Bankruptcy Code I. Consumer Bankruptcy a. Introduction to Bankruptcy b. Elements Common to Consumer Bankruptcy i.

The Estate All the legal or equitable property that the debtor owns and has a right to at the time of filing (regardless of its apparent value at the time). 1. 541 interest 2. 541(c)(1) brings into the estate property with restrictions on transfers and does not remove those restrictions. 3. 101 Claim a. Unliquidated claim has no number assigned to it b. Contingent claim/expectancy where creditor cant pursue until and unless some event occurs. These are property of the estate only if, at the time of filing, the debtor has some legally enforceable right to the property. c. Matured claim debt that has already come due. 4. 542 property of the estate must be returned to the estate a. If youre holding some guys car or something, you have to give it back or else give back the money you got for selling it. 5. 341 meeting the trustee presides over a meeting with the debtor. Creditors may attend but arent required to do so. ii. The Automatic Stay to prevent any interference with the debtors proper enjoyment of his property, and ensures that all creditors are paid equitably. 1. 362(a) what is stayed a. Actions to collect or enforce all kinds of things 2. 362(b) what is not stayed a. Criminal actions b. Paternity, child support, etc. 3. 362(h) willful violation can give damages, costs, fees, and possibly punitive damages. Applies only to an individual, not a corporation. 4. 362(c)(2) the stay lasts until the case is closed, dismissed, or discharged 5. Relief from the stay - 362(d): requires notice and a hearing. a. For cause, including adequate protection (see also 361); or i. Creditors must be protected from the depreciation that property has over time. If they dont receive this amount, the stay will be lifted.

ii. Adequate protection: (periodic) cash payments, additional lien, other relief to preserve the indubitable equivalent of the creditors claim. iii. Lack of insurance is one kind of inadequate protection. b. If debtor has no equity and its not necessary for reorganization i. The property cannot be necessary for an effective reorganization. iii. The Trustee 1. 701, 702 appointment of trustee c. Liquidation Bankruptcy i. Exemptions why use FMV instead of liquidation? Because the debtor would have to buy a new one. a. 522(d) all the federal exemptions. State law may provide its own list of exemptions under an opt out provision. i. First, the secured creditor gets paid off in full. The exemption is subtracted from any equity. The balance goes to the estate. ii. The debtor gets to keep clothing and household goods etc. sufficient to make a fresh start, but not luxury items 1. In re Mitchell debtor with a giant diamond ring must declare fair market value, not liquidation value. 2. In re Johnson doctor put a bunch of money in a pension plan. iii. Homestead exemption states may protect prebankruptcy planning 1. In re Reed 2. In re Coplan not allowed to claim homestead exemption to a greater extent than they would have at home in Florida. However, if they would have fought it out with the creditors in Florida state court they would still have their house because Florida is religious about the exemption. 3. In re Hanson son gave parents fair market value for some equipment but stored equipment at their house. Held: not fraudulent. b. Rule 4003 says the trustee has 30 days to object, and if he doesnt, the debtor gets the claimed

exemption even if the debtor isnt really entitled to it. i. Taylor v. Freeland & Kronz: TWA discrimination claim was property of debtor, not estate, because trustee failed to make timely objection. c. 542 says that if you have property of the estate you must turn it over to the trustee. Just because the debtor prevails in an exemption, that doesnt mean that the debtor doesnt have to turn it over. It just means that the trustee is barred from questioning the value. The trustee still gets the car, sells it (for the real value) and the debtor gets the amount of the exemption. d. Liens and Exemptions i. Consensual liens trump exemptions. Take these out before determining exemptions. Wouldnt you take out any lien before the exemption, even involuntary? No. Only voluntary ones. This means exemptions come before taxes. ii. Now, what if there is a $1000 judgment on what would have been left after the sale of the car and the payment of the voluntary secured interest. Then youve got the involuntary secured interest (also a lien). So all you have left is zero, and the debtor gets no exemption. iii. 522(f) says a debtor can avoid a judicial lien (but not one for child support) or a lien for household things if it impairs an exemption. ii. Claims and Distributions 502 Where is this in the code? At filing, creditors file a proof of claim under 501. The trustee reviews all of these documents and objects to invalid claims. Claims against the estate (other than administrative expenses under 503) can only be measured at the date of filing. Post petition claims are against the debtor personally. 1. Secured claims receive the full amount of claim up to the value of collateral, off the top. (100 cents on the dollar). a. Undersecured - 506(a) says that if youre the holder of a secured claim, youre secured up to the dollar amount of the collateral. If youre undersecured, you are only guaranteed to get the value of the property and the rest is unsecured.

