Class 24 Bankruptcy, Spring, 2009 Review Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/[email protected]

Class 24Bankruptcy, Spring, 2009

ReviewRandal C. PickerLeffmann Professor of Commercial Law

The Law School

The University of Chicago

773.702.0864/[email protected] © 2005-09 Randal C. Picker. All Rights Reserved.

April 19, 2023 Copyright © 2005-09 Randal C. Picker 2

C01 Case Initiation and Property of the Estate

Other People’s Money Hypo Presence of debt alters investment

incentives Firm willing to undertake bad investments if

insolvent: spending the money of the creditors


C01 Summary

Sophisticated creditors can adjust, so creditors not harmed

But good investment projects won’t be financed and society would be worse off

Bankruptcy rules matter: does this hypo describe the U.S. Bankruptcy Code?


C01 Summary

Key Sections 109: Entity Eligibility 301: Voluntary Case Initiation 303: Involuntary Bankruptcy 541: Property of the Estate


C01 Summary

Key Ideas Classes of included and excluded entities

(mixed status of trusts) Opportunities created by structure

(bankruptcy remoteness) Absence of general insolvency requirement Property of the estate: derivation idea


C02 The Automatic Stay

Key Sections 362: The Automatic Stay 28 USC 959 525: Nondiscrimination by Gov’t

Key Ideas As to General Creditors

Immediate protective shield that freezes efforts by creditors to collect


C02 Summary

Key step in mitigating common pool problem As to Government

Debtor Must Comply with Applicable Law• Filing for bankruptcy does not exempt a debtor

from laws Gov’t as Creditor Has No Special Position


C03 When A Claim Arises

Key Section 101(5)

Key Ideas Broad within bankruptcy conception of when

claim arises Critical case law question is link between

state law status of right and existence of bankruptcy claim


C03 Summary

Different issues are typically at stake: state law context is typically statute of limitation inquiry: repose v. forfeiture

Three positions in cases Frenville: need to have state law claim to

have bankruptcy claim Grady: prepetition activity suffices Piper: prepetition activity plus nexus


C04 Allowing and Estimating Claims

Key Sections 501: Filing proofs of claims or interests 502: Allowance and disallowance

Key Ideas Presumed allowance absent objection 502 lays out series of objections


C04 Summary

Key Special Limits 502(b)(2): Unmatured interest 502(b)(6): Cap on lessor damages

502(c) Estimation of Claims Focus on likelihood of making case given

evidentiary standard Other Disallowance: Punitive Damages and

Sec. 105


C04 Secured Claims

Key Sections 506 552 1129(b), 1322(b)(2), 1325(a)(5)

Key Issues 506(a) bifurcation and valuation under Rash 506(b) and interest for over-secured

creditors


C05 Summary

506(d) and limited lien stripdown under Dewsnup

552 Cut-off of postpetition effect of prepetition security agreement


C06-07 Executory Contracts

Key Section 365

Key Ideas Three Core Ideas

Assumption: Making the estate liable on the contract

Rejection: deemed breach of the contract under 365(g)


C05-06 Summary

Assignment: deriving value from the contract for the estate even when the debtor may not continue

Tricky Issue “Assume or assign” limitation of 365(c)

• Creates a kind of forfeiture in certain circumstances but might be thought of as substitute for enforcement of ipso facto clauses


C08 Trustee as Hypothetical Lien Creditor; Rights of

Actual Creditors Key Sections

544 550 551

Key Ideas Give trustee deemed status Piggybacks on state secured transactions

law (Article 9)


C08 Summary

Key risk for unperfected secured creditor: lien will be avoided and preserved for the benefit of the estate under 551

Kors makes clear trustee steps into lien rights and not private contractual rights such as the subordination agreement

551’s preservation means liens are avoided for benefit of unsecured credtiors and not junior secured creditors


C08 Summary Key Ideas for 544(b)

Trustee steps into shoes of actual unsecured creditors

May give trustee access to state fraudulent conveyance law with longer statute of limitations


C09 Summary

Moore v. Bay Avoidance not limited in extent to extent

actual unsecured creditor could avoid Avoideance benefits all unsecured creditors

and not just those who could have avoided under state law

544(b): Avoidance and Not Damages


C09 Fraudulent Conveyances

Key Sections 544(b) and derivatively UFCA/UFTA 548

Key Ideas Efforts by debtors to keep assets away from

creditors Actual Fraud


C09 Summary

Constructive Fraud Exchanges involving less than reasonably

equivalent value and some measure of insolvency

Tricky Issue Sealed Air: What info do we use to evaluate

the claim of insolvency and what claims are relevant to that calculation?

C09 Summary

LBOs and Fraudulent Conveyances Focus on steps in transaction or overall

effect Target lender or shareholders receiving

dividend?



C10 Preferences

Key Section 547

Key Ideas Two core notions at work

Protect against near-bankruptcy transactions that distort equality principle

Protect against transactions that are unusual and hurt the creditors as a group


C10 Summary

Key timing issues under 547(e) for secured creditors especially

Defenses are separate and cumulative Tricky Issue

Single transfer, multiple creditor consequences


C11 Adequate Protection

Key Sections 361 362(d)

Key Ideas 362(d) sets forth structure under which

secured creditors can get relief from the automatic stay

Absence of adequate protection one cause


C11 Summary

Key Issue In Timbers Should time value of money be adequately

protected to stave off relief from stay motion?

No, but see statutory response in 362(d)(3)


C12 Preconfirmation Distributions

Key Section 363(b)(1)

Key Ideas Under what circumstances, if any, can prepetition

claims be paid before the date of general distribution to prepetition claims?

