B):
“(B) with respect to a class of unsecured claims
“(i) the plan provides that each holder of such class receive or retain on account of such claim property
of a value as of the effective date of the plan, equal to the allowed amount of such claim
Or
“(iii) the holder of any claim or interest rate that is junior to the claims of such claims or interest that is
junior to the claims of such class will not receive or retain under the plan on account of such junior claim
or interest on any property.
Clause ii is the statutory formulation of the absolute priority rule.

Application: Insolvent Debtor


X is a chapter 11 debtor. It has $30 M in claims, and $15 M in assets.
Equity holders (they are a junior class of interests) cannot participate so long as creditor claims are not
paid in full.
Plan will typically eliminate all equity interest if debtor insolvent.
If so, they are deemed to reject (Sec. 1129 (g)) and plan proponent will have to show that creditors are
not receiving any more than they are owed (the second part of “fair and equitable”)
So in any case in which equity is eliminated, there is an entity valuation
So who runs the reorganized debtor? Plan will provide – there has to be someone holding the equity
interests.

“New Value”
All absolute priority rule says that junior claimants cannot receive anything from the debtor in respect of
the pre-petition claims. But what if they put up new money for the equity of the reorganized debtor?
The money is “new value”
Concerns about asymmetric information- insiders know more about the debtor

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203 North La Salle (p. 128) – debtor cannot use exclusivity to promulgate new value plan without
competitive bidding for new entity
Also, there must be showing that the contribution is equal to the value being received, and is necessary
for the reorganization.
Really just a corollary of the absolute priority rule.

Equity Interests
Often there are classes of equity interests- preferred stock, etc.
Absolute priority works here as well. Section 1129 (b) (2) (C) is similar in structure to Section 1129 (b) (2)
(B) – all senior classes must be satisfied or consents before junior class may participate.

Example: Preferred stock must receive the contractual priority before common stock receive anything.

Problem, page 136


JJ owes $15 M, $10 M to a secured creditor, and $5M to unsecured creditors.
JJ proposes plan, in which it will pay $50,000 a month to secured creditors, and $25,000 to unsecureds.
Equity interest not affected.

Value of these payments are $6 M and $8M respectively. Can JJ confirm plan?
Only if classes consent.
If they do not, absolute priority rule prevents Jerry/Joe from retaining his equity interest without
provision of new value.

Problem, page 136 (part 2)


Same facts as first, except now creditor are the plan proponents. Plan proposes to cancellation of debt
and equity, and issuance of common stock in reorganized debtor 50/50 to secured and unsecured
creditors.
What happens to equity?
They are eliminated, only way to confirm is cram down. At cram down, the creditors will show that they
are not being paid in full, and thus equity in property eliminated.
The only thing equity holders can do is to show that the creditors are being paid more than they are
owed, which is not likely.

Problem, Page 136, Part 3


Same facts as part 1, except now the debtor can afford an aggregate at $150,000 in monthly payments.
Creditors propose plain in which secured creditors will receive $100,000 per month and unsecured
$50,000
Value of these stream of payment are $12M and $6 M respectively.
Can equity object?
Yes, its value diminished through overpayment of creditors, and is thus impaired, it will vote against.
If equity is being eliminated, same results because they only way to confirm is through cram down.
Valuation of plan consideration shows that the creditors are receiving more than they are owed
prepetition, so the fair and equitable rate is not satisfied.
Administrative Claims and Discharge
Section 1129 (a) (9) requires all administrative expenses to be paid in full in cash at confirmation Section
1129 (a) (9) (A)
Exceptions:

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Wage claims can be paid over time if present value equals amount allowed amount and class accepts
(Section 1129 (a) (9) (B)
Tax credits can be over paid

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