i. These are valued at the date of filing, in dollars. ii. If theres no equity in the house, for example, the estate will abandon it back to the debtor. Then the bank will try to have the stay lifted, and will foreclose to get their money. b. Fully Secured/Oversecured - 506(b) says that if the property is worth more than the claim, the creditor can get all the fees and costs associated with the claim up to the amount of the value of the property, but only as stipulated in the security agreement. i. 506(c) - Expenses to preserve or dispose of the property for the benefit of the estate, taken before 506(b).. c. IRS claims are entitled to post petition interest. Such claim means any secured claim. 2. Unsecured claims receive a pro-rated share of the estate depending on the percentage of the debt owed each creditor. a. 502 says entitled to interest up to the date of petition but not post-petition interest. b. These cannot include unmatured interest on a loan, though bankruptcy does accelerate principal. iii. Priority of claims in Liquidation 1. Secured claims Only secured creditors get interest, under 506(b) (up to the value of the collateral). 2. 726(b) burial expenses for converting to chapter 7 case. 3. Super Duper Unsecured 364(c)(1) A loan made to the debtor post-petition where the debtor needs extra loans. Can only be authorized by the court. Very few Chapter 11 lenders have this. 4. Super Unsecured 507(b) The court awarded the creditor adequate protection, but the debtor failed to pay or otherwise failed so the creditor is left unsecured. This is higher than any other 507 priority. 5. Priority Managing the estate 507(a)/503(b) administrative claims to preserve the value of the estate. 6. Post-petition unsecured claims under 507(a). 7. Pre-petition unsecured claims these are of the lowest priority. iv. Discharge 523 Creditors retain in rem remedies, but in personam debts are discharged. 1. 524(a)(2) says you cant try to collect on a discharged debt.

2. 523 Exceptions to discharge - This is for making particular kinds of claims survive bankruptcy: child support, student loans (except under undue hardship), loans fraudulently procured, luxury items, etc. a. Taxes Not dischargeable 523(a)(1) Taxes are not generally dischargeable in Chapter 7, but some of them can be discharged in Chapter 13. i. 507(a)(2) Unsecured claims from 502(f), which would include property tax, etc. arising early in the case in the ordinary course of business (between filing and either appointment of trustee or order for relief) ii. 507(a)(8) Unsecured tax claims on 1. (A)(i)Business taxes for the last three years. 2. (A)(ii) Property tax assessed within the last 240 days etc. 3. (B) Property tax due less than a year before filing. 4. (C) Social security withholding (no time limit on this) 5. (D) Employment taxes in the last three years 6. Various other things like excise tax and customs duty. iii. 523(a)(1)(B)(ii) Late tax return within two years of filing petition is not dischargeable. iv. If the debtor has made a fraudulent return b. Taxes dischargeable i. Discharge under 1328(b) may give a debtor a hardship discharge. c. Undue hardship is usually for a medical disability that impedes ones earning capacity. The question is really whether you are living at a reasonable level, or what the loan was for d. 523(a)(2) Fraudulently getting and/or using a credit card. i. (a)(2)(B) Lying to get the card ii. (a)(2)(A) Lying to use the card iii. (a)(2)(C) When you use the card for luxury purposes within 60 days of filing, where youre extending credit. 3. 727 Certain things can stop your discharge under Chapter 7 (these do not apply to other chapters). These may include false claims, concealing evidence of the financial

condition, not a partnership, concealing property within a year of filing a. Plaintiff in a 727 case can be trustee, creditor, or U.S. trustee. Plaintiff has burden of proof by preponderance of evidence. b. If a creditor prevails against a 727 discharge, none of the debtors claims will be discharged. The debtor loses all possessions except for exemptions, but still owes everyone the same balance. v. Reaffirmation and Redemption - 521 describes the debtors duties to redeem or reaffirm property (must declare intention within 30 days of filing, and perform within 45 days thereafter). 1. Redemption 722 Debtor pays the market value, as determined under 722, in one lump sum (not installments). This is for low-value property abandoned by the estate that the creditor really isnt interested in trying to re-sell. (I pay $50 and get to keep my washing machine.) a. The value is subject to cramming down. Often used for cars, the collateral may have no equity and a debt much greater than the FMV of the car. So the car is abandoned by the estate, and the creditor is just going to sell it anyway, so debtor gives creditor the FMV of the car and they receive the benefit of not having to pay to sell it. i. Associates Commercial v. Rash b. If debtor has already been paying on the note, the debtor does not get credit for the previously made payments, because these just go toward the unsecured part of the claim. c. Debtor may pay off the estate by giving the trustee the equity. 2. Reaffirmation 524(c) Debtor commits to repaying the debt. Creditor sends debtor a letter, and after debtor signs, creditor files it with the court. a. In re Latanowich Sears made a pattern of violating the procedure, and was slapped with punitive damages. b. Mailing of a solicitation is not a violation of the stay, because theres supposed to be bargaining about terms (amounts and dates of payments). c. Debtors lawyer must sign a declaration that hes been informed about everything and that he knows he has 60 days to change his mind. Lawyers often refuse to sign if the debtor has kids, for example. d. If debtor is pro se, there has to be a hearing to determine whether the agreement is fair.