Right test would focus on net benefit to estate of striking deal, but hard to implement


C12 Summary

Kmart narrows general practice of allowing these payments

Mabey rejects payments in context where future damages were still accruing and might have made payments cost-justified to the estate


C13 Sales of Assets

Key Section 363

Key Ideas What is an appropriate basis for selling

assets? To what extent will this undercut the plan

process? Lionel attempts to impose standard


C13 Summary

Sales Free and Clear Under 363(f) TWA offers understandably expansive

reading of this section to channel preexisting claims against assets to the proceeds of sale


C14 DIP Financing

Key Section 364

Key Issues 364 creates hiearchy for postpetition

financing: admin expenses; non-invasive security interests; invasive (priming) security interests, as to which adequate protection required


C14 Summary

What limits scope of allowed liens? Cross-collateralization limits

• Can’t grant security interest in postpetition assets to secured prepetition debt

Lyondell Chemical Allows roll-over of prepetition debt More relaxed rules for a more difficult

climate for DIP lending?


C15 Administrative Expenses

Key Section 503

Key Issues Core idea is postpetition creditors will insist

on dollar-for-dollar treatment, 503 creates that automatically


C15 Summary

Tricky Issues Reading v. Brown makes clear that

postpetition torts committed in operating the property of the estate will have admin expense status

Wall Tube pushes to make the estate liable under 503 even in connection with prepetition activities if non-bankruptcy law creates ongoing obligations


C16 Priorities in Distribution

Key Sections 507 510 725 726

Key Ideas Mechanics of distribution are set forth in 507, 725

and 726: creates complicated hierarchy backed by pro rata rule for general unsecured creditors


C16 Summary

Equitable Subordination Under Section 510(c)

Judicial doctrine embraced in Code How will it evolve? Is inquitable conduct

required? What defines that? Clark Pipe suggests reluctance to find

inequitable conduct when pursuant to industry-standard contracts


C16 Summary

Substantive Consolidation Sensible to mush together assets in

bankruptcy if mushed together outside of bankruptcy

C16 Summary

Third Circuit’s Test in Owens Corning “The upshot is this. In our Court what must be

proven (absent consent) concerning the entities for whom substantive consolidation is sought is that (i) prepetition they disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors.”



C17 Plan Process and Classification

Key Sections 1111 1121 1122 1123 1124


C17 Summary Key Ideas

Critical role of classification in plan process given voting by class and requirement of assenting impaired class (1129(a)(10))

1111 Gives recourse status in bankruptcy to nonrecourse

claims Secured party can elect to have full amount of claim

as secured claim Key for 1129(b) cramdown


C17 Summary

Woodbrook requires separate classification of 1111-created deficiency claim for nonrecourse secured loan


C18 Disclosure Statements, Solicitation and Voting

Key Sections 1125 1126

Key Ideas Disclosure statement process creates

informational floor for voting


C18 Summary

Century Glove draws appropriately hard lines about what constitutes a solication of a vote

Protects free flow of information and negotiation


C18 Summary

Key Ideas on Voting How should claims trading alter the voting

process? Figter permits claims trading and reads

numerosity requirement in 1126 as per the statue


C18 Summary

Creates incentive for debtor and creditors to buy small trade claims

Allegheny creates disincentives for purchases, weakens liquidity of market and makes de facto restructuring through claims sales harder


C19 Absolute Priority Rule

Key Section 1129

Key Ideas Does a new value exception exist to the

absolute priority rule? Under there circumstances under which old equity should be able to participate with new value?


C19 Summary

203 N. La Salle doesn’t answer that; instead, it tells us, correctly, that the option in that case counts as new value

Restructure around that through an auction


C20 Interest-Rate Selection

Key Ideas Interest rates critical to present value

calculations required by Code Three opinions in court, with no majority

opinion Five interest rates to work from Expect courts going forward to work up from

prime


C21 Individual Debtor Bankruptcy

Key Sections 522 523 524 707 727 1321 1322 1325 1328


C21 Summary

Key Ideas Levers of Individual Bankruptcy

Discharge and circumstances under which it can be denied (Tveten)

Exempt assets and interaction between federal and state schemes

Nondischargeable debts: expansion over time

C21 Summary

Choice between Ch 7 and C13 Ch 7: Give up current assets, keep future

income C13: Keep current assets, give up future

income Expansion of 707(b) over time, esp in 2005, to

push more debtors into Ch 13 2005 statute embraces means-testing regime

for substantial abuse test in 707(b)


C22 Mortgage Stripdown

Historical Setup Dramatic economic upheavals often

generate strong legal responses Shows up for mortgages in the 1930 with

Frazer-Lemke statutes Tricky status on constitutionality


C22 Summary

Durbin Legislation and 1322(b)(2) In current statute, no 506 stripdown for

mortgages on principal residences Proposed legislation would have done this,

in complicated way, for preexisting mortgages

Temporarily dead


C23 Chrysler Sale Order

Key Ideas Requires assumption of UAW CBA as

condition of purchase To the extent that the CBA is an above-

market contract for UAW—and I assume that it is—this will reduce the purchase price for the assets to the detriment of other creditors


C23 Summary

Tricky to Know How to Situate This Outside of plan so not clear fair and

equitable test or unfair discrimination has any technical bite

If we think of this as just a 365 assumption and assignment issue, broad discretion in bankruptcy court


Documents

Class 24 Bankruptcy, Spring, 2009 Review Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/[email protected]