e. A debtor can bargain away the discharge of a debt in exchange for new credit, but Schermer doesnt do it because its often not a good benefit for the debtor and you can still always repay voluntarily. f. The bank can make you reaffirm your unsecured debt as a condition of renegotiating your mortgage. Judges might or might not allow this, and might suggest conversion to Chapter 13. 3. Surrender of the collateral Once you surrender your house, you owe the bank nothing. 524 says that after you get a discharge, the bank cant sue you for the deficiency even if you owe more than the house was worth. The bank has to proceed in rem against the house under 362 (for cause, no equity, and not necessary for reorganization). 4. Retention/Ride through Continue to make payments This option is not found in 521, but at least 3 circuits say if youre current you can continue to make payments. Estate must have abandoned the property as exempt or for lack of equity. This lacks the consequences of reaffirmation, because personal obligations are discharged. However, the property can be repossessed. vi. Non-discrimination - 525 1. 525(a) says the government cant discriminate. 2. 525(b) says private employers cant refuse to hire you 3. 525(c) says you cant discriminate in student loan guarantees. d. Chapter 13 Debtor keeps assets, and works out a payment plan. i. Events of Chapter 13 1. Creation of the Estate still as in 541, including all property at filing. a. 1306(a)(2) says that the estate also includes future earnings. b. 1306(b) Debtor retains property even for which there are secured creditors. c. 1327(b) After the creation of the estate and confirmation of the plan, property vests back in debtor, removing possibility of an Automatic Stay violation. i. 3 months after plan is confirmed, you borrow $300 and fail to pay it back. The creditor can get a judgment against you. No violation. ii. You have unpaid parking tickets and plan confirmed to pay them. You get more tickets. The city tows your car. Violation.

d. Conflict between 1327 and 1306 A post petition creditor can sue the debtor and execute a judgment against any property not devoted to the plan. This does not interfere with vesting. 2. Automatic Stay 362(a)(3) Adequate protection is an issue only from filing to confirmation of the plan, because after plan confirmation creditors are protected by the plan. a. The stay does not apply to postpetition earnings. b. 1301 provides a stay against co-debtors. These would be a family member that co-signed on a loan but is not in bankruptcy. c. In re Radden Creditor had possession of the car and wanted to lift the stay under 362(d)(2). But the judge refused to lift the stay if the debtor made payments and kept insurance. The court found no equity in the car and said it was necessary for effective reorganization. 3. Appointment of Trustee 4. Confirmation of the Plan 1325 Only the debtor can author a Chapter 13 plan. It must provide adequate creditor protection. a. 1322 says a plan can last not less than three years but no longer than five years. 5. Broad discharge 1328 a. A chapter 13 discharge gets rid of all nonpriority unsecured claims. Its broader than a chapter 7 discharge because youve paid for 3-5 years. b. Anything where the last payment is due after the plan is over you dont get a complete discharge from (like a mortgage). c. You do get a discharge from 523(a) 2, 4, 6, which is fraud and not dischargeable in chapter 7. d. Now a Chapter 13 discharge does not exempt you from fines imposed due to conviction of a crime. e. If you die, you can get a hardship discharge. ii. Plan Elements Secured Creditors, Home Mortgage 1. Lien Retention 1325(a)(5)(B) Not only can the bank get its present value of the money, and also gets to keep the lien against the property. 2. Value the value of the property for chapter 13 is replacement value, not wholesale value. a. Associates Commercial Corp v. Rash The Supreme Court says that valuation of secured property should be value to the debtor, so something close to retail. b. Cramming down -

3. Interest Over the course of the plan, debtor must pay back the principal plus interest, commensurate with the value of the money as well as the risk involved in lending to an insolvent person. a. To compute interest, look at market rate for T-Bills, notes, and Bonds that will mature around the same time. This rate is for a risk-free loan, so increase that rate by the risk. b. ARM Adjustable Rate Mortgage, whereby the rate on the mortgage starts out low and changes yearly. 4. Modifications of claims 1325(b)(2) Debtor can modify obligations of a secured claimholder except for if the claim is secured only by the debtors primary residence. 5. Home Mortgage 1322(b)(5) While debtor cant modify the mortgage, the bank must let the debtor spread out the arrearage over a reasonable time (usually the duration of the plan). But you also have to make the payments that are due. a. In re Taddeo You can de-accelerate in Chapter 13 if you continue to make payments and cure the arrearage in a reasonable amount of time. (Here, the lender had tried to make the whole thing due so the debtors filed bankruptcy to get the stay to protect them.) b. 1322(c)(1) Debtor can file in Chapter 13 up to the point that the house is sold in foreclosure. Even if there is a judgment for the sale, and it hasnt taken place, you can still file. c. 1322 (c)(2), if your mortgage comes due during the term of the plan, you can pay it off by the last day of the plan as long as you afford it 1325 rights: lien retention and present value (which you might do this through refinancing). d. Value of the house The Supreme Court has said you cant bifurcate a claim for the principle residence. So even though 506 would say that, its overridden in this circumstance by 1322(b)(5). i. In re Taddeo e. 506 determines whether the debtor must pay interest on the back mortgage payments i. Oversecured - 506(b) gives interest through confirmation, and also interest on the arrearage and value for duration of the plan. 1325(a)(5)(B)(ii). ii. Undersecured iii. Plan Elements Unsecured Creditors, Disposable Income

1. Best Interest of Creditors Test - 1325(a)(4) The standard for what must come out of a Chapter 13 case is what would have been paid out in a Chapter 7 case. a. Do a hypothetical liquidation to find out what percentage the unsecured nonpriority claims would get. 2. 1325(b) Unsecured Creditors receive a pro-rated share of the debtors disposable income. 3. 1325(b)(1)(A) If a trustee or unsecured creditor objects to the treatment of a claim, the court may not approve the plan unless a. The value of the property is not less than the amount of the claim or the plan provides that all disposable income will be devoted to the plan. b. Disposable income total income minus necessary expenses of debtor and dependents. c. Cushion the lesser of $200 or 10% of the gross income. Schermer encourages this for debtors with kids. 4. Special cases of Disposable Income a. Married couples - 302 permits a joint case if both members are married at the time they file. You count the other spouses disposable income in the bankruptcy of one spouse because the income will be distributed between them. b. Donations to Church - 548 says you must get value. However, 1325(b)(2)(A) now says you can give to your church as long as its not more than 15% (or your pre-petition custom?). c. Private school private high school is not a necessary expense. Go to public school. But you can finance college other ways. d. Fancy car switch to a smaller car so you can pay more to your unsecured creditors. e. Extra cash sources reasonably certain cash flow. f. Retirement plan It has to go to the best interest test. If youre less than 10 years from retirement, Schermer lets you contribute. Otherwise, if you arent paying your creditors you cant put away money for yourself. 5. Zero Percent Plan Unsecured nonpriority claims get nothing. But unsecured priority claims must be paid in full. a. Attorneys fees are priority under 507(a)(1), as allowed in 503(b)(1)(A). Also, court costs can be paid in installments. iv. Plan Elements Taxes, Modification, Dismissal

1. Conversion from Chapter 7 to Chapter 13 a. 707 If filing a Chapter 7 is a substantial abuse the debtor has a week to prepare a Chapter 13 case or else the Chapter 7 case will be dismissed. However, the Chapter 7 case will not be involuntarily converted to Chapter 13. b. You can keep luxury goods in Chapter 13 if you pay 100% plus interest to creditors. c. In re Strauss Debtor cant clear out dischargeable debt in Chapter 7 and then pay nondischargeable debts in Chapter 13. 2. Taxes a. 1325 (tests for plan confirmation) If you havent filed tax returns, you may fail on good faith or equivalence to Chapter 7. b. Secured Tax Claims i. In re Baker Debtor cant choose to pay secured tax claims first in order to keep property. However, if you file Chapter 13 before the lien is filed, interest stops. You can thus prevent interest and penalties. ii. Voluntary? Being in Chapter 13 is not voluntary for tax purposes; therefore debtors cant choose to apply payments to nondischargeable debt first. Rather, IRS makes its own choices about plan allocation to the oldest liability first (not necessarily secured). c. Priority Unsecured Tax Claims i. 507(a)(8)(A)(i) Taxes can be priority if less than three years overdue. ii. Interest on taxes d. Nonpriority Unsecured Tax Claims i. In re Zieg Fraudulent or evasive failure to pay taxes is not entitled to priority under Chapter 13 even though it is in Chapter 7. So you can have them discharged. 3. Good Faith 1325(a)(3) based on a totality of circumstances, not just whether a debtor is trying to avoid the consequences of chapter 7. a. University Professor files chapter 13. Claimant alleged sexual harassment, and he filed 13 right after she filed her suit. b. Congress has made no rule to say that if something cant get discharged in 7 then it cant in 13, so in

some cases, you can take advantage of 13s broader discharge. 4. Discrimination between classes of nonpriority claims 1322(b)(1) You can choose to pay one nonpriority claim over another as long as you dont discriminate unfairly. a. Look at 1122 for classification of claims classes of claims must be substantially similar. i. Does the discrimination have a reasonable basis? ii. Can debtor carry out the plan without discrimination? iii. Is discrimination proposed in good faith? iv. What kind of treatment is proposed to the class discriminated against? b. Nonpriority claims need not be paid in full. They just have to get at least as much as they would have in Chapter 7. c. Dischargeability is an unfair criterion for purposes of this analysis (Cant put all your money to paying off student loans which cant get discharged and then have all your other debts discharged at the end). d. If theres a co-debtor, then you can discriminate on that claim. 5. Dismissal - 1307 Trustee or party in interest can have the case dismissed for cause. a. Example Debtor had filed 5 times and failed to file a plan each time. On the day after it was due, trustee filed for dismissal and introduced evidence of the five filings. Debtor admitted he was just trying to stop the city from condemning his property. The code allows dismissal for cause. b. 109(g) cant file for 180 days after dismissal if there was a willful misuse of the system. c. Courts can always impose costs or sanctions. v. Threshold Eligibility - 109(e) 1. Must be a natural person to file Chapter 13 2. Regular income can be a gift from a friend or some irregular source, if its a sure thing. 3. Monetary limits of debt: $269,250 in unsecured and $807,750 secured. 4. Contingent claims Contingent debt imparts no liability to the threshold unless the condition precedent occurs. If the amount of a liability is readily determinable then the claim is liquidated (or if a simple hearing is all that is necessary to determine the amount).

II.

vi. Consumer Bankruptcy System policy reasons for not letting people off the hook, etc. 1. Code sections: 109(e), 2. 1325(a)(3) Good faith requirement. If the debtor moves to Florida with a debt not dischargeable in 7, and arranges for creditors to get 0.01%. This could result in their plan not getting confirmed, or a refusal to grant a discharge. 3. 1328(a), 707,330. Business Bankruptcy a. Chapter 7 Liquidation i. Involuntary business bankruptcy Debtor is trying to defeat security interest, or is paying creditors preferentially, or is dissipating the assets. 1. 303(b)(1) criteria the test to file a petition a. If 12 or more creditors, you need at least 3 entities and a total unsecured debt greater than $10,775. b. If 11 or fewer creditors, you need just one special creditor (cant be employee or insider). Still must owe $10,775 unsecured. c. For counting creditors, use creditors whose claims have not yet come due as well as those who are already overdue. 2. 303(h) must be satisfied as well, to succeed in the claim: a. Debtor is not paying debts as they come due. i. Equity Insolvency debtor cant pay debts as they come due. ii. Accounting Insolvency you owe money on the books, but have incoming cash all the time which you use to pay current bills. b. A custodian other than a trustee has taken control of the property. c. For determining insolvency, exclude those creditors whose debts are not yet due, including due to dispute about the claim. i. In re Silverman Creditor fails to check debtors credit report to find out if his credit is good. Holder of a disputed claim dies bit gave standing to file involuntary bankruptcy petition. 3. 303(a) It only takes one partner of a partnership to file an involuntary bankruptcy petition. 4. In re Gibraltor Amusements ii. Creditors rights 1. 303(g) ask for a trustee to protect the estate (debtor can, in the alternative, file a bond).

2. Relief from stay - 362(d)(1-3). debtor cannot waive right to automatic stay, because its a protection for the other creditors, not really for the debtor. a. This might be enforcible if there really were no creditors, or if there was consideration. iii. Debtors protection 1. 303(e) Court can make the petitioner (creditor) file a bond to protect the debtor from frivoulous cases. 2. 362(a) The stay comes into effect at the filing of the involuntary bankruptcy. iv. Gap period between filing to the date the petition is entered. 1. 502(f) Claims arising in the gap are treated as prepetition (theres a stay, but no trustee). But they have a high priority under 507 because we want people to give credit to the debtor until the court makes its findings. (theyre second in line to administrative expenses) 2. Gap claims an also be (unsuccessfully) attempted at 503(b). 3. 549 payment for prepetition goods is avoidable, so creditor has to give it back to the bankruptcy estate. b. Chapter 11 Reorganization rehabilitation of businesses i. Events of Chapter 11 1. Debtor becomes Debtor in Possession (DIP) - 1107 DIP has all obligations and powers of trustee, but without compensation. 2. Appointment of a Trustee 1104 A trustee is appointed only if there has been gross mismanagement or if its in the interest of the creditors. a. Creditor must show clear and convincing evidence that the trustee is necessary. b. Debtor has the right to make the plan within the first 120 days, but if a trustee is appointed in that time period, that right is terminated. c. Trustee runs the company and files any avoiding actions that need to be filed. 3. Appointment of an Examiner third option, the guy that examines the financial affairs of the debtor. a. Examiner looks at pre-petition transactions of debtor. i. Sharon Steel case prepetition asset transfers. b. Examiner also proposes a repayment plan. c. Might look over a leveraged buyout. d. Eastern Airlines Frank Lorenzo was selling the airplanes of Eastern Airlines to his other airline that

wasnt in bankruptcy. An examiner would also look at this transaction. e. Examiner would mediate disputes between debtor and creditor to facilitate negotiations (including labor negotiations). f. Examiner cannot later become a trustee. 4. Continue to operate the business DIP continues to manage the business, and perhaps pays a stay bonus to the management team. a. This might not be approved by a court on its own, but if the creditors agree, it would be allowed. i. Geneva Steel Severance and bonus stay package. b. Stay bonus would be a priority claim because its post-petition. ii. Operating in Chapter 11 (Cash) 1. 364(a) Debtor can incur unsecured debt in the ordinary course of business without court approval, and if debtor doesnt pay, the claim receives high priority under 507(a)(1). 2. 363(b)(1) Cash collateral is frequently placed off limits and debtor must get court approval to use cash reserves that are outside the ordinary course of business. a. 3. Lock Box The merchant from whom debtor brought the property has given a lien on its inventory and accounts receivable. 4. 552 When a debtor acquires property post-petition, prepetition liens cant get at it. However, if that property was acquired with the proceeds from pre-petition property which had liens against it, then the liens may still exist. 5. Setoff 553 (not a new right, but a preservation of a state right) a. To set off claims, there are two requirements: i. Both sums of money must be pre-petition (amount owed by debtor and amount owed to debtor must both have been pre-petition). ii. Mutuality debts must be in the same right and between the same parties (not between someone acting as an agent for someone else and in a personal capacity). b. 506(d) If you have a setoff right, youre a secured creditor. c. Restrictions on Setoff Cant setoff if within 90 days of filing, so that creditors cant position themselves on the eve of filing and become secured.

d. 362(a)(3) says Debtor can exercise control over deposits. But 553 maintains the right of setoff from non-bankruptcy state law to which the debtor was already subject. e. 362(a)(7) stays setoff. The bank can Temporarily hold the money, which does not violate the stay (Strumpf). f. The bank may move immediately to lift the stay. i. 362(d)(1), for cause, exercising 553 rights of setoff. ii. Decision to setoff iii. Action of setoff iv. Record to verify setoff g. In re HAL, Inc. - The government is a single entity, so it can setoff prepetition interests (even to different government branches). iii. Post-Petition Financing 1. Adequate protection 361, 362, 363(d)(1), 364. a. 362(d) Periodic cash payments go to adequate protection, and keep the value of collateral constant over the life of the loan. i. In re Earth Lite Debtor had cash on hand, but court refused to let the debtor spend it without cash payments to creditor (to maintain adequate protection). 2. 507(b) If creditor goes to court to receive adequate protection, and debtor misses payments, these payments have Super Priority above all 507(a) priorities. 3. Obtaining credit post-petition 364 a. 364(c)(1) Super Duper Priority claim. Creditor is unsecured, but with priority over the claim that turned out to be inadequately protected. b. 364(c)(2) Debtor gives lien on unencumbered property, so that creditor now has a secured claim. c. 364(c)(3) Debtor gives creditor a subordinate lien against property that has an equity cushion for an existing secured claim. i. Before this creditor can be satisfied, debtor must pay down the senior lien. ii. Evidence of an equity cushion is supported by an appraiser, and if it turns out there is no equity then thats how you get a 507(b) claim. d. 506(b) Secured creditors get interest. Postpetition lenders wont lend unless theres plenty of collateral, so they will receive interest.

4. Working with the creditors a. 549 Debtor is not allowed to pay pre-petition debt, but can give an interest in post-petition property to a different creditor, or to the same creditor in exchange for new value (avoid setoff or preference). b. Prepackage plan when you tell your reorganization to all your creditors beforehand. c. Free fall plan when you have no such plan. d. Cash collateral agreement conditions for using the money and amount, and conditions of default. e. Cross-collateralization undersecured prepetition lender gives out a loan on postpetition property. The secured status reaches back to the prepetition claim as well. i. Post-petition, theyve got a secured claim for an amount which, prepetition, was undersecured. ii. Courts dont like this because its inequal for creditors. iii. Problem 25-2. iv. Avoiding Powers (Strong Arm Clause) 544 1. Trustee (DIP) can file an action to avoid unperfected security interests, making such interests unsecured. a. DIP has status of a judicial lien creditor, which defeats unperfected security interests and all unsecured claims, but not secured claims. (so these get paid only after all secured claims) 2. 362(a)(5) Creditors cannot perfect after filing because this would violate the stay. 3. 544 enables trustee to turn unperfected secured creditor into an unsecured creditor whereby the creditor loses secured status but still keeps its claim. a. (a)(1) is about personal property b. (a)(3) is about real property. 4. Perfecting a Security Interest With regard to a purchase money security interest, creditor has 20 days to perfect from the moment of debtors possession. Creditor can do this whether purchaser/debtor has filed or not. If creditor perfects within 20 days, perfection relates back to the date of the transfer.(Is this relevant only for 547(c)(3)(B)?) a. Perfection no bona fide purchaser can get an interest superior to the interest of the transferee. v. Avoiding Powers (Preferences) 547(b) 1. Avoidance of preferential transfers preserves the equality of distribution and the integrity of the estate.

2. Plaintiff is trustee or debtor in Possession (must be brought post-petition). 3. Trustee recovers preferential (or otherwise avoidable) transfers under 550 4. Elements of Preference a. Transfer to or for the benefit of creditor i. 101(54) describes transfer b. Antecedent debt (did debt exist when the payment was made?) i. Prepaid goods do not belong to the buyer until the buyer receives them. Therefore, the transfer may occur within the 90 days but if the goods are prepaid it wont be on an antecedent debt. ii. If extension of credit, attachment, and perfection all occur contemporaneously, no antecedent debt. c. Insolvency (b)(5) i. If debtor is insolvent, creditors get less than 100 cents on the dollar. ii. If an unsecured creditor received full payment, he probably received more than he would in Chapter 7. Therefore, theres likely an avoidable preference. iii. This is a rebuttable presumption of insolvency, using the debtors balance sheet iv. Do not use analysis of whether debtor is paying as debts come due. v. You might see a solvent debtor if there are significant assets. d. Payment within the relevant time period: i. 90 days before filing 1. Count day before filing to the day of the transfer (date of filing is day zero, date of transfer must be 90 or lower). If the 90th day falls on a legal holiday or weekend, it goes to the next business day. 2. Check is paid the date it clears. ii. One year before filing (for insider, who debtor wants to protect). 1. 101(31) tells who the insiders can be. 5. Determining Date of Transfer 547(e)(2) a. Is the transfer of a security interest? i. If no, T is the time of the physical interest.

ii. If yes, decide which part of 547(e). b. T=A 547(e)(2)(A) Transfer relates back to the date of attachment of the security interest, if perfection occurs within 10 days of attachment of the security interest. c. T=P 547(e)(2)(b) If Perfection does not occur within 10 days of attachment, transfer is deemed to have occurred at the time of perfection (so it may more easily fall within the 90 day preference period) d. T=C 547(e)(2)(c) If theres no perfection by the later of commencement of the case or 10 days after the attachment, transfer is deemed to be at commencement of the case. i. If never perfection see also 544, where debtor is treated as unsecured. This is the only place where 547 and 544 come together. ii. If perfection after the commencement of the case, check for violation of the automatic stay. vi. Defenses to Preference Action 1. 547(c)(1) Action would otherwise be a preference but it was (substantially) a contemporaneous exchange and parties intended it to be contemporaneous. This often also involves (c)(3). a. In re Alexander Contemporaneous is purchase and perfection within ten days, not 14 days. But its still substantially contemporaneous. b. If theres contemporaneous exchange, theres no antecedent debt and no net depletion to the estate. c. If not involving a security interest (as called for in (c)(3)), it would be an exchange that was paid with a check. 2. 547(c)(2) Ordinary course of business defense a. The debt on which payment was made was incurred in the ordinary course of business (of both debtor and transferee) b. Transfer (payment) must have been made in the ordinary course of business. c. Transfer (payment) must be made according to ordinary business terms (in the industry). 3. 547(c)(3) Enabling Loan Defense a. For Purchase Money Security Interests Creditor gives debtor money to buy stuff, and takes an interest in the stuff. Debtor holds on to the stuff and

uses it for the benefit of the estate, but the creditor (bank) holds the title. No net loss to the estate. b. Timely and accurate perfection is essential under (c)(3). i. Must be within 20 days. ii. Must have a title search to ensure there are no other liens. (and get title insurance). c. Fidelity Financial Services v. Fink A trustee may not displace a security interest used to acquire the encumbered property if the security interest is perfected on or before 20 days after the debtor receives possession of such property. 4. 547(c)(4) New Value Defense a. For replenishment of the estate i. Claims must be unsecured ii. Not paid. b. How it happens i. Debtor made a payment that would otherwise be a preference, and then creditor supplied some new materials with no further payment. ii. If the delivery was accompanied by payment, the original payment is not protected by the new value defense. 5. The Floating Lien 547(c)(5). a. A security interest attaches to a mass whose identity shifts over time such as planting seed to grain crops or inventory to accounts receivables. b. 553(b) A rough equivalent to a floating lien applied to a right of setoff. c. Creditor who exercises setoff before bankruptcy may be subject to avoidance, but setoff after filing (under 362) is OK. 6. Earmarking Doctrine (Is this a defense to preference?) i. New lender (bank), where debtor and lender agree to use funds to pay specific debt (such as mechanics lien). ii. Terms are actually performed (Bank pays mechanic and debtor makes payments to bank). iii. Transaction as a whole does not diminish debtors estate (debtor still owes same amount, but to a different party. Also, he has his fixed car). vii. Limitations on Avoiding Powers 546

1. Trustee cant avoid a preference after the case is closed or dismissed, or the earlier of 2 years after the entry of the order or 1 year after the appointment of the first trustee. viii. Avoiding Fraudulent Transfers and Obligations 548 1. 548(a)(1)(A) Trustee can avoid a transfer within one year if debtor did it to hinder, delay, or defraud some other creditor. 2. 548(a)(1)(B) If youre insolvent and you get less than a fair amount of money for the property. a. This is how church contributions come up, but theres an exception for these in 548(a)(2) 3. Prove this using circumstantial evidence. Something about 523 and 727(a)(2). 4. Where do debtors hide their money? a. ERISA Spendthrift trusts b. Offshore Accounts Isle of Man, Mauritius, Cayman Islands, etc. c. Leveraged buyout The Company really gets nothing, because all the assets are pledged to the bank. Lots of people think an LBO is a fraudulent conveyance, so sometimes an examiner is appointed to review the transaction. i. Management borrows money from the bank. ii. Management uses that money to re-buy the stock from the stockholders. iii. The company now owns the whole company, but the debt is secured against the assets of the company. iv. The assets go to the bank. v. The money from the assets go to the company. vi. Management uses the money to pay off the shareholders. c. Various other topics i. The Police Power 362(b)(4) Courts arent stayed from proceedings against the debtor in environmental matters (also health and safety things). Congress values these more highly than unsecured creditors. d. Executory Contracts 365 i. A principal debtors weapon is the ability to reject executory contracts or unexpired leases. 1. 365(d) Reject Debtor is not bound by the terms but is liable for breach and gives rise to a claim. It can take place right at the beginning, or at plan confirmation (is this because the debtor asked for an extension?) a. Requirements to reject a contract

i. 60 days from filing, or go to court to get additional time (which can be the duration of the plan). 1. Debtor must keep paying the rent as long as it occupies the premises. 2. Postpetition rent is an administrative expense under 503(b)/507(a)(1). 3. 365(a) Rejection is not effective until the court approves it. So in between the debtor vacating the store and the hearing, debtor must pay rent because debtor could change his mind in that time. ii. Good faith Debtor is not just filing bankruptcy to get out of a bad real estate deal. iii. Business judgment test The business is losing money and rejecting will help it rehabilitate, etc. iv. 502 Pay damages of breach to Landlord 1. 502(b)(6) Debtor must pay rent for the greater of one year, or 15% of the rent for 3 years (or less than 3 years if the lease is up before 3 years). 2. Landlord gets a prepetition claim for this money. b. Debtors responsibilities i. Debtor must cure post-petition rent within 60 days (Is this what cant be extended under (d)(3)?) c. Landlords options i. 364(d)(3) Can send letters to debtor asking for rent and its not a violation of the stay. ii. Landlord can go to court to compel assumption or rejection of the contract. iii. 365(h)(1)(C) Landlord can still regulate the use of a shopping center, and can contract to prohibit a Going out of business sale. 2. 365(b) Assume Debtor remains bound by the terms and contract exists even after bankruptcy. a. Debtors obligations i. 365(b)(1) Debtor must cure and provide assurances of future performance.

1. Debtor should show projections of future ability to pay, cash deposit, bond, etc. 3. Assign Debtor must assume a lease in order to assign it. Court must approve 365(b)(3) tests in order to allow assignment. a. Do we really have a shopping center? (Must we resolve the elements of (b)(3)?) i. If there are maintenance fees directed to common areas (sidewalks, parking lots, etc) ii. Tenant association? iii. Common hours? b. Why might debtor do this? i. Debtor will have no further obligations on the lease. ii. Market rent for the property is higher than the lease rate. iii. Debtor wants to remove itself from just one area. c. What do landlords get? i. 365(b)(3)(C) and (D) Debtor has to preserve things required by landlord (quality of tenant, working hours, etc).